Preparing for overdrive

ABERDEEN, SCOTLAND – In yesterday’s note, I published a few responses I’ve received from the readership on the curious case of Tesla.

Broadly speaking, most of the letters I received took a negative view on the company – or at least its valuation. But there was one exception, which I’d like to share with you today.

To be honest, this response concerned the predictions of Akhil Patel, Southbank Investment Research’s resident economic cycles expert, more than Tesla, but the Tesla angle was interesting nonetheless.

For those who may not be familiar with his work, Akhil Patel makes a compelling argument that the animating force in our economies which drives their boom and bust nature is land speculation, which moves in a predictable – yet mostly unnoticed – cycle (for an overview, see: The Theory of Everything, 1 May 2019).

By his reckoning, we are currently in the “mid-cycle slowdown”, priming for the adrenaline-fuelled second phase of the cycle, an aggressive and violent boom which will ultimately lead to a massive crash in the latter half of this decade.

When I first encountered Akhil’s work many years ago, I was sceptical of his theory. But over time I’ve become more and more convinced he’s really on to something.

Here’s that letter from the reader in full, emphasis mine:

[Akhil Patel’s observations] on the cyclical nature of economies explained a great deal in the past and are predictive for the future, but we need some additional work from Akhil on the current confounding factors at play, namely Covid-19 which has accentuated the mid-cycle downturn, while the election in the USA of Joe Biden and the predicted investments in a Covid 19 recovery package, also green energy, plus the UK governments apparent intention to spend its way out of the current situation, will almost certainly guarantee the second half-cycle melt up roaring away until around 2025-26, as predicted by Akhil’s models.

We have already had the mid-cycle downturn and the helicopter money flowing into western economies will guarantee that the present bull market will be artificially extended by money continuing to flow into the irrational valuations of companies such as Tesla and many others, until land prices become too expensive and commodity prices become too inflated to support the lines of underpinning credit.

BTW: Tesla can keep going longer than most because the price of the land they are building factories on is cheap and there is a lot of it and they are nor particularly tied to location – after all, one can drive a new car to the purchaser.

Thus the dilemma remains – does one continue to invest in value of which there is a lot about if one looks for it, or does one park one’s convictions and ride the irrational growth roller-coaster in the hope of recognising the signs of when to get off (akin to investment in gold vs Bitcoin)? I suspect that to make money one will need to do at least some of the latter, which is where Akhil’s interpretation of the signals would come in.

Bottom line, melt-up to 2025-26, coincidentally just after the beginning of the Biden/Harris second term, when the stimulus packages are likely to have moderated, and then a major crash on the scale of 1929, accompanied by the puncturing of many bubbles, with only those having managed the transition of their businesses onto a sustainable and ethical basis surviving.

Would greatly appreciate Akhil Patel’s take on this.

Akhil keeps his readers updated with a monthly supplement to Frontier Tech Investor. I can’t show you all the goodies, but I did thoroughly enjoy his latest update, and I can show you a wee snippet:

… after almost a year of enduring the strange circumstances in which we now find ourselves, it’s hard to imagine that things will ever quite be the same again.

But one thing that hasn’t changed, or been altered, is our progression through the cycle… we are [currently] moving through the mid-cycle slowdown or recession…

The story of each real estate cycle is similar. The mid-cycle turns our attention forward to the more consequential half. And from my reading of history, it seems that it is precisely because the mid-cycle is difficult and challenging that we behave, paradoxically, more bullishly in the second half of the cycle. I will come back to this point shortly.

But for the time being we will still be in the mid-cycle recession unless things open up pretty sharpish. But given the latest news on the spread of the virus, I think it will take some time for that process to even begin. And there will be a lot of economic pain to process this year, so expect the news to reflect that.

But this year will begin the second half of the cycle. Setting aside the rather significant moves in the stock market we have seen in past few months, the economic action starts slowly, but builds inexorably…

Let’s turn to how things should play out from here, if history is to repeat. If 2021 gets the second half [of the cycle] underway and we work through the economic adjustments that take place after every recession, by 2023 things will be humming along again rather nicely. Having seen off the mid-cycle, and returned to growth and better times, by then the mood should be approaching optimistic, perhaps even with a touch of over-optimism, certainly as we move into 2024.

This is in part driven by an expansion in bank credit. Bank lending has been largely unaffected by the present recession. The reason? Because property prices have largely been unaffected. Even though rents have come down in certain areas, prices on the whole have remained stable and in some cases have increased.

Part of the response to the pandemic has been to loosen banking regulations in the US, Europe and Australia, allowing banks to dip into capital buffers to expand lending. The combination of banking resilience and more available capital means that as economies open up, banks have plenty of headroom to expand lending. Combined with lavish spending on infrastructure that inevitably raises land prices and after solid growth in loan books into 2024, the cycle will go into overdrive…

So in response to that reader, we ain’t out of the mid-cycle woods yet. But we should be this year.

I think Akhil is right about people becoming more bullish after having faced a recession. Once economies re-open and start expanding again, I think we’ll see a relief rally and a half. Layer that on top of the behaviour we’ve seen over the past few years in the stock market, and the action in risky assets could be almost brutally bullish.

But that’s all for today. I’ll be back again tomorrow, where we’ll take a look at the madness going on in silver (don’t worry, I hadn’t forgotten about it)…

All the best,

Boaz Shoshan
Editor, Capital & Conflict

Category: Economics

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