After the rally from 2009 stock market bottom, stocks relentlessly marched up often without a breather. We have reported complacency has reached extreme levels in the past. But that in itself does not pinpoint a top. But when we have multiple measures lining up, one has to stop and contemplate the possibility that we are seeing the view from the very top.
It is amazing to read assertions from the Fed and others that the stock market is nowhere near being in a bubble. Several aspects of the financial environment are actually so extreme as to be unprecedented. Some indicate a bubble, and others a bubble in trouble.
Below are eight indicators we are watching closely, among others.
1) Record debt in U.S. dollars
Total dollar-denominated debt peaked at $52.7 trillion in early 2009. At the end of Q1 2015, it stands at $59 trillion, an unprecedented amount.
2) Margin Debt at All-Time Highs
Never have more trading-account owners owed so much money, and never have they had such a low level of available funds from which further to draw.
3) Stocks Are Overvalued (based on dividend yields)
The Dow’s annual dividend payout has been less than 3% for 235 out of the past 246 months. Prior to the bull market that started in 1982, the longest duration under 3% was just one month, at the top in 1929.
4) Fund Managers Are Maxed Out
The percentage of cash in mutual funds has been below 4% for all but one of the past 70 months (a period of nearly six years). Prior to this time, the longest such duration was only nine months, a streak that ended in October 2007.
5) Stocks are at a Triple Extreme
Previous triple manias occurred in 1901/1906/1909 and 1965/1968/1972, and both led to severe bear markets. This one is even bigger and has lasted longer.
6) Stocks Rose on Low Volume for Six Straight Years
Such a thing has never occurred before — one year, maybe, but not six.
7) Unprecedented Divergence Among Major Indexes
On May 20, we published an interim issue of The Elliott Wave Theorist to tell subscribers:
Today something amazing happened: The Dow Transports closed at a 6-month low on the same day that the S&P 500 made an all-time intraday high. I doubt this has ever happened before.
The Dow Theory non-confirmation between the Dow Industrials and Transports is now [more than] six months old. This big a divergence, for this long a time, is very bearish.
Advisor Bearishness at 38-Year Low (optimism near record high)
The 30-week moving average of the percentage of bears among stock market advisors is at a 38-year low. (Investors Intelligence data is inverted to show optimism.)
Are you prepared for the market crash? Beware! By definition, only the few can sell at the top which is a point in time. When it comes to pass, a rapid decline can wipe out years of gain in a matter of weeks! It has happened in the past. Do not think this time is any different.
“Chao gu” is the Chinese term for speculating in stocks. Roughly translated, it means “stir-frying” shares. Lately, though, for millions of Chinese investors, it means getting fried.
Enter the “nerve-shredding,” “whiplash-inducing,” rollercoaster “tantrum” of China’s stock market. After soaring to 7-year highs on June 12, both the Shanghai Composite and Shenzhen stock indexes collapsed in a respective 21% and 25% sell-off (as of June 30), frequently marked by wrenching intraday swings the likes of which haven’t been seen in 20 years.
In the words of one June 28 news source (bold added):
“You have to have a very strong stomach to trade in China. You have to be prepared for days when you are up or down more than 5% and there is no clear fundamental explanation.” (FinanceAsia)
In fact, not only isn’t there a bearish fundamental explanation for the market rout, but those fundamentals widely seen as bullish for stocks have also failed to stem the slide. Take, for instance, these recent stock-boosting initiatives on the part of the People’s Bank of China:
A .25% cut to both its 1-year lending and deposit rates
A decrease in banks’ reserve requirements to loosen the lending spigot
The first-ever approval of local government pensions to buy stocks
That China’s stock market shrugged off these (and other) supposedly bullish catalysts hasn’t gone unnoticed. In the words of one Chinese investor, these moves imply “the stock market is kidnapping the government.” (The Globe & Mail, June 30)
Well, he’s sort of right. The moves imply the government is not in control of the market. Actually, on June 5, our own Asian-Pacific Financial Forecast expressed this exact sentiment and wrote:
“China’s current bull market is not a product of government stimulus or of investor ignorance or — as a prominent short-seller told CNBC this week — ‘the largest pump-and-dump in history.’ “(Bloomberg, 6/1/15).
So, what is it a product of? Well, our Asian-Pacific Financial Forecast provides this Elliott wave explanation:
“Actually, it’s the initial wave within China’s wave V up, which followed the end of its wave IV contracting triangle.”
In other words, Chinese stocks have been in a bullish Elliott wave formation, but those don’t develop in a straight line; you should expect pullbacks, whether or not there is a good “fundamental” explanation for them.
In fact, before the current rollercoaster ride began, our Asian-Pacific Financial Forecast wave count showed China’s stocks nearing a wave 3 peak, setting the stage for an important decline. On June 5, we wrote:
“The indexes should soon correct in wave 4 for some weeks”
One week later — on June 12 — China’s stocks turned down in the stomach-churning decline we see today.
Whether this decline marks a long-term top for China’s bull market — the same June 5 Asian-Pacific Financial Forecast shows you what key indicators to look for, and when.
The best part is, EWI has bundled exclusive charts and commentary from that subscriber-only report and made it available as a FREE resource to all Club EWI members.
This free resource, titled “China Stocks: Where Have They Been and Where Are They Going?” may be the most valuable report you read on the developing trend in China’s stock market. And the best part is, it’s absolutely FREE to all Club EWI members. If you haven’t joined already, a life-time membership to Club EWI is also FREE!
This article was syndicated by Elliott Wave International and was originally published under the headline China’s Stock Market Rollercoaster Ride Continues. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
The real reason consumers aren’t spending is not a matter of monetary policy; it’s a matter of psychology.
On June 2, the postman rang once — and, boy, did he ring.
That day, the Wall Street Journal published a strongly worded letter titled, “Grand Central: A Letter to Stingy American Consumers,” which included these notable passages:
“Dear American Consumer,
“This is the Wall Street Journal. We’re writing to ask if something is bothering you. The sun shined in April and you didn’t spend much money. The Commerce Department here in Washington says your spending didn’t increase at all, adjusted for inflation last month, compared to March.
“You’ve been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What’s up?
“Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates. We listen to Fed officials all of the time here at The Wall Street Journal, and they just can’t figure you out.”
Well, on behalf of the “stingy American consumer,” we’d like to answer this letter to best of our ability.
“Dear Wall Street Journal,
“Your frustration is well founded. Something is off. People have taken the Fed’s gift of free money and returned it to sender. This isn’t normal, as the chart of the total savings versus the Federal Funds rate since 1975 shows.
“Here you can see that for the better part of four decades, lower rates coincided with mild to steady savings… until mid-2000. Then, the pattern changed drastically. The cheaper it became to borrow, people borrowed less — a lot less.
“‘What’s up?,’ you ask? What changed to compel this radical shift toward thrift?
“In Chapter 9 of his business best-seller Conquer the Crash, Bob Prechter explains:
When the social mood trend changes from optimism to pessimism, creditors, debtors, producers, and consumers change their primary orientation from expansion to conservation.… consumers save more and spend less.
A defensive credit market can scuttle the [central bank's] efforts to get lenders and borrowers to agree to transact at all, much less at some desired target rate.
During deflation, they cannot even induce them to do so with a zero interest rate.
“Deflation? Nobody said anything about the “D” word, but in fact, that’s exactly why consumers have gone on a buying boycott. Conquer the Crash writes:
These behaviors reduce the ‘velocity’ of money, i.e. the speed with which it circulates to make purchases, thus putting downward pressure on prices. These forces reverse the former trend.
“Note the emphasis on ‘downward pressure on prices.’ Here, our November 2014Elliott Wave Financial Forecast shows you ample evidence of its arrival:
Most economists are baffled: ‘One of the greatest mysteries is why the U.S. has lacked inflation, despite all the money being pumped into the economy.’ This long-term chart of the CPI shows a succession of lower highs since the early 1980s, as inflation turned into disinflation, which is on the cusp of leading to outright deflation.
Some argue that the Consumer Price Index is rigged to show milder levels of inflation, but the bottom graph shows the same steady move toward the zero line in the Personal Consumption Expenditures Index, an alternate inflation measure favored by the U.S. Fed.
“Deflation is rare. Because of that, few people understand it. Deflation is also tricky, because it makes even the most ‘reliable’ financial assets to lose value, and those assets that no one expects to grow to actually gain.
“The ’stingy’ consumer is not the cause; it’s the effect of a deflationary trend now underway in the world’s largest economy.”
Elliott Wave International’s European markets expert Brian Whitmer often cautions his subscribers to beware of the pitfalls that will accompany the developing deflation in Europe.
On May 20-27, Brian is hosting a free 5-video event at elliottwave.com: Investing inEurope: 5 Critical Insights.
“Europe seems to be leading the way on important global trends, so even if you don’t invest in Europe, knowing about these trends in advance can help you determine your investment strategy.” — Brian Whitmer
Excerpted from the April 2015 European Financial Forecast (pub date: March 27.)
One big clue to the size of the oncoming debt deflation is the central bank’s ongoing policy shift away from bail-outs — where taxpayers shoulder the losses at a failed bank — and toward so-called bail-ins, where the losses are dumped onto bondholders. In February 2015, we commented that “the days of unconditional financial rescues are clearly over,” and it took almost no time for this forecast to become another hard-hitting reality. Indeed, “Europe’s latest debt nightmare” (UK Telegraph, 3/7/15) quickly thumped bondholders in Austria, as its Financial Market Authority refused to cover €10.2 billion in bond guarantees at Heta Asset Resolution (Heta). Heta, itself, was the so-called bad bank created in 2009 to absorb the soured assets of another failed lender, Hypo Alpe Adria. It’s the first major banking failure under Europe’s new Bank Recovery and Resolution Directive, and it displays nearly every pitfall that we’ve spent months cautioning subscribers to avoid. Here, for instance, was our September 2014 admonition to senior debtholders at Banco Espirito Santo, who only narrowly avoided losses when the Portuguese conglomerate went belly up (emphasis added):
The terms of the rescue call for BES’s junior bondholders to share in the losses with stockholders…. For now, the rescue won’t affect senior bondholders or bank depositors, but, like before, this arrangement should change at some point in the near future.
–European Financial Forecast, September 2014
In Austria’s case, the near future proved to be closer than we thought, as sources in Vienna tell the Telegraph that “even senior bondholders are likely to face a 50% write-down.” The top panel on the chart depicts a 50% nosedive in Heta’s 4-3/8% note, expiring in January 2017. These bondholders have become the “first victims of the eurozone’s tough new ‘bail-in’ rules,” according to the Telegraph, but they won’t be the last. The bottom panel on the chart depicts the long-term decline in Austria’s ATX index, and Bloomberg reports that Europe is “awash with interlinked banking and public liabilities, many of which will never be repaid and basically need to be written off.”
In fact, financial ripples from the Heta debacle started spreading immediately. On March 16, Germany’s association of private banks stepped in to rescue Duesseldorfer Hypothekenbank AG, a real estate lender with €348 million in exposure to Heta. Property lender NordLB reported €380 million in exposure, while BayernLB, the German bank with the largest known exposure, reported €2.35 billion in unsecured credit lines to Heta. Germany’s Commerzbank (€400 million in Heta bonds) is considering legal action against Austria’s decision, but the potential lawsuit provides little comfort for investors sitting on major losses now.
A Simple Fight Over Money
Austria’s debt write-down uncovered more than the weak assets that pervade the books of European banks; it exposed the political rifts that divide the country itself. Indeed, most of Hypo’s original bonds were underwritten by the southern Austrian region of Carinthia. When Fitch ratings stripped Austria of its AAA credit rating in early March, finance minister Jorg Schelling took to public radio demanding that Carinthia pay its full share. The following day, Carinthia’s premier Peter Kaiser shot back. “Carinthia cannot pay,” said Kaiser, observing that the €10.2 billion in debt guarantees amounted to more than five times the region’s annual budget. (Deutsche Welle, 3/4/15)
It’s true. And with nearly €1 billion in Heta bonds coming due, Austria’s Der Standard anticipates that a “flood of lawsuits” will inundate the Austrian courts. The problem is that these floodwaters will keep rising in an environment of sustained deflation. In February 2015, the EU commission revealed that national governments are backstopping more than €1.2 trillion of various forms of debt. At €113 billion (35% of GDP), Austria is one of the biggest users of state guarantees. But Ireland, too, has contingent liabilities that amount to 32% of its economy, and Germany is backstopping debt that equals 18% of national output. Last month, GMP warned about the dangerous interdependence between European banks and their respective sovereign governments. The hazard is fast getting real now.
This article was syndicated by Elliott Wave International and was originally published under the headline One of Europe’s Latest Debt Nightmares. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Lyndon McLellan owns the L&M Convenience Mart in rural North Carolina. A few months ago, the Internal Revenue Service went to McLellan’s bank and seized all the cash in his store’s account.
McLellan had violated a “structuring” law by making cash deposits of under $10,000. Structuring laws are supposed to catch drug traffickers and money launderers. But small business owners can also unknowingly run afoul of these laws.
Last July, a swarm of officers from North Carolina’s Alcohol and Law Enforcement, the local police and the FBI descended on McLellan’s place of business.
The agents told the small business owner something that shook him to his core: The Internal Revenue Service had seized all of the money in L&M’s bank account: $107,702.66.
“‘Are you telling me you took my money?’” McLellan recalled asking the agents. “I didn’t understand what was going on. They dropped a bomb on me. I was lost for five to 10 minutes. I can’t believe that y’all guys can walk in here and tell me y’all took every bit of my money out of the bank.”
The Daily Signal, May 11
McLellan is still fighting to get his money back.
“In 2005, the Internal Revenue Service made just 114 structuring seizures. By 2012, that number had risen to 639.”
This story shows how the government can financially upend the lives of citizens.
Consider this excerpt from the March Elliott Wave Theorist:
The most vulnerable money is sitting in bank accounts. Depositors in Cyprus banks found that out in 2013, when the government seized a large portion of uninsured deposits to pay its debts to the EU. …
… I have long advocated holding outright cash notes, which are already preserving value better than commodities and negative-interest-rate bonds. But we cannot depend upon government to act fairly. If in a future panic central banks opt to recall cash, even cash-holders will be doomed. All authorities need do is demand that people turn in their cash for new notes worth 1/10 as much. In 1933, the U.S. government confiscated gold because that was the money of the day. Now, dollar deposits and cash notes are the money of the day, and they are even easier to seize.
We’ve been updating subscribers on the “War on Cash.”
JPMorgan Chase Bans Storage of Cash in its Safety Deposit Boxes (InfoWars)
Citi Economist Says It Might Be Time to Abolish Cash (Bloomberg)
Sweden moving towards cashless economy (CBSNews)
Large U.S. bank bans wire transfers, limits cash withdrawals (TheCrux)
Giant financial institutions and the government are now waging a large-scale war on cash.
This is the time to get the financial insights you need to protect your hard-earned savings.
Big government is conspiring with big banks to wage a secret war on cash by limiting and even outlawing the use of physical currency. This development may have a devastating impact on your hard-earned savings unless you prepare right now.
This article was syndicated by Elliott Wave International and was originally published under the headline Why the IRS Seized All the Money from a Country Store. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Most tech stocks lead by Silicon Valley companies had a great run after the 2009 bottom. Nasdaq once again reached above 5000. The Silicon Valley traffic is unbearable, the rents for tech workers are unpayable, housing in the valley challenges prior heights, or already above. Yet the stock market pundits make us believe stock have a lot more to run. Is that really so?
On March 2, the day of the all-time closing highs in the major stock indexes to date, a swift-acting subscriber snapped a photo of this headline on financial news television.
Notice the sub-header: “Back from the bubble.” I think it should read, “Back in the bubble.” But few people agree with that idea.
A new article published on March 3 — which means the interview took place on March 2, the day of the Nasdaq’s high so far — included a revealing quote. The reporter asked a gentleman who started a tech fund in late 1999 (a few months before tech stocked topped and crashed), “Will investors ever see a bubble like the dot-com boom again?” The answer: “It’s unlikely.” Could we not be making the same old mistakes again?
This Q&A is more evidence that people forget their prior moods and rationalize present extremes into normality no matter what is happening around us.
Will we see another bubble? We are in one now, by some measures the biggest one ever. If people do not consider this a bubble, then I guess it makes sense to say that those living will not see one again.
Most articles focusing on the Nasdaq Composite index’s return to 5000 quote professionals saying that this time it’s different: The last time was “dreams,” but this time there are “real profits.
Investors are often non-rational in the past but never now.
It is true that the 2000 top in the tech sector capped a bigger mania than we have today. But today’s condition is still a mania. Last year saw just shy of $50 billion worth of venture capital invested in start-up businesses, most of which are technology companies. The only years of higher investment levels are 1999 and 2000, as the stock market reached its greatest overvaluation ever, by multiples.
2014 is “only” the third-bubbliest year in U.S. stock market history. Yet most bubble talk today excuses the situation. It generally comes in three types:
“There is no bubble” (that’s from the Fed and most economists);
“It’s early in a bubble with much more to go” (that’s from the average money manager); and …
“It’s definitely a bubble, but it’s not as extreme as the last one, so stay invested” (that’s from most other people who’ve commented).
Not everyone lives in the illusion. Mark Cuban gets it. Calling the current tech bubble worse than the last one, he highlights the fact that there is no liquidity underlying angel investors’ huge investments in tech companies. That’s the same message we get from the overall stock market’s low volume. When tech investors and other stock owners decide they want out, low liquidity will mean few buyers, and even willing buyers will have little or no credit available, per the margin-debt statistics cited above.
Money manager Crispin Odey gets it, too. On January 27, he was quoted as saying that the bear market is “likely to be remembered in a hundred years… there will be a painful round of debt default.”
These comments sound like ours here at EWI. The following comments are far more typical:
“There’s no basis to call for a market peak,” [a respected manager of over $9 billion], 71, said today in an interview on Bloomberg Television. “It could be a couple more years. I don’t see signs of euphoria in the stock market,” he said. “Maybe a pocket or two of overpriced equities but, by and large, people have been very conservative in their approach, so that’s not an issue.” (Bloomberg, January 22)
“People are underinvested and continue to want to own this market,” says [a highly regarded technical analyst]. He sees things aligning with the market of the 1950s and early 1960s, when U.S. stocks ultimately rose five-fold. In the current bull market, the S&P 500 has roughly tripled off of 2009’s low, and “if this plays out like I think it will, this is still the early innings of a secular bull run.” (The Wall Street Journal, December 30)
Here’s a headline from this week:
How long can the bull market keep going? Most analysts expect continuing rise, with no signs of peak on the horizon
– Atlanta Journal–Constitution (AP), March 10
Comments in the press in more recent days include: “The United States is back, and ready to drive global growth in 2015.” “Plunging oil prices are a big reason for the optimism.” And: The economy is “like a perfect storm to the upside.”
In the meantime, an incredible 89% of large-cap-stock money managers — who are about 96% invested — have produced less return than the S&P over the past five years:
86% of big-cap fund managers trailed S&P 500 in 2014
In 2014, 86.4% of large-cap equity fund managers underperformed the S&P 500. Over a five-year period, 88.7% of large-cap managers failed to beat the benchmark, and over a 10-year period, 82.1% underperformed. Among mid-cap managers, 66.2% lagged the S&P MidCap 400 on a one-year basis, and 72.9% of small-cap managers lagged the S&P SmallCap 600, S&P Dow Jones Indices said in a news release Thursday. In fixed income, a significant majority of the actively managed funds in the longer-term government bond and longer-term, investment-grade corporate bond categories underperformed their benchmarks, the release said. (Market Watch, March 12)
The reason for this lag is that there is a mania in the benchmark, which managers can’t outperform, while quiet weakness attends a broad list of stocks. The same thing was happening when the S&P was the focus of speculation in 1999.
On Friday (Feb. 27), the 4th quarter U.S. GDP was revised downward to 2.2% from the original 2.6%.
“U.S. stock markets shrugged off the revision,” wrote Fox Business. And why wouldn’t they — after all, the conventional wisdom says that as long as the economy is growing, so will the stock market.
Except, it’s not exactly true.
See, if that notion were true, then you’d have to assume that the U.S. economy was in a bad shape in 2007, when the stock market began its biggest decline since the Great Depression. But the facts show the opposite.
When the Dow topped in October 2007, key economic measures were in fact very strong:
In the quarter preceding the market peak, GDP expanded at 2.7%
Unemployment in 2007 was 4.6%
Consumer confidence was very strong, too (top red circle; chart: Bloomberg)
If a strong economy today means a strong stock market going forward, then stocks should have continued higher. They didn’t. The Dow fell more than 50% over the next year and a half:
If you feel that’s counterintuitive, then fast forward to early 2009. That’s when we saw the exact opposite economic picture:
Consumer confidence fell to an all-time low (the second red circle on the blue chart)
GDP growth fell to a negative 5.4%
Unemployment rate more than doubled to almost 10%
Because of such terrible economic data, few mainstream economists were optimistic in early 2009. And yet the stock market bottomed in March of that year.
This reminds me of a quote from our monthly Elliott Wave Theorist:
“Suppose you were to possess perfect knowledge that next quarter’s GDP will be the strongest rising quarter for a span of 15 years, guaranteed.
“Would you buy stocks?
“Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929.
“GDP was positive every quarter for 20 straight quarters before the 1987 crash — and for 10 quarters thereafter.
Experienced traders say that sometimes, just 2 or 3 good trades make their entire year.
True: If you get in early and ride the trend for a few weeks or months, that may be all you need. That’s why having a perspective on the markets is so important.
That’s also why, our friends at Elliott Wave International, have hand-picked the best clips from their trader-focused “Outlook 2015″ video series to share with you and give you a fresh perspective in 5 key markets: EURUSD, EURJPY, GBPJPY, Crude Oil & Gold
Access this free video series now and get new video forecasts by 4 of EWI’s veteran Pro Service analysts.
Each of the four videos will show you the market’s big Elliott wave picture, give you a forecast for the weeks and months to come — plus several short, punchy, market analysis lessons in Elliott waves/technical analysis you can use again and again.
Crashing oil is all over the news. Mainstream media tells us why the oil fell. And we keep hearing that it will continue to fall. But back in June all we heard was why the oil was destined for new highs. Why is the new so useless?
Because 99% of oil forecasts out there are based on so-called fundamentals. The same “fundamentals” that back in June, when oil cost $107 a barrel, promised even higher prices due to:
The rising threat of Islamic State in Iraq
Weak U.S. dollar and
Strong U.S. job growth
Now that oil has fallen to $54, the same sources are giving you “reasons” why it should fall even more.
You can see what’s happening: Too many analysts simply extrapolate yesterday’s trend into tomorrow.
That’s like saying that because it’s sunny today, expect sun tomorrow, too. That’s not forecasting.
Elliott Wave International prides itself on being bold with its forecasts. They have just released a new report from their in-house Energy expert giving you a unique look at the trend in Crude.
Special Report: “Oil: What’s Next?”
EWI’s Chief Energy Analyst, Steve Craig, has lived the oil market for close to 30 years. In this free report, Steve shares his take on where oil has been — and where it’s going.
As early as 2011, our analysis warned that Europe’s deflation was coming — here’s why
For the economies of Europe, the past few months have felt like one long ice-bucket challenge that never ends: A perpetual state of shock induced by the bone-chilling fact thatdeflation
“…has become a reality in many European countries.” (Oct. 24, New York Times)
At last count, eight European nations are now in outright deflation, including:
Italy’s -0.1% annual inflation, the country’s first descent into deflation since 1959
Spain’s -0.3% annual inflation, the most serious deflation of any larger eurozone economy
France’s near 0.0% core inflation, the lowest in modern history
And no, in case you were wondering, it’s not the warm and fuzzy kind of “good deflation” being touted here in the United States, where the only consequence is lower prices. In Europe, it’s the
“…pretty awful kind.” “Titanic Europe headed for shipwreck” KIND OF awful (Nov.14, The Telegraph)
So, we ask you: What could possibly be scarier than deflation? How about — not even being able to foresee it?
Yes, deflation was a surprise to the financial authorities. Says one Oct. 12 financial blog post:
“It seems the entire world is cooling off in ways most political leaders and central bankers never saw coming. Global finance ministers are now up against a beast none have known in their professional lives.”
That’s what should keep adults like you and me up all night — the “never-saw-it-coming” part. Just how safe is our future if the people whose job it is to keep the world’s economies stable lack the tools to predict one of the most dangerous economic conditions?
This recent lack of foresight jives with what former Federal Reserve chairman Alan “The Maestro” Greenspan said in 2008:
“We can tell a bubble only after it burst.”
It also jives with what some big wig at the Organization for Economic Co-operation & Development said in 2012:
“The responsibility of the ‘latest’ financial crisis, which no one saw coming, should be borne by all of us.”
But the fact is — there was — and is — a way to see these deflationary economic sea changes coming.
This chart of the UK Consumer Price Index is a reliable bellwether for inflation in Europe. You can see that price expansion peaked in September 2011 at 5.2%:
At the time, the “D” word was completely off the mainstream radar. Soaring oil, grain, and commodity prices, alongside a stimulus-happy European Central Bank fueled widespread fears of runaway inflation.
One month before the top, Elliott Wave International’s August 2011European Financial Forecast laid the opposing groundwork:
“We maintain our stance, however, that the looming threat is not inflation but deflation. Far from a sense of relief, the Banks’ paramount feelings should soon develop into an unrelenting dread.”
Here’s what made us take a contrarian stance (among many other reasons):
[In the August 2011 issue,] for instance, we showed a chart of eurozone manufacturing production and British GDP growth. Both were falling, not rising, indicating Europe’s likely return to economic contraction.
[This] chart is another key piece of deflationary evidence… It shows the relentless downward trajectory of Swiss, German and British 10-year bond yields, which is one of the thorniest problems for those who take the inflationist worldview.
Bond yields aren’t just falling: 10-year Swiss, German and British yields collectively dropped to record lows last month. The unrelenting demand for Europe’s safest debt is a smoking howitzer that is blowing the inflationists’ case to pieces.
– The European Financial Forecast, Sept. 2011
However, the widespread call for inflation only continued to intensify in the mainstream finance. In fact, in February 2012, when the U.K. producer price inflation came in higher than expected, it prompted this word of advice from economists:
“PPI: Another wake-up call for apoplithorismosphobes, the clinical term for those who fear deflation. We recommend that sufferers ’seek therapy.‘” (March 12, Wall Street Journal)
Yet, our July 2012 European Financial Forecast remained committed to its counter claim:
“Our models say that inflation rates will keep failing until they’re again measuring the rate of deflation as they last did briefly in 2009.”
So, it’s now 2014 and deflation in Europe is no longer a specter or a figment of an unbalanced imagination. Here’s a comment from the September2014 European Financial Forecast:
“The central bank’s latest deflation-fighting contrivance is a €400 billion package of targeted LTRO loans, which are designed to compel banks to lend to ordinary business owners… The ECB has slashed its main refinancing rate to 0.15% and now charges for banks’ overnight deposits. The result? Shown below, Europe’s largest economy, Germany, just contracted 0.2%; French economic output has ground to a halt; and Italy just entered its third recession since 2008.”
Now that deflation in Europe is a reality, the question is — will it get better? Is this just a temporary economic condition that will be soon replaced with another one — the condition that economists are much more familiar with, inflation?
We don’t think deflation will surrender quite so easily. Want to learn more about deflation before it could potentially affect your investments?
Today, we invite you to read a free report from Elliott Wave International titled, What You Need to Know About Protecting Yourself from Deflation. This 10-page report will help you understand how you can better prepare yourself for its devastating effects.