No Upside For Cyclicals, Commodities, And Yields. It’s The Business Cycle.


  • The business cycle drives markets.
  • The business cycle is at a turning point.
  • The decline of the business cycle drives earnings, yields, and commodities lower.
  • The business cycle will rise again when inflation and home prices decline.
Source: The Peter Dag Portfolio Strategy and Management

The decision to increase production to replenish inventories due to increasing demand involves several steps. There is the need to hire more people, to increase the purchase of raw materials, and to increase borrowing to finance operations and to improve and increase capacity.

These decisions have a positive impact on employment and income. Commodities find a bottom following the prolonged slide during Phase 3 and Phase 4. Yields also stabilize as the demand for credit increases.

The positive feedback is caused by rising employment, rising income, and rising sales. Business needs to increase production to replenish inventories to meet expanding demand.

There is a point, however, when capacity constraints begin to appear, and the economy is overheating. The business cycle is now in Phase 2. In this phase commodities rise first, followed by rising yields. Wages grow faster and inflation moves higher.

This is where we are now. Inflation is beginning to erode the purchasing power of the consumers. Home prices have been rising fast, impacting consumers’ optimism. The outcome is a slowdown in retail sales.

This is a critical phase for business. Cutting production to adjust inventories due to the prospect of slower sales is not an easy decision. The costs involved in reducing capacity are high. However, industrial production eventually must be cut to adjust inventories to waning demand.

This is the time when the business cycle enters in Phase 3. The slowdown in production shows at first in lower growth in average workweek, lower commodities and lower yields.

The negative feedback of lower employment, lower demand, lower inventories, lower production, lower income will eventually stop in Phase 4. The end of this phase will be flagged by the decline of the main factor that has caused consumers to reduce their purchases.

As soon as inflation declines, purchasing power improves, demand rises, and the positive feedback causes the business cycle to enter in Phase 1.

Where do we stand now?

 Source:, The Peter Dag Portfolio Strategy and Management

Inflation is rising with consumer prices up more than 6% y/y (see above chart). Inflation has been steadily rising since 2016, an event clearly noticed by consumers.

Source:, The Peter Dag Portfolio Strategy and Management

Consumer sentiment rose more slowly beginning in 2016 as inflation started to rise. The sharp rise of inflation since 2020 has been accompanied by steeply lower consumer optimism. Overall inflation is hurting the purchasing power.

Source: St. Louis Fed, The Peter Dag Portfolio Strategy and ManagementInflation at the gas pump, groceries, and retail stores is not the only enemy of consumers’ optimism. The increase in home prices of more than 15% y/y is creating a negative environment for spending (see above chart). One more reason why consumer confidence has declined sharply in the past several months.

 Source: St. Louis Fed, The Peter Dag Portfolio Strategy and Management

It should come as no surprise, therefore, that retail sales have been growing more slowly, declining in three of the past six months (see above chart). It seems reasonable to expect consumer confidence to improve only after inflation and home prices start slowing down, thus increasing the purchasing power of consumers.

Source: St. Louis Fed, The Peter Dag Portfolio Strategy and ManagementThe job of business is to produce and stock the products consumers want to buy. This is what has happened since 2020 (see above chart). Inventories have been growing rapidly since April and the rate of change is still rising. Business will have to cut inventories considering declining consumer confidence and slower sales.

This is exactly the inflection point pushing the business cycle from Phase 2 to Phase 3. Like many times in the past, business will eventually be forced to slow down production as consumers’ demand keeps slowing down. This is where we are now in the business cycle.

Source:, The Peter Dag Portfolio Strategy and Management

The business cycle indicator in the above chart shows the business cycle is declining, reflecting a slowdown in business activity. The slowdown is meaningful enough to be accompanied by lower copper (and commodities in general) and yields.

This is what investors should expect when the business cycle is in Phase 3. The business cycle indicator is updated in each issue of The Peter Dag Portfolio Strategy and Management. An exclusive complimentary subscription is available to the readers of this article on

Key Takeaways

  • The business cycle is in Phase 3 and will eventually transition to Phase 4.
  • Inflation will decline toward the end of Phase 4.
  • Cyclical stocks are unattractive in Phase 3 and Phase 4.
  • Defensive stocks and bonds outperform the market in Phase 3 and Phase 4 as discussed in a previous article (see here).
  • Inflation is rising with consumer prices up more than 6%
  • The decline in both inflation and the growth of home prices will trigger the end of the weakness in cyclical stocks. Defensive stocks and bonds will start underperforming at that time.

Gold Forecast – Soaring Inflation and a Collapsing Dollar to Fuel Gold’s Next Big Advance 

Companies were unable to fill entry-level positions as they compete with Federal unemployment benefits. Not working apparently still pays better than working for some Americans.

Companies continue to cite higher input costs and inflationary worries across all sectors of the economy. The next round of CPI (consumer price index) numbers comes out Wednesday.


Note below the parabolic rise in lumber prices. Lumber per 110,000 board feet has rocketed from $259.80 in 2020 to $1,686.00. This is adding tremendous pressure to residential construction expenses.

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Source: Bloomberg


Higher building costs, low housing inventory, and record low interest rates have created a perfect storm for skyrocketing housing prices. In some areas, housing has jumped 15% to 20% during the pandemic. I hear stories of bidding wars and prospective buyers offering anywhere from $50,000 to $100,000 over the asking price to secure a property.

Feeding these absurd price increases is unprecedented money printing. Below is a chart of the year-over-year change in the M2 money supply. In February 2021, it hit a record 27%.

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Source: Bloomberg

In my opinion, the inflation genie is out of the bottle, and there is little the Fed can do to stop it. As companies increase prices, consumers will become conditioned. Eventually, the psychological aspect of higher inflation and a collapsing dollar will prompt individuals to buy items today for fear of higher prices later. This is something we have not seen since the 1970s.


Eventually, the speculation we currently see in cryptocurrencies will move to precious metals (hard assets). Last week, Dogecoin exceeded the market cap of General Motors. Unbelievable!

Dogecoin was literally created as a joke in 2013 – it has ZERO use but speculation. A few days ago, while I was getting an oil change, I overheard employees speculating how they were about to get rich off Dogecoin and how they would instantly quit their jobs. These are the types of conversations you overhear near a top.

Historically speaking, precious metals are hands-down the best long-term inflation hedge, especially silver.



After a brief bounce, the dollar reversed lower after testing the 50-day EMA. Prices closed below the short-term trendline, and we could be on the verge of a major breakdown. Dropping below the January low (89.17) could trigger a collapse back to the 80 levels by August.


Gold broke decisively above the $1800 level, and prices are poised for a sharp advance as the dollar collapses to fresh lows. Initially, we expected a retest of the $2000 level, but prices could surge to new highs if the dollar slips to 80 as forecasted. The 40-day cycle bottomed precisely with our outlook.


Silver Prices are rising slowly out of the 8-month cup-with-handle formation. I’d like to see the uptrend begin to accelerate over the coming weeks and mount another assault on the $30.00 price level. Ultimately, I’m looking for a breakout above $30.00 and a run to multi-year highs before the next intermediate cycle peaks sometime in August.


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Expect increased volatility as we determine the fallout over the recent cyberattack on the U.S. oil pipeline.

A much higher than expected CPI number could light a fire under precious metals.

AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. For more information, please visit here.