“So how was it down there? Was it insane,” a friend asked your editor on the phone this morning.
“You mean here in Australia? Are you talking about the election?”
“No you moron. I’m talking about the Deep End.”
“Your Markets and Money yesterday. You went off the deep end. Did someone slap you upside the head and get your mind right? What was that all about?”
We probably could have saved a lot of trouble by just writing: people tend to overestimate what they think they know and underestimate what they don’t know. It’s best to be modest, work hard, and recognise that sometimes what you get in life is neither what you expect nor what you deserve.
But let’s talk about markets and cycles first today before we get on the crazy train. And since yesterday was all about words (even though words can change worlds), let’s look at some pictures. First up is the proof that no matter how much you hate reading about it, what happens in the American market is usually what determines what happens in the Aussie market.
Click here to enlarge
The chart above shows that despite different economies, different key industries, and different names, the Dow and the All Ordinaries have pretty much moved in lock step with one another. So what does it mean that on Thursday the Dow closed below 10,000?
Well, according to Dawes (a sample of whose work we’re sending out this weekend) it means the Aussie indexes have entered the “sell zone.” You can see from the chart that the July lows have yet to be taken out. But that’s the level our friend Phil Anderson said to watch for earlier this week. If the markets don’t take out the July lows, Phil reckons it would be “exceedingly bullish.”
We realise we pretty much butchered the explanation for what a Kondratieff cycle (or wave) is. So today we resort to a simpler explanation: a picture. In Phil’s presentation the other night he concluded that rather than being in the middle of the Kondratieff “long winter” we’re still on the upswing in the cycle. If true, this would be bullish for commodities. But let’s look at the wave before we get to the metals and grains.
Full disclosure: your editor knows very little about this very exclusive domain of cycle theory. And this particular chart illustrating the waves a bit prejudiced in that it suggests we are closer to the top of the cycle than the bottom. But when you’re talking long cycles, being “near” the top means that a powerful trend could have several years to run.
That, in fact, is what Phil suggested the other night about commodity prices. It would mean that gold, oil, and some of the grains – all for their own reasons – would make higher highs in the coming years. But do other charts bear that prediction out?
Doing a little research of our own this morning, you can see that commodities have yet to make a new high in U.S. dollar terms. But in terms of the British Pound and the Euro, commodities have in fact eclipsed their 2008 levels. Should you be bullish, or terrified?
The alluring way to look the charts above is that the huge sovereign debt problems in Europe, the UK, and America are again making tangible assets popular. In 2008, we recall a lot of people saying – ourselves included – that real assets would be a better hedge against inflation and/or a market crash than stock and bonds.
The trouble is, there turned out to be just as much leverage in the commodities markets in 2008 as there was in stocks. When the credit crunch hit, commodities crashed hard. And commodity stocks crashed even harder. So now, are commodities again making a high as equity markets turn down?
That’s the $64 trillion question.
The big deleveraging and asset deflation of 2008 was sparked by the failure of Lehman Brothers. That terrified plenty of people. Since then, the debt problem has migrated to the balance sheets of sovereign governments. That suggests the next failure – if one is required to kick off a big deflation – would have to be a sovereign one and not a corporate one.
But we reckon that this time the trigger to a big move in the markets will by psychological and not mechanical. That is, investors in the Western world are already adapting to a world with lower corporate earnings and less private and household debt. It’s the people running monetary and fiscal policy – central bankers and elected officials – that haven’t adapted yet. And you know what happens to species incapable of adapting to new circumstances.
In the meantime, it’s wise to remember, as the great Blue Oyster Cult tells us, that the seasons don’t fear the reaper. Cycles aren’t anything to fear. It’s just something we have to learn to live (and die) with.
And economically speaking, we may just be in the middle of a cycle where wealth and power are migrating from the West to the East. It’s an argument we began making in 2003. If you’re in the West, the bad news is that it’s probably winter time for asset markets. But the good news is that there’s a place where honest-to-goodness green shoots may come again. We’ll visit that place next week. Until then!
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