Chapter 2: The Economic Life Cycle Jon Greenwald Ipek Kazan Raegen Richard

5 Phases in the Economic Life Cycle Up-cycle Phases Up-cycle Phases Revival Revival Acceleration Acceleration Maturation Maturation Down-cycle Phases Down-cycle Phases Ease-off Ease-off Plunge Plunge Expansion tends to last longer than recession. Expansion tends to last longer than recession. Each transition between phases is marked by a red flag event. Each transition between phases is marked by a red flag event.

Up Cycle Revival - Red Flag Event: GNP turns positive - Other Events: Mortgage rates decline and housing starts to increase Low financing rates boost consumer spending Increasing pressure on credit demand and prices Interest rates and inflation rise irregularly

Up Cycle Acceleration - Red Flag Event: Speedup in inflation - Other Events: Consumer spending becomes more confident Housing activity increases Businesses start to rebuild inventories and spend more on plant and equipment

Up Cycle Maturation - Red Flag Event: Sharp split between cautious consumer spending and optimistic business spending - Other Events: Consumers spend less as inflation accelerates and interest rates increase Economy keeps going because of optimistic business men Growth suffers under pressure of accelerating inflation and rising interest rates

Down Cycle Ease-off Ease-off - Red Flag Event: GNP turns negative - Other Events: Inflation and interest rates increase Inflation and interest rates increase Purchases of big ticket items and housing fall off Purchases of big ticket items and housing fall off severely severely

Down Cycle Plunge Plunge - Red Flag Event: Peaking of interest rates - Other Events: Businesses turn to extreme caution and liquidate inventories rapidly Employment drops sharply Corporate profits plummet - At the end: Inflation and interest rates begin to come down Declining rates help the economy return to the revival phase

Hunt’s discussion is limited to mutual funds Hunt’s discussion is limited to mutual funds Provide highly liquid way to invest Provide highly liquid way to invest Liquidity is important to keep value during financial climate change Liquidity is important to keep value during financial climate change Investment vehicles used: Investment vehicles used: Stocks Stocks Bonds Bonds Gold/Commodities Gold/Commodities Money Market Funds Money Market Funds Investment Implications of the Life Cycles

1. Stocks and Bonds Rally in Plunge substantially Fewer investment opportunities as getting into Expansion as inflation and interest rates rise More speculative in late Acceleration Poor investment during Maturation

Investment Implications of the Life Cycles 2. Gold and Commodities Start to perform well in the Acceleration and Maturation Fall apart early in Ease-off 3. Money Market Funds Poor investment in Revival due to unfavorable interest rates Begin to perform well in Acceleration Outperform most investments in Maturation Still performing well in ease-off

Factors leading to Life Cycle Changes Volatility comes from smaller sectors that swing widely (net exports, consumer purchases of big-ticket items, inventory investments, etc.) Volatility comes from smaller sectors that swing widely (net exports, consumer purchases of big-ticket items, inventory investments, etc.) Other factors: Other factors: - Federal Government Intrusions - Federal Government Intrusions - Global Factors - Global Factors - Shocks - Shocks - Financial Crises - Financial Crises

Best Information Old reliable factors: Old reliable factors: - Gross National Product - Producer Price Index - Money Supply Be careful about news media Be careful about news media Watch out for frequent revisions Watch out for frequent revisions

Luck?? Long term success: read economy effectively Long term success: read economy effectively Short term booms: usually luck!! Short term booms: usually luck!!

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