International Policy Digest

Electronic Arts
World News /19 Sep 2018

This Indicator has Predicted Recessions for Over 700 Years

As a trader by profession & an economic enthusiast at heart, one of the qualities you inculcate over time is that of Pattern Recognition. While I have written regarding a certain upcoming economic crisis on a global scale earlier, and also have been preparing for the same for quite some time, I am to let you know of my most favorite indicators to forecast an economic bust. This is a 700-year old pattern.

During the 1300s, the Lincoln Cathedral Spire completed construction in England that became the then tallest structure in the world. This was soon followed by the severe economic crisis across Europe, which included the English King defaulting on his debts. This was also termed as “The First International Debt Crisis” by many renowned historians. Fittingly, the Spire would collapse several times, before people stopped bothering to rebuild after Collapse #4.

Around 1797, England’s Ditherington Flax Mill was built. It hence became the tallest building in the world. It is referred to as the World’s First Skyscraper. Simultaneously, the Panic of 1796–97 hit both Britain and the United States. It was the bursting of a huge real estate bubble and a credit crisis (sound familiar?).

In the early 1870s, construction of NYC’s Equitable Life Building was completed. It was the first skyscraper to feature passenger lifts in the world. This became the new tallest building in the world. Its construction coincided with the Long Depression of 1873 which ravaged Europe and North America for 5 years.

In 1890, the New York World Building became the tallest building in the world. This occurred the same year as the Economic Panic of 1890, which was the 19th century’s most famous Sovereign Debt Crisis.

In 1894, Philadelphia City Hall briefly became the record holder for the world’s tallest habitable building. During the Economic Panic of 1893–94, the US Treasury Department had to be bailed out. President Cleveland was forced to borrow $65M in gold from JP Morgan & the Rothschild Banking Family of England.

New York City’s MetLife Insurance Tower became the world’s tallest building in 1909. The 1907 Bankers’ Panic or Knickerbocker Crisis pushed the NYSE down by almost 50% from its previous year’s high! Several banks and businesses went bankrupt and it was then that J.P. Morgan intervened and pledged his own money to save America’s banking system. It was this Panic that led to the creation of the US Federal Reserve a few years later.

Inaugurated in 1913, New York’s Woolworth building was the next in line to become the world’s tallest building. If you’re a finance enthusiast, you’d know what followed: The Greatest Financial Crisis of 1914 which was the first truly global financial crisis.

In 1930, the Bank of Manhattan Trust Building (now the infamous Trump Building) became the tallest in the world. It was quickly surpassed by the Chrysler Building and then by the Empire State Building in 1931. The world’s longest, deepest and most widespread depression, The Great Depression, hit the global economy in the early 1930′s.

In 1972, the ill-fated Twin Towers became the world’s tallest buildings. What happened thereafter? The Oil Embargo of 1973, famously referred to as the First Supply Shock among our industry of energy traders, where the prices of crude oil soared from $3 to $12 per barrel.

The start of construction in 1996 of Malaysia’s Petronas Towers followed the Asian Financial Crisis of 1997 when Thailand’s economic bubble burst. The next one to take over the top spot in 2004 was the Taipei 101, which actually had started construction in 1999, just before the Dot Com Bubble Crash. Finally, the Burj Khalifa became the world’s tallest building in September 2008, just 2 weeks before Lehman Brothers filed for bankruptcy, which kicked off The Great Recession of 2008.

Mere coincidence? No logical reasoning associated? Think again. This turns out to be one of the best economic indicators prior to an economic collapse. Firstly, it is certain that these massive buildings are very expensive projects, with extremely long duration periods before the commercial ones break even. Thus, they were mostly financed by debt. Such easy and free-flowing credit is only so available when an economy is near its cyclical peak. Right before the peaks, the economy seems to be flourishing. Everyone has the spending power and the desire to borrow to spend, assuming their sources of income will remain stable for eternity. There is an abundance of investments, credit, and human ego. What better way to display wealth to build massive monuments?

So, where is the next tallest building then: right around the corner. And there’s more than one this time. China has the Goldin Finance Tower (which has a diamond on the roof) and the 126-floor Wuhan Greenland Center, which are both expected to be completed in 2018–2019. Also, the 1-km, 252-floor Jeddah Tower expected to be completed in 2019–2020.

Prosperous times? No. Not when the global debt is at $247 trillion, which is 318% of the global GDP. In fact, in 2012 Barclays launched a Skyscraper Index that shows a correlation between the construction of the next world’s tallest building and an impending financial crisis. In fact, the report even suggests that the rate of increase in height could also reflect the extent of that economic crisis.