By Robin Griffiths

October 7 (King World News) - “World Investment Strategy”

One of the central tenets of cycle theory is that the long term trend always dominates the shorter term cycle.  Joseph Schumpeter, the Austrian economist who did so much to promote our understanding of cyclical behaviour in the 1930s, warned that what he termed “external events” could temporarily distort the contours of a cycle.


When one of these external events occurs, the shorter term cycles are more easily blown off course than the longer terms ones (although these, too, can be twisted by very extreme events).  In the current situation we regard Quantitative Easing (QE) as an external event because it is specifically designed to prevent the market acting as it would do without this intervention....

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History indicates that when an external event does occur, the underlying rhythm of the cycle does not disappear completely.  So, when the impact of the intervention gradually recedes, the cycle will reappear – apparently by magic – bang on time as if nothing had happened.  It is possible that something like this is going to happen in the months ahead.

The two shortest cycles in our model are both supposed to be turning down now.  In fact they are on borrowed time.  The annual seasonal deviation did, indeed, make a peak in May for the FTSE-100 index, which is now 4 per cent lower.  The market would normally drop rapidly in the period from late August through to late October or November and there is still a risk that it could do so.  For this reason, we are remaining cautious and continue to recommend a relatively large cash holding with respect to western markets, especially in the US where the S&P500 index is about 4 per cent above the May top.

However, even though the Fed did not act last month, the fact that they have been preparing the market for the end of QE suggests that the longer term cycle will not be distorted.  The question we need to address now is if the autumnal setback indicated by the short term cycles does not materialise, does this alter our underlying strategy?  The answer is not by very much.  The western markets are not cheap, in fact by Benjamin Graham’s standards they are expensive.  Warren Buffet has already said publicly it is difficult to find anything that he wants to buy at current prices.  Another consideration is that the US economy is not that strong.  If the Fed were confident that the rebound was self-sustaining they would have started tapering already, but they decided not to do this.

In market terms, a number of coal-mine-canaries have been dropping dead.  There has been distribution in some of the major stocks.  The volume of trading has been higher on down days than on up days.  The number of stocks holding the market up has been shrinking and the type of stocks that are holding it up is another significant pointer – the financials look toppy while the classic defensive stocks are performing better than the growth ones.

All this is not to say that equities cannot go higher.  We have seen them go way higher in the past as P/E ratios have expanded.  Unfortunately this is usually within the context of a bubble blowing up that then has to come back down again, often with a crash, which frequently takes the market lower than it was before the bubble process started.  This means there can be a further rise from here but it is a trade and not an investment.  You will be relying on your ability to get out before everybody else does.

The euro does not work in its present form, but there are huge vested interests in keeping it going.  A two-tier system may have to be brought in as this would give an immediate economic boost to the four or five weakest members.  This implies a longer term currency risk for investors buying European assets from either a sterling or dollar base.

The outlook for the stock markets is the same as for all western markets.  They are in secular downtrend with only Germany looking as if it could push up to new highs.  The region as a whole has no chance of doing this but, as we have been highlighting for years now, there is an enormous economic gulf between the strong and weak economies.  We, therefore, maintain our position of picking stocks rather than investing in the broad market indices.

Griffiths added this regarding gold and silver: Our long term bullish view of gold was endorsed by a poll of the world’s largest bullion dealers.  They are expecting the price to average $1,400 in 2014.  The first indication that positive momentum is returning to the market would be a move back above $1,420.  This would complete a reverse head and shoulders extending back to May and give a target of $1,600.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

IMPORTANT - One of Bill Fleckenstein’s best KWN audio interviews ever discussing the coming collapse in stocks, gold, the end game and more is available now and you can listen to it by CLICKING HERE.

Update - The KWN audio interview with David Stockman discussing financial collapse, a coming flight to gold, the end game and more is available now and you can listen to it by CLICKING HERE. 

The audio interviews with Bill Fleckenstein, David Stockman, Robin Griffiths, Jim Grant, Gerald Celente, William Kaye, Dr. Paul Craig Roberts, Chris Powell, Michael Pento, Eric Sprott, Andrew Maguire and Grant Williams are available now. Also, other recent KWN interviews include Marc Faber and Felix Zulauf to listen CLICKING HERE.

Eric King

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