This will be a quick post today illustrating what I expect over the next 2 years, and the inter-market relationship between the currency markets, CRB and stocks.
Pay particular attention to the
inverse relationship between the dollar index and the CRB; notice how
the CRB almost immediately began moving down into its three year cycle
low once the dollar formed it's three year cycle bottom in May 2011.
Stocks are driven by not only the
dollar but to some extent by commodity prices. When commodities start to
surge too high they act as a drag on the economy and consequently the
stock market begins to stagnate. When commodities are falling, as they
have been for the last year, it tends to act as a mild tailwind for the
stock market and this explains why stocks have continued to rise for most
of this year despite the dollar moving generally upwards since
I think I have mentioned before that
virtually every recession since World War II has been preceded by a
spike in oil prices of 80% - 100% over a short period of time (usually a
year or less).
The surge from $50 a barrel to $100 in
2007 was the straw that broke the camel's back and tipped the economy
over into recession, which began in November '07. A further spike to $147
a barrel the next summer guaranteed that the recession would be the
worst since the Great Depression, especially considering that the real
estate market and debt bubble was imploding at the same time.
Now that the CRB has formed its three
year cycle low the dollar index should be at or pretty close to a final
top, which should then be followed by a move down into its next three
year cycle low sometime in 2014.
If the inter-market relationships
continue to hold up, and I don't see why they wouldn't, then we should
see commodity prices moving generally north for the next couple of years
until the dollar forms its 3 year cycle low in mid-to-late 2014. At
some point along the way rising commodity prices are going to begin
pressuring the economy, just as they did in 2007 and 2008, and also in
2011 as the CRB surged up into its final three year cycle top.
My current guess is that we will see
the stock market start to stagnate in 2013 forming a much extended
rounded topping pattern. By late 2013 the stock market should be clearly
in a new bear market that will begin to accelerate to the downside as
commodities spike into their final top as the dollar bottoms in 2014.
At that point I expect to see a severe
deflationary event as the stock market and commodities collapse similar to what happened in the fall of 2008 and early 2009. This collapse
and deflationary event should be accompanied by the dollar rallying out
of its next three year cycle low in 2014
Most bear markets tend to last between 1 1/2 to 2 1/2 years so we can probably expect a final bottom in early to mid 2015.