Cycles

April 5, 2002
Be aware of economic cycles, just as you watch the changing seasons.
Each type of investment has its cycle, and the way to invest
safely and profitably is to keep harmony with these cycles. Leon Richardson
The information within is not intended as a
recommendation to buy or sell anything!
Due Your Own Due Diligence
SUMMARY

In my opinion, studying cycles by themselves do not give 100% correct business/economic conclusions in timing and price of anything. Cycle studies are useful for investment decisions when combined with fundamental analysis [FA] and technical analysis [TA]. Identifying the turning points of longer and more powerful cycles help the user to recognize new trends and opportunities. Cycles make a myth of the popular "buy and hold" strategy.

Various cycles permeate throughout history. Many cycles with long term periods are apparent in significant economic development. Powerful cycles have a considerable effect on tradeable markets.

I have formed four conclusions from long period cycles from now 2002 through 2007.

  • Silver and gold prices (in terms of fiat) will rise faster than other items.
  • This will be a time of worldwide gut wrenching and currently unimaginable business/economic upheavals. There will be many new opportunities.
  • There will be many world wide regional military clashes.
  • "Expect the Unexpected."
INTRODUCTION:

The study of cycles is a subset study of Technical Analysis which bases its premise on "all the information is in the price chart." Fundamental Analysis bases its premises on things such as supply, demand, stockpiles, competition and so forth.

This essay focuses on:

  • Characteristics of repeating cycles and understanding theories of cycles where possible
  • Long period business and economic cycles that may affect silver prices within the next decade.
Some Definitions

Cycle is a noun defined as (1) intervals of time during which a sequence of a recurring succession of events or phenomena is completed (2) a course or series of events or operations that recur regularly and usually lead back to the starting point (3) a portion of time determined by some recurring phenomenon (4) the interval of time required for a cyclic motion or phenomenon to complete a cycle and begin to repeat itself

Frequency is the number of repetitions of a periodic process in a unit of time:

The period of a cycle is the time between two common points such as a top of adjacent cycles.

Phenology is the study of nature's cycles of life or cyclical events of nature..

In my opinion, the following are business/economic cycle graphical representation characteristics.

  • Cycles have a beginning and an end. Cycles do not go on forever.
  • Cycles may be periodic, but do not repeat the periods precisely.
  • Cycles are not symmetrical in shape as are mathematical sine wave cycles.
  • Cycle Bottoms may be periodic, but the cycle top(s) may not be.
  • Cycle Tops may be periodic, but the cycle bottom(s) may not be.
  • Cycles are often observed within more powerful cycles having longer time periods.
  • Cycle interpretations vary as to the interpreter as to when tops or bottoms occur.
  • Cycles can contain a cycle(s) distorted by market manipulations and irrational human logic.
  • Cycles are not always cycles, but may be data manipulation or data noise.
  • Cycles can be out of phase with other cycles. As such a cycle may be a leading indicator or lagging indicator of something else

Extrapolation of cycle data is dangerous. The future is not always be indicated by the past.

Sage Advice
from "The Zurich Axioms" by Max Gunther

ON FORECASTS: Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.

ON PATTERNS: Chaos is not dangerous until it begins to look orderly. Don't see order where order does not exist.

Minor Axiom: Beware the historians trap. History does not repeat itself exactly, However, it often rhymes. History may repeat itself in similar manner because we have not learned from history.
Minor Axiom: Beware the chartists illusions
Minor Axiom: Beware the correlation and causality delusions.{Correlation does not always imply causality effects). (The fact that 18 of 20 of the last correlations of events resulted in a subsequent observation, does not guarantee the 21st correlation will have that same subsequent observation.
Minor Axiom: Beware the gambler's fallacy [A state of expectant euphoria or illusion of order]

ON CONSENSUS Disregard the majority opinion, it is probably wrong! [Disregard what everybody tells you until you have thought it through carefully for yourself --Rene Descarte--]

10,000 YEAR & 1000 YEAR Elliot Waves

A 10,000 year Super Grand Cycle is claimed by Elliot Theorists with Robert Prechtor a leading proponent in Elliot theory analysis. It is claimed that this cycle is very powerful and has now turned down hard. What this means in the next decade is unclear to me. Could it be world wide economic chaos, a naturally occurring disaster such as a large asteroid impact, a nuclear war destroying much of the world, or something else?

There have been claims of a shorter 1,000 year wave (Wave X cycle) with powerful but unknown effects on the world's economy and businesses. This cycle is presumed to have also turned down hard.

How these two cycles were determined is unknown to me.

Other shorter period Elliot Wave Waves

Elliot waves are based upon the premise that prices or other activities have five wave cycles up labeled 1 thru 5 followed by 3 down wave cycles labeled a,b,c. The up wave cycles numbered 2 and 4 are declining waves in the up wave cycles. I have difficulty believing some of the claimed waves are present in price charts. However, there appears to be validity in some situations by followers of this theory. Some of the completed waves are purported to be shorter than a month.

The 432-year Superinflation Cycle
[Material from 'Cycles' magazine, January/February 1991,
Al Owen who is editor and publisher of 'Newsletter Digest' wrote the article in September 28, 1989 issue.]

The 432 year cycle is purported to be the Kondratieff wave times eight. Prices rise and fall over each 54 year period, but remain, on average, more or less level for 324 years. About every 432 years, a massive superinflation over a 108 year period occurs in which price levels quadruple or more, and they STAY there. These approximated periods or cycles are as follows.

50 to 60 YEAR Kondratieff Cycle

The Kondratieff wave purports to reflect major economic and social developments through history.

The Kondratieff cycle theory is based on English consumer and wholesale prices from 1288 to current times. Kondratief (a Russian in early 1900's) is credited with this cycle although it brought the displeasure. of Stalin upon him.

The cycle theory has been refined as a paired cycle by Economist Robert DeGershdorff in a 1979 study of economic trends in England for the period 1200 to 1932. DeGershdorff concluded the following. (1) A major cycle, with an average length of 54 years appears to have existed. (2) Adjacent 54 year cycles seem to be paired with two cycles of relative inflation followed by two cycles of little or no inflation. The possibility of a 108 year cycle is suggested. (3) the pattern of cycle timing shown in the English consumer price index CPI is replicated for the most part in both the history of U.S. wholesale prices and the current history of the U.S.

DeGershdorff listed the following long wave (108 to 110 year) cycles.

High Inflation trends:   1288-1339,  1339-1393    1509-1571,  1571-1621    1723-1780,  1780-1834
1932- ?
Low Inflation trends:   1395-1437,  1437-1509    1621-1672,  1672-1723    1834-1886,  1886-1923

The conclusion from this if valid, is that if this current long wave cycle of high inflation trend continues to hold true, then this is likely to make the inflation of the 1970's look tame by comparison.

The following eight stages are said to be apparent throughout a typical 50 to 60 year half cycle. [Trading the Signs of the Times, by Joseph S. Holleman, Futures magazine, September 2001] The italic text at the end of each stage is the Author's comments.

1. Monetary expansion: This stage begins with a political event. however, , the beneficial effects are not felt for several years to come and often provide no political benefit to the party in power at the time. (Could this be the "Roosevelt New Deal" in the mid 1930's)
2. Popular War: This event typically gives the economy a much needed shot of adrenaline and serves to release a lot of pent-up hostility. (example: World War 2?)
3. Technology boom: Innovations in the areas of communications, automation, and transportation lead an expansion in which personal income increases steadily and inflation remain under control. (example: computers from about 1950 to 2001)
4. Unpopular war: An ill-conceived act by the government interrupts the prosperity and puts an end to the stage 3 boom. Disillusionment over the course of this war emerges quickly. (example: could this be the the Vietnam War? )
5. Inflation: Excess spending during the last war sets off a period of rising inflation. (Could this be the 1980's and 1990s?)
6. Monetary contraction: More conservative forces rise to control the inflation of stage 5. The money supply contracts and the downward part of the cycle begins. (Could this be the U.S. Republican party pledge of 2001)
7. Speculation and excess: The conservative forces in power become concerned they may be turned out by the voting public. They relent on the monetary contraction, interest rates plummet, and financial markets soar. A period of complacency and false prosperity begins. (In the author's opinion, I believe the first K wave in the pair has been extended by 25 to 35 years due to the average U.S. life span going from 40 years to 65 or 75 years. Most of the people who remember the depression will be gone, and the people still living will not have the depression in their memories. . Completion of this K wave is closer to 1987 + 25 = 2002 or 1987 + 35 = 2012. The U.S. and the world is now in the "Speculation and Excess stage).
8. Liquidation: Concerns that Stage 5 inflation may be rearing its head again precipitates an ill-conceived second contraction of the money supply. Interest rates rise, a financial market panic and mass liquidation begins, producing a serious depression. When this stage occurs in the middle of a long wave cycle, it generally does not precipitate a serious long lived depression but serves to flush out excesses in the economy, leaving the system in a healthier state than it was in before. (in the author's opinion, this liquidation phase will begin in earnest sometime in 2003 to 2006 time period)

More detailed information about the Kondratief long wave cycles and the events within related to the U.S. economy can be found at:

A Historical Review of the American Gold market
www.gold-eagle.com/editorials_02/kennedy011602.html   Part 1
www.gold-eagle.com/editorials_02/kennedy013102.html   Part 3
29.5 YEAR U.S. War Cycle

War cycles are peaks between most violent military periods. Records kept by Wheeler and interpreted by others suggest a 29.5 Year War Cycle between peak violence. War cycles are important as they can have devastative economic impacts, Silver is now a critical commodity used in war machinery.

When war cycle peaks occur with maximum number of sunspots, there is some correlation to the war being international in origin. When the war cycle peak occurs with minimum sunspots, wars are regional. Sunspot cycles are natural cycles within the sun and is approximately 11 years long between peak number of sunspots, although the period varies. For more information on sunspots, consider www.sunspotcycle.com

The following are war cycle peaks with a projection forward.

1854 (U.S. Civil War)   1884 (many small)   1913 WWI   1942 WW2   1972 Vietnam
2002 Afghanistan?,  India-Pakistan,  Middle East (Iraq, Iran, Saudi Arabia, Syria, or Israel?),
( North Korea & South Korea?)  (China & Taiwan?)

The 1884 time peak had no major historical battles. However, nearly all of the African continent countries were being militarily conquered primarily by Italy, France, Germany, England, Portugal, and Spain for the purpose of colonization. There was a war in South America with Bolivia, Peru, and Chile ("War of the Pacific"). The French was taking over Vietnam. Other southeastern Asia ports and countries were being subjugated by military forces. The last of the Native American Indian vs the settlers wars were taking place on the North American continent. In 1883 the Krakatoa volcano exploded with the force of over 20 hydrogen bombs. Low sunspot activity occurred in 1972 and thought to have been near the low in 1884.

8 to 11 YEAR U.S. Recession cycles

Recessions in the U.S. are currently defined as three or more consecutive months of falling real Domestic Product GDP (economic activity). The vertical bars showing these recessions are in the following graph. A recession has been proclaimed at the end of 2001 and into 2002. Technically, revised data say such a recession did not occur. The period (time between) the bars varies but the longest time is about 10 years. Similarly, the width of the bars is typically about a half year to over a year in length. This suggests the next U.S. recession is likely sometime in late 2002 or early 2003. .

30 & 60 Year Gann Silver Cycle

Flannigan, a U.S. investment letter writer has stated both a 30 year and 60 year cycle bottom for silver has occurred in November 2001. Other shorter silver cycles have been published, but they may no longer be existing due to market manipulations in recent years.

Silver Seasonal Cycle

Seasonal charts are created to determine effects of seasons on a commodity. Seasons are cyclical. Originally, they were related to agricultural prices, but occur elsewhere. Retail store sales are seasonal in nature with high volume of sales in December (Christmas sales) than compared to the rest of the year.

Seasonal charts are created by finding the average price for same time period of the year for multiple previous years. This is converted to percentage changes from the overall mean value. The danger of seasonal charts is that they are averages. Each year, the peaks and valleys tend to be in different locations. To be useful, one should always consider fundamentals and other factors that are going on in the current year. The silver seasonal chart is only one of many tools to be used as an indicators. You cannot consistently draw conclusions from it.

The silver seasonal chart below is taken from the Gold Eagle site which also includes other silver related charts. www.gold-eagle.com/charts/gegsr.html

DJIA/SILVER Ratio Cycles

The DJIA/silver chart has the same pattern as the DJIA gold chart which is shown below. The only differences are the ratio values. They range of ratio values are larger. The DJIA/silver peak ratio in 2000 of 10,000/$4.10 = 2,439 corresponds to the DJIA/gold peak ratio of 43.3 of the same time. The DJIA/Silver ratio 16 in 1980 corresponds to the DJIA gold ratio of 1. The importance of this chart is to note the cyclical pattern of of the cycles within an up trending channel pattern. Ratios have an advantage of showing possible value perception distortions and usually eliminates distortions from money inflation. Ratios usually show a pattern of returning to the mean value. Note that the major downturns occur within a few years as compared to decades for the rise. So opportunities to financially benefit are of a very short time period. Ratios suggest spread trading of two items. An expected return to the mean would project buying a gold index (or a silver index) and selling an equal amount of the DJIA index. Exit strategy for a decline would be at some value below the mean but above the channel line. Spread trading takes out the guess work of inflation concerns. Both gold and the DJIA may go up, but gold will go up faster. Similarly, the DJIA and gold can both go down, but the DJIA will go down faster. The DJIA may go down and gold may go up. You win under these three conditions.

Dow Jones to Gold Ratio chart from 1900 to present.
U.S. Stock Market Cycles

The "4 year Presidential Cycle" is based on premise that stock market prices tend to rise in the last two years of a presidency and has a bottom in the middle of the presidency term of which the next bottom projected is November 2002. These cycles are grouped into larger cycle group called a "120 Year "Master Presidential Cycle" which bottoms in 2014. More information about this cycle can be found at:

The "Presidential Cycle" and its effects
www.gold-eagle.com/gold_digest_02/droke031902.html

Stock market cycles are claimed to be associated with 29 day Lunar cycles with stock prices being higher at new moons and lower at full moons.

Other claimed stock market cycles are described at the web site

Adam Hamilton suggests three 33 year cycles for the Dow in the 20th century. Each cycle consists of an approximate 17 year cycle of a bull and a 17 year bear cycle. More detailed information can be found at

A Silver Astrology Cycle?

The following web site claims to predict silver prices by astrology charts (cycles in star positions) or other similar means. A recent claim was that Friday, 2002 March 22 would be the beginning of a significant silver price rise.

I leave the credibility of astrology to the reader's beliefs. However, I remind you of another Zurich Axiom.
"If astrology was as precise and accurate as claimed, then all the astrologers would be rich."

Cycles in the DJIA or an Illusion?
There are lies, damn lies, and statistics.
There are lies, damn lies, and pro forma accounting

The following chart on a semi logarithmic scale to adjust for inflation factors appears to have cyclical patterns. This is a case of continual doctoring of the DJIA values. Of the 30 companies in the original Index, only General Electric Company remains in the index. Many of the original companies are defunct. Is changing of the companies numerous times over the years that make up the DJIA is one way of pro forma accounting?

Other touted indicators such as the Consumer Price Index (CPI) and Price to Earning (P/E) ratio are being redefined. Redefining means different ways of calculations to come up with different numbers. In my opinion, this is an on going practice of "cooking the books" by economists to present more desirable numbers for their employers.

Wally Bently
wallybently@aol.com

 

I appreciate all e-mails, comments, questions, and flames on this essay.

Gold weighs 19.3 times as much as an equal volume of water.