The Economic Machine Analogy, Dimension And Degree

I like to use the analogy of the economy as a huge, 3-dimensional machine with billions or trillions of parts working together, something like a complex system of gears and rods of various sizes moving it along. The parts are made up of anything and everything that is related to the economy; countries, industries, businesses, mom-and-pop shops and individuals like you and me. It can endure some kinks here and there, and the machine itself is dynamic whereby if some parts are damaged or gone, it will tune itself to suit the current situation. The economic machine would require one important item that enables it to run smoothly, and it is a lubricant called liquidity. The lubricant oils the machine at many different points, and in turn cascades down to other parts, like a champagne pyramid.

The global crash of 2008/2009 was a liquidity crisis, during which there was not enough lubricant to oil the entire machine, due to being leaked off somewhere (e.g. sub-prime bubble). The subsequent “friction” caused some parts to be damaged, and consequentially affected other parts, too, on a wide scale. The introduction of quantitative easing, reduction of interest rates and other fiscal and monetary measures brought the much-needed lubricant back to restart the machine engine.

In the COVID-19 situation, to put it simply, the machine had simply stopped due to the lack of demand and supply in some quarters, mostly attributed to guidelines and regulations of curbing the spread of the virus through lockdowns or other means. This stop is causing other parts to either slow down or halt, too, and if this scenario persists, it does not bode well for the machine. Governmental responses include the tested-and-tried lowering of interest rates, easing of credit crunches and loan payment deferments, payouts to affected individuals, etc. These initiatives are at least trying to make the parts move at its minimum acceptable speed. 

Dimension And Degree

I would like to introduce the concept of the double Ds and they are dimension and degree. It is a very useful framework especially if you are an active investor and adhere to the associative investing idea (mentioned here).

Dimension is the way on how and where you look at things, and sometimes they look different if you viewed them from different locations; e.g. the number ‘6’ looks like a ‘9’ if you stand the other side, and the scenery seen from your bus/car/train while going to work is not the same as the one when you are coming back home. If we equate the economic machine as a car, you can see the car doors from the side, not from the front, but you can see the headlights and the doors if you stand in between the front and side. Seeing things from different dimensions enables you to have different perspectives, and with them your decision making would be clearer.

Degree is how far you are looking at from the point of origin, and it is also important when you are looking at the markets and economy. Going back to the machine, if a part moves, others will move, too. However, the move does not go in a linear fashion, but instead all around as long as there are links in between (remember, it is a 3D machine). It is like tracing your family tree, where most people would just go up to their parents, then grandparents, and so on, in a line. A more thorough method is to branch out your other family members, like your uncles, aunts, cousins or even their in-laws. I understand that it is exhaustive to go that far and you may lose your focus, so stop at a level where it is deemed not to have an adverse impact on your original prospect.

Guesstimate, a term which I like to use in my analysis, is an estimated guess to “see” the future, using known information and knowledge at your disposal to have a sense of what are the possible outcomes. Using the dimension and degree context mentioned above, you can have a hunch on what would be the market direction and the state of the economy, and/or knowing the upcoming growth areas and trends, by imagining the movements of the machine parts and see how it goes from different angles. Though we cannot really tell what is in store for us, a guesstimate is much preferred over a wild stab-in-the-dark guess.

There are some tools on how to visualise all these dimensions and degrees, but first thing is to get some papers and pens or markers. Mind maps, SWOT (Strengths, Weaknesses, Opportunities, Threats) matrices and Michael Porter’s Five Forces are some of the tools you can use, along with thought processes such as lateral and contrarian thinking which might help to give fresh insights on your analysis. In all aspects, having an open mind is key.