Cycles, Markets, Trends…Wars


While in London last week, I participated in an international investment seminar organized by Lalic Insurance Services of Panama – See http://www.garyascott.com/courses/552/

At that course I pointed out how we are in a 15 year downward cycle that is supported by over 100 years of history. These cycles appear to be intricately connected with waves of productivity and the various industrial cycles fueled by water, steam, internal combustion engine, jet engine, T.V., Telephone, computer and internet and also affected by war.

You can see this quite clearly in the graph below how each upwards cycle rises after a war (postwar boom) and how the market then crashes before the next upcoming war.

See this chart

The first postwar boom probably started in about 1865. We cannot see this as the chart does not start until 1890. I am guessing the 1865 date because this was the end of the War between the States. This war was a battle over cotton the primary ingredient used in the water powered industrial revolution, an era dominated by textiles.

We can see this boom carrying on up through 1900.

The first fifteen year downwards cycle began in 1900 a downfall leading to WWI in 1914. There were a couple of short term blips (which also occurred in other cycles) probably one caused by the Russo-Japanese War which ended in 1905 when President Theodore Roosevelt mediated the Treaty of Portsmouth. The blip you see in 1907 was called the panic of 1907 and was caused by a run on the banking system. (Note this very important point-you will see why in a moment.) This was stopped by J.P Mogan's importation of $100 million of gold from Europe, but the correction was only temporary as the chart clearly shows.

At the end of WWI we see the next post war boom which runs up to 1929. Then comes the next fifteen year downcycle from 1929 to 1945. As in the last cycle there is a sharp downward blip in the middle caused by a run on U.S. banks which is once again mitigated by intervention, this time, FDR's Presidential election and the New Deal.

There is a nice postwar boom 1946 through 1968 once again followed by a fifteen year downfall. (Note the sharp downwards blip in the middle caused when high inflation, a devaluing US dollar, and rising oil prices once again shook the U.S. banking system).

1968 begins the next 15 year downwards cycle which is the rundown to WWIII (Reagan-Thatcher versus the Evil Empire), albeit a cold war the end of the USSR and the nuclear threat kicks off a post war boom that runs (surprise-surprise) for about 15 years until the crash of 1998. Is this a coincidence or a pattern? If history has anything to do with the future than we can expect the following: The next big bull market in Wall Street will begin about 2012. There will be a U.S. banking crisis somewhere around 2005 and a nice short term recovery thereafter.

What does that mean for now? First it means that we should not expect too much for the Dow – S&P until after the banking crisis which is still a couple of years away.

Second, this means that until then we need to invest differently, in a more protected way and most of all ignore all the headlines in the short-term news. Forget the "Is the bear finally over?" headlines and the "Does the latest five day rise in the Dow signal the next bull?" banners, etc. Third we need to protect ourselves from bad banks and a crunch in the banking system. We already see some huge problems building and the fall of Worldcom is an early warning shot. (see our recent World Reports if you are an eclub member) – see http://www.garyascott.com/eclub/

One way to invest is to use value investing and this is why we have been following the advice of eclub advisor Michael Keppler who rates all the world markets in terms of relative value. His strategy is working in these days of depressed news. The Global Advantage Major Markets High Value Subfund is now ranked number two in three year performance, up 40.3 percent in both the S&P (5 Stars) and FERI Trust Fund ratings of 464 global equity funds registered in Germany. This beats the MSCI World Index by 15.5 % p.a. over the last three years.

Keppler in his latest major market update points out that all 18 markets he follows declined in June, but that Denmark and Austria both down 4.3% were the least hurt. Austria has been on Keppler's buy list for many months, though Denmark is now on his sell list.

The only change in Keppler's ratings since last month is that Japan has been downgraded from Neutral to sell. Keppler's Top Value Portfolio only holds markets on his buy list which are Austria, Belgium, Germany, Hong Kong and Norway.

Here are Keppler's Major Market ratings:Buy: Austria, Belgium, Germany, Hong Kong, Norway.Neutral: Australia, Italy, Singapore, Spain, United KingdomSell: Canada, Denmark, France, Japan, Netherlands, Sweden, Switzerland, U.S.A. Next message looks at the top value emerging markets and we will update all at Jyske Bank's upcoming course in Copenhagen Aug. 28 to September 3 – see http://www.garyascott.com/courses/ Until next message good investing to you.

Gary


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