The economy works in a predictable cycle…

The previous post reminded me of something. My uncle once sent me a chain email about the economy and its predictability. When I first read it around 3 years ago, I didn’t really connect with the message. Now, the email makes total sense. Read the email reproduced keeping in mind what happened over the past 1 – 2 years.

“The economy works in a predictable cycle. Let’s start from the end of a depression. When the market revives from a depression, stock prices will be the first thing that climbs up. Then, all kinds of interest rates will increase. This is followed by a drop in unemployment rate and companies posting good annual report. Stock prices begin to skyrocket and everyone starts to talk about how much they make in stocks. Those who have earned enough from the stock market will start to pump their money into properties. Property hype begins. Property prices shoot up. Interest rates continue to increase. Salaries increase. Economy is now in a boom.

During economic boom, more money is channeled into properties. Property prices continue to rise. Stock prices begin to stagnate due to lack of fund. Interest rate and rental rise to an all-time-high, businesses manage to survive because consumers’ spending is still high. Consumers’ spending is high because of good salaries, good bonus and good earning from stocks. Usually when this happens, some bad news will set in and the market crashes. Stock prices fall sharply. Money in the market suddenly dries up because everyone withdraw their money out of fear. Economy begins to slow down. Rental falls, property prices begin to fall. Everyone starts to tighten their spending, resulting in poor business for every company. Business is bad, unemployment increases. The economy is now in a depression.

During economic depression, businesses with poor business model or poor products will be phased out. Interest rate starts to drop to help businesses to survive. The market begins its correction process. After the correction, the economy cycle repeats. Stock market will be the first indication, followed by interest rate, and finally property. The rich understands this economic cycle. Unlike the poor, the rich will start to park their cash in the stock market towards the end of the depression. The rich will wait patiently for 1, 2 or 3 years. They are not bothered by the daily fluctuation in stock prices. When stock market revive, they easily make 200-300% return. The next thing they watch out for is the property prices. When property prices begin to show its first quarter increase, they will sell off some of their shares and grab a few properties. In another 1 or 2 years, their properties appreciate in value and they easily make a few millions. When the economy reaches its peak, they will sell off some of their properties, keep some to earn rental income and park the rest of their money in fix deposit, survive through the depression (which can last for about 5 years!) and wait for the next cycle! Guess what the poor will be doing? They do the exact opposite. When the market is good, they got their pay rise and bonuses. They feel rich and start to think of some investment. Usually, they will turn to a bank and listen to those unit trust managers who show them all kinds of track record about the superb performance of their unit trusts. The poor will then put their hard-earned cash into those unit trusts and become a victim of the next economy depression.

I hope you know where your economy is at right now. In Singapore, property hype has just began. Property prices are increasing at astonishing rate and it’s getting harder to find good investment. Economic boom may continue for another 1-2 years (that’s my guess), but the days of getting 100% return in stock market is gone. Property investment is still viable, but 100-200% return is not likely. For those who have just started work, this round of economic boom is not for you. You should use the next 5-7 years to accumulate your cash and get ready for the next boom. Remember, history repeats itself. You don’t have to be a swami guru to predict the future.”

Remember the email message was from 3 years ago. So the last paragraph doesn’t represent the current situation. Where are we right now? We might be in the slow recovery phase as the US interest rate is still very low and have remain unchanged.  And look at the bolded phrase in the message, “the rich are not bothered by the daily fluctuations”. If you have a long-term outlook, then the short-term volatility is actually an opportunity for you to get stocks at a sale. And the stock price always goes to its true value in the long-term. This brings me to a Benjamin Graham quote. He once said, “In the short-term, the stock market behaves like a voting machine, but in the long-term it acts like a weighing machine”.

Advertisements

2 thoughts on “The economy works in a predictable cycle…

  1. Hi FF,
    Thanks for sharing the article. By now everybody should have known about this cycle, I wonder why people are still not learning from the past experience?

    • Hi blueeagle,

      Thanks for visiting my blog!

      History repeats itself, especially in the stock market, as it is based on emotions and feelings. When stock prices are going up, people get euphoric and their emotions take over and they don’t want to be left out of the bull run. Their knowledge (that what goes up must come down and also about the economic cycle in the post) takes a back seat. The market is always driven by emotions such as fear and greed.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s