The Cycle Blindness

Start of August is the celebration of the richness of harvest. It is a time for festivals. People step out and celebrate. This is seasonally a good time for food and beverage companies. It was during these weekend jaunts out of Cluj, back at the farm house about 80 kms away, we started picking plums and enjoying the natural inspiring beauty of corn fields and farm lands around us.
Did our city life really isolate us from the underlying agricultural economy? Did the harvest cycle stop affecting us? Or are the agricultural, climate, commodity, social behaviour and economic cycles somewhere connected? A common theme runs through all these cycles. They are all linked and have a distinct periodicity. The long term and short term climate cycles establish what we harvest and eat and what we eat is linked to our social, economic growth and expression. And a crisis or a down cycle on any one of these cycles affects all the rest. Though the modern economies are no more agrarian, the current food crisis is increasing inflation and pushing commodity prices higher. The unison of up and down cycles are changing how we celebrate (behave) and remain happy (prosper). Jacob J Van Duijn, talks about how a classified or phased approach to economic development is important to realise that human behaviour as producers, consumers, and investors create cycles. But still a majority of us are unaware of the economic consequences of this behaviour. For example, every generation comes with capital investment ideas and allocation as the previous capital investments become technologically obsolete. This leads to the repetitive investment cycle. But little is learnt from the past.
This creates a gap between our understanding of the economic future and the current socio economic perception. This is one of the reasons humans are generally under prepared for the future. We can’t understand how policy induces monetary cycles or how oil prices or shock induced boom bust cycles and over investment, under consumption, demographics and mass psychology driven cycles can influence and change a growth period into recession or vice versa. There is one more reason why we are cyclically blind. We relate or register more to short cycles. The fluctuations caused by Kitchin cycles (3-4 years) very much determine people’s mood and expectations regarding the short term outlook of the world economy. Because, in the short run it produces the dominant cyclical pattern, most observers tend to overlook the longer term developments which lie underneath. Needless to say, this form of myopia may cause rather wild swings of over optimism and over pessimism. This is why euphoria and pessimism repeat with such regularity.
As we move from short term to long term cycles the cycle applicability and debate intensifies. More so because what affects us in the long term is still unclear. In 1991, Richard Mogey, Cycle Guru said, “Many have been expecting a Kondrateiff wave (the long term 60-year cycle) to top for nearly twenty years, but it has yet to unfold.” This long-term cycle has been hotly debated and a few cyclists like Tony Plummer, Author and cyclist, suggest the Berry cycle (25-30 years) and Strauss and Howe cycle (90-99 years) as a more valid case over Kondrateiff cycle. Plummer’s case becomes more relevant if you connect power law relationship between Kitchin, Juglar, Berry and Strauss. All are linked with a factor of 3. Three Kitchin cycles make a Juglar cycle, three Juglars make a Berry cycle, three Berry cycles make a Strauss crisis cycle.
Small fluctuations caused by the Kitchin cycle sometimes go unnoticed by the masses. But it is the large Juglar, which registers in the long term memory. Average length of little less than a decade appear to be in conformity with the way people think of time spans, the swinging 60’s, the 90’s etc. Hence Juglar recessions have a deeper impact on mass psychology. Juglar recessions are also deeper than Kitchin recession just like Juglar upswings more sustained than Kitchin upswings.
Juglars are also considered as the most long standing, dominant and periodic. This cycle was identified by Clement Juglar, a French economist in the mid 1800’s. Juglar began his work with cyclical studies in French marriage, birth and death rates. These observations led to similar cyclical behaviour conclusions in interest rate, credit contractions and commercial crisis. His studies concluded that credit contractions and crisis occurred with an average periodicity of 9-10 years. Juglar cycle is also referred to as the pendulum swing of prosperities and liquidations.
A similar 9-12 year cycle is also witnessed in agriculture, social trend and is informally also labelled as the business cycle by economists. There is another business or trade cycle namely the 7-11 year investment cycle also known as the cast iron cycle, which existed 250 years ago and still exists today. Cyclists have discovered more clusters of 10 year cycles. The most reliable is the sunspot cycle of 11.2 years. Sunspot cycles are also known as prosperity cycles. Research by Garcia Mata and Shaffner suggested that low sunspots actually work on the human psyche to influence confidence. Kitchin and Juglar cycles have been known to work on yields also. And of the many other running cycles, Juglar and Kitchin cycles work best for stock markets.
For example, historic lows are generally made in the second year of the decade. 2002 was a historic low worldwide, be it Nikkei, Dow, Sensex, Brazilian BVSP, Russian IRTS, it was everywhere. Juglar slowdowns have also known to degenerate into real crisis and depressions. The Juglar recession cyclicality has been observed since 1721.
But recession is not a singular event. It is linked with both short term and long term cycles. And since excesses happen in stages, correction of market imbalances also does not get over just by price retracement. Hence real recessions generally take time to balance and get into the human psyche. This is why recessions are also about market mood and not just about prices. Prices are just one way to express it. Simply speaking Juglars are real recessions. Historically we have not seen a bigger than a Juglar recession globally. The great depression (1929-1937), the Japanese depression (1990-2002), the American bear market (1965-1975), the Sensex sideways action of the 90’s (1990-2002) were all of Juglar time frames. Shorter recessions are labelled as Kitchin recession. Some European countries experienced a Kitchin recession in 1987, when industrial production came to a standstill. Though irregular, only Kitchin and Juglar could explain the global recession of the 1970’s.
There are other inter-market aspects linked with Juglar cycles. The bond markets generally hit a low on every Juglar low. The bond market rise from 1921-1932 in America is a classic example that can explain how interest rates should behave. American bond markets also hit a low in 1990-1991, ushering in another decade of prosperity. If we consider the Sensex in a Juglar up starting 2002, the cycle should complete anytime between 2011-2013.
This means interests and inflationary conditions should continue to rise for the next 3-5 years. This observation is in sync with the other commodity cycles, which we see peaking around 2012-2015. This also means that what we just saw from January 2008 was a Kitchin or growth recession, the real bust or Juglar recession should start at least a year from now.
The cycle truth is hard to accept. Like technical analysis is a foot note in Elliott, both Elliott and economics is a foot note in cycles. They are larger than life, above any mathematics and fractal science. And this more than 200 years of observed cyclicality can’t be wished away, just because it does not fit our conventional beliefs.
Accepting that we are cycle blind is a step forward to understanding economic uncertainties that surround us. Just like it takes 10 years to become a glassmith, for a global analyst, it takes 10 years to witness the Juglar recession and cycle truth.