Summary of notes and ideas
This book is only for you if you are into investing and interested to find out why stock markets rise and fall. Additionally to the book, I would recommend to read this research piece by Ed Easterling (part I and part II) of Crestmont Research and review this at Advisor Perspectives.
From the book:
Barry Bannister, a capital-goods analyst for Stifel Nicolaus and Co., the financial services company, show that for the past 130 years “stocks and commodities have alternated leadership in regular cycles averaging 18 years.”
At the beginning of the cycle commodity supply is low; this causes commodity price inflation. Manufacturers respond by putting up prices to maintain margins. Ultimately this reduces demand as consumers have to economise. Consumer spending falls and stock markets fall.
The feedback mechanism causes commodity prices to fall, now manufacturers get a boost to their profit margins and company profits and stock prices rise. Competition increases and the economy grows.
British businessman John Mills presented the theory that business cycles are driven by credit cycles governed by the psychological mood of the masses. Mills believed that business cycles consisted of three periods: after a panic or crisis there will be a post panic period of depressed trade where credit is restricted; a revival period where trade and employment pick up and credit becomes more widely available; and then finally a speculative period where numerous new enterprises are started as cheap credit is easily accessible and capital is mis-allocated again leading to a bust.
Dr . Warren F. Hickernell referred to booms and busts as follows:
Intelligent men furnish the initial impulse toward expansion when business is depressed, and they are followed by the ignorant. Later, the intelligent contract operations when inflation appears, but the ignorant expand excessively until checked by a crisis. In a state of panic, the ignorant curtail abnormally
More recently there was the 2000 dotcom bubble and the 2007 housing bubble where investors once again underestimated the risks and overestimated the rewards. There are psychological and neurological characteristics that lead investors to take more risk and become increasingly confident until they are stopped by a crisis. These human characteristics lead to patterns of behaviour that recur over time and there is no reason to believe that the future will be any different.
An important point to note is that the Balenthiran Cycle identifies changes in market sentiment. It should not be used for picking exact market tops and bottoms but rather looking for when to change investment approach to suit the changing markets.
If you want to find out more, read the full book: