The HOPE framework allows us the ability to track
economic cycles and predict what is coming next. At this
time economists are coming up with a wide range of
estimates and possibilities, from a soft landing to a
massive depression, and that is why there is so much
volatility in the market. It is so important to have a
framework to understand from the history about the
Economic Cycles and the lag effect.
H - Housing; O - Orders; P - Profits; E - Employment is the
sequence of events.
Housing has ALWAYS been at the beginning of the
economic upturn or downturn. It is very sensitive to
interest rates. It is the largest piece of wealth owned by
most individuals (Wealth effect). It contributes directly or
indirectly to almost 20% of the GDP. It is the first area that
turns down about 6 months after the interest rates hike.
For Orders you can look at Purchasing Manufacturers
Index, Credit off-take, Manufacturing data, etc. This works
with a lag of about 6 to 12 months after rising or falling
interest rates. PMI is not an exact number to indicate a
recession, but it does show the direction of the
movement.
Corporate Profits then go down or up. As the interest rates
rise, leveraged companies’ interest payment rises and cost billions, but the profits go down. Further,
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with interest rates rise,
consumers spend less as they have to pay more on their
loans. All this reduces sales, and hence profits.
Then employment finally decreases or increases. If the
profits and sales fall, then employees are laid off to cut
costs. The employment situation is what determines a
hard or a soft landing. A hard landing normally occurs
when there are rapid rate hikes, inflation is high and banks
tighten their lending standards. This happens with about
an 18 - 24 month lag.
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