History of Economic Cycles

Identical things occurred earlier.  After analysing patterns of past happenings one can recognize the cause & effect relationships. One can also pen down principles to understand the different stages of Economic Cycle. In the past people dealt with the stages of Economic cycle wisely in past. Be it a financial crisis or a debt crisis. So I am explaining those stages to you. There are six stages to the cycle.

Let me discuss them briefly. Firstly there's the primary part of the cycle where debt is employed to create optimum returns and then it can be managed well, value of asset increases things look great which leads to the arrival of the bubble phase of the cycle.

 In the bubble phase people are in a position to generalize the past because asset goes up. People think their assets will continue to rise and they borrow money and they leverage. People in the previous phase did the calculations to see that maybe one won’t be able to sustain excess level of debt growth which lands them into the third phase of the cycle that's characteristically the part of the cycle when central banks start to put on the brakes, tighten monetary policy and the like.  Consequently people come into the down leg. As interest rates reach to zero percent people enter into a depression part of that cycle because monetary policy doesn't work normally.  When interest rates reach to zero then people need quantitative easing.

 This period that people are in is very similar to 1930s.  There are only two times in the history of present Century where we had debt crisis in which interest rates reached to zero and at both occasions the central bank had to print money and relied on a different type of monetary policy known as quantitative easing . To buy financial assets which pushes up in both of those cases the value of those financial assets and produces a recovery but it pushes interest rates down to zero or near zero where they are around the world and that buying in this case 15 trillion dollars of financial assets has pushed up Financial assets and driven the interest rates down to zero.

Therefore this has caused asset prices to go up. It has also caused populism, extreme populism because that process creates a gap between the rich and the poor.  Those who have more assets see appreciation in their assets and for different reasons a wealth gap has developed if you look at present situation the top tenth percent of the population's net worth is equal about to the bottom ninety percent.  This is exactly similar to the late 1930s when we had that stimulation.  So now we have a situation where we're in the part of the cycle where quantitative easing has been used, asset prices are up interest rates are low and we're beginning a tightening of monetary policy very much like we began in 1937.  We have a political situation where there is a conflict between the rich and the poor which is bringing out populism around the world.

 I think the cause effect relationships are similar which means that if you have a wealth gap and you have a decline in the economy where you're sharing the pie how do you divide a budget sharing the budget there's a risk that both sides are at odds with each other.  There's also a greater Global risk intentions, economic tensions produce Global tensions for numerous reasons, so I think that in this expansion we're almost in the seventh inning of a nine inning game.  Let's assume that we're in the advanced part of the cycle the part of the cycle in which monetary policy is tightening and there's no more capacity to squeeze out of the economy and also as interest rates tend to rise if they rise faster than is discounted in the curve it can hurt asset prices and asset prices are fairly fully priced at this level of interest rates at some point we're going to have a downturn because that's why we have recessions.

 

 Nobody ever gets it perfectly and my apprehension is what that downturn would look like. That's not immediate we don't have the same stresses but I think it  maybe in two months,  maybe it's in two years I can't guess. What concerns me is that the situation internationally is quite similar to the late 30s. In these periods of time these geopolitical cycles there is an established power and an emerging power that then have a rivalry.  At first it's an economic rivalry and then it can become quite hostile so back then the United States and England won World War one and we had the peace but then as there was a rising Germany and a rising Japan there became that kind of economic rivalry that became more hostile.

 I think that we have a situation where there is a rising China and the United States is an existing economic power and there is a rivalry about that and there can be a hatred about that so when I look at it I think the parallels are quite similar, doesn't mean that the same outcomes have to happen but does mean that I think we have to be alerted to the fact that going forward in a downturn monetary policy will not be able to be as effective as it was last time.  So we have to be cautious about a downturn I would say air on the side of having a little bit more flexibility and then we have to be concerned about the wealth Gap and the consequences.

Geopolitically America is in a very privileged position of having a reserve currency one of the things that distinguishes countries that really have problems from those who are able to manage their debt problems is whether the currencies denominated the debt is denominated in one's own currency. In order to do that to continue to maintain sound Basic Finance I think we're going to have though a squeeze that will be not just related to debt but even more importantly related to pensions and Health Care obligations that will happen so I think these will be difficult times not immediately but I think in maybe a few years and I think it will be very dependent on how we are with each other.  you say where it's not an immediate issue but a couple of years out we may have a downturn as you look at where we are in the cycle what do you think normal investors should do I think that there are two key parts of investing there is what is your strategic asset allocation and then there's moving around there's tactical bets in Alpha and I think the average man should not try to make tactical bets to try to produce Alpha because he's going to get it wrong Alpha is better than average yeah in other words to say Now's the Time to buy Now's the Time to sell it.