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May 30, 2008

Revolution and Market Cycles
by Clif Droke

In the aftermath of the credit crisis, real estate deflation and stock market correction, there has been a startling rise in the talk of revolution among many Internet chat rooms and message boards.

This is no idle chit-chat, mind you. It's part of a serious discussion about the alarming possibility of a militant uprising should the economic situation deteriorate further. "Typical bombast from the lunatic fringe," is how some have responded to the sudden appearance of revolutionary furor. In view of the market cycles, however, the longer-term implications behind this kind of talk can't be so easily dismissed.

Right away there are two inferences that can be made here. The first is that the liberal use of the word "revolution" is commonly heard only at major financial market and economic bottoms. History shows that most actual revolutions were made following major financial debacles or economic depressions. Indeed, revolution in most instances is a consequence of the long-term Kress cycle bottoms.

It comes as no surprise then that following four years of a tight money economy in the U.S. (thank you Alan Greenspan!), the point of maximum recognition has been made this year by the mainstream media and the average consumer/investor. The greatest recognition and hand-wringing over a weak economy always occurs at or very near the end of an economic decline. So if we assume the worst of the economic weakness is behind us, it makes perfect sense that talk of revolution has become prevalent along the so-called "fringes" of the socio-economic spectrum.

Further, that the U.S. stock market is currently undergoing a major bottoming process after the debacle earlier this year is obvious based on the internal indicators. To show you what I'm referring to, let's look at the dominant long-term internal momentum indicator known as HILMO. HILMO stands for Hi-Lo Momentum and measures the rate of change in the number of stocks making new highs minus new lows. The hi-lo rate of change is one of the best means of quantifying the last incremental demand for stocks.

The above chart shows the 200-day rate of change in the net number of new highs on the NYSE. Notice that a few weeks before the stock market put in its final high for 2007 back in October last year, the 200-day HILMO indicator had already topped out in June-July and was in the process of rolling over. Whenever 200-day HILMO is falling and enters negative territory, the market becomes abnormally vulnerable to negative news. Major price shocks become more common.

The 200-day HILMO indicator stayed down through most of this year until last month, when it joined the short- and intermediate-term internal momentum indicators in turning up. The former indicators had already been up since March. With the improvement in 200-day HILMO, this shows that the long-term internal momentum has reversed upward and the market will be less vulnerable to being "torpedoed" by bad news over the credit crisis, oil crisis, et al, like it was in late 2007 and early 2008.

The current revolutionary fervor can be safely viewed through the contrarian lens, meaning that its implications are non-threatening in nature and signify that the worst of the economic and financial debacles of the past year are likely behind us. This conclusion also fits in with the upcoming 6-year cycle bottom, plus the fact that the 10-year cycle doesn't peak until later 2009. That means the bull market which began in 2003 should have at least one more year to run before cyclical and secular forces combine to create more turmoil for the market and the economy.

Now let's look at the longer-term implication of the revolutionary talk. While the discussion of revolution around the interim bottoming process this spring has been somewhat innocuous, it does reflect a change in attitude that has been building for some time. The past decade has witnessed a shift of fortunes whereby the many, namely the public, have become increasingly burdened by higher taxes (fuel, food and housing costs). At the same time the few, namely the super rich, have aggrandized their wealth and political power. Multinationals have increased their reach at the expense of smaller enterprises and a growing number of Americans have been pushed to the margins of the global economy. This has only served to fuel their suspicion and disenchantment of the aristocracy of the few.

This analysis doesn't even begin to take into account the long-term disenfranchisement of those on the lower end of the socio-economic scale. Taking a tour of any of the "bad parts" of the large inner cities throughout the nation gives one an idea of the sociological trouble brewing beneath the surface.

Since the long-term Kress cycles serve as the lens through which we're making this examination, it's only fitting that we use Mr. Kress's definition of revolution:

Revolution = radical change in lifestyles

The bottoming of the 120-year Master Cycle always brings about revolution. The first revolution since the founding of our nation in the 1770s was political in nature. The second revolution, when the last 120-year cycle bottomed in the 1890s, was industrial. The third revolution when the current 120-year cycle bottoms next decade will probably be a social one. As Kress has stated concerning the final "hard down" phase of his 120-year cycle, "There's the potential for Big Brotherism to get worse and we'll probably see the U.S. becoming more socialistic as our standard of living deteriorates."

As the 120-year cycle bottoms in 2014, so does its 60-year cycle half component. The 60-year Kress cycle sometimes (though not always) coincides with K-wave bottoms and is known as the market Super Cycle. The last time the 60-year cycle bottomed was in 1954, at which time the 120-year cycle peaked. This saw the peak of America's industrial prowess and shortly thereafter our industrial base began its long decline.

Since the founding of our nation in 1776, there will have been four 60-year cycle bottoms by the time 2014 rolls around. As the number four represents completeness, Kress concludes that at the fourth Super Cycle bottom in 2014 the U.S. will have completed its journey from birth to death as the world's leading nation. Kress predicts the U.S. will be replaced as the dominant economic superpower in 2014 when the 120-year cycle bottoms.

Will the coming economic shift in 2010-2014 produce a social revolution? Remember that revolution is also essentially an economic expression. It has at its root the money motive. Dr. Stuart Crane has said, "As long as the cost of resistance is greater than the cost of compliance, people will remain docile and will submit to a tyrannous government. But whenever the cost of compliance exceeds the cost of revolution, a revolution will be the inevitable choice."

That is, when it costs the average citizen more in dollar terms to pay the taxes [food, fuel and housing costs] demanded by the State than it does to resist, the masses at some point are forced by economic necessity to say, "No more!" This is how revolution begins.

Beginning sometime around the tumultuous decade ahead in 2011-12, the final "hard down" phase of the 60-year and 120-year cycles will begin and with it will likely come the beginnings of social/political revolution. Remember the Kress formula that revolution equals a radical change in lifestyles. It will be important to plan for this dramatic shift in our nation's standard of living coming up in a few years. Your financial destiny depends on it!

Clif Droke
ClifDroke.com

Clif Droke is the editor of Gold Strategies Review., providing forecasts and analysis of the leading North American small cap, mid-tier and senior mining stocks from a short- and intermediate-term technical standpoint since 1998. He is also the author of numerous books, including "Channel Buster: How to Trade the Most Profitable Chart Pattern" For more information visit www.clifdroke.com

Copyright © 2003-2009 Clif Droke

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