If you’re going to investigate how economy moves and what it drives you’re going to see each time 2 big corrections in the full recovery cycle. The first one is called “deflationary” one, the second is called “inflationary” one. I’d like to share some opinion why they appear, what drive them, how economy creates enablers to turn on those 2 corrections in cycles and how always we are seeing similarities between inflationary correction and hope dead-cat bounce. I’m going to describe why those 2 corrections appear, and why hope bounce is always connected with “inflationary correction” hope one more time.
So here we have :
In the previous cycles we can easily see those 2 corrections…
1997 – deflationary correction (enabler : Asian Crisis)
1999 – inflationary correction (enabler : Asian Crisis)
2000 – cycle peak
2001 – hope correction
2003 – cycle bottom
2004 – deflationary correction (enabler : Bombay stock market crash)
2006 – inflationary correction (enabler : US Housing peak warning “crash”)
2007 – cycle peak
2008Q2 – hope correction
2009 – cycle bottom
2012 – deflationary correction (enabler : EURO crisis)
2015 – inflationary correction (enabler : China crisis)
2018 – cycle peak
2019 – hope correction
In the stock market you’re just watching how economy moves in the parts of its cycle and how it creates enablers which are just transition points between 4 economy cycle phases, we can even call them : spring, summer, autumn, winter. All events you see are just enabled by the economy, while we can hear lots of things how things went “accidentally” bad caused those troubles. It’s just a theory trying to justify we can have influence on the economy, while in reality you don’t even need to watch and read “events”.
So in reality this is how economy moves :
First “big” correction called deflationary is caused by the fact, that companies started too big run towards recovery, saying other words, they rushed into competition believing the economy is so overheated like in “inflationary” phase, or they exaggerated the level of recovery. After cycle bottom, when economy cleaned the mess from the expansion, we can’t forget that final customers who are mostly driven by inflationary phase are still muted in their total credit spending. They spend wisely, they still have not recovered financially, so they need more deflationary environment (new more productive products, cheaper which they can wisely use). Investing too much in deflationary phase believing customers will start it’s buying spree leads to first big drop in stock market – deflationary correction.
After deflationary correction, real recovery starts ongoing, and it’s going towards the next correction (which is the biggest in the cycle) – called inflationary one. Actually I should call it 2nd deflationary correction, but this one initiate transition to inflationary phase, when customers start their silly/stupid buying spree because prosperity returned forever. So the time between those 2 corrections companies built a big “productive” base for the customer and from inflationary correction, customers jumping in led by a conviction the last prices drops it’s a bargain and those prices are going only to raise to infinity. This is a period mostly when 10Y yields start to raise and FED starts it’s hiking process.
FED can hike before this period. FED hikes till Cycle top. Once they hike and cycle top has been created there is a point of no return. We can have also mid-cycle cuts, but only if they occur between inflationary correction bottom and cycle peak. If FED will manage to cut rates in this period. These are “mid-cycle” adjustments, if FED passes this moment, there is no way out.
Economy turns down in couple phases…
1/ Economy cools
Economy starts its cooling process very innocent… Remember 26thJan18 VIXplosion? That’s a global cycle peak IMO based on my theory.
2/ Economy slows
Economy slows always after leading economy top – US or exUS depends on the cycle
3/ Economy melt-downs
Something that wipe out hope correction
4/ Economy crashes
After initial rescue, everything gone. Economy ALWAYS crashes below (W)MA200 when indexes are running to retest from bottom (W)MA200 after big rescue.
Economy bottoms, all is cleaned and ready to reverse.
Hope correction is mostly related to the same arguments as inflationary correction.
So in current cycle – China will bring more stimulus.
Now we’re going to find out if this theory is valid or not.