Chart of the Week - Stifel Nicolaus Cycles

By: David Chapman | Thu, Apr 5, 2012
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55 Year Peaks between Kondratiev Peaks and bottoms
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The above chart was sent to me by John Johnson, Chief Strategist Davis Rea www.davisrea.com. I thought it sufficiently of interest to share it with everyone.

What the chart shows is a commodity cycle that fits very well with other well known long term cycles. The cycle noted above is the Kondratiev Wave cycle of peaks and troughs in the stock markets that occur roughly every 50-60 years (although some now note that the cycle may now be extending to 70 years or as some have suggested the current Kondratiev winter is being extended through the actions of central banks - i.e. very low interest rates, quantitative easing (QE) etc.). The Stifel Nicolaus model also fits well with a long term commodity cycle identified by Edward Dewey and Edwin Dakin who in 1947 published their book Cycles - The Science of Predictions.

In their book Dewey/Dakin outlined a 54 year cycle in wholesale prices going back to 1790. Kondratiev wrote his theories in the 1920's and his study covered capitalist societies (Britain and the USA) and his study also went back to around 1790. Dewey and Dakin noted Kondratiev in their book.


Dewy & Dakin Predictions

Year of Peak Prediction -
Dewey & Dakin
Actual Peak Peak War
  1755 Seven Years War French/Indian Wars (Britain/France)
1817 1817 (1810) War of 1812
1871 1868 (1864) US Civil War
1925 1920 WW1
1979 1980/1981 Vietnam
2033   ???

 

Yearof Trough Prediction -
Dewey & Dakin
Actual Trough Trough War
  1729/1730 French Colonies and Great Britain
1790 1790 (1783) American Revolution
1844 1842 (1837) Mexican American War
1952 1949 (1932 & 1947) WW2/Korean War
2006 2001 (1998-2002) Gulf War 2, War on Terror


Kondratiev Cycles

SPRING (EXPANSION) SUMMER (RECESSION) AUTUMN (PLATEAU) WINTER (DEPRESSION)
1784-1802 (American Revolution 1775-83) 1802-1816 (War of 1812) 1816-1834 (Era of Good Feelings) 1834-1844 (Mexican American War 1846-48)
1844-1858 (Mexican American War 1846-48) 1858-1864 (Civil War 1860-65) 1864-1874 (Reconstruction) 1874-1896 (Spanish American War 1898)
1896-1907 (Spanish American War 1898) 1908-1920 (WW1 1914-18) 1920-1929 (Roaring 20's) 1929-1949 (WW2 1939-45)
1949-1966 (Korean War 1950-53) 1966-1981 (Vietnam War 1962-73) 1982-2000 (The Information Age) 2000 - ? (War on Terror? WW3? 2001-?)

 

Above are tables showing the Dewey & Dakin cycles and the Kondratiev Cycles. The Dewey & Dakin cycles are taken from their book although TC has filled in the more recent actual peaks and troughs that were not available in their 1947 book. The Dewey Dakin cycle has overlaps with the Stifel Nicolaus model but there are differences as well. The best example is the Stifel Nicolaus model having a low in 1991 whereas the Dewey Dakin model had its cycle low due in 2006. Indeed there was a significant commodity low in 1991 while the cycle low for the Dewey Dakin model came in prior to 2006.

Thus far four Kondratiev cycles have been identified. The first three lasted 60 years, 52 years and 53 years respectively. The current cycle is now in its 63rd year and may have even longer to run. Some are calling for the current Kondratiev cycle to run to at least 2020 and possibly longer. Until the debt situation is resolved one way or the other the winter of the current Kondratiev cycle could drag on for many years.

Gold cycles analyst Ray Merriman www.mmacycles.com has noted what he believes is a 25 year cycle in gold. Grant you since gold has only been free trading since the early 1970's there is not a long history. Gold topped in 1980 then bottomed in 2001 a period of 21 years from peak to trough. Merriman calculated his 25 year cycle from a low in 1976 to a low in 2001 a period of 25 years. The previous cycle was a long bear market for gold. If the above cycles hold true for gold then gold entered a new bull market phase (the bear and bull cycles rotate) in 2001 and this up cycle could have upwards of 25 years to run. This suggests according to Merriman a significant low near 1926.

The 25 year cycle breaks down into three 8.5 year cycles (Note: all cycles tend to break down into either twos or threes so it could be two cycles of 12.5 years although the 8.5 year cycle appears to be the one that is being followed). If 2001 was the trough of the 25 year cycle it was also a bottom for the last 8.5 year cycle in the 25 year cycle (previous distinct lows in the gold market were seen in 1985 and 1993 as both troughs fit the 8.5 year cycle quite well). The next 8.5 year cycle trough was then due August 2009 +/- 17 months. The actual trough occurred in October 2008 at $681. That appears to have satisfied the last 8.5 year cycle trough. The next 8.5 year cycle trough is due February 2017 +/- 17 months. A bull cycle was confirmed when gold took out the cycle peak of the last 8.5 year cycle made in March 2008 just over $1,000.

The peak in the current gold cycle has thus far occurred in September 2011 near $1,920. The Stifel Nicolaus model seems to be suggesting that 2011 is a failed peak and that the markets could enter a bear market that does not make its bottom until around 2025. However, the Stifel Nicolaus study is on commodities and not gold specifically. Merriman's gold cycle work appears to counter that suggestion at least for gold. If the current 8.5 year cycle is correct than the peak for the current bull cycle should not occur until later in this 8.5 year cycle. The current pause for gold appears to be 1/3rd cycle correction or the 34 month cycle low. Unless the low seen on December 29, 2011 at $1,525 is taken out the 34 month cycle low may already be in. What is needed is a confirmation and that can only occur once gold takes out $1,920.

Merriman believes the gold cycles are measured from trough to trough. His first 25 year cycle from 1976 to 2001 saw the first 8.5 year phase of the cycle result in a runaway move to the upside to the top in 1980. If the current cycle does make its bottom as in 1926 then the first 8.5 year phase of the next 25 year cycle could be also be a runaway move as was seen in the 1976 to 2001 25 year cycle. The peak of that cycle could then eerily occur anywhere from 2033 according to the Dewey/Dakin model or 2035 according to the model presented by Stifel Nicolaus. Following that peak a long bear market could get underway that would be due to bottom in 2047 according to the Stifel Nicolaus model. Merriman's model would suggest a cycle low closer to 2051 while the Dewey/Dakin model would not have its predicted trough occur until closer to 2060.

The Stifel Nicolaus study was on commodity prices. The Kondratiev wave study was on stock markets and capitalist economies while the Dewey Dakin study was on commodities. Merriman studies a number of individual markets including stocks, bonds, gold/silver, oil, currencies and grain markets. Merriman's studies are more specific while Stifel, Kondratiev and Dewey Dakin are broader in scope. One thing is consistent, however, and that is the possible presence of long cycles of 50 to 60 years.

The key for an analyst such as myself is to try and interpret the different methodologies and how it might be applied to today. The Stifel Nicolaus model adds another element to that task. The different methodologies have conflicts even as there are similarities. One thing to note on the Stifel Nicolaus model is that each trough to peak cycle broke down into 3 phases. This is consistent with the model describe by Merriman who breaks longer cycles in twos or threes. And this breakdown of a cycle into twos or threes is consistent throughout the study of cycles. And if the application is correct than it can be applied to any market or even individual stocks and commodities.

 


 

David Chapman

Author: David Chapman

David Chapman
DavidChapman.com

David Chapman

MGI Securities
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