This is the Data Science Conversations podcast with Damien Deighan and Dr. Philipp Diesinger. We feature cutting -edge data science and AI research from the world’s leading academic minds and industry practitioners, so you can expand your knowledge and grow your career. This podcast is sponsored by Data Science Talent, the Data Science Recruitment Experts.
Welcome to the Data Science Conversations podcast. My name is Damien Deighn, and I’m
here with my co -host, Philipp Diesinger. How’s it going, Philipp?
Good. Thank you,Damien. Great. So today we’re doing something quite different to the norm. We are very excited to have Akhil Patel here with us talk about the economic cycle and what the short and long-term implications are for the current boom in the AI and tech sector, given that the Gen AI sector in particular has had a flood of investment in the last two to three years. By way of background, Akhil is a globally recognized expert in international finance and economic and market cycles. He is currently the director of property share market economics, and he’s also the principal policy advisor at the European Bank for Reconstruction and Development in Canary Wharf and London. He specializes in making robust, short and long -term market forecasts, including annual stock and commodity market roadmaps, and identifying key market turning points. His work has been widely featured in both business and mainstream media, such as the BBC, Scottish TV and the influential UK Financial Magazine Money Week. Prior to his current roles, he also worked in the UK government in the Civil Service, where he helped to set up the £3 billion international climate fund.
Academically, he went to Oxford University, where he obtained a degree in the classics and he holds two master’s degrees, one in finance, and another in public policy from the London School of Economics. He is also the author of one of the most influential economics books published in recent years, The Secret Wealth Advantage. Welcome to the podcast, Akhil.
Hi, Damien. Thank you very much for the introduction.
So maybe if we start at the high -level you, Akhil, can you maybe explain to us why it’s important that people are paying attention to and have some understanding of cycles?
Well, the world is cyclical. The sun rises in the morning and sets in the evening. We’re born and die. Nature has cyclical rhythms. They’re everywhere. They’re all around us. It’s particularly cold and rainy day in London, reminding us that the seasonal pattern is well and truly intact as we move in through autumn into winter. So the world is cyclical. What’s really interesting is human beings display cyclical behavior in many areas. And one of the areas that I’m particularly interested in is the stock market. You see stock market cycles quite regularly, both short and long term. And also longer term, you see cycles in the economy. So you get periods of kind of rising prosperity and rising activity and then suddenly periods of falling prosperity, falling activity, and indeed sort of crises. And I think probably a lot of your listeners have, over the last of 10 to 20 years, experienced both the kind of the upside and the downside of all of that. And that’s kind of essentially getting a handle of the rhythm of the cycle and what it might mean both where you are currently and what might be coming next.
I think is quite important. And one of the cycles you’re particularly interested in is the 18 year cycle. Could you walk us through your hypothesis of that and explain how it works, please?
Yeah. So the hypothesis is, and there’s quite a bit of evidence behind it, that there is an actually fairly regular 18 -year cycle. It’s sometimes a bit shorter at sort of 16 to 17 years and sometimes a bit longer at 20 years, but it’s pretty regular. There is this cycle of boom and bust. And so all of the kind of major financial crises, recessions and so on in the past of 200 years in predominantly Western economies and in particular the US and the UK for which we
have the kind of longest running data and that’s partly a function of the fact that they’ve been the most politically and economically stable countries over that period.
You can see that there is this sort of 20 year pattern which always kind of results in a major financial crisis and recession stroke depression at the end of it. And on the other side of the cycle, you get some relatively lengthy periods of increasing activity, increasing wealth and prosperity, business profits and so on.
So you talked about data. Maybe I’d just give us an overview of what the typical data sources are that you formulate your forecast and analysis from.
I mean, I should add at the outset that I’m not the kind of discoverer of this cycle. Because cycle. My work builds on how to make it some practical and apply it to business and investment decisions. And I will want the question about data is it goes back to this American economist in the 1930s called Homer Hoyt, who had acquired a very large data set of land sales in Chicago over the 19th century.
And what he discovered by analyzing that data was a pattern of 18 years of kind of a boom and bust. So very significant rise in property values, particularly in the couple of years into a peak and then a major kind of collapse in those land values. And he saw, he wrote in 1933, he saw five 18 year cycles in Chicago from the moment that it was sort of first populated. you know, a few villages on the banks of Lake Michigan to a major metropolis over those 130 years that he was studying. And that is the fundamental kind of data that we use to kind of build a picture of the cycle. It’s land prices and land sales. We don’t tend to measure such things in quite the same way in kind of the modern economy, but people track the cycle through house And I also, in kind of a building a picture of where we are in the cycle, I kind of use data about money supply because these days what’s going on in the banking system is very important to what’s going on in the property markets in the land market. I look at things like the bond market and the yield curve, which tends to have a pretty good track record for forewarning people about recessions and so on. And I know based upon my study of cycles that if you’re going to get a recession, it’s usually something to do with what’s going on in the property market. I use stock market data because the stock market is a price discounting mechanism, and so often is three to six months ahead of actual events.
And so, you know, you can use the stock market data of home builders, for example, to get a sense of what’s going on in the property market, which gives you a sense of what’s going on in the broader economy. Eventually, most Western countries of any size are synchronized to the cycle.
Now, very interestingly, in the 19th century, and, you know, appreciate that’s quite long time ago, the UK and the US exhibited this 18 -year pattern, but they were kind of opposite to each other. So when the UK was going through a crisis, the US was sort of halfway through its cycle and vice versa for quite some time. After the Second World War, all kind of countries that sort of exhibited this pattern kind of reset at the same point. I mean, I think largely because they all reconstructed in the late 40s, early 50s and so on. And you saw this very clearly in different countries, France and Germany and Italy and increasingly as they developed in kind of Portugal and Ireland and so on. And they had a very major crisis in 2008. But also quite Interestingly, in countries that had been really beaten back, I mean, not
Germany as an example, but also Japan, which had a very major boom in the 50s and 60s, had a actually relatively minor crisis in the 1970s when we had a major crisis in Western economies. But kind of very famously, 18 years after that, had a really, really significant crisis in the early 90s. I think the real question as we go forward now is the extent to which China also exhibits the same pattern.
Now, the Chinese economy is a bit different. As I’m sure you’re aware, it has sort of capitalistic characteristics, but also has very, very heavy state intervention. But the signs are that, you know, in the Chinese market, property plays a central role.
There’s a lot of leverage against property. Decision makers are also kind of reacting to all of those things and potentially it is also synchronized but you know we have to wait i think a little bit to see the actual evidence on that yeah and you have highlighted a couple of times the the importance or the value of land or property values if i understand correctly your argument is that really said land values captured the the surplus of growth right so like they they pull construction, speculation, and so on.
Can you elaborate on that a little bit?
Yeah, so any activity in the economy requires a bit of land because it has to take place somewhere. And people tend to congregate for hopefully fairly obvious reasons in the same
places. So land is essentially a scarce asset. It doesn’t get created. It’s just exists. It’s a kind of a what we say is a gift of nature. Therefore, whoever owns the land has monopoly pricing power. And so while there’s a lot of competition in the labour market for people, and there’s a lot of competition in the general business, kind of capital investment in other markets, so the competition reduces the surplus that anyone can make and the residual kind of values by the
lands. Now, you know, you might be an owner of the property in which you’re doing your business and so you might not have to pay that over to a landlord, but actually a lot of businesses do. And so you might not necessarily always see it, but the extent to which you are making profits, it tends to get funneled into the land market. That means that it is a very great asset for speculating in for buying land and then holding it and selling it for higher price tomorrow is also underpins the collateral in the banking system so banks can push kind of credit into into the property market that enables people to pay more for land and so on but you know when it comes down it then affects what the banking system can do as well so it has a sort of a dual kind of role in in both the kind of the boom in the bus side of the economy yeah and probably would also play a key role in terms of features or data -driven indicators or so that you would use if you could build you know a cycle dashboard now like what would be the top leading indicators you would put on that dashboard to to spot the kind of the turn of the market is it like land block prices construction Well, yeah, construction activity is one.
I mean, house prices is obviously where you see some of this. I think house prices, so land is a very locational asset. And what you tend to find towards the end of the cycle is that the most kind of speculation is taking place in relatively small towns or in places at the edge of city. So if you’ve got your eye on what’s going on in those markets, you might start to see the beginning of a downturn. Obviously, if banks are pumping a lot of money into the economy, it’s actually probably largely going into the property market. And so you can get a sense of whether things are accelerating or declining by following kind of the money supply and sort of derivative indicators of that. I also like to use the stock market, as I mentioned at the beginning, because if you’ve got home building stocks that are showing a decline while while the broader market is rising, that suggests that those analysts who study the stock price and the earnings of those companies are suggesting that in the future there isn’t going to be quite the same level of earnings and therefore that bit the stock price is pushed down. At key points in the cycle, that’s suggesting there’s a slowdown coming in the property market, which potentially means problems in the broader economy.
I would like to take a brief moment to tell you about our quarterly industry magazine called the Data Scientist and how you can get a complementary subscription. My co -host on the podcast, Philipp Diesinger, is a regular contributor and the magazine is packed full of features from some of the industry’s leading data and AI practitioners. We have articles spanning deep technical topics from across the data science and machine learning spectrum. Plus, there’s careers advice and industry case studies from many of the world’s leading companies. So go to data science talent .co.uk forward slash media to get your complimentary magazine subscription.
And now we head back to the conversation.
So maybe Akhil you could walk us through an entire cycle and what it looks like, maybe starting at the end of the 2007, 2008, great recession as it has been called, because I think most people should be, if they didn’t work and live through that, they would at least be very familiar with what happened. So can you take us through there up to the present day, how it works?
Yeah, certainly. So, I mean, maybe before I start the overall kind of run through, I’ll say that it’s an 80. Now, sometimes the first seven years might be a bit shorter or a bit longer, and the second seven years might be a bit shorter, a bit longer depending on other factors. The final crisis recovery phase is, I think, fairly regularly around four years for reasons that I’ll come on to. So what tends to happen is the cycle begins when you’re kind of really feeling the difficulties from the last crisis. The banking system is really on its knees. It’s banks not lending so much. The government is doing quite a lot to reflect the economy. The mood and sentiment is quite negative. There’s been a lot of business failures, house prices are down. Stock market has come down typically 50%. And there’s a recession, there’s quite an air of negativity. But that’s the point at which the crisis ends, the new cycle starts. For the previous cycle, the peak of the cycle was around 2007, and the start of the current one was sometime during 2011, early 2012.
And if you recall, in the UK at least, we were talking about triple -dip recession in early 2012. Mario Draghi, who was then the head of the European Central Bank, had a press conference in London. It looked like the euro was going to collapse, and he said, I’ll do whatever it takes to save the euro. And It’s often big statements like this that tend to mark the turning of the cycle. You then see a beginning of activity and it’s often in new industries and that’s often related to new technology. And often it’s doing things in new ways that the economy hasn’t seen before and a lot of business investment and activity starts and that and that kind of pushes up demand into other sectors eventually. Now, we are in a very technologically rich age, and there’s any number of technologies that you might point to having been instrumental in sort of getting the current cycle going, but I would particularly point to the fact that everyone was on 4G and had a smartphone by kind of the early 2010s. And that gave birth to a whole number of industries from, you know, it’s affected banking, it’s affected dating, It’s affected, you know, how you move around the city and how you rent places and so on. And that really drove a lot of investment in kind of Silicon Valley in areas around London. A lot of businesses relocated there. That started getting kind of the economy move again. You started to see by 2012, 2013 a few, you know, construction cranes going up.
There was a burst in the property market in 13, etc. So you tend to have a return to activity. The stock market is now rising again and so on. And so you would then expect about seven years of generally things going upwards. So from around 2011, 2012, you’d expect around 2019 to be seeing signs of a slowdown. Now, we did get that. People weren’t really paying attention to that. In the really biggest cities where property prices recovered first. in late 2018, early 2019, or maybe it was later in 2019, I can’t remember precisely. The world was generally slowing down into the COVID crisis, which effectively ended the mid -cycle recession because, I mean, I know we had a very significant recession, but actually it was just because we decided to stop doing things for an indefinite period of time. And then we introduced the most enormous stimulus that you could possibly imagine, which basically started the second half of the cycle off. levels of savings and people who really wanted to spend money. And we had an absolute burst of activity. We had interest rates at 0 % removal of taxes on property purchases and so on. And so what I think happened, at least at the start of the second half of the cycle, is what might have taken place in previous cycles over four or five years happened between mid -2020 and early 2022.
When property prices went, I think bananas, I think is the technical term for that, GameStop took them to the cleaners, effectively. It was really kind of very strange kind of period in our lives. And I think central banks really started to panic in 2022 at the prospect of really significant inflation returning, and they took interest rates from zero to north of 5 % in a really short space of time. And that has, to a certain extent, killed what might otherwise have been a boom, but a boom spread out over several years. But nonetheless, you know, if you’re a stock market investor and investor in commodities, it’s been a really strong run for a few years. And so in the pattern of the 18 year cycle, we’re getting close to the peak of the current cycle. And then you’d expect the next four years to involve a fairly significant downturn, if not also some kind of financial crisis. Now, it’s very important to say that no two cycles repeat exactly. If they did, everyone would see it. And it also means that sometimes what might have been the most significantly affected country in the last cycle might not necessarily feel the effects quite so much in the next one. It’s very clear that people who are
investing and doing business in the US still remember 2008. And the US, I think was at the center of that sort of major boom and then crisis, it’s quite likely that the central part would be some other place. I mean, obviously, the US is going to be part of it because it’s the world’s largest economy still and so on. But maybe the sort of the main kind of trigger point might be elsewhere. And there are a number of areas of the world which have been going really quite crazy over the last few years in terms of construction and speculation. The Middle East springs to mind, but parts of Asia. Japan had a very muted cycle last time, but things have been motoring quite significantly then. Germany didn’t have much of a property boom in the 2000s, but my understanding has had a very significant one since the start of the current cycle. So, you know, you might see things start off in a different way towards the end of this cycle. It’s quite hard to predict in advance where that might be, but you tend to look for the countries that have experienced the most kind of rapid increase in property prices, the most kind of construction, particularly at this stage, the most optimism and sort of excessive behavior.
That kind of gives you an indication of where things are going most over the top. So essentially what you’re saying is the second half of this particular cycle, it normally takes seven years of steady upward to the peak, we saw two years of mania after lockdown, which has kind of not interrupted the cycle, but it’s maybe changed.
It’s trajectory. I mean, COVID was incredibly disruptive in any number of ways. I think, as I said, you know, the amount of money pumped into the economy and directly into people’s bank accounts was relatively unprecedented. You also had this situation where you denied people for several months, normal economic activity. And so when they emerged from COVID with record savings, they really went for it. Also at a time when quite a lot of businesses had shut down and supply chains had been restricted. And so sellers had much greater pricing power and you had demand that was relatively price and sensitive. So we had a burst of inflation and people still kept going on holiday and going out to eat and so on, and a time with less competition. And so that really created an enormous amount of activity. Plus also people had started, you know, putting their money in the stock market and in crypto and other things. That sort of behaviour you would normally expect to be towards the end of the second half the cycle. So in my, it might come on to the book that I’ve written, but the final two years before the peak tends to be the one with the greatest kind of mania. Maybe this cycle around a variation is that we got most of that really excessive behavior, you know, early on in the second half of the cycle. But I would say, though, given the share price of companies like Nvidia and so on and what’s going on in the AI space, we are seeing some pretty manic behavior right on time. So it’s not that it’s all in the first couple of years, but it appears to be some kind of change or variation for this cycle, which, you know, does happen from time to time.
Moving it on to AI then, what’s your view on the AI investment surge of the last few years? And do you think it’s, we’re in a bubble?
I do. If you look at the prices that people are prepared to pay in relation to current or even prospective future earnings, I mean, it’s, I don’t think you can call it anything other than a bubble. It’s interesting, though, because everyone seems to be talking about how it’s in a bubble. And, you know, I would have thought that it’s not so widely, you know, these things are not so widely known. But I think there’s enormous amounts of hype, the business case for some of these AI companies is maybe not quite as strong as it should be. If you’re going to be spending hundreds of billions of dollars and investments and training models and so on, I think you would want to have a bit more of a guarantee of a proper return on your investment. And by no means an expert I should add. And I know I’m talking probably to a more expert audience on this, it seems that pricing and fundamentals have taken different paths, and that for me is a classic indication of a bubble. And also the interrelationships between the main AI players, you know, Invidia investing in Open AI who have, you know, signed contracts to buy things and vice versa with other players. Invidia itself being quite exposed to one or two very large customers in Taiwan, if I’m not mistaken, and that being a sense of, you know, well, that’s an area of significant geopolitical risk. And then the significance of Nvidia’s share price to the overall US market and people’s wealth and their portfolios and so on. I mean, it’s, it just seems to be enormous amounts of sort of interconnection. When one thing kind of falls, it could have quite a significant domino effect. And I think that will be sort of quite interesting. Now, my slight concern is a lot of people know about this. So, and to that extent, some of this concern might already be priced into the market. What I would say, having studied historic cycles, it’s usually things that people haven’t thought about that acts as the trigger for the crisis. You know, people weren’t really talking about subprimemortgages in 2007. I know that we’re all talking about now. Everyone’s watched the big shorts and so we’re all well versed in all of that. But in early 2007, it wasn’t really well known outside the parts of the finance industry. Maybe one area is that, you know, there’s a lot of investment in data centers and data centers require land. There’s a lot of bank credit created to to acquire that land, require a lot of natural resources. I think they have effects in local communities which are not great in terms of noise pollution and putting prices up of electricity and so on. Maybe there might be some kind of regulation that comes in that squeezes this activity and puts a stop to it, which then brings prices down, which brings the market down, which causes some banks to fail, which means that they reduce their lending to other parts of the economy. If they’re similarly in stress kind of positions, that might have more of a cascading effect. So it will be interesting to see how it plays out, but I certainly think there is a bubble going on, and it’s an increasingly risky one from a kind of financial investment point of view.
And which countries would you expect to move first in a 2026 downturn?
Well, it’s, I mean, it’s going to be parts of the US because a lot of this enormous investment is in the US, but I don’t know if you have traveled to Dubai and, you know, parts of Saudi Arabia and so on. I mean, what’s going on there in terms of what I would call malinvestment, you know, building skyscrapers, but then building artificial islands and God knows what else, ski resorts in the middle of a desert and stuff like that. I mean, exactly what happened. long -term investments have spent the last 10 years arguing about Brexit and so on, haven’t really had a very crazy kind of speculative boom like we had in the 2000.
So I don’t think it would trigger the crisis, but would be affected by it, of course. Maybe, you know, I understand that, you know, the country is affected by the Euro crisis last time Ireland and Spain and so on, have had another very significant property boom, it might start there. Maybe the left field suggests would be somewhere in Germany. So I think the German government was sort of quite pleased at how it handled the last crisis because it hadn’t had much of a property boom, didn’t need to bail out the banks in the same way that the US government did and the British government did. Maybe people there are less kind of aware of the consequences of some of these things related to the property market. I think that would be quite interesting. But, you know, on the other hand, things are quite flat in Germany, as I understand, given sort of the effects of decline in manufacturing and, you know, the Ukraine war and so on. So usually tend to find that the triggers are where there’s been the most rampant speculation. And you wouldn’t say that’s necessarily the case in Europe and in Germany in places like that. So I’d say the Middle East is probably more of a likely bet.
In terms of looking at previous bubbles, do you see parallels between the current AI investment bubble and maybe the dot -com boom and bust? Or are the differences?
Well, the differences in relation to the dot-com is the dot -com bubble took place a different point in the cycle. So that was in the up to the mid -cycle, sort of seven years in when you get a sort of a minor recession after it, and the US had a six -month recession at the end of 2001, but there was no effect on the banking system. So while there’s a lot of attention to the dot -com, I don’t think it will have the same effect as the bursting of the air bubble because it’s kind of related much more to the end of the cycle, decline in kind of land prices and and itself is a very huge investor around the sort of global economy. It’s linked to sort of, you know, banks and other non -banking providers of credit. So there’s some parallels, but maybe slightly limited. What I would say, though, is they both involved enormous amounts of capital investments, maybe over over investment in capacity. And I think you would certainly say that those two things share that in common. Another parallel that I think is quite interesting is what was going on in Japan in the 1980s. And so to the point that I made earlier about how all these companies are interconnected and financially beholden to each other, you had something similar in Japan with these industrial conglomerates that had their preferred banking partner and preferred service providers partners. And they were all this kind of slightly incestuous grouping. And there were several of these different things going on. And, you know, as banks lent to, I don’t know, Mitsubishi to do something, often actually to buy land and, you know, in speculating land, the share price of Mitsubishi would be boosted. And therefore the bank, the share price of the bank would be boosted because they also own shares in Buzimich. So there’s all this kind incestuous relationships. It wasn’t independent third -party transactions. And I think there are some parallels to the current situation in the AI space. And another parallel that I’ve written about is to the, and this is going back somewhat, to the railway booms of the 19th century, which again involved enormous capital investment and in a way that, you know, some of these lines that were developed to run the railways, you know, could never possibly make any sort return on investment. And yet there was all this hype around them and people speculating in them and so on and driving share prices up. But ultimately it was a lot of hot air underneath some of the claims that would be made.
So I think there’s a parallel there as well.
Yeah, I think it’s going to be super interesting because back at the dot -com era, AOL were the big kings. They were huge. They were the dominant player because the internet ran on dial -up modems, if you remember them. And then the switch to broadband came really quickly and AOL became history. So I think Let’s see if Open AI turned out to be the AOL of this bubble. Let’s see.
But I think the parallel you’re talking about in relation to all of the interconnectedness is a really good one. Because in the last couple of weeks, we’ve seen this crazy high -value deal between Oracle and Open AI, where Open AI is supposed to buy an outrageous number of chips and infrastructure from Oracle and of course Oracle’s share price goes through the roof and OpenAIA cannot ever afford to fulfill that contract. So I think those things are clearly happening.
So if you were to get your crystal ball out, Akhil, and pin down maybe a more precise period. When do you think is the likely six to nine month period, if we can be that precise, that the next crash will occur?
So probably for the last of 10 or so years, we’ve sort of highlighted 2026 as being the likely peak date of the cycle. I think this will be the point at which you don’t get much more in terms of appreciation in the property market, and when I say property market, I really mean residential market. There tends to be a slight difference between residential and commercial, which we might want to touch one in a second. That being the case, you would then expect six, nine, eight months, a year after that to be the point at which, you know, you’re really in the middle of a, or at the start of a significant part of a financial crisis. So, for example, the peak of the residential market, property market was probably 2007 in last, in the last, maybe end of 2006 in the US, US tends to be slightly ahead of other countries in terms of their progress through the cycle. And you didn’t really get the onset of the financial crisis until late 2007. and really, it really sort of built on itself in 2008.
So there was a bit of a lag, and there have been previous cycles where there’s also been a lag between the peak and the major crisis. So I’d say that we’re arriving at the peak now, might get to the peak sometime next year, and you would expect there to be not that long before a really major crisis. So maybe in 2027 and so on. Now, there are a couple of caveats.
I mean, I think, Damien, you should point out you’ve been reading my work for some time. I think I’ve been relatively consistent in what I’ve said throughout this podcast and the dates I’ve given and so on. The only caveat I’d point out is that there can sometimes be a longer lag between the peak and the onset of the In the 1920s is a good example of that, where you had a kind of a major, well, the peak of the U .S. real estate markets, at least in residential terms, was in 1926. But because of the level of investment and tax incentives and other things going on, the commercial market had a rather large boom in 1927 and 1928.
All these Manhattan scrapers that you can see still, a lot of them were built in that period. I mean, well over any sort of assessment of demand. It was just building for building’s sake. It wasn’t really any genuine tenants to come and pay the exorbitant rents that have to pay to occupy those spaces. And then you had a really, really significant crash and crisis in 1929, 1930, 1931. So there may be some kind of lag that takes place along those lines. But I really don’t think we’re in the same kind of era as the 1920s because it doesn’t feel like it’s not the same optimism, new idea of a new era. I mean, maybe people have made a packet out of their AI investments. I think it’s a new era, but I don’t think the rest of us do. So the base case is as, you know, as I said initially, peak next year and then we’re kind of on the lookout for a kind of major crisis within a year after that. So, and just to define peak, because obviously the economy, global economy has been weak, I think that’s fair to say. You’re defining the peak as measured by top of the stock market, top of the property prices.
What does peak mean?
Yeah, top of the property market the top of the land market, so you don’t get any further appreciation in, well, the residential land market, but we don’t measure residential land. So it would be residential prices will stop going up. They may not go down initially much either. It might kind of go sideways for a bit of time. And, you know, there’s some argument to say that we’re kind of starting that period now. I just think that we’ll get a bit more before the peak, but that’s kind of my opinion. Often the data is a bit lagging. You know, you see what’s going on until like two or three months after the event. And so I’m talking about that rather than the stock market. The stock market tends to peak after the top of the real estate market.
Sometimes it’s fairly quick to price in the problems of the, you know, the crisis period, sometimes it takes a bit longer. And indeed, if something really significant happened, like the end of the trade war and the Fed claiming that inflation had been controlled and would then reduce interest rates from 5 % to, say, 2%, and there’s no more war in Ukraine and Russia, the US and China stop their trade war. And really big things like this, and the US government decides to sell all its gold and pump it into the US economy in advance of the mid -year elections next year, or the mid -term elections next year. You know, something really significant, it may artificially stimulate things for a bit longer. You know, you have to be prepared for things being slightly different, but, you know, you’re living on borrowed time when you get to this point in the cycle. And if you get sort of two very significant years, for example, like we got in 1920s before the peak, then the crisis that comes after that is much more significant. My suggestion would be that you would have, against the backdrop of a worsening economic situation, maybe a very volatile stock market. So you might get things coming down quite hard, but then the government trying to recover things and pumping a lot of money in. I mean, Trump famously sets quite a lot of store by how the stock market is doing. He kind of reads it as an assessment of his presidency, I mean, quite conveniently, because markets are in all -time eyes and there’s a massive AI bubble. So it’s to his kind of benefit to say that. But then that does mean that, you know, the government might try and intervene to prop it up. So it might be a series of big down moves and big up moves and down and up and people won’t really know entirely what’s going on. And that’s not unlike what went on in the late 70s, which was in the aftermath of that 18 year cycle. You had a very significant move down from 1973 to 1974, than a recovery in 75, 76. And you had a series of quite big peaks and quite big lows in the late in the early 80s. And quite famously, by the early 80s, investors had had enough. And I think the Business Week magazine in the US had the title, the death of equities. And if I’m not mistaken, August 1982, which was pretty much the best time to buy stocks in about 20 years.
So, you know, but you know, it’s over seven years, people have just, it’s been up and down, up and down. People have had enough. They can’t take it any longer. So we might be in that kind of scenario, very difficult economic situation, but, you know, there are sort of opportunities for savvy investors. I think also it’s not really a one -time event. So even in 2007 and 2008, there was nearly a year gap between the collapse of Bear Stearns and Lehman Brothers, which are seen as the two significant events.
So how could this play?
kind of a peaking in the land market and then that is the backdrop to all of these other things taking place. So you might find that, you know, real estate is no longer sort of going up. I mean, it’s not going up much now, but it is still slightly growing. There are increasing number of delinquencies in the banking system and so on. So there’s a kind of a difficult backdrop and then you get something quite monumental like an AI bubble crash or popping or whatever you, the right metaphor is. And that has an effect, it has almost a dual effect. The first is, of course, as we’ve discussed, they’re all interconnected, they’re linked to financing providers and so on directly and you’ll get a few things collapsing around that. But it also has quite a symbolic effect in the sense that something major has crashed and so people look not just at their AI investments in their stock portfolio, they look at their investments in general and people pull back and when they do that there is a cascading effect so then it ripples out to other sectors banks might not lend as much that might put some businesses out of business and so on and so it as i said earlier it’s like a set of dominoes and you’re never really sure where it’s going to lead and i think what you’re alluding to in your observation is that you get a problem And the first sign of the problem was in February 2007 when HSBs reported on losses on some of their funds and that led to a bit of a sell -off in the US market soon recovered, but it was a bit of a sell -off. There was some, the bond market started to price in problems. Then there was a bit of a calm. The stock market got back up. There were problems in the summer. Everyone might recall the run on than Rock, which had been doing things like borrowing very short -term money to extend to buying property. And that business couldn’t be sustained because, you know, interest rates were moving up, at least in the rate of interest that people, people, banks lend to each other. And so they were facing a lot of funding issues and they could no longer sustain their business. And then people got worried about the cash that was in the bank and queued up first run on a British bank in 150 years. But then that went away. Markets got up to new highs. But clearly underneath it, there was a lot of problems. And then you had sort of in March, you had the baresterns and moments when it was unclear to what extent central banks were backstopping the system, et cetera, et cetera. And then the series of rolling crises during 2008, 2009. So given that the level of the debt to GDP ratio because of the bailouts during lockdown in virtually every major Western economy, it’s kind of out of hand now.
Do you think we could see like the US or the UK or some major Western company have a sovereign debt default at the end of this?
Because that would be a staggering thing to happen. I would. Default, maybe not, but, you know, certainly problems in the bond market, the rate at which they, you know, pay interest on their borrowings, certainly is likely to be a problem, given the debt levels and the lack of confidence and the concern about the future role of the dollar and so on. I mean, we’ve seen a little taste of that in October 2022 when Liz Truss was Prime Minister, or September, I can’t remember, and her sort of spooking the bond market with her spending plans. Now, you know, that was dealt with relatively easily in the end by the Bank of England, but it did create quite a spike in interest rates. And to that extent, I think we have never really recovered from that. It’s quite possible, probably the, possibly the first time the US government experiences something similar, partly because people aren’t rushing into dollars like they have done in previous crisis situations.
Maybe central banks have been buying up, it seems, a lot of gold, diversifying their reserves. American rivals, particularly the BRICS countries, have been looking to create a new kind of financial system that’s not so much dollar -based, maybe commodity -based, maybe maybe the bigger role for the Chinese currency or a basket of currencies. And so the kind of the way that the crisis will play out is going to be different. And that might involve Western countries having less of a haven kind of role, partly because they’re so indebted and partly because there are alternatives.
And so that, I think, will create quite significant levels of panic if it looks like potentially there might be default. I mean, these countries can’t actually default unless they have very significant foreign obligations. So, i .e., they’ve borrowed in currencies that are not their own. If it’s their own currency, you know, they can just print as much as they need to to make good on their obligations. Of course, there are consequences to that, but that, you know, they’ll never be a technical default.
Okay. Talking of safe havens, there’s a definite belief in the tech sector that Bitcoin is the new gold. Given this crash is coming, how do you see Bitcoin? Because that also appears to be the other part of the tech sector where there’s a bubble, right? So how do you see
that thing out?
I mean, I had that thought for quite some time. I’ve been a bit surprised by the price action of Bitcoin in the last sort of few weeks given what’s happened to gold gold has surged up towards four thousand five hundred dollars silver above fifty dollars for the first time ever and bitcoin is really not it’s had to move up it’s had to move down it’s it’s been it’s been slightly strange if that were the kind of thesis that it’s going to also be part of the mix it’s maybe a bit early to conclude either way on that but i’m not sure that the the thesis is as sound as I thought it was earlier this year. But I’m prepared to wait and delay my judgment on that. I think the reality is, though, that when you get to the end of a cycle, when you have a crisis, people have to park their money somewhere. You know, above a certain level, you can’t keep it in the bank. And you might wonder if deposit insurance is even going to work. So where do you put it? And, you know, some of these pretty tech companies are sitting on enormous amounts of cash. the US dollar too much and the US government. Maybe that’s where things end up for no other reason that it’s tried and trusted and is of a size that people can use. But there’s also the gold market. Bitcoin indeed might be one of those markets. And
then the rest is, you know, you’d have to sort of look at, you might have to keep your money in different types of property or, you know, parts of the stock market. Maybe, you know, Invidia and so on will actually increase in value because of that. It’s quite hard to say we’re coming out of a cycle with the kind of international financial arrangements quite different to where they were when we started the cycle.
So I think all you can do now is kind of know how the cycle plays out in the past, have your eyes open and be prepared for something different to be happening this time around. You’ve mentioned banks. I remember vividly in Cyprus, the government doing bail -ins when the banking sector in Cyprus collapsed in the 2008. Do you think that bank bail -ins, which is where there’s a run on the banks and the bank survive by taking the money from the customers, right?
They take 20, I think it was 20 or 25 % they took off all of their customers, the banks in Cyprus, to stay afloat. And of course, many of their business customers went bankrupt.
Can you see any, do you think bail -ins are possible?
I think they are possible. I think they’re more likely in countries where, you know, they can’t have access to their currency and they need a way of bailing out those institutions. And I think I’m looking in particular at Eurozone countries where, you know, the ability of the government to acquire euros in a crisis is contingent on a lot of things and it usually depended on decisions made in Brussels or in Luxembourg. Sorry, not in Luxembourg, where is the ECB based, wherever that’s based. So I think it’s not universally going to be the case. I think many banks so many governments have given themselves the option, but I would be very surprised if it’s a widespread thing. But using the adage of never let a good crisis go to waste, I think they will use these crises to advance other kinds of policies like digital currencies and things of that nature or more widespread use of stable coins in the US. That, I think, will change the dynamic of bailouts and stimulus and so on. And I think we’ve kind of had a taste of this already if those of you who were in the UK during COVID might remember the help out to eat out. You basically were given money on a time -limited basis to use in a certain sector of the economy that was particularly badly affected by COVID, i .e., the hospitality industry. you could do that in a much more widespread. if that didn’t take place because that would be directly stimulating the most negatively affected parts of an economy during a crisis. The problem is that it gets caught up in politics and other things and people may want to save and maybe you might be contingent on you having a clean social media platform and so on. I don’t want to get too far down that route, but the technology is there for that to happen or potentially close to being there for that to happen. And I think Like, bond market and so on, it sort of, it will depend. I think it’s not a given that it’ll be at zero. Inflation will certainly drop in a crisis unless there’s an enormous amount of stimulus going in, which and going into areas which generate inflation. But otherwise, you tend to expect disinflation and deflation and that’s when interest rates drop. So we’ll see that. The comfort that I would draw, maybe not so much that i think example, as the collection of tech stocks in the US tends to start moving upwards first as you get to the recovery phase of the cycle. And that is symbolic of the fact that there’s a lot of capital and investment in ideas flowing through the tech sector. So if you’re involved in that space, I think it can be quite exciting times because there are a lot of opportunities, there’s space to set you know, investment capital looking for a home and so on for good ideas. And so the recovery takes place first in that sort of area. And, you know, let’s face it, we’re only scratching the surface of the potential of some of these technologies to make things better. So while I think we are in a bubble, I think there’s a lot of over and man investment in the AI space. Fundamentally, the technology is totally game changing when we find the rights of applications and it gets to the right sort of quality and so on. And similarly, a lot of the crypto coins, I think, are just kind of a load of rubbish. The technology is also game changing in terms of revolutionizing payments and the way that people contract with each other and the speed at which this can happen and so on. Having a secure way of transmitting information quickly, wherever you want and so on. I mean, it’s going to fundamentally reshape the economy. And so the productivity gains that we will see in the next 10 to 20 years, I think are going to be absolutely enormous and gives me a lot of optimism for kind of the next cycle in the future. So, you know, the key thing with all of these things is to be able to survive during the downturn. And if you can do that and, you know, still have the ability to invest or to make decisions not based upon the fact that, you know, out of necessity, but out of opportunity, I think you can be in a really good position for the beginning of the next cycle. And that, you know, tends to be the really best time to be investing and expanding and so on. So what do you recommend then people do now as we’re entering this final stage 12 to 18 months before the crash well it obviously depends on you know their circumstances and what they’re doing and so on i mean i think i’ll only say one or two things of a generic nature the first is if you are invested in things like crypto and the stock market i mean please make sure you’re not over leveraged you know maybe don’t commit more money into those things maybe build up a reserve, make sure that you’re, you know, you’re not buying things on the basis of the capital gain just because it rose 20 % last week. It’s going to, you know, you’re doing so on the basis that will rise 20 % next week. Stick more to fundamental values. And then the other the main thing is we’re potentially at a time of relatively difficult conditions. and you need to be able to kind of assess your businesses, your investments and your borrowings. And under different scenarios, like, you know, you decline in revenue of X percent and so on, you can survive. So you have the ability to reduce your costs. You have the ability to continue servicing your lending, your debt. And just be sure that for a few years, you won’t be forced to sell something that you don’t want to because you definitely don’t want to be selling during a crisis because you won’t get a good price and you’ll be forced to sell your best stuff which you really don’t want to do so I think those are the kind of two main pieces of advice that I tell people now you have to apply that during circumstances as a business owner or investor or you know employee or whatever it is you’re doing what would be your fundamental advice to business leaders or to founders even maybe even in the tech space.
In the tech space, and during a downturn. Yeah, approaching one, yeah. Approaching a
downturn, well, I think cash tends to be quite scarce in these organizations. So, you know, trying to build up that. I don’t know to what extent people have borrowings, but being able to manage that or being able to handle not being able to roll over debt during a crisis because if banks are having problems, they’re not going to necessarily lending on relatively speculative business opportunities. I think I’d be right in saying that the majority of expenses is staff expenses. So knowing how to handle that cost base during a downturn, I think is very important, whether it’s, you know, reducing hours or reducing headcount or something, you know, as unfortunate as it may be the goal of survival. But, you know, also looking around you and to the extent that you are working through the downturn and are surviving and have some reserves, looking at, you know, businesses that you might want to partner up with or indeed acquire as things start to recover. So, you know, it’s both the sort of retrenching, but then also being willing and ready to expand having survived. So those are the sorts of things that I’d be telling people how to handle it. Yeah, my peers that didn’t survive in 2008, all did the same thing in 2007 and 2006, which they took on bigger offices, longer leases, they hired a bunch of people, they borrowed much more money, they took out big loans one or several of those and then of course once the downturn comes banks can ask for their money very quickly and getting more funding in a downturn for that two -year period I remember specifically no one was lending any money like you couldn’t get a mortgage you couldn’t get a business loan that it was almost impossible between 2008 and 2010 And then it recovered really, really quickly. Like you said, in the tech space, it was amazing. That period from 2010 to 2019 was just incredible. It was a straight line nine years up.
So as we head to the close, Akhil, could you give us a brief snapshot of your book and what’s interesting about that?
Yeah, okay. It’s called The Secret Wealth Advantage, how you can profit from the economy’s hidden cycle. And essentially, I have structured it as a journey through the cycle. So I take the reader through each stage of the cycle. I use a different episode from history to outline how that stage of the cycle plays out what you need to look out for in the current moment when you get to that point in the cycle and then also ideas as an investor or a business owner of making investment decisions. I also explain why the cycle happens.
So we talked earlier about kind of the role of land and land taking the gains of, you know, progress and development. I explain why people don’t see the cycle, typically how money, banking and so on fit in, why, you know, investment managers tend not to kind of understand how to navigate the cycle and how to kind of stay safe in terms of avoiding getting caught up in a little fraudulent activity that tends to be around at the peak of the cycle. So it’s both explanatory and kind of predictive and gives hopefully people a clear idea of how the cycle plays out and how you can take advantage of it.
Great. And how can people learn more about your work at property, share market, economics, your company?
Yeah, so if any of this is of interest to people, I think the simplest thing is just to go to our home page, which is www.propertysharemarketeconomics.com and sign up to our free newsletter. So it’s completely free, just entry your email address. There’s also on our homepage access to some of our archive material. So you can see what we wrote and said on podcasts in the past, some of the market calls that we’ve made. And yeah, I think that’s probably the easiest thing to do.
Great. And I would just finish by saying, obviously, I’m biased. I’ve been subscribed to Akhil’s work from his very first newsletter. But what obviously that has given me is watching and make these predictions and then in real time they become true. And what’s unique about Akhil, in preparation for this podcast, he sent us two articles that were published.market reach all -time highs, and that’s exactly what happened. And you don’t get too many economic forecasters that do that. They make a prediction. It’s wrong, eight times out of 10, and then they never refer back to the predictions that they made previously. So I think his stuff is stellar. Please go and sign up for his free newsletter. So that concludes today’s episode. Akhil, thank you so much for joining us today. It’s been an absolute pleasure talking to you.
Thank you so much for having me. I’ve really enjoyed it.
And thank you also to my co -host, Philipp.
And of course, to you for listening. Before we leave you, just quickly mention our industry publication, the data and AI magazine. It’s free. It’s packed full of insight into what’s happening in the world of enterprise data and AI. And you can get that free copy at data science talent .co .uk forward slash media.
And of course, you can check out our other episodes of the podcast at datascienceconversations .com. We look forward to having you with us in the next show.
Thank you for listening.
