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I remember writing in TTN a couple of years ago about how life was going to get a whole lot more expensive and sure enough economic theory did not fail me. I am not clever it is just we humans are so predictable in our consumer habits and we economists can see it coming. But it is not rocket science. Simply consumer behaviour is what drives it all. It is all about what we are feeling now and what we will feel in the coming months or year or so. Often what we do is subconscious but collectively all our sub- conscious minds add up.
I have also spoken about the ‘economic super cycle’ many times. Let me briefly repeat what this is. There are many cycles in our financial world – daily, weekly, monthly and even decades. The super cycle covers decades and the one we are experiencing now is a boom but super cycles can also be recessions and even depressions that can last for many years.
The last economic super cycle was driven by growth in Japan and now we are experiencing one driven by demand from China but also by other developing nations throughout the world.
Super economic cycles are not straight up – there are dips along the way and these dips are recessions. The catalyst for these dips is more often than not inflation. Inflation happens because demand outstrips supply. As consumers we want more, and recently we have seen growth in the number of consumers. This is unprecedented and was unforseen by suppliers. For example here in Oz we have not had the equipment, labour, infrastructure to ship enough to meet global demand. We all know about the scarcity of oil and the consequential rising petrol prices.
But as prices get higher – and oil is an example that is easily understood – we cut back on our consumption and we have seen this happen over the last 12 months but often there is a lag and only now are we seeing oil prices recede. So consumers cut back, producers cut back and the economy eases up. Prices ease because resource prices fall. Stocks rise and employers cut back in numerous areas. For example ‘discretionary’ expenditure falls e.g., in advertising and in turn jobs are lost. This happens throughout all industry sectors to varying degrees.
So all slows for a while until we realise that things are not all that bad and as prices have become more affordable we start to buy again and the whole cycle starts all over again.
So 2008 is one of those slowing years but 2009 we will be back spending and things will pick up and all will be rosy again.
Well that is until prices scream to levels that have never ever been contemplated. So we will see a boom that will make the last few years look like a tea party.
But remember the bigger the boom the bigger the bust. Remember Uncle Tom told you.
Enjoy the ride
Tom Scollon
Chief Analyst
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