Hello Eric!
I missed until today your November 28 post on timing the end of the Long Wave at the Kondratieff Conference wherein you mentioned my posts at the University of Colorado Long Wave site in 1998.
In 1998 I did indeed think that the Long Wave could be bottoming. That was when hog futures made lows equal to those of 1919 and when most commodities were plummeting. Newspaper front pages and magazine covers were filled with deflation headlines and pictures. 1998 would have been "early", but it had real potential to be the disinflationary low of the "down grade". Also interest rates were making new lows and the 30 year Treasury bond futures making their highest highs since their 1981 "fall from plateau" lows. Although stock index prices are not a primary indicator of complete cycle turns, even the 1998 crash was compatible with a potential Kondratieff down grade final low. And the 1999 rises in the CRB Futures Index, long term interest rates, and stocks were compatible with the presumption of 1998 as a low.
However, the events of 2000 and 2001 invalidated my presumption. Clearly there were still substantial deflationary pressures. Most of the orthodox Kondratieff Wave analysts from the 1970's on had forecast 2003-04 as the most probable time for the next low. Frost and Prechter, in their seminal Elliott Wave book of 1978, had reproduced Julian Snyder's famous chart originally published in International Moneyline in the mid 1970's. This chart projected the low after 1973 as coming "near year 2000". With gold and CRB having made lows in 1999 and second lows minimally higher in 2001, it seemed simply a matter of time before all the rest fell in line and the bottom was confirmed. With the stock market collapse in 2002, and demand already picking up in Asia after their 1997-98 debacles, it was clear to me that the low was just about in place. I recall discussions with you all through that period from 1998 on about the fact that the wave low might not be a V bottom but be over a period of time, indeed just as tops tended to be prolonged in the "plateau" topping period. This is my version of Snyder's chart which I made in 1998:
In any case when the stock market began bottoming in 2002 and with the 2003 retest of the 2002 lows, and when everything else had bottomed, it looked like the 1970's orthodox prediction of a wave down grade low for 2003-04 was indeed correct. And up we sailed out of very oversold and sentiment-debauched low in 2003. I felt 100% certain we had bottomed, and gradually the perma-deflationists had to admit that inflation was back and join the up grade wave.
The first clue that all was not well with the up grade wave was in 2005, and this was the big bond rally which came to be known as the "Greenspan Conundrum". Interest rates ought not to have been dropping so drastically when inflation in commodity prices and gold was ramping. There were many "explanations", most prominently the Chinese buying of US bonds with their bountiful net trading profits. But it was still somewhat disquieting for the Kondratieff phasing. Then in 2006 there was the first gold spike and very quick correction from ~730 to ~530 and the sharp stock market correction. Most commodities quickly took off again thereafter except for some base metals (those not exchange-traded). Bonds began to fall but did not even get the low of 104 on the long bond futures as they had done in 2003-2004. So the Greenspan Conundrum was still tantalizing Kondratieff wave analysts.
I had been gradually backing out of stocks all year in 2007 but had stayed in gold and commodities and added on. But I began writing about what I started calling a "vacation from inflation". After June 2007 we not only had another manifestation of the Greenspan Conundrum, but gold stocks were lagging gold badly. I anticipated a six month to perhaps as long as 18 month "vacation from inflation". I did not yet sell off my commodity funds and stocks, but I put tighter stops all around.
I was not surprised by the March and July highs this year, but I certainly did not expect the crash in commodities we have had! I was thinking perhaps 15-20% and 6-18 months. Ominously bonds began rising as well. Arbitrarily I drew a line in the sand for the long bond futures at the 2003 high of 123, roughly comparable to 4% in yield. If we were truly in the long wave up grade phase, then bonds shouldn't fly above the 2003 bond high and below a 4% rate low. At least bonds should not go above and stay above 123 for more than a few days. I bought TLT and EDV and sold them when the bond got to 123 basis the December bond futures.
Well, it has happened. Bonds are well above 123, and commodities and stocks have crashed as well. I put some of my personal experiences into this, which can be in read in more detail at the blog, to show that one can trade the wave even if you turn out to be incorrect. I was incorrect. The "vacation from inflation" is a lot more than that, and I see you have wrestled with it as well. The 1830's, 1896, 1949, and 2002/03 wave lows had seemed embedded and sealed forever.
As you know, Walt Whitman Rostow, the MIT economics professor and economic historian who later became national security advisor to Lyndon Johnson, always felt that the recession of 1953-1954, not 1949, marked the real final economic low of the deflationary down grade from 1919/20. As you suggest, perhaps 2008-2009 will be the final low after all. Since a full cycle is as long or longer than the normal investing career of most individuals, few of us have seen a full Kondratieff cycle and still fewer a cycle and a half. The neat schematic diagram of Julian Snyder, reprinted by Frost and Prechter and many others, that all knew so well, was far too simple. The topping process of the last (or this?) wave lasted from 1973 to 1980, and this bottoming process may have lasted from 1998 (or 1999 if we pick gold) until now. In a bottoming process like this both deflationists and inflationists will be correct at different times. Since 1999 the inflationists have mostly been right, but the deflationists got their innings in this year!
Note: Eric is my long time friend and Long Wave colleague who runs the conference at:
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