Can any cycle model work on a specific level to a precise day, years and decades in advance? We have the chance to figure this out in the next days. The eminent turning point is coming from Martin Armstrong's business cycle studies which signal the June 13/14 2011 as a major reversal of fortune in financial markets.
Although there is no major market peaking or bottoming dramatically right now, we still see price structures in the currency markets involved in reversal affairs. The Swiss franc, for instance, is approaching a high against the US dollar, as are the Australian dollar or the New Zealand dollar, although less exuberant both. This means we need to watch the dollar as we move into the crucial date.
Martin Armstrong, who discovered the cycle, explains in a recent essay that "... markets that tend to be approaching highs are the interest rate markets. This tends to suggest that the debt crisis will get worse over the next 4.3 years into 2016 and that we are more likely than not going to see rising interest rates regardless of what the governments wish to create." Indeed, if Southern European countries break away for the deflation imported by having adopted the Euro, with the resulting economic debt chaos, the dollar would be favored.
The cycles logic would suggest, in the case of metals, that a high for gold on June 13th/14th with a low in the dollar would signal a reversal in both markets. However, gold may remain range bound in higher levels, pausing it's trend when priced in dollars, only to resume the primary trend after the temporary consolidation.
Some of the biggest investors out there view cycle theories with respect, and factor cycles
into their financial commitments. Investors use cycles as an overlay to shape their big pictures of the financial world and to remind themselves that there is always a reversion to the mean.
Armstrong ’s model, focuses on those markets showing a exuberant personality, those with the greates concentration of capital in one sector, and tracks the footprints of money around the world. When capital shifts it's attention, it behaves like water: it goes where it encounters the least resistance, leaving behind big financial panics.
Armstrong was the one to observe the shifts in capital flows hit the markets every 8.6 years across many asset classes. The estimate of magnitude seemed to revolve around periods of 51.6 years, which nests a series of 6 business cycles of 8.6 years each. Armstrong revealed that the business cycle concept can be backtested into ancient history going back to the Greek and Rome empires and all monetary systems that followed.
Later, he realized that 8.6 years was exactly three thousand one hundred and forty-one days: 3,141, the number pi times a thousand. This is not to confound with Phi, also called the golden ratio, represented by the irrational number 1.618. While the general interest in phi and the Fibonacci sequence goes back many decades, the Pi number has not really served as a financial cipher. At least not for the general public.
One of the most difficult observations for the analyst to face is the inversion. In some cases, where a cycle low is expected, a peak occurs instead and the specific turning point can only be identified as a high or a low in the markets when approaching the date. The same is true for the Economic Confidence Model.
In an article written in September 1999, Armstrong reveals the mystical number behind his studies and explains his observation that driving forces behind the business cycle were decisively intensified due to the introduction of the floating exchange rate system back in 1971, what is know as the beginning of the Forex market. From that moment on, greater waves as measured by amplitude should be expected.
Using 1929.75 turning point as a reference, subsequent major and minor turning points could then be projected forward in time. In 1976, one of these 8.6-year turning points was quickly approaching (1977.05) the model was forecasting a significant turn in the economy back toward inflation. The stock market had crashed by half and OPEC was trying to reduce oil demand. Anticipating this, the market price for oil exploded and the world financial system, entered in a series of recessions and high inflation that persisted until the early 1980s. Gold rallied from $103 to $875 by January 1980.
As the 51.6-year turning point approached in 1981.35, the federal funds rate, which was about 11% in 1979, rose to 20% by June 1981. In it attempts to attack inflation the US government caused a massive recession into the next half-cycle date of 1985.65. It was in September 22, 1985 that the Plaza Accord gave birth of the G5 and the exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987 forcing foreign capital out of the US.
Martin Armstrong was invited by the Brady Commission to share his views on the 1987 market crash which he predicted to the precise day using his computer models. The target date of 1987.8 was precisely October 19th, 1987 the day of the low.
As the Japanese repatriated their money for investment, the value of the yen appreciated as well as and Japanese assets. Global capital felt attracted until the Japanese bubble peaked, and the following1989 PEI's prediction marked the Nikkei’s peak before it crashed. Flows had to search for the next foreign investment and capital shifted its attention towards South East Asia over the next half-cycle of 4.3 years reaching its point of maximum intensity in 1994.25. Within the scheme of global capital flows, not all markets can experience a boom simultaneously, therefore, when capital returned to the US from South East Asia, the result was the Asian Crisis in 1997.
Another big pi date was July 20, 1998. The European markets had captured the greatest intensity between 1996 and 1998 and Russia too had reached a peak intensity which marked the high point in the S&P 500. This was just before a Russian default broke the giant hedge fund Long Term Capital Management nearly collapsing the entire world's financial system.
Armstrong's work also identified November 2002 which turned out to be a major bottom, when both the S&P 500 and the NYSE made their final highs in that month. The next important turn date was January 1st, 2005 - the date which marked the high for the NASDAQ for the year. The next turn point wouldn't come until February, 23, 2007. This time the market didn't exhibit major price turns, and the forecast was seen with disdain by Armstrong skeptics. But the precise date turned out to be the peak of the easy-money bubble with some of the tightest credit spreads ever.
The illustration shows the idealized business cycle. Note that some of these precipice events took place on the minor halfway point of the 8.6-year cycle, at 4.03 and 2.15 year periods which the model accounts for.
Voted “Americas Top Economist” in 1990 by Equity Magazine, Martin Armstrong founded a forecasting firm called Princeton Economics and constructed the Economic Confidence Model, which focuses on the impact of the 8.6 year business cycle on the world economy.
In the early seventies, as a self-taught a trader and dealer in gold, he began compiling forecasts about commodities and currencies, based in cycles research involving market crashes and world monetary systems. The roots of his model were kept secret for many years while his forecasting business grew with clients and offices overseas. The New York Times, Wall Street Journal and Bloomberg quoted him, and he shared his views on CNBC and other financial broadcasts.
In 1998 Armstrong was running a couple of hedge funds, investing billions of dollars on behalf of Japanese clients. The Japanese called him Mr. Yen. By that time, many governments were eager to get a closer look at his model and he declined several purposes. But not long afterward, in September 1999, the FBI raided the offices of Princeton Economics and after that month the US Attorney handed down a criminal indictment against Armstrong. The SEC and the CFTC filed civil suits charging that Armstrong had been running a Ponzi scheme. He was arrested and charged with defrauding investors.
After nearly seven years spent in civil contempt without a criminal trial, Armstrong's strange and convoluted legal case was resolved in August 2006, but only recently, in March 2011, he was released from federal prison and is now under home confinement, from where he publishes his research.
Within what would appear to be randomness for most people, technical analysts seem to embrace the idea of an hidden order even if no satisfactory explanation has been given for its existence. patterns and narratives shape our particular view on the world. The difficulty that arises from this cycle analysis is precisely which sector of the global economy will become the now focal point at the 12th and 13th turning point. As currency traders, we are probably in the eye of the storm.