Key Takeaways
Leading indicators have been plummeting and analysts have called for an imminent recession, but our Swissblock Business Cycle model suggests we have a few months before it sets in.
Coincident indicators continue to expand, signaling a robust economy and plenty of room for risk assets to outperform.
Bitcoin is setting up for another leg up, only that this time around it will go beyond $32k and kick off a full-blown alt season.
Our Swissblock Business Cycle provides a clear exit point for risk assets.
Intuitively, the term Business Cycles makes sense. We have all experienced how good times in the Economy come and go. Economists and analysts talk about them – but do not seem to understand the meaning of them – or how to observe the Business Cycles. Often, we see analysts predict economic prosperity only to see a downturn setting in a few months later.
So, what drives the Business Cycles? How can we observe and understand them correctly? And why are they important to trading and investing?
Swissblock Business Cycle Model
Intro to Business Cycles
Ever since Schumpeter 1939 published “Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process”, Business Cycles have been analyzed and discussed. Innovative methodologies and techniques on how to gauge and forecast ups and downs in economic activity have been tried. Today a long range of approaches exist. Not all are equally good!
At Swissblock we believe that a true measure of the strength of a Business Cycle theory is its ability to correctly forecast recessions and thereby also major moves in key components of the economy like market rates, inflation, employment, and GDP - and through this - stock market directions. A theory that does exactly this, exists!
At its core, the theory is very simple and builds on well-known economic parameters published on a monthly basis by The Conference Board.
The Economy moves through 4 phases: Expansion, Slowdown, Contraction, and Recovery.
The phases are defined by the Leading, Coincident, and Lagging indicators which are all published by The Conference Board. As the components rise (expand) or decline (contract), and fluctuate through the equilibrium, the Economy moves through the 4 phases.
It is important to understand, that the different indicators of the Economy are not all at the same spot at the same time. The leading indicators may be contracting, predicting a coming Recession while the coincident indicators are expanding (growing). This is the situation we currently observe. Notice the current positions of the different indicators as of August 2023 in the visual above.
But before diving into the current situation, we should take a look at the connection between leading, coincident, and lagging indicators according to the Swissblock Business Cycle Model.
Below we depict the connections and relationships between the leading (LEI), coincident (COI), and lagging (LAI) indicators.
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