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Bears, Bulls and the Strategic Necessity of the Business Cycle

Bears, Bulls and the Strategic Necessity of the Business Cycle. By James H. Nolt, Dean of the NYIT-NUPT International College, Nanjing, China and Senior Fellow, World Policy Institute, New York. Business Cycle. Very poorly understood among all schools of economics and business theory

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Bears, Bulls and the Strategic Necessity of the Business Cycle

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  1. Bears, Bulls and the Strategic Necessity of the Business Cycle By James H. Nolt, Dean of the NYIT-NUPT International College, Nanjing, China and Senior Fellow, World Policy Institute, New York

  2. Business Cycle • Very poorly understood among all schools of economics and business theory ● Neoclassical microeconomic theory ● Marxian and Neo-Ricardian theories • Business Cycle could be tamed by government regulation. ● Business Cycles has recurred with some regularity ● Even within highly-regulated economics (Japan’s)

  3. Business Cycle occurs because of leveraged finance’s • The irresistible temptation • Competitive power • Vulnerability of leveraged finance

  4. Corporatism • Market power and strategic competition ●Bulls: a leveraged growth strategy Bulls flourish in easy money and credit at the expense of more established bears ●Bears: slower-growing, less indebted Often large established market leaders

  5. Government regulation can’t prevent business cycle E.g. government regulation of derivatives • Temptation of quick wealth • Insider information • Problem for effective regulation and risk management

  6. Why are economists so blind about the business cycle? • Use Models based on mathematical elegance rather than using realism • The natural tendencies toward market equilibrium are overstated by most economists

  7. Bulls and bears are not just subjective opinions, but represent objective investment positions • Strategic players ● Bears: expect and promote bust ● Bulls: expect and promote boom • Non-strategic players ● Hedge their bets ●Neutral between boom or bust

  8. Bulls and bears can be in any line of business • Scale of organization ● Individual firms ● Informal pools of investors ● Formal consortia or cartels • Type of investor ● Financial ● Non-Financial

  9. Rival Interests of Bulls Versus Bears • Most competition is asymmetric (different strategies and capabilities) • Simplest dichotomy: Bulls versus Bears

  10. Why cows would be bears • Strategic Competition ●Easy credit and continuous growth fuels the fast growth of hungry bulls eager to steal market share from the fat established cows ●How can cows protect themselves?

  11. Inexpensive credit is the resource that makes bulls such fearsome competitors • Bear confront bulls: tightening or restricting credit • Bullish debtor loss, bullish creditors are weakened or destroyed

  12. Revenge of bears: competitive impact of restricting credit • The longer and more unrestrained the growth, the more exuberant and wildly speculative the most bullish investor become • The more risky leveraged investments accumulate in any economy, the more vulnerable those bulls become to a reversal of the business cycle when the bears counterattack

  13. An example: Japan 1927-1932 • Strategic competition between bears and bulls ●Intense financial, business and political crisis in Japan from 1927-1932

  14. “Big Four” conglomerates (zaibatsu) • Mitsui • Mitsubishi • Sumitomo • Yasuda (now Fuji) ● Zaibatsu also linked to powerful foreign banks and business firms and strong participants in foreign trade and investment

  15. Japan’s new zaibatsu during World WarⅠ • New zaibatsu enjoyed the amazing growth of Japanese industrial output • These new conglomerates grew with massive infusions of cheap capital • They depended on loans from external financial institutions, mostly government-controlled banks

  16. Japan after World WarⅠ • Delays its restoration of gold convertibility of the yen • Wartime inflation • Shinko zaibatsu resisted the necessary deflation and remained bulls • The old established Big Four zaibatsu were bears and insisted Japan return to the gold standard yen

  17. Bears launched a devastating two-pronged attack on bulls • Government banks restrict loans • Big Four banks curtail credit during 1927 for the new zaibatsu overnight • The Big Four gained control of surviving companies of bankrupted adversaries • During the next few years, Japan followed a tight credit policy

  18. The bitter revenge of the bulls • With the onset of the Great Depression, bears deflationary policies met growing resistance. • Bulls sought revenge by funding underground terrorist groups, military secret societies • By 1932,the military took Japan off the gold standard, devalued the yen and began pumping government credit bank into the new zaibatsu to reinvigorate them once again

  19. Bulls and Bears Today and the Growing Role of Butterflies • More players who act alternatively as bears or bulls are called butterflies • The U.S. and the world are entering difficult economic circumstance • Many large companies have dangerously unhedged positions in various derivatives markets

  20. Thank you for your attention! Question welcome

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