on a daily basis, people are increasingly inundated with more “noise” than ever before.
From never-ending coverage of the
presidential race to what the stock
market did that day and what it means
for the future, analysis and commentary
are abundant and come from a growing
array of media and mediums.
But has all this information made the
public more informed or just more
desensitized to trends and unable
to grasp when trends slip the surly
bonds of fundamentals and even
common sense? The severity of
the asset bubbles during the past 15
years—tech stocks at the beginning
of the century, housing during the
mid-2000s, and ultimately complex
securitized debt instruments—suggests
it’s the latter. It is still hard to believe
that the signs of these crises, so clear
in hindsight, were either unrecognized
or ignored by all but a select few.
Nowhere was this collective myopia
more evident than during the housing
bubble. Unlike securitized debt, housing
is not a complicated asset, and it had
long been known as a safe, albeit
relatively slow growing, investment.
But when the tech bubble burst in 2000
and the Federal Reserve lowered interest
rates, consumers had unprecedented
access to cheap financing.
Housing prices, which had historically
appreciated just slightly more than
inflation, began to surge. Collectively,
consumers held to the tenet that home
prices could only go up over the long
run. They failed to appreciate that
median home prices had increased
by a staggering 125 percent from 1998
to the peak of the housing bubble in
2006. Equity requirements fell, credit
standards all but disappeared, and
supply grossly exceeded demand as
speculative buying skyrocketed. Looking
back, it’s staggering that these trends
weren’t more obvious to more people.
Recognizing that people are prone to
group think and unable to see the bigger
picture through the fog of the news, the
reliance on central banks to guide the
economy and the distractions of daily
life, it’s interesting to think about how
people might look back and realize in
five years what they can’t see today.
The Economic Cycle
Over the long run, increased productivity
is the only true driver of economic
growth. However, along that upward
climb there are repeating patterns, a
series of expansions and contractions,
known as the economic cycle. Although
each cycle is unique in its own way, the
fundamentals of the economic cycle
have proven reliable and can not only
help explain where things stand today
but also put the last decade in some
perspective. Generally, the economic
cycle comprises four stages (Figure 1).
In the U.S., most observers use the
framework developed by the National
Bureau of Economic Research (NBER),
which dates business cycles by tracking
inflection points in economic activity.
According to the NBER, the U.S. has
experienced 12 distinct periods of
How Long Can It Last?
Trends and the Economic Cycle
BY BRIAN J. GRANT, CTP, MANAGING DIRECTOR, CONWAY MACKENZIE INC.