One sign that the long term cycles are leaning heavily against the financial market and the economy can be seen in the ease with which negative economic headlines can catalyze a stock market sell-off. This action is typical of a bear market. The recent sell-off is also a sign that the positive effects of the peaking six-year cycle is being somewhat muted by the longer term cycles, which are in steep decline.
The 120-year cycle, along with its various component cycles, will bottom in late 2014. The final “hard down” phase of this mega-cycle began in 2008 with the peak of the 12-year cycle. Currently only the six-year cycle – one of the smallest cycles in the 120-year series – is ascending, but once it has peaked in a few weeks the market will enter a cyclical configuration that hasn’t been seen since 1892. That year was the last time the U.S. entered a cyclical “vortex” as the 120-year cycle caused a collapse in asset prices and led to a major economic depression.
Monetary regulators have had their work cut out for them in the last couple of years, but have been fortunate to have caught a major break thanks to the yearly cycles. One thing that has been propitious for the Fed in its attempt to stimulate the financial economy is the six-year cycle. As previously discussed, this important cycle bottomed in late 2008 and helped make possible the success of the Fed’s first quantitative easing initiative.
The year 2009 witnessed a powerful recovery rally in the major indices, which was a product of the first quantitative easing program, the six-year up cycle and the 10-year cycle peak in late 2009. The peaking of the 10-year cycle at the end of QE1 contributed to the “flash crash” of 2010. With the commencement of the Fed’s second quantitative easing program in November 2010, the final peaking phase of the six-year cycle helped the stock market experience eight more months of recovery before the latest mini-crash descended on Wall Street.
It’s amazing when you consider that the recent market collapse in less than a month completely destroyed eight months of recovery work courtesy of the Fed. As of this writing, the NYSE Composite Index (NYA) is more or less back to where it started in November 2010 when QE2 began.
The final yearly cycle peak of long-term significance is scheduled for around Oct. 1 and should provide the impetus for at least one more rally this year. Once the six-year cycle peaks, the Fed will find it difficult to produce any meaningful boosts to asset prices. QE2 has already proven to be largely ineffective – if not an outright failure – and any further attempt at asset price manipulation will run counter to the longer term cycles. Deflation will be the operative word as we approach the Grand Super Cycle bottom in late 2014.
One of the hallmarks of this long-term deflationary phase which began in 2008 is rapid change. The complete retracement of the November 2010-June 2011 equity market rally in about a month’s time is an example in microcosm of the rapid change that deflation can effect. An even bigger problem that will soon confront us is how quickly ephemeral gains made in the employment rate and other economic indicators can quickly reverse, essentially undoing the 2009-11 recovery.
Currently the economic malaise the U.S. is suffering is being misdiagnosed by the government’s economists. The slack demand in the economy and persistently high unemployment levels have been called a “soft patch” by some and a “recession” by others. Experience teaches that a true recession is a temporary decline followed by a reasonably brisk return to normal conditions. What we’re seeing instead is four-year period of economic weakness with no return to normal. To that end, the economic spin doctors insist on calling this the “new normal” when in actuality these conditions are abnormal.
The current economic malaise can best be described as a depression. A depression is essentially a period of several years in which economic performance is below normal and unemployment remains stubbornly above the average. But the word “depression” is a politically unpalatable word. It’s much more soothing to the ear to use terms like “soft patch” or “Great Recession.” No one has the guts to use the cold, harsh “D word,” but it would be more helpful for most Americans if they were informed that a New Great Depression is underway. This condition is being brought to us courtesy of the 120-year cycle decline, which still has a few more years to run.
Sooner or later everyone will have to face facts and address the problems associated with deflation. When deflation sets in to an even fuller extent after the six-year cycle peaks, economists will be awestruck at the rapidity with which economic downside momentum increases. Investors should accordingly prepare for deflation in the years 2012-14.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
by Clif Droke
No comments:
Post a Comment