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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Stockton is on the verge of becoming the largest city in the United States to declare bankruptcy…

San Francisco Chronicle (3/4)

Bloomberg reports (2/25) that it costs the city $175,000 just to get a consulting firm’s fiscal evaluation. Management Partners issued a report which said:

…the city took on a large amount of debt in anticipation of ongoing growth that now exceeds the city’s ability to pay.

Compensation packages exceeded sustainable levels and the city assumed a significant liability for improved retiree health coverage without sufficient recurring revenues to cover growing costs…

Stockton also has one of the nation’s highest home foreclosure rates and has been called “Foreclosureville USA.”

And Moody’s just downgraded Stockton’s rating to Ba2, which is two levels below investment grade.

In the same Bloomberg article, the California State Treasurer said “The reputational stain can bleed onto other local issuers and the state, and that can hurt taxpayers in the bond market.”

Yet in recent months investors have been enamored with municipal bonds. Our December Financial Forecast said:

No matter how thick the storm clouds over state and city finances become, the belief in a bullet-proof municipal bond market just seems to grow. As the [chart below] shows, the ratio of AAA municipal bond yields to comparably-dated U.S. Treasury yields rose…in August.

…investors still believe munis are safe, but we’ll stick with our bearish forecast…the evidence continues to mount that a change for the worse is underway. Deflation will only accentuate the impact of waning revenue streams, underfunded pension liabilities and bloated labor costs.

Financial Forecast, Dec. 2011

Other municipalities facing recent bankruptcy include:

• Jefferson County, Alabama (home of Birmingham)
• Central Falls, Rhode Island
• Boise County, Idaho

Jefferson County, Alabama is the biggest U.S. municipality to face bankruptcy; Stockton is the biggest city.

In fact, as of December there were eleven municipal bankruptcies in 2011. Many other cities face extreme financial woes.

Economic recovery?

Look under the hood so you can see what kind of condition our economic engine is really in. Prepare for what’s ahead.

EWI’s NEW free report, The Economic Rot Beneath, reveals important economic numbers that you are not currently reading in the mainstream headlines � but you should be. For instance, did you know stocks priced in real money (gold) are down 87%? Or that U.S. manufacturing jobs are half of what they were in 1979? Or that housing starts per capita are back to 1922 levels? Learn what’s really going on in the U.S. economy. Download your free report now.

A recently-published, landmark research paper shows the link between stock market performance and presidential election winners.

By Elliott Wave International
What’s the biggest influence on the outcome of presidential elections?

Many observers would identify the role of campaign spending by super PACs, a candidate’s debate performance, and, of course, the health of the economy (”stupid”).

Yet if you want an answer backed by a large body of evidence, you’ll find one in the recently-published, landmark research paper by Robert Prechter, Deepak Goel, Wayne Parker and Matthew Lampert, titled “Social Mood, Stock Market Performance and US Presidential Elections.”

A lot of time, data analysis, and copious statistical evidence led them to this straightforward result: “Social mood as reflected by the stock market is a more powerful regulator of re-election outcomes than economic variables such as GDP, inflation and unemployment…”

In other words: If you want a good predictor for the result of an incumbent president’s re-election, look to the stock market.

Large amounts of earlier research have focused on stock performance after a presidential election. But very few scholars have reversed that order, to investigate a possible link between elections and preceding stock market performance. So reverse that order is what the authors did. What’s more, they’re the only ones to study the issue from a socionomic perspective — the premise that waves of social mood simultaneously drive the valuations of stocks and sitting presidents.

The group published their research on January 17, and it’s already getting attention. A Washington Post columnist read the paper and got its practical usefulness, by noting that Obama should benefit from a stock market that’s been mostly higher since 2008, while a Republican challenger “should hope the Dow crashes.”

You can read the entire research paper yourself by following this link >>

This chart debunks a long-held myth.

By Elliott Wave International
Back in the day, one of the first things I “learned” about investing was that low or declining interest rates are good for stock prices.

I’ve since had to “unlearn” this.

A certain market commentator recently reminded me of the “lower rates equal higher stocks” myth. He opined that stocks aren’t being kept afloat by hopes for a European debt solution, but then claimed that the real reason to be bullish is very low interest rates.

Yet is the near-zero rate on T-bills the reason stocks have held up since early October?

“[The chart below] shows a history of the four biggest stock market declines of the past hundred years. They display routs of 54% to 89%. In all these cases, interest rates fell, and in two of those cases they went all the way to zero! In those cases, investors should have traded all their bonds for stocks. But they didn�t; instead, they sold stocks and bought bonds.”

Elliott Wave Theorist, February 2010

Have a look at the chart:

From the evidence, you can see why the notion that low interest rates and a rising stock market almost always “go together” is just not accurate.

Now, we do know that stocks can fall when interest rates are high:

“The only comparably deep bear market in the past 80 years in which interest rates rose took place in the 1970s when the Value Line Index dropped 74 percent. Economists all draw upon this experience, but they ignore the others. Today’s environment of extensive investment leverage and an Everest of debt in the banking system is far more like 1929 in the U.S. and 1989 in Japan than it is like the 1970s.”

Conquer the Crash, second edition, (pp. 429-431)

Interest rates do not dictate the market’s price pattern — nor does any other event outside of the market itself.

The market has a life of its own, as revealed by the Elliott Wave Principle.

See the evidence that refutes 10 false claims on what drives stock prices — and find out what really moves the markets — in the 50-page Independent Investor eBook.You’ll also get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history, with new analysis, forecasts and commentary to help you think independently in today’s market. Download Your Free 50-Page Independent Investor eBook Now >>

In this video clip, taken from Robert Prechter’s interview with The Mind of Money, Prechter and host Douglass Lodmell discuss “real” money vs the FIAT money system, and what is backing your dollars under our current system. Enjoy this 4-minute clip and then watch Prechter’s full 45-minute interview here >>

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Watch the full 45-minute interview FREE Get even more valuable insights as Mind of Money host Douglass Lodmell interviews Elliott Wave International’s President, Robert Prechter, about how to keep your money safe, the deflation versus inflation debate, and many more topics that are critical to your financial future. Start watching the free 45-minute interview now >>

It’s hard to believe that 2011 has passed so quickly and that 2012 will soon be here. Now is a good time to look back over the past year and assess your finances. Did your choices this year put you in better or worse circumstances? Do you have the information needed to make wise decisions in the next year? Are you prepared to protect your financial future?

The following excerpt from Conquer the Crash explains the importance of preparing and taking action now so that you’ll be ready for what’s ahead. You can read 8 more chapters from Conquer the Crash — 42 pages of critical information, including a list of imperative “dos and don’ts” — Free. Find out how below.

Chapter 14: Making Preparations and Taking Action

The ultimate effect of deflation is to reduce the supply of money and credit. Your goal is to make sure that it doesn’t reduce the supply of your money and credit. The ultimate effect of depression is financial ruin. Your goal is to make sure that it doesn’t ruin you.

Many investment advisors speak as if making money by investing is easy. It’s not. What’s easy is losing money, which is exactly what most investors do. They might make money for a while, but they lose eventually. Just keeping what you have over a lifetime of investing can be an achievement. That’s what this book is designed to help you do, in perhaps the single most difficult financial environment that exists.

Protecting your liquid wealth against a deflationary crash and depression is pretty easy once you know what to do. Protecting your other assets and ensuring your livelihood can be serious challenges. Knowing how to proceed used to be the most difficult part of your task because almost no one writes about the issue.

Preparing to Take the Right Actions
In a crash and depression, we will see stocks going down 90 percent and more, mutual funds collapsing, massive layoffs, high unemployment, corporate and municipal bankruptcies, bank and insurance company failures and ultimately financial and political crises. The average person, who has no inkling of the risks in the financial system, will be shocked that such things could happen, despite the fact that they have happened repeatedly throughout history.

Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. For now, you should focus on making sure that you do not become a zombie-eyed victim of the depression.

The best news of all is that this depression should be relatively brief, though it will seem like an eternity while it is in force. The longest depression on record in the U.S. lasted three years and five months, from September 1929 to February 1933. The longest sustained stock market decline in U.S. history lasted seven years, from 1835 to 1842, and featured two depressions in close proximity. As the expected trend change is of one larger degree than those, it should be a commensurately large setback, but it should still be brief relative to the duration of the preceding advance.

Taking the Right Actions
Countless advisors have touted “stocks only,” “gold only,” “diversification,” a “balanced portfolio” and other end-all solutions to the problem of attending to your investments. These approaches are usually delusions. As I try to make clear in the following pages, no investment strategy will provide stability forever. You will have to be nimble enough to see major trends coming and make changes accordingly. What follows is a good guide, I think, but it is only a guide.

The main goal of investing in a crash environment is safety. When deflation looms, almost every investment category becomes associated with immense risks. Most investors have no idea of these risks and will think you are a fool for taking precautions.

Many readers will object to taking certain prudent actions because of the presumed cost. For example: “I can’t take a profit; I’ll have to pay taxes!” My reply is, if you don’t want to pay taxes, well, you’ll get your wish; your profit will turn into a loss, and you won’t have to pay any taxes. Or they say, “I can’t sell my stocks for cash; interest rates are only 2 percent!” My reply is, if you can’t abide a 2 percent annual gain, well, you’ll get your wish there, too; you’ll have a 30 percent annual loss instead. Others say, “I can’t cash out my retirement plan; there’s a penalty!” I reply, take your money out before there is none to get. Then there is the venerable, “I can’t sell now; I’d be taking a loss!” I say no, you are recovering some capital that you can put to better use. My advice always is, make the right move, and the costs will take care of themselves.

If you are preoccupied with pedestrian concerns or blithely going along with mainstream opinions, you need to wake up now, while there is still time, and actively take charge of your personal finances. First you must make your capital, your person and your family safe. Then you can explore options for making money during the crash and especially after it’s over.

As the subtitle implies, this book is designed as a guide for arranging your finances prior to any future deflationary depression, whether one occurs now, as I expect, or not. Although I want this book to have value beyond the present situation, some of the specifics of my suggestions are time-sensitive by nature. If you need to know today where you can find the few exceptionally sound banks, insurers and other essential service providers, if you want to locate the safest structures in the world for storing your wealth, whether in paper monetary instruments or physical assets such as precious metals, you will find the answers in these chapters. Yet over time, the best institutions and services today might be long gone, and others may have taken their place. For a few years at least, we will post free updates to this information at www.conquerthecrash.com/readerspage. But if you read this book 50 years from now, you may have to do your own research to fit the investment options and service providers available at the time. Nevertheless, the general nature of your goals should be much as outlined herein.

Most people do not have the foggiest idea how to prepare their investments for a deflationary crash and depression, so the techniques are almost like secrets today. The following chapters show you a few steps that will make your finances secure despite almost anything that such an environment can throw at them.

8 Chapters of Conquer the Crash — FREE! This free, 42-page report can help you prepare for your financial future. You’ll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Get Your FREE 8-Lesson “Conquer the Crash Collection” Now >>

History’s Hidden Engine

Part 1 - Presumed cause and effect relationship goes like this: War, prosperity, civil protest dictates society’s social mood. A strong economy, good leaders, rising stock market creates positive social mood. Adversely, inept leaders, bad economy, unemployment, declining markets create negative social mood. We will now start to look into this entrenched belief. What if the change in social mood was the cause of the rest? The part 1 of this series of videos talks about the correlation between stock prices and the rest of the social events such as pop culture, clothing, music, movies. Certain social trends become apparent at stock market tops and bottoms.

Part 2 - The changes in social mood give rise to history. They dictate economic events, political events. Social mood drives cultural trends and even philosophical trends. The 400 year history of stock prices show that the economy and politics follow the stock market. In other words, stocks are a leading indicator. This is because a change in social mood is first registered in stocks and the rest of the economy feels it later. But then can the stock market be predictable? This would require that the change in social mood is something that is predictable. Here comes the Elliott Wave Theory that identified fractal patterns in the form of waves in stock prices at all degrees, from 1 minute harts to 400 year stock market charts.

Part 3 - How perfectly does the market follow the wave principle? Consider the stock prices around 9/11. After a disastrous event like that our emotions could tell us the market would fall much lower. But soon after 9/11 the stock market started it’s rally and this had to happen because according to Elliott Wave Principle a 5 wave decline was already almost complete. Is it always possible to read the Elliott Waves correctly? Or do they have problems that reduce their usability? Yes, it is hard to know here you are in a bigger wave as you go. You may think you are at a top, yet the market may go higher. But waves combined with other market indicators can help you turn the odds in your favor in the markets.

Part 4 - What makes the stock market patterned? What makes the social mood patterned? What is a fractal pattern? Where else do we see similar patterns? Trees, ferns, blood vessels, lighting and more. The theory goes on to say that the society is part of the nature and the social mood is patterned just like the rest of the nature. This is what gives the patterned nature of the stock market prices.

Part 5 - A fractal is not the only patterned natural phenomenon we see in the nature and in stocks. There is another form that is commonly seen in the nature: A spiral. A logarithmic spiral depicts growth and expansion in the universe. How does a spiral connect to the stock market and the wave theory? This is the basis of the fibonacci numbers. The market wave lengths seem to be following the fibonacci sequence. Why is it that way? Perhaps simply because we are part of the nature and many other things follow the same patterns.

Part 6 - In a society whose social mood seems to be governed by the laws of nature, is there room for an omnipotent FED (Federeal Reserve) that can control the economy? Do the politicians really control the masses? Or are they at the mercy of the trends in social mood?

We hope you enjoyed watching this series as much as we did. Check back again for more videos and articles that challenges the traditional beliefs of out time on the stock market.

You can learn more about socionomics and effects of social mood at the Socionomics Institute.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott’s work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost’s forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

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Some cite the good earnings that we have had. According to Robert Prechter, good earnings, or record earnings actually appear at the stock market top or right after the top:

In this CNBC video Prechter explains his bearish view for the next few years. According to his analysis 2012 is likely to witness a bear market in stocks, commodities and there will be no place to hide, no place to diversify. Debt is the problem and there is too much of it now. This practically impossible to pay debt provides the deflationary pressures in the economy.

Stocks topped in April 2011, Gold topped in 2011, many foreign markets topped even earlier. 2012 is likely to be the year of US dollar. Ironically, the sickest currency US dollar is in short supply. Entire world went on a borrowing spree for decades and they promised to pay back with interest in the future. The future has arrived.

But what will the stocks do? Can the stock market survive 2012? Or is it going to be a year that goes into history as one of the great crashes of all time?

Don’t blame Martin Van Buren for America’s first deflationary depression. Social mood rode higher in the saddle than did our 8th President, who only stood 5′ 6″.

Elected in 1836, by the time Van Buren assumed office in March 1837 a speculative bubble had burst and a banking crisis was at hand (sound familiar?) — the national mood had turned south and the “Panic of 1837″ followed. Van Buren was known as “The Little Magician,” but he could not pull an economic recovery out of the hat. He met defeat seeking a second term.

America’s first deflationary depression lasted until 1842. Van Buren blamed over-zealous business practices and a credit bubble (sound familiar 2x?). The panic precipitated bank failures; many speculators who bought land to capitalize on railroad expansion lost everything. The depression worsened as Van Buren continued Andrew Jackson’s economic policies. Businesses failed and unemployment was widespread. There were even “food riots” in several cities.

(Author’s note: Because of substantial revenue inflows into the Treasury during the boom of the early 1830s, the United States government became debt free in 1835. Ironically, this was the very year the depression began. Stock prices fell sharply despite the federal government paying off all of its debt. Conventional wisdom would have us believe reducing the national debt, or paying it off entirely, would lift stock prices. It didn’t happen in 1835, so there must be something else at work. That “something else” is social mood.)

The 1837-1842 deflationary depression comprised Supercycle Wave II, the end of which saw the beginning of the biggest economic expansion in history — Supercycle wave III! The 1929-1933 Great Depression still grabs more attention, but in fact the earlier Supercycle Wave II decline set the stage for the United States becoming the greatest economic and military power the world has ever known.

President Herbert Hoover held office during the 1929 Crash and onset of the Great Depression, a.k.a. Supercycle Wave IV. Yet no U.S. President has thus far been at the helm during a Grand Supercycle market decline. The last decline of that degree had its origin in the South Sea Bubble in 1720, when Great Britain’s King George I was on the throne. The rampant speculation of the time spread beyond the financial class, such that porters and ladies’ maids had enough money to buy their own carriages. Members of the clergy took part in the mania. Poof! Life savings were wiped out. England’s Postmaster General committed suicide. Hundreds of members of Parliament lost money. As for the directors of the South Sea Company itself, they were forced to give up their property and arrested to boot.

Martin Van Buren led the nation during our country’s first Supercycle depression — as President he was powerless to stop it. Who will occupy the Oval Office when the next Grand Supercycle depression develops? This we believe: That individual will be powerless to prevent it. He or she will only be a President.

What is more powerful than a President of the United States? The answer is “social mood.” How is this powerful force shaping the economy?

Discover the answer in the 90-page Free Report called the Deflation Survival Guide.

Now is the time to prepare for a deflationary depression. Start by reading the 90-page free eBook, Deflation Survival Guide, which includes Robert Prechter’s most important analysis and forecasts regarding deflation. This guide will help you survive a major deflationary trend, and even equip you to prosper. Download your free eBook, the Deflation Survival Guide, now >>

Here’s why you SHOULDN’T get too comfortable

Bear markets are cunning beasts.

Don’t get me wrong — we are not in the bear market territory yet. At least, not officially. But if this is the beginning of a bear market, then what we are seeing is a bear market rally.

An “official” bear market begins when the stocks indexes decline 20%. The DJIA’s decline from the May 2, 2011 high to the September 21 low is about 17%. Close, but no cigar.

Add to that the strong rallies we’ve seen over the past few weeks (Sept. 12-20: +685 points in the Dow, for example) — and lots of people conclude that despite the volatility, things aren’t so bad.

But let’s get some perspective. The stock market has been around a while. Only when you look at its history do you realize just how cunning — and fast, and strong — bear markets can be. Past recessions and depressions have displayed examples of extraordinary bear market rallies before the prices hit the ultimate stock market bottom.

Here’s a chart we’ve shown readers before. It’s worth printing out and keeping on the wall above the desk where you open your brokerage statements.

This is the DJIA between 1930 and 1932, one of the worst bear markets in history. Robert Prechter, EWI’s president, took the time to measure the percentage gain of each bear market rally during the 2-year period — you can see them in this chart.

When you routinely see double-digit rallies (11 percent, 18 percent, even 39%) over the course of two or three years, it’s easy to be lulled into thinking that maybe things aren’t so bad. Here we are counting 7 bear market rallies some of which would make you feel like a bull market with is time length and price gain.

The reality, of course, is that the bear market’s chokehold grows tighter around your neck with every drop-rally sequence. (Think back to the 2007-2009 collapse, and you’ll remember the same behavior.)

Which brings us to here and now. Rallies and declines of 300-400+ points have been so common since August that we’re kinda getting used to them.

The question is: Are we in a bear market, or is it that “maybe things aren’t so bad”?

You need some perspective to answer that question. The research we do here at EWI can help.

Free Report: Stocks — Buying Opportunity or Another “Free Fall” Ahead?Find out what these market moves mean to your investments with current analysis from Elliott Wave International. Bob Prechter has just released a FREE report — with urgent analysis from his August and September 2011 Elliott Wave Theorist market letters, including another video excerpt from the special video issue of the August Theorist. Stocks — Buying Opportunity or Another “Free Fall” Ahead? will help you put these uncertain markets into perspective so that you’ll be better positioned to both protect your investments when needed and prosper when opportunities arise. Download your free report now>>