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Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles
Economic and stock market cycles affect companies in every industry. Unfortunately, a confusing array of anecdotal and conflicting indicators often renders it impossible for managers and investors to see where the economy is heading in time to take corrective action. Now, a 35-year Wall Street veteran unveils a new forecasting method to help managers and investors understand and predict the economic cycles that control their businesses and financial fates. In Ahead of the Curve, Joseph H. Ellis argues that the problem with current forecasting models lies not in the data, but rather in the lack of a clear framework for putting the data in context and reading it correctly. The book explains critical economic indicators in nontechnical language, identifies and documents the recurring cause-and-effect relationships that consistently predict turning points in the economy, and provides the tools managers and investors need to position themselves ahead of cyclical upturns and downturns. Economic events are not as random and unpredictable as they seem. This book helps readers recognize and react to signs of change that their rivals don't see—and win a sizeable competitive advantage. Joseph H. Ellis was a partner at Goldman Sachs and was ranked for 18 consecutive years by Institutional Investor magazine as Wall Street's No.1 retail industry analyst.
256 pages, Hardcover
First published October 1, 2005
32 people are currently reading
227 people want to read
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Displaying 1 - 12 of 12 reviews
May 16, 2010
Slightly disappointing as it came with rave reviews from a colleague; my expectations were probably too hyped. Could've been revolutionary in its time -- published a massive 4 years ago, but the market adopts new practices like 'snap' -- but I think a lot of what he discusses are already integrated into leading i-bank analytical work so is perhaps less stunning than what I expected. Still, a logical and clear read, with some interesting points, below:
1). Basic schematic of US economy (actual figure more complicated than I can depict here):
Real consumer spending => w 0-6m lag
Industrial Prod and Services => w 6-12m lag
Real Capital spending
All 3 above => Corporate profits => Stock market and Employment
IP always swings more than Real Con, b/c of inventory effects that increase amplitude of swing. Even more so for capital goods as they are further up the value chain. The volatility of production (at consumer, inventory supplier, and capital goods supplier levels) all lead to big swings in corporate profits at respective levels, leading to stock price changes. Declines in Real Con don't always lead to recession, but do almost always lead to bearish stock markets. (Note he describes the business/stock cycle here, not structural changes -- I think this is a big point that could cause one to misinterpret the strength and applicability of Ellis conclusions).
2). Track
(i) YoY rates, not actual levels, not MoM or QoQ.
(ii) use 2 charts, showing cause and effect
Other tips: using a rolling 3m avg to smooth monthly data, use different scales, have vertical and horizontal lines to aid perception
3). Unit purchasing power, or real wages, determines consumption of 93-96% of the workforce (assuming 3-7% unemployment; I adjust this too for those out of workforce). Hence, changes in real wages are more significant factor in driving consumption, than are changes in unemployment.
If you consider both
(i) YoY changes in Real Wages (= Nominal hourly wages x PCE deflator which is CPI), as well as
(ii) YoY changes in employment,
this gives you most of what is driving US real consumption. The third factor is consumer credit, discussed in the appendix.
4). The role of credit -- interestingly, when he charts real wage change against real consumption change (graph 10-10, p 134), it looks to me that real consumption change always stays above real wage change. I.e. in good times, it improves faster and reaches higher levels of change, than in bad times, when the lowest rate to which it falls is the rate of change of real wages. To me, this shows that structurally, the ratio of real consumption is rising relative to real wages, which reflects the role of credit in the US economy.
Ellis comes to this conclusion too -- that credit amplifies the impact of real wage growth. Interestingly, he presents a simply numerical eg that shows persuasively that it is new borrowing (ie. change in debt) that adds to consumer purchasing power, and thus it is the rate of change of new borrowing -- ie, the second derivative of credit levels -- that an analyst should track.
He also says that borrowing increases strongly when employment growth is strongest and consumers are confident on outlook to take on more debt => this means though that credit growth is a coincident to lagging indicator, not a leading one.
But he doesn't discuss -- and no fault of his, since he couldn't have foreseen the GFC in 2009 -- structural changes in the level of credit; e.g. qns like when the interest cost burden of debt cripples an economy, or what happens in a structural deleveraging cycle. (To his credit, he does not in his final chapters that US discount rate, prime rate, and 10 yr bond yields were, in 2004, at historic lows, and cautions investors to watch for higher yields and a structural bear market.) Possibly, this omission could throw off his conclusions -- real wage changes would still lead real consumption, but what changes is that the contribution of credit is negative, rather than positive, and while real consumption still follows the cycle, on a through the cycle basis it trends downward, rather than upward.
5). Interest rates -- also a good lead indicator, from his charts. But he argues that only about 7% of consumption in the US is tied to interest rates -- big consumer durables, home furnishings, jewelry and the like. However, he says, it is because interest rates are driven by, and lag slightly, inflation, which does affect real wages.
He also notes that interest rates drive expected returns on different asset classes, but the book is less concerned about strategic asset allocation and he doesn't delve into this.
1). Basic schematic of US economy (actual figure more complicated than I can depict here):
Real consumer spending => w 0-6m lag
Industrial Prod and Services => w 6-12m lag
Real Capital spending
All 3 above => Corporate profits => Stock market and Employment
IP always swings more than Real Con, b/c of inventory effects that increase amplitude of swing. Even more so for capital goods as they are further up the value chain. The volatility of production (at consumer, inventory supplier, and capital goods supplier levels) all lead to big swings in corporate profits at respective levels, leading to stock price changes. Declines in Real Con don't always lead to recession, but do almost always lead to bearish stock markets. (Note he describes the business/stock cycle here, not structural changes -- I think this is a big point that could cause one to misinterpret the strength and applicability of Ellis conclusions).
2). Track
(i) YoY rates, not actual levels, not MoM or QoQ.
(ii) use 2 charts, showing cause and effect
Other tips: using a rolling 3m avg to smooth monthly data, use different scales, have vertical and horizontal lines to aid perception
3). Unit purchasing power, or real wages, determines consumption of 93-96% of the workforce (assuming 3-7% unemployment; I adjust this too for those out of workforce). Hence, changes in real wages are more significant factor in driving consumption, than are changes in unemployment.
If you consider both
(i) YoY changes in Real Wages (= Nominal hourly wages x PCE deflator which is CPI), as well as
(ii) YoY changes in employment,
this gives you most of what is driving US real consumption. The third factor is consumer credit, discussed in the appendix.
4). The role of credit -- interestingly, when he charts real wage change against real consumption change (graph 10-10, p 134), it looks to me that real consumption change always stays above real wage change. I.e. in good times, it improves faster and reaches higher levels of change, than in bad times, when the lowest rate to which it falls is the rate of change of real wages. To me, this shows that structurally, the ratio of real consumption is rising relative to real wages, which reflects the role of credit in the US economy.
Ellis comes to this conclusion too -- that credit amplifies the impact of real wage growth. Interestingly, he presents a simply numerical eg that shows persuasively that it is new borrowing (ie. change in debt) that adds to consumer purchasing power, and thus it is the rate of change of new borrowing -- ie, the second derivative of credit levels -- that an analyst should track.
He also says that borrowing increases strongly when employment growth is strongest and consumers are confident on outlook to take on more debt => this means though that credit growth is a coincident to lagging indicator, not a leading one.
But he doesn't discuss -- and no fault of his, since he couldn't have foreseen the GFC in 2009 -- structural changes in the level of credit; e.g. qns like when the interest cost burden of debt cripples an economy, or what happens in a structural deleveraging cycle. (To his credit, he does not in his final chapters that US discount rate, prime rate, and 10 yr bond yields were, in 2004, at historic lows, and cautions investors to watch for higher yields and a structural bear market.) Possibly, this omission could throw off his conclusions -- real wage changes would still lead real consumption, but what changes is that the contribution of credit is negative, rather than positive, and while real consumption still follows the cycle, on a through the cycle basis it trends downward, rather than upward.
5). Interest rates -- also a good lead indicator, from his charts. But he argues that only about 7% of consumption in the US is tied to interest rates -- big consumer durables, home furnishings, jewelry and the like. However, he says, it is because interest rates are driven by, and lag slightly, inflation, which does affect real wages.
He also notes that interest rates drive expected returns on different asset classes, but the book is less concerned about strategic asset allocation and he doesn't delve into this.
August 2, 2022
目標：以經濟指標預測經濟周期，因為等到真正衰退出現，那其實已然太晚；於是作者試著提出一套科學方式來幫助一般大眾了解分析各種經濟指標，因此內容相當簡單，不用太多專業就能掌握，不過內容比較類似建立觀念，實戰性還有一定限制
1．經濟報導、新聞、評論等都很難幫投資者做出正確預測，因為他們只提供結論，而不能提出過程
2．消費支出至今還是美國經濟的主要動力來源，gdp為消費支出、資本支出與政府支出三者為主，而消費佔了七成左右；而消費又由服務、耐用品、非耐用品三者為主，而服務佔了六成左右；如同經濟衰退屬於滯後指標一樣，就業也是滯後指標，等公司企業開始降低僱用時，已經是衰退開始之後的事了
3．經濟滑坡分為四個階段：峰頂、減緩（消費支出放緩、零售增長放緩、利率升高、通膨升高，但就業仍充分）、擔憂（利率升高、通膨升高、消費減少、實質gdp增長率下降、失業率仍然於低位）、衰退（實質gdp連兩個季度下降、企業利潤下降、失業率上升）。所以與上個季度比較的數字可能不盡公平，上個季度如果已經是衰退，那比擔憂好一點不表示是減緩，有可能還是擔憂，所以一定要放長更長期的階段中來比較。另外，在gdp增長率下降時，已經開始對企業產生損失了，到真正衰退時才開始計算就實在太晚了。
4．雖然熊市發生不一定會有衰退，但熊市來的會比衰退更快，而簡單的來說，企業或投資不能等衰退發生，而是要在減緩之時就要開始變通調整了
5．善用圖表，但繪製圖表必需詳加考量並且資訊有效，不然只會增加誤導的作用，比如說不用季節本來就有不同的銷售，比較就要和去年或前年的同季來比較，而且要加上增長率的概念，這樣更能看出不同年度的成長或衰退
6．指標有領先與滯後兩種，不能搞混兩者的關係，否則在閱讀圖表時會造成困惑
7．強調消費為經濟成長的主要動力，消費增加到工業增產會有半年的時差，而工業增產到加大投資又會有半年到一年的時差，
8．股票熊市大概起自實質消費支出峰頂，而牛市起自消費支出谷底
9．影響消費的因素：收入與財富為主（尤其是每小時平均工資），而消費者情緒則關係不大，所以應該以數據為主，而非太過依賴心理作用
10．實際收入與實際支出會有大半年的時差，而實際支出導致公司利潤又有半年的時差，而公司利潤到增加就業又有半年到一年的時差
11．消費支出其實會領先就業率，也就是說看經濟前景不能以就業率為主，而是要以消費支出為主，而失業率真的到頂時，往往牛市已經開始了，所以入市的最好時機就是失業率最高的時候，另外因為就業是滯後指標，所以消費支出的增加主要是因為工資上升
12．fed調整利率而影響實際消費支出大概要三個月，不會是立即的，而利率影響最大的一個是住房，一個是汽車，大概只佔消費的1/3
13．利率的調整與股市呈負相關影響
14．聯邦赤字增加代表借的錢增加，自然會抬高利率
15．大多數企業都不會有經濟預測部門，畢竟市場變化太快，而且預測的準確性很值得商確，於是作者提出他在高盛設計的預測方式來證明預測有其重要參考性
16．Less is more，有時候太過複雜的預測不僅費時費力，而且不一定能得到更為準確的結果，所以能活用經濟學的基本知識再加上常識所建立的模型反而效用更高
1．經濟報導、新聞、評論等都很難幫投資者做出正確預測，因為他們只提供結論，而不能提出過程
2．消費支出至今還是美國經濟的主要動力來源，gdp為消費支出、資本支出與政府支出三者為主，而消費佔了七成左右；而消費又由服務、耐用品、非耐用品三者為主，而服務佔了六成左右；如同經濟衰退屬於滯後指標一樣，就業也是滯後指標，等公司企業開始降低僱用時，已經是衰退開始之後的事了
3．經濟滑坡分為四個階段：峰頂、減緩（消費支出放緩、零售增長放緩、利率升高、通膨升高，但就業仍充分）、擔憂（利率升高、通膨升高、消費減少、實質gdp增長率下降、失業率仍然於低位）、衰退（實質gdp連兩個季度下降、企業利潤下降、失業率上升）。所以與上個季度比較的數字可能不盡公平，上個季度如果已經是衰退，那比擔憂好一點不表示是減緩，有可能還是擔憂，所以一定要放長更長期的階段中來比較。另外，在gdp增長率下降時，已經開始對企業產生損失了，到真正衰退時才開始計算就實在太晚了。
4．雖然熊市發生不一定會有衰退，但熊市來的會比衰退更快，而簡單的來說，企業或投資不能等衰退發生，而是要在減緩之時就要開始變通調整了
5．善用圖表，但繪製圖表必需詳加考量並且資訊有效，不然只會增加誤導的作用，比如說不用季節本來就有不同的銷售，比較就要和去年或前年的同季來比較，而且要加上增長率的概念，這樣更能看出不同年度的成長或衰退
6．指標有領先與滯後兩種，不能搞混兩者的關係，否則在閱讀圖表時會造成困惑
7．強調消費為經濟成長的主要動力，消費增加到工業增產會有半年的時差，而工業增產到加大投資又會有半年到一年的時差，
8．股票熊市大概起自實質消費支出峰頂，而牛市起自消費支出谷底
9．影響消費的因素：收入與財富為主（尤其是每小時平均工資），而消費者情緒則關係不大，所以應該以數據為主，而非太過依賴心理作用
10．實際收入與實際支出會有大半年的時差，而實際支出導致公司利潤又有半年的時差，而公司利潤到增加就業又有半年到一年的時差
11．消費支出其實會領先就業率，也就是說看經濟前景不能以就業率為主，而是要以消費支出為主，而失業率真的到頂時，往往牛市已經開始了，所以入市的最好時機就是失業率最高的時候，另外因為就業是滯後指標，所以消費支出的增加主要是因為工資上升
12．fed調整利率而影響實際消費支出大概要三個月，不會是立即的，而利率影響最大的一個是住房，一個是汽車，大概只佔消費的1/3
13．利率的調整與股市呈負相關影響
14．聯邦赤字增加代表借的錢增加，自然會抬高利率
15．大多數企業都不會有經濟預測部門，畢竟市場變化太快，而且預測的準確性很值得商確，於是作者提出他在高盛設計的預測方式來證明預測有其重要參考性
16．Less is more，有時候太過複雜的預測不僅費時費力，而且不一定能得到更為準確的結果，所以能活用經濟學的基本知識再加上常識所建立的模型反而效用更高
June 11, 2010
Joseph H. Ellis has over two decades of dabbling in the stock market. Over the years, he argues that analysts have been fundamentally flawed in forecasting the next booms and busts in the economy. Reading over the number in quarters instead of annuals have resulted in noise that disallows you from seeing the macro picture, according to him.
In Ahead of the Curve, author Ellis proposes an alternative way to look at market cycles and how you can apply them to your business and investments. The reader will be briefed on leading and lagging indicators such as inflation rate, unemployment rate, GDP growth - and how these numbers can be harbingers of either good or bad news.
But be warned though, the work is graphic intensive and it would be a good idea that you have basic knowledge in investing before you pick up this 276-page hard cover.
In Ahead of the Curve, author Ellis proposes an alternative way to look at market cycles and how you can apply them to your business and investments. The reader will be briefed on leading and lagging indicators such as inflation rate, unemployment rate, GDP growth - and how these numbers can be harbingers of either good or bad news.
But be warned though, the work is graphic intensive and it would be a good idea that you have basic knowledge in investing before you pick up this 276-page hard cover.
July 17, 2015
If you want to know how to properly use the economic data we all get for free to help in making strategic decisions for your investments, company, or clients, this book will take you step by step through the process conceived and built by one of Goldman Sachs' most respected industry analysts. Please use the information in this book to help yourself make sense of the business cycles in your industry. I highly recommend it to valuation experts, economists, marketing researchers, corporate strategists and students.
October 26, 2008
80% of US GDP is consumer driven. Ellis details his method of forecasting with a focus on the consumption side of the equation. He makes his case with helpful, full-page 40-year charts of macroeconomic data.
December 7, 2008
This is an very insightful reading with regards to market forecast techniques. It really break's down the market cycle from an macro view that anyone can understand. I am glad that I read this book in early 2007!
December 30, 2008
Again, another HBP book that is very easy to get into and understand on the Market conditions and cycles from a Macroeconomic view for any level of understanding. Great book to make sense of the complex area of business and market forecasting.
January 8, 2009
Good book on economic indicators from the prospective of an ex-Stock Analyst. Conclusion of the book is that Real Consumer spending is the backbone of the economic cycle.
January 29, 2009
Very cool book on economic forecasting, specifically the important factors to watch for
November 19, 2012
This book is pretty dense, I would only recommend it to those who are serious about studying the economy and markets.
November 26, 2012
an absolutely fabulous and easy read. it goes in to why consumer spending is 2/3 of gdp. and the cycles of the retail industry. youll love this read, and learn a thing or two along the way.
Displaying 1 - 12 of 12 reviews