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TONYC : http://caldaroew.spaces.live.com/

August 07

friday update

SHORT TERM: market rallies on payroll report, DOW +114

zzzf.png

Overnight the Asian markets were mostly lower. Europe opened lower but closed +1.30%. US index futures were lower overnight and at 8:30 Non-farm payrolls were reported better than expected: -227K v -443K, and unemployment at 9.4% v 9.5%. At the open the market gapped up to 1004 and continued to SPX 1010, a new uptrend high, in the opening minutes. By 10:00 the market had pulled back to 1002. After that the SPX resumed its rally and by 1:30 it hit the OEW 1018 pivot. At 3:00 the Consumer credit report was released: http://www.federalreserve.gov/releases/g19/Current/. The market continued its pullback from that high into the close. For the day the SPX/DOW were +1.30%, and the NDX/NAZ were +1.30%. Bonds lost 26 ticks, Crude slipped $1.10 cents, Gold dropped $5.00, and the Euro was also lower. Support for the SPX remains at 990 and then 961, with resistance at 1018 and then 1041. Short term momentum continued higher and was nearly extremely overbought before declining into the close. While the market was lower overnight, this mornings payrolls report helped the SPX hold support at the 990 pivot and move higher yet again. Todays rally took the SPX right to the 1018 pivot and that's where it stopped. Overall it was an odd day in that the USD and the SPX rallied together. Bonds, Crude and Gold, however, were lower. Best to your weekend!

MEDIUM TERM: uptrend

LONG TERM: bear market

CHARTS: http://stockcharts.com/def/servlet/Favorit...t?obj=ID1606987

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THE NEXT MAJOR WAVE is down, and it may have started already - RP

// "step aside" - "specs should look at the short side" - "dollar has bottomed" //

 

Bob Prechter "Quite Sure" Next Wave Down Will Be Bigger and March Lows Will Break

 

Posted Aug 11, 2009 11:52am EDT by Aaron Task i

 

In late February, Robert Prechter of Elliott Wave International said "cover your shorts," and predicted a sharp rally that would take the S&P into the 1000 to 1100 range.

 

With that prediction having come to pass, Prechter is now saying investors should "step aside" from long positions, and speculators should "start looking at the short side."

 

"The big question is whether the rally is over," Prechter says, suggesting "countertrend moves can be tricky" to predict. But the veteran market watcher is "quite sure the next wave down is going to be larger than what we've already experienced," and take major averages well below their March 2009 lows.

 

Yes, the late 2007-early 2009 market debacle was just a warm-up to what Prechter believes will be the bear market's main attraction. In this regard, he says the current cycle will echo past post-bubble periods such as America in the 1930s and England in the 1720s, after the bursting of the South Sea bubble.

 

The 2000 market peak market a "major trend change" for the market from a very long-term cycle perspective, and the downside is going to continue to be painful well into the next decade, Prechter says. "The extreme overvaluation, the manic buying and bubbles in the late 1990s [and] mid-2000s are for the history books - they're very large," he says. "The bear market is going to have balance that out with some sort of significant retrenchment."

 

/see: http://finance.yahoo.com/tech-ticker/artic...Lows-Will-Break?

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TIP- Prechter on Bloomberg ... in a few minutes

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TIP- Prechter on Bloomberg ... in a few minutes

Here's Jim Sinclair's view of Prechter's appearances on Bloomberg today

 

Prechter is getting a big Bloomberg push today because he is going to say what they want to hear on gold and the US dollar. They will even allow him to pan equities to get a bull recommendation on the dollar and a bear recommendation on gold.

 

He does not know or maybe care that he is being used as part of the MOPE campaign directed at making the financing of the deficit at comfortable rates.

The appearance is, according Bloomberg, to discuss if gold is going higher in order to get the bulls to listen and orally hammer them.

 

Please do not send me 500 scared emails asking about a man who on every modest reaction in gold since $248 has forecasted a return to $248.

 

 

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Here's Jim Sinclair's view of Prechter's appearances on Bloomberg today

Prechter is getting a big Bloomberg push today because he is going to say what they want to hear on gold and the US dollar. They will even allow him to pan equities to get a bull recommendation on the dollar and a bear recommendation on gold.

 

He does not know or maybe care that he is being used as part of the MOPE campaign directed at making the financing of the deficit at comfortable rates.

The appearance is, according Bloomberg, to discuss if gold is going higher in order to get the bulls to listen and orally hammer them.

 

Please do not send me 500 scared emails asking about a man who on every modest reaction in gold since $248 has forecasted a return to $248.

 

 

 

There could be an element of truth to Sinclairs paranoia but he is starting to sound like a very righteous, fundamentalist religious nut cake. Anything or anyone who goes against the price of gold going up is castigated to hell and lambasted. Maybe he should look at the nature of his own predictions and see how he is doing.

Dont get me wrong I think we will get to where JS is talking about. But lack of patience will not help the cause, in fact he could infuriate other gold 'believers' and encourage them to write him off (and along with him gold) as a weirdo freak (which I am sure he is not).

 

Theres a lot of evidence for Prechter being correct IMO. Time will tell. He is not being incorporated into the media hegemony by stating gold may well go down temporarily and the dollar up.

Likewise there is a lot of evidence for Sinclair being correct IMO. Eventually.

 

 

 

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The whole article is well worth a read to understand why the dollar rose in the first place - there's a big difference in wanting to buy the dollar and being forced to buy the dollar. Adam Hamilton is one of the best IMO:

 

http://www.marketoracle.co.uk/Article12588.html

 

Many foreign investors had to first buy US dollars before they could buy US Treasuries. So the USDX started rocketing higher in this bond panic. Check out the sharp August USDX spike above. By early September, the panic buying moderated so the USDX fell sharply. The US Treasury had nationalized Fannie and Freddie with taxpayer money, short-circuiting the bond panic. But then within a couple weeks the failure of Lehman Brothers sparked the actual stock panic.

 

The fear surrounding these events, fanned to great heights by disastrous government interventionism, led to a mass exodus from stocks worldwide. Investors wanted out at any price, anything to end the pain. So once again cash and US Treasuries became the destination of choice to weather the epic storm. Foreign investors were dumping their local currencies to buy US dollars, which drove a blisteringly fast USDX rally.

 

 

The USDX’s major influence on gold over the past year has important near-term implications for gold traders. Prior to the bond panic, the USDX was languishing around 72 to 73. Since stocks bottomed in early March, the USDX has been rapidly falling back down towards those pre-panic levels. Because of this trend, I really doubt the USDX will stop near 78 today as Wall Street hopes. At best, it will probably continue back down into its pre-panic trend rendered above. Call this 73 or so, a lot lower from here.

 

But the cold, hard reality is the dollar’s fundamentals today are radically worse than they were last summer. The Fed has doubled M0 in a matter of months, the most inflationary event in its entire history. Washington is hellbent on running the biggest deficits the world has ever seen. These panic-driven developments are flooding the world with new dollars at a time when interest rates are far too low to make it an attractive currency.

 

Large foreign investors see this monumental surge in dollar supply and they worry about the dollar’s purchasing power. They want to pare back their still-massively-overweight holdings in US dollars and US Treasuries. So dollar investment demand is falling at the same time dollar supply is exploding. With less demand bidding on far more supply, it’s inevitable the US dollar bear is going a lot lower. So odds are the USDX won’t stop for long in its pre-panic trend, but grind even lower.

 

 

I listened to that interview that Prechter gave and he was kind of right in what he was saying, but he just can't put any dates on when it will happen - so Elliot Wave cannot predict the peak of this cyclical bull market from where the bear market begins?.

 

Because Prechter is so bearish, it seems he sees this 'third wave' happening very soon which will spark the dollar rally - that's not going to happen. Equities are in a cyclical bull market by the 50/200-day EMA golden cross (not the SMA which gives false positives) as of this week on the S&P - and I expect them to peak in the middle of 2010 whilst the dollar goes much lower, possibly well into the 60's.

 

http://stockcharts.com/h-sc/ui?s=$SPX...id=p86378371933

 

It's only when equities peak in the middle of 2010 and are vastly overvalued with the dollar vastly undervalued that we get another strong dollar surge like we saw last year. All the problems will start to come back again in 12 months time and I think it's then that the dollar makes it's moves again as people flee the stockmarket, but I can't see it going into the 90's because of where it will be starting from.

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A BIG HATS OFF ! ... to Tony Cardero, Elliott wave analyst.

 

He called this latest rally up from Monday's selloff perfectly.

Here's his chart - thinks we are almost done on the upside - maybe even today

 

47610168.png

 

An excerpt from Thursday's comment:

Today's push higher helps to confirm that Intermediate wave B concluded at SPX 979. Intermediate wave C should now unfold in five waves over the next several days. The upside target remains the OEW 1041 pivot, but the SPX needs to clear the 1018 pivot first. Best to your trading!

 

/more: http://caldaroew.spaces.live.com/

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Call him the ultimate contrarian. he is

one man who did not fl inch in the face

of overwhelming majority of market

commentators who predicted soaring

infl ation following the credit-awash policy

central banks chose to drown the world in.

instead, he was steadfast in his belief that

the outcome would be far more dangerous

i.e. defl ation. the script he laid out in his

book “Conquer the Crash” in 2002 has vividly

played out since august 2007 as the credit

implosion fi nally reared its ugly face.

Robert Rougelot Prechter, Jr. a psychology

graduate from Yale began his professional

career in 1975 as a technical market

specialist with the Merrill lynch market

analysis department in new York. he has

been pushing his contrarian commentary

since 1979 through the monthly publication

the Elliott Wave theorist.

that Prechter is swimming against the

tide when he expects the dollar to rally

for the next three years is a monstrous

understatement. But that is classic Prechter.

Bringing back Ralph nelson Elliott’s

work to the investing mainstream has

occupied much of Prechter’s waking hours.

What has propelled him centre-stage of

late, besides his dire predictions for the

world fi nancial markets, is his time and

attention to socionomics. While one would

like to believe that divergent views make a

market, Prechter believes that social mood

underpins everything right from markets to

fashion trends to popular entertainment.

at 60, Prechter has weathered enough

bull markets, bear markets, intermediate

downtrends, sucker rallies and boatloads

of sarcasm evangelising Wave theory. in his

words “i have been wrong in the beginning,

in the middle and in the end, if you are

trying to assess future events you must live

with making mistakes.” to see the world

through Prechter’s eyes, fl ip the page.

Rajesh Padmashali

35

7 August 2009 Outlook PrOfit

Does all this talk of green

shoots amuse you? Are these

“green shoots” an illusion

like the “new economy”?

If the market were at a major bottom,

the metaphor might apply. But what

we have now is some of the old, trampled

grass raising its head a bit.

What does General Motors (GM) filing

for bankruptcy tell you? How far

is General Electric (GE) from eventual

disintegration?

GM’s bankruptcy is a lagging indicator,

a result of the wave 1 decline which

ended on 9th March; that was an extreme

turn towards pessimism. In the

next leg down, that is, during wave 3,

hundreds of companies that were not

as weak as GM will get weak and file

for bankruptcy. GE, along with most

other companies, will suffer the most

during that down wave.

Was Milton Freidman wrong after all,

there is free lunch for all those deemed

“too big to fail” on Wall Street.

TANSTAAFL (There ain’t no such

thing as a free lunch) is a law of nature.

The only question is who pays. The

government and the Fed decided to

make innocent taxpayers and prudent

savers pay for speculators’ failed bets.

What is the way out for the indebtedness

of the US? How does the debt get

wrung out of the system? Companies

are not growing nor are consumer incomes.

Default and paying off are the only

ways out of debt. Most current debt

will be eliminated by way of default.

The authorities are trying to prop up

illiquid institutions, and if they had

not done that they would have already

failed. People are banking on the Fed

to print money to buy all the bad loans.

The psychological forces of the bear

market will keep the Fed from succeeding

whatever they try to do. As we

dive into depression, the ability to pay

back debt will evaporate so fast that

the authorities will not be able to respond

in time.

Is there anything the Fed can do to

soften the blow now that they have

run out of ammunition in terms of

lowering rates?

Definitely, it can disband and go away.

My guess is that sometime between

2010 and 2016, the Fed will lose whatever

credibility it has left.

In your view what has happened to

all this credit infusion post Lehman?

What is it leaking into?

It is going into shoring up payments

on bad debt, such as asset-backed paper

and AIG debt-insurance contracts.

Over-extension of credit always ends

up in deflation. But popular consensus

is towards hyper-inflation based on fiat

money. If we indeed had hyper-inflation

coming, commodities had to stay

up; we have not seen that happen yet.

Will the US dollar continue to contradict

popular opinion and be a relative

outperformer despite “fundamentals”

being against it?

The job of the markets is to fool everyone.

One of the reasons that I believe in

the dollar is because no one else does.

Believe is not the term that I would

want to stress here but more debt is denominated

in dollars than in any other

currency. When those IOUs implode,

remaining IOUs gain in value. Come

to think of it the same cash in 2007 can

now buy twice as much stocks, twice

as much property, twice as much commodities.

It may take months more for

the US dollar to complete its basing process.

But when it turns up again, it will

go up because of bad fundamentals.

When you wrote “Conquer the Crash”

what were you thinking? Where did

the clarity on deflation preceding hyperinflation

come from?

I started with Elliott wave analysis,

where I saw the very high degree of

wave that was ending. Then I studied

the history of like junctures, and observed

that over-indebtedness accompanied

all of them. In each case, the

ensuing bear market caused credit to

implode. From there, it was all about

predicting the details that would accompany

this scenario. So far, it is

working out as it should.

You published “Conquer the Crash”

in March 2002. The implosion started

happening in August 2007.

The implosion actually started in mid-

2005, when real estate turned down.

That was about three years after the

book came out, giving people plenty

of time to divest themselves of investment

property as prices roared into the

peak. Then stocks turned down in 2007

and commodities in 2008. Being early

was better than being late.

What makes manias extend their run?

Financial manias run on the increased

availability of credit coupled with the

net desire of people to employ it. I had

thought in 2000 that the country had

reached the limit of credit expansion.

The savings rate was zero, and lenders

were demanding only 10 per cent

down on houses. But by 2007, lenders

were financing broke people and even

covering the closing costs. And people

were borrowing off the equity on their

homes and spending the money, pushing

the rate of savings to negative! Talk

about an extreme.

Market extremes can drag longer

than one can fathom, how do you

deal with these or is there a standard

overshooting duration that you have

observed?

Sometimes markets turn so swiftly

that you will miss them if you don’t act.

That is why I move when the work demands,

which makes me early at times,

when trends extend past the norm. But

markets are returning to normal. After

17 months of falling stock prices, The

Elliott Wave Theorist recommended

covering shorts in late February, and

the market turned up three weeks later.

I was happy to be a little early, because

anyone who waited had to chase

the rally. I called for a short-term turn

to the downside on June 11, and that

turned out to be the top day. In the long

run, it pays to act when you should.

What is noise to you while reading

the markets? What are the indicators

that you monitor? What are your

tools of the trade?

News and market opinions are 99 percent

noise. News is not causal, and

most investors waste their mental energy

focusing on it.

I monitor Elliott waves, sentiment

indicators and momentum indicators.

They tell the story of market

psychology, and that is the basis of

Cover Story

36

Outlook Profit 7 August 2009

Default and paying off are the only ways out of

debt. Most current debt will be eliminated by

way of default

31

market analysis.

How did you come across Elliott Wave

Theory? When did it become your

holy grail?

I came across Elliott waves in reading

Richard Russell’s Dow Theory Letters

in the early 1970s. Then I found Elliott’s

original works in the New York

Public Library. Since then, I have published

all of Elliott’s works as well as

those of his successors, including Russell,

whom we feted, by the way, at a

dinner recently in San Diego.

The Wave Principle became my primary

tool about a month after I began

tracking waves using an hourly chart.

That’s all it took. It was an eye-opener.

The general perception is that Elliott

Waves are very complex to understand.

What is your take on that?

I think the primary theory is simple

but like life, the waves in actual manifestation

are quite complex. The complexity

comes not from the qualitative

aspects because waves only take five

forms, it’s in the quantitative aspect

because sometimes a wave will be very

brief, perhaps you can short and the

price turns, other times it will be very

textbook like.

Is there a way to know that we are interpreting

the wave right?

If you are applying the wave behavior

guidelines properly, this means you are

doing it right and that even if you are

doing it right means you’ll be wrong a

number of times. Sometimes the most

probable outcome doesn’t occur, that’s

what probability means. Let’s suppose

the probability of one outcome

is 70 per cent; that is almost a statistical

guarantee that you’ll be wrong

one third of the time that you use very

same interpretation under very identical

circumstances. So I think the way

the practitioners handle it is to always

have what we call the second best interpretation

or alternate count. You

know that you are right as long as you

do not need to return to that alternative.

As long as your primary interpretation

of the market is following your

expectations, you can assume with

some confidence that you are right and

continue till the need arises to switch

to the alternate count.

What is a typical workday for you like

or is there one at all? Looking at your

historical charts and depth of market

understanding makes one wonder

whether you are away from your

“tools of the trade” for long?

I work all the time, even weekends.

And it still does not seem to be enough.

In 2008, I was asleep at the marketing

wheel, too busy doing market analysis.

It was such an exciting time for Elliott

waves; every move was clear. We were

having a ball, and our subscribers were

either on the sidelines calmly watching

or making a lot of money short.

How does the daily sentiment index

(DSI) that you monitor work? Is it a

proprietary tool or available for use

by the average investor?

The DSI is a poll of traders. When over

90 per cent of traders are bullish on a

market, the market is usually near a

peak; when 10 per cent are bullish, it’s

usually near a bottom. At the S&P’s

bottom in March, only 2 per cent of

traders were bullish. Along with the

completed wave formation, that reading

was a great buy signal. Anyone can

follow it. It’s published by trade-futures.

com.

Can wave patterns detect market

manipulation; to begin with can markets

be manipulated for sustained

periods of time or at all?

No person or agency can manipulate

37

7 August 2009 Outlook Profit

What is an Elliott Wave?

Elliott waves are the basic building block of the Wave Principle. The wave

principle is Ralph Nelson Elliott’s discovery that social behavior trends and

reverses in recognisable patterns. Elliott isolated 13 patterns of movement, or

“waves,” that recur in market price data and are repetitive in form but not necessarily

repetitive in time or amplitude. He named, defined and illustrated the

patterns. These patterns are Elliott waves. These Elliott waves link together to

form larger versions of those same patterns. They, in turn, link to form identical

patterns of the next larger size, and so on. The result is the illustration you

see in chart A.

Elliott’s pattern consists of “impulsive waves” and “corrective waves.” An

impulsive wave is composed of five sub-waves. It moves in the same direction

as the trend of the next larger size. A corrective wave is divided into three

sub-waves. It moves against the trend of the next larger size.

In markets, progress ultimately takes the form of five Elliott waves of a specific

structure. As you can see in chart B, in the most basic Elliott wave structure,

waves (1), (3) and (5) actually affect the directional movement. Waves (2)

and (4) are countertrend interruptions.

The two interruptions are a requisite for overall directional movement to occur.

And though there are several variations of Elliott waves, all of them fit into

the basic structure in chart B. The stock market is always somewhere in the

basic five-wave pattern at the largest degree of trend. Because the five-wave

pattern is the overriding form of market progress, all other patterns are subsumed

by it. At any time, two or more valid wave interpretations usually exist.

So, it’s important for any investor or trader to carefully assess the probability

of each interpretation. The Elliott Wave Principle does not provide certainty

about any one market outcome. Using the Elliott Wave Principle is an exercise

in probability.

Source: Elliott Wave International

A) Elliott wave structure

1

1

1 1

1

2

2

2

2

2

3

3

3

3

4

4

4

4

4

a

a

a

c

c

c

b

b b

6

6

(1)

(J)

(1) and (2) = 2 waves

(1), (2), (3), (4), (5), (a), (B), © = 8 waves

1, 2, 3, 4, 4, a, b, c, etc = 34 waves

6

6

6

(5)

(5)

(a)

©

©

(1)

J

(2)

(4)

B) Elliott wave basic pattern

Wave 1

1

2

3

4

5

Wave 2

Wave 4

Wave 3

Wave 5

Cover Story

38

Outlook Profit 7 August 2009

broad markets, at least not for more

than a day or two. The natural movements

of markets make it appear

sometimes that they can. I smile when

I see reports such as, “The Fed is losing

control of the bond market.” As if

it ever had control in the first place.

When markets go up, the Fed seems

to be in control; when they go down,

it seems out of control. But the control

aspect is an illusion. Market direction

is the sole basis upon which people decide

whether the Fed is in control or

not. And markets go two ways, dictating

the changes in perception.

What was your single best trade or investment?

My fastest and largest gain ever came

from being short the stock market

from July 2007 until late February

2009. What a great ride. The next best

one was being long South African gold

stocks in 1973-1974. Being bullish on

stocks in the 1980s was huge, but the

gain wasn’t as swift. Being bearish

the metals from 1980 to 2001 was also

good, especially since I had the rallies,

too. There were others, but those are

the highlights.

Was taking part in the United States

Trading Championship about proving

to the world that wave theory

works or it was just another point of

evolution for you?

In the trading championship, I made

many trades in options over a period of

four months. At the end, the account

was up 444 percent, not to mention

that it paid almost the same amount

in commissions on top of that. My long

term opinion at the time was super

bullish, and this period was a choppy,

net down market, from February

through May 1984. So I think it is fair

to say that reading waves on the short

term trends was useful. But people are

naturally skeptical. For critics, there

is never proof. I just try to pile up evidence

as I go.

What event or personality has had

the biggest influence on your career?

Probably the main positive influence

was an article in Barron’s that appeared

in July 1984. I was very bullish

on the stock market, calling for an end

to the correction. The Dow took off like

a rocket about two weeks later.

Do you still believe that dividends are

the only reason to own stocks, after

all dividends though not mandatory

are subject to company performance,

e.g. Microsoft intentionally came

very late into the game.

Practically speaking, the main reason

to own or short stocks is for capital

gain. But theoretically speaking, the

only reason that anyone should care to

own stocks is that they pay dividends.

Otherwise there would be no payout

to the owners. Being an owner without

a dividend or at least the promise

of a dividend means you own nothing.

It doesn’t matter if the company ends

up ruling the world; you still get nothing.

So the whole potential for capital

gains is predicated on dividends and

the possibility of dividends.

“When money supply rises, inflation

rises soon after”, what is wrong with

this conventional thinking in the current

context according to you?

It should read, “When the money +

credit supply rises, that is inflation.”

Economists look at cash and shortterm

debt and call it money, ignoring

longer-term debt. So they keep predicting

inflation in a deflationary environment.

For the record, dollars are

not money. Gold is money. Congress

outlawed money in 1933.

You say the dollar is not money; it is

still the world’s reserve currency at

the moment...

It is a currency and it is a substitute for

money, but true money has to exist as

a form of final payment, which is no

one’s obligation and one that will hold

its value over centuries and dollars

don’t do that. The dollar is only backed

by the taxing power of the US government.

This grand supercycle bear

market just might be large enough to

force a rethinking of the entire idea

of fiat money. People do not owe any

gold, what they owe today are dollars,

Swiss francs, Euro or Yen, As deflation

occurs, creditors want to be paid back

what they are owed by way of dollars,

and the debtors will have to try to get

dollars to make their payment. So what

will be in demand are dollars, it is not

time for gold to be in demand yet.

Could you explain to us the difference

between monetary inflation and

credit inflation and how it is the latter

that has taken place so far, precise

reason why the central banks

are helpless in countering the credit

contraction?

In our fiat-money world, money inflation

is the creation of dollars by the

Fed. Credit inflation is the creation of

obligations to pay dollars. When the

supply of IOUs expands, people have

that much more purchasing power, so

prices adjust accordingly. When debtors

default, the IOUs go away, and so

does the amount of purchasing power

people had. And prices adjust accordingly

then, too. Over-issuance of IOUs

is a worldwide problem, but the dollar

is the most lent currency of them all.

What kind of contraction have we

seen in money supply if at all or is the

credit contraction playing out largely

by way of destruction in asset prices?

The money + credit supply is contracting.

The markets know it, and

they are re-pricing assets accordingly.

With real estate down 40 per cent,

stocks down 58 per cent high to low

and commodities down 58 per cent

high to low, the financial markets are

saying that the contraction in the total

value of credit has probably fallen by

about 40 percent. People can’t see it,

because the government and the Fed

have created programmes to hide the

implosion by trying to keep up an illusion

that IOUs are worth 100 cents

on the dollar. But on average, they are

worth 60 cents, and the financial markets

reflect that fact.

Where does one hide in this kind of

scenario?

I recommend Treasury bills, Swiss

money market claims, New Zealand

bonds and some gold. This portfolio

has protected everyone who adopted

it. If you are going to hold dollars you

have to hold it in some form that will

survive a long wave of deflation. The

dollars that will best survive are cash -

actual green dollars. The second safest

instrument is Treasury bills. It’s the

last IOU that the government will allow

to fail as they have to borrow short

term to keep their operations going.

The same cash in 2007 can now buy twice as much

stocks, twice as much property

39

7 August 2009 Outlook Profit

I am tired of hearing people insist that the Fed can expand

credit all it wants. Sometimes an analogy clarifies a subject,

so let’s try one.

It may sound crazy, but suppose the government were

to decide that the health of the nation depends upon

producing Jaguar automobiles and providing them to as

many people as possible. To facilitate that goal, it begins

operating Jaguar plants all over the country, subsidizing

production with tax money. To everyone’s delight, it offers

these luxury cars for sale at 50 percent off the old price.

People flock to the showrooms and buy. Later, sales slow

down, so the government cuts the price in half again. More

people rush in and buy. Sales again slow, so it lowers the

price to $900 each. People return to the stores to buy two

or three, or half a dozen. Why not? Look how cheap they

are! Buyers give Jaguars to their kids and park an extra one

on the lawn. Finally, the country is awash in Jaguars. Alas,

sales slow again, and the government panics. It must move

more Jaguars, or, according to its

theory — ironically now made fact

— the economy will recede. People

are working three days a week just

to pay their taxes so the government

can keep producing more Jaguars. If

Jaguars stop moving, the economy

will stop. So the government begins

giving Jaguars away.

A few more cars move out of the

showrooms, but then it ends. Nobody

wants any more Jaguars. They

don’t care if they’re free. They can’t

find a use for them. Production of

Jaguars ceases. It takes years to work

through the overhanging supply

of Jaguars. Tax collections collapse,

the factories close, and unemployment

soars. The economy is wrecked.

People can’t afford to buy gasoline,

so many of the Jaguars rust away to

worthlessness. The number of Jaguars

— at best — returns to the level

it was before the program began.

The same thing can happen with

credit. It may sound crazy, but suppose

the government were to decide that the health of the

nation depends upon producing credit and providing it to as

many people as possible. To facilitate that goal, it begins operating

credit production plants all over the country, called

Federal Reserve Banks. To everyone’s delight, these banks

offer the credit for sale at below market rates. People flock

to the banks and buy. Later, sales slow down, so the banks

cut the price again. More people rush in and buy. Sales again

slow, so they lower the price to one percent. People return

to the banks to buy even more credit. Why not? Look how

cheap it is! Borrowers use credit to buy houses, boats and an

extra Jaguar to park out on the lawn. Finally, the country is

awash in credit. Alas, sales slow again, and the banks panic.

They must move more credit, or, according to its theory —

ironically now made fact — the economy will recede. People

are working three days a week just to pay the interest on

their debt to the banks so the banks can keep offering more

credit. If credit stops moving, the economy will stop. So the

banks begin giving credit away, at zero percent interest. A

few more loans move through the tellers’ windows, but then

it ends. Nobody wants any more credit. They don’t care if it’s

free. They can’t find a use for it. Production of credit ceases.

It takes years to work through the overhanging supply of

credit. Interest payments collapse, banks close, and unemployment

soars. The economy is wrecked. People can’t afford

to pay interest on their debts, so many bonds deteriorate to

worthlessness. The value of credit — at best — returns to

the level it was before the program began.

See how it works?

Is the analogy perfect? No. The idea of pushing credit

on people is far more dangerous than the idea of pushing

Jaguars on them. In the credit scenario, debtors and even

most creditors lose everything in the end. In the Jaguar scenario,

at least everyone ends up with a garage full of cars. Of

course, the Jaguar scenario is impossible, because the government

can’t produce value. It can, however, reduce values.

A government that imposes a central bank monopoly, for

example, can reduce the incremental

value of credit.

A monopoly credit system also

allows for fraud and theft on a far

bigger scale. Instead of government

appropriating citizens’ labor openly

by having them produce cars, a

monopoly banking system does

so clandestinely by stealing stored

labor from citizens’ bank accounts by

inflating the supply of credit, thereby

reducing the value of their savings.

I hate to challenge mainstream

20th century macroeconomic

theory, but the idea that a growing

economy needs easy credit is a false

theory. Credit should be supplied

by the free market, in which case it

will almost always be offered intelligently,

primarily to producers, not

consumers. Would lower levels of

credit availability mean that fewer

people would own a house or a

car? Quite the opposite. Only the

timeline would be different. Initially

it would take a few years longer for

the same number of people to own houses and cars – actually

own them, not rent them from banks. Because banks

would not be appropriating so much of everyone’s labor and

wealth, the economy would grow much faster. Eventually,

the extent of home and car ownership – actual ownership

– would eclipse that in an easy-credit society. Moreover,

people would keep their homes and cars because banks

would not be foreclosing on them. As a bonus, there would

be no devastating across-the-board collapse of the banking

system, which, as history has repeatedly demonstrated, is

inevitable under a central bank’s fiat-credit monopoly.

Jaguars, anyone?

Jaguar inflation

Edited excerpts from Robert Prechter’s Most Important

Writings on Deflation. The following piece appeared in

the February 20, 2004 issue of Elliott Wave Theorist

The US Federal Reserve Building,

Washington DC

Cover Story

40

Outlook Profit 7 August 2009

As for the Swiss money market claims,

the government there runs a conservative

book which also reflects on

their currency. But I still believe that

the US dollar is going to outperform

all of them during the next deflationary

wave. That could start happening

sometime late this year. As soon

as wave 2 is over, the stocks rally will

be over and we will have a powerful

downward wave 3.

Will the deflation wave swamp financial

markets worldwide or do the

economies of China & India have reason

to breathe easy?

Deflation will swamp all financial

markets. The US and Europe owe the

most, so their economies will suffer

the most. But creditor nations, such as

China, will lose out, too, because they

won’t get fully paid.

What is your China call? Does all this

talk of it replacing the United States

as the world’s greatest economic

power make any sense to you?

I’ve been saying for years that China

will be a leader, probably the main

leader, in the 21st century. But first

China has to get past Supercycle wave

2, which has now started. This is the

wave that led to the Civil War in the US.

After some equivalent difficulty, China

should emerge as the main world power.

But this scenario will take decades

to play out.

Are you implying that there could

be civil unrest or even a civil war in

China?

We cannot predict something quite

that specific. But we can certainly say

that tensions within China are likely

to grow substantially. You just used

the phrase civil unrest. I think we can

predict that with near certainty, but exactly

the form of that unrest whether

it actually goes as far as a civil war is

rather doubtful. I think China’s wave

structure is equivalent to where the

United States’ wave structure was in

1835-37, that was the peak of its first

wave up of supercycle degree. The

US corrected from 1835 to 1859 that

was two decades, China maybe entering

something much like that. So

the amount of time that wave 2 could

take be a very swift decline lasting 5-

10 years, or it can be a sideways formation

lasting three decades, we just

don’t know yet.

And because the social mood might

turn very negative across the world

could we have a World War?

In fact Allan Hall, my colleague who

works at the Socionomics Institute is

currently working on a report discussing

the probabilities for wars to occur

in this bear market. The bad news is

that all bear markets bring social unrest

but the good news for us currently

is that the biggest wars occur in what

we called C wave of the corrective process.

And we are currently in major

wave A (what we call super cycle wave

A) it’s an equivalent of 1929-32, during

that decline there was no serious war.

It was afterwards in the wave C down

that World War II started. So our argument

is that we do not have to worry

about anything equivalent to a World

War III for several decades at least.

Are all bull markets a manifestation

of mania in one form or the other?

The Wave Principle model answers

your question: Bull and bear markets

occur at all degrees of trend, so they

are all qualitatively the same. They

are all manifestations of social-mood

change. Mania is a quantitative term.

The peaks of very large positive-mood

trends we call manias. Manias are

among the few times that anyone can

see the non-rationality of markets. But

markets are non-rational all the time.

There is always a disconnect between

the stock market and past economic

growth. But the stock market is the

best predictor of subsequent growth.

Is it a fair observation that all bull

markets end badly?

Well, all bull markets lead to bear, and

vice versa. It’s an endless form.

What is your prognosis for crude going

forward?

Oil is in a very long-term bear market,

especially in real terms. The oil bulls

bankrupted a lot of people. It went to

about 150 dollars and then dropped

to 33. So if you acted on the basis of

reading books on peak oil you would

have been ruined by now. Oil has not

stopped going down and before all of

this is over oil might go down to 10

dollars. I don’t think the oil/gold ratio

will ever return to the level it saw in

2008. I also doubt we will see the dollar

price of gold exceed that of 2008, but

that call is subject to my being right

on deflation.

You said gold is real money, but that is

not enough reason for you to hoard it?

Gold is going to jump short term and

get everybody excited. It is going to

hold up because the US dollar is on

Deflation will swamp all financial markets. Over

extension of credit always ends up in deflation

14000

13000

12000

11000

10000

9000

8000

7000

6000

Sep 07 Jan 08 May 08 Sep 08 Jan 09

Source: © 2009 Elliott Wave International (www.elliottwave.com) Data courtesy of foundation for the Study of Cycles, Inc.

1

2

3

4

5

(1)

(2)

(3)

(4)

(5)

1

2

4

3

5

2

1

3

4

5

j

(A)

(B)

May 09

A clear Elliott

wave in the Dow

41

7 August 2009 Outlook Profit

its way to making a new low and that

should last for the next few weeks. But

if you look at a three year perspective

the dollar will rise and gold will fall,

maybe to 650. It also means that a new

high in gold will not make me turn bullish.

But somewhere around 2012 may

be the time to look at gold and at that

point the timing might be more important

than the price. So when the dollar

eventually ends its rally, gold might be

the buy of a lifetime. The next coming

wave of deflation is going to make the

dollar go up; all the IOU dollars that

are expected to add to inflation will default

and disappear.

Was gold right through 2001-2008 a

beneficiary of liquidity flooding the

markets?

Yes, definitely. Commodities went up

along with it.

So would that then make it a candidate

for correction?

Yes. But it is less volatile than the markets

for commodities.

In lieu of hyper-inflation coming to

pass, what is your prognosis for gold?

Will it rocket the way that gold-bugs

around the world are baying for? Incidentally,

Alf Field has projected

$10,000; do these targets seem to be

in the realm of reality for you?

The current price of gold reflects all

the inflation that has taken place since

it was priced at $21 an ounce back in

1932. So obviously super-bulls are

counting on more inflation. I think we

are in the midst of deflation, so I do not

think gold is going to $10,000 an ounce,

at least not until the deflation is over.

During deflations, creditors and debtors

both want to be paid in the currency

in which they transacted. That has

been, and will continue to be, the focus

of monetary demand. But gold is money,

and this change in social psychology

is so large that it may usher in a new

financial system in which the world

goes back to using money instead of

debt as its medium of exchange. This

is one of several reasons why I have

consistently advocated holding some

gold, even while working to call the

rallies and declines for traders. If the

deflation proceeds in normal fashion,

then there may come a time when we

will want only gold.

Could you elaborate on the circumstance

when we will want only gold?

That is bit of an exaggeration. Once

we reach the bottom, if certain political

authorities decide to turn to the

printing press to print Federal Reserve

notes, the kind of cash that you have

in your wallet, then that will drive the

prices of everything upward. So at that

point you would want to hold a substantial

amount of gold because it will

be the only real money. However, we

don’t know that the political class will

turn to money printing at that point. If

they do, to have real money, meaning

gold, at that time would not be a bad

idea at all. In fact people should have

some even now. I recommended in

“Conquer the Crash” that you should

have some gold always.

In a worst case scenario there is not

enough gold to go around. The total

value of all gold mined is about $4 trillion.

So you think it’s eventually going

to result in the kind of mania that

is being talked about by gold-bugs?

No, because most of the dollars that exist

today are not transactional dollars

they are credits. They are IOU dollars.

Treasury bills, bonds, everything you

can name is a IOU to the dollar. The actual

monetary base is only about 2 trillion

dollars, so I don’t think there is a

discrepancy there at all.

What kind of upside price action

would convince you that gold is another

bubble in the making?

It doesn’t matter. Bubbles are always

retraced. What matters is whether gold

is going to go up for real. We watch the

waves constantly to make that decision.

By a real bull market, I mean one

powered by inflation. For that to happen,

we would need silver going up

along with it. Yet here it is, still stuck

at levels down 70 percent from its alltime

high.

The Dow has not made a new high in

terms of real money; however what is

it that has held gold back so far from

creating inflation adjusted highs? Is

that possible going forward because

as per your observation gold does

well in an expanding economy and

we seem far from that for now?

Gold already reflects all the inflation

since 1932. I don’t know what you mean

by “inflation-adjusted highs,” since I

adjust for inflation using gold. But one

reason it is not soaring in dollar terms

is that the economy is not expanding.

Gold usually goes up when the economy

is expanding. The idea that it goes

up in recessions and depressions is a

myth. Observe that the last time gold

and silver peaked, in March 2008, was

almost exactly when the current recession

started. And so it goes, again and

again, totally contrary to what the one-

Financial manias

run on the increased

availability of credit

coupled with the net

desire of people to

employ it

100

10

1

0.1 1859 1878 1897 1916

Throw-over

Throw-over

complete

Yearly/monthly

1859-2009

1935 1954 1979 1992

Source: © 2009 Elliott Wave International (www.elliottwave.com) Data courtesy of foundation for the Study of Cycles, Inc.

A

B

C

D

E II

I

III

IV

V

2011

j

k

l

m

n

Completed longterm

bull market in crude oil

Cover Story

42

Outlook Profit 7 August 2009

noters and the media tell you.

I think it’s normal that markets are

crazy; does that statement of yours

pretty much sum up the crux of Socionomics?

Correct! The market is non-rational all

the time, not just when it is at mania

highs or crashing. But the socionomic

hypothesis is about causality: Most

people think that social actions regulate

social mood; socionomics postulates

that social mood regulates social

actions.

Was Socionomics the next eventual

orbit after wave analysis became second

nature to you or is it inextricably

intertwined?

Yes, Socionomics was a natural progression

of thought. If the stock market

follows wave patterns, then they must

be endogenously regulated; otherwise

news would have to be patterned to

produce wave patterns, which is an untenable

position. Then I noticed that

other aspects of social expression ebb

and flow with the waves in the stock

market. This observation led me to

hypothesize that waves are fluctuations

in social mood, which have consequences

in social action.

How does Socionomics differ from

behavioral finance?

Behavioral finance finds narrow departures

from rationality in human

behavior as it relates to finance. Socionomics

is a full theory of non-rational

herding behavior patterned as

a hierarchical fractal. In 2007, I wrote

a paper on this idea for the Journal of

Behavioral Finance.

Herd thinking makes markets and

media does play a role? Why is the financial

media such a lousy prognosticator

of market turns or any other

trend altering event for that matter?

The media fulfill many roles. They usually

reflect the sensibilities of the herd

exquisitely. So they rarely make good

market calls, which require a contrary

stance. But in the aggregate they serve

as a great indicator. When the media all

agree on a market’s direction, it is an

indication that the herd is aligned one

way, which in turn indicates an imminent

change in trend.

What is your all-the-same markets index

telling you now? Are the components

showing any divergence? How

far are we from moving into extreme

pessimism from extreme optimism?

It shows so far a shallow retracement

of the 2008-2009 collapse. The components

all peaked in early June within

days of each other, except for bonds,

which topped in December. In March

at the bottom we said we are looking

for a big rally that could carry the S&P

500 till 1000-1100. So there is no change

in that best guess outlook which would

be a normal range of 2/3rds of wave 2.

How do you interpret the recovery

in copper prices or the rise in 10 year

yields to about 4 per cent?

Together, they reflect the recent rise in

optimism, which in turn is leading to

some relief in the economy.

Is the “recovery” that we have got

all intervention liquidity driven? Is

it then 2003-2007 playing out all over

again?

Psychology drives liquidity as well as

economic expansion and contraction.

The 2003-2007 rise was of Cycle degree.

The current rally is only of Primary degree,

so it will not re-create the excesses

of the previous period. Intervention

ruins the economy. But I think it is a

normal part of social action and one

of the mechanisms that is propelling

society into the abyss that the wave

structure said was coming.

Is it 1929 all over again or far worse?

What is your worst case scenario for

the world financial markets and for

the US?

The market has gone through a bigger

top and trend change than in 1929. My

scenario is for the markets to fall further

than in 1929-1932, for more banks to fail

than in 1933 and for unemployment to

exceed the peak level of 1933. To many

people, that is a “worst case” scenario.

To me, it is the likely scenario.

At what point would you say that the

deflation phase is over and now we

are moving into hyperinflation? Are

we there yet?

Deflation will end when the last weak

debtor defaults and the last downtick

in asset pricing occurs. We are a long

way from that point. Hyperinflation

might occur after the low. There is no

monetary law that says it must.

Does it mean that after deflation has

run its course the world economy will

start rebuilding again?

Yes, definitely. In other words the economy

will lag the bottom in the market

just as it did in the early 1930s. And it

will hit its worst low as stocks are rallying

but you have to obviously buy

before the bottom of the economy. But

then yes, we expect the economy to

rebuild and go through a super cycle

wave B and that will be very strong re-

What is

Socionomics?

Socionomics is a comprehensive

theory of social behavior that describes

the causal relationship between

social mood and social action.

It believes that social moods

determine the character of social

actions. The credit boom and bust

is a prime example. An increasingly

optimistic social mood generated

a climate of confidence in which

borrowers were certain they could

repay loans – even if they were

unable to afford a downpayment

– and lenders were sure that the

debtors were capable of honoring

their obligations. Lowered lending

standards fostered a run-up in

credit and in the real estate mania

that followed, homes were viewed

as investments and mortgages

were securitized and traded. When

social mood changed, so did

behavior. Lenders became more

conservative, borrowers began

to question their ability to repay,

the value of mortgage backed securities

plummeted and half built

neighborhoods stood as ghostly

reminders of the confidence that

once ruled the marketplace.

Source: Socionomics Institute

43

7 August 2009 Outlook Profit

building but it won’t be the start of the

great new wave up again.

Your grand super cycle reading calls

for the Dow to go to the 400 level.

Well, I keep specific numbers only for

subscribers. But what I have been saying

publicly is that the Dow could go

below 1,000 which is a radical enough

statement.

Is there something that will make

you reassess that call?

I can’t imagine but we have to see an

improvement in the technical indicators

prior to that level. We have to see

a better price earnings ratio, we have

to see dividend yield in the Dow and

S&P of 7-8 per cent. We have to see

extremes of pessimism that are greater

than what we saw in 1974, 1942 and

1932. If we saw those and the Dow was

still above 1000 I would probably turn

bullish.

None of them seem to be happening

at the moment...

Oh, not even close. In fact the price-to

earnings ratio has gone worse. I think

the dividend payout ratio is about to

get worse because the current dividend

payout is three times the level of earnings.

I think companies in the next year

have to be cutting their dividends.

If we come back to the final bottom

that you expect between 2010-2016,

can we take that as a time frame for

the Dow to test the 1000 mark?

Yeah. That’s a probability.

What kind of percentage would you

attach to that?

I don’t think I can be that scientific to

give a specific number. It is just that

the A wave of the grand super cycle

bear market and the 4th wave position

is usually the deepest wave much like

1949, 1932 and right now. If this one

follows that fold we can probably see

those numbers in the coming decade.

What will be the conditions like when

the final bottom is expected to materialise?

There will be more unemployment

than in 1933, we could have more social

unrest than in 1933, there could

be more polarisation between government

and political factions than in

1933, the economy will contract further

and the stock will have fallen a greater

percentage than in 1933. Because this

is a one degree large wave.

We have a $15 trillion US economy

at the moment or 10 per cent unemployment

rate at the moment. How

much contraction do you think will

happen?

There is an official unemployment rate

which is at 9.5 per cent right now. But

then there is something more comprehensive

called U6 that the government

also keeps a tab on. And that is

the one in which they monitor people

who were looking for a job but gave

up looking for a job. It also includes

people who want to work full time but

have to work part time and that figure

is already at 16.5 per cent. During the

great depression about one fourth of

Americans were unemployed. I had

long predicted that at the bottom of

this wave at least one third of Americans

will probably be unemployed. But

short term, as the rally is going up, the

economy is responding accordingly.

Though unlikely, we might even have

a positive quarter. Junk bonds spreads

have improved somewhat. So the optimism

is causing a lot of these things to

look better.

When the employment rate hits one

in three, will that be the point of maximum

pessimism?

No, the pessimism will come before

that. For example, the point of maximum

pessimism was reached in July

of 1932 that is when stock markets

around the world all bottomed. But the

unemployment rate saw its most extreme

level in the first quarter of 1933,

which is two quarters later and that is

normal as the economy lags. So you

have to buy stocks when there is no

reason to buy them. We are so far from

that point it is hardly worth talking

about. The extent and duration of optimism

from 1995 through today is so

extreme that the markets won’t bottom

until they express a corresponding degree

of pessimism.

What is the biggest risk to your analysis?

What could go wrong?

I can’t see anything that can go wrong.

I have been building up for this since

A.J. Frost and I wrote a book on Elliot

Wave Principle in 1978 stating that

there was going to be one of the biggest

bull markets of all time on the upside

to be followed by a complete retracement.

That is what the wave principle

called for, and is stilling calling for. It

has lasted longer than we thought it

would but I see nothing that will stop

it from happening. I would attach very

low probability for it to go beyond 2016,

not that it is impossible. Sometimes

waves stretch out in time and nothing

is zero probability when you are predicting

the future. I still expect a final

bottom between 2010 and 2016. p

No person or agency

can manipulate broad

markets, at least not for

more than a day or two

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Where we are....or at least, may be - from the AllAlanBlog

 

"I'm not sure who "Punisher" is, but his explanation of where the markets are right now is pretty much the prevailing view of Robert Prechter and other mainstream Elliott Wavesters.

 

On the above chart and according to this view, the markets are completing Wave 2 Up before a Wave 3 Down in what is a multi-year bear market, with Wave 3 ending sometime in the 2011-2012 time frame."

 

001nos.png

 

From Punisher:

 

"EW is based on the price action of the market being fractals that build upon each other. 5 waves in the direction of the trend, 3 waves against the trend, and then again, until you have done that 3x. You now have an even larger 5 wave pattern and so you get an even larger 3 wave pattern against the trend. Do that 3 more times, etc. etc. These patterns build on each and form 'degrees of trend'. The larger degrees of trend are:

 

- primary

- cycle

- supercycle

- grand supercycle

- submillenium

- millenium

- supermillenium

 

"The last grand supercycle correction that we had was the south seas bubble in 1720. It lasted some 60+ years. According to Prechter, we have finished our last grandsupercycle and have started another correction that could last 40+ years. Certainly there would be many bull rallies or even bull markets within that time period. However, prices would continue down over the long haul. The last two supercycle corrections were the Land Panic of 1830's and the Great Depression. So that should put things in context. Prechter's long term target for the Dow is 400 at the end of it all. This next leg down should be deeper and longer in % of terms then the first primary degree wave down we had that ended in March. So we should look for a 60-75% hair cut to the indices once this primary wave 2 finishes (which it may have already, but we won't know for sure until price confirms it). I hope that helps."

 

/see: http://allallan.blogspot.com/

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Quote

 

So that should put things in context. Prechter's long term target for the Dow is 400 at the end of it all.

 

unquote.

 

 

Prechter has said he expects the low (400) between 2010-2016. Is this correct and should we be thinking 2012-2014 as the low? Or is he saying this end grand supercycle could be 20 years off?

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Get FREE : Bob Prechter's July issue of the Elliott Wave Theorist.

 

3195-AL-EWT-Club.jpg

Have a look : http://www.elliottwave.com/r.asp?rcn=jsgrp...p;acn=goldstock

 

...has rocketed to thousands of new signups in the past couple of weeks,

the deadline for the special promotion has been extended to September 9.

 

Don’t forget to check out the Featured Articles now available. The articles span a variety of subjects and usually include timeless material that can be released at any time. It’s a great way to feature quality content and get Club EWI signups.

 

The two most recent articles include :

Efficient Market Hypothesis: True "Villain" of the Financial Crisis?

and

The Bounce Is Aging, But The Depression Is Young.

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I sent the following message to the people who run the EWI Affilate program:

Bob Prechter's interview with Jim Puplava was really excellent,

 

and I shall be mentioning on my website GEI.

 

I do think Bob deserves an Nobel Prize in economics far more than clowns like Paul Krugman,

whose ideas are both wrong and dangerous

 

== ==

 

http://www.netcastdaily.com/broadcast/fsn2009-0905-3a.mp3

 

About Bob Prechter, and past interviews on FS

http://www.financialsense.com/Experts/2009/Prechter.html

 

 

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Yes I would agree that was certainly a necessary pre-condition. Indeed it is part of any lasting solution going forward. Enforced BALANCE between trading and borrowing and lending parties where each has to be both at once.

 

Prechter's words:

DEFLATION "Requires the precondition of an ocean of unpayable debts."

 

He mentions debts of $50 Trillion, with many of them against Property.

The process of unwinding those debts, and writing them off is deflationary.

 

The change was "no news at all... people just stopped buying them." - A change in attitudes.

Then, "all the financial markets collapsed in tandem."

 

"All the wealth that people think they have disappears as easily as it was created.

Areas of malinvestment get deserted."

 

I highly recommend the interview.

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Prechter's words:

DEFLATION "Requires the precondition of an ocean of unpayable debts."

 

He mentions debts of $50 Trillion, with many of them against Property.

The process of unwinding those debts, and writing them off is deflationary.

What I found very interesting is not once did he mention the effects of the government buying of MBS and the purchase of their own treasuries in QE. What he did mention was that we were not going to see Bernanke throwing money out of helicopters. Obviously the helicopter speech was a metaphor for money printing, so he has already been "throwing money" via buying their own treasuries.

 

They are going to be buying even more this week. Jim Puplava on FSN mentions they will be buying between the 16 and 19 year treasury auction. I believe the monetization of debt is exactly how the US plans to avoid deflation. What is there to stop them printing indefinitely and buying their own teasuries, the currency is fiat?

 

He is a cleaver guy but he doesn't address everything, he suits what is happening to his preconceived ideas, so he can resell his book.

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He is a clever guy but he doesn't address everything, he suits what is happening to his preconceived ideas, so he can resell his book.

 

I have met him twice, and think he is very honest.

 

It cannot have been comfortable for him in 2005-7, when he looked very wrong,

but he stuck to his (Elliott Wave) principles

 

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Nobel Central Bank of Sweden Prize in economics in honour of Alfred Nobel

Just for anybody who is not aware that the Nobel Foundation does not pay any prize for economics.

 

It's from the Central Bank of Sweden, about as political as you can get.

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I have met him twice, and think he is very honest.

 

It cannot have been comfortable for him in 2005-7, when he looked very wrong,

but he stuck to his (Elliott Wave) principles

Any comments on the rest of my post and how he ignores the monetization of government debt which is going on.

 

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Any comments on the rest of my post and how he ignores the monetization of government debt which is going on.

I thought he did cover that. Something along the lines of the Fed, being a private institution, is not willing to self-destruct and will only buy debt that is essentially government guaranteed. You might like to listen a second time.

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I thought he did cover that. Something along the lines of the Fed, being a private institution, is not willing to self-destruct and will only buy debt that is essentially government guaranteed. You might like to listen a second time.

I have listened to it twice, just to check ;)

 

The FED are monetizing debt by printing money and buying government treasuries, because no one else wants them now. Which is what Bernanke was referring to in his helicopter speech. Prechter said in the interview that Bernanke wasn't going throw money out of helicopters, but they are and he is ignoring the fact and just missing the metaphor. It makes no difference if they are buying "guaranteed" government debt with their newly created money, they are still monetizing debt.

 

The monetization of debt is highly inflationary not deflationary. That is why the chinese are so hacked off with the US and are coming up with their own ways to threaten them back. i.e. saying they are going to default on derivative contracts as the US are defaulting on their debt by monetizing it. Which will lead to even more bailouts and monetization of banking debt.

 

Do you see the US stopping monetizing debt soon? I see them having to ramp up the amounts. Hence the only thing that is guaranteed is the dollar losing purchasing power and things getting much more expensive in dollar terms.

 

The monetization of debt is the one thing that deflationists completely ignore, when they talk about the amounts of debt that have to be "wiped out". The debt isn't being wiped out, it is being monetized. I completely agree that if we didn't have a fiat money system we would be facing deflation, but we don't and there is nothing stopping them printing now.

 

Prechter does not consider the monetization of debt when he talks about the amounts that need to be "wiped out".

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The FED are monetizing debt by printing money and buying government treasuries, because no one else wants them now. Which is what Bernanke was referring to in his helicopter speech. Prechter said in the interview that Bernanke wasn't going throw money out of helicopters, but they are and he is ignoring the fact and just missing the metaphor. It makes no difference if they are buying "guaranteed" government debt with their newly created money, they are still monetizing debt.

 

The monetization of debt is highly inflationary not deflationary. That is why the chinese are so hacked off with the US and are coming up with their own ways to threaten them back. i.e. saying they are going to default on derivative contracts as the US are defaulting on their debt by monetizing it.

 

Do you see the US stopping monetizing debt soon? I see them having to ramp up the amounts. Hence the only thing that is guaranteed is the dollar losing purchasing power and things getting much more expensive in dollar terms.

 

The monetization of debt is the one thing that deflationists completely ignore, when they talk about the amounts of debt that have to be "wiped out". The debt isn't being wiped out, it is being monetized. I completely agree that if we didn't have a fiat money system we would be facing deflation, but we don't and there is nothing stopping them printing now.

 

Prechter does not consider the monetization of debt when he talks about the amounts that need to be "wiped out".

There are plenty of others buying US government debt at the moment. Watch the yield, while it remains well below 4% there is no problem. Believe it or not, treasuries, on the face of it, look to be in a bull market. I do not think Prechter ignores that the Fed are buying some treasuries. He just agues that it is not nearly enough to off-set the current deflation, and then that the Fed is constrained, both politically and by the market, in what it can and can not do.

 

Also, consider for a moment that if the Fed was fighting deflation and wanted to create inflation expectations in the minds of investors... so as to get them spending, how better to do this than buy some treasuries? All is not what it seems.

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The problem I have with Prechter is where he talks about Government debt to GDP ratios. He always seems to avoid the question of the end game, which is the solvency of the US goverment.

 

The deflationary spiral must eventually lead to a massive loss of confidence in the dollar when the US is unable to repay their debt obligations through standard taxation. This is what I believe Jim Sinclair refers to as a 'currency event'.

 

I'm definately with Prechter for the next couple of years or so with his dollar strengh and deflation but after that I become very wary of his uncertainty. I'm also aware that the guy has been wrong on a lot of things for a long long time. <_<

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The problem I have with Prechter is where he talks about Government debt to GDP ratios. He always seems to avoid the question of the end game, which is the solvency of the US goverment.

 

The deflationary spiral must eventually lead to a massive loss of confidence in the dollar when the US is unable to repay their debt obligations through standard taxation. This is what I believe Jim Sinclair refers to as a 'currency event'.

I think his general macro view is pretty good. I notice his views on gold are evolving and I wonder if his views on the dollar might likewise evolve.

 

You would think that the massive debt burden would have to have an eventual effect on the dollar. Surely, fundamentals would finally catch up with the dollar as it devalues against certain currencies on the fx market.

 

This is no way anything like Sinclair's "currency event" where the dollar goes out in a hyper-inflationary bang. imo the dollar will, after a period of relative strength, devalue by half in a whimper. The dollar will remain valuable to the general population, and will also do well in purchasing assets which would have declined even further. The dollar's decline will show up primarily against gold and perhaps also some other currencies.

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There are plenty of others buying US government debt at the moment. Watch the yield, while it remains well below 4% there is no problem. Believe it or not, treasuries, on the face of it, look to be in a bull market. I do not think Prechter ignores that the Fed are buying some treasuries. He just agues that it is not nearly enough to off-set the current deflation, and then that the Fed is constrained, both politically and by the market, in what it can and can not do.

 

Also, consider for a moment that if the Fed was fighting deflation and wanted to create inflation expectations in the minds of investors... so as to get them spending, how better to do this than buy some treasuries? All is not what it seems.

They are not trying to create inflation expectations in the minds of investors they are buying government debt because they have to, as the chinese no longer want it. They can't be so stupid that they are expecting to get the consumer spending as the consumer is now broke, no more removing equity from their properties.

 

So I guess from the above you think they will be stopping buying treasuries soon, let me know when they do. The fed's actions so far have off-set the current deflation quiet well, that is why we are now back on an inflation surge.

 

In the interview Prechter says there is no way for the government to devalue the dollar now , as we are not on a fixed gold ratio. The printing of money to buy government debt is exactly that, a way of devaluing the dollar. Please explain to me why that is not a way that they can devalue their currency.

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