St Augustine's time

GUEST COLUMN

St Augustine (354-430 AD) was asked once by a disciple, "What was God doing when he was not creating the universe?" The saint smiled and said, "There was no time before and there is no time after this universe."

Time means different things to different people. To an investor 'time' is good if markets are going up and is bad when prices fall for more than a few percentage points.

For us at Orpheus, just like nature, time is cyclical. And a multitude of time cycles influence businesses at a single time. Different markets have different cycles of different degrees. And every market cycle turns down and destroys giving growth a new chance.

The stock market has an economic nature, which we as a society create. Even this economic nature grows and decays with time. And since societies are integrated, just like markets, we feel the Domino effect. We are connected, like they say with the flaps of a butterfly wings in another corner of the world.

Ask an investor who was invested in three emerging markets, China, India and Romania. The recent dip from the top was 11 per cent, 16 per cent and 12 per cent respectively.

This was the blue chip performance. A deeper look and you can see that Shanghai New World Company (Trading House) dropped 30 per cent, India's BSE Smallcap Index fell 23 per cent and the Bucharest Financial Index (BETFI) fell nearly 25 per cent from the year top.

A quarter of what markets create in nearly a decade can be destroyed in a few trading days. Laws of market like nature are ruthless. It takes more time to build and less to destroy. Linearity of motion is in the mind. Nothing linked with humans is linear, it's cyclical, a low "� a high "� a low.

But what triggered the fall? There are not very many valid reasons to explain this fall, but market contagions, which spread like fire, from one market to another. Fear is a bigger motivator then greed and we humans are loss averse. Nobody wants a loss. So they all want to exit at the same time, across markets causing crashes.

What scared them? Energy crisis? Oil price rise above $40 has been known to trigger a US recession. This time oil at $80 doubled from its recession time, without a real slowdown in US. Fear of global warming? Are we really scared of global warming and climate change? Fear of terror? Post Sep 11, US markets bottomed in six days and moved in positive zone. If we were heading for a terror fear, why would that take markets to a new high for five years in a row, across the world?

The fact is that we all herd, and laws of demand supply do not work in markets, higher prices lead to higher demand and lower prices lead to lower demand.

Hence, a majority invariably gets trapped near a contagion top. Vicious cycle of greed and excesses invariably cracks. This is what is happening in emerging markets today. We are building on what happened in Japan and what is happening in the US today, a bubble.

It took Japan 20 years and is still unwinding. And it might take the US more than a decade to unwind. Human indulgence inflates asset prices to a point where return becomes inevitable. And the market psychology cycle moves down to complete.

Confidence, greed, fear and panic, the cycle repeats relentlessly. Unfortunately for us, the cycle that really matters is more than a lifetime. And if you are not a student of econohistory or mass psychology, you might never see it.

Edward R Dewey (1895-1978) wrote about mob cycles in his seminal book Cycles in 1971. President Hoover wanted Dewey to find out the cause of the Great Depression.

Economists gave him no consistent answers and Dewey lost faith in economic methods. This was the reason he received and took advice to study how business behaviour occurred rather than why.

In his books he quotes Russian Professor AL Tchijevesky who talked about cycles of human excitement every 11.1 years. The study was thorough and involved 72 countries with data more than 2,422 years. The professor characterised four phases in each cycle with the last cycle marked the cry for "peace".

Harold Martin studied cycles linked with the church, which illustrated a tendency for man to return to God every nine years. This nine year cycle was seen to work directly opposite to the timing of another cycle of similar length in bank deposits, cotton prices and many other business indicators. The alternating cycle of boldness and fearfulness kept repeating with an interval of nine years.

Bidding prices against each other in bold times and joining a church in times of fear. Cycles have also been found in marriages, immigrations, crime and even yo-yos. When the fad comes, supply isn't enough. And then the demand vanishes, abruptly.

We don't think emerging markets have reached a cycle top yet. But the signs are visible. This is the reason why what affects Shanghai or Mumbai affects Bucharest too.

Asset inflation pushes markets beyond local rationale. Cash is a valuable asset class attached with low risk, and it can buy more at a bottom than at a top.

Unlike equities, agro commodities are starting a new cycle globally up. Once the cycle turns down, the financial and banking industries will be the worst hit.

Consumer staples, utilities and energy can still outperform after markets get over with the global contagion. And there will be a time to remember God, through Augustine's confessions.

The writer is CEO, Orpheus CAPITALS, a global alternative research company