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Thursday, August 06, 2015

The New Business Cycle

The 4 Stages

Beginning approximately 2000, the following 4 stages are repeated (cycle of approximately 8 years):

  1. Business is apparently good for most (even bubbly), while skeletons are hidden in closets.
  2. Skeletons begin to come of the closet.
  3. The business admits to being in recession, and most businesses have a skeleton or two to reveal.
  4. Political fallout.

Bubble Building Phase

The dot com bubble was the most severe bubble of modern times, with equity valuations soaring to absurd levels.  This was repeated duing the housing bubble 7+ years later, and an energy / stock market bubble in recent years.  The S&P index in comparison to GDP has soared to clear bubble levels:


Skeletons Come Out

Here are a few examples:

Recession Acknowledged

Eventually, the accoumulation of bad news becomes too much, and a recession is acknowledged by the political and economic establishment.  At this point, the losses become extremely widespread and affect masses of people through employment and asset price effects.  Countless tech firms went bankrupt in 2001, and massive amounts of wealth evaporated.  In 2008-2009, housing prices collapsed and unemployment soared.  

Most companies use this opportunity of an acknowledged recession to write off massive quantities of questionable assets.  Thus earnings of the S&P 500 were negative in the 4th quarter of 2008.
In fact, the negative earnings of 2008 Q4 (-$23.25) is something that has never happened before in the history of the S&P 500.

Political Fallout

Once the recession is acknowledged and the negative consequences reverberate throughout the country, there are inevitably strengthened calls for reform.  The Sarbanes-Oxley Act of 2002 set new or expanded requirements for all U.S. public company boards, management and public accounting firms.  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression.  Also, it was no coincidence that Americans voted for change in a big way in the 2008 election, with a Democratic landslide in Congress and the election of the nation's first black president.

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