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Thursday, February 26, 2009
Saturday, February 21, 2009
The Last Bastion Against Deflation: The Federal Government
February 19, 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
Now that the downward portion of the credit cycle is firmly in force, further inflation is impossible. But there is one entity left that can try to stave off deflation: the federal government.
The ultimate source of all the bad credit in the U.S. financial system is Congress. Congress created the Federal Reserve System and many privileged lending corporations: Fannie Mae, Freddie Mac, Ginnie Mae, Sallie Mae, the Federal Housing Administration and the Federal Home Loan Banks, to name a few. The August issue [of The Elliott Wave Theorist] cited our estimate that the mortgage-encouraging entities that Congress created account for 75 percent of all U.S. debt creation with respect to housing. For investors in mortgage (in)securities, the ratio is even greater. Recent reports show that these agencies, which have been stealing people blind by taking interest for nothing, account for a stunning 82 percent of all securitized mortgage debt. Roughly speaking, the government directly encouraged the indebtedness of four out of five home-related borrowers. As noted in the August issue, it indirectly encouraged the rest through the Fed’s lending to banks and the FDIC’s guarantee of bank deposits. These policies allowed borrowers to drive up house prices to absurd levels, making them unaffordable to people who wanted to buy them with actual money. Proof that these mortgages are artificial and the product of something other than a free market is the fact that while Germany, for example, has issued mortgage-backed securities with a value equal to 0.2 percent of its annual GDP, the U.S. has issued them so ferociously that their value has reached 49.6 percent of annual GDP, a multiple of 250 times Germany’s rate, and that is not in total value but only in value relative to the U.S.’s much larger GDP. (Statistics courtesy of the British Treasury.)
Well, the ultimate source of this seemingly risk-free credit still exists, at least for now. When Bernanke & Co. met in the back rooms of the White House in recent weekends, he must have said this: “Boys, we’re nearly out of ammo. We have $400b. of credit left to lend, and we have two percentage points lower to go in interest rates. The only way to stave off deflation is for you to guarantee all the bad debts in the system.” So far, government has leapt to oblige. One of its representatives strode to the podium to declare that it would pledge the future production of the American taxpayer in order to trade, in essence, all the bad IOUs held by speculators in Fannie and Freddie’s mortgages for gilt-edged, freshly stamped U.S. Treasury bonds.
Now, what exactly does that mean for deflation? This latest extension of the decades-long debt-creation scheme has essentially exchanged bad IOUs for T-bonds. This move does not create inflation, but it is an attempt to stop deflation. Instead of becoming worthless wallpaper and 20-cents-on-the-dollar pieces of paper, these IOUs have, through the flap of a jaw, maintained their full, 100 percent liability. This means that the credit supply attending all these mortgages, which was in the process of collapsing, has ballooned right back up to its former level.
You might think this shift of liability is a magic potion to stave off deflation. But it’s not.
Believers in perpetual inflation will ask, “What’s to stop the U.S. government from simply adopting all bad debts, keeping the credit bubble inflated?” Answer: The U.S. government’s IOUs have a price, an interest rate and a safety rating. Just as mortgage prices, rates and safety ratings were under investors’ control, so they are for Treasuries. Remember when Bill Clinton became outraged when he found out that “a bunch of bond traders,” not politicians, determined the price of T-bonds and the interest rates that the government must charge? If investors begin to fear the government’s ability to pay interest and principal, they will move out of Treasuries the way they moved out of mortgages. The American financial system is too soaked with bad debt for a government bailout to work, and the market won’t let politicians get away with assuming all the bad debts. It may take some time for the market to figure out what to do about it, but as always, there is no such thing as a free lunch. The only question is who pays for it.
The Fed is nearly out of the picture, so the consortium of last resort, the federal government, is assuming the job of propping up the debt bubble. It is multiples bigger than any such entity that went before, because it can draw on the liquidity of American taxpayers and clandestinely steal value from American savers. So the question comes down to this: Will the public put up with more financial exploitation? To date, that’s exactly what it has done, but social mood has entered wave c of a Supercycle-degree decline, and voters are likely to become far less complacent, and more belligerent, than they have been for the past 76 years.
An early hint of the public’s reaction comes in the form of news reports. In my lifetime, I can hardly remember times when the media questioned benevolent-sounding actions of the government. Articles were always about who the action would “help.” But many commentators have more accurately reported on the latest bailout. USA Today’s headline reads, “Taxpayers take on trillions of risk.” (9/8) This headline is stunning because of its accuracy. When the government bailed out Chrysler, no newspaper ran an equally accurate headline saying, “Congress assures long-run bankruptcy for GM and Ford.” They all talked about why it was a good thing. This time, realism and skepticism (at a later stage of the cycle it will be cynicism and outrage) attend the bailout. The Wall Street Journal’s “Market Watch” reports an overwhelmingly negative response among emailers. Local newspapers’ “Letters” sections publish comments of dismay and even outrage. CNBC’s Mark Haines, in an interview on 9/8 with MSNBC, began by saying ironically, “Isn’t socialism great?” This breadth of disgust is new, and it’s a reflection of emerging negative social mood.
Social mood trends arise from mental states and lead to social actions and events. Deflation is a social event. Ultimately, social mood will determine whether deflation occurs or not. When voters become angry enough, Congressmen will stop flinging pork at all comers. Now the automakers want a bailout. Voters have remained complacent about it so far, but this benign attitude won’t last. The day the government capitulates and announces that it can’t bail out everyone is the day deflationary psychology will have won out.
……….
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.
* What happens during deflation?
* Can the Fed stop deflation?
* Why is deflation bad?
* Inflation vs. deflation
* And much more in Prechter’s FREE Deflation Survival Guide.
Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
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
Now that the downward portion of the credit cycle is firmly in force, further inflation is impossible. But there is one entity left that can try to stave off deflation: the federal government.
The ultimate source of all the bad credit in the U.S. financial system is Congress. Congress created the Federal Reserve System and many privileged lending corporations: Fannie Mae, Freddie Mac, Ginnie Mae, Sallie Mae, the Federal Housing Administration and the Federal Home Loan Banks, to name a few. The August issue [of The Elliott Wave Theorist] cited our estimate that the mortgage-encouraging entities that Congress created account for 75 percent of all U.S. debt creation with respect to housing. For investors in mortgage (in)securities, the ratio is even greater. Recent reports show that these agencies, which have been stealing people blind by taking interest for nothing, account for a stunning 82 percent of all securitized mortgage debt. Roughly speaking, the government directly encouraged the indebtedness of four out of five home-related borrowers. As noted in the August issue, it indirectly encouraged the rest through the Fed’s lending to banks and the FDIC’s guarantee of bank deposits. These policies allowed borrowers to drive up house prices to absurd levels, making them unaffordable to people who wanted to buy them with actual money. Proof that these mortgages are artificial and the product of something other than a free market is the fact that while Germany, for example, has issued mortgage-backed securities with a value equal to 0.2 percent of its annual GDP, the U.S. has issued them so ferociously that their value has reached 49.6 percent of annual GDP, a multiple of 250 times Germany’s rate, and that is not in total value but only in value relative to the U.S.’s much larger GDP. (Statistics courtesy of the British Treasury.)
Well, the ultimate source of this seemingly risk-free credit still exists, at least for now. When Bernanke & Co. met in the back rooms of the White House in recent weekends, he must have said this: “Boys, we’re nearly out of ammo. We have $400b. of credit left to lend, and we have two percentage points lower to go in interest rates. The only way to stave off deflation is for you to guarantee all the bad debts in the system.” So far, government has leapt to oblige. One of its representatives strode to the podium to declare that it would pledge the future production of the American taxpayer in order to trade, in essence, all the bad IOUs held by speculators in Fannie and Freddie’s mortgages for gilt-edged, freshly stamped U.S. Treasury bonds.
Now, what exactly does that mean for deflation? This latest extension of the decades-long debt-creation scheme has essentially exchanged bad IOUs for T-bonds. This move does not create inflation, but it is an attempt to stop deflation. Instead of becoming worthless wallpaper and 20-cents-on-the-dollar pieces of paper, these IOUs have, through the flap of a jaw, maintained their full, 100 percent liability. This means that the credit supply attending all these mortgages, which was in the process of collapsing, has ballooned right back up to its former level.
You might think this shift of liability is a magic potion to stave off deflation. But it’s not.
Believers in perpetual inflation will ask, “What’s to stop the U.S. government from simply adopting all bad debts, keeping the credit bubble inflated?” Answer: The U.S. government’s IOUs have a price, an interest rate and a safety rating. Just as mortgage prices, rates and safety ratings were under investors’ control, so they are for Treasuries. Remember when Bill Clinton became outraged when he found out that “a bunch of bond traders,” not politicians, determined the price of T-bonds and the interest rates that the government must charge? If investors begin to fear the government’s ability to pay interest and principal, they will move out of Treasuries the way they moved out of mortgages. The American financial system is too soaked with bad debt for a government bailout to work, and the market won’t let politicians get away with assuming all the bad debts. It may take some time for the market to figure out what to do about it, but as always, there is no such thing as a free lunch. The only question is who pays for it.
The Fed is nearly out of the picture, so the consortium of last resort, the federal government, is assuming the job of propping up the debt bubble. It is multiples bigger than any such entity that went before, because it can draw on the liquidity of American taxpayers and clandestinely steal value from American savers. So the question comes down to this: Will the public put up with more financial exploitation? To date, that’s exactly what it has done, but social mood has entered wave c of a Supercycle-degree decline, and voters are likely to become far less complacent, and more belligerent, than they have been for the past 76 years.
An early hint of the public’s reaction comes in the form of news reports. In my lifetime, I can hardly remember times when the media questioned benevolent-sounding actions of the government. Articles were always about who the action would “help.” But many commentators have more accurately reported on the latest bailout. USA Today’s headline reads, “Taxpayers take on trillions of risk.” (9/8) This headline is stunning because of its accuracy. When the government bailed out Chrysler, no newspaper ran an equally accurate headline saying, “Congress assures long-run bankruptcy for GM and Ford.” They all talked about why it was a good thing. This time, realism and skepticism (at a later stage of the cycle it will be cynicism and outrage) attend the bailout. The Wall Street Journal’s “Market Watch” reports an overwhelmingly negative response among emailers. Local newspapers’ “Letters” sections publish comments of dismay and even outrage. CNBC’s Mark Haines, in an interview on 9/8 with MSNBC, began by saying ironically, “Isn’t socialism great?” This breadth of disgust is new, and it’s a reflection of emerging negative social mood.
Social mood trends arise from mental states and lead to social actions and events. Deflation is a social event. Ultimately, social mood will determine whether deflation occurs or not. When voters become angry enough, Congressmen will stop flinging pork at all comers. Now the automakers want a bailout. Voters have remained complacent about it so far, but this benign attitude won’t last. The day the government capitulates and announces that it can’t bail out everyone is the day deflationary psychology will have won out.
……….
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.
* What happens during deflation?
* Can the Fed stop deflation?
* Why is deflation bad?
* Inflation vs. deflation
* And much more in Prechter’s FREE Deflation Survival Guide.
Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
Thursday, February 19, 2009
Tuesday, February 10, 2009
Dow Jones Industrial Average 1929, 1933, And Today
S&P 500 Index 3Day Candlestick Chart w/Linear Regression (click to enlarge)
Dow Jones Industrial Average 3Day Candlestick Chart w/Linear Regression (click to enlarge)
Dow Jones Industrial Average 3Day 1929-1930 (click to enlarge)
Dow Jones Industrial Average 3Day 1929-1933 (click to enlarge)
Picking bottoms is a losing game, there is a lot of talk of 800 on the S&P 500 as being support, but that is just a number and not a significant number mathematically. In the chart above showing the DOW-30 in 1930, there looked to be a bottom, but it was a false bottom. No matter what the government solutions and ideas that come in the coming weeks and days, it is going to time to build a base and most likely lower lows are ahead. With lower lows in equities, will come higher trades in bonds, which mean lower rates...this is what the government wants. Higher Bonds and Higher Equities is not in the cards at this time, one is going to win....Bonds first, then equities down the road.
Dow Jones Industrial Average 3Day Candlestick Chart w/Linear Regression (click to enlarge)
Dow Jones Industrial Average 3Day 1929-1930 (click to enlarge)
Dow Jones Industrial Average 3Day 1929-1933 (click to enlarge)
Picking bottoms is a losing game, there is a lot of talk of 800 on the S&P 500 as being support, but that is just a number and not a significant number mathematically. In the chart above showing the DOW-30 in 1930, there looked to be a bottom, but it was a false bottom. No matter what the government solutions and ideas that come in the coming weeks and days, it is going to time to build a base and most likely lower lows are ahead. With lower lows in equities, will come higher trades in bonds, which mean lower rates...this is what the government wants. Higher Bonds and Higher Equities is not in the cards at this time, one is going to win....Bonds first, then equities down the road.
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.
* What happens during deflation?
* Why is deflation bad?
* Effects of deflation
* Deflationary spiral
* And much more in Prechter’s FREE Deflation Survival Guide.
----------------------------------------------------------------
Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
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.
* What happens during deflation?
* Why is deflation bad?
* Effects of deflation
* Deflationary spiral
* And much more in Prechter’s FREE Deflation Survival Guide.
----------------------------------------------------------------
Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
Monday, February 9, 2009
February 9, 2009 S&P Mini Intraday Chart - Opening Range
S&P Emini 3minute Chart w/opening range and extensions (click to enlarge)
Sunday, February 8, 2009
Using Opening Ranges Intraday
The opening range concept mentioned in the previous few posts can also be used intraday. Below is a chart of the S&P 500 Emini futures. The opening range is calculated using the high and the low of the first 15minutes of the day. To calculate the extensions you simply add the range to the high for the first 15minues, and subtract the range from the low of the first 15minutes.
S&P 500 Index Emini Futures 2/4/09(click to enlarge)
On days when there is not a strong momentum trend, these levels act like targets and support and resistance. Almost like they are magnets that prices are pulled to, even if it is for a short time.
Below is a chart of the Five Year Treasury Note Futures, again the prices seemed to be attracted to these levels.
5 Year Treasury Note Futures 2/4/09 (click to enlarge)
S&P 500 Index Emini Futures 2/4/09(click to enlarge)
On days when there is not a strong momentum trend, these levels act like targets and support and resistance. Almost like they are magnets that prices are pulled to, even if it is for a short time.
Below is a chart of the Five Year Treasury Note Futures, again the prices seemed to be attracted to these levels.
5 Year Treasury Note Futures 2/4/09 (click to enlarge)
Opening Range with Linear Regressions
The chart below is of the S&P 500 Index and has two sets of lines. The horizontal lines represent the opening range and its extension levels. The black lines define the opening range and the two red lines mark extensions off of this range. Once the market traded below the bottom of the opening range black line, the next target was one level down, the first red line. As the 800 level held, the market then tested this line a few times, and like last Friday, had a rally above it.
The downward sloping lines from left to right are the linear regression line and the corresponding standard deviations from this linear regression. Friday morning was an important morning in that the Unemployment Number was to be released at 8:30am eastern time. It was also important technically because the prices Thursday closed right that both the linear regression line and the first extension off of the opening range. Any trading above these lines accompanied by even the smallest amount of momentum, would lead to a strong short-covering rally and higher prices. The overall volume for the day was not very strong, so look for a choppy market next week. If Congress passes a stimulus bill, look for an opportunity to take profits on any rally and/or get short. Support should be around 840 for now, and resistance will be the lower part of the opening range, 890.
S&P 500 Index Futures Opening Range + Linear Regression (click to enlarge)
It is important to keep a longer term perspective and not get caught up in the hype of 200pt up days on the Dow 30. It seems like every positive day, experts on TV come out to say this is the start of the new bull market. Below is a chart of the S&P 500 Index. It is not a daily chart, but a three-day chart. Each candle represents 3 trading days. It clearly shows how small the rally was Friday in the big picture. It does also show that 800 looks to be holding strong, only time will tell how strong that 800 number is.
S&P 500 Index 3-Day Chart (click to enlarge)
The downward sloping lines from left to right are the linear regression line and the corresponding standard deviations from this linear regression. Friday morning was an important morning in that the Unemployment Number was to be released at 8:30am eastern time. It was also important technically because the prices Thursday closed right that both the linear regression line and the first extension off of the opening range. Any trading above these lines accompanied by even the smallest amount of momentum, would lead to a strong short-covering rally and higher prices. The overall volume for the day was not very strong, so look for a choppy market next week. If Congress passes a stimulus bill, look for an opportunity to take profits on any rally and/or get short. Support should be around 840 for now, and resistance will be the lower part of the opening range, 890.
S&P 500 Index Futures Opening Range + Linear Regression (click to enlarge)
It is important to keep a longer term perspective and not get caught up in the hype of 200pt up days on the Dow 30. It seems like every positive day, experts on TV come out to say this is the start of the new bull market. Below is a chart of the S&P 500 Index. It is not a daily chart, but a three-day chart. Each candle represents 3 trading days. It clearly shows how small the rally was Friday in the big picture. It does also show that 800 looks to be holding strong, only time will tell how strong that 800 number is.
S&P 500 Index 3-Day Chart (click to enlarge)
Saturday, February 7, 2009
S&P 500 Index 2009
S&P 500 Index Opening Range Extensions 2009(click to enlarge)
S&P 500 Index % Stocks Above 40 Day Moving Average (click to enlarge)
After a 200+ up day on the DOW, it is amazing how all the "experts" on television begin talking about the next rally. It was not that long ago that the DOW moved 500 points in the last hour of trading, so it is important to keep things in perspective. There is still a lot of overhead resistance and no sign of up-days with significantly stronger volume.
On a percentage basis it is easy for Bank Of America and some of the regional banks to have incredible days, but that is only because they have fallen so far. Monday should be a key day. The Congress should have made some progress on what ever stimulus package they are going to pass, but more importantly the Treasury is going to explain its plan for the "Bad Bank" that will take on the rotten financial instruments that are causing so many problems. It will be important to follow the specifics of this plan. Chances are the plan that is introduced Monday will evolve over the coming days and weeks. The problem is still what to pay these banks for these assets.
One idea would be to take 180Billion out of the remaining Tarp pool, and start this "Bad Bank". With this starting capital, the bank could then additionally sell a type of preferred stock or bonds based on the initial capital and the questionable assets they will take on. This would give it a multiplier effect, and not limit the bank to the original investment from TARP.
Another factor that should be considered, is not to pay these banks for these assets, but to give them an equity stake in this "Bad Bank". They could claim this stake as an asset, and receive interest payments if it is structured as a type of preferred share. This would not give the banks the raw capital that some of them need to meet the re-lending requirement being put on them by the government, but it would give them a stake in the proceeds along with the tax payers who are fitting the bill. When was the last time the interests were aligned between investors and company in the banking industry?
Hopefully the "Bad Bank" will be structured to where the tax payers are not taking all the risk for an inappropriate percentage of the reward. If this deals starts to sound like the picture below, watch out for new lows in the market.
CEO of the Bad Bank...or maybe the new spokesperson for Citigroup?
***Update***
Geithner Delays Bank-Rescue Speech to Keep Focus on Stimulus
Feb. 8 (Bloomberg) -- Treasury Secretary Timothy Geithner postponed his unveiling of the administration’s plan to shore up the financial industry as officials focus on getting approval for their separate economic stimulus plan in the Senate.
Tuesday????
--------------
The final installment of Elliott Wave International’s expansive NEW Deflation Survival eBook is online now. The free 60-page eBook is packed with Robert Prechter's most important teachings and warnings about deflation. This is one of the most valuable resources EWI has ever offered at no cost. Learn more below or download it now – for free.
S&P 500 Index % Stocks Above 40 Day Moving Average (click to enlarge)
After a 200+ up day on the DOW, it is amazing how all the "experts" on television begin talking about the next rally. It was not that long ago that the DOW moved 500 points in the last hour of trading, so it is important to keep things in perspective. There is still a lot of overhead resistance and no sign of up-days with significantly stronger volume.
On a percentage basis it is easy for Bank Of America and some of the regional banks to have incredible days, but that is only because they have fallen so far. Monday should be a key day. The Congress should have made some progress on what ever stimulus package they are going to pass, but more importantly the Treasury is going to explain its plan for the "Bad Bank" that will take on the rotten financial instruments that are causing so many problems. It will be important to follow the specifics of this plan. Chances are the plan that is introduced Monday will evolve over the coming days and weeks. The problem is still what to pay these banks for these assets.
One idea would be to take 180Billion out of the remaining Tarp pool, and start this "Bad Bank". With this starting capital, the bank could then additionally sell a type of preferred stock or bonds based on the initial capital and the questionable assets they will take on. This would give it a multiplier effect, and not limit the bank to the original investment from TARP.
Another factor that should be considered, is not to pay these banks for these assets, but to give them an equity stake in this "Bad Bank". They could claim this stake as an asset, and receive interest payments if it is structured as a type of preferred share. This would not give the banks the raw capital that some of them need to meet the re-lending requirement being put on them by the government, but it would give them a stake in the proceeds along with the tax payers who are fitting the bill. When was the last time the interests were aligned between investors and company in the banking industry?
Hopefully the "Bad Bank" will be structured to where the tax payers are not taking all the risk for an inappropriate percentage of the reward. If this deals starts to sound like the picture below, watch out for new lows in the market.
CEO of the Bad Bank...or maybe the new spokesperson for Citigroup?
***Update***
Geithner Delays Bank-Rescue Speech to Keep Focus on Stimulus
Feb. 8 (Bloomberg) -- Treasury Secretary Timothy Geithner postponed his unveiling of the administration’s plan to shore up the financial industry as officials focus on getting approval for their separate economic stimulus plan in the Senate.
Tuesday????
--------------
The final installment of Elliott Wave International’s expansive NEW Deflation Survival eBook is online now. The free 60-page eBook is packed with Robert Prechter's most important teachings and warnings about deflation. This is one of the most valuable resources EWI has ever offered at no cost. Learn more below or download it now – for free.
Friday, February 6, 2009
NDX 100 2009
Nasdaq 100 Index Opening Range Extensions 2009 (click to enlarge)
Some of the stronger component subgroups in technology.
SMH Semiconductor Holders Trust (click to enlarge)
BBH Biotech Holders Trust (click to enlarge)
Below are a couple of charts showing that it is possible to trade above the opening range.
GS Goldman Sachs 2009 Opening Range (click to enlarge)
U.S. Dollar Index 2009 Opening Range (click to enlarge)
Some of the stronger component subgroups in technology.
SMH Semiconductor Holders Trust (click to enlarge)
BBH Biotech Holders Trust (click to enlarge)
Below are a couple of charts showing that it is possible to trade above the opening range.
GS Goldman Sachs 2009 Opening Range (click to enlarge)
U.S. Dollar Index 2009 Opening Range (click to enlarge)
Monday, February 2, 2009
Free Report
Download The Most Important Investment Report You'll Read in 2009 - It's Free!
Do you know what to expect from the markets in 2009? Are you prepared to take advantage of the opportunities – and avoid the dangerous pitfalls – that you will face this year?
Elliott Wave International, the world’s largest market forecasting firm, has just released a free report that can help.
“The Most Important Investment Report You’ll Read in 2009” gives you valuable, independent forecasts of stocks, bonds, metals, the U.S. dollar and economic trends that you can act on —not the conventional “connect-the-dots” analysis that does you no good. You’ll get hard facts, eye-opening charts, and straight-forward commentary to help you navigate the current market turmoil.
Elliott Wave International subscribers pay $19 a month to access this information in the Elliott Wave Financial Forecast and consider it a bargain. But for a limited time you can read the full 10-page issue, FREE.
Don't delay. Your portfolio cannot afford to be without these valuable market insights.
Click Here to Get Your Free Report
------------------------------------
About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.
Do you know what to expect from the markets in 2009? Are you prepared to take advantage of the opportunities – and avoid the dangerous pitfalls – that you will face this year?
Elliott Wave International, the world’s largest market forecasting firm, has just released a free report that can help.
“The Most Important Investment Report You’ll Read in 2009” gives you valuable, independent forecasts of stocks, bonds, metals, the U.S. dollar and economic trends that you can act on —not the conventional “connect-the-dots” analysis that does you no good. You’ll get hard facts, eye-opening charts, and straight-forward commentary to help you navigate the current market turmoil.
Elliott Wave International subscribers pay $19 a month to access this information in the Elliott Wave Financial Forecast and consider it a bargain. But for a limited time you can read the full 10-page issue, FREE.
Don't delay. Your portfolio cannot afford to be without these valuable market insights.
Click Here to Get Your Free Report
------------------------------------
About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.
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