When stocks go to the moon, buildings head for the sky.
Skyscrapers have always been perceived as a symbol of economic and financial success. But, it can also be an indicator of recessions.
Don't believe me? 1997, the Petronas Twin Tower in Kuala Lumpur had just been completed. What happened right after that? The Asian Financial Crisis.
Was it just a coincidence or was it the skyscraper effect?
What is the Skyscraper Effect?
- The skyscraper effect is an economic indicator linking the construction of the world's tallest buildings with the onset of a recession
- The idea that constructing a record-breaking skyscraper will be punished by an economic crisis may seem a bit far-fetched but there's actually some logical reasons behind it
The Theory Behind The Skyscraper Effect
- To understand the skyscraper effect, you first need to understand how the economy works (Ray Dalio's "How The Economic Machine Works" is a must watch)
- The economy goes through cycles - expansion and contraction. During an expansion phase, the economy grows. The stock market is performing, businesses are profiting and people are making money
- Investors then speculate that businesses need more space and foreign companies want to invest so this is when plans for a skyscraper might start. "Build it and they will come" they often say
- But skyscrapers take a long time to construct. The economy will inevitably reach a peak and switches to a contraction phase. Prices then become too high and growth isn't sustainable anymore which then leads to a market crash
- Oftentimes, this happens right after the skyscrapers are completed which is why they might seem like uncanny indicators
Skyscraper Effect Example