Macro And Markets

Posted on June 21, 2013June 21, 2013 Posted in Bonds, Commodities, Currencies, Demographics, Geomagnetism, Indicators, Inflation, Lunar Cycles, Macro, Real Estate, Solar Cycles, Stocks22 Comments

The Fed announced tapering of QE as of 2014, subject to developments of course. It will first need to taper out its QE to zero before rates can rise from ZIRP. Rates will then likely be raised slowly as in the 1950s due to high government debt. Together this means easy monetary conditions will persist until US demographics bottom out 2014-2019. I suggest that is broadly necessary to counter the demographic downtrend and could mean that we see continued low growth with more asset bubbles appearing and then popping.

What would change this course of action? If inflation became problematic and yields rose too far too fast. Currently inflation is benign as global growth remains fairly soft. History reveals that a low growth low inflation low rates environment is good for equities. It took the last 12 months for investors to really gain confidence in economic growth persisting (if soft) and with a gradual bottoming in government bond yields:

Source: Bloomberg

At those record low yields, investors were making a guaranteed real loss, yet money flows were still attracted into government bonds – with the assistance of QE in USA, UK and Japan – due to fear of greater losses in other asset classes. Recently that has changed, and it is because low economic growth has persisted long enough with some of the main worries (e.g. Euro debt, sovereign default) deflated. That does not preclude new crises emerging, but there has been a gradual process of repair since 2008, and I suspect we have seen the bottom in bond yields.

Because we are currently in demographic downtrends for the USA, China and Europe, I suggest it makes sense that only low growth is the current norm and that easy monetary conditions are likely to be maintained until a collective demographic improvement as of around 2020. Gains in real estate and equities should be capped by the demographic downtrends, but supported by the easy money conditions. Commodities have historically performed well during demographic downtrends, but could struggle to make large gains if soft growth holds down demand. Money should continue to flow out of government bonds, with any of those three classes the recipient, unless real yields rise too high for bonds to become attractive again. Yields cannot be allowed to rise too high because of high debt servicing and negative economic impacts. Combined, that makes for a fine balancing act between all four asset classes.

Japan is one economic giant that is in a demographic uptrend and I believe the recent surge in equities there is a belated catch up to that trend.

I believe Japan was ripe to bottom around 2002, along with demographics, but was then pulled back down again with the global crisis in 2007/8. The H1 2013 Nikkei rally was stopped at the long term declining resistance, but I think this time it will burst through it successfully, in due course:

The Japanese government has declared it will do whatever it takes to re-inflate the economy and assets including buying equities. The question is how long it will take to break through. If US equities are beginning a topping process then it would seem unlikely that Japanese equities break out at this point. If emerging markets are heading into a crisis, as Russel Napier believes, then a global sell-off would likely take place again.

There are 3 possibilities here for US equities. One is that they have run up in an eiffel tower parabolic formation and will collapse now down the other side. Two is that they have begun a topping process whereby we should see an overall sideways volatile range over several months whilst negative divergences appear. Three is that they are consolidating before further gains.

Because of the sharp run up and the demographic headwinds, I have my doubts about option three. However, cyclical stocks bulls usually end with commodities and inflation rising to become problematic and helping tip the economy into recession. Inflation rises, yields rise and the higher input costs and higher rates squeeze the economy. Bonds top first, then equities, then commodities. At this point we appear to have seen a top in bonds, but do not yet see commodities or inflation rising. Therefore we don’t see the usual historic pressures to pull down equities. Low growth, low inflation, low rates: good for equities.

For option 1, a harsh collapse, some analysts are referring to a 1987 overlay, predicting a crash. I can’t rule it out, I can just refer to that current environment again – it differs significantly from 1987 where yields and rates were much higher. We know that flash crashes can happen, where automated selling begets automated selling, but I suspect we’d need a swift change of status quo to bring it about. Something like the possible emerging markets crisis.

For option 2, a topping process, we would have time. There is no rush to short until we need more technical evidence of a topping range and negative divergences in breadth and leading indicators begin to appear.

In the short term, I believe we could be reaching a point this weekend whereby equities rally up again. Passing through the full moon together with a possible bottoming out in geomagnetic disturbance – the Singapore STI shown here mapping very closely to the model:

Plus, low Nymo and bullish percent / call put readings in US equities suggest a bounce imminently.

If equities do bounce then crude oil has a chance of holding its breakout, which it is currently backtesting. If crude cannot, and falls back into the triangle, then the textbook action to follow would be a breakdown out of the bottom of the triangle, which would likely spell prolonged doom for the commodities complex.

So will commodities come again? I believe they will. Nothing goes up or down in a straight line. Mean reversions eventually occur, if not something more juicy. What could give them momentum? A top in equities or concerns about the economy functioning without QE could spur money into precious metals as safety again, with a short squeeze possible on record short interest. Geopolitical developments can affect oil prices and in turn wider commodities and protests/wars are common at solar maxima. Global warming and global wierding remain risks to agricultural commodities, with May having come in at the 3rd hottest on record globally and Jan-May the 8th hottest on record. Global temperatures have historically peaked around solar maxima.

The latest on solar peak prediction is that NASA believe a summer peak in 2013 is likely, NOAA a Nov/Dec 2013 peak, and SIDC running with two options as shown:

Source: SIDC

Averaging, we could look to a late 2013 smoothed maximum. Historically, secular asset peaks have been made close to solar maxima, along with inflation peaks. We should allow around 12 months for commodities to rise up and make a ‘secular’ peak and an associated inflationary peak if it is to happen along with this solar maximum, so it should be the theme from here into 2014 if it is to occur. With bonds having likely topped and equities having rallied hard, we are also ripe for outperformance to emerge in commodities. However, economic data out of China, increasing inventories, depressed sentiment in the class, and strength in the USD are some reasons why this is not occurring. Until this collective picture changes in some way, I have to remain open to the possibility that commodities will underperform through the solar maximum, and this could mean a different asset class is bid up to a speculative peak if the solar maximum is still ahead.

From my recent Dow-gold ratio analysis, I suggested two likely bottoms in the ratio: 2014 or 2025 (approx). Either a swift run up to a speculative peak in gold into next year, or a mid-point currently on the way to a bigger gold peak a decade away at the next solar max. From the same analysis, demographics in the main nations no longer offer clear support for either equities or gold going forward, which I suggest means we are likely to see less wild swings between the two, and alternating shorter bulls. So I remain happy to average down in gold and other commodities, particularly with my new cash injection, and await either a mean reversion rally or a possible momentum move into commodities once a trigger emerges. I also would add to long Japan equities on any further drops. I am tempted by the weakness in positive-demographic Brazil and India to build more of a long positive there, but each are currently experiencing their own economic or social problems which could yet worsen so I am going to hold off. I would look to add short equities if a topping process becomes clearer with negative divergences. I remain short treasuries.

I believe the greatest risk currently to my portfolio is some kind of sharp global sell-off, a collapse in US equities infecting all pro-risk. However, I really can’t call a winner from the three options I outlined above for US equities at the moment, so await further flags and developments. If pushed, I still place greatest likelihood by a historically normal unfolding of events, namely that bonds have topped and we will see equities top as commodities outperform, with commodities topping last, helping tip the world into recession and end the equities bull; that the solar maximum will inspire speculative peak and that peak will be in commodities (or precious metals at least) due to the collective demographic downtrends aside Japan. However, I am nowadays ultimately of the view that there is complex interaction between demographics, solar cycles, fundamentals, government intervention and more, that make it a difficult calculation. I believe anomalies can occur if several of these factors conspire together to produce one, which is why there is no holy grail. However, I expect clearer ‘probabilities’ to emerge from here, one step and development at a time.

Developments

Posted on June 18, 2013June 18, 2013 Posted in Bonds, Commodities, Geomagnetism, Indicators, Stocks33 Comments

Oil broke out – upwards – though it is not yet sufficiently clear of the triangle to call it finally resolved:

Large speculators have been betting big on such a bullish outcome:

Source: Sentimentrader

Small speculators, usually ‘wrong’, are betting big on further treasury bond declines:

Source: Sentimentrader

Which means we could see a near term pullback in yields. And that brings us to tomorow’s FOMC. Having sewn seeds of doubt that QE may see some tapering as early as in tomorrow’s announcement, I suspect whatever they say could be a catalyst for big moves in the markets. If treasuries are due a bounce, then gold is too:

Source: ShortSideOfLong

The SP500 has consolidated its pullback and is at a point whereby it could make a further leg down, in an ABC correction, or make a fresh attempt at a new high. By geomagnetism, the former is more likely:

I remain of the view that a topping process has begun in the SP500 and that it should take several months to play out in a volatile range. A new marginal high on negative divergences would be normal, so if an ABC correction did occur we should still then see a return to the highs. Outperformance should transfer to commodities, whilst this takes place, and maybe the breakout in oil is the first key development in this.

Leading indicators have generally softened but remain positive:

Source: Conference Board

The Bradley turn for equities is 22 June and gold seasonals take off as of mid-June.

Dow-Gold Ratio

Posted on June 12, 2013 Posted in Commodities, Demographics, Indicators, Solar Cycles, Stocks27 Comments

The opposing trends in the Dow and gold over the last 2 years have doubled the Dow-gold ratio from its 2011 low to around 11 today:

Source: Stockcharts

Another delve into demographics reveals that the US Middle / Young ratio topped and bottomed historically very closely with the Dow-gold ratio (click charts to view larger):

The demographic data points in the chart are 5 -yearly but a more detailed view of the M/Y ratio for the USA reveals a flattening from 2014-2019 and a true bottom and pick up from 2019. That would suggest a bottom for the Dow-gold ratio in that 5 year window, but with a bias towards 2019. However, ‘secular’ bull markets have typically historically peaked around solar maxima, which could bring the bias back towards 2014 (if the solar peak is this year).

Drawing in the other key demographic measures of Middle-Old ratio and Net Investors, the correlation is reinforced:

However, the projected window for a Dow-gold ratio bottom widens to 2014-2022 (again viewing more detailed data than my 5-yearly above). Furthermore, from here forwards we see much flatter and also divergent demographics which may potentially spell a new era, in which more balance between gold and equities is maintained, with less wild swings between the two.

The UK FTSE-gold ratio history looks like this:

Source: Goldmadesimplenews

The UK demographics look like this:

The FTSE-gold top around 1965 matches the demographics top. The FTSE-gold bottom 1975-1980 matches the demographics bottom. The FTSE-gold ratio topped in 2000 around 5 years before the demographics topped, and I would suggest the US influenced this. The bottom for UK demographics is from around 2020-2025.

Adding China, Japan and Germany to the USA and UK into a weighted model (by GDP and stock market cap) also pushes the demographic bottom out to around 2025, but again divergent and flatter trends put a question mark over that point and thereafter:

Drawing all together, I would suggest the likely window for the Dow-gold ratio to bottom is 2014-2025. As ‘secular’ bulls historically have ended close to solar peaks, then I would refine that and suggest the likely bottom for the Dow-gold ratio is either 2014 OR 2025 (based on solar peak projections of this year and around 2025). If the middle-young ratio is the more dominant demographic ratio for stocks-commodities then 2014 is more likely, both by US and weighted-composite demographics. However, gold would need to take off soon (and/or the Dow collapse) to enable that. Either way, going forward we might expect less long and less wild ‘secular’ swings in the battle between gold and stocks, based on flattening and divergent demographics ahead. We might rather find alternating cyclical bulls and bears between the two.

Topping Sequence

Posted on June 10, 2013 Posted in Bonds, Commodities, Geomagnetism, Macro, Stocks37 Comments

In Martin Pring’s work on the business cycle he proposes that bonds top first, then stocks, then commodities. Here is an illustration (click to view better):

I am of the conviction that bonds began to top last year, with momentum having taken hold the last 6 weeks. Here are US, UK, German and Japanese 10 year government bond yields:

Source: Bloomberg

Equities have made a steep rally over the last 12 months which echoes previous cyclical bull terminal runs:

Source: MSCI

The trajectory and the duration suggest stocks should be due to top soon, however it is usual for a topping process to unfold over several months:

Such a process usually unfolds with negative divergence warning signs. We have one current divergence in the geomagnetic model:

Meanwhile, bond yields should continue to rise and commodities should attract momentum. ECRI leading indicators have historically given rise to commodity price action with a lag, and the LEI strength over the last 12 months should now turn commodities upwards:

Source: M Pring

We see crude oil once again making an attempt to break upwards out of its long term coiling or triangle, with the support of an inverted head and shoulders pattern:

And mid-June is a historic take-off point for gold:

Source: Zealllc

By Russell Napier’s work, cyclical bulls in stocks historically end with yields rising and inflation troublesome. I see this as a fit with Pring’s work and my own, namely that we see equities rising, then yields and velocity, commodities become a beneficiary until inflation and yields start to tip leading indicators over and money exits equities, with commodities late cyclicals often rising into a peak once the business cycle has started to turn down. This, collectively, is the historic norm, and I believe we will see a repeat here, but it’s a question of timings.

I believe we are at the start of a multi-month topping process in equities, that commodities are from here going to be the momentum class, and that money should continue to exit bonds. However, we do not yet see rising inflation and we only have 6 weeks momentum out of bonds, which suggests the whole process should take some time yet.

A look at the equally weighted commodities index reveals that commodities prices are still elevated, and a momentum rally of 25% (red line) off a typical W-base would take us close again to record highs:

Source: MRCI

That would ensure the missing inflation, but I suggest we may need one or more triggers to held generate such a move into commodities. I can only guess at such trigggers. One could be if crude oil can break out this time – as crude is an input in agricultural commodities and an important inflation driver, it could inspire price rises in both softs and gold. Another is the June 19 FOMC output, either sticking to or scaling back QE. The latter should create an initial sell-off but then I believe would translate into a faster flow out of treasuries and into commodities.

On a personal note, since moving to Austria we have been living with the in-laws. We will finally move into our new place 1 July, and we are renting there with no plans to buy in the foreseeable future. We just sold our house in the UK at the end of last week which means I now have a large lump sum in the bank account at my speculative disposal, because it is no longer stuck in the housing market. I am going to take my time to work with it and work out how best to deploy it, but it clearly alters the status quo. It means I am flush with cash, but as a trader I see this as a golden opportunity to turn it in to something much bigger. In the short term it means I can and will want to be more aggressive with opportunities, in building up my exposure, so I wanted to share it with you to set the context when announcing future trades.

Complex Interaction Part 2

Posted on June 6, 2013 Posted in Demographics, Solar Cycles, Stocks25 Comments

I decided to add Brazil, France and India into the demographic composites (currently USA, China, Japan, UK and Germany) to expand the major global giants from the core 5 to 8 (based on GDP / stock market / population). I gave all three a weighting of 1, the same as UK and Germany (China and Japan 2, USA 4). This is the result:

From 1980 to 2000 investors had it good, with all three measures in strong rising trends. The current window, marked by the red box, is the opposite, with all 3 trending down, but as we are working on 5-yearly intervals in the data, it would be useful to be more precise, so here are the forecast turning points in the biggest economy, the US. In 2014 US net investors bottoms out its downtrend and turns into an uptrend; in 2019 the US M/Y ratio moves into a new uptrend; and in 2022 the US M/O ratio switches from down to up. That means there is a gradual turn around in US demographics over a period of years and that the current bull market since 2009 is counter trend. The key is whether the current strong bull ought to roll over into a bear market, and I believe it should, as all 3 demographic measures for the US are still currently declining.

In the 1970s most of the 8 giants were in declining demographic trends and in the 1980s and 1990s most in rising demographic trends. That made for a fairly clear broad global bear market followed by a fairly clear broad equities bull market. Going forward this is not the case as we have divergence amongst these leading countries and less compelling trends. As global stock markets continue to largely move together I think it is still more likely that we will have a ‘global’ bull or bear with some countries dragged along counter internal demographic trends. I feel fairly sure that the demographics of the US, still the most dominant economy and leading stock market, will be very important to the overall trend. To this end we can be glad that the USA is ending down trends in all three measures between 2014 and 2022, but what happens over the next few years whilst it bottoms out these negative trends is less sure.

Japan’s net investor and MY demographics have been rising since around 2002, with the former due to top out by around 2015 and the latter by 2020. As Japan’s stock market has been suppressed until November last year I believe there is a good chance of a strong belated bull market here and certainly for the next couple of years. The threat to this is if the US market tumbles into a bear in line with its demographics, pulling down the world. Nonetheless I expect Japan to outperform so choose the Nikkei to load in on the long side.

Meanwhile, France suffers the worst demographics trends forward out of the 8 giants. Here we see the three demographic measures of France versus Brazil and India.

As of now all three demographic measures for France are trending down with no let up until around 2035-2040. Additionally the CAC is on a p/e of 17 currently, one of the more expensive markets, with no demographic justification. I therefore see France as a good market to short going forward. However, right now there is evidence of a pan-Eurozone improvement ahead this year, with France’s PMIs turning up along with other Euro nations. I am therefore not convinced right now is the time to open short. However, I will be looking for the opportunity ahead.

The best period ahead for a global bull market would appear to be from around 2022, at which point the USA and China become stronger again, with Brazil and India in support. Clearly that is some way off. The next solar peak is likely to be around 2025, and should produce a secular peak in ‘something’. The work of the current solar peak is also likely not yet done, if the smoothed peak is still ahead. With all that in mind, I suggest these are the possibilities: (1) commodities go parabolic 2013-2014 and make their secular peak, taking stocks into a bear before stocks become the desired class again, led by Japan, Brazil, India (2) commodities only make an intermittent peak around this solar peak and make the secular peak around 2025’s solar peak, making for a 2 solar cycle commodities bull (supported by global wierding, global population growth) with equities in an extended global bear, (3) Japan equities go crazy and makes a truly rapid bull market to exhaustion closely following this solar peak (belated take-off, ferocious climb, premature exhaustion versus demographics) or (4) Japan makes a 13 year bull market and peaks around the next solar peak, extending its run to a few years after demographics have turned, i.e. a greed peak again.

Complex Interaction

Posted on June 5, 2013 Posted in Demographics, Solar Cycles, Stocks17 Comments

I am now of the mind that there is a complex interaction between demographics and solar cycles bringing about what is more commonly known as ‘secular’ bull and bear markets in equities. We need to understand the demographic trends of the main countries (those of major GDP, stock market capitalisation and population in the world), whether these are broadly trending together or divergent, and when the trends change. We also need to know when solar peaks fall, as demographic trends peaks that fall close to solar peaks are likely to be brought to an excitement maximum around the solar peak. We also know that solar cycles influence birth rates and thus demographics, adding to the complex interaction.

We know that stocks markets around the world largely move together, so I believe we need to pay particular attention to the demographic trends of the ‘giants’ as it is unlikely we can muster a global stocks bull if the collective trends in the giants are negative. To this end I have amalgamated USA, China, Japan, Germany and the UK into composites of middle-to-young, middle-to-old and net investor ratios, and projected them forward. I selected these five countries based on their GDP and stock market capitalisation dominance since 1950 to now. I then applied GDP/marketcap-appropriate weightings in creating demographic averages, with Germany and UK weighted 1 each, China and Japan 2 and USA 4. This is the result:

We see a clear collective downtrend in the demographic trio of measures from around 1965 to 1980. I believe that is the reason why we saw a broad global equities bear market for that period. We saw a clear collective uptrend in the trio of measures from around 1980 to 2005. I believe therefore there was a long equities bull in this period across most of the world. Within that long global bull market Japanese stocks topped in 1989 (solar peak) and US stocks topped in 2000 (solar peak), but the collective weighted demographic trend did not really change until around 2005, hence the MSCI world index registering a peak in 2007 rather than in 2000:

Source: MSCI

Because collective demographic trends then turned down from circa 2005 and are not projected to bottom for a few years yet, I suggest the current global rally in stocks is likely on borrowed time, and that there is the possibility of a global bear market in play from 2007 through to either around 2020 or 2025. There is a window of demographic respite from around 2025 to 2030, but then the three measures are united negative again from around 2030 to 2035.

I have broken down the three demographic measures below.

Net Investors is collectively in a downtrend from here onwards. However, Japan is good right now, and several of the countries enjoy an up move from around 2025 to 2030.

The collective Middle To Young ratio is more healthy going forward, but rather flat overall. Japan again shines now.

The Middle To Old ratio is overall rather dire for the next decade, but there is a collective improvement from around 2030.

In summary, the current global stocks rally ought to come to an end as it is counter demographic trends, i.e. it is unlikely to be a new ‘secular’ bull market in progress. However, within that Japan has the demographic trends to justify such as bull market for itself, and its take-off in November 2012 was belated by demographics. Therefore I expect Japan can carve out more gains, but that the other major nations are more likely to tip over into a fresh equities bear in due course. As global markets tend to move together I don’t expect Japan can go its own separate way, but rather that it will outperform the others as markets move up and correct less than the others as markets move down.

Returning to the first chart above, there is the possibility of an overall global bear market in stocks lasting until circa 2025, which is likely to be the next solar peak (or thereabouts). If that were to occur then commodities could potentially only be at an intermittent peak currently, heading for a ‘secular’ peak around 2025’s solar peak. Food for thought.

Roundup

Posted on June 4, 2013 Posted in Commodities, Geomagnetism, Indicators, Macro, Solar Cycles, Stocks10 Comments

NASA now estimates the solar peak to be ‘summer 2013’, which is line with Jan’s latest. As forecasts are still being amended by both SIDC and NASA, we will just have to see how sunspots develop, but the key for me remains whether February 2012’s peak-to-date can be beaten.

My suggested mirror from history is 1946-7, into the solar peak, treasury yields reverse course from ultra-low. Here is the Bradley model for 1946 courtesy of WX Guru.

Source: Llewellyn Publications

A similar model to this year’s Bradley, with a peak in June.

Gann Global maintain the closest mirror is the 1950s and draw out this map for commodities (using the BLS commodities index):

Source: Consensus / Gann Global

I still foresee commodities rising and outperforming as stocks lose momentum and the USD weakens. Leading indicators suggest emerging markets and Europe should outperform going forward, which should bolster commodities and the Euro.

Here we see PMIs for various European countries turning up:

Source: Moneymovesmarkets

I have added to long sugar today. It has been languishing on oversold and overbearish readings for some time now. That does not mean a turnaround has to happen. But it has pulled back sufficiently for me to want to add.

Source: Indexmundi

I have also added to long Natural Gas today. It has pulled back from having reached over 4.5 dollars to just under 4. It is still at historic cheapness and relative pricing to oil. Plus it is in a better position in terms of inventories compared to crude.

Source: IEA

And lastly today I have opened a long position in the Poland WIG stock index. Here is is modelled against the latest geomagnetism update.

Geomagnetism has changed significantly over the last month, from benign to troublesome. I believe this has been a factor in stocks pulling back. As can be seen, the geomagnetism forecast for the next 3 weeks is not good, but I wanted to open a position in the WIG and it is just a starter position. With a current reasonable p/e of 12 and a likely improvement ahead in Europe, I decided to start that position today.

Poland WIG, Geomagnetism and US Dollar Index

Posted on May 28, 2013 Posted in Currencies, Demographics, Geomagnetism, Indicators, Stocks52 Comments

I modelled the Poland WIG in the same way as the Malaysian, Indian and Brazilian stock indices.

The lunar edge over the last 4 years for the Polish stock index looks like this, compared to the others:

A decent sensitivity.

The Polish WIG now features on the short and medium term model pages, and here it is on the latter timescale:

A pretty good tracking of the model.

The geomagnetic model has lately made a notable switch into a downtrend, shown against the SP500 on the shorter term timescale here:

There is now a notable divergence which could spell a trend change in stocks or a topping process beginning imminently. However, rising into the solar maximum has previously encouraged speculation and into the 2000 peak the market pulled away from the geomagnetic model, as the speculation overruled. So two competing things to consider, but in short the low-geomagnetism support for the market has been pulled away.

Lastly, I checked the US dollar index history to see if previous bull markets in the dollar corresponded to positive demographic trend periods. Here is the USD history since 1967:

Source: Bespoke

The US enjoyed a positive demographic trend period from around 1980 to 2000, so both the main bull markets that can be seen fell within this. However, so did the USD bear market from around 1985 to 1995, so I don’t see a useable relationship.

I am away for a few days, back Monday. See you then.

Secular = Demographic

Posted on May 27, 2013May 27, 2013 Posted in Commodities, Demographics, Indicators, Inflation, Macro, Solar Cycles, Stocks22 Comments

Secular bull or bear markets in both equities and real estate are in essence demographic bull or bear markets, with equities and real estate correlating fairly well with each other over time, and in turn with demographics. In other words, slow moving trends in demographics make for the longer term ‘secular’ bull or bear markets in stocks and housing, within which there are cyclical bulls and bears. To enable this relationship in any particular country, certain fundamental conditions are required: sufficient levels of sanitation and education, social discipline and peace, a sufficiently diversified economy and good infrastructure, i.e. what we would generally find in developed countries but may be lacking in positive-demographic but raw frontier nations.

The first chart shows US demographics, using middle-old, middle-young and net investor ratios, modelled against a composite of real stock prices and real house prices. The composite topped along with demographics circa 1965, then bottomed together around 1980, then topped again around 2000.

All three demographic measures swung fairly closely over that 50 year period, which perhaps explains why the composite tracked so well. We might note that the composite peak in 2000 was fairly extreme, suggesting an episode of excess greed that subsequently required wash-out, and also that the secondary peak circa 2005-7 was counter new demographic trends, and thus liable to the steep crash that then followed in the composite.

Looking forward, net investors stops falling as of around this year, the middle-young ratio bottoms circa 2015 and the middle-old ratio after 2020. This suggests there is scope for new ‘secular’ bull markets in stocks and housing, but it is unclear when they might kick off. Note though that the composite has again made a counter rally to the demographics from 2009 to 2013, which suggests another leg down in real terms would be appropriate before any new secular bull. Note also that we don’t see strong uptrends or all three measures united again, like from 1980-2000, which suggests future secular bulls in the USA may not be as powerful.

Next up is the same chart for Japan, but not stretching back as far in time. Again the equities and real estate composite peaked with the demographic measures in the late 80s, and again with a fairly excessive greed peak and subsequent harsh wash out.

The composite has belatedly taken off again only in the last 6 months, with net investors and middle-young having turned positive again around 2002, continuing until around 2020. There has thus been a 10 year delay in Japanese stocks and housing in turning back up with demographics. However, this period coincides with the wash-out negative-demographic period in the USA, the largest economy in the world, which suggests Japanese risk asset markets were infected by situation in the USA.

The third chart shows the same modelling for the UK. The demographics for the UK topped out in the late 1960s and the stocks/housing composite made a top around then but went on to eek out a slight higher peak circa 1972. So again we saw belated adjustment as this was then rectified to a combined low in the late 1970s. Demographics and the composite then made a strong secular bull until the 2000s.

The peak in the composite for the UK was around 2007, in line with the demographic peak. For the UK this peak was higher than in 2000 and justified by the demographics. The US peak circa 2005-7 was a lower peak than in 2000 and fittingly its demographics were already on the decline. The later demographic peak in the UK was reflected in other major nations and thus possibly ‘infected’ the USA in pulling the US composite up into a decent 2005-7 peak despite the falling demographics. Looking forward, the UK faces demographic downtrends until around 2020-2025 which suggests a secular bear could be in play until then. However, we need to look at the demographic positions of the other major economies of the world so see the overall picture as evidence of cross-infection and lags are at work. To that end, here are the three demographic measures as used above for China, Germany, France and India.

China made an excess-greed peak in equities and real estate circa 2007, tying in with the topping of demographic trends. It now faces difficulties until circa 2020.

Germany faces similar headwinds until around 2020, or potentially even around 2035.

France is in a united downtrend until circa 2035.

India is in an ongoing uptrend in two measures, and the middle-old ratio is a little deceptive as India is starting from a very small older population which is growing. For that reason there is a downtrend in the ratio, but it is still fairly benign compared to the more developed countries above.

The chart for Brazil looks very similar to India, ongoing positive, and if we round out the top 10 major economies of the world, Italy is similar to the other European countries with unfavourable demographic trends, whilst Russia has a positive period from now until circa 2025. The caveat for Russia would be that is may not score as highly on the criteria for the relationship to fulfill, for example the stock market quite closely tracks the prices of energy commodities due to the economy not being as diversified.

So with a view of the next 10 years, the largest economy in the world, the US, has fairly flat demographics and is unclear. The second economy, China, is at risk of a secular bear until circa 2020 but then improves. The third economy, Japan, is in a positive period until around 2020, and is in fact playing catch up to demographics. The fourth largest economy, Germany, is negative until around 2020 but has better potential after that. The UK, France and Italy are part of an unfavourably-demographed Europe, whilst Brazil and India are ripe for long bull markets.

In short, from now until around 2020 Japan, India and Brazil are in positions to rally but China and most of Europe are pulling down, with the USA unclear. From circa 2020 to 2025, Germany, USA and China are in better positions for secular bulls, whilst Japan’s window closes. On balance, that suggests a global secular bull with many participants has better odds in the second part of the decade, so the question is what is going to happen between now and then, i.e. select secular bulls in those countries with favourable demographics only, or ‘infection’ from the larger economies to the others.

Most of the major economies of the world, listed above, enjoyed positive demographic trends from circa 1980 until circa 2000 or 2005. That made it easy for the world to embrace a collective strong secular bull on the whole. Looking forward, there is a large pool of countries with strong demographics for the next 20 years, but they are largely ’emerging’ countries, including Brazil, India, Turkey and Malaysia. That suggests there will be a global shift in performance over time away from the old developed world to these countries and others. However, currently, USA, China, Japan and Germany make up almost half the global GDP, which means their fortunes affect the world. It will take a long time for the emerging countries to alter this in a significant way.

This is my suggestion. If US stocks and real estate (and in turn global stocks and real estate) can make another cyclical bear leg down to bring the composite down to the demographics, and put them at better relative cheapness to other assets, by circa 2015, then there will be better odds of a global secular bull beginning 2015 and strengthening from around 2020-2025.

Now I need to bring in solar cycles at this point, because something is going on with them, which further shapes the picture.

Here is the UK real equities chart versus sunspot cycles. The three major peaks in equities coincided with every third solar peaks. Inbetween interim peaks were made, also at 3-cycle intervals. And commodities also made secular peaks every third solar cycle, which were the buy points for equities.

We know the performance in equities largely correlates with demographic trends, and from research in my recent posts, we know that there is a solar cycle influence on demographics. However, is that ‘every third’ solar cycle rhythm just an accident, or is it a ‘natural’ sine wave? The long term real Nikkei chart reveals links with solar peaks but no such repeating rhythm. However, commodities have made a secular bull once again over the last decade, in alignment with the pattern.

We know that over time, real commodities have gone nowhere, and have been no long term investment. They just enjoy bursts of interest.

We know that they do not correlate with demographics, but rather tend to make secular peaks and troughs that are fairly opposite to equities. So do they just come into favour when stocks and real estate are out of favour? There must be more to it than that. Real negative interest rates unite the periods in which commodities soared, however, commodities are closely correlated with inflation, so their rises cause the negative real interest rates. In the 1970s interest rates were high, but real interest rates were still negative due to very high inflation.

The period into 1917 was similar to 1980: high yields rates and velocity, high commodities and inflation. 1947 similar to today: low yields rates and velocity, high commodities and inflation. Right now we have only mild inflation, but there have been bursts of problematic inflation, particularly in 2008 and 2011. This chart shows those sets of relationships in the US, and the UK experienced very similar.

So the four commodities secular bull periods are only all united by two things: high commodities and high inflation (with the inflation being notably higher than rates, to create negative real rates). As commodities are the key driver of inflation, we are left with one uniting feature: escalating commodity prices. So what causes these periods of escalating commodity prices?

I believe it’s a multi-part answer. Supply lags is one known. It can take 10 years for a new mine or energy field to come into production. That can create a decade-long demand and supply inbalance, as periods of lower commodities demand can close down projects and therefore create problems of inelastic supply further along in time. Commodities come into favour when their relative pricing to other assets is historically low, and this occurs at the end of secular bull runs in stocks / housing (as evidenced in dow-gold or real estate-gold ratios). Demand for commodities can also increase as more countries develop and urbanise,which can occur from economic boom periods. In today’s environment of ultra low rates and yields – similar to 1947 – investors look beyond cash and bonds for returns, putting commodities in favour. Conversely in the 1970s and 1910s, investors looked to hard assets (commodities) as hedges against supply-side inflation. Common to all, stocks and housing were in down trends due to demographic trend changes so commodities then became the go-to investment.

Following a decade long commodities bull market we have reached the point today whereby commodities are relatively historically expensive to stocks and real estate, peaking in this regard so far in 2011, and whereby new supply has been catching up and coming on stream in the last few years. However, real interest rates and yields remain negative and so maintain commodities interest, whilst demographics for the major nations largely remain in downtrends which should keep equities and real estate under pressure to the benefit of commodities. It’s therefore a balanced picture, but recall that commodities have been a terrible long term investment, so if the balance tipped further towards stocks and real estate then we should expect an end to the commodities bull.

With all that in mind, this is my view on what is most likely to happen. Commodities ought to make one last bull rally, in keeping with solar cycle history: excitement and inflation into and around the peak. Both equities and commodities have a history of making major peaks near to the solar maximums, regardless of cyclical patterns. That should tip the world into a recession and equities into a bear, to take off again from yet lower relative value levels circa 2015 once demographics are bottoming out more in the US. For stocks and real estate to be already in secular bull trends at this point – say, from 2011 – is rather counter the collective demographics. This fundamental downward pressure on stocks and real estate (in certain key countries) ought to reassert itself shortly and money flows ought to move into commodities (for likely one last time) under conditions of negative real interest rates.

If there is another cyclical bear in the US, then as per the cyclical bears of 2001 and 2008, the other major country stock indices are likely to participate – i.e. all moving as one. However it ought to be shallower in those countries with more favourable demographics.

S O L A R C Y C L E S

Category: Stocks