The Federal Reserve Casino, 3 Strikes and you're out!

Analysis

Debt driven economies, fuelled by extreme reserve bank stimulus will behave in short but predictable cycles.

As you can see in the above graphs and charts there are 3 main bubbles (the first two have popped obviously) and all have followed a 5 year boom period, followed by a 16-32 month bust period.

I believe we are nearing the peak of the 3^rd bubble, and this time its 3 strikes and the US is out.

I like to use the S&P 500 as my litmus for the state of the economy and historically it has accurately shown cycles in the economy as well as bubbles.

For more explanation on the S&P:

The S&P 500, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor's. It differs from other U.S. stock market indices such as the Dow Jones Industrial Average and the Nasdaq due to its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices and many consider it the best representation of the market as well as a bellwether for the U.S. economy.^[4] The National Bureau of Economic Research has classified common stocks as a leading indicator of business cycles.^[5] It is a free-float capitalization-weighted index.^[3]

Anyhow getting back to my analysis, the Tech bubble began building pace in 1995 as seen by a steepening of gains in the S&P 500, this steepening followed a typical bubbles trajectory and continued at an accelerating pace until early 2000. The bust was slower than the housing bubble as the US is in less debt then after the housing bubble.

The housing bubble began partly as a way for the government to repair the economy from the fallout of the tech bubble, but making easy credit available. Again this followed the same trajectory as any other bubble, and once it popped the decline was more rapid as this time the debt level was even higher. The bottom level was also lower.

This time we have a bond bubble. Because the tech bubble decimated the US populations sharemarket portfolios, and then the housing bubble decimated their housing assets, it is the bond bubble that decimates the populations futures. The government is printing money (quantitative easing) and artificially inflating the share market in the process (more on this in a future post). Because bubbles are proven to be fuelled by government intervention in free markets and then driven by human psychological patterns it is fair to say this bond bubble phase will behave exactly the same.

My predictions for the next bubble bursting are in red below.

  

	Start Incline	Peak	Bubble Duration	Finish Decline	Bust Duration
Tech Bubble	Early 1995	Mar 24, 2000	5 years	Oct 4, 2002	2 years, 7 months
Housing Bubble	Oct 4, 2002	Oct 12, 2007	5 years	March 6, 2009	1 year, 5 months
Bond Bubble	Mar 6, 2009	From July 2013 but no later than April 2014 it will peak.	5 years	Mid 2014 to early 2015	9 months approx.

	Start Price	Peak Price	End Price
Tech Bubble	500	1527	801
Housing Bubble	800	1561	683
Bond Bubble	683	Approx 1600 – Look for warning signs when S&P approaches this target.	Between 500 - 600

This is a great chart from bigtrends.com that exemplifies the much researched psychology of bubbles. They are more predictable then you think.

Bubble Chart Source: http://www.bigtrends.com

An interesting psychology occurs when the peak is reached and the first dramatic drop occurs. There is always a rebound back to near peak levels after investors enter into ‘denial’ and believe it’s just a blip on the radar. Above is a chart of a typical bubble cycle and circled in the top in yellow is what I call the “Correction of Denial.” Below is a breakdown of how this occurred in the last two bubbles and my prediction for the next.

	First Peak “New Paradigm”	Peak Price	Correction Rally “Return to Normal”	Rally Price	Duration
Tech Bubble	Mar 24, 2000	1527	Sept 1, 2000	1520	5 months, 1 week
Housing Bubble	Oct 12, 2007	1561	May 16, 2008	1425	7 months
Bond Bubble	Once we reach the 1600 mark for the S&P	1600	3 - 6 months later, but not as big a rally as the other bubbles.	1300 approx.	3 - 6 months approx..

What are your predictions? I'd love to know ... send me an email nickj4848@gmail.com