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The Business Cycle And the Future

By Martin A. Armstrong

Princeton Economic Institute

September 26, 1999

For many years, I have pursued a field of study that is at best non-traditional. My discovery of a global
business cycle during the early 1970's was by no means intentional. As a youth growing up in the 1960's,
the atmosphere was anything but stable. I don’t really know if it was Hollywood that captivated my
interest in history with an endless series of movies about Roman and Greek history, but whatever it was
that drove me, I can only attest to what resulted.

My father had always wanted to return to Europe after serving under General Patton during the war. My
mother insisted that she would go only when he could afford to take the whole family. That day finally
came and something inside me insisted upon being able to earn my own spending money. I applied for a
job despite my age of only 14. It wasn’t much, but on weekends I worked with a coin/bullion dealer. In
those days, gold was illegal to buy or sell in bullion form so the industry centered on gold coins issued by

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Mexico, Hungary and Austria. I soon became familiar with the financial markets as they were starting to
emerge. It was this experience that began to conflict with the formal training of school.

One day in a history class, the teacher brought in an old black and white film entitled "Toast of the Town."
This film was about Jim Fisk and his attempt to corner the gold market in 1869 that created a major
financial panic in which the term "Black Friday" was first coined. In the film was a very young support
actor named Cary Grant who stood by the ticker tape machine reading off the latest gold prices. He read
the tape and exclaimed that gold had just reached $162 an ounce. I knew from my job that gold was
currently selling for $35. At first I thought that the price quote of $162 in the movie must be wrong. After
all, Hollywood wasn’t known for truthfulness. Nonetheless, I was compelled to go to the library to check
the newspapers of 1869 for myself. This first step in research left me stunned – the New York Times
verified $162 was correct.

For the first time in my life, I was faced with a paradox that seemed to conflict with traditional concepts.
How could gold be $162 in 1869 and yet be worth only $35 in the 1960's? Surely, inflation was supposed
to be linear. If a dollar was a lot of money in 1869, this meant that adjusted for inflation gold must have
been the equivalent of several thousand dollars. If value was not linear, then was anything linear?

I began exploring the field of economics on my own and reading the various debates over the existance of
a business cycle. Kondratieff was interesting for his vision of great waves of economic activity. Of course,
others argued that such oscillations were purely random. Over the years that followed, this nagging
question still bothered me. I had poured my heart and soul into history, quickly learning that all
civilizations rose and fell and there seemed to be no exception.

I was still not yet convinced that a business cycle was actually definable. Kondratieff’s work was indeed
interesting, but there was not enough data to say that it was in fact correct. On the other hand, it seemed
that the random theory crowd was somehow threatened by the notion that the business cycle might be
definable. After all, if the business cycle could be defined, then perhaps man’s intervention would not be
successful. Clearly, there was a large degree of self-interest in discouraging any attempt to define the
business cycle. I knew from my study of history that a non-professional German industrialist took Homer
and set out to disprove the academics who argued that Homer was merely a story for children. In the end,
that untrained believer in Homer discovered Troy and just about every other famous Greek city that was
not supposed to have existed beyond fable.

I didn’t know how to go about such a quest to find if the business cycle was definable. Admittedly, I
began with the very basic naive approach of simply adding up all the financial panics between 1683 and
1907 and dividing 224 years by the number of panics being 26 yielding 8.6 years. Well, this didn’t seem
to be very valid at first, but it did allow for a greater amount of data to be tested compared to merely 3
waves described by Kondratieff.

The more I began to back test this 8.6-year average, the more accurate it seemed to be. I spent countless
hours in libraries reading contemporary accounts of events around these dates. It soon became clear that
there were issues of intensity and shifts in public confidence. During some periods, society seemed to
distrust government and after a good boom bust cycle, sentiment shifted as people ran into the arms of
government for solutions. Politics seemed to ebb and flow in harmony with the business cycle. Destroy an
economy and someone like Hitler can rise to power very easily. If everyone is fat and happy, they will
elect to ignore drastic change preferring not to rock the boat.

The issue of intensity seemed to revolve around periods of 51.6 years, which was in reality a group of 6
individual business cycles of 8.6 years in length. Back testing into ancient history seemed to reveal that
the business cycle concept was alive and well during the Greek Empire as well as Rome and all others that

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followed. It was a natural step to see if one could project into the future and determine if its validity would
still hold up. Using 1929.75 as a reference point, major and minor turning points could then be projected
forward in time. For the most part, I merely observed and kept to myself this strange way of thinking. In
1976, one of these 8.6-year turning points was quickly approaching (1977.05). For the first time, I began
to use this model expecting a significant turn in the economy back toward inflation. My friends thought I
was mad. Everyone was talking about how another Great Depression was coming. The stock market had
crashed by 50% and OPEC seemed to be undermining everything. I rolled the dice and stuck to it and to
my amazement, inflation exploded right on cue as gold rallied from $103 to $875 by January 1980.

As my confidence in this model increased, I began to expand my research testing it against everything I
could find. It became clear, that turning points were definable, but the wildcard would always remain as a
combination of volatility and intensity. To solve that problem, much more sophisticated modeling became
necessary.

As the 51.6-year turning point approached (1981.35), there was no doubt in my mind that the intensity
would be monumental. Indeed, interest rates went crazy with prime reaching 22% and the discount rate
being pushed up to 17%. The government was attacking inflation so hard, they moved into overkill
causing a massive recession into the next half-cycle date of 1985.65. It was at this point in time that the
Plaza Accord gave birth of the G5. I tried to warn the US government that manipulating the currency
would set in motion a progressive trend toward higher volatility within the capital markets and the global
business cycle as a whole. They ignored me and claimed that until someone else had such a model, they
did not believe that volatility would be a concern.

The next quarter cycle turning point was arriving 1987.8 and the Crash of 1987 unfolded right on cue. It
was at this time that a truly amazing development took place. The target date of 1987.8 was precisely
October 19th, 1987 the day of the low. While individual models specifically based upon the stock market
were successful in pinpointing the high and low days, I did not think for one moment that a business cycle
that was derived from an average could pinpoint a precise day; it simply did not seem logical.

After 1987, I began to explore the possibility that coincidence should not be just assumed. I began
researching this model even more with the possibility that precision, no matter how illogical, might
possibly exist. I began viewing this business cycle not from a mere economic perspective, but from
physics and math. If this business cycle were indeed real, then perhaps other fields of science would hold
a clue to this mystery. Physics helped me understand the mechanism that would drive the business cycle
but mathematics would perhaps answer the quantitative mystery. I soon began to understand that the circle
is a perfect order. Clearly, major historical events that took place in conjunction with this model involved
the forces of nature as well. If this business cycle was significant, surely it must encompass something
more than the mere economic footprints of mankind throughout the ages.

The Mystery of 8.6

At first, 8.6 seemed to be a rather odd number that just didn’t fit mathematically. In trying to test the
validity of October 19th, 1987 being precise or coincidence, I stumbled upon something I never expected.
This is the first time I will reveal something that I discovered and kept secret for the last 13 years. The
total number of days within an 8.6-year business cycle was 3141. In reality, the 8.6-year cycle was equal
to p (Pi) * 1000. Suddenly, there was clearly more at work than mere coincidence. Through extending my
studies into physics, it became obvious that randomness was not a possibility. The number of variables
involved in projecting the future course of the business cycle was massive, but not completely impossible
given sufficient computer power and a truly comprehensive database. The relationship of 8.6 to p (Pi)
confirmed that indeed the business cycle was in fact a perfect natural cyclical phenomenon that warranted
further investigation. Indeed, the precision to a day appeared numerous times around the world in different

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markets. Both the 1994.25 and the 1998.55 turning points also produced clear events precisely to the day.
The probability of coincidence of so many targets being that precise to the day was well into the billions.
Indeed, the relationship of p to the business cycle demonstrated the existence of a perfect cycle that
returned to its point of origin where once again it would start anew. The complexity that arose was that
while the cycle could be measured and predicted, precisely which sector of the global economy would
become the focal point emerged as the new research challenge.

It was also clear that the driving forces behind the business cycle had shifted and intensified due to the
introduction of the floating exchange rate system back in 1971. My study into intensity and volatility
revealed that whenever the value of money became uncertain, inflation would rise dramatically as money
ceased to be a store of wealth. Numerous periods of debasements and floating exchange rate systems had
taken place throughout recorded history. The data available from Rome itself was a spectacular resource
for determining hard rules as to how capital responded to standard economic events of debasement and
inflation. The concept of Adam Smith’s Invisible Hand was valid, but even on a much grander scale
involving capital flow movement between competing economies. The overall intensity of the cycle was
decisively enhanced creating greater waves as measured by amplitude by the floating exchange system. As
currency values began to swing by 40% in 4-year intervals, the cycle intensified even further causing
currency swings of 40% within 2-year intervals and finally down to a matter of months following the July
20th, 1998 turning point.

The Domino Effect

The events that followed 1987 were all too easy to foresee. The G5 talked the dollar down by 40%
between 1985 and 1987 essentially telling foreign capital to get out. The Japanese obliged and their own
capital contraction led to the next bubble top at the peak of the 8.6-year cycle that was now due 1989.95.
As the Japanese took their money home for investment, the value of their currency rose as did their assets
thereby attracting global investment as well. Everyone was there in Tokyo in late 1989. Just about every
investment fund manager globally was touting the virtues of Japan. As the Japanese bubble peaked, capital
had acquired a taste for foreign investment. That now savvy pool of international investment capital
turned with an eye towards South East Asia. Right on cue, the capital shifted moving into South East Asia
for the duration of the next half-cycle of 4.3 years until it too reached its point of maximum intensity

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going into 1994.25. At this point, international capital began to shift again turning back to the United
States and Europe, thus causing the beginning of a new bull market in a similar manner to what had
happened in Japan. In fact, 1994.25 was once again the precise day of the low on the S&P 500 for that
year. As American and European investment returned home, the steady outflow of capital from South East
Asia finally led to the Asian Crisis in 1997. In both cases, Japan and South East Asia blamed outsiders and
sought to impose punitive measures to artificially support their markets. In Japan, these interventions have
left the Postal Savings Fund insolvent as public money was used to support the JGB market. Financial
institutions were encouraged to hide their losses and even employees from the Minister of Finance were
installed in some cases engaging in loss postponing transactions of every kind. Major life companies were
told not to hedge their risks for fear that this would make the markets decline even further. Thus, the
demise of Japan that would have been complete by 1994 was extended by government intervention that
has most likely resulted in a lengthening of the business cycle decline into 2002.85.

The next peak on the 8.6-year business cycle came in at 1998.55, which was precisely July 20th, 1998.
While the intensity was defined rather well by the model’s forecast of 6,000 on the Dow by the quarter-
cycle target of 1996.4 followed by 10,000 for 1998, the development of highly leveraged hedge funds
created a trap that was not fully anticipated. It was clear that the European markets had captured the
greatest intensity between 1996 and 1998 and that Russia too had reached our target for maximum
intensity. However, the excessive leveraging of funds like Long-Term Capital Management had
significantly created the peak in volume as well. Thus, the spread trades were so excessive, that the
collapse that was to be expected, took on a virus type of affect. As Russia moved into default, and LTCM
moved into default, the degree of leverage caused a cascade of liquidation that was spread around the
world. Everything became affected causing the collapse in liquidity and credit to further undermine the
global economy as a whole. Despite the new highs in US indices into 1999, the broader market has failed
to keep pace and the peak in both liquidity and volume remains clearly that of 1998.55.

The Future

While this business cycle can be calculated on quarter-cycle intervals of 2.15 years into the final peak for
this major wave formation of December 24th, 2032. Though this is long beyond my life expectancy, there
is so much more behind the true understanding of the driving forces within the business cycle. I have
learned that it is easy to claim coincidence and ignore the telltale signs of a hidden order. It is easy to
argue that there is no basis for such a model without ever making an effort to test results. If everyone
stopped with such criticism, most of ancient Greece would still be buried and Homer would still be
considered a book for children. Man would not fly or travel to the moon. A cure for cancer would not be
sought and progress would simply not exist. But furthering our understanding is part of humanity. Like
law, that when strictly enforced deprives society of justice when circumstances are ignored, it is also the
sin of ignorance toward new concepts that deprives mankind of progress and ultimately our posterity.

The Economic Confidence Model in 2.15-year intervals

1998.55... 07/20/98
2000.7.... 09/13/00
2002.85... 11/08/02
2005.... 01/02/05
2007.15... 02/27/07
2009.3... 04/23/09
2011.45... 06/18/11
2013.6... 08/12/13

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 2015.75... 10/07/15
2017.9... 12/01/17
2020.05... 01/26/20
2022.2... 03/22/22
2024.35... 05/16/24
2026.5... 07/11/26
2028.65... 09/04/28
2030.8... 10/30/30
2032.95... 12/24/32

The future that lies ahead will increasingly move ever greater toward intensity and volatility. Such periods
have always brought not merely great booms and busts, but they too hold in the palm of their hand the
thunderbolt of war. The economic future of Russia is one of such corruption and decay, that it too will rise
as the warlord who seeks to regain what he has lost. China too will eventually beat the drums of war as its
economy worsens and its leaders seek to hold the slippery reigns of power. Such periods of economic
strife will begin to grow in intensity particularly following 2002.85 and moving into 2007.15. Only when
economic chaos reaches a sudden state of eruption is it possible to see a successful revolution. The
government was not prepared in Indonesia. However, unless a complete shock takes place in China and
Russia, it is far more likely that these two nations will not fall to internal revolution but will seek to turn
the economic tides against their neighbors. These are basic facts of history that cannot be denied. War is
directly linked to the economic fate of mankind. Undermine the economy and you will create the next
Hitler.

During the American Revolution, World War I and World War II, the act of counterfeiting the currency of
your enemy was but one means of warfare intent upon undermining their economy. The dark side to
investigating the business cycle is clearly exposing the map through which an enemy can exploit your
economy at the precise moment of maximum intensity thereby creating the greatest amount of economic
instability. I suppose it is like splitting the atom. The power can be used to light a city or harnessed to
destroy it. We must always face that plus and minus no matter what field one seeks to explore.

The financial markets will contract globally. The untold hidden losses within the Japanese financial
system are slowly bubbling to the surface. However, as new mark-to-market rules approach on April 1st,
2001, the sins of the past will all be forced into the open light of day and those who have thought that
economic recovery was underway will be shocked by what they will still face. While the US market may
yet contract into 2000, the flicker of hope for one more rally into 2002.85 exists as long as the rest of the
world remains so uncertain. But for the US market to survive into 2002, it must also retest support going
into 2000. Without a pull back, the global instability will create a dangerous economic situation in the
years ahead. It is clear that a high in 2002/2003 for the US market may be followed by a crash, but the
shift in capital investment will then move back toward the tangible sectors that have been left behind.

In the next issue of the WCMR, the details of this business cycle will be expanded to provide a list of
turning points down to the 8.6-month interval. There is a wealth of knowledge that lies ahead if we are not
afraid to explore. Regularity of the business cycle does not mean that we lack free will. For it has taken
me 30 years of observation to get this far. The peak for one nation may be the low for another. For within
the scheme of global capital flows, not everyone can enjoy a boom simultaneously. For every gain in
trade, there must be someone who loses. This is simply the nature of the global economy. The greatest
booms unfold when capital concentrates in one sector. When that capital shifts, you also find the result of
the greatest financial panics in history. An individual will always possess the free will to follow the crowd
or strike out with his own independence to buck the trend. There will be those who believe in the business

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cycle and use it to their advantage just as there will be those who refuse to acknowledge its existence. As
long as not everyone believes, the cycle will exist forever. The regularity of the business cycle is not
determined by man alone; for within its deep calculations resides the very heart of nature itself. Like the
Biblical forecast of Joseph that seven years of plenty will be followed by seven years of famine,
understanding the nature of the business cycle can certainly enhance our ability to better manage our
affairs rather than constantly add to the intensity of the cycle through our own error of intervention. For
now, it is more likely that the politics will continue to act in the opposite direction of the cycle adding to
its intensity and enhancing its volatility. Perhaps I have been an evangelist seeking to point out that the
economy is like a rain forest – destroy one species and it will ripple through the entire system. The global
economy to me is the same delicate system that cannot be viewed in isolation, but only through its
collective integration. The failed labor policies of Europe have created perpetually high unemployment
and the worst record of economic growth for the past 30 years. Instead of objectively reviewing what has
happened, Europe seeks to federalize and strengthen the very controls that already exist. Communism and
socialism are all political byproducts of our failure to understand the business cycle. Blaming the rich,
your neighbor or a particular race are all vain quests to explain the cause of a cycle that has moved
through the boom bust phase. Who knows, perhaps it is possible that if for one moment we truly
understood the business cycle and worked in harmony with it, the possibility of reducing the amplitude
just might result in a more stable political-economy for all mankind.