US Demographic Peak Of 2000

The US enjoyed united demographic uptrends from 1980 to 2000 and since then united downtrends. Here are a collection of charts that show the powerful reality of this influence.

1. Risk assets markets in real terms trended accordingly, and are calling for another cyclical bear down within a secular bear underway since 2000:


2. Real economic growth trends also align:



3. A dwindling proportion of people in jobs:

18se54. With associated lower household incomes:


5. Means that there is less dollar circulation in the economy Screen Shot 2014-09-18 at 07.18.07

6. And consumer sentiment is overall waning.

18se77. Turning to the supply side of the equation, business capacity utilisation is in decline:

18se198. And corporate investment too:


9. However, corporations have been doing better than households:

18se310. As they have cut staff, replaced with tech, and kept wages low for retained staff:

18se29Source: ForexLive

11. With shrinking real demand in the economy and in asset markets, the Fed has attempted to offset this by depressing rates:

18se2Source: Gary North

12. And ‘printing money’:

18se2413. The stock market has to a degree been a beneficiary as investors search for yield and corporations indulge in buybacks rather than business investment. However, this has all been sponsored by increasing debt, enabled by the low rate environment:


Drawing this together, demographic trends are creating a negative feedback looping between jobs, wages, incomes, spending, business investment and utilisation in the economy. Lower demand and lower supply. QE and ZIRP can’t really influence this because they are nothing ‘productive’ (tinkering with the money mechanism), and they are also only policies of encouragement rather than policies of force. However, they have served to shore up the banking sector, to keep debt costs low, and to push some people and businesses to look for yield, driving up some asset markets with an associated wealth effect. Equally though they have detrimental effects by postponing necessary economic cleansing, driving up asset prices through increasing debt (i.e. unsustainable), discouraging more productive use of money and in some ways worsening the economic situation by reducing incomes dependent on saving rates. Nonetheless, the Fed was keen to avoid the 1930s front-loaded deflationary devastation and has succeeded in this. But have they prevented it, or just postponed it? On a long term view, they have of course only postponed it, because the massive borrowing that they have undertaken is wealth taken from the future. But for us traders, the shorter term outlook is key.

I believe the above collection of charts demonstrate clearly that the Fed’s policies do not overcome the overarching demographics as they all show a series of stair-steps downward since 2000. If we contrast it with the 1930s we see evidence that the Fed has helped to phase the devastation, but the charts show they have not been able to neutralise it. When we consider the unprecedented collective demographic downtrends in place now in all the major nations, I believe it is clear we are on the cusp of another leg down, both in economic measures and asset markets, that will take us to a new level in all lower than 2008/9. We can cross reference this with the stock market currently at extremes in valuation, sentiment, leverage, buybacks and allocations: namely it has the attributes of a ponzi scheme wealth effect, at high risk of full reversal. When the stock market collapses, the next leg of demographic devastation will wash through, revealing the relative impotence of the central banks.



Problems in China

1. China tipped over the demographic cliff circa 2007-2010. Here are middle to young, middle to old, net investors and dependency ratio (inverted) measures:

16se152. China’s stock market enjoyed a parabolic mania at the demographic peak, like the US did in 2000 and Japan in 1989.

Screen Shot 2014-09-16 at 07.39.37

Source: Yahoo

3. China’s stock market correlates closely with commodities:

Screen Shot 2014-09-16 at 07.33.17

Source: Yardeni

4. Demand for commodities is weakening as the economy weakens:

Screen Shot 2014-09-16 at 07.25.48Source: Yardeni

5. Chinese official GDP stats are questionable, so proxies are used for greater reliability. Here, steel, cement and electricity output show a wilting in 2014, flirting with the zero level:


Source: Bloomberg

6. Imports and exports are at much weaker growth levels since the demographic peak, and both have seen lurches below zero in 2014:

Screen Shot 2014-09-16 at 07.26.24

Source: Yardeni

7. Government spending has shrunk:

16se7Source: AlphaNow

8. Producer prices are mired in deflation:

Screen Shot 2014-09-16 at 07.26.59

Source: Yardeni

9. And certain indicators have suddenly become more acute in 2014, starting with foreign direct investment:


Source: ZeroHedge

10. Then the housing market:

16se6Source: AlphaNow

11. The shadow banking market:

16se2Source: Investment Watch

12. And lending:

16se18History shows that economies which expand at breakneck speed typically derail at some point. A potential hard landing for China has been discussed in the media for a long time, but analysts don’t largely understand that it is only in the last 3-4 years that this has become more realistic, since China fell over the demographic cliff. Their one child policy has a nasty sting in its tail. The key is whether the Chinese government can roll out measures that nip the sharp 2014 declines in the bud (which would postpone rather than prevent the devastation), before the negative feedback looping becomes too acute.

In my view, it is the unprecedented collective demographic downtrends in USA, Europe, Japan and China that are tipping the global economy into an unstoppable negative spiral here (only currently propped up by the wealth effect of the stock markets) and central banks will not be able to prevent it. Japan, USA, Europe and China all took turns to be the engine of the world economy between 1980 and 2010 but now we are engineless until circa 2020/2025. By demographics that means a global deflationary recession, or a depression. Passing through the solar maximum here in 2014 should produce dwindling speculation and economic activity and nudge the stock markets and world economy over the edge, feeding off each other.

Gold Update

Gold behaves as the anti-demographic. This chart shows US demographics versus p/e ratio (equivalent to inflation-adjusted stocks) and gold price on a long term view. P/es or real stocks trend with demographics in secular fashion and gold the inverse.


Underlying Chart: Glenn Morton / My annotations

In the 1970s we saw a gold secular bull as demographics declined, then 1980-2000 the inverse. Demographics turned again around 2000 and put us in a secular stocks bear and secular gold bull from then through to circa 2025, which makes the gold correction since 2011 a pause in proceedings, similar to the Dec 1974 – Aug 1976 correction in the last secular gold bull:

12se8The late 20s stock market peak was equally a demographic peak and gave rise to a stocks bear / gold bull combination. Homestake Mining is used as a proxy here:

Screen Shot 2014-09-12 at 08.10.01Gold should make a speculative mania into solar cycle 25’s peak, circa 2025, with this target on the dow-gold ratio:

12se7A look at long term gold and silver sentiment shows a pattern has developed over the last year similar to the lift-off in 2000.

12se3 12se4Source: Jeremy Lutz

Cross-referencing with the current position in stocks, we see a range of topping indicators and extreme overvaluation in equities, which sets the scene for a new cyclical stocks bear (within an ongoing secular bear) to erupt imminently whilst gold resumes its secular bull. So I am looking for a floor in precious metals around here (I am long and looking to add).

Gold miners show a rounded bottom whilst gold sentiment has reached bottoming levels:


Source: Emma Masterson12se5

Source: Mark Hulbert

Gold has been falling the last several weeks in dollar terms as the USD has rallied strongly, but gold in yen, sterling and euros looks more healthy. The rising dollar is consistent with the deflation theme that is powered by demographics, and this theme should pull the rug sharply from under stocks in due course. When that occurs, gold should lift off, as in 1987:

29au14Source: P De Graaf







Characteristics Of A Stock Market Peak

Focussing on the US stock market, I’ll divide this into two: what’s currently flagging a peak, and what’s – arguably – missing.

First, the different angles and disciplines that are signalling a top.

A. Valuations

(1) CAPE, (2) CAPE/Baa yield, (3) Crestmont, (4) Q ratio, (5) Stock market to GDP ratio, (6) Median stock, (7) Relative pricing to bonds and commodities, (8) Relative pricing to other countries, and (9) Relative pricing to demographic trends: all show extreme overvaluation, fitting with previous major peaks.

B. Sentiment & Allocations

(10) Investors Intelligence, (11) Rydex, (12) Fund Managers, (13) AAII allocations, (14) Households, (15) Put/Call Ratio. We don’t need to speculate about whether this is ‘the most hated rally’ or whether Joe Public has yet to get involved. These measures collectively tell us that allocations and bullishness are extreme high and echo previous major peaks.

C. Dumb Money

(16) Retail v. Institutional, (17) Major distribution days, (18) Multiple Expansion, (19) Money losing IPOs, (20) Buyback levels. Again, these all resemble previous peaks.

D. Leverage

(21) Margin Debt, (22) Net Investor Credit, (23) Leveraged loan issuance. Compensating for a lack of demographic tailwind these have been driven to new all-time records.

E. Negative Divergences

(24) Stocks over 200MA, (25) New high-lows, (26) Nasdaq advance-declines, (27) NAAIM exposure, (28) High-yield to treasuries, (29) Consumer discretionary to utilities. These have broadly been in place since the turn of the year and are now mature versus previous major peaks, suggesting we should be around the end of a topping process.

F. Technical Indicators

(30) Skew, (31) Extreme low volume (Nasdaq and SPY volume on up down days), (32) Extreme low volatility (levitation above 200MA, weeks without a 3% move), (33) Sornette bubble end flag, (24) Compound annual growth. A variety of angles, each with a case for a peak.

G. Sector & Asset Rotation

(35) Best performing asset in 2014: Treasuries; (36) Best performing sectors: Utilities & Healthcare; (37) Hot assets, sectors and indices broke down from parabolics: Bitcoin, RUT, SOCL, IBB (tentative). In summary: out of speculative and cyclical and into defensives.

H. Natural Force Timing

(38) Peaks typically occur close to solar maxima (est. March 2014 (RUT)), at (39) Inverted geomagnetic seasonal peaks (Dec/Jan (risk, Nikkei), Jun/July (Dax, Dow)) and (40) Close to new moons (in Jan, Mar, Jul and Aug). The solar maximum is the question mark, because it is an estimate currently, but we know we are in the timezone of a smoothed solar maximum and from history a market peak is likely near.

Drawing all these angles and disciplines together it should be clear that we are in the vicinity of a stock market peak. You may take issue with a particular discipline or a particular angle or those indicators with shorter histories, but the collective case overwhelms. If you take issue with the collective case by arguing that is has all been distorted by QE and ZIRP, then I would point to 1930s US and 2000s Japan where the conditions were the same and we nonetheless experienced bear markets and recessions. But I’ll tackle this distortion idea more below.

Let’s now turn to what may be missing for a stock market peak and thus keeping the bear market at bay.

I. Topping pattern and technical breakdown

Nikkei, FTSE, Dax, Russell 2K are all overall flat for 2014 and display typical topping patterns. Yet, the other US indices remain in clear uptrends, India’s Sensex remains in a steep ascent, and the Hang Seng recently broke out. So the overall picture is mixed. None of the indices have made a decisive technical breakdown at this point.

J. Leading Indicators, Corporate Profits, Recession models, Financial Conditions

Conference Board LEI, ECRI WLI, corporate profits, yield curve recession model, other proprietary recession models. Corporate profits have turned down by certain measures but not all and the rest of these indicators display no clear warnings currently. Economic surprises are currently positive and the US economy is generally doing ‘fine’. More on these below.

K. Inflation & Rate Tightening

Commodities and inflation rallied from Nov 2013 and peaked out in May 2014, but still at overall historically low levels. Yields tightened into the end of 2013 but since then have reversed and eased. The Fed remains on zero rates but is tapering QE to an Oct 2014 termination. This is a general misfit with recent bull market peaks that have seen higher inflation and a series of interest rate rises. More on this below.

L. Question marks over (i) The solar max, (ii) Sornette bubble end flag, and (iii) NYSE Advance-Declines

Most solar models predict the smoothed solar max to be behind us, circa March 2014. However, SIDC are still running with an alternative model that peaks at the turn of 2014-2015. Also, Mark has a theory that under weaker solar maxima, like this one, speculation runs beyond the smoothed solar max, which would also take us beyond the end of 2014. The Sornette bubble end that flagged in July was at a lower intensity than mirror bubble ends in history, allowing for a potential greater flag ahead (which would imply the market needs to rally further yet). NYSE advance-declines have not negatively diverged yet unlike previous recent major peaks, however they did not at all peaks, and Nasdaq advance-declines have been divergent for 6 months.

More on these below.

Leading indicators by CB and ECRI typically do a good job of announcing recessions ahead of time (though there have been some false positives and false negatives). However, they are not a good predictor of the stock market, with research showing they are typically coincident with each other.

Screen Shot 2014-09-08 at 08.16.18

Source: Yardeni

The stock market is a leading indicator of recessions itself, and in fact an agent, due to the wealth effect. Both ECRI and CB accordingly include the stock market performance in their leading indicator calculations.

ECRI WLI growth turned negative in 2000 and 2007 after the SP500 had suffered initial falls of around 15% in both cases (from March 2000 and from June 2007). In 2014 we have seen no such damaging break yet, but with ECRI WLI down to 1.8, a true technical break in stocks would likely pull it below.


Source: DShort

CB LEI topped out with the market in March 2000, and whilst it topped in early 2006 ahead of the 2007 market peak, it didn’t fall until stocks fell in 2007.

Turning to corporate profits, they also typically turndown as a leading indicator of a recession, but there are different ways of calculating this indicator.

The first method below shows profits peaked ahead of the stock market peak six times, coincident twice and after once. By this measure corporate profits peaked at the end of 2013, and are diverging in line with the majority of historic cases.


 Source: PFS Group

A second method shows that corporate profits peaked out coincidentally with the stock market the last two times (or along with the initial falls of ~15%), and accordingly this measure is still levitating with stocks in 2014.


Source: PFS Group

The yield curve as a recession predictor does not work under ZIRP. Japan three times entered recession without yield curve inversion under ZIRP, and the US did likewise in the 1930s-40s.


 Source: ZeroHedge

PFS’s recession model is proprietary but note how it only took off once stocks fell hard in the last two peaks:


Source: PFS Group

Like ECRI and CB leading indicators, it is coincident with the stock market.

Similarly, financial conditions also did not fall until the stock market peaked in June 2007, May 2010 and July 2011.


 Source: Financial Sense

In short, leading indicators, financial conditions and valid recession models are benign whilst the stock market continues to levitate. Once it falls, they will begin to flag, as the wealth effect rapidly declines. The yield curve model is invalid and corporate profits are either coincident or warning with negative divergence, depending on the method. So, none of these indicators are bullish support for the stock market.

US QE is being wound down and will end in October. The stats show that 80% of QE money is parked as excess reserves at the Fed paying a meagre return to the banks. This is because they can’t lend it out: the demand simply isn’t there under demographics. The money multiplier and money velocity are both still in decline. So, 80% of QE money is impotent for now, but this is a threat for the future once demographics improve and demand comes back. The other 20% of QE money is difficult to track, but under conditions of ZIRP we can assume some has entered the stock market searching for yield and return. Ultimately though, QE does not create economic growth: it is just corruption of the money mechanism. Therefore, price rather than the earnings has risen significantly in stock market, making for valuations on a level with previous major peaks. Zero interest rates encourage money to search for yield but also can only tweak demand, not revolutionise it. Also, a large swathe of retirees have less income under ZIRP which acts as a drag in the economy.

The reality is that the US economy is overall chugging along at a lower rate than in the past when demographics (and debt levels) were more favourable. As in the 1930s US and 2000s Japan, QE and ZIRP can only have limited effect whilst demographics dictate.


 Source: Fat-Pitch

Demographics are both deflationary and recessionary. Therefore, we have seen overall low inflation recently and the Fed does not have the luxury of rate rises. The point about both inflation and rate rises is that they choke the economy in rising input prices and tightening. Yet demand is too weak to stoke inflation and the economy too weak for rate rises. The tightening is coming from QE wind-down, but as noted the overall effects of QE are less than touted. I would argue that a sharp fall in equity prices is all that is missing from tipping the economy over, and that we again have to look to 2000s Japan and 1930s US as the most relevant analogs here.

We could argue that falling commodity prices lower input costs and are a driver for the economy and that falling yields are effective as easing. However, if we are in the last gasps of a stock market top then both treasuries and commodities are acting as per a deflationary recession.

The ECB cut rates and launched a form of QE last week. Does that offset the Fed winding down? Analysis of the ECB package shows it to be more window-dressing than content. The Eurozone economy is 3.5 times the size of Japan yet its package amounts to just one tenth the size of what Japan is doing, whilst the rate cuts were largely symbolic. Despite Japan’s aggression, the effects have been disappointing, which brings us back to the point about what QE actually does: it does not drive economic growth, and therefore, the new ECB actions are unlikely to make a significant difference.

Leading indicators predicted a mid-year upturn in US economic growth and this has occurred. Accordingly, economic surprises have leapt into the positive. However, leading indicators predict a peak in growth around now, which should set the scene for disappointment in data in Q4. As this coincides with the termination of QE, maybe this combination will unsettle the ‘Fed policy trumps all’ crowd perception.

In summary, the evidence suggests policies of ZIRP and QE are limited in their potency. They may both play a role in current higher stock market valuations, but the disconnect between prices and earnings/growth is bearish, as it was in 1937. The weak economy under demographic trends is unable to support inflation and rate rises, and I believe is at the mercy of the stock market. Namely, if the stock market falls, the economy will tip over. If it doesn’t it will continue to chug along.

So what is the trigger for the stock market? History shows that major peaks typically occurred without a major trigger, and then sharp falls occurred once there was a suitable technical break. So what factors bring about the topping out?

The evidence suggests one is saturation or buyer exhaustion. We have very recently seen sentiment, allocations and leverage all back to extremes of extremes. I therefore believe we are running out of fuel to go higher: everyone bullish, no-one left to buy, credit facilities stretched.

A second one is natural force timing, and the biggest factor in 2014, I believe, is the solar maximum. Most models point to a smoothed solar max being behind us, around March. Most market peaks, and growthflation peaks, occurred very close to the smoothed solar max, so we should be able to cross reference this.

As things stand, margin debt peaked Feb, the Russell 2K and social media peaked Feb/Mar and biotech is making a double peak now with Feb/Mar. Also, commodities and inflation peaked around April time, and we have seen various indices and risk measures peak out between December and August, either side of this kind of epicentre. So it looks promising.

However, as noted, SIDC are still running a model with an end of year smoothed solar max, and Mark’s theory is that weaker cycles such as this won’t see speculation peak until later in the maximum, not until 2015. Playing into these possibilities we see biotech, junk bonds, the Dow, and (likely) margin debt challenging their highs and attempting breakout. We can also monitor sunspots in real time to see if likely to exceed Feb.

So, I believe we have a useful combined measure there: if JNK, INDU, IBB, leverage and sunspots all break upwards and out to new highs then peak speculation is delayed, and we might then also look to the Sornette bubble end flag to rally again to a higher intensity. However, cross-referencing further, with sentiment and allocations last week back to record extremes, I see a breakout will be very hard to achieve here. Plus, the mature divergences in the market suggest this should be the last gasps of the topping process, not earlier in the process, and we are in the relevant time of the year for the falls to occur. I therefore continue to believe that the most likely scenario is that this rally since August 8th is the terminal rally, shown arching over on the 4-hourly SP500 below, and that JNK, INDU and IBB will all double top out.

Screen Shot 2014-09-08 at 10.16.32

 SP500 4-hourly


40 indicators in 8 angles argue for a stock market peak. The only question is the timing, and that is the difficult calculation. The best-fit remains an epicentre of March 2014, placing us now in last gasps. Breakouts from here in several speculation measures would negate that and postpone the top. When the stock market falls it should trigger the ‘missing’ alerts in recession models, financial conditions and leading indicators. The effects of QE are overstated, whilst ZIRP and disinflation reflect the overarching weakness in demographics. Whilst the stock market levitates, the economy should continue to chug along, but if the market falls meaningfully then the economy should tip over into deflation and recession. I believe the two key and associated drivers of the peak are buyer exhaustion and the solar-speculation-maximum, and it appears they came together to peak levels between January and now, making a topping process. Helping tip the perception should be the inverted geomagnetic seasonal lows of Sept-Nov, the predicted disappointing economic data ahead, and the termination of QE support. For this not to materialise, sentiment, allocations and leverage will all have to stretch to new levels of excess to enable a higher stock market. Whilst not impossible, it is not probable.

Last 30 Years

MSCI world equity index valuation chart for the last 30 years:


Source: Investec

The overall dotted line trend matches the black global demographics composite in the next two charts:

3se2 3se3

Conventional analysis of equity valuations considers cheapness relative to history and averages as a predictor of returns. But valuation has to be considered relative to demographics, or rather, long term trends in valuation ARE demographics. Expensive will get more expensive if you have an increasing swell of people in the right age group to buy the market, and vice versa. By global demographics, we are destined for cheaper valuation yet, and the current bull rally is a counter-trend solar-maximum-inspired speculation peak.

The MSCI world index is weighted like my demographic composites. Therefore the US demographic peak was the most important peak and put in the main top. Since then Europe and China have joined the trend change, making post-2009 the most heavy collective demographic pressure yet. Accordingly, we have seen interest rates held at unprecedented low levels due to the resultant economic weakness.



If demographics are so dominant then we should see evidence in the current counter-trend bull of major weakness under the hood, which we do.

Whilst the SP500 has grown 120% in real terms since 2008, real revenues have grown just 2%. Companies have engaged heavily first in cost cutting then in buybacks. Sales remain elusive.


Also, the last 2.5 years in US stocks have been over 80% multiple expansion versus less than 20% earnings expansion, and this price-based rather than earnings-based expansion in equities whilst the economy has remained weak has taken stocks cap to GDP to an all-time record:

Screen Shot 2014-09-03 at 09.00.19

With a dwindling pool of stock market buyers under demographics, the market has been bid up on lower volume and increasing use of debt, taking the latter also to a new all-time record:

3se10Source: DShort / UKarlewitz

This mix of unhealthy attributes has taken stock market risk to an appropriate record:

3se9Source: EcPofi

In summary, the stock market rally since 2009 has been built despite demographics, largely through QE money, stocks buybacks, private investor leverage and a speculative pull into the SC24 solar maximum. But accordingly it is a rally at high risk of total reversal, it is a tower of sand.

It is the unprecedented collective demographic downtrend now in place between USA, Europe, Japan and China that make it so potent. World trade is depressed and each of these areas is struggling individually. Europe is on the cusp of deflation and recession. Japan’s Abenomics is not working. The USA, although outperforming currently in certain measures, is still operating at a lower all-round level of economic performance versus previous decades. And China, the last to tip over the demographic cliff, is now facing a bursting housing market and shrinking growth. In the 2000s China was driving the world economy, offsetting the USA which had gone over the demographic cliff. Now the world economy has no driver, with India’s economy still too small to offset all the majors. It makes for a negative feedback looping that ZIRP and QE should be powerless to stop.

Turning to the near term. Froth has gone back up to the max.

3se8 2se3Increased volume did return yesterday post Labour Day, to test the validity of last week’s rise. Indecision was the result, so we roll over to today. The market is up so far with a burst on Ukraine peace news. Recall the Bin Laden top? Bin Laden captured and killed 2 May 2011, the market burst up, closed down and it marked the top for the year. With the Dow, JNK and IBB all still at double tops, it could go either way here. So let’s see how today closes.

US Stock Market Valuation

Firstly, trailing 12m p/e valuation. This chart clearly shows this measure is a rather useless tool, and can be disregarded:


Source: D Short

Secondly, forward p/e (12m) valuation. This measure is based on expectations and guidance from companies and analysts. Under- and over-estimating is common for a myriad of reasons (some deliberate, some unrealistic), so this measure lacks reliability and produces another poor chart:


 Source: Invesco

Thirdly, dividend yield valuation. Also a valuation measure with problems, due to companies increasingly having moved away from paying dividends in favour of share buybacks:

Screen Shot 2014-09-01 at 15.47.11

 Source: Vector Grader

Fourthly, CAPE (or Shiller) valuation. Takes the last 10 years earnings inflation adjusted, and is much more reliable, with a 0.9977 historic correlation with the real SP500:


 Source: D Short

By CAPE valuation the SP500 is in the 93rd percentile of all historic valuations.

However, the last couple of years have seen the real SP500 diverge from CAPE, suggesting an additional degree of exuberance is in play:


 Source: Lucretalk

This is resolved by using, fifthly, the Crestmont p/e. Similar to the CAPE but uses a different method of normalising the EPS, which makes for an even tighter fit including that additional recent exuberance. By Crestmont p/e US stocks are in the 98th percentile historically:

1se8Source: D Short

Sixth, the Q Ratio. This is a totally different approach based on the market divided by the replacement cost of all its companies. It, however, produces a similar compelling result historically, and estimates stocks to be in the 97th percentile historically, cross-referencing with Crestmont:

1se9Source: D Short

Seventh: Market Cap to GDP. We can add in Warren Buffet’s preferred valuation measure as additional confirmation of the extreme historic over-valuation:

1se10Source: D Short

Using the level playing field of the CAPE measure, we can see how the US’s valuation stands up relative to other countries:



Source: Seeking Alpha

By this comparative measure, US stocks are again extremely expensive, almost the dearest in the world.

Now we need to draw in demographics. Here are treasury yields and SP500 CAPE versus their respective US demographic trends:

1se14Source: Barclays 

The implication is that market valuation has to be assessed in the context of demographics. An expensive market will get more expensive if there is a swelling population of the age that would buy stocks (or bonds), and vice versa.

US demographic trends argue for lower valuations ahead, lower real stock prices:


Therefore, the extreme valuations in US stocks, both relative to history and relative to other countries (with more favourable demographics) argue for a bear market. There is no demographic tailwind to take them to even higher valuations.

The question is, why have US stocks run up so far?

Is it the aggression and support of the Fed? If so, then with QE scheduled to end in October, the market should be readying to fall. But, as per my recent post, I rather believe ‘Fed policy trumps all’ has been the mantra for the mania rather than the driver.

Is it the relative economic performance versus Europe and Japan, including its progress from energy importer to exporter? The problem is that all that is priced into the valuations, i.e. price has nonetheless run up far beyond earnings.

Is it the safe haven perception of US equities and the US dollar? Perhaps.

Is it the propensity for US companies to equity buybacks or for US investors to draw on loans and margin, both propelling prices higher? Could be.

Or is it that US stocks began the process still elevated following 2000’s biggest mania of all time? The valuation charts show this to be so.

I believe I can explain the mania of the last 18 months with the solar cycle. The sunspot maximum has driven the speculation to take US equities to these dizzy valuations and cast doubt on the secular bear progression since 2000, as the current bull has been given an exuberant last leg into 2014’s solar max (see my recent Last 18 Months post). However, now that we are through the smoothed solar maximum, the combination of valuations (CAPE, Crestmont, Q ratio and market cap to GDP) and demographics argue for a new bear market at hand within an ongoing secular bear to take us to the kind of washout valuations that 2002 and 2009 so far failed to deliver. Rather, we have stair-stepped our way down since 2000 in alternating cyclical bulls and bears, and we can see this in other economic measures:


Source: D Short


Source: Fat-Pitch

Screen Shot 2014-09-01 at 16.53.35Source: Fred

Demographics and valuations both argue for another step (or even steps) down lower from here.

One more valuation measure to finish: we can look at US stocks pricing relative to commodities and relative to bonds. In both regards US equities are now at the same extreme relative pricing as 2000’s peak.

1se19 1se20

Source: Stockcharts

Therefore, by CAPE, Crestmont, Q ratio and market cap to GDP; by relative expensiveness to commodities and bonds; by relative valuation to other stock markets around the world; and all in the context of demographics: I believe US equities are very clearly a major SELL.

New Secular Stocks Bull

Is not underway:


Does not begin at these valuations:


And can not occur under these demographic trends:


Rather, those charts collectively present the real story. This is a cyclical bull market peak (per valuations) within an ongoing secular bear that began in 2000 (per demographic trends). The inflation-adjusted SP500 and gradual downtrend in p/e valuations show the secular bear  in progress. The destiny (per demographics) is single digit p/es, in line with historic normalisation and necessarily befitting the greatest mania ever. The reason the cyclical bull peak is particularly high in nominal and valuation is the speculative drive of the solar maximum, with the current peak being one solar maximum after the mania peak, as 1937 was to 1929:


Turning to the near term. We’ve seen a partial retrace of the falls, but all the evidence suggests this will now roll over and firm up the new downtrend, the new bear market. On European indices the technical breakdown is clear and the current retrace barely a blip in the downtrend so far. Germany announced negative GDP and France zero GDP yesterday.


The SP500 now stands at twin resistance and this is an obvious point for the rally to roll over.

Screen Shot 2014-08-14 at 19.00.01A look under the hood shows that volume has been thin and waning each day of this rally, and the best performing sectors have been healthcare and utilities, the post-peak duo. US small caps underperformed, treasury yields made new lows and crude oil broke down yesterday – all risk-off developments. Therefore I expect bears to resume control today or Monday.


In the last decade, demographic trends in the Eurozone turned from growth-positive and inflationary to recessionary and deflationary.

Screen Shot 2014-08-07 at 09.27.41

Cross-validating this, we see a trend of disinflation since the peak that is threatening to turn into outright deflation:Screen Shot 2014-08-07 at 09.27.05

We also see overall slowing economic and credit growth since that demographic inversion:7au12

Meanwhile the rise in stock prices over the last 2 years has been multiple-expansion rather than earnings based, in keeping with the weak economy (and the solar maximum driving the speculation):7au8In the latest data: Economic surprises for Europe continue to stay below zero; Italy has re-entered recession; German and Spanish bond yields are at record lows; German industrial orders contracted at their fastest rate since 2011; Eurozone retail sales have fallen sharply since June.

In short, Eurozone equities are due a sharp correction and the negative effect from falling stock markets is likely to tip the weak economy into outright recession and deflation, an outcome that was written some time ago in the demographic trends. Those trends suggest the next 2 decades will be difficult for the Eurozone, and that picture is consolidated rather than offset by demographic trends in USA, UK, Japan and China.

Short term US equities: Little movement the last 2 days. Stocks consolidated their breakdown, or exhausted their selling momentum, take your pick. Oversold indicators remain in place arguing for a bounce, but indicators for the overall correction suggest more downside is ultimately required. By my work we are post-second-chance and drawing on the analogs bulls should get little look in. The best fit then would be another leg down here into the weekend’s full moon, continuing to make it difficult for people to get in or out of the market, and gradually ramping up the fear. Gold broke up over 1300 again yesterday, and its large basing pattern continues to build.

Cross Referencing

Wim Grommen argues there have been 3 industrial revolutions: 1780-1850, 1870-1930 and 1940-2000. They terminated with major peaks in the stock market and then gave way to degeneration phases.


Source: Wim Grommen

My perspective is demographic booms in the 1920s and in 1980-2000 made for economic and stock market booms, culminating in mania peaks at solar cycle maxima, and then giving way to prolonged economic downturns and secular bear markets once demographics turned.


A third perspective is that both episodes in history were based on a major run up in debt, or prosperity taken from the future:


In short, the two periods rhyme. Parallels have been drawn between the Great Depression and the Great Repression in terms of severity of crisis, slowness of jobs recovery and bank failure risks. Similarly, central bank intervention became a dominant factor, with ZIRP and emergency spending programmes being required.

However, the Great Depression was much worse in impact when we consider number of failed banks, level of economic decline, drop in prices, and this despite the 2000 asset boom being a more extreme mania than 1929. One key reason for that was the aggressiveness of central bank response this time round, with more flexibility and conviction to draw down harder and faster on prosperity from the future.

Central banks cannot overcome demographic trends and post-mania busts, but they can postpone their full impacts if they are prepared to pay for it, helping stop the devastation being so front-loaded. So, the bear market from 1929 to 1932 was totally devastating and took valuations straight to bottoming levels (shown at -56% below), whilst the 2000-2003 bear was halted at still expensive valuations. 2009 then washed out valuations lower, and I believe we are on the cusp of another bear which will wash out properly. In other words, central banks have succeeded only in phasing the devastation, and the next leg down ought to be the worse: more of a deflationary depression.

12ju5Source: DShort

That projection can be cross-referenced with the demographic trends chart further up the page, and is further strengthened at a global perspective by similar demographic trends in Europe and China.

Between 1932 and 1937 a cyclical bull market erupted with distinct similarities to today (see post here). There was one solar cycle between the 1929 and 1937 peaks, and one between 2000 and 2014 (shown above). The 32-37 bull topped out along with the solar maximum in Spring 1937 with no divergence in cumulative advance-declines, which I believe will mirror today: an all-in peak at extremes in valuation, sentiment, leverage and complacency.

11ju9Source: DecisionPoint

Here is evidence that we have reached such extremes:


And the bubble-end flag is raised:

Screen Shot 2014-06-14 at 12.31.20Source: Financial Crisis Observatory

And this fits with solar cycle maximum peak-speculation timing.SolarCycleSpeculationPeaksFriday’s session provided a bounce at the full moon. The bounce came at an important level in the large cap indices: a backtest of the ending diagonal or wedge. As full moons often mark inversions, that gives two reasons for stocks to rally again from here. However, by various indicators further declines appear more likely, and such a development would then fulfil the ending diagonal overthrow pattern, whilst ensuring lower highs are maintained in the small caps. That would then enhance the likelihood of all the indices having peaked and the smoothed solar maximum having passed. Emerging new up legs in gold, miners and silver are another clue that could be occurring, whilst geopolitical developments in oil could be a catalyst to end the complacency.

The best cross-referenced case I have currently is that the smoothed solar maximum, RUT, COMPQ, IBB and margin debt all peaked out around February/March. The majority of solar forecasts support this, and we have seen various asset peaks between December and June around this centre. The Sornette bubble-end is flagging again here as sentiment, valuations and complacency are all at the level of extreme that would fit a reversal, plus certain divergences are mature. The selling on Wednesday and Thursday did little to reset the short term indicators that would suggest stocks rally again now.

However, the risk remains that the solar maximum could potentially get stronger yet. Solar scientists have not so far done great in their predictions for this cycle. They are generally united in projecting a waning sun for the rest of this year, but SIDC still continue to run with an alternative model which would delay the smoothed maximum until the end of 2014.


Source: SIDC

Right now sunspots are high again as the sun has leapt back to busy in June after three months of waning, so I continue to monitor. Cross-referencing again, if the smoothed solar maximum were still ahead, then we ought to see large caps hold their breakout here and continue to advance, the other indices break upwards to new highs (invalidating their Feb/Mar peaks) and margin debt reverse its waning trend.

So, as things stand, the highest probability case is for this to be the end of a topping process that began at the turn of the year, with the solar and speculation peak centred around Feb/Mar. If so, then stocks should fall again this coming week, fulfilling the ending diagonal and bubble-popping, and completing the ‘second chance’ lower peaks in RUT and COMPQ. If instead the large caps hold the break and rally upwards, taking the Nasdaq Composite along to new highs in the process, then it would strengthen the case for the solar maximum and peak speculation to be shifted along to at least June, but potentially to even further out in the year. An important week.