My targets are derived from what occurred under similar circumstances in history. Therefore they are an average and actuals can stray some way from averages, so caution is warranted. Nonetheless, there are compelling reasons for why they may represent the best ‘guide’ going forward.
The equities mania into 2014/5 rivals the biggest manias of all time in terms of valuation, leverage, allocations and sentiment. Not only that but those biggest manias of all time share a similar topping pattern that may be playing out again.
Think of similar waves of crowd psychology playing out each time. Post ‘second chance’, declines were swift and deep:
Dow 1929: 3 weeks 44% declines
Dow 1937: 8 weeks 38% declines
Dow 1968: 8 weeks 18% declines
Dow 1987: 2 weeks 34% declines
Nikkei 1989: 6 weeks 27% declines
Nasdaq 2000: 3 weeks 35% declines
SP500 2011: 2 weeks 18% declines
They average out at 30% declines over 4.5 weeks.
Continuing with history as our guide, we ought then to expect a subsequent slower partial retrace of those falls lasting around 4 months. So hard falls averaging 30% over several weeks followed by a 50%+ retrace of those falls averaging several months, before we tip conclusively into a fully fledged bear market, like this:
There is a seasonality to stock market peaks and troughs in a year, due to the seasonality of geomagnetism.
Based on this, we might look to around March/April 2016 as a bottom for the post second chance waterfall decline – if that is where we are in crowd psychology – followed by a slower retrace wave into mid-year. Remember, this is just a guide based on history and seasonality.
Biotech has been the mania within the mania, or poster boy. History suggests the full mania should be retraced.
Now the longer term. Cross referencing valuations with solar cycles and demographics we get this prediction:
Underlying source: DShort
Whilst gold should do this:
Making the 2011-2015 gold bear a cyclical bear within a secular gold bull 2000-2025 (or thereabouts).
The Dow-Gold ratio fits in like this:
And the Dow, something along these lines:
The waves and price points should not be taken too literally. The key point is that by demographics the developed world is set to follow Japan’s 1990s/2000s model: a long drawn out secular bear market. By solar cycles we should see a speculative mania peak in gold at the next solar maximum (circa 2025) together with a major stocks bottom.
However, this is all assuming the game remains ‘fair’ and central banks do not drastically distort market mechanisms, because it is a sure thing that they will respond with even more unorthodox and desperate tactics should an approximation of these forecasts play out.
Prior to the next solar max comes the next solar minimum, which historically has been the scene of bottoms, panics or crises. So circa 2020 we get a major low in equities before the deeper one of around 2025. In short, these may represent the ebbing and flowing of cyclical bears and bulls within an overall long term secular bear.
Underlying Source: Sergey Tarasov
By demographics, the future looks like this:
This suggests the global economy and stocks/housing markets will continue to struggle beyond 2025 and all the way out to mid-century. On such a long timescale, developments could feasibly make such predictions redundant.
Hope for a more positive outcome could be seeded in (1) major paradigm shifts from technological evolution (2) a shift to pro-active immigration policies in the major nations to alter demographics or (3) countries with positive demographics such as India and Brazil become much more dominant in the global economy to offset the others.
However, the kind of deflationary depression or long period of negligible growth predicted by demographics that may first come to pass historically gave rise to unrest and war. Additionally the world is forecast to be moving into another grand solar minimum, which also historically resulted in low/negative growth and war. Furthermore, the end game for debt is monetisation, which is where we now are. Recession, deflation and runaway debt is a poisonous mix.
Source: Michael Roscoe
In short, something much more devasting may be seeded in these themes and a long period of difficulty for the world could indeed be unfolding.
Photo source: National Geographic