7 Year Boom and Bust Cycles

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It’s all about the digits in life, both literally and figuratively. One of the most interesting and seemingly powerful or magical numbers is the number 7, for better or for worse. Digits can be a slang for money, and can represent digital images on computer or smart device screens.

For many people, they react more to symbolism from numbers as opposed to spoken or written words due to their personal perceptions about the number 7’s significance as read about in the Bible, learned from astrology histories or planetary alignments, the human anatomy, or from other sources. If a person believes wholeheartedly that symbols do have a direct impact on financial markets, then their same beliefs can later come true as a self-fulfilling prophecy as they make either proactive or reactive investment decisions based upon these core beliefs.

The Power of 7

In many cultures worldwide, the number seven is perceived as either lucky or unlucky. Seven also represents the planet Saturn since it is seventh from the sun, which is the most worshipped and symbolized planet in world history. Saturn’s symbolism can represent both Light and Darkness (or good and evil, depending upon one’s perspective).

The alleged original seven deadly sins were comprised of lust, gluttony, greed, sloth, wrath, envy, and pride. Interestingly, these same seven words can be used sometimes at various stages of a booming or busting economic or real estate cycle.

prayerThe number seven is listed at least 735 times in the Bible; there are seven petitions in the Lord’s Prayer. As it pertains to the lunar cycle, the moon has four phases with each lasting seven days. The Sumerians created a week consisting of seven days; each day of the week was named after a planet such as Saturday (“Saturn Day”).

The primary phone numbers in the United States are made up of seven digits. There are seven wonders of the world, seven continents on Earth, seven dwarfs, seven virtues, and the “Seven Ages of Man” as described by William Shakespeare.

Picture16People have seven year cycles of human growth. Rainbows, and the primary color spectrums and chakras, consist of seven colors. There are seven notes in the musical scale. Numbers are the base for color and sound frequencies as well. No matter how a person looks at the number seven, it potentially directly or indirectly impacts all of us every single day of the week.

Since most investors are people, the link between the number seven and the human body is quite interesting:

* 7 parts to the embryo
* 7 main parts to the body (head, neck, torso, arms, and legs)
* 7 parts of the human head (2 nostrils, 2 ears, 2 eyes, and 1 mouth)
* 7 primary glands (pituitary, pineal, thyroid, thymus, pancrease, sex, adrenals)
* 7 main organs (brain, heart, genitals, lungs, liver, kidney, stomach)
* 7 divisions to the brain
* 7 parts to the inner ear
* 7 parts to the retina
* 7 heart cavities
* 7 layers of skin
* 7 bodily functions

7 Year Financial Cycles

 

cycleOver the past several years (seven years, especially), the prices for stocks, interest rates, oil, and real estate have rapidly increased and decreased at various points in the financial cycle. Amazingly, we’ve seen the Dow Jones index hit all-time highs, the U.S. government deficit reach historical highs, oil prices swing dramatically upward and downward, short and long-term interest rates have hit historical lows, and some real estate prices have reached all-time highs partly due to record low cap rates for various commercial real estate properties, and record low vacancy rates for some residential and commercial properties.

The U.S. economy has followed consistent 7-year “Boom and Bust” cycles over at least the past 42 years as noted by these key years which tended to take place during the season of Fall:

* 1973 – Oil Shock Crash: This was directly related to the end of Bretton Woods when the “gold standard” was switched to the Petrodollar (“oil for dollars”) system beginning earlier in 1971. Between October 1973 and January 1974, oil prices quadrupled within just a few months due to the ongoing OPEC (Organization of Petroleum and Exporting Countries) Embargo, or the reduction in oil production, increasing U.S. demand, and skyrocketing oil prices for American consumers. Since energy tends to be one of the main cores or hubs of annual rates of inflation, then real estate values began to rapidly increase in the United States throughout much of the 1970s since real estate typically is one of the best investment hedges against inflation.

crash* 1980 – Interest rates hit historical highs (21.5% Prime Rate – December 1980), which made mortgages too expensive for investors. The Federal Reserve actively raised rates supposedly to “quash inflation” at the time. Yet, property values and many top Savings and Loans were crushed instead at the time up until the Fed began rapidly reducing rates thereafter.

* 1987 – “Black Monday” Stock Market Crash (October 19th): A horrific trading day that included a 508 Down Jones point drop on the same day prior to closing at 1,738 (a 25% + loss in just one day). For the entire month of October 1987, the Dow Jones lost over 22%.

* 1994 – U.S. Bond Market Crashed (A Trillion + in losses): In spite of ongoing low inflation, the Federal Reserve raised interest rates several times within the same year. The 30-year Treasury rate went from 6.2% near the start of 1994 to 7.75% in mid-September. These quick rate hikes adversely affected and eliminated upwards of $600 billion of bond values. Internationally, the bond losses might have been closer to $1.5 trillion.

*2001 – Stock Market Crash and 9/11: After the longest shutdown of the U.S. stock market since 1933, trading resumed on September 17th prior to the Dow tanking 684 points (a 7.1% decline). For this first week back in session, the Dow dropped a total of 1,370 points (or a 14% loss). The S & P 500 index fell 11.6% for the first week back after 9/11. Upwards of $1.4 trillion of stock value vanished for the first five days of trading after 9/11. Shortly thereafter, the Federal Reserve began a series of significant rate cuts which directly boosted stock and real estate values for many years up until the official start of the “Credit Crisis” in August 2007.

*2008 – Stock Market Crash: The Dow Jones fell an unlucky 777 points in one day on September 29, 2008. Quantitative Easing (began in November 2008), Operation Twist, and other bailout strategies began shortly thereafter in order to attempt to boost stock and real estate values while artificially suppressing interest rates at later dates to near or at all-time low mortgage rates and cap rates for prime commercial properties. The Dow Jones later hits a low near 6,500 in March 2009 before Quantitative Easing helped to fuel a stock boom for the next several years.

*2015 – Currency Wars and Stock Market Pricing Glitches: The ongoing “Currency Wars” between the Petrodollar and BRICS (Brazil, Russia, India, China, and South Africa) have led to wide-ranging stock, rate, and bond pricing, especially in recent months. Many investors had trouble getting their buy or sell orders through on a timely basis, which, in turn, is leading to more individuals and institutions pulling a portion of their stock gains out of the market, and reinvesting those funds into real estate.

2015 Stock Markets Worldwide

USA: The Dow Jones has fallen upwards of 2,000+ points from peak highs within just the past few months.

China: The Shanghai Composite Index fell almost 40% from peak highs earlier in the year.

Japan: The Nikkei index plummeted more than 3,000 points from peaks reached earlier in 2015.

Germany: 25% of Germany’s stock value has been wiped out in 2015.

The United Kingdom: British stocks have fallen 16% from previous peaks.

Brazil: A staggering 12,000 point drop from previous peaks partly due to ongoing currency issues there.

India: 4,000 point drops from previous peak highs.

Russia: 10%+ price drops for Russian stocks. Low oil prices worldwide are negatively impacting the Russian economy due to their large natural supplies of oil.

Standard & Poor’s 500’s 7 Year Price History (2008 – 2015)

 

standard

Sources: Standard & Poor’s, Robert Shiller’s Irrational Exuberance book’s section on S & P 500 price histories.

10-Year Treasury Rate’s 7 Year History (2008 – 2015)

 

10 year
Source: U.S. Department of Treasury

The Petrodollar and Financial Market Cycles

“Money makes the world go ‘round,” as the old saying goes regarding both the positive and negative impacts of money on people’s daily lives. In the USA, we use a currency system called the “Petrodollar” (“oil for dollars”). Many people describe the USA’s fiat currency system as money that is created “out of thin air.” While the Federal Reserve and the U.S. Treasury may create it magically from the printing and virtual digital presses, it is still backed by oil as opposed to gold several decades ago.

History tends to repeat or recycle itself in a number of ways. Before oil prices plummetted in both 2014 and 2015, there were seven previous 35% + oil price drops within the time span of just 18 months going as far back to 1986.

* 1986 – “Oil Supply Shock” in Saudi Arabia
* 1988 – Second stage of the 1980’s oil glut
* 1991 – Gulf War end “Relief Rally”
* 1998 – Price collapse related to the Asian markets bond and derivatives defaults
* 1993 – Weak worldwide demand and rising OPEC / North Sea production
* 2001 – High Tech, Telecommunication, and NASDAQ collapse and 9/11
* 2008 – “The Credit Crisis” – near implosion of world’s financial system

In the USA, oil is equivalent to money since the value of the dollar is directly related to the fluctuating price of oil in our “Petrodollar” currency system. President Nixon took the USA off of the “gold standard” in 1971, and later pegged the dollar to oil prices directions, especially with Saudi Arabia after 1973.

WTI (West Texas Intermediate) is the underlying commodity used for the New York Mercantile Exchange’s oil futures contracts; it is also the benchmark use for the Western World’s oil pricing.

WTI Crude Oil Price History (2008 – 2015)

 

wti
Source: The New York Mercantile Exchange (NYMEX)

Inflation and the 777 Jackpot

When oil prices fall dramatically, it can lead to rampant skyrocketing inflation which can be helpful to investments like real estate. Historically, real estate has been an exceptional hedge against inflation. Falling energy prices also can help other forms of the consumer spending sector since more Americans may have extra cash to spend on things like groceries, clothing, restaurants, and entertainment.

Historically, there have been some incredible buying opportunities at the depths of many of these past seven (7) year “Boom and Bust” cycles. The key for all of us is to focus more on the opportunies as opposed to the obstacles which may stand in our way. Many families created generations of wealth shortly after the end of “The Great Depression” era by purchasing assets at a fraction of their true market value while riding the inflation wave over the next several decades.

Investing today may remind one of riding on the Titanic out in stormy weather on one of the Seven Seas worldwide (Arctic, Antarctic, North Pacific, South Pacific, North Atlantic, South Atlantic, and the Indian Ocean). Some financial markets and ships may sink around the world, figuratively or literally. Yet, many investors may prosper should they make the best choices during these turbulent times, and later hit the investment jackpot with the best digits possible – 777.


Author: Rick Tobin

Rick Tobin Professional Pic sharperLook for Rick’s ebook on Amazon Kindle: The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date.

Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources.

You can visit Rick Tobin at RealLoans.com.

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