Allianz Guru Series by Henry Yang: The Market Cycles and the Matrix (Yes, the Movie Trilogy!)

The fourth movie premiered in the Philippines in January 2022. But I still haven’t watched it yet to date. Watching The Matrix trilogy as an adult, I felt that the undertones and replication to life resonated with me more than ever (as opposed to just waiting for all the action scenes when I watched this when I was younger). Now I hope that readers of this blog would get the equivalent of a “red pill.”

Spoiler alert! Just to be polite – the films have been around for more than two decades. But feel free to watch it first before proceeding to reading. You have been warned.

The film series depicts a dystopian future in which humanity is unknowingly trapped inside a simulated reality, The Matrix, which intelligent machines have created to distract humans while using their bodies as an energy source. When computer programmer Thomas Anderson, under the hacker alias "Neo," uncovers the truth, he is drawn into a rebellion against the machines along with other people who have been freed from The Matrix. Neo's prowess throughout the films cements the rebels’ belief that Neo is "The One," a human prophesied to free humankind.

In the end, Neo learns a surprising truth about The Matrix. There have been multiple cycles of The Matrix already! In each cycle, an incarnation of The One has appeared, igniting a rebellious war between man and machines but ended up right at the start with humans back into their blissful slavery.

You’ve probably heard the phrase “history repeats itself” and have encountered events and issues that have been present throughout humanity’s existence:

• Pandemics – Too many to mention but some examples are black death in 1300s, smallpox in 1500s, Spanish Flu in 1918-19, Asian Flu in 1957, and of course, COVID-19.
• Shifts in the dominant world power – China was dominant for centuries. The Netherlands, a relatively small country, became the world’s reserve currency empire in the 1600s. Around 1750, the British empire took over. Finally, the US rose to become the world’s superpower over the last 150 years while China is rising again.
• Global Recessions – Oil Crisis in 1973-1975, Energy Crisis in 1981-1982, Gulf War Recession in 1990-1991, Global Financial Crisis in 2007-2009, and of course, the economic havoc brought by COVID-19.

Though there are a lot of differences, there are patterns that appear regularly. With all these repeating patterns, it is better to pay close attention, especially if you’re an investor.

The business cycle refers to fluctuations in economic activity over years. Despite being called a cycle, it is important to understand that the business or economic cycle resembles the movement of waves. These waves don’t rise and fall at periodic intervals. Periods of economic growth lasted several years, while others are measured in months. Recessions, too, can last for a number of years or be as short as a few months.
 

At the start of an economic expansion, businesses and consumers start to recover from the previous recession, and so they spend more, expand, and even take on higher debt. Due to the brighter prospects of the economy, a family can take out a loan to buy a new car and a business can borrow by issuing bonds to build more distribution outlets. As the expansion continues, this higher level of debt-fueled consumption moves into the excessive side and makes them increasingly fragile. Investment prices typically move from cheap to expensive during this portion as company earnings rises.
 

Eventually, some negative catalyst will occur and due to the fragility from the excesses, this triggers an economic shock. Fear starts to spread and this is where investment prices would drop at a fast pace. To reset the system back to stable economic growth, policymakers usually respond by offering lower rates – easier to borrow if rates are low, right? And fiscal stimulus – providing direct funding to suffering portions of the economy. Then, the cycle starts anew.

Knowing that the economy moves through periods of recovery and recession gives you a better perspective on the future possibilities. If you would just rely on news, even financial news, it would seem either you’re missing out on a very strong market rally from an ultra-strong economy or the world may be crashing so hard that you better get out of your investments right now. Understanding that these cycles naturally occur due to human behavior, instills a level of peace in you. Whatever is the current scenario, there’s always a possibility for change. Remember that adjustments can always be done by economic players – governments, corporations, consumers.
 

Furthermore, it gives us a good reason to avoid being overconfident. Experiencing strong gains in your investments doesn’t mean all these rising fund prices will continue endlessly. On the other hand, losses may not be permanent if you’re invested in responsibly selected positions as policymakers have tools at their disposal to jumpstart the economy.

Every cycle has similarities with and differences from the previous ones. Like Neo in The Matrix, you do not have the power to stop the cycle. But you can adjust your investment strategy. By matching your investment with the right level of risk, you’ll be able to withstand the business cycle. Check out: How to hire an investment expert to invest for you.
 

Avoid looking at just one tree and missing the whole forest. Don’t worry too much about your gains and losses in your portfolio. But review from time to time if the processes you have in place are sound.