The Economic Cycle

The output of an economy is the product of hours worked and output per hour. Thus the long term growth of the economy is determined by fundamental factors like birth rate and the rate of gain in productivity.

The average rate of growth of the economy is rather steady over long periods of time.

The notes below are from the memo The Long View from January 9, 2009, which has a more detailed explanation and some illustrations.

Long term trends (WWII – 2007) that have given the economy and stock market a strong uptrend over several decades.

• Macro Environment
• Corporate Growth
• The Borrowing Mentality
• Popularization of Investing
• Investor Psychology

Three main protagonists of this book are:

1. Psychology
2.Emotion
3.Decision Making Processes

Most forecasts do not add value or lead to investment success. It is easy to be an average investor, investment success consists in outperforming other investors and the averages. Investment success is a relative measurement.

Possibilities with regard to economic forecasts:

• Most economic forecasts are just extrapolations
• Extrapolations are usually correct, but not valuable
• Unconventional forecasts of significant deviation from trend would be very valuable if they are correct, but usually they aren’t.
• Thus, most forecasts of deviation from trend are incorrect and also not valuable.
• A few forecasts of significant deviation turn out to be correct and valuable, leading their authors to be lionized for their acumen.