Credit Cycle

ts been quite a long time , since I last wrote about a company . Today I am here to write about what I learnt from Howard Marks Memo and its book .

The reading was very enriching and informative as there was times , where I could not believe and accept if you see in a long run ( bird eye view ) it all makes sense.

I thought maybe I can share it here.

Firstly, the whole world’s primary output is GDP which they produce in a certain year through use of various fixed and working capital. The greater the output greater the prosperity and thus greater the reward. On an Average with favourable conditions ( working age population , fairer eco system and comprehensive long term approach ) a nation can build and transform its resources to most productive uses.

The Output which is total produced within a certain time frame is directly linked to credit cycle , the amount of credit available to the nation really provides finance to carry on different productive endeavours , why I am referring to this cycle now is as it sets the base of every productive nations, economies and also companies.

The credit cycle is something which is kind of an leading indicator where the economy is heading, imagine this if we think we are prone to develop and dedicate huge proportion of our cost in R&D , it shows that we have enough liquidity and money to survive everyday operations and cost , whereas a company which reduces their exposure to R&D ought to use those limited funds for everyday necessary operations.

The same is the concept for a nation, when Lenders are confident in an economy , they thrive and capital base increases. Because bad news is scarce , the risks entailed in lending and investing seem to have shrunk. Dodgy financial institutions move suddenly lot of capital is their in the market, with less or no financial standard and thus capital destruction phase starts.

The bottom line is that a country , economy or a company can grow through its effective and properly planned capital allocation startegy , the way capital is bought into the market and also the way it is been used speaks volume about a certain company or economy in general.

If we are printing money and credit is booming , what’s happening is we are boosting our consumption now and productivity ( actually to work for it ) to future. It is very important in the short run basically to be mindful about the consequences.

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