Tuesday, November 27, 2012

Skyscraper Indicator Signals a Top

For the third time in less than 15 years, the Skyscraper Indicator is issuing a peaking signal. The indicator was pioneered in January 1999 by Andrew Lawrence, research director of Dresdner Klienwort Wasserstein,  showing that the world's tallest buildings have risen on the eve of economic downturns.

In the last 15 years, the skyscraper indicator signaled a top in 1997-1999, 2007, and now. A chart of the DJIA of the last 15 years with the important events labelled puts it in perspective:

As the chart indicates, the Petronus Towers in Malaysia were built in 1997 with a height of 1461 ft (448 meters), indicating that a large degree peak was imminent. The completion of the towers was quickly followed by the Asian Financial Crisis, a small taste of the economic major depression that would follow less than 3 years later. Just 2 years later, an even larger building, the Taipei 101 in Taiwan was built, soaring 1671 ft (512 meters) high. The completion of the Taipei 101 was closely followed by the end of the Grand Supercycle degree advance that started in 1784 and the beginning of the economic major depression, the "Crisis of the Western World".

A long topping process has been in progress since the onset of the Grand Supercycle degree bear market, with exuberant optimism stubbornly holding its ground. After the initial decline following the bursting of the dot com bubble in 2000, the DJIA, the S&P 500, and the Wilshire 5000 rallied to new highs in 2007. Just before the 2007 peak was reached, a skyscraper of unprecedented height started to take shape in Dubai as the Burj Khilifa rose 2717 feet (833 meters) into the sky upon completion. Shortly after the building was completed, the "Panic of 2008" struck the western world. The "Panic of 2008" climaxed in March 2009 at the end of the first phase of "The Great Deflation".

As we entered the second phase of "The Great Deflation" in March 2009, exuberant optimism returned within a year. Three years into the bear market rally, at the top of Primary wave [A] of Cycle wave x up (2009 - 2021), China is planning to build the world's tallest skyscraper in just 90 days (!). The new building, Sky City, is planned to be 220 stories, rise 2749 feet (838 meters) high, and be completed around March 2013.  As with the other two peaks, the construction of the building is expected to herald a multi-year decline in the stock market as well as a multi-year decline in the job market, which will be Primary wave [B] of Cycle wave x.

The second phase of "The Great Deflation" is expected to end in 2021, which would be the end of Primary wave [C] (2016-2021) of Cycle wave x (2009 - 2021) up. The second phase could easily climax with nations, states, cities, and even corporations, endeavoring to build skyscrapers well over 3000 feet (920 meters) tall just before the onset of the third phase of "The Great Deflation", Cycle wave y (2021 - 2042), in which a massive deflationary collapse unfolds in full force.

The Skyscraper Indicator has proven to be a very strong predictor of impending economic downturns, going all the way back to the 1800s. Here is a longer term chart of the DJIA showing the correlation between the building of skyscrapers and stock market peaks:

As shown in the chart above, when the Skyscraper Indicator issues a peaking signal, the peak is Cycle degree or higher, with the accompanying economic downturn being a major recession or larger. Due to the 21 year topping process that has been playing out since the onset of the bear market in 2000, social mood has remained very optimistic. With the construction of a massive skyscraper in China on the table, the indicator is issuing a peaking signal and another down-trend is imminent if not already in progress.


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