Cycles Cannot Be Ignored – We Have Currently Entered Into A Period Of Down Cycles For Economies and Investments –  A Look At Some Key Ones….

Cycles – they do matter as the world has learned, many things repeat themselves over and over…

The study of cycles sometimes gives some the impression of stories made up by analysts and economists to justify their existence. The reality though, is that there is pure science behind cyclical analysis. The study of cycles is basically the study of patterns, which is one of a number of building blocks on how the universe is constructed. The three most important of these building blocks include pattern, space and time. All of these can define cycles, as they require a defined pattern; something of substance or space; and a defined period of time to complete.

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The world goes through cycles in pretty much everything. We do not know necessarily why or how, but cycles happen. There are climate cycles; economic cycles; lifecycles; geopolitical cycles; political cycles; and war cycles to name a few. We are currently entering into a ‘war cycle’ that comes every 54 years, in subsets of 18 and 36 years. History has shown that during these periods major events occur and we are starting to see these in the world today. We have Middle East issues including Israel/Palestine and ISIS; Ukraine – Russia; Libya; North Korea; and general uprisings throughout the world as lifestyles are negatively being impacted by poor economic conditions.

Cycles are telling us we are entering into a negative phase this year, which will last up to 4 years. One of the cycles is the war cycle, which is even more concerning, is the fact that it is occurring simultaneously with an economic and fiscal crisis that is far from over. What is most scary is the fact that most of the major cycles are pointing down this year for a few years. From a cycle perspective, we have not lived through such a dangerous period since the great depression of the 1930’s where many of the cycles also converged on the downside.

There are a number of cyclical analysis we uses at Fortrus including:

  • Elliott Wave cycle (socioeconomics theory)

  • Generational or demographic cycles (spending wave based on age of society)

  • Geopolitical and war cycle (18 & 54 year cycle – revolutions, wars and terrorism, 53.5 year cycle)

  • Socio-political cycle (54 year cycle)

  • Demographic or Spending cycle (peak spending at age 46)

  • Commodity cycles (price of commodities boom and bust)

  • Business cycles (4.5 & 9 year cycle of peak, contraction or recession, trough and recovery or expansion)

  • Credit expansion or contraction cycle (average 5.5 years)

  • Sunspot Cycle (average cycle 8 to 10 years)

  • Kitchen Cycle (40 month cycle related to inventory of commercial businesses)

  • Juglar Cycle (7 to 11 year cycle that tracks fixed income investments by companies )

  • Kuznets Cycle (18 year cycle that moves from low to high income inequality)

  • 7 quarter stimulus cycle

  • Kondratieff or K-cycle (long term economic cycles)

  • Hegemonic Cycle (rise and fall of super powers, today US to China)

It would take a small or maybe long book to review all of the above cycles but lets have a look at a few key ones to show you how dangerous the times are from a cycle perspective.

Let’s start with a look at the Elliott Wave cycle. In simple terms, stock markets trade based on psychological moods of society. We are at the tail end of a Grand Super Cycle, which began back in 1720. The markets in 2000 completed the cycle, super cycle and grand super cycle, which is the end of the overall cycle, and indicates that major economic and investment pain is to come.

To date, many of the expected consequences, including a deflationary depression and a collapse of stocks and growth in low quality bonds, have been delayed due to massive intervention by Central Banks and governments. Unfortunately, the reality is that all these institutions have done is defer the inevitable and will leverage the problem even more than it was in 2000. All they have accomplished is to “kick the can down the road”. The natural forces of deflation cannot be avoided, yes deferred, but not completely avoided by the actions of man. The natural cycle will complete itself regardless of human action, and when it does, we all will question why we did not let it cleanse itself when problems first rose in 2000. Here is a great chart from Elliott Wave International (www.elliottwave.com) which reflects where we are:

If you look at the last phase of the major super cycle (IV) to (V), which rose from 1932 to 2000, we are forming a historic top in the market. It could have totally crashed in 2000 but the Federal Reserve and other world central banks rapidly lowered interest rates to keep the bubble alive and encouraged more debt. This was the time to buy gold and silver as this was the beginning of a historic bull market for precious metals. The topping pattern has been a 15 year process due to interest rates being dropped to a record low levels; governments taking on trillions of debt to try to keep things afloat; and Central banks creating money and stimulating economies through quantitative easing programs.

All of this unprecedented activity and growth has resulted in the lowest growth rates coming out of a recession in over 100 years. But why? Simply the deleveraging process and deflationary pressures are strong, and no amount of human action can change the historic cycle.

Economies, like stock markets go through cycles and from an Elliott wave perspective, they are driven by the cumulative social mood of society. The market is expected to retrace all of its gains during the last up phase from 1981, which would bring the market back to 1000, a 94% correction from current levels. What drove up the markets was confidence and debt/margin and what will force its major retrenchment will be negative mood and debt/margin deleveraging. What goes up must come down! We are not convinced of such a crash of this magnitude but brilliant Elliott Wave theorists are…a warning signal.

The next cycles we will review, all of which will be relevant between 2014-2016 are; the 39 year generational (demographic) cycles, the 18-36-54 year geopolitical (war) cycle, the 30 year commodity cycle, and the 4.5 to 9 (10) year business cycle…. All of these cycles point down for the next few years.

The socio political cycle is peaking for much of the world including the US, Canada and Europe. China is also a perfect example here, as it has become an economic superpower and is poised to become the second largest economy in terms of GDP by 2025. Yet signs are pointing to a reversal of fortune: China’s one-child policy, rapidly aging population and shrinking labor force could result in tight bottlenecks in various sectors and higher manufacturing costs. Other factors, such as inflation and high export and transportation costs, also play a key role. There up rise has gone on for about 27 years. Look for them to go through challenges moving forward. That does not mean they won’t grow, but their socio political expansion will slow dramatically.

From the first above chart you can see that that the 18 year generational cycle (green line) is now on a down slope. This is due to the baby boomer group aging beyond their peak spending years, and transitioning into a mode of downsizing and saving. This will greatly impact society as consumer spending is the major component of growth in the developed world, and without a new strong consumer base to take their place, spending levels are likely to drop, especially if you consider the high levels of debt and low savings rate among baby-boomers and younger generations. Debt will have to be paid down and savings increase before consumer confidence and spending returns to historical levels that baby-boomers primarily lived through.

The business cycle in the chart above (red and blue lines) are also pointing down for the next couple of years. This makes sense as the current business cycle began in October 2009, over 5 years ago. It is getting long in the tooth.

Now lets have a look at the demographic or spending cycle.

As you can see, the peak spending age is 46, and spending just goes down from there. As you can see from the next chart, spending based on baby boomers should have peaked in 2009 and fallen from there. This trend is occurring but Central Banks are doing all they can to keep the baby boomers spending via historically low interest rates. It is not working and will ultimately fail, as we head into a period of deflation.

We do think that this cycle has been pushed out a few years by both Central Bank money printing as well as monstrous government deficits. Spending has turned down and it will get worse as economies roll over into a recession. That is where negative rates will not encourage individuals to borrow as in a world of deflation, price of goods and services go down, so people just wait and wait to see prices fall.

In this situation, the spending wave will not turn up again until 2022 at the earliest.

Since consumers are about 70% of the economy, this poses a major risk to growth. This is a key reason why we expect a major economic and stock market contraction. This decline in spending fits in with the theme that society is entering into the ‘winter’ phase of its growth cycle, which is a period of deflation; no or negative growth; and deflating assets.

The second cycle on the chart above is the 36 and 54-year geopolitical cycle, together with the 18 year war cycle (they all interact together). This cycle goes through periods of war and peace, periods of discontent and contentment, and uprisings and stability. We are now entering the next phase of negative events, similar to what the Elliot Wave theory proposes. There is currently potential for a number of wars with the possibility of a major world conflict.

The period we are entering is historically driven by chaos, hatred, and war, both civil and international. The possibility of physical conflict does fit in with current economic trends, as trade or currency wars tend to always lead into real wars. During these period of conflict, and economic unrest, politicians often attempt to deflect blame on outsiders. The easiest people to blame are those outside your borders, and this is why economic conflict often leads to violent conflict.

Both of the above charts reflect the same message……The war cycle is trending upward at its fastest rate since just prior to the Korean War and in the meantime the socio-economic cycle challenges are also on the rise. Logically, there are different degrees of socio economic challenges and we are at one of the most difficult phases of the cycle. This is logical given that the war cycle is ramping up aggressively, and causes the chaos to spread exponentially.

Dr. Raymond Wheeler of the University of Kansas has shown that the rise and fall of governments has a high relationship to climate changes. Edward Dewey expanded on Wheeler’s findings and found the 18-year war cycle as described above is consistent through 2,600 years of data. Human society seems to have a natural tendency and high likelihood of engaging in conflict every 18 years on average, and is a factor that seems to correlate with the early or late arrival of the war cycle in response to changes in the monetary system.

When governments and Central Banks made major changes to a countries monetary system and currency (usually being devalued) in the midst of a financial crisis, it was shown to have a strong positive or negative correlation on the war cycle coming due. Those countries that experienced depreciating currencies were more likely to enter into the war cycle, while those whose currency appreciated were more likely to avoid the war cycle. The key factor was whether or not the country became protectionist and engaged in trade wars. Today, we have currency wars which is a form of trade wars, and has caused growing tensions between nations including the US, Japan, China, Europe and Russia. This fact unfortunately would lead us to believe that these trade wars could soon lead to physical wars.

The next cycle is the commodity cycle, which appears to have peaked in 2011, and it does not reflect a significant reversal in momentum to up until 2025 or so.

As you can see in the next chart, commodity prices go through 5 wave cycles, like Elliott Wave that last a total of 30 to 31 years. Given we are very possibly ending a Grand Super cycle of growth, the corrective period will probably be exaggerated to the downside in this cycle.

We have seen a major corrections in commodity prices over the last 5 years, right in line with the top in commodity cycle. Significant (up and down moves) is anticipated in the coming years, with the big picture being down. Saying that, we are living through a crash today as most commodities have corrected significantly (see below). War could cause some of these forecasts to change though. We may see some deviations in prices like oil if war were to breakout, especially war in the Middle East. Gold may also act as a safety net for investors if we do go through a period of socio-political challenges and war. Overall, the trend is expected to downward in commodity prices for another 9 years.

To see how quickly down markets can kick in, lets have a look at how key energy, metal and agriculture prices have fallen over the last 2-4 years from their peaks:

  • Oil – down 52%
  • Gas – down 75%
  • Copper – down 36%
  • Sugar – down 38%
  • Wheat – down 41%
  • Coffee – down 39%
  • Corn – down 37%
  • Cotton – down 24%

Now I do not want to see e-mails that food and clothing prices at the store do not reflect this, as that will be the basis of a future newsletter. Clearly many companies are more concerned about their bottom line than passing off savings to customers in today’s world.

Other cyclical analysis that is waving red flags include the Sunspot cycle. This may sound strange and ridiculous but it has been proven that there is a correlation between sunspots and economic recessions and wars.

It has been found that a key factor to when wars begin has been sunspot activity. This is when geomagnetic activity on the sun is the greatest and occurs when solar activity is rapidly increasing or decreasing. Looking at historical international battles and relationship with sunspot data, it clearly showed a relationship with the upsurge of solar activity and the descent of war. Battles never started at the peak years of solar activity and hardly ever at the lows. We are now just past the peak period activity is trending down, which historically has been a period where wars began.

The average sunspot cycle is 10 years. The last top was in early 2000… right at the top of the tech stock bubble. The sunspot cycle bottomed years later than normal, with the stock market crash bottoming in early 2009, the exact time the sunspot cycle bottomed. Now NASA has shown that the present sunspot cycle peaked in 2014. Sunspot cycle points down from 2014 into late 2019.

As you can see in the next chart, many wars began just prior or just past the peak of the sunspot peak. Again, this is where we are at now (just past the peak), so this is another cyclical tool that is providing a warning signal for war, and a correction in market prices.

The next cycle we will review is the Kondratieff Wave. Nikolai Kondratiev was an architect of the first Five Year Plan, an economic program put into place in the Soviet Union after the Russian Revolution. Kondratieff found that a capitalist system has cycles, similar to the seasons of the year. Capitalism is self-renewing and cyclical in nature but is the best chance for economic betterment for society. The ‘Long Wave’ he defined was between 50 and 60 years in length. Here is a look at the four seasons, including the best investments in this cycle in the most recent waves:

Current cycle 51 year cycle: 1949 to 2000:

  • Spring: 1949-1966: economic expansion, high savings, low interest rates….BUY: stocks and real estate

  • Summer: 1966-1982: high inflation, rising and high interest rates…..BUY: commodities, gold and real estate

  • Fall: 1982-2000: decrease in savings, significant increase in debt……BUY: stocks and bonds

  • Winter: 2000-?: deflationary recession or depression, debt is repudiated, bankruptcies, foreclosures, social discontent….BUY: Gold, mining shares, cash or high quality cash equivalent

Based on this wave cycle, we are at the beginnings of a major deleveraging of debt and a severe economic contraction. This contraction has successfully been avoided to date, other than the 2007-09 crash, due to massive government debt incurred, unprecedented Central Bank stimulus and historically low interest rates. You would think that the economy would be booming based on these three stimulants but instead it is crawling along.

Here is a more detailed chart of the Kondratieff cycle. It shows timeframes and many of the socio-economic and wars that occurred within the cycle:

All the above cycles point down from this year moving forward. Some will be for a couple of years others will put pressure down for the next many years.

So does that mean you hide your money in the mattress and hide yourself and your family in the hills for the next 5 or so years…of course not? But we have to be aware that from a cycle perspective, the risks are as high as we have seen for about 80 years.

Governments and Central Banks have provided around $33 trillion of debt and stimulus to try to get growth and world economies going. The result has been the worst growth coming out of a recession in post war period. This should tell us that the deflation and debt de-leveraging forces are much bigger that any money governments or Central Banks can provide. To put the $33 trillion dollars in perspective, that amount injected into the world system is as much as was done in the history of man prior to 2008…that is scary.

Matt Sammut                                                                                                                                                                                                 Founder & Chief Investment Strategist                                                                                                                                                        Fortrus Financial                                                                                                                                                             www.fortrusfinancial.com