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Guest Post: A Brief History Of Cycles And Time, Part 1

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If I’ve learned one thing over the last 12 years from following markets, economics, and geopolitics is this: no man can push the Wheels of History. It unfolds in its own time and no other."

 
I am honored to publish a deeply insightful two-part essay by longtime contributor Eric A. on long-term cycles, and how they shape our spectrum of responses in periods of crisis and transformation. This essay has profound implications for our individual choices in the years ahead, and I believe it helps explain my own political/ financial philosophy outlined in my books: 
 
Here is Part 1 of Eric's essay. Part 2 will be published tomorrow.

 
Many of you may be familiar with the Foundation series by Issac Asimov. In it, mathematician "Hari Seldon spent his life developing a branch of mathematics known as psychohistor. Using the laws of mass action, it can predict the future, but only on a large scale; it is error-prone on a small scale."
 
In practice, we can see that this would be theoretically correct: we study history precisely because human nature is relatively the same and the same events recur with the same predictable responses. If history really were chaos--a muddle of events appearing randomly and being resolved in unpredictable ways--there would be no point in studying it.
 
Using this same method, in “Foundation” Hari Seldon uses his model to predict with great accuracy the unfolding of the human universe hundreds and thousands of years in the future.
But that’s sci-fi, right?
 
Not exactly. Like many sci-fi stories, “Foundation” takes a true premise and extrapolates it into the future. In the 30’s “Buck Rogers” hypothesized the existence of rockets and trips to Mars. Star Trek hypothesized the wide use of lasers--a laboratory curiosity--and phasers, similar to the microwave technology we use every day. Science Fiction by definition thinks ahead to ask “what if?” We know what is possible, but what if we could harness, refine, perfect it? By definition, it must be ahead of its time, or it wouldn’t be “Sci-Fi” but “Contemporary Fiction.”
 
Foundation originally appeared in Astounding Magazine in 1942. So how are we doing?
 
As it turns out, pretty good. There is a “Hari” working on exactly this problem: Harry Dent, of demographics research. “Demographics are destiny” he would say. As each generation is born, it demands support in housing and schools, then is productive in their middle years, creating the most wealth right on cue in their 50’s, then retiring and drawing resources until death, and so on through time. It cannot be changed except with mass epidemic or calamity of war. And this is provably true: demographics of the Boomers in the U.S. are measurably slowing the economy as they retire, precisely the way that Japan’s earlier baby boom slowed their economy into a Depression 20 years earlier.
 
There is Robert Prechter’s “Socionomics” study, which states that markets and governments don’t create human moves, but are instead the consequence of them. That is to say, human emotions and behavior run in cycles of set period. Obviously humankind cannot become infinitely more optimistic forever into the future. In the same way trees don’t grow to the sky, at some point human expectation must reverse and become less optimistic, more conservative and pessimistic until it reaches an opposite extreme.
 
And this theory has a lot going for it: if governments truly controlled stock markets, economies, nations, then why would they ever decline? No government or market would ever voluntarily get smaller, less powerful, and prosperous. And yet despite everything they can do to prevent them, markets and economies always, always DO reverse. Always. And what’s more, they move in predictable cycles over time, from the 4-year business cycle to the 70-odd year Kondratieff Cycle.
 
 
This 70-year cycle of human lifetime is what Strauss and Howe refine in their work The 4th Turning. The idea that there are four generations that proceed in predictable order: Prophet, Hero, Nomad, Artist that occur over and over again in western history since at least the 16th century. Imagine a kitten being born, living half its life in winter, never seeing spring until they are full-grown—how that affects their behavior, their perception of life.
 
This is the same for the generations, being born in turns in a stable, expanding world or an unstable, contracting one markedly alters the perception and behavior, the demands outlook, and skills of a 20-year generation. This not only meshes with the Kondratieff Cycle but explains the expansions and contractions, breathing in and breathing out, the ebb and flow of optimism and pessimism that are easily so predictable in aggregate, just as Asimov predicted.
 
There is one additional candidate: market timer Martin Armstrong. Armstrong doesn’t just follow cycles, but like Hari Seldon, has made a complex computer model of all factors, and has made a career predicting precise turns in timing, often to the day, as in the market crash of 1987.
 
 
How can he do this? Because people in aggregate do not have as much free will as they believe they do. We as people are not only our own observations and desires, but we exist as an integral part of a larger ecosystem – a social, economic, political, thermodynamic, and mathematical ecosystem that we cannot escape. Just as the kitten above, living in a world that has always been snow leads you to simply BE different than who you might have been only knowing the ease of the summer sun.
 
What could possibly create human cycles with such predictability in time and frequency? Although everyone from Ecclesiastes to Machiavelli to Munehisa Homma remarks that they exist, no one really knows. But how about something like this?
 
 
Or other, longer cycles, from the sun, the stars, the weather, the planets? We don’t know. Like gravity or time, we can only see and measure the effects, we cannot yet hypothesize their cause.
 
Back to charts, many of you may be familiar with this chart by market commentator Karl Denninger, from 2009:
 
 
What does this tell us? GDP, the real economy theoretically rises by let’s say 3% a year. However since 1971, debt has risen something more like 9% a year. Any 5th grade student recognizes the law of simple exponents. That GDP, that is, economic “Reality” is falling ever further behind economic fantasy, that is, all the undelivered paper promises represented by “debt.”
 
This is the mathematical system we live in that also largely represents the thermodynamic reality of the U.S., and critics have been bringing this to public attention since the budget debates of the ‘80’s. The injustice, the irrefutability, and impossibility of avoiding the sudden collapse of the market--indeed the real world of politics, war, death, and human action—back to the lower line. They have been warning the public since before the first crash of 2001 that this MUST happen, and must happen badly.
 
So why hasn’t it crashed? Why, 14, 24, 34 years later is the economy still limping along, the illusions still firmly in place despite every evidence and warning?
 
It isn’t time.
 
We in the blogosphere have been warning people about impending collapse for over a decade, and for the most part we’ve been right: tech on the Nasdaq crashed from 5000 to 1000, never to recover. Housing crashed never to recover. The Dow fell from 14,000 to 6,600. Every bank nationally and worldwide is insolvent. Most developed nations are also insolvent along with their debt, which is the de facto currency and blood of the very system of human exchange. We predicted this and were correct.
 
Yet seen another way, nothing has changed. Instead of falling to 7 PE and 4% dividend ratio, the Dow rebounded to 14,700. Instead of over-correcting beyond a 3:1 income ratio, below $126,000, U.S. housing remains levitated at roughly $200,000, far above what the young can afford, stranding 20M houses in vacancy and decay. With market proof, mathematical proof, proof of financial action such as the hundred Trillion in bank bailouts and the political red flag of the Cyprus bail-in, how can this be?
 
It isn’t time.
 
If I’ve learned one thing over the last 12 years from following markets, economics, and geopolitics is this: no man can push the Wheels of History. It unfolds in its own time and no other.
Look at the Generations: at this time, the Boomers are still in undisputed control of the US, economically, socially, and politically. They own a quorum of all wealth.
 
 
They have a supermajority in Congress. Economically, attention is largely focused on only this demographic which still has some remaining money—the Viagra and prescription drug ads, the focus on investing and retirement, even the age of the actors in movies, TV, and commercials tells us so. The young, although now larger in numbers, have no effective political power. This will change, but it only changes when it does, on the strict schedule of demographics.
 
Socially, we saw the markets crash into ’01 and ’08. But like the matching dates of 1921 and 1929 these were sudden extremes in human pessimism which could not be sustained. It matters not at all whether they are “true,” or whether fundamentals support them: human emotion cannot remain at extremes of either optimism or pessimism; it cannot move in one direction all at once. They must and will fluctuate, and the time it takes for the mood of an aggregate population to fluctuate is a predictable quantity, at minimum the 4-year business cycle.
 
Speaking of 1929, the inflation-adjusted Dow:
 
 
Or as inflation is notoriously difficult to measure, you may prefer the in vs out flows to gold as a money-standard:
 
 
Although noisy, note one thing in both these charts: the highs and lows tend to occur with a set frequency. The Dow with a small frequency of 4 years, a larger of 8, then 40, and so on, giving us times of 1929, 1968, and 2008. In Dow:Gold ratio, we have something only slightly more complicated, neatly marked by Greshams-law.com: 14 year Bear markets, followed 20 year Bull markets. There are very few ultra-long historical charts, but here is one:
 
 
For context, in 1344 A.D., gunpowder was a new invention, The 100 Years War was beginning, Joan of Arc hadn’t been born, and America wouldn’t be discovered for another 150 years.
Yet note the chart above shows the same similar periods of highs and lows, for both 8 and 40 years. Why?
 
Hari Seldon’s phychohistory. The waves of human emotion, of optimism and pessimism both long and short term haven’t changed. Short-term it can only persist for 4 years while longer term only for sub-40 years, or exactly one-half one generation. Divide your four 20-year generations in half and you’ll find that same turning.
 
So why are the markets still going up? Why can’t people respond to warnings of the blogosphere, or warnings of collapsing economies and accounts right before their eyes?
 
Answer: Because they can’t. It isn’t time.
 

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Mon, 05/13/2013 - 14:53 | 3557264 rajat_bhatia
rajat_bhatia's picture

All you guys try, you can't beat bernanke's plan. 

Mon, 05/13/2013 - 14:59 | 3557288 flacon
flacon's picture

Everybody posts that last gold chart, but NOBODY has the high resolution version of it. Funny that... 

Mon, 05/13/2013 - 15:02 | 3557298 MillionDollarBonus_
MillionDollarBonus_'s picture

The US stock market is simply reverting to its long term linear uptrebd. Every educated investor knows that over the long term, stocks appreciate. The risk is the possibility of getting in too late and having to withdraw after a correction in order to access retirement money. That’s why I encourage young people to buy early and reap the rewards later.

Mon, 05/13/2013 - 15:05 | 3557311 Buckaroo Banzai
Buckaroo Banzai's picture

Nobody ever lost money in the stock market! Well, except for the hundreds of millions of people who have lost money in the stock market.

Mon, 05/13/2013 - 15:15 | 3557343 LawsofPhysics
LawsofPhysics's picture

Purchasing power motherfucker, I guess it depends what your stawks are priced in huh.

Mon, 05/13/2013 - 15:22 | 3557372 Jekyll_n_Hyde_Island
Jekyll_n_Hyde_Island's picture

"Every educated investor knows that over the long term, stocks appreciate."

  I know that markets and currency and stocks inflate -- and I know because of the laws of thermodynamics [and Tyler's fancy charts] what inflates must invariably deflate...

  I'm not going to get caught with my pants down in the kitchen fucking the maid who looked hot on the odd weekend -- that's all I'm saying.

 

 

Mon, 05/13/2013 - 15:23 | 3557384 NoTTD
NoTTD's picture

I'm assuming this is meant to be parody.

Mon, 05/13/2013 - 16:20 | 3557407 W T F II
W T F II's picture

Complete and UTTER nonsense.... Ibbotsen is a fabrication from another era. Fisrt off, the dividend, and compounded re-investment of the dividend, drove over 50% of the returns and current dividend is less than 1/2 the period average of over 4%. Second is the period Ibbotsen measures, 1926-present. We can unequivocally say that that period was a Golden Era of discovery, innovation, technological advancement, population growth, infrastructure creation and the like. Does anyone think we'll replicate such advancement going forward..?? Well, you'd better if you're long for the "long haul", because mathematically you will need to TRIPLE the price appreciation part of the return, given the diminishment of the dividend's total return effect. Does anyone think THAT is likely, or even remotely possible..??

The above is the issue Wall St and "wealth management" will NEVER discuss...!! They can't...

Mon, 05/13/2013 - 15:24 | 3557388 Jack Napier
Mon, 05/13/2013 - 15:00 | 3557290 Divided States ...
Divided States of America's picture

well it looks like i will be dead broke before this thing reverses...thanks for that.

Mon, 05/13/2013 - 17:53 | 3558150 e-recep
e-recep's picture

hang in there bro, only 40 more years and all shall be well.

Mon, 05/13/2013 - 15:00 | 3557292 LawsofPhysics
LawsofPhysics's picture

Perhaps, but given the opportunity to meet the bernanke in a dark alley, you can be sure as shit we would beat the fuck out of him.  Take your victories when you can... as some things will never change...

Mon, 05/13/2013 - 15:28 | 3557399 NoTTD
NoTTD's picture

Possbily true - but I'd still like to beat him personally.  With a whip aerial.

Mon, 05/13/2013 - 15:01 | 3557294 Iam Yue2
Iam Yue2's picture

"In the same way trees don’t grow to the sky..." What, they don't .....

Mon, 05/13/2013 - 16:58 | 3557889 French Frog
French Frog's picture

TheBernank's model: "Poison in a pretty pill"?

Mon, 05/13/2013 - 15:03 | 3557306 dbTX
dbTX's picture

I'm leaving the office early today so I can spend some quality time with my Eagles.

Mon, 05/13/2013 - 15:09 | 3557326 Inthemix96
Inthemix96's picture

Aha!

This is one suject you bitchez will get trounced on, as I know Cycles like no other, in-fact I would go as far to say I know what I'm talking about regarding Cycles.

I once owned a Raliegh 5 speed tourer, with extra thin racing tyres and quick shift shifter, fully equipped with with a racing special gel seat and aerodynamic hydrophonics.

And I fucking drove it, many times.  Tyler, thats enough, I think my pedigree here speaks for its self.  No more comments needed, as these quaifs, probably even you have never sat your arse on a well tuned, street legal 5 speed.

And drove it with venom in your blood.  Mind, five minutes earlier a snake bit me, I ended up a little light headed but I'm hard as fuck and it made no difference, and I carried on with a stiff upper lip.  Could have been the medication like.

:-P

Mon, 05/13/2013 - 18:51 | 3557328 francis_sawyer
francis_sawyer's picture

NOTHING ever existed prior to 6,000 years ago...

~~~

Then, all of a sudden... A jazz ensemble, which called themselves 'Squeaky McWheel & the Yodelers' appeared in a garden OUT OF NOWHERE... They brought 'literature', 'law', & 'music & entertainment' upon the world...

& oh yeah... 'fractional reserve' BANKING too...

Edit: BTW ~ If I had 'publishing' credentials here... I could publish 'MASRTIN ARMSTRONG' charts [from a decade age], that showed COMPLETELY DIFFERENT WAVE CYCLES... But since most of you all are 'cheesepope' sychphants, I'll make you look them up yourselves...

Mon, 05/13/2013 - 15:11 | 3557329 AnAnonymous
AnAnonymous's picture

I knew this was this 'american' author.

Funny how all those 'americans' come with their fetishes.

Make them so predictable.

Mon, 05/13/2013 - 15:18 | 3557356 patriphil
patriphil's picture

Nenner has been wrong for so longgggggggggggg. Dow 5000 ya right.............Precter is another one. 

Mon, 05/13/2013 - 15:22 | 3557377 W T F II
W T F II's picture

Nenner sold @ 1,500....

Mon, 05/13/2013 - 15:18 | 3557358 fonzannoon
fonzannoon's picture

did everyone btfd?

Mon, 05/13/2013 - 15:21 | 3557374 W T F II
W T F II's picture

Timing, as they say, is EVERYTHING....

Mon, 05/13/2013 - 15:22 | 3557378 NoTTD
NoTTD's picture

That's because the Wheel Wills as the Wheel Will.

Mon, 05/13/2013 - 15:26 | 3557394 NoTTD
NoTTD's picture

The all time high was in 1477?  That's quite coincidence because that's the same year I began to stack.   My timing has always been terrible.

Mon, 05/13/2013 - 15:30 | 3557406 i8emallup
i8emallup's picture

I'm short sunspots.

Mon, 05/13/2013 - 15:37 | 3557446 dolph9
dolph9's picture

Yeah, but aren't you guys forgetting that the entity called the United States of America is immune to history and the laws of science?  That we are the hyperpower at the end of time itself, and it's our mission to rid the world of every other competing ideas and powers so that people can watch movies and go shopping forever?

Mon, 05/13/2013 - 15:39 | 3557450 Fuku Ben
Fuku Ben's picture

"Imagine a kitten being born, living half its life in winter, never seeing spring until they are full-grown—how that affects their behavior, their perception of life." - Strauss & Howe

I'm sure Strauss & Howe properly credited Plato

Plato (380 BC) - The Allegory of the Cave

http://www.youtube.com/watch?v=UQfRdl3GTw4

Mon, 05/13/2013 - 15:42 | 3557471 lasvegaspersona
lasvegaspersona's picture

Deflationists!! Will they never learn?

There has never been a deflationary  collapse of a fiat currency. Unless one changes human nature there won't be either.

When the pain Of deflation) gets bad even the 'hard money' folks will demand that more currency be printed. The Fed will oblige and buy up every bit of paper with any perceived value. 

We will either get hyperinflation or (more likely from my point of view) a sudden catastrophic collapse and reset of the world's monetary system.

Mon, 05/13/2013 - 16:55 | 3557879 Mr. Hudson
Mr. Hudson's picture

How do you know that? Nobody knows how this all going to end. According to Griffin, in his book "Creature From Jekyll Island" every fiat currency experienced a serious deflation before hyper-inflating.

Mon, 05/13/2013 - 19:13 | 3558461 lasvegaspersona
lasvegaspersona's picture

Mr. Hudson

I agree that various outcomes are possible but mankind has always chosen inflation when there was a choice.

What comes before the final HI can be deflation yes...but it ENDS with an hyperinflationary bang...always. Gold standard is different but with pure fiat...always HI.

The possibility of a sudden reset is freegold chit chat.

Mon, 05/13/2013 - 15:59 | 3557588 Fuh Querada
Fuh Querada's picture

Intriguing but WTF? The inventor of Elliott waves died penniless.

Mon, 05/13/2013 - 16:11 | 3557660 edifice
edifice's picture

Sunspot cycles and recessions?  Are you kidding me?

Mon, 05/13/2013 - 17:37 | 3558072 Overflow-admin
Overflow-admin's picture

LOL, like if the sun could have any effect on our little planet Earth ^^

 

Next they will say that they have found a relation between water and growth. GENIUSES.

Mon, 05/13/2013 - 17:49 | 3558129 e-recep
e-recep's picture

yeah, the sunspots idea is ridiculous. the long cycle period is nothing but human life expectancy in years. one generation knows the meaning of thriftiness and discipline, the next doesn't and screws up. that's the main reason. those who lived thru the great depression years are no longer with us or are too old to get their voices heard. so the spoiled and ignorant generation is on the loose destroying everything.

Tue, 05/14/2013 - 08:34 | 3559777 Urban Redneck
Urban Redneck's picture

life expectency isn't constant over time and geography

Tue, 05/14/2013 - 09:33 | 3560059 e-recep
e-recep's picture

but it always has an average global value.

Mon, 05/13/2013 - 16:21 | 3557721 Agstacker
Agstacker's picture

Glad I'm stacking up silver, can't believe how cheap it is

Mon, 05/13/2013 - 17:37 | 3558065 e-recep
e-recep's picture

you see the dow to gold ratio is hovering around 10.5 these days? now that baby will come down to less than one in a couple of years and stay low for a long time. be patient.

Mon, 05/13/2013 - 17:38 | 3558075 Milestones
Milestones's picture

An excelllent, interesting post. Greatly enjoyed it.          Milestones

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