During the 1990's I published a gold advisory and also a 20-40 page annual recap with an attempted prediction for the coming year. My main guide was and still is the long economic wave of Kondratieff (KW) which concentrates on interest rates, commodity prices, and general inflation. KW is only indirectly related to stock prices, and different tools and economic series are necessary for more precise stock market analysis and prediction.
A few quotations from my January 10, 2000 "Year End Review":
"There [were] several rallies in in prices of commodities along the way (1982, 1986, 1992, 1999), but the trend is down into the trough (2002-04)." "So on interest rates [also] we would appear to be in the late down phase of the Kondratieff wave, with the absolute bottom due in ~2002-2004 if we are to have a typical 53-54 year cycle."
"At the present time it seems most probable that the FED will raise rates once the Y2K non-event is past us and with the inflationary threat and existence of massive stock market speculation. This will be done as early as possioble in the new year so as not to be seen as a factor in the November presidential (and Congressional) elections. And the markets will respond. Bonds should rally, and commodities (on balance) and the stock market fall. This is precisely the pattern we would expect for the late phase of the Kondratieff wave, as from 1946-1949."
I must admit that I had previously very briefly thought 1999 might become the early occurrence of of the long wave trough as that was the year when deflation made the magazine covers and news. Some commodities made very long term lows, such as hogs and gold, but the stock market rise off the 1998 low made that 1999 trough totally improbable. The trough of the ~54 year cycle is the most dependable place for prediction since rates, stock market, and commodities all tend to bottom in a fairly narrow window of time. This was the first trough I had lived through, and I expected it might be V-shaped, but I began to realize it could be W-shaped as in the 1890's and late 1940's. I now accept that the KW bottom can last five or more years as the top typically does (1921-29 1974-80).
From 2003 for sure, but even from 2001 with gold and oil, it became generally accepted that deflation was behind us. By last summer nearly eveyone was a raging inflationist, and predictions of $2000 gold and $200 oil before too long were not uncommon. I was a little early in predicting major pullbacks in that developing mania , although I had learned in 1979 not to sell everything at one time. So I gradually cut back on energy and precious metals investments. Since we are in a long term bull market for commodities, I did NOT short sell anything or recommend that anyone do so. And I kept core gold and energy holdings.
Because the capitalization-weighted stock indexes were very heavily weighted in energy by then, and mutual fund and other pooled investments (hedge funds) even more so, I expected a stock market pullback as well. This is partly why I hedged my portfolio for a good part of last year and spent a lot of effort on volatility control. That proved to have a cost, as I have told you before, but even so my total liquid investment portfolio including gold and all cash was up 8.6% on the year. Given the dividend fad and large cap preference, the SP500 was up over 15%.
By the way, someone at MarketWatch.com mentioned the other day that energy cap-weighting of the SP500 is nearly 50%. I haven't checked this myself , but what a change from early 2000!
NYMEX crude oil in the front month fell as low as $52 this past week, which is a 35% drop since last July 14. A warmer winter than normal in the northeast US is getting blame on the news since they use so much highly polluting heating oil and have needed far less, but it's far more complicated than that. Copper, the "commodity with a PhD", is off substantially as well and gold a bit less so.
(More soon.)
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