LOOKING AT CYCLES
Cycles are based on only one data point - price - in each category. Therefore, through the unique spectrum of cycle analysis, reviewing the past major moves in these global macro areas have proven to be better indicators of future direction and level - and wealth preservation - than the traditional mix (i.e. 60% stocks, 30% bonds, 5% private equity, 5% currency and real estate). Cycle analysis takes into account repeating patterns from the past and assumes these patterns will continue. This means employing several thought processes and a revised construct for wealth preservation that are different from those used in the past.
First, cycle analysis teaches us that the news is not what is running the markets, cycles are.
Second, there is a growing sense the "craziness" and volatility of markets, not apparently explainable by fundamental research or earnings projections, is based on past patterns repeating. This provides comfort to those looking for explanations to market movements. Clearly, media sources around the world would like to explain it otherwise. However, it must be remembered the media is only concerned about one thing: selling advertising space.
Third, cycles govern macroeconomic indicators as well - unemployment, GDP, volatility, Institute for Supply Management figures, shipping activity, etc. This allows for a completely different world view in these areas.
Fourth, there is a tendency on the part of institutions, government funds and brokers to maintain a long bias, often mandated. Looking back over 30 years ago, a bond investment in the early 1980s, with 16% rates, and stocks, with the Dow at 1000, held until today would have been quite prescient. This teaches that stocks and bonds can move together, despite what many think.Bond cycles indicate a very long term reversal coming in a few years. Stock cycles are similar – topping in a few years. This will go against what many family offices are planning for (and the media as well).
We believe family offices would be wise to learn about the use of cycles in their planning. Take it from a family, the Rothschilds, who, a long time ago, decided to look back, even then, at patterns that could help plan for the future. In today's turbulent environment it would be wise for family offices to consider allocations of liquid assets based on cycles, which introduce an element of timing, rather than historical stock-bond allocations.