What are the economic cycles?
The economy is driven by four major cycles.
Due to the technology and integration these cycles are actually becoming shorter.
The market cycle is usually shorter than the economic cycle as the markets are always forecasting at least six months ahead.
What are the economic cycles?
1. Ultra Long Cycle – 70-100 years driven by technological advancement.
This cycle (in civilian use) has started around 1955 and probably has an end towards 2015/20.
In 1955 the jump in technology from the Second War World became available for civilian use and it was the primary cause, together with the reconstruction, of the 1960s boom due to the jump in productivity and efficiency.
Even if it’s hard to forecast such a technological jump, we are a bit overdue. The jump potentially will be driven by cloud technology, quantum computers, robotics and genetics.
The effect will be start be felt probably from 2015/18 in the markets.
2. Long Cycle – 20 years driven by political/resources events
The last Long Cycle was in 1989 -2008
In 1989 the USSR fell and a few years after China opened up to the West.
This provoked a few positive shocks:
- New and growing demand for product from the new client base
- Cheap workforce due to the young masses entering the market
- Availability of cheap credit
- Availability of cheap resources
- Noninvolvement of politics in the market
These factors contributed to an easy five year economic cycle which was positive for shares and capital markets. It consisted of relative long rallies and shallow corrections as well as short and small wars.
There was constant but not an overwhelming jump in technology.
The cheap credit would cause occasional bubbles (Australia 1992 Real Estate, Tech 2001). Alternative strategies are relatively inefficient. In investment terms, a strategic asset allocation of 70% equity and 30% bond worked perfectly.
In 2008 the cycle came to an abrupt end.
The new cycle (2008 – 2025) has special characteristics:
- Scarcity of resources
- Aging of population – rising costs
- More expensive workforce
- Unavailability of cheap credit
- Involvement of Politics in the market (direct intervention of Federal Reserve, Currency and market manipulation) tantamount of economic warfare
This environment will lead to short rallies and rapid corrections. The usual safe havens (such as Bonds, gold) do work, but only for finite periods.
Alternative strategies are essential in this period, but specially what I define an “adaptive asset allocation” which is a mix of tactical and strategic.
In this period, as State entity compete for resources, major conflicts can easily breakout and so also technological breakthroughs.
3. Short Cycle – 5 years driven by political adjustments
The last short cycle started in 2009 (so the economic cycle ends in 2014, but the market cycle finishes this year!)
This cycle is a transition cycle to a new world so determined by shock waves rallies and crashes until the world adapts to the new order.
This cycle will finish this year, spurring a major rally. Start date is yet to be determined but potentially July -September.
Unluckily, statistically, this kind of rally ends with a serious war (Vietnam, Israel’s wars in the 1970s).
4. Ultra Short Cycle 1 year – driven by company restocking pattern and political shocks
This is usually driven by the restocking habits of the companies (last year was a restocking year and profit driven by cost cutting – not increased sales) and policy outcomes.
In this case, in general, company targets are harder to be achieved – but the market at this moment is fully supported by political intervention.
So, where are we now?
We are at the end of the five year short cycle.
Two forces are driving this market rally:
- The actions of the gang of five (Federal Reserve, Bank of Japan, Bank of England, Bank of Europe and the Chinese Government)
- The media
Since these factors are outside our control, it is correct to participate to this rally with a conservative stance aiming to achieve your personal targets and not trying to beat the market.
Several dangers lurk behind the surface:
The debt issue has been merely been postponed to September 2013.
The real economy is improving, but at a very different pace that the one suggested by the share market.
The Federal Reserve wants to decrease the Open Markets Operations, possibly without provoking a market rout.
Motivation: The mandate of the FED is to create jobs and controlling inflation. The Open Markets Operations are aimed to increase the Velocity of Money (the speed at which the banks lend money to commercial operator). The operation has not been successful as the new money go directly into the share market and not the economy.
Contrary to the share market trends, the situation in Europe has not been improving at all. Actually signs of social instability are increasing dramatically (misreported by the media at large) and encompassing also wealthy nations such as Sweden. Germany needs to spark again some fear, otherwise a rally in the Euro will compromise further any growth potential.
The situation in Syria has just deteriorated. Lebanon will most probably fall again in a sectarian war as the Hezbollah (Iran proxy) are now actively siding with Assad’s forces.
Another addition to the instability is the lifting of Europe ban to release weapons to the rebels and Russia commitment to provide SA300 “Patriot style” anti-missile defence to Assad’s Government. This will definitely provoke some kind of reaction from Israel.
Syrian pro Assad activist tried unsuccessfully to hack and disrupt Haifa (Israel) water supply system. This is the first publicly recorded cyber-attack on a civilian infrastructure in the world.
The Chinese leadership is accepting that a slowdown in growth is due during the change between infrastructure economy and consumer economy, also for environmental issues.
The events of recent weeks highlight that Japan is in uncharted territory. The rally will, most probably continue, but there are hidden risks. It also showed that the risk of inflation could create havoc in all the financial markets. It is not an issue for now, but next year it is a definite risk.
Australia needs a new level of politics as it is dragged along by the world and without any real initiative “she’ll be right” style.
We now need a strong political leadership to drive the after mining boom growth – otherwise we will be at the mercy of political moves of other country such as China, Japan and USA.
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Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.