Jan 1, 2012

2011 Recap and a Primer for the Inflection Point of the K-Winter in 2012

“Check, please!”

The much anticipated Santa Claus rally in the days leading up to Christmas finally came and propelled the US averages to the same levels at this time last year. It seems like we have been running in place for years now and are now thoroughly exhausted. In fact, investors have little to show in the past year and much less over the past decade.  There is a perfect explanation for this- the Kondratieff Winter that began in early 2000 and stocks historically perform awfully during this period.

The US averages are down around 15% on a nominal basis since 2000 and adjusted for inflation the major averages are down almost 40% since then and this pathetic performance has occurred with shockingly low volumes that belie any meaningful rallies of yesteryear. Efforts from Washington as well as the Federal Reserve that can be described as both unprecedented and truly gigantic in scope yet they have failed miserably to stem the deflationary tide. Debt levels among governments, corporations and individuals are now at all-time records by several standard deviations even after three plus years into this de-levering process brought about from the global financial crisis. In this year 2011, we saw new low water marks brought about by the K-Winter- the first ever downgrade of the US AAA credit rating, European sovereign debt being issued above the unsustainable 7% level, and a failed German bond auction among others. Have no illusions- we are now deep, deep into this fourth Kondratieff Winter of the modern industrialized era. So now what?  I suspect it’s time for the “check, please”. The tab must be paid for much of the excesses of recent decades and the invoice has been sent.

As the saying goes, it’s time to pay the piper. It’s happening all over the world now with one notable exception- the US. It’s only because we hold the world’s reserve currency and have the most liquid market to be found anywhere in the world- the US Treasury market. Since our cost of capital remains low, we haven’t been forced into the austerity seen in Europe and other over-levered nations in the Western world but I suspect that condition will change in 2012. It’s really remarkable that the US stock market averages were flat for 2011 when you consider that China was down around 20% (and is now four years plus removed from their peak in 2007), Europe as a whole was down over 35% and essentially no country I can recall had a positive year in performance. Hence, US dollar hegemony impacts the US markets.

My outlook for 2012 for the markets is abundantly weak. I expect stocks to perform the worst, especially US stocks which have remained resilient to date and are thus more overpriced for this winter period. I expect bonds to rally and remain stable for a time but at some point I feel that the bubble in US Treasuries will soon burst, and when it does look out below. US Treasuries are the single most over-owned security in world history today and the risk-reward for them gets worse by the day. Although I have expected the worst period of the K-Winter to happen sooner, there are many reasons why I feel it’s closer than ever. So I will now review the various reasons supporting this and attempt to articulate the case to our readers.

When I launched this site in early October 2007 just days before the all-time nominal highs in the market averages, the content relied on the core of Kondratieff Wave theory and the insights provided by Robert Prechter, the world’s most esteemed practitioner of the Elliott Wave theory. As the crisis deepened in 2008 and into 2009 I was sure this was “the big one”. It felt right and the magnitude of the unfolding crisis was sufficiently awesome in scope. But in 2009, two things happened that altered my view in the short term. The first was the sheer scale and breadth of the bailouts coming from Washington and other was the financial alchemy coming from the Federal Reserve. I wasn’t sure either would get such a mandate but they did pull it off. It could have only happened if the US Congress and the American people suborned such grandiose efforts to stem the winter. They did, and by allowing such carte blanche they helped prevent a complete meltdown but perhaps unwittingly made things worse down the road. We now have several trillions more in debt today than March of 2009 yet we are no closer to meaningful improvements in economic growth and jobs or in rectifying the core problem of the Kondratieff Winter- trillions of excessive debt that is in jeopardy of default.

The second surprise to me was the EW Theorist report put out in late February 2009 by Robert Prechter. As a subscriber, I was expecting to see more confirmation at that time that the markets were set to go deeper in the abyss. But instead, his message was the complete opposite- cover all shorts and get long in a hurry. This rally he said would be longer and go farther than anyone could imagine and it sure did. It bottomed days later in early March and the subsequent rally actually went longer and farther than his own forecast. This can be directly attributable to, among other measures, Chairman Bernanke’s QE2 program that was announced in late summer of 2010 when it seemed the US economy was about to fall off a cliff. So in the spring of 2009 I took a step back and acknowledged it was perfectly acceptable within the parameters of K-Wave theory to allow for a very strong bear market rally in the interim.

However as someone so attuned to the Kondratieff Winter my natural inclinations were biased in believing the deflationary bust would occur sooner than later and in the spring of 2010 I was bearish (as was Prechter) and as it turned out we were both a bit early.   But around this same time in the spring of 2010 I did discover another source of material that I found could be used to complement the K-Wave and Elliott Wave theories in projecting better when the real winter would take shape. It came in the form of the financial astrology of Ray Merriman at www.mmacycles.com. He provides daily and weekly analysis with paid subscriptions each Friday also provides a free update on his forecast for the coming week that is based on natal astrology. Eureka!  This was the missing link I had been seeking all along and I began incorporating his findings into each blog I wrote each month. Meriman’s work makes it easy for us to understand the nature of financial astrology and its relevance to market cycle forces. Its relevance may surprise or perhaps stun even the most liberal and open-minded of us who seek alternative sources of knowledge in the capital markets. Today though, it could be seen as gem in the dark seeking the light of day because it never discussed by the mainstream financial press.

Here is a prime example of the manifestation of my evolution in becoming a true believer in this.  In the spring of 2010 I expected that the so called bear rally from early March 2009 was long in the tooth and saw the US economy deteriorating so I was inclined to short the market. The “flash crash” in May of 2010 was the final kicker and convinced me we may be on the verge of a meltdown. But Ray Merriman had warned that a major astrological configuration was upcoming (Jupiter) and that this influence would be powerful and bring forth the animal spirits in the markets. Just as the markets appeared poised to capitulate in late August 2010 (foreshadowed by the so-called “death cross” in the charts) they reversed course and whipsawed higher once Bernanke announced QE2 in late August. To my chagrin, Merriman’s forecast was spot on and he rest is history- I was born again.

I was wrong to believe Bernanke lacked the will to enact such a blatant act befitting a Ponzi scheme but he did and the bottom line was that I misread the tea leaves in failing to see that the prevailing conditions coming from above would permit such a bold move at that time.  Financial astrology serves to make sense of the maddening incoherence germane to the US stock market. Financial astrology to me seems a bit like a cheat sheet- simply ignore the headlines and just look for the conditions set for from the stars that influence human behavior. After the whipsaw following Jackson Hole in 2010 I realized the need to give this new source its due and I began to report Merriman’s themes and forecasts to my growing audience. I want more people to consider for themselves the relevance of this discipline and see for themselves how insightful it can be as a tool for guidance in the markets. We all know how truly maddening it can be trade the US market over the past few years and even the most seasoned and attuned money managers have been getting slaughtered. So I hope the concept of financial astrology gets more attention in the coming years as a credible tool for managing portfolios. Today it is the domain of a very tiny subset of traders and fund managers but I suspect it will grow measurably in acceptance over the coming years.

Lets’ recount another example of financial astrology in actions at its best. Recently in the summer of 2011 I was set to go “all-in” again shorting the market after the S&P downgrade over the summer. Just like the spring of 2010 it looked right to me. Merriman has warned too before that the Jupiter influence vanished in the spring of 2011 and the markets peaked then in late March. His forecast made it clear the markets would tank in the spring and summer of 2011 but get this- he warned over the summer in the midst of the biggest full-blown “risk off” period we had seen since the 2008-9 crisis- that good ol’ Jupiter was coming back as a major influence in November 2011 and this conjunction would last into early 2012.  In the past, the events of late July and August would have validated my own convictions that this decline was “the big one”. But since I had learned before from this methodology of financial astrology that the influences from the heavens trump the headlines, I bit my tongue and held back and refrained from shorting the market and reflected this development in my monthly blog here. Sure enough, the markets plunged just over 20% into bear market territory and then shorts were taken to the woodshed yet again as the markets reversed higher just as the Jupiter influence returned. So note to self- don’t invade Vietnam and don’t short the market during any Jupiter conjunction. Merriman was right and for the first time in two years I didn’t get burned on the reversal higher.  Merriman had proved to me that the answers for why this period was not destined to be the final capitulation were rooted to some degree in this strange but true discipline of natal financial astrology. When I researched the archive of weekly forecasts on his site going back to 2008 I was amazed at how well he had framed the juxtaposition of the markets in terms of what he calculated from the astrology above. And we are talking about some crucial periods here where he had to square the circle or if not anyone could dismiss this as heresy.  Some may chuckle here at significance of financial astrology but I would just say to those to check out his forecasts for themselves. Their accuracy is just fantastic and almost a bit spooky. I just wish I had found him sooner because I could have saved myself a bit of aggravation.

So what is Merriman’s call for 2012? The end of Jupiter (rally) and the onset of increasing influence of two extremely significant astrological conjunctions. The first one is the influence of Pluto and Uranus and the next is the adjunct of Pluto in Capricorn.  Pluto rules debt and removing from our world things that have proven to be oppressive to people. Capricorn represents all the impeding structures in our world that have been erected but do not serve the masses as they should. Institutions such as the IMF, the Fed and other central banks, the UN, etc would all fall into this group. Pluto in Capricorn actually began in 2007 with the Cardinal Cross alignment and lasts through 2015. Pluto also aligns with Uranus which represents upheaval, reversal, and unpredictability in general. Given that these are the primary influences from above for the next few years it is not a stretch to believe that the 2012-2015 period will be unlike any other we or our ancestors have ever seen in terms of radical and meaningful change all over the world.

So the bottom line of what I propose is this: all three of the disciplines I have studied and reported on here all suggest that the worst elements of the current Kondratieff Winter are set to unfold in the near term and the effects will be swift and possibly brutal. By their nature, two of these disciplines- the K-Wave and the Elliott Wave- are poor tools for near term market forecast because each cannot accurately predict in the short term the effects of human free will upon the larger model.

The K-Wave theory holds that the excesses built up over the present K-Wave cycle must be removed through large deflationary defaults but cannot forecast the exact timing of this event. Likewise, the Elliott Wave cannot always be used as a reliable indicator for the short term direction of the markets because the waves making up the primary count can be extended out through human decisions that can serve to delay the inevitable outcome. The best example of this is the QE2 program launched in the fall of 2010. In both of these the larger picture was very clear but the one in the near term not so much. But also there are true limits to the extent that the wave count in Elliott Wave theory can extend and likewise there are limits to how long the Kondratieff Winter can be forestalled because the weight of the excessive debt gets larger the longer it is extended. In any case, those who follow both of these generally expect the bottom to fall out pretty soon.

However, now for the first time the natal financial astrology promulgated by Ray Merriman suggests that the real inflection point for this economic winter is now very close at hand and he expects 2012 to be one of the worst years ever for the capital markets. What is worth noting here is the Merriman forecasts have resisted calling for a primary degree plunge since 2009 and thus his readers haven’t been exposed to the false alarms coming from EW and KW followers. Many of these have become disillusioned with Elliot Wave theory or the K-Wave theory because the US markets have to date stubbornly refused to cooperate. My take is this- the K-Wave has proven to be very accurate in reflecting the underlying conditions around the world for the past decade and to a lesser extent the Elliott Wave has been good in framing the big picture but since the Feb 2009 call has been poor in the short term. I believe once the market plunge begins in earnest both will be seen in a better light by their followers and doubters too.

What may kick off this inflection point in 2012 sending the markets much lower? The list is too long to recall here but I believe there are several critical factors that rise to the top of the list. These would include: credit  ratings downgrades for many AAA rated European sovereign nations (most notably France), soaring bond yields in Italy, Spain and other major European sovereigns, protectionism and global trade wars, a spike in US long term interest rates as investors demand more yield for the risk, the perception of lasting political incompetence in the US and Europe in dealing with the K-Winter, a hard landing in China marked by an enormous property bubble and a growing sense of unease by investors and consumers who lose confidence in the economy and the capital markets. I will be watching the yields on long term Italian debt carefully because I suspect this is the market most likely to roil the global capital markets at some point in 2012. It fits with my belief that a rising yield deflationary collapse is on the horizon that may confound investors and pundits for years.

I relate our markets today to the period after the first sub-prime defaults occurred at Bear Stearns in the spring of 2007. The housing market had clearly peaked and anyone could see the makings of an enormous bubble yet the markets actually made all-time nominal highs later that year in October. Today, the bubble I see isn’t limited to one market- it’s the sum total of all the debt out there which many have estimated exceeds $120 trillion excluding several hundred trillion in outstanding derivatives. K-Wave theory holds that markets will not hold up in the face of such daunting levels. And now for the first time, the stars agree.

Note to our readers: On November 3rd I felt compelled to devote the entire monthly comments to introducing to our readers the works of one David Knox Barker, the author of www.longwavedynamics.com. This is one smart dude.  Over the holidays I finished his latest book titled Jubilee on Wall Street and found it to be among the finest books I have ever read. In fact, I now regard him as the world’s top authority on long wave cycles and the Kondratieff Wave theory in particular. So next month I will be posting a comprehensive account here recounting his core themes and outlook for the remaining winter period and even more on the Kondratieff Spring period not far off. I urge our readers to strongly consider buying this book and please feel free to send us your comments. Barker has a technical mastery of the subject matter that far exceeds anything I’ve seen to date and his core theme on the K-Wave is unique in that it is parallel to the one we have advanced here- that we should be focusing more today on the next cycle phase- the Kondratieff Spring- and the wonders it will bring.

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