The Economic Clock®: Investment Economics Made Easy

Admin — Sun, 09 Apr 2006 17:49:40 +0800

Are you tired of being bombarded by useless statistics when making investment decisions? Are you increasingly frustrated by having to “wait” for markets to release their next set of data? Besides the noise that they create, do they really give you a logical and consistent framework with which to plan your next move?

For further information on the "mechanics" of the Economic Clock®, see below.

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What is the Economic Clock®?

The Economic Clock® focuses on the following principles:

Every economy two parts: a monetary and a real component;
There is either too much or too little of something. There
a. is either too much or too little money, and b. are either too many or too few goods around;
Asset markets are moved by the availability of liquidity. So they move up only if there is too much money around – only if there is too much money relative to the needs of the real economy. In easy terms: once you have paid all the bills and still have money in your pocket, that surplus has to go into some form of an asset – from stocks to bonds, real estate, Logically, then, asset markets must fall when there is no excess money to go into them, and
The monetary component always moves ahead of the real component: laconically put, it is easier to cut interest rates than it is to open factories.

Here is what the Clock’s “arms” are about and why they can provide a tool to maximize your investment decisions and minimize your risk:

the monetary economy is about liquidity and, thus, interest rates: when there is an excess supply of money, rates fall; when there is an excess demand for money, rates rise, and
Meanwhile, the real economy is all about job security and, thus, consumer end demand. If there is an excess demand for goods, sales are rising, and if there is an excess supply of goods, sales are falling. Rising demand mean rising corporate profits (via higher turnover and/or margins), so falling sales mean falling corporate profits.

How the Economic Clock® Works For You

We look at the monetary economy because the level of liquidity determines the direction of asset prices. We look at the real economy to determine the outlook for macro profits and thus whether liquidity will go into equities, bonds or other asset classes – and if so, when. When we combine these two, you have a very powerful tool to save you time and make you money!

Here is the logic of the individual time zones and the logic of the sequence of the Clock. We underline what has changed in the respective arm of the Clock:

Zone 1 represents easier monetary policy. The Central Bank has begun easing, creating an excess supply of money. And it has begun this easing process because there is an excess supply of goods. Hence our “Strong Buy” recommendation in this time zone: stocks are still cheap and earnings are set to improve.
Zone 2 shows that the excess supply of money has worked: now we see an excess demand for goods. That creation of an excess demand for goods, after all, is the objective of Central Bank easing. This combination is what we call “market magic”: demand and therefore profits are about to rise, yet there is still plenty of excess cash around. But from a valuation perspective, stocks have become much more expensive, hence we still recommend buying – but less enthusiastically.
Zone 3 represents monetary tightening, the policy-induced creation of an excess demand for money: rising interest rates are the result. This is because the excess demand for goods is creating inflationary pressure. Now markets start tumbling, as the profits outlook only can worsen if rates rise. Hence our “Strong Sell” recommendation.
Zone 4 represents the end of the cycle: The Central Bank’s creation of an excess demand for money has started to create an excess supply of goods, so profits tumble. Nobody wants stocks when rates are high and profits are falling, hence our “sell” recommendation.

Note that zones one and three are for the early birds: these investors make/save the most money. Zones two and four are for the more risk averse: they also make/save money, but less than the early birds.

There are some caveats to The Economic Clock®.

Mid-cycle corrections. Of course there can be mid-cycle corrections. The most frequent one occurs between zones 1 and 4: the excess supply of money in zone 1 can revert to an excess demand for money in zone 4 if for instance the Central Bank gets cold feet and starts tightening prematurely.
Turning points. Equally, we are in the business of identifying key turning points for you make more accurate investment decisions. Sometimes, economic time zones appear to be “jumped”. Often markets hop from an excess supply of money in zone 2 to an excess demand for money in zone 4, seemingly skipping stage 3. Actually, stage three – characterized by an excess demand for goods – is raced through, and then the economy gets stuck in zone 4. But we are not in the business of pinpointing this short race through stage three, being keener to use the Clock more as a compass than as a detailed road map.
Lags. These are to be expected. On many occasions we have seen “overshoots”: in America, money started contracting in December, 1999 – but because there was still an excess demand for goods, the profits outlook must have been pretty good. So the market kept rising until July 2000, at which time it started crumbling with the emergence of an excess supply of goods – and thus a worsening profits outlook.
Different money demand. As we see currently, Central Banks may be easing, but banks don’t want to lend. That represents a different, very harsh form of an excess demand for money – and is the flip side of the easy credit policy which we saw particularly in the latter part of the Greenspan era.

Subscribers to EnziosClock will learn -

how to use The Economic Clock® to tell where we are in the cycle which should trigger your investment strategy,
what the next logical cyclical progression will be,
how to identify mid-cycle corrections, turning points and lags, and
which sectors to load and unload at which stage of the cycle.

There are various reasons why it does not work equally well on an empirical basis in all markets: different stages of development & liberalization. Key, though, is that even if the empirical side does not work equally well for each market:

in all likelihood you are dealing in more than one market, so you may be dealing in other markets where the Clock does work, and
even if no empirical luck, the Clock gives you a logical, user-friendly investment compass that will save you time and money when using macro to base investment decisions on.

Enzio's Clock - The Economic Clock®: Investment Economics Made Easy - Comments

The Economic Clock®: Investment Economics Made Easy

What is the Economic Clock®?

How the Economic Clock® Works For You