We can take a look below chart of 10 year treasury rate vs SP500 since 1791 and help understand how long term interest rate cycles and what is the relationship between them.
For instance, in 1798-1835, LTIR went through the 1st down cycle wave(1DW). This is the reflection of US economy boom associated with territory expansion, including steam boats and Canal digging. Then followed by an up cycle from 1835 to 1861, which might be related to diminishing economic growth effect from technology advance and territory expansion.
This pattern repeated in 1861-1900 as a down cycle(2DW), then in 1900-1920 as an up cycle(1UW). This cycle was related to Industry Revolution with explosive railroad construction and machine replacing labor across all Industry; the following LTIR up cycle in 1900-1920 was a correction after the rapid growth era with chaotic economic and political situation in the world, which eventual triggered WWI.
US LTIR downturn didn't end until 1946, which was the end of 148 years super long LTIR down cycle and associated with bloodshed of WWII.
Even quick rising of LTIR from 1946 to 1981 (35 years) could be looked as a bouncing back of long trajectory of LTIR down trend.
If you think LTIR down wave in 1861-1900 (40 years) was associated a bouncing back wave in 1900-1920(20 years), and down wave in 1798-1835 (37 years) was associated with up wave in 1835-1861 (26 years), so down wave in 1798-1946(148 years) could be associated with a up wave in 1946-1981(35 years)! This conclusion seems more reasonable after LTIR hit historical low in 2012 and kept in a downtrend since then.
The LTIR down wave started in 1981 and continued with multiple sub down-waves with no foreseeable ending. Where is the LTIR standing in the overall long stretch down turn?
If history can provide any guidance to the future, we at least can follow the repeated pattern in history to make some educated guess, which may give us a vintage view on why LTIR behaved like this currently and what LTIR future trend may look like.
LTIR Historical Repeating Pattern
1. Down Trend Pattern
As we mentioned LTIR repeated long downward trend in 1798-1835 (37 years, 1DW) and 1861-1900(40 years, 2DW), then repeated short uptrend in 1835-1861(26 years, 1UW) and 1900-1920(20 years, 2UW). These are the reflection of technology advance in two waves, which pushed economy growth, so the money cost got cheaper, which explained the overall downtrend since 1798 and the shorter time period of LTIR uptrend compared with downtrend.
Technically speaking, 1st and 2nd DW could be further split into two downward sub-waves with longer timeline in 2nd sub-wave: 1798-1809(11 years) and 1815-1834(19 years) for 1DW and 1861-1875(14 years) and 1876-1900(24 years) for 2DW. So the two down waves followed by one up wave (2D1U) is the repeating pattern. It also can be observed in a larger scale: there were two 2D1U waves in 1798-1920, followed by a rapid down wave in 1920-1946, which included roaring 20's, Great Depression, and WWII, the following one uptrend wave ranged in 1946-1981(35 years), which is considered as bounce back the 1st super-up-wave (1SUW) against the 1st super-down-wave(1798-1946, 1SDW). Again, the pattern of 2D1U.
As we mentioned in the past, LTIR downtrend since 1981 is a starting wave of 2nd super-down-wave (2SDW) with the scale that may match 1SDW (1798-1946, 148 years)!
Of course, we don't know exact the path of 2SDW, but we have the hint from 1SDW. The 1st wave of 2SDW should have longer cycle time than 1st(37 Yrs) or 2nd DW(40 Yrs) as we noticed the extended duration from 37 to 40 years. Fundamentally, it makes sense as we know the technology advance is greater in 2nd DW. So the natural conclusion is the 3rd DW we currently experience should be longer than 40 years. this is because Information Revolution has larger impact than Industry Revolution(2DW). My expectation is 60-65 years for 3DW, followed by a bounce back waves(3UW) for 30 years. This means currently LTIR cycle won't end until 2040-2045, and followed by a LTIR uptrend wave from 2040 to 2070-2075.
Then if we are lucky and have another technology breakthrough, we may enter 4th DW with a scale that are even longer than the 3rd one if historical pattern is followed. These cycles are uncertain and so beyond our life span that it's almost meaningless for the discussion in this article. So let's figure out if 2040-2045 is a reasonable estimation for 3DW. The rational behind this estimation actually is based on the understanding of uptrend wave(1SUW) in 1946-1981.
2. Up Trend Pattern
When we examine the down turn wave pattern, a very reasonable question is if up trend could display similar 2U1D pattern, which is an opposite pattern in up waves.
This is a fundamental question about the nature of the interest rate movement, or even any human driven price movement. Based my observation, many academia's conclusion, and my common sense reasoning, I firmly believe these movement (LTIR and other prices) are fractal or chaotic systems. This means they have self-similarity across different time scale. The self-similarity applies to the shapes, waves, and patterns/rules they follow.
In order to understand LTIR uptrend structure, we need use Stock Index as reference to count LTIR cycle so LTIR uptrend pattern can be identified.
Stock Index (SI) Correlation with LTIR
As we mentioned before, SI movement is highly correlated to LTIR, so the SI trend waves can be used to benchmark LTIR waves, vise versa. The following analysis is based on SPX and 10 years Treasury Rate overlaid chart in 1791-2013.
Just by looking at trend line of SPX vs LTIR, we can easily see SPX leading LTIR for trend turning. this is illustrated in below table:
Table.1 SPX vs LTIR Trend Turning Year Comparison
Just think about why there's misalignment between SI and LTIR, which is the yield of SI. My opinion is SI price is leading the SI yield, which is more reflecting cost of money in current economy, just like SI is the leading indicator of the economy,
Does SPX follows 2+1(2U1D or 2D1U) LTIR waves? Based on my observation, the answer is yes. it's very obvious to find 2D1U, like one SI wave(1990-2007) had 3 SI up sub-waves in 1990-1994, 1994-2000, and 2002-2007, which was associated with 2 LTIR down waves(1990-2000) and 1 up wave(2003-2007). The 2D1U LTIR waves also can be found in 1932-1953: SI had 3 up sub-waves along with LTIR 2 down sub-waves(1932-1936, 1941-1946) and 1 up sub-wave(1946-1953).
The 2U1D LTIR pattern is a little tricky to find, like SI had 3 up sub-waves in 1953-1961, and repeated in 1962-1973. The 2 LTIR up sub-waves were very obvious in 1953-1958 and 1962-1968, but the 3rd LTIR down sub-wave was in 1960-1961 and 1969-1973, when LTIR didn't make new high, i.e., in a down trend, and SI made historical new high. so the LTIR up trend displayed 2U1D pattern, which is the opposite pattern to LTIR down trend.
Always bear in mind that this is a look back view, so when we look forward, we always see the uncertainty in the future. Although we identified many rules that is stationary in the past and could be applied to the cycle of SI and LTIR, we actually don't have the certainty for the future market movement. But the good news is these patterns can help us understand where we are in the market cycle and what's possibly laying ahead. For instance, after understanding the cycle in 1990-2008, which had 3 waves, based on SI and LTIR cycle and their correlation, we know that current market since Mar'2020 are in 3rd sub-wave of 2nd wave, which is characterized by rising inflation and LTIR, which is similar to the market in 1998-2000. But this cycle is going to longer than the prior one. The reason is because 3rd cycle displayed longer cycle time than 2nd wave, like SI super-cycle in 1932-1973 with 2nd wave in 1953-1961(8 years) and 3rd wave in 1962-1973(11 years). It also may be related to the level of LTIR: as LTIR level gets lower, the cycle time is getting longer, like 1st cycle in 1932-1953(21 years) with low LTIR level vs 3rd cycle in 1962-1973(11 years) with much higher LTIR level.
Although we don't have certainty for the duration of these waves, we at least have the some certainty for the existence of these waves. These trend and waves are so long term that they are hard to be changed by market volatility or human maneuver. So in long enough term, like >30 years, these wave and trend pattern became very stable. Compared with short term trend and wave, these long term patterns are more repeatable, displayed with self-similarity, just like any other fractal or chaotic system in mother nature.
As we went through this exercise, we use SI and LTIR as reference to benchmark each other, so we can identify what wave or stage of the cycle the SI or LTIR is on.
SI and LTIR Current and Future Trend
To understand the current, we need know the past. If you read above LTIR cycle analysis, you should know LTIR is in a mega down cycle since 1981, just like the cycle in 1798-1946. Although it looks obvious when you look the above SI vs LTIR chart. Additionally, since LTIR broke through new low in 2012, this confirmed that LTIR long term down trend is true and up trend in 1946-1981 is a bouncing back mega wave. This makes sense as the economic growth brought by Information Revolution is so massive that LTIR, i.e., money cost, will keep low in a very long time. So this down turn should be longer than last one, which was 40 years (1861-1900) long and driven by Industry Revolution.
Because of the 2+1 correlation between SI and LTIR, examining the SI waves in 1932-1974 with LTIR waves will shed lights on how the current SI waves progress since 1974.
Table. 4 SPX Up Waves vs LTIR Wave Trend in 1990-2007 (2nd wave)
Above table 4 and 5 are very comparable, and the similar wave structure also displayed within LTIR uptrend in 2nd wave(1953-1961) and 3rd wave(1962-1973) but the LTIR waves were in opposite direction.
This comparison make me believe that current market is very similar to the market in 1998-2000, which had rising inflation and interest rate in a much mild fashion though. Follow the same pattern, I expect LTIR 3rd up-wave since Mar'2020 should have similar duration as 2nd one, which ranged in Jul'2016-Oct'2018 (28 months). This means the uptrend since Mar'2020 should top around Jul'2022 with a couple of months variation. now we just saw LTIR 2 year's new high in June and will see if LTIR tops next month.
Although 1990-2000 and current cycle displayed similar waves, they also have many differences.
One is the different CPI environment. In 1990-2000, we can find mixed inflation and deflation pattern. for instance, from1990 to 1997, rising SI is associated with declining LTIR and declining SI is associated with rising LTIR, which is disinflation pattern. In 1998, the pattern became rising SI along with rising LTIR and declining SI was associated with declining LTIR, which is deflation pattern. In 1999-2000, the pattern became inflation pattern, which is rising LTIR no matter SI is rising or declining. But it quickly changed to deflation pattern in 2001 after recession hit.
If we check the 2009-2020, we always see the deflation pattern for SI and LTIR association. But since 2020 after Pandemic Recession, the same inflation pattern showed up, which is the same pattern in 1999-2000.
The other is that current cycle is much longer than 1990-2000 cycle. The 10 years cycle in 1990-2000 is definitely much shorter than the current cycle since 2009 and it's still on going with possible ending in 2024. If that's true, then current cycle is 5 years longer than previous compatible cycle.
Now if we assume the recession in 2024 will be similar as in 2000-2002, then the upcoming recession should end in 2026. The 3rd wave will be similar as 2nd wave in 2011-2024 with shorter duration, which is the pattern happened in 1994-2000(2nd wave) and 2002-2007(3rd wave).
If the pattern repeats, then the next SI cycle (3rd wave) could last 10 years with rising LTIR and inflation, which is the same pattern in 2002-2007. This means next 3rd wave may range from 2026 to 2036.
Once the SI 3rd wave is over, LTIR may plunge to new low and form the last down wave. This down wave could last 4-5 years from 2036. It will wrap up the super down wave cycle in 2041 and give the cycle time of 60 years (1981-2041)!
The above technical analysis seems confirming the aforementioned fundamental analysis: Industry Revolution brought in 40 years LTIR down cycle, and the Information Revolution bring us even longer LTIR down cycle of 60 years. Nobody would deny that Information Revolution started in 1980s has bigger impact than Industry Revolution, so does it impact on LTIR and its duration.
