History repeats itself or at least rhymes. That is not meant to be an insult against history. I repeat myself too. There are long term cycles and short term cycles. If you draw a chart it looks like big waves made up of little waves. A trend or cycle could last for several hundred years or just a few days depending on the type of trend. The job of forecasters is to discover which things are on a long trend and which ones are shorter. Predicting the future is not quite as easy a looking a chart of history and extending the trend into the future, but looking at the past can give you a good idea of what is possible and what is likely.
Long trends tend to be particularly difficult since you often do not have information (or memory) that goes back far enough to get the full picture. Until last year most people thought that house prices would always go up, or at least never go down. We proved that theory wrong. House prices cycle too. As a matter of fact a major real estate crash occurred in 1925 leading people to search for a better place to invest their savings – stocks. Four years later – oops!
Americans like to blame China for our current difficulties, but the developed world has for as far back as we have data had major depressions about every 70-90 years and booms and recessions every 6-8 years. The smaller recessions inside the larger cycle are usually not that big a deal. They are normal and not the fault of one particular nation or person. They the natural result of group psychology. They just happen. The major events like the Great Depression are about a lifetime apart. I do not think the length of this cycle is a coincidence.
I believe that the people who lived through a depression raise the next generation in a way that strongly discourages the mistakes that lead to events like the crash of 1929. But the next generation does not have the emotional memories that would drive them to teach ideas like intelligence in risk assumption. For the rest of their lives they keep the economy growing at a steady and safe rate. After they die and/or retire, though, the next generation looks at the track record and thinks, “Well I guess, we have this figured out.” So they make sub-prime loans, treat mutual funds like savings accounts, buy homes they cannot afford, borrow against future income growth that is not guaranteed, and assume that if all else fails the government will bail them out.
If you are willing to accept risk you can demand higher returns, but at this point most people are accepting risks they do not see, and therefore not asking for higher returns. The whole theory of higher returns on the investments that work balancing the losses from ones that do not, fails. For years this has worked because the government has always found a way to bail us out, but each time the government saves the market the market takes on more risk.
At some point the government is going to decide not to help the market or they are going to move too late and the house of cards is going to fall. It is not a question of “if” it is a question of “when”. I read a bull who claimed that a stopped clock is right twice a day, as an argument against ever being cautious. He was right. There are cycles and the bears have been grumbling for quite awhile, but we are also getting close to 80 years since 1929. We may get to go a little longer since life spans are longer now but the pressure is definitely building.
This is all a little more complicated because of China and the rest of Asia. They are just hitting their stride. You would think that they are early in their cycle, but the level of risk relative to return in these countries is being affected by foolishness in the US and Europe. They are also a higher risk because of environmental factors. They are burning through resources at an unsustainable rate. They are going to have to slow down a bit, but slowing down without stopping is really tough.
That leads me to the question of this post. What will the next crash look like? A broken oil pipeline, that causes a power-out, that that causes a late shipment, a canceled order, a lost relationship, a drop in stock value, and then overreaction and panic? Or maybe a just a slump that gets gradually worse and worse that we cannot get out of for anything? No one knows how or when it will happen, but it is certain that it will. Remember what goes up will come down. It may take much longer than the bears expect, but it will happen and it will probably be much sooner than most people are ready for. To be fair, I am not ready yet either. But, I have plenty of time, right?