Back in 2002, Robert Prechter wrote a book called Conquer the Crash. It discussed how the money supply works and thus why deflation happens to the credit portion of the money supply at some point eventually no matter what the federal reserve wants or does. His book made it clear that human herding behavior controlled the credit cycles and thus the timing of them.
His book also introduced (to me at least) the concept of Elliott waves (which Prechter had written several books about over the past prior decades, essentially picking up the work of the original discoverer of the wave principle, Ralph Nelson Elliott. Elliott waves are a form of herd tracking, a set of rules and guidelines for market timing.
Prechter chose to release Conquer the Crash in 2002 because his wave count back then showed that we were likely at the peak of a Grand Super Cycle 3rd wave. Remember what was going on back then, dot bomb insanity, etc. Below is his wave count at the time. As you can see, he was expecting an eminent crash and he had every right to do so based on the data available at the time.
However, I assert that Prechter was not wrong but rather simply too early. This is a very easy situation to fall into if you are trying to call the wave count in real time (which is the only time that calling it has any value at all!). Who gives a crap about how the count followed all of the rules if none of it was actionable in the pursuit of screwing the other gamblers at the table out of their hard earned cash? Yes, that is what the stock market is all about, and no, not everyone understands this truth. Mark and Patsy have their retirements tied up in it and I am attempting to relieve them of their cash. I don't feel badly about it because Mark and Patsy are ruining America by voting for liberal politicians while laughing at Ron Paul and Ross Perot for not being good-looking, charismatic Hollywood actors. I hope their laughter lasts well into their retirements and is a source never ending warmth and comfort to make up for the fact that they voted themselves into poverty and assisted greatly in the decline of the once great nation which was America.
Below is an updated version of a chart that I found on the web which was created about the same time as Prechter's book came out. I updated it with the chart data that has become available since then in order to show the full picture which has now (apparently/likely) revealed itself. Prechter wasn't witnessing the peak of the 5th wave back in 2002, it was actually only 1 of 5 where the 5th wave would eventually turn out to be an expanding wedge as shown below. From this picture you should be able to understand why I sometimes appear so excited in these pages about the coming prospects for profiting on the short side. We are finishing up a massive 5th of 3rd wave where the 5th part of it started back in the 1930s! Keep in mind that the guideline for a pullback here is to the level of the prior 4th wave. The chart below is log scale so read those numbers on the right hand side carefully. The target for the DJIA is Five hundred (500). Will it get down that low? Nobody knows. But it will certainly break well below blue 4 of the expanding wedge which made up wave 5.
As they stop contributing and begin withdrawing, people will find that even good corporate profits do not buoy the markets. P/E and P/B compression will be rampant. People will be all confused because they don't understand that corporate earnings do not directly drive stock market prices!! It is the buying and selling of the shares which control the prices. If boomers are selling the shares in their retirements in order to eat, travel, and live out their golden years, and if kids don't have the demographic numbers, jobs or salaries that enable them to buy the shares up at higher prices then we will certainly have lots of supply of shares on the market with greatly reduced demand. Economics 101 says that will result in lower share prices and there really is nothing anyone can do about it.
Corporate equities are not money. They have no intrinsic value and they cannot be used to pay the rent, etc. They still have to be traded back into dollars to do that. So Wall St. fanboys can (and will) go on and on about the "great value" of stocks and how they are being maliciously manipulated downward by "the evil shorts" in the coming years. They will ask the con men running the show to "do something" to save the retirements of Mark and Patsy, including punishing the evil shorts. But short sellers are no more evil than loggers who recycle the remains of the freshly fallen trees. The trees were born, grew up tall (but not so tall that they reached the sky) and then finally died and fell over of their own weight. The tree is going to fall over and someone might as well profit from its collapse. The wave count is yelling "tiiiiimmmmmbeeerrrrr" right now.
Below is the zoom in on what I model as being the end days of the expanding wedge which marks the end of supercycle wave 5 of grand supercycle wave 3. The five rail bounce now appear to be complete as we see that the 5th wave broke out, peaked, then broke back down below the top rail into wave 1of the new bear market. However, wave 1 was never going to be powerful enough to hold the line so to speak and so the wave 2 bounce re-took the line. My current model says that over the next 2 weeks we should see a very small 3rd wave re-break-down that top line, likely with some level of authority in order to send the signal to the herd that the break down is real. Once this top rail breaks down with gusto, it is like pricking a fully inflated balloon. Not necessarily in the speed of collapse but simply in the inevitability of it. Once people become concerned that the party is over, nobody is going to try to ride the crash out this time. Everyone still remembers far too clearly the crash of 2007-2009 where no less than 50% of the value of the major indices simply evaporated into thin air from whence they came.
If we do not see a growing sell off with clear signs of market panic very quickly then I will not hesitate to revisit this view. It is always possible that there is one more wave up left, say, to DJIA 17500, before the real crash begins in the historically dangerous months of Q4. This would be the scenario where TVIX falls all the way to the $2-$2.20 range in a 5th wave down. We have to respect the potential for this so that we have plenty of cash to short this thing down once the real crash does begin. In other words, set trigger points and use stops!
But for now, I betting that the crash starts to become visible early next week.
Cap'n, just for clarification, "...lots of boomers are now discontinuing 401k contributions to their retirements after having spent the past 5 years doubling down on their contributions to make up for lost time. They are going to be very, very sorry they did this." Sorry for doubling down, not for discontinuing, right? I'm considering withdrawing my 401k in total, and starting a precious metals IRA. BTW, great visual on the loggers and the wave count! Lastly, how likely is it the the fed will simply not raise rates, continue to print and purchase debt, and perpetuate this market for awhile (weeks, months, a year) longer?
ReplyDeleteThanks, Steven B.
Hi Steven B, yes of course I meant sorry for doubling down. The government told them it was the right thing to do. Corporations told them it was the right thing to do. Not only right, but irresponsible NOT to.
ReplyDeleteThe fed will actually not raise rates. The rates will be raised by the markets and then the fed will follow in order to not appear to be something other than completely in control.
The formal term for this is "losing control of the bond market". It always happens sooner or later but not usually because of money printing but rather because something else causes loss of confidence in the con game.
In order for money printing to be the real cause of hyperinflation you would have to see governments printing infinite money. This never happens. Government simply follows what the market already believes is the case by printing larger and larger denominations.
Continuing to print is already becoming painful. Do you think the rioting in MO is just because some kid got shot? I proved many times in these pages that the cops shoot people in the face all the time with no repercussions and I also predicted that we would start seeing civil unrest, riots, etc. This is because the expansion of the monetary base occurred without any salary expansion. Thus people making hand to mouth livings begin to feel they have nothing to lose. This is why that "zillionare" guy I wrote about recently is worried about a "pitchfork revolution" and he is showing his intelligence though this concern.
Anyone who thinks the fed is so powerful that it can keep the stock market up when the herd is panicking also believes that the wizard of Oz is all powerful and not just an old man behind smoke and mirrors. If it were possible for powerful money printers to stop economic reversion to the mean it would never have happened before. No, it will not be different this time. Of course markets can remain irrational longer than shorts can remain solvent which is why I like to use stops and am very vocal about it here. I was amazed today that TVIX did not find a lower low than the bottom of the ending diagonal weeks ago. Like I have been saying, expect the market to be tricky near the big turn.
ReplyDelete