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Just the Facts ma'am

March 24, 2003

What a week!

  • Fact 1: The USA declared war against Iraq - effectively on a unilateral basis
  • Fact 2: Key markets - as represented by the indices - were exceptionally volatile

Trying to gain some clarity on Fact # 1 is proving difficult as, scrolling through the various cable TV news programs, it swiftly becomes apparent that the media are largely journalising (as opposed to reporting) the news.

However, I have been reading an exceptionally interesting book that may shed some light on what's happening. The book "The Fourth Turning, What the Cycles of History Tell Us About America's Next Rendezvous with Destiny" was written by William Strauss and Neil Howe and published by Broadway Books in 1997.

In a nutshell, the book looks at cycles - not from an economic perspective - but from a sociological perspective. It traces recorded human history back to the Greeks, and concludes that the human cycle ("saeculum") follows an entire natural human life of approximately 75 - 100 years, and the cycle has four turnings - each lasting a generation of 18 - 25 years. The four turnings manifest on the emergence of each new generation and are:

  • The High - an upbeat era of strengthening institutions and weakening individualism, when a new civic order implants and the old values regime decays (Last: 1946-1964; 18 Yrs)
  • The Awakening - a passionate era of spiritual upheaval, when civic order comes under attack from a new values regime (Last: 1964 - 1984; 20 yrs)
  • The Unravelling - a downcast era of strengthening individualism, when the old civic order decays and a new values regime implants (Last: 1908 - 1929; 21 yrs; Current: 1984 - ?)
  • The Crisis - a decisive era of secular upheaval, when the values regime propels the replacement of the old civic order with a new one." (Last: 1929-1946; 17 yrs)

The book shows that throughout recorded history, the above cycles repeat - over and over; and it demonstrates that the cause of the turnings is, ultimately, linked to the values of newly emerging generations within a single human lifespan. In short: Children form different (and predictable) sets of values from those of their parents.

In this context, we are approaching a period of secular upheaval, and the US's attack on Iraq is symptomatic of the end of an unravelling season within the 75 -100 year cycle.

So what? What does this mean in practical terms to you and me?

Well, for one thing, it gives me a position as to roughly where we are - and implies that the crisis season has probably not yet begun. It tells me that the Iraqi caper is unlikely to lead to WWIII any time soon. It also tells me that a tectonic geographic shift in the world's power base may be on the cards.

Let's think in "12 year old mentality" terms:

  • The last unravelling season occurred when the epicentre of Society's power base was located in Great Britain.
  • The last crisis season culminated in the loss by Britain of this power base, and its relocation to the USA.

As history has a habit of repeating itself, I would not be at all surprised if, within the next generation and, at the culmination of the next crisis season, the USA will no longer be the seat of the world's power base.

We can leave for another day the speculation as to where this power base may shift to. For the moment, I am more interested in the facts. If we are now only entering a crisis period, is it perhaps too simplistic to think only in terms of "inflation vs deflation"?

For some time now I have been focussing on the fact that the bond yields have not been confirming the simplistic model that we may be facing EITHER inflation OR deflation. Something has been off-centre and this model just doesn't feel right anymore.

Where can we look for answers?

As usual, some important answers lie in the charts.

  • Fact 3: The US stock market peaked in 2000, following the longest Primary Bull Market in recorded history - some say it dated back to 1976 (24 years)

Note from the chart below (Courtesy that the PMO oscillator entered negative territory in late 2002 - for the first time since 1982 (20 years).

In terms of Strauss and Howe's logic, the downside penetration by the PMO may have coincided with the culmination of the Third (unravelling) Turning and the commencement of the Fourth (crisis) Turning.

It follows in terms of this logic, that Human Society as a whole - which is now probably close to becoming a single macro-organism - is entering a period where the old civic order will be replaced by a new one. In short, the generational focus on "materialism" may be drawing to a close.

What will replace it? Well, let's just keep focussing on the facts for the moment.

  • Fact 4: Bond yields screamed upwards from what appears to have been a "double bottom". In a single week. the long bond yield rose over 40 basis points and has penetrated on the upside both the downward sloping trendline and the 200 day moving average.

Clearly, the bottoming of yields came as a surprise, and the week has been characterised by what may be euphemistically described as "portfolio repositioning"

As an aside, the upmove has not yet led to a breakout, as can be seen from the following Point and Figure chart. In my view, a breakout will be of extraordinary significance, but we cannot yet draw any definitive conclusions - other than to say that if a breakout does manifest, the next target is 5.6%.

  • Fact 5: Probably the most surprising chart of the week is that of the Commodity Price Index, which shows an almost perpendicular plunge of the PMO oscillator
  • Fact 6: The PMO oscillator of the Gold Price shows very similar movement to that of the $CRB's PMO. Note how the gold price is now resting neatly on two support lines.
  • Fact 7: The US Dollar Index broke up out of a steep downtrend, but its PMO oscillator is still not in positive territory

OK them's the facts, ma'am. Now, can we make any sense of them?

Of interest is the apparent logical disconnect between falling commodity prices and rising bond yields - particularly if your frame of reference is inflation vs deflation. If we were heading for inflation then BOTH yields AND commodity prices should be rising.

It could be argued that as most commodities are priced in US Dollars, a rising Dollar will make commodities relatively more expensive in non US currency terms. To compensate for this, and to keep commodity prices relatively constant to countries outside the US, the commodity prices can logically be expected to pull back when the dollar rises, and vice versa.

It could also be argued that if the US Dollar is being regarded as the "safe haven" during the Iraq crisis, then gold as a safe haven is not the flavour of the month. This would explain the drop in the gold price.

But if money is flowing INTO US Dollars, where is it going? One would expect non US residents who are BUYING dollars to park those dollars somewhere. Surely they should be BUYING bonds? Again, we have a logical disconnect. Again, yields are doing the opposite of what would logically be expected.

Proceeding from the base assumption that the market is never wrong, it would seem that the market is signalling something that is outside the paradigm model of inflation vs deflation. I.e. There must be something wrong with our base assumptions.

This article has done enough damage to my brain cells and it is probably appropriate to leave the reader with an "interim" conclusion. However, I do have a gut feel as to where to find a possible answer to the conundrum, and I will be doing some research over the next couple of weeks.

Interim Conclusion

Recently emerging HARD facts do not validate the simplistic thought paradigm that the world is facing either a period of inflation or deflation. If this thought paradigm is indeed incorrect than it will NOT automatically follow that "if the dollar collapses, therefore the gold price will rise". It will also NOT automatically follow that "if the US economy weakens, therefore the dollar will collapse".

We should not reach for knee-jerk answers at this point. The gold price remains in its Primary Bull Trend, and most markets are in either overbought or oversold positions from a trading perspective..

However, there are more complex forces at work. The markets are telling us so. We should try to hear what the markets are saying.

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