[A-List] McKillop, Part 3

["bon moun" <sherrynstan@xxxxxxx>]

Posted: Sunday, July 13, 2003
By: Andrew McKillop
1929-style Stock Exchange crash likely this October 2003? - Part 3
Do cycles even exist ?
Note that the OECD Secretariat, right up to the later 1990s and in its
HISTORICAL STATISTICS series of publications, included a 15-20 page
section titled "CYCLICAL BEHAVIOUR OF THE OECD ECONOMIES"
The dating base of this was a 4.8-year cycle, that is 5 complete cycles
in 24 years.
For all members of the OECD, and the G-7 big economies, these OECD
cyclic diagrams show sometimes very, very tight fits with about a
4.5-year cycle.
If we go along with Kondratiev, who argued sometimes "the longer the
cycle, the better its predictive capability", and we take a 27-year
major cycle like discussed in Part 2 (that is an 18-year main sequence,
and 2 x 4.5-year 'lead-in and lead-out' cycles) we get the last 4.5-year
cycle as 2001 (July) - 2005.
Like the very first lead-in of 1978-1982 (July), the lead out is weakly
uptrending. The overall or main sequence trend remains downward.
The half-way point in the last lead-out short cycle is 2001.5 + 2.25 =
2003.75
That is Sept/October 2003.
As a final point, note that 'changeover points' are just right for a
bourse crash! Nothing in Kondratiev says when or even IF a bourse crash
will happen. But this conjunction of cyclic trends, around October 2003,
does nothing at all to oppose a crash, and even 'enables' it.
Oil prices: In 2003 dollars, the oil price through the 1920s showed some
agitation. Around 1927 it had reached a level of about $18-per-barrel.
By 1929 it was already shrinking quite fast. Apart from 'demand
destruction' (the new, cute word for economic recession and stagnation),
that period was the first high point of world oil discovery - with rates
of annual additions in relation to annual oil consumption being the
highest ever (and much higher than in the second high point for
discovery in volume terms - the early 1960s). In the 1925-32 period
annual oil discoveries were up to 40-50 Bn barrels in a few lucky years
- while annual world production and consumption was well below 4 Bn
barrels.
That is, every year for several years, the world found and proved 10
years or more of oil requirements. Since the 1990s the world uses at
least 4 times more than it finds, each year.
The late 1920s conjunction of rising discoveries and falling demand
dealt a powerful blow to oil prices. In current dollars, their fall
stabilized around $1.80-per-barrel in the 1933-36 period.
World oil consumption at the time was way below 12 Mbd annual. Oil
intensity of economic output, even in the civilized world, was way below
today (under one-fifth). Can we therefore scratch oil prices from the
list of possible or potential causes of the 29 crash ?
Probably yes. If you have other ideas or opinion on the subject just say
so.
Conversely, oil price falls - a crash of oil prices, also called the
1986 Anti Shock - almost certainly helped trigger, or intensified the
1987 stock market crash. This is not just my opinion. There is plenty of
Web material on the subject.
Basically, it can be explained like this:  "Through 1986, from December
1985 through August 1986, oil prices were nearly divided by three, that
is fell by about 65% in 8 months, to a low of around $11.50/barrel in
dollars of 1986, for many light blends. Expressed in dollars of 2003 the
price fall was from a year peak of about $52-per-barrel to around
$19.50/bbl. Absolutely no spontaneous, self-reinforcing and of course
non-inflationary increment to economic growth was recorded in any OECD
country.
Conversely, unrestricted double-digit growth of stock market 'value',
without corresponding growth in the real economy certainly has strong
impacts. While the 1986 oil price crash was a non event in economic
growth terms, exactly as the fall in prices after Desert Storm in 1991,
unrealistic growth of stock market indices in 1986-87 was fuelled and
comforted by the oil price crash (or 'Anti Shock'). Both in bourse
mythology and in fact any long bull market always has its Dark Twin
waiting, and this took the shape of the October 1987 US, and then world
stock market crash. Stock market capitalization losses in 1987, that is
loss of nominal or paper 'value' were estimated at around $ 2 400
Billion, in today's dollars. " From 'Why We Need $70/bbl Oil' by A
McKillop, various Web sites.
Oil prices and the 2000-02 crash
Did oil prices have anything to do with the 2000-02 'slow motion crash'
? The biggest yet in loss of notional 'value', but also so slow we can
scratch it out as a 'crash', if we want, and call it a 'secular
adjustment', or 'overdue correction' or any kind of other term we like
if the word 'crash' hurts too much.
Plenty of ex post facto bourse and business gurus are out there telling
us ... retrospectively ... that Yes! the 2000-02 crash correction was
triggered by tripled oil prices through late 1998-early 2000.
One example of these hooray henrys that ... retrospectively ... discover
the Oil Link in the biggest-ever fall in stock market capitalization is
US Federal Reserve Governor Laurence H. Meyer. In a dinner debate at the
New York Association for Business Economics and The Downtown Economists,
New York, June 6, 2001, he manfully asserted: "Energy prices rose
throughout 1999 and 2000. Oil prices shot up in the fall and natural gas
prices soared late last year just as oil prices (had begun) to recede.
The higher energy prices undermined consumers' purchasing power''.
That is, they stopped buying equities just like that, and started
sulking ... the crash was inevitable.
The funny thing is that all this retrospective wisdom from retrospective
experts didn't hit the Street (wall) or any other streets until well
into 2001. Equities had already been falling like dandruff or autumn
leaves for months on end. Indeed, the crash was waiting for its second
coming - also called IX/XI or Sept 11 ... which in pure cyclic terms
should NOT have happened.
Oil prices had tripled in 1998-2000. Tripled from almost nothing, to
just about something, we have to add. The gurus don't add that, and
would accuse me/you of madness if we argued that oil prices turned up at
a critical cyclic moment ... just as the uptrending 2000 (July)-2005
cycle was beginning.
In late 1998/early 1999 the oil price had tested a real floor - about
$10-per-barrel. At that price, you might as well give it away or build
Memorial Baths for professor M A Adelman to float in, like some oiled
seabird (The Albatross of Bad Augury not the Stormy Petrel).
MORRIS ADELMAN IS THE PROFESSOR WHO CAN 'PROVE' OIL IS WORTH
$2.50/BARREL THE DAY BEFORE THE LAST BARREL WILL BE PRODUCED. HE IS A
GREAT PROFESSOR. ($2.50 in dollars of 1972 it goes without saying - or
at least it goes without saying to Prof. M. Adelman)
How did the Oil Price 'trigger' for bourse crashes work out in all this?

1929: Not at all. Not possible to incriminate oil.
1987: Very certainly yes. Too-LOW oil prices certainly helped trigger or
intensify the crash
2000-02:/Probably not, and only retrospectively even for gurus and
nicely employed, well-fed spokespersons of the New American Century
(Heritage Foundation, etc).
Other Oil Linked crashes
Surely, in 1973-75 and in 1979-81 there were pretty big 'corrections' of
bourse numbers, and these were surely 'linked to oil price changes', but
nobody takes much notice of these relatively 'modest' crash-lets or
slides in bourse value. We are talking about REAL crashes.
1929-style Stock Exchange crash likely this October 2003? - Part 4