Cycled,Recycled,and Super Cycled

“The essential truth of the Super Cycle does not vary: Booms in one sector are built on the strength of busts in another”

This week, while on work related travel, I read Super Cycles by Arun Motianey, formerly managing director of macro research and strategy at Citigroup. His ideas are to a degree a repudiation of those things he has believed for most of his career. In order to better explain recent events he has proposed a phenomenon he describes as Super Cycles. It is not a mystically or psychologically deterministic cycle such as Kondratieff Seasons or Elliot Waves seem to be, but conclusions based on an analysis of a little over a century of data. The author’s treatment of this data seems a bit Procrustean but less so than much of economic theory that tries to force irrational behavior into mathematical equations that pretend human economic activity is as predictable as the motion of the moon and the stars.

Here then is my simplistic and perhaps a little ridiculous effort to explain a very complex theory.

Once upon a time 80% of the world’s acorn production came from Bugblonian oak trees. Then the Mongol general, Arful invaded Bugblonia, burned down the forests and planted grass for his horses.

The shortages in the acorn market sent the prices for this essential component of hog feed through the roof. Every person with an oak tree in his yard started collecting and selling acorns. Industrious and courageous entrepreneurs bought forest land with borrowed money and began large scale production of acorns. They knew that the price for acorns was accelerating so rapidly they could not help but make money. As this trend continued, these businessmen bought more land and planted more oak trees. After a few years, the price of acorns stabilized and in order to meet payments on their debt, the acorn producers were forced to increase production and lower price. Finally, overcapacity and excess debt on land only marginally capable of producing acorns led to the great acorn panic of 1422. All over the known world business, faced with bankruptcy, dropped the price of acorns and the value of their underlying currencies to almost nothing.

Then a curious thing occurred. The drop in acorn prices fueled an enormous boom in the manufactured hog feed industry. The price of hog feed was still high but acorns, the base component in hog feed, had dropped to a fraction of its former cost. Once again ambitious industrious men saw an opportunity for profit, borrowed money, increased the size of their factories, bought expensive new technologically advanced equipment to process hog feed and made a ton of money. Corporations in other businesses saw that huge fortunes were being made in this industry, and so opened their own hog food processing divisions. Guess what happened. The availability of processed hog feed increased and the price dropped, leading to the catastrophic great depression of 1434 to 1450 and the collapse of over 1,000 banks all over the worlds.

Then the same phenomenon repeated itself as the producers of hog meat took advantage of the collapse in the cost of hog food and increased the production of ham, bacon, and baby back ribs. Once again there was a price to pay for excessive exuberance and overproduction of hog meat and the price dropped. This presented a wonderful opportunity for the consumers of bacon and the bacon restaurants that serviced their gluttony. The consumers took out second mortgages on their homes so they could bring home more bacon. The restaurant business took off as fortunes were made in spiral cut ham, BLT sandwiches, and all you can eat barbeque businesses.

Then the collapse of 1478 took down the large advanced economies of the world based on bacon consumption and the pork service industry.

We are the bacon consumers and owners of the restaurants and food service businesses in this little story. In 2010, the United States finds itself drowning in an ocean of consumer debt. Our service industries including the ultra-critical financial service industry are overwhelmed with their own bad debt. Finally, our governments both local and Federal have made too many promises that can not be honored, both to our creditors such as China and to our own people who expect to collect Social Security some day.

The author sees no way out until this excess of bad debt is repaid or repudiated. He believes there is nothing the governments of the advanced world can do to make the situation any better. They can only postpone the inevitable which, by the way, will make the final cataclysm that much worse. The author contends we can only choose our own means of execution, a quick violent death in the electric chair of inflation, a longer suffocating death in gas chamber of another Great Depression, or most likely given political realities, a prolonged death by strangulation on the gallows of stagflation.

The author favors a short violent inflation that would cause American household income in the service sector to drop 20% in real terms when compared to the value of commodities. He offers investment advice for all of these three eventualities, but I save that for another day.