What Goes Up...

You could look at market cycles narrowly – just by keeping your eye on price movements. Or you can look at the Big Picture…all the connections between markets and the rest of the world…in the hopes of understanding what is BEHIND the price movements and where it might take them.

Friday, the Dow dropped 76 points. It’s probably going down soon…but maybe not yet. The Dow would have to rise to about 10,350 to equal the ’29 bounce. And heck, it’s not September yet. September is traditionally the worst month for investors…followed by October, November, December, January, February, March, April, May, June, July and August.

But what’s this? The morning news: Chinese stocks suffered their worst day since November – with the Shanghai index down 6%.

The rally is probably not over; still we wouldn’t want to be long when the market opens in New York this morning. [Ed. Note: By the time the US edition of the DR came out, the Dow had lost close to 200 points.]

Many analysts regard everything beyond the price data as noise. You never know whose ideas or whose explanation or whose predictions are correct, they say. All you really know for sure is the price.

According to the Efficient Market Hypothesis, the price has in it all the information, theories and delusions of all the players in the world. By this reasoning, the price information is ‘perfect.’ No one can know more about what a stock should sell for.

Many analysts think they can watch the patterns of price movements and find some clues at to what they will do next. They see ‘heads and shoulders,’ ascending triangles and descending tops…and think they mean something. For us, here at The Daily Reckoning, price movements tell us something, but only in their extreme form…and only because we have an intuition about the way nature works.

When we see a price that has suddenly shot up, for example, we expect that it will suddenly shoot down sometime in the future. When we see a series of price increases over a long period of time, on the other hand, we expect to see a series of price declines over a long period of time, too. If we look closely, we find that the price at the end of the long incline is exceptionally high…and the price at the end of the long decline is exceptionally low. We believe – intuitively and logically – that exceptional things don’t remain exceptional for very long. That’s why they are exceptional. Broadly, when prices are exceptionally high they will fall – to the point where they are exceptionally low, and vice versa.

Beyond that, we draw little nourishment from the price numbers. They don’t tell us why things are happening. And while we recognize that it is impossible ever to really know why anything happens (the number of butterflies possibly flapping their wings in China is beyond our comprehension), we are nevertheless heirs to the old story-telling tradition of our deathward marching tribe. We want to know why things happen the way they do…we want heroes and villains…we want winners and losers…we want a plausible story that explains what is going on.

We have maintained an episodic correspondence with Jack Lessinger for nearly 20 years. Jack is a “socio economist.” That is, he’s looking at the big picture of economic trends as they fit into the wider world of social life.

What Jack sees – in his new book, The Great Prosperity of 2020, is a series of booms and busts that correspond to the way people think about themselves…what they want…and how they want to live.

This is what defines American capitalism, he believes. And then he connects these phases of American capitalism to development patterns and real estate trends. Since about the beginning of the 19th century, he sees three major forms of capitalism – the small-scale frontier capitalism which peaked out about the mid-1800s…followed by large-scale industrial development which reached its zenith, according to Jack, at the beginning of the 20th century…followed by the consumer society that we grew up with.

Each major trend rises and falls. Prices rise and fall with them. The first wave of development raised prices of frontier land, first in the Mississippi River basin…and then out on the prairies. In real terms, farmland in some part of the mid-west hit peaks in the speculative fever of the 1880s that have never been seen since. Then, the development of the next phase pushed up values in major industrial centers – particularly in Chicago – whose growth far surpassed the older cities such as New York and Philadelphia. There too, prices in inner city Rust Belt metropolises have never been higher. Then, came the Material Age…when the consumer was king. Every king wanted his own suburban castle…and his carriage, with horsepower provided by Chevrolet or Ford.

The bigger picture was that energy was cheap and US manufacturing was leading the world in the post-WWII era. Cheap energy seemed to make suburban life a sensible, affordable alternative to the city. In the suburbs you had the advantages of being close to a major city – with access to jobs, entertainment and education. You also had the advantages of country living – backyard swimming pools, gardens, lawns, fresh air, and space.

Movement to suburbia began in the ’20s. By then, the first suburbs were being built north of Baltimore…connected to the downtown area by tramways and paved roads. The richest families began by buying summer places on the high ground of Guilford and Mount Washington. Then, as transportation improved…and the cities became more and more crowded with immigrants and factory workers…the rich lived year-round in their leafy refuges.

As the trend developed, the suburbs spread…and the middle classes joined the exodus. By the ’80s, practically all that was left in the central cities were drug addicts and welfare recipients.

Meanwhile, in the early phase of the consumer trend, wages for ordinary working stiffs were going up rapidly. A guy could graduate from high school, get a decent job, and expect to earn more and more money. This gave him the wherewithal to buy more and more stuff. So buying stuff became a national pastime. “He who dies with the most stuff wins,” was the basic rule of the game.

The first challenges to stuff culture came early, says Jack. The hippies and counter-culture movements of the ’60s were basically a reaction to the excesses of consumerism and suburbanism. Then, prodded by the oil crisis, there was a counter-trend movement towards self-sufficiency and independence in the ’70s. Those early attacks were beaten back by credit and bubble markets. It seemed crazy not to enjoy the benefits of stuff culture when it was at its apogee in the late 20th century.

But now the consumer economy has played itself out, says Jack. It is spent, wornout and passé. Here at The Daily Reckoning we described the Bubble Epoque – the final, blowout phase of the trend – day by day, during the 2001-2007 period. Now, we are describing the bust-up. The consumers are broke. The suburbs are démodé. The lust for stuff has given way to a lust for security, stability, and simplicity.

The shift from one major trend to another one is typically marked by depressions. The transition period requires retooling, re-pricing and often, relocating. The suburbs are unlikely to be a growth area in the next socio-economic trend. Instead, it is likely that suburban property hit its all-time high in 2005-2006. We will never see those prices again – ever. People will move. They will move to new areas.

The “season of depression,” to use Jack’s term, usually lasts 20-30 years. We are in one now. He puts the end of the depression – and the beginning of a new period of prosperity – at 2020.

Until tomorrow,

Bill Bonner
The Daily Reckoning