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.
