I have enjoyed the opportunity to interview Charles Nenner and his business partner David Gurwitz on several occasions here. Mr. Nenner’s newsletter, of which I am a recipient, is always on the top of my daily reading list and for good reason. Mr. Nenner’s cyscle research is followed my many on the Street and his forecasting continues to be in high demand ever since he predicted the top of the market in 2007. But that is old news. What is he saying now and why is it important to at least consider his outlook?
First of all, Mr Nenner’s research is based on hundreds of years of historical data. In fact, he believes that any student of the business cycle should use a period of no less than 250 years for proper research. Second, Mr Nenner does not believe that economic theory predicts market behavior, cycles do. Third, his cycle work reveals that it is much more important to research the past effects of economic numbers and the market reactions to them than it is to try to predict the number itself.
What follows is a text on “Cycles and the Interpretation of Events”recently submitted in his daily newsletter. I have been granted permission to publish it in an unedited format. Remember: you saw it here first.
Economic Piece #1 – March 15, 2010 – Cycles and Interpretation of Events
Over the weekend, we sent out cycle charts that included updates of work on Unemployment and Industrial production.
Before discussing the two charts, we want to give a small introduction on how and why cycles work.
We get many questions which indicate that clients are trying to understand economic change in historic time.
Only detailed historic knowledge can answer most questions. Without it, theoretical analysis is inconclusive.
Looking at the facts of the prior quarter or even half of a century, in our opinion, is quite inadequate.
A period of 250 years is the minimum for the student of the business cycle.
Since the overall developments which are generated by the economic system are cyclical by nature, the task to be accomplished goes far beyond mere descriptions of spectacular breakdowns. We feel that cycles are needed to describe the industrial processes behind them.
The value of so called historical work studying “crises” is impaired by a general lack of interest in scholarship, and a focus on looking for the fast bonus on Wall Street.
What we really found in our work of time series pattern recognition is the predictability of financial markets.
When at Goldman Sachs, I gave classes, trying to convince people with PHDs from Harvard and Cambridge that it is very difficult to make money following the economic textbooks.
Cycles as we define them function in an almost magical way to predict facts and interpretation of facts so they can be used to forecast market movements.
We deliberately mention facts and interpretation of fact separately for the following reason:
Let’s take a situation where one owned IBM for a year and has a big profit.
Let’s say that IBM will come out with a great number tomorrow.
Based on cycles, the stock can go either up or down.
If tomorrow is a cycle low, and IBM shows great results, the stock will go up.
The Wall Street Journal and CNBC and Bloomberg and the other news services will probably write the following: results were great and the market liked it and bought IBM.
If these “excellent” results come out around a cycle high, the stock will go down.
We will probably read the following in the same places: investors took profit, since they do not expect IBM to do better next year.
The facts were the same – but the interpretation of the facts based on the cycles – which most investors were not aware of – would be different.
When a cycle bottoms, most events start being interpreted in a positive way. That causes a bottom to be a bottom.
Conversely, when cycles top, everything seems to start to look bad – which cause it to be a “top”.
Also, an interpretation can change reality.
For example:
The perception of a rate hike can do the work for the Fed without a real move, and often, only the expectation of inflation can have an effect.
Therefore, it is possible to get a high inflation number with a surprising concomitant rally in the Bond markets – since the interpretation is the following: that this, for now, is probably the last strong inflation number.
In our work, we feel that predicting the market behavior after economic numbers come out – by studying the past effects of the numbers and the reactions to them – is more important than predicting the number itself.
We will, in our future updates, try and provide an economic outlook based on our cycle work.
Yesterday, we sent out the cycles for Unemployment and Industrial Production.
We see the cycles top for Unemployment, and cycles show a low for Industrial Production only by year end.
Our analysis is that Unemployment has topped, which does NOT mean lower readings immediately.
We feel that it will also take until next year for short term interest rates to bottom out.
Again, when this is based on economic theory, it does not predict market behavior – cycles do, however.
We will also continue to try and make sense of the China factor, since this seems to be what all investors are focusing on.
For now, we want to mention that the inflation in China – according to our cycles – is based primarily on energy and food, and that there still is an underlying deflation danger in the world.
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And what is Mr Nenner’s current forecast? He recently granted an interview to to the madhedgefundtrader wherein he discussed among other things: a possible stock market crash as early as April of this year. You can read the text HERE. Next up for Mr Nenner? An interview with me. Stay tuned.
