Market Cycles: Like Bicycles, But Not

By: 7 people who know what they are talking about…

…and Eric.

The Greece [ Josh Park]

RIPPERONI GREECE

U DUN SON

The Greece [ Josh Park]

Was Greece doomed to fail?

Economists say yes! (Or shall we say “nee”?)

​

• As mentioned last week, the Greek disaster was precipitated by the 2008 economic crash
• This crash, or at least a crash, was certain to happen, due to the nature of a capitalist economy
• This concept is expressed in the idea of market cycles

2008 Is Not Alone

There has been a long history of crashes:

• 2008 Crash/Recession
• Millennium (2000) Dot-Com Bubble
• Japanese Asset Bubble (1991)
• Black Monday (1987)

A couple more, then the one we all know:

• The Great Depression (1929)
• A billion 19th century panics
• The Mississippi and South Sea Bubbles (1720)
• Tulipmania (1637)

2008 was is nowhere near, in real terms, the largest of these, as the Mississippi Bubble is often held responsible for the collapse of the French monarchy seventy years later.

Market Cycles

We shall define market cycles as:

“Alternating periods of growth and decline in an economic system.”

Types of Cycles

Short Term:

• Kitchin Inventory Cycle
• Juglar Fixed investment cycle
• Pork Cycle

​

​

Long Term:

• Kuznets Infrastructural investment cycle
• Kondratiev Cycle

​

​

LOL BIKES SO FUNNY

Business Cycle Structure

Spectral Analysis

For the time scale Y_t where {ε_t}^∞_t=−∞ &

​

covariance-stationarity process

{Y_t}^∞_t=−∞

is

Kitchin Inventory Cycle

Focuses on an individual firm and says that:

• A firm is doing well commercially, leading to increased output, often by increasing employment
• This continues to the point where supply outpaces demand
• Excess stock begin accumulating
• This information takes time to hit the executives in full
• The executives take time to realize that production should be decreased
• The firm sells excess stock
• The price is right, and the firm is doing well commercially

​

Repeats every 3-5 years

Juglar Cycle

An approximately decade-long cycle impacting investment in fixed capital v. employment for a region:

• Decreases in production and employment costs, favorable credit, etc. draw investors
• As more investors are drawn in, labour, land, etc. have higher demand and shorter supply
• Interest rates rise, and actual and expected profits decrease
• People begin drawing out of the real market, and invest in financial funds
• Loss of investment leads to unemployment, decreased production, etc.

​

Repeats every 7-11 years

​

​

Pork Cycle

A model for describing fluctuations in livestock prices. Occurs on very short timescales, and is a result of the delay between investment and payoff caused by breeding times. Repeats every time you’re hungry.

Kuznets Cycle

Cycle in the mid to long term (15 - 25 years), which focuses on demographic and building shifts:

• Kuznets’s proposal:
• The infrastructure for a given region is initially more than enough to support the number of people in that region.
• Immigrants pour into that region because of this.
• The infrastructure is no longer sufficient to support the number of people living in that region.
• The government responds by building more infrastructure. Immigration to that region decreases.
• The new infrastructure is more than enough to support the people there.
• Some modern economists argue that the cycle is actually caused by fluctuations in the value of land.
• Regardless, the fact that this trend exists is undisputed, even if the cause of it isn’t.

Kondratiev Cycle

A long term cycle (45-60 years) probably caused by technological innovation that focuses on the entirety an economic system.

• A singular technological breakthrough/innovation is made.
• Other advancements are quickly made off of the back of this breakthrough.
• This cluster of technological innovation propels industry and investment in certain fields, creating booming growth.
• The innovation can only propel industry so far, and eventually growth slows down. Investment does not.
• Overinvestment in stagnating industries inevitably causes the economy to decline.
• Another singular technological breakthrough/innovation is made.

​

The Kondratiev cycle is slightly controversial.

Crashes

Market/economic crash (a.k.a. bubble)

• A situation where market prices are determined on impossible odds and are opposite to intrinsic value.
• Intrinsic value -- a rigorous value determined by fundamental analysis.
• Prices are determined by a positive feedback mechanism, rather than negative feedback.
• Prices are highly volatile and are impossible to determine from only supply and demand.
• Things go too darn fast.
• Mostly determined in retrospect (i.e. the Great Recession).

​

​

Case Study: Tulipmania

The first major economic speculative crash we know of, not counting some currency shenanigans during the Thirty Years’ War:

• In the 1630s, tulips were introduced into the Netherlands and became incredibly popular.
• They soon became more valuable than Donald Trump’s lips.
• As the tulip supply was initially highly limited and demand was huge, a speculative craze started for investing in tulip futures, ballooning the price of a single bulb to several times a year’s wages for a craftsman.
• When supply rebounded from the delay and a bulb went unsold at an auction, a market correction started and the whole thing fell apart.

Case Study: Tulipmania

All subsequent market crashes have followed the same general sequence as Tulipmania:

• Introduction of a novel concept
• Initial hype
• Supply-demand equilibrium
• Overvaluation
• Overproduction
• The market crashes

(Not necessarily in that order.)

Case Study: South Sea Bubble

Case Study: Great Depression

• Manufacturing technologies were invented which boosted production.
• High rate fixed capital investment overbuilt industry
• High rate fixed capital investment — Large volume investment in non-liquid assets, usually physical (e.g. machinery, factories, land, robots, etc.)
• This is in contrast with investing in labor, tech, financial assets, etc.
• This saturated the market with goods, which was indicated by the surplus of automotive production at the time.

Great Depression (cont.)

• Economic gains led to speculation
• In order to invest more in the market, businesses tried to inflate profits
• Workers [read ‘consumers’] had minimal wage gains, despite increased productivity
• People had the same amount of money, but wanted more goods, which stretched people thinner — causing many to take loans
• The relative decline of mass purchasing power
• Then the market crashed and stuff went downhill, fast.

I cry every time :(

Case Study: Great Recession

• Subprime lending — lending money to people who may have difficulty maintaining the repayment schedule.
• Many banks were lending money to millions of Americans who couldn’t repay the loans in time or at all.
• Banks attempted to profit off of this by repackaging the debt
• Once people actually started defaulting on their loans because housing values fell, these securities became ‘toxic’
• Banks began failing, which led to a chain of foreclosures, defaults, calling in of loans from those that were least capable to pay them, and in the end, global commerce and finance coming to a grinding near-halt.