Is ‘Boom & Bust’ Human Nature?

Very few ever seem to learn from the enormous amount of historical evidence surrounding the economic cycles of both markets and the macro (national) economics of individual countries.

We are now witnessing the slowing of the so called ‘world engine’ of China with levels of growth down to below their stated minimum requirement of around the 7 to 7.5 percent per annum which is purported to be necessary to sustain a colossal population’s demand for jobs thereby avoiding potential social unrest.Boom1

China’s average wage increased last year by almost 50 percent and the currency continues to strengthen; that often coupled with a 120 day lead time from order to delivery of goods in Europe, for example, is taking the icing off the cake.

This same ‘pricing themselves out of the market’ has happened over centuries as the prosperity increases in particular economies, the unit labour costs increase and the once cheap haven for manufacturers become much less competitive. If you couple that with the current trend in the US, the UK and parts of continental Europe to bring manufacturing home, where possible, you have the beginnings of a trend. With the habitual inequalities in this world there will, seemingly, always be somewhere the economic powerhouses can have their products manufactured at rock bottom labour rates and business being what it is, multi nationals will have no compunction in moving operations to the latest cheap hotspot, whilst also using favourable tax regimes as bases, a fact that has resulted in much publicised criticism of many global players in recent months and prompted governments to try to take action to curb what they see as evasion. This will aim to ensure large corporates pay tax in the countries they do business and receive revenue.

With the somewhat patchy world economic recovery from the financial crisis and geopolitical tensions creating volatility in the markets, the lessons we can take from this ballet, which has been played out since time immemorial, is that there is always a ‘rise and fall’ in national economies, from the British Empire to the American version and now the Chinese rocket. No one is writing China off economically; however, the never ending meteoric growth of individual countries is unsustainable. The fact is that, in China’s case, there may be a new burgeoning middle class, nonetheless, they still have well over one billion people in poverty. As is often the case in the developing economies, there’s only a relatively small percentage of the overall population that sees significant benefit from the country’s success at a macro level, certainly in the earlier stages of development.

The cyclical nature of a particular country’s economy brings knock on effects in their market which, in turn, has similar effects on other markets and so we go on.

These swinging fortunes should lead us to ‘Economics 101’, ‘supply and demand’. When I first studied economics at my grammar school, they gave me a ‘Hanson’ textbook and on near-enough the first page ‘demand and supply’ was covered. Why have we forgotten this basic truism?

We have studied the available options for investors over many years and there are, in fact, more than a few examples of funds whose sphere of activity is based in a sector where demand far exceeds supply and surprise, surprise they have been able to maintain consistently decent results throughout the whole financial malaise of the last 5 to 7 years and can attribute more than a little of their success to Mr Hanson’s first lesson.

Important Note – – This article contains general information only and is not intended to be taken as specific financial, investment, or tax advice. A personal analysis should always be obtained.

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