A while back while I was sitting on the beach with Charlie in the supposed paradise of Boracay Island, Philippines, I came up with a theory about when the next major US market meltdown (or meltup?) will occur. Usually we would have been picking up chicks but unfortunately that former island paradise is now overrun with ladyboys, prostitutes and fat Western tourists. So instead Charlie and I sat on the beach drinking $1 San Miguel Lights and discussing just what this crazy world is coming to.
In a nutshell, the theory that I came up with is that the time period between major US bear markets is decreasing at an exponential rate (give or take). This theory dovetails nicely with some other well supported theories as well as some of the indisputable facts of the times (i.e. rampant money printing). An exponential equation also seems like exactly the right way to describe what happens when a government prints too much currency and triggers hyper-inflation. The amount of stimulus becomes ever greater and ever more frequent because the more they print the less effect it has in stimulating the economy. All the while the value of the currency itself approaches zero but [arguably] never quite gets there. Although a logarithmic equation also nicely fits the data currency value nor time period between booms and busts can go significantly negative as that type of equation would predict. (You could argue that currency value goes slightly negative when the money literally becomes “not worth the paper it’s printed on”).
Another body of work that I believe supports my hypothesis is that of author and inventor Ray Kurzweil which is well articulated in his books The Age of Spiritual Machines: When Computers Exceed Human Intelligence and The Singularity Is Near: When Humans Transcend Biology. I highly recommend reading those books but to break it down for you in just a couple of sentences, Kurzweil postulates that exponentially shortening periods of time between major “salient events” or paradigm shifts quite literally describe “life, the universe and everything”. Some notable examples are the rate of development of both biological and artificial intelligence. I am hypothesizing a similar curve may also accurately describe the life cycle of a phony fiat currency / central banking regime such as the one that currently controls the US Dollar.
Lastly, this brief post by Tyler Durden on Zero Hedge that Charlie sent me the other day also seems to support my theory. In short, what it shows seems to be an exponential increase in “black swan” or 4+ sigma events, which means 4 or more standard deviations from the norm. I think that is exactly what we would expect to see as this exponential downward spiral continues to accelerate at an ever increasing rate of speed.
Now that I have explained the background let’s get on to the methodology, the assumptions and the findings.
Methology: I used Excel to fit an exponential curve to the peaks and troughs of major US bear markets to measure the period of time between them.
Assumptions: A major US bear market is defined as greater than one year between peak and trough and a decline in value of 30% or more in the Dow Jones Industrial Average. Therefore the major US bear markets began in 1929, 1973, 2000, and 2007. (The bear market of 1987 is clearly a major statistical outlier given it’s extremely short duration).
Findings: I believe the next major US bear market has already begun. I believe the peak occurred April 29, 2011, the trough is yet to occur and is predicted to occur around October 3, 2011 with the following trough occurring on or about October 9, 2012
Let’s get a few things straight though, this is not a Ph.D level dissertation, this is a crackpot theory dreamed up while drinking on the beach and was developed within the time constraints of the charge left in my laptop battery. I would prefer to have more data points and more time. I am not an economist, I’m a guy who likes to travel the world and drink cheap beer. I tried a number of different types of equations and also experimented with the possibility that April 29, 2011 was not a peak and that we have not yet reached the current peak. Ultimately I decided that an exponential equation was the best way to go and that April 29, 2011 was the peak of this cycle.
The known peaks: 9/3/1929, 1/5/1973, 1/14/2000, 10/12/2007, 4/29/2011* (* hypothesized)
The known troughs: 7/8/1932, 12/6/1974, 10/4/2002, 3/6/2009
That makes the time between peaks before major bear markets measured by the preceding peaks in the US was 44.25 years, 27 years, 7.75 years, and 3.5 years. See any pattern?
The equation: y = 143.68e-1.005x where y is the number of years between troughs and x is the sequence number of the crash. The first crash would be the crash of 1929 since that was the first crash under the current central banking regime established in 1913.
This is junk science and I know it is. However, I think the general concept that booms and busts will become shorter and shorter will hold water. I think we can expect a trough sometime between now and next spring and I think we can expect the next peak within a year to 18 months at the outside after that if this doesn’t in fact turn out to be “the last hurrah” we’re in already. It can’t be too much longer before the booms and busts are so close together it becomes difficult to discern them – think Zimbabwe and adding zeroes to the currency on a routine basis.