Business Cycles: To Infinity And Beyond

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The business cycle, as we have previously known it, possibly does not exist anymore. Technically, the business cycle is the alternating periods of expansion and contraction of economic activity. Historically, these periods follow a pattern of bottoming out, a.k.a. a trough, followed by expansion, then topping out, followed by a contraction, a.k.a. a recession or a depression, down to a trough; rinse and repeat.

The reason I have been thinking the business cycle may not exist anymore is that over history, expansions and contractions were fairly repetitive events. The economy would expand and get too hot, the Fed would step in, raise rates, typically too much for too long, and bada boom, bada bing, the economy would roll over into recession.

Today, the Fed does the exact opposite, which is to ease monetary policy even though the economy is in a rip your- face-off expansion, resulting, for all intents and purposes, in the demise of the business cycle. This counter shift of monetary policy can be traced back to the extraordinary monetary measures introduced during the 2008-2009 financial collapse and they have remained in place since.

Barring the pandemic, it begs the question: if the boom that began in 2009 -- the Buzz Lightyear Boom, that is -- would have gone on uninterrupted, would it have extended to infinity and beyond? Another question is what impact does the Buzz Lightyear Boom have on stock prices? I mean seriously, if the economy can expand unabated as far as the eye can see, why can’t stock prices go up forever?

Okay, so there have been a few scorching sell offs since 2009, but these were short-lived as the Fed seemingly knew the exact moment to whisper sweet words of reassurance, and as if by magic, crisis averted.

The upshot is there is an entire generation of, how should I say, market participants, who know nothing but an ever-expanding economy and stock prices that always go up. When there was a normally functioning business cycle there was a natural distribution, or selling, of positions when the economy began to overheat.

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