I enjoy living in the Northeast. This part of the country has 4 full seasons and I thoroughly enjoy them all. Each season is pleasant in its own right and they tend to set a certain rhythm to life.
Philosophers have commented that the seasons can harmonize our lives. The variation of the seasons satisfies our need to change and our need for familiarity simultaneously. The seasons are very different from one another as they change from Spring to Summer to Autumn to Winter, yet at the same time, we have the identical four seasons every year and we know what to expect from each.
Those who study history also know that nations and economies also pass through seasons. The difference with historical seasons is that they tend to last much longer. Each season lasts about a generation and a four season cycle lasts about 80 years.
A primary reason why so many people have trouble when investing and understanding economics is that they cannot identify what season they are in. We sympathize as this is extraordinarily difficult because a person is likely to go through only one of each season in their lifetimes…if they are lucky.
The only way to understand where we are without waiting 80 years is to study history. Any shrewd investor will tell you an understanding of history is essential. So with this we present:
The Four Economic Seasons.
Spring – The Production Economy
This is the earliest phase of an economy and the most pure. Everyone and everything is geared toward being productive.
Imagine a maker of laundry soap. He focuses on making the best soap he can that will perform its intended purpose outstandingly. He experiments with different formulas trying to attain the best combination. Will it remove grass? Red wine? How about vomit?
Customers may try the product to determine its effectiveness. If it’s effective, they generally come back in droves. The entire focus of the sales transaction is on the soap. The Soap Maker uses plain packaging or his customers bring their own. “Put it in a plastic bag ..or wait here’s a cardboard box..throw a few pounds in there.” It doesn’t matter……people just want effective soap.
This is the most masculine season of economic life. Success in the marketplace is determined by the quality and effectiveness of the product or service. The Soap Maker’s best friends are his scientists, engineers and production people.
Summer – The Marketing Economy
During this stage of an economy, many people are selling the same kinds of soap. “Having a homogenous product is not good for business”, determines our Soap Maker. So he begins to build this thing called a “brand.”
He invests money in fancy packaging, logos and slogans. Ah yes, our soap is sold only in a sharp looking navy blue box with the signature yellow stripe across the top. And every box is emblazoned with the company slogan, “The Soap That Mothers Choose Most.”
People that buy the soap are proud to walk around with the fancy box and they want their friends and neighbors to see that they are buying the “name brand” soap. “I just got a promotion, now we can start using the name brand stuff!” or “Honey, all the people at the YMCA wash their clothes with this brand”, are the reactions our Soap Maker wants.
This is the most feminine season of economic life. Success in the marketplace is determined by our Soap Maker’s ability to make emotional connections with his customers through the branding process. The Soap Maker’s best friends are his marketing and sales people.
Autumn – The Financial Economy
Up until now our Soap Maker has maintained a focus on the product and the customer or basically a moral approach. Now is where it starts to get shaky.
During this stage of an economy, many people are selling the same kinds of soap and there are competing brands. Our Soap Maker (now the Soap CEO) decides that to make more money he can buy out the weaker soap makers using stupendous amounts of debt. He doesn’t plan or repaying the debt because that would prevent him from making more acquisitions.
The simple strategy is to jack up revenues through acquisitions and just service the debt. As long as debt stays cheap, this will allow the company to maintain all the right financial ratios, earn high profits…. and high compensation for our Soap CEO.
This is the most “nerdy” season of economic life. Success in the marketplace is determined by our Soap CEO’s ability to hit internally generated financial targets and present them to investors/bankers as evidence of his management prowess. Hitting the financial targets allows him to borrow more money and acquire more companies and also causes the stock price to rise, thereby generating even more compensation for our CEO.
The Soap CEO’s best friends during this season are his financial, accounting and investment gurus.
Winter – The Political Economy
So our Soap CEO continues rapid growth and accumulation of debt until either debt becomes more expensive or, more likely, he has accumulated so much debt that even a slight slowdown in demand causes the company to go cash negative.
So when the house of cards begins to crumble what does our Soap CEO do? He looks around and sees how big the company has become and how many people they employ.
Hmmmm….
So he tells the government, “Look if you don’t bail me out, there’s going to be a social collapse. All these people are going to be unemployed, angry, with no soap and they will be looking for answers from you.”
And so the results of the Soap CEO’s reckless management is borne by the common man.
This, my friends, is the season where the sleazebags come out of woodwork and rise to the top. At this stage any requirement of skill or merit has long been left behind. Success in the marketplace is determined by your political connections. “Who do you know and how much influence do you have over them?”, is the determining factor.
The Soap CEO’s best friend during this season is his lobbyist.
All in all, I think everyone can guess what economic season we are in based on current events. I estimate the current economic “year” started with the Great Depression in the 1930s and went something like this:
1940s-1950s Production Economy
1960s-1970s Marketing Economy
1980s-1990s Financial Economy
2000-present
How long with the current phase last? What will bring it to a close?
Of course we don’t know the answers to these questions. History does tell us that the cycle typically ends with some type of cataclysmic event such as a depression or war or both.
Perhaps the Boy Scout motto says it best, “Hope for the best and prepare for the worst.”
Have a great weekend,
Michael Bechara, CPA
Managing Director
Granite Consulting Group Inc.
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