The Economic Time Clock

What time is it?

Knowing what to invest in is difficult at the best of times. There is so much information in the media, that often it seems to be conflicting.

A tool called, ‘The Economic Clock’ has been around for a long while and is based on the assertion that the economies of most developed countries move in a regular pattern known as the ‘boom & bust’ cycle.

The economic clock is a composite of individual economic indicators such as interest rates, employment real estate and the share market. The economic clock depicts the sequence of events in an economic cycle that influence the value of the asset classes.

Each event in the cycle tends to be the result of the proceeding economic condition.

While the clock is not fool proof, it does demonstrate indicators to watch out for.

How has the ‘clock’ played out in real life?

The ASX200 reached 6,828 on 1 November 2007 (source : www2.standardsandpoors.com), as the murmurs of the subprime mortgage crisis become louder and the worlds credit markets started to unravel.

This saw prices begin to tumble and some corporate failures during 2008 headed by Lehman Brothers and Washington Mutual and locally investment companies; MFS, OPES Prime and the high profile collapse of ABC Learning Centres and Babcock & Brown.

All of this resulted in 2008 ending firmly in 5 o’clock territory as credit or access to money was nigh impossible.

The prevailing mood was definitely gloomy! What has happened this cycle that is different to many others has been the magnitude of government intervention on a worldwide scale.

This has resulted in massive interest rate cuts that saw a 4% reduction over a 5 month period. This effectively has been an attempt by the Reserve Bank of Australia to ‘bring 7 o’clock forward to 5.30′ and limit the depth of the recession.

Fiscal Stimulus

This is another lever the government have pulled very hard on to get the economy going.
Part of these packages was to increase the ‘First Homeowners Grant’ to once again limit the effects of ‘6 o’clock’ or falling Real Estate prices.

This has had the effect in Newcastle of ensuring a lot of the properties priced in the lower bracket have been selling quickly and for around asking price.

My fear around this grant is that the artificial ‘bubble’ that has been created in this market by bringing potential buyers over the next few years forward to take advantage of the window available for a short time could cause a backlash in 2010 & 2011.

What I mean by this is that there are a number of threats to this market segment maintaining its current pricing.

1.    Interest rates are at all time lows: When, not if, these increase there will be an increase in mortgage stress, that will be felt most by those with the highest borrowings compared to valuation.
2.    Unemployment: is a lagging indicator of the economy and as such will continue to rise even though the economy has recovered. With it being generally acknowledged that there is a 6 to 9 month lag, this puts unemployment peaking around the middle of 2010.
3.    Divorce & separation: though not limited to first home buyers, separation is something that can cause a motivated vendor.

So, you put one or more of these together and there could be the situation where people must sell.

This influx in supply combined with the reduction in demand (they have fast tracked their purchase to get the grant!) mean the price must go down.

The economic data and GDP figures are pointing towards ‘Recovery Begins’, with Junes figures due out in the next 2 – 3 weeks.

Share Market is a leading indicator of the economy and therefore goes up and down before the economy. This is also typically 6 to 9 months time frame.

The Australian ASX200 has recovered from its close of 3,145 on 6 March 2009 (perhaps 5.18 or ‘doom’!) to now tracking around the 4,250 levels (source : www2.standardsandpoors.com).

This is a 35% increase in 5 months.

Opportunities

There are opportunities in every market and the economic clock can be used by anybody as a general indicator.

An example of this is at 9.30 – 10 o’clock to increase property exposure and reduce bonds as interest rates are due to rise.

If you would like to see what is the best strategy for you NOW, please contact Gen X Advisers

We are conducting a poll to gauge where average Australian feel the economy is at. Our advisor, Dustin Kavanagh, has had clients suggest that it could be anywhere between 5 – 8 o’clock. What time do you think it is?

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