John Overstreet

Contrarian, macro, commodities, long/short equity
John Overstreet
Contrarian, macro, commodities, long/short equity
Contributor since: 2012
JJ1937, you "liked" Rock's comment and then wrote that? Okay, I guess.
I am unclear as to how it is material to the article. History suggests that the sources of these events are, in fact, immaterial. The proper comparison with 2008/9 is 1921. I don't know what accounted for the collapse in earnings then. We've forgotten about it, because the Depression eclipsed it.
Banana milk when I was writing it. Cheers.
Interview your local drunks, and let's see.
I write an article at the beginning of every quarter, and you think I base them on a single trading day? Call off the search, buddy, it's a lost cause!
From a supercyclical/long wave perspective, we're definitely in a bear market in commodities, which I've been arguing since 2012, I think. But, cyclically, we are due for a bounce. As to what it will take for that bounce to occur, I am not brave enough to guess. In fact, I would take the opposite position and say that geopolitics tend to follow the market rather than vice versa and often there is just a coincidence between the two. Remember the long, drawn out, bloody, genocidal war between Iraq and Iran in the 1980s? Oil plummeted. Even the spike in '73 followed a cyclical rise in every other commodity sector. The Arab Spring and ISIS's shocking rise? Oil fell. I think it may be possible to connect Long wave peaks with larger geopolitical tectonic shifts like wars, but I don't know much could be said definitively.
Collin, these are definitely not uncharted waters. We have been here before. The future is always the undiscovered country, but the past is always prologue, too. The set up is nearly identical to that of the 1920s. Obviously, something will be different and I don't know what it is, but let's not lose the forest for the trees. Alright, I'm all metaphored out.
I don't think so, because the 1920s were experiencing a commodity crash in much the same way the 2010s have been. I don't know what those sectors of the stock market were doing in the 1920s, but I can't imagine they were outperforming the broader market.
Since the creation of the Fed, there have been a series of structural changes in market behavior, primarily a convergence in yields and inflation, but these changes have also occurred within a fairly stable framework. I don't see evidence that the market behavior is all that different from previous examples of stock market booms during periods of disinflation.
It is the stability of these patterns that inclines me to agree with you that Fed policy has little/no impact on the immediate outcome. If the apparatus of central banking were removed, that would be a different story, but that's not on deck.
I don't think I put as much emphasis on interest rates as most people do. The Fed just follows the market. When earnings growth and commodities turn up, the Fed will rsise rates.
Generally, during bull markets, short-term rates remain low and flat, so the only thing that is different is the degree of lowness and flatness. If I'm correct that oil prices are going to jump over the next year, then rates will raise soon enough.
That's a really good question, ghiblinewt. The natural assumption is that China has been driving IM prices. I am skeptical about this because of my own hangups about our grasp of causation in markets, economics, and the whole of social science.
My own assumption is that due to the size of the American position in global capital markets, that American markets essentially serve as a proxy for the global market as a whole. The long- running relationships between earnings, yields, and metals prices in the American experience of the last 140 years and between yields and metals prices when the British dominated global markets going back to the 1700s suggests that that is the case, and that seems to suggest (to jump over a few steps in the argument), that the Chinese role is closer to epiphenomenon than catalyst. Cometh the hour, cometh the emerging market.
So, I generally look to metals prices, especially nickel, and the narrow dollar index to try to guess where EMs are going long-term, but I view EM investing as stock-picking, which I don't have a good method for. I wrote about this question one year ago. Although the dollar is up since then and metals down, I am doubtful that this is a good long-term entry point for EMs, but they might also see a cyclical bounce, as well.
Thanks for the question.
j6813f, I'm not sure stocks were the last to get the memo. If you remember, oil spiked in August 2008. Stocks were already in free fall. It may depend on what level of precision you are looking at, but generally, everything was highly correlated from about 1998 to 2011. During bull markets, those correlations weaken, and we typically need them to return and for the cycle to turn up before the market tops.
I could certainly be wrong, but I'm not seeing the case for a crash yet.
Thanks for the comment, DWD.
I wanted to focus more on the cyclical, short term side of things in this article than on that broader comparison. I've written about the similarities between the present super cycle in yields, stocks, earnings, and inflation in my last article and in a couple of others over the last two years, and that frames my consideration of how the present cycle will unfold.
In brief, it is predicated on the notion that earnings, yields, and commodities tend to be highly correlated with one another at both the cyclical and supercyclical levels. But, when earnings growth rates deviate from yields and commodity inflation, stocks go through a 7-8 year boom, after which they crash. As in the 1920s, the present deviation has occurred in the immediate wake of a severe crash that itself followed a commodity super cycle. In the 1950-70 and 1980-2000 markets, this deviation did not occur until much later, and in the '60s it was less extreme.
If I do end up being right, it will be by accident, because this is at bottom an arbitrary statistical interpretation without any positive theoretical underpinning. My hope is to be accidentally correct to such a degree that people will be forced to come up with an explanation after the fact.
Thanks again for your thoughtful comment
Not that I don't enjoy replying to cryptic cyber-graffiti, but you have gone from oblique references to Oscar Wilde, Little Nell, and asteroids to the squarest, geometrical interpretation of a deliberate misquote at a breakneck speed. Pick a lane, please--clever or coherent--and I will do my level best to keep up. Otherwise I'm too slow to anticipate the tone you wish to be responded to by the time you wish to reply.
We are all in the gutter, but some of us are looking at the asteroids?
Thanks, NLO. I'm not sure if your complaint is that the S&P Composite Index is referred to as the S&P 500 or that the Composite Index "cannot be verified to exist".
I'm probably not the person to take this complaint up with, however. Shiller is using the data from the Cowles Commission which was tasked with creating a broad-based historical stock index after the disaster of 1929. Later, the S&P 500 was devised to perform this task "in real time" and the two are often conflated.
Doug Short has a very nice, clean presentation of the history of the construction of the Composite Index and how it's price history compares to that of the Dow.
I think it shows fairly decisively that the Composite Index, which is the standard measure of historical stock data, is valid. Perhaps I should refer to that data set as the Composite Index in the future, but I don't think that it makes a material difference to the analysis.
In any case, thanks for drawing attention to this issue.
At present, it looks as if the average price for WTI next year will be $75.
Pickens has repeatedly been wrong about predicting prices. As oil dropped last year, it smashed through every floor he laid out and nearly faster than he could lower his estimates.
Nov 5 2014; oil won't fall below $70
Stephen, if my comment was a personal attack, then I apologize and urge you to report my comment immediately. In my experience, Seeking Alpha has zero tolerance for abusive comments. You mysteriously quoted a source called "MarketCycle", and I quoted it back.
It is a truism to say bear markets follow bull markets. It is like saying night follows day, when night is the absence of day. Likewise, I don't know if I agree that "business cycles repeat". Certainly, if they exist, they repeat. I think that is the definition of a cycle. I don't know how you define "business cycle" in this context, however. Business cycles defined as trough-to-trough or trough-to-peak aren't very cyclical. Your techniques are proprietary, as you say, so perhaps you cannot elaborate on your alternative view on this matter of what they tell us about the future.
I'm not sure how you read my article to say that 'markets go up and then they go down'. Rather, in all of my articles this year, I have emphasized the relationships between cycles in different variables and relationships between various supercycles and the relationships between cycles and supercycles and what they tell us about market conditions.
More generally, I don't understand your overall criticism. You are damning me for being a cyclist, which I'm not, and yet your MarketCycle quotes (I reproduce them below in case my previous comment is deleted) are naively cyclical.
"'Market cycles can not only be observed, their patterns are repetitious enough to be traded.' MarketCycle’s clients profit by exploiting this opportunity."

"MarketCycle understands the markets and we understand the bull and the bear market and business cycles and how tops and bottoms are formed. There is no one else using our unique and proprietaray [sic] methods of investing."
Perhaps some confusion comes from the fact that I make reference to Kondratieff Supercycles? If so, I would point out that I did not predict markets from the Supercycles but rather predicted the Supercycle itself. Thus, the title.
Thanks, ConGa95054,
I am not sure the disconnect is really an ignorance of statistics. I think it is a psycho-social issue, if I can use that term here. Or, maybe it's simpler to say that the problem is one of paradigms. People generally cannot accept facts that disrupt their paradigm and in economics we have an abundance of paradigms and an absence of facts. It's not so much that they reject my claims about the future as it is that they reject my interpretation of the past. And, I think in this case, if the historical correlations at the cyclical and supercyclical levels do exist, they will tend to be judged as either disruptive to our beliefs about markets or written off as coincidence. Not only is the latter choice easier, it is also backed by vested interests, by which I mean political parties, think tanks, academics, banks, advisors, journalists, and whatever other experts there are who have been tapped to explain the markets to the broader society.
At least, that's how I read the knowing winks, harrumphing, and pejoratives in the negative comments. For them, there's not much they can say, because that's the nature of a paradigmatic rift. As far as they're concerned, I might as well argue that the moon is made of cheese.
They did back in 2012-3, just as PM markets were tanking. PM prices tend to move with production levels of basic commodities, so it appears that as the emerging market story of the 2000s was coming to a sudden end, Chinese started buying up gold and silver.
Europe is alive and well. Every time voters reject a treaty or an agreement, Europe finds a way to turn that frown upside down.
Or, maybe NAI really does mean NO and OXI means YES?
Oh, ad hominem, argument from authority, and then straw man.
Historical cycles suggest that these sorts of exchanges are over before they begin, so I will respectfully withdraw at this point.
Hi, Broken Clock, that's a good question. China's stock market shot up while the dollar strengthened, which is a little odd, but the inverse correlation between dollar index strength and emerging market returns really only holds for longer periods of time. I am keeping my eye primarily on nickel prices. I wouldn't count on a sustainable boom in EMs until I saw a convincing revival in nickel and other base metals.
In the context of this article, I am nervous about global markets in a period of persistent, universal disinflation, even if they should outperform the US, not only because returns might be low, but if the 1930s were any guide, there might be a good deal of geopolitical fragmentation. I think there is some question about the sustainability of the post-WWII monetary system in such a scenario, and I wonder if the Greek default revolt presages a more fundamental challenge to the American order. Those are not predictions, though, just worries.
This seems disingenuous, Stephen.
Elsewhere, you say...
"'Market cycles can not only be observed, their patterns are repetitious enough to be traded.' MarketCycle’s clients profit by exploiting this opportunity."
"MarketCycle understands the markets and we understand the bull and the bear market and business cycles and how tops and bottoms are formed. There is no one else using our unique and proprietaray [sic] methods of investing."
My techniques are all on the table and readers are free to make up their minds on their own.
My pleasure!
Is your point that wisdom is to be found in good astrology? Or in fortune cookies? :-)
Cautionary is, I think, the best word to describe this article. There's no guarantee that historical patterns will continue to manifest themselves in the future, but one ought not be surprised if they do.
There's not much I can add to what you've said, Tsunama. The curious thing about this boom is that it has primarily occurred during a period of profound pessimism, not exuberance. Now that the fear of a 2009 style crash has evaporated, I think it's an indication that we're nearing the end. Thanks for reading!
Glad you liked it!
Thanks for the comment, Durwood. I am not sure what sort of manipulation you are referring to precisely. I believe that the sorts of factors and relationships I have focused on here are too broad to be manipulated on such a scale as to make a long-term difference, however.