It was 1991, and the city of London had a problem…
At the time, the city was experiencing a surge in homelessness. And an enterprising duo – John Bird and Gordon Roddick – hit onto a solution.
The two men founded The Big Issue, a publication sold exclusively by London’s homeless population. The idea was to put the “unhoused” (to use the modern parlance) back to work, generating legitimate income.
The model was a success and copied in cities like San Francisco. In 2021, The Big Issue celebrated its 30th anniversary.
But the model revealed something else…
Certain vendors learned quickly that more magazines were sold on busier street corners. Quieter streets, meanwhile, sold fewer copies even with the same amount of labor.
Fights broke out to control the preferred locations. Soon, vendors were prepared to bid for the best locations. Others were willing to defend their spots with violence.
It’s a straightforward observation.
Certain pieces of land produce more value independent of labor… And this simple observation is key to understanding the 18-year land cycle. This, in turn, dictates the course of economies and markets.
On Monday, I shared how I came upon this discovery. But it begs the question: How and why does this cycle happen?
That is the topic for today.
And as mentioned, it can be enormously profitable for those willing to understand…
Welcome to Cycles Trading
Welcome back to Cycles Trading, with me, Phil Anderson.
I have made it my life’s work to understand how economies and markets really operate. And what I discovered is that rather than being random, the ebbs and flows of economies can be predicted with startling accuracy.
Because history does repeat.
It all comes down to the land market, which rises and falls every 18 years. This, in turn, charts the direction of economies, markets, and everything in between. The goal of this publication is to understand this cycle, and profit along the way.
If you’re skeptical, I don’t blame you. But allow me to prove it. And to do that, we need to meet a Mr. David Ricardo.
Ricardo’s Rent
Born in 1772, the English economist David Ricardo is a key figure in understanding the 18-year cycle. Specifically, we need to understand his Theory of Rent.
In 1817, Ricardo observed that wheat prices were increasing at the same time as arable land prices.
This posed an interesting question: Was the rising value of wheat driving up the land market? Or was the rising land market pushing up the price of wheat?
Ricardo determined that it was the former. The profit potential in the wheat market was driving the price of land – and the price tenants were willing to pay for that land – higher.
The story above demonstrated this nicely.
Like the magazine vendors who were willing to bid on preferred locations, these tenants knew that the profit opportunity was higher even with the same amount of labor.
So far, so good.
But what does any of this have to do with profiting from the 18-year cycle?
No Economy Without Land
The reality is that all economic activity is dependent upon land. Agriculture is an obvious example. But even in a so-called “digital economy,” land is essential.
Amazon owns 16.7 million square feet of land for its distribution facilities. Airbnb boasts 4 million homes on its network, which of course all require land.
And as Ricardo’s Theory of Rent tells us, these companies are willing to bid on land that is advantageous for production.
Farmers, for example, will bid on land that yields more crop. But Amazon also wants land close to its end customers… And Airbnb wants access to land near preferred locations. It is this bidding for and purchasing of land that makes a market.
And all markets, by their nature, have booms and busts. But because the land market is so integral to all economic activity, the booms and busts of land dictate the direction of economies.
Natural Limits
In the beginning of the cycle, it is the banks that help fuel the growth in land value. It is only through the creation of credit that land can be afforded and bid up to unsustainable highs.
And banks are incentivized to expand credit. Credit growth fuels bank profitability.
Credit may be theoretically unlimited, but land is not. It is, after all, a “real” asset. We can see it. We can touch it. We can produce value from it.
And as a real asset, it has limits…
Just as trees do not grow to the sky… Just as the horizon does not stretch on forever. Even the sidewalk ends somewhere… Land cannot be infinitely valuable.
At some point in the cycle, the value of land becomes prohibitive. In other words, people can’t afford it.
Once land costs too much, activity in the construction industry stalls. Other industries leveraged to the rising price of land, like mortgage companies, begin to fail. This is how the contagion spreads to the wider economy.
Then comes recession and falling stock prices… And when the wreckage is cleared away, the cycle begins anew.
And as my readers know, this cycle has played out regularly every 18 years for centuries.
It is an astonishingly simple observation. As the land market goes, so goes the economy. And by extension, so goes stocks…
In future editions, we’ll look at historical examples and consider which investments thrive or fall apart, depending on where we are in the cycle.
Regards,
Phil Anderson
Editor, Cycles Trading with Phil Anderson