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Predicting/Preparing for
2 Economic Transitions

Understanding the macroeconomics which drive business
cycles is key to developing a relevant strategy to manage
through economic cycles. This last economic contraction,
while not totally unique, followed an understandable pattern
over past economic history. In this last economic downturn,
some equated the business dynamics to a “hangover after a
binge”, i.e. economic contraction after a global liquidity
binge.

Many parts of the world had experienced a long global
liquidity bubble that was fueled in large part not only by
home prices in the US but also in places like the UK, Spain,
and Ireland. As well, factors of equity markets in places like
China drove a big run-up in commodity prices not limited
to oil (which may have represented the last hurrah of the
liquidity bubble). Investors were looking for the next best
place to put their funds as the housing market came crash-
ing down.

We also saw a rise in oil prices from 2002 to 2007 driven
via strong economic fundamentals. The end of that run was
largely due to speculative commodity trading. This signifi-
cant factor was intensified by the strong growth in China.
As China came off a blistering run of expansion, investors
started moving into commodities as the global economic
conditions began to unravel.

Simultaneously, the binge on liquidity driven by greed
came unraveled when the US financial markets began to fall