Abnormal Business Cycle?

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    Just found your site recently. Very informative and enjoyable.

    I find your business cycle approach interesting and logical. I wonder though whether we are in a standard business cycle?

    Not to go to into great depth but I sometimes question whether we are playing the same game as a national (or even world) economy as we have for much of the post WWII era. For one thing, we came out of the war (and WWI for that matter) with such a great competitive advantage because the rest of the world was so broken and/or pursuing economic methods that proved to be not viable (communism). The world markets are now much more competitive. This is just one factor I wonder about. There are several others.

    As evidence of my concern, I point to your Extended TSP Fund Performance Table and the unprecedentedly low funds rate that have been buried to almost zero for several years now without resulting heating up of the economy. By most measures we should be seeing pretty significant inflation by now but are in fact basically fighting deflation. And any minimal discussion of raising the rate results in immediate concern and low growth rates.

    And this with asset prices that are still pretty high by historical measures. Despite what people think because of the previous bubbles, stocks and houses are still pretty high by historical measures with the S&P500 running in the neighborhood of 20 PE (vice historical 15 PE) and houses probably up 20% above long term inflation adjusted average. (Reference http://www.multpl.com/sitemap )

    What are your thoughts? Are we still playing the same game or are we entering another economic era?


    I read an article the other day which suggested that the “Great Recession” has made as long lasting an impact on American consumers as the Great Depression did on a previous generation. Could this explain some deviation from the usual business cycle?



    TS Paul

    I absolutely believe that every business cycle is different and they will continue to evolve as time passes. I generally don’t go back much further than the 60s or 70s when I think about the modern stock market, and even then things are completely different today than they were then.

    This one in particular has likely been dramatically effected by the Fed’s activism – I haven’t gone back to check recently enough to recall, but I can’t imagine we have had such a sustained run of artificially low interest rates in modern history.

    And to 12^2’s point, investor psychology certainly impacts the market in the short and medium term. I tend to believe that effect on the Thrift Savings Plan largely wears off as we stretch to long term, but there may well be something to the notion that millennials continue to duck the stock market because it tanked right about the time they first became aware of it.

    The TSP Allocation Guide www.TSPallocation.com


    Interesting thoughts from 12^2 and TS Paul. Thank you.

    TS Paul, your comment about the millennials brought back a memory. I was a young 20something and had been married for just under two years. I somehow came up with some money and put $5k into a mutual fund. It was my first major investment and, although I don’t remember for sure, it may have been my first ever investment in stock. Thought I was on my way to adult financial responsibility and kind of proud of myself. It was September of 1987. I remember it being worth about $3500 a month later and think about how smart I had been.

    I held on to that same investment until a few years ago and then sold it as part of some money I put together to pay off my mortgage. Never added or took out money to my recollection. I ran the numbers on it and found that price/wise it made between 4 and 5%. With dividend reinvestment it made about 8% over the intervening 20 something years. Which with the external research I have done and the numbers I have calculated on my own with raw data, is about the average return on the broad US stock market for the last 100+ years. Interesting 20+ year exercise.

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