When I’m looking at each economy cycle, no matter if it’s a big one, or small one every time I hear – this time is different. I’ve never understood people trying to convince themselves that market is bottoming or topping and the same time we will hit minus infinity or plus infinity with the record amount of theory why this time is different, why yield curve crash this time won’t cause any problems and why we still sitting in 2015 phase in current 2019 narration.
I am going to tell you something I’ve observed and this is my point of view, no matter if you agree with that or not, but it works and that’s the point.
Have you ever heard people trying to say – “This time is different gravity does not matter”? or “Einstein theory has been changed”?
In physics and mathematics we have laws created hundreds and thousands years ago and nobody even bother to say this time is different, while in the economy people trying to push free interpretation to the same mathematical rules discovered hundreds years ago saying it’s different, despite the fact that economy cycle is a sine wave, money have got value, F/X rates another value and credit wants to go towards infinity while rates need to go to minus infinity (aka disinflation) and the golden rule is supply and demand equation which decides about the switch of the rates/credit function (just multiplies it by -1) – so rates will go to infinity and credit to minus infinity and disinflation starts to be seen as inflation.
Imagine you’re going to a doctor, you are 65 years old, you smoke and you drink a lot, so you are in a typical late cycle and statistically you are almost dead and the doctor tells you – I need to check your heart and you agree despite the fact you feel really really good.
The doctor put all the “equipment” on your body and started the machine. You had no idea what was written on those charts, but the same time you see a table with some charts and heart disease list and chart patterns. You ignore it because charts are messy and more or less looking same, but the doctor probably was fully aware how to read those charts. After couple of minutes the doctor stood up and said :
“Mr. Smith – you have a beginning of heart attack, probably it is too late, because you are too old and you drink and smoke for a long time, but it’s the last moment to react, because later will be too late”
Initial moment was like somebody put a bucket of cold water on your head, but the same time you try to listen to you heart and body, and nothing unusual you noticed, so you agree, but the same time you ignore the diagnose, because the party can last forever, the medicine is way ahead vs 100 years ago and for sure this time is different.
If the economy wouldn’t be a pure math you could have had a free interpretation, but the doctor told you exact things which will happen in the future and tells you that in about 9-12Ms you will have the problem with a pain under left rib, and probably you won’t be able to go higher than on the 2nd floor using stairs.
Months passed and you slowly realized how big magician your doctor really is, as he predicted perfectly the future. How the hell he could have known it will be 2nd floor, when actually you hit 3rd floor, but all other symptoms of the heart attack, like a pain under left rib, appeared after exactly 7 months from his diagnosis not even 10. Magic? Well of course no.
Just like people today don’t even try to prove that 2 is 2 or Force =mass * gravity(acceleration) the same time we don’t even try to oppose that cycles exists and logic of Mr. Wyckoff, a guy who lived between 1882-1932, has been used for 100 years all over and over again.
This guy observed that market tops and bottoms doing exactly 3 points. I don’t know if he observed that too, because that is my understanding those 3 points are :
- Global Economy Top (First warning – get out from illiquid real-estate etc) – BC
- Global Leading Cycle Economy Top (US or EEM, still have some time – finish your work) – UT
- Dead-cat bounce (The moment when stock market starts chasing lowering PMIs and the market starts its recognition phase) – first LPSY or UTAD
In general first top is the most important because this top indicates top of the global economy and Mr.Market knows FED is behind the curve and won’t react as it should as nothing painful is happening. It’s like a beginning of a heart attack symptoms which you ignore. You’re gonna ask ok, but FED can cut rates and will prevent it from collapse. Well the market clearly knows if FED will do it on time or too late. If chart shows the beginning of a heart attack it means FED is too late and the changes are irreversible. Saying cuts at this moment you mean, you need to transform a 65 years old man smoking and drinking to 45 years old with a 6-pack on his belly with a magic touch. Possible? Of course not. Same happens in the economy.
There are plenty of examples, but I’m going to show you 2008 year in term of Wyckoff Logic heart-attack pattern and irreversible economy move. I by-pass discussion about typical economy cycle, like this below, because identifying the pattern relies on yield curve, bonds, stocks, and currency-VIX mixture. Each of this period has it’s own combination of yield-curve-stocks-bonds-currency-VIX-mixture. I won’t explain why this period was inflationary recovery, because that is a different story. Saying other words … If 4Q2007 was correctly identified, economy will do everything to tank no matter what others do, and it will be irreversible.
Once the red line appear on the screen you don’t want to feel in the inflationary slow-down – the period between 2 tops – global economy top and leading economy top where in reality the economy starts its heart attack, but all shouting “This time is different – to the infinity!”. I need to show also 2018 example. Just check what happened between 1Q18-4Q18 – how CEOs were really happy how their profits will be raising up to infinity and how new paradigm kicked in, how beautiful future and permanent prosperity is ahead of us and FED is reaching 4% rates, but the same time in 1Q18 (remember XIVed event? – BC) economy started tanking vertically down regarding PMIs, Retail Sales, Consumer Spending etc killing in 4Q18 the Leading Economy (US) by UT move and worst December since 1931, only dead-cat bounce left after which the economy will use its gravity to take the stocks with it speeding up the levels of “tanking”. Just check what newspapers were writing between 2Q07-4Q07 and what they wrote between 1Q18-4Q18 – you gonna see exactly the same things.
- They see amazing prosperity between BC and UT (1st and 2nd top)
- They see slow-down between 2nd top (UT) and dead-cat bounce (UTAD or 1st LPSY)
- They see recession issues after dead-cat bounce (after UTAD drop or after 1st LPSY)
- Pure recession after next LPSY, depends on the scenario if it’s the one with UTAD or with LPSY.
The reality is different
- Slow-down kicks in between (1st and 2nd top)
- Recession kicks in between (2nd and dead-cat bounce)
Well big banks saw first dots in downturn.
And in 1Q2018 XIVed was right (yeah the first top often is very innocent) it was a top of the global economy and it’s irreversible until economy will unload its problems, just like 2Q2007.
Stock market and economy clearly know what will happen. They knew in 2015 that there are plenty of room to ease forcing economy to enter on the next gear – inflationary recovery, and China did it. Infinite stimulus for empty housing market, same time now economy knows more easing doesn’t help whatever you do showing middle finger to those who stimulated the most.
Kondratiev died in early 1938. He couldn’t predict the future, but not only he calculated how long the cycle lasts, but he managed to describe what happenes in each part of a cycle. He couldn’t know that the economy cycle after 1929 will repeat exactly the same pattern which he observed. He analyzed all cycles since 1700 till 1932 – not only he calculated how long each phase lasts but he managed to describe very detailed the connections between cycles and social privileges and technologies. He couldn’t know the stocks will go nowhere between 1966-1980 after first phase of inflationary period. He couldn’t predict the invention of the Internet – but he described this moment as there is a strong need for a credit bubble to anchor technological advance which further on will lead to financial crisis and finally depression. We passed the financial crisis for now, and we’re just about to check if he is right or wrong.
This observation might lead us to a theory that economy is just a 100% math based knowledge – depression created by abused consumption will create a war while inflation created by currency collapse will restore equality, fertility and poverty. All in 45-60Ys economy cycles.
I’ve read some comments about his theory and people told :
OK, he was lucky because the war was spread and ended the cycle.
That is the point – people trying to predict details, instead of concentrating on the outcome. No matter if it will be war or spaceship attack, bank collapse or magnetic thunder, the reason to lead to the outcome will always appear as the outcome. Saying other words, if we simplify the economy equation to :
X+Y+Z = -5
where economy level is always between -5 and 5, we try to predict X and Y and Z what is quite hard, but nobody wants to say the given outcome which is -5 (and we might expect bad things) or +5 (and we might expect good things)
Both theories (Kondratieff and Wyckoff) came across the globe early 1900. And so far they still keep working raising questions why they work if the economy is unpredictable same as stock market?
Let’s take a look at 2008 market collapse and the logic behind.
At the point #1 at the top we had the top level of PMIs. Between #1 and #2 – nobody could believe something has changed. CEOs were providing so optimistic values, nothing wrong happened, some problems arrive on the horizon, but easily will be contained, #2 is a moment when real doubt starts. From this moment everybody knows earnings are going to collapse and nobody even tries to hide it. Point #3 is the last hope (in this case it was rate cut), but as usual market expected more and FED delivered too little and from this point market starts to chase lowering PMIs… Between point #1 and #2 => new paradigm narration, between #2 and #3 – slow-down on a horizon, #3+ recession hits as lowered PMIs start to bite companies and delinquencies and unemployment, so the snowball was created between point 1 and 3 and now it’s moving down. NBER has a weird calculation of recessions, sometimes it’s 3rd top sometimes much lower. I have no idea what they take into consideration.
Each period between points has its own narration. It’s like the doctor tells you – “Man, you will start to feel the pain under left rib, just give it 10 more months”. The pain appear, so he tells you “Confirmed, now it’ll start to be really painful around your neck and you start to be exhausted”, just give it another 3 months. You are. Magic? Nope.
Why it happens like this? I have no idea, but the same time a doctor not even bother to discuss why his templates of heart electrocardiographs look like as those charts are already proved to be right in diagnosis including list of symptoms and almost timing.
The Wyckoff electrocardiogram gave you a possibility to understand what the patient called the economy will feel and when it will be in flames based on the fact what symptoms will arrive between certain moments. Later people trying to fit on the chart our X and Y and Z and said that is our reason and it was impossible to predict that. Well maybe it was but nobody said you had to predict X, Y and Z when you have the outcome -5, already provided on a golden plate and you are interested at the sum of all events X+Y+Z so why you even bother to know each one? Don’t worry. B737 max will fall one more time if it’ll be needed, 3rd bank in China will explode, Draghi will start MMT sinking EURO or Apple factory will be seized in China and all will be arrested. You have your X and Y and Z but the outcome again is -5 so very negative.
Greg's blog ... When the crowd is always wrong 