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.
