Periods, Ages, and Regimes

Periodization, the identification of ages that have commonality, is a part of understanding history. We look for commonality and factors that can describe or define a time. We don't much think about periodization in finance and economics, but it has an impact on how we look at the past and affects our ability to understand the present. 

In finance and economics, we also like to talk about business cycles as if there is a natural periodicity that recurs on a regular basis. We also refer to business cycle periods as regimes, yet regimes are also influenced by the age or period that surrounds the business cycle. 

The recession of 2008 is called the Great Financial Crisis (GFC). The period of QE is a policy age that distorted the normal behavior of the business cycle. Hence, an age is more than just a historic naming convention but serves as another conditional variable. The 70's were dominated by the inflation. The 80's have been described by Reaganomics, dollar distortions and budget deficits. All data during the 90's should be looked at through the lens of inflation targeting. The 1990's also was the period of the Great Moderation as defined by Ben Bernanke. The early 2000's reflect a period of loose regulation. We will talk about the Lost Decades in Japan. We will define the post-WWII period as the Bretton Woods period. These names provide shorthand for all that occurs during the period.

A period classification can be determined by a single event, a policy regime, a level of calm or turbulence, or events like a war. There usually is a beginning, middle, and end which is the transition for another period. For finance followers, it can surround a bubble. For policy people, it can represent a regulatory or policy environment. Political disruptions can spillover to finance and define an era. Some environments will be subtle and not earn the word great like the Great Depression, Great War, or Great Financial Crisis. Some may be related to a single event like the Tech Bubble. 

Even quants should think beyond the business cycle regime and focus on the broader context of factors that overlay investment and business decisions. Unfortunately, it takes a special investor to understand the common factors for a financial age. Additionally, there is little agreement about the beginning or the end of an historical period. This may be especially true when it comes to finance and economics as opposed to politics and culture. An era is not defined by investment returns because the returns may be the result of the environment.

It is worth thinking beyond a business cycle to classify a longer era or period. If clarity does not exist, it could be a period of transition which may result in extra uncertainty and opportunity. Naming and definitions matter and support better understanding of investment environments.