Any Happy Returns

Chapter 1An Introduction to Cycles and Secular Trends

The farther backward you can look, the farther forward you can see.

—Winston Churchill

In The Long Good Buy: Analysing Cycles in Markets, I focused on the tendency for financial market cycles to repeat themselves over time. Most of these market cycles are driven by, or at least a function of, business cycles. Cycles are important, and trying to predict where we are in a cycle and what happens next is a key focus for investors. That said, equally, financial cycles can help predict economic cycles. As Claudio Borio¹ says: ‘The main thesis is that macroeconomics without the financial cycle is like Hamlet without the Prince’.² In the environment that has prevailed for at least three decades now, just as in the one that prevailed in the pre‐World War II (WWII) years, it is simply not possible to understand business fluctuations and the policy challenges associated with them without understanding financial cycles.

Although financial cycles are a persistent feature of economies and markets, they often exist within longer‐term trends or ‘super cycles’, in which dominant drivers generate strong patterns of returns that can overshadow the shorter‐term impact of the business cycles. Although shorter‐term cycles are important, getting the bigger secular trend right can significantly enhance returns for investors over the longer run. For example, over an extended period of low inflation there could be several business cycles. Equally, ...