As regular subscribers to the BullBear Market Report know, I have been tracking the onset of a long-term "secular systemic shift" since the last bull market began in 2011. In 2018, I began pointing towards 2020 as the year that shift happens. I think it's hard to dispute that, indeed, 2020 has proven to be a watershed year.
At this time, we are a few weeks away from the November 3 U.S. election and there is little doubt that the results will largely determine a tectonic shift in one direction or another. Shifts of a secular and systemic nature are always marked by major political and geopolitical upheaval, revolution and war. The presence of such upheaval in the political and social superstructure is confirmation that a process of fundamental change is in progress in the economic foundation.
History never repeats, but it often rhymes. Each secular systemic shift has its own characteristics. Since the last shift, which took place between 1929 and 1949, had the characteristics of the Great Depression, fascism, Holocaust, world war and the atomic bomb, there can be a bias towards expecting a similar outcome in the current historical time frame. And it's certainly not impossible that we may be faced with transiting a similar epoch now. But it's important to remain open-minded about all the possible outcomes.
In the context of financial system analysis, there has been a strong current which is philosophically married to expectations for an eventually disastrous outcome. In 2012, at the start of the last bull market, I identified this trend as "disasterism," of which there are two main varieties: inflationism and deflationism. Both emerged from anti-Keynesian monetarist intellectual circles that placed the Federal Reserve, central banking and monetary policy at the center of a theory that, one way or another, had to inevitably result in a deep, dark disaster. I think that we have seen periodic crises that have, of course, been linked significantly to money supply and monetary policy. And while the 2007-2008 and 2020 periods have certainly been ugly and scary, I don't think we can really say that they rise to the level of the historical events of 1929-1949. And again, I'm not saying that our current circumstance won't devolve to a comparable level. As I have said before, we are in a state of de facto war between the US and China and a de facto Civil War in the U.S. There is little doubt that epic technological, sociological and economic changes are in progress. But I do think it's important to realize that the dislocation and pain associated with the current process of transformation may end up being brief and less impactful than might otherwise be expected.
In the last report, I touched on "peak financialism" and the rise of the financialist economy as a necessary and inevitable stage of late capitalism. Financialism became necessary as the capacity for economic value generation via the productive processes of industrial capitalism began to fall off sharply. The financialist epoch can be logged as beginning with Nixon's termination of the US dollar gold standard in 1972, reaching its peak with the coronacrisis bailout of 2020. In many ways, that period was simultaneously the peak of capitalism as well as the transition to the next epoch. And the next epoch is marked by the economic and societal characteristics of information.
The period we are now involved in is not a period of transition from one kind of capitalism to another, but rather from capitalism to an information-theoretic paradigm. The various parties embroiled in the current civil war are contending to determine the political and societal superstructural characteristics of the new nascent system but are largely unaware of the underlying technological and economic forces that are describing the terrain of battle. For example, "conservatives" think they are fighting for a return to past glorious conditions and principles, when there is no possibility of return in the face of the epochal transformational forces at work. "Liberals" (in many cases, really Marxists) think they are fighting for progress towards a utopian future that they can mold to their ideals, though any idealized vision will necessarily be bent to the will of the driving technological imperatives. Neither side really has a grounded idea about the fundamental technological economic reality that is emerging around them. Nonetheless, aware or not, the pieces on the board have to make their moves and the drama has to be played out. Historical forces will have their way. It is the details of the outcome that are in doubt. And to a significant extent, those details will be shaped by the outcome of the November 3rd election.
Back when we could legitimately say that markets existed, we could say that market forces tabulated all current and future information in the form of prices, and that the emergent patterns of those prices told us about the future that the markets were anticipating. Today, we do have to question whether or not financial market forces really exist due to the extreme interventional policies of the central banks. But so far, many technical analysis methodologies still seem applicable and still yield good results, if applied objectively. And my current read of the technicals is that a major new bull phase is either in progress or beginning relatively soon.
If a major new bull phase is beginning now, there are many who will say that it is not "real" and that it will only represent monetary inflation and not genuine economic dynamism and growth. That may very well be the case. But on the other hand, as I detail in the current BullBear Market Report, "Is a New Long Term Bull Phase in Stocks Already in Progress?" economically sensitive areas of the financial system are flashing the end of major long-term bear phases and showing the potential for a major shift to outperformance after a long period of underperformance. This suggests that a more optimistic outcome than most are predicting is emergent, and that many widely held assumptions about the characteristics of the secular systemic shift may be erroneous.
Price Chart Analysis
The very long-term monthly chart of the Dow Jones Industrial Average is currently trading near an all-time closing high and very close to the upper rail of its long-term trend channel.
If the 2018-2020 pattern is complete, DJI may be poised for an upside breakout and acceleration through the upper rail of the channel. This would appear to be the start of Wave 3 of a very long term (V). An upside channel break on this scale would represent a secular systemic shift. Inflationists will, of course, say that this is only a representation of monetary inflation and not representative of real, dynamic economic growth. Yet, there is much in the current setup in rest of the financial system that strongly suggests an economic boom equivalent to or even exceeding that which was marked by similar price action in the Dow in 1949 and in 1982. In other words, going long the Dow now is functionally similar to going long in 1949 or 1982.
One key analytical element supporting this conclusion is the performance of the Wilshire 4500 index (Total Market excluding SPX 500) relative to the SPX 500. Here's the 10-week EMA of the Wilshire 4500/SPX 500 ratio.
While this ratio lagged badly coming out of the March 2020 bottom, it has since played significant catch-up. Note that prior periods of extensive outperformance of the broader and smaller issues represented in the Wilshire 4500 index relative to the narrow and larger capitalization issues represented by the SPX 500 have always been periods of significant market strength.
It's noteworthy that the monthly close chart of the Wilshire 4500 is surging assertively to a new all-time high after smashing through its prior highs.
This comes even as the SPX 500 is still hanging out below its September and October highs. So, the leading outperformance of the economically sensitive issues in the Wilshire 4500 may be giving an important signal about future economic performance in spite of the current dismal outlook for an economy still largely mired in coronacrisis lockdown.
Further supporting the thesis of a forthcoming economic boom, the monthly chart of MSCI Global Stocks excluding US equities shows the strong probability that the index is in the process of ending a 20-year Elliott Wave triangle bear market.
In 2020, the index fell back below its 1999 bear market start level and through long-term support of its 200-month EMA and the lower rail of its 2011-2020 channel, but has since rallied sharply back into the channel and back above the 1999 high. It still needs to break above the downtrend from its 2017 high, but it's not far from doing so. If indeed the long-term bear market in global stocks ex-US is now over, that would certainly tend to support a strong economic outlook going forward, and would also support the conclusion that a secular systemic shift is in progress.
Copper is widely regarded as an economic bellwether, and its price chart has seen a big break higher in recent days even as stocks have pulled back.
(Source: BullBear Market Report)
The breakout on the above daily chart follows a very important weekly bull breakout:
(Source: BullBear Market Report)
After a breakdown from the lower rail of a very clear long-term 13-year Elliott Wave triangle bear market, copper rallied back into and through the apex of the triangle and is now pushing strongly to new highs. This is a very bullish technical occurrence. Also please note the weekly bull cross of the 50-week EMA above the 200-week EMA. A new bull market for copper appears to be starting, and this is very supportive of the 2021 economic boom thesis.
Similarly, the long-term monthly chart of the WisdomTree Continuous Commodity Index Fund (GCC) also shows a lower rail break and a rally back through the apex of the long-term formation.
A long-term bullish shift in the general commodities complex may be in progress, and, of course, this is highly suggestive of future economic growth.
In addition, the Treasuries yield curve has recently seen substantial steepening:
While the steepening of the curve can be variously interpreted, in the context of a broadening of stock performance into the economically sensitive Wilshire 4500, the end to a 20-year bear market in global stocks ex-US and the end to a 14-year bear market in commodities, an appropriate interpretation is that the curve steepening is forecasting future economic growth.
The weekly price chart of the 30-year Treasury bond is set up very well to crash back into its long-term channel:
Note that it is set up now almost exactly as it was in October 2016. Now, as then, there was a false breakout above the upper rail of the long-term trend channel together with a large weekly bear RSI divergence. This led to a sharp drop back into the channel and a revisiting of the lower rail of the channel. The 2016-2018 period, of course, correlated with a period of relatively strong economic growth associated with the Trump election victory and subsequent changes to economic policy. It's likely that this chart is anticipating a redux of that scenario.
The spread between the yield on the S&P 500 and the 30-year Treasury yield is very close to its all-time high. When this spread was at an all-time high in 1994, 1998, 2002, 2009, 2012 and 2016, economic growth surges were nearby or in progress, and it was a good time to buy stocks.
While it's not impossible that the economic boom boom apparently being forecast by the markets could be associated with a Biden presidency, it seems less likely. A Biden presidency would be an implementation of the World Economic Forum "Great Reset" program, which would involve ongoing coronavirus lockdowns, planned transition of large segments of the labor force onto subsistence Universal Basic Income, radical forced transition to non-economic "green" energy, high taxation and other low-growth, redistributionist policies. This is not likely to be a recipe for a dynamic, high-growth economic scenario.
The extensive technical evidence shown here is just a small part of what is presented in the current BullBear Market Report, "Is a New Long Term Bull Phase in Stocks Already in Progress?" We are standing at the door of an epochal technological revolution involving artificial intelligence, quantum computing, automation, robotics, nanotechnolgies, new super materials, space mining, 5G, the Internet of Things and much more. As the radical technology of the steam engine made possible the development of industrial capitalism, these new technologies will usher in the next epochal shift into an information-centric economic system that has the potential to benefit all of humanity or, alternatively, enslave all of humanity. The sociopolitical characteristics of the new system will be determined by how effectively we carry forward into the future the best aspects of the Western liberal traditions, such as democratic process, rule of law, individual rights, property and self-determination. If these are not rolled forward into the future, then the eventual outcome may resemble something more dystopian than we might like. And that may be very well what the vote on November 3rd will ultimately determine.