The Oracle of 2009

By: Francis Bussiere | Tue, Jan 6, 2009
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The Oracle of 2008 in review


The US Dollar starts a rebound in early 2008
Precious Metals have an exhaustion rally in 2008
Oil will rise to 110-120 and then decline to 60-70 in 2008
Credit fears spread to high-grade Bonds by mid-year
Equity Markets are making the highs of the decade

 

Debt Deflation and Ponzi schemes


A Debt issuance cycle shares many characteristics with the Ponzi scheme now in the news with the Madoff fraud. When total Debt is growing it stimulates the economy with new cash flows which helps with the payments on previous debt, much like Madoff used new investor funds to pay off previous investors. However, as soon as confidence erodes from the inevitable failure of some of the weakest debt like sub prime now, the new funds dry up and making payments on previous debt becomes more difficult for everyone. The self feeding leveraging mechanism on the way up, works even faster on the way down and the result was the worst year on record. Unfortunately, the 1930's and the 1990's in Japan have taught us that these forces are too large to counteract with any policies and the outcome is always a couple decades of recessions like Japan in the 1990's or a depression when the effect is global like in the 1930's and possibly now. One thing policy makers can and will do is keep interest rates low until most of the debt has been retired either through defaults, reduced settlements or paid in full. We have seen this before in the 1930-40's and it is still ongoing in Japan which will now be joined by the USA and the rest of the world in keeping Rates extremely low for decades.

 

The 8.6 year PI Economic Confidence model


Martin Armstrong discovered the 8.6 year PI Economic Confidence Model that correctly predicted many Economic Confidence crisis like the 1929 and 1937 stock market declines, but also the 1985, 1994 and 2002 major Commodities lows and various major Equities lows and highs as well. The Fed will do what it can to stop a Global Depression like the 1930's and that includes trying to reflate the economy through asset purchases. This reflation can be seen in the recent move from 120 to 140 in the 30 year Bond which added Trillions to the balance sheets of Bond holders and gave them room to breathe from the crisis. According to the previous Debt Deflation cycle, Bonds should stay high for an extended period of time as the Fed buys Treasuries to keep Rates low.


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The Oracle of 2009 - Equities

Worst Bear market since the Great Depression


Since we are in a Debt Deflation Bear market we should expect behavior closer to the 1930's than the less severe inflationary Bear market of the 1970's or the Tech bubble Bear market of the 2000's. Looking at all four Bear markets together we can see that the current Bear is much stronger than the other two and almost as bad as the 1929 Bear. In all cases the Bear markets lasted more than one year with most having three down years in a row suggesting 2009 will be down again and we will not see an up year until 2010 or 2011 as the 8.6 year PI Economic Confidence model discussed previously forecasts.


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Chart courtesy of dshort.com

 

The SPX should rally to 1150 or so and then decline to at least 600


It is likely that we will reach the 1994 previous wave lows of SPX 430 before this Bear ends in 2010 to 2011, but in 2009 a more realistic target is the next support area near the 1996 lows of SPX 600. Since we dropped 50% from the highs in 2008, we will probably do the same in 2009 and that means a rally to the SPX 1140-1200 level in the first half of the year before we decline to the 550-600 level in the second half. Since this Bear is more severe and unfolding faster than I expected, we must also consider a darker scenario that sees the highs of 2009 closer to the 1000 area and a second half decline to the SPX 500 level in 2009.


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Sell in May should work very well in 2009



Chart courtesy of www.cross-currents.net

This seasonal pattern based on trends in inflows does not always work because other powerful forces may be moving the market in opposite ways. This year will likely to be a good year for the Sell in May trade, since it lines up with the April 19th, 09 Armstrong model date and prices are depressed going into this seasonally strong period of buying. The 8.6 year PI cycle is further reinforced by detecting its 1/2 Harmonic resonance at 4.3 years or 28 months seen in the chart of the Nasdaq below. Most cycles are detected with accurate lows since fear is more powerful than greed, but this cycle is most accurate with the highs in the Nasdaq, suggesting that this index is surprisingly still driven more by greed than fear for now. The 28 month cycle high in the Nasdaq is further evidence of a probable rally into the April and May 2009 cycle highs of the 8.6 and 4.3 year PI cycles.


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The Oracle of 2009 - Bonds

Bonds should decline to 120 by Summer and then rally back to the highs


Just like in the 1930's and the 2000's in Japan, the bursting sub prime Real Estate bubble of 2007 is causing large Debt Deflation and policy makers have to use any means available to keep Rates low in order to avoid a Global Depression. Keeping Rates low artificially will help keep the cost of maintaining the excess debt low for home owners, corporations and governments at the expense of savers who will see their savings erode. The 60 year cycle in Rates and Bonds is well known from Kondratieff's work but is a lot more regular with the highs in Rates, so the target date of 2010 for a high in Bonds is subject to be off by a number of years and according to history we should expect a late high in Bonds rather than an early high. Since the shorter cycles are turning down into mid 2009, I expect Bonds to decline towards the 120 level by mid year, only to rally back up to the highs by year end.


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The Oracle of 2009 - Currencies

The US Dollar drops to 0.70-0.75 only to rebound to 0.85-0.90


The US Dollar has probably seen the highs of this 4.3 year PI cycle high correction since both the larger 8.6 and 17.2 year PI cycles are already headed lower and the February 2010 cycle high will likely be just a test of the 2008 highs before the dramatic Wave 3 of 3 collapse to the 0.40 level for the meeting of the 17.2 year cycle low in 2011 and both 4.3 and 8.6 year cycle lows in 2012.


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The Oracle of 2009 - Commodities

Commodities should rebound to 300-340 before falling back to 280


Back in the last Debt Deflation cycle of the 1930's, Commodities made a final low in 1932 and we should expect a similar outcome this time around. The CRB is now overly weighted with Oil and will probably rebound to the 300 to 340 area in 2009 before heading lower for the 6 year cycle low in 2010.


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Oil should rebound to 70-80 only to pull back to 50-60


Oil may have completed its bull market expected to end in 2010 since all commodities except Gold took heavy damage, but the 5 year and 30 year cycle high in Oil due in 2010 will most likely keep this commodity headed higher than most expect in 2009.


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Gold should rally to 1000-1100 before falling back to 750-850


Gold held up much better than other Commodities during this crisis and will likely lag during the Commodities rebound in the first half of 2009, and I doubt it can make more than a marginal new high before it pulls back to test the 2008 lows near 750.


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Silver should rally to 14-15 only to pull back to 11-12


Silver should outperform Gold and reach the 14-15 level before Summer and then pull back to the 11-12 level.


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Francis Bussiere

Author: Francis Bussiere

Francis Bussiere
AstroCycle.net

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