Second Depression: The Big Picture

Before getting into a discussion of how far the markets will fall (globally) today, let me give you the thumbnail sketch of how all this fits in the historical context.  Having this broader view may help you hold to the Big Picture and prevent undue panic, at least so I’d hope.  If you want to skip straight to Robin Landry’s latest, click here, but this background stuff really is important.

Nota bene (NB): There’s not a lot of humor in this morning’s report.  Too       many people are being hurt and their life savings stolen to be too chipper and  light – this is serious time and this is triage alley.                                              

As any long-time reader knows, this site has been – since 1996-1997 – about writing about just this period in history; the period when the panic selling shows up and we get into a longwave economic collapse of the sort that happens periodically and, as some of its students, including me, argue, those times include right now.

Economic Cycles

Most major business schools pay scant attention to economic cycles.  True, there’s a bit of obligatory mention of the shorter term cycles, but these are usually mentioned with a large helping of disdain by academics because they are not formula intensive and thus, require long-term thought, contemplation, and judgment, rather than simplistic  formula creation and application in order to explain human behavior.  We ain’t a simple enough formula to be repeatable, except as some gross levels like food & water.

The major cycles are (roughly is descending order of credibility among academics):

• Joseph Kitchin‘s (1920′s) 3-5 year cycle, sometimes blurred and glossed over as the “presidential cycle”.  Reality?  It’s something of an inventory cycle.

• Clement Juglar‘s (1862)  7-11 year cycle of fixed investment, occasionally blurred and glossed-over at “the real estate cycle” or “the California real estate” cycle. 

• Simon Kuznet‘s (1930) infrastructure investment cycle. 15-25 years.

• Nicholas Kondratieff‘s (1926) long-term business cycle, argued [by some] to be 45-60 years duration.  Also called the K-wave.  The cause and proper label of the K-wave is still hotly debated

• Grand Economic Supercycle:  250 years, plus or minus a revolution, typically made up of 5 K-waves.

Why the K-Wave Matters

The two longest wave structures in longwave (LW) economics are the most important because they serve as boundaries for the sub-cycles; Kuznet, Juglar, and Kitchin.

Even more important than its bounding function is the implication for public policy makers.  This, unfortunately, is difficult since the underlying causes

of the K-wave have been hotly debated for years.

In the mid 1990′s, while I was completing my MBA, I was a fairly regular poster at the University of Colorado’s Center for a Sustainable Future economics discussion board called simply “Longwaves.”  May of the greats from that period of online discourse are still around today:

• Ian Gordon, last I heard was president of the Longwave Analytics side of at www.longwavegroup.com.

• Peter Eliades still operates www.stockmarketcycles.com.

• Kit Webster publishes www.websterscommentaries.com

• Bob Bronson still kindly cc’s me on his client & friend notes.

• Stephen Swaim and I still talk almost daily (and his ‘master matrix’ will be the subject of a discussion tomorrow when I’m up in Ohio.

• Ehor Mazurok & I worked on the cause of the LW as being the accumulation of debt to a currency as a possible cause and publish the Mazurok-Ure Correlation in January 2001.

• Robin Landry and I also talk, almost (and sometimes many times) daily.

I’m sure I’ve left other’s off the list…

Key thing here is that even amongst this group there was never agreement on just what ultimately drives the long wave.  Here’s a sampler of the ideas kicked around:

• The LW may be driven by accumulated debt weighing on a currency, as the MUC proposed in 2001.  You can see this notion reflected in the S&P projections (justifying their recent downgrade of the USA) which suggested deficit spending just to service debt will top $20+ trillion in seven or eight years and that simply doesn’t work with a country having a present-day GDP of  $15.003-trillion (current as of the latest Q2 estimates).

• I’ve also argued that an aging population may be a driver of the Longwave.  The reason being that people with a memory of the previous depression  tend to act as a brake on runaway spending.  As they die off, the “brakes come off” and spending goes crazy.  When was the last time you talked to someone who was of conscious age (5-10 years old) during the last Depression?

• It may be simply related to an accumulation of the smaller cycles, something like three Kuznet’s cycles would give us the approximate length of the K-wave with little error since that would pencil to 45-=75 years.

• It may also be a period of three saeculums, where a saeculum is roughly the lifetime of a human, or, as some of the discussions went on the old csf.colorado.edu discussion site, perhaps it was a modified saeculum, representing the economic lifetime of participants. Since nowadays, most young people are not entering the workforce until they are 20-22, and most (try to retire) at  at 65, the useful like of a worker/economic system participant is now something less than a full saeculum, but until we tear apart cohorts, working ages, and retirement ages, that’s going to remain contentious.

• Yet another school of thought held the K-wave length was inviolate and the 1987 crash was “IT” which I remember hotly disputing at the time since it failed to result in the massive public infrastructure spending and economic reforms that accompany long wave bottoms.

• Yet another colleague, Jim Goulding, used Strauss & Howe’s work to hypothecate the coming Longwave “winter” and it may be found onloine here and yes, it’s available for Kindle.

A 1987  Replay Side Note

In Peoplenomics last weekend, I presented a chart comparing the events of this week to the events of 1987.  I updated the chart this morning so you can look at the similarities for yourself, I’ve drawn some arrows to help.  Both are zero’ed to the first of respective years and the 2011 period is offset about 50-days.

Does this imply that this move could continue to the Grand Super Cycle Elliot Wave logical stopping point around Dow 9,500?  Well, I’m no soothsayer, but it is possible.

The only question is WHEN?

I’m leaning toward the “Rapid Resolution Model” that says we continue down another 1,200 Dow points from here in the next week, or three, and then stage a good-sized rally back to the 11,500 Dow range.  That way, the larger decline, which in both predictive linguistics and the “master matrix” would get underway in mid October and may culminate with a Dow around 6,627 about the Winter Solstice, December 21 – a Wednesday, and so the markets should be open.

At that point, if this scenario is the one that is followed, I’d be buying hand over fist, since an expected bounce from that level would mean a huge profit opportunity before the “Sell in May and go away” windows shows up in late spring of next year.

(This is not financial advice, just a discussion of longwave economics and my personal outlook.  You do what you will – you’re on your own.)

Longwaves and Wars

Longwaves are dangerous things (great chart)  in that they have a tendency to end in wars.  Take the longwave winter of 1860, just for instance.  That’d be our Civil War, which was anything but.

And what really ended the Great Depression (1) in the 1930′s?  The Keynesians (deficit spenders) argue that it was the massive public works projects like the REA, Grand Coulee Dam, the Tennessee Valley Authority and so on.

Unfortunately, this is only partly true.  What really jerked America out of the longwave economic malaise was the little blip called World War II, and so when you see China and Russia posturing today, as they are, and when you read about how US domestic travel controls and so forth are being increased – including requiring official approval to leave the country – shades of the Jews plight in 1939 from Germany – we can make out a pretty ugly outline of the (to borrow HG Wells and Clif’s work) the shape of things to come.  A nightmarish half-rhyme off the last time around.

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There, don’tcha feel better?  No global war possible till at least Q3 of next year – I hope – so we move on to shorter term outlooks.

But read up on the K-wave and in particular, the longwave cyclical wars and ask yourself “Is that what all that fighting in Iraq, Libya, and the sandy-stans is all about?”

Uh-huh, yup, you bet’cha.  The policy game here has been trying to pull the war stimulus forward, ramp up spending, but the rabid right has lost focus on the longwave and by preventing deficit spending now, and tax increases, the way down into a lower economic low becomes a shoo-in, and that, unfortunately, doesn’t end pretty.

But that’s the Big Picture in a nutshell – many pieces left out – but maybe enough to help you frame why we’ve been so insistent on accumulating the long-term foods and other items (stored meds and such) in order to help “muddle through” what’s an ugly period ahead.

The main difference this time?  This global depression is like to be one level of greater degree from the last one.  Robert Kaplan’s book The Coming Anarchy: Shattering the Dreams of the Post Cold War ($10.50, Amazon) is a fine companion, because this particular Mulligan will have a different taste to it. 

And if you don’t know what a Mulligan is, you missed some of Louis L’Amour’s finest stories – the ones about how he knocked the country, helped make the stew at a tar-papered shack in Long Beach while trying to find a deck job of any sort as a merchant seaman around during the Depression.

Depressions are horrific things.  For people like L’Amour, however, who bought tiny “pocket classics” and read them to sailors in the fo’c'sle of tramp steamers in the Pacific, they were formative and built not only hjis character, but that of the Nation.

Unfortunately, we’re there.  And as America heads into a lot of “character-building” in the coming few years, we hope to be able to help.  And that’s why this weekend’s Peoplenomics is all about spontaneously creating companies….think of it as Grass-roots Entrepreneuring 101.   You’ll want to keep it handy.

Landry’s Latest

OK, the Big picture out of the way, let’s move on to Robin Landry’s latest note to colleagues in the investment community which he kindly shares with us (and folks like Bob Prechter, too…):

In my last update dated 6/30/2011 I said I would send an update with the charts labeled as to where I believe we are in the wave count.

When the market broke the support lines last week I have been trying to find the time to send out this update but until now I have been covered up. I am doing this from home and hope I can stay awake long enough to finish it.

? As the enclosed charts show I believe we are now in the Primary wave 3 down to lows below the low of March ’09.

I know many will find that hard to believe but I have been saying this was coming for many years. Bob Prechter of www.elliottwave.com  has also been warning of this likely outcome for several years.

Monday at around 2:22 pm CST I sent Bob an email pointing out the advances vs. declines was at a level on the NYSE that I had never seen before, 58:1 declines vs. advances. I also mentioned that if my memory was correct the highest declines vs. advances ratio I had seen before was in the Depression and in 2008 when the decline vs. advances was 34:1.

After the close Bob emailed me back that the closing ratio today had reached an historic 69:1. Wow!! If this is historic, and it is, I can’t imagine what the ratio will be when we are in Intermediate 3 of Primary 3 later this year or next year.

I was told later that on the Nasdaq ratio was 99:1 WOW!!.

There will be a large intermediate wave 2 rally once Intermediate wave 1 down is complete. I believe this will be the last chance to get out before the more dramatic Intermediate wave3 gets underway.

I will update with likely upside target once I1 is complete. There are those who say this is a buying opportunity but I don’t think so. I for one will follow my indicators. As always I welcome questions and comments and will answer as time permits. – Robin

On the www.urbansurvival.com/week.htm page, clicking the charts will give you the larger .pdf versions.

One other great bear site?  Fiend’s SuperBear Page.  Like me, he’s been “growling since 1996…”

The Looks of Asia and Europe

Once again, our Jakarta Bureau Chief, Bernard Grover,  has the overnight wrap-up:

“Europe is arguably already beginning a revolution, and Rassmussen pollsters conclude Americans are on the verge. 

Dow’s set to gap down another 200 at the open and Europe got spanked again, though as we wrap up here in Asia, things look somewhat quieter, except for the Swiss.

Asia got a tourniquet on before flatlining at the close, and even managed some green on the board, but Hang Seng and Seoul are still bleeding profusely.  Nikkei is still getting whomped, as well.  The kiwis, who skated yesterday, got theirs today.  This is better than Harry Potter in 3D!

The big story is gold, which has hovered between 1750 and 1775 all day.  At the low end, it was still 30 over platinum’s high, which is probably over-bought, but who knows where the hysteria will end?  It’s quoted locally at 57/gram (24k), though 50 is possible if you know where to go.

The dollar has fallen to IDR8550, and for comparison, it was 10,000 when I got here four years ago, and has been as high as 12,000 in that time.  It seems that Fukushima is not the only major melt-down in the world, these days.

At any rate, momma’s got sapi rending on the stove and probably wants to give me some extra sugar for getting us into gold and land two years ago.  I’ve made better than 200% between the two…well, 190% after inflation.  Do I earn my UrbanSurvival Junior Economist pin?”

In keeping with South American dictators and certain branches of government UrbanSurvival readers are according honorary doctorates.  Save them sheepskins for starting fires under the Mulligan next year.

Europe is making a half-ass bounce attempt this morning, or was an hour before press time.

Other Logical /Logifying Frameworks

…which we use once in a while is called the Manufacturer’s Resource Wars which is what’s going on under the [longwave] surface here as China, Russia, and other large players (think NATO/Libyan-oil & water) are all being fought over via proxies.

This note from our Winnipeg reader is spot on:

“China has effectively secured transportation networks through the heart of Africa. In April Chad, flush with gold, uranium and oil, signed a billion dollar Chinese loan for a new airport and associated road links to it’s capital. Last week Chinese lenders arranged a billion dollar deal with oil-rich South Sudan for improved rail links. Once complete, China will control a rail network from Cameroun’s Atlantic coast to the Indian Ocean. “

And, of course, the first major framework is Clif’s GlobalRev work that fell out of modelspace of the predictive linguini/ web bot project.  This is a particularly pertinent framework if you’re trying to figure out why all those young people are still rioting in London.

“16,000 police to retake London: PM recalls Parliament as the police lose control of Britain’s streets” offers Mail Online.

Answer as to their motivations?  Simply the Janis Joplin lyrics at work again:  “When you ain’t got nothing, you ain’t got nothin’ to lose…”

Or, a word of advice to both the Brit/Parly’s and the US Congressers frrom the book of Joplin:  “Nothing don’t mean nothing, honey, if it ain’t free.”   Hear that?  Off in the distance?  Yo, shit’s on fire.

Or, a little more foreground:  as the Belfast Telegraph frames it in yet another graceful context “Global Crisis goes full circle.”  Yessir, sure does.

And from the Book of Dylan, this morning’s last bit of social scripture:  “For the first ones now, shall later be last, for the times, they are a changin.…‘” 

And the chorus: To everything, turn, turn, turn, there is a headline.

Where’s my damn coffee?

Back to point: I would not be surprised to see the UK activate their “COBRA” committee today, but that, by this two year back article – may be exactly the wrong thing to do according to the report.

Fed Watch

Are we having fun taking bets on whether the Fed will raise a quarter?  You bet – and their decision will be out this afternoon.  We’ll post an update if I’m not tied up on the phone with clients, etc.

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I noticed the Bloomberg headline “Fed’s [D. Nathan] Sheets quits as Bernanke’s Chief International Advisor”.

Can’t help but note the Fed is now one sheet to the wind. I sheet you not.

Yawnernomics

Productivity Numbers have just been released this morning – maybe enough to keep you awake for, oh, say a couple of minutes…

Nonfarm business sector labor productivity decreased at a 0.3 percent annual rate during the second quarter of 2011, the U.S. Bureau of Labor Statistics reported today, with output and hours worked rising 1.8 percent and 2.0 percent, respectively. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2010 to the second quarter of 2011, output increased 2.5 percent while hours rose 1.6 percent, yielding an increase in productivity of 0.8 percent. (See tables A and 2.)

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

Unit labor costs in nonfarm businesses rose 2.2 percent in the second quarter of 2011, because hourly compensation increased 1.9 percent while productivity decreased 0.3 percent. Over the last four quarters, hourly compensation increased more than output per hour, and unit labor costs rose 1.3 percent.

Tomorrow it’s wholesale inventories in the morning and the Treasury Budget in the afternoon.  Remind me to write Stephen King a note as ask if he’s been called in as a consulting writer…The Dead Zone is a good title for the economy, and Needful Things seems to fit Washington to a tee.  Just curious, mind you.

Hungry to Learn

Might want to look around your own state to see if something like this is in the works as budgets collapse:  The Detroit News has been reporting on how 30,000 college students have been kicked off food stamps in Michigan.

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“Loan aps from kids” are up 20% this week alone, here at the National Bank of Dad.  No repayment expected.

X-Marks the Sun

Biggie solar flare:

An X6.9 flare peaked at 08:05 this morning (15min ago). The source is presumably (TBC) NOAA AR 1263, now at the solar West limb. Note that this active region triggered a rise in proton flux levels during an M-flare yesterday evening. The flaring site might thus be in geo-effective position and more protons might be expected in the coming hour.

Couple of readers have asked if this could impact GPS systems and the answer [should be] is no.  Still, I’ve got an hour planned to write down old-fashioned VOR navigation frequencies for my flight back from Ohio.  VHF (line of sight) radio works.  Good to have belt and suspenders, lol.

Recurrent Training Issues

Say, here’s a weird one:  The Air Force grounding of F-22 Raptors is in its fourth month says this here report.  They figure 210 days of not flying makes someone need to retake the whole training sequence.

Here I thought a biennial flight review was bad; control, throttle, carb heat and a few stalls and recoveries.  Hah!  On the other hand it’s a $20K older Beech versus a $415-million per copy taxdoggle…. the Project On Government Oversight has been following the Raptor for five years now…

Air Force Times reported last month on toxins like propane and anti-freeze in the bloodstreams of some pilots – except those out of Tyndall.  A maintenance procedure?  No telling.

We’ll just take our aspirins (which assist oxygen uptake at high altitudes) and keep the pulse oximeter handy, thanks.

More after this….