These three simple lines summarize the action of monetary, economic, and financial markets. The logic tying their behavior encapsulates history and at the same time they tell you what to expect in the future. The cause and effect relationships they represent between economic and financial variables convey a sense of inevitability.
We are just players, trying to influence their behavior. The only effect we hope to achieve is to control their amplitude, their volatility. The higher their instability, the more pronounced is our economic discomfort. But the immutable relationship between these three lines cannot be changed.
Our history is full of crises with different types of political leaders trying to change our destiny, trying to convince us that their way of managing the process is our best option. Yet, you can rest assured that the sequence of turning points of those three simple lines will not be affected. It will remain unaltered by the publicity stunts played by our leaders.
The press, analysts, and financial TV networks use reams of paper and an inordinate amount of time to analyze what has been done, what should have been done, and what might happen. In spite of the time spent and of all the plans made, those turning points will continue to follow each other with an amazingly consistent regularity.
They seem to follow precise instructions. It feels like looking at a parade. The music plays. People move, as you would expect. They always did it that way. They will continue to do it forever.
The reason for the three lines to behave consistently as they do is because they reflect the decisions of consumers, investors and businessmen. Some economic players act. Others, because of their position in the economic chain, react to what is happening. In other words, the actions of the three lines reflect the causality and feedback built in the system.
Causality takes place, for instance, when the money available in the banking system is borrowed to invest and to buy goods, thus causing the economy to grow faster. Another example of causality is that the strong demand for goods eventually causes strains in the system. The outcome is that commodities, inflation and interest rates rise.
But interest rates and commodities cannot rise forever. At some point feedback gets into the picture to bring the system back into equilibrium. For instance, the rise in interest rates forces people and businessmen to borrow less which will eventually force the economy to grow at a slower pace and ultimately cause interest rates to decline.
All these thoughts crossed my mind as I was preparing the forecast for 2002. What is difficult is to remain objective, to focus on the trends that matter, and to avoid getting involved with the emotions of the times. One needs to keep in mind that, in spite of all the clamor, the more things change, the more they stay the same.
(This Observations appeared in the 1/24/02 issue of The Peter Dag Portfolio)
George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
2009 Market Timer of the Year by Timer Digest
To find out more about my in depth views of the markets and my strategy just visit our website https://www.peterdag.com/ where you can subscribe to The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific investment portfolio.
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