The Long Wave, the Slow Turn and the Mother of All Bear Markets

[Steven Vincent]

(This is the introduction to the latest BullBear Market Report)

As 2017 emerged into the following year I noted that the big cap indices had shown characteristics of a parabolic blow-off run since the November 2016 election.  Technical analysts know that when a market is running persistently above trend, a significant mean reversion is likely.  The cyclical bear market of 2018 accomplished that mean reversion as well as laid the technical foundations for the emergence of a much larger degree secular bear market in the not too distant future.

I've been plotting the developments towards this coming Mother of All Bear Markets (M.O.A.B) for many years now.  I had turned long term bullish right at the 2009 low.  As the tumultuous events of 2010, 2011 and Quantitative Easing unfolded, I revised my analysis to conclude that a long term bear market triangle, similar to Wave II that ended in 1982, had wrapped up in November 2012 (the actual start date of the new bull market turned out to be late 2011).  Here are some excerpts from Bull Bear Market Reports during that time period:

 

Presumably this Major Wave V bull market will be driven by world monetary debasement as the problems of Western economies are kicked down the road, and that the correction of the entire five wave sequence from the 1932 low would involve the required economic, social and political adjustments.  Apparently bears will have to wait for a while for the Apocalypse...

The last BullBear Market Report explored whether the long term Bear Market that began in 2000 may have ended in November of 2012.  This report comes down on the side of concluding that indeed a new, secular Bull Market has begun...evidence is mounting that the 2011-2012 period was an (E) wave of a long term triangle and that recent price breakouts and changes to the technical character of the market mark the start of a very long term Major V bull market.  The Dow Jones Industrial Average appears to be projecting to a completion of the ongoing bull market from the 1932 low in the area of 18,800 in the late 2015-early 2016 time frame.

It has been my position since I started publishing the BullBear Market Report that the market was in a Wave IV correction and that the ultimate bear market would still be some years away and from a higher level.  The 2007-2009 crisis and bear market was more akin to the Panic of 1913 than the Crash of 1929. 

While technical comparisons to the prior major wave bull market from 1982-2000 may be more useful than anything that happened during the bear, we will also need to take into account that this Bull will not share the same characteristics as the Wave III market.  As a terminal Wave V, it is likely to be shorter in time and duration, technically weaker and engender less public participation than the prior bull wave.

It's important to note that during the 1970's bear market there was a preponderance of analysts who were sure that the Keynesian monetarist experiment would blow up and that a new depression was assured.  The rhetoric was not much different than it has been since 2000 and particularly since 2008.  While my personal sympathies are with Austrian free market and sound money economics, it's important to note that such economic theories are not market timing methodologies.  They were proven wrong in the 1970's and apparently are going to appear to have been proven wrong again.  As hard as it may be to believe, the mad scientists at the economic and monetary controls will probably appear to be geniuses for another 3-5 years and at the top the critics will largely have been silenced.

I would guess that much of today's doomsaying will be quieted by the time Wave (V) completes.  Concerns about debt to GDP ratios and other such worries will likely have abated and long term bears will have capitulated.  Keynesian monetarist apologists will chortle wildly, assured that their "can kicking" policies were successful.  However, while some sectors of the economy will experience organic economic growth, other sectors will likely languish.  Structural unemployment will likely persist and even deepen for some segments, such as the 18-25 year olds.  There may be no real, dynamic growth engine (such as technology or housing had been previously).  And the government debt bomb will likely continue to grow.

Is it possible that Wave V will be a long, extended wave and not short and relatively brief?  I don't think there is any way to answer that at this time.  I do think that we are in the early stages of developing 2/3 of the planet and that revolutionary technologies can and will have transformative effects on productivity and economic growth.  Will growth and productivity be able to offset debt burdens, monetary debasement and the inefficiencies stemming from centralized economic planning and corporatist corruption?  We won't really be able to attempt an answer until we are much further into Wave V.

Of course, if we are calling this a Wave V bull market, then a primary bear market would have to follow.  Presumably this would be accompanied by the disastrous conditions that doomer economists have been predicting since the 1970's.  

So where are we on the roadmap?  The End?  The Beginning?  In my current view, we are at the Beginning of the End.  As in the 1970's, the post-2000 bear market was interpreted by many as the final top to the long wave.  But instead it seems that those anxious to reap the Armageddon whirlwind will probably have to wait a few more years.

Here's a view of the Dow Jones Industrial Average since 1932:

Most analysts continue to make the mistake of believing that a secular bull market started in March of 2009. The actual situation of this market very closely parallels the 1974-1982 time frame. While the price bottom was made in 1974, the actual secular bull did not begin until the 1982 low. Our contemporary 2009 bottom and November 2012 low are playing the same role and function.

As a technical analyst I am free of the burden of needing to understand why the market is doing what it is doing. I am strictly concerned with what it is doing, what it is setting up to do and what it is likely to do. Having said that, it is helpful sometimes to reflect on the underlying fundamental forces driving a market along. There appear to be two primary characterizations of the fundamental environment. The first regards the rising stock market as an inflationary epiphenomenon of massive global monetary liquidity. The second anticipates significant, dynamic economic growth nationally and globally that will eventually become evident and will explain and justify rising stock valuations.

There are not yet any clear signs of the emergence of new, dynamic growth sectors in the US economy and, internationally, signs of slowing in the Chinese growth engine. If the market arrives at a technical top in the 2015-2016 time frame without any real, organic underlying economic growth, then it will be likely set up for the grand super cycle debt bubble pop that so many doomer economists and analysts have been calling for.

My current view is that clearly monetary inflation is playing some role in generating the conditions for the stocks bull market. It is making bonds an unappealing option, it is keeping the financial system flush with liquidity and it provides an underlying psychological confidence to investors. But I don't buy the notion that we will get a valid secular bull market on monetary inflation alone. There will have to be some degree of real world economic growth involved. One area that may be playing a big factor is the US energy boom. New technologies are making very large oil deposits accessible that were previously economically unavailable. As the economy becomes more energy efficient through new green technologies, the US may become energy independent and a net exporter of crude by 2020. As supply grows and demand stabilizes, the price of crude oil may fall significantly for a long period of time. In fact the chart is showing signs of following the rest of the commodities complex into a large bear market decline. An economy wide decline in energy costs could be an enormous boon to the US, setting up a resurgence of global competitiveness. Another key factor is technology and innovation. For example, the 3D Printing revolution could have profound and dynamic effects on the relationships between products, consumers and manufacturing. Radical new materials also offer the potential for dramatic developments in economies of scale, energy efficiencies, production and distribution. It's also important to keep in mind that US corporations are currently very lean and efficient and sitting on record cash piles that if invested under the right circumstances could propel a real economic boom. And much like the 1995-2000 period, the US dollar may rise on the strength of demand for dollar denominated assets as the world once again makes the USA the preferred investment haven. In fact the dollar is showing signs of a long term bottom very analogous to the bottom made in the 1995 period.

Keynesian monetarism has distorted and retarded national and global economic growth. If market forces had been allowed to prevail for the last 40 years, many of the economic, social and technological hurdles we are now seeking to clear would have been long ago surmounted. Fiat debt money creates malinvestment, distorts financial systems, skews wealth distribution, corrupts political systems, creates a dependent, undereducated labor force and fosters the worst in human character. To the extent that we have needed extreme measures to exit the problems of 2007-2008, those who have taken such measures are to blame for creating the circumstances that required them. It's going to be infuriating to anyone who advocates economic freedom and sound money, but I think we are bound to see the Keynesian Monetarists gloat that they have proven the integrity of their "model" for the next few years. And then? Will the chickens produced by the so many debt eggs laid over so many years finally come home to roost? I think there is a technical case for that top of all tops in the 2015-2016 period. And if the right technical circumstances come together against a backdrop of an inflated market without any real underlying dynamic growth, then the gold bugs and doomer economists may finally have their day to gloat. But as they say, "Be careful what you wish for...because you just might get it."

When the wave from 2011 reached the 2015/2016 topping zone, I recognized that there were significant bearish technical features that had developed and called for a market high, recognizing that while it was possible that the full Wave (V) had completed, it was also possible that the market had only completed the 1st wave of (V).  The Trump election in November 2016 and the subsequent wave 3 of (V) ensued, generating parabolic features on the resulting tax cut and government spending boom.  During 2018 the market traversed a volatile wave 4, a precursor and setup to the final 5 of (5) of (V).

The current cyclical bull market (starting in November/December 2011) has not generated the quality, organic economic growth that would reasonably be expected from the massive, global, coordinated monetary and fiscal expansion that has been in force since the last crisis.  For every dollar of new debt, there has been a rapidly decreasing return in terms of GDP growth.  And the low to moderate growth that has been seen is without a dynamic driving component. 

Very little has changed since 2009.  The flood of liquidity has mostly failed to set off the transformative action of new technologies and industries.   We did see liquidity flood into the US oil sector, and as predicted in my work, the price of crude oil crashed and the US has become relatively energy independent and is expected to become a net exporter of energy.  Even so, the economic effect of such a transformation has appeared to be muted so far.  If the price of crude had remained ongoingly high above $100 that would have likely been a drag on the economy, so driving the price down by more than half was at least a cyclical if not secular boon.  The 3d printing and supermaterials revolutions appear to have stalled along with promised technological transformers such as quantum computing and nanotechnology.  One might have hoped that the mass of unprecedented liquidity would have made major transformative change possible, but it has not happened.  Online shopping and direct delivery of products to consumers has no doubt introduced some efficiencies and helped to spur consumer demand (I know that personally if I had to go to a store and buy things I would probably buy much less...I hate shopping in stores!).  Uber is an improvement over the taxi, but it's still passengers riding around in cars (with a driver). Some nascent forms of Artificial Intelligence have emerged, but remains primarily in the industrial and enterprise and financial realms, adding efficiencies and lowering costs for corporations and helping them to sustain profitability.

The only other significant development that can be pointed too is the emergence of blockchain and cryptocurrency which are as yet in their infancy.  These will be highly significant in the future, but at present are not yet transformative.

So here we are, 10 years into a brand new world of unlimited monetary and fiscal largesse and for the most part all we have to show for it is the pulling-forward of future consumption to maintain the current appearance of economic growth.  We must keep in mind that a span of 10 years today is not the same as 10 years beginning in 1982.  As technology and economic efficiencies advance, the pace of dynamic, transformative developments should increase as well (as predicted by Moore's Law and the theory of Technological Singularity). 

From 1982 (the start of the last secular bull market) to 1992 we went from:

• TV via UHF/VHF to universal Cable delivery
• landline telephones to ubiquitous cellular technology
• computers only for academia, science, industry and government to personal computers in every home
• information accessible only from analogue central distribution points (TV, radio, newspapers, libraries, books) to universally available, on demand, digital distribution and sharing via the Internet
• Financial management involving paper forms, deposits, receipts and ledgers and visits to a bank to ATM's, direct deposit and instant tranfers of funds between accounts and institutions

These were truly transformative developments that fundamentally underpinned the 18 year bull market that ended in 2000.  We have not seen much that compares with such change in the 2011-2018 period.  The quality, performance and user experience has improved in all of these areas, but are functionally basically the same since 2000.

The only real fundamental changes I see having developed in the epoch of Quantitative Easing is online shopping/direct delivery and the approaching US energy independence.  We are seeing the beginnings of the automation and robotization of production and distribution and the automation of driverless transportation.  Other than that, the quality of economic development since the last bear market to the present does not compare favorably to the 1982-1992 period. 

Instead of stimulating innovation and spurring transformation, the central banking model has incentivized financial gamesmanship in spite of the recent painful experience of the financial crisis.  Income inequality has skyrocketed.  The globe is sitting on an ever increasing debt pile required just to maintain the status quo.  When we should be sprinting ahead to the future, arguably, we are jogging in place in an ever deeper and muddier hole.  The attempts by the political and economic authority to mitigate or eliminate the violence at the transitions ends up exacerbating and prolonging the inevitable.

Shift happens.  Paradigms that have been long in force get overthrown.  It's never a smooth, clean process.  There is disruption, conflict and violence.  But it would seem to be a natural, necessary evolution.  The Financialist epoch, with beginnings in the foundation of the Federal Reserve in 1913, entered its takeoff phase in 1949 with the end of the 1929-1949 triangle bear market and the start of the current Long Wave.  The end of that Long Wave fundamentally implies a painful adjustment period.  And following that adjustment, the world emerges, transformed and unrecognizable.  Horses and buggies become trains and automobiles, written messages become telegraph and telephone signals, candlelight becomes electrified illumination.

Strauss and Howe basically started to address this with their theory of the "Fourth Turning", a wave like theory of generational societal development.  R.N. Elliott's wave theory and WD Gann's theories similarly view markets and societal phenomena as cyclical and recurring and thus subject to study and anticipation.  The difficulty is to remain agnostic in the analysis.  Too often, analysts become politically and philosophically attached to a dogmatic view of how things "should be".  Ultimately the ocean will rise and fall as it will; our paddling about in it has no effect. We can, however, seek to keep our heads above water when the inevitable storm hits hard, intelligently riding the crests and troughs.

It may not be too soon to speculate on what the post-Financialist epoch might be like.  To even consider a world that does not depend entirely on debt and consumption as its motive force, one needs to venture a bit into futurism. All things considered, post financialism is very likely to contain significant elements of what is currently considered by the mainstream populace to be science fiction but which knowledgeable observers recognize as emergent fact:

• Artificial Intelligence takes over direct management of production and distribution
  • fully robotized
  • block chain transparency
  • 100% efficiency
• Cryptocurrency replaces national fiat currency
• All people receive a subsistence digital income that can be spent on food, clothing and housing
• Universal, free education and medical care
• Artificial Intelligence regularly produces radical technological advances
• Zero Point Energy (extraction of usable energy directly from the unified field)
• AI, blockchain and human/computer interface streamlines decision making at all levels

When AI becomes ubiquitous, unified and conscious (and it will), there simply will be no better way to make decisions, produce, distribute and manage.  If MOAB starts in 2020 and lasts two decades, like the last very long term secular bear, then, as the world churns through its process of debt implosion, war, revolution, population decline and depression, AI will be co-developing together with cryptocurrency and blockchain and other related technology.  Production and distribution will be fully automated and robotized.  There simply will no longer be any reason for people to not be provided with an adequate level of nutrition, housing, medical care and education.  Working for an above-subsistence level of income will be an option available to those who choose to choose to elevate themselves in service to others.  The continual development of ever-more wonderful technologies will foster a virtuous cycle of advancement.  Unlimited, free energy powers everything.  Private ownership of enterprises begins to fade and central government gradually withers as AI takes over decision making.  Financial markets and debt become irrelevant and eventually the AI settles and closes all accounts.

While the above scenario may seem fantastical and whimsical, it is not.  The personal computer was unimaginable until it became an ubiquitous reality.  Many serious minds agree that Artificial Intelligence is already developing, and will be followed by Conscious Artificial Intelligence (an AI that knows its an AI and its place in history and the cosmos) and eventually by Technological Singularity (Unified, Conscious, Artificial Intelligence).  Just as humanity traverses through the consequences of its greed, fear and irrationality, we will produce a rational Intelligence without greed and fear that accepts the input of global, societal goals and produces efficient, effective results.

As you can see, I am not leaning towards the dystopian view here.  I do think that the "adjustment period" is going to be painful, destructive and dark, but will ultimately be a necessary interlude in the transition to a post-financialist future.  I'd like to point out that the future scenario depicted may seem a lot like Communism on the surface.  It may appear that the AI is simply sitting in for an all powerful Politburo of human dictators.  But there would be a direct, continuous interface between each human and the AI such that it will be able to factor in both the totality of societal mood and interest with individually specific needs.  So rather than centralized dictat, it would represent decentralized and transparent interactivity, possessing many of the attractive properties of the blockchain.

There is no way to continue to sustain a Financialist system based on debt and consumption.  Debt is no longer fueling economic growth and innovation, it is stifling it.  Consumption has been pushed as far as it can go and future consumption has been pulled forward to sustain the present.  Population, particularly in the childbearing years, is declining worldwide, and a growing population is fundamental to a debt consumption based model.  The system has played itself out to its conclusion.  Something entirely different will eventually replace it.  I see no reason why it must be a dystopian system and no reason that it should be perfectly utopian either.  Time marches on, shift happens, a new world is born out of the ashes of the old.  If we can get through the next 20-25 years without annihilating ourselves, the post-Financialist future is, potentially at least, very bright.

The rest of this report is reserved for subscribers and focuses on technical analysis of price charts and indicators in stocks, bonds and additional fundamental analysis and conclusions for traders and investors for the short, intermediate, long and very long term.