Hi Captain, yes I think the long term charts are fantastic for context and just interest. Stock charts and economic factors comprise cycles within cycles. I focus on the monthly and weekly scale because it’s more relevant to trading but the bigger the cycle the more powerful it is, so worth understanding the bigger picture.
A couple of interesting references:
Jako posted a similar but more detailed chart than yours on 21/01/14 which I kept a copy of and posted below. Shows a bit more detail.
There was also a fantastic post by lighthouse on XJO on 04/03/14 with 13 charts on different economic parameters going back to 3,000 BC which I kept a .pdf of. Bit frustrating I haven’t been able to figure out how to post a pdf file as I think you’d find it quite interesting, but 4 of the 13 charts were posted on zerohedge here: http://www.zerohedge.com/news/2014-02-09/long-term-charts-2-western-markets-middle-ages
To get to your question, there’s a few observations on your chart worth commenting on.
Cycles: In studying long-term stock charts I’ve generally thought there is a 40 year and larger 80 year cycle in stocks occurring, based on low to low. If you look at your interest rate chart (I assume 10year bond) there is something of a 40 year low to low interest rate cycle occurring here. However if you look at the tops, it is maybe a 60 year cycle occurring, so peaks in 1980, 1920, 1860, and just to the left of your chart and shown on Jako’s is 1790 peak (70 years). Some peaks inbetween in say 1820 and 1840 so take your pick of your timelines, but there’s a clear cycle occurring however you want to count it.
Suggests next peak in interest rates might occur around 1980 + 60 years = 2040.
Channel: The other interesting observation is the long term down-sloping channel. If you ignore the 1980 bubble period and draw a line through the tops and the bottoms you get quite a remarkable channel which touches bottom about now. That shows long term interest rates in general decline for 220 years, notwithstanding the spurts of high interest rates, it always comes back to lower levels.
Just thinking about that, it means that anyone holding assets like property for the past 220 years would always get a tailwind in valuation from long term decline in interest rates. Can it now go long term below zero? If you think not, then does 2016 become an historic period where long term rates reverse to start climbing for the next 50, 100, 200 years, and that property and asset values have to push against rising rates for that period? Perhaps property and buy and hold shares will turn out to be a bad investment through that period.
If you just take the established downsloping channel and combine with cycles, the next peak in say 2040 would intersect the top of the channel at about 2.5 -3%. I think Janet Yellen would be happy with that rate of interest rises.
Elliot Wave: EW is the science of bubbles. You can clearly see an Elliot Wave cycle from 1945 to now, more clearly on Jako’s chart below. Prior to that you can’t really discern it, but those mini spikes would be if you could zoom in on the detail.
For the recent period since the 1980 fall, there’s a clear Wave B, and then there’s easily a 5 wave count for Wave C (final down move) so the falls could be complete. But like on a stock chart, you need to look for other confirmation that it has completed as we haven’t had the start of an uptrend yet to confirm. Draw a line through the peaks from 1980 to now on Jako’s chart and it hasn’t broken that downtrend yet, although his chart ends in 2013. Your chart shows it’s pulled back since, so you’d assume we’re at the bottom. Check that against 1945 and there is a double bottom here (I think), to be confirmed.
If this was a stock chart, I’d consider the fundamentals, then probably take a punt here that the fall is over and we’ll recover long term. Lots of implications for asset prices in that view.
Asset Pricing: Look at the massive fall in interest rates from 1980 to now. Think about the rate of that fall and the boost that gives to asset prices. My ancestors came to Australia on the first fleet in 1788 and their first child was one of the first conceived in the colony. In my whole family history since then, your chart shows that the optimum time to be born for building wealth was 1950 to 1955. It meant that you were 20-25years old in 1980 with generally job security at that time to enable you to buy your first house. You could then easy as anything use the increasing equity to leverage into more property, or even if you put a bit into shares, all asset prices got the incredible tailwind of that huge cyclical fall in interest rates. It was a 1 in 200 year event and probably longer.
(Btw, these people are 61 to 66 now, pontificating about how lazy the following generations are, expecting the easy life compared to how hard they had to work, whilst throwing grenades at Malcolm Turnbull for daring to trim their superannuation low tax gravy train on their millions. I was born on the first day of the generally accepted year for Gen X, and spent my adult life sitting just behind the boomers after they had locked up the best waterfront houses and C-suite jobs, so don’t mind me if I use your graph to indulge in a bit of boomer bashing!).
I find it so interesting now to think about where asset prices might be going. Where everyone’s memory and experience is of ever rising prices over the past 30 years and longer and making easy money investing, these graphs suggest it might just get a lot harder for the next 20 years or more as the yield play reverses and you actually have to take risk or produce something to create value, against declining or flat asset prices. (The rise in yields from 1945 to 1980 didn’t smash houses prices I guess but there was strong expanding economy and demographic expansion through that period, which gave some support).
Not sure if any of that answers your question, but just a wander around interest rates and economics for interest I guess.
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