[B]Business cycle – where are we?[/B] The traditional business cycle is the periodic up-and-down movement in economic activity, measured by fluctuations in real gross domestic product (GDP) and other macroeconomic variables. A business cycle is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time.
Economists note, that complete business cycles vary in length. The duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging six years in length. So as a tool for analyzing and influencing the economy, is the business cycle outdated? Yes, says the Bank for International Settlements (BIS) in Basel, Switzerland.
The BIS argues that we need to pay less attention to the business cycle and more attention to what they call the financial cycle. It typically lasts 15 to 20 years and may straddle several traditional business cycles. Where business cycles focus on the build-up, glut and collapse of real products and services; the financial cycle focuses on, the build-up, glut and collapse of credit. Once again the central bankers are admitting, that the economy is all about central banking and their financial engineering activities.
Well, one can debate this concept on whether it is good or bad, we as traders are to just understand the economic world we live in and trade accordingly. Looking at the thumbnail chart from the BIS, we can see these two business and financial cycles. One thing is clear, financial cycles, not business cycles, have become the dominate force in our economy today. Two note worthy takeaways from this chart.
First the volatility of these financial cycles are increasing over time, indicating that the efforts of central bankers to manage the economy are most likely doing more harm than good, but this means that the low volatility we are currently experiencing in the markets will end at some point. Secondly, we are now in the sweet spot, in terms of both the business cycle and financial cycle. Hmmmm … it’s all down hill from here, I hope you are enjoying the good times on this current up turn.
Blue Point Trading, William Thompson