Solar Cycles and the Business Cycle
The business cycle consists of two phases, expansions and contractions, which have a rather high correlation to the expansions and contractions of solar cycles. Prior to the Federal Reserve trying to manage the business cycle, expansions lasted about four years and contractions about six months.
Since the Fed has attempted to wipe out contractions, expansionary phases last on average about eight years and contractions about two years. Our current expansion is running over nine years and the general feeling is that the Fed has finally eliminated economic contractions, but the solar cycles suggest otherwise.
The solar cycle, which is when the north and south poles of the sun reverse, occurs on average every eleven years. The solar cycles can be as short as eight or as long as fourteen years. The solar cycle begins at a solar minimum, when the number of sunspots is zero, peaks about five-and-a-half years later at a solar maximum, and then returns to a solar minimum over the next five-and-a-half years.
Economies also run in cycles and investors are continuously trying to predict when the next expansion will begin, so they can invest at the bottom, and when the next expansion will peak, so they can sell at a high point. While we live in a cyclical universe, central bankers have convinced themselves they can create a perpetual economic expansion through the proper mix of money-printing and interest rates. So far, no central bank has come close to achieving this goal, but it hasn’t stopped them from trying.
There is a surprising correlation between business cycles and the solar cycles. The reason this correlation exists is that humans are far more productive when the Sun is visible in the sky compared to when it is nighttime. Early humans understood this, as chances of survival depended on the Sun.
Survival for early humans meant a consistent food supply. Since crops grow during the day, our descendants looked to the Sun and its cycles to try to understand how the world worked. Early humans also figured out along the way that life became more difficult during solar minimums, which is why man began tracking sunspots as early as 1755. Man’s survival ebbs and flows based on the sun cycles.
When solar maximums are higher the Earth receives more light for longer periods of time, which allows humans to be more productive. More daylight is more opportunity to farm, mine, invent and produce. When cold and dark are predominant, man is the least productive. Historically, many great empires were built over hundreds of years where the solar maximums of each preceding cycles were higher than the last.
When overlaying recessions, as according to the National Bureau of Economic Research, against solar cycles, I noticed there has never been a recession during the upward phase of a solar cycle. Most recessions occur in the latter stages of a solar maximum and the rest tend to occur during the downward phase of the solar cycle. Occasionally, recessions occur during solar minimums, which are among the worst. The Great Depression and the Great Financial Crisis both occurred close to or at solar minimums.
The correlation between the business cycle and the solar cycles are easy to understand. The expansionary phase of the business cycle begins once consumers have deleveraged from the prior recession, which can last a couple of years depending on how much debt was created during the prior cycle. The expansionary phase of the solar cycle begins after the solar minimum, which too can last up to a couple of years in length.
The expansionary phase of the business cycle is the most productive phase, which is aided by more predictable weather and more sunshine as the number of sunspots increases. As the Sun reaches its solar maximum, the economy is usually running very strong. As the solar cycle turns, less daylight leads to lower productivity.
The reason recessions were common on the latter side of a solar maximum is because the stock market by this time is expecting earnings and profits to continue expanding indefinitely. As productivity falls, so do earnings, which triggers a recession. As the number of sunspots decreases towards a solar minimum, the economy enters a recovery phase from the recession where consumers and businesses are repairing their balance sheets. Once the solar minimum has been reached, the next business cycle and the next solar cycle begins.
Prior to the Federal Reserve trying to manipulate the business cycle, there were two-to-four business cycles per every solar cycle, depending on the length of the solar cycle. Since those business cycles were rather short in length, the recessions weren’t as harsh as they are today. Most people didn’t know the economy was in a recession, because it was limited to a small part of the economy. Today the opposite is true. Due to our elongated expansions, the ensuing recessions are severe and affect a larger part of the population.
The dot-com bubble, which coincided with solar cycle 23 (1996-2009), is a perfect example of an elongated, Fed-manipulated business cycle. The mistake the Fed has started making is easing during the rising part of the solar cycle. This phase of the solar cycle is already conducive to increased productivity, so it doesn’t need any monetary juice from the Fed. By adding monetary stimulus to an already productive period, the Fed creates bubbles in the economy.
This fueled the dot-com bubble by keeping interest rates artificially low which allowed investors to borrow an unprecedented amount of money to buy technology stocks. Technology stocks were trading at levels so high, relative to their earnings and valuations, that it was impossible for the companies to grow fast enough to justify their stock prices. The Fed began hiking interest rates in mid-1999 and a year-and-a-half later, the dot-com bubble burst.
Coincidentally, the dot-com bubble burst just before the peak of solar cycle 23 and lasted the entire peak of solar cycle 23. Normally recessions occur in the latter half of the peak of a solar cycle, or as the cycle is headed down, but not this time. In response to blowing a massive stock bubble, the Fed lowered interest rates and the government eased home lending laws to spark another bubble in the housing market.
In my opinion, the Fed made a catastrophic decision to ease on the downward half of solar cycle 23. Back in 2002, many economists believed the recession should have been deeper, but the Fed’s easy-monetary policies caused the economy to start turning around prematurely. The Fed lowered the Federal Funds rate to 1.00% and, as the economy started growing, they began to hike rates in May 2004. By August 2006, the Fed held the Federal Funds rate at 5.25% until September 2007 when they were forced to start lowering it again as the housing market began to capitulate.
By late 2007, solar cycle 23 was rapidly approaching a solar minimum as the Sun was only creating approximately ten sunspots. By early 2008, when the stock market self-destructed, the sun was near a solar minimum as it was creating less than five sunspots. Solar cycle 23 finally bottomed in early 2009 at the same time the Fed decided to lower and hold the Federal Funds rate at 0.00%.
The mistake the Fed made was keeping monetary policy easy on the back half of the solar cycle. This decision forced them to tighten monetary policy after creating a housing bubble, just as the Sun was headed into the least productive time of the solar cycle. The economy experienced a confluence of the Fed’s tightening, the housing bubble bursting and global productivity slowing down.
Rather than give the economy time to repair itself from the second bubble in eight years, the Fed adopted a zero-interest-rate policy and pumped the banks full of cash through their successive Quantitative Easing programs. This is the first time the Fed has kept monetary policy easy through nearly an entire solar cycle.
The economy tried to recess in the second half of 2016, which was during the downward side of solar cycle 24, but the Fed intervened to keep the economy going. The economy tried to recess again in December 2017, but the Tax Cuts and Jobs Act pumped enough money into the economy to give the economy life once again. As the Sun heads into a solar minimum, the Fed is once again tightening.
The Fed has aggressively eased for nearly an entire solar cycle, which they have never done before. Global central banks have pumped so much money into the global economy that they have created bubbles across multiple asset classes. The Sun is rapidly approaching a solar minimum, which should occur in early 2019. It will be interesting to see if the Fed has engineered the impossible and eliminated the business cycle altogether, or if the impending solar minimum will trigger the biggest global financial crisis in history.
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Daily Market Briefs
- Thoughts from the Weekend
Going into last week’s Federal Reserve meeting, speculators increased their already record short positioning on U.S. Treasury bonds to a new record short position. Speculators and investors alike are betting ten-year Treasury yields are headed somewhere between 4-6%, yet they continue to run into an impenetrable wall that is preventing yields from rising past 3.1%. What they don’t realize is the impenetrable wall is the Federal Reserve.
When the Fed was running their Quantitative Easing programs, the purpose was to lower short-term interest rates by buying bonds. The Fed bought both short- and long-term U.S. Treasury bonds and Mortgage-Backed Securities. While many believe long-term rates fell during QE, they rose.
To stimulate the economy, the Fed was pushing borrowers to short-term interest rates, which were extremely low. There was still a demand for long-term bonds, as Americans were still financing long-term debt in the form of mortgages. Long-term debt needs to be backed by long-term bonds, so to attract capital as the Fed was vacuuming up every long-term bond in sight, long-term yields rose.
Starting in December 2016, the Fed began tightening or engaging in the opposite of QE, or Quantitative Tightening. As the Fed unloads its long-term bonds back into the hands of the public, there isn’t enough demand for long-term borrowing. The net result is that short-term interest rates should be rising, which they are, and long-term interest rates should be falling, but they aren’t. The only reason long-term rates aren’t falling is due to the record speculative short positioning on U.S. Treasuries.
The Fed is going to increase the amount of bonds they unwind from their balance sheet from $40 billion per month to $50 billion starting in October. This will continue to act as a massive headwind to the speculators who are convinced long-term yields must go higher.
Ultimately, these speculators will find themselves on the wrong side of the trade and will be forced to exit their short positions. When they do, the largest short-squeeze in the history of the U.S. Treasury market will send long-term yields plummeting.
As long as the Fed is tightening, speculators will have to commit an ever-larger amount of capital towards keeping long-term yields elevated. In the end, the speculators are doing battle with the most powerful monetary force in the world. It’s not a question of if long-term yields will fall, it’s a matter of when the speculators realize they aren’t going to win.
- What happened to the stock market on Monday?
U.S. equity futures flashed green on the news a trilateral trade deal between the U.S., Mexico, and Canada has been reached. While stocks are excited over this news, stocks did not sell off when President Trump sought to renegotiate NAFTA, so news of a renegotiated deal shouldn’t have much impact. Also, the changes in this new trade agreement were minor, so there seems to be quite a bit of excitement over some small changes. Keep in mind that all trade deals must be approved by Congress.
The excitement over this potential trade deal speaks to the bullishness of the U.S. stock market, which wants to rise regardless of the news. Experts continue to indicate there is one final surge left for stocks, called a blow-off top, which is when retail investors pile into stocks to allow large money managers the ability to exit.
Yet in a brokerage allocation report released by Charles Schwab this weekend, Schwab reported retail brokerage cash levels were at their record low as retail investors are fully invested. With retail investors, institutional investors, and hedge-fund managers all-in stocks, the last buyers are corporations purchasing their stocks back. While it is possible there will be a blow-off top, the Fed’s monetary tightening has kept the stock market largely in check all year. With the Fed set to accelerate their tightening starting this month, it will take a flood of money flowing into stocks to create this final move higher. Where that money will come from, remains a bit of a mystery.
Stocks closed higher on the day but faded their early gains. Small-caps and bank stocks were both down for the day. Speculators came in strongly on Friday to short Treasuries and followed through again on Monday. Despite the largest speculative short positioning against the Treasury market, ten-year Treasury yields will not budge over 3.1%. Clearly, bond sellers are exhausted which leaves the door wide open for a major reversal in yields.
Agricultural commodities saw buyers move in and volumes jump today. This is an indication a bottom may be in place and that agricultural commodity prices are about to start rising.
- What happened to the stock market on Tuesday?
The DJIA set a new all-time high today as the S&P 500, Nasdaq-100 and Russell 2000 all closed lower. It now takes the average American worker 1,164 hours to buy one share of the Dow Jones Industrial Average!
Treasury yields moved down in early trading, jumped on remarks from Fed Chair Powell that the Fed was likely to continue raising the Federal Funds rate, and then fell in late afternoon trading. Treasury short-sellers continue to lay siege to the bond Bulls, but they aren’t gaining any traction for their effort.
The biggest buyer of Treasury bonds is commercial banks who have expanded their purchasing of Treasuries over the past four weeks at a rate of 15% year-over-year. Bankers have a great deal of information on the economy and when they are buying, investors should take heed.
Technical traders are indicating that physical gold and silver could both be near breakouts to the upside. The largest gold mining EFT, symbol GDX, continues to run into a wall at $19 per share. A CEO of a large gold miner purchased an estimated 2.5 million shares of his company stock recently. When corporate insiders are buying, it’s an indication of where prices are headed in the future.
Agricultural commodities jumped on strong volume day and the broad-based agricultural commodity EFT, symbol DBA, closed over its 50-day moving average. Today’s volume and price action is indicating higher prices are likely to come.
According to a recent survey by the Federal Reserve, U.S. households reported 34.3% of their financial assets are invested in stocks as of the second quarter. This is the second highest level in history, with the dot-com bubble being the highest.
In another survey published by the MIT Sloan School of Business, Republicans bought stocks following the Presidential election, while Democrats bought bonds. Republicans have won in the short-term, but will they win in the long-term?
- What happened to the stock market on Wednesday?
The ISM factory survey data for September showed an increase in hiring and demand from the services sector. What is interesting is this demand hasn’t been showing up in the retail sales data, but it has shown up in the wholesale inventory data, which has been recently rising. Businesses are expanding their hiring for the holiday season in an extremely tight labor market.
Wages haven’t increased to bring people who have retired back into the workforce. Most of the jobs being created are minimum wage, low productivity jobs, which is causing employers to raise wages to pull employees from other companies.
The September ADP jobs data showed a whopping +230,000 jobs created. Those who follow the Phillips Curve, which suggests inflation is inversely correlated to job growth, saw this as a renewed reason to short U.S. Treasuries. Too bad there is no evidence that inflation is tied to the number of employed.
With the Fed tightening, short-term yields are rapidly rising faster than long-term yields, which leads to an inverted yield curve. An inverted yield curve causes banks to tighten lending standards and reduce lending. When the growth money-generators of our economy slow, so does inflation.
What I find interesting is that 10-year Treasury yields are 0.51% higher than their recent peak with the largest speculative short position in the history of the Treasury market. The word on the street is the reason U.S. yields are rising is due to the high dollar-hedging costs foreign investors have to pay to buy U.S. debt.
Many believe both stocks and yields can continue rising. By design of our monetary system, stocks and yields can rise during periods where the money supply is growing. Our money supply has been decelerating for the past two years and is going to continue decelerating as the Fed continues to tighten. Stocks and yields can’t continue rising together. One can, but not both. At some point, both will fall.
Stocks closed the day slightly higher after late day selling. Treasury yields pulled back from their highs as buyers came in during late trading. Physical gold was rejected at its 50-day moving average, as were the large gold miners. After yesterday’s big jump, agricultural commodities gave back some of their gains to close just below their 50-day moving average.
- What happened to the stock market on Thursday?
When liquidity dries up, stock prices fall. Yesterday’s news pointed to strong growth out of the factory sector, which has analysts believing tomorrow’s Nonfarm Payrolls report could show upwards of +500,000 jobs created. With wages still rather low, it’s hard to understand where all these workers are coming from. What we do know is at this point in the business cycle, when labor is constrained, the quality of workers available is low.
Yesterday’s bond rout has everyone looking for answers, but we do know Fed Chair Powell’s comments about taking the Federal Funds rate over the “neutral” rate, likely caused the computer algorithms to heavily short Treasuries. Any rapid move in the markets today is most likely coming from automated computer trading programs.
The market believes the “neutral” rate, where rates are not too loose but not too tight, is between 3.00-3.50%. The market responded by pushing short- and long-term yields higher to compensate. Those who understand the effects of the Fed’s balance sheet unwind on short-term rates already knows we are in the neutral rate today.
When yields rise liquidity in the market dries up which causes stock prices to fall. From what I can tell, most computer trading programs are 100% allocated to stocks. As stocks fall, those programs sell. To avoid further selling, traders started buying in late-morning trading to keep these programs from dumping stocks. If liquidity is drying up, there will be continued downward pressure on stocks, regardless of the news.
Despite all the talk that Treasury yields are headed to 4-6%, which they aren’t, trading volumes have been high on the Treasury ETFs. High volume during a sell-off is indication buyers are soaking up all the shares being sold. For the past couple of days, sellers had the upper hand. Today, buyers were putting a halt to the price drop.
I believe this last surge in yields is a blow-off top which is when the price of a security moves dramatically in a short period to pull in all the remaining buyers or sellers who have been sitting on the sideline waiting for an opportunity to enter the market. A decelerating money supply and falling monetary base are bearish for yields.
On Tuesday, agricultural commodities surged on a small short-squeeze. On Wednesday, short-sellers were back. Today, short-sellers found out there aren’t many other sellers and that those who recently bought, aren’t selling either. This is another potential sign a bottom is in.
Physical gold failed to hold above its 50-day moving average for the third day in a row. Large gold miners did find support, but (symbol GDX) continues to get rejected at $19 per share. The battle between the bears and bulls continues.
- What happened to the stock market on Friday?
The September Nonfarm Payrolls report showed +134,000 jobs created with upward revisions for July and August. According to the BLS, the economy has been creating on average, 200,000 jobs per month for the past six months. When adjusting for the BLS’s Birth-Death model, which factors newly created businesses, the six-month average falls to 76,000 jobs created per month.
Job growth is mostly coming out of the 25 and under group, which is made up of unskilled workers. Employers are looking for skilled labor to replace their retiring workers, but there just aren’t many left in the ranks of the unemployed. Wages increased +0.3% MoM, but hours worked fell. When factoring the number of hours, wages fell -0.6% MoM. Not exactly what needs to happen going into the critical holiday season.
The trade deficit widened to $53.2 billion and our deficit with China is now the largest it has ever been. Tariffs with China are expected to rise in January, but so far, the tariffs haven’t had the desired effect.
Short-sellers continue to pound on Treasuries as yields are now back where they were in 2013 as buyers gladly buy at increasingly lower levels. There isn’t any shortage of Treasury buyers in the market and with our trade deficit widening, foreign central banks will continue to buy our debt to recycle dollars back to the United States.
After nearly falling off a cliff, buyers came back in late trading to alleviate some of the day’s losses. The stock market is starting to feel the effects of a liquidity drain, which is evident by how stock prices try to rally, then just start falling. With the Fed continuing to tighten, this trend should continue.
After spiking in early trading, buyers once again came into the Treasury market in late-day trading. The “Smart Money” tends to wait until late in the day before buying. For all the claims there isn’t anyone who wants to buy U.S. government debt, the trading volumes certainly disagree. Large price moves on large volume are a sign of a large number of sellers and a large number of buyers. Higher interest rates have always broken every market, plus they also drain liquidity. This time won’t be different.
Physical gold finally broke over its 50-day moving average, but the gold miners sold off a bit. There is an appearance of a head-and-shoulders reversal pattern in the gold and silver miners. I am eagerly looking to see if this completes into a move higher where we can participate.
Agricultural commodities rallied today on average volume, which is an indication that sellers are tapped out. With a huge cold front moving into the Midwest region, crops are at risk for freeze damage. This should add to the bullish case in for crop prices.
Portfolio Shield™ Update –
The monthly rebalance went smoothly. There is a glitch in the Morningstar® Investment Detail report where the graph does not print correctly. I’ll post the updated report once Morningstar® corrects the problem.