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Boom Boom



There is much chin scratching of late about the rapidity and the surprise associated with company- and industry-specific negative comments regarding demand prospects. Whether it be semiconductors and retail over the last few weeks or company-specific comments from Alcoa (AA:NYSE) or Coca Cola (KO:NYSE), this pre-announcement season is already shaping up to be one of the "worst" in more than a year in terms of % of S&P 500 companies that are guiding down.

Lost in this "surprise" is an idea that Austrian business cycle theorists have been talking about since the early 1900s: the boom-bust cycle. We have referred to this boom-bust cycle various times in our commentary regarding the Fed and their predilection to generate more and more credit in a futile attempt to ward off any economic contractions.

Specifically we have stated only what Austrian business cycle theory (ABT) states: that any credit-induced boom will, as night follows day, be followed by a commensurate bust of equal or greater proportion.

What is most interesting to me, as is backed up by the emerging trend that business trends seem to be "surprisingly" weak both to investors as well as CEOs and CFOs, is the rapidity with which this weakness has manifested.

Interesting in the sense that the rapidity of the boom phase - when the Fed lowered rates in rapid succession to historic lows in 2001 - may be just as impressively rapid in the bust sequence in 2004 and 2005. We'll have to see of course, but the rapidity in the decline of the, say, semiconductor industry's fundamentals, provides a potential "model" for the rest of the sectors of the economy.

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