Today’s Predictable Problems: A Cycle Top

On the left is a representation of Dr. Raymond Wheeler’s Drought Clock. He created this clock in the 1940s to help others predict cycle turns based on changes in historic climate. Dr. Wheeler found major climate cycles of 25, 100, 170, and 515 year intervals. For a larger representation of his clock and more information on it, click here.

The 515 climate cycle is also a major civilization cycle where virtually everything around us changes. This weekend, I’m pulling out a few of those changing cycle top “traits” with some short examples of how the same events recur over and over again, not verbatim, but with changes. It’s the reason we often say that “history rhymes.”

“Those who do not remember the past are condemned to repeat it.” George Santayana

It’s amazing to me how quickly the world is devolving into complete chaos. Of course, this is a trait of moving to a colder climate, and has happened throughout history at both 172 and 515 cycle tops. After going sideways for the past 19 years or so (since 1998) world temperatures are gradually turning down. The first part of a cold period is wet, the balance is dry. However, it’s not only the climate that’s predictable.

“As far back as I can remember, I’ve always been a strong believer in the importance of cycles. You’d better try to understand them, because all of your timing and often your luck is tied up in them.” Lee Iacocca, past President and CEO of Chrysler Corporation (1978-1992)

There are many major cycle top traits that appear right on schedule, but in a slightly different manner than the last time. If you’re a student of cycles, like I am, you recognize the similarities to mass historic changes of the past that “the herd” simply doesn’t recognize.

Above is a representation of relative temperature highs and lows (cycles) and how they correspond with the rise and fall of civilizations. This data on temperature comes from the Greenland Ice Sheet Project, funded by Denmark, Switzerland, and the United States in the 1970s and 80s.

Building Walls

The building of walls always happens are major cycle tops in history. The cycle tops occur roughly at 500 year intervals, so 500 BC, AD 100, 600, 1000, 1500, and right about now.

President Trump is talking about the “Great Wall of Meximerica.” But it’s not the first wall at a cycle top.

In AD 122, Hadrian, then emperor of a struggling Roman Empire built Hadrian’s Wall (an 80 mile long wall in Northern England) to keep out the barbarians.

China’s Great Wall was built in stages, but the majority of construction happened during the Ming Dynasty (1368-1644) to keep out the Mongolians. This happened at the top of another ~515 year cycle.

So President Trump is not doing anything new—just working to the cycle clock.

Migration

The Jewish Diaspora: from the 6th century BC

An early story of the movement of peoples begins in the Middle East in the 6th century BC (a 500 year cycle top). After the destruction of Jerusalem by Nebuchadnezzar, many Jews lived in Egypt or Babylon. In these alien surroundings they preserved their own customs.

It was the beginning of the process by which the Jews spread throughout the world – the Diaspora – remaining always a minority in the societies they entered (until the creation of the modern state of Israel). Other tribes on the move either become a majority in their new home or were absorbed. Only the Jews, through retaining a religious and to a lesser extent a racial identity, survived through two and half millennia as a recognizable, though widely scattered people.

There as another mass Jewish migration around the time of the next major 500 year cycle top. The Jews revolted against the Roman Empire in 66 CE during the period known as the First Jewish–Roman War which culminated in the destruction of Jerusalem in 70 CE. During the siege, the Romans destroyed the Second Temple and most of Jerusalem. This event marked the beginning of the Roman exile, also called Edom exile. Jewish leaders and elite were exiled from the land, killed, or taken to Rome as slaves.

Germans on the move: 2nd century BC

In the 2nd century BC, Germanic tribes moved south and east from Scandinavia. Other Germans pressed south along the Rhine as far as the Danube, forcing the Helvetii – a Celtic tribe – to take refuge among the Swiss mountains.

Two German tribes, the Teutones and the Cimbri, migrated so far south as to threaten Roman armies in southern France and northern Italy. They were finally defeated and pressed back in 101 BC. But from the Roman point of view a long-term threat had been identified – that of the German barbarians whose territory became the region beyond the Rhine and the Danube.

Angles and Saxons: 5th – 6th century

With Gaul in the hands of Germanic chieftains, and the Roman legions withdrew from Britain. At the same time, land-hungry tribes were tempted by the short step across the English Channel. Among those who take this step were invading the eastern and southern coasts of England, are Angles and Saxons. They came from Denmark, from northwest Germany and from the lower reaches of the Rhine. This migration was so large that it caused the re-settlement of Brittain.

The Arab conquests: 7th century

One of the most dramatic and sudden movements of any people in history was the expansion, by conquest, of the Arabs in the 7th century (only the example of the Mongols in the 13th century can match it). This was responsible for the spread of Islam. It began with the Islamic Prophet Muhammad in the 7th century.

The desert tribesmen of Arabia formed the bulk of the Muslim armies. Their natural ferocity and love of warfare, together with the sense of moral rectitude provided by their new religion, formed an irresistible combination.

Gypsy Migrations from 1417

Whatever their origins, the Gypsies spread rapidly through western Europe during the 15th and 16th centuries. Their refusal to settle and assimilate with the local population enabled them to retain a separate identity. But it also provokes hostility and persecution.

This is seen, from the start, in the removal of Gypsies from western kingdoms – akin to the expulsion of Jews (whose sufferings the Gypsies also share in the 20th century). Gypsies were expelled successively from Germany (1497), Spain (1499), France (1504), England (1531), Denmark (1536), Scotland (1541) and Poland (1557).

Inflation vs. Deflation

Let’s go back to Ancient Rome for a good lesson in inflating the money of the population, the favourite past-time of most governments throughout history. Over the course of the destruction of the Roman Empire, the coinage was inflated by about 95%.

Today there’s an inflationary war being raged across the globe. Governments love to inflate their money, as it boosts trade. When you inflate (create and disperse more money within the economy), money decreases in value. If you decrease the value of your money, the products you produce end up being less expensive to the inhabitants of other countries that have more valuable money (have not inflated their money).

Eventually, however, the economy of the host country suffers (the one that inflates the money supply). That’s because lowering the value of money at home increases the general cost of living. Prices of items within the country increase. Over time, the population attempts to keep up their standard of living but to do so, has to go deeper in debt. Eventually, it leads to a loss of confidence in the economy and eventually, deflation, leading to a complete financial collapse.

The above chart shows the declining value of today’s dollar due to inflation. Over the past 100 years, it has declined by 96%. That means that compared to 1913, today’s dollar is worth four cents. However, costs have not collapsed to the same degree, so we’ve rolled into heavy amounts of debt in an attempt to keep up our lifestyles. This is unsustainable.

This has happened over and over again throughout history. It took place in the 1920s in the US, leading to a financial bubble and eventually, a stock market and real estate crash: The Great Depression. The Greater Depression is just around the corner.

Trade Wars

We’re heading into trade wars once again. The writing is already on President Trump’s wall, even before construction starts. You’d think the country would have learned its lesson in trade wars and their impact on the economy from the 1930s. Apparently not.

In 1930, President Herbert Hoover approved the Smoot-Hawley Tariff Act, which raised tariffs on over 20,00o imported goods. This was akin to a trade war and resulted in reducing America’s imports and exports by more than half. It exacerbated the depression.

In fact, if you do a bit of reading about President Hoover, you’ll find an uncanny parallel between the financial situation of the 1920’s and that of today. It was a period of inflationary expansion, caused by central banks, and resulted in a financial stock market bubble and ensuing crash.

Stock Market Bubbles

The above chart shows the extraordinary financial bubble created over the past 43 years by our current monetary system, which is based solely on debt. There’s as much debt in the world as there is wealth. As a result, most of the wealth is an illusion. Bubbles always crash and this is the largest debt bubble in history. In the next few months, we’ll see the top.

There are many more traits that arise at these 515 year cycle tops. I’ll continue to focus on a different group of them over the coming weeks. They’re predictable because they’re periodic (they’ve happened at regular intervals historically). They’re well-documented in history books and, of course, books about cycles. But, nobody reads history …

All the Same Market

“All the same market” is in place once again. This is the movement of currencies and equities seemingly in sync. In retrospect, it was the defining feature of the past week. All the USD currency pairs have wandered around at the top of their waves as the US indices have completed theirs.

I’m on the fence regarding ES, SPX, and the USD currency pairs regarding whether they have to test their tops, or exceed them slightly, or head down from here. My preference here is for a double top. So, we could get a double top or even a touch higher in wave5 of (3) on Monday.

Either way, the count really won’t change. Wave (3) up is done or will be on Monday and wave (4) down is on the agenda for this week.

As I often say,

“The market does the most predictable thing in the most unpredictable manner.”

This past week was a great example.

Even though the USD currency pairs and the US indices are virtually back in sync once again, the above adage will likely continue to play out. Both the USD currency pairs and the US indices should move down as one.

However, there’s one currency pair that has a mind of its own, and that’s the British pound. It looks to be completing the first wave up of a new sequence and may get aligned with the other currency pairs and the US indices a little later this week. That would put everything more or less back in sync.

I’m still projecting that US indices and the USD currencies will get to the start of the fifth waves together. Volume is extremely low everywhere, and the fourth wave is a countertrend (corrective) wave, so there’s not a lot of motivation for a strong move. However, once we get into the final fifth wave up to an all time new high, that should change and volume should pick up somewhat.

As we reach the very top of the final wave, though, volume should drop right off to virtually nothing. That’s when we’ll see the turn and the strong set of waves down, which will be the start of a multi-year bear market, or crash.

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The Ending Diagonal Option

I’m keeping the option for an ending diagonal open, but my preference is that we’re heading down into a regular wave 4. The ending diagonal at the top of wave 3 has changed my mind

Based on relabelling as a 5 wave move in ES wave (3), I’m still projecting a final top to our five hundred year set of Supercycle waves sometime in the early part of this year. I’ve given up on being specific, as these waves have been moving very slowly. Ultimately, Mr. Elliott’s waves will forecast the end and give us adequate warning of the turn.

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Here’s the latest daily chart of ES (emini futures)

Above is the daily chart of ES. The trendlines are gone, as the structure counts best as a simple wave 3.

There are no changes in the prognosis. The dismissal of the ending diagonal pattern simply means that wave 4 down will seek its own bottom and is not confined by the requirements of an ending diagonal. It’s therefore likely to retrace 38% of the C wave at its own pace (to about 2202). This new count also aligns ES with the wave structure in the DOW, and it’s always a good thing when the structure is similar across the major indices. Having the DOW that out of sync with the SPX has been pointing to an issue with the SPX count.

The 4th wave will come down in three waves. After we finish the A and B waves, we should be able to project an end to the C wave of the 4th wave. Once we finish the fourth wave , we’ll get a final blow-off wave for the month of February, with a potential top that month or into very early March. We may very well see the ending diagonal as the 5th wave.

Here are the path predictions going forward:

• Wave 4 will come down in 3 waves with any of the corrective patterns possibly in play.
• Wave 5 is likely to be an ending diagonal. In any event, it will be in 5 waves (not motive).

Summary: We either in the fourth wave heading down, or are going test the top of wave (3) one more time before heading down. Monday should see the turn down, one way or the other. USD currency pairs and the US indices are getting aligned to make the next move down together.  After completing the fourth wave, we’ll have one more wave to go, which is likely to be an ending diagonal as a fifth wave. The long awaited bear market is getting closer.

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