Is A 1929-Style Stock Crash Likely October 2003 ? - Part 2

August 5, 2003

A few theoretical asides

No major attention is given here to 'Derivatives and Creative Financial Instruments' and their trading. This could be a lapsus. There are unbelievable quantities of 'overhang' due to derivatives - shadow 'value' always seeking redemption - that may total over $100 000 Billion 'notional'. In some cases, eg. derivatives based on 'emerging country debt', these hang on a knife edge, today as in 1998. However, concerning the biggest 'underlying security' in emerging country debt instrument trading, the Russian economy, higher oil prices ( which might serve as trigger for an October 2003 bourse crash) are at present high enough to prevent the Russian ruble from meltdown. Another big 'underlying security' in the emerging country debt market, Venezuela, is in exactly the same position. For the moment, neither Russia nor Venezuela are likely to bring the emerging country debt instrument market, and its own derivatives market, tumbling and crashing.

Cyclic factors

We have to cite Kondratiev

What counts is that Kondratiev, and especially Slutsky counted cycles, or waves using scarce concealed numerology with a base 9. Logic for this is found in the "near 10-year business cycle", or "Juglar commodity price cycle", or any other near-10 year cycle you like, but Kondratiev and Slutsky used rather precise 9-year cycles, and multiples of 9-year cycles.

Dating the cycles

K-cycles (Kondratiev) can extend to almost any multiple of 9 years, but not above (about) 390 years. The best or reference measure is - annual economic growth trends. Kondratiev posits a sort of Big Bang, he dates to around 1605. Between about 1560 and about 1605, due to colonial pillage or 'vibrant exploration' in Central and Southern America, perhaps 50 000 tons of gold, and 450 000 tons of silver washed up on Europe's shores. Their economies have never recovered.

This is not accepted by a certain Eric von Baranov (Editor of The Kondratiev-cycle Theory Letter)(Internet site). He denies that Kondratiev ever said or implied there was some initial Big Bang, around 1605, and all 'waves' started from that moment and will go on forever.

Von Baranov also says (on Peak Oil) that (I cite) "all the nuclear wastes from a lifetime's energy supply to an average California household today, could be packed in a match box" Breaking technology in the nuclear field will enable the Final Wave (he goes on to say), the ultimate Peak Growth the world economy has ever seen, let alone imagined..... Keep that matchbox away from me.

That said, major recent Kondratiev cycles that I count are 1924-51, then 1951-78, and 1978-2005.

Down-Up-Down. And 2005-2032 will be Up, but we could have 're-figured secular notions of growth', and even more surely what 'wealth' means by then.....The Final Wave will come, we will surf on that one, KFCs to the right, Windows to the left. The cliff edge straight ahead....

Each K-cycle contains/is made up of 6 x 4.5-year cycles. These can be arranged as an 18-year Main Sequence, with 2 short cycles leading and lagging, playing in and playing out. They also can be sliced into 3 x 9-year waves. Feel free - Kondratiev certainly was!

So let us take the 1978-82(July) short downtrending cycle.
Theoretically, there should have been noticeable, even large falls in economic growth rates. Check out economic growth rates for civilized countries in 1978-82 ! In this period the retrenchment and recovery following the first Oil Shock gave way to the fantastic plunge in economic growth brought on by the Ranting Duo of R Reagan and M Thatcher cranking interest rates into the stratosphere ('good monetary management') as a measured response to the second Oil Shock of the bearded Ayatollah and his cheering students taking US embassy CIA personnel hostage in Tehran (and cutting world oil supply by about 6% for several months).

Wiseacres (wise hectares ?) will tell us/ This crash in annual and trend economic growth rates was due to Demon Petroleum. Oil prices, in 2003 dollars hit $103/barrel in last quarter 1979/ first quarter 1980.

Growth could only fall because "High oil prices hurt economic growth".
Ask regular grade energy economics 'experts' such as the well-paid Daniel Yergin of Cambridge Energy about that. He is really nicely paid. He will assure you, as well as George W Bush, that oil prices above about $40/barrel will have sombre impacts on economic growth (the funny thing is, economic growth already was pretty sickly, Germany is already in recession, for example).

Cyclic fall in annual average economic growth rates

I suggest the fall in economic growth rates through 1978-82 was cyclic and would - anyway - have happened. The Oil Panic following the Tehran Show in 1979 (the CIA guys with designer eyemuffs or Santana-style headbands, the yellow ribbons...the Reagan election show and all...) only increased it. A very important caveat is that oil prices, themselves, are virtually nothing at all to do with economic growth. High oil prices can enable and speed world economic growth, surely. However the subject is a sideshow to the present question of cyclic influences.
I will be delighted to make a paid study of the subject.

It is useful to have an idea of what can be called cyclic optimum economic growth rates. At the time (around the 1972-85 period) these were likely 3.75% annual real GDP for OECD countries, but have considerably fallen from about 1985. After 1985, due tofalling oil and commodity (real resource) prices, and the Neoliberal 'sloppy economy' context in most OECD countries, and a host of other growth-cutting factors we will not discuss here, the capacity for economic growth has most certainly fallen. The cyclic optimum may now be below 2% annual, in part because we are at the end of a long downtrending cycle, of 1978-2005.

Real world average annual growth rates for OECD countries (real GDP) are now not much above 1.5%. For 2003, growth of real GDP for some OECD economies will scrape zero. Germany may attain 0.3% ; France may achieve 0.8% ; Japan may attain 0.4%. Italy will have problems beating 0.5% growth, Spain and UK may achieve 0.8% - 1%, optimists in the USA can talk about 1.75% growth of real GDP on an annualized base, but the real outturn could scrape 1%. Oil exporting Norway will achieve perhaps 4.5%. Oil importing China will lkely beat 7.5%, and oil importing India will grow by about 5%.

Try this another way round

In a short UPtrending cycle growth rates should increase

Economic growth rates should have uptrended in 1982(July) - 1987. And they really did! In 1984 the US recorded its highest-ever growth in the entire 1945-2003 period. This record growth surprised everyone and delighted the backers of Ronnie Reagan in his bid for re-election!
Oil prices were $57-$65/barrel in 2003 dollars that year. Mr Yergin and similar well-paid 'respected' look-alikes will tell you how much "High oil prices hurt growth". Very satirical.

There is no problem coming forward.

1987-1991 (July) was downtrending. Growth fell. Despite the heroic Gulf War-1 and about 150 000 Iraqi dead in a great colonial adventure called Desert Storm (some 300 tons of depleted uranium was used by the war criminals), and the cream on the cherry pie called Cheap Oil, there was no upsurge at all in economic growth. G Bush-1 was not re-elected.

The 1991(July)-1996 cycle was uptrending.
And economic growth rates trended up - a bit. They were already suffering heavy collateral damage from Neoliberal Nostrums and notions of what constitutes good economic management. There was the de-structuring of the world economy (called Globalization), in the richworld there was an aging fascist-inclined "middle class" voting for war criminals who delivered Cheap Oil (because it " ensures economic growth "), creating an extremist political elite of the Bush 2 type, and their lookalikes in other ex-civilized countries (formerly called 'democracies'). Oil and real resource prices were much too low to rescue any growth. The Clinton Boom was a classic paper (and electronic) boom, as noted by Michael Hudson, and had no special significance because it was 'underlain' or pegged on the vehicle of dotcom, hi-tech and other fetish symbols of the 'postindustrial' economy/

" The bubble of the 1990s has been called a bubble, an internet bubble and other forms of technological bubble, but technology was only a vehicle for what basically was a financial bubble. It was not powered by industrial engineering as much as by " financial engineering, " manipulating corporate balance sheets in a Japanese... (zaibatsu style manner). Investment bankers treated telecoms and kindred companies as vehicles to float their stock, take huge cuts for themselves, and then make yet more money on first-day stock run-ups''. M Hudson in interview with Standard Schaefer, Counterpunch, July 2003 (Web site

The boom lasted long, and the bubble took long to deflate because governments were not only aiding the banks, insurance and other financial players to make safe killings with ever blinder-eyed stock market and accountancy practices 'vetting', but were themselves raiding company pensions funds (through encouraging or forcing so-called Money Managers to play the stock exchange with paid-in pension funds and then taking taxes off the profits made by those bourse players). These huge new flows of real funds aspired by the bourse casino - hilariously sold to the voting masses as the "Bourse for All" and the ideal way to plan one's retirement funding - were given that essential if tiny part of reality by 'surprising' economic growth rates of about 2%-per-year. We should note that the Clinton Boom 10%-a-year inflating of the paper bubble, bit the dust at thebest cyclic opportunity, that is right at the end of the next down-trending segment or wave, in 2000. Its demise was set in (cyclic) stone from almost the day GW Bush stepped into office !

Heading for a hiding

The 1996-2000(July) cycle was downtrending. Those who might claim, by intelligent afterthought, that the Clinton Boom was 'especially unreal' could compare it with equity numbers growth through 1925-29 and 1985-87. Or they could try the Paris Bourse explosion through 1719-21, in which 4000%-per-year growth of notional 'value' was obtained, through a scam operated by John Law - using a 'financiarization' process to drain real (gold) resources to the King's bankrupt treasury in return for paper equity, on the lure of massive profits 'surely' arising from the Mississippi Company. This Enron of the day bit the dust when major players got too greedy and siphoned off too much in the way of real funds. No bubble can last too long, however, without some real growth of the real economy. Through 1996-99 real economy growth rates trended down, and by at latest early 2000 were heading towards the near recession that goes with Neoliberal no-investment economics like a hand in glove.

The current short cycle

That leaves us in the 2000(July)- 2005 cycle, right now. This is an uptrending short cycle. Just like in 1925-1929.

There are only a few months of error-margin in this cycle-based analysis. Briefly, the 1929 crash happened just after the entry to a long downtrending sequence, and we are well into the second part of a short uptrending cycle, right at the end of a long downtrending wave. Note that 1924-29 was right at the beginning of a long downtrending cycle, and we are very close to the end of a long downtrending cycle.

We are still in a long downtrend. It ends July 2005. Like Eric von Baranov trumpets, the Long Wave that is coming will be Uptrending (and he says nuclear powered). But that is too far ahead to feedback into the present and rescue nice clean-fingernail bourse players from an Oct 03 Crash.

It could happen - on cyclic trends.

Gold is the world’s oldest and most known currency.