Cycle Analysis….history has shown us that numerous world events repeat themselves and that they do so in a timely fashion. Wars, price of commodities, depressions, business cycles all go through natural cycles and currently all are entering into a down cycle that reflect a period of danger……..
Many find it difficult to accept that the world and many events within it go through natural cycles. There are periods of prosperity and growth…..and there are periods of retraction and cleansing. Based on historical data, we have now entered into a down period where risks are dramatically higher for increased wars; geopolitical struggles; recessionary if not depressionary conditions; deflation; asset revaluation down including stocks and real estate; and cleansing of debt. We have seen the Federal Reserve and other Central Banks throw everything they can at preventing this from happening but natural cycles appear to be stronger than man-made solutions. Europe continues to economically stagnate; Far East led by China is slowing; North America has very weak growth and is showing signs of inflationary pressure risks. Will these cycles once again play havoc on the world. Here is an overview of many of the major cycles that are taking hold today ……..
Enjoying this article? Receive our Fortrus 4-Minute newsletter for FREE - Sign-up now! Empower your investing today! For a limited time, receive our Precious Metals: Gold and Silver report, a $79 value for free!
Cycles…..destructive forces are real
The study of cycles gives some the impression of voodoo or pure speculation. 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.
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; life-cycles; 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; Ukraine – Russia; Libya; North Korea; and general uprisings throughout the world as lifestyles are negatively being impacted by poor economic conditions.
We will be reviewing a number of cycles through our work at Fortrus, all of which are telling us we are entering into a negative phase this year, which will last the 12-24 months. What makes the current war cycle we see today even more concerning, is the fact that it is occurring simultaneously with an economic and fiscal crisis that is far from over..:
There are a number of cyclical analysis we uses at Fortrus including:
- Elliott Wave cycle
- Generational or demographic cycles
- Sociopolitical and war cycles
- Commodity cycles
- Business cycles
- Credit cycle
- Price, inflation, wages and stagnation cycle
- Credit expansion or contraction cycle
- Sunspot Cycle
- 7 quarter stimulus cycle
- Kondratieff or K-cycle
- American Hegemonic Cycle
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.
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 14 year process due to interest rates being dropped to a record low zero; 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!
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 to a down 2014.
From the first above chart you can see that that 36 year generational cycle 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.
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.
All three 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 socioeconomic 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 and Russia. This fact unfortunately would lead us to believe that these trade wars could soon lead to physical wars.
The 4.5 and 9/10-year business cycles are both trending down this year and will not likely find a bottom until around 2020. We have seen a steady move up in most world stock markets within an economic environment of modest growth, fueled by central bank stimulus. These cycles tend to last around 5 years and we are reaching an end soon. There are many economic statistics that are now reflecting economic stagflation (low growth and high inflation) although government statistics would argue low growth and low inflation. But as was discussed earlier, the way inflation is determined today should be questioned as reflecting the true cost increases to the average person.
The next cycle is the commodity cycle, which appears to have peaked in 2011, but it should not reflect a significant reversal in momentum up until 2023.
We do not see a crash in commodity prices but rather forecast a stagnant sector in the coming years. War could case 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 sociopolitical challenges and war. Overall, the trend is expected to downward moderately in commodity prices for another 9 years.
Other cyclical analysis that is waving red flags include the Sunspot cycle. This may sound strange 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 predicts the present sunspot cycle will peak in late 2013 or early 2014. Sunspot cycle points down from the end of 2013 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 Kondratieff 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 equivalents
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 time-frames and many of the socioeconomic and wars that occurred within the cycle:
An extension to the Kondratieff wave is the Anglo American Hegemonic Cycle:
The Anglo-American Hegemonic Cycle
Cycles of War and Prosperity
1819 – End of postwar recession – start of asset-bubble phase of up-wave
1825 – Stock market crash – start of down-wave
1833 – Start of last expansion of the down-wave
1837 – End of last expansion of the down-wave – stock market crash – start of last recession of down-wave
1843 – End of down-wave – start of war-inflation up-wave
1865 – End of American Civil War – end of war-inflation up-wave
1867 – End of postwar recession – start of asset-bubble phase of up-wave
1873 – Stock market crash – start of down-wave
1886 – Start of last expansion of the down-wave
1893 – End of last expansion of the down-wave – stock-market crash – start of last recession of down-wave
1897 – End of down-wave – start of war-inflation up-wave
1918 – End of First World War – end of war-inflation up-wave
1921 – End of postwar recession – start of asset-bubble phase of up-wave
1929 – Stock market crash – start of down-wave
1932 – Start of the expansion of the great depression
1937 – End of the expansion of the great depression – stock-market crash
1949 – End of down-wave – start of war-inflation up-wave
1989 – End of Cold War – end of war-inflation up-wave
1991 – End of postwar recession – start of asset-bubble phase of up-wave
???? – We believe that 2000 or possibly 2007 began process; stock market crash/high – start of down-wave
Hegemony, which is based on the economic supremacy of individual states, tends to be short-lived. If one state has economic supremacy and uses it to promote an era of prosperity and advance in the global economy, like we have seen with the US since WWII, rivals will soon develop as other leading states organize to close the gap. This is a major theme today, as much of the world is or wants to move away from the US dollar reserve, and superpowers are looked upon less favorably. China and Russia are the biggest concerns for the US power structure as both appear to have objectives excluding the US and both are emerging world powers. Such rivalry can feed into both the economic, and physical conflicts present in the war cycle.
A second problem is what happens to the hegemonic state itself. A tension develops between maintaining a global role and preserving a strong economic capability through new technology and investment. Internal conflicts may arise for a country in regards to security, consumption, and investments, leading to a condition of imperial overstretch. Again, a theme we are seeing today, as the US is as indebted as any nation has ever been, and there is an internal struggle between helping the have-nots and the capitalistic system at its core. The pressures for government spending to boost public and private consumption, and military security tend to crowd out the pressures that come from industrial investment. The elites in the hegemonic state become more interested in attending to the problems of world order and managing the global landscape than to concentrating on the long-term needs of their domestic economy.
Periods of true economic supremacy have been short-lived, but once a state has exercised hegemony it is usually reluctant to relinquish it. Because of this reluctance, a shift in powers does not usually happen in a simple, non-aggressive manner. The torch is not just passed off to the next leaders but instead the current hegemonic power will fight to hold onto what they have grown accustom to. War tends to be inevitable in these cases. It would usually start via economic wars, which we do see today via currency wars, trade restrictions and tariffs, before it usually progresses to military challenges. We must remember that China holds over $1.25 trillion of US debt and Russia holds about $163 billion of debt. If at any point they decide to sell their holdings, the US faces a challenge of further monetizing their debt through the Federal Reserve, which inevitably could cause hyperinflation and kill the US economy. This has left tensions around the globe at an all-time high.
Disclaimer: The above is presented for educational purposes only. Under no circumstances should it be mistaken for professional investment advice, nor is it at all intended to be taken as such. The commentary and other contents simply reflect the opinion of the authors alone on the current and future status of the markets, investment strategies and various economies. It is subject to error and change without notice. The presence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered by them.
Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities nor investments. Do NOT ever purchase any security or investment without doing your own and sufficient research. None of the parties adding to or affecting the content of fortrusfinancial.com (or any linked e-mail address like Fortrus.ca) in any way shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Neither Fortrus Financial Inc., fortrusfinancial.com nor any of its principals or contributors are under any obligation to update or keep current the information contained herein. The principals and related parties of fortrusfinancial.com may at times have positions in the securities or investments referred to and may make purchases or sales of these securities and investments while this site is live. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources, which are believed to be reliable, they cannot be guaranteed.
Lastly, the predictions and forecasts shown on this site and all related documents are all based on publicly available data from official government sources, central banks, international organizations and investment management firms.
Disclosure We accept no advertising or compensation, and have no material connection to any products, brands, topics or companies mentioned anywhere on the site.