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How knowledge of the cycles can help the “lost generation”

Posted by on Dec 1, 2013 in 18 year real estate cycle, About Ascendant Strategy, Forecasts, Topical news |

Last week, a number of news outlets in the UK ran stories about England’s “lost and indebted generation” – stories based on data put out by the Student Loans Company on how graduate earnings had fallen since the beginning of the financial crisis.  Indeed, owing to higher education funding cuts and therefore rising tuition fees (public spending cuts are common at the end of the economic cycle, as the cost of bailing out the banking system compounds the problem of sharply reduced tax revenues), the research found that in real terms earnings for the young men and women graduating into the last recession had fallen by 12 per cent compared to the pre-crisis cohort of graduates at the same stage in their careers and that on average they owed 60 per cent more in student debt.  Further research from the US also suggests that the earnings of those graduating during recessions usually take a decade to reach the same level of earnings as their more fortunate peers who graduate when times are better.  This is not a pretty picture. We at Ascendant Strategy will freely admit we are not experts on higher education.  But we want to take the opportunity to show you how powerful knowledge of the economic cycle can be.  We view the major economic trends through the lens of a repeating 18-20 year cycle and can therefore see how these develop between from the peak of one cycle and the next.  The most challenging time for an economy is at the cyclical peak and subsequent downturn, which occurs on average every 18-20 years.  Other recessions are not as severe.  This affects all aspects of an economy, not just those areas that are Ascendant Strategy’s primary focus: making sound and profitable investment decisions.  And so we know that, while challenging, the experience of the current generation is not unique.  During last similar cyclical downturn in the early 1990s graduates were similarly affected, with graduate unemployment peaking at 12 per cent in 1992 (see ONS stats), before falling through the recovery and subsequent boom; and then again rising through the global financial crisis to a peak in 2010.  In Japan, the situation was even more severe for graduates in the 1990s, with many labelling the dramatic fall in opportunities as the “ice age”. We forecast that the next major downturn will occur in the middle of the 2020s.  Until then we expect a period of continued recovery and prosperity: in fact we think this next cycle may involve a bigger boom than the past one.  (Why?  We see a lot of promise in the current rapid technological innovation, its application to industrial processes, potentially new and cheaper sources...

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Why James Bond would be an Ascendant Strategy client

Posted by on Dec 1, 2013 in 18 year real estate cycle, Kondratieff (Long) wave cycle |

I know what you’re thinking: what on earth would Ian Fleming’s super-spy and general all round hero have to do with Ascendant Strategy, a firm of independently-minded researchers with an expertise in economic cycles and a client base that consists, not of presidents and princes, but largely of investors and corporate directors? You’re probably answering this one for yourself: nothing to do with them. Actually, we think Cmdr James Bond CMG RN would be quite interested in what we have to say and would not be in the least surprised if he called us to sift through our intelligence. I will tell you why we think this. At Ascendant Strategy we research economic cycles and develop insights in ways that are of practical use to clients. One of the most important cycles we research is the Long Wave commodity cycle, sometimes known as the Kondratieff wave. This was first formally put forward by a Russian economist in the early 20th century, Nikolai Kondratieff, who observed that there were long cycles of development within capitalist economies, lasting around 50-60 years in total. Each wave consists of 20-25 years of rising, followed by 25-30 years of falling, commodity prices and interest rates. Kondratieff’s writings were influential in the West and were taken up by, among others, Joseph Schumpeter in the 1930s. Subsequent research points to several interesting insights about economic development based on this cycle, including the relationship between these long waves and levels of investment and therefore levels of employment, income and wealth generation; and new innovations, the application of which tends to come forward at the start of the cycle, often leading to a technological revolution that drives the cycle forward. In modern history, the dates of the Kondratieff Waves have been as follows: 1790-1810s (up) 1810s-1840s (down) – key innovating technologies:  The industrial machine and the dissemination of mass production 1840s-1870s, 1870s-1890s: Telegraph and railroads 1890s-1920s, 1920s-1940s: Telephone and the motor vehicle 1940s-1970s, 1970s- early 2000s: Electronics and consumer aviation Early 2000s-[2020s]:  The internet, big data and additive manufacturing Source: Kondratieff, Ascendant Strategy calculations and Phil Anderson It is difficult to date major economic and structural cycles like these precisely and so these dates are approximate. Indeed a number of commentators consider that the world is still in the downswing of the most recent long wave: at Ascendant Strategy we believe that the decade-long bull market in commodity prices during the 2000s to be a strong indication of the start of an upswing, with higher commodity prices to follow during the next 10-15 years. So why would James Bond be interested in any of this? As a user of extremely advanced technologies (remember the invisible car in the...

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How Ascendant Strategy came into being

Posted by on Dec 1, 2013 in 18 year real estate cycle, About Ascendant Strategy |

The idea for Ascendant Strategy was conceived as the global financial crisis started – to our mind – in February 2007.  “Sub-prime lending” was starting to slip into people’s vocabulary but it was then still a full six months before Northern Rock – the first official warning shot across the bows of the global economy – which for most experts was the beginning (we have developed indicators that were flashing red warning signs from December 2006). One of the reasons I knew that a major cyclical downturn was coming was because I had been expecting it.  By this stage I was familiar with a fair amount of cycles research, in particular with the work of Fred Harrison, who wrote a seminal work, The Power in the Land, in 1983 and forecast the cyclical downturn at the end of the 1980s/beginning of the 90s.  He repeated the feat in the 2000s, correctly calling the bust that reached its fullest extent in 2010. What led us to the idea of creating Ascendant Strategy was the fact that in the events that followed during 2007, 2008 and 2009, we felt that there was no practical advice for investors on how to navigate events, and what to do with their investments (we use the term “investor” and “investment” broadly. We regard any major financial decision – whether looking where to place savings, allocate an investment portfolio, undertake a major business expansion – as an investment that are subject to the same disciplines of: understanding the returns, and the risks; and critically knowing where one is in the economic cycle.  This last piece of the puzzle is something that only Ascendant Strategy can really teach you). We observed that all of the old maxims of the investing world – the efficient market hypothesis, maximum diversification etc. – did not well serve investors at this stage of the economic cycle.  This feeling was reinforced by our research of trends during the recessions.  For example, SMEs that rely on bank lending – with perfectly good balance sheets and business prospects – tend to be harshly dealt with by lenders during cyclical downturns, with loans called in or access to finance abruptly turned off.  Often the need for finance has been exacerbated by the easy credit conditions that invariably accompany the run up into cyclical peaks.  We felt that sound practical business advice helping business owners and investors make decisions informed by how the cycle operates was a massive gap in the market – and hence the idea of Ascendant Strategy was conceived. Our Strategic Leaders research series documents the experiences of corporates and investors during the financial crisis, key decisions they were faced with and how...

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The 18 year economic cycle – the basis of our rigorous economic framework

Posted by on Dec 1, 2013 in 18 year real estate cycle, Forecasts |

This post sets out the key features of the economic cycle that forms the basis of Ascendant Strategy’s rigorous economic framework and our ability to help investors and corporates make sound investment decisions. Most economies within the modern economic and financial system (i.e. those characterised by a relatively free price mechanism, private land tenure, a well-developed banking system, etc.) display regular cyclical patterns of expansive followed by depressed economic activity.  The research we have access to shows that the periodicity of such activity is a remarkably regular 18 years on average. How the economic cycle unfolds The cycle is driven by two major factors: speculation in real estate and the lending (credit creation) against the massive increase in real estate (in reality land) values that are generated by such speculation.  Owing to the fact that land is absolutely fixed in supply and that its use tends to cluster in specific locations that are themselves unique, higher prices for real estate do not bring more supply into markets (as they would other commodities, goods and services).  (Indeed, there is evidence that the opposite happens, whereby owners of land withhold land from the market in the expectation of future price increases, thus restricting supply and contributing to further increase). Competition for land and location occurs most when economic conditions are good, businesses invest, consumers feel wealthy and their purchasing power increases, resulting in higher levels of economic activity.  Ultimately the gains of such activity manifest themselves as the higher rental value of land, as many have noted, which in stable private property systems is capitalised into a price.  The cycle unfolds in four phases as follows: The first act of the 18 year cycle begins as the wreckage of the previous cycle is cleared away, where economies move from recession back to growth and business conditions pick up, unemployment comes down and consumer spending returns.  This leads to the first expansion of an 18 year cycle. An increasingly confident economy may often experience a mid-cycle slow down.  This slowdown is the traditional version of a business cycle downturn where supply may outrun demand or vice versa.  Such contractions generally prove to be short-lived and tend not to be financial in their nature, i.e. implicate the financial system. The next act of the cycle is the second boom.  Speculation plays as much of a role in this boom as does business expansion, though standard economic data may not be able to distinguish between the two.  In this phase of the cycle, higher demand for real estate (land) is more obvious; and land is more expensive to acquire, mortgages comprise an increasing proportion of the loans made by the banking system, the quality of...

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