Long term interest rates are heading inexorably higher and the Australian dollar is coming down, according to one of the world's leading market analysts, Charles Nenner, head of research at the Charles Nenner Research Centre in Amsterdam.
Nenner, dubbed the "cycle guru" because he uses technical analysis to predict future market moves, has a huge following among hedge funds, investment bankers and brokers.
His reputation was enhanced after he correctly predicted the peak of the US share market in 2007. Now, in an interview with Business Spectator, he warns that US bonds have now entered a bear market.
Although Nenner says we might see small bounce in bond prices from this point, the low point for bond yields has already passed. (Bond prices move inversely to yields.)
“Rates will go higher”, he tells Business Spectator, “we've already seen the low in rates."
His first target is for the 10-year bond yield to climb to 4.3 per cent (from 3.7 per cent at present) while the yield on 30-year bonds will move to around 5.2 per cent (from its current level of 4.77 per cent).
At that point, he predicts the bond market will rally, with bond prices rising while yields drop back, because of fears over weakness in the US economy. After this rally, he predicts bond prices will fall, and bond yields will again push higher.
Bond yields have been rising recently, over concerns that the US Federal Reserve might scale back its bond buying in coming months.
But in making his forecasts, Nenner does not try to second guess the actions of the US central bank.
Instead, he argues that if you look at a graph of bond prices over the past 300 years, you see a perfect cycle – with exactly the same distance between the tops.
This, he says, is proof that even though economists and politicians like to believe they can influence the economic cycle, ultimately their actions ultimately have very little impact.
Nenner has also become much more cautious on the outlook for gold.
After going long on gold from $US400 per troy ounce, Nenner has since closed out his position.
Although he thinks the gold price will stage another rally into late February, he advises people who have not yet got out of gold to close their positions and to avoid taking on new positions. A close below $US1300/oz, he says, signals that gold is in trouble. (Gold is currently trading just above $US1,350 per troy ounce).
Longer term, however, he sees the gold price moving up towards an ultimate target of $US2,500/oz, but this could take two and a half years.
He's also wary about the US economy. Six month ago, Nenner predicted that the US economy would fool everybody by showing signs of strength, but that it would then deteriorate again. At present, the indicators are showing a rebound in economic activity, but Nenner believes that in a few months time, the US economic recovery will show signs of wilting.
Still, he says, the US unemployment rate is likely to continue to decline until 2013. Several months ago, Nenner predicted that the US unemployment rate – which was then close to 10 per cent – would start to fall. The US unemployment rate dipped to 9 per cent in January.
Nenner says he's mostly out of the US equity market, which he expects will gyrate this year, moving both to the upside and the downside. The next market correction is likely to begin in several days' time.
Further out, he expects a “major, major mess, with a major down movement” for equity markets starting in mid 2012, and extending through 2013 and 2014. This is likely to coincide with major global conflict in late 2012.
On the local front, Nenner says that he's been long on the Australian dollar since it was trading at 65 US cents, but he expects the currency will top out in mid February. “I think the Australian dollar is coming down”, he says.
However, he adds, this is likely to be a correction, rather than a sustained decline.
Nenner explains that according to Kondratieff cycles, growth is driven from a different part of the globe every 60 years.
At present, he says, Europe is at one end of the spectrum, the US is in the middle, while Australia, China and Singapore, which are all experiencing robust growth, are at the other end.
“I'm not too worried about Australia. It looks good,” he says.
But what about other favourite methods for predicting future share market moves?
For instance, some investors believe that share markets are more likely to post strong gains in the third year of the US presidential cycle (which we're currently in), as US leaders try to boost the economy to bolster their re-election prospects.
Others believe that a rise in the share market in the first five trading days of January makes it much more likely that share markets will end the year higher (the Dow Jones Industrial Average rose 0.8 per cent in the first five days this year). Still others contend that if the share market rises in the month of January, then the market will finish the year higher (US shares posted strong 3.5 per cent gains in the first month of this year).
Interestingly, Nenner says that he's looked at what has happened to markets when all these three of these elements have been positive over the past 100 years.
In 90 per cent of cases, he says, when all three indicators have been positive, share markets have finished the year higher. There were only two occasions when all three indicators were positive, but share markets finished the year lower.