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Michael J. Clark was born and raised in Sinclair, Wyoming. He is a poet, novelist, artist, historian, and market analyst. His fine arts portfolio can be found at the following address: http://www.hoalantrangallery.com/MJC2.htm His writing portfolio can be found at:... More
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  • Historical PE Ratios: Marking the Tops of Economic Expansions (and Warning of Coming Economic Contractions) 13 comments
    Apr 20, 2010 2:50 AM
    Robert Schiller recently posted a chart showing the history of American interest rates in the 20th Century and the history of PE ratios in American stocks.



    Note the similarity between the historical PE ratios (blue line) and our contention that financial cycles run in 36-year periods, top to top.  We don't agree exactly with the dates of economic tops in this chart -- but we're nearly in agreement.

    We have American economic cycles in the Twentieth Century exhibiting tops in the following years:

    TOPS

    1893
    1929
    1965
    2001

    BOTTOMS

    1911
    1947
    1983
    2019

    Interest rates should be lowered as we proceed toward economic bottoms and should be raised as we proceed toward economic tops.  Had we begun raising interest rates slowly as we approached 2001 then we would have avoided all this mess of this decade -- and the coming decade.

    We need to realize than Nature has patterns and cycles -- and we need to put our human ego aside (the human desire to control nature) and work WITH these cycles, instead of against them. 

    We CANNOT have perpetual economic expansion in a system that has dual movements of expansion AND contraction.  Inflation needs to be followed (each time) by deflation.  Our view that inflation is GOOD and deflation is BAD may be true for the rich in the nation but it is not true for the society as a whole.





    Disclosure: No issues mentioned in this article.
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Comments (13)
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  • for the past two decades the economy ran without benefit of a governor (brake) in place to curtail its unbridled growth, now we find ourselves in a multi year rising interest and tax rate environment, the complete opposite of what is needed to pull our economy out of recession, people cheer YoY better then expected earnings and many believe that earnings will pull us out of recession, that is true but when was the last time we came out of recession with such headwinds in our near future. If the old adage " dont fight the Fed" holds true the markets should at some point consider the consequences
    20 Apr 2010, 08:31 AM Reply Like
  • Author’s reply » We haven't had a real philosophy guiding interest rates (perhaps we've never had this). The Fed was working for/with the presidency trying to see the party that appointed him stay in power -- and to keep the bankers happy.

     

    If we continue to have a Fed, then it will truly need to be detached from politics and attached to a philosophy which guides us through the expansions (day) and the contractions (nights) -- and stick with the philosophy like it was a religion.

     

    The Fed should no longer exist for and of the bankers, but for and of the health of the society itself.
    20 Apr 2010, 09:44 PM Reply Like
  • Of course it should be detached from politics, it's not even American owned. Why in hell is a foreign owned banking cabal supplying the American money and then renting it back to Americans? Americans should be doing that.
    20 Apr 2010, 10:03 PM Reply Like
  • Author’s reply » Any sane person would agree with this (unless they had been bought off in the process).
    21 Apr 2010, 07:49 AM Reply Like
  • Haha. You hit the nail on the head once again Michael. "Bought off" is right.
    21 Apr 2010, 09:26 AM Reply Like
  • 36 years is half the cycle. Google and research "fourth turning" and "generational dynamics". Much research has been done on this subject and the 70-80 year cycle makes a lot more sense to the human condition than other cycle periods. Not to say that others don't exist but notice that 1940 - 80 is 1860 and 1860 - 80 is 1780 and all three of those were the major wars of their time. Next stop: 2020.

     

    The thinking, BTW, is that every 80 years we repeat the same mistakes because the people who know better and lived through it the last time are dead or out of power and considered old fuddy-duddies. Only they knew the horrors of The Great Depression, WWII, the Civil War and the American Revolution.
    27 Sep 2010, 06:05 PM Reply Like
  • Author’s reply » I view them as 'seasons' and seasons each have their own laws, motifs, limitations, and necessities. Winter, for instance, CANNOT be a growing season. Summer, as well, cannot represent the Northern Freeze.

     

    9 is the only number that repeats itself when it is multiplied by any other number.

     

    9 x 2 = 18 = 1 + 8 = 9.
    9 x 12 = 72 = 7 + 2 = 9.

     

    72 years is the full cycle that seems so precise (70-80 years).

     

    72 = 4 x 18.

     

    Plato wrote that 'God geometrizes'...in the 'laws of Nature'.

     

    1857 + 72 = 1929 Civil War Era begins with major depression
    1929 + 72 = 2001 World War II Era begins with major depression
    2001 ...begins with major depression.
    28 Sep 2010, 07:45 AM Reply Like
  • (The late) William Strauss and Neil Howe laid out the framework in their 1991 book, "Generations."

     

    I expanded the theory in Chapter 20 "Generational Cycles in the American Stock Market" of "A Modern Approach to Graham and Dodd Investing."
    27 Sep 2010, 06:22 PM Reply Like
  • I think it's dangerous to try to place a hard and fast rule on human nature such as using 72 instead of allowing some wiggle room. To go along with the ideas discussed I suggest wave/particle theory, which you are likely aware of and consider amazing in its own right. The actual events I consider the particle while the time periods are the wave. There is only potential for the event within the wave and then everything "crystalizes" and the event takes places. We still can't agree on exactly what caused the crash of '29 or 2008 and that is because a wave is impossible to define, at least by us.

     

    I love Robert Prechter's work but I think that he suffers from the expectation of the wave, which is so enticing. Best to wait for the crystalization to begin. It always seems to be apparent and recognizable, as long as you know the wave is coming.

     

    Would love to hear more from you so I will become a follower.
    28 Sep 2010, 04:41 PM Reply Like
  • Dear Fred:

     

    Here is my version of Prechter's call, which uses causal, as well as "wave" variables.

     

    seekingalpha.com/artic...
    28 Sep 2010, 04:52 PM Reply Like
  • Interesting, you have found indeed the cycle, properly is a 36x2=72 year cycle of economic evolution, due to the evolution of machines energy and money:
    journals.isss.org/inde...
    www.economicstruth.com/
    24 Oct 2010, 03:02 PM Reply Like
  • Author’s reply » I believe the geometry, the Cycles, are the CAUSE and the details, such as evolution of machinery, etc., are merely sequences in the chain, that appear to be causal in nature. Focusing on the details as if they are causes leads to a misunderstanding of necessity. Bernanke's focusing on the 'causes' of the Great Depression has forced him to miss the Big Picture, which is the necessity of the Season itself.

     

    Does the Winter cause the snow, or does the falling temperature and rising humidity cause the snow? What cause the falling temperature and the rising humidity? The Winter does.
    25 Oct 2010, 06:56 AM Reply Like
  • Author’s reply » Luis: interesting sites you've given us. Thank you.
    25 Oct 2010, 07:18 AM Reply Like
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