How can you look out at the economic expansion and determine when there’s two outs and we’re in the bottom of the 9th inning? Hopefully I won’t have to remind you that the “business cycle” is very much alive in the United States – that’s a given. Let’s get that out of the way first so you can invite what I’m about to present here with an open mind.

I’m a “Macro” guy, I’ve always been a macro guy, it worked well for me when I was managing money. I don’t try to pick individual winners – I look at where the money is flowing into, out of, and why. I’m way more concerned about where all the (invested capital) might go. It’s pretty easy to see where most of the investment capital has been, parked for the past several years during this expansion. All one has to do is look at the valuations of the FANG stocks and the technology sector et. al., but I don’t stop there, what I want to do continuously is to try to figure out where is the majority of funds moving next? Because see I want to get there before the others do! 🙂 In order to do this effectively you have to study and at least try and have a good understanding of the “Business Cycle” for clues as to why that money might move. There’s always a fundamental reason why capital moves, and trust me, move it will. (Refer to my past references on posts to the fact that money is akin to water, it will always flow toward the path of least resistance.)

If one looks at past economic expansions there is a pattern I’ve noticed time and again – toward the end of the expansion, and before the blow-off top that brings all that was built back down to the reality of yet another recession, one thing happens which is a good indicator that we are very late in any expansion. It happens close to the end, in the later innings of an expansion and it’s been fairly consistent. That is, hard assets begin to outperform. What do I mean by hard assets? Commodities in general as opposed to financial assets. Plus the stocks of companies that are associated with hard assets – base materials, construction related industries, and commodity producers, from oil and gas to precious metals to chemicals. Also note that during this expansion a new class of commodities was created known as “virtual currencies”, so we need to include them in this category as well as real estate, which is also categorized as a hard asset. Suffice to say, you may notice these sectors beginning to outperform while, at the same time, other sectors of the economy begin to grossly underperform. This phenomenon has been a good signal that we are in the late innings of any economic expansion.

I remember one case in particular that was quite stunning. Back in October of 2007 a financial market panic ensued once the news broke that a couple of residential mortgage lenders had gone under, [which we found out a few months later] was the beginning of the end to the bubble in residential real estate. But it was still too early to know just how deep the problem would be. As the new year, (2008), came around the stock markets along with most sectors of the economy began to roll over and play dead. One big exception to this rule was oil and gas, or energy-related companies. This particular sector held its value quite well at a time when the remainder of the stock market had already crashed. Turns out that the energy sector was a lone bastion of value until much later that year. If you remember one barrel of oil had climbed to as much as $142/barrel from late 2007 and into early 2008. It wasn’t until August of 2008 that energy sector stocks finally capitulated and crashed, meeting the rest of the U.S. stock market at the bottom. I remember it was really something to watch.

I’m not exactly sure as to why these expansions and subsequent contractions play out the way they do. Could it be that inflation eventually leads to prices high enough to erode consumer consumption, resulting in widespread layoffs along with the shrinking of investment capital, which has a sort of “domino effect”? I’m not sure, but no one can argue against the fact that ever higher prices eventually lead to some demand destruction, and in a ton of different ways, eventually spilling over across all sectors of the economy. Until such a time that a reset necessitates [in the form of a recession]. Or it sure seems to play out that way.

The study of economic cycles is never a definitive, or cookie cutter exercise. There’s always something a bit unique about each and every expansion, but given that, they also share some similarities as well. And public policy can be a huge factor in the [future success of] or [earlier than expected failure] of an economic expansion. I just added one more to a dozen reasons why it is critical to nominate and elect only very capable and qualified advocates of “free and open market capitalism” to hold public office(s) in these United States going forward… that is, if you want to have lasting success.