I mentioned this morning that Jeff Hirsch is the anti-Prechter — forecasting a wild $38K Dow in 2025. (Discussed this AM here, with Jeff’s full piece here)

Jeff and I are in the same secular bear market camp; However, he argues that the current secular Bear market will end ~18 years after the last secular Bull market ended in March 2,000. I cannot place the end of the Bear that precisely, but I figure its coming sometime this decade.

Ironically, the route Jeff takes to get to $38k uses an approach similar to Prechter’s: Long historic cycles that impact group psychology, with regular wars that lead to massive government interventions and big inflation (so far so good). As the chart below shows, major global wars were followed in the 20th century by high inflation and 500% market moves over the following decades. Note huge 1447% Dow move from 1982 – 2000 — the theory being it was caused by an outsized 207% CPI inflation.

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War followed by Inflation, Peace, Secular Bull Market Gains

click for ginormous graphic

chart courtesy of Stock Trader’s Almanac

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One caveat: The 3 year Korean War (1950-53), with ~37,000 US dead, is omitted from this chart. I’d like to know why (other than convenience sake) that this was not considered a military conflict on par with WWI or Viet Nam.

Category: Cycles, Inflation, Investing, Psychology, Technical Analysis, War/Defense

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “War & Peace + Inflation + Secular Bull = Dow 38K ?”

  1. destor23 says:

    If you imagine the Korean War in there it creates quite a wrinkle. It kind of temporarily interrupts the post WWII boom, but not really. More just kind of slows it down. I don’t know if it invalidates the rest of the work, but it doesn’t fit cleanly.

    He also leaves out Gulf War I, which I realize was short but it involved a whole heck of a lot of the world’s post Soviet powers. It too had a kind of temporarily moderating effect on the post Viet Nam climb.

    I also object a bit to lumping everything that happened after 9/11 as “War On Terror.” If you include the War On Terror then I think you have to include the Cold War and other not-wars named as wars.

  2. dsawy says:

    Especially since the Korean War never ended. All we have in place to this day is a cease-fire. There was no formal agreement to end hostilities.

    Hence the garrison of US troops that has remained in Korea and Japan ever since.

  3. dsawy says:

    By the way, Kondratieff suggested similar cycles in western economics, with the inclusion of wars and inflations.

  4. Mysticdog says:

    A major issue with this theory is expecting the “War on Terror” to ever end. There is no one to surrender, and way too many people make big bucks (and keep political positions) off it never ending. There are a few hundred actual “Al Qaida”, and maybe a few hundred other people who could put “terrorist” as a career title.

    Then there are many thousands of drug cartel types using terror tactics, with most of the people under them just looking for a paycheck.

    Then there are several thousand more lone wolf type people (probably growing every day), some of whom will commit terrorist acts on their own.

    How does the war end?

    The other problem is just why are there so many obviously doomed attempts to make a master stock market/economic cycles that depends on just one or two variables? Everything is completely different from 1918, 1945 or 1972.

    How much wealth would have to be created to reach DOW 38000? How many new companies, new stocks, etc. Where would that money even come from?

    We are much closer to 1930 than 1945 in wealth concentration, employment, and so on.

    Why do people take these kinds of analyses seriously at all? There is little difference between this sort of thing and the infamous “pirates prevent global warming” analysis.

  5. dsawy says:

    “Pirates prevent global warming?”

    Wow. I missed that.

    @Mysticdog, you have some very strong points there. I’d throw in that the terrorist (and other non-state militaristic actors) coupled with corporatism results in a diminished capacity for nation-states to respond to economic issues in previously “neat” and “tidy” manners.

  6. ray l love says:

    There were price controls during each of the World Wars so how could there be inflation? IIRC, the inflation came fast and furious after the price controls were lifted at the end of each war, but, the graph shows the inflation as during those wars.

  7. [...] Be wary of big secular calls made on limited history.  (Big Picture) [...]

  8. dr dre says:

    Prechter and this dude have a lot more in common than your first sentence suggests. Prechter believes we have some supernatural leg down to dow 1,000 in the next 6-12 months (SPX is one big head an shoulders for past 50 years)…but then from the ashes Prechter predicts a massive run up, general wealth building opportunity…. but before the glory comes the fire and ashes.

    This guys down 38,000 is not too dissimilar in the end. He just shows a sideways war induced market (more probable IMHO than Prechter) and then once hyperinflation abates the market rises…

  9. insomnsv says:

    Whether Kondratieff, Prechter, extrapolation per Japan’s “Lost Decade”, or superimposing the year 2000 (NOT 2007) on top of the past Secular Bear markets, the end date of our CURRENT Secular Bear is roughly 2016.

    It is only logical to expect war, continuation of our current banking mess, and endless “expansion of the Fed’s Balance Sheet” (why don’t they just be honest and say “creation of money out of thin air”?) to both monetize debt and goose up the equity market at the same time OVER THE NEXT SIX YEARS!

    Why don’t we focus on discussing that instead of counting the chick in 2025 whose EGG hasn’t even materialized yet?

  10. san_fran_sam says:

    Weren’t we supposed to be at Dow 36,000 by now? Whatever happened to THAT guy?

  11. evanhuntington says:

    BR

    I do find this analysis interesting but not exactly actionable at this point in time. I would like to know your thoughts on the CFNAI published yesterday. It has contracted for the last three months and is subtrend at the moment. What do you think the likelyhood of it crossing the magic -.7 mark is?

  12. Do you find CFNAI data actionable ?

  13. ancientone says:

    Another chart showing the stock market prices with inflation subtracted would give a better picture than just showing the raw numbers. For example, the flat trading range from 1965 to 1982 when shown with inflation subtracted becomes a serious leg down in prices, at least in terms of buying power, which is the most realistic way of measuring one’s wealth.

  14. Patrick Neid says:

    This chart also shows why even if you knew that the market was going from 60 to 10,000 it is very difficult to make money in the market. Thousands of stocks go bankrupt, long term bear markets waste capital, your life goes on and you need the money etc etc.

    If capitalism doesn’t die there is a good chance this market could hit 1,000,000 by the end of the 21st century and yet it will still be very, very difficult to make money– and that’s the way it should be.

  15. evanhuntington says:

    @BR

    I suppose it depends on what action you want to take. You have referenced it before (I think in a positive light) but not for some time.

    If used for determining individual trades, I do not think it is actionable.

    As I am sure you know, it is a macroeconomic gauge. It either supports or calls into question my world view at any given point. So, for purposes of evaluating total portfolios or setting full year budgets, I think it is useful and actionable.

  16. ancientone says:

    Well Patrik, that’s just wrong. If the market is going to go from 60 to 10,000, it’s not that hard to make lots of money. All you have to do is stay in an index fund for the duration of the rise.

  17. ACS says:

    Would it be too simple to say that Korea came so soon after and was so small compared to WWII that it didn’t have the “importance” it would have had it been a few decades later like Vietnam?

  18. soloduff says:

    With all due respect to the learned posters and their insightful comments, both the goal (forecasting 2025 economic news) and the method (pick and choose from past patterns) are preposterous. This is not science, which tells us how things work and what to expect. This is “forecasting” of the most commonplace sort–from the good (B. Ritholtz) to the bad (A. Greenspan) and the ugly (D. Luskin). The method’s greatest absurdities lie in the forecast of “regular” wars–”forgetting” about the ongoing nuclear proliferation and its inevitable upshot–and its “forgetting” the environmental factor–which, if James Hansen et al. are correct, should be presenting us with unprecedented problems by 2025, absent a thorough political renovation worldwide. Given the stupidity of both our elites (who prove that greed interferes with prudence) and our hoi polloi (who daily prove P.T. Barnum’s famous maxim), it is a safe bet that the only political innovations that we will see will be of the Tea Party sort, whereby the lunatic fringe is tapped for the mainstream by our rulers, out of desperation. (Promise them anything but give them fear, hatred and war . . . .) The saddest thing about this exercise is that folks are looking into the middle-term future and . . . trying to make a buck off it! (And yes, I understand that mainstream economics is a farcical apologetic for the status quo; but if we do not know the science in point, we should admit this and try to teach ourselves how “the economy” works. Some are actually trying this–check out “heterodox economics,” such as is pursued at Real-World Economics Review online.)

  19. mservat says:

    BR, this is not a fair statement that Jeff Hirsch is anti-Prechter! Bob Prechter has projected that this secular bear market will bottom sometimes in 2016, inline with your (BR) timing prediction of 2015 – 2017, and the DOW will be around 2K/3K or 1K. He has also anticipated a bull market, a very big one, there after. All I am trying to say is, Bob Prechter has not talked about the year 2025.

  20. EuroKiwi says:

    I think he’s getting his cycles mixed up here.
    Whilst I’m a big fan of the 16/18 year equity cycle, its seems that here he is assuming inflation will go the same way.
    Evidence seems to suggest that inflation has a cycle of more like 60/80 years, and conceiveably we entered a mild deflation era back at Y2K that will last til after I have shuffled off this planet. That’s not necessarily a doom’n'gloom scenario as people are now conditioned to think when they hear ‘deflation’. The last equivalent period largely coiincided with Queen Victorias reign 1830′s through to the years when the build up to WW1 reignited inflation. This is a period that on balance produced widespread improvements in the standard of living in the Western nations (and Japan).
    The conditions for this to happen appear to be a combination of demographic aging, technological advancement and peace/disarmament. All 3 conditions appear very likely in the next decade or so.
    The go-to book on this is Fischer’s ‘The Great Wave’ http://www.amazon.com/Great-Wave-Revolutions-Rhythm-History/dp/019512121X/ref=pd_sim_b_3 . Where he traces the phenomonem back several centuries.

  21. Patrick Neid says:

    Ancientone,

    For the most part they didn’t have indexes during the 20th century. But even if they had the long bear markets erode capital and each investor’s finances take twist and turns. Can some folks do as you say? Absolutely and they do but even then the wealth rarely makes it past the third generation. Plus talk is cheap. When a core position and your net worth drop 50% belief in 5% compounded and the capitalist system goes right out the window as it is now.

    Simply put we have 200 years of 5% compounded. Do you think it will continue? If you do buy an index fund whenever there is a 50% correction and add accordingly going forward. Put it in your will that the same has to be continued for 100 years. You will be the next Medici’s. What will happen instead is you will read all the blogs and convince yourself that the world is ending, panic, sell out your position at the bottom when you should be adding, miss the next leg up promising to buy a pullback that never comes, have a medical emergency, perhaps one kid too many and the money will be gone. Meanwhile the market will be trading at 300,000 and you were originally in at 17,000! And so it goes.

    In 1984 the market was at 1000. Fifteen years later it was at 10,000. I only know a couple of people who rode it the whole way and liquidated in December 2000 and that was to settle an estate. So, good luck.