Business Cycle or Credit Cycle?

[On the Road]

Cycle Paths…As we’ve mentioned a few times in the past, we believe there is one question that is the key to understanding and successfully navigating the current economic and financial market environment. Point blank, and although this may sound wildly melodramatic and over the top, we believe that the correct answer to this question will absolutely determine success or failure for investors looking ahead. We’re just trying to keep it simple and distill all of the noise and daily sound bites blaring at us from the financial media down to one overriding issue. Here goes. Is the current post recessionary economy more properly characterized as a business cycle or a credit cycle? Which one is it? Answer the question correctly you win the prize. And we’re not kidding.

What stands out to us like a sore thumb in the current recovery cycle is the dichotomy of character relative to past economic recovery periods. In so many key economic indicators of the moment, we see activity almost completely opposite of historical experience during recovery cycles. Is it the new "service economy" that appears to be reshaping the rules? Is it the rapid globalization of economic activity that is being displayed in such a dramatic change of domestic economic character? Or is it simply the fact that what we are living through is not a business cycle at all, but rather a credit cycle?

---snip

Switching gears for just one second, we want to have a very quick look at the current character of corporate spending. You remember, the “business” part of the economic recovery cycle, so to speak. What you see below is the history of net corporate cash flow as a percentage of GDP on top of the coincident time period chart detailing non-residential fixed investment as a percentage of GDP (a proxy for corporate capital spending). It’s pretty darn clear that as corporate cash flow grew in the 1970’s, corporate capital spending mushroomed. At the time, much of this went into energy infrastructure. Same deal in the post recessionary period of the 1990’s. Corporate cash flow grew big and so did capital spending centered primarily in tech equipment. In other words, as corporate cash flow has accelerated over time, so has corporate capital spending. The patterns are pretty darn clear.

So here we have current net corporate cash flow as a percentage of GDP near all time highs. The current cycle has no precedent in terms of strength. Yet coincident time period capital spending relative to GDP has modestly increased relative to this burst of cash flow. Just what’s going on here? Why aren’t corporations spending their cash more aggressively? After all, they are literally spitting out cash at the moment. This too is an anomaly right alongside the consumption and employment pattern dichotomies described above.

http://www.contraryinvestor.com/mo.htm



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Note: Just discovered this site, and it seems like a pretty good mix of sophistication and clarity. The author's position is takes longer than four paragraphs to lay out, so the snipped portion doesn't do the argument justice.

[AX10]

1. Kick, Kick, Kick!

[EVDebs]

2. Ever hear of Kondratieff waves ?

Similar theory on business cycle. Trouble is that wealth concentration and the Keynesian 'marginal propensity to consume' of the masses vs. the rich elite investor class guarantees the troughs in the business cycle.

Unless you can get supply side idiots to allow for greater taxation on the wealthy Bush 'base', don't expect miracles.

The coming crash will be an excellent 'buying opportunity' however for those with lots of euros. The dollar won't be worth as much...

[On the Road]

4. I'm Agnostic on Kondratieff Waves

Don't know enough about them. Braudel mentioned them in his economic history of the 15th-18th centuries. He spoke of them as being 150 years in length (which seems kind of long for a recurring pattern to be detected), although some people use that term for shorter periods.

I agree there will be a crash which will present excellent buying opportunities, although how deep and how long remains to be seen. Lots of people have gone broke betting against the US economy.

[EVDebs]

6. ? Kondratieff was murdered by Stalin

Sent to the gulag for proposing these Kondratieff waves, which could be interpreted that capitalism could be 'perfected' (finetuning is what we call it today).

Leviticus 25 also speaks of Years of Jubillee ... I'm not agnostic on the hubris of economists who think we won't have depressions in the future (near future). I'd settle for a mild recession, but the fools following Greedspan and his band of supplysiders need some edication.

[Terry in Austin]

8. Kondratieff Waves

More like 40-60 years, apparently.

I haven't gotten very far into Braudel himself yet, but some of the other Braudel school writers like Immanuel Wallerstein and Giovanni Arrighi base a lot of their analysis on Kondratieff cycles, which they refer to as 50 to 60 years in length.

They note that there are two phases to the cycle, the so called "A" and "B" phases; the first characterizes an economy that's based primarily on production and trade, while the second is mainly about finance -- i.e., lending out accumulated capital.

[On the Road]

9. Now That Would be a More Reasonable Time Period

Five or six decades is a reasonable time horizon for industry to develop, trade connections to grow, wages to be increased, profits to be accumulated, and the mix of industries to change. It happened pretty clearly in European countries. And it's just the right timing for the boom after WWII. Maybe Japan is just the first domino.

:scared:

[orwell]

3. Thanks Ribo

Very good presentation with some charts I haven't seen before.

It seems pretty clear that this is a credit cycle expansion with some rather alarming characteristics. Some of the most telling are the lack of job and income growth, which should be expected with the global competition in labor against the backdrop of neoliberal economic policies.

The more alarming information was in regards to the explosion in consumer liabilities on their personal balance sheets. If there is a rather minor pullback of 10 to 20% in housing prices from the inflated levels we see today in some of the go-go markets, the liabilities will not go down, just the asset values. This could make this asset/liability mix look far worse.

Thanks again

[On the Road]

5. What's Great About the Article is That It Gathers Together

a number of different statistics which have been widely publicized in isolation but puts them together to tell a new story in a very persuasive way. What's truly amazing is that the business sector seems to have been flat or declining across the board all through the so-called recovery, and that it's been completely masked by consumer credit spending.

If you liked this article, you might also like www.cross-currents.net , including the occasionally updated "Pictures of a Stock Market Mania." (I actually found ContraryInvestor on the Links section of Crosscurrents.) Very interesting selection and interpretation of statistics.

[orwell]

7. Thanks for the Link

The business sector has done quite well under the * regime. In fact, the numbers show business are raking in the free cash. That is what is so unusual about this cycle. Instead of investing the cash in new domestic productive capital, they are either building plants overseas, keeping it for takeovers or dividend payouts, or investing it in financial instruments. (This may explain one of the reasons why long term rates have been falling during this Fed tightening cycle.)

Over the long term, this has ominous implications for both the labor market and the US economy as a whole. When you effectively cede your manufacturing base to foreign suppliers, you open yourself up to a very dependent relationship.

It is becoming increasingly clear that what we bring to the global economic table is hundreds of millions of rabid credit charged consumers. What happens when the rest of the world wants us to pay the bill?