WealthCycle example.pdf

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Wealth Cycle.
This chart is the most important chart to follow. It shows the wealth cycle which is the flow of capital
from commodities to equities and equities to commodities. So you will know which asset class to investing.
“UP” is deflationary in the wealth cycle and shows equities(SP500) are the investment to be in. “DOWN” is
inflationary in the wealth cycle and shows gold is the investment to be in. Turning points are around market
crashes so use the crash indicators to exit early. The cycle usually goes for ~10 or ~20 years, so expect to
pullout to cash at a crash every 10 years and then you will have to see if the choice is equities or gold for the
cycle. Following this chart will allow you to catch pull-backs on the large wealth cycle of SP500/Gold.
According to Baran (2013) stocks and commodities are negatively correlated.
Furthermore, Bannister and Forward (2002) found that equities and commodities alternate on leading the
market on average every eighten years (18-year cycles), which also corresponds to deflationary and inflationary
cycles. Periods of deflation are characterized by a boom in stocks and sound money (i.e. gold standard of
1879, Bretton Woods after WW2). These periods are followed by inflation, including inflationary events
such as the Gold nationalization of 1934, the Nixon shock of 1971, and war (WW1, WW2, Vietnam, Iraq).
Realizing their position in the cycle, in 2002 Bannister and Forward correctly predicted the outperformance
of commodities over the following years and the risk of war in the middle east.
Turning Points: (~18 year average)
* 1887(Gold standard begins in USA, Deflation and a boom in stocks follows)
* 1907(Panic of 1907, Inflation and WW1 followed. Boom in commodities)
* 1920(Commodity bubble bursts, Deflation and a boom in stocks follows)
* 1929(Stock market crash of 1929, Inflation and WW2 follow. Commodities rise)
* 1950(Commodities burst. Deflation and a boom in stocks follow)
* 1971(Nixon shock. Dollar devaluation. Vietnam war continues into 1970’s. Commodities rise)
* 1982(Interest rates peak. Deflation and a bull market is stocks begin)
* 2000(Tech bubble bursts. US wars in Afghanistan and Iraq. Commodities rise)
* 2009(Deflation and a bull market in stocks begins. Interest rates are at record lows)