Barclay T.Leib – Measuring Financial Time The Magic of Pi

“This analysis originally appeared Feb 25, 2001 on Sandspring.com. It is a long term look at cyclical equity market rhythms, but now four months old, it is also slightly dated in parts. Specifically, when Mr. Leib’s $294.50 Fibonacci gold target mentioned in the article was reached, he advised to book profits and turned short-term neutral gold.”

Michael Alexander did a great job dispelling the idea that stock cycles are merely a matter of luck in his recent book Stock Cycles (Writers Club Press iUniverse.com 2000). “the best time to buy stocks is always now because stocks in the long run always go up.” Beginning with statistical history, he shows how the valuation levels at beginning of 2000, “there is a 75% chance of negative capital gains return over the next 20 years,” And a “zero percent chance of the S&P 500 returning even 15% over the next five years.”

Due to the recent drubbing of the S&P 500, Alexander looks to have been singularly prescient. It is too bad that book publishers take so much time to make good copy final bound.

In the language of Alexander, a true academic, divides equity market behavior into two cycles. “monetary” One and a “real” One can choose from four basic permutations.

1) High inflation, high real earnings
Generally, sideways periods of Market chop

2) Low inflation and high real earnings
– Periods of market boom

3) Low inflation, high real earnings
– Periods of Booming bond markets and deflation/depression

4) High inflation and low real earnings
– Periods of stagflation of Equity market

Alexander explains that earnings growth in the U.S. was virtually the same over the 17-year period 1965-1982 as between 1982 and 1999. of Equities during the first of These periods had a negative inflationary monetary environment. In contrast, the latter period saw markets rise. of A better monetary environment.

Alexander also compares the times of 1929-1948 with this of 1948-1965. He finds that while monetary conditions were the same in both periods of time, real earnings were drastically different in each period. In the first period real earnings were low and inflation was low, resulting in a bull market for stocks rather than bonds. The second period saw low inflation and high real earnings, resulting in a bull market that was once more strong.

All this is great, but Alexander seems to forget the obvious periodicity of Each of these periods is roughly 17 years long. He mentions that the peaks and troughs in U.S. inflationary periods are generally spaced on average of 51 years, or 3 x 17 Years. He shows this nice chart over a long period of U.S. price trends

Source: Stock Cycles by Michael Alexander

Notice that the average 51-The year inflationary trough trend continues, 1949 + 51 = 2000, so inflationary trends ought to already be on an upswing — which they are. This means that equities will be in for another repeat. of A 1965-Inflation starts to affect earnings growth and 1982 type chop performance. It could also mean that earnings growth starts to slow down (as newspapers report daily). of It is possible for stagflation to occur late.

Let’s look closer at the 17-year-old.-Alexander’s year cycle is a cleverly discussed topic, but Alexander fails to elaborate. We believe that it is actually 17.2-Year cycle. Why 17.2 Years? Why 17.2 years? of Martin Armstrong, who measured the distance between market panics in the 19th and 20th century, believed he had found a cycle that he called the Princeton Economic Confidence Interval. of 8.6 years. He believed that there were multiple 8.6 year cycles that built in intensity over time to create a long.-wave of Economic activity has been 51.6 years.

8.6 years equates to 3.141 days, which is very close to the mathematical value of Pi (3.14159) is multiplied by a thousand. Twice pi multiplied by 1000 equals 6,283 days, or 17.2 years.

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Do you remember the equation from grade school?

2 ** r = the circumference of A circle

Assume that r (or the radius) is equal to the base unit of 1. This equation would then reduce to just 2 *, or in our thought process, the circumference of A circle that equals the completion of One complete cycle. This is pretty cool, huh? It’s not hard to see how concepts such as calculating the circumference could be useful. of A circle holds in the physical world of Why shouldn’t geometry hold in the financial world? of Wall Street?

This brings us to the next hypothesis:
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The magnitude of The rules clearly govern the up- and down price fluctuations on equity markets. of the Fibonacci Golden Ratio .618 (and its reciprocal 1.618) as derived from the Fibonacci Number Sequence 1,1,2,3,5,8,13,21…., the duration of economic cycles is governed not as much by Fibonacci, but by the cycle 2 *.

Anecdotal evidence supports our belief in the importance of 2 *?

We had the most famous panic of all in 1720. of All time: The South Sea Bubble. Prior to this event, the worst financial crisis was in 1092 when the South Sea Bubble occurred. of Debasing precious metal content of For the first time since fall, currencies were able to return of The Roman Empire and the rise of interest rates in Britain to more than 50% per year. The difference in years between these two events just happens to be equal to 2 ** 100 = 628 years. Strange coincidence, no?

It was 628 years ago that this event occurred, which puts us in 464 A.D. when the Vandals actually overtook the Roman Empire and Britain was under Anguls control. The Roman currency was involved in the process of This was the time of serious debasement, or in other words, another financial panic.

Bringing our long-If one measures the time between the founding and the present day, term analysis can be applied to the spectrum of the United States. of Our nation on July 4, 1776, with the Declaration of The 2000 high in U.S. equity equities was the Independence Day. There were exactly thirteen 17.2-year periods. of February 23, 2000 — a date that fell almost perfectly between the January 2000 high in the Dow Jones Industrials and the late March high in the NASDAQ and S&P 500.

Another coincidence? Perhaps. Let’s look at the thirteen other 17.2-Year cycles are subdivided into their twenty-eight components.-Six 8.6-year half cycles. We are very focused on the rhythm. of inflation during each half-Stock prices versus cycle. We will attempt to assign each cycle an acronym as we go along. “Alexander classification.”

We start on July 4, 1776. This is not just because 1776 is the birth of our nation, but also because 1776 contains exactly five 17.2-The first paper money experiment in America took place in 1690. It was 86 years later that year cycles. It took place in the previous year of 1690. The Massachusetts Bay Colony funded a military expedition in Canada with paper money, known as Bills. of Credit. We don’t think it is our right to examine the rhythm. of Modern times must be imperfect in their arbitrariness starting on July 4, 1776.

Let’s now describe the 8.6 year half.-We will attempt to find a pattern in the cycles that span 17.2 years. of It all depends on your behavior. Please bear with us. of Historical work for the moment.

First 17.2 year cycle

July 4, 1776 to February 8, 1785: War and inflation marked the beginning of the period. of This period. One gold dollar was equal to four Continental Congress dollars in 1778. One year later, the ratio was 100-1. This will be an Alexander type 4 high inflation/low real earnings period.

February 8, 1785 to Sep 16, 1793:-The war period was followed by a depression when wholesale prices crashed between 1784-1787. There was a demand for paper money by states to decrease the price of the currency and reduce implicit debt. The collapse of 1791 had exacerbated a panic in the country that was already suffering from deflation. of land speculator William Deur. British Consols (or bonds) were highly sought after. Many banks failed, and Secretary was eventually forced to step in. of The Treasury Alexander Hamilton will flood the system with capital from U.S. Treasury purchases of Stocks and bonds The Panic of 1791 was the beginning of a major crisis in the Post.-Revolutionary War U.S. of This period is an Alexander type 3 period of net low inflation, low earnings….with equities under pressure, while foreign bonds were strongly bid.

Second 17.2 year cycle

Sep 16, 1793 – April 24, 1802 The Treasury turned the force of Between 1793 and 1802, deflation was transformed into inflation. Prices increased steadily over the entire period. The Economy grew strongly too, but it was tempered by inflation. These years were clearly an Alexander type 1 period in which equities were under constant pressure. of High inflation, high growth-net offsetting one another.

April 24, 1802 to Nov 30, 1810 – Inflation continued its rise, while growth declined. Another period of mild Alexander type 4. of stagflation.

Third 17.2 year cycle

November 30, 1810 to February 7, 1819: Post the War of 1812, the U.S. deflationary forces were reintroduced to eventually lead to the Panic of 1818, when the second bank was established of The United States defaulted. U.S. manufacturers demanded that protective tariffs be increased. Low earnings and deflation led to an Alexander type 3 period.

From July 7, 1819, to February 12, 1828: The second 8.6 years of This cycle saw the U.S. Economy recover and commodity prices fall – a period commonly referred to as the “The Cycle.” “Era of Good Feelings” Clearly, an Alexander Type 2 period.

Fourth 17.2 Year Cycle

February 12, 1828 – September 18, 1836: This period was marked also by relatively low inflation, strong earnings growth, and yielded an additional 8.6 years. of Alexander Type 2 Period.

Sep 18, 1836 – April 26, 1845. Andrew Jackson’s drive to return U.S. banks to the State level succeeded in lowering confidence in the currency. New York banks were established in May 1837.

Many other banks in the country followed suit and stopped redeeming paper money for gold. 618 banks collapsed by the end of 1937 and gold were completely out of circulation. Private bank currency of Money circulated only because it was often of dubious origin and had a high rate of counterfeiting. It wasn’t until 1846 that a stable and independent treasury system could be established. These years saw gold’s purchasing power skyrocket. This was clearly a stagflationary Alexander 4-period, even though other commodity prices fell.

Fifth 17.2 Year Cycle

April 26, 1845 to December 1, 1853-Scale industrial growth was achieved with westward expansion and railroad construction. of Gold out west. High growth environment with rising inflation, leading to an Alexander type 1 mixed-period classification.

December 1, 1853 to July 10, 1862-Inflation and declining asset prices led to a financial panic that occurred in 1860 due to land speculation and railroad speculation.

Sixth 17.2 year cycle

July 10, 1862 to February 14, 1871 The Start of The Civil War and the deficit spending by Treasury to finance it brought about another period. of Inflation is rampant. However, the economy was experiencing real growth in order to produce goods in support of The war. The end result was a type 1-Alexander period, punctuated in 1869 by a brief gold panic.

Feb 14, 1871 to Sep 22, 1879. Inflation dropped steadily in these years following a panic over railroad stocks in 1873. However, real growth in the economy was steady. These were the classic Alexander type 2 boom years.

Seventh 17.2-year Cycle

Sep. 22, 1879 to April 28, 1888. Inflation continued its downward trend during these years. Big business and greater industrialization also continued to rise. Although stock prices didn’t rise dramatically, we still refer to these Alexander type 2 year.

April 28, 1888-Dec 4, 1896: 1888 witnessed a shift against big business due to the introduction of Antitrust legislation and its reversal of Excessive railroad speculation. Particularly after the Panic of It was established in 1893 as a low-inflation, low-growth economy.

Eighth 17.2 Year Cycle

Dec 4, 1896 to July 12, 1905. 1897 was the bottom of deflation. American growth, imperialism pride and American expansion led us to the Spanish-American War of 1898. This was an Alexander type 1 period, with high inflation and growing economic activity.

July 12, 1905 to February 17, 1914: Inflationary and progressive trends are strong of Better labor conditions made this a good time to be an equity investment. The panic of 1907 was very short-Lived and of We would call this period an Alexander type 4 despite the fact that it had little to no consequence.

Ninth 17.2-Year Cycle

February 17, 1914 – September 24, 1922: The war years brought about a pleasant step-Up in corporate earnings but more inflation to finance war effort with a break at commodity prices in the second half of This is the period. This is probably the most difficult period to categorize. We’ll still call it an Alexander type 1, however.

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Sep 24, 1922 to May 2, 1931 – Low inflation and high real U.S. economy growth led to an equity markets boom that was despite the severe consequences of The Oct 1929 market collapse didn’t reverse before May 1931. This was an Alexander type 2-boom environment.

Tenth 17.2 Year Cycle

May 2, 1931 to Dec 7, 1939: Low corporate earnings and deflation create the greatest trough in American economics history — an Alexander-type 3 environment.

Dec. 1939 – July 15, 1948: World War 2 results in growth to return and also inflation — an Alexander type 1 standoff.

Eleventh 17.2-year Cycle

July 15, 1948 – February 19, 1957: Post-Technology improvements and war productivity combine to bring the equity market back to a boom Alexander type 2.

Feb 19, 1957 – Sep 28 1965: Inflation that began creeping higher and a brief Cold War scare about Cuban Missiles failed to deter a bullish market, where real business growth continued. This led to a continuation of the Alexander type 2 bull markets. 1965 was a time of momentum in stocks, and a real high for the next 20 years.

Twelfth 17.2-year Cycle

Sep 12, 1965 – Apr 19, 1974: Strong inflation due to deficit spending for Vietnam war. Corporate earnings growth has moderated. This creates a type 4 stagflationary atmosphere that is bad for equity markets.

April 19, 1974 to December 11, 1982. Corporate earnings growth gained momentum. However, inflationary pressures as well as high interest rates hampered equity markets headway in a type 1.

Thirteenth 17.2-year Cycle

Dec 11, 1982 – Jul 18, 1991: Inflation declined as corporate earnings remained high, a type 2-boom environment. The The Gulf War causes a mild recession at its end of This period.

July 18, 1991 – February 23, 2000: Inflation is still low, but debt remains high-Corporate growth spurred by financed financing increases reported earnings. of The type 2 boom environment.
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The 8.6-Year patterns that we have created go:

1776-1785 – Type 4: High inflation, low Growth, WAR
1785-1793 – Type 3: Low inflation, high growth
1793-1802 – Type 1: high inflation, high growth
1802-1810 – Type 4 – High inflation, low growth
1810-1819 – Type 3: Low inflation, low Growth, WAR
1819-1829 – Type 2: Low inflation, high Growth Boom
1828-1836 – Type 2 – Low inflation, high growth boom
1836-1845 – Type 4 – High inflation, low growth
1845-1853 – Type 1: high inflation, high growth
1853-1862 – Type 3: Low inflation, low Growth
1862- 1871- Type 1: high inflation, high growth, WAR
1871-1879 – Type 2: Low inflation, high Growth Boom
1879-1888 – Type 2 – Low inflation, high growth boom
1888-1896 – Type 3 – Low inflation, low growth
1896-1905 – Type 1: high inflation, high growth, WAR
1905-1914 – Type 4 – High inflation and low growth
1914-1922 – Type 1: high inflation, high growth , WAR
1922-1931 – Type 2 – Low inflation, high growth boom
1931-1939 – Type 3: Low inflation, low Growth
1939-1948 – Type 1: high inflation, high growth, WAR
1948-1957 – Type 2 – Low inflation, high growth boom
1957-1965 – Type 2, Low inflation and high growth boom
1965-1974 – Type 4. High inflation, low Growth, WAR
1974-1982 – Type 1: High inflation, high growth
1982-1991 – Type 2 – Low inflation, high growth and WAR
1991-2000 – Type 2, low inflation and high growth

Out of A 223.5-Year period, the majority of The market’s true inflation-In reality, adjusted gains occurred in only 77.4years. The balance of The years have been nothing but a struggle. This is enough to suggest that equities are where the money is at. of We haven’t checked actual price history carefully enough. There have been many long periods of time. of time when equities have not returned a lot of net returns. If the analysis below is correct, 2000 and 2001 were years where equities have yielded little net return.-2008 should be one of them.

Fourteenth 17.2-year Cycle

Feb 23, 2000 – Sep 29, 2008. After each double 8.6-Year cycle of Type 2 boom: We have experienced either a dangerous type 4 (high inflation and low growth) or a equally frightening type 3 (low inflation and low growth). We have never experienced three types 2 boom periods at once. We have never had the benigner type 1 situation. of High growth and high inflation after consecutive 8.6-Year type 2 boom periods. The 51-Year cycle in commodity prices due bottom in 2000-2001, a market of type 4 of Low earnings growth and high inflation seem to be the most likely outcomes at this point. The next eight years will not be easy.

Sep 29, 2008 to May 7, 2017, assuming the initial 8.6 years of This 17.2 year cycle can be categorized as a type 3 situation or 4 situation. The pattern in each case is different of Our previous instances have shown that the 8.6-year period should be considered a type 1 market of Rising inflation offsets strong growth. This would be the fitting conclusion to America’s demographic boom.

Longer term, the next 17.2 year cycle would then fall in July 2034, which coincidentally perhaps, is 314 years ( again) from the 1720 South Sea Bubble, 942 years (3 * ) from the Crisis of Between 1092 and 1570 years (5 year) since the fall of the Roman Empire. I hope to be alive to see what happens in this year. Likely America’s excessive amount of debt.-Trade deficits that are negative or up will be stopped once and for everything.

How can we make use of all this information, cyclical behavior if it is possible to call it that?
These are some general guidelines:

We trade the market, we don’t invest in it.
We tend to forget about the trading rules that have worked well for the past 17.2 year.
We seek trading opportunities that offer a potential return. of Inflationary forces

One ounce is the old saying. of You can buy one trendy set of fashionable gold jewelry with your gold coin. of Men’s work clothes, also known as a business suit. This rule suggests that gold is not worth its price at $261 an ounce. A jacket would cost $261, but pants would cost $400-$550 depending on where you shop. of course). This undervaluation has been around for a while, but as boring and cheap as gold has been over the past two decades, it is still worth consideration for purchase. We have a rule that we don’t forget trading strategies that have worked well for the past 17.2 year. We believe that gold could move towards the $294.5 target this fiscal year based on the Fibonacci rhythm extrapolated from April Comex futures.

We think that, despite longer term cyclical bearish views about equities and gold, it is very likely that we will see an equity market bounce into June 2001 before another plunge to marginal new equity highs by November.-December 2001. This view is shown below in an update of our “pattern match” of The current NASDAQ 100 is the same as the old price behavior of Gold back in 1980-1981.

Even though gold was in secular bear markets, it managed to rally to just over $500 an ounce. The first occurred in 1982, and the second in 1985, and continued into 1987. The NASDAQ 100 could eventually reach just over 3000, in a similar fashion but possibly a bit faster. We expect a rally. of In June, unknown magnitude (22200)-This could be capitulated by 2600 on the NASDAQ 100. Another downswing to marginal new lows by the year’s end would then occur, but we will continue to try and turn the upside as we enter 2002.

However, the NASDAQ 100 could eventually drop to the low 1700s. This could take a long time. of It took time, in a similar way as it took gold multiple decades to migrate to its $251 lowest trading ranges of the $300-$375 range.

We wouldn’t be surprised to see DJIA make marginal new highs during this bounce period. As more capital moves to Japan, we wouldn’t be surprised to see dollar appreciation against the yen.-Haven of U.S. They tend to buy the highest highs. This makes gold in yen an especially explosive chart pattern.

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This leaves us with a cyclical equity bear but with a projected low short term.-risk bounce. Some may want to take the chance period. Our proclivity is to trade more than just sitting on the sidelines. Both long gold and short Japanese yen have great appeal.

Let us end by talking about the interpretation of our 8.6.-Half of the year-Martin Armstrong’s original 8.6-year cycle. Armstrong’s cycle was perfect on the equity high of July 20, 1998. His cycle had also captured the 1989 Japanese Nikkei high for the week 8.6 years prior; 8.6 year before that, it also captured the May 1981 DJIA peak pre-a sharp bear market that lasted into August 1982. It even happened just before the 1929 stock crash. Perhaps Armstrong’s cycles dates, especially from a trading perspective, are more accurate than our window for catching major market turns. Armstrong was correct in predicting that equities would continue their climb after July 20, 1998. The hellacious rally of We at Sand Spring were inspired by 1999 and early 2000 to modify his method in order to find a better overall beginning and ending point. of The 8.6-Year cycle rhythm. We wanted to extend it back further in time.

Perhaps we were successful in this effort. It seems that 628, 314 & 17.2 have appeared almost eerily in the work we did in places we weren’t expecting them to. Other cycle scholars, such as Dr. John Vyden of UCLA has also modified Armstong’s cycle to make it more interesting. Perhaps there’s more than one 8.6-Year cycle out there, but a continuum of They play leapfrog with one another all the time-Line of history.

Through the fog, however of Short-We don’t care if market noise or gyrations are used to describe it, but one thing is certain: Fibonacci rules rhythm of price fluctuations, while , and more specifically 2 * , rules the passage of time.