Economic Cycles
We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely
Edgar Lawrence Smith, in his book Tides in the Affairs of Men, proves the correlation between weather and solar events and financial cycles. For example, the Year Seven Phenomenon says that the seventh year of the decade usually sees a substantial stock market decline or even a crash. I am still scared about that history of all years ending in 6 & 7 suffering one 20% correction since 1856
Joseph Alois Schumpeter's Business Cycles (1939) initially proposed a three-cycle model of economic fluctuations, the Kitchin, Juglar and Kondratiev cycles. Michael Alexander shows here and here a scheme of nested cycles like these:
| Cycle | Aliases | After | Range | Typical length today |
|---|---|---|---|---|
| Cobweb | Agricultural, commodity or corn-hog cycle | |||
| Kitchin | Inventory cycle | Joseph Kitchin | 3-5 years | 4 years |
| Juglar | Fixed investment cycle | Clement Juglar | 7-11 years | 2 Kitchins or 8 years |
| Kuznets | Building or infrastructural investment cycle | Simon Kuznets | 15-25 years | 2 Juglars, 4 Kitchins, or 16 years |
| BAAC Supercycle | Bronson Asset Allocation Cycle Supercycle | Robert Bronson | 2 Kuznets, 4 Juglars, 8 Kitchins, or 32 years | |
| Kondratiev long cycle | K-cycle | Nikolai Kondratiev | 45-60 years | 2 Supercycles, 4 Kuznets, 8 Juglars, 16 Kitchins, or 64 years |
These economic fluctuations define business cycles, which can result from interactions among inventories, production, employment, and an utilizing of capital equipment
Charles Hugh Smith also describes some bigger long-term cycles, including these:
| Cycle | Duration | Description |
|---|---|---|
| Credit expansion and contraction | 60-70 years | Transition from unsustainable credit expansion (bubble) to renunciation of debt (credit collapse) and global depression |
| Generational Cycle | 80 years (4 generations) | Nation-changing social, political and economic upheaval: the American Revolution: 1781 + 80 years = Civil War, 1861 +80 years = 1941, World War II + 80 years = 2021 |
In the other side, banks and other financials reflect perfectly these business cycles. However, different banks follow different cycles. For example, regional banks are less exposed to derivatives and national credit cycles. Common cycles are 3, 5 and 7 years
These are some of the cycle bottoms that I could guess:
| Name | Symbol | Cycle Length | Correlation | Price | Date |
|---|---|---|---|---|---|
| Bank of America | BAC.N | 1-2 years | $42 $43 $38 $29 $30 $20 |
Nov 2007 Oct 2005 Nov 2003 Oct 2002 Set 2001 Dec 2000 |
|
| Citigroup | C.N | 4-5 years | $30 $30 $24 |
Nov 2007 Sep 2002 Oct 1998 |
|
| US Bancorp | USB.N | 1-2 years | $40 $30 $26 $20 $18 $18 $15 $24 |
Aug 2007 Oct 2005 Apr 2004 Apr 2003 Oct 2002 Oct 2001 Jun 2000 Sep 1999 |
|
| Wells Fargo | WFC.N | 2 years | $30 $30 $24 $21 $17 |
Nov 2007 Oct 2005 Mar 2003 Oct 2001 Mar 2000 |
|
| Washington Mutual | WM.N | 7 years | real estate cycles | $18 $15 |
Nov 2007 Feb 2000 |
For some reason, Warren Buffett and Lou Simpson prefer banks with short cycles:
This might be pure coincidence or not. They might be choosing business with a more predictable balance sheet. They might be avoiding serving Ponzi investors (see Minsky moments)
