The Economic Confidence Model & Global Financial Interconnectivity

Historically, economic growth moves in cycles, with phases of steady expansion followed by contraction. Financial markets follow this pattern as the wider economy shapes interest rates and, in turn, liquidity conditions across global markets. In earlier articles, we looked at models of business cycles, such as:

🔗 Ray Dalio Economic Cycles

🔗 Gann’s Law of Vibration

🔗 Benner’s Cycle

Below, we look at another model: Martin Armstrong's Economic Confidence Model (ECM).

Highlights of the ECM

• Armstrong claimed that economic cycles follow a constant ratio based on 𝜋 = 3.14.
• He also argued that financial assets do not rise in a straight line over time but instead follow an 8.6-year cycle (3,141 days, or 𝜋 × 1000).
• According to him, there is a larger 51.6-year cycle made up of six waves (6 × 8.6 years = 51.6 years).

 

More About Armstrong's Economic Confidence Model

Armstrong's model is based on a cyclical pattern that lasts 8.6 years or 3,141 days. As noted above, this equals 𝜋 × 1000. Within the 8.6-year cycle, there is a smaller quarter cycle of 2.15 years (785 days).

• At the end of each 8.6-year cycle, the model predicts a major crisis
• After this crisis, the economic climate improves again for another 8.6 years

He also argued that the 8.6-year wave is part of a larger 51.6-year wave (6 × 8.6 years). He further claimed that each 51.6-year wave is part of an even longer 309.6-year cycle (6 × 51.6 years).

• 51.6 years cycle (6 waves of 8.6 years)
• 309.6 years cycle (6 waves of 51.6 years)

Armstrong tried to support his theory with historical data. For example, he claimed that the existence of the ancient Roman currency Bronze Follis, also followed a 52-year cycle.

Chart: The ECM Model by Martin Armstrong (source)

Who is Martin Armstrong

Martin Arthur Armstrong started his career as an economic forecaster in 1973, when he began publishing predictions for the commodity market. Later, he launched a paid newsletter. Armstrong's theory was initially applied in 1977 when he successfully predicted a strong bullish trend in commodity prices. Since then, he has made some successful predictions that gained him popularity.

However, later in his life, things didn’t go well for him. In 1999, the Japanese fraud investigators accused Armstrong of improperly collecting money from Japanese investors. Afterward, he was convicted in the US for investment fraud and spent 11 years in jail. He was released in 2011.

 

Primary Dimensions of Economic and Market Movement

Martin Armstrong was chairman of Princeton Economics International Ltd. According to research published on the Princeton Economics website, there are four main dimensions of market and economic movement:

• Time
• Price
• Volatility
• Market interrelationships

Princeton argues that global connections and interrelationships are very important. Therefore, fundamental analysis must be global and not limited to domestic trends and events.

 

 

Other Similar Long Wave Theories

There are several similar models of business cycles, such as Benner’s Cycle, recently reviewed by TradingCenter.org.

 

Benner’s Cycle

Benner’s Cycle predicts the ups and downs of the stock market based on a repetitive cycle that lasts 18/16/20 years. Overall, the model seems reliable at the beginning of each market cycle, and completely unreliable at the end. As concerns market tops and mid-cycle tops, the model proved sometimes accurate, and sometimes not.

🔗 More: » https://tradingcenter.org/index.php/trade/equities/362-benner-cycle

 

The Kondratieff Long Wave Theory

The economist Nikolai D. Kondratieff introduced the long-wave theory during the early Russian Communist era. Kondratieff identified a pattern within the prices of agricultural products and copper. He claimed that the prices of these commodities follow a long-term wave, which is the result of technological innovation. This concept was initially introduced in his 1925 book ‘The Major Economic Cycles’. It is estimated that these long waves last 40 to 60 years.

Chart: Kondratieff Cycles by Allianz Global Investors (source)

 

Examining the Concept of Global Financial Interconnectivity

In recent years, the idea of global financial interconnectivity has been confirmed. After the 2007–2008 financial crisis, strong correlations appeared across almost all financial markets. These links can be seen between different regions and asset classes. This recent interconnectivity can be attributed to:

(i) the introduction of new financial products such as ETFs

(ii) the implementation of new cross-asset portfolio-diversification strategies

To achieve portfolio diversification, these cross-asset strategies spread investment capital across multiple asset classes, which can be easily done today using ETFs. Overall, global access strengthens the connections and interrelationships between all financial markets.

Considering the above, the best approach to economic analysis is the “Outside-in” method. This means looking at the overall economic environment before focusing on any specific asset class or financial instrument. In addition, recognizing strong intermarket correlations is key to achieving real portfolio diversification. We should account for all cross-asset correlations and adjust our positions accordingly.

 

 

Final Thoughts -Having an Open Mind but Taking Nothing for Granted

From time to time, several forecasting models have been examined on TradingCenter, but not because all of them work. There is no static economic model that can predict the future. Our world and economy are constantly changing. How can a fixed model predict a dynamic economic environment?

Investment decisions should not rely on any static model. While patterns exist in economic activity, these patterns are dynamic and shift with new economic, political, and technological developments. Models based solely on Phi, Pi, or any other mathematical constant cannot capture the chaotic nature of the economy or reliably predict global financial markets.

“Having an open mind doesn’t necessarily mean accepting every new idea.”

Finally, regarding global financial interconnectivity, there is no doubt. The globalization of the economy, along with new financial products like ETFs, has created strong correlations across nearly all financial markets. We should consider these cross-asset correlations and manage our portfolios accordingly.

 

■ Martin Armstrong's ECM Model Based on Pi {π = 3.141}

George Protonotarios, financial analyst

for TradingCenter (c) May, 1st 2024

 

🔗 Sources:

• ArmstrongEconomics.com
• Allianz Global Investors -The Sixth Kondratieff Long Waves of Prosperity
• Wikipedia.org
• Models and Methodologies, 2^nd edition, 2015, Martin Armstrong