Inflationomics

Using Cycles to Predict the Future

Some people believe that human behavior is as predictable as night and day—that humans follow set patterns of behavior routinely.  And while many humans do maintain a routine (work, sleep, play), many don’t.  Some people are known as contrarians.  They like to do the opposite of what the majority is doing.  Some people work at night and sleep during the day.  Some people work harder than others, while others don’t work.  And one has to wonder which side of the globe is more productive at any given time?  How does this affect predictability of human behavior? 

Natural disasters, e.g., earthquakes, volcanic eruptions, sun flares, are less predictable than perhaps hurricanes, tornadoes, and floods, but they can all affect human behavior.  Technological inventions such as trains, planes, and automobiles, not to mention the light bulb, have certainly affected human activity.  In many ways, modern technology has freed people from the predictability of farm life; i.e., get up with the sun, tend to the livestock, plant the crops, harvest the crops, etc.  In fact, farmers are only about 3% of the population in developed nations these days.  People are more mobile, less dependant on sunlight and living longer than ever before.  How can all these changes provide the same “predictable” results generation after generation?  They can’t!

Many people find it comforting to believe that the future is predictable, possibly even pre-determined, but not everyone agrees with this view.  Some people believe that the free interaction of individuals in unpredictable ways shrouds our eyes and only gives us glimpses of what might occur if we take this path or that path.  For example, do we extend credit beyond a saturation point, break down, experience deflation and recover, or do we print ourselves into hyperinflation to avoid deflation?

If not cycles, what then?  Cause and effect.

Natural disasters, for example, cause a loss of life and property.  Volcanic eruptions, which can affect air travel, are impossible to predict and most of them don’t erupt according to any cycles. The same is true for solar flares, earthquakes, tornadoes, and floods.  They all cause damage, the effects of which must be dealt with by humans whenever they occur, not on a cyclical basis.

Technological inventions have certainly altered the time frame in which humans operate.  Transportation is finding faster ways to transport larger numbers of people all the time.  Does this speed up cycles (thus making them inconsistent and therefore not cycles), or does this affect peoples’ reaction times to various phenomena?  The planet has more people than ever before, and they are living longer as well.  Doesn’t this affect how people think, behave, and react to various phenomena?  Won’t more elderly people and fewer young people bankrupt the United States’ Social Security System and Medicare system at some point?  These systems have never been bankrupted before so how can anyone say they will occur according to some cycle?

The closest we come to cycles is trends or tendencies.  If the Fed prints money faster than the economy adds goods, we have inflation.  Over time, this action can cause prices to trend upward.  If done in excess, we could reach a tipping point where people lose faith in the purchasing power of the currency and we experience hyperinflation.  If credit is offered below a market rate, excessive borrowing may ensue with a rising default rate as the natural consequence.  In time, if enough people default, creditors will also have financial problems, lending will contract, and the whole global economy will slow down.

Bottom line:  While certain consequences can be predicted to some degree based on causes and their known effects, human action does not occur according to rigid cycles, as some people would like us to believe.  Reactions to natural phenomena, the timing and duration of wars, and government market interventions/manipulations, while predictable once they occur, can not be foreseen far enough in advance to occur according to any set cycle.  As for me, I’ll stick with cause and effect, trends and tendencies, not cycles.

 

Cycles Eliminate the Need for Reasoning and Explanations

A four-year cycle either exists or it doesn’t exist.  If it exists, prices subject to this cycle will consistently behave according to the cycle.  That’s the nature of cycles.  If the cycle doesn’t exist, prices will not follow the cycle.  It’s that simple.  You can’t have prices following a cycle some of the time and not all the time.  That isn’t a cycle—it’s a non-cycle.  That’s like saying that a cycle is a cycle except when it isn’t a cycle, or a cycle exists except when it doesn’t exist.

Throughout Harry Dent’s book, The Great Depression Ahead, he regularly describes cycles as “largely consistent,” or “less consistent,” or “the most consistent.”  Question:  if a cycle is less than consistent, is it a cycle?  Answer: No.

On the other hand, if cycles do exist, we wouldn’t need to reason any further.  Obviously, the reason for the price movement is that there is a cycle.  We need no other reason.  We don’t have to explain, as Harry Dent does on page 111 of his book, The Great Depression Ahead, that “in the coming years, housing will fall both from overvaluation and from rising unemployment and deflationary trends.”  All he really needs to say is that there is a four-year cycle, a 3.3-year cycle, or a 500-year cycle (whichever it is) that comes into play and that is why prices will fall.  No reasoning is necessary when dealing with cycles.  It’s just a matter of identifying which cycle is applicable.  Reasoning is only necessary when dealing with cause and effect.  Reasons need only be given when different possible outcomes exist—for different reasons.  The fact that Harry gives a “reason” for the coming fall in housing prices suggests that other possible outcomes exist, for example, prices could rise because the Fed enters into an unprecedented period of quantitative easing.  Perhaps a cycle doesn’t exist for the Fed’s actions/reactions.  After all, the Fed has only been around since 1914 and Bernanke has promised not to make the same mistakes the Fed made during the Great Depression of the 1930s.  If he does the opposite of what the Fed did in the 1930s, how would this affect a Fed cycle?

Bottom line:  When it comes to applying cycles to human action, it’s impossible to predict with any certainty, the outcome of the interaction of billions of people all acting (for their own reasons) with imperfect knowledge of the factors affecting market prices.  Some people negotiate fairly, some cheat, some people use force to get what they want, but it all affects the markets that come up with a new price every second of every day around the world.  With an ever growing world population and a finite list of resources (on this planet), an ever-changing allocation of resources will be necessary.  This allocation process will not be done according to any “consistent” plan; i.e., cycles.  It will happen according to the priorities demanded by the markets with irregularly timed misallocations by various governments (and central banks) that want to impose their own priorities on those of the billions of consumers around the world.

In short, prices will change for the billions of reasons market participants find to allocate limited resources among their unlimited wants, not because of some cycles that impose a rigid conformity to human action and the future course of market prices. 

Robert Jackson Smith

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