WOR interview: Larry Edelson on supercycles, emerging markets

Larry Edelson discusses record levels of national debt, proven economic cycles that signal decline in the U.S. and the rise of Asia, and his use of technical analysis for market forecasting.

 

This episode originally appeared on The Financial Quarterback with Josh Jalinski.

Summary:

“It’s going to hit the fan for the U.S. in a couple of years, right around 2017, 2018.”

Transcript:

Josh Jalinski: We are featuring songs from the Ed Sullivan Show and we’re introducing our special guest, Larry Edelson, who is joining us all the way from Thailand. Welcome, Larry. Are you enjoying the shores of Thailand? Where are you in Thailand?

Larry Edelson: Hi, Josh. Well, I get down there a couple times a year and yes, they have beautiful beaches.

Josh: And well I hope you’re enjoying it. Now, recently I read one of your reports that’s predicting some real turmoil around October 7 and, you know, the next couple weeks ahead. You potentially believe we’ll retest the lows in the stock market. That’s what’s on everybody’s mind. Where is the stock market going the next four weeks and obviously we don’t know every day. Things can change.

Larry: Right, right, right. Well, you know, Josh, the short term is always harder to forecast than the longer term and you know that said, for many months now I have been stating very publicly that the market was topping and headed lower in a mini … what I’m calling a mini bear market. Not a crash like we saw in 2000 or 2007 and 2008, 2009, but a reprieve from the market that we’ve seen since it bottomed back in 2009. It just has to happen because, you know, nothing ever goes straight up. I am a long-term bull on the stock market for reasons that most people would not even think of and maybe we can get to that later but in the short term yes, I do think we’re headed down to below the August lows over the next few weeks.

Josh: You’re thinking even as low as 13.9, 14,000 for the Dow?

Larry: Yes.

Josh: Is that correct?

Larry: That’s about the worst case.

Josh: That is in your Real Wealth Report. So that’s the worst case scenario.

Larry:  Correct.

Josh: Medium case scenario maybe what, retest the lows around 15.5 that we experienced in August?

Larry: Yeah, 15.5, maybe get down to 14.9, the $15,000 level, 15,000 Dow. That would be a moderate case.

Josh: Now, what is giving you that indication? I know you’re a cycle theorist and we’ve had some of them on recently. The reason being is the study of cycles based on …  I mean I research hundreds of people literally every week and the only people that got this sort of correction of the summer to the degree to which it was accurate that I read were not the traditional bulls, the fundamental guys. They were all the technical guys. Want to comment on how you were able to see that?

Larry: Well, I’m a technical guy. I’m a cycles guy. You can’t forecast economies or markets by fundamentals. You really can’t. Many people think they can but it’s really the other way around. The market is a barometer of how people feel. To the extent that that’s affected by fundamental news, okay, maybe you can forecast by fundamentals but more often than not, if you try to forecast by fundamental forces, you’re going to be on the wrong side of the market for the simple reason that things always look good when the market is doing well and the market is forward looking and conversely things always look the worst when the market is falling but that’s usually the end of that particular trend. So, you know, by its very nature fundamental forecasting is often wrong at major turning points.

Cycles, on the other hand, are the study of the emotions of populations, cultures, different economies, different countries which wax and wane and they’re measurable. So yeah, I’m a cycles guy and I’m a technician guy and, you know, very simply put, the market went up for almost six years without much of a pause. That is unsustainable. It’s just unsustainable.

Josh: Yeah.

Larry: And if you understand how markets work and it takes obviously a lot of experience trading and investing and managing money and studying the markets but the way markets work is in order for the market to go higher, it needs to pull back and refresh itself. It’s that simple.

Josh: Yeah, it just needs a reset button every once in a while. Now, you’re funda …

Larry: It needs to hit that button every once in a while.

Josh: You’re fundamentally bullish. Now, you mentioned technical analysis. What are some barometers or guides that our listeners could look for to gauge where the market kind of sentiment is going from a technical perspective and we’ve talked about this in the past. You could look at like the Dow Jones transportation average or something like that.

Larry: Uh-huh. Right.

Josh: But what are some of the things that you use?

Larry: Well, I use primarily simple bar charts and I use what are called action-reaction lines. I do some charting using the techniques of Dr. Alan Andrews who was an MIT physicist back in the early 1900s who was also an investor and discovered that for every action in the market there is a reaction and you can see them on a day-to-day basis. The market goes up, it pulls back. The market goes up, it pulls back. The market goes down and it rallies in a bear market. The market goes down and it rallies. It bounces. This is the nature of free market forces and I use that type of action-reaction analysis in the markets to determine what is the action for the upside and what is going to be the reaction to the downside as a result of A, above.

It’s a little bit difficult to explain to the layman but if you think in terms of radio waves or sine waves or frequencies, they oscillate. The markets oscillate as well. Economic statistics, whether it’s GDP or unemployment, oscillate as well. Everything fluctuates and when you start to become proficient in measuring those fluctuations you can then go to the next step which is forecasting and looking to the future. The problem with fundamentals is it’s backward looking. In order to look at the future, you have to look at the market or the data series that you’re studying, understand how it’s oscillating and then you can make projections into the future.

So that’s what I do in combination with a timing element which is the cycles. Cycles relates to timing. When is the expected high …

Josh: And kind of where are we headed in the cycle of market history. Now …

Larry: Well, there are many cycles. You know, there are many cycles but right now the short-term cycles are pointing down.

Josh: But the long-term …

Larry: The long-term cycles …

Josh: Pointing up.

Larry: … are still pointing higher.

Josh: Now, why are they pointing up? Is it are we going to have a QE4 next month if the market goes down to the degree you think it could? Is it … Where do you get sort of the moxie to say the Dow is going to hit 31,000 eventually?

Larry: Okay. Yeah, sure. Now, that’s where I … I always start with the technicals and the cyclicals as I just described to you and then I ask myself, well, if this is saying this, what fundamentals are in play that could fulfill that forecast? For example, my forecast within a couple years we’ll see Dow 31,000, what are going to be the fundamentals that will fulfill that forecast as you just said? Could it be QE4? Perhaps. Perhaps, we do know that Yellen held off on raising interest rates. She may hold off again. She may raise them again. We don’t know. Come October, November, December, she may decide to raise them.

So what other fundamentals then could be at play and if you look around the world today, Josh, the world is in a state of disarray. There is no question about that. You have Europe collapsing. Europe is in terrible shape. You have geopolitical strife all over the globe, from the refugee crisis which is also straining Europe’s finances to ISIS to tension between China and Japan over the South China Sea and the Spratly Islands to political discontent here in the United States as shown by Donald Trump’s popularity. He’s an outsider. He’s beholden to no one. He has yet to come out with any real economic policy other than his immigration but look how popular he is and what is that saying? It’s saying we’re sick and tired of career politicians.

So you look around the world and you gather up all this evidence and then you go back to the history books and you look at what’s unfolded before. My rationale for the Dow going to 31,000 is really very simple. The world is in a place very similar to where it was in 1932 to 1937 and I call it the other side of the Great Depression that no one tells you about. We all know the sad stories about the Great Depression and how miserable it was. But, what is not told is that between 1932 and 1937 all of Europe went bankrupt on their sovereign debt. They went belly up much like what’s happening today. We know about Greece but there’s many other Greeces in Europe. Okay? And between… Are you still there?

Josh: Yes.

Larry: Okay.

Josh: So, let’s pause for a break. We’re with Larry Edelson of moneyandmarkets.com and what’s your website, Larry.

Larry: It’s moneyandmarkets.com.

Josh: Moneyandmarkets.com. The Real Wealth Report is his journal. We’ll have him back for the next segment talking about the other side of the Great Depression that people don’t talk about and, folks, there is no better time than the present to get a second opinion on your wealth, so call us now. 888-988-JOSH, 888-988-5674. With all this uncertainty and opportunity, isn’t it time you get a second opinion on your wealth? 888-988-5674. We’ll be back after this.

“Don’t be Cruel” by Elvis Presley

Josh: A little Elvis. I always have a great listener who says you need to play more Elvis. So we got to get an Elvis hour back but this hour is featuring songs from the Ed Sullivan Show and we’re with Money and Markets, Larry Edelson talking about where he believes the market’s going short term and long term and you’re talking about a narrative between 1932 and 1937 where the market went up surprisingly. So go ahead.

Larry: Yeah.

Josh: So Europe is crashing.

Larry: Between 1932 and 1937, Josh, this is what people don’t, most people don’t know. As I said earlier, Europe was going bankrupt and as Europe went bankrupt, European capital wanted to get the heck out of Dodge, so to speak and it came pouring into our country, into the most liquid market available at the time which was the U.S. stock market. So the U.S. stock market between 1932 and 1937 rose 382% in the middle of the depression. We have the similar confluence of events occurring now. Europe is going bankrupt. Japan is also bankrupt, okay. Capital is pouring into the biggest market on the planet.

Josh: Yeah, Japan, people do not realize, Japan is a bigger problem than Greece, bigger problem than Brazil.

Larry: Oh, much bigger. Much bigger.

Josh: You know, probably on the same level as China. You want to comment on Japan? People don’t even understand.

Larry: Well, Japan has a host of problems. I mean we all know that, you know, it’s been in a recession, near depression since 1980 basically, since 1989 and despite all the money printing the Bank of Japan has done, you know, the economy largely still is stuck in the mud in deflation, okay. Japan’s economy is also a highly regulated economy which doesn’t help and then the third problem in Japan is the gentrification of the population. That is the Japanese population is shrinking because there are not enough new Japanese people being born and there are not enough young Japanese workers to support the aging Japanese population. So the government doesn’t have enough tax revenues to support the whole thing. So Japan is imploding and it’s merely a matter of time before Japan ends up like Greece.

Now, what’s going to happen to all that capital in Europe and in Japan? It’s going to go to the safest, deepest, most liquid markets in the world for safety and that’s not going to be U.S. Treasury bonds because they yield nothing and because we also know that there’s a giant debt bubble in the United States as well. This is almost an exact repeat of 1932 to 1937. It’s going to propel the Dow to 31, 32,000 over the next few years even as the U.S. economy muddles through at lukewarm at best.

Josh: Now …

Larry: And my main message to investors is don’t count on fundamentals right now. You know, GDP, all that isn’t going to matter. What really matters right now is capital flows from other parts of the world. They’re all pointing towards the U.S. That’s why the dollar’s rallying, the dollar’s becoming so strong.

Josh: So we’re really the least worst option but we’re still in bad shape. So, I mean …

Larry: We’re still in bad shape. That’s absolutely 100% correct, Josh. But we’re winning that ugly contest because everyone else is in such worse shape.

Josh: Now, isn’t that what’s guiding the Fed? I mean I listened one time, this was five years ago. Never forget it. I was in Switzerland at a conference for leading financial advisors and Scott Minerd of Guggenheim spoke and he used cycle theory to actually state that a lot of people at the Fed were going to surprise us and that the market was going to do things that nobody thought on the upside possible and …

Larry: Uh-huh.

Josh: … he was formerly a bearish guy and that really threw me for a loop having a bear turn bull and he used certain like Kuznets cycle and other things and he was saying a lot of that theorization is undergirding what the Fed’s doing where they’re trying to keep rates low long enough as far as the eye could see for us to sort of be that least bad option, take the capital inflows, and then we’ll be okay. So what’s your comment on that?

Larry: Well, I would generally agree with him. I’ve done a lot of work on the Kuznets cycle. There’s Juglar cycle, the Kitchin cycle, the Kondratieff wave. These are all well known, well established economic cycles. Each one has a little bit of a different term to it and affects different segments of the economy. But yes, there are certain conditions that develop on a cyclical basis that result in… Let me put it this way. They result in conditions and market moves that you would never expect given normal logic.

Josh: So the Fed could be seen as geniuses down the road even though people are having a hard time with it.

Larry: No. No, I don’t think they’ll ever be … The climate isn’t ripe for the Fed to be seen as geniuses because they’ve kept rates so low for so long that they’re actually penalizing savers. That’s what called financial repression and what it is is it’s a deliberate attempt by the government and central banks to basically …

Josh: Prop up the stock market.

Larry: … repress savers and confiscate their money to help pay off debt. That’s what’s going on. That’s why the Fed is keeping rates so low. But, you know, they’re also this time around as opposed to 1932, the Great Depression, acutely aware that we have a very serious condition overseas with Europe and Japan. So, you know, if they were to raise rates now, they would just attract capital to the United States like a magnet and that would push the dollar so high that we’d end up in a deflationary spiral. So they don’t want that to happen either.

Josh: And the emerging markets would get crushed, right, with a strong dollar.

Larry: They’re already starting to get crushed.

Josh: And they’re already having a problem. Now, on … In regard to your idea that the Dow is going up, down short term, up long term, how do you … You know, I got this question one time from a listener friend who said something like, you know, with analysts like you — no offense here — how do know, you know, it’s sort of like a broken clock is right twice and different things like that. You know, the forecasters always provide sort of red meat to the listener but where, you know, are you … How do you justify … Like, we’ve had four different cycle, three or four different cycle guys in the last month …

Larry: Uh-huh.

Josh: … and you each say things that are similar and these are some of the leading guys in the country and yet so different. So one guy is predicting okay, the euro is going to go up and, you know, long term and the U.S. is going to have another Great Depression. You seem to be saying the same thing, just in a different time period. So with these waves and cycles, it’s not just whether we’re in a bear market wave. It seems like that’s sort of evident to everyone. It’s what wave, intermediate wave we’re on within the supercycle wave. You know, and that’s where the debate comes where everybody’s kind of saying something similar. You’re all sort of bearish but you’re the most bullish of the four people that we’ve had on, you know, and I actually …

Larry: Yeah.

Josh: … my theory largely because the guy I heard who really drove this home for me years ago had this whole chart laid out from 2010 to about 2018 and virtually everything’s come true which is crazy and …

Larry: Uh-huh.

Josh: … he’s fundamentally bullish, you know, and I just see just looking at the same concept as you that we’re going to have a really horrible next four weeks but that November and December will probably surprise everybody on the upside more than they even realize and we’re going to talk about that after we return from the next break. Keep you on for one more segment and then, folks, if you have a question for Larry or myself, you can call us. We’re with Larry Edelson of moneyandmarkets.com and the Real Wealth Report and we’re going to talk more about, you know, how do you tell, you know, whose forecast is right. I mean obviously nobody can predict the future, you know. Everything’s subject to market risk and all those disclaimers that, you know, we’re not recommending you buy or sell anything. But, you know, how do you tell whose cycle is right? When we return.

This is Josh Jalinski, the Financial Quarterback and if you want to meet with me, we’ll be in Long Island; New York City; Short Hills, New Jersey; Toms River, New Jersey; Red Bank, New Jersey, all next week. So Long Island, New York City, North Jersey, Central Jersey, South Jersey. Give us a call, a couple spots left this week. We want to hear from you, want to meet with you. There’s no time like the present to get a second opinion on your wealth. If you call us within the next three minutes, you’ll get a copy of the book by Ed Slott, The 2015 Retirement Decisions Guide as a free gift but you need to call us now at 888-988-5674. 888-988-JOSH. We’ll be back after this.

“I Saw Her Standing There,” by The Beatles

Josh: “I Saw Her Standing There,” one of my favorite Beatles songs. What about you, Larry? What’s your favorite Beatles song?

Larry: Oh, just about all of them. That’s a hard one.

Josh: So, yeah. But so we were talking about there’s obviously different technical people. They all have different measures. How does the average listener kind of guide and everybody seemed to say oh, their track record’s correct. But the three guys we’ve had on, we’ve had you, we’ve had Tom McClellan, we’ve Eduardo Meirelles, a bunch of guys, Stan Harley. You all said hey, the market was going to go down this summer but then you’re all sort of saying different things going forward. What would guide the listener to know whose narrative is correct?

Larry: Oh, that’s a very subjective …

Josh: Yeah.

Larry: … question. You know, of course track record is important. But, you know, it has to fit with each individual investor. It has to fit with … When it comes down to it, you know, an investor picks an advisor or picks an investment based on a whole host of criteria unique to that person and their world view. So from that point of view, you know, each investor should learn as much as they can about who they might be following, read up on it, read up on cycles, economic cycles. You can Google and obtain lots of information about economic cycles and, you know, make their own determination.

Josh: Now …

Larry: There are a lot of good cycles guys out there. Perhaps the best in the world is a fellow named Martin Armstrong who I encourage everybody to Google and take a look at, one of the preeminent cycle researchers around.

Josh: Well, there’s definitely a lot to learn. Now, where do you get the divergence because this is … You know, basically the next three months are going to tell it all I believe. You know, who’s right in their theories. Why is it that I feel that you’re sort of right, that we’re going to have a hellish October and somewhere around the middle of October things are going to turn. I just feel that in my gut, I think because I’ve been just following this and reading these narratives for so long that I sort of almost have a consensus view in my head of different guests that I’ve had. Why is it that I’m feeling that? Is there… other than these cycles …

Larry: Well, I think that you’re probably in tune. You’re knowledgeable. You’re in tune. You talk to a lot of people. You have a world view. All those things are critical for success today and I encourage anyone who’s listening to this to really have a world view. America is still the largest economy in the world but the world is rapidly changing. Five years or less, China will be the largest economy in the world. There are vast political realignments going on in the world. All of Asia is becoming a very significant player on the world’s stage, China, of course, the largest. But even Southeast Asia is becoming a very significant player on the world’s stage. Emerging markets are really big players these days. Europe, meanwhile, is a basket case. All of these things, they correlate. You can’t just look at the U.S. economy and say okay, GDP is 3.9%. We’re doing fine. Okay, on the surface we’re doing fine. But there are threats and competition coming from all over the world. So you have to look at that and then you have to go back and look at history. History does repeat itself. It does indeed repeat itself. The actors may change but the…

Josh: Yeah and I guess what brings these cycles to some sort of, you know, theories. I mean if you look, even India, I read an article that likened the new president of India to Ronald Reagan in the ’80s and how, you know … So there are, like you said, actors may change. Want to comment on what’s going on India? Have you followed that at all?

Larry: Well, India is an enormous opportunity for the next several years. I would put India about 10 years behind China but it has a distinct, a unique cultural attribute that’ll put it on steroids so to speak and that’s the fact that everyone in India speaks English and then you have a new leader who’s Reagan-esque and free market oriented and that’s really going to be a tremendous boon to India. So, you know, there’s a lot going on in the world today and you have to have a sense of understanding, of looking out and not having blinders on you and looking at the world, seeing what’s happening and going back to history.

Josh: Because history is a great guide. Past performance is never indicative of future results but history sure does rhyme a lot with human nature and that’s what’s scary too. I mean I’m seeing this in nephews, nieces, kids that I know. The appeal of socialism in the U.S. has never been higher and that worries me as a study of economic markets. But you’re still bullish on the U.S. and that I think is the disconnect that … Final thoughts on what else makes you bullish other than that 1932 to 1937 narrative? We have about 30 seconds.

Larry: Well, what… Yeah, the fact is we still have the most liquid … You know, we have the largest debt in the world. In addition to our $18 trillion national debt, we have $200 trillion in unfunded liabilities, okay. Our dollar denominated debt is spread out all over the world. That means that we’re, on the one side — it’s a two sided coin — on the one side it’s a negative for the U.S. economy and for the government, for Washington but on the flip side is it’s hard for the rest of the world when it has troubles to go anywhere else but to the U.S. dollar for safety and U.S. markets. It makes our markets the deepest, most liquid markets and refuge on the planet. It’s a double edged sword and, you know …

Josh: Well, great segment and interview.

Larry: We’re ultimately — let me just say one thing — I can’t use the word but it’s going to hit the fan for the U.S. in a couple of years, right around 2017, 2018. Then our bubble will burst and it will speed back in the other direction.

Josh: No, yeah and I definitely see that and that’s important. You’re not fundamentally bullish. You’re bearish within a cyclical bull over the next couple of years.

So, great interview. Larry Edelson of moneyandmarkets.com, Real Wealth Report and thanks. I hope to have you again on in the future and, folks, we’ll take our final break of the hour.