It was late 2005 when I realized that the bubble I had predicted three years earlier just wasn’t expanding the way I thought it would. It was an unexpected development, so I started digging to find the answers. Once I compared the Roaring ’20s and the Roaring 2000s, I began to see what was different.
I found two cycles that became core to my forecasting: the 36-year geopolitical cycle and the 30-year commodity cycle. These cycles affected strong changes in both eras. In the ’20s, commodity prices dropped and the geopolitical environment was favorable — both factors benefited the economy. But in the 2000s, commodity prices climbed and once we moved into 2001, the economy was hit with the tech crash and 9/11.
Since then we have seen one terrible event after the next: the failed Iraqi war, the Afghanistan war, the rise of pirates off East Africa, the Arab Spring revolutions from Libya to Tunisia to Egypt, the Syrian civil war, the Russian invasion of Crimea and the threat to take over Ukraine.
Israel is combating Hamas and the deadly Ebola virus is exploding in West Africa. In the past months, we’ve seen the rise of Islamic State (ISIS) and how they’re forcing the world’s hand. We’re now at war with them and sending heavy airstrikes into Syria and Iraq in an attempt to keep them from advancing any further…
The trend occurring now couldn’t be more apparent. Let me point out that geopolitical cycles alternate from positive to negative about every 17 to 18 years (recently it’s been every 18 years). This cycle will continue to point down into late 2019 or early 2020 along with three other primary cycles: demographic, innovation and boom/bust (sunspot).
The current global geopolitical environment we’re living in will only get worse and extend into 2019. Stocks are performing as if we’re in a “risk-free” climate following along with the Fed’s delusions of grandeur.
The chart below shows how valuations on stocks have trended very closely with this cycle… it’s mind-boggling.
Shiller adjusts for the cyclicality or earnings which is much better than the normal price to earnings (P/E) ratio. Just like during the Great Depression or the inflationary 1970s, when investors perceive risk during a rough cycle P/E ratios fall.
Analysts and economists who say the markets aren’t overvalued don’t understand that you can’t compare valuations in very different eras. We’re highly overvalued right now and if you want to compare it to another time then it should be to the 1930s or 1970s.
Looking at Shiller’s model alone, we’re at valuation levels of 26+ that are as high, or higher, than most major long-term bull market tops in history which occur between a P/E of 22 and 27. Only 1929 and 2000 figure higher and those were bubbles that occurred in the strongest demographic, technology and geopolitical cycles.
I had seen this cycle presented in rising and falling P/E ratios back in the late 1990s by Ralph Acampora but I discounted it as there was so much correlation with my Generational Spending Wave. But from 2001 forward, the geopolitical cycle diverged strongly from the spending wave and that’s when it became more obvious that this was a cycle in its own right… and how powerful and accurate it has been since.
From 2020 forward, many of the world’s conflicts will inexplicably begin to abate. For now, we find ourselves reluctantly drawn into global conflicts and wars in a region we used to aggressively protect due to our dependence on oil and even now that our dependence has waned, we’re still drawn in.
Despite strong demographic trends, I have no interest in the Middle East, Russia or in Africa until this cycle shifts. I also have no interest in most emerging countries until the commodity cycle shifts, which probably won’t be until around 2023.
But the most important insight is that this bubble is due to burst and burst dramatically. All it will take is for something to go wrong and that is a given in an adverse geopolitical cycle. Then investors will realize that the Fed is not all-powerful and can’t continue to offset declining demographic and geopolitical trends.
There is no way they can keep this ridiculous bubble going much longer… Bubbles don’t correct, they burst!
Follow me on Twitter @harrydentjr.
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