Revisiting the 18 yr cycle theory

It's been awhile -- too long really, but this market is somewhat dull and I guess my interest languished. The US market has thrived on corporate profitability and an improving economic landscape, as well as benefited from being the one stable bet in the world (China with a too hot to touch economy and Europe with some of its members falling apart and no strong central government to force them to shape up). So you're left with an outperforming US market that should continue to outperform really - that should benefit from 0.25% savings rates at banks and the security blanket of the trillion dollar debt and its comforting and arguably stimulative effects.

But how did we get to this point?

It's been an incredible ride really, the past 18 months. We've gone from a stable market, to one that witnessed goliath corporations decry bankruptcy, other goliath corporations beg for and receive government salvation from bankruptcy, the resurgence of American corporate savvy and profitability, and now a world where America appears to stand strongest amidst a more capitalist China and European sovereign debt issues that mimic the over-leveraged nature of the US just years ago.

And here we are at Dow 10,800-ish.

I find myself remembering a post from October 2009, describing the theory of the 18 year cycle, and I'm starting to wonder if that might not be too crazy after all. You might remember, the theory states that you'll have 18 years of robust growth and easy money followed by 18 years of sideways market moves and profitability that results from true investor savviness.

The years 1982-2000 = easy money. Throw a dart and you wouldn't done well. The market climbed from around 875 to 10,800.
The years 1965-1982 = sideways moving market that started around 850 on the Dow and ended around 875 (That's a 0.3% return per year I believe).

Now, the present day. The market started 2000 around 10,800 and, by this theory, should be at that level around mid-2017. The market is CURRENTLY around the 10,800 level. So is this a crazy idea? Maybe.

After all, right now you have avoided European collapse for another year or two. Avoided severe US debt issues for another few years. Endured and stabilized a housing tragedy. Corporate balance sheets and profitability are in excellent order. And with treasuries paying such low returns, the American stock market is literally the last resort recipient of people's savings. People and their retirements can't afford to earn 0.25% a year in a savings account.

So, truley the market should experience positive - albeit historically mild - gain for the rest of the year and apparently 2011. But the thing is -- the European debt issues must be dealt with. The US debt issue was merely transferred from private bank balance sheets to the public/government balance sheet. It has no where else to go. Also, consumers are still only saving at a 3% rate - maybe not because of excess now but rather b/c they have no choice and are using all funds to pay bills and buy "necessities". But still, savings is minimal - which means a constrained consumer going forward as well as a risky one that is vulnerable to being over-leveraged....again.

In other words, the Chinese economy has too slow down at some point or else it will pop even harder later. The American debt issues have to be addressed via higher taxes or later retirement ages (or both) at some point or we'll have a Grecian situation.

Maybe that's why it takes 18 yrs to return to robust growth. If I've learned anything in the past 2 years its that people love to delay pain and will do anything they can to avoid it. That means that the day of reckoning and adjustment is only prolonged. So maybe it takes 18 yrs and multiple shoes dropping to force everything to be cleaned out of the system properly -- and only then to foster an 18 yr period of positive, clean and robust growth.