Revisiting econohistory

GUEST COLUMN

In the age of consumerism even 'History' sells. And the most opportune time to sell economic history is after a small price dip (some call it crash) across markets.

And reading about financial crashes does wonders for Yahoo and Google: When was the last time Shanghai crashed? When was the last time Dow crashed more than 500 points?

Econohistory is profitable. It tells you when to stay in cash. A student of economic history will not only exhibit high asset picking accuracy but also save time by looking for cues after the event.

He might take time to reach to the final investment strategy, but he definitely won't lose sleep. What's all the study worth if you cannot accept stock market crashes as healthy, sane and certain, and a good time to dig in for low risk entry points.

Understanding the big picture was never as important as it is now. Asking why do crashes happen in the first place should tell us more about markets than why did this crash happen? It's like asking something as basic as why is (was) Adam Smith (1723-1790) celebrated? Was he popular because he talked about a free leash to capitalism, the invisible hand? Is his genius eternal?

From a market wave perspective, the first multi-decade wave of American markets lasted well into the 19th century, which was followed by the great depression, which laid the foundation for another 200 years upmove.

Today, the Wealth of Nations is on the edge. Smith's work established the economics that we know today. He was the first free trade proponent. And wrote the first manifesto against mercantilism (large gold reserves are key for economic success).

Gold attains a new cult now and with national currencies backing risky assets, we are somehow moving back in time. Smith strongly believed in business cycles and the delicate balance of demand and supply. Economists today have pronounced the business cycle dead and increase in supply does not deter investor demand. There is a buyer at every dip.

Ricardo (1772-1823) agreed with Adam Smith, but had a less optimistic theory. His theory of comparative advantage suggested that everyone is happy if countries exploit their respective advantages.

Today, we blame China more for causing chaos. The win-win situation created by the global manufacturing base seems unclear.

Thomas Malthus, economic history's greatest pessimist talked about hunger and starvation. The cues are already here. Climate change is already disrupting crop production.

Malthus went so far as to specifically predict that a crisis must occur by the middle of the 19th century. History proved him right as 1857 and till late 19th century, the US economy went through big turmoils owing to the Civil War and there were short economic depression in major cities.

Karl Marx (1818 -1883) saw capitalism as unstable and fraught with perils. He countered Smith by saying that the economy would grow, but with lots of problems. He said capitalism could bring about its own downfall. The Great Depression proved him right. He concluded that economic forces are what drive historical events.

He talked about wealth inequalities and resulting unhappiness. He believed that were the proletariat to seize the means of production, they would encourage social relations that would benefit all equally, and create a system of production less vulnerable to periodic crises.

John Maynard Keynes (1883-1946) had solutions for recessions, which empowered the state and the central banker. Keynes brought macro economics, which pushed capitalism from the business to the state.

Now, we are in a multilateral economic situation. Who controls global market stability on this scale is not an easy question to answer.

Keynes can't help us today and the prime of Adam Smith's work is past. Marxism did not work, as labour has a new meaning now and people can't work without leadership. Now, global capitalism assumes leadership, the very aspect Marxism wanted to counter and contain.

So we are left with Malthus and Ralph Nelson Elliott (1869-1941). Elliott, can be considered a social economist, who extended the Marxist punctuation of crisis to a cycle form. He was the first to juxtapose the social behaviour pattern with the economic growth and decay pattern of markets. He developed the work of Charles Dow.

In conclusion, crises are cyclical and depression is a reality. Emerging markets are definitely a relative story, but even being relative outperformers cannot avoid big volatilities.

Investments need broader asset coverage, pure equity might still take you to the "moon", but the swings might be dizzying. And the times ahead should see more econohistory being discussed. You never know Thomas Malthus might just edge out Britney.

The writer is CEO, Orpheus Captals and can be reached at mukul@or-phe-us.com