THE MAGNIFICENT SEVEN OR THE SEVEN YEAR ITCH

Whilst studying at university one of my modules was entitled Macro Economics. The aim of the course was to try and explain the cyclical nature of an economy. I had no idea what the lecturer was talking about.

This article tries to simplify the economic cycle. Surprisingly it sort of works.

Going back conveniently 49 years (which is 7×7) we get to 1966. In that year the American economy was at full employment and capacity utilization was at 90%. The demand for capital was at an all time peak from both the private and public sectors as the US administration was in the middle of the Vietnam war. The huge demand for money resulted in both inflation and rising interest rates and the terms ‘credit crunch’ and ‘liquidity crisis’ were born.

7 year later in 1973 the world witnessed the one and only time the Arab world united when Saudi Arabia used its oil to pressurize America after the Yom Kippur war. Energy prices rose dramatically and long queues formed at the petrol pump.

Forward a further 7 years to 1980 and we witness the very near demise of a number of US banks and brokerages. These institutions had been shorting silver whilst the Hunt brothers were buying on margin and taking physical delivery. Silver rose from $4.00 to just under $50 an ounce.

Fortunately for the financial institutions, COMEX decided one weekend to change the rules of the game forcing the Hunt brothers to come up with hundreds of millions of dollars forcing them into bankruptcy.

7 years later in 1987 the world witnessed ‘Black Monday’ when the DOW30 Index lost 22% and the SP500 more than 20% in one day. Interest rates rose dramatically.

Then seven years later, in 1994, the bond markets crashed.

There was no apparent reason for the sudden selloff which started in the US and Japan and then spread more or less across all developed markets.

In fact 1994 was notable for being a very uninteresting year;there was no presidential election, no major geopolitical developments, no stock market crash, and no summer Olympics.

Notable perhaps in one aspect only; bond investors total complacency.

The market exercised its right to punish the vast majority at the expense of the small minority.

Forward another 7 years to 2001 and we can all remember this one. A bunch of nuts flew planes in the World Trade Centre towers. Risk assets tumbled hard and fast with the banks at severe risk until the FED created billions of $’s to keep them afloat.

The ‘war on terror’ had begun.

Fast forward another 7 years to 2008 and the Subprime fiasco, Lehman Brothers in the US, sizeable bank bailouts and nationalizations throughout the western world and the advent of even more new economic terms such as QE, ZIRP, Tapering amongst others.

2008+7 conveniently equals 2015 – That is this year unfortunately.

It has been relatively calm so far. What happens before the end of it will be interesting.

Besides being an ‘incredible’ macro economic cycle measuring number, 7 is brilliant at measuring lots of other silly things:

• Mankind apparently has 7 layers of skin.
• Ocean waves have a sequence of 7.
• The rainbow has 7 colours.
• Apparently there are 7 holes in our head.
• The earth was created in 7 days.
• Again only very apparently. 7 deadly sins. 7 hills in Istanbul, Rome and Jerusalem.

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