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December 28, 2008

Recession: A Reason to Rejoice
by Clif Droke

What would normally be a time of happiness and cheer this holiday season has become instead an occasion of gloom and foreboding for many. At every turn we hear dire predictions of pending calamities to befall the economy in 2009. Prophecies of another Great Crash like the one of 1929 are repeated with such frequency that they are now believed by one and all.

Pessimism has become so ingrained that financial market discourse has embraced a tone of "when, not if" concerning predictions of financial collapse. Such doleful sentiment is strengthened by the latest news headlines, including these:

"Economy declined 0.5 percent in third quarter"

"Car sales sink to lowest for three decades"

"It's like 1930s, says Merrill chief"

According to an AP news report, some economists believe the economy's fourth quarter for 2008 could witness a 6% decline, making it the biggest quarterly drop since 1982. The chief economist at HIS Global Insight summarized the consensus view when he said, "It will get a lot worse before it gets better. We are in the midst of the worst recession in the post-war period, even factoring in a massive stimulus program."

Such alarming statements evince a change in consumer sentiment as well as investment patterns over the past few months. The shift in sentiment has gone from fear and trepidation to outright gloom and despair.

Such reports, attendant with the obsessive fear of recession, far from being a cause for fear should instead be a reason for rejoicing. History shows that when recession becomes a point of fact acknowledged by all, the worst of its effects have already manifested and has about run its course. There is a caveat to this rule, however, which involves the actions (or inactions) of the Fed. We'll examine it here to see if we might be facing an exception to the rule, in which case the alarmists will be right.

It is a great consolation when recession is everywhere talked about as it is today. As Laszlo Birinyi states in his "Cyrano Principle," "If the concerns of the market are as obvious as the nose on your face, the market and monetary policy makers will have an amazing ability to adapt and adjust." Like a fire that ignites deep within a cavernous building is first unrecognizable to those outside, once the spark has kindled a great flame and begins to engulf the entire structure, the fire engines will all converge upon the conflagration with gusto. You needn't worry about the response of the authorities at that point, for it's only a matter of time before they become extinguished.

When recession is the obsession of the day we can have assurance that the worst has already been discounted by the forward looking equities market. The latest FOMC directive implies the Fed stands ready to do any and all things necessary to stimulate the credit market and the economy. The best argument in favor of recovery in 2009, though, comes not from the Fed but from the Kress cycles. In 2008 the financial markets and the economy were forced to contend with the worst possible Kress cycle configuration in years. The dominant 6-year cycle was down through October while the composite interim cycle was down through December.

Now that the cycles have bottomed, the financial market should be able to stabilize and recovery some of its former strength and vigor. The Kress 6-year cycle is dominant, especially when it's in the ascending phase. The rising 6-year cycle will be assisted by the peaking 10-year cycle for much of 2009, another key cycle. The combination of an up 6-year cycle and a peaking 10-year cycle is a powerful stimulus and conducive of financial market strength and economic support.

Over the past 40 years there have been six instances in which the 6-year and 10-year cycles were up simultaneously. The periods were: 2005, 1997-99, 1984-87, 1979, 1975, 1967-69. Each of these periods provided a positive environment for the financial market and a ballast for the economy until one or the other of the two cycles peaked.

The most recent instance of the 6-year/10-year up cycle occurred in 2005. It produced a yearly gain in the S&P, as did the previous instance of the 6-year/10-year upside configuration in 1997-99. Each of these periods of the past 40 years were unique as the Kress cycle environment was different each time. As Mr. Kress reminds us, the cycles can't be viewed in a vacuum but must be compared with the next bigger and smaller cycles within the series. I would add to this that it's prudent to take into account the technical nature of the market when doing cycle analysis. Viz. are stocks oversold or are they coming off a lengthy upside run as they were in the 1967-69 period? Is the Fed tight with its monetary policy or does loose money prevail? The answers to these questions provide the context for the Kress cycles to exert maximum influence.

The period in the last 40 years that most closely parallels the present is 1975. In the year prior to '75 the U.S. stock market suffered its worst bear market since the Great Depression and was down around 45% from its high. Inflation was accelerating and the economy was recovering from some serious weakness. It was the 10-year cycle bottom, along with the Kress 40-year cycle low, that marked the end of the bear market in late 1974, and the start of a new cyclical bull market. The peaking of the 6-year cycle in 1975 was also an instrumental contribution behind one of the biggest relief rallies of all time. The fact that the market was coming off a major oversold extreme also provided context for the 6-year and 10-year cycles to exert greater influence over the market, leading to a massive - and unexpected by most - recovery rally in '75.

In the wake of the historic 2008 bear market and resultant oversold condition, few expect a recovery in 2009. It's only natural that many feel disconsolate over the prospects for recovery in the year ahead. Most experts expect several more month of weakness, and calls for depression are commonly heard even from conservative quarters. With the powerful combination of the 6-year and 10-year cycles up in 2009, and with the stock market coming off a multi-decade oversold internal condition, the dire predictions of the pundits are likely to be repulsed by the market.

The Kress cycles made possible the credit crisis and recession of 2008. The advent of the new 6-year up cycle will make possible a recovery in 2009. The cyclical principle is still at work and reminds us that nothing is as constant as change and alternation. As the Chinese sage has said, "Incessant falls teach men to reform, and distresses rouse their strength." The falls and distresses of 2008 have paved the way for strengthening in 2009, made possible by the Kress cycles.

The Chinese sage also reminds us, "If you have not passed through the bitterness of starvation, you know not the blessings of abundance. If not through the parting of death, you know not the joy of unbroken union; if not through calamity, the pleasure of security; if not through storms, the luxury of calm." The cleansing storms of 2008 will allow the market to experience a semblance of calm with the key interim cycles up in the months ahead. The bad news of 2008, forged in the fires of the crashing Kress cycles, will tend to the benefit of the market in 2009 with their ascent.

The forward looking stock market is already anticipating recovery in 2009. The same bad news which pushed stock prices lower when the 6-year cycle was bottoming isn't having the same negative effect on stocks it did just a few weeks ago while the cycle was in its final "hard down" phase. This is the market's way of confirming the cyclical shift from a negative to a positive polarity.

The economy will eventually feed off the strengthening Kress cycles and today's gloomy headlines will give way to better news. This eventuality will be underscored once the stimulus money reaches the retail economy and works its magic. It takes six to 18 months for rescue money to stimulate the economy. This will occur in 2009 while the 10-year cycle is peaking.

From the Chinese sage we glean yet another timely insight: "In the management of affairs, people constantly break down just when they are nearing a successful issue. If they took as much care at the end as at the beginning, they would not fail in their enterprises." There is much to be learned from this wise observance. So many investors have given up just as the Kress cycles have completed their bottom and right at the cyclical bear market's end. History shows this to be the worst time to succumb to the pervasive pessimism. At the same time, the mass capitulation between October-December is one of the surest tokens that a bottom of major proportions is in.

Far from being a cause for despair, the current obsession with recession is a reason to rejoice. The public is now digesting what the market has long since discounted. The time has now come to look forward to brighter days.

Clif Droke
ClifDroke.com

Clif Droke is the editor of Gold Strategies Review., providing forecasts and analysis of the leading North American small cap, mid-tier and senior mining stocks from a short- and intermediate-term technical standpoint since 1998. He is also the author of numerous books, including "Channel Buster: How to Trade the Most Profitable Chart Pattern" For more information visit www.clifdroke.com

Copyright © 2003-2009 Clif Droke

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