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The upcoming bottom of the 60-year cycle will drastically
alter the U.S. economic landscape. The ending of the long-term disinflationary/deflationary
undercurrent will soon give way to a new long-term cycle of
re-inflation/inflation, bringing with it both challenges and opportunities.
As we begin a new 60-year cycle, the main challenge for
the Federal Reserve will be to resist the temptation to stimulate the economy
during periods of sub-par growth. The saying, ��Old generals fight the old wars�� applies
here as the Fed has always had difficulty in discerning the dominant economic
undercurrent.
For instance, from the 1980s onward, most Fed presidents
have had an abnormal fear of inflation after the harrowing experience of the
1970s. Only in the years following the credit crash has the Fed
concentrated on fighting deflation. After the unforgettable experience
of 2008, it doesn��t take much imagination to see the
Fed fighting the specter of deflation for years to come, long after deflation
ceases to be a threat.
If the Fed remains true to form we can probably expect to
see a continued commitment to a fairly loose monetary policy in the first few
years of the new 30-year inflationary cycle. The good news is that
it will still likely be several years before significant inflationary
pressures come to bear. In the years immediately ahead we should
see an increasing volume of the excess cash on the sidelines returning to
circulation. This will result in a gradual rise in inflation,
though it shouldn��t immediately result in runaway
inflation. The second half of the 30-year cycle in the years 2030
through 2044 is when hyperinflation will likely become an issue.
The following graph is a stark reminder of the
deflationary undercurrent of the last several years. It shows the
velocity, i.e. turnover, of money in the U.S. economy.
At some point the velocity of money will reverse its
long-term decline as confidence increases and investors realize that the
threat of deflation has disappeared. Will the hundreds of billions
in sidelined money enter the economy as a slow, gradual
trickle? Or will it re-enter the channels of commerce quickly as a
mighty onrushing torrent? Since no one can definitively
answer this question, the wisest policy would be for the Fed to resist the
temptation to employ money printing schemes as a palliative for boosting the
economy, especially as this will be unnecessary in the years ahead.
In his March 11, 2009 Special Edition VII entitled, Terminal
Opportunity 2009, Samuel J. Kress described the 60-year cycle as
the primary bias or Super Cycle, with the 30-year cycle being
the half-component of the 60-year cycle, also known as the secondary
bias cycle. Kress wrote:
The 60-year [cycle] correlates to the average duration of the underlying
economic super cycle which ranges from 40-80 years. This cycle
was identified in the early 1900s by a Russian economist, Nikolai
Kondratieff, which tracks wholesale commodity prices, and being void of any
value added, it represents real demand in the
economy. Additionally, it indicates the boom/bust phase of the
credit/debt cycle. Being variable in duration, it is more
appropriately referred to as the K Wave. It includes four
(completeness) economic seasons: spring, summer, fall, winter. [Special
Edition VII, Terminal Opportunity 2009, p. 2]
The chart example labeled 60 Year Super Cycle is an illustration
from a past Kress Special Edition and delineates the
phases of the 60-year cycle. It is broken down into four
15-year segments which are known as economic seasons. The
following graph correlates each season to its appropriate inflationary
or deflationary aspect over the previous 60-year period from 1954
through 2014.
The first 15-year segment of the 60-year cycle is characterized by
re-inflation; the second 15 years typically sees increasing inflation or even
hyperinflation. The next 15-year segment sees disinflation or
early deflation, and the last 15-year segment is the deflationary
phase. Each 15-year segment of the 60-year cycle is assigned a
season, e.g. winter, spring, summer, fall.
Is it possible that the years immediately ahead could see above-average
inflation? The answer is yes, but only if theres an unusual
dynamic in place. An example of an unusual dynamic would be the
outbreak of a major war. War is always inflationary for commodity
prices and would only serve to heat up the economy faster than the new
30-year inflationary cycle would do on its own.
Following the 60-year cycle bottom of 1774, for example, inflation was a
major problem in the colonies during the U.S. Revolutionary war in
1777-79. At that time a pound of butter cost $12 a pound while
flour fetched nearly $1,600 per barrel in Revolutionary
Massachusetts. Keep in mind this was only 3-5 years after the
long-term Kress cycle bottomed. Jason Zweig observed that
inflation was also a major problem during the U.S. Civil
War. During the war years in the early-to-mid 1860s, inflation
raged at annual rates of 29% (in the North) and nearly 200% (in the
Confederacy), he writes. He also points out that immediately
following World War II, inflation hit 18.1% in the U.S.
Turning our attention to the stock market, many analysts have taken up the
theme that another major correction or even a crash is just around the
corner. The thinking behind this is that the stock market rally of
the last five years artificially induced through the Feds monetary
stimulus. Under the bears theory, once QE completely ends the
markets will experience a major re-valuation and a return to a normal
price level.
In response to this scenario, an observation can be made that the market
is already back to normal. Consider that equities, which
desperately wanted to rally in the years between 2004 and 2007, were held
back from realizing their full potential by the tight Fed policy of the
time. The Feds interest rate policy of 2004-2007 did the economy
no favors and was one of the catalysts behind the credit crash of
2008. When finally the Fed got its investment rate policy back in
alignment with the long-term cycle, the market quickly returned to its proper
level as the economy recovered.
Consider, too, that weve come through a tumultuous 15-year period which
saw two major bear markets, the constant threat of terrorism, a two-front
multi-year war, and the near-collapse of the U.S. economy. The
years between 2000 and 2014 can therefore be described as an elongated
correction in the super long-term uptrend in Americas
progress. A few years ago there was a question as to whether or
not the economy would survive the upcoming 60-year cycle bottom. With
hindsight its now obvious that the last 15 years of the cycle the
deflationary phase was cleansing and restorative rather than ultimately
destructive.
There is every reason for believing the next few years of the new 60-year
cycle will be as salutary to the economy as the previous 15 years were
depressive. A new economic spring season will soon follow the
economic winter of the last several years. With the coming of
long-wave spring we should see increasing signs that the economy is returning
to a normal, healthy rate of growth. The fear and uncertainty that
were prevalent in the last 15 years will gradually subside and be replaced by
rising confidence as investors and businesses take more chances and spend
more money into circulation. The rising tide of long-wave spring
will lift all boats as a greater segment of Americas social classes begin
to experience an economic rebound from the depressing years of the winter
season.
At long last, its time to bid the 15-year economic winter adieu and
welcome the onset of spring!
Kress Cycles
Cycle analysis is essential to successful long-term
financial planning. While stock selection begins with fundamental
analysis and technical analysis is crucial for short-term market timing,
cycles provide the context for the market��s
intermediate- and longer-term trends.
While cycles are important, having the right set of
cycles is absolutely critical to an investor��s
success. They can make all the difference between a winning year
and a losing one. One of the best cycle methods for capturing
stock market turning points is the set of weekly and yearly rhythms known as
the Kress cycles. This series of weekly cycles has been used with
excellent long-term results for over 20 years after having been perfected by
the late Samuel J. Kress.
In my latest book ��Kress
Cycles�� I explain the weekly cycles which are
paramount to understanding the timing of stock market turning
points. Never before have the weekly cycles been revealed which
Mr. Kress himself used to great effect in trading the SPX and
OEX. If you have ever wanted to learn the Kress cycles in their
entirety, now is your chance. The book is now available for sale
at:
http://www.clifdroke.com/books/kresscycles.html
Order today to receive your autographed copy along
with a free booklet on the best strategies for momentum trading. Also
receive a FREE 1-month trial subscription to the Momentum Strategies Report
newsletter.
Clif Droke is a recognized authority on Kress cycles
and internal momentum, two valuable tools which have enabled him to call most
major stock market turning points from 1997 through the
present. He is the editor of the Momentum Strategies Report
newsletter, published three times a week since 1997. He has also
authored numerous top-selling books, including his most recent one, ��Kress Cycles.�� For more
information visit www.clifdroke.com
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