Why Central Banks Fail in Fighting Inflation and Recession

Roundup of Acute Problems and Wholesome Solutions 
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Central banks often botch their mission to pursue high employment and stable prices while avoiding the dual banes of inflation and recession. The direct cause of the foul-up: a focus on lagging signals rather than current signs, let alone leading cues. Simply put, the stewards drive the economy while staring at the rear-view mirror. 

According to an old adage, economists have predicted 7 out of the last 3 recessions. Remarkably, though, one type of maven in the business world wields superb skills in pegging business cycles including early signs of recession and inflation.

On the glum side, the blunders of central banks pose merely the tip of the iceberg of stumpers in the public sector. On the bright side, however, the proper course becomes clear enough once the sinkers have been charted and fathomed. From a larger stance, the culture of an entire society – namely, the totality of values and customs – does not change overnight. For this reason, the full range of problems surveyed here will not be redressed anytime soon.

Yet, one hang-up in particular could and should be cured at once; namely, the shortfall of practical knowledge among the central banks of the world. The main deficit concerns the web of causes and effects behind the business cycle in areas ranging from waves of commercial activity and shifts in consumer demand to sprouts of budding inflation and curbs on hiring policies. 

As a remedy, a central bank worth the name ought to form a Board of Operative Counsel and pay heed to the insights and suggestions on hand. The Board should comprise a handful of adepts fully versed in the workings of the marketplace. In this light, an entrepreneur has learned through wrackful experience how to grasp the key factors ranging from the cost of inputs and shifts in demand to the bloat of inventory and need for layoffs. From the converse stance, a self-starter who does not learn to read the winds of change turns promptly into a failure and a dropout.

To sum up, the central banks of the world botch their roles due to patchy knowledge of the driving forces as well as actual conditions in the marketplace. For starters, the policymakers rely on woolly models sprung from ivory towers. The airy yarns include fairy tales such as the boundless wisdom of producers and utter rationality of consumers, the instant adjustment of prices and perfect allotment of resources. One byproduct is a false faith in inapt yardsticks, as in the likes of lagging signals including the unemployment rate and the consumer price index. 

In a nutshell, the public sector suffers from myriads of flaws. A showcase involves the political class that panders to hoggish factions to the detriment of the entire society. Another sample concerns a shallow grasp of the driving forces in the economy along with their knotty impacts in areas ranging from production and employment to consumption and inflation. Happily, though, a cogent picture of the ills sets the stage for wholesome cures for public policy including monetary strategy.

 

Notes

The full report is titled “Why Central Banks Fail in Fighting Inflation and Recession”. The ebook may be downloaded in EPUB format at Smashwords, or in Kindle mode at Amazon.

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Skyscrapers Predict Real and Financial Markets

 

A Spurt of Gross High-Rises

Marks an Asset Bubble 

and Portends a Market Crash

A breakout of soaring skyscrapers can presage a crash of the stock market and a recession in the real economy. That is, a bubble in real estate by way of oversize buildings heralds the end of a boom and the onset of a bust. In this way, a rash of record-busting construction serves as a portent of doom during the long-lived cycles in the property market as well as the financial forum.

In the modern era, real estate and financial assets form the bulk of wealth for the population at large. For this and other reasons, the tangible and virtual markets are closely intertwined. In the larger scheme of things, the fortunes of both types of assets depend on the health of the economy at large. In that case, it makes sense for the real and financial markets to display a heap of correlation and even a glob of causality with each other.

In their own way, skyscrapers can serve as beacons for investment planning by spotlighting bouts of excess in the property sector as well as other domains such as the stock market. All too often, an upcast of buildings that set fresh records for height is a glaring sign of froth in the real economy and the financial system. For this reason, the sober investor should pay heed to high-rise projects that make little or no sense from a pragmatic stance. To wit, a spate of record-breaking buildings is a cue for the canny player to rejigger their portfolio and prepare for a blowout in the real and financial markets.


NOTE: The full report is a document in PDF form under the title of “Skyscrapers Predict Real and Financial Markets”. The briefing may be viewed or downloaded here.

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Market Timing via Monthly and Holiday Patterns

 

A Free Lunch in the Stock Market 

The stock market displays a medley of patterns that can serve as the crux of a timing strategy. A showcase lies in the oft-seen surge of the market around the turn of the month as well as the run-up to a holiday.

As with all things, the timing strategy does have its shortcomings. An example involves the need to dart in and out of the market more than a dozen times a year in order to take full advantage of the patterns.

Another drawback stems from the higher rate of income tax on short-term profits as opposed to long-run gains in the stock market. The precise impact will of course depend on the specific circumstances such as the trader’s country of residence.

Despite of the hassles, though, trading with the calendar can deliver a higher payoff at less risk than the humdrum policy of buying stocks and holding them indefinitely. For this reason, a timing strategy based on monthly cycles and market holidays represents a free lunch on Wall Street.

Read more on Market Timing via Monthly and Holiday Patterns.

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Forecasting Crashes of the Stock Market

 

Impact of Cycles versus Bubbles

at the

Dawn of the 21st Century

 

The stock market can crash whether or not a bubble exists. A showcase was the smashup of 2011 which popped up in tune with the long-range pattern of bombshells but otherwise without any good reason.

The pointless breakdown had one positive outcome. Given the confirmation of the running sequence of crackups, the schedule of flaps appeared to be on track in spite of the partial derailing linked to financial crisis of 2008.

For the wordly investor, the main event of 2011 was the blowup of the stock market in the U.S. and elsewhere, along with the bedlam in kindred fields such as commodities and currencies. As is often the case, the mayhem caused by the participants in the arena – be they part-time amateurs or full-time professionals – was for the most part a premature and avoidable ordeal for the entire community.

The teardown of the markets was prompted by the specter of a full-blown recession in the global economy within half a year or so. One reason for the jitters stemmed from the fitful progress of the industrial nations such as the United States, Britain and Japan. Another factor lay in the brouhaha over the debt crisis in Europe, along with widespread fears of a breakup of the euro along with the collapse of the regional economy.

For a number of years, the politicians in the developed world had been going out of their way to prop up the distortions in the marketplace that arose during the run-up to the financial crisis of 2008. Instead of prolonging the malady, the politicos ought to have left the economy alone to heal itself. Better yet, public policy could have helped to undo the damage done throughout the entire meshwork of production and distribution. Thanks to the counterproductive moves of the pols, however, the economy was doomed to struggle and flail for many years to come.

On a positive note, the crash of the stock market in 2011 showed up in sync with the long-running schedule of meltdowns. For this reason, the sequence of blowups appeared to be on track despite the partial derailing linked to financial crisis of 2008. As a consequence, the next crackup of the bourse could well occur around 2017 in line with the ongoing chain of flaps in the modern era.

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Note: This report is a revised and extended version of an article published last year titled Forecasting the Next Crash of the Stock Market. The new publication is available in a variety of formats ranging from HTML to PDF. A popular form lies in the EPUB standard favored by many devices including Apple products such as the iPad. A variant of EPUB is the MOBI version used by Amazon Kindle. Further details on the report are available by clicking the image to the right.

 

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Market Cycles

 Causes and Effects of Waves 
 in the 
 Financial Forum and Real Economy 

A host of market cycles crop up in the financial forum as well as the real economy. In fact, the two domains of the virtual and tangible are interlinked in myriads of ways. As an example, the action in the stock market depends for the most part on events taking place in the external environment. In the opposite direction, the goings-on in the financial arena affect the vitality of the economy at large.

Looking at the big picture, the whole environment – made up of natural forces as well as human factors – plays a crucial role throughout the marketplace. A showcase lies in the impact of the weather on concrete goods as well as virtual assets. For instance, the onset of winter kindles the demand for heating, the prospect of which prods merchants in the commercial realm and traders in the futures market into bidding up the price of oil in advance.

In these ways a heap of cyclic themes show up everywhere, from stocks and bonds in the capital markets to crops and toys in the real economy. Moreover, the hardy motifs span the spectrum of time scales, from less than a month to more than a decade.

Read more on Market Cycles.

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Volatility Slams the Return on Index Funds

 The Return on Index Funds  

 Rises with the Aloofness of the Investor  

 and Falls with the Volatility of the Market 

A high level of volatility in the market prods investors into fiddling with their portfolios, thereby slashing the return on investment for index funds. By trading in and out of the stock market at precisely the wrong times, the fidgety players end up shooting themselves in the foot.

Over the long haul, the sprightly segments of the market are apt to outpace the other branches. The dynamic niches include bantam firms, technology ventures, and emerging regions. On the downside, though, the spry markets tend to be more roily than the rest.

Unfortunately, the investing public has a way of dashing in and out of the market at just the wrong moments. As a result, the punters give up a great deal of the gains on offer in the lusty domains. The higher the volatility, the greater in general is the lag of the investor behind the target index.

On the upside, though, there is a straightforward way for the mass of investors to boost their earnings by a significant amount. The gamers could enjoy a plump increase in profits if they would stop meddling with their portfolios and simply ignore the goings-on in the marketplace. Moreover, the benefits of a laissez-faire policy grows with the turbulence of the market, along with the flightiness of the corresponding index fund.

Read more on Volatility Slams the Return on Index Funds.

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