Idiotopedia: The Economics of Investing - A Love-Hate Relationship

Envision this: Economists crowded together in the shadows, wearing their best suits. They're squinting into a massive crystal ball; brows wrinkled, trying to divine the future of the economy. Then, one of them suddenly bangs his fist on the table with a loud groan. The people around you could be wondering, "What's wrong?" But instead, he exclaims, "It's that damn economic cycle again!" Say that with me now: "No matter how many times we try to predict it, it always comes back to bite us in the you-know-what." That's the way it is, guys. Oh yes! We have arrived in the lovely realm of economic cycle investing, where not even the experts can predict the future. Well, due to inefficient information dissemination, the economy will always be subject to a cyclical pattern. In addition, even if this knowledge were to reach everyone at the same time, everyone's interpretation or psychology of it would be unique and likely exaggerated. As a result, every action taken in reaction to an economic cycle is usually belated and inadequate.

Disclaimer:?It would be prudent to qualify my subsequent topic of business cycles and financial markets. I want it to be crystal clear that I am not psychic, first and foremost. I may try, but I can never accurately anticipate the economy's future. I can't even decide on tomorrow's lunch menu or even whether I can still write or not... Second, I must stress the inherent dangers of financial investment. I could wind up wealthy, or I could be living like a bump. Finally, I cannot be held liable if I wait too long or take the wrong steps after reading this information. Then... it's your fault if you make a rash decision like betting who will be the next president (eh, do you think it's made up already? #LOL ; another conspiracy theory will be in my next article.) Anyway, we'll blame the crystal ball if things don't work out, OK??

The market starts doing the wave when the economy is booming like a cactus in the desert. The market's mood swings can take the economy to the moon, but when things seem at their best, the market panics because it fears it will miss the rocket ship to the next level. If you want to ride the market's crest, you'll need the reflexes of a ninja to get in before it goes to sleep.

Somehow, the bliss of an inflated economy is like throwing a party with nothing but cheap champagne and naive hope. The party is in full swing until someone notices they're all perched atop a precariously balanced table. The champagne isn't as refreshing as it once was, and regret is in overflowing supply. When this happens, prices fall, sales fall even worse, and the news is filled with stories of financial devastation. However, the market will respond as it always has: by denying any problems and acting as if everything is fine. When you have faith and refuse to accept reality, who needs facts? It's like the economic version of the circle of life.

Well, market psychology is amazing in that it always seems to take us to rock bottom. Quality things are incredibly affordable right now, yet no one will touch them with a ten-foot stick. When the economy is in shambles, few people want to be seen purchasing discounted goods. It's smarter to wait for better times so you can pay full price like a champ. Once again, we've let another window of opportunity pass us by, and the cycle continues. The sorrow of being perennially unfashionably late to the sale party is almost poetic.

I comprehend that the allure of a good investment is understandable. Where else, after all, can you make money by stealing from the market and then pretending that what you've taken is actually of "value"? But, of course, the market is always pleased to comply, providing a never-ending supply of exploitable gaps. The pursuit of financial gain is important, but maybe there's more to investing than that. Investing in companies with a positive social impact or those that help advance innovation and advancement may be where actual value can be found. So don't give up hope; being a successful investor and a good citizen is still possible.

I want to pay attention to the present state of the economy and the business cycle, which has reached a wild gathering where everyone is trying their luck. I know that everyone at a party has a story to tell, and the same is true for businesses that have survived the recent economic downturn. Like the popular kids in school, some companies consistently achieve success, while others consistently fail to do so. But here's the catch: sometimes, people who follow a different path than the majority are successful. It was almost as if they were shouting, "I don't need your restrictions, Mr. Market! Well, did you know that? That takes a lot of guts. So, let's raise a glass to the pioneering souls who proved the business cycle didn't have to be depressing. The world wouldn't turn without the misfits, the freaks, and the outcasts. Am I?

Suppose Forrest Gump thinks life is just like a box of chocolate. Although, in that case, I believe in doing business and understanding the economic cycle, just like in chess, you need to plan and predict your competitor's movements to succeed as an investor. However, in this situation, your adversary is the market itself, which is savage. It can make you feel like you've been checkmated with its surprising drops and spikes. That's why, despite the market's unpredictable behavior, it's crucial to have a plan and stick to it. And if all else fails, keep in mind these words of wisdom from the great investor Warren Buffett: "Be frightened when others are greedy and greedy when others are fearful.

Let me make another simple analogy; imagine you are a weatherman; it's like trying to tell if it will rain or shine by looking at the clouds and feeling the breeze in Jakarta with erratic hot weather patterns. Then, see the clouds and wind; the indications can give us a feel of what's to come, but they can't tell us for sure. We use weather predictions to get ready for the day, and AI could be used in the same way to predict and stop possible weather threats. We can only trust our guts and cross our fingers until then. Maybe one day, there will be a computer tool that can predict attacks as well as a weather report.

As was said above, the economy always moves from one phase to the next, just like the earth goes around the sun and the four seasons change all the time. Therefore, there are 4 phases of the economic cycle that are sufficient for investment purposes, namely:

1. Inflation (by means of)

2. Recuperation (growth)

3. Get too hot (peak)

4. Stagflation (contraction)

I first want to look at the "get too hot" part. (Why not start with number 1? Writing number 3 first is bad enough, and I'm too lazy to fix it.)

OK, let's start with "get too hot" or peak, which is when inflation is high. When prices go up too much, it is always because there is a problem with supply and demand. The "get too hot" phase is when suddenly a lot of people want an item, even though they're not sure that the item's value is worth the high price. At the same time, the number of people who want the thing doesn't go up much, so the price goes through the roof.

An intriguing point to keep in mind is that unexpectedly strong demand is the definitive cause of structurally inadequate supply. If demand rises on its own, supply won't have any trouble keeping up, and the problem isn't structural. Logically, stock prices are generally rising along with most goods' costs and sales volumes. At this juncture, commodities represent the best asset class, and companies involved in the production of these commodities represent the best stock investments.

But why are commodities preferable to a defensive stock that provides safety in times of economic uncertainty? Didn't the price and volume of sales of necessities likewise rise? True, but the cost of production is increasing as well. When compared to other industries, commodities have a profit margin since the cost of raw materials remains generally stable while the selling price and sales volume rise. For instance, the cost of extracting mining goods often does not grow considerably over time; therefore, mining businesses' costs are similar.

After the "get too hot" phase, it will almost certainly enter a "stagflation" or contraction phase, during which prices are so high that sales volume has dropped dramatically (because people can't afford it), resulting in a decline in total income (price multiplied by volume sold) from the previous "get too hot" period. After that point, the "no choice" cost to produce them is already insanely high; thus, costs might stay high for a time but not go up any higher. Under these circumstances, business revenues will fall for everyone.

Therefore, I can assume the stock prices will fall based on the above case. In this scenario, having cash on hand is preferable because a given amount of cash will allow you to purchase more shares of stock. For example, let's say I anticipate a decline in Company A's share price; it makes sense to liquidate my holdings now, stash the proceeds in the bank, and reinvest at a lower price. In times like these, investing in defensive stocks (companies that supply basics such as food and water) is advisable because consumers' needs for these products never change.

However, why do we still require fossil fuels and other commodities if this is the case? All industries feel the effects of falling demand for commodities like oil, gas, and coal because these resources are used in virtually every industry. Meanwhile, only the essentials can survive through this, or their sales will fall after everything else has collapsed. Well, the best defensive stock to buy at the moment is the one that's trading at the lowest price. Growth variables, often considered when calculating a company's P/E (price-earning) ratio, should be ignored during this period.

The next stage of the economic cycle is called "inflation," and it follows this one. In this state, both the price and the number of transactions have hit rock bottom. Bonds are the best investment option because stocks face a protracted period of indifference before they finally begin to rise again. If the market continues to trend sideways and you have some spare cash, how do you decide what to invest in? The recovery rate is still unknown, but bonds offer a guaranteed return that, despite its low yield, is still preferable to doing nothing. If widespread agreement existed, bond prices would rise (with correspondingly lower yields).

While the previous phase saw stock values fall, this one sees them move sideways since the panic has subsided, but the market is still waiting to see what happens next. As a result, companies are investing more in capital equipment and software to prepare for the next phase (the recovery), meaning dividends are smaller than usual. The risk of going into the stock is already low because of the low price, but there will still be time to move the capital elsewhere for these reasons. Companies peddling staple goods with a high growth potential (defensive growth) are your best bet. It is acceptable to re-incorporate the growth factor into the P/E ratio at this time. I can all agree that a company's true worth is greater than its market price if its growth rate is strong. So be it.

Since not all industries have had growth at this stage, except for the equity markets, which are among those exhibiting defensive growth, commodity prices should remain constant. Nonetheless, the headwind is still modest, so the uptick in commodities is still not as favorable as the uptick in defensive growth in stocks. Then, when the economy has finished its "inflation" phase, it will enter its growth phase. The economy is improving, and the interest rate is low. As a result, equities, especially cyclical growth equities, are expected to do the most, making them the best asset class overall.

Somehow, there will also be upswings for defensive growth stocks. Nevertheless, its value has usually increased in the preceding phase, so now it is the company's turn to sell products that are typically acquired when people have a lot of money (cyclical growth), such as cars, houses, luxury bags, and perhaps girlfriends #LOL , thus cafes, restaurants, luxury hotels, and vacations. A stock with cyclical growth that has just rebounded from its low point is preferable. Since many other industries will provide support, commodities will also see substantial growth, but without a demand shock, their expansion will fall short of cyclical growth stocks.

OK, when the market became overly optimistic and flush with cash, it again entered the "get too hot" phase. If people start spending just because their neighbors are, it will generate a demand shock. Because this demand shock hit so many different industries, commodities will enjoy the strongest tailwind possible again.

That's the framework; now I can share some thoughts about the much more complex and exciting implementation!

Commodities perform well during the "recuperation" or growth phase, while cash and defensive value stocks prosper during the contraction period. After a long consolidation, however, there will be little distinction between defensive value stocks and defensive growth stocks. In addition, I dislike this sort of classification because the price ultimately dictates the worth of anything. Even in bad times, there is always value to be had if I can find it, and it doesn't matter if growth is occurring or not. So, much like the discussion about the temperature, my options are commodities or defensive investments.

The rising popularity of LV, Hermes, and other luxury brands in China was reported by Bloomberg while I was writing this article. Given this information, it's tempting to think that the sideways movement we've been experiencing is only a temporary constriction that has already ended. However, almost all indices have gone flat over the past 12 months, although most have risen over the past three months. So, have commodities and stocks finally hit bottom? Try to check GoTo or Grab, perhaps with their performances, to learn more.

The likelihood of a recession in the USA, the UK, and Europe is high. The results of this will be felt everywhere. But the effect won't be as dramatic as in the past. Inversely, countries with strong GDP growth and trade surpluses will see an influx of currency. Now! Which one is correct? It is important to consider where the current economic cycle is in relation to the preceding one. In this scenario, it seems like both outcomes would improve. So much for the business cycle; what really matters are the costs and benefits of a specific business.

Even though globalization makes each country's economic cycle different, everything still affects each other. So, even though the economic cycle is the biggest of all processes, the business process also has its cycle. This is because each industry is different, which gives feedback to the economic cycle as a whole. So, it's not a simple case of one thing leading to another, which makes it very complicated. Thus, even if the business cycle is thorough, it may not apply to all industries. Even within each industry's unique economic cycle, the impact is unique to each organization. Some businesses are prepared, while others are not, and each company's market perspective is unique. For example, some companies in the same industry have a P/E ratio of 20 while others have a ratio of only 2 -- this is the difference between a 10x bagger and a 90% bonus. Do you think so?

Let's get back to the topic: Indonesia's inflation rate is currently declining (but it could rise again), and the interest rate is likely to remain unchanged. Our economy is robust, with a large surplus and rising trade balance, a small share of GDP devoted to government spending, and a history of robust GDP growth notwithstanding the recent downturn. This is a genuine expansion, and it will be maintained. We should experience a liminal period from here before continuing the peak or reversing into contraction. It's unclear whether we'll begin a period of decline or reach a new peak. Do you think the next political event will make everything worse? Or.... better? Let me know...

Somehow, we all know that China is Indonesia's top export partner, with the USA coming in second. While China continues to reopen and promises to regain its economic development, the USA and Japan are on the verge of recession. At the same time, India's GDP growth has caught up to China's. Additionally, it should be noted that 12% of exports go to the USA, and 24% go to China. Foreign direct investment (FDI) in India is still growing.

Oh well, market psychology does not exhibit any overt euphoria. Contrarily, everything is still pretty cautious, except for a few frying stocks attempting to seize the moment. It's challenging to think that Indonesia will experience a "contraction" anytime soon. Unfortunately, there are no signs of that. There are some businesses that, while having lower earnings than anticipated 6 months ago but higher revenue, are nonetheless valued with a P/E ratio under 2 and keep losing money. These businesses will almost certainly return to the recovery stage (demonstrating once again that this sideways movement may be a slight contraction that has ended) ... well, I can share silly bedtime stories about this all day, but let the journalists play their roles.

As a closing to this article, if the economy is in its peak phase and there are no signs that it will end or that it has "jumped" into the recovery cycle or a new bottom, and if promising startups will profit from this phase and get a PE ratio of less than 2, is it a 3 or not? Then, bet smart! Oh well, although my health condition makes it hard for me to move around... I can only use my notebook or mobile phone for about 4-5 hours daily, but I still love writing and sharing what I know. As a beginner in the finance and business worlds, I've always enjoyed telling my friends about my humble experiences, even the smallest ones. And let's be honest, who doesn't like a good laugh? So, even if I can't write as much as I used to, I'll still try to make my work easy and profound. And, somehow, at the end of the day, nothing makes me happier than knowing that my words have made someone laugh or helped them see the world in a different way. Plus, let's be honest: writing from bed is kind of a power move, at least for my therapy. So, let's enjoy the journey—stay happy, healthy, and sane!