Thursday, February 13, 2014

Is a crash needed before the 120-year cycle bottom?

Question: “Aside from technical analysis and the Kress cycles, from a valuation standpoint the bottom of a bear market is normally between 14 and 20 years away from the prior top and prices for stocks are so low that you find good quality stocks at PE- rations under 10 and dividend Yields in the Dow around 5 or 6%.  If I am correct, then it is your thesis that the long-term deflationary cycle will bottom later this year and we go into a more inflationary period.  Given the fact I mentioned above we would need a crash like 1929 or 2008 to come along with those prior bear market bottoms, what is your opinion?”

Answer: If the 120-year Kress cycle bottom materializes later this year as expected, what it portends for the economy is the gradual re-emergence of inflation over a period of many years.  This doesn't necessarily mean that we’ll see a jump in inflation starting next year, for it could take several years for inflationary pressures to mount.  The worst of the next inflation cycle likely won’t be until the 2020s when the first 30-year cycle of the new 120-year cycle is peaking.  

As for stocks, the Kress cycle theory suggests that while the next year or more following the 2014 bottom should be bullish for stock prices, it won’t necessarily be a time to be a long-term stock investor.  If inflation does increase in the years ahead, while it may initially be beneficial for stocks, increasing inflation will more than likely be a drag on corporate earnings at some point.  

It’s doubtful that the upcoming 120-year cycle bottom this fall will bring about a 2008-type market crash.  Perhaps a 20% or so correction is about as much as we can expect.  Most of the PE contraction you mentioned above was already effected during the credit crash of 2008.