There’s two pieces of good news, and one piece of bad news.
The 1st good news is that the Fed tightening cycle is all but over.
Whether its "1 and done" or "2 and thru," its pretty clear we are
waiting for the fat lady to sing. The 2nd part of the good news is that
we now get to enjoy an entire new cycle of home refinancing, with the
homes subbing for ATMs for many American consumers.
The bad news is this economy is a dog who’s hunting days are coming to
an end, sooner rather than later. The market cycle is playing out, and
the present Bull is set up for the last leg up between now and the end
of the year. But the final move — often a wicked rally — sets up the
Barry, some of your comments this week have been quite unclear and apparently contradictory. According to the new article in Smart Money, you are calling for a rally from now until late in the year. But earlier this week on this website, you said market was frothy and to expect a correction. Can you clarify this?
2nd quarter hours worked are growing at about a 3.3% rate while the consensus forecast is for 3,2% real GDP growth. This implies zero productivity growh. If unit labor costs continues to grow at the first quarter rate the Fed will continue to tighten.
I posted agreement to Barry’s premise on my blog. My disagreement is primarily about the length of the next leg. A market top near the off-year congressional election is not likely.
Of course the market gets frothy from time to time during a Bull rally. Bumps and grinds do not kill a Bull market.
In regard productivity and unit labor cost, these measures tend to look bad when there is slowing econonomic growth but they bounce back quickly when growth resumes. The evidence grows that the FOMC should take a month or two off before making moving up another quarter.
I can see the FOMC tweaking this cycle for months to come. Two years from now, in the Presidential election year, short rates could be 100 or 200 basis points higher with the cycle being long in the tooth.
The cycle from the low bond rate in 1986 lasted several years with a big crash in the middle, the cycle from the bond rate low in 1995 was a pretty steady climb until the dot.com crash. This cycle should play out inbetween those extremes.
Not to cut it too fine, but:
6/1/05: Intermediate top — a pullback which bottoms some time over the next two weeks
6/10- 6/20/05 the next phase of the rally begins, which could run until November/December
11/05 – 12/05 Final topping of the Post Oct 2002 cyclical bottom
Obviously, his is subject to revisions as new data comes forth — but its the probabilistic framework I am starting from;
This is one possible scenario, and I have assigned it a medium degree of probability
One of the more voodooish cycle theories I’ve come across is the Princeton Economic Institute’s 8.6 Year Global Business Cycle. It’s nicknamed the Economic Confidence Model and was created in the 1970s by a guy named Martin Armstrong was in now apparently in jail or contempt of court charges related to some financial monkey business.
But his chart has been prophetic to say the least. It called for an intermediate top in Oct 1987, a major top in July 1998, a secondary top in Aug 2000, a major bottom in Oct 2002, an intermediate top on Jan 1 2005. All of these were prophesized in the 1970s.
You’ll recall that the internal top for the 90s rally was the summer of ’98, so the PEI call for a major top was accurate in a way.
The chart now calls for an intermediate bottom in late Jan 2006 with a major top in late Feb 2007 (akin to the 1998 top) and a secondary top in mid-Apr 2009 (akin to the late 2000 top). The next major bottom is predicted for June 2011 (akin to Oct 2002).
One of the few macro-voodoo-cycle theories that appears to frequently coincide with reality. So if still operational (and it called 1/1/05 to the day), don’t expect the current rally to top until the 2/07-4/09 period—although we could see weakness until early 2006.
Here’s a link for anyone interested:
Armstrong’s 8.6 year cycle is statistically significant into the billions to one odds. The actual peaks and troughs on his chart cannot be literally interpreted as highs an lows though they are cycle turning points.
He warned in the early 1990’s that there was going to be a major debt crisis and that the USA would experience hyper-inflation with gold going into the thousands of dollars. He accurately predicted in 1996 that oil would go to minimum $65 and in general inflation would rise into 2007 and likely beyond into 2009.