A long psychological / socioeconomic cycle part 1, Introduction and generational archetypes

The psychological state of emotion follows a cycle that changes society. Its driver is the aging of generations/archetypes. History creates and modifies them. Generations age and shape states. In this book, I use the cycles and the generations/archetypes found in Neil Howe´s and William Strauss´book ”The Fourth Turning”. it is a must read to anyone who is interested in this cycle. There are four types of generations and they progress through the same four stages of life and cycle from cradle to grave in their own order. Investing is so much about mass psychology that the cycle cannot be ignored. Generations and stages of the cycle affect the prices of asset classes and their returns. Both affect what kind of companies are most likely to succeed in certain stages. The cycle is intertwined with a long debt cycle. I will go through the basics of the cycle before telling about its impact on investors. The cycle has four different stages from the beginning until the end:

• A High

• An Awakening

• An Unraveling

• Crisis
  
  
  

The cycle lasts approximately the average lifespan. Life is divided into four different stages: childhood, young adulthood, middle age, and old age. They last an average of about 20 years. In addition, during the cycle, there are four different archetypes, which are almost always generated in the following order:

• Prophets

• Nomads

• Heroes

• Artists

I focus on the United States, its stages, and archetypes. In the last few centuries, one archetype has never been born, and this happened during the Civil War, when the Heroes did not have time to be born. The focus on US cycles is due to two reasons: the first is that it is the most important national cycle to the investors around the world, and the second is that it is difficult to get accurate information about China, even though it is almost as large an economy. The US cycle is progressing almost as well as the whole of Western Europe and this phase is likely to overlap strongly with China.

Archetypes affect different stages and different stages affect different archetypes. As the majority of one generation lives in their last years, a new generation of the same archetype begins to emerge. Prophets are the opposite of Heroes. The contrasts apply to the Nomads and the Artists. The same contrasts fit the experiences of generations at different stages of life. For example, parents leave Nomads on their own in their childhood and Artists are guarded like the Fort Knox. A new archetype begins to emerge shortly before the new phase occurs.

The contradictions also follow different stages. Highs are close opposites to the Unraveling and Crises are close opposites to the Awakenings. The destructive power of Crises at the end of the cycle is a necessary evil. It renews social structures and social relations. Destruction is possible when almost everyone who has experienced the previous Crisis has died. Each step is similar to the same step in the previous cycle, although they are different. The dominant archetype at each stage reflects their life experiences. This leads to the progression of the different stages of the cycle. The best signs of change in stages are the increased intergenerational contradictions in the transition from one stage of the cycle to another.

Archetypes/generations

The majority of the archetypes have their own common characteristics. In addition, each archetype has an impact on the others during different stages. Everyone in each sees similar events at the same stages in life. The majority of them think the same about families, the fundamental pillars of society, political leaders, and the future. Majorities of each archetype react to life events in a similar way. The biographies of the archetypes resemble each other.

Prophets spend their childhood less protected during the Peak. They are selfish young adults in the Awakening. Their middle age goes by cherishing moral principles in the Eruption. Old age is mostly led by the Crisis. It is either a significant victory or a failure. Some of them will survive until the new High, but their significance is then minor. Their leadership moments during the crisis will have a significant impact on the next cycle. The younger age groups see them as selfish, proud, and cold-blooded. They focus on dreams, values ​​and spirituality. They affect the Heroes the most. Donald Trump and Steve Jobs are examples of the Prophets.

Nomads spend their childhoods unprotected in the Awakening. They are underestimated as young adults in the Unraveling. In a Crisis, they are acting as middle-aged pragmatists and their role in resolving it is being forgotten. The majority of them are forgotten as the elderly, although some of them are in leadership roles at High. Some survive to the new Awakening. Others see them as pragmatic, immoral, and soulless. They focus on freedoms, survival, and honor. They affect Artists the most. Jeff Bezos and Elon Musk are examples of Nomads.

The Heroes spend their protected childhood during the Unraveling. They help resolve the Crisis as young adults under the guidance of the Prophets and the Nomads. They become brazen middle-aged people at the top. During awakening, they play a strong role as the elderly. Some of them will survive to the new Unraveling, but they will not matter much. Others see them as selfless, capable, and machines. They focus on society, technology and success. They have the greatest influence on the Prophets. Mark Zuckerberg and Thomas Jefferson are examples of Heroes.

Artists spend their overprotected childhood during the Crisis. Careful, young adulthood goes at the High. They are indecisive middle-aged during the Awakening and settle into the position of the younger generations as the elderly in the Unraveling. Some Artists will survive to the new Crisis, but they don’t matter much. Others see them as indecisive, open-minded, and emotional. They focus on professionalism, legal security and diversity. They have the biggest impact on the Nomads. They often have the best opportunities to invest and good pensions because they enjoy the wealth generated by the largest age groups. Their birth rate is low. They are particularly benefiting from rising house prices. Thomas Edison and Warren Buffett are examples of Artists.

National economic cycles

 Cycles related to national economies include the long socioeconomic / psychological cycle, the cycle of economic development, the cycle of the leading economic country, the long debt cycle and the short debt cycle. The first four cycles may be strongly interlinked, as is now the case in the United States. The situation is exceptional and happens about once a century in a maximum of two individual countries. Now it only happens in the United States. A short debt cycle works within a long debt cycle. Economic cycles are most important for index and long-term government bond investors. The more an investor focuses on the activities of individual companies, the less he needs to take care of the national economy and its development.

There are four components to economic growth in advanced economies: productivity, the long debt cycle, the short debt cycle, and politics. In the long run, economic growth is based on changes in productivity and the number of working age population. Policies generally do not play a major role in the short-term productivity of advanced economies. Most political agents do the same things, even if they sell it under a different name. Politics has only a meaning when there are significant forces of change in the social system. This happens on average once in a person’s lifetime. Major changes in the social system follow the socioeconomic / psychological cycle. Birth rates are also wrapped around it.

The long debt cycle is also wrapped around the socioeconomic / psychological cycle, but short debt cycles have little to do with it. They mainly produce fluctuations around average economic growth. This is mainly reflected in productivity. It is impossible for people of working age to be cloned, for now. The policy influences fluctuations mainly by regulating the state and municipal loan taps, but there are no long-term changes in productivity. The main reason why politics doesn’t matter is the basic features of man-made systems. The outputs of political systems rarely change.

The current situation requires further reflection. Therefore, there is also a part in a book which describes how the long-term cycles intertwine. In it, I discuss the similarity between the long-term debt cycle of the United States, the psychological / socioeconomic cycle, and the cycle of a leading economic country. They intertwine in a way that affects the world. It is a pity that no one knows the exact effects in advance. That’s why I focus heavily on the current situation and guess what might happen. I have a better view of the first one. With regard to the latter, it can be said that my crystal ball is fuzzy.

Bubbles, Booms and Crashes part 7. I found one, what should I do?

When a bubble or boom is found, it is clear that most investments are too expensive. It is difficult to recommend any investment. Using leverage is even less recommendable. Extremes can last longer and grow higher or decline lower than anyone thinks. They are unpredictable and not easy to predict. The peaks and crashes of bubbles and booms may seem clear in retrospect, but few succeed in predicting them. Don’t try to time peaks and crashes.

It does not mean that you should not do anything. Bubbles and booms are good moments to consider selling investments that are too expensive. Not everything is worth selling at once. It may make sense to diversify your sales of the most expensive investments. This makes sense because prices are rising higher than expected. Tax consequences should be taken into account. At the same time, people can sell their loss-making investments to reduce taxes.

Uniform proposals cannot be made for all asset classes. For example, more time should be set aside when selling houses. They are not worth buying unless you get them really cheap. The same applies to other real estate. Easy-to-sell assets such as securities require a more individual approach. Short selling, i.e. the sale of other people´s securities, is difficult to recommend because of their negative risk / reward ratio. The profit can be 100%, but the loss can be several hundred percent. Options that take advantage of price reductions are another matter, but my expertise is not enough to make any suggestions.

Once a bubble or boom is identified, the investor´s cash reserve increases, because it makes sense to start selling little by little. The buying should not be rushed. As cash reserves grow, you have to be patient as temptations to participate in the boom increase as prices continue to rise further than expected. You can pay off your debts if you have them. At the same time, it is worth increasing cash position, because sooner or later prices will crash. Then you get good investments with low prices. Lack of cash in a collapse lowers long-term investment returns. Everyone should match their money supply to their needs. For example, the age of the investor matters. The older the investor, the smaller the portion of the assets is worth investing in. There are plenty of other reasons, but I won't go into them in more detail.

The crash is a good time to buy. It may take a long time for the bubble to move from the top to the bottom. Smart money makes sure it gets to sell as much of its bubble-priced assets as possible to others. It can take years to profit from being right. Prices are also falling lower than anyone expects. Crash of more than ten percent or more than fifty percent are normal in equities and in alternative investments such as commodities and currently popular cryptocurrencies. I do not recommend the latter to anyone as they may become worthless.

In crashes, it makes sense not to sell everything fast and it is not worth trying to predict the bottoms either. They can take years or decades before prices return to the previous peak. There is no hurry. Although the rise may be rapid at first, prices will remain far from previous peaks for longer after the bubble. Tax consequences can also be considered during collapses if possible. Cash reserves during crashes are useful, because you might have to sell your best assets during them. Nobody will buy your worst investments during them.

Bubbles, Booms and Crashes part 6. Indicators

 Previously, I listed a few signs of booms such as reflexivity, money supply growth, psychological phenomena, and political factors without their more specific signs or indicators. It should be clarified how the indicators are reflected in national economies and in the prices of investment products. In numerical signals, the rate of change is important. In them, a longer-term decelerating pace of change anticipates a slowdown in bubbles, booms, which lead to crashes. There is no single sign or indicator that predicts the progression. The more characteristics you can find the better you know what you see.

Reflexivity has signs. One is to move further and further away from the average historical return. For example, stocks can be examined in comparison to the trend of ten-year average earnings per share, which has been around 17. The farther one moves from that figure, the more reflexivity is affected. As growth slows, reflexivity decreases. The interest rate of government bonds must be scrutinized because it makes more sense to pay higher prices for shares when it is low. The prices of houses or other share classes can be compared to the average trend growth for the reasons mentioned earlier.

The former is not the only sign. Declining interest rates and the fact that borrowing is based more on collateral values ​​than income are indicative of reflexivity. The first increases the chances of reflexivity and the higher leverage it requires. Higher prices combined with higher leverage increase the likelihood of reflexivity. The latter is an early signal that anticipates reflexivity. Lower collateral requirements and increases in collateral values ​​increase the probability of reflexivity and strengthen it.

In smaller countries, a significant rise in the amount of external money flows and the strengthening of the local currency signal reflexivity. So do loans to locals in foreign currencies. When foreign money notices the higher-than-normal returns offered by the local country, it rushes to the local market. Local incomes are rising and the currency is strengthening further, making the local market more attractive.

Reflexivity works in both directions. The previous phenomena also work in crashes, but they increase the decline in prices. They fall below average trends, increasing the decline, as interest rates rise, prices fall, and declining collateral levels increase borrowers’ willingness to increase collateral requirements. The transition from collateral requirements to income requirements will lower prices as revenue declines. The transfer of foreign currency away from local markets lowers prices, lowering the value of the currency, reducing the value of collateral previously issued, which also affects prices.

Several figures and indices can be examined to notice reflexivity. Changes in the supply of money tell something about it. Different countries have their own statistics. Not everyone is as reliable, but at least the US and eurozone money supplies can be tracked. There are also indices around the world to describe indebtedness opportunities such as the MBA Mortgage Index in the US, the address of the website can be found in the sources. The longer the maturity of the loans offered, the more certain the reflexivity will affect. Long 100-year mortgages or government bonds are a signal. The historically high volume of loans in the stock market compared to the indices indicates possible reflexivity.

Psychological factors are present in bubbles, booms and crashes. Let’s start with social proof and state that at its highest it applies to almost everyone. Everyone in their immediate circle is starting to have one or more people who are quickly enriched with popular investment products or have invested large sums in them, with at least a large amount of assets on paper. They are also eager to recommend their investments to others and say they are stupid if they don’t do the same. The more close colleagues or friends report on their successes and hundreds of percent returns in the short term, the closer the boom and the end of it is. The collapse has begun when the same people don’t say a word about investing or their losses. Social proof is mostly caused by amateur investors.

The progress of social proof can be monitored in Google Trends. There you can see how popular certain keywords have been at any given time. Peak moments don’t directly correlate with prices, but the highest search volumes are in the vicinity of both peaks and bottoms within a few months. The latter may be even better correlated.

Be fast! Buy before it becomes too expensive! The feeling of scarcity and hurry is one sign of a boom. Quick jumps in housing prices or multiple oversubscriptions of investment products indicate a shortage of supply or a sense of it. Low number of shares available in IPOs may be a conscious choice for listed companies. Two- or three-digit percentage increases in listed products on first trading days indicate scarcity. In the crash the supply of stocks is plentiful. This is reflected in the rapid decline. For example, a broad front before popular stocks lowers its prices in double digits on several days.

The majority of people follow a few authorities that seem credible. The latter may have been in other businesses before the bubble or boom. The general public gets promises from them where prices multiply fast. As the boom progresses, the promises increase. They sound nonsensical to those familiar with things. As the bubbles and booms progress, the warnings of the former follow, the anti-authorities of the booms, increase. At the same time, more people believe they are incomprehensible. In crashes, authorities and their promises are revealed to be either scams or their views wrong. During that time, the “Warren Buffets” will also start to get rich with their foreclosed assets. Their returns exceed averages by significant margins as the collapse progresses.

Excessive regard in one’s own abilities, possessions, and chances of success is reflected in excessive trust in both communities and individuals. The euphoria created by booms and bubbles increases confidence in significant and rapid economic growth. It can be seen e.g. as large-scale, absurd consumption patterns. Record prices are paid at auctions. You can see signs like the construction of the world’s tallest building or record-breaking massive construction projects that exceed their budgets. A sign of bust may be the interruptions in them.

It is particularly evident in individuals who, during the new economy, have earned significant returns, at least on paper, through either their investments or their business. They buy expensive cars and waste their money on status symbols. The phenomenon does not only affect individuals. One sign of the new economy is found in individuals who leave their jobs because they believe they can be investment professionals. They recommend the same to others. This “This time it is different” delusion is big.

The above factors reinforce the illusion of excess availability, but they are not all the causes for its existence. The media is a significant part of the strengthening. They give their followers what they want to hear during a boom. They want to hear that ”now is a good chance to get rich immediately,” etc. They dig up people who suddenly became rich and let them present their advice. It is common that the majority of journalists don’t understand enough to be able to question bad advice. They lift the wrong authorities on pedestals and write negative stories about how those who have invested for decades have lost their grip. They talk about how their investments don’t match short-term successes. The number of things moving from media placement is at its peak at the end of the boom or the start of the collapse. At the same time, their availability and popularity are at their highest.

There are many signs of political factors reinforcing bubbles and booms. One is tax cuts on certain investment products or real estate. Bubbles and booms may gain significant start-up momentum or accelerate as wealth is diverted to tax-advantageous destinations. Speeches by politicians and central bankers about the merits of a booming economy run rampant. Some of them may warn the public. Unfortunately, they do not lead to actions when they are important.

Promises to save investors are a sign of the moral hazard that has occurred in all booms. Promises ultimately lead to actions. Unfortunately, they are too late. The first capital injections for those who mismanaged their business are a sign of moral hazard and anticipate a boom in artificial respiration for too long. At the same time, the probability of a larger collapse increases.

The increase in the use of “alphabet soup” or other new investment products in language is a sign of a boom. Increasing supply to retail investors also speaks for itself. Their complexity can also tell about it. The more investment products you don’t understand, the more surely the bubble is growing. The deregulation is also a sign of a boom. Increasing them probably indicates the risks that have already materialized. Regulators are often late.

The interference of central bankers or politicians in market price formation are signs of bubbles, booms, and crashes. Purchases or price cuts by central bankers of investment products will increase bubbles and booms. Unexpected sales or price increases can signal or cause a risk of collapse. The boom can also be seen in the lack of supply regulated by politicians. For example, land use restrictions can tell about a real estate bubble. The rapid increase in supply indicates that the crash is approaching.

There are enough signals about the existence of bubbles, booms and crashes. Alone, they don’t tell much. Certain signals have been present in all the booms and collapses of recent decades: the shift from income-based to collateral-based lending, cheap money and the money supply it increases. Other signals are less relevant, but the more of them are found the more likely booms and collapses are present.

Crash signals are less important because they occur afterwards. They don’t help with timing of sales, but they tell about the likelihood of new investments making sense. The most important of these is the extensive and rapid price cuts of tens of percent. After that, you can start to invest carefully. In addition, “just crazy to invest now” and all the other post-panic messages on the psychological profile after the aforementioned collapses are signals of better investment moments.