The Hindu Business Line : An economics book to help you sleep better

HELLO, howdy, are common greets, and nobody takes the `how' as a serious poser. A majority will have trouble answering "Are you healthy?" because it is not easy to know if one is really healthy. Multiply that hitch a million-fold if the question were to be rephrased, "Is the economy healthy?" That perhaps explains why, as Jon Markman would say, "95 per cent of economists failed to predict the start and end of the last recession in the US."

The Economist is more categorical: "The dismal scientists have a dismal record in predicting recessions." Bad news; but good news, again in the words of Markman, a CNBC financial columnist, is that "Lakshman Achuthan and Anirvan Banerji got both right." And their new book, Beating the Business Cycle, published by Currency Books (www.currencybooks.com), is about predicting and profiting from "turning points in the economy".

The book's blurb brings economy to the common man's agenda with a teaser: "How can you make wise decisions about your company and your personal future when you have no idea where the economy is headed?"

The answer is, you cannot, continue the authors, almost suggesting you better check the economy gauge before looking into your fuel tank, "so that you can navigate the road ahead." Achuthan and Banerji are directors of Economic Cycle Research Institute (ECRI), "in constant demand by corporate America and the media", and "the secret weapon of companies from Disney to DuPont, major fund managers, and many central banks."

These cycle seers are ready with answers for some common questions too, such as: "Should a large company search out new clients and build new factories or stores, or should it consider cost cutting and layoffs? Is it the right time for you to splurge on that luxury vacation or addition to your house, or would it be more prudent to cut back on big expenditures and save money for a rainy day?"

In less than 200 pages, the authors offer you "the edge you need to trump the competition and stay ahead of the crowd," by taking "guesswork out of deciding which of the hundreds of economic indicators to trust and which ones to trash."

No laborious preface or intro, and Chapter 1 opens with Road Runner cartoon, where "the joke is always the same" — running right over the edge of the cliff missing the target.

Likewise, a shift from boom to bust, from economic expansion to recession, can be painful, even tragic, for those blindsided by the downturn, explain the authors. Solution is to be forewarned with an "`economic dashboard that will help steer your future financial decisions in the right direction before you find yourself plunging into the abyss." Also, "while most economic books are liable to put you to sleep, this book should help you to sleep better."

When a road that has been straight was assumed to be so further down, despite a caution sign, you find a crashed vehicle at the bend. And the economy highway is more treacherous because there are no roadsigns to warn you.

"When business leaders, media, government officials, economists, and individuals make such mistakes together, things go wrong in a big way. A herd mentality takes over and otherwise sane and rational people do crazy things." Sadly, if you are among the affected, you cannot laugh away the tragedy as a cartoon, and "peel yourself off the canyon floor."

If you were to search for economic indicators to serve as guide, there are simply too many. But many are unreliable, because "most of the indicators these pundits rely on inevitably come from the 99.99 per cent that are useless." Another problem: "Even if the indicators are useful, they often give contradictory signals, making it impossible to decipher what they mean."

A chapter on `International Experience' speaks, among other things, about the authors' work on India's indicators. "The 1990-91 Gulf Crisis had a little-known effect on the Indian economy," they write.

"As a result of the conflict, Indian expatriates working in Kuwait, Iraq, and other countries in the region were forced to leave. Suddenly, the inflow of money from the expatriate workers stopped. India's foreign exchange reserves plunged, and the country found itself in a full-scale economic crisis. In response, the newly elected Indian government began to liberalise the economy, allowing the influence of the free market to grow." Achuthan and Banerji add that India's indicators started working only after early 1990s.

Ever wondered why economy rises and falls? To answer this, the book weaves in a study done by Ruth Mack almost half a century ago, on cycles in shoes. That was when shoes were a discretionary spend, so "someone thinking of replacing a worn-out pair of shoes would act on that urge when they were feeling relatively prosperous."

Mack's study demonstrated how the cycle becomes more pronounced the farther you get from the consumer, cascading in ever-larger cycles the closer you come to the earliest supplier in the chain. As the economy shifts from its manufacturing focus to that of services, we find a smoothing because the latter lacks inventories. However, parts of service sector remain cyclical, point out the authors.

To read the economy like an open book, you should know the different indicators: the `coincident' ones go in step with the economy and help "track the business cycle's progress"; `leading' ones such as "mortgage applications and profit margins turn before the economy does"; and the `lagging' ones act true to their name. Logically, if you lock your eyes to the leading indicators everything should be okay. But there is a problem: leading indicators "occasionally run off course." Individually they can fail, but collectively they succeed, and we are not talking about cabinet ministers.

Takeaway ideas and tips abound in a chapter on `real-life scenarios'. If, instead of learning about future inflation gauge or weekly leading index, you think that one can be safer by following public opinion, as the Big B used to offer as lifeline in KBC, please remember that it is but a lagging indicator.

A book for those who want to be in charge of their financial destinies.

Economics@TheHindu.co.in

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