Step Aside Business Cycle: Presenting The Business Swirl

Tyler Durden's picture

The business cycle ought to be thought of as a series of discrete phases, each one quite distinct from the other, rather than as a smooth and uninterrupted process through time. This is how Goldman Sachs describes what is a compelling view of the dynamics of macro acceleration-and-deceleration and expansion-and-contraction and how these separate phases of their so-called 'swirlogram' can be mapped into asset class performance. This means that unlike traditional business cycle momentum jockeys and the extrapolating 'rulers' of the world, trade positioning should depend not only on the current state of the cycle but also on the near-term phase transition. As the cycle turns, so do assets; economic acceleration serves as an early indicator of looming shifts. Hence, vigilance in monitoring the business cycle with an eye towards identifying cyclical turning points is instrumental to a disciplined investment process. These lessons are timely too. Back in March, the business cycle peaked. The GLI shifted from the Expansion phase to the Slowdown phase; growth remained positive but acceleration turned negative. More ominously, April GLI growth was quite modest, with downward revisions to the last few months of data too. If the current downbeat data trajectory is extended, current GLI readings may prove to be overly optimistic. And should acceleration remains negative (which today's Philly Fed will drive), there is not much of a growth buffer to prevent the cycle from slipping into the Contraction phase, where the message for asset markets is clear and sobering.

The 4 quadrants of the new business cycle vision...


and how assets perform under these quadrants...

Visualizing the business cycle

We use the GS Global Leading Indicator (GLI), its growth (positive and negative) and acceleration (positive and negative) to define the business cycle and its four phases (see Charts 1 and 2). Peaks and troughs are clearly identified by the interaction of these two key characteristics. Cycle peaks occur when growth is positive, but no longer sequentially better, as acceleration shifts from positive (continuously rising growth) to negative (declining growth). And cycle troughs occur when growth is negative but no longer increasingly so, as acceleration shifts from negative (continuously declining growth) to positive (improving growth).

Recasting the GLI as a function of its own growth and acceleration yields a different visualization of the business cycle that amplifies the prominence of the four phases. Each monthly data point is identified by two characteristics: GLI growth (the month-on-month percentage change) on the x-axis and GLI acceleration (the month-on-month change in growth) on the y-axis. Formally, this is a phase-space representation of the GLI; informally, we call it the GLI Swirlogram, as illustrated in Chart 3. In this representation, each phase is associated with a specific quadrant.


As the GLI moves through time it traces out (by construction) a clockwise curve (see Chart 4), with some phase transitions more likely than others.

Just the facts: Phases of the cycle and asset returns

Moving clockwise through the Swirlogram, starting from the top right, the four phases of the cycle and some of key characteristics are:

1. Expansion (positive growth and positive acceleration):

  • Asset returns are strongly positive – be it global equity indices, sectors, US treasuries (in yield terms) oil, metals, and some currencies too.
  • This phase occurs about 40% of the time and lasts about seven months on average.
  • From here, the cycle always peaks and moves “forward” (clockwise) to Slowdown. Acceleration turns negative even as growth remains positive. (Technically, owing to the smoothness of the GLI, this transition is deterministic, as we detail in our paper.)
  • Economic data are relatively highly correlated with each other and fairly persistent.
  • Returns dispersion across assets (within an asset class) is most modest in this phase, as a rising tide lifts all boats.

2. Slowdown (positive growth and negative acceleration):

  • Returns are more muted, though for the S&P 500, still positive. Volatility is higher and so effective returns (which are expected returns scaled for uncertainty) are lower too.
  • Realized skew is most negative in this phase.
  • This phase also occurs about 40% of the time and lasts about seven months on average.
  • Following a cycle peak, acceleration is almost as likely to turn positive again, as growth is to turn negative. Slowdown could either be a mid-cycle pause or a precursor to negative growth.
  • Correlations across key macro data is, on average, weakest in this phase of the cycle.

3. Contraction (negative growth and negative acceleration):

  • Returns are strongly negative in this phase. On an effective return basis, the Wavefront Growth Basket has the most concentrated negative returns across the assets we consider.
  • This phase occurs only about 10% of the time and is short lived, lasting about 3 months on average.
  • From here, the cycle has (nearly) always found a trough and moved on to the Recovery phase.
  • Macro data tell a fairly clear and correlated story in this phase.

4. Recovery (negative growth and positive acceleration):

  • Returns shift from strongly negative to very close to zero, on average.
  • Returns dispersion across assets (within an asset class) is highest in this phase, signaling that differences in relative performance (adjusted for volatility) are greatest in this phase.
  • This phase also occurs only about 10% of the time and is short lived, lasting about three months on average.
  • Although worries about “double dips” often abound, and transitions in theory could be either forward to Expansion or back to Contraction, in the 25-year history of the GLI, the cycle has always moved forward to Expansion from the Recovery phase.
  • Macro data are most correlated and persistent in this phase than any other.

Watching the data for tactical positioning

Should the data push through to this more negative state of the world and if history is any guide, asset markets are likely to respond fairly aggressively. It is interesting to note, that several assets that are typically harmed quite a bit in the Contraction phase have, in advance, already posted some significantly negative returns during the current Slowdown phase. Looking at assets from March 1st (when the February GLI was released) to current, the GS Wavefront US Growth Basket, the Materials sector, EM equities, and the Aussie dollar have posted returns more consistent with the Contraction phase rather than the Slowdown phase that has been observed. By contrast, the S&P 500, the Consumer Discretionary sector, and even the DAX, though not stellar, have performed much more in line with typical Slowdown patterns and have not yet suffered from Contraction pains, which may still turn out to be false.

Over the last week or so, markets have been buffeted by several factors: renewed uncertainly about the near-term outlook in Europe, weak Chinese data, and US financial sector issues too. None of these have motivated us, from a tactical perspective, to get off the sidelines.

we do not yet have enough information to feel comfortable with one interpretation over the other. As always, and as our recent work amplifies, the upcoming data and their direction will be crucial. Thursday’s Philly Fed release of May data will feed into the Advance May GLI reading. We will be watching closely to see if the GLI remains in the Slowdown phase or if it nears or even crosses into the Contraction phase.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Buckaroo Banzai's picture

Huh. Kinda like what happens when I flush my toilet.

Aziz's picture

At the centre of the spiral is a black hole....

goldfish1's picture
Maybe new business models are needed: Ford, GM and BMW linked to illegal logging and slave labour in Brazil

"By buying this steel, these well-known brands are helping to destroy the Amazon..."

Manthong's picture

Popular myth says that south of the equator it swirls in the other direction.

dannyboy's picture

Tyler, an important thing that you missed (or maybe just didn't put in) is the fact that, this is almost the model representation of this article you wrote a while back. "In Its Latest Nonfarm Payroll Mea Culpa, Goldman Stumbles On THE Answer... And Changes The Rules Of The Game"

Every time they intervene it becomes less and less effective till the drain (or spiral) just doesn't move or goes 3D? Lol.

dunphyben's picture

da Vinci must've been a good investor, huh?

AlaricBalth's picture

Looks like a Fibonacci spiral, only inverted, which would signify logarithmic contraction.

onelight's picture

Spiral Dynamics in action...

Some guys have them on the back of their heads. It's a balding pattern, I think. Should drive some hat sales. 

dunphyben's picture

"And that, my friends, is when we found the market's spiral galaxy, and quantum social engineering was born."

-Carl Sagan, on his new CNBC show, "Mad Investment Cosmology"

NotApplicable's picture

Good thing the economy is a floater! Otherwise, we would've lost it on the last lap.

TheFourthStooge-ing's picture

Buckaroo Banzai said:

Huh. Kinda like what happens when I flush my toilet.

This implies that the Bernank is the little guy in the boat:


A Nanny Moose's picture

Does this swirl reverse south of the equator as well?

Sudden Debt's picture

And the wolf started to BLOW BLOW BLOW the straw bankerpiggies house!
Down came the roof!

blunderdog's picture

Someone call Charles Fleischer.  I think they're plaigiarizing his moleeds research.

dunphyben's picture

command + f to get to that word. "fibon-"


next they'll find out the international web is a physical manifestation of metatron. 

LawsofPhysics's picture

It would appear that my saying "beating expectations all the way down" can be applied to more than just unemployment.

CrashisOptimistic's picture

People who still think about cycles don't understand the relentless, permanent nature of oil scarcity.

Gully Foyle's picture

Someone needs to check out Ace of Spades and Hot Air a lot earlier in the day.

This was posted first thing this am.

NotApplicable's picture

Wait, is this a race?

Remember, without time, everything would happen all at once.

onelight's picture

Everything's already happened...this is just the replay.

Bull Bear Otter's picture

Put the phase circle all the way in the slowdown quadrant, eliminate the line between contraction and recovery.  You will find that the angle of the dangle is directly proportional to the beat of the meat.

bdc63's picture

"We will be watching closely to see if the GLI remains in the slowdown phase or if it nears or even crosses into the contraction phase."

contraction it is.  now what  ...

blunderdog's picture

Um, right, er, well...according to the chart, the winning stategy during periods of contraction is to sell GS WF US Growth Baskets and buy EM Equities.

Maybe I should get into this racket.  It's all SO EASY.

Scalaris's picture

The golden ratio of the illusory economic growth during the period of a global financial contraction.

The Fonz...before shark jump's picture

Just like swirl there of the terlet

Archie bunker

BlackholeDivestment's picture

The expanding contraction of the beast, ''Fed'', by ''I slaughter children daily''. Ewe QE baby Ewe E. Lol, Lloyd ''Price''. LMAO 

icanhasbailout's picture

I associate that shape with the phrase "death spiral" or with the orbits of asteroids plummeting to Earth...

Cycle's picture

If you look at an economic time series as a multifractal in both price and time, you can extract parameters from the price-time space and reconstruct a cyclical pattern function that allows some prediction of future behavior. When analyzed, a time series like the DJIA shows a series of cyclical patterns that sometimes combine to form pseudo-cycles. My point is that there seem to be many cycles operating at once.  I can't say what their origin might be, but one could speculate based on the cycle length. From longer generational cycles of decades, to shorter cycles reflecting seasonal patterns, electoral patterns, and intermediate cycles of credit expansion and contraction. For the DJIA there appear to be cycles as long as 47 years, intermediate cycles of about 11.8,  8.6 years, electoral cycles almost 4 years on the dot, all the way down to cycles of 7 months 3 months and even 5 days.I don't have the training or the cmomputing power of the GS quants,  but I'd love to know where they come up with this neat, but not-quite-like reality picture of a swirly cycle, since for financial time series I work with there are at least a dozen interacting cycles.

blunderdog's picture

People assume that the business cycle is a strict progression of cause to effect, but *actually* from a non-linear, non-subjective viewpoint - it's more like a big ball of wibbly wobbly... businessy-wusinessy... stuff.

Or...not really, but if it helps you to think about it that way, feel free.

Cycle's picture

Well, feel free to set up and set fire to your own straw man. Now there's cause and defect for you.

blunderdog's picture

It was just a joke, but since you didn't recognize the quote: the problem is the whole "with the proper model, we can predict the future" premise.

If *you* can predict the future, it would be reasonable to assume others can too, yet when *everyone* can predict the future and has different goals in mind, you would need separate universes for each prediction to come true.

Biorhythms?  Astrology?  The Mayan calendar?  Kabbala?  Chicken-hearts? 

Take your pick.

Convolved Man's picture

Yes.  Yes.

Didn't Einstein's theories postulate a singularity forms at the center of this swirl?


Oh, sorry Aziz.  Didn't see your conjecture.

Well done.

Practical Irrationality's picture

The best lack all conviction, while the worst / Are full of passionate intensity.

onelight's picture

Right ... and some are just confused.

Hey it's getting late in the day, don't we need a rally soon?

So Facebook can avoid IPO'ing into a market-selling hole??

neutrinoman's picture

Nice diagram. There's a similar one in Foster Morrison's Art of Modeling Dynamical Systems. It's a phase diagram, with one variable (growth rate) and its rate of change (growth acceleration) on the two axes.

Another fan of this approach is Steve Cucchiaro at Windhaven:

This makes me think of Lakshman Achuthan's late 2012-early 2013 recession call. He's tracking the same thing in a different way. He's gotten a lot of flak, but ECRI is highly respected and has an excellent track record. He analyzes raw data himself, with his own methods, and avoids a lot of the "seasonal adjustment" and other nonsense of the conventional crap that fills up 90% of the media.

LFMayor's picture

Cousin Eddie:  "SHITTER'S FULL!"

Ljoot's picture


CTD ... Circling the Drain.

ParaZite's picture

That graphic kind of reminds me of a toilet flushing... and away goes fiat down the drain.

Coldfire's picture

The Swirlogram reminds me of three things:

1. A non-function;

2. The flight path of a Zuni bird; and

3. The four quadrants of the CTRL-P key.


flyme's picture

 What a Christmas pressie to look forward to.