In 2010, Barron’s wrote a piece on me effectively laughing at my forecast that the share market would rally to new highs. What seems to inevitably unfold is this notion that whatever the event might be in motion, the mere thought of a reversal in trend appears impossible. When the press disagrees with Socrates, I know it will be the press who is wrong. And because they end up being wrong, of course, they cannot print a retraction so they will just pretend you do not exist rather than admit – Sorry, we were wrong. The Dow made that new high above 2007 by February 2013. That was 64 months from the October 2007 high.
I have been in the game for many years. With each event, it appears to be like Groundhog Day. They pop their heads out and declare they do not see their shadow, so the entire world will disintegrate and that is always based upon opinion. It is never backed by real analysis. Just the standard human trait of assuming whatever trend is in motion will remain in motion.
Being an institutional adviser, I have never had that luxury. We have had to deal with some of the biggest portfolios in the world, not to mention financial crises. Clients expect accurate forecasting, and it has to be long-term – not day trading. They are not interested in the typical headlines of doom and gloom that the press love to print with every financial event simply to get readership. That is all they care about. It has been the financial version of the fake news.
When we step back and look at this favorite fundamental that people beat to death to predict the end of the world, it always comes down to the national debt and the collapse of the dollar. Little did they know that the increase in National Debt during the 2007-2009 Financial Crisis was supposed to bring down the sky and end the existence of the dollar.
It was that previous 1985 Financial Crisis that set in motion the Plaza Accord which brought together the central banks creating what was then the G5 – now G20. Of course, like every government intervention, the side effect was the 1987 Crash and their attempt to reverse their directive at the Plaza Accord became the Louve Accord. When the traders saw their efforts to support the dollar failed, the collapse in confidence led to the 1987 Crash.
It has always been a CONFIDENCE game as I pointed out with the 1933 Banking Holiday previously. In this case, the failure of the Louvre Accord, when they came out and said the dollar had fallen enough, once new lows in the dollar unfolded traders realized the central banks could not stop the decline. That led to financial panic by 1987 which manifested in the 1987 Crash.
This chart shows the quarterly change in the National Debt since 1966, Here you can see the 1985 and 2008 Financial Crises were on par. We can see the sharp rise in debt in 2008 simply made a double top with the Financial Crisis of 1985. Neither one ended the dollar no less the world economy. So when I warned the share market would rally and make new highs in 2010 and Barron’s laughed, I said the same thing after the 1987 Crash and people laughed then too.
In fact, on the very day of the low, I said this was it and that we would rally back to new highs by 1989. That was perfect and the market responded to the Economic Confidence Model (ECM) which had been published back in 1979. This was more than simply forecasting the 1987 Crash and the very day of the low. It clearly established that the ECM had revealed that there was a secret cycle behind the appearance of chaos even in economics.
Larry Edelson was actually a competitor at the time. But Larry respected that the forecast from the model was far beyond what people would ever expect. If we are ever going to advance as a society, we have to stop the bullshit and understand HOW markets actually trade and WHY. Larry did that. He understood that the model was something larger than just personal opinion.
Even those claiming to be using the K-Wave cannot make real forecasts. The basis of Kondratieff’s argument came from his empirical study of the economic performance of the USA, England, France, and Germany between 1790 and 1920. Kondratieff took the wholesale price levels, interest rates, and production and consumption of coal, pig iron, and lead for each economy. He then sought to smooth the data using an averaging mathematical approach of nine years to eliminate the trend as well as shorter waves. Kondratieff thus arrived at his long-wave theory suggesting that the economic process was a process of continuous waves of boom and bust.
Kondratieff’s work was compelling and contributed greatly to the Austrian School of Economics that first began to develop the concept of a Business Cycle. The general central principle of the Austrian Business Cycle Theory is concerned with a period of sustained low-interest rates and excessive credit creation resulting in a volatile and unstable imbalance between saving and investment. Within this context, the theory supposes that the Business Cycle unfolds whereby low rates of interest tend to stimulate borrowing from the banking sector and thus then result in the expansion of the money supply that causes an unsustainable credit source boom which leads to a diminished opportunity for investment by competition. However, a simple correlation between interest rates and market activity has revealed that such theories are far too simplified and make the classic mistake of trying to reduce everything to a single cause and effect.
Here is a chart of the business cycle that was created by a farmer named Samuel Benner. Benner based his work on Sunspots, actually incorporating solar maximum and minimum, which he did not comprehend at that time, that today’s Climate Change zealots refuse to consider. Nevertheless, someone manipulated Brenner’s work and created a chart to try to influence society handing it in with a wild story to the Wall Street Journal published this cycle on February 2nd, 1932, when the market bottomed in July 1932. Still, nobody knew who had investigated this phenomenon in 1932.
When I was doing my own research reading all the newspapers to understand how events unfolded, I came across this chart. I found it interesting that during the Great Depression people were reaching out and some began to embrace cyclical ideas. The problem with both Kondratiff and Brenner was that the period they used to develop their cycles was the 19th century because the real Industrial Revolution was unfolding and in the 1850s, 70% of the civil workforce were all in agriculture. Consequently, if you constructed a model based entirely upon one sector, it would work only as long as that sector was the top dog.
Being a historian buff, it quickly hit me that NOTHING remains constant and that the economy will ALWAYS evolve, mature, and then crash and burn. Where agriculture was 70% of the workforce in 1850, it fell to 40% by 1900, and then down to 3% by 1980. The commodity source of Kondratieff and Brenner would not hold up as the economy evolved.
Just look at energy. The earliest lamps, dating to the Upper Paleolithic, were stones with depressions in which animal fats were burned as a source of light. In cultures closer to the sea, they began to use shells as lamps which they would burn at first animal fat. Clay lamps began to appear during the Bronze Age around the 16th century BC and the invention quickly spread throughout the Roman Empire. Initially, they took the form of a saucer with a floating wick. Energy evolved from animal fat to oils.
We even find Roman oil lamps as luxury items crafted out of bronze. There are collectors of terracotta oil lamps for there is a vast variety of motifs. There is everything from dolphins, and various entities, to erotic oil lamps, which may have been used in brothels. The point is, if you constructed a model on vegetable oil, you would have surely accomplished similar results to Kondratief and Brenner. Things simply change.
Then of course, just as the energy moved from animal fats to vegetable oils, by the 19th century it turned to whale oil which was extracted from the blubber – animal fat. Emerging industrial societies used whale oil in oil lamps and to make soap. However, during the 20th century, whale oil was even made into margarine.
Then the discovery of petroleum resulted in the use of whale oils declining considerably from their peak in the 19th century into the 20th century. Ironically, it was fossil fuels that probably saved whales from extinction. Hence, now we are entering a period where they deliberately want to end fossil fuels and move to solar and wind power. Obviously, just a cursory review of energy reveals the problem of basing a model on the current energy source or major economic industry. Things change with time.
Therefore, when I came across the list of panic published in 1907, it was worldwide and not confined to a single country, not to a single sector. Each panic took place for something different. The first was in 1683 and that is when the Turks sought to invade and capture the financial capital of Europe at the time which was Vienna. By using an international list of panics, everything was incorporated. In testing the cycle frequency, it held up in ancient history as well. There was something that was remarkable and provided the first glimpse of the very existence of a secret cycle behind everything. That was what inspired the New Yorker to write their piece on the ECM.