Transcription
So, when one takes an interest in analyzing the movement of stock markets, one realizes that markets rise then fall violently, then do nothing for a period of time, then explode again. And to tell the truth, when one looks at this with their head in it, it feels like complete chaos. Complete chaos. Whereas in reality, there is an order, and an order on different temporalities, so different time frames, and this order can be generally summarized by economic cycles. And this is precisely the subject of this video because you can imagine that if you are able to understand which economic cycle we are in and therefore have, let's say, the underlying direction of a certain asset, it will be much easier as a trader or investor to position yourself in the underlying directions by knowing the cycle we are currently in. At the beginning of 2025, I had also made you a video on my wild expectations for the stock market in 2025, and I had a bullish vision. This bullish vision mainly stemmed from an understanding of these cycles. Hence the importance of understanding these cycles to be able to anticipate markets rather than always being in reaction and changing one's mind, literally changing shirts every morning whenever something happens and being on the emotional side of the markets. So, in short, without further ado, let's go see it. [Music] Right here, I have literally drawn for you what the three most well-known cycles look like and how they fit together. So, as you can see in green here, we have the long-term cycles which will look a bit like this. Above that, we will see the medium-term cycles which will therefore oscillate around this long-term cycle, a long-term cycle that we also tend to call a secular trend. The medium-term cycle that I just explained to you are the economic cycles, the debt cycles, what are called in English business cycles. And oscillating around this average, we have another cycle which is much shorter-term, which will be a cycle that will be more related to economic data, growth, and inflation. So, firstly, this long-term cycle, also called secular trend, tends to last between 5 and 10 years. Now, the engine of these longer-term secular trends will notably be everything related to innovation during this period. So, for example, currently, we are entering a period of innovation which is AI, but we have also had electrical innovations, we have also had Internet innovations. These are part of the drivers of these secular trends. Another driver of these trends, which will be a bit longer-term, will be everything related to demographics. Okay? Populations that are getting older and older if they are not replaced. I remind you, the way to calculate the productivity of a certain country, of a certain economy, will generally be the output, so what someone is capable of producing, okay, in this country, in this economy, multiplied by the number of people who are productive, okay? who are not of retirement age. So all these demographic changes will impact these long-term cycles, these secular trends. And now, the other main driver of these major trends will be everything related to debt and deleveraging. And now, as an investor, when we look at this long-term secular trend, I spoke to you about productivity which was the possible output multiplied by the number of people, roughly, who were capable of producing. Here, we are greatly approaching a GDP calculation. And so this secular trend can be recognized, let's say, by the variations in GDP of a certain economy. So what I have put here is the real GDP, so the real GDP of the US. So, you can see it from a linear point of view, we can't do much with it. Now, if we look at US GDP YY, that's the ticker on Trading View, you will find yourself on the BO GDP but gay, meaning the annual change, so in percentage form, that you will see here. And in this way, we will be able to start seeing these trends with these periods of troughs, rebounds, troughs, rebounds, troughs, rebounds, troughs, rebounds, troughs, rebounds, troughs, rebounds. Okay? And we generally see these troughs marked by a recession. So, that is to say, where GDP is negative for more than two quarters. You can see here, we are on the zero line. So as soon as the Year-on-Year GDP goes below this line, we officially enter a recession. Now, you can see, however, that this cycle continued well for the 2000s, so the dot-com crisis. However, we did not officially enter a recession. However, if we look at the S&P 500, the NASDAQ, the US stock markets, we will see this drop that was completely felt. So we did not reach a recession stage. I want to tell you as an investor that whether we enter an official or unofficial recession, the impact on the market has been the same, and this cycle has continued to play out. You can see here the second to last was in 2008, and the last was the Covid crisis, and the next one, when will it arrive? So, this is the secular trend, which is this longer-term cycle. Now, in the middle of this cycle, we have the medium-term cycle, also called the business cycle, which is the best-known cycle and the cycle that generally evolves in four distinct stages, which I have put here. So here we have the medium-term cycle, the business cycle, and we have these four stages. We first have the early cycle, which is characterized by a market recovery. Credit is easier because generally during this part, which is the contraction part, interest rates are usually lowered. If interest rates are lowered, it means that in this early cycle, during this recovery period, rates are lower, so credit is easy, and generally growth is rapid. So this is the early cycle, which we could also call in French the expansion period in this cycle. Then we have the mid-cycle, so the maturity period. And during this period, we tend to see a continuation of the growth we saw in the early cycle. Growth that was explosive in this early cycle. Here, we see growth that continues, that is stable, and we see generalized confidence returning to the markets, where people realize that, phew, we were not on a secular trend where we were entering a new major recession crisis. No, what we saw was a contraction. So now confidence is returning. Now, following that, we have the third phase, which is the late cycle, in French, which would be the overheating period. Okay? And generally, this late cycle is rather characterized by the arrival of inflation. And if you think about it, it's quite normal. That is to say, here, rates have greatly decreased to stimulate this initial growth of the early cycle. Then rates have either remained low or have continued to decrease. Confidence has returned, people have purchasing power again, this drives up prices, okay? And this economic stimulation stimulates inflation. In this late cycle, this is where we start to see the signs of this inflation becoming a bit too strong. We also tend to see during this late cycle potential signs of central banks tending to tighten rates. So when we say tighten rates, it generally means increasing these rates, which makes credit more difficult and leads us to the fourth phase, which is the contraction/recession phase. Every contraction is not necessarily a recession, and this contraction is generally characterized simply by a decrease in overall demand. Okay? So if we look, for example, at 2022, a year that was negative for the US stock indices, we see this contraction phase that was 2022 perfectly. Okay? We had this first contraction which was in 2020 with the health crisis. The health crisis had a big impact, okay, a recessionary impact. So here we had, let's say, the long-term cycle and the medium-term cycle coming together in a way. We saw this significant drop. Following that, the Fed, so the US central bank, decided to intervene massively by first lowering rates to zero and, in addition, by doing quantitative easing (QE) to further stimulate this economy, which led to an extremely strong early cycle, a rebound with very favorable credit conditions. So we saw this in mid-2020, then we had the mid-cycle during the period of approximately 2021. Then at the end of 2021, beginning of 2022, we started to have the late cycle to enter contraction in 2022. And this late cycle, as I just explained to you, was characterized by an increase in inflation, inflation that had been stimulated by the rate cuts and the quantitative easing that had been done during this first contraction. Okay? So at that time, we had these inflation problems and also the Fed starting to announce that they would begin to raise interest rates. Okay? And we can notably see in 2022 here, you can see I had my notes of the main things that were happening, and here is the fed funds rate. So, in short, US interest rates. You can see that during this period, generally, but markets always function as a forward-looking mechanism. So, that is to say, today's valuation is a representation of what should happen in the coming months. Okay? We don't know what's happening today. So we have this forward-looking mechanism. It's exactly the same as if I told you that this watch is very popular today, it's worth a certain price, but in a month, they will stop production and announce this halt in production, saying that it was actually one of the most limited editions of the watch, and so on and so forth. Obviously, you know the price will go up. The question is, will you wait for them to announce it to invest in this item because for you the price will increase, or will you do it in advance because you know very well that in a month they will do it? Everyone will buy in advance, so prices will skyrocket, will increase even before the official announcement is made. Well, this is exactly the same. You see that the markets started to fall even before the first rate hikes. So you see that the first rate hike was right here. Okay. The markets had already priced in this increase in interest rates, which would put some pressure on the economy. But in short, this first drop was mainly characterized by the war in Ukraine. But you can see that from this rebound, it was aggressive rate hikes. So here, it was the Fed increasing its rates very aggressively. So, increase in rates, credit becomes more difficult. 2022 was a negative year, a negative year for stock indices, and a year that for me in my active trading was, I believe, if I'm not mistaken, one of my best years of my entire life, of my entire career. When I say best year, it's not necessarily in dollar P&L, but more in percentage equivalent P&L of the account, because obviously today, I have a larger account than in 2022. But anyway, to get back to this topic, what I also want to tell you is be careful not to fall into this trap. In fact, you need to understand that a small cycle, a business cycle, does not automatically mean recession. And in this case, we went to -20%, you can see it here. So we had reached, if I'm not mistaken, I think it was -24% or -27%, I don't remember exactly in 2022. But we had reached those levels, levels on which I was able to add and therefore completely profit from this drop, this contraction, without panicking about entering a new recession. All this because, again, I understood the importance of cycles and the phases we were in. And so this phase we had here was Covid, okay? We had the post-Covid early cycle, mid-cycle in 2021, late cycle at the end of 2021 and in 2022, we had the contraction, and in 2022, I was able to accumulate my investments like a pig thanks to this understanding of cycles. This brings me to the last cycle, which is the short-term cycle, which will be driven by growth and inflation, and has a duration of approximately 6 to 24 months. So now, this short-term cycle will fit into the medium-term cycle. Remember, we are on something that looks like this. And these cycles will be primarily governed, directed by economic data, economic announcements, everything related to inflation, growth, employment, monetary policy decisions, but also geopolitical events. By the way, that reminds me, let me know in the comments if you would like me to make a complete video on the impact of geopolitics in trading, because there is a lot of very interesting things to say, especially regarding the difference in reaction between positive and negative geopolitical news. So let me know in the comments if you would like me to elaborate a bit more on this subject. And now, what I also wanted to do was explain to you how, let's say, the mistakes to avoid with the understanding of these cycles and rather how to use them. But the first thing will be to connect the scales. That is to say, to understand which long-term cycle we are in, which medium-term cycle, so business cycle, we are in. This way, each small movement, which is generally caused by the short-term cycle, so growth, inflation, economic data, etc., you will not panic, and you will not fall into, let's say, we have some negative data, and again, we can look at any year, okay, a year that was positive, we have correction periods during that year, okay? So these small cycles, and I want you to be able to understand this interconnection in the cycles so that when we see this kind of drop, you see it as an opportunity in a larger cycle rather than seeing it as panic and falling into one of the mistakes that unfortunately many beginner traders make, which is confusing levels. That is to say, a short-term correction does not necessarily mean we are entering a global recession. Okay? And generally, most traders will equate a small drop with a new huge stock market crash, we will lose more than 60%. And also see every small expansion as the new super cycle that will last 30 years. But again, we can very well be in a situation where, as you can see, the long-term cycle is negative, okay, and we will have, let's say, this bullish movement, and people will think we are entering a new bullish super cycle. Whereas if you take a step back, exactly like in trading, when you look at time frames, you have weekly, daily, 4-hour, 1-hour, 15-minute. It's exactly the same with economic cycles. Hence the importance of having a strong macroeconomic understanding of the world around us. Because unfortunately, without that, it's like having no map. You have no map, and every time something happens, you have no idea if it will last this long or that long because you have no idea what macroeconomy we are in, what economic data is coming out, what their impact is, and what their importance is. And precisely, all that I am explaining to you here about cycles, I also want it to allow you to anticipate rather than always be in reaction. Okay? I'll give you an example. If we see inflation exploding and inflation increasing, etc., I want you to be able to see this, analyze it, and understand what the next move of the Fed will be, what the next monetary policy decisions will be because of this increasing inflation. Well, very probably, they will tighten the economy, probably raise interest rates sooner or later. It's the same when we realize that credit is becoming too accessible, too easy. So the value of money is too low, so interest rates are too low for too long. Okay? Generally, the bubble is never far away. Okay? And it is those who understand the cycles who can benefit from, let's say, these major movements, these major macroeconomic swings. If, in short, I had to simplify it for you again with an image, I like to do that, it would be time. It would simply be time. That is to say, our long-term trend will be the climate. So the region in which we are, what is the climate of this region. Okay? It's very important to know. The medium-term cycle will give us the season. It's the same. If you are in France and you are in Paris, if you are in November and if you are in July, it will not be the same. And it's important to know which season we are in. And now, the short-term cycles will be more like the day-to-day weather. What is the wind? What is the rain? What is the temperature? And in the same way, I hope you understand, by looking at it as if it were a weather thing, we have beginners who will be in the middle of May or June in France. So good weather is coming, and suddenly there are 2 consecutive days where it rains very heavily, the weather is not very good, it's a bit cold. If we had this on the markets, people would immediately think "Oh, we're entering a new ice age, guys, etc." When in fact, absolutely not. And any person who knows the month, knows the season we are in, is able to see what the weather is like on that day, etc., and who is also able to see that we live in France, France, a country where the climate is between X and Y, will be so much more informed and make decisions that are much less emotional than any other person who, as I told you, has no notion of climate, weather, seasons, etc. So, in short, this is a bit my way of explaining economic cycles and their importance for investing, but also even for short-term trading to understand the economic world we live in. On that, it was Elliot. C.