Stock Market: Economic Cycles
Table of Contents

Economic Cycles

We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely

Warren Buffett

Edgar Lawrence Smith, in his book Tides in the Affairs of Men, proves the correlation between weather and solar events and financial cycles. For example, the Year Seven Phenomenon says that the seventh year of the decade usually sees a substantial stock market decline or even a crash. I am still scared about that history of all years ending in 6 & 7 suffering one 20% correction since 1856

Joseph Alois Schumpeter's Business Cycles (1939) initially proposed a three-cycle model of economic fluctuations, the Kitchin, Juglar and Kondratiev cycles. Michael Alexander shows here and here a scheme of nested cycles like these:

Cycle Aliases After Range Typical length today
Cobweb Agricultural, commodity or corn-hog cycle
Kitchin Inventory cycle Joseph Kitchin 3-5 years 4 years
Juglar Fixed investment cycle Clement Juglar 7-11 years 2 Kitchins or 8 years
Kuznets Building or infrastructural investment cycle Simon Kuznets 15-25 years 2 Juglars, 4 Kitchins, or 16 years
BAAC Supercycle Bronson Asset Allocation Cycle Supercycle Robert Bronson 2 Kuznets, 4 Juglars, 8 Kitchins, or 32 years
Kondratiev long cycle K-cycle Nikolai Kondratiev 45-60 years 2 Supercycles, 4 Kuznets, 8 Juglars, 16 Kitchins, or 64 years

These economic fluctuations define business cycles, which can result from interactions among inventories, production, employment, and an utilizing of capital equipment

Kondratieff_Wave.gif

Charles Hugh Smith also describes some bigger long-term cycles, including these:

Cycle Duration Description
Credit expansion and contraction 60-70 years Transition from unsustainable credit expansion (bubble) to renunciation of debt (credit collapse) and global depression
Generational Cycle 80 years (4 generations) Nation-changing social, political and economic upheaval: the American Revolution: 1781 + 80 years = Civil War, 1861 +80 years = 1941, World War II + 80 years = 2021
4-cycles2.png

In the other side, banks and other financials reflect perfectly these business cycles. However, different banks follow different cycles. For example, regional banks are less exposed to derivatives and national credit cycles. Common cycles are 3, 5 and 7 years

These are some of the cycle bottoms that I could guess:

Name Symbol Cycle Length Correlation Price Date
Bank of America BAC.N 1-2 years $42
$43
$38
$29
$30
$20
Nov 2007
Oct 2005
Nov 2003
Oct 2002
Set 2001
Dec 2000
Citigroup C.N 4-5 years $30
$30
$24
Nov 2007
Sep 2002
Oct 1998
US Bancorp USB.N 1-2 years $40
$30
$26
$20
$18
$18
$15
$24
Aug 2007
Oct 2005
Apr 2004
Apr 2003
Oct 2002
Oct 2001
Jun 2000
Sep 1999
Wells Fargo WFC.N 2 years $30
$30
$24
$21
$17
Nov 2007
Oct 2005
Mar 2003
Oct 2001
Mar 2000
Washington Mutual WM.N 7 years real estate cycles $18
$15
Nov 2007
Feb 2000

For some reason, Warren Buffett and Lou Simpson prefer banks with short cycles:

This might be pure coincidence or not. They might be choosing business with a more predictable balance sheet. They might be avoiding serving Ponzi investors (see Minsky moments)


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