As some readers may know, this website’s core, solid, founding value point is something called longwave economics. Before running off simpering to some pop-news anti-think site screaming “I don’t get it!” it’s really very simple, so this morning we will give you a quick dose of the reality.
1. Cycles Are Real
There are cycles in everything. Life, relationships, and, current case in point: Investing.
The sun comes up, the sun goes down. That’s a cycle. Same thing works for markets. They rise (like yesterdays predictable reaction to the Easy-Money Gang at the Fed, which continues making up money through “quantitative easing” because if they don’t print, we crash. And they fall. Like at the open this morning, likely.
Now, see? I told you this would be easy.
2. We in a SMALL recovery cycle inside a LARGE DEFLATION cycle.
The small recovery cycle is because the Fed is printing money like crazy. The SMALL recovery is seen when you look at a 5-year chart of the S&P. Since the bottom of the 2009 market bottom, when the S&P was around 683, the S&P has risen to a remarkable 1,810 and change as of yesterday’s close. Almost a 3X rise. Better than your house, huh?
You can see, however, the larger BIG DEFLATION CYCLE when you look at a 10-year Treasury Note chart at maximum zoom out over here. Notice that in July of 1981, the 10-year note was paying almost 16%. As of the close Wednesday, it was paying 2.89%.
This is called DEFLATION and when it ends, maybe in the 2014 – 2017 period, we still likely start up the inflation path, yet again.
3. Proofs of Deflation
God, this is simple! Look at housing prices. Look at the declines of income. Inflation-adjusted consumer discretionary. Your lifestyle. Are you blind?
4. Then Why are Stocks Going Up?
There are two simple reasons:
First is the Fed is making money extraordinarily available for its buddies. You and I have to deal at the retail level, but at the wholesale level, if you will, money is cheap. When the Fed stops passing out money on street corners the market goes into a tizzy. And when you see a good-sized decline going into a Fed meeting, it’s really just the market trying to strong-arm the Fed into passing out still more money.
And in yesterday’s “easy way out” decision, Ben Bernanke, el al, did exactly this, because they read the same history we do. And they probably have a very good idea of where we are.
The second reason stocks are going up? The returns on stocks, which would have been a laughing matter at these level 10-years ago, look pretty good compared to what banks are paying. Last time I looked (two weeks ago) the Big National Banks were paying little guys like us one-tenth of one frigging percent. Per year.
That’s BS because you know what? Government figures out this week showed, if you were paying attention, that prices of stuff we actually BUY are going up at 1.2% per year. Official numbers are right here.
5. What’s Ure point?
Lookie here, and I’m talking to that dodo next to you: If you put money in a bank at 0.1% and the cost of stuff is going up at 1.2%, that means you’re actually losing money putting it in a bank! Yes: I think only an idiot puts money they want a return on their dough. Buy something there will be a greater demand and price for in the future!
Sure, a bank is a great place to stash tax payments, property tax money, and you need it for transactions, of course. But with the bad taste the public has for stocks (thanks to the lack of dough due to the housing disaster and memories of the Tech Wreck/Internet bubble collapse, stocks have been screaming.
6. But stocks can go down…
So can banks. In fact: There have been about 6,500 bank branches closed in the USA since the IndyMac crisis. Just last week, the Texas Community Bank, National Association down in the Houston area went down. The painful purge is still with us.
7. But can’t companies go bankrupt?
Maybe, but remember the Fed has been passing out money like crazy. Pick solid companies with products you really use (medical supplies like Band-Aids, or food products, toilet paper, or whoever makes that next computer you’re thinking about). They can go bankrupt, too, but by then if they do, banks will have done a bail in anyway.
8. But stocks can go down…
Would you shut up on risk? Driving is a risk, getting out of bed is a risk. If you think a stock, or group of stocks is going into free-fall, read up on the intelligent use of options to protect your position from downside.
And better, learn to use the triple-levered exchange-traded funds (ETFs). These are amazingly simple, liquid as hell, and our Peoplenomics trading model, based on using triple levered funds turned in 39% year to date when we ran the numbers a couple of weeks back. The market’s still moving up and I figure it will end the year up about 44%.
This is NOT investment advice. All I do is advise people to think.
9. I’m not sold on the Longwave view of Life.
Suit yourself.
Back in April of this year, I presented Peoplenomics readers with a Kondratieff view of 2013. And in it was a most revealing chart that most people are totally ignorant of. Even professional economists hold something magical about the 1930’s Depression, but from the Longwave perspective, the Great Depression was NOT, as it turns out the “biggy”.
Here’s what I think many of the hackademics miss: There were actually four distinct panics in the period 1903 to 1921. Only one of these is attributable to the outbreak of hostilities in World War I.
And then what happened? Easy money, good times, and the run-up to what turned out to be the 1930’s Great Depression event.
However, since the Kondratieff wave timing low was likely “set” with the trough war (called the US Civil War, if you’ve heard of it?) then when would we expect the first of the panics to arrive, given that the nominal length of a longwave period is 54,5 years?
Well, the Civil War broke out in 1861. So adding 54-years to that would give us what? 1905, ideally, and yet here we are with the 1903 and 1907 panics and this latter one saw the market drop half of its value, as measured by the Dow Jones average.
Where does that 1905 ideal low land us in the next cycle? Well, at another little trough war called the Vietnam War, which you may have also heard of.
And OMG, look: the K-wave low was hit in 1962.
Which brings me to the Big Picture of where we are today and where I think we’re going.
I’m just penciling 1962 plus 54 and you can do the math yourself. These charts do not decrement for purchasing power dilution/monetary inflation, which make the assertion even more obvious.
10. So when do we get to the bottom of this crappy economy?
This is what I reported to Peoplenomics subscribers in April 2013.
When our “Bottom is Due”
Well, the short answer is that it should have been here on February 14, 2013. However that would only be true if we had perfect symmetry between the 6/22/1962 low and the mini-crash low on 10/19/1987. Unfortunately, the date range as Kondratiev himself notes, may vary by as much as 25%. We’ll study this in detail as we move forward this morning.
Still, that does give us a pretty good insight into the market timing: We observe an implied rather precise economic cycle length here as being made up of ~9,250 days, which would translate to a recent K-Wave length of 50.6849 years. From this basic calculation we can inspect how well this fits by looking back through market history.
9,250 days before that 1962 low was 2/23/1937. But the actual market low for what most economists figure to have been a secondary Depression, off the 1929 collapse, showed up about a year off-schedule on March 31, 1938.
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