Frequently I receive emails from clients who ask variations on the theme of the QE-driven stock market in light of the long-term Kress cycles. For instance, one client recently wrote: “I really like your work but lately am struggling to piece together the longer-term direction. You seem perpetually bullish, which has proven to be right, but am struggling to see what will change your mind to be bearish at any point. Is it mainly liquidity that you see driving the market higher from here to the end. Or the New Economy Index?”
My answer to this first question is that one can never underestimate the impact that liquidity has on pushing stock prices higher. The Fed has committed itself to a policy of stock market recovery. As the noted economist Ed Yardeni has opined the Fed’s “shadow mandate” is to support stock prices by means of its QE policy. As another observer stated, “Never sell short a liquidity-driven bull market.”
It should also be mentioned that Bud Kress, the late cycle expert, emphasized that as long as there are no major long-term yearly cycles down for the year in question, there’s no reason to assume the Fed can’t engineer a bull market even in the face of the major structural problems facing the U.S. economy. The next time a major series of yearly cycles will bottom is 2014. Therefore there’s a very real possibility the U.S. stock market will be able to dodge another bullet in 2013 before the next set of long-term cycle bottoms arrive.
He continues, “If earnings continue to grow and liquidity is maintained, will this just override your 2014 bear thesis?” To this I can only answer that earnings growth will eventually reach its limitation and will be hard pressed to continue expanding into 2014 with the long-term deflationary cycles in the “hard down” phase next year. Already we’ve seen evidence that the all-important rate of change (momentum) of earnings is slowing down.
Another question: “When the departed Kress thought that if you artificially extend the cycles via direct intervention (i.e. the Fed), it may produce deeper ramifications down the line. Is that possible here?” I would argue that not only is it possible, but indeed likely due to the distortions the Fed’ endless QE programs are creating.
Another question: “If you don’t see any problems amounting until end of this year or early next year, it all seems a bit too quick to bring about a deflationary cycle, does it not?” Under normal circumstances I’d agree with this observation. These aren’t normal times, however, and we’ve seen just how quickly markets can turn with the slightest provocation in recent years (e.g. the “Flash Crash,” Greece, Crete, et al). If you go back to the last time the 120-year cycle bottomed in the mid-1890s, you’ll find that the stock market was in a roaring bull market right up until the start of 1893 – less than two years before the scheduled 120-year bottom in late 1894. The panic of 1893 was swift, sudden and virtually without warning. If it can happen once it can happen again.