Episode 43: Following Business Cycles with Lakshman Achuthan

Ben Lakoff, CFA
April 26, 2021
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Lakshman is Mr. Economic Cycles and has spent his whole career on economic cycles.

There are so many different cycles at play and it’s a bit overwhelming. We discuss where we are in the economic cycle, some mistakes that those using models to predict where were going, and where he thinks we could be going – based off the leading indicators and what he’s seeing.

Enjoy this episode with Lakshamn Achuthan on Business Cycles and how they impact your investing decisions.

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Show Notes

0:00:00   Welcome and context

0:01:47   What is your background?

0:08:36   How do you look at the current economic situation?

0:17:05   Where are we at in the current cycle?

0:25:50   Are those different cycles you track to influence the inflation cycle?

0:31:21   What indicators are you watching for?

0:35:14   Why the Fed doesn’t understand inflation?

0:46:10   Seeing things before the government and acting on it

0:52:30   What’s the best way to digest this info as an average investor?

0:57:30   What have you learned from your mentors?

1:03:10   Where can people find out more about you?

Show Links

Lakshman on Twitter

The ECRI Inflation Cycle

Business Cycles: The Problem and Its Setting

Episode Transcript

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the all to asset allocation podcast. Today’s interview is with Lakshman Achuthan. Lakshman is Mr. Economic cycles himself, and he has spent his entire career studying economic cycles.

There are many different economic cycles in play at any given time. And it’s actually a bit overwhelming in this conversation. We discuss where we are in the economic cycles and some mistakes, those using economic models to predict where we’re going might make and where he thinks we could be going based on the leading indicators that he’s following before you listen, please don’t forget to like, or subscribe to the podcast or even better leave a review.

If you’re watching this on YouTube. Hi, please subscribe to the channel and, or give the video a thumbs up all over these things really help new people find the podcast and it really helps keep this thing going. So thank you. There is a lot here, but cycles are very important to understand, because even though it may feel like it’s different this time more often than not, it’s actually not.

Please enjoy this conversation with  on all things cycles, enjoy blacksmith. I’m very excited to have you on today.

Lakshman: [00:01:28] You’re welcome. Thank you. It’s a pleasure to be here.

Ben: [00:01:32] which added a bit beforehand and I I’ve listened to on real vision and macro voices and senior on Bloomberg, but for my listeners that don’t know who you are.

Can you give a little background of who you are and how, and what you do at  ECRI?

Lakshman: [00:01:49] Sure. Who am I, I, you know, so I’m a student of the business cycle. That’s what I would, you know, I try to be humble. Even though we have a lot of indicators that give us some conviction at times and I’ve been doing this my entire professional career which began around the 1990, 91 recession and studying cycles at the at the feet of the giants who came before me.

So that’s Jeffrey Moore Jeffrey H. Moore. And he was the father of leading indicators helped invent the idea of leading indicators and create the original indicators over, you know, basically in the fifties, 1950s. So, and then he was. Building on his mentors work. Arthur Burns and Wesley Mitchell about a hundred years ago.

And they’re working on the basic question of what the heck is going on, right? Cause there’s booms and there’s busts and everybody has a theory and it didn’t make any sense much as the say, I don’t know how much has changed today, but you know, they were getting whiplash, right? Huge, huge swings up and down.

You get the, you get depressions and then you have the roaring twenties and then you have the depression. It’s like, what the heck? And so Mitchell and burns, defined what a business cycle was. What is it? It’s not two quarters of negative GDP, but that’s a necessary that’s that’s not a necessary, but it’s an insufficient condition.

It mostly happens, but it doesn’t always happen now. So they said here here’s what a recession is. It’s a pronounced pervasive and persistent decline in output income employment in sales. And then an expansion is when all those things are rising. And there was a consistency to that. Both empirically, when they looked backwards, they were looking all the way back to the civil war in the U S and also when they were looking around them and around the world inside of free market oriented economies.

And we can get into that. So that’s kind of like what they call. They even wrote a book called the business cycle, the problem and its setting. And they were just saying like, Hey, what’s the lay of the, of the land. What’s the rough game board that we’re playing on and free markets. And the business cycle is a very durable.

Construct. And, and so then the next generation Jeffrey Moore or their protege works on leading indicators of the business cycle. Do we have any chance of seeing if it’s going to turn and go the other way, that’s, you know, 1950s, sixties, seventies technology. So since, since then, you know, I come in in the nineties and everybody who’s at Eckery the economic cycle research Institute, we all, we’re all taking that second generation of work, Geoffrey Moore’s work and, and he was a founder of equity with us and moving it forward.

And you know, now I would describe what we do as a many cycles approach to looking at the economy and monitoring free market activity. And so stuff happens, right. There’s a pandemic, there’s the, you know, the market breaks. There’s some geopolitical thing. There’s some shock. What does it all mean?

How does it fit? Is it a recession or not, is growth going to keep going one way? The other way. That’s what these indicators help us Devine. And there is a process and a lot of objectivity and data that goes along with it. Now having said all that, and then I’ll stop. And, and, and, and I want to hear what you have to say, but having said all that, there was a period many decades ago in academia, where there are fads and fashions.

Okay. And people went away from cycles. They really wanted to go toward a econometric model building. There’s a what we called a, we wrote a book 15 years ago and we called it physics envy. The economist wanted to be a hard science, right? And they want to say, Hey, we can, we’re just as good as you know, math and, and, and, and, and medicine and, and, and physics.

And we can write these models and we have computers with statistics and we can optimize everything and figure it all out. And they really moved away from what we’re, what we’ll talk about today, which is cycles that’s kind of in the backwater. It’s almost forgotten a forgotten art in many ways. And those big institutional kind of moves are done on massive econometric models.

Policy, monetary policy has run on these huge models if we insert this and that, then I’ll get a certain outcome. And the problem of course, is going back to Mitchell and burns the problem in its setting. Business cycle is tricky. There’s this all the psychology of us as groups, right? The groups of people making decisions are driven by fear and greed.

All kinds of inventories and capital structures washing around and huge feedback loops that are not, they’re too complex to model. And so you get these errors they call them in academia where it’s like, oops, I didn’t see that coming. And you get surprised one way or the other. So now I’ll, I’ll I’ll stop a long-winded answer.

Ben: [00:07:29] No, no worries. And well, those are, those are just airs to be just kind of optimize the inputs a little bit more and then you’ll, you’ll eliminate them next time. Right?

Lakshman: [00:07:38] Optimizing? Yeah.

Ben: [00:07:40] you are Mr. Economic cycle. you’ve spent your whole career at these mentors that have been influential.

It’s very, very impressive. I understand the economic cycles are very hard to predict whether you’re using these economic these models or, or looking at cycles, but on your website, I found something that was interesting. So the economist magazine noted in 2005, that ECRI is perhaps the only organization to give advance warning of each of the past three recessions, just as impressive, it has never issued a false alarm. You say that these things are hard to predict and hard to forecast, but that that’s a pretty darn good track record.  Past performance is no indicator of future performance. I get that, but I I’d like to start just right now where we are.

This is a weird world, stock markets, all time highs, asset prices are super high monetary policy. Like we’ve never seen before. And yet jobless claims all time high. The, you know, it’s a very weird world. How do you knowing so much about economic cycles? How do you look at the current situation?

Lakshman: [00:08:48] You know, I, I stick with our knitting, you know, I stick with our basics, the kiss principle, right? Keep it simple. And calling myself stupid. I’m just like. Don’t try to be too smart about this we know cycles. And we know that, you know, again, stuff happens, right? There’s these big events and boy, Oh boy, 2020 was huge with mind blowing kind of events that seem like they ought to dictate the world.

Right. And, and, and through that we watched the cycle. So we can do that looking at three or four buckets of objective data that we essentially put into indexes ultimately. But there’s the first and foremost, you want to know where you are before you even tried to do anything. Beyond that. And to do that, you have to track your coincident data, which is output.

So it could be industrial production or GDP things that are being produced. Sometimes that’s easy to measure, like it’s a car and sometimes it’s a service, so it’s a little more fuzzy to measure, but you try your best to measure it. And you’re probably, you also acknowledged you’re going to get it wrong.

You’re not going to be precise. This is not a precise science, but you’re going to be roughly right. You’re going to give a good guess. And there’s there’s so you look at your coincidence data and your coincidence data tends to be around government data because they’re counting things, stuff up.

And, and that’s one key source of data is government data. It’s imperfect, but it’s a good guess. And, and I, and I basically believe that. You know, people are trying their best to count stuff up. There may be some biases in there, but to the extent they are, they’re probably consistent. They’re not erotic biases.

So over time I get to see kind of some pattern of up and down. Now, now I’ll put employment, income and sales tanked it peaked in February it was the high point of 2020. Right. And then starts the recession and a recession is measured by how kind of deep it falls. So the depth of it how diffuse it is, is it is it hitting everybody?

And then the duration, how long does it go on? And in this particular recession, right? Given the nature of the turning off the lights, right. It was like, we just turn the economy off and everybody stayed home. So, so given that nature the depth and the diffusion of the recession was literally off the charts.

And, and, you know, know you in a, in a away from an infection or something like this, where you turn everything off, the economy would fall. It might fall quickly. It might fall not so quickly, but it wouldn’t just go to almost nothing. Right. So you had this off the charts decline, which then. Knowing the cyclical dynamics there’s pent up demand.

There are certain things that are springing it, wanting to push it to the upside. It means the minute there’s a crack in the door and it starts to open up, you’re going to do better than those extreme lows, which is going to bring an end to the contraction. So just understanding that dynamic let alone what we were seeing in our leading indicators.

We knew in April that there that the recession would be short because we didn’t know exactly what the restart would look like, but the odds of a restart were growing every day. Right. That there was going to be some, you can’t be just starting these shut off forever. Yeah. So even if, even if there was no positive news, things would restart.

Practically, you know, and you see a lot of people wanting to go out anyway, regardless by hook or by crook. Right. And I was going to restart stuff. So kind of knew that now this becomes interesting for investors who are, you know, they’re getting dragged through everything. You see all the headlines in March and April February, March, April, they were pretty spooky and the market itself was plunging.

But going back to being a student of the cycle you know, Pat, you know, past is no guarantee, but it tells you something. And in every, around the vicinity of every business cycle trough and a couple of hundred years in the U S and in, you know, over half a century around the world, That’s marked the bottom of the market.

So it’s not so much that you had to know the exact story of anything. But on a directional basis, it’s a pretty strong relationship. And when you get into managing cyclical risk, which is really what we do, it’s all about like, Hey, is this a cyclical risk rising or falling at any time in some area?

And, and they’re like, okay, yeah, off the charts cycle risk up until when you see the light at the end of the tunnel and the recession, we had good reason to say the recession was going to be short. So relatively speaking cycle risk on the market is falling, even though everything looks totally crazy.

So that’s where that cycle vantage point can give you some bearing that’s one example. In, in, when everything seems entirely crazy and to be clear in 2021, everything’s gonna seem crazy. It’s all gonna look like, is it different this time? And, and on this price, the most expensive you know, four words in the English language?

Ben: [00:15:07] We joke about it and but it certainly does feel different this time. And I know it probably always feels different this time, but the world is very different and looking back at hundreds of years of cycles, but now post globalization, post Bretton woods, all of these things, the world really is different.

And I know you boil it down to human emotions and humans making these decisions. Ultimately you can kind of figure out some cycles there, but you know, knowing all of these things. What, where are we in the current cycle? You said it’s going to be crazy, but how do you start thinking?

Lakshman: [00:15:43] Yeah, I’m S I’m sorry.

I’m sorry. We are in so, so once we set end of recession or short recession, back in early April, we said the recession super short, maybe shortest ever. And it looks like it was now. So you begin an economic cycle after us. I mentioned that we do many cycles, right? So the science has advanced quite a bit over the last half century.

And so we have a lot of global analogous indicators globally. There’s no global business cycle, but there is a global industrial growth cycle. And so we have a lot of good indicators there. And they all were just really lit up in a very extreme way. There is a long standing relationship that the depth of recession.

Indefinitely. It’s just in the beginning part of tern also. So U S business cycle recovery combined with a global industrial growth recovery combined with and stay with me here, a separate cycle, not a business cycle, not growth up and down, but a completely, almost completely separate cycle of inflation.

And so on that cycle we also had a strong upturn developing. So that has from again, from a cycle indicator, dashboard view, vantage point, we’ve got, everything had been falling down, recession kills inflation. So inflation had been blending. The economy had been bunging and then it all is headed up in Really unambiguous ways, really clear ways, meaning that.

And what I speaking my language cycle language, meaning that the forward-looking data, not the coincidence data, but the leading index data that we maintain was rising in a pronounced way, a pervasive way. It just wasn’t one piece kicking it up. And it was persistent. It hadn’t turned down. And, and so when you have those so-called three PS moving to the upside on growth and inflation, you know, that’s what people have come to call the reflation trade.

And you have seen that expressed in a lot of different ways. I think the bears have had to kind of go into hibernation in the latter part of last year. And the narrative, right. Which had been kind of all over the place to be honest, right. Either with infection or politics, right. Had to coalesce somehow around the reflation trade.

And you’ve seen you read all the letters and the listeners and viewers will read the letters. You see, people have gone around to yeah, there’s this replay. And here’s how I, here’s the story. I think that is behind it. And so on and so forth, you know, we, we let the indicators do what they do. And then we try to, we try to figure out what’s the story after we, but, but from the, from the indicators, not so much from our own particular point of view, ideology, whatever we bring to work with us, you know, it’s, it’s really, what are the indicators saying again, going to these many cycles stuff, approach.

We have, we look at cycles. Inside the economy inside the overall economy. So we’re looking at manufacturing, construction services, global industrial growth, and we know COVID is happening. It’s not that we’re not blind to that. And how does it manifest in these many cycles? And it was pretty darn clear actually.

It’s a very strong manufacturing and goods upturn, very strong residential construction of turn and not so much on services, you know, a little bit, but not really, not really anything that was kind of off to the races and that fits with what you’ve probably heard described as the K shape recovery.

You know, there’s many angles on that case shaped right. One you could say is, Oh, it’s, it’s all the stuff like anything that’s stuff. It’s a house. It’s a car, it’s a jungle gym. It’s a, you know, furniture set, whatever it is that your goods that you’re getting games stuff for the house. So all that stuff, super strong services, not so much.

So the top part of the K is the goods. The bottom part of the K is the services you can go to the jobs market. You, if you have an experiential people facing low paying job, you’re at the bottom leg of the Quay and you’re in trouble and you’re still in trouble to tell you the truth. Look at jobless claims now, right?

So that’s totally, hasn’t recovered. Keisha K the K jobs recovery is in full effect. On the other hand, if you can work from home, like we’re doing. And, and, and you don’t have to kind of be in that front line wage earning position, then maybe you’re even doing better in some cases like, oddly enough.

Right. And there’s a lot of the income there is actually. Okay. And, and so the buying power of that income, which is the bulk of consumer spending on that, on the higher paying earners, the high, the higher wage earners what are they going to do with that? They can’t spend it on all that experiential stuff.

So they are spending it on the goods. You have a huge spike. So now go back to the global industrial upturn. Massive spike. You know, it’ll, it’ll, it’ll compete with Bitcoin and Tesla on commodity prices, right? On industrial commodity price growth. And we track that quite closely. It’s, it’s very, very strong.

Overall it’s more than probably around 11 year high. Now, if you look at the non exchange traded industrial commodities, which kind of filter out the easy speculation they’re at all time highs near all time highs effort. Okay. So that’s strong, you know, now so we’re very much in the reflation trade is totally not over still plenty of time to make hay on that.

Trees don’t grow to the sky cycles. Don’t keep going one way. They wouldn’t be a cycle if they did. And so this is going to top out and we’re on the lookout for that, you know, that, so that’s, our job is to, it’s almost almost as simple as saying, is it up or is it down? Is it it’s binary? And so whenever we’re in one direction, in this case up, our job is to watch for what are the situations where it could turn back down.

Ben: [00:22:49] Yeah. And I get that. And th that totally makes sense. But, you know, going back to this time, it’s different. I, I just think with this, this wealth inequality and change and a big portion of the population doing very well, if not better, and spending and driving this good prices and inflation, but that other half and I don’t know what the percentages are, but there, there has to be.

There’s likely going to be more and more government support, which then that impacts it in some other way. There’s so many of these different cycles and the way that they’re relating to each other, but knowing that, does that, does that impact the way that you’re looking at this inflation cycle?

Lakshman: [00:23:35] The short answer is no.

And, and I’m being super clinical here, which does not mean, I don’t care about half of the consumers that are hurting. I just want to say it. I’ll probably, I really do see that I’m not blind to it. It is real. I think, you know, as a society or policy, you got to think that through I’m not here necessarily.

I mean, my, my professional life is not about the policy prescription, but knowing where we are in the cycle in the end, the cycle is still going up. Okay. With or without the people that are hurting who will probably be getting some more support. Right. We see that there has been a couple of fiscal efforts to support so far.

There’s going to be more, I think we, we all understand that. And until the services side and the, those people facing lower wage jobs are fully back online. There’s a gap and, you know, we hope it’s sooner that they’re back online. And even when they’re back online, quite frankly, they don’t fully support the lower half of consumers.

It’s not until, you know, it is still pretty tight. There’s tight belts there. But having said all that, you get another stimulus. What does it, what does it do? Does it change anything radically in the way that we think about cycles and the short answer is no. We, this is an interesting thing to, to talk about.

So there’s just a lot of data out there and whether or not it’s a worthwhile, there’s more and more data being collected all the time. And so you have this whole explosion of big data. I’m going to mind the big data to tell me what’s going on. And there’s interesting stuff there. And so far when we look at that and we, when we do it improves on the margin sometimes more than less, but pretty much on the margin.

Now casting. Where are we now? That’s a, that’s a, you know, a new way of saying coincident data. All right. So the big data tends to maybe sharpen up the clarity of the coincidence data. Doesn’t tell you anything about the future stuff. I’m afraid, you know, I mean, we keep looking you basically have a few different sources of data.

You have the government data we talked about earlier, you have the market data, which is what it is, you know, it’s real and you got to deal with it. And, and then you have survey data or other data that you can collect. And survey data is relatively new. It probably is like really started coming up in the seventies and we use all three sources of data.

When we look at Our indexes and we say something profound has happened. Is it going to change the way we look at that? Something no, because we don’t change our indexes. Our indexes are expressing a handful of key drivers of the cycle. I mean, there, aren’t an unlimited number of drivers of inflation cycles.

There’s a, you know, a finite set. We have a good handle on that. We’re tracking those underlying inflationary drivers very, very closely to the extent and of a development like stimulus. We’re going to send out a thousand dollars check or $2,000 check to the extent that that impacts one of the key drivers of inflation it’s implicitly in the inflation indicators.

Now having said all this objectively boiling down, all those indicators, those objective ones, they hit a 13 year high last Friday. Okay. So we have the reflation trade it’s on its business site. Growth rates cycle is up inflation cycle is up and on the inflation cycle side. The forward-looking data. When it’s going in one direction, we’re always looking, Hey, did it fall?

Did it fall? Did it fall? And I just, you know, the latest update is no, it hit a new high, I don’t know how high it’s going to go. I can’t predict the predictor, but I can tell you there’s no downturn insight and that’s for the next two or three quarters and inflation.

Ben: [00:28:15] So your models are seeing that this inflation cycle is pointing up.

And that is useful. It looks out for the next couple quarters, but not super, super longterm. Is that correct?

Lakshman: [00:28:31] Correct. That is correct.

Ben: [00:28:33] And what do you, what are you watching with this you’re watching for that, that the slope of it to, to lower to two, what are you watching?

Lakshman: [00:28:42] Yeah. All different versions of that.

Right? So I’m looking for there’s different growth rates that we’re watching. We’re also watching the level of the future inflation gauge in particular. We’d like to watch the level of that. And so when the level reaches a 13 year high, it’s just like, Hey, there’s no downturn in sight. And when we look at the story behind that forget about the speculation that’s out there.

We know that there’s a business cycle, recovery underway. It’s, it’s not over at all. There’s no downturn there on the growth side. Not withstanding. The COVID impact right now, it’s still to the upside. That’s the objective data showing that when we look at, how could that be? How can that be with all this going on?

The story remains for the time being that construction on the residential side is as strong. And the demand on the good side is very, very strong. Anecdotally you know, we buy a lot of our goods from overseas, right? I mean, we know that. And so one little snippet in there is that the price of a container that you put stuff in, what you want to sell to the United States has gone up.

I think it’s about two and a half times since last year in China. So you’re producing in China. You’re exporting your stuff. You saw some of the export data came out the other day, a little stronger and you got to ship it and there’s not enough stuff to, there’s not enough boxes to put it in the demand far outpaces the supply of boxes.

And so you can have the price go up two and a half times. That’s a cycle. This is cyclical. It can’t, you know, trees don’t grow to the sky. It’s not going to keep happening, but boy, it’s fun when it’s happening. If you’re the container owner or renter or whatever. Yeah. And so you make hay now and that’s, my overall sentiment would be make hay now.

But you can’t put it on autopilot. There’s going to be some turn this year. Right. And I don’t see it yet in any cycle, except for global industrial growth. There’s some, our longest leading indicators on global industrial growth, not country-specific. It’s really supply chain stuff. They do show some topping out and, and those long leading indicators are really good at giving us a yellow flag.

They don’t tell us a lot about the specific timing we need to see our shorter leading indicators begin to confirm what we’ve seen in the longer leading indicators. So we’re watching them closely. They’re still, you know, up are a little flat, but not no downturns. So we’re watching those very closely so far.

So good mix.

Ben: [00:31:37] It makes a lot of sense. I’m curious, knowing that we talked earlier that these huge economic models are influencing fed policy. Is that right? We talked about some of the shortcomings of these, these economic models and optimizing for this and that knowing that the fed is making decisions based on these models and that those can be somewhat disconnected from the actual cycles that are going on, where are they mostly different and at how does this impact what they should be doing versus what they’re actually doing.

And does that impact the, the new way that the cycle is going?  How do you think through that?

Lakshman: [00:32:17] Yeah. That’s such a good question and it’s changed over time. And so full disclosure, if you do a little Googling, you’ll, you’ll see that Jeffrey Moore, my mentor was also Alan Greenspan’s.

Professor. So Greenspan at one point, you know, circa 1990s or vintage 1990s, he’s got different vintages, I would say. And so vintage 1990s, he was the Maestro. I think they even wrote books about him like that. Right? Because he famously did not he did this thing in the mid nineties from that, or that is consistent with cycles that I don’t think anybody really understands in the mainstream kind of financial areas.

And he did a preemptive hike in 94. It blew up orange County, I think, and a couple of hedge funds cause they were we’re on the wrong side of that. And it was the worst, one of the worst years in the bond market in 94. And then he did a preemptive easing, preemptive, meaning he moved before inflation.

And how do you do that? You might need a leading indicator. And so, so th that’s the link to the future inflation cage, right? So in that moment, you have a really interesting chapter in monetary policy, where if you’re a big player, like the fed that can impact the economy and you can smooth out the cycle a little bit.

If you think about the way cycles will work if you kind of, you know, smooth out the top and the bottom, it’s a smoother cycle, that’s actually a lot more possible to navigate as a decision maker than one that’s going like this. All right. So, and for employers and for, for, for making longer-term plans and executing longer-term strategies, all of that is a much more fertile landscape.

The nineties was actually a pretty amazing decade at 20 million jobs. It’s a lot of jobs. Okay. So that was then now, if you’re not doing that and you’re kind of playing catch up on the inflation cycle. Ooh, it got outta the bag. I got to stomp on it or, Oh, it’s too low. I need to ease. I’m I’m too tight for too long.

Then if you think about the way cycles work, you’re actually making them more of all. So I think it’s super expensive that the fed doesn’t really understand inflation cycles, but you know, we’re We’re in the we’re, we’re in the there’s one area of cycle research and you know, big institutions tend to think that they know what they’re doing.

Right. And that’s the lay of land. So it is what it is now. In the more recent times we had a S inflation cycle upturn in 2016, and that sounds like ancient history. I know it’s like four or five years ago, but so you have this inflation cycle upturn and the central banks around the world. Not only the fed they, they have you know, they have a get together each year and they get together and they were together in Portugal and they had their mission accomplished moment as an inflation cycle, upturn justice cycle.

And they’re like, Hey, we did it. We’ve gotten rid of low . It’s all good. We’re good to go. We’re tightening. And of course, things that are cyclical turn, as I’ve been talking about. And the future inflation gauge, which correctly anticipated the reflation of 2016 at a time when inflation expectations were near their lowest readings in the summer of 16 they, they then turned down in the summer of 18 now still pretty ancient history, but I will remind you that all the bond Kings and whatever, you know, the gurus we’re talking about the 10 year at three, four or five more percent.

That is definitely. A bond bear market. And you’re a dummy, if you don’t know this. Right. And well, the fig is immune to all that stuff and it’s just going down. It’s like as an inflation cycle downturn, it is, it is, you know, and then we have to deal with that. We’re like, Whoa, okay. You know, what’s the story?

How do we get it? We make the call bond market. Doesn’t top out the yields. Don’t top until I think October, November. And then of course, Mr. Powell, who’s behind the curve, talks to Ms. Woodruff in December and says, we’re nowhere near neutral. We’re super easy. And then now more recent history, you get the Powell pivot in 19, you know, all this stuff.

So I think it makes for a lot more drama that they’re not watching inflation cycles. So right now they’ve made this promise, right? They had to lower rates, a lot push out. I mean, a lot is putting it mildly. Right. They pushed out a lot of QE or whatever you want to call it. I don’t want to get into the semantics of it.

There’s a lot of liquidity, a lot of support. Okay. And you’ve also got the fiscal side, as we talked about working and we’ve got a pledge from the fed saying two things, I guess they kind of remember that they screwed it up in 16, 18. And so they say, well, we’re not even going to try to forecast it anymore.

We’re just going to wait until it gets really hot. And then we’re gonna take our time and make sure it’s really hot. And then we’ll maybe act, I mean, they said it in a much more dryer, a way essentially. That’s what they did. They took many pages to say that in very erudite ways. Okay. So. There we are. And then they also talked about the K shape stuff or the inequality, you know, the, the, that is present.

Right. And you can see in certain demographics. And I think the fed is looking at black unemployment or black participation in, in jobs, let alone other minorities, although some other minorities are a little higher in their participation. And I think they’re very reticent to be tight before that unemployment starts to drop some more noticeably.

Okay. So that’s another new factor. Cause before that was probably on the back burner for decades. And now they’ve kind of brought that into the room. Okay. Long story short, they’re trying their best. To leave rates low. Very recently Charlie Evans was out and he started to murmur something about, you know, you know, how they Jawbone.

And I think it’s, it was interpreted as maybe just a little, teeny bit less dovish. Okay. So whatever the we’ll, we’ll have some of that cause inflation is rising as we, as we know, and what’ll get interesting is when it goes above 2% or the upper bound of some target they have is a PCE, this or that, whatever they’re going to, it’s going to start pushing that probably.

And how does that go up? What is their reaction function? You know, they do have this tendency, if the stock market falls to react. You know, and the question there is what, what is that reaction function do that, you know, they let 5%, correction goes 10%, too much, you know, where do they? And they don’t, the problem is they don’t have a lot that they can do, right.

When they’re, when interest rates are low, they don’t have all that much to go places to go. You could look at Japan, they start buying different bonds. They start in, in Japan, they actually S they actually started buying equities. So I’m not sure where that goes, but I can say that they’re going to get challenged because inflation will rise probably a little bit more than expected for now.

And as long as the economic growth continues to recover, which it looks set to do. Probably kind of try to let that ride as long as they can. And the stock market may be fine with that. Because again, if economic growth is going up, default risk is lower than it was. Earnings are better than they were.

And so the negative of the higher interest rate is mostly offset. If not more than offset. The part I would really warn people about is if you ever see me on TV, you’re talking or something, and I’m talking about growth rates cycle downturn, okay. Then I would say, Hey, that’s a good time to reign in some risks relative to whatever your risk profile is.


Ben: [00:41:28] They keep the growth rate, the growth cycle going up, then inflation cycle going out. This is also fine.

Lakshman: [00:41:35] It’s okay for now. Yeah.

Ben: [00:41:37] And I mean, I think there’s just. Obviously, this is what people are using your data and looking at cycles, but there’s just this massive ability to almost front run and forecast the decision-making of the fed.

Assuming these leading indicators are slightly more accurate than the way that they’re making decisions. You can, you can see these things before they’re doing kind of the knee jerk reaction to them.

Lakshman: [00:42:01] But the thing, you know, I, the, the one thing that exact science, right? It’s not an exact science. I look, I’ve lived this, I’ve tried it.

I paid for my honeymoon using the fig you know, so that was good. And that was, that was betting on, on rate cuts

Ben: [00:42:18] because you thought inflation was coming. So you wanted to pay

Lakshman: [00:42:20] now or, or, you know, there was back in the day when interest rates were up. You know, when you had a little room below between where they were.

So I got married in 2001. And so it was early before that in two, th there’s a recession, right? Typically interest rates have to fall. And typically the fed is late. And my father-in-law at the time introduced, he’s like, Oh yeah, that’s interesting. And he was in the markets and he was like, you should check out those Euro dollars.

That’s a very frictionless way to play your view on rates. And so it was basically a, it’s basically a fed sponge rates, right. So, so it’s very liquid market and so on and so forth. And I did really well with a small amount of money, which was nice. And then you learn that Oh gosh, it’s not that easy.

Because what can happen if you, if you come back to like, Go back to 2018. I’m more sophisticated, right? I’ve learned a lot, a lot, a lot of wear and tear on the old body between 2020 18. But you get it, you get an inflation cycle, downturn call and nobody reacts. So this is a typical experience.

Someone watching cycle indicators like we do, and not that many people do right. To tell you the truth, right? So you, you also need to be a certain breed that you’re totally fine disagreeing with 90, 95% of the room at certain times. Like you gotta be built that way. Otherwise this stuff is not for you. I mean, you have to find out a different way of filtering it into your process.

Now, the, in this instance, you get the inflation cycle downturn in the summer of 18 yields. Don’t top out till October, November. So you need to learn that patience of watching the market and seeing how it’s doing and waiting for it to turn. But by the time it begins to turn what you have as a cycle watcher is your, your prior in a Basie sense, your prior is already set.

You’re prepared. You’re ready. You can have more conviction.

Ben: [00:44:42] Okay. That makes sense. And having that, having that conviction to outlast through those times, it’s it’s definitely not easy.

Lakshman: [00:44:50] Very, yeah, it’s a, it’s an, it’s an interesting thing, right? So this is, so if you go to working with institutions where a lot of us are individuals, and we can personally take a decision, I am going to follow this process.

I I’m, you know, I’ll try it out. I’ll learn about it or whatever institution, very tough. You know, they’ve got their, you know, the firm has its asset allocation and if you deviate off that you better be prepared to you know, by hook or by crook, something’s going to happen. Right. And so, and if these turning points is when, if you use the word models a couple of times, and I just want to clarify, we don’t have any models, but it’s a great distinguishing word.

A model is often more, mostly an extract, a very sophisticated extrapolation of relationships. And so to the, and I think most people are using models and institutions are. And so they, they get set on a direction let’s say right now that everybody’s set on reflation. Okay. So the model is optimized on the reflation and it’s going to push.

The problem is the cycle underneath it. Growth and inflation are not linear, have ebbs and flows to them. So our indicators, which are directional indicators, not so much magnitude more about is the direction up or down. So if the indicators roll, the primary information is inflection point directional change.

And if you have a model pushing up and an indicator has rolled down, the divergence is huge. And following this down means you have to leave everybody. So your pricing is probably good, but then the question is, how long can you hold that position? So you gotta kind of find different processes. Depending how comfortable you are deviating to manage that.

And I got to tell you, you know, it’s like eight or nine times out of 10, that stuff gets resolved towards the cycle. And occasionally the cycle recover back up this way, but it’s almost always this way. And so that’s the, what we do is we kind of work on how different groups would express that in their own efforts.

Ben: [00:47:32] Yeah, that makes a lot of sense.  If these things seem easy or you’re probably not incorporating or thinking about everything right. And talking about easy, there’s a lot of like rules of thumb. And in this industry, you know, like you said earlier, economic rate, economic downturn cut the rates like, but all of these things are changing if your rates are at zero, but I I’m curious for the average investor, understanding the cycles, play a way in the way that I should be investing and allocating my my portfolio.

What’s the best way to digest this information? Is it looking at the fig reading your reports, but you know, I, I don’t have time to look at all of these indicators and cycles and how they interrelate. What’s the best way for the average investor to kind of digest this.

Lakshman: [00:48:23] You know, Oh, this is super over, you know, the warning label on this as it’s very simplified, but I’d say watch the weekly leading index that’s out every Friday.

So we have a Twitter feed business cycle and every Friday we’ll throw up the weekly index. And other times we’ll put in other things about cycle turns. And if the weekly leading index starts to roll over in a persistent way, meaning for, you know, a couple of months then that’s a, a good time, I think, depending on your w it’s relatively speaking, but that may be a good time to be pulling in your risk around equities.

I’m just, I I’m, I’m saying, you know, Cycles and growth relate roughly to equities and, and, and risk. It’s not so much that equities go down. Well, let me clarify something here. You know, because if that comes out and says, Hey, I’m doing QE all day long, I’m going to, whatever, you know, Mario doggy, all, whatever it takes, they say something it’s going to make the market go up.

Okay. But what happens is that corrections, big ones, double digit percentage point falls are a cluster. They cluster inside growth rates, cycle downturns. So unless you want to hang out for the drama, right? I mean, a day trader might want that, you know, they’re in, they’re in that they’re going to be, but, but the risk of a correction.

Of double digit percentage points above 10% above 20%. In some cases, those are all inside of growth rates cycle slowdowns. The weekly leading index anticipates those. So weekly leading index can go down and the market can go up. That doesn’t mean the relationship doesn’t work. It’s just that your risk profile in that moment is very, very different.

And on the flip side, when the weekly leading index is going up, your odds of a large correction like that are extremely low. So it works both ways. You know, the, the future inflation gauge, you gotta, you gotta watch that. I mean it’s, it’s it’s up for the time being, so, you know, interest rates, if you’re in the bond area you’ve got growth up.

You’ve got inflation up. So yield curves, Tarpon Stephens, you know, that’s there and, and the bond guys have to make money where they can. I think the main thing I would say is that you can’t leave things on buy and hold, right. You can’t just leave. You can’t own it and leave it. Just does not, I mean, it would be nice, but you can’t do it.

And, and you also have to deal with what everybody’s been talking about for years. And you’re saying, you’re looking at single digit returns, partly because your typical 60, 40 portfolio has 40% of it’s sitting there not getting a lot. Right. So how do you actually perform? You want to retire? You want to do whatever you have some goals that are higher than a few single digit returns.

And I, you know, I would say the macro. Conversely to what people think in fact. Right? So it’s when people are thinking, Oh, Rachel low. So macro doesn’t matter so much. I would actually go the other way and say, macro is going to matter much more than you think. And, you know, I don’t know exactly where it is, but somewhere in 2021, there’s a big pivot.

Ben: [00:52:09] Yeah. That’s, that’s really important.  There’s so much going on. It’s, very difficult, but I think that’s, that’s very valid and I’ll link all of those things in the show notes for sure. Pivoting a bit and we’re bumping up against the time, but you know, mentors have obviously B been very, very helpful in your life.

So Jeffrey Moore Ajay is obviously a big one. I’m curious how you approached him for the first time and what advice you would give to younger people listening to the show, perhaps on, on approaching mentors and thinking through incorporating mentors as a key part of their life.

Lakshman: [00:52:44] But I’m a big believer that I don’t have anything.

So I’m like, I don’t know anything. And the more I know, the more I know, I don’t know. So I, yeah, I mean, you’re in a great seat to get, to talk to all the people that you talk with. I mean, it’s a really wonderful kind of moment even to have access the way we do with the technology and whatnot to do that.

Now, in my mind particular case one of my professors had received her doctorate doc, Dr. Moore, Geoffrey Moore was one of her dissertation advisors. And I was going to go it’s this, you know, it’s just luck. Sometimes I was going to go to wall street and you know, I, I knew something was, it didn’t fit for me.

I would get, I was going through the interviews and everything. And and she, you said to me, why don’t you come up to Columbia and hang out with more for a few days. And I loved first, his openness, otherwise I would have never gotten in the door. And second, I immediately took to his big idea, right?

It’s it’s it market oriented economies have indogenous cycles. And then I, what, the way I heard it, cause he speaks very much in academe demic terms. I was like, Whoa, this is a big unifying thing for all those different countries that I backpacked through in my semester off from college that my parents didn’t want me to take.

When I had to be con I had to live on a budget and convert from Deutsche marks to Franks, to Lira. And I was blowing my budget every day as you do. And then I was like, Whoa, I got bailed out because the dollar got stronger. How the heck does that work? Remember in the mid eighties, the dollar is getting strong.

And so I was like, ah, this all make, this is the unifying thing cycles and free markets. And one of the things I didn’t even talk about it here is that the same drivers of the cycle in the United States work in the UK. They work in Japan. They work in China. They work in India. They worked in Korea. They work in South Africa.

They work in Poland. They work in now Russia. They didn’t work in the USSR. We tried back way back when or the earlier group. So in trying to break the idea where does cycles not work well in a truly managed economy, some massive disaster, like. You know, a volcano exploding for six and Ash for six years of winter or a really big war, nothing that we’ve seen recently.

Right. But a really big war. And those are places where cycles don’t work and outside of that cycles are do rigor. And so you gotta have, you know, sometimes the opportunity presents itself. It’s just about seeing it and saying, I want to do this. Cause I walked away from a better check on wall street to get nothing basically at Columbia, but to get to hang out with more.

And we had the opportunity to leave the university, which we did in the mid nineties and just went independent. And as far as I know, last thing I’ll close on is I think we’re the only one of the only institutes that’s like not funded. By a special interest. I can, I can pretty much tell you that half of our clients are bullish.

Half of them are bearish. Half of them are conservative and half of them are maybe a little more conservative and then the rest of the liberal. And then, you know, they really want the objectivity, you know, it’s not about the ideology so much,

Ben: [00:56:43] this is what makes up markets. You have really, really smart side people on both sides of the

Lakshman: [00:56:49] trade with strong,

Ben: [00:56:51] strong conviction and rationale for, for both of them.


Lakshman: [00:56:56] Yeah. And I think, you know, I’ve had, I’ve obviously met a lot of business people too, and investors and you know, one of the, you know, you’ve heard the thing that like the markets are just like this wonderful casino, but they changed the rules every day. And one of the reasonably consistent rules, although the details change.

Or cycles, you know, and, and the rest of it’s, you know, mayhem, I mean, that’s exciting. It is indeed. Well,

Ben: [00:57:27] Laxman, it’s been a really it’s, it’s been a pleasure today to have you on, and you’ve really helped me. And hopefully my listeners as well understand how important business cycles are and how they work together.

But there’s certainly a lot there. And like you said, I mean, now the more I know about cycles, the more I know, I don’t know, and this is very apparent. But either way I really appreciate it. Where, where would you like to leave my listeners? Where can they go to find out more about you business cycles or would you like to send them?

Lakshman: [00:57:55] Yeah. I think the easiest way to, to kind of keep an eye on what we’re saying probably is Twitter which is business cycle is our handle or our website, which is business There’s a lot. We try to give a great deal of information publicly. So it’s, it’s, it’s, there’s a lot of public information on that website.

If you’re, if you go hang out there for a half an hour and dig through it and then shoot us questions and, and whatnot. And, and we will try to answer them as, as best we can. I mean we do. And if, and if, you know, have us back on for another interview, I mean, if someone asks me a question, I will answer it.

Ben: [00:58:34] Awesome. Awesome. Well, I’ll definitely get some questions before from the audience and those in really appreciate it. Thank you so much. And a happy new year.

Lakshman: [00:58:44] You too. Thank you.

Ben: [00:58:45] There. You have it. Thank you for listening. I really appreciate your support. Show notes, transcript links, and more can be found on our [email protected].

If you’d be so kind, please share this with anyone you think might be interested or get some value from this conversation. If you have any questions or comments, please reach out. I’m always happy to hear them. Lastly, if you’re on YouTube, please like the video or subscribe to the channel. If you’re listening to the audio version of this, please subscribe to the podcast and or leave a review.

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

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.