Economic cycles I

The ten minute mini-day times 144 reappears as the day (1440 minutes), times 144 as the twenty week Wall Cycle, times 144 as the inflation/deflation Kondratieff Wave, times 144 as the 8000 year Spengler cycle in which four mighty cultures (of 2000 years each) rise and fall.

The desire/will pendulum within a complete cycle one can be pictured as follows:

Year of Dawn: from the lairs of night herds of Southern Desire emerge and begin to timidly graze.
Year of Noon: grown bold, the herds of desire graze everywhere.
Year of Sunset: the answering predators of Northern Will begin to trim the ranks.
Year of Midnight: the predators of will dine en masse in a royal contest for turf.
We derive these moods from only two sets of contraries: desire vs. will and joy (superfluous energy) vs hunger or gloomy revenge (lagging energy). These will modulate into a fourfold sequence such as that of the Years above, shown here as four phases of the (48 to 64 year) Kondratieff Wave.

Of course these are driven by economic events which account for cycles in the equity markets.  In theory equity markets anticipate economic cycle.

The three most important cycles are:

1. the 3-4 year Kitchin inventory cycle,
2. the 7-10 year Juglar business investment cycle and
3. the 15-18 year Kuznets cycle in housing construction / prices and associated consumer spending.

We have mentioned these cycles in the past, but we have referred to the Kitchin Cycle most often.  The PMI reports tell us we are seeing a decline in manufacturing.  Freightliner, Paccar, Cummins, Whirlpool and others have announced cutbacks. 

JD Hunt the largest trucker just reported a stinko quarter.  Fedex issued negative guidance.This implies that inventory levels are high and retailers/merchants are ordering less as they try to work off inventory.  Also, import levels are not increasing as the Eurozone is in a recession and China is showing slower growth.  All pointing to a slow down in inventory accumulation and probably a pull back in inventory levels.

In summary - an inventory trough is approaching.  Now, the economic cycles and equity cycles do not often occur at the same time.  If as expected the equity market moves first that could occur in the 4th qtr of 2012 or 1st qtr of 2013.  It is due within the 3-4 year (average about 3.5 years or 42 months),  but may be nearer the 4 year (48 month) time frame because of Federal Reserve intervention. 

Here is a visual  of the Kitchin and shorter nested cycles:

We will discuss other longer cycles in subsequent posts.  As you would expect if we get multiple economic cycles contributing to a move then that move becomes substantial. 

Our call for the prior week (downside bias and suggesion of buying and inverse as insurance) was on the mark.  IMO the bears continue to be in control for now, so hold your inverses...  GL traders.

The really long cycles

The K-Wave (half a Kondratiev cycle)
The Russian economist Nikolai Kondratiev (also written Kondratieff) was the first to bring these observations to international attention in his book The Major Economic Cycles (1925) alongside other works written in the same decade. Two Dutch economists, Jacob van Gelderen and Samuel de Wolff, had previously argued for the existence of 50 to 60 year cycles in 1913. However, the work of de Wolff and van Gelderen has only recently been translated from Dutch to reach a wider audience.

More recently, some argue that government intervention into the economy to try and control economic cycles has lengthened the cycle to around 64 years. Most refer to this as a K-Wave.

The Super cycle
Others such as Elliott have speculated there are longer cycles (Grand Supercycle). Also, supposedly within a Grand Supercycle there are shorter (yet long) cycles known as Supercycles. How does a Supercycle fit within the context of a K-Wave? Well, some claim within a K-Wave there are two Supercycles (each half the length of a K-Wave).


And then there is Kuznets
Simon Kuznets (Nobel Prize winner) studied demographics and from his studies found cyclic trends. Kuznets swing is a claimed medium-range economic wave with a period of 15-25 years found in 1930 by Simon Kuznets.[1] Kuznets connected these waves with demographic processes, in particular with immigrant inflows/outflows and the changes in construction intensity that they caused, that is why he denoted them as "demographic" or "building" cycles/swings. Kuznets swings have been also interpreted as infrastructural investment cycles.

So a Kuznets cycle is half a Supercycle. So a K-wave is 2 Supercycles or 4 Kuznets cycles...

The Fork in the road

We have talked about the Kitchin cycles and Wall cycles in the past. But a gentleman last name Juglar claims there is a 8-11 year cycle and like stars they named it after him (the Juglar cycle). Many have related this to the Kuznet Cycle (half a Kuznets cycle) and the Kitchin Cycle (2 Kitchin cycles). This implies 8 Juglar cycle within a K-wave and 16 Kitchin cycles in a K-Wave.

If a K-Wave is 64 years that is 768 months. A Kitchin cycle is 42 months +/-. We did the math and find a 64 year K_Wave is 18 Kitchin cycles.... So we are not happy with the Kitchin/Juglar relationship.

We have told you about the 10 year cycle (and how it is approximately 3 Kitchin cycles). We do the math and a K-Wave is 6.4 ten year cycles (or 6 x 10.57 years). Three Kitchin Cycles of 42 months (3.5 years) is 10.5 years.  I believe this relationship works better than the Juglar/Kitchin relationship.

There is some dispute as to whether there are 16 or 18 Kitchin cycles within a K-Wave. I tend to believe there are 18 (6 X 10+ year cycles or 3 X 6 Kitchin cycles).

And as always here is a visual (K_wave, Supercycle, Kuznets  - updated 02-27):

Enjoy the big picture. 

Later we will try to tie in the shorter cycles we discussed.