The 7-year sabbatical cycle (part 3)

Part (C) : commodities and the next bullish markets.

The final part in this series will be sub-divided as follow:-

i.                 The Dow Jones Industrial Index forecast

ii.                Commodities prices, gold and oil futures.

iii.               China

i.                 The Dow Jones Industrial Index

Further to the article in part 2 of this series, the speaker mentioned of Kitchin cycle.

Kitchin cycle is a short business cycle of about 40 months discovered in the 1920s by Joseph Kitchin.

Kitchin said that in good years, the commodities supply get flooded and so prices dropped. Hence, it is necessary to reduce output so that prices can rise again. This cycle is about 3-5 years. This also explains that there is a sort of mid-term hiccup in between the 7-year cycle.

The speaker also mentioned about Schumpeter cycle of innovation. Schumpeter was the most influential thinker to argue that long cycles are caused by innovation. He identified innovation as the critical dimension of economic change.

The table below is based on the chart presented by the speaker. In his opinion, the innovation cycles have reduced from 60 years to 30 years.

1st wave	2nd wave	3rd wave	4th wave	5th wave
60 years	55 years	50 years	40 years	30 years
1785	1845	1900	1950	1990
1845	1900	1950	1990	2020

Upon more research, another writer said that the innovation cycles should be somewhat like this. Take a look.

Look at the picture above again and you will find that this writer predicts the computer innovation cycle ends in 2025, which is 3 years from the next sabbatical year 2022 (i.e 7 years from 2015).

Future outlook: shall we look at companies that are involved in nanotechnology and high information technology?

Question: what is the direction of DOW then?

The speaker’s opinion is that Dow will hit 30,000 points within the next cycle until 2022.

Take a look again at DOW 100 year chart below.

So if we look at the DOW 100 year chart again, we notice that there are 2 major bullish cycles started from low of Jun 1949.

1^st big bullish cycle = Jun 1949 to Jan 1966 = 17 years

2^nd big bullish cycle = Jun 1982 to Dec 1999 = 17 years

Next big cycle?

Say from Feb 2009 + 17 years = 2026.

2026 will be about 3.5 years after the next 7-year cycle falling in 2022.   

Chart wise, basing on the above idea, it may look like Dow can be projected beyond 20,000 points.

Question: How can Dow move beyond 20,000 and when?

The speaker said that Dow already hit the 7-year sabbatical in 2015 and the current downtrend in Dow should bottom out within 2 quarters 2016. If we refer to the 7-year sabbatical table and my analysis of the Dow 100 year chart bear markets (reproduce below)

1959 = not much effect 1966 = bearish (until Jun 1970 bottom. How?) 1973 = bearish (bottom out in Nov 1974) 1980 = bearish (until Jun 1982 bottom?) 1987 = bearish 1994 = not much effect, market still bullish (blue ring) 2001 = bearish (until Sep 2002?) 2008 = bearish (until Feb 2009) 2015 = bearish started from Feb 2015. Still no sign of bottom yet. 2022

That means, Dow will hit bottom sometime this year and starts another big bull run towards 30,000. He said that with interest rate rising in USA, more money will flow into stocks. The phase 2 of his idea of national debt crisis in Japan will attract more money into US stocks by then.

Do you agree to his opinion?

ii.                 Commodities prices, gold and oil futures

Gold has hit very low since peak in 2013. 

Any sign of reversal yet?

The speaker was confident to predict that gold has bottom and should begin up trend again.

Take a look at U.S Gold ETF, GLD.

Outlook: From chart, it looks like GLD is short term reversal and should be in up trend.

The long term outlook is still not clear. Most big countries stop using gold as reserve and also not many use gold as hedging instrument. Maybe demand is not enough to push gold price back to $1,800?

Next commodity: OIL.

From chart above, we can see that oil prices hit very low – 12-year low to be exact.

The last time oil prices hit below $30 was between 1998 to 2001. That was the time of Asian Financial crisis and the sabbatical year of 2001.

Question: will oil price fall below $30? Possible.

Will oil price fall below $20? Maybe not.

The speaker forecast that oil price if hit below $30, should the most be around $28 before rebound strongly and rise again.

Can you accept?

In recent times, both commodities and stocks are correlated and fall when bonds and USD rise. http://stockcharts.com/school/doku.php?id=chart_school:overview:intermarket_analysis

So if according to the speaker, if Dow Jones hits bottom in 2016 and begin another bull run, both gold and oil should rise.

So this is the scenario this year:-

·        Gold rise in the short term but long term still downtrend.

·        Oil should rebound if hit below $30.00

·        U.S market will continue bearish sentiment until bottom out this year. Thereafter, will be a major bull run.

Do you agree?

iii.               China

The next cycle of Dominance will be in the Far East. China will overtake USA as the biggest economy in less than a decade.

How?

Take a look at this computation.

GDP current prices (http://knoema.com/nwnfkne/world-gdp-ranking-2015-data-and-chart)

YEAR	USA	CHINA
2014	17348	10356	Actual data
2015	17,968	11,384	Forecast
2016	18,381	12,124	Forecast
2017	18,804	12,912	Forecast
2018	19,237	13,751	Forecast
2019	19,679	14,645	Forecast
2020	20,132	15,597	Forecast
2021	20,595	16,611	Forecast
2022	21,068	17,691	Forecast
2023	21,553	18,840	Forecast
2024	22,049	20,065	Forecast
2025	22,556	21,369	Forecast
2026	23,074	22,758	Forecast

 The table above assumes USA GDP growth at 2.3% and China GDP growth at 6.5%

So do you see that it is possible that China can overtake USA within a decade? Of course with all situation being the same as today. Not possible? It is only an opinion and we should not stop to reconsider.

Of course China has also implemented many ideas to boost their economic growth. The biggest project will be their One Belt One Road Initiative.

China also formed AIIB (Asian Infrastructure Investment Bank).

The AIIB, a modern knowledge-based institution, will focus on the development of infrastructure and other productive sectors in Asia, including energy and power, transportation and telecommunications, rural infrastructure and agriculture development, water supply and sanitation, environmental protection, urban development and logistics, etc.

(http://www.aiib.org/html/aboutus/AIIB/)

On the other side, USA rely on computers has reached the end of its innovation cycle (if according to the Schumpeter Wave) in a couple of years to be taken over by nanotech.

(note: U.S companies involved in nanotech include IBM, MU, HAL, XOM, MRK, ABT, DUPONT, DOW, GE)

Gillian Tett of Financial Times spoke to Bloomberg that China’s economy is still growing at a strong pace but what is happening to their markets early 2016 is the loss of confidence of investors to their policy makers’ uncertainty and changing regulations. China is trying to liberalise their currency, interest rate and capital flow but at the same time they are also controlling their market with tight regulation.