What Directly Effects Economic Activity and Capital Markets?

The Summer Solstice, which marks the beginning of the summer season, passed not so long ago. I know because it falls on June 21-22, right next to a friend of mine’s birthday.

This friend hates her birthday and always has.

Just imagine how interminable your birthday must seem when it falls on the longest day of the year. Never mind the record highs we’re experiencing across the mid-west this season…

But my asking if it’s cold enough for you has nothing to do with the annual calendar. Our focus is on the economy.

When things are hot in the economic world, it means there’s a lot of growth and growing threat of inflation. If rising temperature is used as a metaphor for economic expansion, then the opposite should work also, where a stagnant or contracting economy can be described as stone cold.

That’s why, I think the U.S. economy, and even the world economies, are encased in an iceberg right now. And the central banks of the world are attempting to melt this iceberg with a few blow torches.

Over two decades ago Harry Dent identified the patternrn of growth and contraction in developed, industrialized economies based on consumers. This patternrn shows how the rise and fall of populations has a direct effect on economic activity and capital markets.

By looking at population charts, it is quickly discernrnible that populations tend to move in 40-year cycles, with two 40-year cycles (a surge in births and then a wave that meets the previous high) completing an 80-year loop.


The resultant economic trends occur in roughly 26- and 14-year waves with the first long wave going up and the second shorter wave moving lower. So in a complete 80-year loop there are two 40-year population waves (or generations), with two smaller waves inside… a 26-year wave up in spending and growth, and a 14-year wave down of saving and contraction.

Because people – even people like us – like to think of things in patternrns, we identified the four “seasons” of the economy to correspond with the 26, 14, 26, 14 patternrn of a long 80-year economic cycle.

The first move up is 26 years of growth when a new generation has fully infiltrated into the workforce and begins spending more. This creates an economy that’s warming and growing, just like spring.

The next phase is 14 years of summer, when things are hot, sticky and stifling… and the new generation is saving more.

Then comes the best season of all, fall. This is when the weather is fair, the summer harvest has been completed, and the fall harvest is coming in as well. There is plenty of everything to go around.

Of course, all things must come to an end, which is why the next 14 years are like winter, with many things dying off and activity grinding to a halt again. The difficulties of winter make way for the new growth of spring and the cycle starts anew.

We’re In the Winter Season

After 26 years of an economic Fall Season from 1982-2007, we are now five years into the economic Winter Season. That’s why we have seen a lot of things change since the start of the credit crisis… and why we have seen economic activity drop dramatically.

Central banks have done their best to hold back the forces of economic “nature.” Their weapon of choice has been stimulus programs. But it becomes clearer every day that these programs are about as effective as blow torches would be at melting away an iceberg. We need to go through the painful process of having many things “die” so that we can move on. That is the only way forward.

Currently the powers that be are keeping many institutions – from banks to whole countries – on life support by administering ever larger doses of financial drugs – bailouts and cheap loans. It won’t work. These institutions are the walking dead, the last vestiges of the previous season that should be allowed to shake off their mortal coil to make way for the new growth the lies ahead.

Stopping the drug flow to the zombie banks and other institutions will returnrn us to the natural business cycle without committing more capital (think about your tax dollars here) to a lost cause.

Of course, with the cold of winter there is little prospect for growth or inflation. That’s why the Boom & Bust portfolio reflects an emphasis on income and short market positions, with a little long equity exposure as well. While we are always looking for good opportunities, we don’t want to make the mistake of jumping into the markets just to be dragged down. This is like mistaking a warm winter day for the end of winter.

We have to recognize that even though things feel “warm” from time to time, this season has a long way to go.

Keep the coat and duck shoes handy.




Ahead of the Curve with Adam O’Dell

A Seasonal Patternrn We Can Bet On

From the macro to the micro… cornrn also displays a seasonal patternrn. But, unlike the multi-year economic seasonal patternrns Rodney described above, this crop’s patternrn is contained within a calendar year. It’s also greatly influenced by the weather.