We mention from time to time that a cycle is a cycle. This means the main trend has similar properties in all sectors with a cyclic model even though markets can often conceal this, adding their own motifs.
For example, when energy prices take this motif, markets will naturally pivot around anything connected with energy turnover, by increasing flurry of sectors most reliant on energy price changes.
In the course of time markets also tend to allow reversal of many groups during a positive cyclic trend.
There might be a couple of ways to explain what we have in mind. One of them is the example with the change in ARM stock prices. The stock price fell below 2.00 in 2003, the trough of the cycle. At the cycle's high (2007) the price reached above 40. During a very strong movement of energy prices one could make more on this company's stocks, given the difference between the high and low, than on Exxon Mobil. Strange but true.
In any case... Look at the yield chart for 3-month US Treasuries and heating oil futures for 2000-2006.
We claimed that new highs reached by crude oil and heating oil futures in 2004 became the main reason why short-term interest rates were raised. We maintained this point of view in late 2003 - early 2004 when we made the seemingly unfounded statement that the crude oil prices would not only reach new highs, but also come close to 75. Looking back, we can say that we were too timid in our assumptions.
Look at the current chart to compare the yield of 3-month US treasuries and Nasdaq Composite (below). Notably, Nasdaq makes advances to the 2007 highs; this all painfully resembles the situation when heating oil went beyond 2000 three years before that. Each time Nasdaq comes close to 2900 the market responds with some kind of a crisis. We are convinced that sometime Nasdaq will open the way to new highs even if investors line up to get gold and cash hoping to save themselves from financial Armageddon. If a cycle is a cycle, and Nasdaq breaks its resistance levels... Look at the long-term and, then, short-term yield.
Stock/bond markets
From time to time we get back to this concept... what about now?
Below is the S&P Chart in the price breakdown for three commodities (gold, crude oil and copper). Interestingly, in the 199s the index was rising independently, while the prices of above commodities were only catching up.
The end result 20 years later was a rebound to the level of relative prices which heralded the beginning of the cycle in the 1990s. The SPX index is now below the gold price (being 5.5 times that before), almost 20 times below crude oil prices and about three times exceeds copper prices (in cents).
Our argument is the fact that there was price growth of financial instruments in the first decade, and commodities in the second one. By end of the cycle prices reached kind of a balance. This warrants a belief that there are no reasons for gold prices to go back to 300, oil - to 10 and copper - to less than a dollar. Of course, if S&P 500 does not fall prey to 'bears' and come back to 300 points, as it was in the 1990s.
Conclusion: the market that has returned to the 'fair' level of relative prices is not the market that balances on the verge of collapse.
What about now, after two decades of growth? What trend should we expect and what will the market be prevailed by in the coming 10 years?
Below we offer the SRB chart for 1980-1982 and futures for 10-year Japanese governmental bonds from 2010 to date. We might be wrong, but here's how we see the situation.
Different sectors and groups dominated the market at different times: in the 1980s it was commodities, in the 1990s - Japan; next it was new technologies and communication media. What will happen now - the question still remains open. We believe it will be the bond market. Based on how the CRB index behaves, we do not agree that prices of US and Japanese governmental bonds have reached their highs. If we're right, the US will manage to avoid deflation while Japan will enter the epoch of inflation for the next couple of quarters.
What we like in this forecast is that this situation is regarded as the least likely even given the support of central banks of the majority of developed countries. No matter how the FED might try to prevent deflation, it is quite logical to conclude that we have reached the low for interest rates of our times.
