Sunday, November 03, 2002 10:28:41 PM
LURQER ON DOW 2900, Part II
I. The Modern Era
Last month in a series of posts, I discussed long term market cycles that are visible on
Figure 1.
In the post From Panic to Mania,
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=18142540
I described the Panic/Bounce/Oscillate from Despair to
Disgust/Show Me/Greed/Mania cycle that has been evident since
the 1929 panic.
In the post The down elevator's route
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=18142943
I mentioned H. Dents belief that long term secular trends are a
function of the spending patterns of large demographic bulges
in the population. For those unfamiliar with Dent's work, he
exhibits a graph (function) of the spending of a typical couple
(John and Jane Doe) over their lifetimes. According to Dent,
the couple will gradually increase their spending as both their
income and obligations (large house for the kids) increase.
Eventually, the spending peaks (with the empty nest) and
declines through retirement. A plot of this spending vs. the
age of the couple would exhibit a single peak in the middle age years.
For a variety of reasons (immigration patterns, hard economic
times, war) the US demographic profile has bulges and troughs.
Currently, the largest bulge is the Boomer generation. If you
convolute the spending function of a typical couple with the
population demographic profile, you get Dent's generational
Spending Wave. Dent exhibited a compellingly strong correlation
between the generational Spending Wave and the stock market's
secular bull and bear markets.
This past week, in reference to a question from LG, I stated
that I believed that the economic cycle prior to the 1920s
was "distorted" by the massive immigration that occurred around
the beginning of the last century. Upon further reflection, I
believe that statement was accurate, but insufficient.
Recognizing the effect of immigration, Dent modifies his birth
statistics to produce his Immigration-Adjusted Birth Index. But
without a good demographic profile of the immigrant population,
the adjustment is at best crude. Since the ratio of immigrants
to native born peaked with influx in the early 1900s, any
economic cycle "distortion" should have a lagged peak soon thereafter.
Another great tumultuous event of this era was World War I - or
as it was known at the time The Great War. It is hard for us
now to realize what and era shattering event that war was. In
Europe it marked the beginning of the modern era. It swept away
the vestiges of earlier more ancient times. The Austro
-Hungarian Empire, a direct lineal descendent of the Holy Roman
Empire of the middle ages, was dissolved. The tsarist Russian
Empire (that had freed its serfs only fifty years earlier) was
revolutionized. The Ottoman Empire (the last great caliphate of
Islam's outward push and the conqueror of the Eastern Roman
Empire) was obliterated.
In this country, the earlier agrarian period that had marked
this country since its origins, came to an end. A popular song
of the era said it all. "How are you going to keep them down on
the farm after they've seen Paree". With the acceptance of the
mass produced automobile in the 1920s, the several millennia
era of the horse was finally over. Wide use of the automobile,
electrical appliances and lighting, radios and telephones all
mark the 1920s as the beginning of the modern era.
In summation, I believe 1920 marks an economic threshold. A
threshold of sufficient magnitude that no easy comparisons of
the period prior to 1920 can be made with the period subsequent
to that time. Characterized by the absorption of the earlier
immigration, the transition from an agrarian to an urban
society and the technologically induced lifestyle changes, this
threshold was the beginning of the Modern Era.
II. Keeping Up With Inflation
In a conversation this past week with LG on my posts regarding
the Panic to Mania cycle exhibited in Figure 1, LG commented
that he thought that each cycle had its own distortion. I
couldn't agree more. In this post, I'll discuss the effects of
the massive inflation of the 1970s on the secular bear of that era.
As expressed in The Modern Era (part I)., each demographic
generational bulge will produce its own secular bull and bear
markets based on its Spending Wave. In 1966, the Boomer's
parents had their mania peak with the GO-Go market. This was
also the time of the large "build up" of the military
associated with increased Vietnam involvement. Johnson's "Guns
and Butter" policy led to a significant increase in the
inflation rate at the time.
Scarred by the economic deprivation of the Great Depression and
infused by Keynesian economic concepts, the Boomer's parents
were in control when the secular bear began in 1966 and
throughout the Nixon years. The prevailing idea was to "fight"
the slowing economic activity with huge increases in the money
supply. The folly of this approach became apparent to all when
the resulting inflation reached double digit proportions in the
Carter years of the latter ‘70s.
As discussed in the post From Panic to Mania (linked in part
I.), a secular bear begins with a panic that carries the value
of stocks from the upper channel line (1966) to the lower
channel line (1974) on the inflation adjusted Dow graph (Figure
1) exhibited above. Subsequent to the panic phase the market
bounces and then oscillates sideways at a lower level until the
Spending Wave of the next generational bulge kindles the
beginning of the next secular bull.
Although visible in the inflation adjusted Dow graph for the
period from 1966 to 1982, the pattern is "distorted" by the
drop in value after 1974 resulting from the sever inflation of
that time. However, if one doesn't adjust for inflation
the "distortion" of the pattern is even greater.
Figure 2
From a purely price perspective, the entire secular bear market
can be viewed as a sideways oscillation. But to borrow a phrase
from the time, the market was not "keeping up with inflation".
To get a longer perspective on the effects of inflation consider
http://www.dogsofthedow.com/dow1925cpilog.htm
Figure 3
This shows that in the previous secular bear (the 1930s)
without the massive monetary increases, deflation occurred -
resulting in the inflation adjusted Dow graph being above the
non-adjusted graph. The OPA
http://www.encyclopedia.com/html/O/OfficeP1r.asp
held prices in check during WWII. Upon its demise in 1947
(corresponding to the vertical line on the graph), inflation
spiked, and the non-adjusted line has remained above the
adjusted line ever since.
These graphs exhibit the perils of either doing nothing, or
simplistically addressing the contracting economy that
accompanies a secular bear market. Hopefully, our "leaders" in
Washington will learn from past mistakes - but I wouldn't bet on it.
III. When Harry Met Folly
In The Modern Era (part I.), I discussed the interplay between
Harry Dent's demographic Spending Wave and the Panic to Mania
cycle linked in part I.
In his books, Dent showed that the plunges to the '32 and '74
Dow panic lows corresponded closely to the falls in demographic
spending of the Boomer's parents and grandparents. He
confidently predicted that the next panic fall would occur in
2007 when the spending would fall for the Boomers.
Instead, the fall occurred in 2000. What happened?
More careful scrutiny of Dent's correlation reveals a problem
with the '74 plunge. Dent's Spending Wave decline predicts a
fall from '72 to '74. This corresponded well with the Dow price
fall unadjusted for inflation exhibited in the non-inflation
-adjusted 1960 to present chart exhibited in Figure 2. It fails
to predict the value fall from the Inflation-Adjusted Dow in
1966 that preceded the final '72 to '74 plunge.
To correct for these discrepancies, various solutions have been
proposed. Roger Babson takes the first derivative of the
Spending Wave function to get his ROC (rate of change)
function. He then correlates the ROC peaks and troughs with the
start of secular bull and bear markets. It's his contention
that it's not so much the absolute value of the spending as the
change in spending that triggers the secular bull and bear
periods. Mike Alexander uses a Wage-Adjusted Spending Wave
http://www.gold-eagle.com/editorials_01/alexander040301.html#fig1
He maintains that to get the real spending you must convolve
the desired spending from the demographic Spending Wave with
the wage rate change. In a period of rising wages, the spending
will be enhanced, and in a period of stagnant wages, the
spending will be depressed.
Both of these approaches have merit and exhibit some success in
matching the observed market profiles. While each of these
techniques "could be right", I believe the problem is more
fundamental. It may be heuristically desirable to explain the
market in terms of a single variable (demographics), but I
don't believe life, the economy or the market is that simple.
Demographics is destiny - but only to a point. I think it's
folly to only consider demographics. During the two 18 year
secular bull markets from '48 to '66 and '82 to '00, greed
trounced fear. "Buying the Dips" always worked. The market
continued to go up. Eventually human emotion trumped
demographics as the controlling factor and greed becomes mania
- then mania leads to panic.
I believe that in a "normal" secular bull cycle, the mania peak
will precede the Spending Wave peak simply because of the
emotional component of the market price valuation. This was
masked by the inflation rampant in the previous secular bear,
but not in the current one. Moreover, I believe that exogenous
events outlined in The Modern Era delayed the initiation of the
secular bull of the Boomer's grandparents. Hence, their mania
did not have time to peak prior to their demographic spending peak.
So, "distortions" in the two preceding cycles led Dent to
erroneously predict a secular bull market peak seven years
later than the one that occurred in '00. Nevertheless, his
Spending Wave is a powerful force and will IMO cushion the fall
to the lower channel in the Inflation-Adjusted Dow graph until
around 2008.
All JMO.
lurqer
MDA Thread #board-1320
Turnips Thread #board-1125
Trading Info #board-1220
Retrace #board-1345
PPT #board-1280
http://www.angelfire.lycos.com/goth/augieboo
I. The Modern Era
Last month in a series of posts, I discussed long term market cycles that are visible on
Figure 1.
In the post From Panic to Mania,
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=18142540
I described the Panic/Bounce/Oscillate from Despair to
Disgust/Show Me/Greed/Mania cycle that has been evident since
the 1929 panic.
In the post The down elevator's route
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=18142943
I mentioned H. Dents belief that long term secular trends are a
function of the spending patterns of large demographic bulges
in the population. For those unfamiliar with Dent's work, he
exhibits a graph (function) of the spending of a typical couple
(John and Jane Doe) over their lifetimes. According to Dent,
the couple will gradually increase their spending as both their
income and obligations (large house for the kids) increase.
Eventually, the spending peaks (with the empty nest) and
declines through retirement. A plot of this spending vs. the
age of the couple would exhibit a single peak in the middle age years.
For a variety of reasons (immigration patterns, hard economic
times, war) the US demographic profile has bulges and troughs.
Currently, the largest bulge is the Boomer generation. If you
convolute the spending function of a typical couple with the
population demographic profile, you get Dent's generational
Spending Wave. Dent exhibited a compellingly strong correlation
between the generational Spending Wave and the stock market's
secular bull and bear markets.
This past week, in reference to a question from LG, I stated
that I believed that the economic cycle prior to the 1920s
was "distorted" by the massive immigration that occurred around
the beginning of the last century. Upon further reflection, I
believe that statement was accurate, but insufficient.
Recognizing the effect of immigration, Dent modifies his birth
statistics to produce his Immigration-Adjusted Birth Index. But
without a good demographic profile of the immigrant population,
the adjustment is at best crude. Since the ratio of immigrants
to native born peaked with influx in the early 1900s, any
economic cycle "distortion" should have a lagged peak soon thereafter.
Another great tumultuous event of this era was World War I - or
as it was known at the time The Great War. It is hard for us
now to realize what and era shattering event that war was. In
Europe it marked the beginning of the modern era. It swept away
the vestiges of earlier more ancient times. The Austro
-Hungarian Empire, a direct lineal descendent of the Holy Roman
Empire of the middle ages, was dissolved. The tsarist Russian
Empire (that had freed its serfs only fifty years earlier) was
revolutionized. The Ottoman Empire (the last great caliphate of
Islam's outward push and the conqueror of the Eastern Roman
Empire) was obliterated.
In this country, the earlier agrarian period that had marked
this country since its origins, came to an end. A popular song
of the era said it all. "How are you going to keep them down on
the farm after they've seen Paree". With the acceptance of the
mass produced automobile in the 1920s, the several millennia
era of the horse was finally over. Wide use of the automobile,
electrical appliances and lighting, radios and telephones all
mark the 1920s as the beginning of the modern era.
In summation, I believe 1920 marks an economic threshold. A
threshold of sufficient magnitude that no easy comparisons of
the period prior to 1920 can be made with the period subsequent
to that time. Characterized by the absorption of the earlier
immigration, the transition from an agrarian to an urban
society and the technologically induced lifestyle changes, this
threshold was the beginning of the Modern Era.
II. Keeping Up With Inflation
In a conversation this past week with LG on my posts regarding
the Panic to Mania cycle exhibited in Figure 1, LG commented
that he thought that each cycle had its own distortion. I
couldn't agree more. In this post, I'll discuss the effects of
the massive inflation of the 1970s on the secular bear of that era.
As expressed in The Modern Era (part I)., each demographic
generational bulge will produce its own secular bull and bear
markets based on its Spending Wave. In 1966, the Boomer's
parents had their mania peak with the GO-Go market. This was
also the time of the large "build up" of the military
associated with increased Vietnam involvement. Johnson's "Guns
and Butter" policy led to a significant increase in the
inflation rate at the time.
Scarred by the economic deprivation of the Great Depression and
infused by Keynesian economic concepts, the Boomer's parents
were in control when the secular bear began in 1966 and
throughout the Nixon years. The prevailing idea was to "fight"
the slowing economic activity with huge increases in the money
supply. The folly of this approach became apparent to all when
the resulting inflation reached double digit proportions in the
Carter years of the latter ‘70s.
As discussed in the post From Panic to Mania (linked in part
I.), a secular bear begins with a panic that carries the value
of stocks from the upper channel line (1966) to the lower
channel line (1974) on the inflation adjusted Dow graph (Figure
1) exhibited above. Subsequent to the panic phase the market
bounces and then oscillates sideways at a lower level until the
Spending Wave of the next generational bulge kindles the
beginning of the next secular bull.
Although visible in the inflation adjusted Dow graph for the
period from 1966 to 1982, the pattern is "distorted" by the
drop in value after 1974 resulting from the sever inflation of
that time. However, if one doesn't adjust for inflation
the "distortion" of the pattern is even greater.
Figure 2
From a purely price perspective, the entire secular bear market
can be viewed as a sideways oscillation. But to borrow a phrase
from the time, the market was not "keeping up with inflation".
To get a longer perspective on the effects of inflation consider
http://www.dogsofthedow.com/dow1925cpilog.htm
Figure 3
This shows that in the previous secular bear (the 1930s)
without the massive monetary increases, deflation occurred -
resulting in the inflation adjusted Dow graph being above the
non-adjusted graph. The OPA
http://www.encyclopedia.com/html/O/OfficeP1r.asp
held prices in check during WWII. Upon its demise in 1947
(corresponding to the vertical line on the graph), inflation
spiked, and the non-adjusted line has remained above the
adjusted line ever since.
These graphs exhibit the perils of either doing nothing, or
simplistically addressing the contracting economy that
accompanies a secular bear market. Hopefully, our "leaders" in
Washington will learn from past mistakes - but I wouldn't bet on it.
III. When Harry Met Folly
In The Modern Era (part I.), I discussed the interplay between
Harry Dent's demographic Spending Wave and the Panic to Mania
cycle linked in part I.
In his books, Dent showed that the plunges to the '32 and '74
Dow panic lows corresponded closely to the falls in demographic
spending of the Boomer's parents and grandparents. He
confidently predicted that the next panic fall would occur in
2007 when the spending would fall for the Boomers.
Instead, the fall occurred in 2000. What happened?
More careful scrutiny of Dent's correlation reveals a problem
with the '74 plunge. Dent's Spending Wave decline predicts a
fall from '72 to '74. This corresponded well with the Dow price
fall unadjusted for inflation exhibited in the non-inflation
-adjusted 1960 to present chart exhibited in Figure 2. It fails
to predict the value fall from the Inflation-Adjusted Dow in
1966 that preceded the final '72 to '74 plunge.
To correct for these discrepancies, various solutions have been
proposed. Roger Babson takes the first derivative of the
Spending Wave function to get his ROC (rate of change)
function. He then correlates the ROC peaks and troughs with the
start of secular bull and bear markets. It's his contention
that it's not so much the absolute value of the spending as the
change in spending that triggers the secular bull and bear
periods. Mike Alexander uses a Wage-Adjusted Spending Wave
http://www.gold-eagle.com/editorials_01/alexander040301.html#fig1
He maintains that to get the real spending you must convolve
the desired spending from the demographic Spending Wave with
the wage rate change. In a period of rising wages, the spending
will be enhanced, and in a period of stagnant wages, the
spending will be depressed.
Both of these approaches have merit and exhibit some success in
matching the observed market profiles. While each of these
techniques "could be right", I believe the problem is more
fundamental. It may be heuristically desirable to explain the
market in terms of a single variable (demographics), but I
don't believe life, the economy or the market is that simple.
Demographics is destiny - but only to a point. I think it's
folly to only consider demographics. During the two 18 year
secular bull markets from '48 to '66 and '82 to '00, greed
trounced fear. "Buying the Dips" always worked. The market
continued to go up. Eventually human emotion trumped
demographics as the controlling factor and greed becomes mania
- then mania leads to panic.
I believe that in a "normal" secular bull cycle, the mania peak
will precede the Spending Wave peak simply because of the
emotional component of the market price valuation. This was
masked by the inflation rampant in the previous secular bear,
but not in the current one. Moreover, I believe that exogenous
events outlined in The Modern Era delayed the initiation of the
secular bull of the Boomer's grandparents. Hence, their mania
did not have time to peak prior to their demographic spending peak.
So, "distortions" in the two preceding cycles led Dent to
erroneously predict a secular bull market peak seven years
later than the one that occurred in '00. Nevertheless, his
Spending Wave is a powerful force and will IMO cushion the fall
to the lower channel in the Inflation-Adjusted Dow graph until
around 2008.
All JMO.
lurqer
MDA Thread #board-1320
Turnips Thread #board-1125
Trading Info #board-1220
Retrace #board-1345
PPT #board-1280
http://www.angelfire.lycos.com/goth/augieboo
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