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Today’s topic might not be too foreign to those with a background in economics. The business cycle has been an important topic in the field of study of economics however it has important implications which logically follow into finance and more specifically investing. Business Cycles often indicate how business activity will occur over the aggregate sum of an economy so it becomes important for understanding increases or decreases in business activity and even more so for specific industries that are more reliant on the health of the overall economy.

There are many theories on business cycles and why they are caused as well as how they can be managed. However, in regards to what investors need to know, the main point is that there is usually a trough during which the economy stagnates due to negative feedback loops, however when the market corrects itself then the businesses tend to quickly adapt to the changed market conditions and begin their business operations back up often greater than what they used to be before the recession. It then becomes exceedingly obvious that over time, it would be of great help in predicting values over a large sample-size to be able to accurately predict business cycles for a specific economy. One could predict whether there would be more business activity or less. It would also yield great insight into how consumers currently value what they have on the market as well as how they rate their savings over the potential opportunities they have (evaluating the opportunity cost). There are many metrics one could look at in order to predict boom-bust cycles, however none of them are nearly as reliable as they need to be before one should feel comfortable recommending them to fellow investors. Besides, logically speaking, if people knew when the boom-bust cycle was coming, it would change as would consumer and investor behavior.

There is however a good way to know if a boom-bust cycle will occur rather than just pure organic growth, often times it comes down to looking at the policies of the central bank to check whether they are engaging in inflating the amount of credit that is in the economy. We covered this briefly last time when we spoke of the private firm, FTX, and how they dabbled in circulation credit and not actual commodity credit. Central Banks will also do this if they issue money that is unbacked, hence creating the arbitrary value of money. They will often times try to increase the “velocity” of money as it would lead to a higher GDP but one can see the problem with causing a high time preference between consumers and how that would lead to less saving and less capital formation in the long run and hence there will naturally be a bust once people realize the sheer extent of malinvestment done under credit rates that were pushed artificially low. Many firms such as FTX will also go down once such a phenomenon occurs. It is also visible now, we are still currently observing many in the tech industry suffer because of the increasing interest rates in the US. Many companies will be forced to make layoffs when they realize that they were actually generating wealth and that their services were not contributing that much to the economy when it tightens up thanks to the interest rates going up.

In Conclusion, one would become a good investor or businessman if one understood the basics of economic principles. Boom-Bust cycles represent one of the most important principles for investors to learn about so that they may comprehend the situation and circumstances behind any investment in a much more holistic manner.