Just finished reading Supercycles by Arun Motianey, a former market strategist at Citigroup Wealth Management. There is some interesting stuff here…
Supercycles is a bit of a TOE (Theory of Everything) for the macro-economy. It does a nice job of explaining causality — an important part of understanding any system. Here are a few of my notes…
First Law of Supercycles: The initial stimulus to a supercycle is a monetary standard that promises price stability. This could be in the form of a gold standard (as in the 1870’s), or enlightened monetary policy (i.e, Volker-era federal reserve policy).
There is something really important here – supercycles begin with monetary stability. This would be the first major indicator of a sustainable recovery.
Second Law of Supercycles: After a stabilization of monetary standards, a misalignment in relative pricing between sectors creates a rolling cycle of boom/bust through different segments of the economy. This “pipeline” is sequenced as follows:
commodities->producer goods->consumer goods->labor
A relative price deflation of labor eventually “loops back” to commodities.
How does this work? Here’s an example — a decline in the relative pricing of commodities (such as we saw in the 80’s), creates abnormally large profits for producer goods (equipment, machinery). These profits attract overinvestment and eventually, overcapacity. Overcapacity invites forced asset liquidation to cover debt obligations, resulting in price collapse/deflation which would then fuel the next bubble (in this case, consumer goods, which bubbled throughout the 90’s).
The end-game here would be relative price deflation of labor, resulting from a collapse in consumer goods and housing real estate.
There are some implications here which are a bit difficult to deal with – one is a potentially high sustained level of unemployment and another is a stagnation of real wages. Motianey estimates the pricing gap between goods and services in the U.S. economy is about 25% – meaning that goods should either become more expensive, or services relatively less expensive. Given that services are labor-intensive, this does not bode well for either real wages or employment.
Here’s the issue – what do we do once we get to the end of the line? “Closing the loop” on the last great supercycle involved entering into the second World War. Let’s not do that again!
My best guess is that we may see a redefinition of the “consumer economy” to what could only be described as a “post-consumer” economy. More on this later…