The Inescapable Economic Cycle: Buying in a recession yields the highest returns.

This article is a compilation from stock market insiders.

The book I'm sharing today is called "Inescapable Economic Cycles".

This book tells us that economic development follows a cyclical pattern, and where there's a cycle, there's a pattern. By understanding this pattern, we can use economic cycles to increase our wealth.

The author of this book is Lars Tvede, who specializes in finance and psychology. He also wrote a classic work called "The Psychology of Finance". With 11 years of experience as a derivatives trader, fund manager, and investment banker, he is a prominent figure in both the venture capital and economics fields.

Next, we will discuss the main content of this book in three parts.

The first part explores how economists discovered economic cycles.

The second part delves into the patterns of economic cycles. It addresses the question: since it's a cycle, does it repeat itself? Can we watch it like a blockbuster movie, starting, pausing, or even replaying it at will?

The third part is relevant to our lives - how we can profit from economic cycles.

Part One:

First, let's look at how economic cycles were discovered in the first place.

The term "economic cycle" is not ancient. The author tells us that economic cycles emerged in Europe only after the introduction of paper currency. Contrary to popular belief, humans didn't initially understand economic cycles well; it took experiencing multiple recessions to gradually uncover the concept.

The first person to take the plunge was John Law, known as the "Father of Money and Finance", who roamed between England and France. Despite the accolades, he was actually a professional gambler. He even orchestrated an artificial economic crisis that led to a shocking hyperinflation known as the "Mississippi Bubble" in an attempt to rescue France from financial turmoil. Even until his death in a Venetian slum, he remained clueless about why his monetary policy failed.

Following in Law's footsteps, Henry Thornton, known as the "Father of Central Banking", was much wiser.

After witnessing Law's tragedy, Henry was determined not to meet the same fate. He diligently studied economic data and made a startling discovery. Astonishingly, from the 17th to the 18th century, in just over a hundred years, England experienced 19 economic crises! However, after each crisis, the economy spontaneously recovered, entering a period of stable prosperity.

However, the special tragedy is that it seems every recovery only lasts a few years, and the economy will collapse again, triggering another crisis. Henry then wrote a book titled "An Inquiry into the Nature and Causes of the Wealth of Nations," which is a review of this cyclical crisis phenomenon.

Among the economists of his time was another genius named Adam Smith. Observing the cycle of the economy from prosperity to crisis, Adam Smith wrote the now-famous book "The Wealth of Nations." Adam Smith found that the process from economic prosperity to crisis is a manifestation of the economic cycle. John Law, Henry Thornton, Adam Smith, and later Adam Smith's followers David Ricardo and Thomas Malthus, formed an economic cycle research team, providing initial theoretical preparation for the discovery of economic cycles.

However, the research results of the economic cycle research team did not prevent economic crises from recurring. In the 19th century, economic crises became more intense, even brutal. From 1837 to 1873, various types of economic crises continued to erupt, spreading from one market to another, from one country to another. At that time, people did not yet recognize economic cycles, attributing these phenomena to economic instability.

But there are always intelligent individuals, such as the French economic master Clément Juglar. In 1862, he did a significant thing. Similar to Henry Thornton's approach, he collected as much economic statistical data from France and the UK as possible, carefully categorizing and comparing these data. He eventually discovered that the economic cycles of all asset prices are repeatable, with a typical cycle length of 9 to 10 years. After Juglar broke through this barrier, in 1885, American Simon Newcomb discovered the Newcomb equation, MV=PQ. Simply put, MV on the left side of the equation represents money in the market, and PQ on the right side represents goods in the market. Following Newcomb's logic, when money and goods are exactly equal, the economy operates smoothly; however, reality is never that perfect! The amount of currency we issue is always imbalanced with the total amount of actual goods. When there is more money than goods, it leads to inflation; when there is less money than goods, it results in deflation. The economic cycle is the process of re-balancing the left and right sides of the equation.

So far, we have reviewed the entire process of economists discovering the economic cycle. After experiencing large-scale crises, a gambler, John Law; a self-taught English banker, Henry Thornton; an economic sage who lived with his mother his whole life and never married, Adam Smith, along with a large group of scholars surrounding them, watched the historical epic of prosperity and crisis, but no one took out a notebook to carefully record what exactly happened. It wasn't until a Frenchman named Juglar quietly organized data and proclaimed the famous phrase "The sole cause of depression is prosperity," that the final layer of the economic cycle was pierced, making everyone aware of the existence of economic cycles. Above is the first part of our discussion on how the economic cycle is discovered.

Part Two:

Next, let's take a look at the second part, the operating rules of the economic cycle.

So, what are the benefits for us ordinary folks after discovering the economic cycle? The benefits are significant! However, before understanding how to make money from the economic cycle, we first need to understand the internal rules of the economic cycle.

Pay attention to the following content. There are three rules of the economic cycle:

Firstly, economists have found that fluctuations definitely exist in the economic cycle. In our daily lives, every person, at every moment, is making decisions about their money - whether to keep it, save it in the bank, or splurge on a big meal. At the same time, millions of companies are making decisions about their assets. These individuals and companies together form a market. If we see the market as a big play, then all of us are the audience. When the play ends, if it's exciting enough, everyone will surely applaud. If you observe closely, you'll notice that initially, everyone claps at their own pace, inconsistently, but as time passes, this rhythm gradually becomes uniform. Economic activities work the same way - they will gradually unify various patterns unconsciously and eventually lock into a strong resonating pattern. The economic cycle research team calls this phenomenon "pattern locking".

Therefore, the economic cycle is like a wave, it definitely fluctuates, with peaks and troughs. The peak is the crest, and the low point is the trough. However, this wave is quite harsh - during the peak of the economic cycle, everyone involved in it earns abundantly and looks radiant; but once the cycle enters the trough, money becomes hard to come by, and most people will wear a worried look, with their sense of happiness plummeting.

This brings us to the first rule of the economic cycle, volatility.

Secondly, in economic activities, every action of each person will create a butterfly effect, influencing others. This is the universality of the economic cycle. For example, I want to buy a PS4 to play the latest "God of War 4", but I don't have enough money on me, so I have to use my credit card for the purchase and pay in installments later. In this process, my need is to buy a PS4 to play games, but due to insufficient funds, I have to borrow money from the bank for consumption. After the purchase, because of my buying behavior, the game manufacturer needs to produce new PS4s for sale, stimulating the manufacturer to continue production. A simple buying behavior directly affects the upstream and downstream of the gaming industry chain. There are many consumers like me, and our purchases will impact the entire supply chain of goods. Similarly, besides consumers, every product manufacturer and intermediary are also influenced by the economic cycle they create. Therefore, everyone is creating the economic cycle and being influenced by it.

Lastly, the economic cycle research team's experts have found that in all economic cycles throughout human history, three external manifestations always play a fixed role. In other words, in the grand play of the economic cycle, there are always three fixed roles. We call this characteristic of the economic cycle "consistency". The first role is inventory, which includes the discovered minerals, agricultural products, and goods manufactured using these raw materials. The cycle of inventory, first discovered by an economist named Kitchin, is known as the Kitchin cycle. It generally takes four and a half years from the trough to the peak. The second cycle is capital investment, where people invest their money in industries such as manufacturing, logistics, and chip production. This cycle, summarized by the famous economist Juglar, is known as the Juglar cycle and lasts about nine years. Lastly, there is the well-known real estate cycle discovered by Kuznets. As Chinese people, we are always concerned about the real estate market. The duration of the real estate cycle is around 18 years globally. These three cycles are like three dragons swirling up and down, but gradually, their flight paths will overlap. When the paths of these three dragons converge, it's time to pay attention. When the three dragons are flying upwards, it signifies a period of economic prosperity; when they are flying downwards, it indicates a major economic downturn! During a downturn, people may either have no money in hand or have money but cannot buy anything, leading to a situation where they may face starvation.

So, that concludes the second part, the three major laws of economic cycles: volatility, universality, and regularity.

Part Three:

Lastly, let's look at how we can utilize economic cycles.

Now that we understand the laws governing economic cycles, how can we make money from them?

To make rational use of economic cycles, we first need to understand the market, specifically the markets where we can profit from economic cycles. There are six such markets:

1. The real estate market, which is of great interest to the general public;
2. The high-end collectibles investment market;
3. The precious metals market for hedging financial risks;
4. The commodity futures market, where authenticity can be a concern;
5. The securities market, where everyone sheds a tear;
6. The largest trading market in the world, the foreign exchange market.

These six markets are accessible to ordinary people. By mastering their operating cycles and methods, one can easily preserve and increase their wealth. Let's focus on two markets that are closely related to our daily lives.

Firstly, the real estate market. Real estate is closely tied to everyone's life. The cycle from the bottom to the peak and back to the bottom in the real estate market is approximately 18 to 20 years. During this cycle, real estate prices will experience significant fluctuations. When land prices rise, it serves as a warning signal of prosperity in the real estate industry. If developers are willing to spend more on land acquisition than before, it indicates a frenzy has begun, signaling that the real estate cycle is nearing its peak. Additionally, if more people are selling houses and some properties remain unsold for months, and speculators are no longer active, these are signs that real estate prices have reached their peak. When these signals appear, it's essential to assess how much cash and outstanding loans one has. In each real estate cycle, those who end up successful have a common trait - they do not use loans to buy property and have enough funds to purchase land and houses during the downturn of the real estate cycle. Let's talk about the securities market. From a cyclical perspective, especially in the stock market, we will find that the stock market is generally a leading indicator of the overall economic environment. What does this mean? Simply put, before the overall economic environment improves, the overall prices of the stock market will experience a wave of increase. However, this increase does not mean that everyone rises together, but rather rises in a rhythmic and staggered manner. For example, the first to lead the way are financial stocks. Because once the economy starts to recover, everyone will turn to financial institutions like banks to borrow money, and then engage in innovation, expand production capacity, and so on. The financial statements of financial stocks will naturally improve significantly at this time. Following this logic, we will find that at the beginning of an economic recovery, it is advisable to buy financial stocks. When the economy starts to grow and the GDP expands, you can consider buying information technology and industrial stocks; when economic growth stagnates, you can start paying attention to resource stocks. In addition, there are some stocks that are not significantly affected by cyclical fluctuations, such as basic communication, electricity, gas, and water utilities related to our daily lives. These industries are stable consumer goods industries and are not very sensitive to economic cycle fluctuations, so they can be considered as defensive products to buy during economic downturns.

Of course, besides these two markets that have a huge impact on us, we may also come into contact with the foreign exchange market, collectibles market, precious metal gold market, and commodity futures market, which also fluctuate in prices along with the three major cycles. To this day, the economic scholars studying economic cycles still exist, continuously improving cycle theories to help more people understand economic cycles and do the right things at different stages of the economic cycle!

Alright, the above is what we discussed in the third part. How to make money by utilizing economic cycles.

Conclusion:

The above is the main content of "Inescapable Economic Cycles". Let's summarize. This book is divided into three parts, discussing the history of discovering economic cycles, the laws of economic cycle fluctuations, and how to use economic cycles for stable wealth appreciation.

The first part explains how economists discovered economic cycles. In simple terms, we have summarized the rules of economic cycles through the repeated cycles from prosperity to crisis and back to prosperity. Economists have also concluded that "the only reason for a depression is prosperity".

The second part discusses the three laws of economic cycle operation. First, volatility - the economic cycle is not a straight line, but a wave of ups and downs; second, universality - the economic cycle affects every economy and ordinary people; third, fixity - we find that in all economic cycles in human history, three external manifestations always appear fixedly, inventory cycle, capital expenditure cycle, and real estate cycle. And no matter how large the fluctuations are, economic cycles will always come.

In the third part of this book, the author tells us how to use economic cycles to safeguard our wealth. The author categorizes all tradable markets into six markets, with the real estate market cycle lasting approximately 18 to 20 years, and in the securities market, financial stocks are the first to rise after the economy begins to recover. When it comes to this, you must have realized that understanding the economic cycle is not just the job of economists, it is also very important for us ordinary people. It is no exaggeration to say that whether you can clearly recognize the economic cycle you are currently in will determine the future of your wealth and destiny.

Key Quotes from the original book:

1. The highest return comes from buying during a recession, but this is usually not done by real estate professionals. Because when prices are really low, professionals may miss the downturn with a severe lack of liquidity.

2. To some extent, the acceleration of currency circulation, or a higher speed, will have a similar effect to increasing the money supply.

3. On average, 9 months before the economy reaches its peak, the stock market has already reached its peak, and then it usually either enters a trading range or starts to decline.

4. Even without the stimulus of issuing currency to increase the supply, or other external stimuli, economic prosperity can still occur.

5. It is not difficult to develop a country from the most primitive barbaric state to the highest level of prosperity, as long as there is a peaceful environment, low taxes, and a judicial system that the common people can tolerate, the rest is a natural process.