This week I would like to share with you the views of Akhil Patel which I read in the 9th July edition of Money Week – and which are quite extraordinary – but probably true.
In his view the pandemic and increases in public debt will not affect the cyclical basis of our economy. Our current circumstances though significant, are only surface deep, and they cannot ‘stop the tectonic forces that drive our economies through cycles of boom and bust’
He cites the years of 1920/21 which he says was a ‘mid-cycle recession’. ‘It was preceded by a war that killed millions. And the trenches in which it was waged incubated a deadly virus that returning soldiers brought home, leading to a pandemic that killed millions more. There was a major stock and commodity market crash. But the property market and banking system held up and the economy came out of sharp recession into what proved the most celebrated boom of the 20th century.’
He attributes this cyclical economic pattern to land and to what Mark Twain said ‘they aren’t making it any more’ Winston Churchill also recognised the role played by land in the economic cycle and called it ‘land monopoly’. Land in good locations where economic activity takes place is finite.
Lizzie Magie a suffragette in the 1900’s wanted to demonstrate the importance of land to the economy through the game she invented which she called ‘The Landlord’s Game’. The player who owns land wins, and those who don’t go bust.
Ironically a man stole her invention and sold it to Parker Brothers making millions from the royalties of a game he called ‘Monopoly’, which I loved as a teenager.
Patel explains that over the last 200 years in the UK and US, an economic cycle can be observed which lasts on average 18 years. The cycle consists of about 14 years of expansion and then boom, followed by four years of contraction and bust.
The 14-year expansion is roughly divided into two halves, with a mid-cycle recession in between. This recession tends to be less severe than the four-year contraction and bust episode.
Patel says the cycle is driven by the finite nature of land.
Land is needed in locations close to people and economic activity. As an economy expands and becomes more productive, prime land becomes more keenly sought after and because it is in short supply the price goes up. It goes up as fast as people are able to pay for it and as governments and businesses invest, the price of land goes up.
Banks love this boom time as their security for their loans is increasing and so are prepared to lend against what they perceive to be a growing asset. In particular, banks want to lend on any project based on land such as land development and construction. However, eventually the price of land just gets too high, and the economy runs out of steam – it simply cannot afford these high prices and the cycle flips.
Construction and development companies go bust and with them the banks which lent to them. The banks then stop lending, and a full-scale banking crisis ensues which inevitably leads to a recession or depression, until properties begin to look cheap and the cycle starts all over again which history reveals takes about 4 years
So where are we in this 18-year cycle?
According to Patel 2021 saw a mid-cycle wobble, which he says coincided with a pandemic but would have happened anyway!
By 2022 the economy will start its second phase of growth and by 2024 will see it moving into a manic phase until it reaches its peak in 2026. The peak Patel says is usually marked with the development of landmark constructions.
In 2008, the last peak, Patel says, we saw the building of the Shard in London and the Burj Khalia in Dubai.
Patel’s advice is that now is a good time to buy prime land and to invest in any land-based business such as construction and development because prices will not be going down – but you should sell up in 2024/5 to avoid the bust phase.
In real terms, property prices tend to fall in the bust period by 30% and the deepest time of the bust period is two years after the peak.
Of course, to sell up just as everyone else is piling takes courage; bank borrowing will be cheap and everyone will be making theirs fortunes which is contagious – but dangerous!!!
We are social creatures, and we tend to follow the crowd even if we, like lemmings, then fall over the cliff. Richard Oldfield a friend and former investment advisor to family offices, in his book ‘Simple, but not Easy’ makes this point most clearly.
So, if you believe in Patel’s theory, you should set a date in the diary to sell land and land based businesses and then set a further date in the diary 3-4 years later to buy – and make an early commitment because following the crowd is SO tempting!!!
Let me know what you think and good luck
If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here where you can see what we are up to and if you would like to join simply upgrade your membership.
If you would like to find out more simply register here