Economic Critical Juncture Towards a Generational Depression
Stock-Markets / Elliott Wave Theory Aug 20, 2008 - 08:42 AMBy: Eric_Chevrette
One more time, we have to reassess the LONG time EW scheme in USA in order to view the currently IMMINENT market developments under the proper perspective at worldwide level. No one needs to repeat that the current global crisis is a bank and credit driven one where the US housing bubble has been the appointed match to ignite the fire. But no one should either keep a blind eye on how DEEP the current credit crisis REALLY IS : as you can see with charts #1 to 5 , it is a crisis of GENERATIONAL size and depth where the peak in October 2007 is the door to that generational crisis. With the BKX index (US banking sector) reaching below 50 in July 2008, we have all EW evidence ( chart #1 ) that the rise from 2003 to 2007 was the final “wave 5” of a FULL cycle of “banking expansion” which did start in USA in 1984 and peak 23 years later in 2007.
Chart #1
Chart #2
With NO surprise, we find a twin cycle for “margin debt” (which is a fairly reliable gauge for global credit expansion) with the same key turning points than with BKX (ignition in 1984, “wave 2” bottoming in 1991, “wave 3” peaking in 2000, “wave 4” bottoming in 2003 and final peak in 2007). YES , blue 12345 with BKX ( chart #1 ) is just casting light on an echoing green 12345 ( chart #2 ) with “credit expansion”. In other words, 2007 is the final peak of a 23 year long “credit mania” which was characterized by 2 bubbles, the dotcom bubble at the peak of “wave 3” in 2000 and the “housing bubble” at the peak of “wave 5” in 2007. Of course, it is NO surprise if we find another EW twin cycle with “consumption expansion” over the same time window ( chart #3 ). As 1982-1983 was the ignition point of all 3 bubbles (bank, credit, consumption), it is hardly possible to refuse the EW evidence that 2003-2007 was the last leg of a full 5 wave cycle for common stocks from 1982 to 2007 ( chart #4 ). This is further confirmed with full EW evidence in chart #5 where it is clear that XBD (Bank Broker Dealer index), a KEY sector to ANY US and world bull market, has now clearly embarked on a lasting bear market after completing a full 5 wave leg from 2003 to 2007 matching blue wave 5 in charts #1&4 .
Chart #3
Chart #4
As the bullish leg from 1982 to 2007 is itself a “wave 5” for common stocks (see green wave 5 with chart #4 ), we have to face the fact that we're now most likely left with a multi year process of “debt liquidation” of GENERATIONAL relevance. Please keep in mind that the bear market initiated in October 2007 should never be compared in size and depth to anything you have seen since 1982: under any circumstances, 23 year of growing credit expansion culminating in 2 bubbles bursting within less than a decade (dotcom bubble in 2000 and housing bubble in 2007) could NEVER be “washed away” by a short 3 year bear market like the one we had from 2000 to 2003. Even if we speak of a multi year bear, it might be better to think of a decade.
Chart #5
As an easy conclusion, you get the FULL picture over the US & world economy: 2007 is most likely the final peak of OPTIMISM in a 23 year cycle of credit inflation with 23 year of growth for ever looser banking practices until the last leg from 2003 to 2007 ushered in a FINAL BUBBLE with real estate in USA. US banks, credit, stocks and consumption did peak out TOGETHER in 2007 while the common peak is opening the door to a GENERATIONAL recession/depression which is as much unavoidable as it is needed as well to wipe out the final excesses of a 23 year long 5 wave market cycle. As we all know, 5 th waves of any degree are just reflecting a collective ILLUSION (the illusion being that growth would last forever, no matter what degree of risk taking would be involved in the financial practices of individuals and private/corporate companies) which is DUE TO BE ERASED .
In other words, the MINIMUM depth of a bear market will be ERASING “wave 5” , which is as good as saying that ALL the featured economical indicators (US banks, XBD, DJIA, margin debt, consumption) involved in the 23 year credit bubble will keep on sliding until their respective “wave 5” has been wiped out . For example, it means that the oncoming generational depression in the USA is going to carry consumption down to 66% of GDP over the next 5 to 10 years (see chart #3 ) . Of course, you MUST keep in mind this really large view upon the size and depth of the mechanism at work since the peak of a 23 year long “credit bubble” in 2007: despite reassurance from many experts in the public media, you will know that 23 years of ever growing excesses will NEVER be solved within a year or 2. Much on the contrary, anyone should be aware that “the world is going to shrink” for the next 5 to 10 years .
Chart #6
Of course, the TOP key factor characterizing this “shrinking world” will be “price inflation” amidst “credit deflation” most likely leading to “GDP deflation”; until the top of green wave 3 with credit inflation was reached in 2000 (see chart #2 ), we lived in an easy world of expanding credit while consumer prices were pretty stable (there was no “price inflation”). But since 2003, it has become more and more apparent with each year that prices are now going UP and eating up a growing portion of discretionary spending.
How MUCH “price inflation” may have to go further on the upside can be easily gathered from chart #6 : in 2007, food prices have just emerged out of a 30 year flat trading band; “the longer the trading band, the wider the swing inside the trading band, then the bigger in time and size the ensuing bull” does belong to the basics in TA . The current case with OIL is clearly referring to these basics after OIL emerged in 2005 from a 24 year band between $ 10 and 40; despite a 250% gain over $ 40 at $ 140, the latest EW assessment of the bull market with OIL ( chart #12 ) does still leave a lot of room to the upside, which is NO surprise after a 24 year flat band. Another current case of “flat band” is COPPER : after trading for 32 years between $ 50 and 150 from 1973 to 2005, COPPER did break out in 2005; with a current high around $ 400 (this is already a 165% gain over $ 150), COPPER has still a long way open for higher prices; as to food prices, it would be hard to find even one practitioner of TA that would feel satisfied with $ 400 as the final peak for CRB FOOD ; alternately, a modest 200% gain over 280 would carry CRB FOOD around 840 which is still a “nice” doubling from the latest highs.
And if a reasonable link should be drawn between charts #1+2+6 , it would obviously be the link of HYPERINFLATION which is always the ultimate price to pay for prolonged inflation/printing of paper money; in other words, when paper money becomes worthless, bread is soon becoming an unaffordable item. Beyond the luring surface of a thick difference in the degree of their relative economical development, the choices (can you be blind about what you do for 23 years?) made by USA and Zimbabwe have led the two countries to hold something in common nowadays . That is just the message from chart #6 after 23 years of suicidal “paper money inflation” in USA . Sadly enough, hyperinflation can not be limited to USA but will affect the entire world.
Now that the final peak of green wave 5 ( chart #2 ) has marked the beginning of a prolonged period of “credit deflation”, we are bound to live in a “shrinking world” (less credit=less opportunities) while the “price to pay for any opportunity” (just to name a few, “food”, “transport” and “salary” are 3 common “opportunities” among many) is going to RISE (this is “price inflation”). Of course, “price inflation” AND “credit deflation” acting SIMULTANEOUSLY are TWO forces reinforcing each other to make the world “shrink” even more . It hardly needs to be said, but in this “shrinking world”, opportunities for financial prosperity will be scarce AND quite different from what investors have got accustomed to over the last 23 years of “credit expansion”.
Of course, the multi year generational depression ignited in 2007 will be characterized by the VISIBLE decline of American power in the next years and decades. No matter if events pull out a different façade for the same events, history DOES repeat itself. Once the “workshop of the world”, England had to accept the erosion of its producing base to the benefit of USA around the end of the 19 th century; as a consequence, England could not avoid the continuous debasement of its currency which ultimately led to the political, economical and military demise of England; previously regarded as the world power “number one”, England was replaced by USA which did emerge as the new world power “number one” in 1948 when the US currency was awarded the role of “gold backed reserve currency”.
When USA did abandon the official link between gold and the US $ in 1971, it was the early evidence that a long process of economical deterioration and currency debasement would start and lead to the ultimate demise of USA as “world power number one”. As we know from past history, the long process of global deterioration for USA would be characterized by the continuous erosion of its productive base while this loss of producing power would benefit to the major challenger AND be stigmatized by a continuous debasement of the US currency. As a matter of fact, the “repetition of history” has become easy to identify: first of all, we know that the ongoing economic “prosperity” since 1982 is an extended “wave 5” ( chart #4 ) while we know that any “wave 5” is characterised by an excess of optimisms leading to fatal illusionary choices. Second, could there have been a clearer collective illusion for USA over the last 23 years than choosing “debt driven consumption” versus production?
Now that China has become with no doubt the “workshop of the world” in place of USA , every one should keep in mind that the wheel of time does turn BUT never turns back. In other words, the collective illusion pursued by USA as a whole (US banks have been willing to adopt ever looser practices of credit for 23 years, BUT consumers have been WILLING to accept ever higher risks of failure in their personal finances, so the years from 1982 to 2007 have been a COLLECTIVE illusion on both sides that “life can be easy going on credit”) has now run its entire course to the final peak of illusionary optimism in October 2007. It should be no surprise to anticipate that this collective suicidal choice would ultimately lead to a severe depression; it is as well no surprise that the current EW scheme does account for a lasting retreat of all world stock markets. It is no surprise either that China has emerged as the undisputable “workshop of the world” at the very same time when EW speaks for USA standing on the verge of economical collapse after a 23 year long collective illusion thru blue wave 5 of green wave 5 ( chart #4 ).
As we know from history (see the 30s during the 20th century which marked the transition time window between UK and US power) , the next decade will experience many years of growing political and economical instability with HIGH risks of a MAJOR war taking place after many years of “pain” have made “the worst” an acceptable part of life. As we also know from past history, China will most likely emerge as the MAJOR world power at the end of this multi year transition time window.
Now that we have targeted at how serious the probability is that October 2007 has been the final peak of a global 23 year long “credit bubble” originating in USA , we're left with the urgent need to assess the imminent course of world markets . Let's start with chart #5 (featuring ADR for international markets and XBD for US banks) : indeed, there can be NO hope to see any bull market soon. XBD has clearly experienced a true and full 5 wave move from 2003 to 2007 while the current trend ( red line from the tops ) has no reason to reverse until both price targets have been reached (see 2 blue circles ). As a consequence, we're facing a 15 month H&S pattern with ADR which has severe implications. Of course, the MAIN relevant question as to the immediate future is whether that H&S pattern is going to “work” or not. Both charts #7&8 are here enough to see why an acceleration of the global slide is to be expected right now .
Chart #7
Chart #8
Indeed Chart #8 does make clear that the rise from mid March to mid May 2008 has been a full 5 wave move with an extension in the final 5 th . As the latest new lows achieved demonstrate (see green circle in chart #7 ), the possibility that the mid March to mid May leg would be a “wave 1” into a new bull is now erased; as a consequence, it can only be a “wave c” inside a counter rally as 3-3-5 or 5-3-5. It is then with NO surprise that we find a perfect EW scheme with chart #7 where the mentioned counter rally does appear as the last 5 wave leg of a B wave featured as red abc .
Chart #9
We have now gathered full TA and EW evidence that the 15 month H&S top will “work” and that mid May is the ignition point of a full 5 wave move down ( blue wave C within blue ABC as a 3-3-5 ). Furthermore, charts #9 to 10 just come in handy to gather more SIMILAR evidence about how critical the current EW juncture is for world markets.
Brazil has been a rare and isolated case of strength since October 2007 with new highs around mid May 2008 ( chart #9 ); but the last weekly close (see blue circle ) has definitely broken the close at the low of January 2008; as a consequence, it is now undisputable that the entire market move with Brazil since the tops of October 2007 is just a large ABC scheme . In other words, we get with Brazil another undisputable confirmation that global markets have embarked on a large ABC pattern since October 2007 where the peak of mid May 2008 is the ignition point of “ wave C ”.
Chart #10 is another strong confirmation with China and the Shanghai Composite index (SSEC) of how CRITICAL the global market juncture has grown to be right NOW . As a matter of fact, the new weekly low achieved this week (see green circle ) is banging the door wide open to a green 12345 extension for SSEC .
If we now turn to Hong Kong with chart #11 , we find another twin path with an imminent green wave 3 : indeed, no matter where you look, ALL technical evidence is there to support the case that a global large green 12345 slide is at work as blue wave C since mid May 2008 while we would just stand at the door of green wave 3 (the WORST acceleration to the downside of the entire move since the tops in October 2007).
What's more, chart #12 is assessing another critical juncture for global stock markets: there is NO technical evidence that the bull market with OIL therefore with all raw materials would be over; much on the contrary, ALL technical evidence is that OIL has now reached the lowest level ever possible within red wave 4 : on one side, the slide of red wave 4 is limited by the top of red wave 1 (overlap rule), and on the other side it is also limited by the long term green uptrend ; as both market junctures currently meet together, OIL looks like a yelling “buy me” case. Of course, this can't be a good thing for global stocks, especially as latest economical data have already revealed how high oil prices are now hurting consumption in developed countries.
As a matter of fact, the new lows now (we mean at the weekly close on Friday, August 15, 2008 ) achieved ANYWHERE (ADR, Brazil , China , etc.) EXCEPT FOR USA really look like they are revealing the end of the short term rebound which global markets experience from the low of green wave 1 ( chart #8 ) . Indeed there has not been any real improvement to be seen with fundamentals over the last few weeks and it DOES look like the “energy” behind that rebound just came from the lucky conjunction of 2 medium term “factors” of temporary relief: on one side, US authorities enforced a short term TRICK with a regulatory ban on short sales in the US banking sector which did trigger an immediate rally from the low of green wave 1 , on the other side, oil prices started a 4 week slide at the very same time. Now that OIL has reached a clear point of reversal to the upside, it seems to be a perfect “time window” for investors to REALIZE at last that no true market reversal can possibly be “ ORDERED ” by any regulatory ban of any kind amidst deteriorating global conditions. It is at least what TA evidence is foretelling in many different ways.
Chart #10
Chart #11
Chart #12
Meanwhile world stock markets should now be all set for an immediate acceleration into green wave 3 which will later appear as the WORST impulse leg to the downside of the entire blue ABC move from the tops in October 2007 ( charts #5&9 ). But in order to keep events anchored into the right perspective, one should always remember that this blue ABC global slide (see chart #5 ) should later appear as brown wave A within a larger brown ABC slide (see chart #4 ) giving deep roots to a recession/depression of generational depth and length taking place as the obvious and self inflicted “punishment” for 23 years of expanding “credit mania” from 1982 to 2007.
If world and US stock markets should now stand at the last gate to a bear market of generational size and depth at the end of a 23 year long cycle of “credit inflation” starting in 1971 with the end of gold backing for the US currency, we all know too well from history (read about the Roman empire, the French Assignats or the Weimar Republic) that troubled times lie ahead: one more time, the price to pay for prolonged currency debasement thru credit inflation/paper money printing should ultimately go spiralling into a violent unwinding of the debt mountain which such loose monetary policies always succeed to bring about; one more time, an entire generation is likely to suffer heavily from growing social, economical and political instability
IF NOT WAR at worldwide level without bearing ANY responsibility for the CAUSE of dismantling forces erupting solely from the behavioural excesses of previous generations. As usual, well informed and prominent people will tell you not to worry because “this time around, things are different”. Sadly enough, the only “difference” we may experience (again) is about the outward appearance of the same underlying events: as USA now starts to appear “naked” with a crippled banking system on top of unsustainable indebtedness, no one should be surprised that American political and military power will be more often and more severely “challenged” than ever before by other contending countries willing to take advantage of US weakness to gain a larger share of world power and influence. In this regard, the Russian blitzkrieg in Georgia taking place during the 2008 Beijing Olympic Games is nothing but a clear sign that American power has decreased badly enough to give space to openly aggressive politics by the Russian state.
YES , facts and events do and will LOOK different. But the way the European Union is confronting Russia after the invasion of Georgia should obviously be reminiscent of the way Neville Chamberlain confronted Hitler in 1938. YES , the outward appearance of events is different. But it does not take much thinking to realize that times of greater INSTABILITY have already started. Of course, the further unwinding of blue wave C for global markets (see ADR in both charts #5&7 ) will most likely induce growing worldwide economical and geopolitical instability for which we just got a deep foretaste at a time known to be a symbol for “world peace”.
That is a long excerpt from what was lately explained in the newsletter now made available from GEW. Should you be interested, you may get in touch at ericchevrette@yahoo.fr
Eric F.M. Chevrette
France
eric_chevrette@yahoo.fr
Fone: 00.237.9.660.53.59
© 2008 Eric F.M. Chevrette
Eric Chevrette translated Bob Prechter's “Elliott Wave Principle” in 1989 after graduating in 1984 from the ESCP (Ecole Supérieure de Commerce de Paris, see http://www.escp-eap.net ) which has been ranked 6 best business school in Europe by the Financial Times in 2006. He since has become interested in “market forecasting” and “global economical analysis” since 1987 and is currently helping people to protect and grow their assets while anticipating the big trends.
Eric Chevrette Archive |
Comments
|
Eamon
20.08.08, 15:00 |
Charts and smarts...
Forget the charts, Eric. This is not some "cyclical" event, and sound money NEVER leads to such "cycles" anyway. This is going to annihilate the present world economy, and all historical comparisons will prove useless. God be praised, the money manipulators are melting down everything for their own, wicked purposes, but He will destroy them, turning their labors, after much pain, into a boon for the long-oppressed commoners (who are despised by the Luciferian bankers). God speed. |
|
Tom
20.08.08, 19:19 |
Elliott Wave Analysis
What happened to "hells bells for market bears" published April 13, 2008 ??? http://www.marketoracle.co.uk/Article4319.html |
|
George Soros
31.08.08, 16:47 |
turning bearish?
Bearish??? I went all in on the Shnaghia on your advice. I'm now out about a billion or so. Call me next time...Jeez.. |
Post Comment (Moderated)
|
