What I’ve learned about economy cycles – summary.

I started lots of topics some time ago, and I have like 5 opened and don’t have time to sit and write all till the end, so maybe the newest one I’ll try to end. Maybe it’s confrontational but I think people complicate the economy trying to predict who and when or what if, but I’d risk a thesis that it’s an upside down, because mostly economy relies on psychology and of course demand and supply of MONEY steered by Central Banks. This topic requires to think outside of the box.

The history shows that even on the beginning of 1900 people started to see the economy cycles and understand where inflation and deflation is located. I came to conclusion that it’s the economy which creates some environment for some changes, if you like it or not. I’m going to show you what I have learned about it, because I’m not a native English spreaker please forgive me some grammar mistakes if any occur and probably by this topic I end economy cycles topics, so let’s start.

Since a very long time we’ve been running in cycles. We have permanent prosperity and permanent problems there is almost no middle stage. The problems are larger when more people try to keep the status quo trying to block the economy from cleansing, but from the psychological point of view, who would like to give back his money if you are 1% of the wealthiest in capitalism/democracy, and who would like to give the power if you are 1% of the most powerful leader during socialism/communism/authoritarianism (also this 1% is the most wealthiest)?

Everything has started from Ray Dalio, and below comments. The level of populism is reaching levels from roaring twenties. Old chart, which can be found in my previous posts but we’re going to concentrate this time how economy creates populistic environment to blow up itself. We’ll talk a bit about unknown Adolf Hitler who started his campaign in 1924, because he was angry on the level of inequality and claimed – it was caused by democracy and Jews who stole the wealth from 90% of society who mostly benefited from the system.

So Ray Dalio discovered that capitalism does not work how it should and we all don’t know what to do to save it. I’d say capitalism worked perfectly until something happened in 2008 what made a first signal worst ahead of us.

As a response, nobody knows why, and nobody can find a solution except classic MMT move (aka Helicopter Money aka QE4People) – which is nothing more than speeding up inflationary environment. We know it’s coming and people trying to prevent the status quo will put us in a direct hug of inflationary environment and secular bond bear market.

Well, if you take a look above and try to look at the populism level, raising socialism and first symptoms of the capitalism end,  the alarm has been ringing mostly since financial crisis. Coincidence? No, no, no…

Since 1980+ officially we live in disinflationary boom. Oil crisis has ended, the economy invented low displacement cars to break the inflation and turn its to deflation and full capitalism which later invented another key deflationary technology aka “The Internet” – but I was explained that earlier.

Interest rates fall and disinflation is the best what you can get for the stock market, but again – economy takes care a lot about the full cycles, so it doesn’t know the state of permanent disinflation or inflation. It does not let you live in the never ending prosperity because it needs constant cleansing. The more it needs cleansing the more dark economy forces will be flying around the world dropping bombs on each part of our lives. If economy is not able to force bankruptcies, it will force the excessive consumption to collapse. In general the more we interfere the cycle (what we do from the psychological point of view, to keep prosperity going on, the harder the drop) the higher gear economy will shift to find more brutal solution to signal end of cycle. The first signals of the disinflationary end came in 1924 when economy “created” a person in the background called Adolf Hitler (he was earlier “created”, but in 1924 he started to be seen in politics). The huge inequality gap which was raising during roaring twenties slashed middle class, spread strikes, and this social “ground” started to be very susceptible on raising socialist power. In 1924 everybody ignored Adolf Hitler – many believed he was stupid, but this guy claimed that the democracy (actually it was capitalism) will lead us to the verge of collapse and he knows how to deal with it. He was waiting. While the inequality gap was raising, more people started to agree with him, same time many believed stocks in 1929 reached permanent high plateau, until people lost everything.

Hitler’s day came after 1929 – economy collapsed, 35% unemployment was so brutal. From this moment people really believed that Jews robbed 90% of society, Hitler is right – we lost everything, but Jews who stole our small wealth lost on market speculation need to be punished. So Hitler was a brutal force from the economy point of view, dedicated to clean the inequality and clean all debts and start inflationary process.

In 1929 we just experienced the deflation, what is nothing more, nothing less than brutal cleansing from QE, low rates malinvestment and inequality gap. All were trying to prevent the bust and keep the prosperity at any cost, but as economy wanted to move towards deflation it created Hitler and gave him a responsibility for the economy cycle change, and killed him to allow the start a new economy cycle after the deflationary period, to create new environment for another 90-100Ys rinse and repeat.

Rich people start to see the poverty caused by inequality, usually when it is too late. This is a moment when capitalism turns towards “robbery”, and it’s 100% identifiable.  They even want to give back a little from their fortunes… The fact they are rich is mostly caused by the moment when during late 80′ when economy was ending its inflationary bust they put all their money into something, while rest of the people was just observing believing nothing is going to change and working for the public services because that was the most comfortable job in the inflationary part of the cycle when socialism leads.

We all know what happened next after 1929, but if we tell that nothing would have happened if Hitler wasn’t around, That is not true. Economy would have found another guy or would have created another dark economy forces to deflate the disinflationary bubble – war is one of them.

Some time ago I read this article :

China’s Han Superstate : The New Third Reich

If you didn’t read that – you should and match them to the economy cycle. Because disinflation ends when rates hit very low levels (even negative now) combined with huge money printing, which later will be a key reason for the raising inflation around the globe combined with raising anxiety and frustration of the nations. There is just one step left – finding the enemy who forced us to live in the inflationary poverty environment, and the conflict is ready to spread.

I was looking around the globe where new Adolf Hitler is raising. After this article I think I got him.

The classic end of disinflation never ends by “Great Recession” or “Financial Crisis”. The moment when Financial System collapses and it’s being rescued by money printing and too low rates, which promote final phase of malinvestment, much higher overcapacity and finally death of consuming. The pattern can be seen here again :

If we consider trade imbalance end in 2008 (just again take a look when populism spiked). Financial crisis 2009, currency wars – 2010-2017, trade wars 2018+ we can tell that the real spike of populism is not yet completed. In 1929 when the disinflationary boom ended we had another spike of populism due to deflation (depression) which allowed Hitler to spread the war and clean the debt and cut some  population, because disinflationary period always lead to older society and economy in a natural way must “cut” a lot of those people, because debt expansion means no children by default.

Our wealthiest 1% (40% of global wealth in 2018), who won a lottery ticket in 1980, and of course risked a lot can now retire, but as soon as they try to sell their expensive houses as a part of their wealth it seems the demand is reaching rounded zero – it’s a first moment when economy slowly starts to rob the wealthiest.

Disinflationary boom means too much people around – so the economy is sending some hidden forces to fight even with that. How? Health-care must go up-up-up. Economy cares very much about your bad health to kill the overpopulation. In general economy wants to remove the weakest links in the system. The next phase we should allow only the strongest to survive, like with the animals. If you like public European health-care, OK, but it’s being sponsored by a debt-based system, so in most countries public health-care is on a paper, but the reality looks like you can die on your bed, as public services have to cut costs due to deficits and big governments debts.

So what disinflation loves. It loves TV for propaganda (-96%) – the same TV that was merged during the whole disinflationary cycle and few can tell you how the reality looks like. Some toys and phones but for the rest you have to pay so much that the inequality is still raising. I bet in 1980 the cost of the healthcare was not so big, but the longer the disinflationary run the stronger economy dark forces will be trying to clean itself. Yes we have inflation even in disinflation but this inflation is created for 1% of society who can pay their bills and the same time tell you in TV that CPI is 2% because TVs went down by 96%.

The real inflation starts when debt collapses and agriculture is going bust around the world.

If we go deeper in details we’ll find even much much more weird things how to put the puzzle together. First of all, disinflationary run ends by Minsky Moment. There is a point where we can’t consume more and level of overcapacity and malinvestment is reaching a stratosphere. I personally think this point was created in 2016 from the economy point of view. Yield spreads were far from inverting there, market was calling for more credit, and psychology won again. China put everything on one card and more overcapacity and done.

Small economy cycles are led by 4 market phases… Last phase is inflationary recovery, and it’s a last parabolic market run before the end of its cycle (in the previous disinflationary cycle it was 1924). So to understand 2016 we should take a look where we are in the “small cycle”. Seems 2016 (based on my calculating and knowledge) was the last phase of the the market. Period between 2016-2018 is called “overheat” – what means much more expectations vs reality which are being revised in “Stagflation” period so during the whole 2018. “Earnings bottom” was 1Q2009 what is missing on the chart.

If I was right 2Q/3Q2018 should be top in earnings, that is why I do not believe in 2020 will be any rebound, I’d say more weakness ahead of us.

More weird things below : Do you see how disinflationary period end? Not by business cycles but by credit cycles, which are replacing the business cycles once we reach some low level of interest rates. Weird thing that Minsky called Speculative Finance where we can set it in 2001 bubble, 2008 bubble as the next one … and final collapse of the credit so this small 2016 drop was a Minsky Moment. Hard to not agree since 2008 we have a massive Ponzi Finance (based on the Minsky chart). Ponzi as a person was also created at the end of disinflationary run during roaring twenties as a final symbol of fraud and malinvestments. Even more … Ponzi was caught in 1920. In 1921 we had Global Financial Crisis, but we had Madoff in our times in 2008. Surprise!

Maybe we can try to find when the middle class was slaughtered? Let’s see when Employee Compensation drops vs Corporate Compensation … Yes in 2001, so the moment when disinflationary run started its final countdown and turned into credit cycles :

Maybe we can see how the final credit bust looks like? Yes – only malinvestment and big stock market run, because we put our efforts and productivity in things we don’t need or they are destructive from the economy point of view, so we only produce debt and nothing more what helps the economy to create a bust trap.

One more time we stop for a moment when business cycles switched to credit cycles, because this is a point where when interest rates went too low. To keep the status quo from the economy point of view, interest rates should have never dropped below the level from 2001 so around 6-7%, but it’s just a theory. Disinflationary economy cycle requires to keep rates going down to the minimum when finally we can blow up everything. When in 2001 people lost a lot of money on dot.com mania (Speculative Phase according to Minsky), they went into housing bubble, after they lost houses in 2008 they have to spend money on something much cheaper, because lowering rates keep 90% of society poorer. What we found? I think cars are much cheaper than homes, same time the dream of high education at the end of disinflationary cycle where you can work at Amazon for 30k$ despite you were told high education works like a passport to 200k$ earnings. Well, probably it was a good approach in 1980, when the cycle was restarting and nobody wanted to have high education because all of us are equal and will be equal in a permanent inflationary environment.

So we can say that most of the economy is being created by housing and automotive sector consumption, and those two sectors are the key to be blown up, what is being done slowly from 2008 till today on each credit cycles leaving no way out for any rescue.

If we look where we are now, 2016 was the moment when market jumped towards its final inflationary run (considered by me as a Minsky Moment). Donald Trump was lucky, because he was elected in the best moment. When market is doing a blow-off inflationary small cycle top (expectations > reality), but he was elected also by the slaughtered middle class as a first symptom of the roaring inequality. Now he has to face – not only the fact we’re ending regular economy cycle 2009+, but it seems we are ending big disinflationary economy cycle 1980+. Having in mind we can cut rates to -5% in theory, imagine what type of products 90% of people will be consuming, as housing & autos which went bust in 2008 and 2019+ playing a key role in GDP and each lower tick in rates means more poverty. That is why we can say that if we’ll reach -2% rates next level of consumption will hit much cheaper products than houses & autos.

Another weird thing… Actually two … Let’s see how last disinflationary run in commodities looked like … Let’s see – have in mind in 1921 we had also Global Financial Crisis and in 1924 we had QE program…

More scary is this bubble… If we compare it with credit cycles..

Each disinflationary cycle is being caused by a credit super cycle lead by one area/country. Roaring twenties were lead by US. I think in our times, there is no doubt we can say – we all live in prosperity thanks to … China. Again magic 1980 and now it’s the end. So we all know where the debt will blow up and where the deflation will start spreading from. It is China – because they lead the cycle.

The debt China has to pay is really unsustainable …

And you think we changed something since 2008? So look here :

And China leads the super cycle …

So in summary saying short. Capitalism raises inequalities because it transfers wealth to 1% and not much you can do about it. Late capitalism promotes malivestment and Ponzi type of frauds, and biggest stock market bubbles are always in disinflationary cycles and mostly at the end, when business cycle is replaced by credit cycle.  If today somebody is going to tell you that you have to work hard to become a B$’nair… I’d say …  look when the disinflationary period started – in 1980. Most of B$’nairs started their careers in the beginning of disinflationary period. Late capitalism closes the window for most of the people. Now this 1% will be trying to defend themselves, but economy is trying to find more hardcore solutions to deflate. During next switch to socialism and inflationary environment we also will have 1% wealthiest and 90% will be suffering from terror and/or authoritarian governments, but we’ll have total equality and most of those B$’s will lose everything, so this 90% people will be satisfied. After next 40 years we will all come back to the same conclusions that it’s time one more time for capitalism because why we were so stupid when we voted on such people because another time the dream became just a dream and we need back capitalism one more time, because again now we know it is the best solution.

When you all will be looking at raising socialism and authoritarianism just understand that 90% of people suffer from capitalism and they have no way out from the last part of it other than believing in populism. One more time we should mention popular MMT. It is another example of socialism and inflationary environment brewing in the background. The economy creates changes, because the world is not equal, but a needle in the compass can’t stay in one position, it moves from left to right because we are just human nature led mostly by greed and the need of having unlimited power – what is a key attribute of a men society.

I’m really curious how we’re going to deal with the wall we’re approaching and if theory from early 1900 still working. We’re going to see it soon.