National economic development cycle and investors

The significance of the economic cycle for the investor depends on few things. Index investors are in a particular need to understand that in addition to price. The stage and direction of the development cycle tell about the potential for long-term returns. The duration of the phases can be decades or centuries. In such a long run, the investor is often dead. The nation´s internal direction of the phase indicates about the return opportunities. A downward-going state is rarely able to change direction before moving on to the next development phase. Changes in direction require radical changes in social systems and citizens' thought patterns. Here are some examples of my estimates for countries at different stages of development:

1. Ethiopia, South Africa, Bangladesh, India, Ukraine, Bulgaria, Brazil, Bolivia, Cuba
2. Malta, Czech Republic, Slovenia, Cyprus, Puerto Rico, China mostly
3. Luxembourg, Singapore, Switzerland, Norway, Denmark, the Netherlands, Sweden, Canada, Germany, Australia, major cities on and around the east coast of China
4. United States
5. Portugal, Japan, Spain, Italy, Finland, Belgium, France, United Kingdom

My thought process was not entirely clear in which category any country should be placed. Instead, the direction of development was easier to notice. It is clear that many impoverished countries that are clearly going downhill have been rich, but whether they are impoverished or still rich is more difficult to assess. Such countries, I think, include at least Japan, Britain, Finland, and France. It is clear that the direction is downwards. The location of the countries in the second phase can also be difficult to see. As an outsider, it’s hard to see if people really feel poor. China is a difficult country to evaluate because the countryside is poor, but big cities are more prosperous. The United States is an exception because of its reserve currency status. It will allow it to become more indebted than other countries without moving to the fifth stage.

The importance of a direction to stock index investors often depends on the state. For example, the direction in Finland is downwards, but most of the large companies on the Helsinki Stock Exchange are export companies, whose results and turnover mostly come from elsewhere. The same does not apply to all other countries, such as the United States and all its indices. The Russell 2000 Small Business Index is more dependent on the direction of the state. Equity investments, mainly in companies operating in the internal market, are subject to the same rules as for equity index funds.

One of the main factors behind the change in direction is the taxation of investors. A downward trend often means tightening taxation and an upward trend. Investors in export-dependent countries need to monitor tax developments. Bond investors also need to understand where countries are and in what direction they are going. On average, the debt of improving countries is falling and that of backward moving countries is rising. Debt securities of a leading economic country are generally considered to be the best asset hedges. Their attractiveness only diminishes when the position begins to look precarious. It may then be too late to respond to maintain status.

National economic development cycle and its stages

 First stage

In the first stage of the national economy, states are poor and citizens consider themselves poor. Many countries have not escaped this stage. The average income is poor and the standard of living is not soaring. People live hand to mouth and don’t waste their money. They have to spend a lot of time getting food and clean water. They have small savings and no one will lend them money unless international organizations do so. Everyone capable of leaving moves for more prosperous places. Citizens receive support from abroad. Birth rates are high. Average life expectancy is low. Corruption is a major reason why countries are not rising. Often countries are dictatorships.

For those countries, location and culture are of great importance. Significant natural resources facilitate opportunities to move forward. It will also be easier for those on the side of richer countries to move forward if they do not have to wage war against their neighbors. Belief in work, opportunities for better conditions in the home country and one's own development facilitate the development of people and the country. People are slowly earning more money than living from hand to mouth. They do so to improve their chances of surviving in the future and do not consume everything because they are worried about their financial future.

The low cost of labor enables countries to develop. Low birth rates ​​are common denominators. The number of employees in relation to the use of machinery is poor. The textile industry and similar labor-intensive industries deliver the best export products. Industry is taking advantage of obsolete machines in richer countries, whose productivity is nowhere near the level of the new ones. Focusing on price competition, usually foreign companies, operate in these countries due to low costs. They consider the risks to be the highest and want a high return on their investment. In general, countries also generate high returns. Old machines and other crap is being exported to countries that richer countries want to get rid of, such as decades-old vans.

Currencies are weak and nations do not have decent capital markets. The real values ​​of the currencies can be found on the black market and it is not worth relying on the official exchange rate. There are a few companies on the stock exchanges and there is no reliability on the financial statements. Foreign investors may be weak in disputes. Citizens who save money either invest in their own businesses or in real estate such as real estate. They believe their money is better safe than stocks or bonds. Countries are only suitable for a few investors.

Second stage

In the second stage, the state is rich, but the citizens feel poor. The behavior is not significantly different from the first stage, but the basic living conditions are better. There is less corruption, people are freer and dictators do not control the lives of citizens as much. Birth rates are higher. Food is easier to buy and clean water requires less energy and life expectancy is higher.

In this phase, personal savings and investment are growing rapidly. People have more money left to save and invest, which can be seen in e.g. on stock exchanges. The number and quality of machines to help with the work is significantly higher than in the first stage. People are motivated employees and work long hours. Exchange rates are often pegged to the reserve currency or to fixed assets such as gold. The economies of the countries are export-driven. They invest efficiently in industrial production. Competitiveness is high because wages are low and exchange rates are deliberately kept too low. Productivity growth will be rapid and debt will not increase too much relative to income.

Supply of many products in these countries is growing more slowly than demand, which is accelerating inflation. Nominal interest rates are not as high as inflation due to currency pegs. Everything is reflected in excessive investment and a balance of payments surplus. Eventually, states will have to switch to their own monetary policy. At the same time, capital markets are becoming more attractive. Private sector borrowing will begin and investors from both home and abroad will participate in the investment. New cities are growing, savings rates are high as revenues rise and foreign exchange reserves are growing.

These economies can be gold mines for the investor. Many of them are progressing to the third stage. It means decades of economic growth. According to Jim Rogers, one important milestone for the country is cutting the currency peg. It tells of the country doing well on its own. The market economy is working well enough. Bureaucracy should be minimal for the investor and adequate liquidity is mandatory. This may limit investments in major listed companies or indices.

Third stage

The third stage is the most prosperous for most nations. State is rich and citizens are rich, both in their own minds and in reality. Productivity growth is at its peak as citizens, businesses and governments invest in products and product development. Enjoying the fruits of work is the prevailing psychological state of affairs as citizens move into it from work and preparing for the worst of times. New generations have not experienced difficult times, so they do not understand the importance of saving and investing. Statistics show that this is reflected in reduced working hours and an increase in demand for luxury goods and services. They also put more money into necessities.

States are moving from net exporters to net importers. Foreign products are cheap compared to domestic ones, and especially cheap ones are imported. The investments of domestic industrial companies is growing in cheaper countries and it is moving away more and faster. Third stage countries and stock exchanges are seen as safe alternatives, which increases speculation in the financial markets by using leverage. The majority of the nations in this phase increase their military performance to advance their interests in the world. Few achieve the status of a dominant economic country. The rest will soon begin to decline and move on to the fifth stage.

Fourth stage

The fourth stage is for the country to become a leading economic nation. Only a few and selected countries do this. The fourth stage country has a reserve currency and its bonds are the best safe haven until the country moves to the next stage. In practice, a country does not have to be the richest, but its economy needs to be big enough to function as a ruling state. The phase lasts for about a lifetime. When a country acts as a holder of a reserve currency, it is a safe investment. However, the prices of assets cannot be forgotten.

Fifth stage

In the fifth stage, countries become impoverished, but citizens feel rich. The delusions of the latter are due to over-indebtedness, as incomes grow slower than debt. The limits of indebtedness are being met and must be reduced. The ultimate reason for this is that there are too few citizens who remember poor periods and the majority have not had to worry about the adequacy of money. Prices are rising when wages and consumption are too high. Savings rates are falling and leverage is rising. Real wealth is deteriorating, even though people think it is growing. Productivity growth will slow as investment in product development, infrastructure and capital-intensive products declines. Competitiveness is deteriorating and deficits are growing. Some countries in the phase are also investing in warfare to protect their own interests.

Economic booms and busts are more common in the final years of a phase because people live in the success of the past and believe the future will match it. The reality is hard to accept. With revenue growth and investment returns lower than debt service costs, the booms will be effectively wiped out. The losses brought about by the collapses are accelerating the downturn. The value of the currency depreciates, destroying the ability to pay debts. Finally, the countries will lose their status at the end of the phase.

The debt burden and the downturn of the nation are facts. Debt repayment is causing a negative self-reinforcing trend in which private sector consumption and wealth are declining. Government debt and deficit are rising. They are paid with central bank money printing, which lowers real interest rates. At the same time, the currency is weakening. Nominal GDP is growing faster than nominal interest rates. This is done to reduce the pain of paying off debt. Investment returns are low due to weak currency and deteriorating economic conditions. States start to compete against weaker nations. The superpower positions are disappearing from countries that were once successful economies. The likelihood of totalitarianism increases when citizens find themselves impoverished.

A long psychological / socioeconomic cycle part 2. Phases

The phases of the cycle last 15-30 years. During the Civil War, the crisis lasted only five. The change of phase can be either a clear and eventful event or a gradual and ambiguous event. Each phase leads society towards the next. A new cycle begins after the Crisis. The previous cycle ended at the corners of 1945 and the current cycle then began at the High which ended during 1963. The subsequent Awakening ended around 1983 and the subsequent Unraveling most likely ended in the great financial crisis of 2007-2008. Since then, society has lived through a time of Crisis that is likely to end in the corners of 2030.

The High will begin once the main problems of the crisis have been resolved. The damage caused by the Crisis will be repaired for a long time during it. Society is slowly rebuilding itself. At the start of the High, the majority does not believe in the future. The mood is slowly rising. Faith in the future will improve to the end. The majority despises individuals they consider selfish. Self-confidence is low and group pressure influences decisions more than at other stages. The role of institutions is growing and they are expected to guide society. Birth rates are usually highest during the Peak. Family values are strong and the number of differences is low.

Awakenings are the times of the Cultural Revolution and the spiritual rebirth. People invest the most effort in developing their values. The role of institutions is diminishing and social disorder is growing. Crime statistics do the same. Demonstrations are becoming more common and some of them are causing riots. Children feel insecure and family values are declining. People are the most creative and creativity focuses on spirituality. At the end of awakenings, social orders disappear and individuals believe their inner values have improved. New values have replaced old ones.

At the start of the Unraveling, people are happy. Belief in the future is high, but at the end of the phase it will darken. The rhythm of life is fast and people think about the present. This is a time of abundance and selfishness. Confidence in governance and common institutions is low, as is morality. Spirituality is diminished, but the people are prosperous or feel that way. During Unraveling, the probability of the largest economic bubble in a lifetime is greatest. Often its consequences are corrected throughout the Crisis.

The Crisis often begins with a rumble. The mental state of society is changing rapidly. Inequality peaks. As the Crisis begins, People are divided, but it will not last indefinitely. Unity and peer pressure are intensifying towards the end of the Crisis. People see themselves as a continuation of a group more than as an individual. Institutions are changed and directed against a common enemy. Xenophobia is at its strongest and wars are likely. They are either against an external or internal threat. Civil wars hardly occur at other stages.

During Crises, responses to threats are often extreme, whether external or internal. Every effort is being directed against a common enemy. This creates tremendous destructive power and an extreme end result. The Crisis is the most important stage of the cycle. Its outcome determines the next cycle, creating a new personality for society. The end result is either freedom, totalitarianism or dictatorship. It is difficult to predict. The Crisis is closely linked to both the long debt cycle and the cycle of the leading economic country. The winner of the crisis sets the rules. This applies to internal and external relations, social relations and the economy.

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.