“In financial markets progress is cyclical, not cumulative” — James Grant
It’s well understood just about everything comprising the known universe tends to move in cycles.
Our planet rotates on its axis producing winter which then melts into spring, warms into summer, and completes the cycle by offering up the breathtaking, radiant colors of autumn — you get the point.
Rain falls and is filtered into streams on its way to rivers, lakes, and oceans, then evaporates back into the sky until it once again falls to Earth in some form of precipitation. Here in the New England, we’ve been seeing a fair amount of the frozen kind lately.
Humanity also moves in cycles and to a large extent we live our lives in relation to the position of the sun in the sky. We tend to “make hay” (work) while the sun shines, and at night as we slumber in dreamland we drift in and out of deep sleep (R.E.M) cycles averaging about 90 minutes each.
The phenomenon goes on and on.
To Everything There is a Season
You’ve undoubtably heard those words before — if not from the best-seller known as the Bible, then almost certainly from one of the most endearing, popular songs of the nineteen-sixties — The Byrds iconic masterpiece, “Turn, turn, turn.”
The seasons are also reflected in a multitude of economic cycles accompanying us throughout our lives — from our own individual, or micro savings and spending cycles to the larger, or macro, business, credit, and investing cycles.
Like so many other things in life, the better we are at developing a fundamental understanding of economics and finance the more adept we become handling our own savings and investments.
Crystal balls would make the prediction of future economic cycles much easier, but, failing that, there exists large volumes of recorded data to help guide us in the forward projection of such events.
At least that’s been the case up until now — however, recent economic cycles have been so far out of whack from what anyone could call, traditional or normal, it’s been especially difficult to measure or quantify making historical comparisons far less relevant.
For that reason, I thought it would be helpful to compare current market conditions with what one might normally expect to see were we experiencing more of a text-book economic/business cycle.
Does Anybody Really know what Time it is?
We’ll begin by examining a somewhat typical text-book business cycle beginning as the economy recovers from a post-recession low.
Typically, economic activity and growth are both weak in the early part of the recovery, but as prices stabilize business sector activity starts to increase. As more people return to work those with new or higher paying jobs start spending more and companies and business slowly begin to grow and expand as well.
As economic activity gains traction and starts building upon itself, expect to see expansion throughout the business sector, and as the labor pool reaches full employment the cycle within a cycle then repeats. Eventually, industrial output reaches capacity and labor markets tighten while resources are in shorter supply.
Higher demand allows for small price bumps and before long everything is a bit more expensive — soon, a variety of economic indicators will begin flashing the warning signs of inflation.
At some point we’d expect to see FED officials indicate the necessity of an interest rate increase.
Higher rates would soon produce the desired effect of slowing economic activity and over time (years) we could expect to see the central bank begin lowering rates as the entire process goes back into reverse.
And that, in a nutshell, is a normal business cycle — a period of recovery, increased expansion, and finally peak economic activity followed by contraction, and back again.
Lather, rinse, repeat.
That’s what everyone from Main Street to Wall Street recognizes and anticipates, since that’s how the cycle of progression has played out dozens of times since the end of World War II.
The problem is that’s not at all what we see happening now — it’s seems as though we’ve awoken to find ourselves in some kind of new economic reality.
Seasons of Wither
It would be foolish to ignore the enormous, truly historic amount of debt (stimulus) borrowed and already spent to help reinforce our unsteady economy.
Debt has become America’s 800 lbs. gorilla.
Question: If massive government debt and stimulus programs were all that was necessary to cure our economic ills, wouldn’t things look very different today and wouldn’t everyone recognize free money for the cure it is?
Unfortunately, that’s not the case, and common sense (and a lot of history) dictates our current course of action is in no way sustainable.
That’s not to say the current cycle might continue to run for several more years — we know markets can behave irrationally much longer than most would think possible, or it may have already ended.
Because every positive cycle will at some point turn negative. This is not just human nature, but rather the very nature of the natural world; making it our burden to try to anticipate the coming changes.
But, in our newfound, artificially driven, completely distorted economic environment, we can put away the heavy coats and mittens because the (economic) winter has been vanquished and we can enjoy springtime weather conditions all throughout the year. Endless summers, too. Right?
Let’s get back to reality for a moment.
Due to massive and unprecedented government intervention from 2008 thru to at least 2014 in the equity markets, neither our general economy or stock markets were given the opportunity to reset and realign themselves properly.
In other words, markets never got the chance to seek a natural balance and determine the fair value of anything — that’s why most economists agree it’s one of the weakest economic recoveries ever.
Today, business and consumer optimism are at or near highs, which at some point should tend to yield real growth, since all growth ultimately comes from businesses creating value, which, at least on a few levels, is happening now.
But we are in uncharted and wildly distorted waters, where risk is starting to outweigh any potential reward everywhere you look, and we can never forget the future depends on the choices we make today.
So, when you’re ready to look past the tired promises of Wall Street and the outright hokum of the big spenders in D.C. and discover what a logical, math-based retirement would look like for you, just let us know.
Spring, summer, fall, or winter, we’re always ready to help.