There are an almost infinite number of cycles in life, the market, and the economy. So we’d be remiss (and downright idiotic) to ignore them.
But working with cycles isn’t as easy as making your coffee. There are principles and guidelines you need to apply and follow to identify the cycles with the clearest patterns, the most regular repetition, and the greatest impact on the field you’re immersed in.
Then you need to find out what actually drives that cycle — what is the cause and effect — so you can better project the cycles that are important.
When I first discovered the Spending Wave in 1988 — a 46-year lag on births for long-term generational booms and busts — the cycle and its causes were clear and simultaneous…
Stocks have peaked every 39 years, right along with generational spending booms. This happened in 1929. It happened again in 1968. And again in 2007.
But the reason identifying the cause of a cycle is so important is that they can be irregular.
For example, the generation cycle wasn’t as dominant for the economy before the rise of the middle class after the Great Depression.
And the next generation, the echo boomers or Millennials, is a more irregular one, which means it will have two surges and two peaks in their boom as projected by its Spending Wave. The first surge will be from around 2023 into 2036 or 2037. The second from around 2043 or 2044 into 2055 or 2056.
If I merely used a 39-year cycle, without understanding the driving force behind it, I would be way off on my forecast for the next boom, expecting a long-term peak only around 2046.
My Spending Wave cycle is definitely the most important cycle I’ve discovered in my career to date. Until last year, that is…
Early in 2013 I discovered a second, critical boom and bust cycle. One that no one else is paying any attention to.
I had been using Ned Davis’s Decennial Cycle, which averages stock performance over the last century. In this cycle, the worst stock crashes and recessions occurred in the first two and a half years of every decade, and the market made most of its gains in the second half of the decade.
This cycle worked very well from the 1960s through 2000 to 2002. But it didn’t work as well between 2010 and 2012. So I began looking for an explanation. I needed to know why this cycle was no longer as reliable as it was before?
At first I thought the Fed’s quantitative easing efforts had overridden the cycle. But I wasn’t satisfied with that answer alone so I continued to dig deeper. That’s when I found it.
I came across an article on Paul McCulley in Barron’s. He was once a top fund manager at Pimco. McCulley claimed that sunspot cycles saved him from the tech wreck of 2000.
Now, I’d heard of this cycle before, but I’d dismissed it because the claim was that it is an 11-year cycle and that didn’t correlate with my view of historical trends.
But after reading that Barron’s article, I began investigating the sunspot cycle again. I found that in the last century — when Ned Davis did his analysis — the sunspot cycle averaged 10 years, not 11.
Now I was interested.
I researched back two centuries, where I have good data on stock crashes and recessions… and I found an unbelievable correlation. Almost every major crash or downturn occurred in the downside of the sunspot cycle, which tends to be up for four to five years and then down for five to six years.
Since then, and after a great deal more research into the matter, I now believe this sunspot cycle is the second most important one in my arsenal (the Spending Wave cycle keeps top spot).
Even more important is that this cycle looks like it will peak early this year.
This chart shows you the last two cycles and the current one…
The last sunspot cycle, called cycle 23, peaked in early 2000, just as the tech bubble was peaking in March.
Remember, the worst crashes and recessions tend to come in a two and a half year period after the cycle peaks (like early 2000 to late 2002). The next danger period tends to be when the cycle is bottoming, and we got the 2008 crash right into the bottom of the last trough. Then we had another bubble in the upswing of cycle 24, as is typical.
It just so happens that the current cycle is the most irregular of the cycles over the last two centuries. It averaged 10 years in the last century and closer to 11 years over many earlier centuries. But you could comfortably place it in a range from nine to 13 years.
Cycle 24, the current one, looks like it’s peaking now, after 14 years; and NASA projects it will head down into around late 2019.
This means the great crash and deflation I’ve been forecasting is very, very likely to occur between early 2014 and late 2019.
Add to that the fact that every other longer-term cycle I have points down together in this time period and I’d say we’re absolutely screwed! If we don’t see a major crash and financial crisis in the next six years I will eat my hat. The greatest danger cycle is between 2014 and 2016.
P.S. I’ll continue to track this critical cycle in our Boom and Bust newsletter. Make sure you don’t miss any issues.
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Ahead of the Curve with Adam O’Dell
The copper market is widely accepted as a forecasting tool, often called Dr. Copper for its ability to diagnose sick stock markets before they collapse and require drastic life-saving measures.