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How to Avoid Being Blindsided By the Business Cycle
From RealVision: “As we all know, the U.S. last suffered a recession in 2009. But did you know that Japan has slipped into recession four times since then? Or that Australia hasn’t had a recession in 27 years – since 1991?
Many investors spend a lot of time and effort trying to predict when the next recession will hit. For good reason – a recession is generally the single biggest risk to your stock portfolio.
There have been two major bear markets in the last 20 years. Both occurred during or leading up to a recession. US stocks plunged 55%+ from 2007–09. And the Nasdaq lost 80% around the 2001 US recession.
If you can identify recessions early on, you can dodge massive losses. Easy to say, hard to do. If you’ve followed economic news for long, you know exactly why it’s hard.
The fact is, most economists are totally inept at predicting recessions. In 2008, mainstream economists completely failed to warn us of the worst recession since the Great Depression.
What’s worse, economists often predict recessions that never materialize. Ahead of Brexit, most economists warned that Britain would plunge into depression if it voted to leave. Wrong. Immediately following the Brexit vote, Britain’s stock market took off. Investors who listened to the warnings of economists and sold their UK stocks missed out on 25%+ gains.
Most of the time, you’re better off ignoring what economists say. But today we’re going to share an economic forecast you should not ignore. Because it comes from one of the very few reliable “economists” out there.
Longtime subscribers will recognize the name Lakshman Achuthan. He was one of the first guests to ever appear on Real Vision TV. A favorite of our subscribers, Achuthan is the rarest of breeds: an economic forecaster who usually gets things right!
The track record of his firm, Economic Cycle Research Institute (ECRI), speaks for itself. ECRI warned of both the 2001 and 2008 recessions. And just as importantly, it has often debunked mainstream predictions of recession. In 2016, for example, ECRI defied the mainstream when it said that Brexit would not cause a recession.
Last week we welcomed Achuthan back to Real Vision TV to update his forecast for 2018. In this issue we’ll tell you why he’s warning about a “synchronized global slowdown” – and what it means for your investments.
But first... how does ECRI consistently nail calls that other economists miss? Getting those calls right comes down to an understanding of cycles. ECRI’s analysis aims to identify turning points in the business cycle. When the business cycle turns down, as it is doing today, the risk of a recession spikes.
Most economists take a more linear approach to projecting the economy. They downplay the importance of cycles and instead extrapolate what’s happening now into the future.
This approach can produce reasonably accurate forecasts when growth is trending up or down. But it totally fails to predict turning points, which are key to identifying recessions. Continue reading…
For more information on ECRI professional services please contact us.