Economic Cycle Theory

Reddit

Everyone and everything is getting higher and higher. Led by the investment banks, U.S. stocks are reporting earnings that “beat analyst’s expectations.” The Dow is over 10,000 again. Even oil is trading at $75.

Keep in mind most of the earnings news is garbage. Earnings are whatever an accountant wants them to be. Compared to last year – which was a shocker – this year’s earnings are bound to be better. And when analyst’s expectations are subjective, are you surprised to learn that the people who sell you stocks think that earnings are “surprisingly” good?

That said, the official unemployment figures in Australia appear to be going down. Consumer confidence numbers are back near all-time highs. At least here in Australia, the stock market and the economy are reading from the same prayer book. Both are singing the praises of the recovery (second coming of the Goldilocks Economy).

Amen.

In the States, it’s a little harder to figure out why stocks are singing such a different tune than the American economy. But it’s not impossible. Take oil.

While the higher price is good for oil companies and investors, you know it’s going to take money out of the pockets of consumers. Lower oil prices were a windfall for drivers all over the world in the last year, putting more discretionary income into the family budget. A higher oil price, as always, is a tax on consumer spending.

But we come here neither to praise nor bury the recovery. In fact, we come here to point out that the recovery is an imposter. It’s a financially-fuelled bear-market rally dressed in respectable clothing. The underlying problems in the economy are still there, dishevelled, dirty, and unwelcome in polite company . And the main problem is simple: too much debt (public, household, and corporate).

Or as Michael Hudson said in a previous interview, “The economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored.”

It cannot be restored, but the rate of its collapse can be arrested so that the members of the financial oligarchy can sell their stocks to a gullible public. And that’s what you’re seeing now. It makes for an incredibly tradable market. But it does make it harder to value corporate assets when balance sheets remain so badly skewed by a) bad assets b) unrealistic expectations of future consumer demand based on credit.

Advantage speculators. Disadvantage investors. And speaking of speculators…

Here’s a prediction about the U.S. dollar. It will find a floor. But that floor could be much lower. The greenback’s collapse is driving more countries to hold Euros, yen and gold in their foreign currency and monetary reserves. This could have a funny effect, though. It will put the spotlight on the fiscal conditions of Europe and Japan. And what do you think could happen then?

The Euro and the Yen may be better off, relatively speaking, than the dollar at the moment. But only relatively. In absolute terms, they are “deeply flawed” currencies as well, to use a Jim Rogers phrase. In the long run, most paper currencies fail. In the short run, there’s going to be a lot of volatility until a new monetary regime replaces the old one.

All of this bodes well for precious metals investors…in the long run. But don’t be surprised if governments get hostile to gold, at least for every day investors. Central banks will own it. But it might get harder for everyone else.

We began the week wondering about the cycles of history and markets. We wondered whether Australia is following the Anglo-American cycle into a long-winter…where people lose confidence in each other, in government, and in the institutions they relied on in the past for law and order, employment, and prosperity.

We’re not much closer to answering that question, and there’s only one day in the week left! Perhaps it will take more time. In the meantime, if you are interested in the idea of cycles and history, there’s a great article by Nick Paumgarten in the October 12th edition of The New Yorker. There are a few quotes from it below.

“Cycle theory is a kind of Gnostic offshoot of technical analysis. The nothing that things generally happen in cycles goes back thousands of years – Joseph’s seven-year-fat-lean cycle – but in the West the formal inquiry into economic cyclicality too hold in the mid-nineteenth century. The British economist William Stanley Jevons correlated economic cycles to the sun, proposing the fluctuations in sunspot activity might affect crop outputs.

“Around the same time, a Frenchman named Clement Juglar identified an economic cycle of seven to eleven years. In the nineteen-twenties, Nikolai Kondratiev, a Soviet economist, concluded that capitalism was inclined to half-century cycles of boom and bust and boom again, rather than, as Marx believed, a single inexorable collapse…”

“It was the Austrian economist Joseph Schumpeter, he of ‘creative destruction,’ who called these cycles Kondratiev waves and popularised them in the West. In the Kondratiev waves and other commonly cited cycles – the Kitchin (three to five years), the Kuznets (fifteen to twenty-five years)-the time span is flexible.

“They are suggestions, not rules. Hardcore cyclists, on the other hand, often seek and find instances of periodicity as rigid and fixed as the laws of physics, which is why hardcore cyclists are often dismissed as mystics and freaks.

“It is easy to scoff at cycle theory. Its whiff of predestination chafes the scientific mind. Our culture’s fundamental belief in causation and consequence, to say nothing of free will, does not easily accept the suggestion of helplessness, or of some kind of as yet unidentified exogenous force. God may decide the outcome of football games and debilitating illnesses, but he does not intervene in matters of investing and finance.

“And yet patterns exist, and we slowly discover them. Seasons, migrations, moons: the template is there. Consciously or unconsciously, most people accept certain components of cycle theory. We seek and see patterns in things. It is the way our minds work, presumably, for the purpose of survival.”

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
Reddit

Leave a Reply

30 Comments on "Economic Cycle Theory"

Notify of
avatar
Sort by:   newest | oldest | most voted
zytron bloodworthy
Guest
Have I MISSED SOMETHING or is this the first time that this nugget has been mentioned on this web site “All of this bodes well for precious metals investors…in the long run. But don’t be surprised if governments get hostile to gold, at least for every day investors. Central banks will own it. But it might get harder for everyone else” Do you mean the very very long run but only if they let you keep your gold kind of thing??? Thanks for a great website. I use it to confirm when truth comes from the fringe to the cultural… Read more »
John Smith
Guest

“Earnings are whatever an accountant wants them to be.” Geez Dan prone to hyperbole much.

prozak
Guest

Z,
it is not something gold bugs want to hear or speak about. They all want the “end of the world” scenario to come about so their gold goes to the moon.

But none of them want to contemplate who ends up owning the gold if the worst case scenario does come about.

Greg Atkinson
Guest

There have been economic cycles for thousands of years…why exactly is this such a big deal? But unfortunately the cycles are not predictable and this has been proven time and time again. Those who reckon the cycles move according to certain patterns that can be measured accurately simply find these patterns in hindsight. None of their systems or methods to predict the future ever work of course but they get plenty of coverage once economic conditions appear to be picking up again.

Ross
Guest

Watcher7 isn’t going to agree with you there Greg.

Dan
Guest
I’m wary of throwing the baby out with the bathwater on gold. I think, for speculation, it’s a shameful waste of time (unless you know something nobody else knows, of course). However, in countries where there are no safety nets, smart operators tuck a little bit of this and that away in a secret place over time, just in case there’s a disaster and they have to flee. In that case you have to have a survival pack of various different kinds of valuable items for exchange (not just cash, as who knows which side is causing your particular disaster).… Read more »
Lachlan Scanlan
Guest
Dan I got a few silver coins tucked away for the apocalypse ;). I think that the masters of the universe already have some idea of where all this currency debasement is going to lead us. So maybe gold will perform well as per last ten years until the time comes about when some new currency and/or political arrangentments are in place. Maybe then lower prices for gold or the action will just go flat. By that time the great transfer of power and wealth will be evident to the masses who’ll wonder why they didnt see it coming. Of… Read more »
peterg
Guest

prozak

“But none of them want to contemplate who ends up owning the gold if the worst case scenario does come about.”

ummm, if the worse comes about, what who? (hehehe)

one thing about gold though, illegal or otherswise, is that when all the (real paper) notes are tenderised with RFID tags, and therefore as traceable as digital cash, you can still melt down the gold and it will, if acceptable in the black (real) economy, be useful and “liquid”… just a thought from a doomsdayist.

Ned S
Guest

Vodka and tobak and benzene and canned munchies are WAY more useful and tradeable than lumps of pretty yellow metal should such badness come to pass fellahs … Believe what you want – But I’m telling you the truth!

Lachlan Scanlan
Guest

Ned I reckon the alcotine mix would make great day to day cash substitute but for those wanting to store a little away (store of wealth) that gold has proven itself through time. Point taken on my silver coins though maybe, intoxicants more tradeable….but wait a minute… hmmmm now storing booze for a future doomsday…what happens if you get thirsy in the meantime :)

Dan
Guest

Ah, a fellow survivalist Ned :)

Greg Atkinson
Guest

I think we all need to relax a little and breath deeply. I recall vividly how the world was suppose to spiral into chaos when the Y2K bug destroyed the fabric of our society…but yet here we all are ;)

By the way if you want to tuck something away that store values then try toys, have you seen what people pay for some of those old matchbox cars or original GI Joes still in the box?!? Or alternatively you could collect classic wines, then if things don’t work out as planned you can drink the stuff.

Biker Pete, Vancouver Island, Canada
Guest
Biker Pete, Vancouver Island, Canada
Attended a few auctions where the top prices were achieved by suits with cellphones bidding on behalf of Asian customers, Greg. It was explained to me that many of these bottles would be exchanged several times, as gifts cementing one deal or another; or, if to be consumed, the year had to be the birth year of an offspring. When you see $4000.00+ spent on a great red, you have to hope it travels well. A friend paid $360.00 for a case of 1980 Grange when a liquor store near us went into liquidation two decades ago. (You can see… Read more »
prozak
Guest

hahahaha…. now we know what penniless pete thinks is a good wine and an expensive wine. oh well pete.

obviously we have to make believe (like pete does) and pretend that that pathetic pete has even actually got within 10 feet of a bottle of grange.

Greg Atkinson
Guest

Biker Peter – I have never had a good eye for wine, just a good stomach :) I was sent some investment material a few years back regarding a wine investment scheme (you buy the bottles and store them in London) but I passed because I wanted the option to turn up at any time and crack one open ;)

Ray Santini
Guest

…these editorials are so good sometimes I’m laughing so much I cant get through the whole article….but I push myself

keep it up
cheers

Ned S
Guest

Hello Lachlan Scanlan!

A wise old mamma who’d been through a few tough times once asked a foolish young man who had his eye on her little girl a few basic questions as to his financial stability:

1 – Do you you have a job?
2 – Do you own your home?
3 – Do you have some money in the bank?
4 – Do you own your car?

But she never asked him whether he had any bullion holdings? Or even stocks nor bonds? I found that an informative lesson. Smile!!!

Pete
Guest

Not everyone who has been through tough times is wise Ned.

In fact, plenty of people who should know better…have been running countries into the ground for years.

Age or experience do not imply wisdom. Wisdom is gained from understanding your experiences, not merely being there at the time.

And that, I believe, is why true wisdom is often very rare.

That old mamma sounds like any old lady concerned about their little ones. And if she had already taken him for a “foolish young man” then it is a fairly safe assumption that he wouldn’t know a thing about bullion or stock trading.

Dan
Guest

Where there is charity and wisdom, there is neither fear nor ignorance.

Ned S
Guest
Given that some of us will probably never be wise Pete, I feel it is handy to try and get the basics right regardless – And wise old mamas who’ve been through a few tough times seem to have a bit of an intuitive understanding for what the basics are. Another one of the basics just might be that central bankers are especially skilled at destroying the purchasing power of fiat currencies? And I’m real sure the wise old mama could have told the foolish young man that too – If he’d been clever enough to ask her – But… Read more »
Dan
Guest
That’s just it, Ned. Tradition is a way of passing on wisdom to the unwise. Yes, the occasional person is born with an amazing intellect, with sublime gifts of insight and understanding, but most of the rest of us just have to get along more simply. To stick to one’s principles, or rather, to the principles of our forefathers is already wisdom enough for most. The modern world is geared to leave people adrift, all relationships being transient and only for self gain. As such people are vulnerable to trends, propaganda and whatever else – they part with their money… Read more »
Pete
Guest
Ned: I am not at retirement age yet. I was taught to respect my elders when I was young and I very much seek and appreciate the advice of people who have experienced things that I have not. But I am careful not to assume that age/experience = wisdom. Many an older person is jaded by past mistakes or jealousy of the youth. Think about all the boomers pushing their kids right now to buy into the housing bubble. That is not wisdom, that is just fear. The majority of them think that the trends of the 2000’s will continue… Read more »
Dan
Guest

Good answers, Pete. I admit on rereading my comment that I hadn’t thought it through particularly well, and the whole thing is quite conditional actually. Indeed the example of Islam’s cultural traditions is an excellent rebuttal.

Ned S
Guest
I don’t think anyone is trying to make the argument that age equates to wisdom Pete? And while I definitely don’t regard myself as wise (or especially aged – Smile – More like the foolish young man perhaps?), I sure do wish I knew at 15 what I knew at 50. Those Many older people you reckon are jaded by past mistakes and jealous of youth sound like a right pack of “baskets” to me – I can’t actually say for sure that I’ve ever met one – Although I have met people who are younger than me and a… Read more »
Ned S
Guest
PS: If you aren’t an Aussie, a goanna is a lizard (they grow up to about 6 foot long maybe? Although I’m no bushy and reckon the biggest I’ve seen couldn’t have been much over 4 foot once I toned them down to reality in my imagination) – Although the one me Abo mate and me et that day was more like 2.5 foot maybe – I’d steer right clear of the big buggers unless you know what you are doing – They have sharp claws for climbing trees – And have been known to mistake people for trees when… Read more »
Dan
Guest

A goanna is also a kind of monitor. But I get funny looks at Hurvy Narmon’s at the entertainment section when I shout “hey check out the goanna! nice resolution .. but I don’t like the sweet spot”.

Ned S
Guest
And a monitor is a kind of lizard. (As I recall?) And “go anna” can be a political statement in the State of QLD. English can sure be an interesting language – Given all it’s numerous and very varied forms. Read a great little book on it (shouldn’t that be “red” – as it is past tense perhaps? Good try but no – Because red is actually what pink is when one removes the white bits – Try eplaining that to a new migrant!) called “The Adventure of English” by Melvyn Bragg a while back (cute surname given some of… Read more »
Don
Guest

I just can’t resist Ned – I bet that Chk Chk girl has seen a cockatoo. How much can a Koala bear :)

Ned S
Guest

God luv ya Don – Just how many of us Aussie males aged between 9 and 90 probably wouldn’t really like to know the answer to that if our surface veneer was scrathed off with a finger nail? CHEERS!

mark
Guest
wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au