investing on the waves: The Netherlands after 1600: boom, stagnation, boom or new period of stagnation

Friday, 11 May 2012

The Netherlands after 1600: boom, stagnation, boom or new period of stagnation

In my presentation Wednesday for the Dutch association of investment analysts (VBA) about “The Kondrtieff wave and longer” I showed the two very long charts below (and many other charts).

The first chart source
http://www.hoofbosch.nl/Aandelenvanaf1602/tabid/69/language/en-US/Default.aspx ) is the Dutch equity market since 1602 (VOC only of course in the first years).

You don’t see Kondratieff waves in the price pattern. What you do see is a tremendous boom from 1602 to about 1730 and then there is a stagnation that lasts until about World War II. From 1950 you get a tremendous boom that just until 1960 produced an all time high , above the one of 1735. This boom ended in 2000.

I think the Dutch equity market will join the other markets in the world (=high correlation with the S&P500) and that will be on average favourable: profit margin will stay high, exports will remain good because of Emerging markets compensating for the disaster in Southern Europe and because of tremendous technological progress (=lots of innovation profits).

Most important the times will be better than most people think now and that will mean higher valuation. Conclusion: better times for equities ahead.

Jaap van Duijn (former CIO Robeco and Kondratieff wave adept) concluded from the chart and his chart of the equity market in the UK since 1800 that stagnation is normal and this normal situation has returned and will remain the base scenario for the coming decades in the West. We just have to get used again that you invest in equities because of the dividend yield, not because of elusive profit growth in the future, just like the old investors in Robeco thought form 1929 to 1982.

The second chart is about the house prices on one of the main canals in Amsterdam, the Herengracht. Piet Eichholtz has collected a lot of data about house prices of the Herengracht since 1600 and produced this chart for a standard average house (all land plots had the same length at the canal, only in the corner you had smaller parcels with half the length and depth like my little house).

Again you see a big rise of property prices until 1730, a big decline until 1800 (bankruptcy of VOC did hurt) and only after WWII prices started to rise to set a new all time high in real prices in 2006.

The chart makes of course no correction for the fat that Amsterdam Herengracht was the most prime location in the world until 1730 and after 1730 it became less prime (but still it is an excellent location). Also there is no correction for restorations.

This is in line with the price development of my little house on the Keizersgracht. The land was sold for 300 guilder in 1672 (the disaster year in Dutch history when England, Germany etc. attacked the Netherlands), the first speculator bankrupted and only in 1680 the house was built and sold for 2000 guilder. It reached its highest price of 6400 guilder in 1730 and then it lasted until about 1960 before the price became higher. It is completely renovated in 1975 and sold for 450,000 guilder in 1978 and I bought it in 1982 for 200,000 guilder (and some other things), after 1982 prices exploded again (to about € 600,000 or more) and now the prices are in decline again (a fall of 25-30% from top should be normal). So here the stagnation seems to last longer, there is no help from Emerging markets.

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Cycles

This blog will discuss from time to time the most important cycles, as we (ter Veer and Vermeulen) decribed in our book.

We illustrate the long wave, the Kondratiev wave, with the chart above the blog. So we see inaverage good times for investors until 2018 (maybe longer).

The four year cycle have we illustrated stylistic above the way ter Veer (and I) always did it. Other people describe the four year cycle difeerently.

From time to time I will try to indicate where we are on the four year cycle. You can't know for sure, so the indication will always be subjective and can be wrong.

At the moment I think we probably are in the phase FG (and we have seen the first correction in this phase).

Summary investing on the waves (beleggen op de golven)

This blog started because of the Dutch book Investing on the Waves (Beleggen op de golven in Dutch).

The summary of the book:

For being a good investor you must have views. You have to explain things well to judge what the future will bring.

We (Ter Veer and Vermeulen) think the next eight to ten years will bring prosperity as the world (dominated by the 85% of the world population that lives in Emerging Markets) has never seen.

We base that view on the study of several shorter and longer cycles in the economy. We use our investment chart (heading this blog) already for several decades: you can see the Kondratiev wave with its regular sequence of the scenarios recovery, creative transformation, prosperity, recession, chaotic downturn and depression.

To determine in which scenario we are you study the important powers in the society: business, employees, government and individuals. The shift of these powers goes in a regular cycle and causes the long wave (Kondratiev) in the economy with its long periods that things go well on average and its long periods that things don't go well.

In the current phase of the cycle business and indivuals are strong (and government plus employees weak). The strong powers cause a high growth of productivity and implementation of many innovations.

High productivity growth is much more important for economic growth than debts deleveraging.

That is why we -especially Emerging Markets- will get strong growth in the world. That will especially be the case when governments invest a lot in infrastructure (including what is necessary for the Green Revolution).

The growth in the world in the past years had three pillars: the ICT-Revolution, the Emerging Markets and the Financial Revolution with its Asset Economy.

All three pillars had its severe setbacks (The ICT-Revolution in 2000-2003, the Emerging Markets in the Asia crisis of 1997-1998 and the Financial Revolution in 2008-2009 because of the Credit crisis). The first two pillars saw very strong recoveries and we expect the same for the third pillar, especially when the Green Revolution will take off..

Gerhard ter Veer was CIO of PVF asset management that later merged with Achmea Asset Management and F&C. After his retirement he wanted together with Peter Vermeulen, then his head of strategy and now strategist at F&C extensively our theories about investing and our views that we had told to the boards of pension funds during decades.

To make things not too heavy and complicated we explain a lot with dreamings, the simple stories that aboriginals use to teach. On this blog you will see more new dreamings.

Explanation for the existence of a long wave (Kondratiev wave)

* Debt mechanism: over and under investment creates long cycles (Marxist explanation)

*Innovation mechanism: inventions, implementations follow long cycles (capitalist explanation). It explains productivity growth and so employment growth.

*Sociological mechanism: you have long periods where the society gets softer and harder.

All three mechanisms explain for a part the phenomenon of long waves. When you take them together, you can get a better picture.

The power shift between Business, Employees, Government and Individuals ( a social mechanism) is according to us the best explanation for long waves.. It explains why in some periods the incentives are right to have succesful innovations,inflation and high investment growth versus other periods in which inflation goes up,unemployment goes up and profit margins go down.

The current debt crisis is definitely a reason why growth is so low in high debt countries.

The possibilities for high growth are underestimated because productivity growth is high, many innovations have to be implemented and important new (emerging) markets grow fast.

In Emerging Markets and some developed markets like Germany you have the old classic situation of the powers for a prosperity scenario: strong Business (strong profit growth, high margins), strong position of employees (unemplyment rate is low or falling to low levels) and a weak position of government (has to downsize). Individualism is not yet strong.
In many dveloped markets like the US and the UK the situation of the important powers is differenT: employees are in a weak position and individuals (like knowledge workers with (international) networks) are in a strong position.

Because of the weak position of employees this is not the classic prosperity scenario, but you still can get high economic growth when the income of business and individuals grows strongly: a Goldilocks economy with a strong asset Economy. When this growth is strong enough this will lead to a more normal prosperity scenario with fast declining unemployment rates.

This situation will occur much sooner than most people realise: productivity growth is high, the housing market in the US will grow strongly from rock bottom levels, investment growth will be very high because of high profit margins and low real interest rates.

Because 85% of the world population lives in Emerging Markets and only 15% in Developed Markets and economic growth in the world is more than 4% (even while it is now only 2% in Developed Markets) for the world in total you can speak of a prosperity scenario.

Investment Chart Kondratiev Wave

Friday, 11 May 2012

The Netherlands after 1600: boom, stagnation, boom or new period of stagnation

1 comment: