Financial Planning: the Narrative Fallacy

No event is unique, nothing is enacted but once…;
every event has been enacted is enacted, and will be enacted
perpetually; the same individuals have appeared, appear,
and will appear at every turn of the circle.

–Henri-Charles Puech

The single most egregious flaw in conventional financial planning is the failure to take important capital market cycles into consideration. Every culture, save what passes for culture on Wall Street, understands the cyclical nature of human behavior. Societies, and the financial systems that facilitate them, emerge, grow, and flourish. Then they denigrate, decay, and crash. Afterwards, they start back up again if there is anything worth saving from the collapse. There are times to be fully invested and times when the prospect of significant losses require holding cash.

The Chief Financial Strategist at the brokerage where we keep money market accounts tells clients they need exposure to risk. They do not. They need exposure to opportunity when there is such a thing, and protection from excessive risk when asset prices, like now, are overvalued in historical terms with the global economy burdened with excessive debt.

A sense of history is required to identify the progression of the cycle from an important low to a top and back again. There are a number of ways to ascertain the relative position of markets within the cycle. For me, the Elliot Wave Principal is the most useful because it notes that the phenomenon of cycles has two properties: 1) The very long term trend is up, but when a major cycle tops the ensuing losses are catastrophic, and 2) The overall pattern is fractal, that is, there are cycles within cycles-they occur in time durations as short as minutes and as long as centuries

For financial planning purposes, the two largest cycles must be accounted for: Supercycle, and Grand Supercycle. When either one of these is topping, investors should sharply curtail their investment holdings and hold cash until the cycles bottom again.

DJIA 1930 to now

 Above is the chart of the Dow Jones Industrial Average from 1890 to the present. A Supercycle topped in 1929 and the DJIA lost 89% of its value. It took twenty seven years for the average to regain the level of that top, but the losses were even greater as many of the companies in the average went bankrupt and were replaced by others. Since then, the market has experienced three upward moves and two retracements. These lesser cycles, called Cycles, rose out of the bottom in 1932, topped in 1937 and bottomed in 1942, rose from there, topped in 1966 and bottomed in 1974, rose from there and are now in a third topping area. Three Cycles bring on a Supercycle top. In the present instance, it is also the third Supercycle since the British market lows in 1722, the start of a Grand Supercycle. This top, then, is a Grand Supercycle top, an event none of us has any experience with.

For those interested in how the Elliott Wave Principle operates, I recommend getting in touch with the folks at Elliott Wave International ( When a cycle tops, it retraces back to the level of the fourth wave of the cycle of one lesser dimension. This is why the forecast is that the market will ultimately fall to the level of the 1929 peak, which was 390. Yes, three nine-o, one hell of a drop. Impossible to grasp, much less believe unless you put some time into studying the Wave Principle.

I was discussing this with a long time reader recently. She said, “Well, nothing is certain.” It was a fair response, but she did allow that, despite her very reasonable skepticism, her family’s investment position is eighty percent in cash equivalents. Bravo!

In a vain attempt to put lipstick on this pig, I will say that the species is bound to survive a Grand Supercycle crash, even though most people won’t know what hit ’em. Forewarned is better.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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