My Stock Market Prediction Using the Pride Cycle

This is a follow-up to my blog on October 10.

I've been watching the Stock Market recently and after looking at historical values for the various stock indices (DJIA, S&P), the GDP (Gross Domestic Product), the CPI (Consumer Price Index), inflation, etc., I have found an interesting pattern that I think can predict what the market will do in the coming years.

Postulate 1:
There is a basic growth rate of the economy of about 3%

Postulate 2:
Stock prices represent an inflation of actual production due to confidence and other emotional factors.

Postulate 3:
The ratio of stock prices to consumption (CPI) should reveal emotional driven cycles.

First, the GDP adjusted for inflation can be predicted very closely by a growth curve, or (principal value) X (1 + % growth rate)^(# of Years). The GDP has been growing at 3%.

Second, the CPI also grows at about 3%, however it fluctuates due to inflation.

The figure below shows a linear plot of the S&P Composite Index, the CPI and a 3% growth curve from 1870 to 2008.


It's hard to tell what is happening in the early years, so here is the same plot with a logarithmic scale. This shows that all 3 lines show about the same growth.


The next plot shows the ratio of the S&P to the CPI. What this shows is how the stock market has deviated from normal economic growth with apparent cycles in the data.


These cycles I compare to "Pride Cycles". Since Stock prices are determined by individuals, there is an emotional and spiritual aspect to price fluctuations. To explain the Pride Cycle, here is a diagram:


Here's a description of the stages in the Pride Cycle

1. Humility - People are humble, willing to do what they are told
   
2. Prosperity - Good leadership arises that leads them to prosperity
   
3. Pride - They get caught up in the prosperity and start getting proud
   
4. Contention - Due to pride, they elevate themselves above others.
   
5. Rebellion - They rebel against their leadership
   
6. War/Captivity - They are invaded, attacked or declare war
   
7. Famine/Disasters - They suffer famine, unemployment, etc (natural or other causes)
   
8. Weakness - They become weak
   
9. Humility - They return to humility and start the cycle all over
   

The most recent, complete cycle was from 1950-1980. Let's see how this compares:

1950-1980

1. Humility - We just finished fighting WWII. We returned home humbled by the traumatic experience.
   
2. Prosperity - Pres. Eisenhower (1953-1961) leads the country to great prosperity which include luxury cars, home comforts like vacuum cleaners, washing machines, toasters, food mixers and electric irons.
   
3. Pride - "Keeping up with the Joneses"
   
4. Contention - The Civil Rights movement (not necessarily bad).
   
5. Rebellion - The "Counterculture" movement in the late 50's to 60's (hippies, drugs, sexual revolution, etc).
   
6. War - Vietnam War from early 60's to early 70's
   
7. Famine - Stagflation and the Oil Crisis in the Early 70's
   

1980-Present

1. Humility - We just finished with Jimmy Carter and the mess the economy was in.
   
2. Prosperity - Pres. Reagan (1980-1988) leads the country to great prosperity.
   
3. Pride - "Yuppies", BMWs, etc.
   
4. Contention - Conservatives vs. Liberals.
   
5. Rebellion - Elect Barrack Obama (Just kidding).
   
6. War/Invasion - The 1990 Gulf War, Sept 11, 2001 Terrorist Attack, Afghanistan War (2001) and Second Iraq War (2002).
   
7. Disasters - Hurricane Katrina, etc.
   
8. Famine - Rising unemployment and falling market.
   

1870-1920
(Added Feb 2, 2009)

1. Humility - We just finished the Civil War.
   
2. Prosperity - Reconstruction Era.
   
3. Pride - Monopolies, Imperialistic foreign policy.
   
4. Contention - Labor Unions, Tariffs, U.S Supreme Court upholds racial segregation (1896).
   
5. Rebellion - Great Railroad Strike (1877), Haymarket Riot (1886), Riots of 1892.
   
6. War/Invasion - Philippine-American War (1898), Spanish-American War (1898), intervention in Nicaragua (1909), occupation of Haiti (1914), World War I (1917), conquered Cuba, annexed Hawaii and Puerto Rico.
   
7. Disasters - San Francisco Earthquake (1906), Wellington Avalanche (1910), The Great Dayton Flood (1913), Hatfield Flood (1916), Spanish Flu Pandemic (1918).
   
8. Famine - I think the disasters took care of any need for famine.
   

My Prediction (Revised Nov. 20, 2008)
The stock market needs to drop to the level of the relative CPI again. Depending on where the bottom is, these are the values for the growth curve for the next few decades.

Date	DJI Average Baseline
12/1/2008	1660
1/1/2010	1717
1/1/2015	2007
1/1/2020	2343
1/1/2025	2734
1/1/2030	3188

It is possible that our economy is growing faster due to technical innovations, however the CPI and GDP don't necessarily show it.

Today, the Dow dropped below 8000 (7552 on Nov 20th). This seems alarming, but I think it still has a ways to go. My prediction is the DJIA will drop below 2500 within 10 years. While this is about an 80% drop, there was a bigger drop from 1929 to 1932 when it fell 90%.

Of course this is my opinion based on limited analysis and I do not recommend making any decisions based on this related to stocks. I do recommend staying out of debt, making purchases with cash, and working towards reaching "Humility" as soon as possible.

Made in the USA: Spoiled brats

I got this in an email. I couldn't have written this better. The email said that David Letterman wrote it. I checked it on snopes.com and it was actually written by Craig R. Smith

The other day I was reading Newsweek magazine and came across some poll data I found rather hard to believe. It must be true given the source, right? The same magazine that employs Michael (Qurans in the toilets at Gitmo) Isikoff. Here I promised myself this week I would be nice and I start off in this way. Oh what a mean man I am.

The Newsweek poll alleges that 67 percent of Americans are unhappy with the direction the country is headed and 69 percent of the country is unhappy with the performance of the president. In essence 2/3s of the citizenry just ain't happy and want a change.

So being the knuckle dragger I am, I starting thinking, ''What we are so unhappy about?''

Is it that we have electricity and running water 24 hours a day, 7 days a week? Is our unhappiness the result of having air conditioning in the summer and heating in the winter? Could it be that 95.4 percent of these unhappy folks have a job? Maybe it is the ability to walk into a grocery store at any time and see more food in moments than Darfur has seen in the last year?

Maybe it is the ability to drive from the Pacific Ocean to the Atlantic Ocean without having to present identification papers as we move through each state? Or possibly the hundreds of clean and safe motels we would find along the way that can provide temporary shelter? I guess having thousands of restaurants with varying cuisine from around the world is just not good enough. Or could it be that when we wreck our car, emergency workers show up and provide services to help all involved. Whether you are rich or poor they treat your wounds and even, if necessary, send a helicopter to take you to the hospital.

Perhaps you are one of the 70 percent of Americans who own a home, you may be upset with knowing that in the unfortunate case of having a fire, a group of trained firefighters will appear in moments and use top notch equipment to extinguish the flames thus saving you, your family and your belongings. Or if, while at home watching one of your many flat screen TVs, a burglar or prowler intrudes; an officer equipped with a gun and a bullet-proof vest will come to defend you and your family against attack or loss. This all in the backdrop of a neighborhood free of bombs or militias raping and pillaging the residents. Neighborhoods where 90 percent of teenagers own cell phones and computers.

How about the complete religious, social and political freedoms we enjoy that are the envy of everyone in the world? Maybe that is what has 67 percent of you folks unhappy.

Fact is, we are the largest group of ungrateful, spoiled brats the world has ever seen. No wonder the world loves the U.S. yet has a great disdain for its citizens. They see us for what we are. The most blessed people in the world who do nothing but complain about what we don't have and what we hate about the country instead of thanking the good Lord we live here.

I know, I know. What about the president who took us into war and has no plan to get us out? The president who has a measly 31 percent approval rating? Is this the same president who guided the nation in the dark days after 9/11? The president that cut taxes to bring an economy out of recession? Could this be the same guy who has been called every name in the book for succeeding in keeping all the spoiled brats safe from terrorist attacks? The commander in chief of an all-volunteer army that is out there defending you and me?

Make no mistake about it. The troops in Iraq and Afghanistan have volunteered to serve, and in many cases have died for your freedom. There is currently no draft in this country. They didn't have to go. They are able to refuse to go and end up with either a ''general'' discharge, an ''other than honorable'' discharge or, worst case scenario, a ''dishonorable'' discharge after a few days in the brig.

So why then the flat out discontentment in the minds of 69 percent of Americans? Say what you want but I blame it on the media. If it bleeds it leads and they specialize in bad news. Everybody will watch a car crash with blood and guts. How many will watch kids selling lemonade at the corner? The media knows this and media outlets are for-profit corporations. They offer what sells. Just ask why they are going to allow a murderer like O.J. Simpson to write a book and do a TV special about how he didn't kill his wife but if he did … insane!

Stop buying the negative venom you are fed everyday by the media. Shut off the TV, burn Newsweek, and use the New York Times for the bottom of your bird cage. Then start being grateful for all we have as a country. There is exponentially more good than bad.

I close with one of my favorite quotes from B.C. Forbes in 1953:

''What have Americans to be thankful for? More than any other people on the earth, we enjoy complete religious freedom, political freedom, social freedom. Our liberties are sacredly safeguarded by the Constitution of the United States, 'the most wonderful work ever struck off at a given time by the brain and purpose of man.' Yes, we Americans of today have been bequeathed a noble heritage. Let us pray that we may hand it down unsullied to our children and theirs.''

I suggest this Thanksgiving we sit back and count our blessings for all we have. If we don't, what we have will be taken away. Then we will have to explain to future generations why we squandered such blessing and abundance. If we are not careful this generation will be known as the ''greediest and most ungrateful generation.'' A far cry from the proud Americans of the ''greatest generation'' who left us an untarnished legacy.

Historic Election

I voted for McCain, and tonight he showed true class in his concession speech. We now have a black man as president. I personally think this is amazing. It shows how our country can overlook its racist history. I have to admit that I have been in fear of Obama becoming president (based solely on many of his ideologies). As a Christian, I am willing to forgive and forget his questionable past. Now that he has been elected president, I will be praying for him every night. I hope that when the mantle of authority rests on his shoulders, that he realizes the significance and importance of his position. My prayers will be to bless him with discernment, truth, wisdom and strength.

Tonight I was a poll watcher for the "Yes on Prop 8" campaign. As I made my very last phone call as part of this effort, I thought "finally its over". While it has taken much energy, I know that I don't have as much at stake near term as many others. I'm reminded of comments I read recently. Basically, I feel sympathy for those who had hoped for so long to have a marriage and then legally have it taken away. No matter who is right or wrong, I know that thousands of people will be suffering deep emotional pain. I will also be praying for them. I still feel that passing prop 8 was and is important, but I also recognize all people as children of God. I hope to understand how to love others better.

I will also repenting of any heated emotions that I felt or words that I uttered in this battle.

Finally, I am glad to live in California and the United States. I have found raising children among opposition to our beliefs and values to be beneficial. There have been examples and counter examples all around us of why we live the way we do.

For it must needs be, that there is an opposition in all things. If not so...righteousness could not be brought to pass, neither wickedness, neither holiness nor misery, neither good nor bad.