Aug 19

Stock Market in Free Fall

Posted in Economy, Stock Market

Mainstream media is trying to rationalize the stock market decline tying it to the economic woes, news and events. But have not have these problems for some years now? Why rally for years on the same news and then suddenly turn south losing 500 points a day every other day? Could the reason fo market decline be something else? Something subtle yet obvious to the alert eyes? Something that mainstream media does not want to say? In the May 2008 issue of his monthly Elliott Wave Theorist, Robert Prechter showed this chart of the Dow Jones Industrials. As you can see, prices go back to the 1970s.

Please note that on the day this chart published (May 16), the Dow closed at 12,987 — barely eight percent below the Dow’s all-time high of the previous October.

Yet, as you can also clearly see, Prechter labeled the white space below the May 2008 price level as “Free Fall Territory.”

At the time, no one else dared to publish such a bearish forecast. This was before the Lehman bankruptcy, the bailout binge, the home foreclosure crisis, and certainly before the worst of the stock market collapse.

In his June 2011 Theorist, Prechter published an update to the chart above, and here’s the major difference: The updated chart “telescopes out” by one full degree of trend. Prices go back to the 1930s. The scale of the white space surrounding this chart’s “free fall territory” label will show you what Prechter truly means.

His commentary in that issue also observed that

“the March-April [2011] rally was one of the most passionate bouts of stock buying I have ever witnessed.”

Bob Prechter made this observation not in admiration, but as a warning.

In the past three weeks, the Dow Industrials have plummeted nearly 2,000 points. Most investors are confused and scared. How far down will the decline travel? Will it end tomorrow or go on for years?

The answers to these questions are crucial to your financial health. You can still get ahead of the trend, but only if you prepare now. Read EWI’s long and near-term forecast. Get it in one comprehensive package — and stay ahead of the crowd.

And — get Bob Prechter’s August Elliott Wave Theorist. It includes “many dozens” of charts. Bob will also record this Theorist as a rare “video issue” — you’ll be able to watch and listen as Prechter himself presents all the content.

Also — as part of the same package, you get the August issue of our Elliott Wave Financial Forecast — you’ll see and read about the latest big picture in stocks, dollar, gold and more.

SAVE 57% with this LIMITED-TIME OFFER: See what we see next for the markets now via this instant-access discount subscription offer.

SPECIAL STOCK MARKET REPORT

The Dow has plummeted over 2000 points in the past weeks and it seems like volatility is here to stay.

Yet, market volatility doesn’t have to bring confusion and fear when you’re prepared with the necessary market analysis. For example, here’s what Robert Prechter had to say about market volatility in his May 2009 Elliott Wave Theorist market letter:

Market volatility makes most investors less certain about market trends. Elliott waves, however, become clearer the more intense the market’s behavior.

When social mood is changing dramatically, non-mood-related short-term noise has a minimal impact, so even waves of small degree adhere more closely to textbook forms. The five-wave decline from October 2007 to March 2009 was quite beautiful, as were most of its sub-waves.

It is an ironic aspect of wave application that when others are more confused wave analysts tend to be less so.

Get a glimpse into Robert Prechter’s current outlook on these volatile markets when you read his recently released FREE report. It includes an 84-year study of stock values that will help you understand and prepare for today’s critical market juncture.

Read your FREE report now.

But hurry, this report is only available until August 22.

We are in a Depression

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Aug 11

Rare Stock Market Opportunity

Posted in Economy, Stock Market

Prechter describes the once in a lifetime stock market opportunity that is ahead of us. He is expecting a major crash that is a great short opportunity. According to Prechter, the bottom of the deflationary depression will be the greatest buying opportunity of a life time if you can hold cash until then.

Robert Prechter Discusses Market Forecasts on CNBC Closing Bell

“The problem is deeper than just a minor recovery
or a minor recession.”

Robert Prechter joins CNBC hosts Bill Griffeth and Maria Bartiromo on Closing
Bell to talk about the still-unfolding forecasts presented in his New York
Times bestseller Conquer the Crash.

We invite you to watch the interview below. Then download Prechter’s
free report
that uses an 84-year study of stock market values to help
you prepare for and understand today’s critical market juncture.

Download Robert Prechter’s Free Report To Discover How You Can
Prepare For Today’s Critical Market Juncture

While
we’re sure you’re reading countless articles and analysis about the market’s
recent volatility, if you’re not reading what EWI’s subscribers read, you’re
missing the valuable, prescient perspective contained in each issue of Robert
Prechter’s market letter, The Elliott Wave Theorist.

Access Robert Prechter’s free report and read in-depth analysis — including
an 84-year study of stock values — that will help you prepare for and understand
today’s critical market juncture.

Download
Robert Prechter’s Free Report
.

comments: 0 »
Jun 11

What is Deflation?

Posted in Economy

Deflation is more than just “falling prices.”

The following article is an excerpt from Elliott Wave International’s free Club EWI resource, “The Guide to Understanding Deflation. Robert Prechter’s Most Important Writings on Deflation.”

The Primary Precondition of Deflation
Deflation requires a precondition: a major societal buildup in the extension of credit. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way: “In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following: (a) All were set off by a deflation of excess credit. This was the one factor in common.”

“The Fed Will Stop Deflation”
I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn. Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can’t afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars — at best — returns to the level it was before the program began.

The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone’s delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit. Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers’ windows, but then it ends. Nobody wants any more credit. They don’t care if it’s free. They can’t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can’t afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit — at best — returns to the level it was before the program began.

Jaguars, anyone?

Read the rest of this important 63-page deflation study now, free! Here’s what you’ll learn:What Triggers the Change to Deflation
Why Deflationary Crashes and Depressions Go Together
Financial Values Can Disappear
Deflation is a Global Story
What Makes Deflation Likely Today?
How Big a Deflation?

There is still time to prepare if deflation is indeed in our future.

“Fed’s Bullard Raises Specter of Japanese-Style Deflation,” read a July 29 Washington Post headline.

When the St. Louis Fed Chief speaks, people listen. Now that deflation — something that EWI’s president Robert Prechter has been warning about for several years — is making mainstream news headlines, is it too late to prepare?

It’s not too late.

There are still steps you can take if deflation is indeed in our future. The first step is to understand what it is. So we’ve put together a special, free, 60-page Club EWI resource, “The Guide to Understanding Deflation: Robert Prechter’s most important warnings about deflation.” Enjoy this quick excerpt. (For details on how to read this important report free, look below.)

When Does Deflation Occur?
By Robert Prechter

To understand inflation and deflation, we have to understand the terms money and credit.

Money is a socially accepted medium of exchange, value storage and final payment; credit may be summarized as a right to access money. In today’s economy, most credit is lent, so people often use the terms “credit” and “debt” interchangeably, as money lent by one entity is simultaneously money borrowed by another.

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:
(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. The psychological aspect of deflation and depression cannot be overstated. …

  • What Makes Deflation Likely Today?
  • How Big a Deflation?
  • Why Falling Interest Rates in This Environment Will Be Bearish
  • Myth: “Deflation Will Cause a Run on the Dollar, Which Will Make Prices Rise”
  • Myth: “Debt Is Not as High as It Seems”
  • Myth: “War Will Bail Out the Economy”
  • Myth: “The Fed Will Stop Deflation” 

10 Things You Should and Should Not Do During Deflation
February 10, 2009

This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter’s FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.

The following article was adapted from Robert Prechter’s NEW Deflation Survival eBook, a free 60-page compilation of Prechter’s most important teachings and warnings about deflation.

By Robert Prechter, CMT

1) Should you invest in real estate?

Short Answer: NO

Long Answer: The worst thing about real estate is its lack of liquidity during a bear market. At least in the stock market, when your stock is down 60 percent and you realize you’ve made a horrendous mistake, you can call your broker and get out (unless you’re a mutual fund, insurance company or other institution with millions of shares, in which case, you’re stuck). With real estate, you can’t pick up the phone and sell. You need to find a buyer for your house in order to sell it. In a depression, buyers just go away. Mom and Pop move in with the kids, or the kids move in with Mom and Pop. People start living in their offices or moving their offices into their living quarters. Businesses close down. In time, there is a massive glut of real estate.

– Conquer the Crash, Chapter 16

2) Should you prepare for a change in politics?

Short Answer: YES

Long Answer: At some point during a financial crisis, money flows typically become a political issue. You should keep a sharp eye on political trends in your home country. In severe economic times, governments have been known to ban foreign investment, demand capital repatriation, outlaw money transfers abroad, close banks, freeze bank accounts, restrict or seize private pensions, raise taxes, fix prices and impose currency exchange values. They have been known to use force to change the course of who gets hurt and who is spared, which means that the prudent are punished and the thriftless are rewarded, reversing the result from what it would be according to who deserves to be spared or get hurt. In extreme cases, such as when authoritarians assume power, they simply appropriate or take de facto control of your property.
You cannot anticipate every possible law, regulation or political event that will be implemented to thwart your attempt at safety, liquidity and solvency. This is why you must plan ahead and pay attention. As you do, think about these issues so that when political forces troll for victims, you are legally outside the scope of the dragnet.

– Conquer the Crash, Chapter 27

3) Should you invest in commercial bonds?

Short Answer: NO

Long Answer: If there is one bit of conventional wisdom that we hear repeatedly with respect to investing for a deflationary depression, it is that long-term bonds are the best possible investment. This assertion is wrong. Any bond issued by a borrower who cannot pay goes to zero in a depression. In the Great Depression, bonds of many companies, municipalities and foreign governments were crushed. They became wallpaper as their issuers went bankrupt and defaulted. Bonds of suspect issuers also went way down, at least for a time. Understand that in a crash, no one knows its depth, and almost everyone becomes afraid. That makes investors sell bonds of any issuers that they fear could default. Even when people trust the bonds they own, they are sometimes forced to sell them to raise cash to live on. For this reason, even the safest bonds can go down, at least temporarily, as AAA bonds did in 1931 and 1932.

– Conquer the Crash, Chapter 15

4) Should you take precautions if you run a business?

Short Answer: YES

Long Answer: Avoid long-term employment contracts with employees. Try to locate in a state with “at-will” employment laws. Red tape and legal impediments to firing could bankrupt your company in a financial crunch, thus putting everyone in your company out of work.

If you run a business that normally carries a large business inventory (such as an auto or boat dealership), try to reduce it. If your business requires certain manufactured specialty items that may be hard to obtain in a depression, stock up.

If you are an employer, start making plans for what you will do if the company’s cash flow declines and you have to cut expenditures. Would it be best to fire certain people? Would it be better to adjust all salaries downward an equal percentage so that you can keep everyone employed?

Finally, plan how you will take advantage of the next major bottom in the economy. Positioning your company properly at that time could ensure success for decades to come.

– Conquer the Crash, Chapter 30

5) Should you invest in collectibles?

Short Answer: NO

Long Answer: Collecting for investment purposes is almost always foolish. Never buy anything marketed as a collectible. The chances of losing money when collectibility is priced into an item are huge. Usually, collecting trends are fads. They might be short-run or long-run fads, but they eventually dissolve.

– Conquer the Crash, Chapter 17

6) Should you do anything with respect to your employment?

Short Answer: YES

Long Answer: If you have no special reason to believe that the company you work for will prosper so much in a contracting economy that its stock will rise in a bear market, then cash out any stock or stock options that your company has issued to you (or that you bought on your own).

If your remuneration is tied to the same company’s fortunes in the form of stock or stock options, try to convert it to a liquid income stream. Make sure you get paid actual money for your labor.

If you have a choice of employment, try to think about which job will best weather the coming financial and economic storm. Then go get it.

– Conquer the Crash, Chapter 31

7) Should you speculate in stocks?

Short Answer: NO

Long Answer: 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 [spend to read Conquer the Crash].

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.

– Conquer the Crash, Chapter 20

8) Should you call in loans and pay off your debt?

Short Answer: YES

Long Answer: Have you lent money to friends, relatives or co-workers? The odds of collecting any of these debts are usually slim to none, but if you can prod your personal debtors into paying you back before they get further strapped for cash, it will not only help you but it will also give you some additional wherewithal to help those very same people if they become destitute later.

If at all possible, remain or become debt-free. Being debt-free means that you are freer, period. You don’t have to sweat credit card payments. You don’t have to sweat home or auto repossession or loss of your business. You don’t have to work 6 percent more, or 10 percent more, or 18 percent more just to stay even.

– Conquer the Crash, Chapter 29

9) Should you invest in commodities, such as crude oil?

Short Answer: Mostly NO

Long Answer: Pay particular attention to what happened in 1929-1932, the three years of intense deflation in which the stock market crashed. As you can see, commodities crashed, too.

You can get rich being short commodity futures in a deflationary crash. This is a player’s game, though, and I am not about to urge a typical investor to follow that course. If you are a seasoned commodity trader, avoid the long side and use rallies to sell short. Make sure that your broker keeps your liquid funds in T-bills or an equally safe medium.

There can be exceptions to the broad trend. A commodity can rise against the trend on a war, a war scare, a shortage or a disruption of transport. Oil is an example of a commodity with that type of risk. This commodity should have nowhere to go but down during a depression.

– Conquer the Crash, Chapter 21

10) Should you invest in cash?

Short Answer: YES

Long Answer: For those among the public who have recently become concerned that being fully invested in one stock or stock fund is not risk-free, the analysts’ battle cry is “diversification.” They recommend having your assets spread out in numerous different stocks, numerous different stock funds and/or numerous different (foreign) stock markets. Advocates of junk bonds likewise counsel prospective investors that having lots of different issues will reduce risk.

This “strategy” is bogus. Why invest in anything unless you have a strong opinion about where it’s going and a game plan for when to get out? Diversification is gospel today because investment assets of so many kinds have gone up for so long, but the future is another matter. Owning an array of investments is financial suicide during deflation. They all go down, and the logistics of getting out of them can be a nightmare. There can be weird exceptions to this rule, such as gold in the early 1930s when the government fixed the price, or perhaps some commodity that is crucial in a war, but otherwise, all assets go down in price during deflation except one: cash.

– Conquer the Crash, Chapter 18

……….

For more on deflation, download Prechter’s FREE 60-page Deflation Survival eBook or browse various deflation topics like those below at www.elliottwave.com/deflation.

comments: 0 »
Jun 11

Banks Are in Trouble, Are You?

Posted in Economy

Is Your Bank on the “100 Safest” List? Maybe You Should Find Out
Close to Collapse: Bailed-Out Banks Facing Bankruptcy

We want to trust in the financial stability of our bank. After all, most of us have money in these institutions.

In spite of our wishful thinking, the tide of bank failures has not stopped. And these failures are occurring well after the heart of the financial crisis — and even after some of these banks received bailouts.

“Nearly 100 U.S. banks that got bailout funds from the federal government show signs they are in jeopardy of failing.

The total, based on an analysis of third-quarter financial results by The Wall Street Journal, is up from 86 in the second quarter, reflecting eroding capital levels, a pileup of bad loans and warnings from regulators.

The 98 banks in shaky condition got more than $4.2 billion in infusions from the Treasury Department under the Troubled Asset Relief Program.”

Wall Street Journal (12/26)

Seven of the 98 small banks mentioned have already failed.

In the U.S. so far this year, 157 banks have failed — that’s the highest number since 1992.

More failures are likely because many banks are burdened by questionable “assets” and bad real estate loans.

“…your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults.

If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.”

Conquer the Crash, 2nd edition, pp. 175-176

Yes, the Federal Deposit Insurance Corporation (FDIC) insures depositors, but the question is: Does the FDIC have the wherewithal to “make whole” all depositors if scores of banks go under at the same time? Here at Elliott Wave International, we do not recommend that you count on the FDIC. Here’s why:

“…did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. 

When the FDIC rescues weak banks by charging healthier ones high ‘premiums,’ overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. 

The result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs.”

Conquer the Crash, 2nd edition, p. 177

Are some banks safer than others? We think so.

“Hope is not a strategy.” If you plan to have money on deposit at a bank, we suggest reading our FREE report, Discover the Top 100 Safest U.S. Banks.” This 10-page bank safety report is available to you after you become a Club EWI member. 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

Please protect your money. Download the free 10-page “Safe Banks” report now.
Learn more about the “Safe Banks” report, and download it for free here.

Bank failures still dominate headlines as the number of failing banks continues at an alarming pace in 2011. The odds are that you’ve seen at least one bank failure in your community since the financial crisis hit in 2008. Some economists claim we’re in a recovery, yet hundreds of smaller financial institutions still suffer from the debt crisis that began a few years back.

Consider this May 25 post from author Kalyan Nandy, on the popular Atlanta real estate site CityBiz: 

“Bank failures continue with no end in sight. Last Friday, U.S. regulators closed down three more banks, taking the total number to 43 so far in 2011…Looking back, there were 157 bank failures in 2010, 140 in 2009 and 25 in 2008.

“Issues like rock-bottom home prices, still-high loan defaults and deplorable unemployment levels are nagging troubles for such institutions…

“The number of banks on FDIC’s list of problem institutions shot up to 884 in the fourth quarter of 2010 from 860 in the previous quarter. This is the highest number since the savings and loan crisis in the early 1990s.”

The following excerpt from Elliott Wave International’s free report, Discover the Top 100 Safest U.S. Banks, explains the true risk that you may face when a bank fails.

Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money. If a large portion of those loans is tied up or becomes worthless, your money claim is compromised.

A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone…

The U.S. government’s Federal Deposit Insurance Corporation guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs.

If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is.

So what is the best course of action to safeguard your money?Read our free 10-page report, Discover the Top 100 Safest U.S. Banks, to learn:

• The 5 major conditions at many banks that pose a danger to your money.
• The top two safest banks in your state.
• Bob Prechter’s recommendations for finding a safe bank.
• And more!

Download your free report, Discover the Top 100 Safest U.S. Banks, now.

comments: 1 »
Jun 11

The Muni Bond Crisis

Posted in Bond Market, Economy

Elliott wave subscribers were prepared for municipal bonds troubles months in advance
November 24, 2010

By Elliott Wave International

This November, the whole world tuned in as the greater part of the U.S.A.’s 50 states turned red — and no, I don’t mean the political shift to a republican majority during the November 2 mid-term elections. I mean “in the red” — as in, financially fercockt, overdrawn, up to their eyeballs in debt.

Here are the latest stats: California, Florida, Illinois, and New Jersey now suffer “Greek-like deficits,” alongside draconian budget cuts, job furloughs, suspensions of city services, and the growing “rent-a-cop” trend of firing city workers and then hiring outside contractors to fill those positions.

Next is the fact that the municipal bond market has been melting like a snow cone in the Sahara desert. According to recent data, 35 muni bond issues totaling $1.5 billion have defaulted since January 2010, three times the average annualized rate going back to 1983. Also, in the week ending November 19, investors withdrew a record $3.1 billion from mutual and exchange-traded funds specializing in municipal debt, triggering the largest one-day rise in yields since the panic of ’08.

In the words of a recent LA Times article “It’s a cold, cold world in the municipal bond market right now.”

And for those who never saw the muni bond crisis coming, it’s a lot colder.

Since at least 2008, the mainstream experts extolled munis for their “safe haven resistance to recession.” And while muni bond woes are only now making headlines, one of the few sources that foresaw the depth and degree of the crisis coming ahead of time was Elliott Wave International’s team of analysts. Here’s an excerpt from the April 2008 Elliott Wave Financial Forecast (EWFF):

“One of the most vulnerable sectors of the debt markets is the municipal bond market. Instead of being a source of state and local funding, many residents will become a cost. Default could hit at any moment after times get difficult… Yields on tax-exempt municipal bonds are above yields on US Treasuries for the first time in as long as anyone can remember, another sign of how limited the supply of quality bonds will become.”

EWI continued to warn subscribers ever since:

February 2009 EWFF: Special section “Out of the Frying Pan and into Munis” showed the continued rise in muni yields ABOVE Treasury yields and cautioned against the idea that tax-exempt debt was a “safe bet.”

September 2010 Elliott Wave Theorist: “The Next Disaster: The public has withdrawn some money from stock mutual funds… But most investors … are shunning treasuries for high-yield money market funds and bond funds, which hold less-than-pristine corporate and municipal debt.”

And now, in the just-published November 19 Elliott Wave Theorist, EWI president Robert Prechter captures the full extent of the unfolding muni crisis via the following chart:

Read more about Robert Prechter’s warnings for holders of municipals and other bonds in his free report: The Next Major Disaster Developing for Bond Holders. Access your free 10-page report now.

comments: 0 »
Jun 11

Federal Reserve Bank

Posted in Economy

The world’s foremost Elliott wave expert goes “behind the scenes” on the Federal Reserve
By Elliott Wave International

This is Part III, the final part of our series “Robert Prechter Explains The Fed.”

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

How the Federal Reserve Has Encouraged the Growth of Credit

Congress authorized the Fed not only to create money for the government but also to “smooth out” the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our “fractional reserve” system, banks were authorized to employ that new money as “reserves” against which they could make new loans. Thus, new money meant new credit.

It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand (“in reserve”) to cover withdrawals. When the Fed increased a bank’s reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the “multiplier effect.” This process expanded the supply of credit well beyond the supply of money.

Because of competition from money market funds, banks began using fancy financial manipulation to get around reserve requirements. In the early 1990s, the Federal Reserve Board under Chairman Alan Greenspan took a controversial step and removed banks’ reserve requirements almost entirely. To do so, it first lowered to zero the reserve requirement on all accounts other than checking accounts. Then it let banks pretend that they have almost no checking account balances by allowing them to “sweep” those deposits into various savings accounts and money market funds at the end of each business day. Magically, when monitors check the banks’ balances at night, they find the value of checking accounts artificially understated by hundreds of billions of dollars. The net result is that banks today conveniently meet their nominally required reserves (currently about $45b.) with the cash in their vaults that they need to hold for everyday transactions anyway. [1st edition of Prechter’s Conquer the Crash was published in 2002 — Ed.]

By this change in regulation, the Fed essentially removed itself from the businesses of requiring banks to hold reserves and of manipulating the level of those reserves. This move took place during a recession and while S&P earnings per share were undergoing their biggest drop since the 1940s. The temporary cure for that economic contraction was the ultimate in “easy money.”

We still have a fractional reserve system on the books, but we do not have one in actuality. Now banks can lend out virtually all of their deposits. In fact, they can lend out more than all of their deposits, because banks’ parent companies can issue stock, bonds, commercial paper or any financial instrument and lend the proceeds to their subsidiary banks, upon which assets the banks can make new loans. In other words, to a limited degree, banks can arrange to create their own new money for lending purposes.

Today, U.S. banks have extended 25 percent more total credit than they have in total deposits ($5.4 trillion vs. $4.3 trillion). Since all banks do not engage in this practice, others must be quite aggressive at it. For more on this theme, see Chapter 19 [of Conquer the Crash].

Recall that when banks lend money, it gets deposited in other banks, which can lend it out again. Without a reserve requirement, the multiplier effect is no longer restricted to ten times deposits; it is virtually unlimited. Every new dollar deposited can be lent over and over throughout the system: A deposit becomes a loan becomes a deposit becomes a loan, and so on.

As you can see, the fiat money system has encouraged inflation via both money creation and the expansion of credit. This dual growth has been the monetary engine of the historic uptrend of stock prices in wave (V) from 1932. The stupendous growth in bank credit since 1975 (see graphs in Chapter 11) has provided the monetary fuel for its final advance, wave V. The effective elimination of reserve requirements a decade ago extended that trend to one of historic proportion.

The Net Effect of Monetization

Although the Fed has almost wholly withdrawn from the role of holding book-entry reserves for banks, it has not retired its holdings of Treasury bonds. Because the Fed is legally bound to back its notes (greenback currency) with government securities, today almost all of the Fed’s Treasury bond assets are held as reserves against a nearly equal dollar value of Federal Reserve notes in circulation around the world. Thus, the net result of the Fed’s 89 years of money inflating is that the Fed has turned $600 billion worth of U.S. Treasury and foreign obligations into Federal Reserve notes.

Today the Fed’s production of currency is passive, in response to orders from domestic and foreign banks, which in turn respond to demand from the public. Under current policy, banks must pay for that currency with any remaining reserve balances. If they don’t have any, they borrow to cover the cost and pay back that loan as they collect interest on their own loans. Thus, as things stand, the Fed no longer considers itself in the business of “printing money” for the government. Rather, it facilitates the expansion of credit to satisfy the lending policies of government and banks.

If banks and the Treasury were to become strapped for cash in a monetary crisis, policies could change. The unencumbered production of banknotes could become deliberate Fed or government policy, as we have seen happen in other countries throughout history. At this point, there is no indication that the Fed has entertained any such policy. Nevertheless, Chapters 13 and 22 address this possibility.

Do you want to really understand the Fed? Then keep reading this free eBook, “Understanding the Fed”, as soon as you become a free member of Club EWI.

The Fed’s Presumed Inflation Since 2008 Is Mostly a Mirage
Excerpted from Prechter’s December 2009 Elliott Wave Theorist

… We all know that the Fed created $1.4 trillion new dollars in 2008. It has told the world that it will inflate to save the monetary system. So that is the news that most people hear.

But the Fed’s dramatic money creation in 2008 only seems to force inflation because people focus on only one side of the Fed’s action. Even though the Fed created a lot of new money, it did not affect the total amount of money-plus-credit one bit… When the Fed buys a Treasury bond, net inflation occurs, because it simply monetizes the government’s brand-new IOU. But in 2008, in order for the Fed to add $1.4 trillion new dollars to the monetary system, it removed exactly the same value of IOU-dollars from the market. It has since retired some of this money, leaving a net of about $1.3 trillion.

So investors, who previously held $1.3t. worth of IOUs for dollars, now hold $1.3t. worth of dollars. They are no longer debt investors but money holders. The net change in the money-plus-credit supply is zero. The Fed simply retired (temporarily, it hopes) a certain amount of debt and replaced it with money.

Evidence for this case is in Figure 4. Even though the Fed has swapped over a trillion dollars of new money for old debt, the banks aren’t lending it. The money multiplier is back in negative territory, which means that there is more debt being retired than there is new money being created. In other words, deflation is winning.

The Fed's new money is simply replacing old debt, not creating new debt 

The bottom line is that the Fed hasn’t created much inflation over the past two years. The only reason that markets have been rallying recently is that the Elliott wave form required a rally. In other words, in March 2009 pessimism had reached a Primary-degree extreme, and it was time for a Primary-degree respite. The change in attitude from that time forward has, for a time, allowed credit to expand again.

But the Fed and the government didn’t force the change. They merely accommodated it, as they always have. They offered unlimited credit through the first quarter of 2009, and no one wanted it. In March, the social mood changed enough so that some people once again became willing to take these lenders up on their offer.

When credit collapses again during the wave 3 downtrend, we at Elliott Wave International will no longer have to keep “making the case” that the Fed is impotent. It will be clear once again, just as it was in 2008. (…continued)


Read the rest of this important 32-page eBook online now, free! All you need is to create a free Club EWI profile. Here’s what it covers:Chapter 1: Money, Credit and the Federal Reserve Banking System
Chapter 2: What Makes Deflation Likely Today?
Chapter 3: Can the Fed Stop Deflation?
Chapter 4: Jaguar Inflation
Chapter 5: Can’t Buy Enough…of That Junky Stuff, or, Why the Fed Will Not Stop Deflation
Chapter 6: The Fed’s “Uncle” Point Is In View
Chapter 7: Government Thrashing
Chapter 8: The Coming Deflationary Pressure on the Government

Keep reading this free report now.

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Jun 11

Bond Market Disaster Looming

Posted in Bond Market, Economy

A must-read FREE report for investors in fixed-income markets like Treasury bonds, municipal bonds or high-yield bonds
November 4, 2010

By Elliott Wave International

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 Next Major Disaster Developing for Bond Holders
(excerpt)

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. …

Annual Value of U.S. High-Yield Debt Issued

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…

Read the rest of this important report online now, free! Here’s what else you’ll learn:

  • How Investors Are Looking Past Red Flags in Muni Market
  • What You Should Know About Today’s “High-Grade” Bonds
  • The Answer To Bond Selection
  • MORE 
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