Boom, Bust, Rinse & Repeat: understanding global cycles

Good discussion here on understanding cycles and the probability of investment outcomes as well as why most prognosticators using linear models never see loss cycles coming.  Worth the 40 min.

If you think predicting economies and financial markets is complex and cumbersome – think again. Renowned investor Raoul Pal’s proven probability framework is simple, easy and quick to learn.  Here is a direct video link.

The caveat I would add, is that intellectually understanding cycles and longer term probabilities does not mean you have conquered the human emotional cycle and our tendency to lose patience with our chosen risk management approach when it looks like things are not going as we expect in the short-run.  Cycles are long term predictable and in the shorter run, noisy and distracting.  We also always have to control and manage our capital risk in keeping with our own life cycle above all else. Even if we may be right in our assessment of longer term cycles, it is unwise and counterproductive to lose big chunks of our life savings in the shorter-run.

Via John Mauldin this week, we also get this update from Pal that overlays the US Presidential cycle looking into 2017 –being the first year of a new Presidential term, following a tw0-term President.

I recently noted that since 1910, the US economy is either in recession or enters a recession within twelve months in every single instance at the end of a two-term presidency… effecting a 100% chance of recession for the new President.

The following chart shows every NBER recession since 1910 (in yellow) with the new President after a two-term election marked in white and the new presidents after a single-term presidency in red. Wilson and Eisenhower appear as both. Only Coolidge saw more than a year (sixteen months) from his second-term election and the onset of the subsequent recession at the end of WWI…
Presidential cycle

Every single US recession bar one (with explainable circumstances) occurred around an election. Only two Presidents in history did not see a recession, and they were inaugurated after single-term Presidents.

Will this time Trump be different?  Unfortunately, as always, we will have to wait to find out.

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