“You will never understand bureaucracies until you understand that for bureaucrats procedure is everything and outcomes are nothing.”
Howdy, gang! Welcome to another installment of “Know Good Things”. I have to take a minute here and say “thank you” to you all. I have been writing this blog for several months now and it’s been a challenging, yet fun task. It’s a weekly task for me to get over my innate inadequacies that I feel burdened with in order to put together something that I feel will be an interesting read for the Tackle Trading audience. This is a rather daunting task even if I do say so myself! I always hope that you are able to grab some sort of helpful tidbit when you read my blogs and I promise to always strive towards accomplishing the task at hand, which is to simply provide you with something to think about and (hopefully) begin to implement.
Last week was the first of a three-part series revolving around the directional type of indicators/reports that we’re trying to familiarize ourselves with. The initial discussion dealt with “procyclic” events, which simply mirror each other by how they are reported vs how they are manifested in the markets. I used GDP as an example of a procyclic report because when the National Bureau of Economic Research provides us with a GDP report that has increased (compared to the previous quarter) then the markets will usually also increase. These types of reports essentially do the same thing by way of their direction. Up with the GDP; up with the markets! Up with Industrial Production; up with the markets! Up with Housing Starts; you guessed it…up with the markets!
It goes without saying that procyclic types of reports are usually the easiest to comprehend and analyze because they don’t bend any laws of nature in our minds. There’s nothing to overthink or extrapolate as it pertains to the raw data and the expected manifestation found in the markets. The opposite of a procyclic report is a countercyclic report and they’re not really that difficult to comprehend…it’s just a matter of learning which is which.
The best definition of a countercyclical economic report that I can think of is: an economic report/indicator that moves in the opposite direction of the up-and-down movements related to the economy (market) as a whole. The markets essentially increase when these types of reports actually decrease and decrease when these types of reports increase. Think of a teeter-totter. As one end of the teeter-totter goes up…the other end goes down! Such is the relationship of a countercyclical report.
There a few good examples of countercyclical reports, but the best (and likely most obvious) is the unemployment rate. The markets tend to react in an upward manner (bullish) when the unemployment rate moves down. On one end of the teeter-totter is the unemployment rate; the other end is the broad markets. If unemployment shows and INCREASE then the likely market reaction will be a DECREASE.
Another really good example is inflation. We have access to two primary reports that indicate the level of national inflation. Consumer Price Index (CPI) and Producer Price Index (PPI) are the main inflationary reports with most of the news headlines going to the CPI because it has a closer relationship with the type of inflation that we, the people, are likely seeing as we go about our daily lives. I actually pay more attention to the PPI because it tells me what type of inflation we’re likely going to see in the months ahead. If producers (businesses) are incurring higher costs for raw materials then they’re obviously going to pass that cost on to us, the consumer.
It’s probably pretty obvious how these inflation reports end up being countercyclical. It’s NOT a good thing when inflation increases! So, when the CPI or PPI reports show an increase in the inflation rate for this month then the market reaction is likely going to be in an opposite direction! An increase in inflation is essentially a pay cut for every man, woman, and child. It affects us all, but the changes in inflation are usually at such a negligible rate (both in actual size and speed) that we tend to not notice it until prices reach a point that is noticeably uncomfortable! We all pay attention to gas prices because we see the price of a gallon in huge numbers all along our city streets. We don’t, however, necessarily notice the price fluctuations of eggs, milk, light bulbs, or candy bars because we don’t usually buy those things as often as we fill up the tank!
Again, becoming familiar with the cyclic nature of economic events and their relationship to market movements takes time. You can certainly spend some time memorizing the characteristics of individual reports, but I’m not so sure that’s time well spent. You should probably just start paying attention to the weekly economic calendar (like I recommended) and keep some personal notes in a nearby notebook as you assess things each week (like I recommended). As you do this, you’ll start noticing your economic acumen increasing…which is a testament to your diligence.
Keep on keepin’ on, my friends!
Be good. Do good. Know good.