What really drives the Economy
Article excerpts from the August, 2007 issue of Trader's Tips
..."After doing some stock market related research, i came across an amazing method, which to a great degree clears my own fog, as for what really drives the economy and in turn the stock market. As many will know, consumers represents 2/3 of all domestic spending and it's ebb and flow is an important factor behind the fluctations in the economy (GDP) and the stock market. But after i found this statistical information, a more in depth, clear and accurate picture is given. And i must say it gives an eye opening overview of what could be in store for the economy and the markets.
The chart below shows a 80 year long, high accuracy correlation between an inflation adjusted Dow and the demographic, 5 year grouping of the 45 to 54 year olds in the US. This grouping is the big spenders which more significantly fuels the economy. There is a natural reason why these folks are the biggest spenders. After long careers their income is good but also with greatest costs, likely having their biggest house & mortgage, a more expensive car and with financially demanding kids in high school etc.
Chart courtesy of Vorago-US database, thegreatbustahead.com
From 2012 to 2025 the number of these 45 to 54 year olds (based on available government birth statistics of the population) will dramatically decrease. To get a clue of it's magnitude, we can see the group's decline comparison from 1929 and from 2012, on the chart. By using it's long correlation history as proof, the odds that a long term market top around 2010-2012 will occur, is quite high.
In my opinion, based on the above insight, a more technical way to confirm this huge market tide has likely changed direction around that time, would be to look for any monthly MACD crossovers in the upcoming years, especially in the 2010-2012 time window. (Jan. 2010 Update: A countertrend high, wave 2, is not ruled out in 2010). And when/if it occurs, i intend to get out of any long term investments on the Long side and instead consider some long term LEAPS puts or go Short on some fundamentally weak stocks.
Given the quite steep rise of this grouping into 2010-2012 and probably with it, an overall continued rise for the stock market, the chance of MACD more accurately confirming when it's all over, should be good. Like MACD did, right after the major top in 2000, when it turned bearish in May and stayed bearish for years after that. An even more conservative, safe strategy would be to exit and re-enter on any monthly MACD crossover signals in the years leading up to the main time window, even if this means taking a few minor whipsaw signals on the way to locating the big one.
An alternate scenario is that if a correction is underway now, which the technical Double Top pattern often indicates, any advance thereafter may go into the 2010 - 2012 time window and possibly form a triple top from 2000. Or in case the highs of this current Double Top is breached in that final advance, i'll come up with Fib. target projections, typically seen for wave fives in the future."...
..."Taking the above information and probable outlook into account, prospering in potential tougher times should still be possible by being prepared for what may come and by changing strategies. Personally, i'm avoiding any more debt and the purchase of a new home but instead continue to rent, because one of the side effects of soon less domestic spending (as we have just seen convincing evidence of may come) should i.e. lead to a weak Real Estate market and much of the equity in a purchased house could disappear as a result. I wouldn't want to be caught in the negative spiral of a big mortgage, a collapsing Real Estate market and a future potential layoff, if companies are facing tougher times in the next decade.
Worst case, i could be forced to sell a home i may get far less than i bought for and still have to deal with the same mortgage, without even having any job income. It would be a financial disaster... If i already had a house, i could use the opportunity within these good times, to sell it for a still fairly good price and get rid of debt. And instead sit on the fence, waiting for a Real Estate bargain opportunity of a life time, which may show up in the next decade or so.
And my best way of saving money, is to first get rid of high interest (credit) debt. And thereafter, saving some money in e-gold currency could be a sound strategy, because gold tend to be a good investment when times are getting tougher, in my view. At least, i think such gold backed currency will hold up better than others in the future."...
..."For new subscribers, according to the studies of longwaveanalyst.ca there are four "seasons" in the 50 - 60 year long Kondratieff Cycle, Spring, Summer, Autumn and Winter.
Stock prices perform well in the Spring with recovery in the economy as well. The last Spring phase was from 1949 to 1966.
The beginning of the inflationary summer is indicated by a peak in the spring bull market in stock prices (Last summer 1966 - 1981). The end of summer primary recession is caused by the cycle peak in interest rates. This recession is one of the four indicators signaling the beginning of the huge autumn stock bull market.
Four events occur at the end of summer and anticipate the beginning of autumn:
1) A peak in prices
2) A peak in interest rates
3) A bear market in stocks
4) A primary recession
It's the period of rampant speculation in real estate, bonds and especially stocks (1982 - 2000).
Beginning signaled by the peak in the prices of the large autumn stock bull market. The purpose of the winter is to cleanse the economy of debt via payback, liquidation and usually bankruptcy. This process creates tremendous stresses to the economy and financial system. (2000 --- >) The next Spring should again bring growth and prosperity.
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