web analytics

How to play the economic cycle

Posted by on Jun 5, 2014 in 18 year real estate cycle, About Ascendant Strategy, Topical news |

This post shows how you, as an investor, can profit from understanding the 18-20 year economic cycle.  This insight on cycles is something that only Ascendant Strategy can teach you. At cyclical peaks… The news about emerging markets in recent months points to the fact that many of them are at or are approaching their respective cyclical peaks, in the way that Western economies were between 2006-2008.  As the stylised diagram below shows, once an economy reaches its 18 year cyclical peak, it will then experience up to four years of economic difficulties.  This happens cycle after cycle, without fail. The question is: what should investors do at such times? The final years of the up-swing of a cycle involves a (credit-fuelled) spending binge during which asset prices, which have risen through the cycle, accelerate sharply and consumption increases conspicuously.  This was the case in western economies in the middle of the last decade and is now true of many emerging economies.  Such trends have been aided by ultra-low interest rates in the recovering West, global capital hunting for yield, lavish government spending on public works, high optimism after a decade (or more) of strong growth and so on. Into cyclical peaks, the business case for investments looks strong, as they are based on good economic fundamentals, continued growth (projecting the recent past into the future), high demand, availability of credit and so on.  Such conditions bring a lot of investors to the party and so there will be lots of competition to acquire assets. When the going is good, exercise caution. Investments must be good value, based on robust fundamentals, current earnings (not capital gains, i.e. future earnings growth) and not dependent on rolling over loans.  We call the final two years before the cyclical peak the “Winner’s Curse”.    You may make some investments that realise gains for a couple of years but when the cycle turns down you may soon find you are holding assets worth less than what you paid for them. How the savvy investor plays the cycle We advise not following the herd.  Be patient and don’t be fearful of missing out.  Examine your portfolio and make sure its value is protected.  The last couple of years into cyclical peaks – when things are overheating – is a good time to dispose of the weaker elements of your portfolio.  It also helps to be in safe and liquid assets. As the cycle turns down, there will be plenty of investors that are over-leveraged and in need of cash.  This is the time when good assets are available at good value.  Furthermore, in a downturn there will be fewer investors, so less competition to bid...

Read More

How knowledge of the cycles can help the “lost generation”

Posted by on Dec 1, 2013 in 18 year real estate cycle, About Ascendant Strategy, Forecasts, Topical news |

Last week, a number of news outlets in the UK ran stories about England’s “lost and indebted generation” – stories based on data put out by the Student Loans Company on how graduate earnings had fallen since the beginning of the financial crisis.  Indeed, owing to higher education funding cuts and therefore rising tuition fees (public spending cuts are common at the end of the economic cycle, as the cost of bailing out the banking system compounds the problem of sharply reduced tax revenues), the research found that in real terms earnings for the young men and women graduating into the last recession had fallen by 12 per cent compared to the pre-crisis cohort of graduates at the same stage in their careers and that on average they owed 60 per cent more in student debt.  Further research from the US also suggests that the earnings of those graduating during recessions usually take a decade to reach the same level of earnings as their more fortunate peers who graduate when times are better.  This is not a pretty picture. We at Ascendant Strategy will freely admit we are not experts on higher education.  But we want to take the opportunity to show you how powerful knowledge of the economic cycle can be.  We view the major economic trends through the lens of a repeating 18-20 year cycle and can therefore see how these develop between from the peak of one cycle and the next.  The most challenging time for an economy is at the cyclical peak and subsequent downturn, which occurs on average every 18-20 years.  Other recessions are not as severe.  This affects all aspects of an economy, not just those areas that are Ascendant Strategy’s primary focus: making sound and profitable investment decisions.  And so we know that, while challenging, the experience of the current generation is not unique.  During last similar cyclical downturn in the early 1990s graduates were similarly affected, with graduate unemployment peaking at 12 per cent in 1992 (see ONS stats), before falling through the recovery and subsequent boom; and then again rising through the global financial crisis to a peak in 2010.  In Japan, the situation was even more severe for graduates in the 1990s, with many labelling the dramatic fall in opportunities as the “ice age”. We forecast that the next major downturn will occur in the middle of the 2020s.  Until then we expect a period of continued recovery and prosperity: in fact we think this next cycle may involve a bigger boom than the past one.  (Why?  We see a lot of promise in the current rapid technological innovation, its application to industrial processes, potentially new and cheaper sources...

Read More

How Ascendant Strategy came into being

Posted by on Dec 1, 2013 in 18 year real estate cycle, About Ascendant Strategy |

The idea for Ascendant Strategy was conceived as the global financial crisis started – to our mind – in February 2007.  “Sub-prime lending” was starting to slip into people’s vocabulary but it was then still a full six months before Northern Rock – the first official warning shot across the bows of the global economy – which for most experts was the beginning (we have developed indicators that were flashing red warning signs from December 2006). One of the reasons I knew that a major cyclical downturn was coming was because I had been expecting it.  By this stage I was familiar with a fair amount of cycles research, in particular with the work of Fred Harrison, who wrote a seminal work, The Power in the Land, in 1983 and forecast the cyclical downturn at the end of the 1980s/beginning of the 90s.  He repeated the feat in the 2000s, correctly calling the bust that reached its fullest extent in 2010. What led us to the idea of creating Ascendant Strategy was the fact that in the events that followed during 2007, 2008 and 2009, we felt that there was no practical advice for investors on how to navigate events, and what to do with their investments (we use the term “investor” and “investment” broadly. We regard any major financial decision – whether looking where to place savings, allocate an investment portfolio, undertake a major business expansion – as an investment that are subject to the same disciplines of: understanding the returns, and the risks; and critically knowing where one is in the economic cycle.  This last piece of the puzzle is something that only Ascendant Strategy can really teach you). We observed that all of the old maxims of the investing world – the efficient market hypothesis, maximum diversification etc. – did not well serve investors at this stage of the economic cycle.  This feeling was reinforced by our research of trends during the recessions.  For example, SMEs that rely on bank lending – with perfectly good balance sheets and business prospects – tend to be harshly dealt with by lenders during cyclical downturns, with loans called in or access to finance abruptly turned off.  Often the need for finance has been exacerbated by the easy credit conditions that invariably accompany the run up into cyclical peaks.  We felt that sound practical business advice helping business owners and investors make decisions informed by how the cycle operates was a massive gap in the market – and hence the idea of Ascendant Strategy was conceived. Our Strategic Leaders research series documents the experiences of corporates and investors during the financial crisis, key decisions they were faced with and how...

Read More