The World is Flat – at the Transitional Divide

One of the side effects of the financial crisis was that growth cycles across the world that had converged leading up to 2008, became untethered in the ensuing aftermath. We recall listening to an economist in the summer of 2006 wax poetic about how the 66 largest economies in the world were enjoying a historic and synchronized expansion. Naturally, his takeaway was broadly bullish – implying a sturdy and broad foundation was extended beneath the markets. While that was exceedingly true at that time, his observation of the cycle resonated for us in a very different way. If everyone was expanding on the same growth wave, the inevitable contraction would be greatly magnified. We found the statement so poignant, it remained written across the top of a whiteboard in our office for several years.
These same wave principals are taught in your high school physics class as a phenomenon known as constructive interference. When two waves of identical wavelength are in phase, they form a new wave with an amplitude equal to the sum of their individual amplitudes. Conversely, when two waves of identical wavelength are out of phase, they cancel each other out completely. Often, it’s a combination of varying degrees of both destructive and constructive interference that determines the composite structure of the new wave – or in this case, the aggregate cycle of the largest economies in the world that had become highly synchronized. Needless to say, our greatest fears in the market were realized just two years later as momentum was translated and magnified sharply lower during the financial crisis.
Back in the spring of 2011, we created a video around this concept (see Here) – that also played on the interventive policies that the financial system were increasingly reliant on. For us, Constructive Interference took on new meaning – which was summed up with three progressive assumptions at the end of the video.
The current financial system requires Constructive Interference by the worlds major central banks – the Federal Reserve acting as the principal director of policy and practice. Consolidation within the financial sector (i.e. Too Big to Fail) in the last 30 years has enabled central banks with the infrastructure to administer reflationary policies efficiently and with greater efficacy during illiquid periods of contraction. The cumulative effects of Constructive Interference within the financial system has led to increased speculation, frequent financial bubbles and confidence within the monetary system to react (i.e. moral hazard

This post was published at GoldSeek on 26 November 2014.