All's Well That Ends Well
You may have recently read some thoughts on what is being dubbed the 99-year cycle. And although we will not get into naming names, one particular author who is widely read is of the opinion US stocks, as represented by the Dow, are at a similar juncture at present when compared to the turn of the Twentieth Century, and that they are poised to take a beating. Of course there are many in this camp right now, which is undoubtedly why put / call ratios remain levitated in spite of the markets incessant ability to continue grinding higher as these people get squeezed. Could it be enough market participants know Grand Super Cycles customarily end with a bang, or is it that hedge funds, mutual funds, and pensions are simply buying insurance on what they see as a temporarily overvalued market. If I were a betting man, the latter would be my choice as the primary force that actually holds stock values up. Of course the other key ingredient in the formula is the squeezing action produced by a never-ending sea of liquidity provided by monetary authorities.
Be that as it may, and in returning to the task at hand, based on our understanding of these things, we find the 99-year cycle theory out of context in that the origin of such a sequence would have occurred smack dab in the middle of a Super Cycle sequence, at a minimum, which is well established in 12000 Years Of Elliott Waves, attached above. Furthermore, not only is this knowledge alone enough to refute the validity of such claims, but just a cursory glance at an appropriately scaled long-term chart of the Dow reveals there are very few similarities between now and the turn in early 1900's, where in fact the 'Grand' sequence was far closer to its beginnings than to an end. Of course both views see stocks collapsing relatively soon, but our view leaves open the possibility the current larger degree sequence in US stocks can run much longer than most bears would like to consider. (See Figure 1)
How can we be confident our ideas on where US stocks are in the 'big scheme of things' is correct? As we see it, one must acknowledge the irrational exuberance that exists in stocks today could last much longer than any other previous Super Cycle within the Grand sequence simply by virtue of all the insurance sold to guard against it, not to mention credit bubble considerations purveyors must ensure are maintained in avoiding collapse, where as mention previously in our work, a simple linear progression of previous Super Cycle peaks would take the Dow (US stocks) higher into January of 2009. (See Figure 2)
And of course there are numerous other ways to measure the relative overvaluation of US stocks today in providing further assurances we are on the right track 'big picture' wise, but those will be left for another day perhaps. Instead, where as you may already know, these conditions can extend far longer than most speculators will be able to endure (US stocks will fall only when outsized negative bets are removed from the market place), the focus of the remainder of this study will be to improve on recent efforts in finding similar trade patterns in history. The idea here is that the ephemeral market / economic conditions and human emotions that are required to trigger major turning points in stocks markets remain primarily constant in nature through time, and that this is largely true across cultures given the globalization of the US banking model. This last point is exemplified nicely in the striking similarity between the post crash experiences between the Nikki 225 in the 90's and NASDAQ since the turn of the millennium. (See Figure 3)
As you can see above however, and as you know from history, American's were victorious in conquering the world this past century, so they must of course attempt 'one upping' those they now rule through economic structures in an effort to maintain leadership / domination. This vein of thinking would account for the divergence from pattern in the NASDAQ compared to the Nikki 225 last year in what would otherwise have been a perfect match. Further to this, some would argue the reason for this divergence is largely due to US ingenuity in that the rulers of the world, whoever they are, through both sales of exotic financial instruments that cause increasingly unnatural trading tendencies in markets (stocks, bonds, and commodities), and monetary largesse, continue to expand unhealthy influence past any known thresholds previously perpetuated by so called 'free market pundits'. Of course US authorities want us (Neocons) to believe domestic markets continue to attract increasing amounts of investment capital because they are the center of the universe. This would all be quite funny if the issues concerned were not so serious .
It does not take long to see what we mean in terms of this divergence when viewing the above, where we are rapidly approaching the point when this gap will either be closed or prices will continue on trend. In this regard, and demonstrating to those who think things are 'different' today that they are 'out to lunch', and that all these new financial structures do not matter, here is a panel clearly showing the American experience remains unchanged in relation to previous manias, and that post bubble parties are still more a function of domestically conditioned human emotion more than anything else. It's either that or we will have to congratulate the artists who are drawing this picture. (See Figure 4)
Without a doubt, the almost exact match between the two trading patterns overlaid above is a very compelling argument one should expect more of the same to come. And as you can see, this would involve US stocks grinding higher into the February area of 2008 if one is counting trading days. What about afterward? Well, we find it no coincidence that economic circumstances in the States are very similar today when compared to the 30's, and for this reason, we should expect future discounting of such circumstances to also be similar in stocks, and their trading patterns.
At the same time however, these observations are qualified in the understanding that as far as the Decennial Pattern is concerned, the Dow diverged from what has been the norm for a very long time last year. Stock market participants should take this as a warning shot across their collective bows that a very large-scale top in US stocks is approaching considering the last time the Dow closed negative in a year ending in 5 was 1885, very close to the origin of the current Grand Super Cycle.
That being said, while attempting to identify a 'track to run on' that makes sense today knowing the current batch of administrators know no good measure, one is compelled to hypothecate that if pre-echo bubble behaviors are similar, post party price action should also rhyme, at least up to the point of where a major world war needs to breakout before the economy / markets begin to implode. In this regard, and as you can see below, if the current sequence were to match the Decennial Pattern seen in the 30's outside of last year's departure, this would involve US stocks making an echo bubble high at the beginning of 2007, followed by an attempted recovery into summer, only to collapse as we move into the first quarter of 2008. It should be noted these lows would be well above those seen in 2002 if history is any guide. This would be viewed by Neocons as a test, as it were. (See Figure 5)
If this was the case, US stocks could recover approximately half of their losses as 2010 approaches assuming similarities in patterns continue to persist, but afterwards the picture becomes much more clouded given the current geo-political picture, peak oil considerations, and technologically advanced fire power. That is to say US stocks plunged back to the lows seen in 1938 in the early 40's due to uncertainty associated with the outbreak of World War II (WWII), but most certainly also recovered afterward because of the post war party being planned.
This time around however, it's unlikely the world gets a war on the relative scale of WWII, and again, peak oil considerations will likely have an impact on the trade due to what could be rapidly escalating energy costs by then. Not that economies will be entirely without war related bolstering associated with fighting over what will undoubtedly prove to be increasingly scarce resources as time marches on. By and large however, because global growth potential will be spent soon, and with prospects of widespread destruction associated with a third world war being untenable, what happens to stocks after 2010 is likely to be quite different when compared to the post WWII experience. (See Figure 6)
Continuing along this line of thinking, and as you may or may not know, there is very good reason to think a correction in equities of what could be termed X-wave magnitude might be rapidly approaching, meaning stocks, real estate, and just about anything that qualifies as an equity could see substantial declines in price. Here, if such a circumstance were to develop, where most would naturally term this condition a 'deflationary depression', one could expect to see equity prices collapse to less than 10-percent of current values, if not go off the board completely in the case of speculative stocks and high risk debt securities. Eric Sprott sees potentially profound changes for the human condition accelerating in the not too distant future due to rapidly depleting natural resources, a hypothesis which cannot be ruled out by a thinking man. (See Figure 7)
Of course, most prefer not to think such thoughts, merrily carrying on with their lives in blissful ignorance centered around US modeled manias characterized by a 'shop til you drop' mentality that promotes 'grand' excess. Naturally, this mentality extends into the financial markets, as you may well know, where we are undoubtedly witnessing a topping process in equities (human intercourse) the scale of which has never before been witnessed by man, and will never likely be duplicated, as well. Further to this, you may find it interesting to know that while large stock / capitalization weighted US stock market indexes peaked in 2000, indexes measuring the mid to small caps, along with market weighted measures of the Dow and S&P 500 (SPX), have been vexing new all time highs just in recent days, meaning in a broader context, a confirmed top has yet to be established. (See Figure 8)
This observation lends a great deal of credence to the hypothesis potentially developing hyperinflationary conditions could cause equities to continue to rise and remain buoyant for several more years, as outlined above. The fact monetary aggregate growth rates are only now turning higher in force, evidenced in Rate Of Change (ROC) indicators and the price of gold, suggests authorities still have a few arrows in their collective quivers to shoot before the war is over. Of course if growth rates in high-powered money, as measured by the monetary base, continue along what appears to be a natural trajectory lower, conditions could deteriorate sooner than later. Here, the idea is that natural growth potentials are already predominantly exhausted, and current efforts to monetize securities markets will fail. (See Figure 9)
It doesn't take a rocket scientist to figure out that once western bankers have used up growth prospects in the east, the party will be over, and the globalization trend will be reversed in favor of more regionalized economies. Perhaps this is what declining growth rates in high powered money confirms for us, suggesting that give or take a year or two, the human condition is approaching a peak in influence on the planet as measured by equity prices at the epicenter of the colossus in New York. In this respect, one should not be surprised to learn that on a structural basis, the market capitalization weighted measure of prices of the New York Stock Exchange is already extending a fifth wave of Cycle Degree, meaning the only question now is exactly when does the larger sequence, Grand Super Cycle or higher, come to an end. (See Figure 10)
As alluded to above, it's becoming more and more difficult to generate growth in the now aging western bank globalization model, where quite simply the system now requires unmanageable increasing quantities of inputs (debt) to maintain output growth in the economy(s). This understanding is also becoming increasingly widespread not only in the academic community, but to what some would consider a surprisingly broad audience these days, typified with recent dramatic accountings of what should viewed as "Much Ado About Nothing" in that undoubtedly Greenspan was steered by the larger environment, and all he did was give us what we wanted. On this basis, it could be said western civilization, and unfortunately for them, all those who have been consumed by 'the machine' along the way, must now face the music for letting one's guard down, hypnotized by the allure of 'easy money'.
For this reason it should be no surprise most prefer to maintain an "All's Well That Ends Well" mentality these days, because to do the opposite would spoil the party. If our observations above concerning measures of human endeavor have any value however, maintaining this careless mentality brought about by the reckless policies of supposedly responsible men in higher places could prove hazardous to not only just your financial well-being, but ultimately, your chances of survival, period. In this respect, no further conclusions will be drawn here on these pages here today, but we invite you to ponder your own.
In leaving you now, we invite you to visit our site and discover more about how an enlightened approach to market analysis and investing could potentially aid you in protecting your finances and family life into the future. And of course if you have any questions or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.