When things are going well, we tend to forget the lessons
from history and our success-habits get sidestepped in the name of leisure and
comfort. Hard work is no longer the norm and society turns back to socialist principles and big government taking all the decisions. “This time it’s different”, we quite often hear; “Our modern society
will never allow the same mistakes of the past to happen again”. Well, thanks to the recent
crises, today there are again people, who remind us that this time it is never different and our linear, self-imposed view
of the world is most likely wrong. We have to discount our modern knowledge and
stick to what has been working over the ages.
So what can the history of the market tell us about where we
are going? What are the lessons from history that we can draw from 100 years of
Dow Jones Industrial data? Where are we today and where are we going? In order
to give a likely answer to this, we will have to shatter some myths.
The first one concerns the structure of time by itself. For
instance, in “The Fourth Turning” Strauss & Howe identify three different
views on the reality of our time-space continuum, i.e. chaotic, cyclic and
linear. Though cyclical time has been at the core of all ancient civilisations and
calendars, today, while still using the same natural time-keeping mechanisms,
we disregard this view and consider time to be linear.
“The great achievement
of linear time has been to endow mankind with a purposeful confidence in its
own self-improvement. A linear society defines explicit moral goals (justice,
equality) or material goals (comfort, abundance) and then sets out deliberately
to attain them. When those goals are reached, people feel triumphant; when they
aren’t, new tactics are applied. Either
way, the journey never repeats. Each act is original, granting a sense of
authentic creativity unknown to those who re-enact the past. […] When we deem
our social destiny entirely self-directed and our personal lives self-made, we lose any sense of participating in a
collective myth larger than ourselves.” – Strauss & Howe – TheFourth Turning
This social meme is one of the reasons why today technical
analysis is quite often disregarded as a pseudoscience and the lessons of
history are not given its proper attention both in our education, as in our
economic life in general. And it still boggles my mind how blindly hypotheses
about the markets are stated without any historic confirmation. So what has
history to tell us about the stock market?
First of all, the stock market runs in cycles of exponential
growth, followed by long periods of inactivity and depression. For instance,
having a look at a chart of the Dow Jones Industrial Average from 1920 to 1953
teaches us several key lessons:
a)
Prices had entered a logarithmic growth phase
before the start of the Great Depression and rose from a value of 60 to 380;
b)
Prices collapsed much quicker all the way back
to 40 in the span of three years, effectively losing 90% of its value (similar
to other markets, as discussed in SOFIX = PORSCHE?);
c)
Prices needed another 20+ years to regain the
territory of the old highs;
d)
Momentum was slowly accelerating and the
logarithmic growth became again visible.
That was it! We were out of the woods, optimism reigned supreme,
it was time for the hippies to run their course and life was great again!
Technological advancements were going well, the future looked better than ever
and the stock market was climbing to new highs every day. Well, it wasn’t long
until we were again in for a harsh surprise in 1966: A 20 year sideways market
followed. This market must have been devastating for the psychology of
investors, as prices were cut in half, doubled again, only to be cut in half
again during the course of this timespan. As can be seen, the myth of buy & hold "for the long run" strategies works only during specific time periods and must be synchronized with the economic cycle. Market timing is the most important factor for successful investing.
But, as all good things come to an end, so did the sideways
market and we continued our exponential growth, rallying from a value of 800 in
1980 into the “Dot Com Bubble” in 2000, with prices reaching 12,000 on the
DJIA.
So where are we today?
If you listen to the world’s politicians and the mainstream
media, we are in the Great Recovery. But can anyone really testify to this with
a straight face? Does anyone really believe this? And more importantly, does
anyone have the confidence to invest into long-term prosperity? Chances are you
see where I am going. We are in the midst of a long period of sideways
movements and are only halfway through. This thesis can be expanded on the back
of several theories.
For one, basic market behaviour tells us, that a corrective
move must take more time than an upward impulse. This by itself gives us a
minimum end date of this sideways move not until 2020 and it could even last
until 2030. Looking at the core of the fundamental problems today, this is a
reasonable hypotheses, as it will take a long time to unwind the mountain of
debt in the world today, while simultaneously trying to preserve the social
fabric and international peace. Those in power will do everything to stay in
power and it will take some significant effort to clean the system from our old
way of thinking. However, once this is done, it is quite likely that we will
continue our journey of progress and exciting times will be due!
This same hypotheses can also be expected by a Kondratieff
cycle, which indicates that we are still in a Winter period, as demonstrated by the
following wheel:
We are also aware of the popular doom & gloom scenario,
connected with the ancient Mayan Calendar in 2012. According to some authors,
this is a time when the world ends; however, the Maya’s way of thinking was
rather that an ending is the start of a new cycle and of something
miraculous. Ex-NASA scientist Maurice Chatelain in his book “Our Ancestors Came From Outer Space” devotes a reasonable amount of time to calculate the Ninevah
constant and its relationship to the Mayan calendar. In fact, under his calculations
this calendar was started 49,611 BC and ends in 2020, in line with our market
analysis. What exactly this will bring to us is still unclear, however David Wilcock argues that our species will enter a higher level of consciousness.
As we all know, all of our human timekeeping has been done
through the astronomical wheel. Using this knowledge for an understanding of
market cycles, we can explore the activity of “Market master” Uranus to give us
matching historical sections, for cyclic modelling until 2016:
All in all, we have unified several different ideas which
all prove to us that will have the pleasure of living through exciting times,
though we can only hope that they will not escalate in international conflicts.
For a roadmap of the events that should unravel, let us again quote the two
historians Strauss & Howe from their book “The Fourth Turning” (1997):
“The next Fourth
Turning is due to begin shortly after the new millennium, midway through the
Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood.
Remnants of the old social order will disintegrate. Political and economic
trust will implode. Real hardship will beset the land, with severe distress
that could involve questions of class, race, nation and empire. The very
survival of the nation will feel at stake. Sometime before the year 2025,
America will pass through a great gate in history, commensurate with the
American Revolution, Civil War, and twin emergencies of the Great Depression
and World War II.” – Strauss & Howe - The Fourth Turning
In future articles I will show the current market structure and
explain why the period around the 15th of May and especially the start of Q3 2012
are critical for a three year change in market sentiment – stay tuned!
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