Cycle Investing: Wealth Preservation Utilizing the Awareness of Cycles in Asset Allocation




Family offices are so busy with traditional activities that it is often difficult to keep focused on the forces militating against preservation of the core family wealth. In addition, wealth used to be more secretive. Today, we can compare 'manager performance.' It is, indeed, difficult keeping up with the Family Joneses. In one area in particular - investments - family offices have the luxury to think longer term. In fact, despite the daily negative pressure and press coverage of the travails of the economy and all the diverse worldwide markets, family offices, because of their ability to be patient, are able to take advantage of a tool very few family offices know about - cycles. In fact, it was the wealthiest family in the world over a century ago that pioneered the use of cycles, the Rothschild family. After the French Revolution in the late 1700s, the Rothschild family created the major banking house in Europe.

The founder, Mayer Rothschild, sent four of his sons to London, Paris, Vienna and Naples, respectively. This positioning enabled them to prosper during the British Industrial Revolution in the 19th century. The Rothschild family created the structure for the international bond market, which made bonds more easily tradable. This was important following the difficult 18th century economic upheavals, which left many European countries in the 19th century with significant budget deficits (sound familiar?) due to wars - past and future. These countries were not considered great credit risks (sound familiar?). The Rothschilds prospered, not only from the bond market but from hiring scores of accountants to calculate "cycles" in agricultural commodities, interest rates and other economic indicators. They researched across many hundreds of years to find prices in these areas.

Charles Nenner is the Founder of the Charles Nenner Research Center, which provides unique, independent global macro market research for stocks, bonds, currencies, commodities, and economic indicators. Charles is considered the leading cycle and technical based forecaster in the world. After completing Medical school in Amsterdam, he spent a decade and a half at Goldman Sachs, and advised the proprietary trading group with his models.

It is quite revealing to know the word "cycle" comes from the Greek word (no pun intended) meaning circle. While many think of today's nine-year inventory cycle or the 60-year cycle in interest rates, the Rothschilds plotted many "cycles" from data series going back hundreds of years in order to find overlapping patterns where the majority of the cycle tops and bottoms coincided. According to their calculations, this increased the likelihood the combined cycles would give accurate predictive postures for all the categories of traded instruments. The results were clearly quite positive for them. This was laboriously done before computers. Obviously, things are a bit easier and faster nowadays. However, because of computer power, there is so much data available today that another problem exists for family offices. Utilizing traditional asset allocation along with long-term planning in the four liquid areas of stocks, bonds, commodities and currencies is difficult to project for the next week, months, years and decades without wading through massive amounts of differing forms of analyses. Current market moves combined with significantly more volatility have further proliferated the difficulty of arriving at any comfortable position. Moreover, family offices are finding it increasingly difficult to produce an accurate assumption rate for investment returns looking out five or 10 years.


Cycles are based on only one data point - price - in each category. Therefore, through the unique spectrum of cycle analysis, reviewing the past major moves in these global macro areas have proven to be better indicators of future direction and level - and wealth preservation - than the traditional mix (i.e. 60% stocks, 30% bonds, 5% private equity, 5% currency and real estate). Cycle analysis takes into account repeating patterns from the past and assumes these patterns will continue. This means employing several thought processes and a revised construct for wealth preservation that are different from those used in the past.

It may well be - and this is an important point - the traditional family office asset allocations need to be "re-engineered" with a far greater emphasis on different asset class constructs based on cycles and the use and implementation of being much more patient and in cash at times. This format has not been normally implemented. The unique tool of utilizing cycles can also lead to other considerations family offices should consider.

First, cycle analysis teaches us that the news is not what is running the markets, cycles are.

Second, there is a growing sense the "craziness" and volatility of markets, not apparently explainable by fundamental research or earnings projections, is based on past patterns repeating. This provides comfort to those looking for explanations to market movements. Clearly, media sources around the world would like to explain it otherwise. However, it must be remembered the media is only concerned about one thing: selling advertising space.

Third, cycles govern macroeconomic indicators as well - unemployment, GDP, volatility, Institute for Supply Management figures, shipping activity, etc. This allows for a completely different world view in these areas.

Fourth, there is a tendency on the part of institutions, government funds and brokers to maintain a long bias, often mandated. Looking back over 30 years ago, a bond investment in the early 1980s, with 16% rates, and stocks, with the Dow at 1000, held until today would have been quite prescient. This teaches that stocks and bonds can move together, despite what many think.Bond cycles indicate a very long term reversal coming in a few years. Stock cycles are similar – topping in a few years. This will go against what many family offices are planning for (and the media as well).

We believe family offices would be wise to learn about the use of cycles in their planning. Take it from a family, the Rothschilds, who, a long time ago, decided to look back, even then, at patterns that could help plan for the future. In today's turbulent environment it would be wise for family offices to consider allocations of liquid assets based on cycles, which introduce an element of timing, rather than historical stock-bond allocations.

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