Friday, May 2, 2014

The upcoming dawn of the 60-year cycle

On Apr. 30, the Fed announced a further reduction of monthly asset purchases by $10 billion to $45 billion, further reducing the scope of QE3.  The press lauded the reduction as a show of faith by the Fed in the U.S. economy despite a “dismal” reading on first quarter economic growth.  The Fed concluded its 2-day policy meeting with the prediction that the economy “will expand at a moderate pace and labor market conditions will continue to improve gradually.”

QE was beneficial for banks and large corporations but did nothing to help small businesses and the middle class.  Jobs and wage growth were stagnant for most of the last five years while the middle class did its best to muddle through under conditions that could only be described as contractionary.  QE was a boon for equity prices but actually hindered the middle class by slowing wage and lending growth.

Since the Fed began scaling back the size of its monthly asset purchases earlier this year, commercial lending has increased.  As economist David Malpass recently pointed out, “Growth was weak in 2009-13 but jumped to a 16% annual rate in the first quarter, when the taper started.”  The Fed plans to gradually diminish its monthly asset purchases until finally ending them in 2015, just as the new long-term inflation cycle will kick off.  The end of QE will coincide with the commencement of a new 60-year cycle.  Assuming the Fed sticks to its stated intention, there will be little counter-cyclical interference with the new long-term cycle (unlike the one that’s ending this year).  That means there will be more opportunity for the cycle to play out and extend its benefits throughout the broad economy, not just the financial sector. 

I’ve included the following graph which was originally printed in the late P.Q. Wall’s newsletter.  This graphic depicts the various “seasons” of the long-term 60-year cycle as it pertains to the phases of the economy.  It also shows the basic divisions and sub-divisions of the inflation/deflation cycle.  We’re currently approaching the end of “winter” and will soon be entering “spring.”

The following graph illustrates in greater detail the phases of the long-term cycle.  Again it is from one of P.Q. Wall’s old newsletters.  This graph is a good representation of the the 60-year cycle and its four 15-year phases.  P.Q.’s prediction that interest rates would bottom out in 2013, which he initially made back in the 1990s, was remarkably prescient.