YELNICK MENTIONS NEOWAVE COUNT, may be changing - that's a BAD thing !
Monday, July 20, 2009The Problem With Breaking the June 11 High
There is a lot of commentary on the prior few posts about Neely having to change his count if the Jun11 high is exceeded. Here is what he had to say about it this morning (emphasis added):
Itís amazing the number of emails Iíve received lately trying to talk me out of my bearish scenario or asking what it means if Juneís high is exceeded (which means they think Iím wrong). That alone favors my preferred scenario, but a move above Juneís high is not a good thing, itís a horrible thing. It means the bear market will last for years and economic conditions will get much worse than originally thought. This would put him in more alignment with Prechter's view, of a bottom in 2014 (+/- a year or so, with 2012 at the earliest)
; or if the government continues to intervene like FDR did in the '30s, this might stretch even longer, to 2017 - 2020. Currently Neely expects a rapid drop to the long term bottom, maybe as early as Jan 2010 (six months!).
As an historical note, the last three deflationary depressions that followed a credit bubble all ended their first phase down in around 3 - 4 years: 1837-1841, 1873-1875, 1929-1932. Hence 2007- 2010/11 would have been consistent. This reflects the rapidity which a market can adapt to changing realities. A lot of ink has been spilled over why the 1930s lasted so long; but it was clear that by the time FDR took over in 1933 a recovery was in progress, and a quite strong one (given how far we had fallen). The policy question is why we went back down.
Keynesians such as Krugman continue to argue that we did not stimulate enough, and that while FDR caused the recovery due to deficits, an attempt to go back to normal in 1937 (due to the apparent recovery) by lowering the deficit sent us back down. This argument is relatively easy to disprove, since the last two Hoover budgets (FY32 and 33) got us to around a 5% deficit per year, and FDR's first three budgets continued at around that level. In what respect were Hoover's stimulus insufficient and FDR's heroic? And even in 1937 spending continued to go up, albeit at a lower pace. More likely something else was going on, and a recent UCLA study found it in the ill-guided attempts by both Hoover and FDR to keep wages and prices high in the face of deflation. This prevented the market from clearing; high wages kept unemployment high, and high prices kept capacity underutilized. In any event, the record of massive stimulus is that it does not work and may deepen the problem if done poorly; just look at Japan twenty years after their credit collapse in 1989.
Monetarists such as Bernanke continue to argue that the Fed failed to provided sufficient liquidity. This comes out of Milton Friedman's trenchant work that blamed the prolonged and deep fall in the '30s on failures of the Fed. Yet in the heart of the recent crisis, Friedman's co-author criticized the policy reaction as fighting the wrong war: the problem back then may have been liquidity, but the problem today is bank insolvency
. Liquidity helps avoid bank runs; but does not repair insolvency, which is due to overleverage and bad loans. At 30:1 leverage, a mere 3.3% of bad loans means you go insolvent. In this case, as asset values collapsed (real estate in particular), banks found they had insufficient collateral for their loans. The problem is much worse in Europe
than here: while our bank assets (loans) are around 2:1 of GDP, according to John Mauldin it is 4:1 in the Eurozone, 5:1 in the UK and an incredible 7:1 in Switzerland. We clucked at the "zombie banks" in Japan after their 1989 collapse, and yet have left our money center banks in the land of the living dead.
Yves popped over some thoughts which he might prepare in a guestblog later this week. He notes that markets outside the US are not confirming this rally, nor are currency or bond markets.
Regardless, if we break the SP956 pivot point, look for an enthusiastic piling on and a sharp rally. We almost hit it today. Potential turn dates for a summer peak center around the second week of August, after the coming lunar eclipse in the first week of August that follows an Asian solar eclipse this week.