Sunspots, Geomagnetism, Global Temperature And Birth Rate

Posted on May 22, 2013May 22, 2013 Posted in Demographics, Geomagnetism, Indicators, Macro, Solar Cycles36 Comments

Both sunspot and geomagnetism cycles correlate with long term global temperature variation, with geomagnetism having the closest correlation co-efficient:

Source: Landscheidt

Changes in global temperature have been demonstrated to influence fertility and birth rates. A composite of 19 countries below shows the inverse relationship between temperature and birth rate over the last century:

Source: ScienceDirect / Harry Fisch

Sunspot and geomagnetism cycles therefore affect demographics through global temperature variation.

There is also a global temperature oscillation related to solar cycling, shown below. Therefore we have two solar influences on climate: an 11 yearly oscillation and a long term trend following long term changes in solar activity.

Source: C Camp

There is typically a spike in births around solar maxima – an 11-yearly peak – oscillating like the above:

Source: W Randall

Additionally, birth rates have been shown to vary with the economy, typically declining during recessions and rising during boom times.

Source: Pew Social Trends

There is a pattern to recessions following solar peaks, and therefore births declining following solar peaks. The chart below shows all three for the US, with the solar peaks marked in black. There is generally a spike up in births at the solar peak followed by a pullback or flattening in births aligned with a recession.

The major peaks in births occurred close to the solar maximums of 1917, 1958 and 1989.

Typically there is growthflation in the economy into a solar peak – which should encourage more births – and human excitement peaks with the sun. Perhaps human excitement at the solar peak also translates into more births, in terms of human behaviour effects, as snow shoe hare populations have been shown to peak around solar maximums. Then, following the solar peak recession and unemployment peaks typically occur, which would pull back the birth rate.

In asset markets we also see both an 11-yearly oscillation correlated to solar cycles and additionally a mapping of long term trend. This is a busy chart, but it attempts to show both the 11 year solar oscillation and the long term solar variance trend against risk assets, demographics and temperature – click to view larger:

So we have a six-way relationship between sunspots, geomagnetism, climate, demographics, the economy and the financial markets. The sun is the agent, and temperature and human behaviour (which translates into economic, risk asset and birth rate effects) are the subjects. There are two patterns: an 11-yearly oscillation and a long term trend variance. Within this multi-relationship there also appears to be a cause and effect chain from the sun to global temperature to birth rate (which becomes demographics) to long term risk asset performance in stocks and real estate.

If we are moving into a long solar quiet period then global cooling should become the theme and this should have implications for fertility, producing a trend of increasing global births. However, if man-made warming overrides the cycle of cooling then the opposite could occur. Whichever wins out should have implications for the world economy and financial markets later in the century.

Japan Financial Markets Economic Correlations

Posted on May 20, 2013 Posted in Commodities, Demographics, Indicators, Inflation, Macro, Solar Cycles, Stocks9 Comments

I wanted to test the correlations and interrelations on Japan. As it went through a different experience to the USA over the last half a century, did the same correlations in assets and the economy hold true? Data history is more limited than for the US, but sufficient to test. Correlation coefficients over +0.5 are considered strong positive correlations between two datasets, and some datasets have been scaled to share the same chart, where e.g. *3 or /10 is shown. Click on a chart to see it larger.

Firstly, I found the same five-way block correlation between interest rates, bond yields, money velocity, real commodities and inflation. Here are two pairings from that group:

Note that the level of inflation was overall at a lower level than in the US over the last 3 decades but the relationship between real commodities and inflation is still clear.

As per for the US, I found this five-way block then produced the correlated-two of recession and unemployment. Below it can be seen how recession followed spikes in inflation, even if the spikes were low.

I also discovered the asset pairings are again found in Japan, with bond yields and commodities related, whilst real house prices and real equities go their own shared path. I show here real stocks and real house prices:

Uniting those two assets into a composite in the next chart, demographic trends again appear to have played a key role in their secular trending.

That Japan did not participate in the secular stocks bull through to 2000 and the secular housing bull through to 2005 that the USA did, makes sense in light of the demographic trends in the period from 1990 to 2005. Additionally, the speculative peaks in Japanese stocks and housing circa 1989/1990 (around the human excitement solar maximum of 1989) were fairly extreme ‘greed’ overthrows, which then need time to washout on the other side.

However, demographic trends overall collectively turned up again from around 2005 and should continue positively until circa 2020. Japanese equities effectively made a triple nominal bottom in 2003, 2008/9 and 2011/12, whilst real estate has been basing since 2010, but a sustained rise in risk assets in Japan did not materialise until November 2012 onwards and I believe this sharp move is a belated catch up to the demographics. If 2013-to-date was added to the above chart we would see a significant pull-up in the stocks/housing composite.

Drawing in bond yields and real commodities to make a 4-way risk asset composite, and as per the USA comparing against the quadruple-agent composite of sunspots, geomagnetism, demographics and real interest rates, there is again a notable mapping between the two (again, 2013 should provide a belated pull-up to the model: a divergence being rectified):

Generating the forecast into the future, but with the caveat of using assumptions and historic rhymes, we get this:

The prediction will be refined over time to validate or invalidate those underlying assumptions and patterns, but the overall uptrend is due to the demographic trends that stand to boost risk assets until circa 2020 and then the next solar maximum should continue the upwards pull until circa 2025, implying there is a good chance of an overall secular bull in stocks and real estate in Japan for the years ahead.

I therefore suggest that the government’s recent doubling down on stimulus is in fact not required, and so it has the potential to supercharge proceedings. So far the yen has dropped sharply, bonds yields have taken off and inflation expectations have risen significantly:

Source: BusinessInsider

As Japan is a net commodity importer, the sharp drop in the Yen pushes up import prices for energy and other resources, so they already have commodity price inflation despite commodities recently underperforming. If commodities now rise, as per my forecasts, then there is a danger that Japan suffers major commodity-based inflation, which should be correlated with money velocity soaring, and an inflationary feedback spiral develops. The government should then accordingly raise rates, but cannot raise them too fast or too far because of the record debt servicing. That, collectively, is why there is a hyperinflation risk. If problematic inflation does erupt then eventually the risk is of a stock market crash. However, until then (and maybe it does not come to pass), stocks are likely to do well based on demographics and a belated catch up, and they should also perform well under ‘some’ inflation. So the question is whether stocks will pullback sufficiently to offer an opportunity to get in or add more. I am long the Nikkei, but do not feel comfortable adding more on the long side at this point when stocks have risen almost 100% in 6 months. Conversely, despite the trade doing very well at the moment, I do not wish to take profits as I believe the major rally to be justified, and expect more gains ahead. So I stay put for now and we’ll see how things develop.

What Really Moves The Markets

Posted on May 17, 2013May 17, 2013 Posted in Bonds, Commodities, Demographics, Geomagnetism, Indicators, Inflation, Macro, Real Estate, Solar Cycles, Stocks28 Comments

The evidence has led me to a ‘dumb’ model of the markets, whereby humans are more subjects and less intelligent creatures of free will. It’s up to you to decide whether I have simply found what suits me and filtered out the rest, i.e. dumb seeks dumb. If we remove all the noise by looking long term, I suggest sunspots and geomagnetism are two big (but very subtle) drivers of human behaviour towards risk assets, with demographics (which are influenced by solar cycles) simply providing bulges in demand to produce long term bull markets in stocks and housing.

I suggest the solar phenomena are influencing human behaviour in the economy and financial markets alike, and that is why we find treasury yields, interest rates, money velocity, inflation and commodities largely correlated together. Optimism, excitement and positive sentiment driving all up, or pessimism, fear and negative sentiment driving all down. Just waves of sentiment supplied by nature. Plus, when increasing numbers join the investor age bracket of the population versus old and young over a period then enduring bull markets in stocks and housing can occur simply due to the growing demand the demographic trend provides. No complex interaction of fundamentals, just more people investing for retirement.

So I figured the next step was to produce a composite model of sunspots, geomagnetism and demographics for the USA over the last century to see to what degree this correlates with the long term US risk asset composite that I charted earlier in the week: namely real stocks and commodities, real house prices and treasury yields. To do make the triple ‘agent’, I used annual mean sunspots, annual average geomagnetism (inverted, because low geomagnetism is pro-risk, high geomagnetism anti-risk) and for the demographics the middle-young ratio up to 1950, then a composite of middle-young, middle-old and percentage of net investors from 1950 to current. To make the quadruple ‘subject’ I used real SP500 annual values, the Schiller real house price index, the commodities index and 10 year treasury yields.

This chart shows how geomagnetism relates to sunspot cycles over the long term:

Source: NASA

Peaks in geomagnetism occur typically 1-3 years after sunspot peaks, averaging 2 years later. This fits with recessions and unemployment peaks usually occurring within a couple of years after the solar peak, as peak geomagnetism escalates pessimism and fear. The strength in a geomagnetic peak is also a reasonable predictor of the strength of the next solar cycle.

Once I had worked back half a century, compiling the data, this is what popped out (click to view charts larger):

The model didn’t work out so well in the periods around 2006, 1974 and 1951. I then discovered what united the three: real interest rates were negative:

Inbetween, the model worked very well. When real interest rates were negative, risk assets (particularly commodities) got an uplift, regardless of sunspots, geomagnetism and demographics. This is because this type of inverted evironment discourages cash and savings, and encourages borrowing and speculation. People are not being compensated by leaving their money at the bank to offset the gradual erosion of purchasing power, so they seek hard assets and risk investments instead.

So I added negative real interest rates to the model (netting them from the composite where they occurred in the last century) and completed the history, and this is the result:

Overall a very close match with the moves into and out of stocks, commodities, housing and t-yields over 100 years.

Therefore, I am suggesting there are 4 main agents in moving financial risk asset markets: sunspots, geomagnetism, demographics and negative real interest rates. On a yearly basis, they collectively mapped the bull and bear waves up and down, with little missing.

I then attempted to project the model into the future for the next 20 years.

Demographic projections to this end are fairly reliable as those entering the key age groups over the next 20 years are largely already alive so we have a good idea of numbers moving through. I therefore used all three measures again – middle / old, middle / young and net investors – and combined into a composite.

For sunspots, there is a historic rhyme with a past period of solar cycles as shown:

Source: WattsUpWithThat

So I projected sunspots forward based on solar cycles 5 and 6. Then, using the link between a geomagnetic peak with the next solar peak, as referenced further up the page, and its typically peaking 2 years after a solar peak as well as general relations with the sunspot cycling, I constructed a geomagnetism model for the next 20 years.

Lastly, for negative real interest rates, I used the late 1940s and 1950s as a guide due to its historical mirror, with high government debt meaning rates had to be kept low, whilst modelling inflation based on its correlation with solar maxima.

The result:

Clearly, there are assumptions and a reasonable tolerance allowance in my 20-year forecasts for the three datasets that make up the model other than demographics. One assumption is that the solar maximum is ahead this year. If that proves correct then there is a fairly potent combination of a sunspot peak with negative real interest rates, which contribute to the 2014 spike, before dwindling sunspots and peak geomagnetism arrive along with fading demographics. From 2022 to 2027 a bull market in stocks and housing should be enabled by an upturn in demographics and the next solar maximum. Overall, however, the future model is downward sloping, as demographics are poor relative to a golden period like 1980-2000, and the sun potentially enters a new ‘minima’ period as shown in the SC5 and SC6 historic rhyme above. This is also despite the built-in expectation that real interest rates may oscillate in the negative for some time yet, as the Fed only slowly and gingerly moves up rates, balancing servicing high debt with keeping inflation in check.

As time progresses, the assumptions in the projections can be confirmed or denied and the forecasts within it refined. As this is a long term model, forward validation is going to take some time. Nonetheless, the backwards validation that came out of the data confirmed the validity of what I believed mainly moves the markets over time, with negative real interest rates added to the three that I set out to test. I am well aware that this is not the mainstream view and would be a hard sell to investors: that the four agents of risk asset markets over the long term are sunspots, geomagnetism, demographics and negative real interest rates. However, drawing those together into a composite appears to account for all the major bulls and bears that we have seen in equities, bonds, real estate and commodities over the last century.

I am still formulating my thoughts on the findings of this last week, but here’s one to end the post: maybe the Fed isn’t as foolish as many make out. The reason the Fed intervenes at all in periods of ‘bust’ or cleansing is to prevent a depression, which would be much harsher on the population and likely bring about social conflict. By pushing down interest rates into the real negative, it can induce risk-asset rallies, which make the people feel better if their investments are rising, and housing rising. The problem is this action typically produces commodity inflation, which is bad for the people. Now there is a large block correlation between official interest rates, t-yields, money velocity, real commodities and inflation, and then recession and unemployment. The first five typically rise together and then produce the latter two. By acting on t-yields through QE, rather than just acting on official rates, might the Fed be able to keep the 5-correlated from rising, and thus also prevent the recession and unemployment that follows too? It would seem worth a try. If that worked, they would perhaps be able to maintain an environment of negative real rates with the beneficiaries stocks and housing, whilst preventing the undesirable trio of commodities inflation, recession and unemployment from rising until they end QE. Right now, that overall scenario seems to be what’s in play in the markets, doesn’t it? However! I am doubtful this actually works. Commodities staged a big rally in 2011 despite QE2. I believe they will do so again and normal correlations will apply.

Update:

One additional chart to ponder – is global temperature correlated too? It’s tempting to shift this along and see how it matches up, but I’d need a good reason to apply a lag. Any ideas folks?:

USA Financial Markets Economic Correlations

Posted on May 14, 2013May 14, 2013 Posted in Bonds, Commodities, Demographics, Indicators, Inflation, Macro, Real Estate, Solar Cycles, Stocks20 Comments

Correlations between real stocks, real commodities, real house prices and treasury yields, together with inflation, interest rates, recessions, unemployment, demographics and sunspots. A more detailed, step by step study of the correlations, using correlation coefficients, whereby +1 means a perfect lockstep relationship between two things and -1 means a perfect inverse relationship, whilst zero would mean no relationship. A reading over +0.5 is considered a strong positive correlation. Note some of the data has been scaled to share the same chart (indicated by, for example, /10 or *3). Also note for US inflation I have used an average of Shadowstats and official CPI since the 1980s, and official CPI before that. You can click on any of the charts to view larger.

Let’s start with a couple of the highest correlations:

Combining the two, 10 year treasury yields, official US interest rates and MZM money velocity all move in almost perfect lockstep. They are currently all together at record lows. If one begins to rally, we should expect all to rally – with implications for the Fed.

Now let’s look at another closely correlated pair:

Real commodity prices and inflation show a strong correlation. There is a feedback looping between the two as rising commodity prices cause price inflation but price inflation spurs money into commodities (hard assets) as an inflation hedge. There was a lot of debate around the 2008 and 2011 commodity spikes as to whether speculators were to blame. The trading of commodity futures has been around for 150 years in the US, and price spikes are more speculator-heavy because of the feedback looping. Regardless of which kicks off the process, the two occur together.

The next chart shows the relationship between US official interest rates and inflation. Most of the time there is a strong correlation, and as the Fed is the sole agent in rate-setting, we can say that the Fed move rates up and down either in response to or in anticipation of inflation, but largely in line with. However the late 1940s and the current period don’t match up as well as the rest.

The picture becomes clearer when we look at real interest rates (net of inflation), and extend further back in time:

We see three clear periods of negative real interest rates – which notably coincided with secular commodities bull markets. Inflation was higher during these periods. If you subscribe to the Shadowstats calculation of inflation (that official inflation stats have been significantly doctored over the last 3 decades) then the purple and red lines would be somewhat higher and lower respectively than shown at the current time. If you take the official CPI data as true, then annual inflation would be currently running around 1.5% which would still maintain the real rates line in the negative. I suggest true inflation is likely somewhere between the two, and thus as shown. As things stand currently, therefore, the environment for the secular commodities bull is still in tact.

Here is another correlation with inflation. US unemployment brought forward two years has a correlation over +0.5 with US inflation:

This is because recessions occur following inflation spikes:

So we see inflation spikes bringing about recessions which bring about peaks in unemployment around 2 years after the inflation spike (due to unemployment being a lagging economic indicator).

Now let’s draw together unemployment (brought forward 2 years) and inflation, and bring solar sunspot cycles into the picture:

Sunspot solar peaks correlate with inflation peaks, and unemployment brought forward 2 years. This is not a lockstep relationship – it is a correlation specifically related to the solar maxima – and the reasoning for that is the ‘excitement’ that Aleksandr Tchijevsky discovered around solar peaks in human history which is backed up by more recent research revealing bilogical changes in humans at sunspot peaks. If this ‘excitement’ translates into buying and speculation at solar peaks then we can justify spikes in inflation (with subsequent recessions and unemployment spikes).

If it is true that humans are biologically disposed to buying and speculation at solar maxima then a composite of risk assets, namely real stocks, commodities, real estate and treasury yields, should spike up at each solar maximum. Here it is:

The composite uses Schiller real house price data and real SP500 index annual values. Each solar peak is accompanied by a spike in what can be termed risk appetite. There are other spikes inbetween the maxima, but what is key here is whether solar maxima reliably bring about spikes in risk assets, given that we are likely in the year of a solar maximum in 2013.

Within the risk asset composite, there are broadly speaking two pairs:

10 year treasury yields have a distinct relationship with real commodities, whilst real equities and real house prices correlate very positively together:

Yet commodities and stocks display an inverse relationship over time of around -0.5, with the result that the two above pairs are often going separate ways. Indeed, thus far in 2013 we have seen US equities and real estate rallying whilst commodities and treasury yields have been languishing. Is it time for a reversal?

If we bring in demographics at this point, and combine stocks and real estate into a composite, this is what we see:

All three demographic measures – middle to old ratio, middle to young ratio and percentage net investors – are all pointing down for the next couple of years. The stocks and real estate composite has historic correlations with the three measures ranging from +0.54 to +0.7, so all strong positive. It would therefore seem more likely that there is another leg down for real equities and real housing into circa 2015, rather than secular bull upwards action from here. Another leg down in real terms would also help satisfy secular p/e, Q ratio and regression to trend measures for equities, which all call for further washout.

Drawing all the above together, along with my previous analysis, I suggest it remains the most likely scenario that we see an inflationary peak to coincide with the solar maximum (allowing for a reasonable time window), within which commodities and treasury yields rise and stocks and real estate decline in real terms, but due to significant inflation hold up in nominal terms. A recession and peak in unemployment should then follow the inflationary peak. As of around mid-decade demographics improve sufficiently to remove the headwinds for equities and housing, which could enable a new stocks bull, with real interest rates turning positive again.

Once again, your observations and suggestions are welcome, as I believe there is more to be teased out.

Brazilian Bovespa, Indian Sensex, Malaysian KLCI

Posted on May 13, 2013May 13, 2013 Posted in Demographics, Geomagnetism, Lunar Cycles, Solar Cycles, Stocks15 Comments

Over the next 10 years there are certain countries (largely emerging markets) with demographic tailwinds which should enable strong equity bull markets (as per my conclusions here), whilst the majority of the G10 face demographic headwinds, which may not only offer poorer returns but potentially even losses in secular bear markets, like Japan 90-00. So I want to put greater focus on the site going forward on my pick of those with tailwinds.

Out of the 24 I studied, South Africa, Nigeria, Poland, Russia, India, Turkey, Brazil, Malaysia and Indonesia had the best demographics looking foward. Out of these I have chosen Brazil, India and Malaysia to track on my site. I selected them because of relatively low corruption, sufficiently diversified economies, and healthy reserves versus debt. Brazil has an advanced tech sector, good oil supplies and one of the richest biodiversities. Equally important was having access to them on my trading platforms and having access to the data for their respective indices. I would have liked to have added one of Poland or Turkey to make even better geographic diversification, however data for both is not readily available. I plan to still invest in one or the other – most likely Turkey – but will limit the modelling on my site to Brazil, India and Malaysia.

Of course having positive demographic trends does not make for guaranteed good returns. Political and economic mismanagement, conflict, regional crises, large natural disasters and a number of black swans are all possible. But all three countries are fairly established and large economies, on the cusp of leaving emerging to becoming developed, and my plan is to spread my risk by investing in all, with the addition of Turkey or Poland, in case one stumbles.

So, I have compiled data for the last 4 years: sufficient to judge lunar and geomagnetic responsiveness, whilst balanced against time demands. Here is the geomagnetic model for the last 4 years versus Brazil, India and Malaysia stock indices:

All three demonstrate fairly good relations with the geomagnetic model. It is tentative of course, but none are so out of sync with the model as to render its use redundant, and this is largely to be expected as geomagnetism should affect sentiment globally. The geomagnetic forecast and models will be updated tomorrow as usual, so these three will now join the updates.

I then studied returns in relation to lunar phase oscillation over the last four years and here is the summary:

All three countries demonstrated higher returns within the lunar positive period (buy on the 4th day after a full moon, sell on the 4th day after a new moon) compared to the lunar negative period (buy on the 4th day after a new moon, sell on the 4th day after a full moon). The least powerful differential was found in Malaysia, yet in the Dichev and Janes study which covered a longer timespan, they found the Malaysia KLCI to be one of the most sensitive to the lunar oscillation. Dichev and Janes did not include India or Brazil in their study, but the results in the table above suggest fairly potent lunar oscillation, with India particularly impressive. I therefore (again tentatively) suggest trade-timing using lunar oscillation should work in these countries.

In conclusion, the Brazilian Bovespa, Indian Sensex and Malaysian KLCI have demographic tailwinds looking out over the next 10 years, which should add to the probability of strong secular equity bulls in these countries. They also compare more favourably to other positive-demographic countries, such as Nigeria, Russia and South Africa in terms of lower corruption, unemployment or more economic diversification. Collectively, they provide sufficient risk diversification and geographic diversification, to which I will be adding Turkey or Poland. However, due to data availability, my tracking on the solarcycles.net will be limited to Brazil, India and Malaysia, and all three demonstrate sensitivity to geomagnetism and lunar phasing, which should provide two tools with which to improve trading returns in these indices.

Sunspots, Equities, Treasuries, Commodities, Inflation, Money Velocity, Interest Rates And Demographics

Posted on May 10, 2013May 10, 2013 Posted in Bonds, Commodities, Demographics, Indicators, Inflation, Solar Cycles, Stocks42 Comments

Time to draw them all together and see the full correlations. This is US-based analysis due to data availability.

The first chart (click to view larger) reveals historic spikes in US interest rates, 10 year treasury yields, MZM money velocity and US inflation (averaging official CPI and Shadowstats data) all within a 2 year period around the solar maximum (note the 1968 solar max was November and the 1979 solar maximum December, hence the 2 year boxes following; also note some of the measures have been scaled to share the same chart).

Stepping back further in time, the 1947 solar maximum was accompanied by a 1947 inflationary peak, followed by spikes in corporate bond yields by 1948 and treasury bond yields by 1950.

If the next solar maximum is ahead in Autumn 2013, then by history we should see spikes in rates, yields, velocity and inflation within around 2 years of each other and of the solar maximum. Is it different this time because the government has acted to surpress both interest rates and bond yields? With velocity correlating closely with bond yields, is an inflationary peak not going to happen this time? I believe it will happen, as the same surpression occurred in the 1940s and yet the spikes took place.

The second chart (click to view larger) adds in real commodities using the CRB index adjusted for inflation (and again scaled). Interestingly, real commodities behave very similarly to rates, yields, inflation and velocity – all moving together into peaks (orange boxes) and troughs (red boxes), over periods lasting around 3 years.

There is a general pattern of collective peaks around each sunspot peak, and additional collective peaks before solar mimima. I don’t yet understand why we see rallies leading into solar mimina, however they have historically set up the panics and crashes that occur at the solar minimum. Nonetheless, yields, commodities, velocity and inflation all acting together is suggestive of waves of ‘human exctitement’ that brings about speculating, buying and circulating money in the economy, or the opposite.

The third chart adds the real inflation-adjusted S&P500 and US demographics trends (middle to old and middle to young ratios combined) into the picture. Here we again see evidence of ‘human excitement’ correlating with sunspot peaks as some combination of real stocks, real commodities and inflation spike up around the solar maximum.

Demographic trends appear to be important for real stocks to peak, whilst commodities appear to behave opposite to demographics.

In summary, there appears to be a 4-way correlation between equities, sunspots, demographics and inflation, whilst there appears to be a 5-way correlation between rates, yields, velocity, inflation and real commodities. My solar-theory take on it is that the same phenomenon of human excitement (driven up and down by the solar cycle) translates into trends in buying, asset speculation and circulating money, hence the united correlations, whilst demographics (which also have a solar input: solar maximum peaks (and occasionally troughs) in births) additionally feed into equities due to investment/disinvestment in equities, relating to retirement.

I’d be interested in your thoughts on any of the correlations in the charts. I suspect there is more to be teased out.

More Demographics

Posted on April 29, 2013April 29, 2013 Posted in Demographics, Macro, Solar Cycles, Stocks29 Comments

The lunar positive period begins here for the next two weeks. Is there a buying opportunity in pro-risk? The geomagnetic trend is still up. Sentiment is at pessimistic levels in a variety of commodities which would be fuel for a mean reversion rally. Sentiment remains a little frothy in equities. Economic surprises for the G10 are in a downtrend and negative. US earnings and revenue beat rates are so far unimpressive. PMIs and leading indicators for key nations have overall weakened a little in the latest readings. Here is the combined picture for pro-risk:

Source: Bloomberg

It still looks like a correction has been in place since the turn of February, but global equities as a whole have managed to carve out a sideways range rather than down. By 5-models-in-alignment the next move would be up from here into mid-year to make a cyclical top. PFS forecast that recent soft commodity prices will provide economic improvement ahead again, as cheaper input costs make for growth. If solar/secular history is to reoccur here, then commodities and treasury yields should start to make their move. I would like to see some evidence of change in trend in economic surprises and a renewed pick up in leading indicators to bolster this likelihood.

Back to demographics. Here is a reminder of real UK equities:

The biggest real gains came in the two solar cycles from 1980 to 2000. I have used the population pyramids to draw out the three demographic trends that have been shown to have a correlation with stock market performance, namely the middle/young ratio (m/r), middle/old ratio (m/o) and the proportion of net investors. We can see that the period of bumper gains in UK stocks was one in which all three measures were trending upwards – a kind of demographics ‘holy trinity’:

Looking forward there is no such golden period ahead for the UK. The caveats, as some of you pointed out, are that immigration policies can change (changing the demographic projection) and investor behaviour may change (disturbing the correlation with the local stock market). But barring any major changes, the UK stock market may struggle going forward.

So here are three countries that do have such a demographic positive unity ahead, i.e. all three measures trending up for a period.

The first is Japan. The black lines are the solar maxima. The outer green box is the overall positive period, and the inner green box when all three are trending upwards together. The window of opportunity is now.

The second is Poland. This next solar cycle, from circa 2013 to circa 2025, is one where all three measures are rising. That makes Poland a likely secular bull market in that period.

And the last for today is Russia. The positive alignment runs from around 2015 to 2025 for a decade.

Russian stocks are still very cheap, at p/e 5.6 and paying a 4% dividend. If commodities can accelerate once more, as per my prediction, then I believe Russian stocks can mean revert to some degree. The positive demographics just ahead also suggest that if the trade does not come good quickly that it should with time.

So my trade for today has been to add to (and average down a little) JPM Russia. The lunar positive period, the expectation that commodities will outperform, plus the picture just outlined.

New Chapter

Posted on April 25, 2013 Posted in Personal, Solar Cycles, Stocks87 Comments

To add a little more to the last post on demographics, solar cycles and equities, here is the long term inflation-adjusted UK FTSE chart. The ‘xx years’ red/green colouring is not my work. I have instead marked the solar maxima in black.

Source: Monevator

Green circles are secular commodities peaks, every third solar maximum, equities buy point (note the equities buy point follows the secular commodities and solar peak by 1-4 years). Yellow circles are secular stocks interim peaks, every third solar maximum. Red circles are secular stock final peaks, every third solar maximum. It’s a very neat chart from a solar cycles perspective, and it may offer more evidence of the 33-year lunisolar cycle (3 solar cycles) creating sine waves in the markets.

However, the long term Nikkei chart that I presented in the last post did not conform. The secular peaks and troughs aligned with solar maxima but the 33-year cycle was not in evidence in the same way. What is consistent across the long term charts for FTSE, Nikkei and Dow was that secular turns aligned with solar maxima, and demographics dictated whether the market was in a secular bull or bear for any specific solar cycle, between maxima.

The reason the Nikkei made a secular bull in the 1970s solar cycle whilst the Dow made a secular bear was demographics, and the same applied in reverse in the 1990s solar cycle. It appears that a secular bull or bear is dependent on the demographic trend, whilst cyclical bulls or bears within the overall trend are not. During the 1990s, the Nikkei made cyclical bulls and bears that aligned with cyclical bulls and bears in the Dow. However, the Nikkei cyclical bulls were more sideways and the bears more downwards than the Dow’s respectively. In other words, stock indices around the world largely move together in cyclical bull and bear trends, but the gradient of the moves (and p/e progression) differs to create an overall secular bull or bear.

So looking ahead to the next solar cycle, from maximum to maximum, circa 2013 to circa 2025, out of the top 10 largest economies in the world, those with demographic trends in that period to support secular bulls are USA, Japan, Brazil and India (with Mexico and Indonesia just outside the top 10 potentially offering additional support); whilst those with negative demographic trends that would argue for secular bears in this period are China, Germany, France, UK, Italy and Russia (or we might simplify to China and Europe).

Compare this to the last solar cycle which was primarily a secular stocks bull, namely the one from the 1989 solar max to the 2000 solar max. The top 10 largest economies in the world were pretty much as now, just with slight differences in order. USA, Europe, China and Brazil made secular bulls, whilst Japan, Russia and India made secular bears. So not all countries made secular bulls, but out of the most important economies in the world, the total GDP of those in secular bulls exceeded those in secular bears. The same should occur in the next solar cycle, but by a lesser margin (having made a comparative calculation). The bottom line is, there are enough of the big guns in a demographic position to generate a K-spring, and if China were to draw down on its massive currency reserves to stimulate the economy in this period then it could potentially escape a bear too. The UK and the Eurozone don’t have such a fallback, and I think it therefore likely that they will endure another secular bear 2013-2025 (circa), if the demographic correlations hold true.

In summary, I think we see an overall up-cycle for equities for the next solar cycle looking out to 2025 or so (whenever the solar maximum falls), a K-spring. But I think buy-and-hold will do best targeted at USA, Japan, Brazil and India, with Mexico and Indonesia also likely outperformers.

My new chapter is moving home to Austria next week. The big trip inspired a big move (and maybe the solar maximum inspired both?!). Certain further-afield countries on the trip were highly attractive, but with two kids the option we have long had under consideration won out. My wife is Austrian, we have a network of family and friends there already, and the kids will become truly bilingual in both the language and culture of their second nationality. We get the better climate that the trip made me crave.

So Eurozone issues are going to have more resonance from now on. We will be living in Vorarlberg, in the very West of Austria on the Swiss/German border. If you live anywhere near there, e.g. Zurich, Liechtenstein, Bodensee, and would like to meet up, please get in touch with me at john(at)solarcycles(dot)net.

Solar Cycles, Demographics and Equities

Posted on April 23, 2013April 23, 2013 Posted in Commodities, Indicators, Inflation, Macro, Real Estate, Solar Cycles, Stocks77 Comments

A long post coming up, but I found this to be outlook-changing research.

Firstly, the Japanese stock index long term chart, with solar cycle maximums marked as black lines (C for commodity secular peaks):

Underlying source: Wikipedia

A fairly simple 100 year history: a long secular bear followed by a long secular bull followed by a long secular bear that potentially just ended at the turn of 2012 into 2013. The secular turns fell very close to solar maxima.

Secondly, the US Dow stock index long term, with solar maximums again marked in black.

Underlying source: Stockcharts

Alternating secular bulls and bears. I argue the mid 20s to mid 30s episode was outsized greed and fear events that cancelled each other out on the way to the true secular peak in 1937. The secular turns fell very close to solar maxima.

Thirdly, the commodities index long term, with solar maxima marked. Again, alternating secular bulls and bears, and again secular turns falling very close to solar maxima.

Source: Nowandfutures

Fourthly, 10 year treasury yields long term chart, with every third solar maximum marked.

Underlying source: Multpl

A longer term cycling of secular bulls and bears, but again the secular turns falling close to solar maxima.

Here is real estate, but only half as much history available as a global index (hat tip Rob):

Underlying Source: P Loungani

There is a tentative cycle here, with the peaks alternating on solar maxima and solar minima. Furthermore, there is the main (circadecadal) solar cycle averaging 10.66 years, and a lesser (circahemidecadal) solar cycle averaging 5.75 years. They fit rather well with the two cycle parts noted above. But a little more history going forward is required to judge this model’s validity.

Moving on, the next chart is US unemployment versus solar cycling.

Source: Gorbanev / Ktwop

Rises in unemployment just after the solar peaks. The chart fits well with my own chart, showing recessions occurring after each solar peak (which correlates with geomagnetism peaks lagging sunspot peaks).

And also this chart, which shows inflation spikes occurring at each solar peak.

Below we see money velocity rising into solar maxima and peaking before or at the subsequent recessions:

And the next chart shows the treasury spread (10 year treasury yields minus 3 month treasury yields) widens to a peak leading into a recession:

Source: New York Fed

Let me draw all that together. At each solar maximum, we see a particular risk asset or assets making a secular peak, whether this be equities, commodities, real estate or bond yields. I argue this is sunspot-driven biological human excitement that translates as a speculative mania in the popular asset class of the time. We also see inflation and money velocity spikes at each solar maximum, which I argue is also behavioural effects in the economy of the same excitement phenomenon. After each solar maximum we see peaks in the yield spread and unemployment and recessions. Market history dictates that bull market cycles end with inflation rising, yields rising and overtightening, so this fits with the picture being revealed. Excessive and unsustainable speculation and buying in the markets leads to excessive inflation and tightening and tips the world into recession – economists would relate to that phenomenon as a regular cycle of greed and fear, boom and bust. But add in solar theory, and sunspot maxima biologically help inspire the greed/boom part, whilst geomagnetism maxima (lagging sunspot peaks) depress sentiment to assist in delivering the fear/bust part.

So by this modelling, we should be seeing a secular peak in commodities and a secular bottom in treasury yields around the current solar maximum, which should fall either Feb 2012 (past) or ahead in Fall 2013. Both commodities and treasuries have fulfilled secular bulls through to 2012/13, regardless of what happens next. The difficult part is in timing the turns when you are close in on the action, as we are as traders here in 2013. What is clear is that money velocity has not yet picked up and inflation has not peaked (making its high thus far in 2008). US jobs and yields spreads do not indicate a recession, and geomagnetism is currently benign. Jobs are in fact predicted to grow ino the Fall:

Source: PFS Group

Historically, recessions have begun an average 14 months after solar peaks, so we might expect to see leading indicators for jobs falling by now if the solar peak passed in feb 2012.

Collectively, these suggest the solar peak is more likely ahead in Fall 2013 than behind us in February 2012. I previously showed that world bond yield and money velocity charts could be bottoming out based on technical action thus far in 2012-2013, and in which case an escalation from here through the solar peak (assuming Fall 2013) would fit well with history. That would also suggest an inflation peak, and a secular commodities peak, lies ahead.

We can now cross-reference this solar picture with demographic models.

The next chart is a 100 year chart of the US Dow p/e ratio together with the trend in US demographics as measured by the middle-aged to young-aged ratio:

Source: CXOAdvisory

This chart is the same demographics trend shown against the inflation-adjusted Dow.

Source: CMG Wealth

Both the p/e and ‘real’ Dow do the same job of removing inflation from the picture. There is a clear correlation between equities and demographics.

Chart 14 shows the SP500 netted of inflation versus the same demographic trend, and I have added in the solar maxima (black lines) again.

Underlying source: Chris Puplava

Now things get interesting, because there appears to be a three-way relationship between solar maxima, demographics and equities, with peaks and troughs in all three lining up. In my Trading The Sun PDF I noted there was some research identifying solar cycling as influential in population and demographics in other species, as well as research attempting to correlate solar cycles with longevity and mortality in humans. But I have now additionally found a research paper by Walter Randall (1991) that identifies an 11-year cycle in human births, and here is the chart showing that dominant cycle in the US:

Source: W Randall

Randall also found variation in human conceptions relate to sunshine levels and geomagnetism.

I have added the solar maxima to the US births per year chart below. We see births have typically spiked up a little at the solar peaks.

Underlying Source: CalculatedRisk

And here are UK births, with solar maxima overlaid:

Some clear peaks and troughs aligning with solar maxima.

So, we have solar-inspired waves in demographics which provides a reasoning for a correlation between the two.

We can also explain the demographics correlation to the stock market. There are young borrowers/spenders, middle-aged investors (partially investing for retirement) and old-ages disinvestors. If the middle group is growing relative to the others, then we have a growing demand for the stock market. Similarly, the old and the young don’t typically buy houses, so a swelling middle-aged group relative to the others is an environment for a housing boom, and vice versa.

So there we have our three way correlation between sunspots, demographics and equities (and housing too). Because of the solar cycle related births swells, we will find certain demographic groups peaking in numbers and relative numbers around solar peaks. That provides peak demand or supply (e.g. a peak in retirees disinvesting), and together with the sun-driven biological changes in human excitement at the peaks, we have a recipe for asset invesment and speculation peaks at solar maxima.

In the US demographic chart above we can see that the steepness of the secular bull from 1980 to 2000 appears related to the steep demographic uptrend of that period. Now here is the same demographic model for Japan:

Underlying source: Chris Puplava

Again, peaks and troughs in stocks, solar and demographics line up. The steep secular bull up until 1989 again appears related to the steep demographic uptrend of that period. The reversal in demographic trend as of 1989 appears to explain why Japanese equities topped out at that solar maximum and did not keep going until the 2000 solar maximum, whereas US demographics did.

Looking forward, we can see that the US demographic model reveals a new uptrend from this solar maximum (circa 2013) to the next (estimated mid 2020s), which is supportive of a secular bull, albeit a relatively shallow one in real terms. Meanwhile, the Japanese model is already in an uptrend and is good until around 2020. Japanese stocks are currently in a sharp upswing, belatedly catching up the demographics and suggestive of a new secular bull.

We have looked at middle-young demographics, so let’s now draw in middle-old demographics. The chart below shows the picture for the US:

Source: BusinessSpectator

The US faces a demographic headwind looking out to 2020 in this regard, unlike its middle-young asset. Using the m/o ratio only we see a prediction for the p/e ratio to drop to just 2-3 by 2020. This should be offset to some degree by the improvement in the m/y ratio. Nonetheless, there is something notable here, which is that p/e ratios for country stock indices appear to largely reflect demographics. In other words, a country stock index with a cheap p/e is only a good buy if the demographic trend forecast reveals an uptrend ahead. Some of the most ‘expensive’ stock indices around the world right now by p/e valuation are Indonesia, Mexico and Philippines, all of which have very favourable demographic trends looking forward compard to most of the world. Rather than shying away from these indices because they appear overvalued compared to historical averages, it might instead pay to invest there, as they should get more ‘expensive’ going forward. This also explains why the Nikkei around 1982 maintained a p/e of around 20 whilst other stock indices were making single digit secular bottoms, because it was in the midst of a positive demographic trend looking out to 1989. Note this relationship is longer term and does not preclude shorter term p/e oscillations. P/e valuations will overshoot and undershoot the demographic trend but mean revert to it over time.

The next chart shows the middle/old trend for Japan, which is a tailwind out to 2020, like the middle/young for this country.

Source: Zerohedge

Two more demographic measures for the US. The first chart points to a bottoming out by around 2020, followed by an upswing into 2036, which is supportive for a secular bull market.

Source: HS Dent

And this chart shows an enduring trend in nominal labour force expansion in the US into mid-century, standing out from the other developed countries shown.

Source: SeekingAlpha

So combining all four demographic measures for the US, we have strong odds of a secular bull from around 2020 to 2030. Prior to 2020 it may struggle to gain traction, and need a deeper washout in p/e. Let’s not forget that we are dealing with ‘real’ Dow/SP500 and p/es, so inflation matters. A sharp rise in inflation could drive down p/es whilst the index goes sideways. A lack of inflation could mean the index falls nominally before embarking on a momentum secular bull run from 2020-2030. Either way, because this demographic uptrend from 2020-2030 is ahead, we might not expect a major washout in p/e in the US. The SP500 and Dow are amongst the more expensive indices by p/e around the world but this could reflect the positive demographics ahead.

Let’s now look at dependency ratios (proportion of retired and young to the working population) demographics globally. Trends in the developed world contrast starkly with trends in emerging countries, as shown here:

Chart 23 reveals the bad situation kicking in as of now in developed countries:

Whilst the next chart shows a particularly positive outlook for Philippines, Malaysia and India:

And the next chart provides another comparison:

Brazil looks good. The USA improves looking out to mid-century. And the worst: Japan. So let’s return to Japan, which we can also model using the dependency ratio as below:

Japan is understood to have battled with asset deflation for 2 decades. However, we see that demographics were responsible for a p/e or real downtrend in Japanese equities from 1989 to around 2000. Then the m/o and m/y demographic trends picked up again, and we can see in the chart below that the Nikkei effectively tracked sideways since then.

We might therefore take a fresh look at it and consider the Nikkei was in a downtrend for a decade (or one solar cycle) and then turned sideways as the demographic trends in m/o and m/y changed upwards. The massive spurt since October 2012 therefore looks reasonable, as a belated catch up to trend. However, not all is well for Japan. The dependency demographic trend is the worst around the world in that it is likely to become devastating by mid-century. It also has the largest debt-to-GDP ratio in the world, over 230%. Interest rates are effectively zero, and cannot be allowed to rise much because of the servicing of the debt. There is little hope of major GDP growth in the years ahead because of the dependency trends and the debt. Despite this, Japan is going hell for leather in a bid to restart the economy and ignite inflation, now doubling money supply from 29pc of GDP to 56pc of GDP by 2014. The first result of this ultra-aggressive policy has been a swift 20% drop in the yen. As Japan is an energy importer, this has immediately produced a big uplift in energy price inflation. If I am correct in predicting a pick up in money velocity here, and also correct in a commodities/inflation peak ahead relating to the solar maximum, then I suggest there is the potential for Japanese inflation to quickly become problematic. As the government cannot combat with rate rises because of the debt servicing, the risk then would be hyperinflation. I know hyperinflation is overhyped, but I just wonder whether it is worth an outside bet here.

Hyperinflation has historically been initiated by either rapid increases in either money supply or money velocity, then the other one has joined in to complete the feedback looping. Japan is obviously at full acceleration on the former. Under hyperinflation, stock markets have historically gone wild in nominal terms, but the cost of living has gone even wilder. In Zimbabwe, the stock market went up 47,000% in a year, but the cost of living rose even faster. So a Japan hyperinflation trade could be achieved either by a spreadbet on the nominal index or a long Japan fund whilst short the yen. This is how I see it: Japanese stocks should rise on the belated catch up to m/o and m/y demographic trends, regardless of the Japanese government’s policy actions, but those actions have the potential to produce wild inflation which would then take Japanese stocks in nominal terms much higher.

Back to demographics. The headwinds facing many developed countries in dependency trends are problematic. Here is real estate modelled against dependency for six developed nations:

Source: Business Insider

If we refer back to the global house index chart further up the page, that cyclical model projected no real take-off in global house prices until 2019. These dependency charts suggest headwinds that further cement the likelihood that housing won’t offer a great return for the next few years in the developed world, applying equally to most other European countries, New Zealand and Canada. China and Korea also faces the same dependency trend issues starting around now.

The countries with the best demographic trends looking forward include India, Brazil, Mexico, Indonesia and Philippines. South Asia, ASEAN and South America look particularly fruitful regions going forward, and Sub-Saharan Africa too. If this is a global transition into a K-Spring, then investments in equities and real estate (K-Spring’s champions) might do best in these countries and areas. The USA should perform well too, from 2020 to 2030, but the period before 2020 is less certain.

Brazil and Mexico have good prospects until around 2025 but India and Philippines extend until 2040. Contrast this with China, which is just hitting trend reversal point into a negative trend, and we can see the likelihood of China stepping back from being the world’s leading growth engine, and in doing so maybe provide a backdrop to a secular commodities bear (as it is the world’s largest commodity consumer).

Source: DarwinsMoney

Dependency ratio trends and projections for select nations:

Source: John Eyers

Maybe the investment star of the next two decades will be India, which could feasibly rise for multiple solar cycles in a powerful secular bull that resembles the Nikkei into 1989 or the Nasdaq into 2000. With its 1.2 billion inhabitants it has the potential to mobilise something significant. But India, just like Brazil or Philippines or Mexico or Indonesia is an emerging country, with emerging risks. Let’s say the demographic outlook provides potential for great returns in these countries, but the structure to achieve it is less reliable than in the developed nations. The developed nations conversely have the track record but now the demographic headwinds.

To draw back together demographic trends, solar cycling and equities, we might expect that the positive demographic trends that have been in place in some of these emerging countries to have provided a secular bull over the last solar cycle, much like the Nikkei powered its way through 4 solar cycles in a secular bull set against a positive demographic backdrop. This is indeed what we see:

Source: Yahoo Finance

Over the last solar cycle, from 2000 until now, all the four country indices shown have made secular bull markets, not secular bears, in line with the demographic trends. They are all also amongst the most ‘expensive’ countries in the current p/e spectrum in the world, again in line with the demographic trend. I suggest that the ‘expensiveness’ of a country’s p/e rather has to be measured in terms of its relativity to its demographic trends. I also suggest that due to the demographic trends in all four remaining positive for another solar cycle, they should go on to continue their secular bull over the next solar cycle. I suggest that may be at a steeper rate, because it will be against the backdrop of a global K-spring, an up-cycle. As a reference point, see how the Nikkei secular bull (first chart in the article) that lasted for 4 solar cycles was at its steepest in the solar cycles of 1947-1958 and 1980-1989, both of which were global upcycles, a K-spring and a K-Autumn.

To conclude, these are the opportunities that I see (for myself of course… I am not an advisor).

1. Long Japan, due to m/y and m/o demographic uptrends until 2020, and an outside bet for hyperinflation. Averaging into any falls. We can see Japan’s little window of positivity here, in the upturn in the green line between 2005 and 2020:

2. Long USA, but more compelling as of 2020. At risk of a p/e washout before then. These two charts show head and tail winds respectively for the US market from now until 2020:

Source: Informed Broker

3. Long a basket of emerging markets with the best demographic outlooks: choosing from India, Philippines, Indonesia, Brazil, Mexico and potentially sub-Saharan Africa. Averaging into any falls.

Here is the very long term look at dependency ratios to end:

Source: Appliedmythology

If these projections hold true, then the four lowest listed regions should offer the best opportunities over the next solar cycle. The following solar cycle the USA stands to fare well (where the blue line flattens). And later his century Russia and Eastern Europe may get their shot at being investment gold.

Additional chart: prospects for specific sub-Saharan African countries: positive demographic trends for the next solar cycle for Algeria, Ghana, Nigeria, Cameroon, Ivory Coast and South Africa:

S O L A R C Y C L E S

Category: Solar Cycles