3The State of the Global Markets – 2013 Edition WELCOMEDear reader,Welcome!Thank you for downloading Elliott Wave International’s new report, The State of the Global Markets – 2013 Edition.We put together this report to get you up to speed with EWI’s big-picture outlook for 2013 and give you a sneak peekinside our regional monthly publications, The Elliott Wave Financial Forecast, The European Financial Forecast andThe Asian-Pacific Financial Forecast, as well as our flagship publication since 1979, Robert Prechter’s Elliott WaveTheorist.As you read, you may notice our analysis doesn’t mention President Barack Obama’s re-election, the fiscal cliff, SilvioBerlusconi’s return as Italy’s premier and other news of geopolitical importance. That’s because we take the radicalview that external events like these have no significant long-term impact on the financial markets. Instead, we look atthe market’s internal price patterns and what really drives them: social mood.Social mood is the common thread connecting everything we do at EWI. We believe that investors’ moods and theirresulting decisions to buy and sell are regulated by waves of optimism and pessimism that fluctuate according to theWave Principle.Once you identify the current stage of social mood and put it into the context with the Wave Principle of human socialbehavior, you can begin to formulate forecasts not only for financial markets; but also for the economy, political votingpreferences, war and peace, and even social trends in music, filmmaking, fashion and beyond.Our sincere hope is that this report challenges your thinking about investing and encourages you to dig deeper intothe Wave Principle in 2013.Thank you for reading,— The EWI Team
42013 EditionOVERVIEWExcerpted from the March 2013 Elliott Wave FinancialForecastThe global economy is adhering nicely to the blueprintEWFF laid out in January 2012:The economy is clearly vulnerable to a debilitating waveof deflation. The threat is approaching quickly from animportant source: Europe.EWFF identified the downturn in Europe’s mostvulnerable economies—Greece, Spain, Portugal andItaly—and stated that the contraction would spreadoutward from these countries just as instability in 1929spread outward from Germany, Europe’s weak spotduring the 1920s. The European contraction now afflictsnearly the entire continent, and it’s gaining speed. Thischart of the year-over-year annual change in EurozoneGDP displays a steady rate of descent, from minus0.1% in the first quarter of 2012 to minus 0.9% in thefourth quarter. By the end of last year, even Germany’seconomy, which is the supposed seat of Europeanstability, recorded minus 0.6% growth for the quarter (anegative 2.3% annualized). The line across the highs onthe GDP chart shows a steady longer-term deterioration.In fact, peak GDP growth in Europe occurred in 1995,four years before the launch of the euro in 1999. Thereis no sign of respite, either. In January, Eurozoneunemployment hit a record high of 11.9%. Spain andGreece led the way with increases to 26.2% and 27%,respectively. Even the EU Commission concedes thatEurope will continue to contract throughout 2013.In our case for global deflation, the January 2012 EWFFreferred to the book The European Economy 1914-2000by historian Derek Aldcroft. The author records that1929 was marked by a “dramatic curtailment of lending,”which “was sufficiently widespread to undermine thefragile stability of the international economy.”The chartson the next page show both EU loans and the total valueof bonds outstanding stalling out in 2008, when creditgrowth peaked at 11.5%. In December 2012, outrightdebt deflation arrived in Europe, as the rate of changeThe WorldFollow this link for the most up-to-date analysis of global markets: http://www.elliottwave.com/wave/MIGMP
The State of the Global Markets – 2013 Edition 5 The WorldFollow this link for the most up-to-date analysis of global markets: http://www.elliottwave.com/wave/MIGMPshown in the second chart dipped below zero for the firsttime. In a classic sign of a spiraling deflation, recordlow central bank lending rates are failing to generateincreased loan volumes, especially at companies with“recession-battered balance sheets” where cheaper creditis desperately needed. “Corporate borrowing in Italy isoff 3%” from 2012, while borrowing by companies inPortugal is down 7%, Greece is down 9% and Spain’s isoff 11%. In time, companies all over the world will bepulled into this spiral.Another clear parallel to the end of the bull market in 1929is a sudden, global drive toward currency devaluation.Aldcroft described these manipulations, which gainedstrength through the course of the 1929-1932 bear market:The way out of the impasse was sought throughdevaluation. The initial deflation was quickly transmittedthrough the links forged by the fixed exchange rates ofthe gold standard, but deflation could never be more thana temporary expedient since to meet external obligationswould have required politically intolerable doses ofdeflation. Consequently the easiest solution was to breakthe links by abandoning the gold standard. This was doneby several Latin American countries, and Australia andNew Zealand late in 1929 and early in 1930.Of course, the gold standard is long gone, but centralbanks are still trying to manipulate their currencies. In abid to weaken the yen, Japan recently initiated a “hugeround of fiscal and monetary expansion.” As the yen fell,one country after another followed with “competitivedepreciations” of their own. On February 8, “Venezuelalobbed a nuke into a knife fight by devaluing its currencyby46%.”OnMonday,Chinajumpedonboard,announcingthat it is “‘Fully Prepared’for Currency War.”As in 1929,deflation is “politically intolerable” and countries arefighting back by attempting to debase their currencies. Butthe strategy won’t work for the same reason that it failedin 1929: devaluation steals all-important purchasing powerfrom the global economy. Here’s how Aldcroft explainswhat happened in the early 1930s:Industrialized countries in Europe felt the impact [ofdevaluation] directly from America, and indirectly viathe periphery, as demand for industrial imports declined,and in turn declining demand for raw materials andfoodstuffs on the part of the industrial powers fed backto the periphery. Once started therefore the deflationaryprocess became cumulative.The charts show that global deflation is underway onceagain, and the cumulative effects are starting to appearin the U.S.Silver is down 42% since its April 25, 2011 peak, whilegold prices are down 19% from their top on September 6,2011; both metals are moving in line with our forecastfrom September 2011, within one week of gold’s peak at$1921 an ounce.The “fear” of hyper-inflation, which permeates bullishgold forecasts, will, in our opinion, ultimately prove tobe badly misplaced. The evidence of a bullish extremefrom which gold is now reversing includes a DailySentiment Index reading of 98% bulls (trade-futures.com); a surge in SPDR Gold Exchange-Traded Fundtotal assets, which, incredibly, pushed its value past thatof the SPDR SP 500 ETF; and a round of margin hikeson gold futures contracts by the Chicago MercantileExchange. The CME responded to intense speculationsurrounding gold’s price rise with two rounds of hikes thatraised margin requirements 49%. Readers will recall thata similar series of margin increases in silver — an 84%rise from April 26 to May 5 (2011) — coincided with theend of the line for the junior metal’s surge. At the time,EWFF noted that a similar series of margin boosts in 1980accompanied silver’s all-time price high. Margin hikesare not necessarily fatal to a rising trend, but when theycome in bunches, as they have in gold and silver in recentweeks, they tend to congregate around major price peaks.—The Elliott Wave Financial Forecast,September 2011The chart on the next page updates one we publishedin December showing gold prices and the total knowngold holdings (in troy ounces) in exchange-traded funds.Investors had been piling into exchange-traded goldfunds from the 2011 peak right through the end of 2012in anticipation of a resumption of gold’s bull marketSPECIAL SECTION: GOLD SILVERExcerpted from the March 2013 and September 2011 Elliott Wave Financial Forecast
The State of the Global Markets – 2013 Edition 6 The WorldFollow this link for the most up-to-date analysis of global markets: http://www.elliottwave.com/wave/MIGMPfrom 1999. Gold bulls actually cited this fund buying asa primary reason why gold would rally to new all-timehighs. In contrast, we labeled the fund purchases as “bearmarket buying.” This activity, in our view, was not adeterminant of gold prices but a manifestation of extremeoptimism and typical behavior during the first decline aftera major top. ETF gold holdings peaked in December andhave since contracted by their largest percentage in nearlyfive years, since July-September 2008, as investors havesuddenly awakened to gold’s failure to advance, a specialsurprise in the face of the Fed’s “QE Infinity” program.As gold works lower over time, ETF holdings shouldcontinue to shrink.Near term, the metal’s persistent decline since October hasresulted in some short term measures of sentiment movingto pessimistic extremes. A near term rally is thereforepossible, but we don’t think the bear market is over.SPECIAL SECTION: A RISE IN OIL PRODUCTIONExcerpted from the November 2012 Elliott Wave TheoristOne bright spot in the news is that oil is becoming more plentiful. Since being reluctantly green-lighted by the ObamaAdministration, drillers have found vast new oil fields in the Dakotas, where unemployment has fallen to less than 3%due to the drilling boom. Current trends suggest that the U.S. will soon surpass Saudi Arabia as the world’s biggestoil producer.This development surprised a lot of people but not you. The July 25, 2006 issue of EWT offered financial and economicreasons why the price of oil in the long run would not follow the path predicted in literally dozens of apocalypticbooks and hundreds of articles on so-called “Peak Oil.” Commentators from Ivy League professors to the New YorkTimes promoted the thesis that the world was running out of oil and had no energy alternative, thus portending anenergy shortage that would cripple the world. In the face of this onslaught, EWT presented this economic argument:The Economic FactorSo far, we have discussed only the financial factor in the pricing of oil. The “Peak Oil” bulls never tire of listingeconomic forces that will cause oil to go up for decades and centuries. Never mind that we did not hear aboutthis when oil was $10 a barrel; now it’s fashionable. But there is a far more fundamental aspect of economicsthat the bulls are ignoring.When a resource becomes scarce and expensive, do people bid it up to infinity and then revert to the Stone Age?No. Why not? High prices provide incentives. Free markets always offer alternatives.Let’s forget for the moment that there is in fact a debate about the extent of underground oil fields and that somegeologists believe they are much more extensive than most people think. Let’s forget the debates about whetherwe can grow enough corn to propel automobiles.What people demand is not gasoline, and not even cars, but transportation. A comprehensive train system runon electric power provided by nuclear plants would work just fine. No fuel oil would be required. And pollutionwould be nearly eliminated.
The State of the Global Markets – 2013 Edition 7 The WorldFollow this link for the most up-to-date analysis of global markets: http://www.elliottwave.com/wave/MIGMPThe only impediments to sucha solution are superstition andpolitics. The free market couldbuild the whole system in 30years if government would letit, just as it built the stunninglysuccessful internet and cellphone networks in just 20years after the governmentended ATT’s communicationsmonopoly in 1984. Economicforces are reliable, but politicalones are not. It is alwayspossible for government to makeenergy production impossible,as it nearly does already inthe United States with respectto exploration, drilling andrefining. Had the free marketbeen allowed to operate, therewould be no crisis today.Even though politics is theonly impediment to reasonablypriced transportation, the “Peak Oil” devoteesnever talk about it. They cite natural resourcelimits and economics. But natural resourcelimits have never limited progress; they haveonly directed it.…So there are both short-term and long-termforces, working slowly perhaps but relentlessly,against an ever-rising oil price. It is not impossiblefor the world to go dark or for people to revertto the Stone Age, but it wouldn’t occur becauseof economic forces on oil prices; it would occurbecause of politics and war, the main immediateforces of setback in human history.—The Elliott Wave Theorist, July 2006As it happened, the cited geologists were right, and thesimplest solution of all is coming into play: find moreoil.Alternatives from hydrogen fuel cells to a process ofturning coal into oil have also arisen, and, if governmentallows, they too will contribute to the supply of energy.The Elliott wave model is the best basis on which toforecast commodity prices, but Economics 101 is usefulat the extremes, and this is a case in point. The economicsbehind the “peak oil” thesis guaranteed its own failure.The results of that fact are finally becoming visible.Incredulous journalists are asking, “Who would havethought…?”To update the Elliott wave picture for oil: In June 2008,a month from oil’s all-time high, EWT made a highlycontrarian peak price argument for oil based on its nearlycompleted ten-year Elliott wave pattern and forecast that“one of the greatest commodity tops of all time is duevery soon.” Oil subsequently crashed from $147.27 to$32.40 in just five months in wave A of the bear market.Three years later, EWT recognized the peak of wave Bin May 2011. So far that peak has held. There is a chancethat the rally isn’t over, but it’s slim. One reason is thatthe rally into 2011 rekindled the peak-oil vision, whichprompted investors’hoarding of black gold in tankers allaround the world.When the owners of that oil see the pricefall further as more supply enters the pipelines, they willgive up and sell their inventories, which will depress theprice even further.Fundamentals generally lag way behind financial trends.In a bear market, fundamentals don’t become obviousuntil wave C gets underway. The fact that economicforces are now joining financial forces in the battleagainst oil’s high price fits our Elliott wave analysis thatoil is already within wave C of a great A-B-C bearmarket, as shown in EWT since May 2011 and updatedin the figure above.
The State of the Global Markets – 2013 Edition 8 The WorldFollow this link for the most up-to-date analysis of global markets: http://www.elliottwave.com/wave/MIGMPSPECIAL SECTION: THE GLOBAL WARMING PANIC IS A DISTANT MEMORYExcerpted from the November 2012 Elliott Wave TheoristSpeaking of energy, a non-event that recently had the media buzzing was the dearth of discussion of the global warmingissue during the U.S. presidential debates, not to mention nearly everywhere else on earth over the past year. Thisis another social change predicted in EWT in the face of vicious opposition. This excerpt highlights the key points:Sometimes scientists herd as muchas investors do, and this study [byNASA] appears to be a case of extremeexpression following a long-establishedtrend. I am not a climatologist, but I ama student of manias and herding, andthat is what the global-warming crazeappears to be about.My purpose here is not primarily tomake a case against man-made globalwarming. My primary intent is to takea look at the question from the pointof view of a social psychologist todecide whether it appears to be theresult of hysteria. The points aboveestablish that there are two sides to theglobal-warming question.Yet only onehas captured the public’s imagination(and I choose that word consciously).The global-warming scare is highlyreminiscent of the Alar scare, in whichCongress called upon the expertise ofmovie stars; the ozone-depletion scareand the acid-rain scare, which have allbut vanished; the claim that pesticideswere making frogs lame (it turned out tobe a virus); the rash of reports of devilworshippers, who were never found;the national child-care molestationhysteria, which turned out to be almostentirely contrived; the panic in Europeover poison in Coca-Cola; and anynumber of like manias. Hysteria oftensignals the end of a trend.There is powerful evidence of herdingat the social level on the global warmingissue. Commentary on the subject iseven selling theater tickets. And likeall past social trends that were ending,there is a rush to extrapolate. Thetemperature data from which modelersat NASA derive their extrapolationare scant, the projection is extremeand their tone is strident. When anywriters, including scientists, extrapolate29 years’ worth of temperature datato predict an imminent apocalypse ofBiblical proportions in an environmentof waxing social focus, rising panicand calls for government obstruction,one must acknowledge the likelihoodof social-psychological forces behindsuch a report and investigate whetherthe data support the prediction.The crowd fearing global warmingrejects as heretics professors andscientists who challenge all thesemethods and conclusions, whether theybe at MIT or Stanford. Such rejection isakin to what happens near the end of afinancial mania, such as the peak of thereal estate mania two years ago, whenbears were dismissed as delusional.GW advocates told me that doubtingman-made global warming is akinto denying evolution, but the GWmovement has not a little taste ofold-time religion in its accompanyingadmonition of humanity: Man is evil;he is destroying the earth; he is “foulinghis own nest,” as one scientist on theweb says. Scientists are usually goodat their fields but not necessarily atrecognizing their own political, moraland [philosophical] biases.One thoughtful scientist took issue withtheterm,“hysteria.”Butthetermapplieshere to social activity, not the overtbehavior of any particular individual.In 2005, when I was speaking aboutreal estate hysteria and warning peopleagainst investing in property, peoplesporting a rather bemused expressionwould coolly respond, as if instructingan alien who lacked understanding ofthe way things worked on Earth, “Theyare not making any more land” and“it’s all about location.” They wouldsay this with utmost calm. They hadthought about it and sifted through theevidence. They were not hysterical butrational and thoughtful. At least, thiswas the appearance of behavior at theindividual level.At the collective level,something else was going on. Thenumber of people participating in thereal estate market was unprecedented,and their borrowing, building andbidding activities, collectively, wereextreme.Advocatesofman-madeglobalwarming may appear sober as judgesindividually, but they are participatingin a mass movement, complete withpress releases, student rallies, popconcerts, movie documentaries and anunderlying tone of moral crusade.I think the current frenzy over thesubject is probably a symptom ofpeaking cycles in both climatictemperature and social psychology.But unfortunately 70 years from nowmost of us won’t be around to knowthe answer. What I expect, based uponobserving mass movements, is that thisfear, too, will go away.—The Elliott Wave Theorist,June and July 2007That was five years ago. Recently it has come to light—from globallycollected data reported by some of the very institutions that had passionatelypromoted the case for man-made global warming in 2007—that the earthin fact hasn’t warmed at all since 1997. One would think the case forman-made global warming would be virtually closed from such contraryevidence and that those who feared global warming would breathe ahappy sigh of relief and go home. Some of them have done just that. Butproponents remain vocal. This week a professor in a syndicated editorialblamed the recent relative silence on the issue on “a profit-driven economic
The State of the Global Markets – 2013 Edition 9 The WorldFollow this link for the most up-to-date analysis of global markets: http://www.elliottwave.com/wave/MIGMPsystem that demands and necessitates endless growth,a global U.S. military presence that helps facilitate itand the ecologically rapacious consumption it entails.”Whatever your opinion of these matters, all three ofthem were in place during the entire period of waxingpanic over the global-warming issue, negating the claimto their causing its opposite. He further charged, “In thewake of extreme drought in much of the United States,widespread wildfires in the western U.S., and nowHurricane Sandy, Barack Obama’s and Mitt Romney’srefusal to discuss human-induced climate change willundoubtedly go down as political recklessness of historicproportions.” If hurricanes, wildfires and droughtswere evidence of man-made climate change, man musthave secretly industrialized the world millions of yearsago. Archaeologists are pretty sure that didn’t happen.The main thing likely to go down as being of historicproportion is the extent of fear about global warming thatheld sway in 2007. I doubt it will return in our lifetimes.Further suggesting that the old trend is dead is thatgovernment, always the last institution to join a herd, istaking action. California passed a “cap-and-trade” law atthe height of the panic in 2006 and is now implementingit. Naturally, it involves taxing people:Under the plan, the California Air Resources Boardwill auction off pollution permits on Wednesday called“allowances” to more than 350 businesses, includingelectric companies, food processors and refineries. Theboard has estimated that businesses will pay a total of$964 million for allowances in fiscal year 2012-2013.(AP, 11/15)Extorting a billion dollars annually from industry willultimately cause more pollution, as it did in communistEast Germany, where air became toxic and rivers caughton fire. But California doesn’t yet shoot people trying toleave, so the first likely trend here is that businesses willaccelerate their exodus out of the state. Unfortunately,there may be more action at the federal level as well. Ata press conference on November 14, President Obamadeclared, “I am a firm believer that climate change isreal, that it is impacted by human behavior and carbonemissions. And as a consequence, I think we’ve got anobligation to future generations to do something aboutit.” (11/14, as reported by Reuters) Mayor of New YorkMichael Bloomberg likes Obama’s position on this issueso much that he endorsed the president for reelection. ButObama’s waste of billions of taxpayer dollars proppingup so-called “clean energy” companies, along withwhatever new taxes and regulations the feds dream up,will ultimately contribute to the trend toward nationalpoverty, which will increase pollution, not reduce it. Withany luck, the depression will distract various governmentsfrom this destructive path. But, then again, destruction iswhat depressions are about.
102013 EditionOVERVIEWExcerpted from the February 2013 Elliott Wave FinancialForecastIncredibly, the DJIA rallied back to 14,000, a move thatgenerated a cornucopia of ever-higher projections. Thewide array of optimistic extremes in sentiment measuresincludes several readings that exceed the extremes of2007, when the Dow made its all-time high. With afinishing structure that ElliottWave Principle describes asoccurring at “the termination points of larger patterns,”the market is ripe for a decline of historic magnitude.THE STOCK MARKETExcerpted from the February 2013 Elliott Wave FinancialForecastThe sudden, loud chorus of market bulls, which has grownto a full-blown crescendo, fits perfectly with the terminalstages of a major advance. This chart shows the stunningbreadth of optimism extending to every class of investor.The first indicator (second graph) on the chart shows thepercentage commitment to equities in the portfolios ofmembers in the NationalAssociation ofActive InvestmentManagers (NAAIM).The latest reading reveals an all-timehigh equity exposure of 104%, which means managersare in a leveraged long position for the first time in theseven-year history of the survey. The reading far surpassesthe 83% level which occurred at the October 2007 all-timehigh in the Dow. A separate BofA Merrill Lynch surveyof 254 fund managers confirms that money managers’“appetite for risk in their portfolio” is at its highest innine years.The second indicator shows a major upswing inbullishness among options traders via the Credit SuisseFear Barometer Index (the name is misleading since arising index means less fear). This index measures tradersentiment by comparing the cost of three-month out-of-the-money calls on the SP 500 relative to puts of thesame duration. The recent extreme of 33.32 on January25 is the highest in the history of the indicator, whichUnited StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFF
11The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFgoes all the way back to November1994. The CBOE Volatility Index(VIX), which tracks the level of fearand complacency using the premiumpaid for at-the-money SP options,declined to a low of 12.29 on January18, its lowest reading—indicatingthe most complacency—since April2007, just prior to the major top inthe financials.The third indicator shows a newoptimisticextremeamonginvestmentadvisors. The 15-day average of Market Vane’s BullishConsensus rose to 68.2% on Thursday, its highest readingsince June 2007. The bottom graph plots the total assetsin the government money-market funds at Guggenheim(formerly Rydex), showing that the public is likewisecomplacent about the potential for a market decline.We’veinverted the totals to align them with the trend in stocks.When people are highly confident that stock and bondprices will continue to rise, they see little need to holdmoney aside in money-market funds and instead load upon financial assets. The total holdings in Guggenheim’smoney-market funds just dropped to their lowest levelever, reflecting a supreme confidence by investors and afull embrace of stocks and bonds.At the opposite extreme, corporate insiders—investorswho are presumably privy to the future potential of theircompanies—are dumping shares into the market at afurious pace.According toVickersWeekly Insider Report,among NYSE stocks there were 9.2 insider shares sold forevery share bought over the previous week. The last timethe ratio of sales-to-buys was higher was in July 2011,just before the Dow declined 18% over the following fourmonths. As we’ve said previously, there may be manyreasons why an insider sells shares, but one of them is notbecause they think their price is going higher.Taken together, the breadth of extremes shown on the chartindicates that stocks are not making a short-term top: thesemeasures are all greater than at any time since at least2007, the year of the Dow’s all-time high. This is a rarealignment that confirms this is an even more important,and more bearish, juncture than 2007.Rarefied Bullishness at a Grand Supercycle PeakObviously, the stock market is nowhere near the start ofa rally, as the Dow has been more or less advancing sinceMarch 2009. But many observers’ comments have beencelebrating the latest new recovery highs as the beginningof a new era. This is a remarkable and meaningfuldevelopment. Here are a few samples:When asked about potential negatives such as high levelsof public and private debt and a deleveraging economy, aCNBC buy-and-hold advocate said, “I just sort of ignoreit. Over the long term, the stock market is going to grow7% a year. People say 14,000, is that the end of it? In 10years, it’s going to be 30,000. In 20 years, it’s going tobe 50,000 or 60,000.” When publishers boldly asserteda bullish future with books that proclaimed Dow 36,000,40,000 and 100,000 in August 1999, EWFF called the“mass fixation an odd combination of dangerous andlaughable.” It’s happening again on a slightly smallerscale, but the willingness to proclaim a great new era after13 years of sideways trading that contains two major bearmarket legs is even more dangerous. As we explained in2000, an overwhelming societal urge to proclaim a newbeginning after a long-running rise is among the mostbearish of sell signals.As stocks ended the Grand Supercycle bull market in realterms in early 2000, a sudden wave of bullish conversionsamong long-time bears flashed a strong “top” signal. It’shappening again, as many former bears are jumping onthe rise with both feet. According to the aforementionedNAAIM survey (see chart, page 3), the current readingof 104% includes a swing to 60% invested in equitiesby managers who identify themselves as bears. Justone week earlier, portfolios of this same cohort were at-125%, which means they held leveraged short positionsequivalent to 125% of their portfolio. The “Explosionof Greatness” comment shown in the above headlines isfrom a hedge fund manager who claims he “has neverbeen bullish.” But now he says, “I am going to come outof the closet…we are bullish” because “there is no major
12The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFnegative. There is no other choice out there.” Anotherfamous bear, “nicknamed ‘Dr. Doom’ for predictinghard times ahead of the 2008 fiscal crisis,” issued an allclear due to the Fed’s easy money policies, which willcontinue “as far as the eye can see.” There were countlessfundamental “negatives” in the first quarter of 2009. Now,say these optimists, there are none. Broadly speaking,when everything looks negative, it’s a bottom. When thereare no major negatives, it’s a top.The Great CapitulationA related metamorphosis is the so-called “Great Rotation,”the suddenly seemingly universal belief that low-yieldinggovernment debt and extremely low returns on cash meanthat pension and insurance funds as well as the publicmust pile back into equities, thereby driving stock pricesever higher. Here, again, the belief is that the trend is juststarting. “If there is a great rotation going on from bondsto stocks, we may be only in the top of the first inning,”says a chief investment strategist. The strategist citesthe “TINA—or ‘there is no alternative’—factor.” TINAis not an investment strategy; it’s a mental state, of thekind that almost always results in losses in the domain ofinvestments. The current version will ultimately end inruin. This January 23 Reuters headline, along with 2,890more Google News stories on the Great Rotation, revealsthe bullish sentiment behind it:The Great Rotation:A Flight to Equities in 2013Belief in this idea is fueled by recently large equity mutualfund inflows after many months of outflows. As thischart of Investment Company Institute data shows, U.S.equity funds flipped from a $30 billion net withdrawal inDecember to a $30 billion net inflow in just the first threeweeks of January. The three-week total is higher than forany full month since 2006.According to TrimTabs.com’sfigures for the full month of January, a record $77.4 billion“flooded” into traditional stock and exchange-traded stockfunds. The total is $23.7 billion more than the previousrecord, which was set in February 2000, one month afterthe Dow’s Grand Supercycle stock peak. As USA Todaynotes, “investors didn’t just put aside their aversion tostocks in January: they tossed it out the window.”After so many months of outflows, analysts say the suddeninward rush “is hardly a sell indicator.” They think it willcontinue for years. But the only comparable experienceargues otherwise. The topping process at the end of
13The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFCycle wave III is similar to the larger-degreetopping process that has transpired from 2000to the present. It comprises three highs nearthe 1000 level in 1966, 1968 and 1973. FromFebruary 1972 to June 1973, equity mutualfunds experienced 17 straight months of netoutflows. In July 1973, after the final rise justabove 1000 had already ended in January ofthat year, mutual fund flows popped to positive.It occurred early in a decline that shaved 45%off of the Dow’s value.This chart of total mutual fund assets confirmsthe potential for a quick return to recordoutflows. The recent high does not include anestimated new record of $64.8 billion in netinflows for January, which brings total mutualfund assets to almost $13 trillion. The clearfive-wave rise from 1984, however, stronglysuggests that the mutual fund business will beshaken to its core in coming years. The GreatRotation is really the Great Trap.CULTURAL TRENDSWorkplace RevolutionExcerpted from the November and August 2012 Elliott WaveFinancial ForecastAccording to USA Today, “at a time when much of thenation is experiencing job cuts, belt-tightening and thestrains of a generally sour economy,” tech companiesshower employees with gourmet meals, free dry cleaning,massages, hair cuts, shuttles and “snacks galore.”Facebook leads the workplace makeover, replacingcubicles with “shared work tables, couches, bars, cafes,eateries and even pubs.” “Life’sA Beach forTech Hotbed,”says another USA Today headline. Naturally, the latestand greatest perk, “unlimited vacations,” is reserved forthe end. According to MSNBC, tech startups now allowemployees to take “all the vacation days they want.”This “workplace revolution” may sound familiar. EWFFcharted the same progression at the conclusion of the bullmarket in 2000. Many will remember it as beginning withthe arrival of “casual Fridays” in the late 1990s. The priorrevolution reached a climax in May 2000, when junioranalysts on Wall Street demanded and received “moremeal money, better laptop computers, casual dress codesand access to the company gym on weekends.” The May2000 issue of EWFF cited that victory as a sure signthat conditions were “extremely ripe for a downturn.”The NASDAQ was already crashing. In July 2000,when workers started to demand “the ultimate perk: along breather from work,” EWFF noted one high-techexecutive’s complaints about a lack of sleep and stated,“These managers should be careful. Workers are onthe verge of more free (literally) time than they everimagined possible.” The same psychological turn willtake place this time, too. In our view, this is the lasteuphoric episode prior to a big Primary-degree stockmarket decline, so the exhaustion that replaces it will benew and improved.
14The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFThe Slow Life Picks Up SpeedExcerpted from the October 2012 Elliott Wave FinancialForecastDeflation and the transition toward negative social moodare separate phenomena, but the changing package-delivery landscape is a perfect example of how moodand monetary trend change work together at the largestmacroeconomic inflection points. Falling demand triggerslower shipping costs, which are further weakened by asudden move away from a long-standing, bull marketpreference for speed. The emerging slowdown isconfirmed by several Fed Ex analysts who insist it is notsimply a matter of reduced budgets. “There has been asecular shift from ‘got to get it there overnight’ to moredeferred products,” says one. “You’re seeing a demand forslow instead of a demand for fast,” says another.High-speed trading is another arena in which the brakesare suddenly slamming on. In September, several articlessuggested that foreign governments are way out front withproposed or even adopted limits and that U.S. regulators“have been slow to act.” One columnist called for a 100%tax on profits from “‘investments’ that mature in 60seconds.” By late September, however, the word was outthat U.S. regulators are getting on board the acceleratingdrive to decelerate the rapidity of trading and establisha new “Speed Limit for theStock Market.” Early thisweek, an SEC panel approveda “high-speed trading killswitch.” According to thelatest accounts, even thehigh-speed traders nowagree. “High-frequencytrading firms, long resistantto tighter oversight of theirbusinesses, are beginningto change their tune” (WSJ,Oct. 1). As The Elliott WaveTheorist pointed out in 2007,“the need for speed” is a bullmarket trait. The referencewas to highway speeds, but,apparently, if the turn is bigenough, even traders, whoneed speed to make money,will get in line. Until veryrecently, economists insistedthat the evidence favored thehigh frequency traders and “a solid body of academicresearch that shows they increase liquidity.” In the newtrend, risk aversion is king and the evidence will showthat the potential for catastrophic losses make it “just toodangerous.”Package delivery and stock trading are two industriesthat have done nothing but go faster since the bull marketbroke to definitive new highs in the early 1980s. Underthe psychology of a Grand Supercycle bear market,however, a move in the opposite direction has graduallygained traction. An early seed can be traced to 1989,during the Primary wave 4 correction, when the “slowfood movement” emerged as a reaction to fast food. In1999, the last year of the Grand Supercycle bull market,it officially branched out with the establishment of theWorld Institute of Slowness. By 2005, the book, In Praiseof Slow: Challenging the Cult of Speed, was heralding“a growing international movement of people dedicatedto slowing down.” “Sometimes it’s more of a click inattitude than anything else,” says Carl Honoré, the book’sauthor. This is precisely our socionomic point. Thingsreally clicked for the movement at the outset of wave 1
15The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFin 2008. The NewYork Times documented its arrival withthis January 2008 headline:The Slow Life Picks Up SpeedThe article explained that the “slow food movement,”emphasizing “above all the creation and consumptionof products as a corrective to the frenetic pace of 21st-century life,” was starting to pop up across a wide range ofdisciplines and lifestyles. “Slow is an idea whose time hascome.”Wikipedia now lists 12 different categories of slow,from slow gardening to slow parenting, fashion, scienceand money.Articles have gotten downright insistent. “SlowDown!” says a Times of India headline from September23. To help their kids succeed, “Parents Should SlowDown,” says another headline from the September 24News Journal of Wilmington, Delaware. Here’s anotherheadline that points to an unmitigated reversal from thebull market: “Slow Coffee Movement Spreading Fast.”AsEWFF has often noted, coffee is the definitive bull-marketbeverage. An interesting subhead to the story notes thatthe meticulous, slow drip method is called “Third Wave”and it “Has Growing Following.”We couldn’t agree more.At this point, the restaurant industry does not seem to bethe least bit threatened; in fact, it is booming. This chartillustrates why. The SP 500 Restaurant Index’s long risefrom 1990 shows that conventional dining is almost ashighly valued as it has ever been. EWT explained why in1998 when it identified restaurants as a peak expressionof a bull market in social mood: “When people feel good,they like to get out, be seen, eat well and drink socially.This makes restaurants a focal point for the expression ofa bull market mood.” Apparently, restaurants are holdingup until the bitter end. Here again, however, the five-waveform of the rise suggests that the small decline fromAprilcould turn into something much larger.As the bear marketprogresses, tastes will shift to alternate, i.e. less expensive,fare, and many will dine out less or not at all.
16The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFSPECIAL SECTION: MAJOR TOP IN THE BOND MARKETExcerpted from a June special report jointly from the Theorist and Financial ForecastBOND YIELDS ARE POISED TO BEGIN RISING ON THE WAY TO DEFLATIONARY CREDIT CRISISU.S. Treasury BondsOur long term outlook for interest rates on U.S. Treasury securities has been a contrary opinion for many years. Mostcommentators have been expecting either economic expansion or Fed-induced inflation to push bond yields higher.Conquer the Crash predicted that long term rates on AAA-rated bonds would fall much further as the monetaryenvironment shifted from lessening inflation to outright deflation. Figure 1 shows the forecast from 2002, and Figure 2updates the graph to the present.In line with our forecast, the interest rate on the Treasury’s 10-year note has just plunged to the lowest level in U.S.history. The decline from 1981 to the present is a stunning 91%. Figure 3 shows a close-up of the entire move.Those predicting economic expansion or hyperinflation have been unable to explain this persistent plunge.Yet each ofthese camps got exactly the “fundamentals” they expected: record monetization by the Fed (advocated by the monetarists)and record spending by government (advocated by the Keynesians). Rates ignored these events and continued to fall.Figure 2Figure 1
17The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFFor the past ten years, many high-profile investors havehated bonds. When interviewed, they would say that theone sure bet was that rates would rise and bond priceswould fall. Those betting against bonds have lost a lot ofmoney, especially since 2009.Under the Elliott wave model, five-wave patterns occur inthe direction of the main trend, and countertrend movestrace out three-wave patterns. Interest rates do not followthe Elliott wave model as well as stock averages, whichare more responsive to overall social mood. Rates are theprice of just one thing: money. But it is still interesting tosee how many five-wave patterns unfolded in the samedirection as the long decline over the past 31 years, aslabeled in Figure 3.In the Great Depression, interest rates on lower-gradebonds trended lower until 1930, and those on high-gradebonds continued lower until 1931. Then they soared, onfears of default. Figure 4, published in Conquer the Crash,shows what happened. (The chart shows rates inverted toreflect bond prices.)During the Great Depression, bond prices finallybottomed, and interest rates peaked, in June 1932 (seeFigure 4); stocks bottomed in July; and those years’onlyfreely traded (semi-)monetary metal, silver, bottomedin December. Following expectations under socionomictheory, the economy bottomed afterward, in the firstquarter of 1933. If the same sequence occurs again, ratesshould peak first, stock prices should bottom next, andindividual commodities should make lows throughoutthe period, with some of them bottoming last. Finally theeconomy will hit bottom.The preceding peak rate of inflation in that cycle occurredFigure 3
18The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFin late 1919/early 1920, so the time between the extremeswas just shy of 13 years. In the current cycle, the grandchange from the maximum rate of inflation to a maximumrate of deflation seems to be on track to consumeapproximately a Fibonacci 34 years (+ or – 1 year).From as far back as 2001, using several time-forecastingapproaches, EWT has forecast that the final stock marketbottom would occur in 2016. This timing suggests a peakrate of deflation in or near 2015, a bit ahead of the lowin stocks. Although we tentatively expect the bottomingsequence to take place between 2015 and 2017, thesequence per se is more certain than its timing.One might think that interest rates will therefore fall untilaround 2016. But they won’t. The reason is that borrowersare going to default.Investors think that the issuers of all the bonds they arebuying will stay solvent and pay both interest and principal.We don’t think so. We think the economy is still slidinginto depression, and when that trend accelerates, investors’waxing fears will cause them to start selling bonds, whichwill lead to lower bond prices and higher yields.Investor psychology should work like this: As positivesocial mood initially retreats, investors looking for a havenbuy bonds that they perceive to be safe. But as social moodcontinues to trend toward the negative, fear increases,deflation accelerates, the incomes of businesses andgovernments decline, and bond investors begin to worryabout losing their principal due to bankruptcy and defaultby bond issuers. That’s when they start selling bonds, andrates begin to rise. Rates on the weakest issues rise first,Figure 4
19The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFbut eventually fear spreads to holders even of formerlypresumed safe paper. Finally, the economy contracts soseverely that it reaches depression, wiping out manydebtors and, in the process, many creditors as well.In the current cycle, low-grade bond yields have yet tobegin climbing. As shown in Figure 5 (again with thescale inverted), yields for the Baa group have been movinglower right along with those forTreasuries. Commentatorsare saying that investors’ sustained move into bonds is asign of fear. But in line with continued predictions of a“sustained but slow economic recovery,” bond buyers havereached a state of epic complacency in the belief that allof these bonds are safe. As we will see in Figure 9, thespread between rates on T-bonds and Baa corporates hasbeen quietly widening for nearly a year. This is a subtlewarning of trouble ahead for the high-yield sector.At thispoint, we still cannot place “peak” arrows on Figure 5 asthere are on the 1930s version in Figure 4. But we shouldbe able to do so soon.Figure 6 shows the history of the Bond Buyer index of40 corporate bonds during the Great Depression. Figure 7shows the history of its modern equivalent, the BondBuyer 20-bond index. Bond prices today seem poised todo what their predecessors did: plunge.In early 1932, prices on these bonds fell below—and ratesrose above—those registered at the preceding peak rate ofinflation in 1920. This is a good reason to expect interestrates on these bonds in coming years to rise above thoseof 1981, i.e. above 16%.The question is, when will rates begin rising in thiscycle? We think the answer is “now.” Evidence is rapidlymounting that the trend in interest rates on high-gradedebt is poised to reverse:1. As shown in Figure 3, the latest drop in yield hastraced out five waves into the June 1 low as bondfutures hit a new all-time high of 152½. This plungein rates should mark at least a bottom and probablythe bottom.Figure 6Figure 5
20The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFF2. The public has been buying a lot of U.S.government bonds since 2002, as shownin Figure 8. Investors stayed enamoredof government bond funds in 2011 whileselling into the stock rally. The publicloved real estate at the top; it loved stocksat the top; it loved commodities at the top;it loved silver at the top; and it loved goldat the top. What do you think it means nowthat the public is heavily invested in U.S.government bonds?3. The Commitment of Traders report showsthat Large Speculators have become heavilyinvested in T-bond futures (see Figure 9).Large Specs are not always wrong, but theyare usually wrong when they follow a trend.The asterisks in Figure 9 show times whentheir buying or selling was in concert withthe trend, and in those cases the market wasapproaching a reversal.4. According to the Daily Sentiment Index(courtesy trade-futures.com), there were97% bulls among futures traders on June 1.This is the third-highest reading on record.(It reached 99% in December 2008, atthe spike high in T-bonds following Fed’spledge to buy them.) The DSI reached 90%bulls in June 2011, and except for a briefperiod in January-March it has been near the90% level for much of the past year. This isboth an extreme level and a lengthy periodof bullish sentiment.5. T-bonds have enjoyed their longest andbiggest bull market on record. There are noguarantees in life or investing, but we arepretty sure that buying an extended marketafter three decades of rise is not a goodidea. Regardless of whether our monetaryand economic expectations turn out right,the bull market in bonds is aged and ripefor reversal.If rates do begin to rise as we expect, mostobservers will probably be fooled. Bulls onthe economy may take the new trend as asign of economic expansion. Those betting onhyperinflation may take it as a sign that inflationFigure 7Figure 8
21The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFis ready to soar. But the real reason for the coming rise in rates will be that investors will be selling bonds and demandinghigher rates due to fear of default. We have seen this development already in the debt paper of Greece and other weakdebtors. It should soon seep over to the stronger debtors.You might think that the U.S. government is the strongest sovereign debtor. It isn’t. Eight other governments pay lowerrates on their 10-year notes. The U.S. 10-year yield hit a low of 1.438% on June 1, its lowest level ever. But the yieldson comparable bonds elsewhere are lower: Singapore 1.37%, Taiwan and Germany 1.17%, Sweden 1.11%, Denmark0.93%, Hong Kong 0.88%, Japan 0.80% and Switzerland 0.47%.The coming fear of default will not be misplaced. With a turn of Grand Supercycle degree behind us, the unfoldingdepression will be deeper than that of the early 1930s. Most debtors around the world will default.What To DoGenerally speaking, if you are invested in long-term debt, sell it. Avoid high-yield bonds like the plague. Stay awayfrom most municipal, corporate, government agency and now even Treasury bonds.A select few entities will be able togenerate the necessary cash flow to defy an otherwise universal rise in yields. Discerning them will be difficult. Goodcandidates seem to be the governments of Switzerland and Singapore, the State of Nebraska and Microsoft Corp.,but we are not complacent about any of them. If you have substantial assets in long term Treasuries and want to keepthem, one good strategy would be to sell short an offsetting amount of junk bonds, thereby aligning your portfolio fora continued widening of the spread between the two. If you wish to hold any unhedged debt, make it short term debt.T-bill rates have been stuck near zero, but if rates overall begin to rise, bondholders will lose money while bill holderswill benefit by rolling continually into higher and higher yields. At the end, the U.S. government might default, so donot consider this a permanent strategy. It’s only a last debt-based strategy until the ultimate crisis. We have alreadyrecommended substantial holdings of outright cash. But at some point, it will be time to convert even the safest debtinstruments to cash and/or gold.
22The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFIn November 1999, The Elliott Wave Financial Forecastdemonstrated the usefulness of this socionomic preceptwhen the Glass-SteagallAct—the post-1929 crash statutethe U.S. government adopted to “purportedly protect” thefinancial industry from itself—was effectively repealed.Citing the government’s role as “the ultimate bag holder,”EWFF stated, “The U.S. government may have justprovided one of its greatest-ever demonstrations of thisprinciple.” That was four months after the all-time high inthe Real-Money Dow (Dow/gold), and two months beforethe all-time high in Dow/PPI. Both indexes have been ina bear market ever since.On September 14, 2012, the U.S. Federal Reserve uppedthe ante in the latest test of our “ultimate crowd” theorywhen it introduced QE3, an “open ended” $40-billion-a-month mortgage-buying program. The U.S. central bankfurther stated that it intends to keep the Fed Funds rateat effectively zero for the next three years. In time, theFed’s herculean effort to stimulate the financial marketsand the economy, with the sanction of government, willilluminate the authorities’ role as the last believer in theold trend even more brilliantly than Congress’s passageand repeal of Glass-Steagall, at the beginning and endrespectively, of a Supercycle-degree bull market. Tounderstand how social mood’s long-term positive trendinfluenced the Fed’s actions, we need to travel back to thecentral bank’s creation, which occurred in the wake of amajor downside reversal in mood.The Federal Reserve was established (not at allcoincidently near a major bottom in 1914) at least partiallyas a response to the Panic of 1907. In an effort to preventfinancial panic from ever happening again (pipe dream#1), the Fed was mandated to restrain the “undue use”of credit in the “speculative carrying of or trading insecurities, real estate or commodities.” (Sound like afamiliar mix?) When runaway financial speculation burstforth in the late 1920s, the Fed rose to the challenge, orat least tried to. In “The Stock Market Boom and Crashof 1929,” economist Eugene White wrote, “The FederalReserve had always been concerned about excessivecredit for speculation. Its founders hoped the new centralSPECIAL SECTION: THE GOVERNMENT GRABS THE BAG WITH BOTH HANDSExcerpted from the October 2012 Elliott Wave Financial ForecastThe Last BelieversWhen government gets into the act of speculation, the top is usually way past having occurred. Government is theultimate crowd, every decision being made by committee. It is always acting on the last trend, the one that is alreadyover. (For example, the Federal government passed securities laws to prevent the 1929 crash...in 1934.) —The Elliott Wave Theorist, 1991bank’s discounting activities would channel credit awayfrom ‘speculative’ and towards ‘productive’ activities.Although there was general agreement on this issue, thestock market boom created a severe split over policy.”According to economist Murray Rothbard, HerbertHoover and Federal Reserve Board Governor RoyYoung“wanted to deny bank credit to the stock market.” InAugust 1929, within days of the Dow’s ultimate peak,the Fed acted, raising the discount rate to 6%.As our opening quote from the Theorist notes, governmentmoves by consensus only, so it did not make structuralchanges deemed capable of preventing another crash until1934, two years after social mood ended its negative trendand the stock market bottomed. In a bid to strengthenthe government’s capacity to curtail “overtrading,” theSecurities Act of 1934 also gave the Fed power overbrokerage firms’margin requirements. In the early stagesof the bull market, the Fed did not wait long to use itsauthority. In April 1936, it raised the initial marginrequirement on NYSE shares from a range of 25 to 45%,to 55%. Considering that the unemployment rate at thetime was 15%—nearly double its current level—this actrepresents an exceptionally conservative stance. Stocksretreated for a time, only to race back to new highs threemonths later. The Fed responded by “doubling reserverequirements (against deposits) from August 1936 toMay 1937,” right up to and briefly past the March 1937Cycle wave I stock peak. Economists Christina andDavid Romer state that the Fed was “motivated by fearof speculation and inflation.”The all-important upper line of the Supercycle-degreetrend channel that dates back to that 1937 peak is shownon the next chart. After the next touchpoint, the Cyclewave III peak in February 1966, a speculative bingeaccompanied the Dow’s double top in 1968-1969.The Fedfelt compelled to act again in June 1968 by raising marginrequirements to 80%, once again “to curb speculation.”The Fed also pushed the discount rate to 6% inApril 1969.In 1970, then-Fed Chairman William McChesney Martinfamously stated that his job was “to take the punch bowlaway when the party is getting good.”
23The State of the Global Markets – 2013 Edition United StatesFollow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFFBy 1974, with the DJIA touchingthe bottom channel line, the Fedacknowledged the bearish trendof Cycle wave IV by reducingNYSE margin requirements forstock purchases to 50%, wherethey remain today.In 1984, a Fed study “castsignificant doubt on the needto retain high initial margins toprevent excessive fluctuationsof stock prices.” When the GreatAsset Mania finally pushedthe Dow through the top of itsSupercycle-degree channel linein 1996, Fed-mandated marginhikes were taken completely offthe table. In December 1996,after the Dow made its firstdecisive break through the top ofthe channel, then-chairman AlanGreenspan issued his famous“irrational exuberance” comment, citing “undulyescalated asset values.” Yet, unlike his predecessors, hedid nothing to change margin requirements.A margin debtexplosion in early 2000 “prompted some policymakersto debate the idea of changing margin requirements tostem possible speculative excess,” but a Federal Reservepaper issued the day after the SP’s March 23, 2000 peak(“Margin Requirements as a Policy Tool”) quashed theidea: “The bulk of the research indicates that changes inrequirements do not have a significant permanent effect.”Ultimately, though, the Fed stayed true to its historicalpattern of raising the cost of credit near the end of upsideextremes along the trendline, hiking the discount rate to6% in May 2000.In 2006, with the Dow once again pushing to new highsabove the top of the trendchannel and the real estatemania at peak pitch, the Fed raised the discount rate onenotch higher, to 6.25%. In a critical change, however, itdid not wait for the Dow to reverse course before easingagain. In the first stage of a bear-market prevention effortthat continues to this day, the Fed reduced the discountrate to 5.75% in August 2007, two months ahead of theDow’s October peak. Various government-sanctionedfinancial bailouts also coincided with the developingstock market reversal. The almost instantaneous impulseto “do something” represented a historic departure fromprevious behavior. EWFF’s November and December2007 issues noted that government bailouts generally“appear successful because they tend to come at lows,”and added that the 2007 bailouts were “too close to themarket’s peak” to work. The word “appear” is actually thekey to that forecast, because it is a reference to the actualcause of the market’s reversal: a change in the directionof social mood. This change is far more powerful thanany action the Fed might take to induce a desired marketoutcome. What matters is not the specific action that theFed may take, but the fact that it feels compelled to actby virtue of the social pressures under which it operates.In the case at hand, the Fed’s long-standing objectiveshave been reversed. Instead of exercising its originalmandate to restrict excessive speculation, the Fed is doingeverything in its power to keep buyers’animal spirits alive,even as the Dow is at its 75-year upper trendline. Theopen-ended nature of the promise to provide quantitativeeasing indefinitely and the stated objective of creatinga wealth effect in the form of higher stock prices areunprecedented. “Fed Aims to Drive up Stocks,” saysa September 14 Washington Post headline. Here’s thebasic plan in Bernanke’s own words: “If people feel thattheir financial situation is better because their 401(K)looks better, they’re more willing to go out and spend,and that’s going to provide the demand.” Never mind thefoolishness of the demand-theory of economic growth.Just as EWT theorized in 1991, the Fed is getting intothe act of speculation with the top long past. It will pay asteep price for goosing the old trend near its end and forfighting the new trend as it begins.
242013 EditionOVERVIEWExcerpted from the November 2012 European Financial ForecastEuropean blue chips remain well beneath their 2011 top,but at least one measure of complacency has surpassed thisprior sentiment extreme. The chart at right plots the iTraxxEuropean Crossover Index, which follows the movementof credit-default swaps (CDS) on 45 sub-investment gradecorporations in Europe. It essentially shows a 180 degreeshift in sentiment — from credit traders’ persistent fearabout corporate defaults in early 2009 to their full-fledgedconfidence in corporate debt today. In fact, the index fellto new lows in October, meaning that credit traders aremore confident about corporate credit quality than at anypoint in the index’s four-year history. Regardless of themarket’s near-term direction, one thing is certain: Thiskind of complacency will disappear when stocks home inon another long-term low.Elsewhere, the aftereffects of a long uptrend in socialmood are also on display. In September, we showed a chartdepicting sinking sovereign CDS premiums and observedthat the sharpest declines were in the very countries wherefunding conditions are a problem. Optimism has sincespread from the countries that will eventually need rescuefinancing to the funding facility that will purportedlyprovide the money. On October 2, Europe’s temporarybailout fund, the European Financial Stability Facility(EFSF), sold three-month bills at a negative yield of -.04%.So, despite a steady deterioration in the European economy, fixed-income investors are not just eager to loan moneyto the facility, they’re willing to accept a known loss over three months in order to do so. Long term, too, investors’faith in the bailout fund seems virtually unshakable. “[A]cross all asset classes, investors were risk-on,” reported aBarclays banker, who led the EFSF’s five-year, €5.9 billion debt deal on October 16. Indeed, this longer-term debtissuance was twice oversubscribed, attracting orders in excess of €12 billion.Many point to the allegedly limitless bond-buying program of the European Central Bank as the reason for traders’returning confidence. “If you’re convinced that the central bank will respond every time markets tank, that puts a floorunder prices,” a London-based economics professor tells the Financial Times.Until now, Germany’s finance ministers had been the biggest detractors of the plan. But as ECB president Mario Draghidrummed up support for it, Germany’s customary caution evaporated. On October 24, Draghi “entered the lion’s den,”(Reuters, 10/24) for a two-hour grilling in front of 100 politicians at the Reichstag building in Berlin. Two hours later, heemerged unscathed, while the lions had turned into kittens. “Draghi Charm Drive Softens Edges of German Skeptics,”reported CNN. “His answers were very convincing,” a senior German lawmaker told reporters after the meeting.EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFF
25The State of the Global Markets – 2013 Edition EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFFForgive us if we are not convinced. The plan is essentiallythe same one presented in May 2010, when eurozoneauthorities created Europe’s first €440 billion bailoutfacility to deal with Greece’s first sovereign debt crisis.For that matter, it’s the same plan that turned up again, inMarch 2011, when Portugal’s debt bubble popped, and theEuropean parliament approved the EFSF’s successor fund,the European Stability Mechanism (ESM). Today, Spainis flirting with bankruptcy, and Italy still struggles undera higher debt burden than Greece, Portugal and Irelandcombined. Here again, uptrending stocks have buoyedconfidence, so authorities believe they can step in whenthey’re needed, where they’re needed. A renewed marketdowntrend will shatter this illusion.Translating Central Bank NewspeakAt least one former optimist has become surprisinglygloomy of late: the Bank of England. In a significantdeparture from the optimism that pervades the Continent,BoE governor Mervyn King warned in October that theBank’s “unorthodox actions” (FT, 10/24) were reachingthe limits of their effectiveness. As EFF has previouslydiscussed, the word unorthodox doesn’t begin to describethe BoE’s actions following the 2008 financial crisis,which include nine interest rates cuts and £375 billion ofquantitative easing.We constantly read that the central bank’s policy isaccommodative, meaning that official bank rates are lowand should spur robust lending and borrowing acrossBritain. This chart of Britain’s official bank rate back to1900, however, shows precisely the opposite: that bankrates stayed low throughout the Great Depression andstill failed to stimulate the economy. Somehow, the BoEmay have gotten this message and is starting to rethink theeffectiveness of its monetary policy. Said King in October,“I am not sure that advanced economies in general willfind it easy to get out of their current predicament withoutcreditors acknowledging further likely losses ....”Translation: The Bank of England won’t bail everyone out.King continued, “When the factors leading to a downturnare long-lasting, only continual injections of stimulus willsuffice to sustain the level of real activity. Obviously, thiscannot continue indefinitely.”Translation: We’ll eventually have to turn off the stimulusspigot.In August 2009, EFF described the ultimate effect ofmoney printing, which is to “warp free market prices anddistort the critically important information they provide.”In fact, central bank stimulus is doubly negative, becauseit pushes investors and business owners to misallocateeven greater amounts of capital, thereby prolonging theeventual economic slump. The Great Depression was atorturously protracted affair for Europe. All the evidencesuggests that today’s downturn will be an even longer,slower slog.
26The State of the Global Markets – 2013 Edition EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFFTHE STOCK MARKETExcerpted from the November 2012 EuropeanFinancial ForecastEurope’s main stock indexes have sofar failed to commit resolutely in eitherdirection, emerging from the traditionallyweak months of September and Octoberunharmed. Stock market tops are almostalways a protracted affair as optimismleaks out of various sectors and indexes,one by one.The September 2012 EFF discussedEurope’s “dangerously splintering”markets,highlightingtherally’shistoricallylow volume, waning momentum andnear- and long-term price divergences. Toreiterate, this is not the kind of behaviorthat signals a healthy long-term advance.Likewise, a multitude of subindexesdisplay the kind of staggered finish thatsignals exhaustion of a larger trend. Thechart at bottom right shows six subsectorsof the FTSE 350 index. After droppinguniformly in 2008 and early 2009, threeof these critical industries — banks,construction and real estate investmenttrusts (REITS) — have merely stumbledalong near their 2008-09 lows. Twomore sectors — mining and financialservices — recovered more of their 2008sell-offs, but peaked nearly two years agoand have given back about half of theirgains already. And auto shares, while stilllevitating as a group, are almost certainlyangling toward another long slide. Thelong-term bear market will publicizeits return with a sell-off that reachesjust about every stock market index andindicator.
27The State of the Global Markets – 2013 Edition EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFFCULTURAL TRENDSExcerpted from the October 2012 European Financial ForecastDuring the bear market, the independent nations of Europe will rediscover their borders and rekindle the animositiesthat kept them apart for centuries.—Elliott Wave Financial Forecast, May 2005At this point, 13 years of downtrending mood isn’t only exposing the rivalries among the member nations of theEuropean Union; it’s also prying apart the provinces, principalities and semi-autonomous regions within the nation-states themselves. In July 2011, EFF highlighted the Scottish National Party, saying that its historic May victoryall but guaranteed a referendum on Scottish independence. According to the Financial Times, the first minister ofScotland, Alex Salmond, has promised to hold a referendum on independence in the autumn of 2014. In Belgium,the divide between the country’s Flemish-speaking and French-speaking regions has narrowed somewhat sinceJune 2010, when a leader of the Flemish nationalist party, Bart de Wever, won a “stunning electoral success” (NYT,6/13/10). In Italy, however, divides are opening up between Rome and the country’s heavily indebted southernregions. Sicily, for instance, is one of five Italian regions with special statutes on autonomy. Despite the region’smassive €5.3 billion in public debt, a Junereport by the audit court (Economist, 7/28/12)found that Sicily has more than five times asmany public employees as the government ofneighboring Lombardy, which has twice thepopulation. Tensions here are about as high asthey are in nearby Sardinia, where a protest bySardinian workers in Rome turned violent inSeptember.The chart at right shows a clear separatistmovement rising in Spain. In fact, “CataloniaIs Not Spain,” according to the banners at theSeptember 11 Diada de Catalunya, whichcommemorates the defeat of Catalan troopsduring the War of the Spanish Succession.In the past, marches to support Catalanindependence have never numbered more than50,000, according to city police. This year,pro-independence demonstrations drew morethan 1.5 million, as Catalan PresidentArtur Maspromised to push for independence from Spainunless the central government allocates a largershare of tax revenue to the region. “The road tofreedom for Catalonia is open,” declares Mas.If we’re correct that much of the IBEX’sbear market remains ahead, Mas’s road toan independent Catalan state should pick upsignificantly more traffic.
28The State of the Global Markets – 2013 Edition EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFFSPECIAL SECTION: THE INTERNATIONAL BANK HEISTS BEGINExcerpted from the April 2013 European Financial ForecastThere is an invisible group of lenders in the money game: complacent depositors, who — thanksto [federal deposit insurance] and general obliviousness — have been letting banks engage inwhatever lending activities they like.—Conquer the Crash, 2002Many bank depositors will lose their savings, and their only crime will have been to believe thegovernment’s deposit guarantee.—Elliott Wave Theorist, August 2008Last month, the financial press churned out a veritable encyclopedia-length discourse on the death of Cyprus’s financialsector. However, one glaring question remains: How did everybody miss it? Actually, the puzzle is far more perverse,because not only did the experts fail to foresee the Cypriot banking debacle, these very professionals who were responsiblefor recognizing the good banks and rooting out the bad ones were, in fact, lauding Cypriot banks throughout their entiredecline.The chart at right depicts a samplingof the accolades that the global financecommunity bestowed on the Bank ofCyprus during its six-year trek intoinsolvency. Starting with the bank’s 2008award for best bank from Global FinanceMagazine, the trail of tributes continuedin 2009 and 2010, when the bank receivedquality recognitions from The Bankermagazine and JP Morgan Chase. Even aslate as 2012, with the bank’s shares down98% from their all-time high, the Bankof Cyprus still received a 2012 privatebanking award from the internationallyrenowned financial journal Euromoney.The Bank of Cyprus website describedits bookending tribute from Euromoneythis way: “This is yet another majorinternational distinction which confirmsthe successful path taken by the Bankof Cyprus Group, placing it among theworld’s top financial institutions offeringprivate banking services.”The startling irony is that the bank’sdescription is exactly correct. Thanks toan entrenched system of fractional reservebanking, most of the world’s top financialinstitutions are fundamentally no sounderthan the Bank of Cyprus. Few investorscared when authorities suspended trading in the bank last month. However, this widespread obliviousness will shiftdramatically as the Continent’s larger, more well-known banks follow suit.
29The State of the Global Markets – 2013 Edition EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFFThe Die Has Been CastAbove all else, the country’s ongoing deposit debacleconfirms the value of EWI’s defensive posture towardbanks. On Monday, March 18, under pressure from theEuropean Commission, the European Central Bank andthe International Monetary Fund, Cypriot PresidentNicos Anastasiades agreed to confiscate 6% to 10% ofCypriot bank balances to partly offset the bailout’s €17billion price tag. By Tuesday, nervous depositors wereemptying ATMs, officials had shuttered banks acrossthe island, and the proposed levy had even sparked aninternational incident with Russia — where most of thelarge depositors are believed to hail from. Unveiled lastweek, the rescue’s terms reveal the startling trajectory thatbank officials took, one that will unquestionably becomea road map for the Continent’s future crises. Under theamended agreement:• Cyprus will close its second largest bank, CyprusPopular, and customers will lose the vast majorityof their €3 billion of savings. According to theCypriot financial minister, in fact, the bank islikely to return just 20% of its deposits to largeaccount holders, and the process may take aslong as six or seven years. Meanwhile, authoritieswill move Popular’s healthy assets to the Bankof Cyprus, which will undergo a separaterestructuring.• Under those terms, 37.5% of deposits over€100,000 will be swapped for bank equity,which is now next to worthless. This levy willaffect more than 19,000 depositors holding acombined €8 billion in assets. “In effect, thatcash will immediately disappear from depositors’accounts,” explains the Wall Street Journal.• Yet, the immediate loss to uninsured Bank ofCyprus customers will be far higher than 40%.Bloomberg, in fact, reports that the bank levy willreach at least 60% when factoring in a temporary22.5% “deposit withholding,” which will receiveno interest and could undergo further write-offs.• Cypriot banks closed for nearly two weeks lastmonth.WhentheyreopenedonMarch28,officialslimited daily withdrawals to €100 and permittedtravelers to take just €1,000 overseas. Someofficials say the government will lift the capitalcontrols next week. Others say that a month ormore may pass until authorities can completelyremove the restrictions. Either way, for the firsttime in the euro’s history, a government hasblocked its depositors from accessing their moneyfor an extended period of time.Despite these stunning developments, analysts remain gliband the financial press blasé. “I really don’t care,” says thechief executive of the world’s largest money managementfirm. “Cyprus Just A ‘Hiccup’ For Stock Rally,” reads aMarch headline from CNN Money. “Cyprus is a uniquecase,” said Spain’s finance minister last month. “Sloveniawill not be the next Cyprus,” reiterated that country’seconomic leader. As with each of the Continent’s fourprevious rescues, authorities are apathetic because stocksand social mood are peaking.Bond investors, too, have largely shrugged off the news.The chart on page 5 shows that 10-year bond yields inGreece, Portugal, Italy and Spain have barely budged sincehitting a two-year low in February 2013. For that matter,even Cyprus’s insured depositors — those with accountbalances below the €100,000 threshold — appear to beexceptionally relaxed for having just narrowly escaped abank robbery. Indeed, Cypriot banks reopened to a fewlong lines on March 28, but the country avoided outrightpanic.If anything, the monthlong debacle shows the value ofsocionomic thinking over that of mainstream economicwisdom. Most analysts routinely fail to uncover economictrouble, because they fail to recognize the stock market’sincredible value as a barometer of social mood. “It was alightning bolt out of nowhere,” a 50-year old Cypriot taxidriver tells theWall Street Journal. In the near future, otherlarge and small banks across the eurozone will be zapped;those deposits, too, will seemingly disappear in a flash.
30The State of the Global Markets – 2013 Edition EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFFSPECIAL SECTION: TRANSPORTATION LOSING TRACTIONExcerpted from the November 2012 European Financial ForecastBack in September, EFF presented a snapshot of Europe’s flailing shipping industry, noting that “weakness in shippingoften provides early warning for a broader economic decline, because bulk transport represents the first link in theconsumer-goods supply chain.” Today, it’s clear that the European car market provided another early tell. In January2012, EFF discussed how the pending bankruptcy of Swedish carmaker Saab portended another dark road ahead forEurope’s auto industry. Three months later, we showed a chart of collapsing EU car registrations and speculated whythe auto market seems especially sensitive to credit deflation:For one thing, most consumers tend to buy cars solely on credit, so auto sales quickly reflect changes in credit availability.In addition, new cars represent a discretionary purchase, meaning potential car buyers can usually forgo the purchaseand still get by.—European Financial Forecast, April 2012The chart below adds detail to the industry’s snapshot that we showed in April. It depicts a three-month movingaverage of individual registrations in Italy, Spain, France and Germany, as well as collective car registrations withinthe 17-nation eurozone. Four of the five metrics just fell to new lows for the bear market, with the pace of deteriorationclearly accelerating. In fact, car deliveries plunged 11% in September, generating the largest year-over-year declinein 19 years, according to the European Automobile Manufacturers’Association (ACEA).Germany represents the car industry’s lone bright spot, as registrations have trended largely flat. But even here, demandis drying up and desperation growing acute. For the third time this year, BMW reintroduced its “lease pull-aheadprogram,” an incentive that lets lease owners skip up to three payments on new or used vehicles.
31The State of the Global Markets – 2013 Edition EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFFThe move follows another widespread sales-boostingtactic called “Specialty Demo Allowance,” where carmanufacturers pay dealers cash bonuses (up to $7,000 inBMW’s case) to add cars to their demo fleets. Even thoughdealers are essentially selling vehicles to themselves,the ploy allows them to chalk up transactions as ifthey’re genuine sales. According to Bloomberg, “self-registrations” now account for at least 30% of Germany’snew car registrations.Industry experts see Europe’s car market shifting intorecession. We think that the professional outlook stillmassively underestimates the demand-reducing potentialof the current deflation. ACEA’s gloomy October 16report coincided with a moderate drop in Europe’s topautomobile- and tire-makers. The chart at left, meanwhile,shows the share performance of the six largest Europeanautomakers back through 2005. Notice that only BMWmanaged to exceed its 2007 high, with Fiat, Daimler,Renault and Volkswagen (Europe’s largest automaker)down 50% to 70% from their previous highs.The bottom graph on the chart shows the brick wall thatEurope’s No. 2 automaker, Peugeot, just crashed into.In addition to cutting 8,000 jobs and closing factories,Peugeot is frantically selling assets in order to raise cash.In October, the French government engineered a rescuefor Peugeot’s financing unit, Banque PSA Finance, withanalysts putting the tab at €4 billion in bank guaranteesand €1.5 billion in new credit lines. Bloomberg callsthe move an “indirect bailout,” but the sheer size of therescue package is at least on par with Paris’s previousintervention in its car industry in February 2009. Then,the French government extended Peugeot and its smallerrival, Renault, €6 billion in low-interest loans, seeking tobolster the companies’ liquidity in the wake of the 2008banking crisis. This deterioration in business followed byanother bailout will spread to innumerable other sectorsand industries as credit deflation intensifies.
32The State of the Global Markets – 2013 Edition EuropeFollow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFFSPECIAL SECTION: SWAPPING OUT FEARExcerpted from the October 2012 European Financial ForecastOver the past three years, as the credit crisissecured footholds in former bedrock economiesacross the Continent, EFF has persistentlydirected readers’attention to the source of creditdeflation: a large-degree social mood decline.To be sure, the credit crunch won’t end until thebear market does. On the heels of a multimonthbounce, however, funding problems appear to behibernating, economies appear to be breathingsigns of life, and key financial players arepositioning themselves for another financialspringtime.Notice, for instance, the sinking costs toprotect bondholders from a sovereign default.Credit-default swaps allow traders to hedgeagainst (or, more directly, to gamble on) adebtor’s creditworthiness, so you would thinkthat swap premiums in Europe would be rising.Yet, swap premiums are down across the board,with the sharpest declines showing up in thevery countries where funding conditions aremost problematic. The top four panels depictCDS premiums across four of the five PIIGSnations: Portugal, Italy, Ireland and Spain. CDSrates in Ireland, one of Europe’s earliest bailoutrecipients, fell beneath a two-year low, whilePortuguese default protection is the cheapestsince February 2011, just two months beforeLisbon activated its €78 billion financial aidpackage.Meanwhile, core European rates have also fallenprecipitously. Observe that French, Belgian,Swedish and Dutch swaps are probing recentlows, while German rates slid below 50 basispoints in September. Here, too, the last timederivatives traders paid this little for creditprotection was July 2011, as the DAX teeteredon the brink of a two-month, 34% sell-off.“Another banana skin has been averted,” acurrency strategist tells the Wall Street Journal.In fact, the diminishing cautiousness of credittraders suggests the opposite: that the financialfloorboards are slippery again. The difference isthat stocks stand to slide much further this timearound, meaning that much larger pools of shakydebt will also hit the skids.
332013 EditionKOREA: UP ON GANGNAM STYLEExcerpted from the November 2012 Asian-Pacific Financial ForecastThe KOSPI continues its stairstep advance in a series ofones and twos. The index is now sitting on the long-termuptrend line from its 1962 low (see chart at right). Ifit falls below its July wave 2 low of 1759, about 7%below current levels, then the odds would increase thatthe alternate count on the monthly chart is correct.Sentiment support for a rally now comes from SouthKorea’s Manufacturing Business Conditions Survey,which in October fell to its second-lowest level ofthe past decade. The worsening conditions associatedwith wave 2 and wave 2 demonstrate Elliott WavePrinciple’s observation that fundamental conditionsduring second waves are “often as bad as or worse thanthose at the previous bottom.” The surveyed conditionsshould eventually rise to record highs as Korean stockscontinue their advance in wave 3.The KOSPI’s gradual advance in the face of dismaleconomic fundamentals fits the mixed mood of thecorrective period of the past two years.That mixed moodis also evident in the sudden popularity of “GangnamStyle,” a song and dance video by South Korean popmusician Psy. Bloomberg columnist William Pesek hitthe nail on the head when he wrote, “Psy’s song andubiquitous video parody the tony neighborhood [ofAsia-PacificOVERVIEWExcerpted from the November 2012 Asian-Pacific Financial ForecastThe Asian-Pacific region sports a broad range of stock price patterns, and thus a broad range of expectations. TheSoutheastAsian bulls, such as the Philippines, continue to power higher, well above their 2010 and 2011 highs. Otherssuch as Turkey and India are approaching their own 2010 and 2011 highs. Still others, such as Korea, have fallen backin small-degree second waves. And at the other extreme, laggard Vietnam needs to decline several percent more as itmoves toward an intermediate-term low.In contrast to peace overtures in SoutheastAsia and LatinAmerica, the tension between China and Japan over territorialissues continues to grow. That negative social mood supports our forecasts for significant lows in Northeast Asia.Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF
34The State of the Global Markets – 2013 Edition Asia-PacificFollow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFFAN ELLIOTT WAVE PERSPECTIVE ON CHINAS STOCK MARKETExcerpted from a September special report from The Asian-Pacific Financial ForecastOver the past half century, Chinese society has passed from a dark age to a golden age. From the misery of the GreatChinese Famine (1958–1963) and the chaos of the Cultural Revolution (1966–1976), hundreds of millions of Chinesepeople have lifted themselves out of poverty and into a world of progress where they believe they can succeed.From an Elliott wave perspective, China’s boom of the past few decades exemplifies the growth phase of the naturalcycle of growth and decay inherent in all societies. China has experienced numerous such long-term cycles in itshistory. The one that began in the late 20th century is just the most recent.Ralph Nelson Elliott recognized a long-term cycle at work inAmerican society when he discovered the Wave Principlein the early 1930s. He recognized that the 1929–1932 collapse in U.S. stocks he had just witnessed was simply a naturalreaction to the boom of the prior several decades. Hisdiscovery of wave patterns in stock prices led him toconclude that the Great Depression was a large-degreebear market — and that, therefore, a large-degreebull market lay ahead. In their 1978 book, The ElliottWave Principle, Elliott’s intellectual descendents, A.J.Frost and Robert Prechter, made a similar forecastfor American stocks and society near the end of the1966–1982 bear market in the Dow Jones IndustrialAverage.Our long-term wave count for Chinese stocks findsChinese society today at a similar turning point. Chinalaunched its modern stock market in 1990, whichprovides us only about 22 years’ worth of actual indexprice data. But using knowledge of historical events, asElliott did, we can estimate how prior waves progressed,thus providing context for the picture as a whole.This chart shows the likely pattern of China’s advanceof the past half century. Notice how the structure of theadvance conforms to Frost and Prechter’s depiction ofan idealized impulse wave whose middle waves areextended (see next page). This structure implies that amulti-year advance in Chinese shares lies directly ahead.Gangnam] and poke fun at the crass materialism that has consumed a country that just 15years ago was beset by economic turmoil. … By both celebrating this phenomenon andmocking it, Psy caught the bipolar nature of Korea’s economy.”The financial crisis of 2008 and even the correction of 2011 probably brought backmemories of the lost decade of the 1990s and early 2000s in many emerging Asianmarkets. Psy’s bouncy tune and horse-dancing marks a break from the mood of austerity whileoffering a preview of more positive times ahead.
35The State of the Global Markets – 2013 Edition Asia-PacificFollow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFFBoom AheadThe long-term wave pattern in the Shanghai Compositeis the primary justification for our bullish forecast forChina, but plenty of other technical evidence supports it.PatternThe correction since the 2007 high in theShanghai Composite is unfolding in wave IV asa contracting triangle. This particular pattern,which often occurs as the fourth wave of a five-wave structure, is labeled a-b-c-d-e. Wave (C)of C down is developing as a textbook impulsewave, as wave 5 has fallen on slower momentumthan did wave 3.Source: Elliott Wave Principle (1978)Source: Elliott Wave Principle (1978)THE END OF INDIAS MALAISEExcerpted from the October 2012 Asian-Pacific FinancialForecastIndian stocks also show a stair-stepping pattern of onesand twos. The pattern is clearest in banking stocks in theshort term (see BSE Bank Index in weekly chart) andin auto stocks in the long term (see BSE Auto Index inmonthly chart). The pattern in the BSEAuto Index, whichcontinues to lead the market as it has since the early 2000s,looks similar to the one it displayed just before it rocketedhigher in 2003. If the Nifty falls below 5449, about 6%below current levels, it would mean that the advance fromthe June low is corrective rather than impulsive.In September, we observed how bad the social gridlock inIndia had become and said that the wave pattern in Indianstocks would eventually resolve the nation’s leadershipcrisis. The series of ever-smaller second-wave lows hasnow broken the impasse. A week after the wave 7 lowin the BSE Bank Index, Prime Minister Manmohan Singhrisked the ruling coalition’s Parliamentary majority toannounce several controversial economic reforms with thepromise of more to come. Conventional observers creditthe announcement for driving stocks higher. A better way