Capital Ideas: Navigating the 7-11 Year Juglar Investment Cycle

Introduction, Definition, Phases, History, Investment Implications, Contrarian Views and Portfolio Construction

1. Introduction: The Medium-Term Investment Cycle

   Between the short, inventory-driven fluctuations of the Kitchin cycle and the multi-decade technological shifts of Kondratieff waves lies the economic rhythm most familiar to investors and policymakers: the Juglar cycle. Often referred to as the 'classic' business cycle, this medium-term wave, typically spanning 7 to 11 years, reflects the fundamental process of capital investment and renewal within an economy.

   Named after the French economist Clément Juglar, who first systematically studied these cycles in the 1860s , the Juglar cycle is primarily driven by fluctuations in fixed business investment – spending on machinery, equipment, buildings, and infrastructure. Understanding its phases and dynamics is crucial for navigating the typical economic expansions and contractions that shape medium-term investment strategy, influencing sector leadership, style performance (growth vs. value), and interest rate sensitivity.

2. Defining the Juglar Cycle - The 7-11 Year Fixed Investment Cycle: The Juglar cycle represents the medium-term ebb and flow of economic activity, distinct from the short Kitchin inventory cycle (3-5 years) and the long Kondratieff technological wave (40-60 years). Its typical 7 to 11-year duration corresponds closely to the lifespan and replacement cycle of major capital equipment and infrastructure. Juglar's key insight was identifying that economic fluctuations weren't random events but part of a recurring pattern driven by core economic processes.

3. Drivers: Fixed Investment, Credit Cycles, Profitability, Technology Adoption: Several interconnected factors drive the Juglar cycle:

   1. Fixed Business Investment: This is the cornerstone of the Juglar cycle. During economic upswings, businesses invest heavily in new machinery, equipment, factories, and infrastructure to expand capacity and improve efficiency, fuelled by optimism and demand. This investment itself boosts economic activity. As the cycle matures or turns down, investment spending slows or contracts sharply, contributing significantly to the recessionary phase.

   2. Credit Cycles: The availability and cost of credit are critical determinants of fixed investment. Expansive credit conditions with low interest rates encourage borrowing and investment during the upswing, potentially leading to over-investment or speculative bubbles. Conversely, tightening credit standards and rising interest rates during the peak or downturn phases make investment more expensive and difficult, exacerbating the contraction. Juglar himself emphasised the role of credit expansion and subsequent liquidation.

   3. Profitability Expectations: Investment decisions are fundamentally forward-looking, driven by businesses' expectations of future profitability. During expansions, rising demand and profits foster optimism, encouraging further investment. As the cycle peaks and signs of slowdown emerge, pessimism grows, leading businesses to curtail investment plans.

   4. Technology Adoption: While the Juglar cycle isn't defined by revolutionary technological shifts like Kondratieff waves, the adoption and diffusion of existing or incrementally improved technologies play a role. Businesses invest in new equipment to incorporate these technologies, boosting productivity and competitiveness during the upswing. The eventual saturation or obsolescence of these technologies contributes to the cycle's dynamics.

   The Juglar cycle, therefore, reflects the economy's medium-term rhythm of building up, utilising, and eventually replacing its productive capital base. Its strong connection to fixed investment and credit conditions makes it particularly sensitive to monetary policy, financial market stability, and overall business confidence, distinguishing it clearly from the shorter inventory-driven Kitchin cycle and the longer, technology-revolution-driven Kondratieff wave.

4. The Four Phases of the Business Cycle: Economists typically describe the Juglar cycle using a four-phase model, closely mirroring the standard business cycle framework. Juglar himself identified phases of prosperity, crisis, and liquidation, which map onto this modern understanding.

   

   1. Expansion (Prosperity): Economic activity grows robustly.

      • Investment: Fixed investment increases significantly as businesses expand capacity.

      • Credit: Credit is readily available and often cheap, fuelling investment and spending.

      • Interest Rates: Tend to be low initially but may rise later in the phase as the economy heats up.

      • Employment: Rises steadily, unemployment falls.

      • Prices/Inflation: May remain moderate initially but often accelerates later in the expansion.

      • Capacity Utilization/Profits: Rise significantly.

   2. Peak (Crisis): The economy reaches its maximum output level; growth slows or stalls. This phase corresponds to Juglar's "crisis" point.

      • Investment: Investment growth peaks and may begin to decline.

      • Credit: Credit conditions often tighten as risks become apparent; interest rates peak. Financial markets may become volatile; asset bubbles can burst.

      • Employment: Employment growth stalls or reverses slightly.

      • Prices/Inflation: Inflation is typically at its highest point.

      • Capacity Utilization/Profits: Remain high but may start to decline.

   3. Contraction (Liquidation/Recession): Economic activity declines significantly. This phase encompasses Juglar's "liquidation".

      • Investment: Fixed investment falls sharply as businesses cut spending.

      • Credit: Credit becomes scarce and expensive; bankruptcies increase.

      • Interest Rates: Central banks typically lower rates to stimulate the economy.

      • Employment: Unemployment rises significantly.

      • Prices/Inflation: Prices often fall (disinflation or deflation) due to weak demand.

      • Capacity Utilization/Profits: Fall sharply.

   4. Trough (Recession/Stagnation): The economy hits its lowest point before recovery begins.

      • Investment: Investment is at its lowest level but may start to stabilise or show early signs of recovery.

      • Credit: Credit conditions remain tight but may start to ease.

      • Interest Rates: Typically at their lowest point.

      • Employment: Unemployment remains high but may stop rising.

      • Prices/Inflation: Inflation is low; deflation may be a concern.

      • Capacity Utilisation/Profits: At their lowest levels.

5. Historical Context : Juglar's pioneering work in the 1860s established the concept of recurring, medium-term economic cycles. He meticulously analysed statistical series for France, England, and the US, identifying patterns in banking data (discounts, reserves, circulation), prices, trade, and population, concluding that crises were not random but periodic outcomes of preceding prosperity, often fuelled by speculation and credit expansion. Juglar himself identified crisis years like 1825, 1836, 1847, and 1857. Subsequent research, developed detailed chronologies of business cycles in the US and other countries, confirming the existence of fluctuations roughly aligning with Juglar's proposed duration. While cycles recur, their lengths can vary considerably, challenging the notion of a perfectly regular 7-11 year pattern. The debate continues on whether cycles possess predictable periodicities or are more akin to random walks around a trend. Some modern analyses using spectral techniques have found evidence supporting the Juglar cycle's presence in global GDP data.

6. Ongoing Debate on Drivers: While fixed investment is central, the relative importance of different drivers is debated.

   1. Investment vs. Credit: Is the cycle primarily driven by the autonomous rhythm of capital replacement, or is it fundamentally a credit-driven phenomenon? Juglar leaned towards credit and speculation , while others emphasise the physical investment aspect.

   2. Endogenous vs. Exogenous Factors: Are cycles inherent to the capitalist system (endogenous)? Or are they primarily triggered by external shocks like wars, policy changes, or oil price spikes? Most modern views acknowledge a combination, where endogenous mechanisms propagate the effects of exogenous shocks.

   3. Alternative Explanations: Other theories exist, such as Marx's view of crises stemming from over-production and the falling rate of profit , or the Austrian school's emphasis on malinvestment caused by artificially low interest rates.

7. Identifying Turning Points: Pinpointing the exact peaks and troughs of the cycle in real-time is notoriously difficult. Data lags, revisions, and the inherent complexity of economic interactions mean that official cycle dating often occurs well after the fact. This poses a significant challenge for investors trying to time the cycle.

   The historical record shows clear evidence of medium-term economic fluctuations broadly consistent with Juglar's observations. However, the lack of perfect regularity and the ongoing debate about the precise drivers and mechanisms mean that applying the Juglar cycle concept requires careful interpretation rather than rigid adherence to a fixed timeline.