It is common knowledge among market historians and even many traders that there tend to be alternating twenty-year cycles of rallies in commodities and stocks. These long-term rallies and the sell offs that follow them are referred to as secular bull and bear markets, respectively. In his new book, “SuperCycles: The New Economic Force Transforming Global Markets and Investment Strategy" (McGraw-Hill, 2010) Arun Motianey produces an economic theory that ties together these alternating cycles, putting them into an even longer-term context and places central bank monetary policy as the originator of the phenomenon.
While superficially, Motianey’s supercycles appear similar to Russian economist Nikolai Kondratiev’s long waves, they differ in important aspects. They agree that the length of the supercycle can range from forty to sixty years and that it is global in scope. Kondratiev’s long cycles were an empirical observation though, not a theoretical explanation and they included socio-political as well as economic behavior. Motianey, on the other hand, creates a model to explain why the cycles take place. Their cycles also have different beginning and end points. Kondratiev began his first cycle in 1790 and his second long wave lasted between 1850 and 1896. Motianey begins his first supercycle in 1873, in the middle of Kondratiev’s second cycle. The key for Motianey is the point where the major world economies increasingly adopted the gold standard.
Motianey’s supercycles begin with the arrival of a new monetary regime that promises price stability. The breakdown of that regime ultimately ends the supercycle many decades later. His first supercycle begins with the gold standard years in 1873 and ends in 1930 when many countries were forced to leave the gold standard because of the Great Depression. The second one is Keynesian based and it terminated in 1979 when U.S. Fed chair Paul Volcker stopped the inflation that began with the breakdown of Bretton Woods in 1971 by imposing high interest rates. Motianey defines the current supercycle as the era of enlightened fiat money – a term that seems inherently oxymoronic. It should end somewhere around 2020 to 2030. The breakdown of our current monetary regime seems to have begun with the Credit Crisis.
In the Motianey model of supercycles, central banks and their mistakes are driving force of the deflationary and inflationary periods that seem to repeat over and over again. Instead of producing their stated goal of price stability, they wind up going too far in one direction or the other and exaggerate the price movements that would have taken place without their intervention. Motianey’s supercycles begin with a period of deflation, as occurred in the late 1800s and the 1930s, or disinflation, which characterized the 1980s. Inflation appears toward the end. Inflation in the 1910s because of World War I and in the 1970s because of the breakdown of the dollar were the two major inflationary episodes in the previous two supercycles. We are now about to head into the inflationary years in the current cycle.
Motianey does nevertheless examine three possible outcomes in his book for the next decade or so. He thinks deflation is highly unlikely as this would indicate a premature ending to the third supercycle and it would make it the only one without an inflationary episode. Motianey considers two ways governments might handle inflation – with indexation and without. While Motianey thinks indexing could be a good idea, history indicates it rarely if ever works out as I pointed out when I interviewed him at the February meeting of the New York Investing meetup. Brazil implemented a completely comprehensive indexation system starting in the 1960s and this only served to entrench inflation and many years later eventually led to hyperinflation. The U.S. already has minor indexation in Social Security cost of living increases and of tax brackets. An expansion of indexation is actually quite likely to take place; it is not a good idea however.
Motianey is an engaging writer and “Supercycles” should be considered a must read for economic junkies. His ideas are fresh and innovative and he attempts to avoid the dogma that frequently leads those in the profession astray. I highly recommend it for those who want to gain greater perspective on the Credit Crisis and where we might be heading in its aftermath.
Disclosure: McGraw-Hill provided a copy of the book for review purposes.