Since the start of World War II, the Foundation for the Study
of Cycles (FSC) has been looking at past events and assessing when and if they
can be repeated. They also look at if it is possible to forecast when they can
be seen again. Over the last sixty years it has managed to forecast most of the
major events - good and bad - that have actually happened.
As regular readers know, I am a great believer in cyclical
patterns and find research by the likes of Kondratieff fascinating. As the
Spanish philosopher Santyana once said, “Those who do not remember the past are
condemned to repeat it.” This is so true when it comes to world economic and
finances.
As with everything, nothing is perfect. Has the FSC made
mistakes? Yes, of course it has but it has got many things right though. It
forecast the start of the bull market at the beginning of the 1980s and the
Crash of 1987. It also got it absolutely spot on with regards to the Bear market
of 2000-2002. The FSC also predicted the massive declines of 2008 and the
recovery.
So, know we know about the past, what do we think is going to
happen in the future? Well, most western markets will go down but they will
bounce back intermittently for the next three years but overall the trend will
be downwards.
In times gone by, most bear markets and recessions in the
west gave good value and there was many an occasion when the Price/Earnings
(P/E) ratio was in single digit territory. Well known companies were selling for
between five and eight times earnings. This time though, the western governments
panicked and the normal nature of things was not allowed to happen this
resulting in P/Es being greatly overvalued.
For the normal investor this volatility is nothing short of a
disaster. However, for those who are prepared to be more flexible, there can be
huge opportunities to make massive profits.
If you studied the FSC research from over a decade ago you
would have been prepared and, therefore, got out of the dot.com catastrophe
before it happened whilst taking a nice profit at the same time. Naturally, you
would have remained liquid and waited for the next opportunity which the FSC
correctly forecast as the S&P.
In 2003, you would have placed your money there knowing you
should take it out in 2009 having made gains of nearly 150%. Carrying on with
this scenario, it you had continued to use the FSC you would have been able to
position yourself nicely, avoid all the traps that almost everyone fell into and
still be healthily in profit. To end with, you will have also been able to catch
the upside of the intermediate rally last year.
Does all this sound too fantastic? Well, yes it does but it
is true and the records are there for all to see. Also, please remember this is
all done just via the equity markets. As many people know, I believe in
liquidity and a multi-asset, multi-management alpha approach. Whilst being a
great fan of equities and also the FSC, nothing does well all the time and the
good times should be protected by alternative strategies.
Despite the superb returns shown above, it would be just as
easy to make even larger profits via the FSC for other assets such as gold. All
superpowers have their problems. Rome nearly went bust, Spain would have gone
under if it was not for the precious metals from South America and we all know
what happened to the UK after the Second World War. What has never happened
before in economic history has the world superpower also been the world’s
largest debtor at the same time. This one factor will do gold a huge favour. As
I have said in this column many times, gold will be an absolute minimum of
USD2,000 by the end of next year and could be a lot more. At the time of writing
it is USD1,357 per ounce. Why is this so? Well, it will occur in the middle of a
declining equity market and western economies in disarray.
This should not come as a shock to many. Over the last few
years there have been two equity market declines and the worst recession since
the Great Depression. However, gold has gone up in value by fourfold. As I have
stated many times before, nothing goes up all the time. Likewise nothing goes
down forever either. Nonetheless, the FSC accurately predicted the start of the
gold bull market in the 1970s and indicated that the early Eighties would be a
good time to make a sharp exit. It also advised to stay well clear of the yellow
metal until the start of the new millennium and then get back into it and stay
for the foreseeable future.
To be continued…
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of any
actions taken or not taken as a consequence of reading the above article. For
more information please contact Graham Macdonald on [email protected]
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