After the first 2 articles concerning GDP, Bond, Commodity, Real Estate and Cycles (expansion/recession) today I will introduce some macro-economic variables: correlations, economic variables and indicators. Don't miss the next where we will talk about the Federal Reserve and its operations, finally about inflation, deflation and stagflation.

CORRELATIONS
We often believe we are investing in something diversified but the trends of the various economies are mostly correlated.

There is a correlation:
-positive (if two asset classes rise and fall together)
-negative (if they are not related)
-reverse (one goes up and the other goes down)

The range of the "correlation coefficient" varies from 1 (positive), through 0 (uncorrelated) and down to -1 (inverse correlation). For example Bitcoin is strongly correlated to the S&P500 (it is an index that follows the price trend of 500 US companies), it is not correlated to the dollar (DXY compares the dollar with the British pound, euro, yen, Swiss franc, Canadian dollar and Swedish krona).

ECONOMIC VARIABLES
We have flow variables (oscillations over a period of time), real (variations on a time basis), stock (available quantity of a certain asset) and nominal (relative to the current value).
These are related to GDP (as already mentioned, wealth of a country in the form of goods and services), inflation (cost of goods and loss of value of fiat currency in case of increasing values), interest rates (% applied to loans or investments) and central bank monetary policy.

INDICATORS
This data is reported at a specific point in time or over a period of time. We will talk about:
-lagging (events that have already occurred, for example the increase in inflation refers to previous months)
-coincident (current/live data, such as the price of an asset at that moment)
-leading (indicates a situation that has yet to occur or makes a prediction like the PMI, i.e. tries to anticipate future trends of the economy regarding employment, industrial production, purchases, price trends, etc. A value over 50 indicates economic growth, below 50 instead a contraction)

The S&P500 is usually compared with USIRYY or inflation (event that has already occurred, therefore a lag indicator which subsequently reacts graphically, then following the trend of the S&P500) and with the PMI (future event, therefore an advance indicator, graphically). They are therefore indicators of delay or forecast, widely used to give a macro-economic interpretation.

PETER LYNCH'S ADVICE
I close the article with 12 tips from Peter Lynch, considered the king of investments. He was a major player in equity finance in the 70s, 80s and 90s in the S&P500 for 13 years in a row (from 1977 to 1990). He is the author of books such as "Beating The Street" and "One Up On Wall Street".

1) "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves"

2) "Know what you own, and know why you own it. Never borrow conviction from others. Do your own research and build your own assumptions"

3) "An important key to investing is to remember that stocks are not lottery tickets. Think of stocks as businesses, not tickers on a screen"

4) “Just because you buy a stock and it goes up does not mean you are right. Just because you buy a stock and it goes down does not mean you are wrong. In the short term, markets are voting machines"

5) "There is always something to worry about. Avoid weekend thinking and ignoring the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling. Signal > noise"

6) “You have to let the big ones make up for your mistakes. In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten. You don't need to be right on every investment but maintain a solid average"

7) “Some stocks go up 20-30% and they get rid of it and they hold onto the dogs. And it's sort of like watering the weeds and cutting out the flowers. You want to let the winners run. Let your winners pay for your losers. Don't sell your winners to double down on losers"

8) "Stocks are a safe bet, but only if you stay invested long enough to ride out the corrections. When you sell in desperation, you always sell cheap. Time in the market > Timing the market"

9) “Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Revenue is great, but cash is the lifeblood of a business"

10) “I don't know anyone who said on their deathbed: 'Gee, I wish I'd spent more time at the office. Invest so that you can increase your free time in later life. Remember to enjoy the present while you build your future"

11) “You can't see the future through a rearview mirror. The market is a forward-looking machine, don't spend too long looking into the past. Spend more time discovering the winners of tomorrow"

12) “The typical big winner in the Lynch portfolio generally takes three to ten years to play out. Investors need the patience to wait for the results that come from long-term holdings. They are not linear"

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