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Is A 1929-Style Stock Crash Likely October 2003 ? - Part 3

August 5, 2003

Do cycles even exist ?

Note that the OECD Secretariat, right up to the later 1990s and in its 'Historical Statistics' series of publications, included a 15-20 page section titled "Cyclical behaviour of the OECD economies". The dating base of this was a 4.8-year cycle, that is 5 complete cycles in 24 years. For all members of the OECD, including the G-7 big economies, these official OECD cyclic economic diagrams show sometimes very, very tight fits with a cycle of about 4.5-years.

If we go along with Kondratiev, who argued sometimes "the longer the cycle, the better its predictive capability", and we take a 27-year major cycle like discussed in Part 2 (that is an 18-year main sequence, and 2 x 4.5-year 'lead-in and lead-out' cycles) we get the last 4.5-year cycle as 2001 (July) - 2005. Like the very first lead-in of 1978-1982 (July), the lead out is weakly uptrending. The overall or main sequence trend remains downward. The half-way point in the last lead-out short cycle is 2001.5 + 2.25 = 2003.75

That is September/October 2003.

As a final point, note that 'changeover points' are just right for a bourse crash ! Nothing in Kondratiev says when or even if a bourse crash will happen. But this conjunction of cyclic trends, around October 2003, does nothing at all to oppose a crash, and could even 'enable' or 'potentiate' it.

Oil prices

In 2003 dollars, the oil price through the 1920s showed some agitation. Around 1927 it had reached a level of about $18-per-barrel. By 1929 it was already shrinking quite fast. Apart from 'demand destruction' (the new, cute word for economic recession and stagnation), that period was the first high point of world oil discovery - with rates of annual additions in relation to annual oil consumption being the highest ever (and much higher than in the second high point for discovery in volume terms - the early 1960s). In the 1925-32 period annual oil discoveries were up to 40-50 Bn barrels in a few lucky years - while annual world production and consumption was well below 4 Bn barrels. That is, every year for several years, the world found and proved 10 years or more of oil requirements. Since the 1990s the world uses at least 4 times more than it finds, each year.Through June 2002-June 2003, using IEA figures, oil production by the 3-biggest oil producers in the OECD bloc (USA, Norway and UK) decreased by a whopping 801,000 barrels-per-day. The late 1920s conjunction of rising discoveries and falling demand dealt a powerful blow to oil prices. In current dollars, their fall stabilized around $1.80-per-barrel in the 1933-36 period.

World oil consumption at the time was way below 12 Mbd annual. Oil intensity of economic output, even in the civilized world, was way below today (under one-fifth). Can we therefore scratch oil prices from the list of possible or potential causes of the 29 crash ?

Probably yes. If you have other ideas or opinion on the subject just say so.

Conversely, oil price falls - a crash of oil prices, also called the 1986 Anti Shock - almost certainly helped trigger, or intensified the 1987 stock market crash. This is not just my opinion. There is plenty of Web material on the subject.

Basically, it can be explained like this.

"Through 1986, from December 1985 through August 1986, oil prices were nearly divided by three, that is fell by about 65% in 8 months, to a low of around $11.50/barrel in dollars of 1986, for many light blends. Expressed in dollars of 2003 the price fall was from a year peak of about $52-per-barrel to around $19.50/bbl. Absolutely no spontaneous, self-reinforcing and of course non-inflationary increment to economic growth was recorded in any OECD country.

Conversely, unrestricted double-digit growth of stock market 'value', without corresponding growth in the real economy certainly has strong impacts. While the 1986 oil price crash was a non event in economic growth terms, exactly as the fall in prices after Desert Storm in 1991, unrealistic growth of stock market indices in 1986-87 was fuelled and comforted by the oil price crash (or 'Anti Shock'). Both in bourse mythology and in fact any long bull market always has its Dark Twin waiting, and this took the shape of the October 1987 US, and then world stock market crash. Stock market capitalization losses in 1987, that is loss of nominal or paper 'value' were estimated at around $ 2 400 Billion, in today's dollars. " From 'Why We Need $70/bbl Oil' by A McKillop, various Web sites.(Note that some Webmasters, without asking/informing me changed the number! They put "$50/bbl").

Oil prices and the 2000-02 crash

Did oil prices have anything to do with the 2000-02 'slow motion crash' ? The biggest yet in loss of notional 'value', but also so slow we can scratch it out as a 'crash', if we want, and call it a 'secular adjustment', or 'overdue correction' or any kind of other term we like if the word 'crash' hurts too much. Plenty of ex post facto bourse and business gurus are out there telling us - retrospectively - that Yes! the 2000-02 crash correction was triggered by tripled oil prices through late 1998-early 2000. Some others, to be more US-oriented, have explained the crash as due to leaping natural gas prices.

One example of these hooray henrys that - retrospectively - discover the Oil Link in the biggest-ever fall in stock market capitalization is US Federal Reserve Governor Laurence H. Meyer. In a dinner debate at the New York Association for Business Economics and The Downtown Economists, New York, June 6, 2001, he manfully asserted:

"Energy prices rose throughout 1999 and 2000. Oil prices shot up in the fall and natural gas prices soared late last year just as oil prices (had begun) to recede. The higher energy prices undermined consumers' purchasing power''.

That is, they stopped buying equities just like that, and started sulking...the crash was inevitable.

The funny thing is that all this retrospective wisdom from retrospective experts didnt hit the Street (wall) or any other bourse places until well into 2001. Equities had alreadybeen falling like dandruff or autumn leaves for months on end. Indeed, the crash was waiting for its second coming - also called IX/XI or Sept 11 - which in pure cyclic terms should NOT have happened. Oil prices had tripled in 1998-2000. Tripled from almost nothing, to just about something, we have to add. The gurus don't add that, and would accuse me/you of madness if we argued that oil prices turned up at a critical cyclic moment - just as the uptrending 2000 (July)-2005 cycle was beginning, and turned up toenable growth.

In late 1998/early 1999 the oil price had tested a real floor - about $10-per-barrel. At that price, you might as well give it away or build Memorial Baths for professor M A Adelman to float in, like some oiled seabird (The Albatross of Bad Augury not the Stormy Petrel).

Morris Adelman has the very dubious honour of being the professor who can 'prove' oil is worth $2.50-per-barrel right up to the day the very last barrel was actually pumped. He is therefore a very great professor. ($2.50 in dollars of 1972 it goes without saying - or at least it goes without saying to Prof M A Adelman)

How did the Oil Price 'trigger' for bourse crashes work out in all this?

1929/ Not at all. Not possible to incriminate oil.
1987/ Very certainly yes. Too-LOW oil prices certainly helped trigger or intensify the crash, by helping players better fool themselves into thinking profits would also gusher from the manna of Cheap Oil. 2000-02/ Probably not, and only retrospectively even for gurus and nicely employed, well-fed spokespersons of the New American Century (US Fed, Heritage Foundation, etc).

Other Oil Linked crashes

Surely, in 1973-75 and in 1979-81 there were pretty big 'corrections' of bourse numbers, and these were surely 'linked to oil price changes', but nobody takes much notice of these relatively 'modest' crashlets or slides in bourse value. We are talking about real-and-serious stock market crashes.

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