Macro

Episode 85: Business and Economic Cycles For Investors with Lakshman Achuthan

Ben Lakoff, CFA
September 19, 2022
41
 MIN
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Lakshman Achuthan of Economic Cycle Research Institute (ECRI) on where we are in the current Business and Economic Cycles and what that could mean for your asset allocation.

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Show Notes

0:00:00  Welcome and context    

0:02:10  Where are we in the business cycle right now?    

0:09:07  What can we learn from the previous cycles?    

0:16:05  What are the main drivers of this current cycle?    

0:19:00  Where are we in the inflation cycle?    

0:28:00  What can be the pivot to change the inflation?    

0:33:35  Is it possible to forecast recession?    

0:37:05  How should people think about positioning their portfolios?    

0:41:25  Where can people find out more about you?

Show Links

Business Cycles Website

Episode 43 with Lakshman

ECRI

Lakshman on Twitter

Helpful other Alt Asset Articles

Episode Transcript

[00:00:00] Ben: Welcome to the alt asset allocationpodcast, exploring alternative investment opportunities available to theeveryday investor. Here's your host Ben Lakoff.

Hello and welcome to the alt asset allocation podcast. Today'sinterview is with Lakshman Achuthan. Business cycles, economic cycles. It allseems so obvious in hindsight, but cycles are easier said than done in terms ofpredicting.

I love having conversations like this, and we're just trying topull ourselves out of the paralysis by over analysis of all the minutia andanswer is the wind in our face or at our back looking at these historicalcycles and leading indicators currently. Right now, the question is. Are we ina bear market rally, or is this actually at the start of a new bull market?

Obviously, with all of my interviews, we're not focusing on theshort term tactical moves, but more so thinking super long term on these thingsand position your portfolios. Hopefully accordingly Lockman is a student ofbusiness cycles for nearly a century. At this point with economic cycleresearch institute, or ECRI.

Highly recommend check out their reports. It's really goodstuff. Lakshman himself really, really knows his stuff about cycles. Before youlisten, please don't forget to like, or subscribe to the podcast or even betterleave a review. If you're watching this on YouTube, please subscribe to thechannel and, or give the video a thumbs up.

These things really, really help with awareness. And I reallyappreciate it. All right. Enjoy this episode with Lakshman on all thingscycles.

Lakshman good to see you. Welcome to the allt asset allocationpodcast.

[00:01:44] Lakshman: Good season. Good to see. Good tosee you too. It's it's it it's been a minute and a lot's been going.

[00:01:50] Ben: It has, and I was looking back. Soepisode 43 in April, 2021 so four listeners I'll link this in the show notes,but that was a great episode. We talked about what are business cycles,economic cycles, why they're important. But since then, obviously a lot haschanged. It's now mid-August 20, 22.

It is weird times now as it was then. And as you say, or astudent of the business cycle, you're a big, big picture guy, which I really,really appreciate, you know, versus getting stuck in the minutiae of a day today short termism. But I wanna start off just by asking. Where are we in thebusiness cycle?

Is this a risk on risk off upswing downswing? Where are we inthe cycle right now?

[00:02:33] Lakshman: Sure. And just, just to set thattable again, we spoke in April spring of 21. Correct? Right. So that that'sperfect in a way, because right there, April may of 2021 was as good as it getsin terms of growth. And I'm sure we were talking about that and, and I shouldgo back and, and take a listen again, where we're always looking forward.

You know, there that's the coincidence, I'm saying as good asit gets in terms of coincidence, snapshot. If we took a Polaroid or whateverfor your older listeners, took a snapshot of what was going on then. You know,double digit growth rates in, in the growth stuff inflation was, was on its wayup, but probably not totally outta control just yet.

And everybody was quite optimistic about everything. And. Ourforward looking data I'm sure was, was moving down deteriorating at that point.In retrospect, looking back in the rear view mirror, it's it's crystal clearthat output even jobs. Okay. We can talk about that. Sales and income have beendecelerating from very lofty levels.

So we've been in to your question just to open up, where arewe? Okay. We're in a slowdown and this slowdown has now been a long timecoming, right? That's a, a, you know, spring of 20 ones a long time ago, sothat slow Down's. And every time you're in a slowdown, you're, there's itresolves in one or two ways.

It's, it's a hard landing or a soft land. Everybody hopes for asoft landing. We all want one. Let's just stipulate that But you don't alwaysget what you wish for, and I'm afraid, you know, just to set up this, thisdiscussion today, I'm afraid we're, you know, the odds are pretty high we'rewe're, we're looking for a, we're cruising for a bruising.

We're looking for a hard landing here in our forward lookingdata because when we're looking for signs of a soft landing, what we mean bythat is we need to see our forward looking data on growth. Stabilizing from itsdecline and starting to turn and go the other way, the drivers of the economyturning and going the other way, and that has yet to a happen.

So there's more slowing ahead and we're all ready dealing withsome declines in the levels of things. Kind of define the economy outside yourwindow. And when you get declining levels, I'm not talking growth rates. I justswitched from growth rates to levels when you get declining levels that's thekind of stuff that describes a recession.

So there's been all this talk about the negative GDP thatitself doesn't describe a recession it's often associated with recession. Wetechnically it's a Necessary, but insufficient kind of statistic to see aroundthe recession. You really need to see jobs growth also code negative. And wedon't have that yet.

And we may not have that right away. Although year over yearjobs growth is decelerating. And, and just to wrap up on the kind of, where arewe snapshot of this slowdown, that's likely to end in a, in a, in a softlanding. Why, how do we get. Just to recap real quick. You know, we had thiscrazy COVID recession, the shutdowns, the basically policy makers in the westreally went for it with stimulus.

And then the economy's opening up. So you have this superstrong upturn. And I'm talking about both monetary and fiscal stimulus, andit's basically the, the countries in the west. Some countries didn't do itquite the same. China took a slightly different path. Japan did much less interms of the stimulus.

You see a little less inflation in those countries as a resultof a, a slightly different policy path, perhaps. The difficulty with the policypath that, that the Western economies in the United States took is. You haveinflation. Okay. So we're, you know, that's the headline everybody's painfullyaware of that you borrow from future demand, right?

You get everybody jazzed up to, to do stuff. And we respond tothat. Right. You know, and, and as human beings and, and the market economy andthat, so that's pulling a lot of future demand forward, which then if you, ifyou take a break from that, Contributes to, to the slowdown of the recession. Lotsof, of, of, of funny stuff in the supply chains which really jerks around theproducers around the world, cuz they don't fully understand.

And some of them don't fully understand the cycle. And sothere's like, whoa, there's so much demand. Let me build it. They will come.And. All of a sudden nobody's buying stuff and they've got over capacity andyou've gotta correct for that. So we're doing that. And then in the meantime,you still have gotta make policy, right.

Or business decisions or whatever business people and investorsI'm, you know, they're, they're, they're figuring it out. I think they're alittle wise to what's happening and adjusting to it. In a way I'm a little moreworried about the policy makers. Cause I don't know if, if the, if, how they'redoing you know, the fiscal stuff is got a lot of politics in it and on themonetary side you have Really a lack of a framework.

They, they're kind of in, in a way blowing in the wind and, andmaybe reacting a bit to, to market sentiment and whatnot. So it's, it's a, alittle it's, it's not a very cohesive policy framework right now. In terms ofmonetary policy. And let me just leave it there. I dumped a lot out there.Yeah. You could take it in any direction.

[00:08:11] Ben: No, there's and there's a lot ofdirections we can go here. And I mean, I think the, the biggest thing is youknow, your you've been a student of history and studying history for a longtime and your Institute has been very good. Predicting recessions based on likehistorical cycles. But I hear all the time that this is unprecedented and, youknow, the government, their, their backs up against the wall.

Just thinking like, you know, are there, how much can we learnfrom previous cycles and previous instances, periods of history versus like,you know, we're in uncharted territories at this point, right. And like,you're, we're. Creating creating the history as we go along. I mean, how doyou, how do you kind of like balance these things?

[00:08:56] Lakshman: Yeah, we are in, in kind of. New newterritory in that sense. I mean, people talk about is this, the seventies is,is probably the easiest one because we hear about the story, the structuralinflation of instructional inflation in the, in the seventies have also heardthe forties.

[00:09:16] Ben: And like, you, you know, picked thesemoments I'm here, right?

[00:09:19] Lakshman: You go back and you see whereinflation ran up and you say, oh, maybe it's like that. So. One lesson. Right?So, so I'm, I'm learning from my own experience. I've been doing this real timeprofessionally since 1990 where we've had some upswings in inflation, but notlike huge, huge inflations. And. Of course, my mentor, Jeffrey Moore, who isthe father of leading indicators.

And then he's, he's certainly recounting to me his mentor,Wesley Mitchell's work since the twenties. So I'm, I'm kind of familiar withabout a century or so, and look, stuff has changed. Right. And, and, andbecause of that experience, both my own and, and through my teachers It's taughtus really not to forecast by analogy too much, rather to look at leadingindicators.

And I want to get to the future inflation gauge in a momentbecause while some key conditions may seem similar to past episodes, otherreally important factors or can be completely different from the seventies orthe forties. Right. And so on the cyclical side of things, if we keep it to thecyclical.

As opposed to structural where we can monitor the key factorsthat drive the inflation cycles. And, and, and we can see, is it, is it headingto the upside or to the downside cyclically, which is looking at a severalquarters? Not many years on the structural side of things. I, I could say rightaway, things are very different from the past several decades.

Number one, That's really important cuz the Fed's operating ina new environment. And number two it's it's it's that includes the seventies. Imean we've got massive demographic shifts, very different from those earlierdecades and that's not just within the United States, but it's globally, whichalso washes onto our shorts.

Okay. Number one, that's a structural thing. That's differentthan those past decades. You've got de-globalization. I think everybody whohears the word right now is like, oh, okay, everybody's starting to fight. Andso the supply chain episode, we're on touring and this and that, but actuallyit started without a fight.

It just was naturally starting deglobalization about a decadeago. Okay. This is not new. So we think it is a, a structural shift, hard toforecast a structural shift. You can kind of see them after you're in them.And, and here we are a decade into I think a bit of a shift of de globalizing.And, and you could see that when you look at the ratio of global trade to globalGDP, you could see that happening.

Then, you know, come to current, you know, current events,meaning like, since. 1718, something like that. 20 17, 18 you know, we've beengetting into kind of cold war 2.0. And, and how does that interact withde-globalization forces that we're already going on? So these are all impactingthe structural inflation table.

And then you've got the, the play, the big player in thedevelopment, in the room or whatever, which is the policy response inparticular, the fed, which leads a lot of other central banks. And you know,I'll just say, and, and look, I'm not fed bashing in the sense of, you know, Idon't just enjoy beating up on them, but this is important stuff.

And they made a really, really, really epic policy mistake. Andwhat do they do now in the wake of that? Do they, you know, it, it, it, becauseit could, it, it may reinforce or push back against these, some of thesestructural forces that are affecting inflation. So The seventies are, are kindof neat.

You'll, you'll neat in the sense that yeah, we had inflationup, it was averaging, I think, I don't know, 7% or so. Right. For the decade incontrast to say the nine, you know, post great recession, excuse me, where itwas averaging like 2%. Right? So you got structurally 7% or 2%. That's bigdifference.

Okay. But when, but the cycles are happening in both instances.Right. And you never know. Well, the market never knows. I think we have asense. The, the market gets confused when there's a cyclical turn inside of thoseperiods. So in the seventies you had cycles in inflation around that average of7%. You can get to a high of 13%.

We were to high of nine. Right. So we're in that area and youhad a low of 3% now that's a 10% gap. Okay. And, and, and I don't think peoplereally think about that too much when they think the seventies they're justlike, yeah, it was high. Yeah. But no, it was, it was going like that. So itfeels to me like volatility is a feature that we're going to.

Navigating it may, that may mean kind of this rebirth of, of,of macro to a degree. It was only a year ago. I mean, when we were talking,there were, it was death of macro, you know, macro was dead. Oh yeah. Macro wasdead. So, so this could be the, the flip side of that kind of feeling for themarket.

[00:14:46] Ben: Yeah. I just always feel myself you know,in a, you use the word feel because it's like, mm-hmm, , it's just kind of thisgut feeling, but like demographics, globalization deglobalization and, and, andthen like living within the exponential age of technological improvements andthen coupled with like potential monetary regime changes and things like that.

It's like, man, it does feel different this time, but it'sstill investors psychology, and it's still humans making these decisions, whichdrives a lot of this the cycles I would imagine. Right.

[00:15:17] Lakshman: You know, a hundred percent. Right.So, and, and we, you know, we we've talked about this and I, and forgive me ifI'm repeating myself.

Right. But there's this, there's this we, we write about thisphysics envy, right. That economists have. sorry. And, and and you. You know,like math or physics or programming or whatever that you're going to in otherhard sciences that you're going to get some precision and maybe big data willgive us precision.

Oh, you know, there's, the II is gonna give us precision also,but the, the thing, the factor to your point is, is kind of how you're feeling.Right? So I mean, not, not in a literal model building sort of way. We don'tuse employ models to forecast cycles. We watch we monitor indicators, but I'dsay, you know, a third, roughly a third of the inputs that are going in thatare capturing the drivers of the cycle, do relate to feelings, which are, if Ioversimplify them fear.

And greed , you know, and that is what keeps us going, right. Imean, it keeps us from, from getting our, our cut off at the knees, the fear.And then it lets us make hay for a rainy day, the greed. Right. And you justhave to have some

of You know, managing that, not letting it get outta control interms of your own decision making. And I, and, and that's where in an, in anapplied way, right. Instead of the theoretical way, how can you use cycles tohelp you out? And so it's not market timing, right? I know. There's a lot oftime and money invested in saying that market timing is a horrible, dirty word.

because it doesn't serve certain agendas where you just wannafeed the beast and buy and hold, but bad things happen during recessions. Ithink we can stipulate that. And, and you tend to get problems with earningsand, and so on and so forth. And you also get those during growth rate cycleslowdowns, and those have been mitigated to a degree by the policy of easymoney which has truncated the persistence of the market reaction duringslowdowns.

But you could only get away with that policy when there's no,I. Now that there's inflation, we're in a seemingly at least for now in a, ina, in a new world. Yeah, indeed. And

[00:17:53] Ben: let's, let's double click a bit oninflation. Yeah. You know, I, I tweeted some questions and like, A lot of themcenter around inflation outlook, like where it's going, how long it's gonna behere, because this is the headline today is inflation moderates or, ormoderates in July.

CPI rises at less than expected. 8.5%. This is, would see, seembananas two years ago that we're like happy about eight and a half percent. Soinflations on a lot of people's minds would love to hear your longer termexpectations on inflations, where we are. Stagflation any of the other termsthat are relevant in this

[00:18:30] Lakshman: situation?

Sure. Well, right now look, I think the cyclical peak is, is,is behind us. Okay. And the question is how, but that doesn't mean you don'tfeel inflation. Okay. Just because there's technically a cyclical peak behindyou, how long is inflation going? Kind of plague the economy that remains to beseen.

It's, it's probably gonna be there for a bit. But I want to,again, orient everybody to what, what goes on with inflation. Most of theeconomic thinking in the world. Okay. Is that there's some sort of construct ofa model of the economy and X amount of growth and here's the inflation andhere's the jobs and they are kind of.

Tethered together. Okay. So if one moves then the other movesand that's how models work. You add this up and you get this equation. That'sgoing to spit out a number. And then that's where some of those numbers comefrom, the estimate was this and it beat the estimate or it didn't or whatever.Look at the end of the day, inflation's still really high, regardless of thatheadline.

And regardless of the beat, it's way too high. I remember thatguy. There's a guy in New York. He's he always runs, I think for mayor he'slike the rent is two damn high. That's his. That's the only thing he says, ,you know, and, and this is, you know, so he's, he's probably gotta, you know, Idon't know where he is right now.

[00:19:50] Ben: He's probably saying that. Well, I'll tellyou what man. My favorite place in Venice is a breakfast burrito stop, but, andit's a truck and the price has gone up now like 25% since. Yeah. I'm like, comeon guys.

[00:20:03] Lakshman: What the hell? Yeah, it's two damnhigh. The price of burritos, two damn high. That's what everybody's doing.

What we're doing is totally different, right? We're looking atcycles. And so there's cycles and growth. We talked about recession for asecond. We can get back to that there's cycles in inflation, which are relatedbut different. And then there's cycles. There's actually cycles in employment.So in the wake of the stagflation of the seventies, Give you a quick historyhere?

My, my, my late mentor, Jeffrey Moore and he's the father ofleading indicators, literally. Okay. Recognized that inflation cycles weredifferent from business cycles. Okay. You cannot equate these two things andthat was 40 years ago. Ever since we've been working on kind of how, what arethe forward looking indicators specific to the inflation cycle?

Now, a lot of that's proprietary. But we do share this, this,this one of these outputs with clients, which is the future inflation gauge.And it's designed specifically just like leading indicators lead the businesscycle, future inflation, gauge leads, inflation cycle, turning points. And thevalue of that work is really big.

So, so in, in the summer of 16 when yields were at multi-yearlows inflation cycle, the fig was going to the upside. It was, it was moving upreally good call. The next, really big one, which is impactful today was in2018. When the fed was in the middle of a rate hike cycle in 2018 and the bondgurus were.

You know that they have bond Kings or whatever. And they weresaying, look, it's gonna be 4%, 5% tenure. Maybe even higher bear market in thebonds is, is, is here to stay. And, and of course, you know, we're monitoring,right? We don't have any agenda here. The, the future inflation gauge goes.Boom the other way.

And it makes a cyclical downturn. Right. And we were trying tofigure out we, we, we understood what was going on as, as we were watchingthat. But the fed kept raising rates in, in, in, and it, it raised rates inSeptember and December of 18, then the market just puked and Powell just said,screw it and went the other way in, in, in January of 19.

And that's the Powell pit. And guess what we're waiting fornow, right? we're waiting for, we're like, Hey, can you do that again? You knowthat that's kind of that's please can, can you do that again? So, so look, it'sD I, I understand the market's gotta get excited and go for that. And they, youknow, who, whoever knows, I don't know exactly what the market's doing, but,but for the fed for a second here, right.

They want to. Kind of diagnose, I mean, any of us, if we, if wekind of crack something up would be like, you know, how'd that happen? I don'twanna do that again. Right. You kind of learn from your mistakes. I'm afraidhere. They kinda learned the, the wrong lesson. They said, oh gosh, maybe therewas a structural down shift in inflation.

That's why we didn't understand it. And maybe the Phillipscurve, which is kind of this old, old idea they have about jobs and inflationis that maybe it's even flatter than we, our models said it was. And sotherefore we really don't have to get excited about inflation at all. And thatset the stage for what they just didn't do, which is react.

Let alone predict the inflation that we're having right now.Right. Which doesn't seem again, like to the, to the noncoms it's like, yeah,duh. Right, but also, also

[00:23:51] Ben: in hindsight, right. It's a also inhindsight, but I think, well, duh, those, those, those signs were

[00:23:56] Lakshman: there, but also in hindsight, butyou know, I, I, I it's, it's hard to wrap your brain around the order of magnitudeof stimulus.

Right. You know, what's a few billion or trillion amongfriends, right. It's like billion trillion. You don't really get thedifference, which is, but there is a difference thing too.

[00:24:12] Ben: Yeah. This is the thing is people like,you know, humans don't understand exponential growth. You like fold a piece ofpaper.

30 times and it reaches the moon, you know, and it's

[00:24:20] Lakshman: like, right. yeah, they does. Theygo.

[00:24:23] Ben: So these numbers of magnitude are, arevery, very different things, but it's just, it's so big that it doesn't makeany sense.

[00:24:29] Lakshman: Anyways, very different. And so thefig now, you know, in the current, in the current stuff we're dealing with now,the fig turned up.

I mean, I, I kind of cringe saying this in the fall of 2020,right. Well ahead of, there was a surge in breakevens which is a market kind ofmeasure of inflation expectations in early 21. And, and of course the feddidn't even start doing anything until earlier this year. Right. Cause theyjust, just didn't get it.

So now you know, the fed ran all the way up to a 33 year highinflation went. It's a directional indicator. Inflation went to a 40, some oddyear high. The fig has, has peaked and, and rolled over. So directionally Ithink the, the, the peak is in inflation is in, but it's gonna stayuncomfortably high for now.

And there's, you know, you'll get some relief in the goods.Inflation, you'll get some relief in the gas. You know, I don't know aboutfood, maybe not, not yet. Right. The burritos are still up. Damn. , you know,the, I saw white bread was still up today. So, but I'd rather have a burritoand, and but the sticky stuff is going to keep edging up.

It may not even, you know, still moving to the upside. So Hardto pivot, right? If you think about it, January 19, you pivot the market puke20% inflation was low. You pivot. Okay. Cause it's like the game book they'vebeen using since the great recession, but now you still have inflation at 8%.How do you pivot there?

It's a little tough. So the forward guidance, maybe this andthat, but. My sense is it may be premature to, to say, they're gonna pivothere. I'd say I'd be curious. Yeah. Curious. He said he wants to be Voker. Hesaid he wants to be Voker, but I don't know. That's a, I dunno if he could dothat,

[00:26:24] Ben: I'd be curious what your like, unpopularor opinion or hot take is on terms of like, what should, what that pivot shouldlook like to kind of get us out of this mess or start pointing us in thedirection.

[00:26:38] Lakshman: Hopefully get us a little moreclear. Well look, the, so the, so that structural stuff, the fed can't reallydeal with, right? It's not like you lower rates and demographics change youlower rates and, and or you raise rates in, in impacts demographics orgeopolitical or cold war or de globalization. It, it doesn't really.

Hit those things, right? What it, what it can hit are thecyclical drivers of growth and inflation with a lag. So the real difficulty isthey're just so fricking late that they've got to be stopping on the brakeswhen the economy is already you know, till tipping into recession that, youknow, technically you you've gotta.

See jobs growth go negative for that to actually be, you know,to, for it, to be an actual recession. And, you know, that could take stillsome more time. I mean, our, our leading employment indicators and, and otheranalysis back in may was telling us that, Hey, the unemployment rate's stillgonna be going down, you know, and, and you really need that to start movingup.

If there's gonna be, if you're gonna be in a recession, youknow, give or take a, a, a few months and that may not be imminent. It's nothere now. So we're, I don't think we're in recession at the moment, unless, youknow, we've got some revisions coming up, you know, that always, this is, thisis why it's, it's frustrating that you can't just say I know exactly where I amin, in economics.

Right. But the revisions to the data that it will help definesome of this. Ultimately I think we get a, we get some glimpse at them at theend of August and the, and the more, more clarity in February of next year. Forwhat's going on and these are benchmark revisions. So those could plop somenegative growth in there and we'll be like, wow.

Yeah, that's behind us.

[00:28:38] Ben: That's wild. We're just, just driving,looking down the rear in the rear view mirror.

[00:28:43] Lakshman: Right. But you listen to, you know,I just, I did a, a, a, I was at a client kind of thing over last weekend. andsome of them, they get, you know, they, I mean, a lot of your guys and ladieswho are listening will, will think about like tech investment and they're justlike, whoa, you know, cause these cuz the tech stuff is tied to themanufacturing cycle, which tends to be a bigger cycle than the overall economy.

And of course everybody was running hand over foot to buy thatstuff a year ago and. If they, if the manufacturers and business managersweren't anticipating this slowdown that we're in they probably had too muchcapacity, probably produced too much in all that. Right. So they're sitting,you mean the Peloton guys,

[00:29:27] Ben: they thought

[00:29:27] Lakshman: that they didn't forecast that thiswas a spike in demand.

Yeah, no, the, the Peloton guys, but I think even more, evenmore extreme, I think the Peloton ones, you can, you can kind. Kind of thinkthrough, but then the ones that, that may be more impactful right. For thebroad economy would be, you know, the, these manufacturers of, of, of, of, ofreally integral things.

So like a, one of our, one of our clients is a long time. It'sa really big chip manufacturer. And they know they've kind of learned how toride. And I think you can apply this to smaller companies too. You don't haveto be the big guy to do this. And, and you know, last year there's a huge boomin chip demand.

Everybody's like going crazy. I don't know enough chips. Youheard all those stories. Right. And, and being forwar kind of among otherpreparations, they did, they did something kind of interesting this time aroundand these cycles happen, you know, every several years. Negotiating withclients who were just like, give me the chips, I'll do anything to get thechips they wrote in pretty stiff penalties for any cancellations.

And so, you know, that fore knowledge forewarning for them isreally paying off right now. Mm-hmm . because a lot of the, a lot of the, theclients and stuff are, are just like, oh my God, you know, I can't takeanything. Don't give it to me, blah, blah, blah. And, and I think it's, it'shaving like nine figure impacts at this point.

And it reminds me, I think there was a quote in during the techrecession, the oh one, one from chambers at Cisco, like the brightest people inthe world couldn't have seen this coming, but yeah, it was cyclical. Mm. Youknow, and they had, I think there was even, I, I, I, I don't know where I sawthis or I do recall it.

I don't think I'm, I'm, I'm making it up, but that they wouldput stuff on boats and ship it just to be like, it's gone, but it wasn't goinganywhere just to get it out. Right. Cause that's how stuck you are.

[00:31:36] Ben: Well, I heard you mention that likeJeffrey Moore, your mentor, that you're doing extremely well, if you canforecast at forecasting, if you can spot a recession right.

When it starts. Right. So it's very difficult, even though welook back at these periods, it's still very, very difficult, cuz ultimately youdon't have crystal

[00:31:55] Lakshman: ball SU super difficult and thenyou've got the, the fear or the, you know, fear in green and I guess. Forinvestors that we flip over from manufac, you know, companies C-suites and, andwe switch over to portfolios.

Is this a bear market rally or is it a new bull market?Anticipating in essence of soft landing, you know what the heck's going on?Right. The I'm looking here. I don't know. This is S and P I have up 1.9%today, 77 points or so. Right. So And that's building on the earlier recoveryoff the low.

So what is it? Which one is it? You know, now from our analysisof managing the cycle risk there bear markets are totally associated withrecessions and we've had one, right? We've fallen 24%. Now we're bouncing offof that. So that's totally consistent with the downturn, big corrections bearmarket.

Totally consistent with the cyclical downturn. All of our goodleading indexes nailed that call a hundred percent. It was a bullseye. Couldthey be wrong in not seeing a business cycle recovery here? Sure. I likeanything's possible. This is not a. Perfect science at all. But in looking atthe history that we have century or so looking at the logic that we have Ihaven't even touched on the world economy, but let me just stipulate for asecond.

It doesn't look good. It's all cycling down. So with all ofthat stuff, it is pretty improbable that there is a soft landing. On the radaror on the edge of our radar that we're just not seeing at all. And somehow themarket is having a view of that. That we're not, that doesn't seem there andI'm looking for it.

Right. Could we be wrong? The most bullish thing you could say,I think is that, Hey, there's still jobs. But when you look in there, there'sall kinds of structural shifts going on in there and mismatches of skills andon and on and on that I, and our forward looking leading employment indicatorsare weak.

They haven't turned up. So when I look at all that, I'm like,Hey, I can in good conscience, say, oh yeah, let's start doing risk. There's,there's no evidence from our cyclical vantage point to, to say that. So havingsaid all that, I have to answer my own question and say, eh, looks like a bearmarket.

[00:34:38] Ben: Well, that's certainly exactly whatpeople are wanting to hear on this podcast.

All right. Ultimately, I mean, not, not financial advice, thisis long term views, just our own opinions, but like, you know, it is aninvesting podcast and I know you're talking with clients so always curious, youknow, It looks like doom and gloom. It doesn't look like this is the beginningof the next bull market.

You're looking at things like unemployment indicators, which,you know, once you dig into they're actually maybe not as rosy as you think. Soin terms of like asset allocation, can you talk broadly on how clients arethinking about positioning their portfolios accordingly going into these kindof headwind?

[00:35:21] Lakshman: Yeah. I mean, by and large look it'sa lot of assets are actually, you know, more leaning toward the hard landingscenario with the exception of equities and broad brush strokes. Right. So youknow, that it's difficult for that divergence to persist. It can persist for acouple months. Sure. Totally.

And, and, and probably just long enough to sucker people in ,you know, that's how, that's how the, that's, how the market works.

[00:35:53] Ben: We're election cycles and things likethis. Right.

[00:35:56] Lakshman: I mean, yeah, there's, there's a lotof that. So, so, but, but probably here's the one thing I wanna share and it'snot complicated, it's it?

We've talked about leading indexes. We've talked about centralbanks. And so we have these so-called long leading index. Now a distinction ofa long leading index is, is, you know, it's leading by a few quarters, not oneor two quarters, but, but more than that, the, the, again, this is not there.

There's, there's no precision here, but I'm talking aboutgeneral relationships. Equities are a short leading. I. I look at all of theexamples of all the turning points all over the place, across space and time,you know, internationally at home, as far back as we see they, they tend to beshorter leading indicators.

They're good ones at cycle troughs, particularly. So if you seea cycle trough yeah. You wanna go risk on which is why this fear of missing outand people are jumping on this. Right. So, so. Those long leading indicators wehave for 22 economies around the world. So all the big developed nations andall the major emerging markets, including China, India, and even Russia.

Okay. And those long leading indicators have never been as weakas they are without a global.

Just full stop separately. We monitor the diffusion thepercentage in other words of central banks, which are tightening rates. And sowhile the long leading 21 country, 22 country long leading index is coming downto a reading that we don't see outside of a global recession. The percentage ofthe proportion of central banks, which are raising rates has never been thishigh.

And as far as we know, monetary policy works with long andvariable eggs, it takes a while to propagate through. Right. So. You know, the,the, when the mortgage rate moves, then it has the impact on this and that andactivity, or when the IPO doesn't happen it, or the second round of funding orwhatever, when it, then it pro it pushes out because it, then it affects allthese dominoes down the line.

And. So that's why you have the long and variable lag. Themarket may react very fast in the hope that something is happening, but thenthe actual activity then has to react to the change in rates or whatever. Soyou've got everybody slamming on the brakes when already everything, all thedrivers of the cycle are jerking to the downside.

That's not a great, great combination. So it makes anyindividual countries, circumstances have a kind of a tougher backdrop. Okay. Sothat's the some kind of insight that comes up from looking at literally hundreddifferent cyclical indexes around the world.

[00:39:08] Ben: Yeah. Well that is great stuff. AndLakshman we're bumping up against the time. I can talk to you for hours about thisstuff, but I'll, I'll link ECR and your Twitter and all of the other things wementioned in this conversation, which was fantastic. But where can my listenersfind out more about you or where

[00:39:27] Lakshman: would you like to send them? Yeah,well, business cycle dot com's our website, or I try to, if I'm thinking orseeing something and, and, and kind of just wanna pop it out there for the, youknow, the ongoing cycle discussion go to at business cycle on Twitter.

And that's about the extent of, you know, it kind of propagatesout from there, but. That's that's an easy way to keep an eye on us.

[00:39:49] Ben: Well, great to have you on again asusual, just dropping tons and tons of knowledge bombs and I'm sure my listenerswill really love it.

[00:39:56] Lakshman: So thank you so much. Always apleasure.

Let's let's do it again. You know, in a couple, you know, acouple quarters, we'll do it again and everything will have changed. Soundsgreat.

[00:40:05] Ben: There you have it. Thank you for listening.I really appreciate your support show notes, transcript links, and more can befound on our [email protected]

If you'd be so kind, please share this with anyone you thinkmight be interested or get some value from this conversation. If you have anyquestions or comments, please reach out. I'm always happy to hear. Lastly, ifyou're on YouTube, please like the video or subscribe to the channel. If you'relistening to the audio version of this, please subscribe to the podcast and, orleave a review.

This really helps more people find the podcast. And I reallyappreciate it. Thanks again, and hope you have a fantastic day. Happyinvesting.

Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.