Below is an excerpt from the newest free Club EWI investor education resource, The Independent Investor eBook 2011. Inside are some of the most eye-opening research findings by EWI’s president Robert Prechter, as published in the recent issues of his monthly Elliott Wave Theorist.
Enjoy this short excerpt — and for details on how to read this eBook in full, free, look below.
Club EWI’s Free Independent Investor eBook 2011 (excerpt) Chapter 1: Quantitative Easing Has Not Brought Back the Old Inflationary Trend
(From Prechter’s January 2011 Elliott Wave Theorist)
While long terms rates are rising, Treasury bill rates are stuck near zero. How is it possible?
… During hyperinflation, rates typically rise to double digits per month. Inflationists find it difficult to reconcile the Fed’s massive balance sheet growth over three years beginning in August 2008 with short term rates at zero and long term rates only in the 2-5% range.
Deflationists (all ten of us) understand why investors are willing to hold government paper at such low returns: The total supply of debt is contracting. Most bonds won’t survive. The federal government’s bonds will survive the longest.
Figure 10 shows that the total supply of “money” plus debt (all of which is in fact debt) peaked in 2008. This decline in overall money and credit is the first on an annual basis since 1929-1933. It is a big deal.
… This graph explains why gold in 2010 was so much lonelier in making an all-time high than stocks, commodities and real estate were in 2006, when everything was making an all-time high simultaneously: The total money + credit supply is down and cannot support new highs in all markets at once.
The Fed’s QE programs are failing to re-ignite inflation. By mid-2011, the Fed will have monetized just over $2 trillion worth of debt since 2008 to bring the value of its total assets to about $3t. This does represent a huge amount of fiat money. But the overall debt load is $65 trillion. Thus, the Fed will have monetized only 5% of the total, meaning that 95% of the outstanding debt is still suffocating the economy like a giant pool of sludge. …The Fed’s degree of monetization in light of these debts is very small.
For more of Robert Prechter’s insights on the markets, including why QE2 was a major tactical error, why rising oil prices are not bearish for stock, and why earnings don’t drive stock prices, read the rest of this FREE 51-page Independent Investor eBook. Download your free eBook NOW.
What advantages does the Wave Principle offer to traders?
Here’s one of the big advantages of using the Wave Principle when trading: you can increase your understanding of how current price action relates to the market’s larger trend.
Other tools fall short in this regard. Several trend-following indicators such as oscillators and sentiment measures have their strong points, yet they generally fail to reveal the maturity of a trend. Moreover, these technical approaches to trading are not as useful in establishing price targets as the Wave Principle.
Here’s another big advantage of using the Wave Principle in your trading, which comes directly from the free eBook “How the Wave Principle Can Improve Your Trading” -
“Technical studies can pick out many trading opportunities, but the Wave Principle helps traders discern which ones have the highest probability of being successful.”
Indeed, this valuable free eBook shows you how to identify and exploit the market’s price pattern, as shown in the Elliott wave structure below:
The Wave Principle also helps you to identify price levels where you may want to place protective stops.
“…although the Wave Principle is highly regarded as an analytical tool, many traders abandon it when they trade in real-time — mainly because they don’t think it provides the defined rules and guidelines of a typical trading system.
But not so fast — although the Wave Principle isn’t a trading “system,” its built-in rules do show you where to place protective stops in real-time trading.” “How the Wave Principle Can Improve Your Trading”
Before you attempt to identify price levels for protective or trailing stops, you should first become familiar with these three rules of the Wave Principle:
Wave 2 can never retrace more than 100 percent of wave 1
Wave 4 may never end in the price territory of wave 1
Wave 3 may never be the shortest impulse wave of waves 1, 3, and 5
Technical analysis of financial markets does not have to be complicated. Here are EWI, our main focus is on Elliott wave patterns in market charts, but we also employ other tools — like trendlines.
A trendline is a line on a chart that connects two points. Simple? Yes. Effective? You be the judge — once you read the free 14-page Club EWI report by EWI’s Chief Commodity Analyst and Senior Tutorial Instructor Jeffrey Kennedy.
Enjoy this free excerpt — and for details on how to read this report in full, free, look below.
Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions (Free Club EWI report, excerpt)
Chapter 1
Defining Trendlines
Before I define a trendline, we need to identify what a line is. A line simply connects two points, a first point and a second point. Within the scope of technical analysis, these points are typically price highs or price lows. The significance of the trendline is directionally proportional to the importance of point one and point two. Keep that in mind when drawing trendlines.
A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic, as it was in the upwards sloping line in Figure 1-1 or extremely pessimistic, as it was in the downwards sloping line in the same figure.
You can draw them horizontally, which identifies resistance and support. Or, you can draw them vertically, which identifies moments in time. You primarily apply vertical trendlines if you’re doing a cycle analysis.
Chapter 2
Drawing Trendlines
In this section, I’ll show you how I draw trendlines. I’ll start with the most common, simple way to draw them…
As gold climbed to its December 2010 all-time high above $1,430 an ounce, virtually everyone believed it would only go higher. Sentiment readings in metals were extreme for much of 2010; they grew more extreme near the peak. As the January 2011 Elliott Wave Financial Forecast reported,
“Several weeks ago, [the net position of large speculators] pushed to an all-time record high, as hedge funds [also] became fully committed to gold’s rise.”
Market observers commonly offered the following reasons for gold’s rally:
Quantitative easing in the U.S. and Europe made investors fearful that all that “money printing” would devalue currencies
Investors worried that Europe’s sovereign debt crisis may spread
Fear of inflation was fuel to the fire
Well, here we are, a month-and-a-half later. “Madman Bernanke” is still at it. Europe’s debt crisis remains fundamentally unresolved. Inflationists are still waiting for a Zimbabwe-like collapse.
Yet this week, gold has fallen as low as $1,338 an ounce. So the question is:
Why is gold falling when the same fundamental reasons that made everyone buy it last month are no different this month?
Mainstream analysts can reply with a dozen “reasons.” Yes, they say, quantitative easing continues, but it’s designed to strengthen the economy — maybe it’s “not all bad.” Yes, Europe is still in trouble, but “they are working on it.” Yes, inflation is coming, but “it’s not here yet.”
Do you know the word for this? It’s rationalization. In 2010, people who felt bullish about gold rationalized their bullishness by focusing on the supposedly bullish factors. When the same factors seem less bullish today, the same people rationalize why they aren’t.
Emotional bias is as old as investing itself. Consider what Bob Prechter said in his December 2010 Elliott Wave Theorist:
On Sunday, December 5, I was in Dallas speaking to a group of savvy money managers… Several of them were keenly aware of the role of market psychology in markets. Still, the only investment comment I received, unsolicited, was “There is only one market I know is going up: silver.” It came from a seasoned, successful investor… I asked what his reasons were, and he mentioned that silver mostly comes as a byproduct of other mining (true), that there are new uses for silver invented every year (true), and that much industrial silver is used up and not recovered (true).
I mentioned that I already knew these things because I read about them 30 years ago, around the time silver topped at $50/oz. Jerome Smith’s book, Silver Profits in the 80′s, cited the following “four primary causes” for a renewed silver boom:
“…electronics industry has exploded [and so] has the…use of silver”
“While demands for silver are soaring, market supplies are declining…”
“Silver production has been far less than consumption…”
“[T]he U.S. Treasury…sold [silver] to fill the gap between production and consumption…in the 1960s and the 1970s. Now it is virtually gone.”
Every one of these statements was — and still is — correct. If markets followed the rules of mechanics, silver would have risen to the moon for the stated reasons. But silver had already peaked at $50/oz. two years prior to the book’s publication. To this day, it has not matched its peak price of 30 years ago. Yet the bullish fundamentals…have remained in place the whole time.
Which brings us to gold’s more than 6% decline (so far) off its December all-time high. Psychology plays an enormous role in market trends. Investor mood — bullish or bearish — sweeps nearly everyone off their feet. They will grasp at every fundamental reason to justify their bullish or bearish conviction.
And when the mood changes and the scales fall away, the “reasons” are still there — but the world suddenly looks very different.
Market charts reflect these psychological extremes in the form of Elliott wave patterns. This makes markets predictable, within a range of probabilities. Read our latest gold and silver Elliott wave analysis today in The Financial Forecast Service, including a specific, actionable forecast for the metals in Bob Prechter’s latest Elliott Wave Theorist, risk-free. Follow this link to learn more.
The following trading lesson has been adapted from Jeffrey
Kennedy’s eBook, Trading the Line – 5 Ways You Can
Use Trendlines to Improve Your Trading Decisions. Now through
February 7, you can download the 14-page eBook free. Learn
more here.
“How to draw a trendline” is one of the first things
people learn when they study technical analysis. Typically,
they quickly move on to more advanced topics and too often
discard this simplest of all technical tools.
Yet you’d be amazed at the value a simple line can offer
when you analyze a market. As Jeffrey Kennedy, Elliott Wave
International’s Chief Commodity Analyst, puts it:
“A trendline represents the psychology of the market,
specifically, the psychology between the bulls and the bears.
If the trendline slopes upward, the bulls are in control.
If the trendline slopes downward, the bears are in control.
Moreover, the actual angle or slope of a trendline can determine
whether or not the market is extremely optimistic or extremely
pessimistic.”
In other words, a trendline can help you identify the market’s
trend. Consider this example in the price chart of Google.
That one trendline — drawn between the lows in 2004 and the
lows in 2005 — provided support for a number of retracements
over the next two years.
That’s pretty basic. But there are many more ways to
draw trendlines. When a market is in a correction, you can
draw a trendline and then draw a parallel line: in turn, these
two parallel lines can create a channel that often “contains” the
corrective price action. When price breaks out of this channel,
there’s a good chance the correction is over and the
main trend has resumed. Here’s an example in a chart
of Soybeans. Notice how the upper trendline provided support
for the subsequent move.
For more free trading lessons on trendlines, download Jeffrey
Kennedy’s free 14-page eBook, Trading the Line – 5
Ways You Can Use Trendlines to Improve Your Trading Decisions.
It explains the power of simple trendlines, how to draw them,
and how to determine when the trend has actually changed. Download
your free eBook.
Since the time of buttonwood trees, Wall Street has had its own version of the Ten Commandments — the cornerstone principles of conventional economic wisdom. The first of these writ-in-stone notions is the widespread belief that earningsdrivethe stock market.
By this line of reasoning, knowing where a market’s prices will trend next is simply a matter of knowing how the companies that comprise said market are expected to perform. On this, the recent news items below capture the public’s devoted following of earnings data:
“Stocks Rebound As Investors Await Earnings.” (Associated Press)
“US Stocks Drop As Earnings Data Fall Short” (MarketWatch)
“Sideways Market Looks For Direction: Earnings Could Point The Way” (MarketWatch)
In reality, though, much of this belief is based on faith, not facts. While earnings may play a role in the price of an individual stock, the stock market as a whole marches to a different drummer.
You get this ground-breaking revelation in the FREE report from Club Elliott Wave International (Club EWI, for short) titled “Market Myths Exposed.” In Chapter One, our editors shatter the smoke-screen surrounding the widespread notion that “Earnings Drive Stock Prices” with these enlightening insights:
“Quarterly earnings reports announce a company’s achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes.”
And — There is no consistent correlation between upbeat earnings and an uptrend in stock prices; or vice a versa, downbeat earnings and a decline in stocks. Case in point: During the 1973-4 bear market, the S&P 500 plummeted 50% while S&P earnings rose every quarter over that period. Here,“Market Myths Exposed” provides the following, visual reinforcement: A chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998.
As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded the March 2009 bottom in stocks.
“Market Myths Exposed” dispels the top TEN fallacies of mainstream economic thought. The misconception that “Earnings Drive the Stock Market” is number one. The remaining nine are equally capable of knocking your socks off and most importantly, helping you protect your financial future.
Get the 33-page Market Myths Exposed eBook for FREE Learn why you should think independently rather than relying on misleading investment commentary and advice that passes as common wisdom. Just like the myth that government intervention can stop a stock market crash, Market Myths Exposed uncovers other important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, inflation and deflation, and more! Protect your financial future and change the way you view your investments forever! Learn more, and get your free eBook here.
Elliott wave analysis can warn you of trend changes when the rest of the investment public least expects a market reversal. With that in mind, we have created a new report for our free Club EWI members: “The Next Major Disaster Developing for Bond Holders.”
In this free report, you get some of the latest commentary on fixed-income markets adapted from various Elliott Wave International’s publications, including 2010 issues of Robert Prechter’s monthly Elliott Wave Theorist and its sister publication, The Elliott Wave Financial Forecast.
Enjoy this excerpt — and for details on how to read this important Club EWI report free, today, look below.
The Elliott Wave Theorist — October 2010
(By Robert Prechter, EWI president)
…History shows that investors have been attracted like moths to a flame to four consecutive pyres: the NASDAQ in 2000, real estate in 2006, the blue chips in 2007 and commodities in 2008. Now they are flitting across the veranda to a mesmerizing blue flame: high yield bonds. Bonds pay high yields when the issuers are in deep trouble and cannot otherwise attract investment capital. The public is chasing a large return on capital without considering return of it. …
The Elliott Wave Financial Forecast — October 2010
(By Steve Hochberg and Pete Kendall)
The rise in optimism since early 2009 has allowed corporations to issue the lowest grade debt at a record rate, even more than in the middle of the incredible expanding debt bubble of the mid-2000s. The annual total of $189.9 billion to date is a record, and the entire fourth quarter still lies ahead.
This is a stunning testimony to just how desperate investors are for the returns they grew so accustomed to during the old bull market. The Moody’s BAA-to-Treasury spread (see chart in the free report — Ed.) has been widening since [April] and has made a series of lower highs in August and again in September. This behavior reveals an emerging preference for perceived safer debt even as junk bond issuance races higher. It is a critical non-confirmation…
On November 1, the EUR/USD — the euro-dollar exchange rate and the most actively-traded forex pair — was trading the $1.38 range, near the level it is today.
But if you look at what the EUR/USD did between November 1 and 9, you’ll see a huge 400-point (or pip, in forex lingo) rally into the November 4 top — and an equally huge decline back to the levels we see today.
That’s an 800-pip “round trip” in just six trading days — a huge move which obviously caught a lot of the U.S. dollar bears and bulls by surprise. Could you have seen it coming?
If you know how to analyze currencies with Elliott wave, the answer is probably “yes.” Wave analysis helps you identify patterns in market charts and tells you how those patterns — ideally — should develop. In other words, Elliott allows you to narrow down multiple possibilities to a handful of probabilities.
A probability is never a certainty. But it’s better than a shot in the dark, as this example demonstrates.
On November 1, Elliott Wave International’s Currency Specialty Service posted the following end-of-day forecast. (Some Elliott wave labels removed for this article):
[Higher, into a top] The euro is poised to thrust above 1.4160. The question is if the thrust takes place before the FOMC announcement and ends afterward, or starts in response to the announcement. Before or after, the euro should hit new highs.
What gave Currency Specialty Service the confidence to make that forecast? It was the “contracting triangle” pattern you see in the chart above. They often appear in 4th waves, right before the market’s final push in wave 5. The EUR fulfilled the forecast with a 400-pip rally into the November 4 top. The following day, our Currency Specialty Service wrote:
The euro is reversing course after a thrust from a triangle. The decline from 1.4283 might not be in five waves, but it has the characteristics of an impulsive wave. A correction of the rally from August should reach the 1.3636-1.3700 area, the 38.2% retracement of the advance…
…which brings us to the price levels where we find the EUR/USD today. And if you’re curious to know what Currency Specialty Service has to say now, you have a great opportunity:
(Note: This interview was originally recorded on September 20, 2010)
In the video below, Robert Prechter talks to Yahoo! Finance Tech Ticker host Aaron Task and Henry Blodget about extreme readings in various indicators that confirm his bear-market forecast.
Video (Part 2): Prechter: Ominous Pattern in the DJIA
(Note: This interview was originally recorded on September 20, 2010)
In the video below, Robert Prechter talks to Yahoo! Finance Tech Ticker host Aaron Task and Henry Blodget about a technical pattern he sees forming in the Dow.
Video (Part 3): Prechter – Investing in Extreme Markets
(Note: This interview was originally recorded on September 20, 2010)
In the video below, Robert Prechter talks to Yahoo! Finance Tech Ticker host Aaron Task and Henry Blodget about a technical pattern he sees forming in the Dow.
New Deflation eBook Available Now: Our friends at Elliott Wave International have just released a complimentary 90-page ebook on deflation from Robert Prechter. As deflation fears are back in the news and most likely also on your mind, it’s more important than ever to — at very least — give the deflationary scenario a serious look. After all, deflation could pose a serious risk to your wealth if it occurs, and no one has explained the potential threats — and how you can survive them — better than Prechter. Even if government stimulus and out-of-control spending have you more convinced than ever that inflation is dead ahead, we recommend that you take a look at Prechter’s reasonable argument to the contrary — just in case the markets surprise everyone as they so often do. Download Your Free 90-Page Deflation eBook from Robert Prechter Now.
Greetings investor,
As the biggest credit bubble in history continues to shrink, consumer prices have stayed flat over the past several months, meaning there is ZERO sign of inflation in the economy — despite growing commitments from the U.S. government.
So what’s keeping inflation at bay, given all the stimulus money promised? The answer: Deflation — an overwhelming urge for consumers to liquidate their assets for cash.
And this new economic phase is finally becoming too obvious to ignore, as explained in recent commentary from the world’s largest technical analysis firm. “The economy is moving into a critical new phase, an outright deflation in which ‘prices fall because people expect falling prices.’ Obviously, this implies an element of recognition, as efforts to protect against indebtedness and falling prices contribute to further declines. We can tell deflation is entering a new stage because of the language and ideas that financial observers now use to describe it.” – The Elliott Wave Financial Forecast (September 2010)
So how do you protect yourself from deflation? The first step is to understand it.
Elliott Wave International has put together a complimentary 90-page ebook, now updated with 30 new pages of commentary from Robert Prechter through 2010. The ebook is designed to help you prepare, adapt, survive and prosper in the event of deflation.
Prechter has spent most of the past decade as an outcast among financial forecasters, because of his certainty that deflation would soon shock virtually all investors – despite the policy makers and string-pullers who promised to prevent it.
To show you just what Prechter’s deflation forecast was up against, consider this: Experts from all schools of the economics profession said deflation was “utter nonsense,” a preoccupation of “small children,” and as likely to happen as “being eaten by piranhas.” How could deflation begin when the entire economics profession unanimously said it’s not possible?
Yet there’s no question some deflation HAS occurred. The question now is, will it get worse?
In his new 90-page ebook, you’ll see why Prechter argued deflation was likely, and why he was certain a monumental deflationary trend would unfold sooner rather than later.
Remember, deflation is extremely rare; it last happened in America almost 80 years ago. So, a forecast of deflation that proves accurate is a monumental feat – especially when all the “experts” disagree.
So if economists were unable — or worse, unwilling — to warn you in advance about the threat of deflation a few years ago, what are they not warning you about now?
It’s time you gave the deflationary scenario a serious look.
Sometimes the investment weather forces you to ‘buy a coat,’ says Robert Prechter August 31, 2010
by Elliott Wave International When it’s sunny, you head outside without a thought, but when it’s rainy, you look for your umbrella.
When the markets are trending up, you don’t worry about your investments much, but when the markets turn bearish … what do you do?
In an interview with Jeff Sommer of The New York Times in July 2010, Robert Prechter said that he is convinced that a “market decline of staggering proportions” is on its way, and that individual investors should get out of the market and into cash and cash equivalents, such as Treasury bills.
“I’m saying: ‘Winter is coming. Buy a coat,’” Prechter said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”
Perhaps the number one precaution to take at the start of a deflationary crash is to make sure that your investment capital is not invested “long” in stocks, stock mutual funds, stock index futures, stock options or any other equity-based investment or speculation. That advice alone should be worth the time you spent to read this book.
1. Stocks May Go to Near Zero
In 2000 and 2001, countless Internet stocks fell from $50 or $100 a share to near zero in a matter of months. In 2001, Enron went from $85 to pennies a share in less than a year. These are the early casualties of debt, leverage and incautious speculation. Countless investors, including the managers of insurance companies, pension funds and mutual funds, express great confidence that their “diverse holdings” will keep major portfolio risk at bay. Aside from piles of questionable debt, what are those diverse holdings? Stocks, stocks and more stocks. Despite current optimism that the bull market is back, there will be many more casualties to come when stock prices turn back down again.
2. Stock Mutual Funds Will Fall, Too
Not only will many stocks fall 90 to 100 percent, but so will a substantial number of stock mutual funds, which cannot exit large equity positions without depressing prices and which have the added burden to you of one percent (or more) annual management fees. The good news is that we will finally find out who the few truly good fund managers are and which ones were heroes by virtue of being around for a bull market.
3. The Fed Won’t Be Able To Save the Stock Market
Don’t presume that the Fed will rescue the stock market, either. In theory, the Fed could declare a support price for certain stocks, but which ones? And how much money would it commit to buying them? If the Fed were actually to buy equities or stock-index futures, the temporary result might be a brief rally, but the ultimate result would be a collapse in the value of the Fed’s own assets when the market turned back down, making the Fed look foolish and compromising its primary goals, as cited in Chapter 13. It wouldn’t want to keep repeating that experience. The bankers’ pools of 1929 gave up on this strategy, and so will the Fed if it tries it.
Of all the belief systems of Wall Street, few can claim the devoted following of the Efficient Market Hypothesis, the idea that stock prices adhere to the same laws of supply-and-demand that govern retail products. Once coined the theoretical “Parthenon” of economics, this notion has consistently endured the test of time —– until now. Academics and advisors across the globe are currently exposing crack after crack in the “Efficient” model so deep as to bring the entire theory crashing to the ground.
“The EMH is not only dead,” writes a July 29, 2010 news source. “It’s really, most sincerely dead.” (Minyanville)
As to what caused the theory’s collapse — one recent business journal offers this insight:
“Financial markets do not operate the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the prices of a financial asset rises, demand generally rises.” (The Economist)
Here’s the thing. SIX years ago, Elliott Wave International president Bob Prechter pronounced the exact same finding in his April 2004 Elliott Wave Theorist. (Read that full-length publication today, absolutely free by clicking on the hyperlink)In that groundbreaking report, Bob presented the compelling picture below that shows how investors increase their percentage of stock holdings as prices rise, and decrease them as prices fall:
The next question is why? Answer: Motivation: i.e. the purchase of goods and services is about need; while the purchase of stocks is about desire. Here, Bob Prechter’s 2004 Theorist takes the rein:
“The fact is that everyday in finance, investors are uncertain. So they look to the herd for guidance. Because herds are ruled by the majority — financial market trends are based on little more than the shared mood of investors — how they feel — which is the province of the emotional areas of the brain (limbic system), not the rational ones (neocortex)… Buyers, in a rising market appear unconsciously to think, ‘The herd must know where the food is. Run with the herd and you will prosper.’ Sellers in a falling market appear to unconsciously think, ‘The herd must know that there’s a lion racing toward us. Run with the herd or you will die.’”
Prechter and contributor Wayne Parker then expanded on his landmark observation in the 2007 Journal of Behavioral Finance. (Also available, absolutely free by clicking on the hyperlink)
In the end, it’s not enough to just tear down the long-standing EMH. One must build another, more accurate model up in its place. And in the 2004 Theorist, Bob Prechter does just that with the Wave Principle, which reconciles the technical and psychological sides of stock market behavior into this key point: Herding impulses, while not rational, are also NOT random. They unfold in clear and calculable wave patterns as reflected in the price action of financial markets.
As the mainstream media continues to jump on board Prechter’s Financial/Economic Dichotomy Theory, you can read both of Prechter’s original writings. Enjoy your complimentary access to the 2004 April 2004 Elliott Wave Theorist and the2007 Journal of Behavioral Finance.
Stress test results for the biggest European banks were recently released, while the largest U.S. banks took their first stress tests in May 2009. But most people don’t really care how much stress their banks are under; they are more worried about their own stress levels. One thing that adds to personal stress is worrying about whether their deposits are in a safe place. Bob Prechter has encouraged people to find the safest banks for their money since he originally wrote his New York Times best-selling book, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression in 2002. This excerpt explains why banks of all sizes are riskier than they used to be (think about portfolios stuffed with derivatives, emerging market debt and non-performing commercial loans). You can also get a list of the Top 100 Safest U.S. Banks — two banks per state — that was just updated in late June with the latest available data by joining Club EWI and receiving EWI’s Safe Banks report.
* * * * *
Excerpted from Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression, by Robert Prechter
Many major national and international banks around the world have huge portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt. I cannot understand how a bank trusted with the custody of your money could ever even think of buying bonds issued by Russia or Argentina or any other unstable or spendthrift government. As At the Crest of the Tidal Wave put it in 1995, “Today’s emerging markets will soon be submerging markets.” That metamorphosis began two years later. The fact that banks and other investment companies can repeatedly ride such “investments” all the way down to write-offs is outrageous.
Many banks today also have a shockingly large exposure to leveraged derivatives such as futures, options and even more exotic instruments. The underlying value of assets represented by such financial derivatives at quite a few big banks is greater than the total value of all their deposits. The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.
Relying upon, or worse, speculating in, leveraged derivatives poses one of the greatest risks to banks that have succumbed to the lure. Leverage almost always causes massive losses eventually because of the psychological stress that owning them induces. You have already read of the tremendous debacles at Barings Bank, Long-Term [sic] Capital Management, Enron and other institutions due to speculating in leveraged derivatives. It is traditional to discount the representative value of derivatives because traders will presumably get out of losing positions well before they cost as much as what they represent. Well, maybe. It is at least as common a human reaction for speculators to double their bets when the market goes against a big position. At least, that’s what bankers might do with your money.
Today’s bank analysts assure us, as a headline from The Atlanta Journal-Constitution put it on December 29, 2001, that “Banks [Are] Well-Capitalized.” Banks today are indeed generally considered well capitalized compared to their situation in the 1980s. Unfortunately, that condition is mostly thanks to the great asset mania of the 1990s, which, as explained in Book One, is probably over. Much of the record amount of credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, consumers (via credit cards and consumer-debt “investment” packages), and so on, is not. One expert advises, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression.
There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks’ debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.
Financial companies are enjoying big advances in the current stock market rally. Depositors today trust their banks more than they trust government or business in general. For example, a recent poll asked web surfers which among a list of seven types of institutions they would most trust to operate a secure identity service. Banks got nearly 50 percent of the vote. General bank trustworthiness is yet another faith that will be shattered in a depression.
Well before a worldwide depression dominates our daily lives, you will need to deposit your capital into safe institutions. I suggest using two or more to spread the risk even further. They must be far better than the ones that today are too optimistically deemed “liquid” and “safe” by both rating services and banking officials.
Inside the revealing free report, you’ll discover:
The 100 Safest U.S. Banks (2 for each state)
Where your money goes after you make a deposit
How your fractional-reserve bank works
What risks you might be taking by relying on the FDIC’s guarantee
Video: The Real-Time Power of Elliott Wave Analysis
Mainstream financial analysts always look for ways to explain market action through news stories and events. Conventional wisdom states that news and inter-market correlations cause market booms and busts, but such explanations rely on selective presentation of the data. In this video, Elliott Wave International’s Asian-Pacific Financial Forecast Editor Mark Galasiewski shows you how Elliott wave analysis was able to predict Hong Kong’s late ’90s mania and its aftermath in real time — without looking at the news or the market’s “fundamentals.”
Discover how Elliott wave analysis gives you a consistently logical explanation
– and debunk one of the major myths of what caused the Asian Financial Crisis
– in the free video, “The Real-Time Power of Elliott Wave Analysis:
Debunking the Myths of the Asian Financial Crisis.” Access Your FREE Video Now.
How To Tell a Good Forecast from a Bad One a good lesson reprinted from March 5, 2009
Here’s a forecast for you. Clear and direct. As quoted by a Reuters reporter in his January 15, 2009, article, entitled, “Global Lending Thaw May Yet Return to Deep Freeze.”
“‘This is a temporary respite and when it’s over, the stock market will make new lows…,’ says Robert Prechter, chief executive officer at research company Elliott Wave International in Gainesville, Georgia.” [Reuters, 1/15/09]
But there are lots of forecasts out there – for the economy, for the Dow, for the price of oil, for the chances of the Boston Celtics repeating as NBA champions – so the question arises, how can you tell a good forecast from a bad one?
Bob Prechter addressed that very question with another reporter in a Q&A originally published in the book, Prechter’s Perspective.
The following text was originally published in Robert Prechter’s 2004 bestselling book, Prechter’s Perspective.
By Robert Prechter, CMT
Q: In general, is there any way for a person to tell a good forecast from a bad one?
Bob Prechter: There is a subtle way to tell a potentially useful forecast from a useless one. Most published forecasts are at best descriptions of what already has happened. I never give any forecast a second thought unless it addresses the question of the point at which a change in trend may occur.
As an example outside the financial markets: a sportswriter for the Atlanta Journal-Constitution published his ratings (scale 1-5) for each of the players on the Atlanta Braves baseball team as a forecast of how they would perform in 1984. At the start of the season, he rated 1983′s Most Valuable Player a “5,” Atlanta’s slugger a “4,” and the right fielder a lowly “2″ due to bad performance in 1983 following two excellent years. Later in 1984, the MVP was batting only .215, and the slugger was batting a dismal .179, while the lowest-rated player, the right fielder, had hit 8 home runs and led the team in batting average and RBIs.
The point is not that the sportswriter was wrong in his predictions. The point is that he didn’t make any predictions, even though he thought he did and said he did. He was merely rating the 1983 Braves in retrospect. He ignored possible bases upon which to forecast the 1984 season, things like motivation, new developments or events in a player’s life, cyclic changes in playing success, etc. As with most forecasts, these things weren’t even considered.
Read forecasts carefully. If they are mild-mannered extrapolations of a recent trend, it’s probably the best policy to toss them aside and go search for something potentially useful.
Q: Obviously, the same holds true in finance.
Bob Prechter: All the time. When economists say, as they so often do, that they see “no reason to expect anything different” from the recent past, they mean it from the bottom of their knowledge. The linear projections they typically employ result in logic such as that expressed by an economist in a national newspaper, who said, “This rising consumer confidence is good news for the economy. Rising confidence spurs the economy, and the pickup in the economy then serves to heighten confidence.” By this line of reasoning, no change of direction could ever occur. That’s why, absent other knowledge, the only forecasts even worth your time considering are those that predict a change. Not because the forecaster is certain to be right, but because it shows that he is thinking and perhaps employing a tool that can anticipate trends.
Q: So the word “prediction” doesn’t necessarily apply to the future!
Bob Prechter: Right. And it’s those predictions about the future that are the tough ones. That’s why economists stick to predicting the past, which is a crafty solution. It leads to misery among the people who follow them, but it doesn’t seem to affect economists’ jobs, so it certainly keeps them happy!
Q: Do you think that predicting the economy is possible?
Bob Prechter: It is not only possible, it is downright easy compared with predicting the stock market. One economist has gotten a lot of chuckles by saying that the stock market has predicted something like 19 of the last 13 recessions. However, that is only a reasonable statement if you believe that a certain rigid definition of a recession is the only one that is viable. In fact, if you look at the ebb and flow of economic activity and generally realize that it lags stock market activity of between 0 and 12 months, you will find that there is no better single indicator of what the economy is going to do than the stock market. Not only that, but even 19 out of 13 is infinitely better than any economist has ever done.
While many people spend time yearning for the financial markets to turn back up, a rare few have looked back in time to compare historical markets with the current situation – and then delivered a clear-eyed view of the future informed by knowledge of the past. One who has is Robert Prechter. When he thinks about markets and wave patterns, he goes back to the 1700s, the 1800s, and — most tellingly for our time now — the early 1900s when the Great Depression weighed down the United States in the late 1920s and early 1930s. With this large wash of history in mind, he is able to explain why he thinks we have a long way to go to get to the bottom of this bear market.
Here is an excerpt from the EWI Independent Investor eBook, which answers the question: How close to the bottom are we?
* * * * * Originally written by Robert Prechter for The Elliott Wave Theorist, January 2009
Some people contact us and say, “People are more bearish than I have ever seen them. This has to be a bottom.” The first half of this statement may well be true for many market observers. If one has been in the market for less than 14 years, one has never seen people this bearish. But market sentiment over those years was a historical anomaly. The annual dividend payout from stocks reached its lowest level ever: less than half the previous record. The P/E ratio reached its highest level ever: double the previous record. The price-to-book value ratio went into the stratosphere, as did the ratio between corporate bond yields and the same corporations’ stock dividend yields.
During nine and a half of those years, from October 1998 to March 2008, optimism dominated so consistently that bulls outnumbered bears among advisors (per the Investors Intelligence polls) for 481 out of 490 weeks. Investors got so used to this period of euphoria and financial excess that they have taken it as the norm.
With that period as a benchmark, the moderate slippage in optimism since 2007 does appear as a severe change. But observe a subtle irony: When commentators agree that investors are too bearish, they say so to justify being bullish. Thus, as part of the crowd, they are still seeking rationalizations for their continued optimism, and one of their best excuses is that everyone else is bearish. This would be reasoning, not rationalization, if it were true.
But is the net reduction in optimism since 2000/2007 in fact enough to indicate a market bottom? For the rest of this issue, we will update the key indicators from Conquer the Crash that so powerfully signaled a historic top in the making. When we are finished, you will know whether or not the market is at bottom.
Figure 1 updates our picture of Supercycle and Grand Supercycle-degree periods of prosperity and depression. The top formed in the past decade is the biggest since 1720, yet, as you can see, the decline so far is small compared to the three that preceded it. There is a lot more room to go on the downside.
Figure 2 updates the Dow’s dividend yield. Over the past nine years, it has improved nicely, from 1.3 percent to 3.7 percent, near its level at previous market tops. If companies’ dividends were to stay the same, a 50 percent drop in stock prices from here would bring the Dow’s yield back into the area where it was at the stock market bottoms of 1942, 1949, 1974 and 1982. But of course, dividends will not stay the same.
Companies are cutting dividends and will cut more as the depression deepens. So, the falling stock market is chasing an elusive quarry in the form of an attractive dividend yield. This is a downward spiral that will not end until prices get ahead of dividend cuts and the Dow’s dividend yield goes above that of 1932, which was 17 percent (or until dividends fall so close to zero that the yield is meaningless).
Get the whole story about how much farther we have to go to a bear-market bottom by reading the rest of this article from EWI’s Independent Investor eBook. The fastest way to read it AND the six new chapters in EWI’s Independent Investor eBook is to become a member of Club EWI.
The following article is an excerpt from Elliott Wave International’s
free report, 20
Questions With Deflationist Robert Prechter. It has been
adapted from Prechter’s June 19 appearance on Jim Puplava’s
Financial Sense Newshour.
Jim Puplava: I want to come back to government
spending, but first I want to move onto the stock market. In
your last two Elliott Wave Theorist issues, you laid
out a scenario that would put the Dow and S&P, which in your
opinion may have peaked on April 26, as the top from here. You
feel that this top is the biggest top formation of all time,
a multi-century top and we could head straight down in a six-year
collapse that would end in 2016 that could see a substantial
portion of the S&P and the Dow wiped out in a similar way
that we saw between 1929 and 1933. Let’s talk about that and
the reasoning behind it.
Editor’s Note: The article you are reading is just
one small excerpt from Elliott Wave International’s FREE
report, 20
Questions With Deflationist Robert Prechter. The full 20-page
report includes even more of Prechter’s insightful analysis
on fiat currency, gold, the Fed, the Great Depression, financial
bubbles, and government intervention. You’ll learn how
to protect your money — and even profit — in today’s environment.
Read ALL of Prechter’s candid answers for FREE now. Access
the free 20-page report here.
RP: Yes, you’re exactly right. I did a lot
of work on technical forms, cycle forms and Elliott wave forms
in April and May and put them in a double issue. Let’s
talk about the cycles first.
The 7¼-year cycle has been quite regular since the first
bottom in 1980. The next bottom was at the crash in October 1987.
The next one was November 1994, which is when the economy went
through four years with lots of layoffs; it was a recessionary
period throughout until that cycle bottomed. The next one was
between September 2001, which was the 9/11 attack, and the October
2002 bottom. And the latest one was at the low in March 2009.
All those periods are 7¼ years apart, so we are in the
uptrend portion of the 7¼-year cycle.
However, notice for example that in 1987, the market went
up until August of that year and then bottomed in October,
just a couple of months later. So the decline occurred very,
very late in the cycle. This time it occurred a little bit
earlier in the cycle, topping in ’07 and bottoming in ’09.
In the current cycle, prices should peak the earliest of all
of them. It’s what we in the cycle prediction business call “left-hand translation.” The
market’s already gone up for about a year, and I think
that’s just about enough. I think we’re going to spend most of
the cycle going down. But the important thing to note is that
the next bottom is due in 2016. That means I think we’re going
to have a repeat of what happened between 1930—which was
the top of the rally following the 1929 crash—and the
July 1932 low. Instead of taking two years, it’s going to take
about six years.
It’s going to be a very long decline. It’s going to be interrupted
by many, many rallies, just as the decline from 1930 to 1932
was. And every time it bottoms and rallies, people are going
to say “OK, that’s enough; it’s over.” But it won’t
be over. It’s just going to be a long, long process. I think
you and I will probably be talking a few times during this
period. One of the interesting aspects of this process is that
optimism should actually remain dominant through the first
three years of the cycle. That will carry us into 2012. Even
though prices will be edging lower, most people are going to
think it’s a buy, and you shouldn’t get out of your stocks,
and recovery is just around the corner, probably for the next
three years. And then, for the final half of the cycle, the
final three years, that’s when you’ll get the capitulation
phase when everyone finally gives up.
Editor’s Note: The article you are reading is just
one small excerpt from Elliott Wave International’s FREE
report, 20
Questions With Deflationist Robert Prechter. The full 20-page
report includes even more of Prechter’s insightful analysis
on fiat currency, gold, the Fed, the Great Depression, financial
bubbles, and government intervention. You’ll learn how
to protect your money — and even profit — in today’s environment.
Read ALL of Prechter’s candid answers for FREE now. Access
the free 20-page report here.
This
article, 20 Questions with Robert Prechter: Long Decline Ahead,was syndicated by Elliott Wave International. EWI
is the world’s largest market forecasting firm. Its staff
of full-time analysts lead by Chartered Market Technician Robert
Prechter provides 24-hour-a-day market analysis to institutional
and private investors around the world.
Fear and uncertainty that drive a severe bear market are the same emotions which can set the stage for authoritarianism, in most any nation.
“Bear markets of sufficient size appear to bring about a desire to slaughter groups of successful people. In 1793-1794, radical Frenchmen guillotined countless members of high society. In the 1930s, Stalin slaughtered Ukrainians. In the 1940s, Nazis slaughtered Jews. In the 1970s, Communists in Cambodia and China slaughtered the affluent. In 1998, after their country’s financial collapse, Indonesians went on a rampage and slaughtered Chinese merchants.” – Bob Prechter, Wave Principle of Human Social Behavior, p. 270
Why do authoritarian tendencies emerge only during bear markets in stocks?
“As society becomes more fearful, many individuals yearn for the safety and order promised by strong, controlling leaders.” - The Socionomist, May 2010
Bob Prechter’s new science of socionomics explains that stock market fluctuations mirror trends in people’s collective mood. In simple terms, when the market is buoyant, it indicates positive social mood; the opposite when a bear market takes over.
The fascinating part is that because the stock market and social mood trend closely together, a forecaster can apply Elliott wave analysis to both — and predict both.
Generally, widespread brutalities and wars do not follow the first phase of a bear market. Extreme violence, when it does occur, often follows the worst part of the market’s downturn — like the end of the Great Depression, a negative social mood period that ultimately ushered in World War II.
But even during the first phase, a negative social mood grows. So, if a forecaster determines correctly where in the wave structure social mood resides, he can make educated forecasts about what will follow in society — given what has happened before under similar social mood trends.
Authoritarianism is a subject of heated discussions these days, which makes it a timely topic for a socionomic study. The latest, two-part issue of the monthly Socionomist gives you just that: A look at historic trends and specific forecasts for the years ahead.
The Senate version of financial regulation is bad for business on Wall Street and, according to the Wall Street Journal, could cut the profits of major financial institutions by roughly 20%. Find out why Robert Prechter thinks it’s also bad for the economy in the third excerpt from Robert Prechter’s May 20 interview with Yahoo! Finance Tech Ticker host Aaron Task.
Get Robert Prechter’s FREE 60-Page Deflation Survival Guide
With you in mind, financial analyst Robert Prechter scoured thousands of pages of his warnings and teachings about deflation. He then handpicked his most important deflation writings and compiled them into a special, unedited, 60-page Deflation Survival Guide. If you havent yet given Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Your 60-page Deflation Survival Guide Now FREE.
Prechter on Yahoo! Finance: “Even $1 Trillion Can’t Save the Euro, But Gold is No Safe Haven”
The euro’s recent loss has been the dollar’s gain, which means that it’s not the best time to buy the U.S. dollar. Meanwhile, the most popular alternative to currencies, gold, isn’t such a good buy either. Watch the second excerpt from Robert Prechter’s May 20 interview with Yahoo! Finance Tech Ticker host Aaron Task to hear what Prechter thinks is in store for the U.S. currency and gold.
For
more information from Robert Prechter, download
a FREE 10-page issue of the Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You’ll find out why the worst is NOT over and what you can do to safeguard your financial future. Hurry! This free offer expires June 7.
