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What happened to the economic clock?

Discussion in 'Investing Strategies' started by tropic, 18th Apr, 2008.

  1. tropic

    tropic Well-Known Member

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    I am just wondering where we are on the clock?
    Usually stock market boom followed by bust and boom on property.
    We had property boom that was followed by stock market boom and bust.
    Now we have both markets going south.

    It reminds me that we shouldn't extrapolate.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The economic clock is a simple, macro level model.

    There are many micro-level impacts on both share and property markets:

    1. local economic effects on real estate (eg mining boom, over- or under-supply of property, local employment rates, etc)

    2. shocks in the market - which lead to short term price corrections

    3. etc

    We are still in the phase of "rising interest rates" (they haven't stopped rising until they fall again!!), with an expanding economy (for now) and the strength of the resources sector is still keeping the markets relatively bouyant. Real estate isn't really falling (perhaps it has corrected a bit in some places - but I don't think they've really fallen much overall).

    I'd guess we're around 1:30 on the clock right now in Australia.
     
  3. Chomp

    Chomp Well-Known Member

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    Hey Sim roughly what would the time frame be on the clock for a full cycle?
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think economists generally use 7 - 10 years for a full cycle ? Not sure on that.
     
  5. crc_error

    crc_error The Rule of 72

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    can someone post a JPEG of the economic clock?
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Don't want to steal someone else's content, so I'll post a link to a Google search which will find it for you:

    economic clock - Google Image Search
     
  7. Chris C

    Chris C Well-Known Member

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    I would have thought we were a little further through the slow down, somewhere like 3 o'clock, but that could just be me being optimistic.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I wouldn't think so ... 2 o'clock is associated with falling shares - but I don't actually think we have had falling shares yet!! (no I'm not in denial!) :D

    The economic clock is all about ... economics!! (funny that). The recent volatility in the sharemarket is not about economics - it is about sub-prime concerns - an "external force" that isn't directly related to the normal cycle. The banks have been hit hard because suddenly have large exposures to loss-making ventures, which is affecting their bottom lines. This has lead to a level of fear in the broader market which is largely irrational (although only in the same way that valuations before the market dropped were also largely irrational).

    We are only now starting to see the first signs of an economic slowdown which will eventually lead to a drop in confidence, a drop in spending, a drop in profits, and thus a drop in share prices. Now, given the share prices have already dropped - I don't think we'll necessarily see much more downwards pressure - rather I expect an extended sideways movement on the markets, unless interest rates start falling soon, which will signal the start of a new phase in the economy.

    3 o'clock is associated with falling resources/commodity prices ... and they aren't falling yet.

    I honestly don't think we've seen the worst yet - and I think there is still a chance we will see inflation remain strong enough to force the RBA to lift rates even further - although I hope that's not the case.

    My current thought is that we will see interest rates remain where they are for another year or more, with the economy gradually weakening, the sharemarket moving largely sideways and property prices doing what they normally do - whatever they like (some segments will see demand due to lack of stock, but others will be very weak due to lack of buyers).

    These are all just my thoughts - happy to hear alternative views.
     
  9. Insight

    Insight Brisbane Buyers Agent

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    I'm guessing a large chance of hold, small chance of a 25BP raise in May or June if the inflation report is bad this Wednesday and a very small chance of a cut as strange things can't be discounted.

    The spread between the cash rate and the 90d bank bill futures is stubbornly high still and the RBA is quite likely to close this gap at some point based on their own history, the only saving grace would be some more bearish reports on consumer spending and the like.

    I think I'm well placed in the game of 'beat the debt eating lion' (I don't have to be the fastest runner just faster than most holding debt), so could weather more increases until the economy goes 'snap'.

    I wouldn't be looking for prices to rise in any scenario with falling interest rates though, perhaps a period of extended stagnation to mild deflation, something like the 90's perhaps.

    Just guessing.
     
  10. Chris C

    Chris C Well-Known Member

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    Not that I'm an expert by any stretch of the imagination, but I was thinking that considering most are speculating that interest rates will start for fall in early 2009, that would make us not too far off 7 o'clock... (somewhere around 3 - 5 o'clock).

    Plus interest rates have been rising for years, suggesting that we are probably well through 1 o'clock. We have also seen large drops in the stock market (regardless of cause) which started in October, that would mean that we are at least at if not through, 2 o'clock. Now whilst commodity prices have not really been falling, that may be due to large demand of the emerging economies of China, Brazil and India, which from what most have been saying are economies that are unlikely slow significantly despite a worldwide slow down.

    Then at 5 o'clock we should see tighter finance and falling employment, which I'd argue we are starting to see the first signs of.

    At 6 o'clock falling interest rates, falling real estate (recession). I don't think there will be massive price drops in the real estate industry (as Australia seems to have been well insulted from the troubles that have plagued America), though by all accounts there are an increasing number of reports that suggest real estate growth has definitely slowed/stopped and that supply of houses for sale are definitely outstripping demand. In addition to that there has been so much talk about whether the US is going into, or already is in, a recession which is reflective of 5-6:30 on the clock.

    But this may just be the "wishful thinking" coming out in me as I "hope" that the stock market and real estate look to start booming again in late 2009, when I'm in a prime position to enter the market.

    :cool:
     
  11. Billv

    Billv Getting there

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  12. tropic

    tropic Well-Known Member

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    On the clock 2 PM is Falling Share prices and 3 PM is Falling Commodity Prices. I live in Perth and if you tell people that the commodity prices are falling next they will think you are stupid. Practically everyone that I talked too think the mining boom will go on for at least another 5 years.
    Except for Kerr Nielson from Platinum Asset Management that is a bit bearish on commodity prices.
     
  13. Brendan

    Brendan Member

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    Interesting.. does the clock operate in different timezones however?

    I am currently in London and we are easily at 6:30pm and I would say that the clock is easily 6-12 months in front of Australia.

    In the UK we saw cheap money > high property prices > rising rates > falling shares > and now we are at falling house prices

    And now even the GBP is worth 20% less than it was 6 months ago..

    So what does this mean to Australia.. if there is a 'time zone' factor, which I believe there is, then does this mean that Australia will see the same effects near the end of 2008 ?
     
  14. AsxBroker

    AsxBroker Well-Known Member

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    Hi Brendan,

    The Reserve Bank of Australia has been increasing interest rates.
    The Bank of England has been decreasing interest rates.

    This means that Australia and England are at different "time zones" in the economic cycle clock.

    Cheers,

    Dan
     
  15. Chris C

    Chris C Well-Known Member

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    Well we are a few months on, and things have definitely changed a fair bit in the past 6 months. So where does everyone think we are on the economic clock now?

    I'm of the belief we are somewhere between 5 - 7 o'clock...
     
  16. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I'd say more like 3 - 4 ... we haven't hit the bottom (6 o'clock) economically yet (the market will bottom before the economy does)
     
  17. Billv

    Billv Getting there

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    I think it depends on which clock you are looking at.

    If we are looking at this one
    http://www.paritech.com.au/paritech-site/education/beginners/images/investment-clock.gif

    then I believe in Australia we are between 6 & 7pm
    Sydney probably at 6.30pm and the rest of Aust. at about 6pm.
    If people panic the could be some property price corrections but the combination of interest rates coming down and the doubling of the FHOG is going to put a floor on property prices.

    We could still have some turbulance in the share markets but governments are working hard to bring confidence to the markets so I believe the situation will start to turn around after the US elections and shares will start to rise.

    IMHO
     
  18. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Don't forget that interest rates wouldn't normally be coming down just yet - inflation is too high and the economy hasn't slowed down enough yet. Rates have only really started dropping this early because of the financial crisis.

    ... so I think we are nowhere near 7pm yet.

    Just my opinion!
     
  19. islandgirl

    islandgirl Well-Known Member

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    Phew...was that ticking only the clock!..
     
  20. AsxBroker

    AsxBroker Well-Known Member

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    Well we have had tighter finance, falling interest rates and we are being told that unemployment is going to rise.

    I guess we are somewhere between 5 and 6...

    Cheers,

    Dan