April 6th, 2013
To understand the deflation problem, one must understand the nature of money and the amount of total debt in the US economy. In a credit based economy, money is created when banks make loans. Our money supply is not what Bernanke prints, but it is what we borrow. Fractional reserve banking coupled with interest based monetary system is the cause of Kondratieff Wave which defines the economic booms as well as the busts.
The widely reported $16.1 trillion federal debt is a drop in the bucket.
Financial transparency is a must for U.S. publicly traded companies. But if the federal government had to abide by those same regulations, more Americans would know that the often-reported $16.1 trillion federal debt doesn’t come close to the truth about the nation’s liabilities.
In a Nov. 26 Wall Street Journal opinion piece, a former chairman of the Securities and Exchange Commission and a former chairman of the House Ways & Means Committee write:
The actual liabilities of the federal government — including Social Security, Medicare, and federal employees’ future retirement benefits — already exceed $86.8 trillion, or 550% of GDP.
The authors say that few people know about the $86.8 trillion figure because that figure is not in print on any federal government balance sheet.
Federal debt is staggering enough. Municipal liabilities also pose a danger to the nation’s financial health.
Illinois has an unfunded pension liability of at least $83 billion. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states.
Bloomberg, Aug. 29
The article also noted, “California, with an A-ranking, one level below Illinois, remains S&P’s lowest-rated state.”
Budget shortfalls in California and Illinois are just the tip of the municipal financial iceberg. Many other state governments are financially swamped.
How did municipal spending get so out of control? Well, a stupefying story out of Bell, Calif., provides a hint. On Nov. 26, CNN reports that the Bell police chief earned $457,000 a year, and “He is now asking for more money.” In 2010, the Bell city manager resigned after controversy over his $787,000 yearly salary.
States Are Broke and Approaching Insolvency
… States’ legislatures continue to blow money. For years,
state governments have been spending every dime they could
squeeze out of taxpayers plus all they could borrow. (The
lone exception is Nebraska, which prohibits state indebtedness
over $100k. Whatever Nebraska’s official position on any
other issue, by this action alone it is the most enlightened
state government in the union.) But now even states’ borrowing
ability has run into a brick wall, because the basis of
their ability to pay interest — namely, tax receipts –
is evaporating. … The goose — the poor, overdriven taxpayer
– is dying, and the production of golden eggs, which allowed
state governments to binge for the past 40 years, is falling.
The only reason that states did not either default on their
loans or drastically cut their spending over the past year
is that the federal government sucked a trillion dollars
out of the loan market and handed it to countless undeserving
entities, including state governments.
The Elliott Wave Theorist, November 2009
If there’s another leg of the economic downturn, expect a further dwindling of tax receipts.
Finally, consider the wobbly financial dominoes in Europe and what may happen in the U.S. after the first one falls.
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Can the Fed Stop Deflation? Should you rely on the
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The following is a sample from Elliott Wave International’s new 40-page report, The State of the Global Markets - 2013 Edition: The Most Important Investment Report
You’ll Read This Year. This article was originally published in Robert Prechter’s July 2012 Elliott Wave Theorist.
In the first five months of 2012, there were 20 times as many Google searches on “inflation” as there were on “deflation.” This is down from a ratio of 50 times in June 2008. If any theme has been overdone over the past six years, it is the theme of inevitable inflation if not hyperinflation.
Inflation reigned for 75 years, from 1933 to 2008. People are so used to it that they cannot imagine the opposite monetary environment. Bullish economists have been calling for recovery, which means more inflation, and bearish advisors have been calling for a crash in the dollar, which means hyperinflation. No wonder those are the terms on which most people have been searching.
But only one word allows you to make sense of what’s going on in the world, and inflation is not it. The secret word is deflation.
- why interest rates on highly rated bonds are at their lowest levels in the history of the country;
- why the velocity of money is the lowest since the 1930s;
- why huge sectors among investment markets are down over 40%;
- why the Consumer Price Index (CPI) just had its biggest down month since 2008;
- why Europe is in turmoil.
Here are some details: Ten-year Treasury notes pay out less than 1.5% annually, their lowest rate since the founding of the Republic. Treasury bills yield essentially zero, their lowest level ever. The velocity of money failed to rise during the past three years of partial economic recovery, and it recently made new lows. Real estate prices have fallen 45% in the past six years. Commodity prices — as measured by the CRB Index — are down 39% over four years. This group includes oil and silver, two of the most hyped investments of the past decade. Remember in March when articles quoted analysts calling for $5, $6 and $8-per-gallon gasoline? In just three months since then, gas prices have fallen 15%, knocking the CPI into negative territory.
Deflation also explains why European loans are at risk, why Germany is tapped out, why Greeks are protesting in the streets, and why U.S. corporations’ overseas profits are down. Deflation lets you make sense of the world.
What is deflation? Economists define it three different ways, but I find only one definition useful: Deflation is a contraction in the overall supply of money and credit.
Why must deflation occur? Answer: There is too much unpayable debt in the world.
As argued in Conquer the Crash, it ultimately does not matter what the authorities do; they can’t stop deflation. This prediction is being borne out. Since 2007, the Fed has monetized $2 trillion worth of debt; the federal government has borrowed another $7 trillion; and it has pumped out $1 trillion worth of student-loan credit. Yet real estate and commodities slumped 40% anyway.
These drunken-sailor-type policies have indeed succeeded in nearly maintaining the overall volume of money and credit.
But in the long run you can’t fight a systemic debt overload by piling on more debt. The Fed and the government are shifting the burden of trillions of dollars’ worth of debt obligations from reckless creditors onto innocent savers and hapless taxpayers. The ploy might work if the public’s resources were infinite, but they aren’t. Perhaps this policy temporarily prevented a series of big institutional disasters, but it was only at the ultimate price of a gigantic public disaster.
Such actions have become politically less palatable. Some observers realize that the student-loan program of lending at below-market rates is exactly the model the government used for housing loans, which ended in a spectacular bust. Others know that the government cannot continue to borrow at the current pace and expect to stay solvent. Politicians on both sides of the aisle are tired of the Fed’s bailing out of highly leveraged financial-speculation institutions.
But whether these policies continue or are curtailed is irrelevant to the outcome. If the government slows its borrowing, the overall value of debt will fall. If the government maintains or increases its present pace of borrowing, interest rates will eventually turn up, and the overall value of debt will fall. There is no escape from deflation.
Ironically, investors in the past decade have been doing exactly the opposite of preparing for deflation. Convinced of perpetually rising prices, they have bought every major investment. They chased real estate up to a peak in 2006. They bought blue chip stocks into the high of 2007. They pushed commodities up to a peak in 2008. They chased gold and silver up to highs in 2011. And through spring 2012, they continued to buy stocks and commodities on any rumor that promised inflation: European bank bailouts, Operation Twist, the Greek election, Group-of-8 summits, Fed meetings, Bernanke press conferences, improved economic numbers, predictions of QE3, central-bank interest-rate cuts, you name it. Meanwhile, the U.S. Dollar Index hasn’t made a new low for four years. During deflationary times, cash is king, and by far most investors have chosen to own anything but cash.
Deflation is still not obvious to the majority. Even now, most economists expect continued recovery, mild inflation and a rising stock market. But the essays on deflation.com are 180 degrees apart from conventional thinking. It may be too late for you to get out at the top, but there’s still time to learn how to sidestep the worst of the crunch.
People will be using the secret “d” word much more often over the next five years. By the end of that time, they will also be using its cousin “d” word, depression.
The federal government defines the Producer Price Index (PPI) as “the average change over time in the selling prices received by domestic producers for their output.”
With help from the Federal Reserve’s massive inflationary policies, the PPI has climbed even as the economy began to fall in 2008-09.
All the while, the financial media persisted with stories of an economic recovery. EWI analysts offer an independent perspective.
The New York Times declares, “Economic Gloom Starting to Lift.”
Corporate America, however, is not so sure. This chart of producer prices [wave labels removed] probably illustrates why. After years of largely uninterrupted growth, the Producer Price Index appears to be on the cusp of a critical reversal that should turn into a steady decline in wholesale prices.
The latest Financial Forecast published Dec. 7,
and the latest evidence reinforces the message of the chart’s
title. The PPI elevator has already descended to a lower floor.
The Labor Department said its seasonally adjusted producer price index slipped 0.8 percent last month, the second straight decline.
November’s drop in wholesale prices was the sharpest since May.
Reuters, Dec. 13
The Producer Price Index decline is happening in tandem with a notable reversal in consumer sentiment.
The Thomson Reuters/University of Michigan’s preliminary reading of the overall index on consumer sentiment plunged to 74.5 in early December, the lowest level since August.
It was far below November’s figure of 82.7.
Reuters, Dec. 7
The Federal Reserve’s machinations — which includes the Dec. 12 announcement of $45-billion in monthly Treasury bond purchases — will not stave off a developing deflationary trend.
In the second edition of Conquer the Crash (p. 114),
Robert Prechter describes what generally happens, depending
on the position of the Elliott waves, near the end of the
Near the end of the cycle, the rates of change in business activity and inflation slip to zero. When they fall below zero, deflation is in force. As liquidity contracts, commodity prices fall more rapidly, and prices for stocks, wages and wholesale and retail goods join in the decline. When deflation ends and prices reach bottom, the cycle begins again.
Can the Fed stop deflation? Should you rely on the government to protect you? Get the answers you need now — free! See below for full details.
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January 18th, 2013
The risk is on they say. Bernanke has been printing money full speed, now to the tune of 85 billion a month, buying mortgages and treasuries. The rest of us are just happy to work hard and get a pay check if we are lucky. The stock market is almost reaching new highs and the housing market is rising fast, in some cities with a speed almost eclipsing the boom days of the bubble. They say the crowd has a short memory. Perhaps they are right. People do not remember that the FED fueled the bubble with low rates and we know what happened next. Are we in a different world now? A world where printing press simply postpones any recession indefinitely?
The global market outlook is far less rosy than the emperors-minus-their-clothes would have you believe.
- Global stocks are near multi-decade, technical price junctures.
- Regional economies recently said to be “recovering” are now slipping back intoa new recession.
- Despite a multi-year rally in stocks, the AP reported on Dec. 27 that mainstream investors are selling shares at breakneck pace. “It’s the first time ordinary folks have sold during a sustained bull market since relevant records were first kept during World War II.”
Politicians and central bankers worldwide reassure investors that the credit crisis of 2007-2009 will turn out to be nothing more than a footnote in market history — despite the compelling proof that it never truly ended.
Meanwhile, U.S. Congress made a final-hour fiscal cliff deal to delay addressing its gargantuan budget woes, Europe remains in turmoil, and Asia-Pacific regions and emerging markets are charting surprising courses of their own.
Just as the timeless fable warns, sometimes it takes a single voice in a crowd to tell everyone the emperor wears no clothes. EWI’s new report, The State of the Global Markets — 2013 Edition, is that voice.
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With our best wishes for a prosperous New Year! May you get to keep your gains in the markets and not fly off the cliff!
December 16th, 2012
Here is an interesting perspective on predicting the outcome of presidential elections. According to socionomic theory, bear markets come with a downturn in crowd psychology. When the crowd turns from optimism to pessimism, it is first seen in stocks, and then the rest of the economy, politics, culture. A president who is in the office during a bear market gets the blame. The aggregate anger turns against those at the helm. Economy suffers because pessimistic people do not expand economic activities. They contract. A president who is in the office during a bull market is praised. This is because the population’s aggregate mood is positive (as reflected in stocks) and the incumbent benefits from this social trend.
On Nov. 2, 2012, the latest research paper from the Socionomics Institute, “Social Mood, Stock Market Performance and US Presidential Elections,” published in Sage Open, a peer-reviewed journal of the social and behavioral sciences.
The paper’s authors, Robert Prechter and Deepak Goel of the Socionomics Institute, the late Wayne Parker of Emory University and Matthew Lampert of Cambridge University and the Socionomics Institute, have achieved an important advancement in the study of social mood’s influence on politics, and have received media attention from The New York Times, CNN, The Wall Street Journal, Forbes, and many other significant outlets.
The “Elections” paper shows a significant positive relationship between net changes in stock prices prior to Election Day and incumbents’ chances for re-election. The authors contend that the stock market does not reliably affect elections, and election outcomes do not reliably affect the stock market. Rather, they say, social mood regulates both.
The key point in the paper is the stock market’s performance in the years prior to Election Day. Consider this chart:
To watch a FREE presentation on the paper — given by Bob Prechter himself — at this year’s Social Mood Conference, simply follow this link.
The paper is available for free download from the Social Science Research Network - a vital resource for scholars, researchers and the educated public that currently boasts over 350,000 papers. “Social Mood, Stock Market Performance and US Presidential Elections” is SSRN’s 3rd most downloaded paper of the past 12 months and among its top 100 all-time. Download the paper from SSRN here.
October 25th, 2012
The size of the coming wave will surprise everyone
It has been 4 years since the 2008 crash, and we have mostly forgotten about the dark days of financial calamity that almost destroyed the world economy. It was later revealed that FED made tens of trillions of loans to ailing institutions to save the world. Now we feel safer, somewhat. Business goes on as usual despite the slow recovery.
If you’re a passenger aboard a ship in deep seas, you can’t detect a tsunami; the swells are indistinguishable from regular waves. Wave lengths can be hundreds of miles long, but only when this energy reaches shallow water on the coast does the mammoth tsunami wall form — and can wash over anything in its path.
So when forecasters warn “Move to higher ground!” it’s not wise to think, “Until I see the tsunami, I won’t believe it’s coming.” Once it’s visible, it’s probably too late.
It’s equally unwise to ignore signs of a financial tsunami.
Investors who wait … before acting will be too late. We have to anticipate developments, and the only way we can do that is to use tools that reveal signs of approaching trend change.
The Elliott Wave Theorist, March 2012
The most famous financial tsunami in modern history occurred in 1929-32. Almost no one saw it coming. For example, the observation below was made shortly before the 1929 Crash.
Stock prices have reached what looks like a permanently high plateau.
Yale Professor Irving Fisher, Oct. 1929
Other prominent people did not see the signs of economic trend change that led to the 1929-32 deflationary crash.
Fast forward to this July 18, 2012, CNBC headline:
Fed’s Bernanke: ‘We Don’t See a Double-Dip Recession’
When reading such comments, one might ask, “Is history repeating itself?”
Elliott Wave International believes only a relative few suspect the magnitude of the approaching economic wave, including the world’s financial authorities.
This largely undetected financial tsunami has been silently traveling for at least 80 years. Once ashore, the outcome may rival 1929-32.
A detailed description of that wave and its expected effects is in the bestseller, Conquer the Crash, now in its second edition.
Moreover, the book tells you how to be prepared. For a limited time, you can get part of Conquer the Crash for free. See below for more details.
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September 3rd, 2012
Before the 2008 crash, US dollar had been declining steadily. Everyone was on a borrowing spree. We borrowed and spent and inflated the money supply. Banks create money when we borrow. And more and more chequebook money was being created. Then we ran out of borrowers and deflation started. US dollar suddenly shot up. Once again, we are at a time when dollar is about to go up against everything else. But there is one currency that is most vulnarable right now. On the day when the Fed Chairman Ben Bernanke delivers his much-anticipated speech in Jackson Hole, we want to tell you about an emerging forex opportunity which…
…has nothing to do with Bernanke.
And that’s exactly what makes this opportunity so promising: Few traders know about it.
See, while most of the forex world is focusing on Bernanke, traders who are in-the-know are looking at what few people see: Elliott wave patterns.
The man who found this new opportunity for you is Elliott Wave International’s Jim Martens.
Who is Jim Martens?
Jim is Elliott Wave International’s long-time Senior Currency Strategist — and one of the very few top forex Elliott wave instructors in the world. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.
Here’s why this forex opportunity is both so urgent and promising:
- This forex market’s daily chart shows complete waves 1 and 2. This is a textbook Elliott wave trade setup:
What should come next is wave 3 — the strongest, longest and most explosive wave in an Elliott wave sequence.
- Wave 2 has already retraced .618% of wave 1 — a common Fibonacci reversal point.
- You risk is limited and well-defined: Under the rules of Elliott, wave 2 cannot retrace more than 100% of wave 1.
So your risk-reward ratio is at least 3-to-1!
Third waves are what every Elliott wave trader lives for. Catching 2-3 such moves can literally make your year.
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August 23rd, 2012
After the crash of 2008-2009, Kondratieff Winter has eased. Money supply expansion has resumed with more borrowers stepping upto the plate. QE1 and QE2 has added to the base money supply and saved the banks - for now. But financial changes can happen at lightning speed in a way we do not foresee. History books call the period after the War of 1812 “The Era of Good Feelings.”
America was a young nation that had a sense of purpose. National political strife was at a minimum; optimism was in the air. Major advances in technology and engineering brought the country turnpikes for easier travel and “The Canal Craze” for more efficient commerce. Once the Erie Canal became an obvious commercial success, imitators borrowed heavily to build more. Eventually the U.S. had constructed 4,500 miles of canals.
Alas, the railroads arrived and made canals obsolete. Canal investors were ruined.
Swift economic changes have happened throughout U.S. history. And they continue to happen still. Major economic changes come via technology: consider the automobile, telephone, radio, television, the computer and the Internet (to name a few). At other times, economic changes are systemic. The Next Major Economic Change May Come from the Credit Craze. Deflation is always accompanied by a preceding credit build-up.
The Era of Good Feelings came to a screeching halt when America’s first deflationary depression occurred from 1835 - 1842. Before then, credit had boomed. America’s second major deflationary depression was the Great Depression that began in 1929. That was also preceded by a credit boom. Today’s credit boom dwarfs those earlier examples.
The March 2008 Elliott Wave Theorist elaborates on the next potential shift in the financial markets.
Over the past 300 years the bigger the investment mania, the faster has been the ensuing collapse. The peaks of 1968 and 1835 led to deep bear markets of six and seven years, respectively. The wilder Roaring ‘Twenties, capping an 87-year rise, led to a deeper bear market, yet it was faster, lasting less than three years. The even more dramatic South Sea Bubble, which peaked in 1720, led to a still deeper bear market, yet it was even faster, lasting only two years. So given that the past ten years of topping has produced the craziest overvaluation, the largest number of bubbles and the most persistent period of market-related optimism ever, by a huge margin, I am more than ever expecting a swift resolution.
This excerpt is from an issue that published just a few months before the fastest financial changes to occur in the U.S. in the past 80 years.
The financial world doesn’t seem to feel major rumblings right now. And that’s why so many can be lulled into a false sense of financial security. Yet, EWI’s economic indicators suggest that the next slippage of the financial plates could unleash far more financial destruction than before. Now is the time to learn to prepare your portfolio by thinking differently
than the rest of the pack.
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July 14th, 2012
Financial assets has still not recovered from the financial crash of 2008. One could argue we are still in Kondratieff Winter. But will it get better or will it get worse? Have we seen the stock market bottom in 2009? Is it safe to buy and hold stocks for the long run? Or is buy and hold dead?
In June of 2002, the terrible dot.com bust was making way for a powerful housing boom, the European Union was growing, and American involvement in the Middle East promised a “quick and easy victory.”
Yet when EWI President Robert Prechter’s first edition of Conquer the Crash published ten years ago on this date, he wrote:
- “Home equity loans are brewing a terrible disaster.”
- “What screams bubble — giant historic bubble — in real estate is the system-wide extension of massive amount of credit.”
- “The Middle East should be a complete disaster.”
- “Look for nations and states to split and shrink.”
Today, 10 years later, the U.S. housing market still hasn’t overcome its worst downturn since the Great Depression; the eurozone is in crisis, and the expected quick victory in Iraq became a drawn-out mess.
Prechter’s analysis - based on the Elliott Wave Principle and socionomics, the study of how social mood motivates social actions — enabled him to foresee these changes in the economic, social, and political landscape.
What other eye-opening forecasts do the pages of the Conquer the Crash reveal? How about:
Banks: “Banks are not just lent to the hilt, they’re past it. In a fearful market, liquidity even on these so called ’securities’ [corporate, municipal, and mortgage-backed bonds] will dry up.” (Remember the 2007-2009 “liquidity crisis”?)
Bonds: “The unprecedented mass of vulnerable bonds extant today is on the verge of a waterfall of downgrading.” (Remember the 2011 downgrade of the U.S. Treasury bonds?)
Credit: Credit expansion schemes — the primary role of the U.S. Federal Reserve Bank — “have always ended in a bust.” (Again, think back to the “credit crunch.”)
And — “Like the discomfort of drug addiction withdrawal, the discomfort of credit addiction withdrawal cannot be avoided.” (You could say that again.)
Anticipating “shocks” to the global system is a remarkable and true, decade-long achievement of Prechter’s Conquer the Crash. And on the 10th anniversary of its publication, we’d like to offer you 42 pages of excerpted material to commemorate Prechter’s work.
||Take advantage of this FREE, 8-lesson report that can help you prepare your financial future. You’ll get valuable lessons on:
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- What to do if you run a business
- How to handle calling in loans and paying off debt
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Kondratieff Wave is once in a 50-70 year economic cycle and when the Kondratieff Winter arrives, it produces Great Depression kind of economic depression, typically with heavy deflationary periods. Today credit and the desire for credit is still at record levels. We have a debt bubble that has not yet deflated. The worst is still ahead of us. Take the time to read Conquer the Crash to judge the evidence yourself. So far it’s predictions are coming true in great detail.
June 7th, 2012
What will austerity look like in America?
State and local governments are broke. Pension plans are unfunded. Unemployment is as high as ever. Sovereign debt is a problem. The total debt in the world economy is too high. Entire western world has borrowed excessive amounts in the last few decades. This is not just the money owed by governments, but it is the money people and companies borrowed from the banks. Debt has reached an all time high compared to the GDP of the countries involved. Perfect storm is coming. Austerity and spending cuts will be deflationary. Why? Are we still in Kondratieff Winter? Or did it end with the 2008 crash? What will the Kondratieff Wave bring next?
Since the start of the European sovereign debt debacle, the word “austerity” has been bandied about a lot.
It wasn’t an everyday word, and may send some people to the dictionary. Merriam-Webster defines “austerity” this way: enforced or extreme economy.
But even knowing this definition might leave one wondering how “austerity measures” relate to Europe’s debt crisis. The Associated Press (5/13) provided this overview:
Austerity has been the main prescription across Europe for dealing with the continent’s nearly 3-year-old debt crisis, brought on by too much government spending. But what does it mean for the average European? Imagine paying sales tax of 23 percent or more. Or having your wages cut by 15 percent. Austerity comes in many forms: higher taxes, fewer state benefits, more job cuts, working longer until retirement, you name it.
How about America? Will austerity measures be imposed on the world’s largest economy? Well, a Marketwatch columnist says “America’s new Age of Austerity is already here…Yes, America is already in a depression.” (5/29)
We agree. In fact, Robert Prechter said as much in the September 2011 Elliott Wave Theorist:
Bulls say the economy is in recovery, albeit a weak one. Bears are calling for a “double dip” recession, like the back-to-back recessions of 1980 and 1982. But, as is often the case, we disagree with both camps: The economic contraction of 2007-2009 was not a recession; the respite since then is not the start of a new economic expansion; and the economy is not going to have another “dip” into recession. The economy has been sliding into depression.
The signs of an American austerity are becoming widely visible. And nowhere is this belt-tightening more evident than in state and local governments. Recent years have seen a multitude of stories that describe reduced services. And in the overall economy, we’re seeing a de-leveraging of debt. Unemployment remains relatively high. Here’s a CNBC headline from today (5/30):
Sign of the Times: 20,000 Apply for 877 Auto Job Openings
This story about a new automobile plant in Montgomery, Alabama is one of many like it that feature jobless or under-employed individuals standing in line.
Above I showed the September 2011 quote from Robert Prechter. Yet he actually foretold much of what is financially happening today in his 2002 book Conquer the Crash.
That’s right. Ten years ago, he described what this age of austerity would look like. Much of what he described looks just like what is going on today. But how about the rest of what’s described in Conquer the Crash?
Yes, there’s more. You see, Prechter pointed out much more than what unfolded in the 2007-2009 financial crisis. Do yourself the biggest of favors and learn what he has to say. Be one of the few who are prepared vs. the majority who will be caught off-guard.
How? Right now, Elliott Wave International is offering a special FREE report with 8 lessons from Conquer the Crash to help you prepare for your financial future.
In this 42-page report, you’ll get valuable lessons on:
- What to do with your pension plan
- How to identify a safe haven (a safe place for your family)
- What should you do if you run a business
- Calling in loans and paying off debt
- Should you rely on the government to protect you?
- Money, Credit and the Federal Reserve Banking System
- Can the Fed Stop Deflation?
- A Short List of Imperative Do’s and Don’ts
It’s not too late to prepare yourself for what’s ahead. Get Your FREE 8-Lesson Conquer the Crash Report Now
May 25th, 2012
Debt Bubble is More Threatening Than Any Single Economic Sector Now
History shows that once a financial bubble bursts, it can take a long time to bounce back. We had a crash in 2008 and since then nothing has been fixed other than printing money and handing it out to the failed banks. Now we are doing more of the same that brought us the crash. How long can it last? Will there be another economic crash soon?
Recent history offers an example: Real estate prices topped in 2006-2007 - then came the worst part of the sub-prime mortgage crisis in 2008.
Yet instead of recovering with the passage of time, real estate prices just keep getting worse:
Home prices dropped for the fifth consecutive month in January, reaching their lowest point since the end of 2002.
– CNNMoney, March 27
As values sink and desperation grows, the number of owners giving their timeshares away for $1 — or less — has doubled in the past year, says Brian Rogers, of Timeshare Users Group, an owner advocacy group. “There’s never been a worst time to try to sell a timeshare,” he says.
– SmartMoney, April 4
Observers have called for a bottom numerous times in the five or so years since the bubble burst.
Again, this is what can happen. Recovery can take far longer than many expect.
Real estate is just one sector of the economy. Let’s consider another sector:
According to Citigroup economist Steven Wieting health care is the next big bubble looming in the distance.
And to make matters all the more worrisome, his analysis suggests it’s like nothing we’ve seen before.
- CNBC.com, April 12
Although health care is a huge part of the economy, it’s still just one sector. Let’s consider yet another sector:
The amount Americans owe on student loans is far higher than earlier estimates…Total student debt outstanding appears to have surpassed $1 trillion late last year…That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.
- Wall Street Journal online, March 22
As big as each of the above sectors are, they are just a fraction of the bigger picture:
…the property market, to me, was a microcosm…of what shape the whole world is in right now — in debt up to its ears and ultimately unable to pay. And that’s what crushed the real estate market and I think it’s going to crush…the entire debt market across the globe… Nobody’s worried…
– Robert Prechter, Financial Sense Newshour interview, March 22
Far from being worried, lenders are once again trying to push credit on risky clients:
[A Brooklyn resident] just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail.
- New York Times, April 10
As bubbles balloon in individual sectors of the economy, the psychology of the pre-financial crisis days have returned.
That’s why it’s important to remember that hardly anyone was concerned about the real estate market in 2006. Then the whole house of cards fell in.
Now consider the entire global debt market: the biggest bubble of all time.
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April 14th, 2012
It has been years since the great recession, but unemployment remains stubbornly high. Europe is struggling with the debt problems of it’s members and the debt problem of the US is in check by strong demand to US dollar despite Bernanke’s printing press. But is a bull market ahead of us despite all of our economic woes? Or is the case that tens of billions of retirement dollars are at significant risk. Is now the time to gamble with retirement?
To meet ambitious investment targets, public pension funds find they must take risks.
But many are down two strikes already, due to their previous big bets with hedge funds.
….the [pension] funds with a third to more than half of their money in private equity, hedge funds and real estate had returns that were more than a percentage point lower than returns of the funds that largely avoided those assets. They also paid nearly four times as much in fees.
New York Times, April 1
The same article describes how other pension funds have embraced this risky strategy, and how funds generally have their assets at risk. In 2007 pension funds allocated 10.7 percent to “high-growth” investments; by September 2011 they had increased that bet to 19 percent. All the while, hedge funds have underperformed, as this chart from our January 2012 Financial Forecast shows:
The [HFRX Global Hedge Fund Index] hit a new low on December 14, producing a rash of articles about how hedge funds got tripped up in 2011. “Many hedge-fund managers who came into 2011 riding a wave of momentum ended the year scratching their heads and nursing losses, whipsawed by markets that seemed to punish them month after month.” “Head scratching” is just right for this still-early stage of the bear. Through the first ten months of 2011, 123 Asian hedge funds shut their doors, the second highest number of closures since 2008, the year world markets collapsed.
Financial Forecast, January 20
The California Public Employees’ Retirement System (CalPERS) is the nation’s largest public pension fund. It recently lowered its investment return target from 7.75 percent to 7.5 percent. The system’s actuary had recommended lowering it to 7.25 percent.>
The CalPERS board members were told by their staff that they had only a 50 percent chance of hitting or surpassing the 7.5 percent target, yet they adopted that assumption. Others say the odds are even worse than that.
If CalPERS loses the bet, as it is likely to, the next generation will pay the shortfall…
….if CalPERS or any other public-pension system banks on higher-investment returns, it must take greater risks to meet the target…Cal-PERS chief investment officer told Pensions and Investments newspaper last year, his system has “a reasonably ambitious return target” and “needs to have a portfolio with a lot of growth exposure.”
San Jose Mercury News, March 24
Is now the time to take greater risks? You saw the 2011 performance of hedge funds, and that was a year when the DJIA was up. Imagine the scenario if the market takes a serious tumble.
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This article was syndicated by Elliott Wave International and was originally published under the headline Public Pension Funds: Tens of Billions at Significant Risk. 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.