Bears, Bulls and the Strategic Necessity of the Business Cycle

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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

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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
  (Japans)

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Business Cycle occurs because of leveraged
finances

• The irresistible temptation
• Competitive power
• Vulnerability of leveraged finance

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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

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Government regulation cant prevent business
cycle

• E.g. government regulation of derivatives
• Temptation of quick wealth
• Insider information
• Problem for effective regulation and risk
  management

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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

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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

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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

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Rival Interests of Bulls Versus Bears

• Most competition is asymmetric (different
  strategies and capabilities)
• Simplest dichotomy
• Bulls versus Bears

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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?

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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

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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

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An example Japan 1927-1932

• Strategic competition between bears and bulls
• ?Intense financial, business and political
  crisis in Japan from 1927-1932

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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

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Japans new zaibatsu during World War?

• 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

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Japan after World War?

• 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

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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

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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

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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

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Thank you for your attention!

• Question welcome