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.
The Economic Seasons
The key insight which will help you benefit from any given economic cycle is understanding that every complete cycle, bottom to bottom, has four phases, which I liken to the four seasons of a year:
- The spring of the early recovery.
- The summer of growth (everyone's favorite season).
- The fall season of harvest.
- The winter of recession.
You can begin with any season, but most of us are used to thinking of spring as the start of each year, so let's just go with that. I use this little diagram to visualize the four seasons of the economy:
There are, of course, a few notable differences between the seasons of nature and the seasons of the economic cycle:
- Duration. The four seasons of nature span, well, one calendar year. The seasons of the economic cycle cover 7-10 years.
- Unevenness. Every climatic season lasts three months — equal time. In the economy, summer is by far the longest season — almost half the entire cycle is taken up by summer. Fall is usually the shortest. Moreover, no two cycles have seasons the same length as the previous one.
- Fall. In nature, temperatures cool when fall comes along. In the economy, we see the opposite. Economists call it an overheating economy. More about that later.
Despite the differences, natural seasons and economic seasons share one key similarity: they follow a fixed sequence. We've never seen spring followed by fall or winter, for example.
This is a key piece of information, because once we know where we are in a cycle, it gives us a clue as to what's coming next. The biggest reason people get hammered in a recession is they don't expect it. And the reason most people miss out on the terrific opportunities springtime brings is they're afraid of another winter around the corner.
There's enough of a resemblance to nature's season in the economy that most people understand the concept. But the question still remains: How can I apply this insight to my finances?
To find the answer, let's look at someone who makes his living from the four seasons of nature: a corn farmer. Let's call him Farmer Fred.
In spring, Farmer Fred plants his corn. In summer he tends to his crop, and in fall he harvests. Then, in winter, he pretty much does nothing except get ready for the next year. And that's where we get our cues for how to plan our moves for each season of the economy.
In the following examples, we'll also look at Fred's neighbor, Claude. He's not so successful. In fact, the neighbors call him Farmer Clod. We will too.
Let's see how our two farmer buddies work their way through a year.
It's impossible to tell the moment when winter turns to spring. Not even Punxsutawney Phil can do that. It's still cold and dark out in the mornings. Farmer Clod wakes up, sees there's no change from winter, so he pulls the covers over his head and snuggles back into his warm bed. Fred, though, has a calendar. He knows you can't go by what you see or what you feel. It's time to plant, so he bundles up, grabs a cup of coffee and gets to work planting.
Farmer Fred knows that the size of your crop at harvest will never be more than what you get into the soil now.
Summer is growing season. Everything is green. Clod feels the warmth and figures this is the perfect time to do some planting. The new crops will have good sunshine and warmth to grow, right? Wrong.
Someone once said the secret to skeet shooting is you have to aim not where the target is, but where the target will be. Same with the seasons. Fred planted when the days were short, so that the crop would be above ground when the warm days of summer arrived. By the time Clod's crop sticks its neck above the soil, it'll be too late to benefit from all that sunshine!
In theory, all you need to do in summer is sit on the porch, drink iced tea and watch the crops grow. In practice, we all know that's not how it works. A farmer has to take care of irrigation, fertilization, and pest control. The word we use to cover all that activity is tending. Fred tends the crop he planted in spring so he can maximize his harvest in fall.
Fall is my favorite season. The weather gets cooler, the leaves turn pretty, and football fills the weekends. Farmer Fred fancies fall because that's when the year's hard work comes to fruition. Harvesting is a time of furious activity, all with an eye on the weather: got to get that crop into the silo before the cold comes! But once pumpkin pie season arrives, the work is done and the loads delivered. The checks start rolling in.
Clod, once he sees the trucks rumbling by with loads of harvest, looks at his fields and just sees green, immature stalks. Nothing to harvest. He panics. But, fortunately for him, he runs into Banker Bob at the overpriced coffee shop. And guess what? Bob is anxious to lend Clod mountains of money. So Clod grabs the money, builds a new barn, buys new equipment and seed…and plants like crazy. Got to get in on this furious and profitable activity, you know?
When Thanksgiving rolls around, everyone is in a mood to give thanks — Fred for the crop and Clod for those loans which set him on the right track.
How you experience winter depends a lot on where you are.
Farmer Clod sits at the coffee shop and bellyaches with his cronies about the inept crooks in Washington, the fat cats on Wall Street, and the one percenters who hog the entire economy and stiff the little guy. The way he tells it, he got stiffed too. Both the immature and the new crops got frozen to the ground when winter came. Circumstances beyond his control, you understand. Banker Bob just has no heart. He foreclosed when Clod couldn't make his payments. Clod even lost his new (leased) Lexus with seat warmers. For Clod, winter sucks.
Farmer Fred and his family, on the other hand, spend their winters in Arizona. Or hanging out in Cancun or Barbados. Because they went by the calendar, and not by their feelings or other people's opinions, they did the right thing at the right time.
Fred accomplished this with the same inept politicians in Washington, greedy crooks on Wall Street, and harsh Banker Bob in town. Halfway through the winter, in fact, Fred got a call from Banker Bob. Was Fred interested in buying Clod's farm for half price? Bob the banker was in trouble. He'd given himself a nice bonus after signing Clod up for that loan, but now the default is coming out of his own pocket. If Fred takes Clod's farm off his hands, Bob can survive to make more bad loans next time around.
Because Fred has no debt and lots of cash, you see, he's in a perfect position to scoop up the bargains winter always brings.
You know the rest of the story: Fred lives happily ever after while Clod is consigned to writing a blog telling everyone how to learn from his mistakes.
What set apart Farmer Fred from his clueless neighbor? Clod acted according to what felt right, while Fred acted according to what the calendar said, regardless of how it felt.
Most of the time the right thing doesn't “feel right”. These days, many people are buying bigger homes because “it feels right” — just as in 2005-06. In the depths of the recession, nobody wants to buy anything. The news is laden with depressed stories.
I thought of buying some property in 2010. I was made to feel like a serial killer, so irresponsible was that. “Why would you buy something that's falling in value?” I allowed myself to be talked out of it. With hindsight, you can see I was stupid because I allowed feelings to dissuade me from a smart investment. (Don't worry, I made other investments at the time which turned out very well, thank you.)
More than 90% of the population make otherwise good financial moves at the wrong time. Those that follow the “calendar” of the economy just do so much better.
The Economic Seasons and YOU
“Great,” you might be thinking. “Nice story, William. But what does this cute little fairy tale of your have to do with Real Life?” Let me count the ways! Actually, there are too many to include in this (already very long) article. But here are a few examples.
When you pick an employer, look at how they treated their employees in the last recession. Were there mass layoffs? Or did they find a way to keep their people busy (end employed)?
Think twice about making a job change late in the summer of the economic cycle — or in fall. That's usually when employers are hard pressed to find enough good workers, so that's the time they make those juicy job offers. However, when the recession comes, it's the newest workers that usually bite the dust, especially if they make more than the old timers. If you're planning on a change, try to make it as early in the cycle as you can.
In a recession, if you keep your job, you can't rest on your laurels. When other workers have been let go, job descriptions become very fuzzy. Workers are expected to do more for less to keep the ship afloat. Instead of whining, realize it's the perfect time to sow your seed for the next season. Volunteer to do any extra work, especially outside of your department. You get wider experience, you make new contacts, and your actions get the word out that you can be relied on to go the extra mile. Once winter is over, budgets will expand (yes, even the state of California is running a surplus this year) and that's when opportunities for promotion are at their best. Who gets the most promotions? Those who went the extra mile in the tough times.
Millions who bought their homes in 2006 and 2007 learned the hard way: Late summer and fall in the economy is not the time to buy a home. On the other hand, those who buy in the winter inevitably get great deals and reap the benefits for the rest of their lives.
Winter and spring are the only good times to take on debt. But you have to keep your eye on the cycle. You may not get hit by the next downturn, but you never know. Either way, you have to be sure to be out of debt by the time the fall of the economy arrives.
You know ahead of time there's a recession coming — you just don't know when. Summer and fall are perfect seasons for earning more money, be it from overtime at work, raises, bonuses, and/or side jobs. If you avoid lifestyle inflation and simply save the money, you'll have a cash hoard to pounce on the terrific bargains only available in and after a recession. Want new carpets for your home? If you wait till the next recession ,you can get them for 50% off. That cruise you've been eyeing? 40% off — and free upgrades too!
There are boo-birds out there who tell you to never “time the market”. Don't scoop up the bargains winter brings. Poppycock.
Warren Buffett, the one who loudly preaches we should never time the market? Well, he's also the circus barker in every recession who yells: buy, buy buy, because prices are low, low, low. He doesn't practice what he preaches.
I look at what people do more than what they say.
If you want to buy rental property, a recession is the best time. Same with anything else of value. I borrowed in the last recession to buy investments at historic lows. After they quadrupled, I sold them, paid the taxes, and paid off the debt.
Please note I'm not advocating the bad half of market timing: Selling when you think prices have peaked. That's a fool's game. I'm only talking about saving up cash to scoop up some once-in-a-cycle bargains.
Springtime in the economy is the best season to start a new business. It's pretty much the only season, really. Around 80% of new businesses fail, so it's wise to stack the odds in your favor.
If you already have a business, spring is also the best time to expand. A friend tells of a businessman here in Denver who was looking for floor space downtown during the last recession. He found a landlord desperate for tenants (as all are), who offered an entire floor for the price of half a floor. Oh, and about $100,000 worth of office furniture, left by the previous tenant who expanded in “the good times” (fall) who went under. When else will you score $100K worth of assets for free? Only in spring. To do that, though, you have to resist the (strong) temptation to expand in the good times and save your cash instead.
Think this is just theory? Quick! Name America's largest airline! If you answered America West, give yourself a gold star. What about United, Delta, Southwest and American? Wrong.
America West, see, was a tiny regional carrier based in Phoenix. Two recessions ago Doug Parker's company bought U.S. Airlines out of bankruptcy court (i.e. for pennies on the dollar) and renamed itself U.S. Airlines. Then, in the Great Recession, they repeated the trick. They bought once mighty American Airlines out of bankruptcy court, and adopted the name of their larger victim. But underneath the American logo and veneer beats the heart of tiny America West (and its smart CEO) who used the economic cycle to grow his company from nothing to the largest. A friend of mine did the same in a more regional industry.
This stuff is real. It can have a profound impact on your net worth…if you can be patient enough to think in decades, not days.
Timing Is Everything
When it comes to big financial moves, timing really can make a big difference. It's not what you do but but when you do it.
Incurring debt makes sense in one season and not another. Changing jobs and buying homes, to name two examples, are good in and of themselves. But do them at the wrong time and they can set you back severely. Do them at the right time and everything will be coming up roses.
It's not enough to just do the right things. You also have to do them at the right time.
I was Clod.
I did the right thing at the wrong time, and lost a lot of money, all because I wasn't aware of the economic seasons. I knew the theory, but I was too impatient to wait and do things at their proper time. It was only after I turned 50 that I became patient enough to wait and take the long term view. Now I'm seriously old, and retired, and (like Clod) I can blog about all the things I learned.
Why don't more people and businesses capitalize on the myriad opportunities a fluctuating economy brings? Two reasons. First, they don't no any better. They aren't aware of the info you just read. Second, they have a life. They don't have the time to track something that moves at the pace of a glacier.
I try to address both those problems at Drop Dead Money, where I cover these ideas in greater detail (and provide strategies for you to follow during each season).
I watch the the slow crawling glacier for you. Once per quarter, I send out an email to subscribers with an update about which season our economy is in at the moment, and what you can do about it. That's all. When you're watching something as slow-moving as the economy, even once a quarter seems too much at times.
Everything is free. There's no hidden agenda or sell, and unsubscribing is a one-click affair. No questions asked. I hate veiled sales pitches and come-ons, so you won't find any of that there. J.D. has been a subscriber for a while — 'nuff said.
Author: William Cowie
William Cowie spent 30 years in senior management (CFO/CEO) before retiring. He has a bachelor's, a master's, and a partial doctorate in management and strategy. Author of the book “The Four Seasons of the Economy,” William also assists medium-sized businesses in the use of the Four Season Strategy to help them capitalize on economic cycles. He runs two blogs: Bite the Bullet Investing (investing) and Drop Dead Money (the economy) and writes for several other blogs in addition.