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.
When the market goes up, or when it goes down, the mainstream media often explains via events or earnings. But very often, the morning headline gets stale by the afternoon on the same day. In the morning it goes something like: XYZ earnings disappoint investors, stocks are crashing! Then by the afternoon they have to change the headline: Investors shrug off bad news. Stocks are soaring! Why does that happen? Is it not that news and earnings move stocks?
Want to Know the REAL Reason Why the Stock Market Turned Down?
The rout in stocks is no “jinx” In case you’ve been roving Mars for the past month, you’ve missed quite a fiasco from the world’s leading stock market:
“Since it topped out last month, the Dow has suffered eight triple digit losses! Add it all up, and the Dow has slid about 7.5% percent from its peak, the biggest retreat in more than two years. It also means the Dow has now given back all of its gains for the year — and then some.” (Daily Finance Oct. 15)
Now, according to the mainstream experts, there are 3 key causes for the market’s sell-off:
On September 19, China’s e-commerce behemoth Alibaba Group launched its $25 billion initial public offering on the New York Stock Exchange — the largest I.P.O. ever in the history of all things, everywhere. An October 13 Bloomberg article calls the BABA reveal a giant, panda-sized sell signal and writes:
“The abundance of investor confidence needed to get Alibaba’s record $25 billion initial public offering off the ground was but one of several red flags that made the market feel top heavy.”
This logic sounds legit now. But back when Alibaba was going to market, the only red flag was the one taunting the wild bulls to charge. From the September 25 USA Today:
“Calling a top based on a big I.P.O. is probably the weakest argument the bears have made so far… While the market isn’t cheap, corporate earnings are still growing solidly, which should keep the bull alive.”
The next reason for the market’s sell-off is…
“A much bigger issue confronting the market is the spread of the Ebola virus. This is by definition, a situation with an unquantifiable outcome and that it would create market uncertainty should hardly be surprising.” (October 13 Bloomberg)
Again, this explanation doesn’t make sense, considering the fact that the Ebola crisis has been front and center in the news since the first outbreak was reported seven months ago — on March 19, 2014. The first 3 American victims of the virus were flown into the United States from Liberia in early August, to receive treatment at the Centers for Disease Control in Atlanta, Georgia.
The third and final impetus for the market’s insidious rout is…
(3) Voodoo Black Magic
Well, sort of. With no tangible trigger for the market’s sell-off, an October 15 news source sites an intangible one:
“It’s not unusual for the market to swing wildly in October… in what’s become known as the ‘Jinx Month.’” (Daily Finance)
Jinx, as in coming from the Greek word “iynx,” bird used in black magic.
At the end of the day, every single one of these efforts to explain the stock market rout occur after the fact – AFTER the Dow has already plummeted over 1000 points from its September 19 peak.
Prior to the market losing its footing, Elliott Wave International published an urgent Elliott Wave Theorist Interim Report. The date of publication: September 19, the day of the high. The report warned investors that the Dow had very good reason to kiss its all-time high goodbye:
“Our daily closing Dow projection of 17,280 was achieved today.”
“Our Flash service is short all three stock indexes.”
“Next week, the U.S. stock averages should decline.”
Once the market began to plummet, our October 10 Short Term Update showed subscribers 2 more objective technical reasons for the reversal.
Reason for reversal # 1:
“It’s now been one full year since October 9, 2013, the date that the Dow’s fifth-wave ending diagonal [Elliott wave pattern] started.”
An Elliott wave ending diagonal pattern is a 5-wave move usually occurring in wave 5. In all cases:
They are found at the termination of larger patterns
The indicate exhaustion of the larger movement
They are followed by a dramatic reversal
Reason for reversal # 2:
“October 9, 2013 marks the start of the trendline that would eventually form the baseline of the diagonal, as shown on the daily chart. The market is signaling that this line is valid and important, as there have been six separate touch points over the past year.
“We’ve often said that trendlines are a meaningful facet of market analysis because we don’t draw them, the market does. All we do is connect the points on the charts to show what the market thinks is significant.
“Today, for the first time in a year, the Dow closed below the trendline, providing another key piece of technical evidence that the wave structure of the prior advance is complete.”
The next chart shows you how the Dow did, indeed, fall below this very important trendline as Short Term Update forecast:
So, to summarize what you’ve just learned:
Fundamental analysis cites Alibaba, Ebola, and/or a magic “Jinx” as the cause(s) for the market sell-off – after the fact.
– VERSUS –
Elliott wave analysis cited an important Fibonacci price target, a mature Elliott wave pattern, and a meaningful trendline as the causes – in advance.
Moving forward, the choice of how you protect your financial future is yours.
It’s times like these when investors like you need to maintain a focus on the coming bear market that will take far too many by surprise. As Bob Prechter says, “bear markets move fast and are intensely emotional; investors and traders who are prepared have greater opportunities on the downside than on the upside.”
In this new report, you’ll read some of the recent analysis Bob Prechter and Chief Market Analyst Steve Hochberg wrote before the late-September turn — and some of what they have written since then.
Are the complacent investors heading for another cliff? Steve Hochberg on the state of retail money market funds vs. stock market capitalization, filmed at the 2014 Las Vegas Money Show
Editor’s note: The article below is adapted from the transcript of the live presentation above, originally recorded at the 2014 Las Vegas Money Show. It features Elliott Wave International Chief Market Analyst Steve Hochberg. Hochberg is co-editor of The Elliott Wave Financial Forecast, one of EWI’s flasgship market letters. Click here for a free excerpt from Hochberg’s latest issue.
This chart is a picture of retail money market funds as a percentage of market capitalization.
In other words, when people are super bullish, they don’t want to hold any money in money market funds. They want to invest it, right?
Because why hold money aside when you don’t think the market’s going down, when it can be in the market if you think it’s going up?
When people are super bearish, what do they do? They take money out of the market, and they put it into money market funds hoping to wait out what they view as a declining market.
Now look at the upward spikes in this chart.
You can see that there was a high percentage of money in money market funds as a percentage of market cap back in 1982 as the market was bottoming and starting that great bull market.
Shortly after the 1987 crash, people got really scared; and again in 2002 after the market had been down 38%, and also in 2009 after the market declined 58%.
We are now at a new all-time low in the percentage of retail money market funds relative of market cap at just 2.8%. In other words, people are fully invested.
Investors are so optimistic about the future, they see no reason to keep money in money market funds in case the market goes down.
This is a classic warning sign that a reversal is ahead. Have you made your logistic plans to pull out of the market on time? Remember: Stocks decline first, economic recession becomes apparent 6 months later which is usually too late to save your nest egg.
The Elliott Wave Financial Forecast warns that the contracting U.S. economy signals deflation ahead
In June, the U.S. government, revising its previous number, reported that the economy shrank by 2.9% in the first quarter of 2014.
The steep plunge caught the bulls by surprise.
It was substantially worse than the preliminary forecast
for a 1.0% contraction, which itself was a far cry from the
initial 0.1% growth forecast in April.
As you can see on this chart, the last time the economy shrank was Q1 of 2011 (a 1.3% dip).
The [2.9%] decline was the sharpest since growth tumbled 5.4% in the first quarter of 2009 during the Great Recession. It was also one of the worst falloffs outside of a recession since 1960.
USAToday, June 25
The Elliott Wave Financial Forecast, the monthly
report issued by Elliott Wave International, the world’s largest
financial forecasting firm, which is well-known for calling
into question many mainstream forecasting methods, holds a
drastically different outlook from the government. If you
too don’t trust the government projections, EWI is a good
source of contrarian-minded research and analysis.
Financial Forecast co-editors Steve Hochberg and
Peter Kendall warn that investors are dangerously discounting
the potential for a market selloff. They say the economy is
slowly contracting and winding its way toward outright deflation,
and the recent government revision is evidence of deflation
in action. In their recent issues of the Financial Forecast,
they have documented more than two dozen measures of extreme
investor optimism, a classic reversal indicator for technical
After the government’s Q1 revision, the stock market hovered in positive territory. What’s more, the Consumer Confidence Index registered a six-year high.
But Hochberg and Kendall believe, in spite of all the optimism, that this latest revision should raise concerning questions among investors about the sustainability of today’s exuberant psychology — especially now that economic growth is inconsistent with the prevailing psychology. When so many sentiment indicators align in one direction, it’s a good time to check in on what the opposite side of the trend might look like. After all, markets never go in the same direction forever, and they tend to reverse alongside extremes in sentiment. Investors who are aware of and prepare for such turning points dramatically increase their chances of surviving them.
Click here for specific forecasts and analysis from Hochberg and Kendall’s latest, July Financial Forecast. You will get free access to a big chunk from their latest issue, complete with labeled technical charts.