Alan Greenspan's Mea Culpa

Fed Chairman Alan Greenspan's startling remarks last weekend provide
new insights into his policy for saving the economy from a meltdown.

Originally Posted by Alan Greenspan to American Economic Association

> "There appears to be enough evidence, at least tentatively, to
> conclude that our strategy of addressing the bubble's
> consequences, rather than the bubble itself, has been successful.
> Despite the stock market plunge, terrorist attacks, corporate
> scandals and wars in Afghanistan and Iraq, we experienced an
> exceptionally mild recession, even milder than that of a decade
> earlier." -- Alan Greenspan to the American Economic
> Association's annual meeting.

Greenspan appears to be making two points here:

(*) He could have prevented the 1990s bubble. Recall that it was in
1995 that he made his famous "irrational exuberance" remark. He
seems now to be saying that he could have taken steps to prevent the
bubble from advancing, but instead decided to let it run its course.

(*) He dealt with the bubble's consequences by reducing the Fed funds
rate to a historically low 1%, making money more available.

I always thought that, ever since he made his "irrational exuberance"
remark, Greenspan knew what was going on, knew that we were in danger
of repeating the 1920s bubble and 1930s Great Depression, but felt
that he couldn't do much about it, something that I agreed with.

But now Greenspan is saying that yes, he knew what was going on, and
he could have done something about it right at the start, but decided
not too. Bad move, Alan.

You can immediately see one big problem: A lot of people were very
badly hurt by the Nasdaq crash in 2000. If Greenspan could have
prevented the bubble then the Nasdaq crash would have been prevented,
and those people would not have been hurt.

However the real issue is a comparison of the 1990s bubble to the
1920s bubble, and the 2000s ecnomony to the 1930s depression.
Greenspan, born in 1926, remembers the depression well from his
childhood, and is well aware of its history.

History of 1929

Here's the history that Greenspan undoubtedly remembers:

The 1920s bubble reached its height on September 3, 1929. The stock
market had only been increasing, and every analyst was predicting
that it would only keep on increasing. Business was booming, and no
one had any idea that this was a momentous day -- the height of the
Great Bull Market of the 1920s. Not a single headline proclaimed that
fact, and not a single analyst predicted what would happen next. The
only real subject under discussion was the question of which stocks
were likely to go up the most, and which stocks would go up less.

After September 3, the stock market became extremely volatile,
falling, rising, falling some more. No one became alarmed, because
there had been brief falls before, throughout the 1920s, and a brief
fall was considered an opportunity to buy cheap stocks before the
next stock market rise.

Starting on Saturday, October 19, the losses became more serious. The
losses continued through the next few days, but everything was still
fairly orderly. Until Thursday.

On Thursday, October 24, 1929, the selling became a deluge, and the
big bankers met to create a pool of money to support stock prices at
their current level. News of this meeting steadied prices for a few
days, and the deluge stopped, temporarily.

The greatest stock market calamity

On Tuesday, October 29, 1929, the bottom fell out. Many major stocks
lost 50-75% of their value in just a single day. It was considered
the greatest stock market calamity of all time. Prices continued to
fall on the following days, but did not reach their 1929 bottom until
November 13. The stock market had lost $30 billion -- an amount that
was considered a lot of money in those days.

What caused the sharp selloff? No doubt some people just panicked or
lost faith, but later analyses proved something quite different: the
people who took part in the massive selling after October 29 did so
not because they WANTED to, but because they HAD to. Almost everyone
was in debt, and almost every investor had bought stock on margin.
(Buying stock on margin means that the investor pays only, say, 25%
of the price, and borrows the rest. If the stock goes up, then the
investor uses the gains to pay off the loan; if the stock goes down,
then the investor has to pay off the loan from other funds, usually by
selling other stocks.)

The massive selling occurred because investors were being forced to
sell all their stock holdings to pay off the money they had borrowed
to purchase stock on margin.

Greenspan's policy

Once you understand what happened in 1929, you can understand
Greenspan's policy in 2000. By lowering interest rates and flooding
the banks with low-cost money, the Fed's intent is to prevent a
1929-style crash by allowing debtors to borrow more money at low
interest rates. If investors aren't forced to sell their holdings,
the reasoning goes, then a crash is avoided.

But this makes a dangerous assumption: That the stock market won't
fall if you only you provide enough cheap money. What if that
assumption is wrong -- that the stock market would have fallen
anyway, because the real, intrinsic value of the stocks was not as
high as the 1920s bubble had pushed it.

That's the irrational gamble that Greenspan and the Fed have been
taking. They've been betting that the inflated value of the stock
market will continue if there's only enough money around. But common
sense says that if stock prices are much higher than the intrinsic
value of the stocks, the amount the stocks are really worth, then
stock prices will fall when the psychological bubble bursts.

There are some analysts today who believe that the 1990s bubble was
like the 1920s bubble, but that we've avoided the worst. An article
in the Wall Street Journal on Monday, 1/5/2004, expresses this
precise opinion. [See next message] According to this article, the
stock market fall from 2001-2003 corresponds to the stock fall from
1929 to 1932, and that now stocks have nowhere to go but up, again.

However, these analysts overlook the following factors that indicate
that today's situation is quite unlike 1932:

(1) The most obvious indicator is the S&P Price/Earnings ratio, which
fell to 5 in 1932, fell to only 25 in 2001, and is above 30 today.
Historically, whenever the P/E ratio goes above 20, it falls well
below 10 within a few years, and we're still far away from that
today. This indicates that a sharp fall (more than 50%) is yet to
come.

(2) If you do a simple long-term exponential trend analysis on the
DJIA, you find that the trend value today is 4500, or 530 for the S&P
500 index (gulp!). Today's index values are still well ABOVE the
trend values, while in 1932, these index values had already fallen
well BELOW the trend values. Once again, this indicates that a sharp
fall is still to come.

(3) The stock index values have a technological cycle, with new
technologies driving stock price increases every 40-50 years:
electricity around 1890, factory assembly lines around 1935, desktop
computers around 1982, and (probably) biotechnology around 2020. In
the 1930s, we were at the BOTTOM of the technology cycle, and
technology aided the recovery; today, we're at the TOP of the
technology cycle, and lack of new technology will hinder the
recovery.

(4) We haven't suffered enough pain yet. This is what I call the
"crusty old bureaucracy" analysis. Every organization builds up its
bureaucracy over the decades, and the same is true for the nation,
taken as a whole. Every 70-80 years, there's a major economic
convulsion that causes every business, school, agency, labor union,
and non-profit organization to redefine itself, causing massive
unemployment. This is still to come in the decade of the 2000s.

It's still 1929

When you look at all these indicators together, what you see is that
we aren't in a recovery today; instead, the Fed's historic
low-interest policy has actually extended the 1990s bubble for a few
more years. Today's economy isn't comparable to 1932; it's still
comparable to 1929.

At age 78, Alan Greenspan is undoubtedly worried about his legacy,
and that was part of the reason he was bragging last weekend.
Unfortunately, it looks to me that Greenspan should have stuck to
a more defensible position: "I saw all this coming, but there was
nothing I could do about it except soften the blow by lowering
interest rates." As things stand, he's taken responsibility for
everything, good or ill.

The four indicators I've listed above are not some obscure invention;
they're perfectly ordinary indicators that everyone would be using
and quoting today if it weren't for the fact that no one wants to
believe them. Our nation's leaders should be preparing us for what's
REALLY likely to happen in the next few years, rather than believing,
as everyone did in the 1920s, that the stock market has nowhere to go
but up.

John

John J. Xenakis
john@GenerationalDynamics.com
http://www.GenerationalDynamics.com

Note: The history of the 1929 crash was adapted from the book, "Since
Yesterday: The 1930's in America, September 3, 1929 to September 3,
1939" by Frederick L. Allen, originally published in 1940.

The following is the article referenced in the previous posting:


Crash, Bang, Wallop

By EDMUND S. PHELPS, Wall Street Journal, Jan 5, 2004

Booms are not all alike. Nor slumps. Shocks and institutions are never
exactly the same. Yet the late 1990s boom, the slide into slump and
recent rebound has a striking similarity to the boom of the roaring
1920s, the deep decline in the early '30s and initial rebound. I see
the two experiences as primarily driven by analogous forces and common
mechanisms -- both non-monetary. And I believe that the rest of the
present decade will tend, barring new shocks, to resemble the rest of
the '30s -- a recovery with investment and employment below historical
norms.

Causes aside, both experiences began with an investment boom, then a
downturn in investment while consumption held up pretty well. Economic
activity closely tracked investment: Employment and hours worked were
elevated from 1925 to 1929 (unemployment at 3.2% in the odd years),
then plunged till 1933 (hours worked falling 25%); they were again
elevated from 1997 to 2000 (unemployment reaching 3.9%), then fell
until mid-2003 (hours worked by about 8%).

Each boom was caused by the advent of a new general-purpose technology
-- commercially available electric power in the '20s, the information
and communication technologies in the '90s. By mid-decade there were
high and rising expectations of profits to be earned in the decade
ahead from applications of the new technology. In the boom years these
expectations fueled a wave of preparatory investing -- much of it in
infrastructure and employee training. The force of the expectations
may be roughly gauged by the take-off of share prices. Take the S&P
Composite stock price index adjusted for inflation -- the "real S&P."
From pre-boom 1924 it rose 20% by 1925 and 104% by 1928; from the
pre-boom 1996 level it rose 30% by 1997 and 98% by 1998.

The basic mechanisms are simple, though not widely understood: New
visions of future profits raise the values (per unit) that
entrepreneurs and CEOs put on new investments in business assets -- in
job-ready employees, new customers, and plant and equipment -- without
raising the cost of acquiring them; this prompts stepped-up investing
in such assets. In addition, increases in these asset values sooner or
later lead to a sympathetic rise in share prices, despite errors and
distortions; and that raises both firms' financial power and
financiers' power to fund new projects and new firms. These
developments in turn have labor-demand effects pulling up wages, hours
and employment. Of course, decreased profit expectations operate in
reverse.

Entrepreneurs, financiers and investors had to be deeply uncertain,
however, over exactly where profits from the developments of the new
technology would emerge and how large they would be. With profit
expectations resting more than usually on guesswork, business asset
values and their reflection in share prices could easily lurch up, or
down. (Markets may have been spooked by the slow rise of profits,
which they did not understand would zoom later, when the big
productivity gains were achieved.) When asset values weakened in
mid-1929, climaxed by the October crash, investing of all kinds was
cut back. The resulting decline in output and employment led to an
unexpected decline in profits and hence a further decline of asset
values and share prices, thus also of investment. And so on in a
vicious circle. The real S&P bottomed in 1932 -- 14% below its
pre-boom 1924 level.

The markets' unnerving in 2000 and subsequent climbdown were broadly
parallel, with the real S&P bottoming (October 2002) in pre-boom 1996
territory.

The saga of the "recovery," which began in 1933, is overdue for
re-examination and is of special interest now in view of the recent
rebound of stocks and jobs. Of course, recovery from the Depression
never meant regaining the record investment and employment levels of
the boom, since they rested on expectations of an extraordinary lift
in productivity and profit ahead, not on expectations that might recur
from decade to decade. But it could reasonably have been believed in
1933 that the economy would tend to recover at least to pre-boom
investment and employment levels. The stock market seemed to be a
believer. In 1933, a year after its low, the real S&P regained and
passed its pre-boom 1924 level. In 1934 the real S&P average passed
the 1925 level; in 1935 it reached the 1926 level. The latter level
held up for the rest of the decade! These data are notable since the
"unsustainable" share prices of the '20s boom were Exhibit A in the
charge that the stock market was no way to run an economy. It is true
that the market in late 1928 and early 1929 probed heights later
proved too high to be justified. But one might as well say the market
in 1925 set prices too low.

This soar of share prices might be thought to have galvanized the
economy onto a course of rapid recovery toward normal activity. But,
after four years of rebound, hours worked in 1937 was still 17% below
its pre-boom 1924 level and unemployment, at 14.3%, was way above the
5% level of 1924 and 1920. There is a lesson in this for the present
day, in which the recovery in the stock market and recovery of the
economy are taken to be virtually the same thing. The '30s showed that
recovery of real share prices is not sufficient for recovery of jobs.

What explains how in 1937, with seemingly great share prices for five
years, employment was still depressed? Was it policy errors? Market
mistakes? Or mostly something else? Part of the explanation is that it
took four years for employment to hit bottom, so it should not be
surprising that, even if share prices were indeed favorable, some of
the recovery would still lie ahead as late as 1937. But most of the
huge shortfall has deeper reasons.

Recovery from the Depression faced stiff headwinds from the
cost-savings and spin-off innovations made possible by the '20s
investments in the new general technology. The '30s, after all, marked
the rise of the great industrial laboratories that so impressed
Schumpeter.

For one thing, the surge of productivity reduced the incentive to
invest. What ultimately determines the rate at which firms invest in
new employees, new customers, etc. is the value put on such a business
asset taken as a ratio to the cost of acquiring the asset. For some
important assets this cost is a matter of labor productivity: if the
latter increases, the cost increases proportionally. This cost was not
an unimportant detail, since productivity improved at a record clip
during the Depression. By the mid-'30s the cumulative increase of real
labor productivity was challenging the cumulative increase of the real
S&P. In 1935, when the real S&P had grown 33% above its 1924 level,
labor productivity had grown about 14%; in 1938, when the real S&P was
37% above (coming off its temporary highs in 1936 and 1937),
productivity had grown 28%.

In my interpretation, these productivity gains had already been
largely reflected in the real S&P levels reattained in the mid-'30s,
so the realizations of these gains (especially in the second half of
the decade) did not for the most part prompt a further rise of the
stock market and of asset values; hence the gains operated to lower
the ratio of value to cost on many or most assets. The gains thus
whittled away the incentive to invest in new employees, new customers,
etc. The ratio of real share prices to productivity, while a
propellant early in the recovery, rapidly ran out of force by decade's
end, when the recovery had far to go.

Furthermore, the productivity surge raised the investment rates that
were required just to stand in the same place. A cascade of new
products and methods meant a wave of obsolescence and thus dislocation
of employees. The layoff rate ran about 3.5% per month on average in
every year but two in the decade, a high rate by historical standards.
Hence, hiring and asset accumulation generally would have to be higher
than in the '20s if employment was not to fall.

Finally, the stock market, leaving aside the ebullience of 1937 and
1938, was flat from 1935 to 1940. Clearly there was no new vision of
yet another breakthrough period to inspire it to dash ahead. But, more
than that, something must have gone wrong that blocked the normal
trend growth of share prices. It could be that share prices got ahead
of themselves by 1935 and had to cool down. A good reason for the
flattening, however, is that the tensions in Europe were beginning to
cast dark shadows on most stock markets and the U.S. was not an
exception.

The technological developments and overseas tensions that slowed and
limited the '30s recovery have clear parallels in the economy's
present situation. The 350,000 employees sent into the jobless pool
every week is a significant hurdle on the way to getting unemployment
back to the pre-boom rate of 1995-96 (5.5%), let alone the 5% level
envisaged by some. Although the real S&P 500 climbed 19% between 1996
and third-quarter 2002, productivity climbed 13.5%, offsetting most of
the stimulus from the former. It is only in the past year that share
prices have spurted way ahead. But with hourly productivity now rising
at 4% yearly, the real values put on business assets -- and their
reflection, real share prices -- must now rise at 4% just to keep
investment incentives from slipping. Finally, these times do not lack
international tensions. We cannot be certain that these several
influences will be the decisive forces in the years ahead. But if they
are, investment and employment levels will be below historical norms
for the decade -- unless new policies come to the rescue.

Mr. Phelps is McVickar Professor of Political Economy and Director of
the Center on Capitalism and Society at Columbia.

Updated January 5, 2004

http://www.wsj.com/wsjgate?source=jo...Fmod%3Dopinion

no matter how many times i have this same discussion with people, or see it repeated incessantly on this message board, it never ceases to amaze me how people want to hang on to this false analog between present times and the 1929 period.

the depression of 1929 was precipitated by a tightening of monetary policy which resulted in a massive shrinkage in the monetary base due to fear over a recurrence of inflation. this has NOT happened in these current times. in fact, the monetary base has expanded quite nicely thanks to greenspan's policies which has revived the economy, for now, and sent commodity prices upwards. it is the growth of the monetary base which is important and NOT the level of interest rates. when the monetary base shrinks then severe recession, and often depression ensues, such as in japan in recent years. this has, once again, NOT happened here in the U.S....at least not yet.

depressions are almost always preceded by a severe period of inflation, followed by a severe monetary contraction and followed after that by a speculative period, usually in large cap stocks (not small caps like we saw in the nasdaq bubble). this is not to say there was not some serious speculation in large cap stocks during the last bubble but just that it was far more pronounced in the small cap, tech heavy nasdaq index. in fact, one only needs to take a quick look at the large cap heavy dow jones index which is currently not even that far from making new all time highs while the nasdaq languishes at much lower levels!!!

as i have said on here before, the bubble that burst in 2000 was the mid boom bear market that punctuates the middle of a 20 year technology based boom period in the economy and financial markets. so far everything that has transpired has fit the model i outlined on here before virtually to a T. the only thing that has concerned me to date was the length of the bear market that began in 2000. it is historically unusual for the stock market to decline for more than 2 consecutive years while in a mid boom bear market.

another thing that i have contended is that anyone who expect p/e ratios to decline to levels that constituted value back in the 70s or 80s is in for a long, long wait. and my contention that the reason for this is a lack of a gold standard. this lack of any monetary standard currently provides sort of a valuation cushion to any market decline thus propping up p/e ratios. and this condition is likely to continue until inflation reaches levels that require the reestablishment of a monetary standard. when the old style value players finally figure this out it will more than likely be too late anyway.

yes, the S&P is substantially above its long term exponential average. but that is normal in a boom phase. and, i would argue, that this is also largely due to the underlying inflationary cushion provided by the lack of a gold or monetary standard. yes, there will inevitably be a nasty regression back to trend and beyond, but the normal historical events that precede such an event have simply not occurred yet.

we are also not yet at the peak of the technology cycle. we have not even begun to scratch the surface of what is possible with wireless technology and that is where the next great wave of innovation is likely. also, the further integration of the computer into the living room is only just now beginning. there is still a lot of ground to cover before this technology boom is tapped out (and i am not even mentioning what still lies ahead in the biotech area).

true, we have not suffered enough "pain" yet. and that is simply because it is not time for that kind of "pain" yet. its coming...but its still at least 10-20 years away.

we are not in a depressionary phase. this is not 1933. this is not 1937 or any other such nonsense. we are now in the second half of a technology based financial boom period which is likely to last into the early part of the next decade until it is ended by a war, which i believe the iraq conflict is a foreshadowing of what to expect. this war is typically followed by a severe recession and then, what i think, will be the worst inflationary period this country has seen since its birth. And the reason that I think this is that this will be the first inflationary phase we have entered WITHOUT a gold standard, or any other monetary standard in place, anywhere in the world. this is likely to be followed by a severe monetary contraction and another severe recession and then by another speculative period and THEN everyone currently looking for a depression will likely get what they have been looking for all this time.

But in the meantime, the two problems to really be preparing for in the near future are the prospect of an unpopular war in the early part of the next decade and the worst inflation the u.s. has seen since its founding.

now is the time to prepare and take advantage of the good years that we still have ahead.

What part of the good years ahead might this be?

U.S. Foreign Debt Called Threat to World Economy





The New York Times

WASHINGTON -- With its rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of such record-breaking proportions that it threatens the financial stability of the global economy, according to report released Wednesday by the International Monetary Fund.


The report sounded a loud alarm about the shaky fiscal foundation of the United States, questioning the wisdom of the Bush administration's tax cuts and warning that large budget deficits pose "significant risks" not just for the United States but for the rest of the world.

The report warns that United States' net financial obligations to the rest of the world could be equal to 40 percent of its total economy within a few years -- "an unprecedented level of external debt for a large industrial country," according to the Fund.

The dangers, according to the report, are that the United States' voracious appetite for borrowing could push up global interest rates and thus slow down global investment and economic growth.

"Higher borrowing costs abroad would mean that the adverse effects of U.S. fiscal deficits would spill over into global investment and output," said the report.

White House officials dismissed the report as alarmist, saying that President Bush has already vowed to reduce the budget deficit by half during the next five years. The deficit reached $374 billion last year, a record in dollar terms but not as a share of the total economy, and it is expected to exceed $400 billion this year.

Though the International Monetary Fund has criticized the United States on its budget and trade deficits repeatedly in the last few years, this report was unusually lengthy and pointed. And the IMF went to lengths to publicize the report and seemed intent on getting American attention.

alarms, warnings and speculations! oh my!

you will see articles like this again and again while opportunities to make money from a growing economy, continued technological innovations, and a rising stock market pass you by while you are too busy paying attention to things like this before it is time for them to have any real effect.

yes, the u.s. has enormous debt. yes, it will eventually come back to haunt us. but is it likely to happen within the next 7 to 10 years? before we experience yet another war that does not go well at all? before we experience a bout of really bad inflation? before we see another monetary contraction and severe recession? before we see yet another period of financial speculation? not likely.

we are in a period most like the one leading up to world war I and vietnam, perhaps even the first crusade or the french revolution. compared to what is coming these ARE the good years!

Originally Posted by John J. Xenakis

Originally Posted by Alan Greenspan to American Economic Association

> "There appears to be enough evidence, at least tentatively, to
> conclude that our strategy of addressing the bubble's
> consequences, rather than the bubble itself, has been successful.
> Despite the stock market plunge, terrorist attacks, corporate
> scandals and wars in Afghanistan and Iraq, we experienced an
> exceptionally mild recession, even milder than that of a decade
> earlier." -- Alan Greenspan to the American Economic
> Association's annual meeting.

Greenspan's policy

Once you understand what happened in 1929, you can understand
Greenspan's policy in 2000. By lowering interest rates and flooding
the banks with low-cost money, the Fed's intent is to prevent a
1929-style crash by allowing debtors to borrow more money at low
interest rates. If investors aren't forced to sell their holdings,
the reasoning goes, then a crash is avoided.

But this makes a dangerous assumption: That the stock market won't
fall if you only you provide enough cheap money. What if that
assumption is wrong -- that the stock market would have fallen
anyway, because the real, intrinsic value of the stocks was not as
high as the 1920s bubble had pushed it.

If you look at the *actual* history of the market during the thirties you will find that much of the very same crazy stuff (margin investing) of the 20s was still the norm right up into the war. Even in 1939, folks who were buying stocks "on margin" still ran $2.6 billion. But according the financial author John Brooks (b. 1917), the trend was leaning heavily toward a chasted market and toward a more "responsible" investment era. This "responsibility" era crested just around the time JFK got shot (google the Ira Haupt & Company story from 1963). The crash in the spring of 1970 (forty years after the '29 Crash) was the beginning of sorts into the modern era of investing, according to Brooks.

The upshot of this is that easy money or not, once the bears pounce they pounce, and the market must respond accordingly. But... that response takes about a generation to have it's true effect.

• Army Officer:
  [list:708cd3abb0]
  You at the barricade listen to this!
  No one is coming to help you to fight
  You're on your own
  You have no friends
  Give up your guns - or die!

Enjolras:

• Damn their warnings, damn their lies
  They will see the people rise!

[/list:u:708cd3abb0]


Dear Enjolras,

Originally Posted by enjolras

the depression of 1929 was precipitated by a tightening of
monetary policy which resulted in a massive shrinkage in the
monetary base due to fear over a recurrence of inflation.

Where did you get this? This isn't true.

depressions are almost always preceded by a severe period of
inflation, followed by a severe monetary contraction and followed
after that by a speculative period, usually in large cap stocks
(not small caps like we saw in the nasdaq bubble).

What "depressions" are you referring to? This is my problem with
many of the analyses I see on CNNfn and other news channels. They
treat today's economy with the recession of 1992, and other recent
recessions.

When I talk about "depressions" or "financial crises," I'm talking
only about the Great Depression of the 1930s that preceded World War
II, the Panic of 1857 that preceded the Civil War and the meltdown of
the English banking system that occurred in 1772, preceding the
Revolutionary War.

Here's a graph that I recently posted in another thread:



So it's one thing to make generalizations that apply to the late 60s,
or mid 70s, or early 90s, but those downturns are tiny blips compared
to the bubble of the late 90s and its aftermath.

as i have said on here before, the bubble that burst in 2000 was
the mid boom bear market that punctuates the middle of a 20 year
technology based boom period in the economy and financial
markets.

This is completely wrong. The year 2000 was most assuredly NOT the
middle of a 20 year technology based boom. The technology boom did
NOT begin with the internet explosion that began in the mid 90s. And
that's a major problem with your analysis. You're confusing the
technology boom with the stock market bubble.

The technology boom began in 1981 with the personal computer. Wide
area networking was already quite widespread throughout the corporate
world by the end of the 1980s, using a variety of technologies
including satellites. By the early 1990s, the wide area networking
boom was leveling off, and was being merged with the internet. What
the internet boom did was to bring e-commerce and internet content
sharing to the general public, but it was not by any means the
beginning of the technology boom.

we are also not yet at the peak of the technology cycle. we have
not even begun to scratch the surface of what is possible with
wireless technology and that is where the next great wave of
innovation is likely. also, the further integration of the
computer into the living room is only just now beginning. there is
still a lot of ground to cover before this technology boom is
tapped out (and i am not even mentioning what still lies ahead in
the biotech area)

Once again, technologies like wireless began in the 80s, with new
technologies like cell phones and GPS. Wireless LANs were available
throughout the 90s. Today, wireless technologies are being used more
and in the home, but this is the END of the technology boom, not the
beginning. Biotechnology IS a new technology, but I'll cover that
below.

In fact, I completely challenge your entire analysis where it relates
the 1990s bubble and its aftermath with technology.

Here's another graph that I recently posted elsewhere, that I believe
is quite revealing:



I know that the above graph is "busy," but please note the following
features of it:

(*) The red squiggle is the S&P 500, adjusted for inflation, graphed
on a logarithmic scale.

(*) The black straight line is an exponential growth trend line.

(*) The green curve is a smoothing of the red index line, but
IGNORING the bubbles of the 1920s and the 1990s and their aftermaths.

(*) The green boxes identify technology booms.

The point is that the green curve shows that:

(1) the index value (ignoring the great bubbles) oscillates quite
smoothly around the trend line;

(2) that each upturn on the green curve is related to a technology
boom (electricity in the late 1800s, factory assembly lines starting
around 1935, personal computers starting around 1981). Biotechnology
is today still mostly a research technology, and is expected to
produce a boom in new products around 2020.

(3) that the technology-based oscillations are COMPLETELY INDEPENDENT
of the secular bubbles, which occur on their own timeline every 70-80
years -- same as the "fourth turnings."

This is important because it's more bad news for the economy today.
During the 1930s depression, a technology boom was just getting
started, and it helped lead us out of the depression.

Today, we're at the TOP of the technology boom, and it's going to
hinder a further recovery.

There's another reason to question your analysis: Japan's stock
bubble took place in the 1980s, burst in 1990, and stocks have been
falling ever since, even through a decade of zero or near-zero
interest rates. According to your analysis, Japan should have shared
the technology boom of the 1990s.

another thing that i have contended is that anyone who expect p/e
ratios to decline to levels that constituted value back in the 70s
or 80s is in for a long, long wait. and my contention that the
reason for this is a lack of a gold standard. this lack of any
monetary standard currently provides sort of a valuation cushion
to any market decline thus propping up p/e ratios.

I'm not sure what P/E ratios have to do with the gold standard, but
here's a graph of P/E ratios for the last 130 years.



Today, the P/E ratio is back to 30. That is historically untenable --
it's never stayed above 20 for more than a couple of years. As I
said, what Greenspans low-interest policy has done is to extend the
bubble for a few extra years.

we are now in the second half of a technology based financial
boom period which is likely to last into the early part of the
next decade until it is ended by a war, which i believe the iraq
conflict is a foreshadowing of what to expect. this war is
typically followed by a severe recession and then, what i think,
will be the worst inflationary period this country has seen since
its birth. And the reason that I think this is that this will be
the first inflationary phase we have entered WITHOUT a gold
standard, or any other monetary standard in place, anywhere in the
world. this is likely to be followed by a severe monetary
contraction and another severe recession and then by another
speculative period and THEN everyone currently looking for a
depression will likely get what they have been looking for all
this time.

You know, if you really believe this, then I don't see how you can be
so certain that your timeline is right. Looking at P/E ratios, you
should really move your timeline up to the present day.

I'm also puzzled by why you're pooh-poohing the IMF report in the NY
Times story that was posted. You say that "depressions are almost
always preceded by a severe period of inflation." Well, that's the
kind of thing that's happening - not domestically but on an
international basis. There has been international "dollar inflation"
for four years now, with the "price" of the Euro, the Pound and the
Yen increasing substantially during this period. Given the analysis
that you've posted, I would think you should be VERY concerned about
this.

we are in a period most like the one leading up to world war I
and vietnam, perhaps even the first crusade or the french
revolution. compared to what is coming these ARE the good years!

How can you possibly say this? Those are mid-cycle wars, and you
obviously agree that today we're headed for a crisis war. As for the
French Revolution, I hope you're aware that it was preceded by a
major financial crisis - the entire government of France went
bankrupt!

John

John J. Xenakis
john@GenerationalDynamics.com
http://www.GenerationalDynamics.com

P.S.: Does it bother you that Enjolras predicted that the people
would rise up to fight with him, and that his prediction turned out
to be wrong?

John,

i have had a chance to look at your web site. you've done some good work. but, in my opinion, you're still dead wrong.

i have posted and written about this subject many, many times...primarily back in late 2001 and 2002. i outlined how world economies move through distinct 100-110 year cycles of inflation and disinflation and how each 100-110 year cycle is composed of a paired cycle of roughly 50-60 years which is again composed of 8 distinct stages which are:

1. monetary expansion

2. popular war

3. technology based boom

4. unpopular war

5. inflation

6. monetary contraction

7. speculation and excess

8. Liquidation

But to save you the time of trying to look up the posts here is an article that I wrote for Futures magazine a couple of years ago.

When I first began trading futures back in the late 70s, and Futures magazine was still known as Commodities magazine, everybody traded gold and silver, soybeans, cattle, pork bellies, etc. They were all the rage. Doctors and lawyers didn?t contemplate leaving their professions to day trade stocks back in those days, as they do now. No, they all wanted to trade commodities. And who could blame them? Commodity prices were soaring and the stock market had basically done nothing but go sideways since 1966 and, in inflation adjusted terms, was on the verge of going lower than it had during the 1932 low in the Dow of 41.22. The best selling books of the time weren?t about new economic booms or how the Dow was going to 100,000 but about how to ?prosper during the coming bad years? and ?crisis investing.?
But then, in August of 1982, the Fed began dramatically lowering interest rates and the world instantly changed. Now financial markets were the new ?new thing.? Everyone went from trading gold and soybeans to T-Bonds and D-Marks and then, inevitably, S&P 500 stock index futures. Computers were just starting to become available to the general trading public at the time and financial markets began to become so popular that an entire cable news channel, Financial News Network (now CNBC), was created and devoted entirely to them. The depth of liquidity in these markets was also so much greater than that of the traditional commodity markets that it allowed the managed futures industry to really begin to get off the ground. This was around the time that people we now consider to be ?market wizards?, such as Paul Tudor Jones, Louis Bacon and Bruce Kovner, began to make a name for themselves.
Then, in October of 1987, the stock market crash hit and all the old gloom and doom crowd from the 1970s came out in force for a collective ?I told you so.? But just when it seemed that this crowd was about to celebrate its moment of ?triumph? and we were about to go into a 1930s style depression, the financial markets seemed to miraculously stabilize themselves, defying all the analogies to the 1930s, and head higher and then higher still. Interest rates proceeded to move lower to levels that had not been seen since the 1950s. Then, around 1995 or 1996, personal computer technology reached a level that allowed the children of those doctors and lawyers from the 1970s, who had presumably followed in their fathers? footsteps, to contemplate leaving their chosen professions to trade stocks. And who could blame them? After all, stock prices were soaring and the prices of commodities like gold and soybeans, cattle, cotton, etc. had been stagnant since the early 1980s. Even the ?market wizards? from the 80s were having a hard time as interest rate and currency markets became increasingly volatile and trendless, much as the star mutual fund managers of the 1960s had a hard time in the 1970s when the stock market became increasingly volatile and trendless. The best selling books weren?t about surviving hard times to come but about the ?great boom ahead? and how we had entered a ?new economy? of neverending prosperity thanks to technological miracles waiting behind every corner.
Amazing, isn?t it? You live long enough and everything old really does become new again. The names may have changed and the game may be slightly different, but its still basically ?d?j? vu all over again.?
It was just after the ?87 crash, when I saw that bread lines were not going to form and soup kitchens were not going to pop up on every street corner, that I began to research the reasoning behind why so many otherwise intelligent people had gotten so pessimistic at that time of crisis and why the economy did not accommodate their views. Had our government policy makers become so wise now that they were able to steer us clear of things like depressions? Was there a way of being able to anticipate when these great waves of change were going to strike the popular markets of the time that all those intelligent people I followed back then had overlooked? If so, what were these signs of impending change and, most importantly, how could an individual profit from this knowledge?
The first really important discovery I made was that people look at the long wave cycle of 50-60 years, otherwise known as the Kondratieff Wave, in the wrong way. They tend to look at it as a single cycle when it is far more complex than that, and this is why so many very intelligent people were wrong in their expectations for what would follow in the general economy after the 1987 stock market crash.
The long wave cycle is actually a ?paired cycle? of either inflationary or disinflationary trends that lasts for 100-120 years, with a lull in the middle. Think of it like a football game with a first and a second half and a halftime show in the middle. In this case, however, the halftime show is generally a financial panic of some sort!
This ?paired cycle? theory was given illustration by economist Robert DeGersdorff in a study he did in 1979 of economic trends in England for the period of 1200-1932. DeGersdorff concluded that:

a. A major cycle, with an average length of 54 years, appears to have existed in consumer and wholesale prices for the last 700 years.
b. Adjacent 54 year cycles seem to be paired with two cycles of relative inflation followed by two cycles of little or no inflation. The possibility of a 108 year cycle is suggested.
c. The pattern of cycle timing shown in English CPI data is replicated, for the most part, in both the history of U.S. wholesale prices and the current history of U.S. CPI.

Based on his work, DeGersdorff listed the following long wave cycles:

High Inflation trends: 1288-1339, 1339-1393

Low Inflation trends: 1395-1437, 1437-1509

High Inflation trends: 1509-1571, 1571-1621

Low Inflation trends: 1621-1672, 1672-1723

High Inflation trends: 1723-1780, 1780-1834

Low Inflation trends: 1834-1886, 1886-1932


Based on this data, we can then project that the next cycle of high inflation trends would have begun in 1932, probably had its lull period in the late 1980s, and then began anew in the 1990s, with the next period of low inflation trends not due until around 2040.
To me, this was a revelation. This explained why we did not see a repeat of the 1930s scenario after the 1987 crash. Depressions of the length and depth that we saw in the 1930s typically only occurred at the end of a long wave high inflation or low inflation trend cycle. We had embarked upon a new long wave cycle of high inflation trends in 1932, and this is readily evident when you look at any chart of U.S. CPI data since that time. Then, in the mid to late 80s, we started hearing pundits talking about how we had entered an era of ?disinflation,? not knowing that this was exactly the point in the long wave cycle where that was supposed to be occurring. This was the ?lull period? that typically occurs as the next half of the cycle is about to get underway. In fact, this period of ?disinflation? typically continues until the boom period (which we?ll be discussing shortly) after the last panic comes to an end. That, coupled with the fact that there was no longer a gold standard to weigh the economy down during a crisis period like this, made the aftermath of the 1987 financial crisis even shorter than it probably would have typically been. The downside to all this is that, if this long wave cycle of high inflation trends continues to hold true, then the next inflationary stage that we enter (which, if my calculations are correct, is just a few years away) will very likely make the inflation of the 1970s look tame by comparison.
Each 50-60 year half of the cycle typically displays eight distinct stages. These stages are:
1. Monetary Expansion: This stage is usually started by a political event that causes a large increase in the money supply. However, the beneficial effects of this are usually not felt for several years to come and often provide no political benefit to the party in power at the time.
2. Popular War: This event typically gives the economy a much needed shot of adrenaline and serves to release a lot of pent up hostility harbored by the general populace due to hard economic times.
3. Technology Boom: Innovations in the areas of communications, automation and transportation lead an expansion in which personal income increases steadily and inflation remains under control. But there is also usually a bear market during the midpoint of this boom (1800-1801, mid 1850s, 1907, late 1950s to 1962, and most recently 2000-2001) which brings out the bearish elements in force and sets up the second half of the boom period leading up into the next stage.
4. Unpopular War: An ill conceived act of hubris by the government that interrupts the prosperity the economy is enjoying and which puts an end to the stage 3 boom period. Protests and disillusionment over the course this war takes typically emerge relatively quickly.
5. Inflation: Excess spending during the last war typically sets off a period of rising inflation that proves increasingly difficult to get under control.
6. Monetary Contraction: More conservative forces rise to combat the inflation of stage 5 and drastically contract the money supply and, in so doing, bring about the beginning of the downward part of the cycle.
7. Speculation and Excess: The conservative forces that are now currently in power become concerned that they may be turned out by the voting public so they relent on the monetary contraction they began which causes interest rates to plummet and financial markets to soar, thus ushering in a period of complacency and false prosperity.
8. Liquidation: Concerns that stage 5 inflation may be rearing its head again precipitate an ill conceived second contraction of the money supply which pushes up interest rates and eventually leads to a financial market panic and mass liquidation which, at the end of an entire long wave inflationary or low inflation cycle, usually takes the general economy with it causing a serious depression. When this stage occurs in the middle of a long wave cycle it generally does not precipitate a serious, long-lived depression but serves to flush out excesses in the economy, leaving the system in a healthier state than it was in before.

As of this moment, we are in the midpoint bear market of a stage 3 technology boom.
If you could go back in time now to the period at the end of the Gulf War what would have been the ideal investments to make at that time? Technology stocks and venture capital that went into emerging technology. It has been this way at the end of every stage 2 popular war for as long as the United States has been around. Its also been true for the rest of the world for a much longer period of time but, for now, I am focusing on the U.S.
If you go back and look at any list of the world?s wealthiest individuals you will find that most of them started building their fortunes just after a stage 2 popular war that led into a stage 3 technology boom. People like Bill Gates and Larry Ellison, all the dot com billionaires that are still around from the internet boom of the 1990s, etc., are not that much smarter than you or me. But they did have the good fortune of catching a wave that has made people wealthy ?beyond the dreams of avarice? for the last 250 years of U.S. history.
The first stage 3 boom in U.S. history began with the end of the French Revolution as the second half of a long wave inflation cycle got underway. It saw the introduction of the steam engine and spinning wheel which transformed the economy of the time as it stood on the threshold of the Industrial Revolution. Advances in building technology allowed water canals to be built that permitted vast improvements in the speed of communications between people and businesses. World trade, at the time, was dominated by the cotton industry and these new technologies significantly boosted production and brought boom times for the cotton industry and the world.
The second stage 3 boom in U.S. history began with the end of the Mexican War and ushered in the railroads and the era of the so-called ?robber barons.?
Railroads lowered transportation costs, opened up heretofore closed off areas of the world to civilization, and helped to generate exports at an unprecedented rate. The railroads also accelerated technological developments in other important industrial areas such as coal, iron and engineering. They changed the way business was done and capital was raised, accelerated the pace of urbanization and boosted the incomes of millions of people.
The third stage 3 boom in the U.S. began with the end of the Spanish-American War and produced the automobile, the airplane, the radio and the telephone. New methods of steel and aluminum production came into being that completely revolutionized previous processes. Electricity was introduced to the average homeowner and businessman.
The fourth stage 3 boom in the U.S. began with the end of World War II and was the first time the U.S. had experienced a stage 3 boom in the first half of a long wave inflation cycle since its founding. This stage gave us television, penicillin, synthetic rubber, radar, nuclear power, jet aircraft, antibiotics, agricultural chemicals, semiconductors and computer chips.
When the Gulf War ended in 1990 we embarked upon the fifth stage 3 boom in U.S. history and the story remained the same as before. If ever there was a period to take risks on new technology this has been it. The stock market has soared as it has in every other such period in our history and a few have made vast fortunes by being in the right place at the right time.
But human nature has been the same since the beginning of time and every boom carries within it the seeds of its own demise, and this one is no exception. We have already seen a hint of this in the fearsome decline that occurred in the NASDAQ in 2000. But it?s not likely that the technology boom is over yet and these types of declines are normal at the midpoint of this type of period. Every stage 3 boom for the last 250 years has begun with a war and ended with a war and, unless the pattern of history is about to change drastically, this is the next event that should put an end to this latest boom.
Wars have demonstrated a tendency throughout history to occur in the major powers of the world roughly once every 18-22 years. The Gulf War ended in 1991 which would lead us to project the next war involving the U.S. to occur in the 2009-2013 time frame and that it should be a stage 4 unpopular war. This means that we probably have a good 7-10 years to prepare for the onset of the next stage and the end of this boom period. But then the U.S. will be on the verge of experiencing only the second stage 4 unpopular war and the second stage 5 inflation during the second half of a long wave inflation cycle in its history as a nation. When this occurs it will most likely put an end to the current technology boom and require a complete and total revamping of investment and business strategy to succeed. And for anyone who cares to look, history does provide us with signposts to guide us through what is likely to be the beginning of one of the most perilous and ?interesting? (in the Chinese curse sense of the word!) periods in the history of the U.S. and the world.

now, regarding your other comments

1."the depression of 1929 was precipitated by a tightening of
monetary policy which resulted in a massive shrinkage in the
monetary base due to fear over a recurrence of inflation. "

"Where did you get this? This isn't true. "

what do you mean this is not true???? monetary contractions create depressions. this is well known. it is also well known that there was a spurt of inflation after world war I which got congress alarmed and when it started to show itself again just before the '29 crash the Fed reacted to it and tightened monetary policy. this served to choke off the supply of money which was feeding the bubble and brought the whole house crashing down but, in the process, it caused the money supply to contract severely which precipitated the depression.

2. as far as what depressions i am referring to see the article above.

3. by my model, the tech boom began just after the end of the Gulf War, making its midpoint right around 2000.

4. Japan is in a different part of the world and is its own individual cycle and phase. the work i have done has led me to focus on the country that is the leading economic and military power in the world at the time, which, obviously, Japan is not at this time or any time in the past 100 years.

5. when Nixon took us completely off the gold standard in the 70s the "weight" of a monetary standard, which i contend is why valuations would reach levels which those in the value camp consider "good" value, was lifted. since that time we have seen a steady inflation of p/e ratios which has caused many of my value oriented colleagues to lose a great deal of their hair, not to mention money, because p/e ratios have been so far off "historically tenable" levels. historical p/e ratios, for now at least, are simply irrelevant.

6. i am confident in my time line because i have seen it in action since i first formulated it in 1987. it allowed me to anticipate the 1987 crash and its relatively weak aftermath, the surge in bond prices that followed, the likelihood that the Gulf War would be a short and popular war, the recession that would follow it which would then be followed by a massive technology boom and the bear market at the mid point of this boom which occurred in 2000. and i began looking for a resumption of the tech boom period in late 2001, early 2002, ( a bit early i admit, but then i am a hedge fund manager so i am always hedged in one way or another). i actually have a real time, real life track record using it...;-)

7. these inflationary periods that count must be preceded by the appopriate events. the tech boom period, according to my model, began in 1990-1991 and typically lasts for 20 years with a bear market in the middle that was due around 2000. now it requires roughly another 10 years into approximately 2010 before its time to start anticipating an unpopular war phase and its recessionary aftermath. THEN its time to start looking for the real inflationary phase. what we are seeing now is just the beginning, just a taste, of what we are likely to see at that point when everything is lined up just right.

8. the mid cycle war is indeed what is due in the early part of the next decade. the real crisis war is not due until sometime in the 2020s, most likely in or around 2027 after the liquidation and monetary expansion stages.

9. i am impressed that you have seemed to at least skimmed through "Les Miserables"! and no, poor enjolras' fate in the book does not alarm me in the least. i have used this nom de plume for many years now because i once heard nathaniel branden say that the character of "enjolras" was the basis upon which ayn rand based all of her main literary characters...;-)

you are not the first person who has challenged the model i have outlined. i have dealt with this since i first encountered disbelievers pre-1987, then just prior to the Gulf War when all of my friends who had protested back in the 60s were getting their "give peace a chance" placards ready again as they readied for what they surely thought would be mass protests. i encountered it in 1994 when everyone around me was still listening to bob prechter and buying into the gloom and doom scenario at that time while i was telling them that a huge tech boom was just around the corner. and my friends in the financial business who had made their reputations as value analysts could not bring themselves to believe me when i told them they would get their heads handed to them everytime they said the market was overvalued back in the 90s. my former doctor and lawyer friends (most of whom are now back to being doctors and lawyers, albeit a tad poorer) who had discovered the joys of day trading did not believe me when i told them that party was soon coming to an end due to the mid boom bear period that was looming at the end of 1999. and few people on this site believed me when i first came on just after 911 and said that we would soon see a resumption of the bull market that would eventually lead the broad markets to new highs. although i do hope the few who did heed my advice, and those that contacted me privately, have been able to benefit from the upsurge in stock prices in 2003 ( 2004 is likely to be pretty choppy though. go back and look at 1994 and 1984 for an idea of what i mean).

i guess i could still be wrong but it does not look like it so far. the dow is not that far from making a new high. the S&P is likely to follow suit, probably in 2005. i even think the nasdaq is likely to eventually challenge its bubble highs, but that will probably take some time. some industry groups have already made new highs above and beyond their 2000 highs.

the ultimate arbiter of all of this discussion is reality and i am more than happy to put my model of the future to that test. it has served me well for approximately 18 years now and i have yet to see anything that would make me think its has stopped working despite all the warnings from those calling for "the great devalution" now instead of later.

Enjolras, where does the recent Iraq invasion fit into your timeline of wars. It isn't really a "popular" war like the Gulf War but it is (to date) less unpopular than Vietnam, and anyway, too early on your timeline. But you can't ignore it; it is a bigger effort than the Gulf War was.

the iraq war is most directly comparable, in my opinion, to the korean war. it is not so much the size of the war but the timing of it and the events that precede it that are the most important in my analysis.

my thought is that the iraq war is almost like a foreshadowing of the conflict that i think is coming in the early part of the next decade. it has been successful enough to still be mildly popular but has also shown the early stages of the mass protests that i think you will see in even larger numbers in the next conflict.

however, if i am wrong, i will be watching commodity prices and the inflation rate very closely once the troops come home and the war is over. we have already seen a sizable upmove in commodity prices in recent months but, again, i think this is just a small taste of what is yet to come and there is likely to be a serious and sharp correction in this area should the market continue to rally, probably most strongly in 2005 after a consolidative period in 2004.

Now mathematically, how do 80 year and 120 year cycles work together? That would require an overall 240 year cycle. Here in the US we are only 228.5 years old. I did note that one of your citations used England back until 1200 or so.

Originally Posted by mgibbons19 (71)

Now mathematically, how do 80 year and 120 year cycles work together? That would require an overall 240 year cycle. Here in the US we are only 228.5 years old. I did note that one of your citations used England back until 1200 or so.

actually the 84 year crisis cycle in the U.S is applicable back to the founding of the first spanish colony in the 15th century. but then S&H found this too! :wink:

the cycles and stage analysis applies to whatever country is the predominant economic and military power in the world at the time. presently, its the U.S. in times past it has been Great Britain, France, Spain, the Ottoman Empire, etc. etc.

one day, when i get the time, i am going to outline the various stages for the last 2000 or so years, or at least see just how close they come.

Originally Posted by enjolras

the iraq war is most directly comparable,
in my opinion, to the korean war.

You might be pleased to know
that the evil Bush/Rove team
agrees with you.

It probably doesn't matter a wit
that I do not agree with either you
or the evil "Bushlickers." :wink:

p.s. Good luck on your future
investment adjustments, you're going
to need it.

Originally Posted by oy

Originally Posted by enjolras

the iraq war is most directly comparable,
in my opinion, to the korean war.

You might be pleased to know
that the evil Bush/Rove team
agrees with you.

It probably doesn't matter a wit
that I do not agree with either you
or the evil "Bushlickers." :wink:

p.s. Good luck on your future
investment adjustments, you're going
to need it.

LOLOLOL!! :lol: :lol: :lol: :lol:

ah yes...the sweet sound of skepticism and disbelief that i have heard so many times for over 18 years now. if it weren't for you guys i'd never make any money! may you be fruitful and multiply!!

Originally Posted by enjolras

Originally Posted by oy

Originally Posted by enjolras

the iraq war is most directly comparable,
in my opinion, to the korean war.

You might be pleased to know
that the evil Bush/Rove team
agrees with you.

It probably doesn't matter a wit
that I do not agree with either you
or the evil "Bushlickers." :wink:

p.s. Good luck on your future
investment adjustments, you're going
to need it.

LOLOLOL!! :lol: :lol: :lol: :lol:

ah yes...the sweet sound of skepticism and disbelief
that i have heard so many times for over 18 years now.
if it weren't for you guys i'd never make any money!
may you be fruitful and multiply!!

You are mistaken, I'm not expressing skepticism and disbelief
in the 100 year deal, only in the less than 80 year deal.

Many folks weathered the Crash just fine, using their brains
and such. But to turn bearish (think Mike Alexander and the Democratic Party) when the bulls are running
is silly. And we all need a little "luck," right? :wink:

John knows I don't see eye to eye with his scenario, I am bullish while he is bearish. Enjolras probably also recalls that I was more bearish than he two years ago. We discussed on The Great Depression of 2001 thread.

In a post dated Thu Nov 08, 2001 6:27 am, enjolras outlined some of the predictions to be expected from his theory,

do i think that a buy and hold investor will outperform money market rates over the next several years leading up into the next peak war? absolutely and by a wide margin.

if the pattern holds then the economy and stock prices should continue their rallies from the september lows for several more years.

I wrote on Fri Nov 09, 2001 6:01 am

On the other hand, suppose the market collapses further as many bears predict. The S&P500 could easily go down to ~700. I don't think it will, but then I thought the April low was likely the bottom. If it does I can lower my cost basis on my TWCUX still further. One who became fully invested in 1998-1999 cannot.

enjolras outlined his cycle ideas and concluded with this on Sun Nov 11, 2001 5:49 pm

the 87 crash occurred right in its projected time window as did the subseqent monetary expansion, gulf war, technology boom, and the mid boom lull or bear market. the next tests are whether or not the boom period reasserts itself and holds steady into the 2009-2011 time frame and is capped off by an unpopular peak war sometime in the 2009-2013 time frame.

if these events do not occur it will be the first time since the 87 crash that such key events have not occurred within their projected time frames and will indeed make the model i have been using suspect. but so far that has not happened, and every indication that i see is that we are indeed on the brink of several more years of prosperity for the economy and stock prices. liquidity is the mother's milk of prosperity and right now we are swimming in it.

The conversation petered out and then briefly picked up in March 2002:

Tue Mar 05, 2002 6:16 pm
as i have said on here many times before, "liquidity is the mother's milk of prosperity." the effects of all the fed rate cutting from last year and the rapid growth in the monetary base since then are only now beginning to be felt. the recovery is only just now beginning and the second half of the boom is about to get underway.

I went on record saying the market had gone low enough to be consistent with past secular bear markets in a post on August 25, 2002 and an article on October 20, 2002 http://www.safehaven.com/showarticle.cfm?id=84

You are mistaken, I'm not expressing skepticism and disbelief
in the 100 year deal, only in the less than 80 year deal.

Many folks weathered the Crash just fine, using their brains
and such. But to turn bearish (think Mike Alexander and the Democratic Party) when the bulls are running
is silly. And we all need a little "luck," right? :wink:[/quote]



well, phooey! no skepticism and disbelief? rats! :wink:

but if memory serves me correctly, mike is not exactly "bearish". he just thinks that in the long run that equity returns will not exceed money market returns. and, frankly, if the "long run" is the next 20-30 years then he may well be right. but over the next 7-10 years, I think the equity market is still a fine place to be.

Well, hi again Mike.

And thanks for reminding me of how smart I was back then! :lol: :lol: :lol:

I always enjoyed our discussions even when we disagreed. Hopefully, we will have some more yet to come!

Originally Posted by enjolras

Well, hi again Mike.

And thanks for reminding me of how smart I was back then! :lol: :lol: :lol:

I always enjoyed our discussions even when we disagreed. Hopefully, we will have some more yet to come!

Hi!

Your cycle views are fairly unique. Two years ago I asked you how can you discern whether or not your model is holding true. You implied that the advance from the Sept 2001 bottom would continue. It did not with the result that the market today is at about the same level as it was then. Nevertheless, we had quite a ride over the last 10 months, but one who went long in Nov 2001 or March 2002 would have little to show for it.

Now at the time were were discussing I was 60% in stocks in my 401(k), which is hardly an extremely bearish posture. I had gone from 50% to 60% stock in September 2001 and reached 50% in the previous April which I thought might be the bottom (and might not) hence by 50:50 posture. I was a bit more sure that the Sept 2001 bottom might be the bottom as shown by my 60:40 posture, now weighted more heavily in stocks.

In summer 2002 as we went much lower I moved to 70% and then 80% stocks in my 401(k).
http://www.safehaven.com/showarticle.cfm?id=83
http://www.safehaven.com/showarticle.cfm?id=82

The S&P500 reached a level that should have triggered a move to 90% stocks on October 9, 2002 (and only on October 9, 2002) but I missed it as I was involved with family troubles with my wayward daughter on that day. In March 2003 I was well aware of the 800 level and ready to to move to 90% should the S&P500 reach 780. It did not and I am still at 80% in my 401(k). I will likely not move any higher. In fact my next move will be to reduce my stock exposure, possibly this year, but more likely in 2008.

Nevertheless the 20% increased stock allocation in summer 2002 is heavily in the black from the rally in 2003 and now I am once again in a favorable position.



This figure clearly shows my thinking. I believed the secular bull market that began in August 1982 was ending in 1999. Already by Jan 1999 I was down to 50% stock and I got out completely on 3 September 1999.
I was early as shown by how the 100% portfolio toasted my butt from Sept 1999 to March 2000.

I started re-entry into stocks in late 2000, when the Nasdaq had fallen 2000 points from its high and continued adding through early 2001 reaching 50% stocks in March 2001. At that time I was still comfortably ahead of both the all-stock and all-income strategy and I was feeling pretty smart.

At the time of our earlier discussion I was still ahead of the game and feeling prety smart. But by fall 2002 I wasn't feeling so smart as I was now behind where a super-bearish 0% stock allocation from Sept 1997 would have me (the dashed line in the figure). Tobin's Q reached an all-time high in fall 1997 and a follower of this standard valuation tool would have exitted stocks by this time. One who followed Robert Shiller's smoothed P/E woudl have exitted six months earlier, following Alan Greenspan's "Irrational Exuberance" speech, which was based on Shiller's valuation ideas.

What I am saying is a John X stance starting in late 1997 was a smarter position to have had than what I did as of Oct 2002. However, a consequence of a John X stance is stocks still looked scary in Oct 2002 or March 2003 and one would NOT get back in at these times if one has a John X view. The massive rally since March 2003 has again put me above the bearish posture (dashed line). And I am still well above the all-stock posture (which is where a bullish "Harry Dent" stance would have me).

I will again be selling down to 0% stock, probably in 2008 or thereabouts. As a result I will return to the 0% stock posture at a level above the bearish posture, this position will never catch me again. If the Jim Goulding view is correct and we see Dow 30000+ in the years after 2008 (when I get out), the all-stock posture will surpass me and I will look stupid compared to Jim. But if that doesn't come true, I will stay ahead of the all-stock position for the rest of the secular bear market.

So this is how I end up judging the effectiveness of my forecasts. If the gray line stays above both the dashed line and the black line then my use of the concept of secular market trends (and aligned turnings) will pay off. If it doesn't then the whole thing was a waste of time. I document my moves in real time in online articles, first on safehaven (where I posted for free) and now on 21st century investors, for which I am paid a 2K each month for an article.

My objective for this cycle stuff is to use it to make predictions. As specific predictions as possible, with the idea that I and my readers can use it to help formulate their investment/trading strategy. There is no guarantee that any of it is valid, Strauss and Howe could well be way off in left field and there is no saeculum, no K-cycle, no Stock Cycle, etc.

To do this in a valid manner one has to go on record with forecasts and see how they turn out. I made such a forecast right here just a few months ago. Basically I said that if the correlation between K-cycle and recession strength still holds, and I have the cycle position right, then the jobless recovery should persist until mid 2005.

Subsequent events suggest that the jobless recovery will not persist until 2005. Therefore, either I have the cycle position wrong, or the correlation between recession severity and the K-cycle position is no longer valid. Either way this is not good news. If I have the position wrong then I might as well give up and get another hobby. If the correlation is not valid (and there are independent reasons to believe that this might be the case) then that removes one more application of the cycles. If nothing correlates with the cycle as it did in the past, then the cycles are useless for predictions and become unfalsifiable--that is, not scientific at all, but pseudoscience.

Without testable applications, I am wasting my time with this whole cycles business. So far, some potential applications are still viable. I did get the stock market top close enough to be useful and I got the bottom good enough to help as well. Recession strength was a miss and politics is a whiff so far too. I have been trying to find a political application. It is extraordinarily difficult to draw an explicit forecast from the cycles in the realm of politics. I field test some of my non-stock forecasts here, Marc Lamb is usually good for spotting the whiffs I haven't given up yet, but it ain't easy.

mike,

if it was easy everybody would be doing it! :wink:

you are correct in that i was a bit early in anticipating the lows. but you must remember that i also trade the market so i was in and out on several occasions, both long and short, until things began to "stick" in 2003. i freely admit though that i was very surprised by the depth of the downmove in 2002 but, all in all, the basic pattern still remains the same and the market continues to crawl a wall of skepticism higher.

what the model i have outlined enabled me to do, however, was to keep probing for lows and to realize all the while that even though there still might be downside to the market there was still a lot more upside. perhaps you might want to consider the use of stop orders in your own investing? either that or the possibility of occasionally hedging your bets through a vehicle like, for instance, the Rydex Ursa fund which basically allows you to trade the S&P from the short side through a mutual fund. it would certainly give you, as an individual investor, some additional flexibility.

personally, i have a hard time envisioning 30,000 or more in the Dow. i suppose its possible but i try to focus more on trends than absolute price levels. i have found in the past that price prediction tends to just get you in trouble by causing you to become psychologically "married" to a forecast. in my opinion, the only real measure of whether your forecasts are any good or not are whether your account is larger or smaller at the end of the year!

Originally Posted by enjolras

mike,

if it was easy everybody would be doing it! :wink:

you are correct in that i was a bit early in anticipating the lows. but you must remember that i also trade the market so i was in and out on several occasions, both long and short, until things began to "stick" in 2003. i freely admit though that i was very surprised by the depth of the downmove in 2002 but, all in all, the basic pattern still remains the same and the market continues to crawl a wall of skepticism higher.

what the model i have outlined enabled me to do, however, was to keep probing for lows and to realize all the while that even though there still might be downside to the market there was still a lot more upside. perhaps you might want to consider the use of stop orders in your own investing? either that or the possibility of occasionally hedging your bets through a vehicle like, for instance, the Rydex Ursa fund which basically allows you to trade the S&P from the short side through a mutual fund. it would certainly give you, as an individual investor, some additional flexibility.

personally, i have a hard time envisioning 30,000 or more in the Dow. i suppose its possible but i try to focus more on trends than absolute price levels. i have found in the past that price prediction tends to just get you in trouble by causing you to become psychologically "married" to a forecast. in my opinion, the only real measure of whether your forecasts are any good or not are whether your account is larger or smaller at the end of the year!

Here we come to an issue that I encounter with traders all the time. Most traders seem to have some sort of macroview. Often this macroview is pretty inaccurate, but the traders do OK because of their trading skill--not because of the accuracy of their macroview. They continue to hold their macroview, considering it valid, because they themselves have done OK. But the fact is, a good trader can make money in any kind of market and he doesn't really need a macroview. Hence good traders can have completely divergent macroviews and still do well at the same time.
A good example was "Shortboy" who was making good coin in 1999 and early 2000 from a completely short portfolio. Obviously the trend was against shortboy, but his skill as a shortside trader was what mattered.

Now, I am trying to identify a macroview, which I use to make predictions. That is, when I write than the market has gone low enough for a new bull to begin, you can take a multi-year long position at that time and hopefully will not curse my name in a few years :wink: And if I say the secular bull market is coming to an end (as I did in my 2000 book or 1999 article), then one is supposed to be happy with me in a couple of years if they got out of stocks after they read the article.

I myself take multiyear buy-and-hold positions because I am not a trader. I suck at trading and am even worse at stock picking. I dislike investing, having been fatally burned by crooking accounting and margin. I want to to employ a passive strategy that will make me a modest return w/o having to do anything, because no matter what I do it will fail--this I know. My confidence is shattered and I will never recover the way I felt in 1998.

Half of the time, my strategy is simplicity itself. Simply passively hold 100% of your assets in spiders during secular bull markets. Unfortunately, as luck would have it, I came to believe that the secular bull market was ending in 1999. As I later learned, another one wouldn't start up again until 2018. So for 19 years I have to do something else, which is a royal pain in the ass. It was trying to figure out what to do in 1998 and 1999 that has cause be so much pain and led me to dislike investing.

So I do the passive thingy I wrote about above. And lo and behold I have not been reamed in my 401(k) and I am actually doing OK. In fact I may yet reach my goal and retire in 2009, but lets be clear, it won't because I will make millions trading the market, but because I have saved prodigiously (my wife and I live on 30% of our gross income).

Not everybody is as shitty an investor/trader as I. My cycle work has attracted some positive press, which is why there is an outfit that actually pays me for my opinions.

mike,

while i would consider myself a trader, and have traded a variety of styles from day trading to buy and hold, my primary approach as i get older is more intermediate term i suppose. my normal position lifetime is a few months to a couple of years. in fact, i have one portfolio i keep that only goes long and seldom trades at all and is up a little over 80% since its inception in October of 2000.

you are correct, though, that for most traders having a macroview, or any view, is often hazardous to their wealth. successful trading/investing is usually not so much a matter of forecasting as it is riding the market's "waves" as they occur and adjusting to any changes that might differ from your overall opinion. after all, only the market is always right, not us.

but i still like the model that makes up my macro view. it has served me well over the years. i may have been early in looking for an upmove in 2001 but it allowed me to anticipate, and profit from the 87 crash. it allowed me to profit from the big upmove in bonds shortly thereafter. it allowed me to profit from moves in oil and gold in anticipation of the Gulf War and its aftermath. It allowed me to profit from most of the upmove from 1991 through 1999 in technology and financial markets in general. and it got me out near the top of that move.

i was a bit early in 2001 and early 2002, sure, but if my macro view continues to be right no one will be cursing my name either if they bought in october of 2001 and suffered through 2002 if prices continue to move up as i expect into the end of the decade.

the problem though that i think you will face after the end of this decade, even if you manage to get out at the exact top and showed enough discipline to keep living on just 30% of your income, is that the next inflationary phase that i think is coming will be bad enough that it will effectively wipe out most of the purchasing power you will have accumulated through capital gains and forced savings UNLESS you take the necessary steps to protect your capital.

i wish you well regardless.

Dear Enjolras,

Originally Posted by enjolras

> i have had a chance to look at your web site. you've done some
> good work. but, in my opinion, you're still dead wrong.

Thanks for the commentary. I could return the favor by saying that I
see dozens of similar analyses on TV, equally Pollyannish, and I
don't find them the least bit impressive. You're welcome.

Look, I've said many times in this forum that I hope you and people
like you are right and that I'm wrong. If half the stuff that I've
predicted comes true, then I probably won't live long enough to say I
told you so. So more power to you.

I got into this when I became very interested (obsessed) with
studying this generational paradigm after 9-11, and with either
disproving it or by proving it by providing a theoretical
underpinning. After a few months of study, it became clear that the
entire generational paradigm could not be theoretically supported
unless crisis wars were accompanied by financial crises, which would
also mean that we're entering a financial crisis today. In studying
historical crisis periods back through the centuries, I've been able
to largely verify that there is such a correlation. And then I was
able to show, by means of analytical tools such as the ones I used in
my last message, that we are indeed in a financial crisis today.

So look, I'll tell you this: I've done thousands of hours of research
and writing on this, and I'm very smart about these things. Maybe
I'm right or maybe I'm wrong, but if it turns out that I'm dead wrong,
then you won't find it by spending a couple of minutes on my web site,
which is what you claim to have done.

> what do you mean this is not true???? monetary contractions create
> depressions. this is well known.

Well, it's not well known to a lot of people. And in fact, it
doesn't even make sense. You might as well say that snowstorms cause
depressions, since there are always snowstorms during depressions.

Recessions and depressions are "caused" by the speculative periods
that precede them. Speculative periods are accompanied by a great
deal of credit and free spending. This increases the velocity of
money during speculative periods, which causes a monetary expansion.
Then when the bubble bursts, everyone suddenly becomes a lot more
risk aversive, and all of a sudden the velocity of money takes a big
drop, and so there's a monetary contraction. So you're right that
depressions are correlated to monetary contractions, but they're not
the cause of the depressions.

Furthermore, when you say that "monetary contractions create
depressions," I infer a hidden message: that the Fed (or someone)
creates a depression by contracting the money supply. The problem is
that the Fed has only a very limited ability to control the money
supply, since it can't control the velocity of money.

The Fed funds rate today is 1%. According to any reasonable theory
of the last 30 years (at least since the rise of Milton Friedman's
monetarism), this should be causing explosive inflation -- 10%, 15%
or more. Instead, inflation was NEGATIVE (-0.2%) for the last
reported period, November 2002!!!! Now how the hell can inflation be
negative if Fed funds rate is 1%? How the hell does that fit into
your theory?

I'll tell you where it fits into my theory. Look at the following
graph:



This graph shows the CPI along with an exponential growth trend line.
This graph shows a CPI of 185 in 2003, and a 2010 trend value of 129.
So this graph is predicting a DEFLATIONARY period between now and
2010.

I originally put together this graph in response to a question from
Mike a few months ago. I found it very surprising at the time, and
I'll admit that I still find it very mysterious that it seems to
imply that inflation is going to fall no matter what the Fed does --
assuming that it's at all reasonable. And obviously there was
something a little different going on in the 20s and 30s. Perhaps
it's as you say -- some overreaction by Congress following WW I. At
any rate, the big monetary contraction in the 1930s would have been
caused by the massive credit collapse in 1929, with a sudden, massive
drop in the velocity of money.

> 3. by my model, the tech boom began just after the end of the Gulf
> War, making its midpoint right around 2000.

This doesn't make any common sense. Surely you can't believe this.
Obviously the tech boom began with the desktop computer in the early
80s.

> 4. Japan is in a different part of the world and is its own
> individual cycle and phase. the work i have done has led me to
> focus on the country that is the leading economic and military
> power in the world at the time, which, obviously, Japan is not at
> this time or any time in the past 100 years.

You can't ignore Japan just because it's in a different part of the
world. They're on an identical technology cycle with America, and
they're ten years ahead of us on the generational scale (WW II started
in 1931 for them, when they invaded Manchuria), so they're ten years
ahead of us in the speculation/crash. But you can't just ignore it
because your model comes out wrong.

> The first really important discovery I made was that people look
> at the long wave cycle of 50-60 years, otherwise known as the
> Kondratieff Wave, in the wrong way. They tend to look at it as a
> single cycle when it is far more complex than that, and this is
> why so many very intelligent people were wrong in their
> expectations for what would follow in the general economy after
> the 1987 stock market crash.

Here's my problem with the whole Kondratieff Wave theory: It's like a
pot luck stew, where everything but the kitchen sink has been thrown
into the mix, and then you try to determine patterns seek out patterns
from the millions of different ingredients, and you're always going to
find something.

You have technology cycles and generational cycles in the stew, and
now you've thrown in popular wars, unpopular wars, and any other
stuff you need to make it come out right. It's all a big mash. I
mean, maybe there are 110 year cycles, maybe not; maybe monetary
policy does matter, maybe it doesn't. With everything lumped
together you can't tell.

Even worse, there's absolutely no logical reason (and no reason
provided that I've seen) why the Kondratieff cycles should work on a
global basis. There are recessions and depressions and wars going on
all the time in different parts of the world, and trying to match
that to the ingredients in the stew just creates a worse jumble.

Look, if you'd like to do a project that puts Kondratieff waves onto
a sounder theoretical basis, I think I know how to do it. Here are
my suggestions:

(*) Start with technology cycles. Take a look at the last graph in
my last posting (the one with the green wave). That graph makes it
pretty clear that there's a 40-50 year technology cycle if you ignore
the generational cycle, so I think it's good guess that the
technology cycles are the Kondratieff cycles to a first
approximation. In addition, technology cycles should be global,
since technology is pretty much synchronized around the world (though
with some lags in earlier centuries).

(*) Next, examine the generational cycles. Now, the important
difference here is that while the technology cycles are global, the
generational cycles have to be localized. Different regions may be on
identical technology cycles, but on completely different generational
cycles. If you'd like a convenient list of generational cycles going
back into the middle ages for several regions of the world, you'll
find it in the appendix of my book (and my book can still be read
online for free, at least for the time being, by clicking on the
"BOOK HOME" link near the top of the web page).

(*) Now you have to put all this together by figuring out how the
generational and technology cycles interact in different regions of
the world. The cycles may interact in different ways in different
regions and in different times, and all of that has to be identified,
catalogued and typologized. If this works, it should be a major
simplification to the Kondratieff wave theory, and you can take a lot
of irrelevant junk out of the pot luck stew.

(*) Then look at other things like mid-cycle wars and monetary
contractions. I think you'll probably find some connections.

This is just my suggestion, and there's no guarantee it'll work,
though I'm pretty sure it will, and that it will provide some very
interesting and useful results. This could then tie in the
generational theory that I developed in my book, and possibly even
provide a way for forecasting the likelihood of mid-cycle wars in
addition to crisis wars.

Just one more point. You and Mike are arguing about whether
something is going to happen in 2001 or 2003. Something like
Kondratieff waves is going to be a long-term forecasting technique,
and will not produce anything with a precision of less than 5-10
years. You have to use short-term forecasting methods to get
anything of use in day to day stock trades.

Sincerely,

John

John J. Xenakis
john@GenerationalDynamics.com
http://www.GenerationalDynamics.com

P.S.: I've seen about 4 or 5 stage productions of Les Mis.

where is your "crisis war"? 9-11 was not a crisis war event. neither is this current conflict in iraq. we are due for another conflict in the early part of the next decade but that would be a mid-cycle conflict for me. and S&H's theories would call for the "crisis war" to occur in the 2020s which i concur with.

i started doing the same thing you say you've been doing since 9-11 back in 1985 and have had a number of opportunities now to test my hypothesis against real world events so your criticisms, so far, aren't holding a lot of water as far as i am concerned. you have not even been able to see one real time event actually take place yet that conforms to your outlook while i have been fortunate enough to see several already. i have spent quite a few hours of research, writing and giving real time counsel on this subject myself, so the only reason that i suggest that you are dead wrong is simply past experience in seeing the model i have outlined actually be put to the test over the course of the last 18 or so years. and i would hardly call the outlook that i am laying out "pollyannaish". after the end of this decade things get rather troublesome indeed.

i will agree with you that depressions are preceded by speculative periods. this fits in with my model as well. a speculative period followed by a monetary contraction creates a liquidation or a depression. and i also agree that the fed has a limited ability to control the money supply but when speculative periods occur sufficiently long enough it does not take too much of a push to send them over the edge. this has been true even before there were such things as central banks.

serious inflationary periods typically occur after wars that do not go well. DeGersdorff's work shows how inflation is also cyclical on a long term basis. as long as we are still in a boom period, which i contend we are, and until we have the unpopular war stage, we will have only mild inflation. i thought that was pretty clear?

you say that my saying that the tech boom beginning after the gulf war does not make "any common sense." :lol: well, it may not make any commons sense to you but it is a fact at least as far as equity prices are concerned. the tech sector had been largely languishing until the end of the gulf war and then off to the races it went. the rest is history.

japan is not the dominant economic or military power in the world so i discount what happens there. if anything, china is on the verge of overtaking japan in the next few decades as being the predominant power in the east. by that reasoning, why not look at brazil or argentina too? the u.s. is the dominant economic and military power in the world and has been since the early part of the 20th century when it took the baton from Great Britain.

the process is very simple. DeGersdorff's theoris about long paired cycles of inflation and disinflation gives you your basic theme. Are you in an inflationary or disinflationary long term cycle? Second, are you in the first or second half of that long term inflationary or disinflationary cycle? Third, what stage are you in within that part of the cycle? its hardly a mishmash. its a simple but logical process of focusing on smaller and smaller parts of a very long term cycle and everything has to follow a very precise pattern in order to be valid.

actually, 50-60 year cycles have been identified globally in all types of financial markets and commodity markets for as far back as data is available. exactly why such cycles are present is anyone's guess. my only interest is that they do exist and how can i attempt to profit from them.

there are a number of books on the kondratieff cycle which do indeed put in on a sound theoretical basis which you can easily find at your local university library. i would recommend starting with Brian Berry, then you might look into the writings of Robert Beckman. There are more but that will likely keep you busy for a while.

and what mike and i were discussing was how to best approach our respective "macro-views" and actually put them into practice so we could hopefully make a buck out of it. mike prefers a buy and hold approach that he does not have to think about a lot. myself, i also have a large scale view, but i always keep one foot near the exit just in case because i know that nothing is the world is absolutely certain but is only a matter of probabilities. but having such a long term, macro-view has enabled me to get in very early on a number of long term trends in the past with very little risk.


as for myself, i have never actually seen the stage productions of Les Mis. I have just read the book 3 or 4 times... :wink:

Originally Posted by enjolras

in fact, i have one portfolio i keep that only goes long and seldom trades at all and is up a little over 80% since its inception in October of 2000.

Obviously this portfolio is not a passive index investment, so here you are employing "stock picking" skill to circumvent the secular bear market, which was just beginning in Oct 2000. This is one of the methods of dealing with a secular bear market. The other is trading the shorter waves.

Now most mutual funds employ stock picking and some do trading. So mutual funds do what you advocate. (They may not do it the same way, or use the same models--but their generalized approach is similar) As a group they underperform the stock index. Thus, to beat the average performance of professional investment managers to whom ordinary folks have access to, one need only buy the index (e.g. spiders).

This "Bogle strategy" works like a charm 50% of the time during secular bear markets. Hence in Otober 1982 one would put 100% of his assets into the S&P500 and let it ride until Dec 2000. And in Oct 2018 he would again put 100% of his assets into the S&P500 index and let it ride until Dec 2036.

The problem comes in the intervening period, from Dec 2000 to Oct 2018, when the average return on the S&P500 will likely be less than 1% in real terms. Your approach to this problem is not very helpful. Basically you say to buy stocks in Oct 2000 that are going to go up over the enxt 3 years while most stocks are going to go down. This is exactly the same as advising one to buy those mutual funds that are going to go up in the future (some do every year). The problem with this advice is I do not know in advance which mutual fund is going to go up in advance, nor do I know which stocks at any given time will go up in the future.

but i still like the model that makes up my macro view. it has served me well over the years. i may have been early in looking for an upmove in 2001 but it allowed me to anticipate, and profit from the 87 crash.

You focus a lot on the 1987 crash. But really, in June 1991, which is the same distance from the Aug 1987 peak as today is from the March 2000 peak, the S&P was UP some 15%. This is like the S&P500 being at 1700 now. If I had stayed fully invested right through the 2000-2002, I would be happy with 1700 now, and so I think I could easily have just rode out 1987 as no big deal. But we are NOT at 1700 today, now we are still down some 25% from the 2000 peak, and I would not be happy with a buy and hold posture from 2000. What I am saying is one could simply ride out 1987 fully invested all the way down and all the way up and have done just fine. I am also saying that one who did the same after 2000 will not feel the same in 2010 and his 1987 counterpart did in 1997.

Right now we need two good years just to get out of the hole dug in 2000-2002. These two good years will push that gray line well above the two alternatives. I think is it nearly certain that we will return to the old highs on the S&P500 by 2008--and probably go modestly higher. But even if we get to 1700 by 2008, that poor sot who rode out 2000-2002 will have just obtained a money-market return from his stocks over the previous 8 years and if we then go down afterward, as I believe, he will end up being mighty unhappy come 2010.

What I am saying is dodging the post-2000 debacle and not getting back in too soon is far more important that doing the same in 1987. The reason is that the 1987 bear was within a longer secular bull market, while the 2000 bear was inside a larger secular bear market. It is safe to ride out bear markets inside of secular bull markets, but it is not safe to do the same in secular bear markets.

So far the post-2000 recovery has been much slower than the post-1987 recovery.

the problem though that i think you will face after the end of this decade, even if you manage to get out at the exact top and showed enough discipline to keep living on just 30% of your income, is that the next inflationary phase that i think is coming will be bad enough that it will effectively wipe out most of the purchasing power you will have accumulated through capital gains and forced savings UNLESS you take the necessary steps to protect your capital.

THis is only true if we are indeed in an upwave (as you believe). Fortunately, I have four years during which both of our view roguhly coincide. I am bullish and you are bullish. Hence we are on the same page. Come 2008 I will diverge from your view IF I still believe in my cycle position. I will only maintain my view of cycle position IF reduced price confirms it (which has not yet happened). If it has NOT confirmed my view I will then drop it. The remaining possibilities are then your view (we are in an upwave) and Marc Lamb's view (we are still on the plateau--i.e. we be 3T). Reduced price will have confirmed one of these positons by 2008 simply because either it will go UP (then I pick your view) or DOWN (then I stick with my view) or SIDEWAYS (then I go with Lamb's view). But right NOW all three views say LONG. So I maintain a bullish posture and hope to enjoy the ride.