Monday, August 11, 2014

Q&A on the Kress cycles

Q: Is it possible that the Fed has postponed the 60-year/120-year cycle bottom through QE? 

A: Mr. Kress always maintained that his cycles were fixed, that is, unchangeable in time.  To him, the 60-year cycle scheduled to bottom in the fall of 2014 would bottom right on schedule regardless of what the Fed was doing to prevent it.  In the many years of constant correspondence I had with Bud Kress, I believe he underestimated (with all due respect) the power of the Fed in mitigating the long-term deflationary cycle.  I agree with him that the Kress cycles are absolutely fixed and that the upcoming 60-year cycle bottom this fall will indeed represent the bottom of the long-term deflationary cycle.  That doesn’t necessarily preclude a future bout of temporary deflationary pressure, however, in response to the Fed’s continued intervention efforts. 

I believe a more accurate way of describing the impact the Fed has had on the 60-year cycle is that its ultra-loose monetary policy has cushioned the blow of deflation.  Instead of runaway deflation, we experienced only a few sporadic bouts of deflation between 1998 and 2008.  Retrospectively, the previous 120-year cycle bottom of 1894 was also relatively benign.  This shows that deflationary “winter” seasons can be mild depending on the extent of monetary conditions.

Q: Have you changed your stance on the upcoming 120-year cycle bottom?

A: As for the equity market, while it’s true that the long-term Kress cycles are due to bottom in late September the zero interest rate policy (ZIRP) of the U.S. Federal Reserve has kept the stock market unexpectedly buoyant.  I still think we may see a correction in the equity market by later this summer before the late September/early October cycle bottom, but at this point the scenario envisioned by Kress isn’t likely to occur.  Weakness in equities has actually been bullish for gold and mining stocks this year, so perhaps the gold sector will escape the selling pressure should we see a decline in equities in the next couple of months.

In retrospect it appears that the super crash predicted by Kress was the 2008/2009 crash.  This crash occurred during the final “hard down” phase of the 60-year cycle (defined as the final 10% of a cycle’s duration).  Ten percent of 60 = 6, and if you subtract 6 years from 2014 you get 2008.  Therefore I think it’s evident now that the 2008 credit crisis was the effects of the Kress Mega Cycle being felt early, but still within the allotted “hard down” phase.  This is what Bud Kress would have called a “bottom in price before a bottom in time.”