Power Up Wealth podcast – Economic Cycle Shows America is Moving Forward – Episode 28 transcript:
Sharla Jessop 0:00
Some parts of the economic cycle can be extremely painful, financially speaking. I’m Sharla Jessop. Today, my guest and colleague, James Derrick, will share his insights on what we might expect from the next stage of the economic cycle.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Thanks for joining us, James.
James Derrick 0:48
Absolutely.
Sharla Jessop 0:49
James is our Chief Investment Strategist at Smedley Financial Services. He holds a CFA designation and an MBA. James, you have spent countless hours studying the economic cycles. What do you find fascinating about the research that you’ve done?
James Derrick 1:06
I think the regularity that you see in the cycles, I mean, I get that that is implied in the word cycles. But also, it just, they just come up so frequently. And they seem like such an irregular thing. Every time it happens. We had the dot com bubble. We had the real estate bubble or the Great Recession of 2007 to 2010. And, and now we’re going through one now. And each time it happens, it feels like it’s new. But these things have been going on for 1000s of years. And oftentimes they’re accompanied by a very specific bubble that we remember, like we’ve all heard about, like the the tulip bubble or tulip mania, the South Sea bubble, the dot com, which I mentioned. And then there are a lot of others that we’ve never even heard of. England had a railroad bubble, and Australia has had a real estate bubble, just like we had a real estate bubble. And so there are all kinds of bubbles going on with these cycles.
Sharla Jessop 2:03
Sometimes I think that when you hear cycle you think bubble, but all cycles don’t necessarily end with a bubble. Is that correct?
James Derrick 2:10
No, I would say not necessarily. But each one does have some issues to work out, I guess we would say you know, whether it’s at an individual level, or at a national or sometimes even a global level. There are some some problems that have to work their way out. And that can be quite painful.
Sharla Jessop 2:28
In your article, you talked about one of the lesser known cycles, talk to us about that.
James Derrick 2:35
So I’ve been reading a book called Boom and Bust at the recommendation of a good friend. The book was written by William Quinn and John Turner, if anybody wants to look it up, I highly recommend it. And I chose to focus on a chapter about the bicycle bubble. I mean, who knew there was a bicycle bubble? I had no idea. So the bicycle was actually invented in Germany in 1817. And back then, you know, I mean, it would have been horse and carriage or bicycle. But the bicycles are not like the bicycles we have today. And I think many of us have probably seen pictures of these old fashioned bicycles, they had very large front wheels, which was actually a real problem. Because if you hit a pothole, and the roads were not paved back then either, so if you hit a pothole, and you’ve got that big front wheel, you’ve got a long ways to fall. So it was really quite painful. And and not to mention, there’s no suspension. They were made out of wood. Very uncomfortable. In fact, a one one bicycle that was popular in the 1800s was nicknamed The Bone Crusher. You could just, I mean, we complain about how uncomfortable bicycle seats are today. Just imagine what the Bone Crusher might have felt like, terrible. So what happened, though, is that maybe 50 years after the invention of the bicycle, there were huge technological improvements. So for example, the the frames could be built out of steel. And so then they were lighter, and they were stronger. It’s kind of funny, because nowadays, we don’t think of steel frame as being light, you know, we think about carbon fiber frames or something like that.
Sharla Jessop 4:19
Something you could pick up with one hand.
James Derrick 4:20
Yeah, yes, the steel frame was a huge technological advantage over wood. Chains. The invention of the chain made it possible to put a smaller front wheel, and then you could move the drive train to the back with the chain. You could go faster. Eventually it led to gears. It meant that if you fell you didn’t you weren’t as high off the ground. So there were a lot of advantages to it. And then the final giant innovation was the pneumatic tire. I mean, being able to have a tire filled with air made the ride much much smoother. And again, like I said, no paved roads and so that would have been even more critical than it is today.
Sharla Jessop 5:03
Seems like such a small thing, but as we were talking earlier, you were sharing what an impact it had.
James Derrick 5:09
Yeah, it became I mean, riding a bicycle became a very cool thing to do in England in the 1880s, in the 1890s. In fact, women in particular, the authors say, I loved it, because it gave them this new freedom that they didn’t have. They could go wherever they wanted. And so they were buying it. And by I mean, it just was all the rage. And, and I had no idea but but here’s some numbers to kind of give you an idea of what a big deal it was in. In 1895 there were 70 bicycle related companies in England. And then by 1896 there were 363. So 70, then 363. And then another in the first six months of 1897, another 238 companies were founded. And so it just was huge. In in the year 1890, there were 595 patents in England for bicycle manufacturing. And by 1896, they had gone all the way to 4269. From 595 to 4269. And that number in 1896 represented 15% of all patents in the country. So some of the greatest innovators of that time were focused on bicycles.
Sharla Jessop 6:31
A new mode of transportation. Interesting.
James Derrick 6:34
Yeah. Yes, it’s pretty fascinating. And so then what happened is, is that people needed to raise money. And so a lot of companies went public. There were, according to the authors, 141 companies where the stock was available to the public. I mean, they had they had leveraged buyouts. The kind of thing that we have nowadays, they had back then as well, you know, somebody takes a public company, private with debt, and then they would advertise like crazy and, and then reissue the stock for a profit. They had, they had people committing fraud and, and making false orders. And, and I mean, just just all the kinds of things you would expect it a bubble, a lot of speculation, a lot of innovation, and, and eventually, the whole thing went bust.
Sharla Jessop 7:22
You know, speculation, that seems to be a common thread for most bubbles.
James Derrick 7:25
I think there’s a lot of excitement. And there’s also sort of a new paradigm shift, and people have first doubt it, and then eventually they buy into it. And they start thinking, you know, with with this new innovation, the sky is the limit. You know, I mean, we, the old numbers don’t apply. The old way of doing things doesn’t apply anymore. We are living in a new world. And people get pretty excited. And about the time when everybody buys into this new narrative, then things begin to change. So So for example, out of these 141 companies, bicycle component companies, only 21 of them made it through the next decade. So there were a lot of failures. What I find really fascinating though is what happened next. Like what survived. And that is fascinating, because the technology of the bicycle frame is very similar to the frame we use today. I mean, the bicycle from 130 years ago, looks a lot like the bike we have today. Which is pretty cool. So So they invented that, that structure and shape that’s still in use today. The chain made it possible for to do motorcycles. In fact, one of those 141 publicly traded companies went on to become a major motorcycle manufacturer in England. And then also then that led to the automobile. And then one of these companies became an airplane manufacturer. And so another one kept making tires for all of these. They made bicycle tires, they made motorcycle tires, they made tires for cars, and they made tires for airplanes, and so they were able to pivot and, and stay very relevant. So these are some of the technological advances that stuck around. And and in fact, one company still makes bicycles today, and that’s Raleigh. And by the way, my first bicycle I ever owned was a Raleigh bike.
You know, it’s interesting, you say that, you know, we go through these periods, and there’s obviously at the top after the speculation, there’s a bubble, and there’s some fallout, but then things return to normal and we start a new cycle. Correlate that with what we’re experiencing today.
Well, I think it goes to show that it’s can be really painful, as most of these companies didn’t survive, but then what does survive is very helpful to society. And it helps move things along. And so in a way these bubbles that come around, I don’t know if I would say they’re necessary, but I think you could make that argument like they are a part of progress. I mean, imagine the the dot com bubble from 2000, you know, it took place during the 90s and then we kind of credit the popping of that bubble from 2000 to 2002. I mean, there was an immense amount of infrastructure built in this country for internet. And so it kind of even though there was a crashing of some of these, these companies that were publicly traded in the internet, it also set the stage for great progress that we’ve been enjoying for the last 20 years. And so I have no doubt that when we get through this current process and I don’t think we’ve even given it a name yet, because it hasn’t really hasn’t really burst. And maybe it will, and maybe it won’t. But there’s no doubt that that will look back at this time of 2022, and maybe 2023. And, you know, we’ll see that there was a lot of technological progress, and a lot of benefit that came from the current cycle.
Sharla Jessop 11:17
And a lot of change. When you think of all the change that’s gone on in the last couple of years, during the pandemic, and post pandemic, you know, the way we work, from where we work, the technology we use to work, it’s all changed.
James Derrick 11:30
A lot of things have changed. The current cycle could probably be defined as 2020 to 2022. Or you could say that it’s from 2010 to 2022. And when you look at the things that have changed, I mean, whether it’s, it’s working from home, and and the ability to work from home and be productive still. Also, electric vehicles. How about energy revolution? Especially here in the United States becoming energy independent here, and that’s become very important in 2022. And, you know, solar progress with solar panels and that kind of thing. And so, there’s been a lot of progress in the last 12 years that I think is going to survive regardless of you know whether times get difficult in the next 6 to 12 months.
Sharla Jessop 12:21
Where does that put us then? What do we look for going forward?
James Derrick 12:25
I think the most important thing to just remember is perspective at all times. The Federal Reserve is dealing with inflation right now. And they have all the tools they need to bring it down, and they will. They’re determined to do it, even if it means recession. So interest rates are headed up, inflation is going to come down, there’ll be a slowing of the economy. And all of this is just a natural cycle that we have seen over and over and over. Yes, it’s been exacerbated by excess stimulus, and by the Federal Reserve, maybe waiting too long. I think we could point fingers all over the place. But regardless, like these mistakes have been made before, and there’s both good and bad that’s going to come out of them. And I think it’s just important to remember that because that perspective will help us make us better investors and help us to keep a smile on our faces, even if times get tougher.
Sharla Jessop 13:20
Great information, James. Thanks for sharing that story and enlightening us on what’s going on with with cycles in the economy and maybe how to react a little more positively to them.
James Derrick 13:30
Yeah, glad to be here. Very interesting times.
Shane Thomas 13:37
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
