1. The Ongoing Rise In Rates

2. Collapsing Money Supply

3. Slowing Credit Growth.

4. Leading Indicators are in a downtrend

5. The Yield Spread and Curve remain inverted!

If the financial cycle is contracting, the economy is in a phase of slowdown or recession. Economic activity, investment, and consumer spending typically decline during this period. The contraction phase is characterized by negative growth in gross domestic product (GDP), rising unemployment, and decreased business activity.

1. Economic Slowdown: Economic growth rates decelerate, and economic activity slows. This is often accompanied by reduced consumer spending and decreased business investment.

2. Rising Unemployment: As economic activity decreases, businesses may reduce production, leading to job losses. Unemployment rates tend to rise during the contraction phase of the financial cycle.

3. Decreased Business Profitability: With reduced consumer demand, businesses may experience declining revenues and profitability. This can lead to cost-cutting measures, such as layoffs and reduced capital expenditures.

4. Credit Tightening: Lenders may become more cautious during a contraction, leading to tighter credit conditions. Banks may be less willing to lend, and borrowers may need help to obtain loans.

5. Falling Asset Prices: Asset prices, such as stocks and real estate, often decline during a contraction as investors become more risk-averse and demand decreases.

6. Lower Inflation: In a contracting financial cycle, inflation tends to be lower as demand for goods and services decreases, and businesses have less pricing power.

7. Monetary Policy Response: Central banks often respond to a contracting financial cycle by implementing expansionary monetary policies, such as lowering interest rates or engaging in quantitative easing. These measures stimulate borrowing, spending, and investment to support economic growth.

8. Fiscal Policy Measures: Governments may also employ fiscal policy tools, such as increased government spending or tax cuts, to boost economic activity during a contraction. It’s important to note that the financial cycle is a natural and inevitable part of the economic cycle. Periods of expansion and contraction are regular, but policymakers manage the impact of contractions to avoid severe economic downturns and promote long-term stability and growth.

For investors, understanding the contracting financial cycle is crucial for making informed decisions about asset allocation, risk management, and overall investment strategies. During contractions, investors often seek more defensive assets and may adopt a cautious approach to protect their portfolios from potential losses.