Multi-Disciplinary Reading – Book Reviews

The Secret Wealth Advantage: How you can profit from the economy’s hidden cycle by Akhil Patel. It’s a must-read book for everyone to understand how real estate cycles affect the economy and your portfolio.

The internal dynamics of the 18-year cycle become clear through study of each historical cycle. It manifests itself as a clear definable pattern of 14 years of rising, then four years of declining, land prices.

The 14-year rising phase of the cycle encompasses three Acts:
a) the Start of the cycle, an Expansion and a Peak: This lasts for six to seven years; best time to invest in stocks, alternative investments (Bitcoin), etc.

b) a mid-cycle Recession, usually lasting a year or two; stock markets crash and economy slows down but property markets and baking systems hold up (2020-21)

c) a Land Boom, Mania and Summit, for another six to seven years, completing the 14-year phase: With the economy awash with cheap money and business conditions buoyant, the stock market surges further into new highs. It is led by construction and banking stocks – the two sectors experiencing the largest boom. Surging stock prices also reflect the increase in assets valued on company balance sheets, much of which is related to property, and the fact investors are prepared to pay more in relation to company earnings. (Delta corp shifting to real estate?)

The declining phase of the cycle comprises the fourth Act and consists of:
d) a Crash and a Rescue, lasting four years on average and bringing a full 18-year cycle to a close: Real estate will slow down, and real estate stocks will also stop rising before the general market.

• During the past history of the world, following each depression some new discovery or some new invention has stimulated business and progress and brought on another boom. (Best to invest in these new age businesses after depression)

• Denial is the prevailing emotion. Few believe that things might be turning around because there is a ceaseless flow of bad news. This fear holds investors back in cycle after cycle. The key to managing emotions at this stage is to tune out the noise and take action. This is the best stage in which to buy stocks and property. The lows are in place and the economy is moving into a new cycle. Ahead of you is an economic expansion lasting 14 years, interrupted only by a mid-cycle Recession. Now is the time to buy.

• Towards the end of the boom, businesses are squeezed in two ways: from rising rents and the rising cost of loan interest. This reduces investment in the economy and has a direct effect on large sectors, notably the construction industry where the largest input costs are the rate of interest and the price of land. As construction slows, this reduces employment and demand, which leads to a crisis.

• When the crisis occurs bank balance sheets are clogged from all of the property loans, but they are incapable of offloading them without realising major losses that would make them insolvent. As my family found out in 2009, they will address this by calling in loans from small businesses, leading to a wave of business failures and unemployment. The process of freeing up bank balance sheets takes years and occupies much of the Start and Expansion stages of the cycle. But eventually it happens and, once returned to financial health, the credit creation process can begin all over again. It has ever been thus.

• A sign that bank lending is pushing up house prices is when the ratio of private debt to GDP increases.

Commodity Cycle:
There was, he claimed, a long-term rhythm in capitalist economies that could be identified through the movement of commodity prices. These went up for 25 to 30 years and down for a similar length of time, completing a cycle of 50 to 60 years. Kondratiev identified that commodity prices had major inter-generational lows in 1789, 1849 and 1896 – approximately every 50 years – and peaked at similar intervals – in the years around 1814, 1873 and (just before he began his great study) 1920. He referred to this rhythm as the ‘Long Cycle’. Each 55 to 60-year Long Cycle spans (approximately) three real estate cycles, but they are linked, not just through the technology that moves them forward, but also, as we will consider, through economic rent.

• When the long-term price trend was rising, Western economies experienced expansion and great prosperity; when it was down, depression and difficulty.

• As citizens, we should remember this because the real estate crisis of the late 2020s will coincide with the peak and then fall in the Long Cycle. This makes those years a time of great geopolitical jeopardy. Great vigilance over, and scrutiny of, the actions of our political leaders is required.

• Soft Landing: (In last two years of Mania) As inflation has been rising, central bankers can see that the economy is in danger of overheating and are forced to act. Interest rates are raised (they may have started during the Mania), but this will not moderate the boom. They may turn to other measures to bring inflation and runaway bank lending under control and to cool the economy. But there can be no ‘soft landing’ because land prices have now peaked. Rising interest rates will eventually cause them to fall.

Ways to find Summit:

• On the eve of the crisis, all of the elements come together to create a perfect storm: a slowing property market (when everyone is fully invested), rising or high-interest rates, borrowers under pressure, a lack of liquidity and tightening regulations. As we saw from the prior chapter, the land or property market is the first to peak. (Keep on Comparing Nifty Realty vs Nifty 50 performance)

• At the Summit of the cycle, the system is in a critical state. While the Crash may not take place for another year or two, the system is vulnerable and the crisis will break out at its weakest point, the one most susceptible to the risk posed by rising interest rates. This will expose the people who are most highly leveraged, either because they have to roll over loans at higher rates or because the interest on loans adjusts upwards.

• Before the crisis the property stocks will be best performing but as we get closer to crisis the real estate will start underperforming and will first show signs of slowdown.