The earliest cycle depicted on the graph experienced a 32 year expansion culiminating in the Roaring 20's. This euphoric party came to a crashing halt in 1929 with the DJIA correcting 89%. While the initial crash lasted 2.85 years, the contraction phase lasted 13 years until 1941 when the next expansion cycle began. The expansion phase represented 71% of the cycle's overall length. The entire cycle reprented a total of 45 years.Expansion returned in the early 40's as WWII occurred. As they say, there's nothing like a war to stimulate an economy and workforce. The post-war boom in the 50's was significant with growth occurring in most industries. The "happy days" of the 50's were good times for most. This expansion phase lasted 23 years until 1964. The inflection point between these two phases aligned with significant social disorder and crises. This contraction encompassed the hippie 60's, major racial conflict, assassinations of several major figureheads, and ended with the inflation and oil embargo of the 70's. The contraction phase last 15 years and represented 40% of the cycle time. These were challenging times and the entire cycle reprented a total of 38 years.
The current cycle kicked off the expansion in 1980. Carter's challenging presidency was coming to a abrupt ending, and Ronald Reagan was about to time the next expansion very well. The 80's and 90's represent what will likely be documented historically as the greatest credit expansion of all time. During this expansion, just about everything expanded with stocks reaching astronomical levels. The rise lasted 18 years until 1999 when the contraction phase began. The DotCom Era was the appropriate euphoric finale to an incredibly expansionary period. Many would argue that the expansion lasted until mid-2007 when the credit market imploded. The value of understanding this ratio has never been more significant. The stock market corrections commenced in 2000 and lasted for several years. The "last hurrah" in 2007 illustrates the power of the Federal Reserve's manipulation via the money supply. It's now obvious to all that this level was purely manipulated and that the DJIA/Gold ratio was telling a very different story. This last eight years also illustrates the forecasting strength of the ratio.
The $64,000 question now is "when does the contraction phase end?". Using the cycle lengths of the prior two cycles would indicate that this contraction phase could last 13-17 years. With a beginning in 1999, that puts an end somewhere in the 2012-16 timeframe. Note that in the first cycle, the DJIA bottomed in July 1932, but the next expansion did not commence for eight more years.
Several other observations can be made from this ratio over the past 100 years. The expansion phases appear to average 2/3's of the cycle while the contraction lasts 1/3. Growth appears to be gradual, while contraction is more abrupt. A second observation is that the expansion cycles continue to be shorter (32-23-18 years). The most recent expansion, while the shortest, had the steepest growth. The contraction after the Roaring 20's illustrates that a short rise is usually followed by a sharp fall. This time should be no different. The last observation is probably the most significant and timely. Over the three cycles, the "highs got higher" and the "lows got lower". If this trend continues for this contraction phase, the low could be frighteningly low. This being the "lowest low" in the past 100 years.
The prior posts in this series:
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