Point BreakA Little Perspective on What Lies Ahead

A Technical Analysis Approach

http://www.investlogic.ch

•Among many present and major issues we can extract some major trends :

•Debt saturation

•Social unrest

•Geo-political tensions

•Resource Shortage

•Emerging markets

•With two main consequences •Fiat failure and currency war

•Statism

•Several identified cycles point toward an end of the present cycle

Troubled TimesExecutive Summary

Second half 2012 is a key period but we found evidences that a major breakdown can be seen end of 2015 with several cycles pointing simultaneously toward an end of their current trend.

•From financial turmoil to social unrest

2007 Financial crisis (commercial banks)2011 Sovereign crisis (States - Europe)2014 Monetary crisis New International Monetary System(currency war)

Consequences. Currencies: Repositioning necessary . Gold: Stay on course . Stock Exchanges: Last reminder before chaos . Banks: Major Danger . Gold and Silver are still in a long-term Bull trend.

•Shift from the Occident to the Orient

Euroland these last few years has gone through a crisis of an intensity and depth unequalled since the beginning of the European construction project after the Second World War. From the end of this summer all the other world powers, led by the United States, will have to face an identical process. It’s at this cost, and only at this cost, that they will subsequently, in a few years, be able to start a slow recovery.

Lately the very unusual underperformance of lower quality, higher beta credit points to that the rally has been used to position in higher quality names (and remain liquid). Just another glimpse of the matrix under the surface.

Troubled TimesExecutive Summary

Troubled Times

Troubled Times

For a little perspective on what lies ahead, let's consider the structural problems that remain even if we were fortunate enough to throw off the yoke of the Fed, the corporate cartels, and the entire system of Elitist dominance.

1. We would still have mountains of debt that will never be paid and enormous losses to write off.An economy that has lived on the creation of debt (phantom assets) cannot be transformed by the mere writedown of debt: the entire structure that created and enforced that debt must be torn down, and everyone who skimmed off a profit or livelihood from that reliance on the machinery of debt will experience a decline in their standard of living.

2. We would still have a global economy facing the constraints of higher-cost energy and commodities.You can "grow" phantom assets to near-infinity, but that near-infinite sum of money will still distill down to a claim on limited resources and income streams. As I have often noted , energy may well be abundant at a certain price; what will be scarce is the cash/income to pay for that "abundant" energy. Abundance of a commodity that has a high cost-basis due to real-world constraints does not lead to lower prices

3. As Status Quo policies fail, replacement policies will become less predictable in their implementation and unintended consequences. There is very little history that informs the confluence of crises we now face; the more replacement policies diverge from the mainstream, the more unpredictable their comsequences become. As the saying has it, the road to Heck is paved with good intentions, and policy choices that seem common-sense in crisis could issue disastrous results. And attempts will be made by the powerful to conserve their own wealth and power at the expense of the general citizenry or politically weaker rivals.

Troubled Times

Kondratieff Cycle

Kondratieff Wave CycleThe 9/11 Decade

•Sovereign debt collapse and banking crises are not new. The past few centuries are rife with examples of sovereign debt and banking collapses. It has touched most every country in the world at one time and hit every continent.

•Europe saw numerous external debt defaults from 1300 to 1800. Spain and France did it several times and even England defaulted a few times. In 1345 Edward III overburdened with debts to finance his wars defaulted bringing down the Florentine banks that were the most powerful and largest banks at the time. Banking crises and collapses were not uncommon during the period.

•There is very little difference with today’s potential default of Greece or Italy and the resulting banking crisis that is unfolding, and earlier periods of sovereign debt defaults and the resulting banking crisis. Spain defaulted 14 times from 1300 through to 1900. There is no record of Spain defaulting since that time. France defaulted nine times in the same period. Could the current crisis bring about the first Spanish debt default since 1882?

•At the heart of all of these periods of collapse and crisis are long-term cycles. Long-term cycles are not the easiest to explain. Many doubt their existence. Yet there is evidence that periods of sovereign debt collapses and banking collapses occur with some regularity.

•The longest cycles that are followed are the 72-year and 90-year cycles of sovereign and banking collapses and economic depression. The long-term Kondratieff cycle now appears to be falling into a similar pattern. Evidence of the Kondratieff cycle used to suggest a cycle of 55 to 60 years. Since 1929 the Kondratieff cycles of spring, summer, autumn and winter appear to be unfolding in periods of roughly 18 years. Four times 18 equals 72 years.

•History seems to suggest that the long-term down cycles are in full force and the worst may be yet to come.

Kondratieff Cycle

Good episode about the Kondratieff Cycle. I'd like to point out that K-Winter doesn't necessarily involve consumer-price deflation. Instead, it involves *asset* deflation (relative to consumer prices), and a cleansing and purging of the bad elements from the economy. In my opinion,...Congress, the President, and the Fed will doggedly do everything to prevent deflation and destroy the dollar via hyperinflationary currency collapse. When the dollar is worthless, the next K-Spring will begin.

Kondratieff Spring has a manufacturing/production boom, K-Summer features a construction boom, K-Autumn has a consumption boom, and K-Winter is the time for cleansing and purging the bad elements from the economy. Stocks perform well during K-Spring and K-Autumn. Gold and/or commodities and real estate do well during K-Summer. Bonds, and/or cash, and/or gold, and/or commodities do well during K-Winter...depending on the circumstances. Gold is the best thing to be in right now.

Also,...China (and possibly also Brazil and Russia) are currently in Kondratieff Summer, and not K-Winter. This will enable them to eventually "decouple" from the debt-ridden Western economies later this decade.

http://youtu.be/WYZbsbFbgr8

Kondratieff Wave CycleThe 9/11 Decade

Grand Supercycle (Elliott)

The Elliott Wave Theory is based on a certain cyclic laws in human behavior psychology. According to Elliott, the market price behavior can be clearly estimated and shown in the chart as waves (wave is here an explicit price move).

The longest cycle, according to Elliott, is called Grand Supercycle that is compose of 8 Supercycle waves. The latter ones are each composed of 8 Cycles, etc. For example, the graphic shows 3 basic cycles. It can easily be seen that impulse waves and the subsequent corrective waves are proportional. The stronger impulse is, the stronger correction is, and vice versa.

I believe we will continue in this volatile sideways period for a longer time than most people would anticipate. This is also supported by a look at the P/E ratios, which still haven’t fallen to levels from which prior decade long bull markets kicked off.

Further sign of the maturity of the bull market is the glaring non-confirmation we are getting from the small caps (Russell 2000 bottom chart) when compared to the large caps (S&P 500). As you can see, the S&P made new highs in 2012, whereas the Russel did not.

If and when the "d" wave is completed then we should get a 3 wave Primary Degree crash, ending close to the bottom of the bear market channel lines.

Grand Supercycle (Elliott)

DJIA 1980-12.08.21

Grand Supercycle (Elliott)

Death Cross (Albert Edwards SG)

A death cross is the shape made on a chart when a market’s long-term moving average the 200-month average breaks above its short-term moving average 50-month MA. It is seen as a sign of a looming bear market, or a cue to sell.

The S&P 500 index is on the verge of hitting an 'ultimate' death cross according to Societe Generale. Strategist Albert Edwards says the S&P last came close to an ultimate death cross back in 1978. A death cross occurs when the 50 month moving average falls below the 200 month average.

Regression to Trend

Into The Matrix

The chart presented below provides nominal rates of return for the S&P 500 index (including full reinvestment of dividends) for each full calendar year period from the beginning of 1900 through the end of 2011

You can find explanations and larger image on our site http://claude-investlogic.blogspot.ch/2012/07/into-matrix-matrix-is-colorfully.html

1930-1942

1970-1977

2001-2012

Conclusion : a Serious Cyclical Bear Market 

•Period of low or no returns is not likely to be over soon. P/E has a long way to decline before the end of this secular bear. We can get to the lower P/E ratios that typify the end of a secular bear market and the beginning of a secular bull market by either going sideways (with lots of volatility) for a long time, while earnings continue to rise, or we can see a serious collapse of the price of stocks in a short cyclical bear market.

•Either way, the next few years or perhaps the entire next decade will be frustrating for investors, as the market continues its rollercoaster ride to nowhere. And given the correlation between US markets and world markets, the coming period is likely to be frustrating in more places than just the US.

•But savvy investors with diversified and well-developed portfolios will not only ride out the storm, they are likely to achieve investment success. There will be winning stocks and strategies in even the worst bear markets. An emphasis on absolute returns and alternative investment portfolios will be rewarded. Hang on and prepare for interesting times

•Value shows multiple long wave cycles and approaching intersection of powerful strength trends•Not only credit expansion-contraction cycle (bust of various bubbles)•Generation cycle 80 years which correspond to a massive crisis tremendous social and political transformation for the US (4 generations) and emerging of a different nation

•wave count : 1861 / 1941 >> 2021 or sometime earlier •Fisher research back to the 13th century (prices), (about 100 years of price inflation and wage stagnation) such as :food, energy, demography

•End in that cycle very stable globally cf price of bread in London (gold standard)

Four Long-Wave CyclesCycles are not laws of Nature, of course; they are only records of previous periods of growth/excess/depletion/collapse, not predictions per se. Nonetheless their repetition reflects the systemic dynamic of growth, crisis and collapse, and so the study of cycles is instructive even though we stipulate they are not predictive.

1. The credit expansion/renunciation cycle. a.k.a. the Kondratieff cycle. Credit expands when credit is costly and invested in productive assets. Credit reaches excess when it is cheap and it’s dumped into malinvestments, and as collateral vanishes then credit is renunciated/written off.

This is inexact, but obviously the postwar cycle of expansion has ended and is now rolling over into the collapse/renunciation stage.

2. The generational cycle of four generations/80 years described in the seminal book The Fourth Turning. American history uncannily tracks an 80-year cycle of crises and profound transformation: 1860 (Civil War), 1940 (world war and global Empire) and next up to bat, 2020, the implosion of the debt-based Savior State and the financialized economy.

3. The 100-year cycle of inflation-deflation described in the masterful book The Great Wave: Price Revolutions and the Rhythm of History. The price of bread remained almost constant in Britain throughout the 19th century. In contrast, the 20th century has been characterized by inflation–the U.S. dollar has lost approximately 96% of its value since the early 20th century. Another characteristic of this cycle is wage stagnation: people earn less even as costs of essentials rise, a dynamic that inevitably leads to political crisis and upheaval.

4. Peak oil, which does not mean the world runs out of oil, it simply means oil production no longer rises to meet demand and eventually declines even as new fields are brought online.

Oil peak (and cheap energy) is the last cycle (cost a lot more and so impact drastically the economy).see http://www.nytimes.com/2012/04/11/business/energy-environment/energy-boom-in-us-upends-expectations.html?_r=1

The bigger issue though will be food.  Largely as a result of the severe drought in the U.S., corn and wheat prices have jumped 50% in the past two months.  This will affect consumption one way or the other. 

Financialization

Follows the typical sinusoidal curve

What is predictable is the way systems tend to follow an S-curve of rapid growth with then tops out in excess, stagnates in depletion and then devolves or implodes. We can see all sorts of things topping out and entering depletion/collapse: debt, financialization, the Savior State, Chinese auto sales, oil production, and so on.

Economic Confidence Model

Martin Armstrong, author of the Economic Confidence Model based on an 8.6 year business cycle theory. Armstrong was the founder of Princeton Economics International, Ltd.,

Economic Confidence Model links to the increase of debts with top in 2015 (as well as for Gold)

http://armstrongeconomics.com/models/the-end-of-time/

Topping process

•The burning question remains, do we see a collapse right now or do we

have to wait until the ECM turns again 2015.75? So far, the timing appears to be on schedule for 2015.75 as the next financial big crisis.

•Austerity program has been quite insane for the problem of cutting public spending and raising taxes to service mountains of debt will ensure high unemployment and nothing but rising social unrest.

•This is a lethal combination, but it also tends to support the view that the real crisis may not hit until the next peak in the Economic Confidence Model due in 2015.75 going into 2017.

Economic Confidence Model

Coppock Chart : Rate of Change

Coppock curve, A long-term price momentum indicator, try to identify long cycle with different periods - the 10-month weighted moving average of the sum of the 14-month and 11-month rates of change in an index -

Clearly show we are not in a bull market

Stock Market S&P weekly chart

Broke on the upside the wedge at the end 2011

Can see some kind of double top in very low volumes

Moving along the Bollinger superior bandwith

TheDow/Gold Monthly ChartThe Most Important Chart in the World

The key thing with the Dow/Gold chart is that it perfectly mimics the various social moods and massive secular trends that exist in the economy over very long periods of time. It is just as effective in periods of deflation as in inflation in telling you the true story.

DOW/Gold 1920-Present • The chart shows us the secular swings in the economy.  • We see how stocks ran up in real terms into the 1929 crash and then plunged

versus gold.  • We see how they ran up in the next great post- WW2 period into 1968 when they

once again plunged versus gold. • We can see the great secular bull market in stocks from around 1982 to the

bubble peak in 2000. 

• In both of the prior two periods (one deflationary and one inflationary) the DOW/GOLD ratio got down to about 1:1. That would imply another roughly 75% drop in stocks to gold and I expect that this next leg is beginning now.

• The Dow/Gold ratio has just had a massive 44% rally in past year or so, but it looks as if it may have formed a serious top. 

• It is no coincidence that it happened in an election year. 

• My sense is this chart is currently in reversal mode and I think the ratio could hit between 4-5 from the current 7.8 over the next 12-18 months.

QE or not QE ?

Lots will depend also of the FED next move QE or not QE ?... we believe we ‘ll have one before the elections

‘In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!’ – PIMCO’s El-Erian

QE or not QE ? •A growing possibility of war in Iran and the worsening economies in

Europe and the U.S. have caused central banks to prepare investors for another round of money printing. The time has now arrived for the Fed and ECB to either follow through on their threats or to sit back and watch as equity shares plummet and bond yields in Europe soar.

•If central banks launch the assault on their currencies, I expect gold and energy prices to increase sharply. In that case precious metal and energy shares should fare the best.

•In the unlikely event that the month of September ends without any action on the part of the ECB and Fed, I would expect a significant retracement in all global markets and especially in commodity prices.

Central Banks Are Intervaining Simultaneously

We can expect a new round of easing as money is cheap for a long timeUltimately : All the debt remains painfully real; it is only the collateral that is illusory.

Spreading Insolvency Around Does Not Create Solvency

QE or not QE ? •At some point, one of two things will happen. Either it will get lent out, or it will be withdrawn from circulation

by the same central banks that injected it. Those two scenarios create completely different investment environments.

•By allowing the money to flood into the economy (i.e. lending it out), banks would create another boom and bust cycle. Just like the 1920s to the Great Depression, the 1990s to the tech bubble and the 2000s to the global financial crisis. We’d just have another one. Unless the economy can’t be revived with a dose of money adrenalin and the new funds flow towards consumer prices instead. That would mean inflation instead of growth.

•Under the second scenario, central banks implement what they call an exit strategy to reduce the amount of money in the economy. But that would mean reversing all those benefits that have been accruing to their mates in government. They would no longer be supporting government bond markets if they tried to bring the money supply down to a reasonable level. In fact, they would be doing the opposite.

•And with government debt to GDP near or above 100% in so many places around the world, that would mean disaster. The interest bill on funding government would soar and consume tax revenue.

• It’s not likely that central bankers will want to be blamed for the bankruptcy of a major government. So they’ll go back to inflating the money supply as soon as things look bad.

•That’s why you hear so much about inflation from us. It seems to be the endgame of so many ways the story of the world economy could play out. What happens in the meantime is a mystery.

QE and Dollar

Short term the dollar is holding well. Long term we are skeptical with a new QE3

‘Everyone knows that it is useless trying to fight the Fed. And so everyone tries to front run them instead. All of a sudden everyone is doing the same thing and this is where the instability lies.’

Deflation, USD and the CPIThe U.S. dollar in a long-term uptrend ?

Here is Chartist Friend's commentary on the charts:

After the bombshell disclosure by JPM there is no doubt in my mind that the financial system is in the process of relentlessly deflating. If they by themselves have the tens of trillions of derivative bets that they are alleged to have, then God help us if that bank blows up. As I have pointed out previously, they topped the DJIA on an occult date (May Day) at an occult number (13,330.30) so I also have no doubt that the coming deflation is as much a part of the plan as the reflation off the SPX 666 bottom was.The CPI purchasing power of the consumer dollar chart is simply an inverse CPI chart, though FRED presents them separately to make sure we are aware that the value of the dollar has been destroyed since the Fed took control of the currency. Since they each have their own chart it's best to view them together. In this way it becomes crystal clear that a rising dollar and deflation go hand in hand, and also that we are entering uncharted economic territory.

US Dollar The Least Worse Fiat Currency

•Short term the dollar is holding well, as the Euro does not bring any alternative. It remains the ultimate safe haven currency for the time being. •On the longer term we are very skeptical.•Important for carry trade and the issue of Govt Bonds

WeeklyAug 22, 2012

USD : Short Term Uptrend

•Countries around the globe are trying to keep their currency value low including the United States.

• if the dollar index rallies to the 86 – 88 level then I would expect the SP500 to be trading back down at the 1000 level. If this takes place, the Fed will likely issue QE3 to jam the dollar back down and boost equities.

•The flip side of the coin is that the dollar rolls over here and gets pulled down. This will boost stock prices in favor for the president’s election. After that the dollar would likely rally which in turn would put a major top in the stock market, kick starting a bear market.

•The big question… Do you short the market in anticipation of rising dollar and falling stock prices? OR do you buck the trend and stick with the theory of a lower dollar value and presidential cycle?

• In August the US Dollar Index made a false break above resistance at 83.50 before retracing to test support at 81.50. Respect of support and the rising trendline would confirm the primary up-trend is intact.

Thank you for your attention

"The idea is there, locked inside. All you have to do is to remove the excess stone." Michelangelo. http://www.investlogic.ch