85 The Cycles of Financial Markets with David Gurwitz of Charles Nenner Research Center - 1of2

Niels

Welcome to Top Traders Unplugged, where my goal is to give you the clarity, confidence and courage you need to invest like or invest with one of the top traders in the world. It is the stories that you never get to hear set out as the most honest and transparent account that I can make of what goes on inside the minds of some of the best investors in the world. Today you’re listening to episode 85. If this is your first episode you’ve heard, you might want to go back and listen to all the earlier conversations.

David

This is David Gurwitz, Managing Director of the Charles Nenner Research Center, and you’re listening to Top Traders Unplugged.

Niels

Thank you for doing this, David. By the way, if you want to read the full transcript of today’s episode, just visit the TOPTRADERSUNPLUGGED.COM website and sign up by clicking “I’m In” in the top right corner, it’s that simple. Now let’s get started with part one of my conversation. I hope you will enjoy it.

David, thank you so much for being with us today. I really appreciate your time.

David

You know it’s my pleasure. We’ve known each other several years, and I’m reallylooking forward to having this conversation.

Niels

Fantastic. Now, David, you’re just my second guest who works with predicting where markets are heading as opposed to managing money, using systematic rules, or discretionary input. In many ways your approach is very similar since you are only looking at data to make your predictions, and you do it in a very quantitative way, like many of my previous guests. Also, you’re not trying to predict what causes the markets to move in a certain direction as you base all your research on cycle analysis.

So we will get into all the details of the cycles and how and why they form, but I wanted the listeners to know as you rightly said, from the beginning, that you and I have had interactions before. In fact, I have been a subscriber to your services a few years back. As far as I recall it is important for me to always say to people that I bring you on because I believe in your work, and I feel that this is something that will add value for all types of investors, and that’s what my podcast is all about. In fact, my only other guest who falls into the same category as you namely Mahendra Sharma, he’s actually one of the most popular episodes on my podcast.

So I’m really excited about our conversation today. It will be very different to the usual format as instead of talking about investment methodologies and concepts, we’re going to talk about very market specific terms and share some of your predictions at a time where we will definitely very soon know what is going to happen here in Europe where Greece is about to have a referendum.

So we’re going to try to cover all the major sectors, some world events and people will get a feel for, at least what you are seeing in the time ahead. Of course some of the listeners will be stunned to hear what you say and frankly many will probably be very skeptical about the concept, but let’s just see if we can’t convince a few of the people to be open-minded about your methodology and the fact that you have, indeed, for more than a decade, made predictions about financial markets and other things that have had a very accurate track record.

But before we jump into all that good stuff, David I just want to ask you a simple question that I try to ask all my guests to appreciate the many different answers you get. It goes something like this if you meet someone for the first time who hasn’t met you before, and they ask what you do, how do you explain what you do?

David

Well it’s a great question because in the world of diminishing attention span you have about 40 seconds there, so now you have 10. Being that I’ve been in the media quite a bit, and they’re going to interrupt me after 27 seconds, I have my 27-second answer. Hopefully, I can get to 10. The answer is… don’t start counting yet until I say OK go… The answer is that I’m Managing Director of Charles Nenner Research Center, founded by Charles Nenner who was at Goldman for 15 years and he came up with a system to predict markets and other things, based on repeating patterns. That’s it. That’s the 10-second answer.

Now it works for stocks, bonds, commodities, currencies, and economic indicators. It also works for intake rates of insane asylums, and hemlines, and records, and all that stuff because the assumption is that patterns repeat. The Focus is on cycles that come from now that we’re in the week of the Greek, waiting, the Greek drama, the cycle comes from the Greek word meaning circle.

Our basic philosophy – Charles came up with this while in medical school, was that top to tops in any data series (and I’m going to explain that obviously) when they are looked at in a different way (which I’ll explain also) can help predict the future. That’s it in a nutshell. We’re not talking about duration, level things, so that’s kind of what we do. We don’t manage money, which is unusual for your interviewees who are all, so far except for the other person you mentioned and myself; they actually press buttons to buy and sell. We don’t.

I’m always amazed that people do that, and I’m glad they do. I’m glad we don’t. We just predict where we see things are going to go or not go. We’re human, so it’s not always right. I want to put that on the table. It’s usually right, and there’s a large audience.

There’re 8 billion people in the world. There are Sovereign Wealth Funds; we have several of those. They have a rather large amount of money. There are family offices. There are many, many thousands of those. We have quite a few of those as clients. There are hedge funds. We have many of those. There are individual traders, and there are institutions.

So each one of those categories requires a different thought process and a different way of dealing with them. Some are stock focused; bond focused, commodity-focused, currency focused, global macro, everything. So our system, which we’ll get into, I think has been somewhat helpful to all the different categories and we’ll get into it as we talk, and I look forward to it because you and I… you have been a client for many years and again, I’ll stress the European piece of this. Charles is from Amsterdam.

Niels

I’m actually going to interrupt you there, David, because you are streaming way ahead of me and all my notes here, so in order for me to keep up I’m going to stop you because I do want to hear the background of you and I do want to hear the background of Charles just to stick with my normal script. So before we get into too much of the business, and all the cycles and all of that, let’s stay with you and Charles and tell me about… You decide who you want to talk about first, yourself or Charles, but let’s hear the background.

As in the other guests that I have had on board who manage money, who produce a track record, my personal belief is that you can’t understand the numbers if you don’t know the story behind them. So I definitely want to know the story behind Charles and yourself and then we get into all the great stuff. So please take the floor again and tell us about you and Charles.

David

So I… I’ll start with me briefly because there’s much more to say about Charles. He’s much more interesting. I’m an attorney and a CPA and an MBA. I have three degrees so people think that I know stuff and that which I would disagree. I went to College in Boston, and then play semi-professional basketball in Spain, where I learned Spanish in 1976. I’ll say it in Spanish, “un año después de la muerte de Franco,” one year after Franco died.

So I’m somewhat European focused for a kid from the Bronx, New York. I grew up by Yankee Stadium. When I talk to Europeans, they do know what Yankee Stadium is, so I can mention it.

So I was in Europe, and then I came back and went to Law School and I worked for an accounting firm. I got my CPA from Coopers & Lybrand, and my MBA from NYU, formerly known as NYU Business School, now is known as Leonard Stern Business School. He gave a lot of money, and they changed the name.

Niels

It’s funny how that works.

David

It’s funny about that. Several years ago I ran into him in an elevator, maybe 15 years ago. I met my wife in front of the elevator at NYU Business School. She was just finishing her MBA, and I was just starting mine. Coopers & Lybrand sent me to go take thecourse while I was doing expatriate tax returns. I was working from six in the morning until eleven at night between work and school. I learned a lot. Hard work never bothered anybody. That much we can put on the table.

So I saw Leonard Stern years later, and I saw him in the elevator and I knew it was him and I went up to him and I thanked him. I said, “Look, I went to this school that’s got your name, and I met my wife.” He right away said you should pay me a commission. So I smiled, “I said you got three billion,” I pulled out a ten dollar bill, he said that’s OK I’ll let you slide this time.

So I went to business school. I worked at Coopers & Lybrand; I was involved in several different industries before. I actually, many, many years ago the founders of Highbridge, Dubin and Sueca, they’re friends of mine and back in the old days, Paul Tudor Jones and Lewis and Zack Bacon were, in ’85 ’86 ’87 were not managing the kind of money they’re managing now, right? We’re talking pooled futures trading is what it was called back then. Wrap accounts, you know? So I know about that stuff, and we were a little involved with it,so I knew that side of the business.

I never thought about research. Frankly, I don’t think to this day people think about research, and here we are in one of the biggest in the world. Research is a whole other thing. So I knew the world back then and I met Charles about fifteen years ago, after I had been involved with some real operating businesses with real stuff: trucking and supply distribution, and manufacturing, and I met him and I have to talk about sports a little bit now.

I’m a trained athlete. I tried out with a pro baseball team when I was fifteen, and I play semi-pro basketball in Madrid. That’s why I was there, 1976, ’77, and I was trained by a gentleman named Red Auerbach, who may not mean anything to Europeans, but he put together the Boston Celtics in the old days. For 30 years, they were always really great teams. He picked great people. He coached them, and I was trained by him.

I knew him quite well, there’s a whole story about how I knew him, and I was and still am a talent scout. I think that’s a real talent in and of itself to know how good other people are or aren’t, which means you have to know yourself and your own limitations to be able to look at how good someone else is. You can’t have a big ego. If you have a big ego, it’s hard torecognize the talent in others, being that I’m not 42 anymore. I find that talent can continue to grow. So I met Charles about 15 years ago, and I knew he was extremely bright.

Niels

How did you meet him, I’m just curious?

David

I moved to a community north of New York City, and he was living there and I was introduced and again, I met him and I was asking him, “What do you do?” He said, “I’m a doctor, “ and I said, “Really? Where to you work?” He said, “Goldman Sachs.” I said, “OK.” Here I am the sports guy, Bronx kid, “Does that mean when they’re trading and they sprain their ankle they put him on crutches and bring him down to your office and you tape them up?” Because that’s what a doctor would do at Goldman Sachs.

He said, “No, I tell them how to trade.” Yeah, I didn’t make fun of him because I think if someone says something, they may be right. So I said, “OK, you tell them how to trade.” This was two in the afternoon on a Tuesday. He looked at me, and he said in his Dutch accent (he speaks eight languages or something) he said, “I guess you don’t believe me?” I said, “No, it sounds like it could be true.” He said, “next week we drive down.”

So we drove down to lower Manhattan, and we park and we go into a building down there and it’s a Goldman Sachs building and he walks in and he had a pass that said Charles Nenner, Goldman Sachs, so I said, “You know, I’m starting to believe you.”

They said, “Hello Mr. Nenner.” We get in the elevator, and we go up to whatever, the seventeenth floor. Someone else says, “Hi Mr. Nenner.” I guess they didn’t see him that often and I’ll tell you why in a second, and we walk into this monster trading room that’s from the movie Wall Street, Michael Douglas wasn’t there but everybody else in the movie was there. It’s Goldman Sachs back then when they really were a hedge fund. They’re not anymore, but I think they really were then.

I’m walking in with Charles. This was fifteen years ago. He had a laptop. It was a little slower than they are today, dos program. Cycles, just like we do now, which we’ll talk about. As we walk by people are like giving him a standing ovation. We walked into some office there; I’m not going to mention any names, “Hey Charles, how you doing?” Turns out he was really working for them. He didn’t need to go in. He worked at home, got up at four in the morning. Things were much slower then. So he had to get up earlier. Now it’s so much faster, obviously.

He was supporting the bond desk, the prop trading desk and other parts of the firm on his system, which I’m going to explain, and he was an independent. He was not an employee, but he was full time there. I was able to start a business with him afterward. I somehow got him into the Wall Street Journal, and a person named Greg Zuckerman, who wrote the book about The Great Trade, John Paulson, The Greatest Trade Ever. So he wrote the first story about Charles and then CNBC, which we’ll talk about, picked it up and that’s how the business got started.

Niels

That’s a great story.

David

It’s a really interesting story. So I was Red Auerbach. I picked up Larry Bird, and Bill Russel. You’re European, so I don’t know if you know these people. It’s like mentioning Pele, you know. So that’s how it started. It was me, the kid from the Bronx causing the trouble. I’ve been that way since I was seven, so nothing’s changed. We built a very nice business. We have clients all over the world. We don’t manage money. We send out a report, which you have gotten on stocks, bonds, commodities, currencies, and economic indicators, Monday, Wednesday, Friday, and then charts on Sunday, which we’ll talk about in detail now. That’s how the business got started.

He’s Dutch, so I actually knew why the Dutch have wooden shoes. Nobody knows thatbecause things called water. It’s a country that’s under water. So the mindset of the Dutch, look I’m talking to a European, so you understand it better than I, but my father was from Poland and he fought for the Russian Army, so I grew up with a European mentality. So I work with Charles I understand the European mentality. The Dutch have to think about if you don’t protect the country we’re going to be in trouble. We’re going to drown, because the country is under water, so that’s why Dutch… so it’s a mindset that he has about protecting the downside. That’s the main thing to the system. It’s great to make a lot of money; you can lose a lot of money. We’ve seen it all the time, and so the main thing is to avoid going against the cycles. That’s the starting point. Then everybody is different. We’ll talk about it all. That’s like the starting point to our background.

Niels

Absolutely, great, excellent, I appreciate that.

Now before we go into the detailed forecast for 2015 we need to talk about what cycles really are and why they work and certainly in my past and in my career, I’ve come across people who have, to some extent convinced me that things are not random and that time is more important than price. When you’re in the market and you know it’s time to get out of a long or a short position, it doesn’t really matter what the price is because you just need to get out. So I’m not an expert, so I’m going to learn a lot from our conversation today. Am I on the right path in that’s the way you view it as well, that time is more important than price?

I do know that you combine these things as well, which I’m also interested in exploring and learning about, but why don’t you talk a little bit about cycles from a very sort of bottom-up point of view?

David

OK. You asked about four questions at once, which I love. So I’m going to try and break it down, one by one.

Niels

So I’m doing it in the non-CNBC way. I ask four questions, and then I shut up.

David

We’ll get to CNBC, we’ll get to them, believe me. Let’s start with them now because I’ve been in the media 100 times. The media gives you 35 seconds to speak, and most of the time they’ll ask in advance what’s your big call: I want the big story. Sometimes there’s no big story. Sometimes things are sideways, right? We’ll talk about Greece in a second, but they have to sell news. The media and the statements made in it isn’t business. The business is, as you have seen, very detailed this is cycles of topping, bottoming, here’s our level, here’s our direction in S&P, NASDAQ, DOW, the DAX, the AEX, the FTSE, the VIX the TSX, we’ve got people all over the world that need to know this stuff. The bonds, the 30 year, the 10 year, the TLT – the long bond fund, TBT – the short bond fund, Bunds which obviously Americans don’t know.

Niels

But we do.

David

German Bunds, I’m ahead of it.

Niels

Exactly.

David

I’m American, I’m the English guy, so I edit everything because it’s sometimes written in Dutch English. I edit it, and I always write German Bunds, because I know, you can laugh at this, but you know we’re just Americans, and we have our limitations, right? They don’t know what Bunds are. A limitation, one of the things that people love about us is we’re brutally honest.

Niels

Yeah, that’s what it’s all about.

David

I remember when I was younger, and the teacher said, “David, you’re not a good liar. You’ve got to be really smart to be a good liar because you have to remember everything. If you just tell the truth and that’s it.” I was eight or nine I said, “You know, that makes sense to me.”

So, then we talk Crude, Nat Gas, and we cover four currencies: the Euro, the Yen, the Aussie, the Canadian and the Dollar. That’s during the week. That’s the pizza we write three times a week and then on weekends we cover for everything else. So in the course of a month you’ll see everything in the whole world: China and the NIKKEI and the SENSEI in India, and all that stuff because we’ve got people all over the world.

Let me tell you how Charles started the business.

Niels

Yeah, that’s fascinating.

David

How he started the business because that explains what cycles are. I mentioned before the Greek word circle is cycle. You all know about the three-month weather cycle, the seasons, everybody knows that and everyone thinks of a Presidential cycle every four years, everybody knows that. What Charles did, let me tell you how he came into this and then you’ll understand how we do it.

So he goes to medical school in Amsterdam in the late seventies. He had been a high-level chess player and a trained violinist from Itzhak Stern, and many languages, and he had studied martial arts and he was a very talented man, very talented man. He’s in medical school and the professor said they don’t understand why certain psychotic behavior seems to show up around the world always at the same time. Let me hold that aside.

A month earlier the same professor had said, we find that around the world, emergency rooms put more doctors on call during a full moon because women give birth more often during a full moon. That makes sense. There’s some cause and effect. It’s interesting, one of the Hebrew words for moon is the same word as the word for womb. So there’s a connection, full moon, and womb. Cabalistically let’s go there for a sec, right?

That makes sense. So a month later this same professor said we’ve got this psychotic behavior pattern we don’t know why and Charles said he raised his hand and said, “It must be during a full moon.” And the professor said, Mr. Nenner, what do you think that we didn’t think of that? We checked it, and we don’t know why it didn’t correspond. So he scratches his head, and he says, “OK, maybe there’s some reason I don’t know why.”

He came to New York with a friend in the early 80s, and the friend had some meetings and there was a show on back then. There were no business shows, there was no internet, there were no business shows, and a man by the name of Neil Cavuto who’s I guess still on Fox News now, got up and said IBM I forgot is either topping or bottoming because of this. Charles didn’t know anything and he said, how do you know why it’s topping or bottoming? And he said, maybe there’s some pattern people don’t know. You can’t say because earnings are this. So he goes down to the 42nd Street Library.

Have you been to Manhattan?

Niels

Yes, but it’s been awhile.

David

Right at 42nd and 5th there’s a big Library. A big park used to be the place where the aqueduct from Manhattan was. The border was all hell at that spot. So he went in, and he asked the Librarian can I have the last three or four years’ worth of Wall Street Journals. I want to look at IBM prices. It took a while to pull them out. There was nointernet, it was all paper.

By hand he started to track and see there was a top every seven weeks, let’s say. Different prices obviously, but a top every eleven weeks, a top every eighteen, a top every twenty-four, a top every forty, so he charted it all on a piece of paper and he found all of those “cycle tops” were topping that week he happened to have been in New York and that’s the reason he figured was the top at IBM, not the reason Neil Cavuto gave.

So he said that must be how everything works. That if you look at many cycles and where they all confluencing as we say in English, where they’re all lining up, it must be that all those cycles are indicating a top. Now a lot of times. Imagine you go take an EKG to get your heart checked, let’s say you overlay them. That’s a great word for traders, overlaybecause we’re like the overlay to a lot of other trading…

A lot of traders, some of the people that you’ve interviewed who were some clients, they use their own systems, and we’re just part of that. They use us to see if we agree with them. We’ll talk about that later, so if you overlay cycles one on top of another going back as long as you can, and the more information, the better. That’s how the cycle system works. We’re assuming the past pattern, as long as it’s exact. If you don’t have something every 25 weeks, every sixteen week, you have no way to be exact. You have no way to be scientific.

This is very, very scientific because otherwise there’s no predictability. So the computer has to find cycles and then we eliminate some of them in order to make the leftover cycle line combined using Fourier analysis, another brilliant European mathematician.

I don’t know if you’ve been to the Eifel Tower, but when you go up there they have a lot of the former French brilliant scientists and mathematicians, he was one of them. He figured out a way to combine vectors. So we use that to combine all these cycles to see when they’re all topping or bottoming. If you look at our charts, which you’ve seen for years, that’s how we come up with tops and bottoms.

So we hope that the remaining cycles we’ve left after we eliminate matching what has happened in IBM or Crude or Euro or Nat Gas, or the Bunds or the VIX or whatever, if these eight cycles are matching up with what’s happened, we’re assuming, that’s all we can do, that those eight are running the show for that category, and, therefore, the continued future cycle line that we can project is going to predict what’s going to happen.

That’s in essence how it works. So by definition we can’t be right all the time because it’s human, the data could be wrong, we may have eliminated the wrong things, and we admit that. But it usually is right, and it just gives you direction. It does not give you level.

Niels

How many cycles in total do you look at or do you track so to speak?

David

Everything traded we have.

Niels

I’m talking about the markets.

David

Let’s say IBM. Let’s take IBM, whatever the computer finds. It’s not like… There are certain cycles that people say; there’s a 19-year cycle. We don’t look at it like that. How do we know? How do I know Apple’s cycles until I look at Apple? I can say there’s a fixed cycle. How do I know? Facebook I can’t do yet. I don’t have enough data. Corn – I have data for 500 years, so I can literally find cycles and whatever the computer says.

Sometimes it only finds 20, and again we ask it based on end of day data; we ask it the end of week; end of month; end of quarter; end of year; so we have different cycles. If you think as a person, look at your own life, we go through cycles. So it would make sense that an asset would have its own history. So we’re tracking the past of it to see how it goes into the future. So that’s kind of the assumption. It’s a deep psychological point I just grazed.

Niels

Let me digress a little bit from what you… I just want to ask you something that I haven’t come across in sort of my professional career as such, but more as a hobby because I have studied another form of cycles, and this is back in sort of the early 2000s and I was attending a seminar, essentially, by a guy who definitely believed that time was more important than price but he had problems with…

What he found was that these cycles, the projections were a little bit uncertain when it came to when is the actual time of a top and when is the actual time of a bottom. So he tried to mathematically define all of these things so that there couldn’t be any… It had to be black and white for him. So he ended up… Something that I have studied, I have to say he certainly convinced me that it is correct.

What he found was that if you take a 28 day cycle for example and you take it for stock markets, that actually all stock markets, and we’re talking about indices I don’t know specifically about individual stock, but certainly indices, that they will all have eleven turning points in a 20 day cycle. However, that particular 28-day cycle from time to time may invert. Meaning there’s an extra turning point.

But some cycles, and you know there’s definitely a four-year cycle and as you move into…I don’t know whether you use that as well, but then there is some the astrologically based cycles like the 19-year cycle that is the Metonic year and other cycles. Some of these cycles there are no inversions. It’s always the same number or turning point.

What he found was that actually if you then go to say precious metals, it may not be eleven turning points every twenty-eight days, there may only be eight. But it will be the same within the same sector oddly enough. Or maybe it’s not so odd, but that’s what he found. Have you found some similar observations about these things, even though it’s a different way of looking at it?

David

No. No, we have not. We just find that every category has its own history, and that’s what we focus on and we don’t project that it leads to other things. We’re not that smart. We’re really not that smart to assume why if the Canadian currencies are doing something, or the Aussie because they’re “commodity currencies” then Crude has to follow.

Niels

No, no, that’s not what I said. I just said that within stock indices then stock indices will actually have the same number of turning points within Energy they will have the same turning points, not across sectors.

David

No, we have not found that.

Niels

OK, that’s fine.

David

It could be. Listen, we’re not the only people that have systems. I’m sure there’resome very good people. We just know this system for all these years. While it’s not always right, it has generally been rugged. What’s interesting about it is it takes price, which is the only thing that we look at. We don’t look at anything else. Now we look at price in terms of cycle, then we look at it in terms of target, which we’ll talk about in a second because that’s the ideal. You mentioned before it’s time to get out. I don’t care about price. Our attitude is if the price gets to… if the Euro gets to 110 (I’m picking a number) and next week those two things were our targets and that was the lowest target we had for price and the cycle time was there, it’s time to get out of your shorts, or get out of being in cash and plan to go long. So we want both to line up.

I wrote an article that anyone can write to you and get for Oil and Gas Magazine.

Niels

Sure, we can put it up on the show notes page.

David

So I wrote it because we have clients from all over the place, and a lot of people in Texas. Let’s talk about Crude for a second as I get into all these things. Crude, we called the top at 97, six or seven months ago. It has been in a range for three years. No one thought it was going to 45, 46, whatever it was and tossed up, and we do think it’s going to go back up, that’s the big picture. Four years ago, on CNBC, five years ago, Charles said, when Crude was 147, if you remember Crude reached 147, there’s going to be something called deflation.

I was sitting about 30 feet away, and everybody snickered. What, Crude is 147, and we’re going to have deflation? Six months later Crude was $48. Why? I have no idea, we don’t know why. It came down a lot eventually got back up into the 90 to 110 range, and kind ofstayed there for a while and all of a sudden it plummeted. We think it’s going to go back.

Why did it plummet twice? We have no idea. Why it is going back? We have no idea. In 2008 when we took everyone out of the stock market in the summer, and we got yelled at because things looked good in the summer of 2008. Then the fall of 2008 we all remember and then Charles on Bloomberg TV said we’re going to have a bottom in 2009, and he has not stayed long all these seven years. I wish we did. 2009, 2010 up to now, but most of the time. Everyone was hoping Crude was going to go up then it would have been a sign of economic activity. I remember people were always asking because they didn’t know what was happening with the economic system.

Lehman Brothers, we all forget. It’s kind of nice now, the markets been up a lot, but there was no QE up to that point, but everybody thought the system was going to fall apart. Sothey were hoping there would be a Crude increase because it would indicate demand increase. Now if Crude goes up you got to assume if there’s not overall demand if China’s less, all the things that people like to think about, it could be war. Which we’ll talk about also as a war cycle.

So over time our system has called Crude incredibly well. Why? We have no idea. You can think about it afterward. The News Shows always have to have reasons. They always laugh at me when I say to them, “You guys, the next guest will give you the reason, I don’t have any reason.”

I was in London on Bloomberg about six weeks ago, the guest, he loved the whole story, he said, you’re going to tell me, “Speak to the next guest to get the answer?” I said, “Yeahbecause I don’t have any answer, I just say we called the top, and no one else did, so I don’t know what else you want to hear? If you were long, I would have said get out. Anyone else giving reasons would have stayed in, so who has a better story? Us being modest and saying we don’t know why it works it just does, or someone is giving reasons with a number of tankers, and this and that.”

I remember when Isis a year ago, News Max interviewed me and said they had taken over their first Oil Well and said isn’t this going to cause an increase in Crude and I said, according to cycles Crude’s going to go down a lot. I haven’t been on the show afterward. But I was right. So who remembers?

So that’s kind of an example of four or five things. One is the press which you and I were talking about before. The press people are affected negatively by the press in my opinion. Being I’m in it a lot, a lot of times I give them the questions to ask me, so at least I’m able to have that type of conversation. But I don’t think it helps. I really think that people should look at the research, talk to me. That’s what we do with clients.

Secondly Crude, we think it’s going to go back up. But in the meantime, the Texas world has really gotten beaten up. Obviously lift costs in Saudi is a lot cheaper. I know all this stuff. I have all these people that taught me the business but is that a reason for moves in prices? According to us, no.

Niels

Alright so let’s stay with that theme a little bit before we move in, and it’s not that I’m not eager to get to the nitty gritty of things, I am. I want people to appreciate a little bit more background because it’s such a different topic than what we normally discuss and of course, in a sense, most of my guests are in the exact same situation as you are when you go into a media show, because they are often using systematic rules that are not predicting but they’re reacting to data.

So I think the audience fully appreciates what you are saying that it can be very difficult to be exciting when you’re always asked the why, and actually you can’t really answer that. But what you can answer instead for me is some people are relating cycles back to what happens far away from planet earth, namely to do with sun spots. It’s not that I want to go too much into that, but I do think it’s important for people to understand that there might be a natural or logical explanation as to why things like sun spots may have an impact on stock markets, for example because most people don’t make that connection. Can you explain a little bit about that and how we humans might be impacted by these things?

David

Correct, I will say right at the beginning while Charles years ago mentioned it, that sunspot cycles exist, it is not one of the top things we use.

Niels

This is more for an explanation.

David

But having said that, if you go to the NASA site there are sun spots, and if you look at the cycles on them, one could argue that tops in sunspots indicate a strong correlation to tops in equity markets and vice versa. It’s not direct, it’s not 100% clear. There clearly is fact that our brains are affected by electronic and electromagnetic pulse.

Music, I happen to be a musician, as you know, so I know the effect of music on brain waves. There’s no question. So therefore it’s logical that the sun spots would affectpeople. How, to what extent, what cycles, is a whole other discussion, but a lot of people don’t want to think that that type of thing would affect us. Seasons affect us. Sunspotswould affect us.

To be able to use it as THE predictive tool is very hard. We don’t do it. We still think cycles and target are the main thing. We look at Elliot Wave; we do. We don’t make it our main thing. There are people who have really hurt people. I have to tell you, because we have a lot of clients who were trying to trade based on is this a C wave up or down and I go listen, it could be, but that’s only if it lines up with the cycles and the target.

To think this is the main thing, macd oscillator, all these things we look at quite closely because it’s important that we look at what everyone else looks at and add our other few things that are unique to us. But as far as the sun spots, it’s a fascinating thing to start thinking about and according to the big picture that we’re seeing which we’ll get to more later, that stocks will not yet, but very soon be near a top for years. It seems to correlate with the sun spots. So that’s another indicator reinforcing that but it’s not the main indicator.

Niels

I want to go somewhere completely different; then I want to go back again. It’s something that I picked up in some of your writings because again, this is… It can be very hard for people to be persuaded or convinced by if it was me coming out talking about systematic trading and the fact that the firm I work for doesn’t predict anything but for 42 years they’ve had an absolutely amazing track record on par with Warren Buffet. People probably wouldn’t make that connection when you’re not trying to predict anything. But also it’s about how we’re conditioned. It’s what we are taught and learned and so on and so forth. I picked up somewhere that if when you look at your client base, actually how people perceive your information, your forecast can also be a little bit different because in certain places on the planet people are conditioned differently.

India, for example, they might have certain preferences in your forecast and so on and so forth. Can you share some of that?

David

Oh sure. This is a great question. The Fareast does full moon trading. You’re familiar with that.

Niels

Just share it, even if I’m familiar with it, there are thousands of people listening to us so let’s get it out there.

David

I’m north of New York, so I’m in US time. I don’t sleep so much because at night I deal with the Fareast, in the morning deal with Europe, and the rest of the day deal with America and California, right? But the Fareast very much believes in cycle, very much, very much. So I never have a problem explaining the idea that they’re long term not a problem.

It’s interesting, many US hedge funds have moved to the Fareast for technical reasons. They didn’t want to deal with the regulatory situation in America anymore. I’m not sure if you’re familiar with that, but I’ve got a bunch of clients that were in America that are in the Fareast, so I just swap the time. We cover, by the way; we have specialty coverage of Australia, of Singapore, of India. We have special things that cover each of that because we’ve got enough clients demanding it in different areas.

Those from India tend to be more positive. Look at their last 30 years. Look at India. It’s an old country, but the last 30 years they’ve had a boom the SENSEI went from 7 to 28 thousand. Long term it looks good, by the way, according to us. Every place is different. I have a lot of family offices in different parts of the world. They don’t trade as much. They give part of the money out to managers. They very often will give X millions of dollars to a grandson and basically ask me to nurture the grandson, right? The rich kid, and nice kids,by the way, surprising most or the time. They’re rich and trying to teach them not to overtrade and what not to do.

So the mindset is very different everywhere. Americans in the south don’t know about currencies. I, I’m American, right? I met Charles I started thinking about the Euro. I don’t know how many people grow up, you obviously you’re in the middle of it.

Niels

But Switzerland is not part of it, so it’s around it.

David

Isn’t that funny? Not part of it, so I’ll tell you another story, very interesting. I’ve got so many stories. When the Euro was 151, I’m going to tell a Yen story after that. When the Euro was 151, five years ago, four years ago, something like that the system showed that the Euro was at the top. We had no idea why, no idea. We sent out something, get out ofthe Euro, and it could go to 122. Now when we say that we don’t say go short. You could go short if this is your target; do what you want because everybody is different.

Three months later was the first Greek crisis. No idea what was going to happen but the system indicated that something was going to cause the Euro to come down. Which, by the way, a month ago we were saying the Euro is going to come up to a certain point and go down. So if you want me to reverse extrapolate, I don’t know if that’s proper English, if you want me to extrapolate.

Niels

English is not my first language anyway so don’t worry about it.

David

It may be my first language, but I hear enough of other languages that I’m not so sure I’m good at it anymore. The Euro looks like it’s at the top short term. So therefore you want to argue that Greece is not going to work? That’s one way people would say. The fact that we’re at a state of existence arguing whether the Greeks going to go or not, or Puerto Rico is going to go or not, or everything else is going to go or not, we look at it as short-term craziness. Yes it affects everybody, it’s their focus, it’s this, it’s that, but there are greater forces from the past is our whole claim that tell us stuff we don’t know why before it all gets to the focus.

Very often we’re right. Not always, like gold is an example. We called the top at 1900, and this has been down for four years and this has been a very difficult bottom to call. So our attitude is, stay out. If you go in, go in with tight stops. We had a lot of people from Canada and Australia who went in at 1700, and we said don’t stay in. Very hard after 11 years gold went from 300 to 1100 to say it’s not going to be more than a short-term correction. Because that’s normal psychology. But that’s what happened, so gold hasn’t really…Charles has said the system has shown bottoms that didn’t happen.

But our argument is, OK if it doesn’t happen you have no downside. You go in assume it’s this level. If it doesn’t go, it doesn’t go. So that also is one of the nice things about the system, while it may not be correct where it’s going the downside is extremely limited because we have such tight stops. So our attitude is you’ve seen us, OK stay in cash, try it with a tougher stop. If it doesn’t go, it doesn’t go. So again, it goes back to that protective Dutch mentality of making sure the country doesn’t flood, keep the sandbags around.

Niels

Sure, so we need to hear the Yen example as well.

David

The Yen has been a hard trade; the Yen’s been a hard trade. Everyone just says short the Yen, short the Yen. When the reactor blew up, when was that, two years. What has the NIKKEI done since then? I’m not on the screen now if you can take a look.

Niels

The NIKKEI is up significantly and, of course, the Yen is down significantly.

David

We said that then, with the reactor blowing up, it’s not going to affect the NIKKEI. Did we know? No. We had said a few months earlier the NIKKEI looked like it was going to be heading up, but not yet. So this thing comes along which really looks horrible, right, horrible. Look back now a few years.

So I guess all I’m saying is that in the look at all the different data series when you go to the Fareast, which is a longer term view. When you take Europe, which clearly is a longer term view when you take America which generally has less of a long-term, even though there’re many pools of money here that are longer term.

There’re a lot of brokers. We have a lot of broker clients with several hundred million dollars of client assets, and they’re longer term and they use ETFs. The ETFs aren’t so good. Like I don’t like UNG for Nat Gas. It doesn’t track anywhere near as well as the futures, but they can’t do it because Wells Fargo doesn’t let them, or whoever. So, people,giving money to that type of a capital allocator I believe that they’re limiting their upside.

Now having said that they’re probably limiting their downside too because most of that money is all word of mouth. If you take your typical broker at a brokerage firm in America, I don’t know what it’s like in Europe. The bigger guys probably get 80% of their money from referrals. Yet their business has been in traditionally 60/40, or 60/30 with some funds. They don’t do many currencies in America. In Europe, they obviously do because they know what a currency is. They haven’t done too many commodities, right, in America that I hear. I’m not sure this is proof, but I’ve heard enough that my own extrapolation is money isn’t thinking in those places and to us that’s been the best place for gain.

So I guess the shorter answer to your question is the mindsets definitely affect the asset allocation in the different countries.

Niels

Yeah, but what I also heard you saying, not directly, so I’m obviously interpreting you, is that it’s not that people can’t intellectually understand that there are cycles, unless they live on the equator, they know there are four seasons for example. But it’s an emotional problem for them. It’s an emotional challenge: more so about accepting that life is not how we have been conditioned to believe, or the world works in the way that we’ve been conditioned to believe that it should work.

David

Correct, correct, and that’s not going to change. I spoke at Bloomberg six years ago. It’s on the Charles Nenner’s site; I gave an hour presentation. Charles was supposed to give it he got locked out of the Bloomberg office in Amsterdam.

It was really funny because I didn’t go in prepared. I was so relaxed, I walked in I introduced him sat down, and then they couldn’t get him on the phone and I had to do the whole thing, which was fun, when you’re not prepared. When I say prepared, I’m always prepared. I’m always… I breathe it. But I remember they got him on the phone, and they asked him is anything ever going to change and he said no. The mindset is never going to change because it’s a very difficult thing to accept what we say, what we’re claiming. I’m used to it. At this point, we have enough clients around the world that obviously they get it. It’s part of the whole system. Very few people just do what we say.

Look, two months ago in April, what would have been the best trades? Long Euro, long Aussie, a couple of five things. How many people are going to do that with their money? Very few. There are a couple of funds that are very concentrated that follow us. They did very well.

In fact, our system was in alpha discover, alpha based on cycle moves, kind of. So generally the last 30 years, look the markets up 18 times since ’81. I’ve said this quite a bit in the press, but I’d like to reiterate here. Listeners in ’81 I got out of business school in ’80, Stern Business School as I mentioned, though it wasn’t that then, and the DOW was what, 1000? The DOW was 1000 from ’66 to ’82 by the way.

Niels

People forget that.

David

Can you imagine right now telling a guy the DOW is 18,000, and it’s 2015 and in 2030 it’s going to be 18,000 and he’ll say, “How can that be?” And I’ll go, “Well let’s go back in a time machine to 1966 and shoot up 15 years to 1980.”

Niels

Sorry to interrupt you, but you can just use the NASDAQ. The NASDAQ is 5000 today. It was 5000 in 2000; that was 15 years ago.

David

We’re going to get there; that’s what I’m saying. You know the movie back to the future? OK, I happen to know the guy who wrote it because he was my camp counselor. It’s a funny story, but he said, “How did I come up with a movie like that?” He was in LA, a guy named Neil Canton, actually, this goes back a long time. I haven’t seen him in a long time. He was upset with his parents and he went on vacation to Hawaii with this other guy that was involved with the movie and he said, “You know, my father, he’s a good guy, but sometimes he drives me crazy. I wonder if he was not such a good guy when he was younger?” That’s how they came up with the movie.

So I look back now that I’m a little bit older and I’ve been in the business with Charles and we’ve seen cycles in a different use, meaning what the world has been like the last ten, twelve years: change in trading, what percent is institutional trading as opposed to individual, the whole thing. Then you look back to the guys who talk to me about what it was like in ’70 to ’74, even Warren Buffet was down those four years. He’s been pretty good since. So ’66 to ’82 the DOW was 1000. It’s been up 18 times. The bonds, 1981 were 16%, 17% they’re now foo.

So if you just bought it, let’s there was a 50-year bond you could buy then. Let’s say, and you bought it. Let’s say there was a DOW ETF, and you played golf for 33 years and you come back. Somehow you got supported for 33 years, and you come back and you go, those are two of the greatest trades I ever made in my life. With bonds at 18% now they’re 2%, who wouldn’t want to give you all this money for an 18% bond today?

It was the same thing with stocks. Imagine doing that same trade in 2007, I’m sorry, ’87, ’94, 2000, and 2007 you got beat up in stocks but you did well in bonds. So for one to say that stocks and bonds either go in the same direction, which they did for 30 years, or in different directions which is what most people think depends on your timing. I’m getting to the latter part of this session with you, but we think longer term they’re both going to go in the same direction that is not so good. 30 years these are great trades.

Now I can argue why what I just said is wrong. I know every argument because I’ve got guys yelling at me all the time, clients. I think rates are going to stay at 1%, and I think the DOW can’t go anything but way up. We think the DOW is going to go way up it just needs a four or five-year detour until it starts.

That’s pretty much in a nutshell the big picture. I won’t get that much for… I’ll give you some war as we talk, but people should write in and look at our stuff and even the long term we don’t write about, because other than Sovereign Wealth Funds, who really cares about long term. That’s kind of the big picture as we saw the last 30 or 60 years ago.

I was born in 1955, in 1952 rates were 2%. The US government was selling US Savings Bonds at 2%. So that’s been a 60-year cycle. Then in 1920 rates were high, and then the depression not that long after. In 1890 rates were low, 1860 was right before the European, the unification of Italy 1871, the Civil War, a lot of stuff happened, the French Revolution, 1860 rates were high. That’s a 60-year bond cycle that is going to repeat. Rates have to go up and people say to me, but they can’t because all rich money is staying in 1% bonds. I know all these arguments, and they seem to make sense except the cycles are the opposite.

Niels

Sure. I’m going to ask you something and of course I don’t know as much about history as you clearly do, so I’m going to ask, and I will be very interested in hearing your answer.

In one sense you say we had 30 years where equities have gone up very sharply and so have bonds and interest rates have gone down. Are you saying that is it only for shorterperiod of time that bonds and stocks can actually go down? Meaning I’m not aware of a 30-year cycle in equities, meaning we can go up for 30 years, and we can go down for 30 years. I’m not aware of that. What is the cycle for equities sort of from a big picture point of view? I think most people are familiar, or at least most people who listen to this podcast, they’re going to be familiar with the 30-year bond cycle. What’s the longer cycle in equities? I’m not aware of that actually?

David

Equities are not the same. They’re two different creatures. The bond cycle, you say you think they would know, you’d be surprised. I was at a meeting with… I was in Manhattan the other day, and I met with three family offices at different times and then a law firm that does a lot of work in the hedge fund space. I was talking about this, and only one knew about it, because they have money. They don’t worry about paying the rent next week, so they’re thinking long term.

I’ll tell you something interesting related to this. Family offices they’re concern is the returnof capital, not return on capital. So if they’re sitting in a place that goes out and look at Lehman Brothers. I had a friend who lost 24 million bucks. He was in Lehman and invested, and it’s gone. So these things happen. We know what happened with the Goldman Sachs gentleman’s firm in Chicago. So these things happen. These are questions we get all the time, what do your cycles say about Rabble Bank? We answer because… What does it say about Bank of America? What does it say about Chase? Will they be in business? Should I put my 50 million with them if they look like they are going to be out of business in five years or six years?

Interesting questions, again, just because we say they’ll be alive doesn’t mean we’re 100% right, but at least it gives us some indication of the future.

Niels

I’m going to come back to that because I have a question about that, but I just want to finish up on my first question. What does a big cycle on equities actually look like if it’s not a 30-year cycle? Can you visualize what that is just for people to appreciate how they’re different?

David

There is no cycle like that for equities because look at this century. Look at the way equities have been up to ’66 and ’82. Yes, there have been moves, obviously before there was a crash there were big moves. It’s interesting. I don’t want to talk about it much but Elliott Wave you could look at over a few hundred years when it started.

The gentleman who’s the most famous Elliott Wave person is Prechter and he looks at a very big wave going back a few hundred years ago and Charles, who doesn’t write about it, doesn’t talk about it much. He looks at it. He has a very long term Elliot Wave look that is quite different that Prechter’s. He starts at a different time. I’m not going to go into the details, so we do look at that stuff also.

Niels

Yeah, I was going to say about… certainly with Elliott Wave I know that, and that’s not to hang anyone out here, but Prechter is for sure probably the most famous one but they have not been very accurate in my opinion. I follow that, and I’ll be blunt about it, it’s not been very good.

David

I have hundreds of clients who have come from there having lost major money. It’s something to think about, for sure, but as a lead thing? I don’t know how you can do it. How does anybody know exactly what wave they’re in? Years ago Google was 4something and thought it was going to go to 600. The way Elliott wave works is one up, two down, three up, four down, five based on Fibonacci. You’re familiar with that.

Niels

Sure, sure.

David

And it’s based on the golden mean. Every number every… If you take Fibonacci as 112358 every number is the sum of the previous two, so the ratio of each number is 2 over 3, 3 over 5, 5 over 8, 8 over 13, 13 over 21, 21 over… each one approaches .618. So the retracement numbers are either .618, 1.618, 2.618, 4.618 or some multiple of that. That’s called the golden number, and it applies in the shape of faces. A fascinating thing to look at in music obviously it’s very prominent.

So cycles give you a look to see what retracement it’s going to be because you don’t know what a retrace is going to be. It will be one of those options. It could be a 168 268 4, we don’t know, but if cycles are topping at one of those exact retracement levels, then in effect we can almost predict that’s going to be the retracement in no more. It’s like in Manhattanif you take a train from 59th Street on the 4 it goes to 86th and 125th and nothing in between. That’s kind of how the cycle, that’s how Elliott Wave levels go, nothing in between.

So our cycles are actually used internally to look at that and but again, it’s not the main thing that people should do, and they do, sometimes and I found, unfortunately, a lot of the pain. To answer your question about longer term cycles in stocks. We’ve had an interesting run from ’66. We’re now 50 years after ’66. So for 15 years it was flat. For the last 35 it’s up 18 times with 7 year hits, right? Well, that’s the question where we’re going now? Obviously everybody wants to know.

You could argue, well you have tech, you have things you never had before, which is true. We’ve never had so much tech money when Uber goes public how much money will that go. M&A looks strong. Drugs look strong. Not all stocks are going to go down, but overall, based on the past cycles we think that the next several years is not going to be great, so it’s something people just have to think about if they’re going to plow ahead in the same way that they have done the last 30 years.

It’s not so simple to do, and that’s kind of our job to help advise people in that very difficult process having lived through a pretty good run.

Niels

Of course I’m not going to let you off that lightly, but before we go there I want to understand something, and then I think we’ve covered all the bases. We talked about cycles and how and why and so on and so forth, but the other thing I just want to find out a little bit more about is your price targeting. In one sense, for me at least, cycles mean that you must believe that time is more important than price and so on and so forth, and cycles you can by observing them and overlaying them. I can see that I can understand that. Price, on the other hand, is to me, much more difficult to predict. How do you know if it’s going up? When I look at…

So as we bring this episode to a close I just want to mention that David very kindly has offered a free trial to all the listeners of Top Traders Unplugged and the way for you to get your hands on this free trial is to go to the CharlesNenner.com website and in the right-hand corner there is a free trial button. Once you press it a form will open up and as you fill in your details with your email address and name you need to also go to the box called Where Did You Hear About Us and put in the words Top Trader or you can put in the shortened TTU. That will give you a free trial. I hope you will enjoy it, and it’s up to you to find out whether this is something for you.

I hope you enjoyed this episode, and I look forward to welcoming you back to the second part of this conversation where we go into much more detail about the specific forecastthey have for the world markets.

Ending

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