A long psychological / socioeconomic cycle part 3. Investing and the cycle

 Why are different phases and archetypes important for the investor? They tell about the rhythms of the past and the future. The time periods are not duplicates, but they have similarities. Phase identification increases the likelihood of estimating what may happen in the coming years or decades. This applies to both life and investing. At the same time, it increases the likelihood of better understanding and better responding to world events. In addition, the outcome of the Crisis indicates that most of the next cycle will follow the outcome. The emergence or non-emergence of totalitarianism determines the opportunities for people, companies and financial markets to produce prosperity.

In the following sections, I review the financial characteristics of different phases that are important to investors, price changes in different asset classes, etc. It is difficult to find historical prices for asset classes beyond a hundred years, so statistical significance is low. Careful interpretation of the historical prices of asset classes must be taken, in order to make better conclusions.

High

The economic characteristics of the High that reflect the Crisis are favorable productivity growth if the Crisis has not led to leftist rule, high taxes on individuals and companies, large infrastructure projects, a new leading economic nation, an emphasis on a unified culture, mostly positive economic growth, and a reduction in stock market volatility. The latter most likely apply to the first decade of the High. In addition, during the High, the largest age groups in the new cycle are likely to emerge, replacing the largest age group in the previous cycle. The departure of the latter will significantly reduce pension liabilities.

During the High, the highest personal tax rates inherited from the Crisis are insane compared to today’s world. They are likely to be well over 50%. The percentages depend mostly on the magnitude of the destruction of the Crisis and the people rising to power. Depending on the nation, corporate taxation of profits can also be more than 50%. High taxes will remain through the phase and the change will then be in a lighter direction until the end of the Crisis. Change may not be slow. High taxation is needed for massive infrastructure projects, such as the possible modernization of energy production and the construction of new roads. Investor tax planning is important during the High. The long-term investment horizon is the most preferred because of taxes.

As the economic winner of the Crisis is allowed to create new rules for the world economy, it will have the greatest influence on the possible change in the reserve currency and the creation of the new worldwide economic organizations. This applies to Crises with global implications. The new reserve currency is most often pegged to precious metals in this phase, which can mean, for example, a fixed price for gold for decades. It can also lead to the decline of precious metals. These can happen during a Crisis, so it is uncertain whether any individual will keep it in storage. Gold may not be eligible for investment.

Of the asset classes, commodities may be more expensive than historical averages in the wake of the Crisis, but their price trends during the High will move downward. In the beginning, interest rates on bonds are usually lower than average, but they are rising. Property prices are special in that they don’t depend much on the stage of the cycle. They are on a sharp rise at some point during almost every phase. The intervals between their peaks are 15-30 years. In a market economy, stock prices rise more evenly than in other stages of the cycle. This is one of the best times for a long-term equity investor. The most favorable development will take place a decade after the beginning of the phase and the average price fluctuations will be smaller than in other phases. This is partly because the memories of the Crisis are strong in the nation and collective insecurity is present.

Companies have good opportunities to succeed in at least the following industries: infrastructure construction, all industries related to children, and all products and services that emphasize coherence. For example, market leaders are likely to increase market share because people want to consume the same products and services as others. The position of monopolies or oligopolies is hardly challenged during the phase. Finding them on the stock market can guarantee higher than average probable returns for a couple of decades. These can be state-owned companies. Equity investments should be considered as long-term investments if it is possible for the age of the investor.

Awakening

The investments and returns of the Awakening will be affected by the events of the High and its progress. One major change is the entry of the largest age groups into the labor market. In this case, the real estate market requires additional investments and at the same time prices may rise. With larger families, larger apartments can be traded better. Infrastructure inputs investments will decline compared to the High. At the same time, prices for construction-related raw materials may rise.

The steady growth that began during the High decline badly at least once during awakening. This has been the case in the United States during the last four Awakenings. Inflationary pressures are rising as large age groups consume more consumer goods and services. Although the last time it was hit by high inflation, it is not the only possible outcome. Deflation can strike. Coupling between the reserve currency and real assets may break. In that case, investing in the latter is a viable option. At the same time, government bond yields are likely to soar for a long time to come.

The Awakening is not the golden age of the stock investor but vice versa. Real dividend income can go into the red. Companies are not seen as an important part of the economy. During that time, companies related to culture, spirituality and drugs are doing well. Mass events can be good investment targets. Intoxicants, both legal and illegal, are more popular than in other periods. It is worth putting your money in the companies that sell them legally. Financial market developments fluctuate.

Unraveling

During the Unraveling, the probability of the economic boom or bubble in a person’s lifetime is the greatest. There may be several, but one of them is larger than others. The largest one is not always related to stocks, although it was during the previous two Unravelings. The stock bubble is not always the most destructive. The absurd consumption of external signs of wealth is the most significant feature of the phase. Consumption binges are visible everywhere. They appear as expensive consumables, expensive individual products, etc. At the same time, the nation can become indebted.

Even in a Crisis, it will take a long time to find out the devastation of the boom or its eruption. The period has far-reaching implications. They appear e.g. as the largest inequality. The devastation can only be solved after the end of the Crisis. Belief in new, life-changing consumer technologies is high and the public can buy them massively. The number of companies related to the boom is the highest. Most new technology companies crash, but the best ones remain. The prices of their shares will fall after the crash of the stock market bubble. Some will return to pre-crash or higher prices, but it will take a long time.

The phase may be the golden age of the banks as individuals become indebted when they participate in the boom. This can be reflected in high property prices. Bank bubbles are possible. They normally burst at the end of the deleveraging, so care must be taken when investing in banks. Bond interest rates may be high at first, but will go down thereafter. When this happens, bonds will be a great investment for a long time. Any asset class can experience a bubble.

Crisis

The whole Crisis may go into the aftermath of the economic problems caused by the boom of the Unraveling. It is accompanied by gloomy economic developments such as collapsing financial markets, high unemployment, deflation or hyperinflation, state insolvency and over-indebtedness of other economic actors, a maximum of economic inequality reflected at its worst in violence, protectionism, poverty and mass unemployment. The problems are great and require significant change. Towards the end, investor tax planning becomes important. Society realizes that economic equilibrium between incomes and costs cannot be achieved without higher taxes. This is especially true during wartime.

Techno-oligarchs are one hallmark. A possible technology bubble has burst and the winners will be able to enjoy the fruits of their labor. Domestic companies are doing better in the internal market thanks to protectionism. This means an increase in market shares in consumer-driven societies. On the other hand, consumption is declining compared to the Unraveling, as the largest and most prosperous age groups are retired and their consumption is lower than during the previous phase.

The regulation of financial institutions will increase through this phase in the event of a banking crisis in the deleveraging. Regulation follows decades of development. Companies with significant tax-deductible losses may be better-than-normal investment targets if taxes start to rise. Healthcare and other industries related to large numbers of elderly people are likely to be a good investment.

The outcome of the Crisis is reflected in the social system of the new cycle. It is one of the most important parts of the success of the national economy, as it affects both productivity and the number of people in the working age groups over the next cycle. Economic growth is, in effect, the sum of the former, although it may be affected by indebtedness in the medium term. In developed countries, the long-term development of productivity growth in an economically viable system is about 2% per year. Productivity growth in less prosperous countries will be bigger than that figure in market economies. The number of workers is affected by both the birth rates and the migration to or from the country. For the index investor, these are the most important pieces of information.

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.