Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycle

by Joseph H. Ellis

Book Overview

Economic and stock market cycles affect companies in every industry. Unfortunately, a confusing array of anecdotal and conflicting indicators often renders it impossible for managers and investors to see where the economy is heading in time to take corrective action. Now, a 35-year Wall Street veteran unveils a new forecasting method to help managers and investors understand and predict the economic cycles that control their businesses and financial...

• Format: Hardcover
• Language: English
• ISBN: 1591396913
• ISBN13: 9781591396918
• Release Date: October 2005
• Publisher: Harvard Business Review Press
• Length: 304 Pages
• Weight: 1.42 lbs.
• Dimensions: 1.1" x 6.5" x 9.6"

Customer Reviews

Making Sense of All of Those Economic Indicators.

Joseph H. Ellis' ability to see ahead of the curve served his clients so well that he was ranked the #1 retail analyst by "Institutional Investor" for 18 years. In "Ahead of the Curve", Ellis presents his method for forecasting market cycles, learned and tested over 24 years at Goldman Sachs & Co., clearly and concisely so that we all might benefit. He tells us how to find meaning in the myriad of abstruse and contradictory economic indicators that we puzzle over in order to "demystify the economic cycle and the stock market's historically consistent relationship to it". Ellis doesn't ask us to believe anything that we cannot see for ourselves. All of the economic data series that he discusses are clearly charted against bear markets, recessions, and other data series, typically from 1960 to 2004. "Ahead of the Curve" offers a new, simpler, and hopefully more accurate means for business managers, analysts, and investors to predict overall market trends that can also be applied to a particular sector or company. Joseph Ellis posits that Real Consumer Spending (PCE) is the "cornerstone of the U.S. economy", the "front end of the business cycle", and the key to understanding the economy as a whole. And he shows us why and how Real Consumer Spending leads Industrial Production, leads Capital Spending, and can predict bear markets. "Bear markets begin when growth in real consumer spending (PCE) peaks and begins to slow." Besides drawing our attention to the causal relationships of various economic indicators, Ellis points to what he believes are the "two great flaws in conventional economic analysis" that have clouded the picture and impeded understanding for too long: The emphasis on Recession, which lags the economy and the stock market and only materializes after the damage has been done. And the habit of tracking data on monthly and quarterly bases, creating a lot of "noise" and zig-zaggy charts, as opposed to tracking year-over-year percentage changes. How to forecast consumer spending? Ellis demonstrates that real hourly wages are the key determinant of growth in consumer spending. And he shows us how the employment rate, consumer borrowing, the federal funds rate (discount rate), the federal deficit, and total domestic non-financial debt fit in the picture. Even if Joseph Ellis' forecasting methods do not prove infallible in the future, "Ahead of the Curve" provides valuable insight into the relationships between economic series based on empirical evidence. Its greatest contribution is to show us which economic indicators matter and how not to be misled by them. Ellis' thinking and his writing are impressively clear, organized, thought-provoking, and easy to follow. Updates to the many helpful charts in the book are available (free) at AheadoftheCurve-theBook.com, along with links to sources for the raw data.

Puts the myriad of economic indicators and reports in perspective...

I agree with the glowing reviews above. This book is a must read for anyone serious about getting the real, albeit well-guarded (or at least poorly understood) secret about using economic reports and indicators. The Ellis take? Most of them are at best coincidental or at worst serious lagging indicators and therefore of little or even negative value in warning of a bear market. Negative in that strong employment numbers, for example, give investors who follow them a dangerously comfortable sense of security while the real indicators and economy are in trouble. That brings up another point. The vast majority of fundamental analysts and experts aim to predict recessions but as Ellis emphasizes, they are missing the boat. By the time a recession descends, about 80% of the damage to your portfolio has already been done. Is it not far more effective to develop an early warning system of impending bear markets instead? That is Joe's clear over-riding goal as it should be for all serious investors. I am a technical analyst and trader and therefore have a bias. If a relationship or indicator cannot be proven through backtesting, turf it. My goal is to make money in the markets and any and all indicators that assist in this goal are of interest. I am now charting real average hourly earnings using the method he uses and update my chart as new data becomes available. I track an array of weekly economic reports and Ahead of the Curve has helped put then in perspective for me. It's an advanced lesson in economic analysis with methods that actually work! I am amazed that the mainstream media have not picked up on this story, but then again maybe it is not that amazing. Anything that goes again the herd is not of interest. But those who make money in the markets know that following the herd is a great way of getting herded off a cliff. It is another unfortunate fact of life that the herd never see bear markets coming till it's too late. It never seems to fail that after an extended period of economic well-being, the herd gets lulled into a false sense of security by financial know-it-alls who say "this time its different" when crucial indicators turn negative. This is more wishful thinking than real analysis and it is too easy to fall prey to this talk, especially when everyone else agrees with you. BTW, the book also includes a great website in which the charts are regularly updated free. The data links are also made available. Great for those who want to check back on his charts over time and watch the changes or construct their own charts. Thanks Joe and looking forward to your next book (if there is one). Matt Blackman - Writer/reviewer and regular contributor to SFO mag, Stocks & Commodities, Working Money, Traders Mag...

Prescient Prudence

This is one of the most informative business books I have read during the past 12-18 months as Ellis shares with his reader what he learned when he set out "to investigate how I might develop an improved method for forecasting consumer spending and, with it, the rest of the economy. Furthermore, I wanted to document the basis for my forecasts with such clarity that my [Goldman Sachs] clients would understand not only the forecast but also the rationale supporting it." At this point, it is worth noting that, for eighteen consecutive years, Ellis was ranked as Wall Street's #1 retail industry analyst by Institutional Investor magazine. As Ellis explains, his book has two broad purposes: "To help us understand and then overcome major flaws in the way most economic information is reported and digested by the business, investment, and economist communities" and "To put the this new framework to work in forecasting." The material is carefully organized and presented in four Parts: 1. "Seeing" the Economy: Creating Order from Chaos 2. Consumer Spending: The Cornerstone of the Economy and the Stock Market 3. Forcasting Consumer Spending: Understanding the Key Indicator Relationships 4. From Theory to Practice: Applying the Charting Discipline to Your Own Forecasting Ellis then provides four appendices. It would be a disservice to him as well as to those who have not as yet read his book to comment in detail on each of the most important insights concerning, for example, the "major flaws" to which Ellis refers earlier. Rather, I wish to share three reasons why I think so highly of this book. First, I commend Ellis on his explanation of how and why consumer spending drives the demand chain in the economy, especially in terms of the correlations between and among consumer spending, corporate profits, and the marketplace. When commenting on industrial production and the inventory effect: "The key point here is that because inventories in the retail, distributor, and factory pipelines grow during periods of strengthening consumer spending and shrink when consumer spending slows, the changes in the industrial production that supplies this system are far more volatile than the changes in consumer spending at the front end of the system." (page 75) I also commend Ellis on his brilliant analysis of the separate but interdependent factors which can (indeed should) guide and inform forecasting consumer spending. Specifically, real income; employment and unemployment; interest rates, inflation, and the economic cycle; interest rates and the stock market; and the link between federal deficits and interest rates. When commenting on the key determinant of growth in unit consumer spending, Ellis suggests that it is "the unit purchasing power, or real wages, of the 93% to 96% of the workforce that is employed (given an unemployment rate of 4% to 7%), rather than marginal changes in the number of employed (or the unemployment rate)." Then later in Chapter Ten, E

a must have book for executives and investors

as an investor and business owner for many years this is the first time i read a book that employs the kiss principle and the 20/80 rule to analyzing the economy. Economists waste so much time analyzing hundreds of statistics when really you only need to examine a handful of old true reliables. This book has the old true reliables and they are beautifully explained.

TWO THUMBS UP.....

Joseph Ellis, gives a clear method on how to forecast business cycles...This book is NOT all about unproven theories, or fancy calculus, or econometrics, on the contrary, Joseph Ellis shows us a simple yet elegant logic on deducting casual relationships among the driving forces of the economy, which can make one filter out all the unnecessary noise and see clearly what really makes the economy thus the stock market perform....This book is a MUST READ...