3 replies to this topic

[tsharp]

How is it possible that Mr. Prechter was mistaken in his views (at least so far) with regard to how badly the trough of the last longwave cycle would affect both the US economy and financial markets?

And is it possible today's permabools will be equally as mistaken over the next two decades as the permabears were over the past two?

I suggest that the mistake of linear thinking is not new... for the most part, we humans are relatively myopic... thinking in smaller linear terms, rather than larger circular. We tend to look at our limited experiences, or recent history, and then project them/it forward, and usually create false expectations, because we're not thinking in a large enough context.

I suggest that Mr. Prechter has mistakenly awaited another economic depression and financial markets wipeout, because he viewed recent US history, and then projected the same pattern (fractal if you will) into the relatively short-term future.

Yes, the longwave can have a period of extreme deflation at its trough, as it did in the 1930s... and, it can also have a period of extreme inflation at its plateau as it did in the 1970s... but do all longwave cycles behave in the same manner?

Could today's permabools also be guilty of attempting to project the relative recent history of the last two growth seasons in the US financial markets into the relative short-term future?

In a recent post I suggested that there appears to be two seasons of relatively good growth in the financial markets during each longwave cycle. (The longwave is nothing more than the ebb and flow of the inflationary/deflationary cycle, with an average cycle duration of ~54 years.)

The first growth season appears to start at or near the beginning stages of a new inflationary upward trend, where inflation and i-rates are relatively low to moderate, an environment in which the financial markets will usually thrive. This is about where I suggest we are now in the most current longwave cycle.

While the second growth season appears to start at or near the beginning stages of a new deflationary downward trend within the longwave cycle, where deflation is relatively low to moderate; also an evironment in which the financial markets will ususally thrive... I suggest that the strong bull market of the 80s-90s was fueled by such an environment.

However, as I alluded to earlier, not all longwave cycles appear to behave in the same manner. There appears to be at least two different models, or patterns (fractals) of behavior during the longwave cycle. The first pattern I'll mention will be the most recent:
1. Starting with low to moderate inflation and i-rates from the previous deep deflation and low i-rates of the last trough = good growth in the financial markets; decent overall economy; occasional recessions.
2. Peaking at the plateau with extreme inflation and i-rates = poor growth in the financial markets; panics in the financial markets; stagnate economy.
3. Phasing into moderate deflation and i-rates, but never falling into extreme deflation into the trough = good growth in the financial markets; decent economy; occasional recessions, but no economic depression.

Whereas the second pattern, which was the pattern of two cycles ago, appears to behave somewhat differently:
1. Starting with low to moderate inflation and i-rates from the previous moderate deflation and i-rates of the last trough = good growth in the financial markets; decent economy; occasional recessions.
2. Moving much more quickly into the Plateau phase of extreme inflation and i-rates = poor growth in the financial markets; panics in the financial markets; stagnate economy. (I suggest this is due the higher relative starting point of the previous cycle.)
3. Phasing into moderate deflation and i-rates = good growth in the financial markets; decent economy; occasional recessions.
4. Bottoming in the trough phase with extreme deflation and low i-rates = economic depression and financial markets crash.

There are other variables to the equation that I'm not going to get into at this time, as the point of this post is simply to help us step back and notice a much bigger picture. Below are two charts of the Dow, with data going back to 1901; I suggest that they clearly show two different patterns in the behavior of the longwave, whether these patterns alternate or there are more than just the two, I cannot say for sure, as my data and study are still not yet complete... but what appears to be certain to me, is that we must learn to think in larger circular terms, rather than in the myopic linear terms to which we've become accustomed.


--tsharp


Fwiw, if the LW patterns do alternate, then we can expect for inflation to become a problem for our economy and the financial markets much sooner than in the previous LW cycle, which would suggest a relatively more muted bull market cycle in this upward inflationary phase.

[BovineMarket]

Just a couple of points to expand your summary (nice points BTW), 1) Prechter has been dead wrong since 1987 and will be dead wrong until 2013 when deflation does hit. Back in the 1930's, there was alot of gold, a gold-backed currency and alot of oil. A gold backed currency prevented the monetary expansion that caused the deflation seen back then.. 2) The global fiat currency will cause further expansion, driving higher inflation prices. A 20 year bear market in commodities has caused severe shortages, which will feed the inflation (Theory that commodity prices drive inflation. Elliott Wave is the most likely bet to quantify where we are in the commodity cycle (using Glenn Neely methodology). Using Astrological stuff ......I do not buy it. Mahendra has been right on some things but waaaaaaaaaay off on other things. 3) The S&P because it broke 1210 will likely hit 1085-1090 prior to resuming an upward trend to lock into a high of 1310-1340. The back half of 2005 will see the market begin to slip and will likely have a 2 1/2 year decline to match the rise.......this puts a bottom out around early to mid-2007. Commodities will likely suffer a minor pullback in this time, but waiting for a bottom to buy the dip will be worthwhile. 4) Around 2010-2012, except for oil sand stocks, all others should be slowly converted to bullion. When deflation does occur, it will be a result of economic collapse on a grand scale. This inflationary cycle has a long ways to go before it is complete. The S&P is likely to decline to 850-900 by early 2007, but it will start rising higher again. THIS IS AN IMPORTANT POINT: the S&P is a fluid index, so oil and gold stocks will gradually start to replace the weightings of the S&P to account for around 60% before it tops (that is another point to determine the top is in for the commodity bull). SO how will this affect the value later on? It likely means a decline to 400 is not going to occur. More likely the S&P could make even newer highs as energy stocks and gold stocks move up. 5) Mild inflation is not going to even be in the cards this coming decade. We will likely have a deflationary episode around 2007, but that will be quickly relieved with monetary intervention (printing). Even if they do not print, China and India will add further pressure to the commodities to keep the short supply even more so, causing higher and higher prices. BovineMarket

[tsharp]

One of my buddies and mentors in LW theory, Dr. Tom Drake, posted this elsewhere, I'm just including it here with credit, because of its appropriate fit into this thread.

Start:

In a recent reply to Francis Bussieres about stock market expectations in this current up cycle of Kondratieff, I briefly outlined the conditions under which subnormal, good, and hypernormal stock prices could result depending upon the rate of inflation.

http://groups.yahoo....1/message/32832

Yesterday I had an excellent off-site exchange with a Lwside1 lurker and sometime poster [tsharp] on the possible alternation of stock returns from one Long Wave cycle to the next.

Since the late 1990's, at the old CSF LW site and later here, I have written about this idea. It was based upon the observation that Dow Industrials stock (price only) returns from the LW low of 1896 to the 1919 LW momentum top were muted compared to those from the 1949 LW low to the 1973 LW momentum top. The 1919 Dow peak was 286% of the 1896 low. The 1973 Dow peak was 651% of the 1949 low.

Although 1896 was the LW low, it was characterized by higher than earlier 19th century LW low inflation and interest rates, and higher than usual stock P/E ratios. Contrast that with the 1949 low when P/E's were quite low and so were interest rates and inflation. The following chart shows several measures of P/E ratios: the top figure shows both 5 and 10 year moving averages of actual then current P/E's, and the lower figure, shows peak earnings P/E's of the same periods from the 1870's (See Hussmans's discussion of peak earnings P/E's, http://www.hussman.n...wmc050222.htm):

http://img139.exs.cx...0/pe18705bi.gif

The current situation post LW final low of 2002/2003 resembles the 1896 low more than it does the 1949 low in the metrics of P/E ratio and inflation. However, interest rates and dividends are more like those of 1949.

One can see on the chart the strikingly different P/E ratios of 1896 and 1949. Thus as far back as 1999 my feeling was that we could have an up cycle this time in which P/E ratios contracted rather than expanded. This would not preclude a bull market overall, but it might be more muted like that from 1896 to 1919.

However, given the low rate of interest and dividends at the 2002/2003 low, the contraction of P/E's might be offset partially by a greater growth of dividends within the total return picture than is usually the case in LW up cycles.

Partly this will also depend upon the timing and rate of growth of inflation in the up cycle. Due to the persistence wartime price controls (and those on gold, mortgage rates, and on oil*), the infaltionary spurt did not begin until late in the up cycle: pressures began to be felt in the late 1960's and gold and oil exploded nearly at the top in 1973.

Thge difference in inflation for the two periods can be seen in this chart of PPI:

http://img107.exs.cx...ppicpcug1rt.gif

Inflation increased steadily from the 1896 LW low and then spiked up during WW1. After the 1949 low there was an initial increase in inflation as we are now seeing and then was only mildly increasing until the blowoff of the late 1970's.

In both periods stocks did well until inflation began to accelerate, with the proviso that post 1949 stocks performed better because of the P/E discussion above.

To summarize:

1. It is normal for stocks to rise in the inflationary LW up cycle, at least until inflation accerlerates above some critical level. (Stock price gain are due to increasing ecnomic growth rates and better pricing possibilities by corporations.)

2. P/E cycle highs and lows appear to alternate between LW cycles or to be on a different cycle from the LW.

3. The current stock situation is more like the post 1896 LW low than that after the 1949 low, except that interest rates are starting from relatively low levels now as in 1949. (Dividend rates are lower now than at either prior low.)

4. Unless inflation rates accelerate early in this up cycle and stay that way (and so far this is not the case), P/E ratio contraction will restrain stock price appreciation somwhat, but dividend growth will offset some portion of this effect.

5. Overall total returns of stocks for this cycle should be somewhere between the 166% price appreciation up to 1919 or the 551% price appreciation up to 1973. If we arbitarily make it to be somewhere near the average of those two cycles, say 350%, to the putative high in 2027 or so, we would expect approximately a four-fold increase in the Dow and SPX from the 2002 low. This would be the nominal return: the intervening inflation would make it much less in real terms as in 1919 and 1973. The gain would be similar to the gain from the SPX late 1994 low to the 2000 high, but spread over 25 years instead of just 5 years.


Tom Drake

END

[Not Too Swift]

Tim, I do not want to detract in any way from your excellent post. Thank you very much for posting a very interesting chart and view. I disagree with the timing because I do not believe that the longwave is fixed in period at 54 years. Central bankers have lengthened the period in this cycle by printing money. Instead of having debt liquidation and deflation at the normal cycle point, we are deferring the pain until tomorrow. The rampant printing of money is doing what the Austrians predict will happen: the debt problem only gets worse. This is because speculators see that the fed will bail them out and then they increase their bet. We have passed the record peak debt ratios set in the Great Depression, and we are now setting new records as we move forward. You can't bail the debtors out: it only spurs them to behave worse. Debt pulls demand forward, and so we continue to cannibalize the future to avoid a real recession today. When it does come it will be a doozy. This is also why I prefer Mike Alexander's view to Tom Drake's. But it will be a decade or so before we know who is right. Thanks again for a great post on a topic that needs wider following. Swift