I just finished interviewing Dr Mark Thornton, author of The Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century. You can get a free PDF copy of the book here without registering your email or anything like that.
But before you read it, I need to let you know that Mark mentioned something in our interview which has me worried.
He suggested that a skyscraper curse signal, which has an astonishingly accurate track record of predicting financial crises, failed to go off in 2020 for reasons that may not invalidate the underlying signal.
In other words, the signal did not technically go off, but only for reasons that do not contradict the validity of the warning that the skyscraper curse signal usually gives. We may still be in for a crisis.
Think of it like this: the canary in the coal mine failed to drop dead from methane gas, but only because it died of COVID first. There may still be a gas leak that’s ready to blow at the slightest spark.
I better explain from the beginning…
In 2019, I warned readers of Jim Rickards’ Strategic Intelligence Australia that the skyscraper curse may go off in 2020, signalling a major financial and/or economic crisis would occur.
Before you accuse me of claiming accolades for having predicted the COVID meltdown of 2020, know that I actually forgot all about my warning because of all the chaos that did happen in 2020 in the end…
In fact, the skyscraper curse signal didn’t go off in 2020 at all for complex reasons of Middle East politics and, of course, the COVID disruptions. But that doesn’t mean a crisis won’t occur.
You’re probably sceptical about the underlying skyscraper curse theory in the first place. It’s easy to dismiss the idea. I did until I read Mark’s book.
But it turns out the skyscraper curse does actually stand up to scrutiny. Incredibly well, too. If you know how to use it properly. And if you take the time to understand what it really is.
Mark addresses the misguided attempts to debunk the theory in the book, in style too. Just as supporters of the indicator only see what they want to, so too do the critics.
My report for Jim Rickards’ Strategic Intelligence Australia subscribers dug into whether and why the indicator works so well.
You see, record-breaking skyscrapers are actually particularly likely to occur when the economy is being manipulated with low interest rates to create an artificial boom for three reasons…
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The first is land prices. When interest rates are low, land prices rise, as you can read about in recent newspapers. When land is expensive, it pays to create more of it per square foot by building higher buildings with more floors.
Secondly, firms and projects that have access to debt get a tailwind from low rates. That means big firms, firms engaging in leveraged buyouts and leveraged acquisitions, and firms that use debt to fund large capital expenditures (like building a skyscraper) experience a boom when rates are too low. These sorts of large firms like having their HQ in record-breaking skyscrapers too.
Last but not least, low interest rates encourage technological progress by making long-term and uncertain investments more viable because the debt that funds them costs less. Technology and record skyscrapers are closely linked because you need new tech to make them viable.
Combine all this, and you get a raised propensity to build record-breaking skyscrapers during times of artificially low interest rates. The sub-head I wrote back in 2019, ‘Getting high on cheap credit’, is a rather good summation.
Of course, after a boom engineered by low interest rates, you get a bust. And so, the skyscraper curse is a sort of signal of peak euphoria, which is followed by a crisis.
Anyway, the point is that a specific understanding of the skyscraper curse, which lends itself extremely well to economic logic, does actually predict financial crises very well.
But what happened in 2020?
Well, the record-breaking Jeddah Tower in Saudi Arabia was under construction. A series of political dramas delayed things over and over again. Then came COVID. So the signal, which depends very specifically on construction reaching record heights, did not go off.
However, and this is what Thornton said, which sent shivers down my spine, the underlying theory may still be valid. You see, if record-breaking skyscrapers are merely a possible signal that the causes of a boom-and-bust cycle playing out in the economy, then the failure of the signal to go off does not preclude the boom and bust from happening.
The skyscraper curse has an extremely good track record of predicting crises, but that does not mean that every crisis has a corresponding record-breaking skyscraper.
The same underlying causes of the boom-and-bust cycle — artificially low interest rates — could still be playing out today, even in the absence of a record-breaking building.
And there are other indicators that are similar to the skyscraper curse. Housing bubbles, for example. And sovereign debt bubbles. I’d say we have both.
This isn’t the first time that unrelated events have disrupted the skyscraper curse indicator.
The Woolworth Building in New York was considered an outlier in the original analysis of the skyscraper curse by its creator Andrew Lawrence. According to him, the record-breaking Woolworth Building sent a false signal that never featured a financial crisis.
But it turns out a severe economic downturn did occur when the building was completed. It’s just that the First World War in Europe sparked such a surge in demand for American exports that it triggered an economic upswing before a financial crisis began.
Now I don’t know about you, but I’d consider the First World War a pretty severe crisis for investors anyway. I suspect abiding by the warnings of the skyscraper curse in 1913 would’ve served you and your capital well…
Perhaps something similar is about to occur. Politics and the pandemic prevented the skyscraper curse signal from going off. But we may still be in for the crisis that the curse is based on.
It’d be ironic if proponents of the skyscraper curse, like me, lost sight of the fact that the curse is only a symptom of the underlying issues, which often, but not always, lead to record-breaking skyscrapers.
Dr Mark Thornton didn’t fall into that trap. And he’s worried about what will happen to the artificial bubble we’re in now…
Regards,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend
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