Re: Current position in the K-wave (corrected)

> I have not read your book so I am not very clear about the details of your
> model. However, the above paragraph tells me that to characterize the
> present, say 1950 is the present, you are using future information spanning
> 1951-2000. In 1950, this information was unavailable. If your objective is to
> characterize the past up until 1950, which is also the past of 2001, in some
> manner, this is fine. But if your objective is to make projections into the
> future of 1950, although I am not sure whether this is the case, the above
> would be a problem.

You are quite right. The use of the 100 year trend is simply for locating turnings points of the past, after the fact. Future predictions are made using the stock cycle, which is characterized by dividing by a "true value" estimate. I use a construct I call price to business resources (P/R), which is sort of a constant dollar book value. P/R is quite similar to Tobin's Q, but easier to calculate. One can also use a conventional P/E using a trailing average of earnings rather than current earnings as Rober Shiller does in Irrational Exuberance.

> I plan to read your book and hopefully carry more informed discussions with
> you after that in private but before that let me ask you whether you have
> done any predictive validity tests of your model. From the above and the rest
> of your mail I am under the impression that you are working with yearly data.
> For example, have you ever run yearly(or longer period)-rolling forecasts of
> some kind after calibrating your model using information only from the past
> of your forecast date and see whether your hit rate is statistically
> significant or not?

Yes, for those portions of my work which are intended to be predictive (i.e. the Stock Cycle). There is a statistically significant correlation between future stock returns and the market valuation calculated by use of Shiller's P/E as Shiller has shown. A slightly better correlation is obtained using P/R. The advantage of P/R is it gave its sell signal in 1999 rather than 1997 (remember Greenspan's "irrational exuberance" speech?--that was based on Shiller's analysis).

Non-financial predictions are made using historical analogy once current position is established by the handful of tools that permit real-time application. Most of the cycles I present, necessarily can only be identified after the fact. Take a leading sector. A leading sector is only known to be such after it has grown to be important (that's how we know its leading). Only at this point will economists gather the data that allows one to construct a leading sector S curve and identify when the curve first emerged. This cannot be done in real time.

> Here is one more question pertaining what is below:
>
> >The Depression and World War II really threw a wrench into the cycles.
> >Government economic management that was introduced in response to
> >these events has produced the twentieth century price revolution and
> >practically eliminated the cycle in GDP. The cycle in stocks is stronger
> >than ever though. GDP is pretty useless for detecting the cycle today.
>
> The above is a description of a structural change in the system. Most likely,
> other structural changes had also occurred in the past. Indeed, there even
> were a few systemic changes, depending on how far back you go in the past.
> Have you ever looked at how such structural/systemic changes affect your
> model?

Yes. I can see effects of two changes that I associate with the financial revolution and industrialization. I use simple models (nothing new) for the three regimes between these two changes to describe why the shifts should occur.

The first change did not change the length of the cycle, but it changed the nature of the social response to the cycle. The second changed both. Prior to the late 17th century, upwaves (A phases) were "bad times" as indicated by rising levels of popular/labor unrest and crime. After the late 17th century downwaves (B phases) were the bad times. After ~1900 the patterns of social response align with Kondratiev seasons, not waves.

William Strauss and Neil Howe have identified a generational cycle in history they call the saeculum after the ancient Etruscan cycle. Each saeculum has four subperiods they call turnings. Two of these are eventful periods that they call social moments and two are not. Social moments and non-social moments alternate. My work shows that the social response to the K-cycle defines its own derived cycle that I call the Kondratiev-stress cycle (K-S cycle). The K-S cycle and the saeculum are aligned with greater than 99% significance. This means that one can characterize the K-cycle in terms of the turnings, which provide an independent non-economic measure. A K-cycle defined from Strauss and Howe's turnings aligns with Goldsteins K-cycles in a 99% statistically significant fashion.

Table 9.1 A comparison of the saeculum-defined K-cycle with Goldstein's Base Scheme

McGuiness/Strauss & Howe Saeculum		Goldstein's Base Dating Scheme		Strauss & Howe Saeculum		Goldstein's Base Dating Scheme
Trough	Peak	Trough	Peak	Trough	Peak	Trough	Peak
1305	1328	1286	1316	1621	1649	1621	1650
1348	1378	1338	1370	--	1727	1689	1720
--	--	1383	1392	1746	1773	1747	1762
1415	1445	1411	1439	1794	1822	1790	1814
1459	1487	1460	1483	1844	1860	1848	1872
1517	^--	1509	1529	--	1908	1893	1917
--	1542	1539	1559	1946	1984	1940	1980
1569	1594	1575	1595

So before the late 17th century we have social moments during upwave and after the late 17th century we have social moments duirng downwaves. This shift is hypothesized to be due to the financial revolution. Around 1900 another shift occurs, hypothesized to be due to industrialization. Now social moments are associated with Kondratiev summer and winter. That is, instead of two K-cycles falling into one saeculum (and one of Modelski and Thompson's leadership cycles) we have one K-cycle aligned with one saeculum and one leadership cycle. The saeculum abruptly shortens to its modern length of about 72 years, a phenomenon Strauss and Howe call the Civil War anomaly and for which they give a completely different explanation. The leadership cycle develops its own "world war anomaly" [why wasn't WW I followed by an American World Power phase as the leadership cycle calls for? Instead WW I was repeated as WW II and then we had American hegemony with a simultaneous Soviet challenge afterward]. Modelski and Thomspon don't give a reason for WW II, instead they lump the two wars together as one war. But WW I occurred at the wrong time in the saeculum, and so we had to wait for the right time (three decades later) for Americans to be willing to take on the role of hegemon. This did not change the leadership cycle, the Soviets were immediately willing to stive for regional dominance after WW II (a characteristic of the delegitimation phase). The saeculum would have been properly aligned had the saeculum not shortened at the Civil War. Had this happened then the 1920's and 1930's would have been a American world power phase and the German and Soviet struggle for regional hegemony in Europe in the 1940's a supplementary (not global) war.

Finally, the K-cycle has lengthened to about 72 years to be aligned with the saeculum on a 1:1 basis instead of 2:1. This transition was completed by the shock to the systems caused by the Depression and World II which brought about the changes in governmental management of the economy necessary to extend the cycle length.

What this means is the leadership cycle should now be about 72 years long. The last global war was WW I and the next one should be 72 years later or around 1990. Following this Global War we should see a new hegemon (or possibly the old one back for a second round like Britain after 1815) emerge and a period of "world power" in the 1990's and 2000's. That is, we should be living in an age of renewed hegemony today following the defeat of a challenger in a global showdown. I submit that this challenger was the Soviet Union; it was defeated at the end of the Cold War in 1991 and that the U.S. has come back for a second round of hegemony like Britain did after the Napoleonic challenge.

This stuff is in my second book, which I haven't submitted to the publisher yet.