Any Happy Returns E-Book

Peter C. Oppenheimer

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 501

Veröffentlichungsjahr: 2024

Beschreibung

"Clear and well-written, and can be seen as a helpful primer on a wide range of issues independent of its main theses" - The Society of Professional Economists - Reading Room "An invaluable read for economic history buffs, the book also offers hints on how to invest wisely that will appeal to other readers too."- Financial Times 'An in-depth but accessible analysis of the complex factors that impact structural changes in financial markets and investor opportunities.' In Any Happy Returns: Structural Changes and Super Cycles in Markets, celebrated author Peter C. Oppenheimer delivers his much-anticipated follow-up to The Long Good Buy. The book discusses how structural changes in macroeconomic drivers, geopolitics, government policy and social attitudes all combine to drive secular super cycles that help to explain investor returns. The author focuses on what he calls the Post-Modern Cycle, what it's likely to look like, how it will unfold and what investors should focus on. You'll also find: * An introduction to the history of cycles and structural 'Super Cycles', and what has driven them. * A detailed analysis of Super Cycles since 1945, including the Post-War Boom, the Great Moderation, the post Global Financial Crisis and Pandemic era. * The specific drivers of the emerging Post-Modern Cycle amid a higher cost of capital, bigger governments, more proactive industrial policy, greater regulation, and less globalisation. * Oppenheimer focuses on the developments in technology and AI, and on efforts to de-carbonise economies, and how these might impact financial market returns and opportunities. An invaluable resource for students of economic and financial history, and for investors, Any Happy Returns is essential reading for anyone seeking insights into upcoming market conditions and returns.

Leseprobe

Table of Contents

Cover

Table of Contents

Praise for

Any Happy Returns

Praise for

The Long Good Buy

Note

Title Page

Copyright

Dedication

Preface

Part I: Structural Trends and Market Super Cycles

Part II: Analysing Post‐War Super Cycles

Part III: The Post‐Modern Cycle

Acknowledgements

About the Author

Chapter 1: An Introduction to Cycles and Secular Trends

Repeating Cycles

The Social and Political Cycle

The Business Cycle

Super Cycles in Financial Markets

Psychology and Financial Market Super Cycles

Notes

Part I: Structural Trends and Market Super Cycles

Chapter 2: Equity Cycles and Their Drivers

The Four Phases of the Equity Cycle

The Drivers of the Four Phases

The Cycle and Bear Markets

Identifying the Transition from Bear Market to Bull Market

Notes

Chapter 3: Super Cycles and Their Drivers

Super Cycles in Economic Activity

The Modern Era: Growth from the 1820s

Super Cycles in Inflation

Super Cycles in Interest Rates

Super Cycles and Government Debt

Super Cycles in Inequality

Super Cycles in Financial Markets

Super Cycles in Equities

Notes

Part II: Analysing Post‐War Super Cycles

Chapter 4: 1949–1968: Post‐World War II Boom

International Agreements and Falling Risk Premia

Strong Economic Growth

Technological Innovation

Low and Stable Real Interest Rates

A Boom in World Trade

A Baby Boom

The Consumer and Credit Boom

All‐Consuming Consumerism

Notes

Chapter 5: 1968–1982: Inflation and Low Returns

A Lost Decade for Investors

Notes

Chapter 6: 1982–2000: The Modern Cycle

1. The Great Moderation

2. Disinflation and a Lower Cost of Capital

3. Supply‐Side Reforms (Including Deregulation and Privatisation)

4. The End of the Soviet Union (Lower Geopolitical Risk)

5. Globalisation and Cooperation

6. The Impact of China and India

7. Bubbles and Financial Innovation

Notes

Chapter 7: 2000–2009: Bubbles and Troubles

The Bursting of the Technology Bubble

The Financial Crisis of 2007–2009

Leverage and Financial Innovation

The Decline in Long‐Term Growth Expectations

The Rise in the Equity Risk Premium

The Negative Correlation Between Bonds and Equities

Notes

Chapter 8: 2009–2020: The Post‐Financial‐Crisis Cycle and Zero Interest Rates

1. Weak Growth but High Equity Returns

2. The Era of Free Money

3. Low Volatility

4. Rising Equity Valuations

5. Technology and the Outperformance of Growth versus Value

6. The Outperformance of the United States Over the Rest of the World

Notes

Chapter 9: The Pandemic and the Return of ‘Fat and Flat’

Pandemic Pandemonium

Another Tech Bubble

The Medicine Worked

The Pandemic and Inflation

From Disinflation to Reflation

Getting Real – The Shift Higher in the Real Cost of Capital

The Golden Rules Resurface

Sector Leadership and the Rotation Towards Value

Notes

Part III: The Post‐Modern Cycle

Chapter 10: The Post‐Modern Cycle

Structural Shifts and Opportunities

Differences from the Modern Cycle

1. A Rise in the Cost of Capital

2. A Slowdown in Trend Growth

3. A Shift from Globalisation to Regionalisation

4. A Rise in the Cost of Labour and Commodities

5. An Increase in Government Spending and Debt

6. A Rise in Capital and Infrastructure Spending

7. Changing Demographics

8. An Increase in Geopolitical Tensions and the Multipolar World

Notes

Chapter 11: The Post‐Modern Cycle and Technology

Characteristics of Technology Revolutions

Exuberance, Speculation and Bubbles

The Dominance Effects

The Emergence of Secondary Technologies

Can Technology Remain the Biggest Sector?

Can the Current Group of Dominant Technology Companies Remain Leaders?

Weak Productivity in the Internet World

From ‘Nice to Have’ to ‘Need to Have’

Productivity and the Impact of AI

The PEARLs Framework for AI and Technology

Notes

Chapter 12: The Post‐Modern Cycle: Opportunities in the ‘Old Economy’

Opportunities in the ‘Old Economy’

Defence Spending

Infrastructure Spending

Green Spending

Government Policy and Spending

Commodities Spending

How Investment Markets Can Help Fund the Capex Boom

The Future of Jobs

Don't Forget the Power of Nostalgia

On Your Bike

Notes

Chapter 13: Summary and Conclusions

Cycles

Super Cycles

The Post‐Modern Cycle

References

Chapter 1: An Introduction to Cycles and Secular Trends

Chapter 2: Equity Cycles and Their Drivers

Chapter 3: Super Cycles and Their Drivers

Chapter 4: 1949–1968: Post-World War II Boom

Chapter 5: 1968–1982: Inflation and Low Returns

Chapter 6: 1982–2000: The Modern Cycle

Chapter 7: 2000–2009: Bubbles and Troubles

Chapter 8: 2009–2020: The Post-Financial-Crisis Cycle and Zero Interest Rates

Chapter 9: The Pandemic and the Return of ‘Fat and Flat’

Chapter 10: The Post-Modern Cycle

Chapter 11: The Post-Modern Cycle and Technology

Chapter 12: The Post-Modern Cycle: Opportunities in the ‘Old Economy’

Suggested Reading

Index

End User License Agreement

List of Illustrations

Chapter 2

Exhibit 2.1 The four phases of the equity cycle

Exhibit 2.2 Decomposition of returns during US equity phases: average of cum...

Exhibit 2.3 Valuations expand the most during the Hope and Optimism phases: ...

Exhibit 2.4 Valuations below the 30th percentile of historical averages are ...

Exhibit 2.5 The US equity market has begun to price a recession on average 7...

Exhibit 2.6 The strongest returns occur when the economy is weak but improvi...

Exhibit 2.7 The average bear market troughs around 9 months before a recover...

Exhibit 2.8 The average bear market troughs roughly 3–6 months before any tr...

Exhibit 2.9 The PMI needs to be at extremes (either high or low) to be usefu...

Exhibit 2.10 When valuations are below the 50th percentile and the ISM is co...

Exhibit 2.11 An easing of inflationary concerns and interest rates also typ...

Exhibit 2.12 On average, the market does not recover until the fed funds rat...

Exhibit 2.13 Accelerating real GDP is associated with positive returns irres...

Chapter 3

Exhibit 3.1 World real GDP has increased more than 100‐fold since 1600: worl...

Exhibit 3.2 GDP per capita increased sharply from the nineteenth century: re...

Exhibit 3.3 GDP per capita rose sharply during the era of Western capitalism...

Exhibit 3.4 The Golden Age generated the best period of real growth in the W...

Exhibit 3.5 Years with annual GDP growth rates above +1.5% and below −1.5%: ...

Exhibit 3.6 Inflation was one of the defining economic characteristics of th...

Exhibit 3.7 Inflation accelerated sharply during the twentieth century: US C...

Exhibit 3.8 Nominal interest rates have risen from record low levels: nomina...

Exhibit 3.9 The concentration of property in Britain declined significantly ...

Exhibit 3.10 Wealth inequality in the UK declined significantly during the t...

Exhibit 3.11 Income inequality in the United States increased substantially ...

Exhibit 3.12 There have been significant differences in rolling total return...

Exhibit 3.13 The real returns in the bond market since the 1980s have been t...

Exhibit 3.14 US equities have materially outperformed bonds post‐GFC and sin...

Exhibit 3.15 There have been four secular bull markets since 1900 and four ‘...

Exhibit 3.16 Post‐WWII there have been three secular bull markets and three ...

Exhibit 3.17 The Nikkei 225 was stuck in a Fat and Flat trading range:...

Chapter 4

Exhibit 4.1 Over the super cycle, S&P returns in real terms including divide...

Exhibit 4.2 In the United States, GDP per capita surged after WWII: GDP per...

Exhibit 4.3 The post‐war decade saw a much more stable economic environment...

Exhibit 4.4 Real interest rates were markedly negative on Treasury bills and...

Exhibit 4.5 The post‐WWII period witnessed a significant rise in birth rates...

Exhibit 4.6 At the drive‐in: vehicles fill a drive‐in theatre while people o...

Chapter 5

Exhibit 5.1 The period from the early 1970s through to the early 1980s was o...

Exhibit 5.2 Balanced portfolios have historically experienced large drawdown...

Exhibit 5.3 The erosion of household net worth was significant during the 19...

Exhibit 5.4 Real interest rates surged in the 1970s: US 10‐year real interes...

Exhibit 5.5 A student hurling rocks at the police in Paris during the May 19...

Exhibit 5.6 Public sector workers' rally: public sector workers at a rally i...

Exhibit 5.7 Japan's trade surplus surged: Japanese exports, imports and trad...

Exhibit 5.8 Profit share of GDP fell in the 1970s and 1980s: shading highlig...

Chapter 6

Exhibit 6.1 The secular bull market from 1982 to 2000 was a period of signif...

Exhibit 6.2 Independent central banks contributed to longer and less‐volatil...

Exhibit 6.3 The Modern Cycle was characterised by a powerful rise in corpora...

Exhibit 6.4 The Modern Cycle was characterised by falling inflation and inte...

Exhibit 6.5 10‐year government bond yields converged in Europe

Exhibit 6.6 Total returns on equity indices rose sharply as bond yields fell...

Exhibit 6.7 US unemployment rate started to improve

Exhibit 6.8 The top 10% share of total income increased sharply from the 197...

Exhibit 6.9 McDonald's opening in the USSR: customers stand in line outside ...

Chapter 7

Exhibit 7.1 Total returns over the cycle between 2000 and 2009 were −58% aft...

Exhibit 7.2 The S&P 500 cyclically adjusted P/E ratio peaked at c. 45× in th...

Exhibit 7.3 The long‐awaited Apple iPhone goes on sale across the United Sta...

Exhibit 7.4 Derivatives exposure in the currency and interest rate markets b...

Exhibit 7.5 Imbalances shifted away from the private sector to the public se...

Exhibit 7.6 Long‐term real GDP expectations declined in the United States as...

Exhibit 7.7 The rise in uncertainty was reflected in a higher equity risk pr...

Exhibit 7.8 Ex‐post risk premium exhibited poor returns in aggregate over th...

Exhibit 7.9 Negative bond/equity correlations have become a familiar pattern...

Chapter 8

Exhibit 8.1 Total returns after inflation and including dividends were 417% ...

Exhibit 8.2 Weak economic recovery: US real GDP from trough 10 years onward:...

Exhibit 8.3 Top‐line sales growth fell along with declining nominal GDP: yea...

Exhibit 8.4 An unusually strong financial recovery: S&P 500 indexed to 100 o...

Exhibit 8.5 Global equity markets rose as the EM wave ended in 2016: price p...

Exhibit 8.6 The German real yield turned negative: 10‐year nominal yield min...

Exhibit 8.7 Proportion of negative‐yielding global government bonds

Exhibit 8.8 Market expectations about future inflation fell

Exhibit 8.9 Greek bond yields surged amid uncertainty: Greece and US 10‐year...

Exhibit 8.10 Median S&P 500 company trailing 10‐year EBITDA growth variabili...

Exhibit 8.11 EPS rarely falls outside of recessions: MSCI AC World annual re...

Exhibit 8.12 2009–2020 was the longest bull market in equities without a 20%...

Exhibit 8.13 The yield gap in Europe widened: 12‐month forward dividend yiel...

Exhibit 8.14 In 2022, the US 10‐year treasury yield rose to around 4% and wa...

Exhibit 8.15 Tech earnings outstripped the global market: 12‐month trailing ...

Exhibit 8.16 MSCI World Value significantly underperformed versus Growth: pr...

Exhibit 8.17 Few companies have high projected sales growth: MSCI AC World...

Exhibit 8.18 Lower bond yields tend to weigh on value stocks

Exhibit 8.19 Cyclicals versus Defensives have also moved with the US 10‐year...

Exhibit 8.20 ​​​Low‐volatility stocks have underperformed as yields and infl...

Exhibit 8.21 The relative performance of Europe over the United States has m...

Exhibit 8.22 The gap between US and European EPS roughly halves when adjusti...

Exhibit 8.23 Pension and insurance funds continue to focus on debt investmen...

Chapter 9

Exhibit 9.1 Pandemic heralds the return of ‘Fat and Flat’

Exhibit 9.2 Empty shelves in a central London supermarket on the eve of the ...

Exhibit 9.3 2020 saw the steepest drop in UK GDP since the 1700s: UK real GD...

Exhibit 9.4 Central banks' balance sheets increased massively from 2007: cen...

Exhibit 9.5 The Fed significantly expanded its balance sheet from 2007: US g...

Exhibit 9.6 In 2020, interest rates collapsed to the lowest levels in modern...

Exhibit 9.7 The premium of Growth relative to Value has increased sharply si...

Exhibit 9.8 S&P 500 absolute and relative valuation as of 31 December 2021: ...

Exhibit 9.9 On longer‐term comparisons, the US equity market continues to lo...

Exhibit 9.10 US savings rate spiked above 30% during the pandemic: US person...

Exhibit 9.11 Market pricing implies a 30% probability that US headline CPI w...

Exhibit 9.12 Wide dispersion between asset price inflation and real economy ...

Exhibit 9.13 Since the 1970s, the highest valuations have been reached when ...

Exhibit 9.14 Steady returns with range‐bound inflation – a reversal from ext...

Exhibit 9.15 The 2022/23 rise in global interest rates is among the fastest ...

Exhibit 9.16 World nominal interest rates reached historically low levels in...

Exhibit 9.17 Asset price inflation and ‘real economy’ inflation during 1973–...

Exhibit 9.18 The pattern of returns since 2022 shows a reversal of the cycle...

Exhibit 9.19 Europe's outperformance versus the United States has reversed d...

Chapter 10

Exhibit 10.1 US financial conditions tightened significantly in 2022. Shaded...

Exhibit 10.2 During the pandemic, financial markets were pricing very little...

Exhibit 10.3 The gap between dividend yields and nominal or real yields reac...

Exhibit 10.4 Global potential growth on a gradually declining path. Global G...

Exhibit 10.5 Global goods trade peaked as a share of GDP in 2008: world merc...

Exhibit 10.6 China's share of global trade and manufacturing increased sharp...

Exhibit 10.7 German import prices decreased after China joined the WTO

Exhibit 10.8 Employment in manufacturing has decreased since 1995: Euro area...

Exhibit 10.9 percentage of respondents who agree with the statement ‘overall...

Exhibit 10.10 Periods of increasing globalisation saw a rise in inequality: ...

Exhibit 10.11 The expansion of effective global labour supply resulted in a ...

Exhibit 10.12 The corporate sector has experienced a significant rise in its...

Exhibit 10.13 Capex in real terms (adjusted for inflation) for both energy a...

Exhibit 10.14 After the pandemic, unemployment rates reached a record low: U...

Exhibit 10.15 Fuel efficiency has increased by roughly 50% since 1950, with ...

Exhibit 10.16 There has been a historic increase in government spending sinc...

Exhibit 10.17 Treasury term premia remain particularly low relative to histo...

Exhibit 10.18 The number of trade interventions has increased sharply over r...

Exhibit 10.19 The demands on governments to step up spending are increasing:...

Exhibit 10.20 European firms are investing less than their US counterparts i...

Exhibit 10.21 The average age of assets has risen and is around 5 years olde...

Exhibit 10.22 Primary energy capex could grow by roughly 50% between 2022 an...

Exhibit 10.23 Working‐age population growth is expected to be negative in th...

Exhibit 10.24 Working‐age population growth is expected to turn negative in ...

Exhibit 10.25 In 2023, India overtook China as the most populous country in ...

Exhibit 10.26 Many emerging economies are expected to experience a decline i...

Chapter 11

Exhibit 11.1 The technology sector has outgrown and out‐earned other parts o...

Exhibit 11.2 Technology sees a sustainably higher return on equity

Exhibit 11.3 The history of industrial revolutions

Exhibit 11.4 The adoption speed of technologies has tended to accelerate ove...

Exhibit 11.5 Only a few sectors have been the biggest in the market over tim...

Exhibit 11.6 The largest company in the index has historically belonged to t...

Exhibit 11.7 The 10 largest S&P 500 companies through time: by market cap as...

Exhibit 11.8 Newer technologies have enhanced productivity: GDP per capita a...

Exhibit 11.9 US Telecom companies appreciated as much as the technology sect...

Exhibit 11.10 European Telecom companies appreciated as much as the technolo...

Exhibit 11.11 Kodak invented the first digital camera in 1975 but filed for ...

Exhibit 11.12 Polaroid had a monopoly in the instant photography market: sto...

Exhibit 11.13 Nokia lagged with smartphone technology: stock price indexed t...

Exhibit 11.14 Microsoft underperformed after the tech bubble and then recove...

Chapter 12

Exhibit 12.1 The ratio of capex spending to corporate sales has declined dra...

Exhibit 12.2 The energy and commodity complex offered limited investment pro...

Exhibit 12.3 Recently, capital‐light businesses have outperformed those that...

Exhibit 12.4 Global spending on defence has trended downwards since the 1970...

Exhibit 12.5 While overall spending on capex in the United States and Europe...

Exhibit 12.6 The same is true for global renewables companies: capex and R&D...

Exhibit 12.7 Green demand will represent 47% of additional copper demand for...

Exhibit 12.8 Green demand will constitute roughly 90% of lithium demand by 2...

Exhibit 12.9 Flows into ESG funds have risen globally: cumulative flows into...

Exhibit 12.10 A twentieth‐century advertisement for a Hirondelle Saint Etien...

Guide

Cover Page

Praise for Any Happy Returns

Praise for The Long Good Buy

Title Page

Copyright

Dedication

Preface

Acknowledgements

About the Author

Table of Contents

Begin Reading

References

Suggested Reading

Index

Wiley End User License Agreement

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Praise for Any Happy Returns

Peter Oppenheimer is a distinguished practitioner of the art and science of stock market analysis. This volume instills his wisdom in cogent and clear terms. I don't know how well anyone can explain markets or even explain respectively their movements, but no one should even try without mastering this volume's important lessons.

—Lawrence Summers, former United States Secretary of the Treasury.

Following his excellent The Long Good Buy, Peter Oppenheimer, in this new and very stimulating book continues and deepens his brilliant analysis of the financial market cycles, linking these with major trends but also with the geopolitical, technological, and other business and societal transformations. The author signals and identifies the emergence of the “Post‐Modern Cycle” and its potential far reaching effects.

—José Manuel Barroso, former president of the European Commission and prime minister of Portugal.

Business and financial cycles matter. Peter Oppenheimer understands them well. But there are times when a combination of social, economic, political and technological factors makes the past a particularly unreliable guide. Peter introduces the idea of the post‐modern cycle, reflecting some deep structural changes in our world. This book is an opportunity for us to liberate ourselves from the tyranny of the present, to think big and long term, and to reap the rewards.

—Sir Alexander William Younger, former Chief of MI6.

By skilfully interweaving the future and the past and incorporating history, culture and politics into his economic analysis, Peter Oppenheimer has written a book that is thought‐provoking, insightful, and original.

—Professor Noreena Hertz, Institute for Global Prosperity, University College London.

Peter Oppenheimer has written a thoughtful and insightful book. He draws our attention to the role that cycles play in helping us not only understand where we are in them, but also to forecast what is likely to follow.

—Kofi Adjepong‐Boateng CBE, Research Associate, Centre for Financial History, University of Cambridge.

Peter's comprehensive analysis of Financial Market Super Cycles (longer‐term trends), within which many cycles evolve, provides many new and invaluable insights. It is an eloquently written book that uses data‐driven evidence, charts, and trends to succinctly convey and reinforce the underlying message. A must read for financial market investors, practitioners, academics, and regulators.

—Narayan Naik, Professor of Finance at the London Business School.

Praise for The Long Good Buy

(published in 2020*)

Oppenheimer offers brilliant insights, sage advice and entertaining anecdotes. Anyone wishing to understand how financial markets behave ‐ and misbehave ‐ should read this book now.

—Stephen D. King, economist and author of Grave New World: The End of Globalisation, the Return of History.

Peter has always been one of the masters of dissecting financial markets performance into an understandable narrative, and in this book, he pulls together much of his great thinking and style from his career, and it should be useful for anyone trying to understand what drives markets, especially equities.

—Lord Jim O' Neill, Chair, Chatham House.

A deeply insightful analysis of market cycles and their drivers that really does add to our practical understanding of what moves markets and long‐term investment returns.

—Keith Skeoch, CEO, Standard Life Aberdeen.

This book eloquently blends the author's vast experience with behavioural finance insights to document and understand financial booms and busts. The book should be a basic reading for any student of finance.

—Elias Papaioannou, Professor of Economics, London Business School.

This is an excellent book, capturing the insights of a leading market practitioner within the structured analytical framework he has developed over many years. It offers a lively and unique perspective on how markets work and where they are headed.

—Huw Pill, Senior Lecturer, Harvard Business School.

“The Long Good Buy” is an excellent introduction to understanding the cycles, trends and crises in financial markets over the past 100 years. Its purpose is to help investors assess risk and the probabilities of different outcomes. It is lucidly written in a simple logical way, requires no mathematical expertise and draws on an amazing collection of historical data and research. For me it is the best and most comprehensive introduction to the subject that exists.

—Lord Brian Griffiths, Chairman ‐ Centre for Enterprise, Markets and Ethics, Oxford.

Note

*

Some roles have since changed.

Any Happy Returns

Structural Changes and Super Cycles in Markets

Peter C. Oppenheimer

This edition first published 2024

© 2024 John Wiley & Sons Ltd

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Library of Congress Cataloging‐in‐Publication Data:

Names: Oppenheimer, Peter C., author. | John Wiley & Sons, publisher.

Title: Any happy returns : structural changes and super cycles in markets / Peter C. Oppenheimer.

Description: Hoboken, NJ : Wiley, 2024. | Includes index.

Identifiers: LCCN 2023039325 (print) | LCCN 2023039326 (ebook) | ISBN 9781394210350 (cloth) | ISBN 9781394210367 (adobe pdf) | ISBN 9781394210374 (epub)

Subjects: LCSH: Business cycles. | Business cycles—History. | Economic development. | Investments. | Finance.

Classification: LCC HB3722 .O655 2024 (print) | LCC HB3722 (ebook) | DDC 338.5/42—dc23/eng/20231002

LC record available at https://lccn.loc.gov/2023039325

LC ebook record available at https://lccn.loc.gov/2023039326

Cover Design and Illustration: Goldman Sachs

To my dear parents,Neville and Deanna

Preface

I thought of that while riding my bicycle.

—Albert Einstein

My previous book, The Long Good Buy was about economic and financial market cycles and the factors that affect them. This book is designed to be complementary; part history and part forward‐looking, it focuses on longer‐term structural changes in economic and financial markets, and the differing secular trends in which cycles evolve. It is aimed at students, market practitioners and anyone interested in the history and factors that drive longer‐term patterns and trends in economies and financial markets.

Within financial markets, there is a patten of both short‐term cycles and longer‐term super cycles, or secular trends, within which the shorter‐term cycles evolve. The shorter cycles largely relate to business cycles. Since 1850, there have been 35 recessions in the US economy (according to the National Bureau of Economic Research) and 29 equity bear markets (falls of 20% or more in the main equity index). Over the period since the end of World War II (WWII), there have been 13 recessions in the US economy and 12 equity bear markets.

Equity markets tend to anticipate economic cycles. Since WWII, the equity market peak has come, on average, about seven months before a recession, and the market has reached a trough also, on average, about seven months before an economic recovery.

In addition to business cycles and fluctuations in economic factors, such as economic activity and interest rates, a variety of other factors have a considerable influence on markets and can drive longer‐term trends. These can range from geopolitics, technological and institutional changes to shifts in government policies and changing fashions and trends in society. Structural breaks in these factors can create longer‐term secular trends or super cycles that can last for extended periods, during which business and market cycles evolve. For example, an extended period of low inflation could encompass several business cycles. Equally, periods of strong economic growth, or stagnation, have prevailed for a long time even when they have been temporarily impacted by short‐lived recessions. These long trends are often associated with specific market conditions and opportunities, and it is these that I have attempted to explore in this book.

Since WWII, there have been six super cycles in equity markets. Half of these super cycles were secular bull markets, that is, periods with very high returns and rising valuations, and half can be described as ‘Fat and Flat’, that is, periods with lower returns over a long period but with a wide trading range.

As an introduction, Chapter 1 looks at the history of thought around cycles in social and political views, economies and financial markets, and the impact that psychology and human behaviour can have on these cycles.

The main body of the book is then split into three parts:

Structural Trends and Market Super Cycles

– a history of cycles and super cycles.

Analysing Post‐War Super Cycles

– a discussion of each of the post‐WWII super cycles and the conditions that drove them.

The Post‐Modern Cycle

– a look at how the next cycle is likely to unfold, what its key characteristics will be, and how it will be influenced and defined by two factors: artificial intelligence (AI) and decarbonisation, the first defining the virtual world and the second very much shaping the real world.

Part I: Structural Trends and Market Super Cycles

Chapter 2 focuses on an explanation of cycles in financial markets and the tendency for patterns to repeat themselves across four phases – Despair, Hope, Growth and Optimism – and their drivers.

Chapter 3 describes the long‐term history of super cycles in key economic variables: GDP, inflation, interest rates, debt, inequality and financial markets.

Part II: Analysing Post‐War Super Cycles

Chapter 4 discusses the drivers of the 1949–1968 super cycle. I look at the impact of international agreements, the backdrop of strong economic growth, technological innovation, low real interest rates and a boom in world trade, consumption and credit, as well as demographics.

Chapter 5 looks at the 1968–1982 era of inflation and low returns, and the impact of high interest rates and low growth, social unrest and strikes, collapsing world trade, high government debt and lower corporate profit margins.

Chapter 6 is a description of what I call the Modern Cycle – a period characterised by the ‘Great Moderation’, disinflation and lower cost of capital, as well as the impact of supply‐side reforms. I discuss the impact of the end of the Soviet Union on geopolitical risk, and the emergence of globalisation and increased international cooperation, as well as the effect of rapid growth in China and India.

Chapter 7 covers 2000–2009, and focuses on the bubbles and troubles that dominated the first decade of the new millennium, from the fallout of the technology bubble to the financial crisis of 2008.

Chapter 8 looks at the unique conditions that dominated the 2009–2020 post‐financial‐crisis cycle and the impact of zero interest rate policies on market returns.

Chapter 9 discusses the consequences of the pandemic, and in particular its impact on policy, and the transition from a deflationary to a reflationary narrative for economic and market returns.

Part III: The Post‐Modern Cycle

Chapter 10 describes the emergence of what I call the Post‐Modern Cycle, and the implications of a period of rising cost of capital, slower trend growth, a shift from globalisation to regionalisation, a rise in the cost of labour and commodities, increased government debt, higher infrastructure spending, ageing demographics and higher geopolitical tension.

Chapter 11 discusses how technology and AI are likely to shape market returns in the Post‐Modern Cycle.

Chapter 12 focuses on traditional industries and the opportunities that are likely to come from decarbonisation and increased infrastructure spending in the Post‐Modern Cycle.

Finally, Chapter 13 provides a summary and conclusions.

Acknowledgements

I would like to thank Goldman Sachs, and in particular Jan Hatzius, Chief Economist and Head of Global Investment Research, for their support and encouragement in writing this book. Much of the work in it reflects the input of my team in the macro research department and would not have been possible without the ideas, effort and support of my colleagues at Goldman Sachs – both within the research department and across the firm. My gratitude also goes to my long‐standing colleagues in equity strategy over 20 years, David Kostin in New York and Tim Moe in Singapore.

I am especially grateful to Guillaume Jaisson at Goldman Sachs for his significant input, ideas and tireless support and help in putting together this book, and to Loretta Sunnucks for editing the manuscript and for her sage advice and input throughout the process. I couldn't have done it without them. I would also like to thank and acknowledge the rest of my team for their input and feedback: Marcus von Scheele and our previous interns Parthivi Bansal and Nicola Ricci for their support and for preparing the charts, as well as Lilia Peytavin, Cecilia Mariotti, Andrea Ferrario and my assistant, Lauren Hutchinson. Thanks also to Nicola Doll for her work on the cover design, and to Paul Smith and Brian Moroney for their help and comments.

In particular, I would like to acknowledge and give special thanks for the significant contribution and invaluable advice of my close colleagues Christian Mueller‐Glissmann and Sharon Bell, with whom I have worked since 2009 and 1996, respectively. Christian has greatly strengthened my understanding of markets across asset classes and has developed many of the frameworks reflected in this book. Sharon has been central not only to the ideas in this book, but also to my thinking about markets broadly and to the work we have produced together over the past three decades. I have learned so much from her and owe her a huge debt of gratitude.

Thanks also to those who read drafts of the manuscript and have made suggestions to improve it. I have been particularly fortunate to learn and benefit from the wisdom of José Manuel Barroso, former President of the European Union, and Sir Alex Younger, former Head of MI6. Both have given me invaluable insights into the impact of geopolitics and how to weigh up risks and opportunities in the context of global tensions. I am very grateful to Professor Noreena Hertz (UCL), for her comments and thoughts, and to my friend and former colleague at HSBC, Stephen King, for his detailed feedback, support and guidance over many years. My gratitude also goes to Lawrence Summers, former U.S. Secretary of the Treasury, for his encouragement. Professor Narayan Naik (London Business School), Kofi Adjepong‐Boateng CBE (Centre for Financial History at Cambridge University) and Dr Sushil Wadhwani (former member of the Bank of England's Monetary Policy Committee) also gave me valuable feedback.

Finally, I would like to thank my very old friend Professor Anthony Kessel for having the patience to teach me how to understand statistics while at university!

My gratitude also goes to Gemma Valler, Stacey Rivera and Sarah Lewis, and all the team at Wiley, for their help and encouragement.

I would like to extend my sincere thanks to the many colleagues, clients and friends who have taught, aided and guided me over my career since it began in 1985. There are too many to mention individually, but their support means so much to me. Finally, my deep thanks go to my inspiring partner Jo for her wisdom and guidance, and to our wonderful children, Jake and Mia, for being so special and, well, … for being them.

About the Author

Peter C. Oppenheimer has nearly 40 years of experience working as a macro research analyst. He is Chief Global Equity Strategist and Head of Macro Research in Europe within Global Investment Research at Goldman Sachs. Prior to working at Goldman Sachs, he worked as chief investment strategist at HSBC and in a variety of other research roles at James Capel, Hambros Bank and Greenwells, where he started his career in 1985. Peter is a trustee at both the Development Committee for the National Institute of Economic & Social Research and The Anna Freud National Centre for Children and Families. He enjoys cycling and painting.

Chapter 1An Introduction to Cycles and Secular Trends

The farther backward you can look, the farther forward you can see.

—Winston Churchill

In The Long Good Buy: Analysing Cycles in Markets, I focused on the tendency for financial market cycles to repeat themselves over time. Most of these market cycles are driven by, or at least a function of, business cycles. Cycles are important, and trying to predict where we are in a cycle and what happens next is a key focus for investors. That said, equally, financial cycles can help predict economic cycles. As Claudio Borio1 says: ‘The main thesis is that macroeconomics without the financial cycle is like Hamlet without the Prince’.2 In the environment that has prevailed for at least three decades now, just as in the one that prevailed in the pre‐World War II (WWII) years, it is simply not possible to understand business fluctuations and the policy challenges associated with them without understanding financial cycles.

Although financial cycles are a persistent feature of economies and markets, they often exist within longer‐term trends or ‘super cycles’, in which dominant drivers generate strong patterns of returns that can overshadow the shorter‐term impact of the business cycles. Although shorter‐term cycles are important, getting the bigger secular trend right can significantly enhance returns for investors over the longer run. For example, over an extended period of low inflation there could be several business cycles. Equally, periods of strong economic growth, or stagnation, have prevailed for a long time – even when they have been temporarily impacted by short‐lived recessions. These long trends are often associated with specific market conditions and opportunities. Most investors spend their time and resources trying to understand the next development or inflection point in the cycle. However, the longer‐term structural developments and inflection points are often more important, albeit much more readily neglected.

The Long Good Buy was published just at the start of the first UK lockdown during the Covid‐19 pandemic. The consensus view before Covid‐19 emerged was that global growth would be strong. Few people at the time were focused on supply chains or the potential for inflation to re‐emerge as a serious threat. The notion that geopolitical tensions would trigger a war in Europe would have seemed far‐fetched. These events in isolation would have been impossible to forecast. However, a confluence of social, political and policy developments suggests that we are in the early stages of an important inflection point: many of the factors that drive the shape and style of financial market returns are changing.

After this introductory chapter, the main body of the book is split into three parts. Part I is a discussion of the differences between cycles and structural trends. Part II presents a history of post‐WWII super cycles and their distinctive drivers. Part III discusses the emerging super cycle and its potential characteristics. I describe this new era as the Post‐Modern Cycle because it is likely to exhibit some of the characteristics of the traditional cycles of the post‐WWII period, with higher volatility and weaker returns, but also to share some elements of the Modern Cycles of low volatility and rising valuations that have dominated the post‐1980 period.

Repeating Cycles

One of the intriguing characteristics of cycles, at least in financial markets, is that they appear to repeat themselves over time – despite significantly different economic, political and policy environments. In a recent paper, authors Andrew Filardo, Marco Lombardi and Marek Raczko noted that, over the past 120 years, the United States has gone through the Gold Standard period, when inflation was low, and the 1970s, when inflation was high and volatile. Likewise, over this long historical period, the price stability credentials of central banks have shifted, and fiscal and regulatory policies have varied considerably.3

Cycles appear everywhere in our understanding of the physical sciences and the natural world. They range from astronomical, geological and climate cycles to the cycles in biology and sleep. The concept that conditions tend to repeat themselves is obvious not only in the natural world but also in human nature and societies, and, therefore, economies and financial markets. The complexity of and interconnectivity between societal priorities, politics, international relations and economic conditions mean that these cycles often exist in epochs, or extended periods, that are a function of structural trends and can create radically different outcomes for financial markets.

The recognition of cycles and trends in man‐made systems, from politics to social attitudes, fashion and the economy, has a long history.4 The Ancient Greeks were interested in political cycles. Plato talks about the kyklos (or cycle) in Republic, Books VIII and IX in relation to different forms of government and the transitions between them. Aristotle also writes about cycles of government and the steps that can be taken to alter them in Politics, Book V.5 Polybius (200–c. 118 BC) developed a theory of the cycle of government called anacyclosis that relates to the lifecycle of democracy, aristocracy and monarchy, and the forms that these can take (ochlocracy, oligarchy and tyranny). This concept is also referred to in the writings of Cicero and Machiavelli.

The Romans understood the importance of longer‐term generational cycles, described as the saeculum. This was viewed as a period that generally defined a person's lifespan, or that of a complete renewal of a human population. For example, it could be a period first defined by a monumental event, say a war, to the point when everyone who had experienced the event first‐hand had died. The Chinese developed the concept of dynastic cycles, in which history is dominated by waves of succession from empires or dynasties founded by strong leaders who are followed by rulers unable to maintain the same level of effectiveness, thus leading to the eventual decline of the dynasty.

The Social and Political Cycle

Although many factors have an impact on financial market cycles, macro factors, such as interest rates and growth, are key. In addition, longer‐term trends in financial returns are influenced by social and political cycles, which can exhibit major structural shifts that spill over into business cycles and financial market returns.

Interest in the multi‐dimensional influences of society, economies and political systems, and the ways in which these factors influence each other, has evolved over time. During the Enlightenment, scholars focused on what they generally perceived to be a ‘natural order’, and developed categories that described a series of fixed stages of cultural evolution and social development. In the nineteenth century, perceptions of cultural evolution and the way in which society evolved were heavily influenced by the theory of biological evolution developed by Charles Darwin in On the Origin of Species (1859). A theory of social evolution emerged in which society was seen as akin to an organism, and this biological analogy became popular among anthropologists and sociologists as a way of understanding development.

The perception of social development as a cyclical phenomenon gained prominence around this time, as social cycle theory in the field of sociology challenged the concept of a unilateral world view in which development was thought to be a constant. Instead, the cyclical approach views developments in society as a tendency for patterns to repeat themselves in cycles. Theories of multilinear cultural evolution also developed in anthropology. Such theories posited that human culture and society evolve in their own way by adapting to the environment at any time, just as political cycles and economies do. The work of anthropologists such as Franz Boas, Alfred Kroeber, Ruth Benedict and Margaret Mead turned attention away from generalisations about culture, focusing instead on understanding cultural processes within different societies. Seen along this more multilinear dimension, societal developments are a function of context and can change over time; for that reason, they repeat themselves if similar conditions prevail, just as economies or even financial markets do. For example, periods of economic stress are often associated with social unrest and political change in immensely different environments over time.

In the twentieth century, historians became more interested in cycles. Oswald Spengler (1880–1936), in The Decline of the West (1918–1922), used the analogy from biology that each civilisation passes through a lifecycle as it moves between birth and decline/decay over long periods of approximately 1,000 years. British historian, economist and social reformer Arnold J. Toynbee came to similar conclusions, and in 1934 he published the first of his 12‐volume work A Study of History in which he embraced the cyclical theory.

George Modelski, a key researcher in the Long Cycle Theory in politics, describes the connection between economic cycles, war cycles and the political aspects of world leadership in Long Cycles in Word Politics (1987).6 His work suggests that there have been five long cycles in politics since the 1500s that loosely correlate with the economic cycles described in Kondratieff's waves. These very‐long‐run political cycles are based around periods of hegemonic rule. The first was in Portugal in the sixteenth century, and this was followed by the Netherlands in the seventeenth century, then Britain (first during the eighteenth century and again in the nineteenth century), with the United States taking over the mantle in the post‐WWII period.7 These long periods also had an impact on economic activity and, consequently, on financial markets. Most of these studies, it should be said, were European‐ or ‘Western‐based’ and ignored major periods of development in other parts of the world; the ‘silk road’ trade, for example, a 6,400 km trade route that expanded economic growth and facilitated cultural and religious interactions between the second century BCE and the fifteenth century CE, is often missing from the early‐cycle analysis, as are the Arab Muslim influence in the seventh century and that of the Mongols in the thirteenth century.

The struggle for power on the international stage also leads to cycles, or long‐term trends, that are influenced by changing approaches to geopolitics and foreign policy. Arthur M. Schlesinger (Junior and Senior) argue in Cycle Theory, in the context of US history, that the United States alternates between periods of Liberal attitudes and increased democracy, in which society focuses on problems and resolving them, and periods of Conservative dominance, with a greater focus on individual rights, with each phase leading to the other.8 They assert that Liberal phases lead to activism burnout, whereas Conservative phases lead to Liberal phases after long periods of unresolved problems. Klingberg also describes cycles in the realm of foreign policy as alternating between ‘extroversion’, periods of expansion of American influence, and ‘introversion’, when policy becomes more isolationist. In his 1952 paper, he described four ‘introvert’ periods averaging 21 years, and three ‘extrovert’ periods averaging 27 years.9

Just as social attitudes have an impact on and reflect economic conditions, so too does cultural expression in society. Oscar Wilde famously noted that ‘life imitates art far more than art imitates life’, and there is some evidence that social attitudes, reflected in artistic movements, reflect and often lead political and economic developments.10 For example, Harold Zullow (1991) conducted a study of the lyrics of the top 40 US popular songs from 1955 to 1989, looking for evidence of ‘rumination about bad events’ and a ‘pessimistic explanatory style’. He examined the cover stories of Time magazine over the same years to look for similar evidence and found that increased pessimistic ruminations in popular music predicted changes in the media's view of world events with a lag of 1–2 years. He also showed that there is a reasonable statistical relationship between popular music and consumer optimism (measured in surveys), as well as consumer expenditure patterns and economic growth (GNP). Pessimistic ruminations in popular songs and news magazines have tended to predict economic recession via decreased consumer optimism and spending.11

The Business Cycle

Interest in economic cycles, and their impact on financial markets and prices, developed mainly in the nineteenth century. The Kitchin cycle is based on a 40‐month duration, driven by commodities and inventories. The Juglar cycle, developed to predict capital investment, has a duration of 7–11 years, while the Kuznets cycle predicted incomes and has a duration of 15–25 years. Ground‐breaking theories on cycles were developed by Nikolai Kondratieff (1892–1938) in the 1920s. His work focused on the economic performance of the United States, England, France and Germany between 1790 and 1920. He identified long‐term growth cycles that lasted between 50 and 60 years reflecting industrial production, commodity prices and interest rates, and argued that these were driven by cycles in technology.

Interest in cycles and trends increased following the Great Depression. Joseph Schumpeter developed his theories in Business Cycles (1939), shortly after Keynes's publication of The General Theory of Employment, Interest, and Money (1936). While Keynes focused on government policies, Schumpeter focused on the impact of companies and entrepreneurs. He argued that the longer Kondratieff cycles of around 50 years in duration were made up of overlapping shorter cycles, including Kitchin cycles (of around 3 years) and Juglar cycles (of around 9 years). He believed that the very long Kondratieff cycles were a result of creative destruction, a process whereby new technologies generate investment and economic growth, whereas older technologies decay. These technological innovations cause growth and a period of prosperity until the economy goes through a stagnation phase as the technologies are applied more broadly across the various sectors of the economy.

Schumpeter identified three long‐term Kondratieff cycles. The first, from the 1780s to 1842, was associated with the first Industrial Revolution in Britain. The second, from 1842 to 1897, was driven by the innovation of the railroads and was the result of industrial countries using the new technologies in steamships and railways to benefit from opportunities in iron, coal and textiles. The third, from 1898 to the 1930s, was driven by electrification, and involved the development and commercialisation of electrical power, chemicals and automotive industries, which, at the time of his writing, he viewed as incomplete.

This approach to splitting cycles into long phases, or trends, suggests that, while there may be shorter‐term fluctuations in economies and financial markets, there are also longer‐term trends that may be driven by major innovations and, for that matter, developments in social attitudes, politics and geopolitics.

Super Cycles in Financial Markets

In terms of financial markets, the tendency towards both short‐term cycles and longer‐term trends reflects developments across the economy, politics, geopolitics and society. Irving Fisher (1933)12 and John Maynard Keynes (1936)13 examined the interaction between the real economy and the financial sector in the Great Depression. Arthur F. Burns and Wesley Mitchell (1946)14 found evidence of the business cycle, while later academics argued that the financial cycle was a part of the business cycle, and that financial conditions and private sector balance sheet health are both important triggers of a cycle and are factors that can amplify cycles.15 Other research has demonstrated that waves of global liquidity can interact with domestic financial cycles, thereby creating excessive financial conditions in some cases.16

More recent studies suggest that measures of slack in the economy (or output gaps – the amount by which the actual output of an economy falls short of its potential output) can be explained partly by financial factors that play a large role in explaining fluctuations in economic output and potential growth, thereby implying a close link and feedback loop between financial and economic cycles.17 A broader analysis of these longer‐term cycles or regimes, however, shows that they are impacted by many factors. Political cycles, changes in social attitudes and priorities, demographics, technology and geopolitics all have an impact on each other. It is often the complex interplay between these drivers, as well as evolving social attitudes, that affect economies and financial returns over long periods of time and help to explain longer‐term structural trends in markets, or super cycles.

Of course, this all raises the important question of whether financial market returns can be forecast or predicted. According to the efficient market hypothesis, the value of a market reflects all the information available about that stock or market at any given time; the market is efficient in pricing and so is always correctly priced unless or until something changes.18 In this way, even if financial market returns are driven or influenced by long‐term economic and political trends, these trends can't be anticipated because, if they could, they would already be reflected in prices. Others (e.g., Nobel economics laureate Robert Shiller) have shown that, although stock prices can be extremely volatile over the short term, their valuation, or price/earnings ratio, provides information that makes them somewhat predictable over long periods, suggesting that valuation at least provides something of a guide to future returns.19

Psychology and Financial Market Super Cycles

In addition to the relationships that exist between financial cycles and economic cycles, with bonds impacted by inflation expectations and equities by gross domestic product (GDP) growth, there are some patterns of human behaviour that reflect and sometimes amplify expected economic conditions. The way in which economics and fundamentals are perceived by investors is crucial to this mix. Academic work has increasingly shown that risk‐taking appetite has been a key channel through which supportive policy (e.g., low interest rates) can impact cycles.20 Willingness to take risk and periods of excessive caution (often after a period of weak returns) are factors that tend to amplify the impact of economic fundamentals on financial markets and contribute to cycles and repeated patterns. The weakness of economic forecasting models in understanding or taking account of human sentiment, especially in periods of extreme optimism or pessimism, is not a new finding. In his 1841 book Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay argues that ‘Men […] think in herds; it has been seen that they go mad in herds, while they only recover their senses slowly, one by one’.21

The notion that individuals are rational and always use available information efficiently was not always the convention in economics. Keynes asserted that instability in financial markets was a function of psychological forces that can become dominant in times of uncertainty. According to Keynes, waves of optimism and pessimism affect markets, and animal spirits drive the desire to take risk. Other economists, such as Marvin Minsky (1975), have analysed these effects.22

A similar focus on crowd contagion, particularly when coupled with a powerful narrative, is described by Robert Shiller in his book Irrational Exuberance (2000).23 Over long periods, if optimism builds, the impact on psychology and crowd behaviour can be significant, often leading to bubbles (that inevitably burst). Here, Shiller describes a bubble as ‘a situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase and bring in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler's excitement'. Throughout history, the impact of crowd behaviour and social influence is present in market cycles. Many high‐profile celebrities and politicians became investors during the British Railway Mania of the 1840s. The Brontë sisters were among them, as were several leading thinkers and politicians, such as John Stuart Mill, Charles Darwin and Benjamin Disraeli.24 They were in good company: King George I was an investor in the South Sea Bubble, as was Sir Isaac Newton, who reportedly lost £20,000 (equivalent to about £3 million in today's terms) when the market collapsed.25

This ‘human’ complication in forecasting was also featured in work on cycles by Charles P. Kindleberger, who argued that there was a tendency for herding in markets, with investors coordinating to buy assets when it would not normally be rational to do so, ultimately with the risk that financial bubbles develop.26