To many investors cycles
are the holy grail of the financial market.
Many investors have devoted years to the study of them. Some have even claimed to have found the
ideal cycles for consistently predicting price movements. What no one can seem to agree upon is exactly
which cycles are most accurate for anticipating market moves. But what all studies of the cycles share in
common is an unshakable conviction that cycles hold the answers for what is
coming in the future.
If there’s one thing
I’ve learned over two decades of studying cycles it’s that there is no holy
grail when it comes to historical market rhythms. Even if there is a “one-size-fits-all” cycle
the true believers in cycles tend to forget that in the short term, factors
such as trader psychology and news reactions can exert an outsized influence on
markets and can temporarily whipsaw a cycle.
The influence of central bank intervention and government policy
initiatives can also override, or at least mitigate, the influence of cycles
for prolonged periods.
As with any technical
discipline, however, there’s always the temptation to strictly adhere to the
cycles in a rigid manner. Alas, this is
where many students of the cycles go astray.
By fixing one’s focus on the cycles to the exclusion of other forms of
market analysis and liquidity studies, cycle traders are often disappointed
when their cycles fail to produce an expected turning point in the market. This failure can be explained by the
influence of, for instance, Fed intervention which can produce cycle
“inversions” or else reduce the impact of the cycle altogether. Extremes in investor sentiment can also
produce temporary countercyclical shocks to the market which frustrate the
cycle trader.
A general rule when it
comes to cycles is that the longer the period (i.e. time), the more reliable
they tend to be. Probably the most
famous of these long-term cycles is the Kondratieff Wave, which tends to
average 60 years in length. The K-Wave
as it’s called is the dominant cycle of inflation and deflation in the
economy. While it does influence stock
prices, its major impact is on commodity prices which in turn influence the
overall state of the economy.
The 60-year cycle was to
have bottomed around the year 2014, although the residual effects of a cycle
this long can last beyond that time.
This is the most likely explanation for the continued deflationary
undercurrent in the global economy. Its
effects are being felt most acutely in China and to some extent in Europe. A visual aid which shows the effects of this
cycle-driven deflationary trend is the Reuters/Jefferies Commodity Research
Bureau Index (CRB), below. As you can
see, commodity prices have fallen to multi-year lows in the face of a drop in
global industrial demand. The effects of
the 60-year cycle are clearly manifest in this chart.
Another longer-term
cycle which tends to reliably repeat is the 20-year crisis cycle, otherwise
known as the “Sheep Shearing Cycle.”
This rhythm manifests itself in the market plunges at roughly 20 year
intervals. (It’s not to be confused with
the 20-year Kress cycle.)
The crashes of 2007-08
and 1987 are examples of this rhythm, as are the 1929 crash and the 1907
panic. Major crashes tend to occur at
roughly 20 year intervals, especially if there is widespread market
participation among the public. The
explanation for this cycle is that a generation runs approximately 20 years and
it takes about that long for the old generation to forget the pain associated
with the previous crash. By that time,
of course, a new generation will have come along which doesn’t remember the
last crash or depression and are therefore more risk averse. Thus the entire cycle of boom and bust
repeats itself as the next generation repeats the mistakes of its elders.
Another reliable rhythm
which manifests in both the financial market and the economy is the 7-year
cycle known as the “Year of Release.”
This cycle was first ordained in the Old Testament book of Deuteronomy
as a relief for indebted Israelites. The
law reads: “At the end of every seven years thou shalt make a release. And this is the manner of the release: Every
creditor that lendeth ought [anything] until his neighbor shall release it; he
shall not exact it of his neighbor, or of his brother; because it is called the
Lord’s release.” [Deut. 15:1-2]
Although the year of
release is no longer formally observed, this ancient precept is unconsciously
embedded in the financial dealings of Western nations. The debt release cycle can be seen in the
recurring price “corrections” of commodity prices, and to a lesser extent
equities, at roughly seven-year intervals.
This cycle can be seen manifesting in the credit crash of 2008, the tech
wreck of the 2000-01, the mini-bear market of 1994, the stock market crash of
1987, the inflationary/commodity peak of 1980, and the broad market plunge of
1973-74.
The most recent 7-year
debt release cycle was scheduled to make its appearance around 2015; and indeed
the cycle’s effects are still being felt.
Depending on how many price imbalances there are within the broader
economy, the influence of the 7-year cycle can spill over into the following
year, as was the case in 1973-74 and 2000-01.
The primary course of the latest 7-year debt release cycle is in the
commodities market, with repercussions in the overall state of the global
economy. It would not be surprising if
the residual impact of this cycle is felt in 2016.
The purpose of the
7-year release cycle is to wash away the negative effects of debt and other
forms of financial enslavement from the economy. This would also include artificially high
prices, which was clearly a problem in recent years in the energy market. That oil and gasoline prices have come down
so sharply in the last year is indeed a godsend for consumers. It’s also beginning to have the beneficial
effect of increasing oil demand.
One area in desperate
need of correction is retail food prices.
Prices to U.S. consumers at grocery outlets are, in some food
categories, at or near all-time highs despite falling diesel and agricultural
commodity futures prices. Before the
course of the debt release cycle has completely run its course, it’s necessary
that the financially enslaved among us experience a release from the heavy burden
of high prices in this area.
A final point to be
addressed is the impact of the 7-year debt release cycle on stock prices. Since the 7-year debt cycle isn’t expressly
aimed at equities, its impact on this area isn’t always sharply delineated. The main effect of this cycle is on
commodities, as previously mentioned. It
can be argued, though, that the 7-year cycle’s impact was felt in the stock
market this year in the lagging nature of the NYSE Composite Index (NYA), which
is arguably the best representation of the broad U.S. stock market. The cycle’s effect is also reflected in the
abnormally large number of new NYSE 52-week lows since earlier this year.
Much of this broad
market weakness is attributable to the weakness of commodity prices, especially
in the energy and mining sectors. Of
course it can be argued that this is a spillover effect of the longer-term
deflationary cycle previously mentioned.
In any event, the impacts of this cycle are still discernible in the
internal condition of the NYSE broad market: new 52-week lows remain abnormally
high as of this writing.
In previous commentaries
I’ve suggested that next year would likely witness a bottom in the commodity
prices that have lately plagued the global economy. The standard deviation of the 60-year cycle
as well as the 7-year debt release cycle support this notion. By the time both cycles have completely run
their course, the oppressiveness of high prices in the economy should attenuate
enough to provide some relief for the debtors who need it most. Thus the Year of Release will have once again
worked its magic.
No comments:
Post a Comment