Sunday, September 07, 2008
If you follow the stock market, commodities, bonds, the U.S. dollar you may be wondering where we are in terms of this business cycle. Are we near the bottom of this so far classified intermediate downtrend within a Dow Theory primary bear market? Will the July low in the stock market hold or will we start the next leg down? Is this the end of the commodity bubble? Where are interest rates headed? Have they bottomed? Should I invest my IRA in the stock market, bonds, commodities, gold, the U.S. dollar or place it in a CD?
To help you make that decision which is yours and yours alone it is helpful to study macro-trends rather than the day to day fluctuations of each market. This involves more that just reading daily charts but looking at long term, cyclical patterns over many decades.
Understanding long-term economic cycles is one of the keys to investment success. In The K-wave, David Barker reveals the astonishing record of the Kondratieff Wave to predict economic cycles. Discovered by an a Russian economist in the early 1900s who was exiled to Siberia due to his unpopularity with the Communist authorities, Nikolai Kondratieff's theory foretold the Great Depression, the post-World War II boom and the inflationary spiral of the 1970s. Now, the Kondratieff Wave is pointing toward a massive slowdown that would wipe out the investment portfolios of even the most well-heeled investors. The K Wave provides striking evidence of a 50 to 60 year economic cycle in which periods of prosperity are inevitably followed by periods of adversity. These cyclical world economic cycles are divided into four seasons. They are "Summer": the period of the 1970's; "Autumn": the period of the 1990's; "Winter": the current 10-15 year period; and "Spring": the beginning of a new primary bull market with global economic recovery.
Looking at the economic system using cyclical tools seems to have gone out of fashion, as the Fed has abolished the business cycle(or so they claim!).
Tim Wood, a CPA who studies market behaviors has given us some guideposts from David Knox Barker’s book The K- Wave.
So, here we sit with a major top and decline out of an indisputable parabolic advance in the Chinese equity markets, which so many were saying just a year ago were leading the world higher. We also have the orthodox Dow theory bearish primary trend change from November 21, 2007 still in place. We have housing that is still in the toilet. We also have seen a major pull back in commodities and the technical evidence tells me that here too, we are on the right hand side of the parabolic advance much like occurred with the Chinese stock market and housing. Plus, we have the advancing dollar that has taken many by surprise.No matter how bad things get economically just remember the eternal perspective: "For we brought nothing into this world, and it is certain we can carry nothing out." 1 Timothy 6:7
What does this all mean? Well, it appears to be indicative of the deflationary forces of K-Wave winter. In David Knox Barker’s book The K- Wave, is a brief list of the events that have historically marked the Winter season:
* "Global Stock Markets Enter Extended Bear Markets"
Given the performance of the Chinese, US, and other stock averages around the world there should be little doubt about this one.
* "Trends During Winter: Stocks Down, Bonds Up, Commodities Down"
I would say that this is occurring.
* "Interest Rates Spike In Early Winter Then Decline Throughout"
In June 2004 the Discount rate was at 2.00%. By June 2006 it was at 6.25%, and since August 2007 the Fed has been forced to cut the Discount rate back to 2.25%. So, this too, seems to fit.
* "Economic Growth Slow or Negative During Much of Winter"
I doubt that many will argue that growth is now slow and in many cases negative.
* "Commercial and Residential Real Estate Prices Fall"
This obviously began back in 2006 and is still in a major slump.
* "Bankruptcies Accelerate and High Debt Eliminated by Bankruptcy"
This has obviously begun and is no doubt related to the housing and credit bubbles.
* "Social Upheaval and Society Becomes Negative"
We are only just beginning to see this.
* "Banking System Shaken and New One Introduced"
The banking system is now only beginning to be shaken. There should be much more to come.
* "Free Market System Blamed and Socialist Solutions Offered"
This has not yet happened, but just wait.
* "National Fascist Political Tendencies"
More to come.
* "Debt Level Very Low After Defaults and Bankruptcy"
This has not happened.
* "Trade Conflict Worsen"
This basically has not happened.
* "View of the Future at a Low Ebb"
This has not happened as everyone seems to be looking for the bottom.
* "New Work Ethics Develop Since Jobs are Scarce"
If I can assure you of one thing, it is that this has not happened.
* "Greed is Purged from the System"
I can absolutely assure you that this has not happened yet.
* "Real Estate Prices Find Bottom"
This has not happened.
* "There is a Clean Economic Slate to Build On"
Not happened yet.
* "Investors are Very Conservative and Risk Averse"
Again, this has absolutely not occurred.
* "Interest Rates and Prices Bottom"
* "A New Economy Begins to Emerge"
Has not happened
* "Stock Markets Reach Bottom and Begin New Bull Markets"
Again, we aren’t there yet.
As I look at the overall cyclical/technical picture, I believe that there is indeed evidence to support the idea that we have moved into K-wave winter. At the very least, these historical markers laid out by Mr. Barker should not be ignored. Until I see evidence to the contrary I also believe that it would be prudent to keep this list of events in mind as we watch the developments along the way. Then if, and only if, evidence to the contrary presents itself, at that time the assumption that we haven’t moved into K-Wave winter would be warranted.
Tim W. Wood.