Today’s article is from William Cowie, a staff writer at Get Rich Slowly and the brains behind Drop Dead Money. I’m not a fan of micro (day-to-day) market timing, but think Cowie makes an interesting case for timing the larger “seasons” of the U.S. economy.
Other than when the stock market crashes or another ten thousand people get pink slips, you never hardly hear anyone mention the economy, do you? Most people (you, perhaps?) view the economy as some external force over which nobody has any control. You feel like a victim of this capricious force and you can “only hope for the best”.
Wrong on both counts.
The economy “happens” whether the news mentions it or not. No, it’s not capricious. And no, you needn’t be a victim.
In fact, being aware of the economy and how it moves can help you put tens (or hundreds) of thousands into your pocket, and help you prevent what you have from being sucked out of your pocket.
The good news is you don’t need a degree in economics, nor do you need to understand those people who usually dress in black, or any of the gobbledygook they speak. The main thing you need to understand is that the economy goes up and down. It moves in cycles.
The Economic Cycle
Different people use different measures of the economy, so I figured why not create another one? Here’s how I track the economy’s cycles:
The exact numbers and scale used for this chart don’t matter. All we need to know is (a) there are ups and downs, and (b) when those turning points are.
The chart teaches us a couple of things.
First of all, the economic cycle repeats. The economy always recovers from even its worst recession or depression, and it always crashes just when things look wonderful. Each bottom is followed by an uptick, which in turn leads to yet another crash.
Second, the cycle’s wavelength is surprisingly constant. One measures any cycle or wave from one top to the next top, or one bottom to the next. Given that most people focus on recessions when they think about the economy, I choose to measure bottom to bottom. The dates in the chart show past economic cycles’ bottoms — more or less. (And if you’re dubious about my custom measure, you can check those dates with the Federal Reserve. They match. Again: exactness isn’t a requirement here; as you’ll see later, for the purposes of your net worth “close enough is good enough.”)
What surprised me the first time I saw this picture was how short every cycle is: ten years or less, bottom to bottom.
That’s not a long time.
Since World War II, we’ve had a recession every 7-10 years, almost like clockwork. When I mention this to people, almost everyone is surprised. (I was surprised too the first time I figured it out.)
Finally, the ups, downs, and turning points of the economy are inevitable. The cycle has peaked and bottomed, within its regular cycle, regardless of who was in the White House, or any other extraneous circumstances. For some reason, people love to blame whoever is President, or whichever party rules Congress, but recessions have occurred under every party’s watch. No force or political party has interrupted the cycle, up or down.
The economy moves to a rhythm of its own.
It’s probably not news to you that the economy goes up and down. On some level, we all know that. Here’s the problem: this knowledge didn’t prevent millions from getting slammed when the Great Recession hit a few years ago. Perhaps you got caught in the downdraft, too.
Why is that? I can think of two reasons.
First, the economy moves at the speed of a glacier — slower than grass growing, paint drying or any other slow-moving part of life. When our attention span these days is measured in milliseconds, it’s impossible to discern any movement. But make no mistake: the economy moves.
The second (and most important reason) economic downturns take folks by surprise is that few people understand how you can make subtle changes to your financial strategy depending on where we are in a given cycle of the economy.
And that’s what this article is all about.
Let me say at the outset that nothing here changes the fundamental financial wisdom. You’ll still need to earn more, spend less, get rid of debt, and invest. But what follows could potentially help you do all four of those things better than before.