Wednesday, June 29, 2011

Update on DJIA and Crude Oil

We have started a counter-trend rally in the stock market and Crude Oil, but we are still seeing exhaustion signs in the economy and job market as consumer confidence declined further last month to 58.5 and jobless claims (4-week moving average) continues to stay above 400,000. A retracement of the declines that have unfolded over the last 8 weeks was fully expected as a bullish divergence started unfolding in both the RSI and the MACD, and a rally indeed started on Monday.

We start with crude oil. The decline from the top is still consistent with a leading diagonal, but the initial decline took longer than expected. Here is the intermediate term chart showing where crude oil may be going next.

The duration of the decline from the peak, as well as the presence of a triangle, is indicative that the initial decline is Minor wave 1 down. A three wave initial decline from the top with a triangle for wave B points to a leading diagonal for Intermediate wave (1) down. We are on Minor wave 2 up, which should retrace 66% to 81% of Minor wave 1, which points to an upside target of $108 a barrel to be reached in early August 2011. We are also on course for Intermediate wave (1) to last a Fibonacci 8 months with a downside target of $76 a barrel to be reached around February 2012.

The socionomic indicators are still consistent with Primary wave [3] down in progress for crude oil. The Obama Administration is no longer putting pressure on Big Oil. This reprieve will likely be temporary, as it is possible that the Obama Administration will put pressure on Big Oil once again as gas prices at the pump and crude oil climb again. There are already indications of possible future actions by the Obama Administration on the issue, with the tapping of the Strategic Petroleum Reserve on June 23, 2011 in which 60 million barrels of oil were released (the United States contributed 30 million of the total) with a possibility of further action in the future. This is something to keep an eye on in the intermediate term future.

Now a look at the DJIA. We are now in the midst of a counter-trend rally within a larger-term decline. Here is a chart of the DJIA updating our current position and the intermediate term outlook.

First is the wave count within Primary wave [2] up. The bear market rally unfolded as a zigzag with the peak in early May 2011. Shown on the chart is Intermediate wave (C) of the bear market rally, which can now be characterized as a five wave advance. Within the Intermediate degree advance, Minor wave 1 unfolded as a leading diagonal, Minor wave 2 unfolded as a zigzag, Minor wave 3 unfolded as an extended five wave impulse, Minor wave 4 unfolded as a running flat (thereby satisfying the guideline of alternation), and Minor wave 5 unfolded as a brief impulse. Notice that the entire advance is contained within the trend channels associated with Intermediate wave (C).

The lower trend channel associated with Intermediate wave (C) was breached to the downside in early June 2011, indicating a trend change and the start of Primary wave [3] down. The DJIA may be on course to backtest the lower trend channel in the near future.

Here is a chart showing the close-up of the decline from the peak and the short term outlook.

As the chart shows, a short term rally has started. The decline from early May 2011 to late June 2011 is best labeled as Minute wave [i] down. The initial decline is actually a five wave structure. A close-up of Minuette wave (v) actually shows it to be a five wave impulse in the DJIA, S&P 500, and the Wilshire 5000. Minute wave [ii] is in progress and is expected to last around 4 weeks with an upside target of 12500 on the DJIA and 1239 on the S&P 500, both to be reached around July 25, 2011. The targets represent a 61.8% retracement of Minute wave [i].

After Minute wave [ii] up ends, the decline will resume with a downside target of 10125 for Minor wave 1. Previously, Minor wave 1 down was predicted to last 3 months and take the DJIA down to 9500. As the longer term projection of the DJIA indicates, Minor wave 1 down is on course to last 5.5 months, which again is consistent with a 5 year duration for Primary wave [3] down.

The socionomic indicators are consistent with Primary wave [3] down in progress. Here is a list of developments that have unfolded since early May 2011:

1 -- Exhaustion in the job market and the economy. The economy created only 54,000 jobs in May 2011. Consumer confidence is falling with the most recent reading at 58. Manufacturing is down. Jobless claims continue to stay above 400,000 week after week. The exhaustion signs are being attributed as "bumps in the road" by economists and politicians, which is consistent with the "Slope of Hope" phase in the bear market.

2 -- Epidemic of cyber attacks, which started in early May 2011. The timeline is here. This development is associated with an increasingly bearish social mood.

3 -- Increasing authoritarianism at the state level, especially in the red states. Since the start of Primary wave [3] down, the GOP has been more aggressive in passing legislation aimed at busting unions, voter suppression, tough immigration laws, and curbing abortion (going as far as defunding Planned Parenthood). The trend of increasing authoritarianism is consistent with a bearish social mood.

4 -- Outbreak of protests in Michigan, Indiana, Wisconsin, New Jersey, and Florida over collective bargaining rights and unions under attack.

5 -- The resurgence of the Tea Party with the rise of Michele Bachmann in the polls in Iowa, the decline of Obama's approval rating, and the decline of Mitt Romney in the polls in Iowa and South Carolina.

6 -- Disappointing performances for Kung Fu Panda 2 and Cars 2. Disney, Pixar, and Dreamworks are all bull market franchises. The horror movie Insidious performed stronger than expected and displayed surprising staying power in theaters. We are in a transitional stage where bull market movies are falling out of favor while horror movies are finding increased success.

Monday, June 27, 2011

Tea Party Resurgence

As another indication of the larger bear market trend back in force, we are seeing a resurgence of the Tea Party in the political arena. In the last several weeks, we have seen Sarah Palin's approval rating bottom and start rising again while Obama's approval rating falls after the bin Laden bounce evaporated.

During the bear market rally that unfolded from March 2009 to May 2011, Obama's approval rating held steady at around 50% while Sarah Palin's approval rating continued to fall. With the advent of Primary wave [3] down, the trends have changed with the Tea Party starting its second resurgence and Obama's approval rating on the decline.

A recent development is the surge of Michele Bachmann in the polls as she is now even with Mitt Romney in Iowa. Today, Michele Bachmann announced her candidacy for President in Iowa. The development is indicative of a declining social mood within the larger bear market trend. This is yet another precursor of the coming Palin Administration Period as Michele Bachmann is a strong proponent of the Tea Party.

Although Mitt Romney is the presumed GOP frontrunner now, increasing polarization in the political arena will change the picture. Mitt Romney will be seen as "Obama-like" by the Republican Party, and the recent term "Obamneycare" coined by Tim Pawlenty underscores that trend. Mitt Romney will probably win New Hampshire and Nevada in the early part of the Republican Primary, but he is already losing ground in Iowa and South Carolina. Expect either Tim Pawlenty or Michele Bachmann to win the Republican nomination.

The Tea Party is already starting to regain steam, as evidenced by Michele Bachmann's rise in the Iowa polls. This trend is just getting started. This is a precursor to what will characterize Primary wave [5] down : The Palin Administration Period from 2017 to 2021 as the worst of "The Great Deflation" unfolds in full force.

Friday, June 24, 2011

Debt Fault Lines Going Critical

As the next leg down in the larger bear market trend continues to unfold, we are seeing hints in both Europe and the United States that some debt fault lines are about to go critical, sending shockwaves through the global economy and setting off a chain reaction of defaults.

The latest developments continue on the theme that we are in a period comparable to the "Crisis of the Roman Republic". The period that we are in, identified as Grand Supercycle wave [IV], is a magnitude more severe than the Great Depression, is still in its early stages in spite of starting back in 2000.

In the last few days, Greece has been flaring up with massive social unrest as the nation goes on the brink of a default in spite of receiving a bailout last year. After surviving a confidence vote a couple of days ago, the nation's parliament is in the midst of passing a second round of austerity measures in order to get the bailout money. Earlier today, Germany walked out of the bailout deal, making a Greek bailout more problematic. There are already a number of analysts that realize that a Greek default is inevitable.

There are a number of nations in Europe that are facing a debt crisis of their own. Greece is in the worst shape, but Portugal, Ireland, Spain, Italy, and even Britain are riddled full of debt fault lines.

Not only is Europe riddled full of fault lines, but the United States is riddled full of fault lines as well. A number of states are on the verge of defaulting on their debts with Illinois, California, New Jersey, Pennsylvania, and Texas in the worst shape. A default by any one of the states will have a ripple effect that reverberates throughout the entire nation in the form of a chain reaction of defaults. The latest news on this front is from New Jersey as Gov. Chris Christie is poised to sign the union busting bill into law. As with Greece, the austerity measures that are poised to become law in New Jersey has resulted in mass protests as people take to the streets.

At the federal level, the debt ceiling has been turned into a political football. As predicted back in early May 2011, the game of chicken involving the debt ceiling has indeed unfolded like a hardcore suspense movie that has even made people in high places very nervous as evidenced by frantic lobbying by the US Chamber of Commerce and by virtually all of the banks. Just today, Rep. Eric Cantor walked out of the "Gang of Six" debt ceiling talks. So far, both President Obama and House Speaker Boehner have drawn a line in the sand in terms of what wont get cut from federal spending, and neither is willing to give ground.

In the near term, expect the game of chicken on the debt ceiling to continue for at least several more weeks, possibly until we get very close to the Aug 2, 2011 deadline, before the GOP and the Democrats finally reach a compromise (very reluctantly, I would add) and raise the debt ceiling.

On the longer term, expect the fault lines in both Europe and the United States to eventually go critical. In Europe, the nations to keep an eye on are Greece, Portugal, Ireland, Spain, Italy, and Britain. In the United States, the states to keep an eye on are Illinois, California, New Jersey, Pennsylvania, and Texas. One of those fault lines is close to going critical.

A debt crisis on both sides of the Atlantic underscores one of the reasons why I refer to the current bear market period as the "Crisis of the Western World". Deflation is already beginning to unfold in full force.

Thursday, June 23, 2011

The Fall of Heroes

There is another social trend that has been unfolding in the last several months, which again indicates that we are in a bear market. This has to do with the correlation between the stock market and people's perception of "good vs evil." that was uncovered a number of years back.

Social mood apparently plays a role on the perception of "good vs evil" as follows:

Bull market trend -- Good guys vs bad guys, heroes are celebrated.
Peak of bull market -- Everyone is a good guy
Bear market trend -- There are no good guys or bad guys. Heroes are trashed. Anti-heroes are embraced.
Bear market bottom -- Everyone is a bad guy

The place where this trend is most apparent is the movie industry. Just this year alone, Thor, X-Men: First Class, and now Green Lantern, all amounted to box office disappointments. Although the movie industry is declining in general, the disappointing debuts of this year's superhero movies, then much larger drops in subsequent weekends, are all indicative of declining social mood as the larger bear market trend resumes with the advent of Primary wave [3] down. This trend is already being noticed by movie pundits, as evidenced by the recent article on Box Office Mojo.

In contrast, Spider-Man 2, and Spider-Man 3 both came out during Cycle wave b (2003 - 2007), a blow-off top in social mood. Both movies scored large opening weekends and large domestic grosses. Even Iron Man 2, which came out last year during the second half of Primary wave [2] up, scored well with the movie going audience. Iron Man and The Dark Knight both came out in 2008 when social mood was still at very high levels, although The Dark Knight managed to blur the lines between hero and anti-hero to a large extent.

In a stunning development that made the news a couple of days ago, Spider Man is going to be killed off. There is more information about the development here. From a socionomic perspective, this is a very big deal. Killing off a major character was considered unthinkable. Spider Man debuted in 1962. Over many years, the iconic character weathered through the major recession of 1966 - 1974, the recession of 1977 - 1982, and the recession of 1990 - 1991. This development underscores the larger social trend at work, namely, the trashing of heroes and the embracing of anti-heroes.

In the near term, expect movies that feature superheroes to continue to disappoint at the box office. By 2012, social mood is expected to decline to a sufficient extent that movies featuring superheroes will possibly outright bomb, not just disappoint. Expect movies featuring anti-heroes, such as pirates, to find increased success at the box office starting next year.

Saturday, June 18, 2011

State Level Authoritarianism

The next leg down in social mood is now in progress, and we are already seeing the effects of declining social mood in the political arena. As expected, we have been seeing an increase in authoritarianism in the red states. As we go deeper into Primary wave [3] down, the trend of increasing authoritarianism is expected to accelerate over time, especially in the red states. There are a number of areas that I will discuss here as they are all pertinent to the larger picture of increasing authoritarianism at the state level in the United States.

Union busting legislation

A number of states have taken up an agenda of busting unions and stripping away collective bargaining rights. This trend has been unfolding for several months, starting with Wisconsin. This was followed by Michigan, Indiana, Ohio, Florida, New Jersey, and most recently, Maine. This is also part of a larger picture of austerity measures being undertaken at the state level as tax revenue dries up as the bear market continues to unfold.

So far, Michigan has gone farther than any other state in this area with Gov. Rick Snyder and the GOP controlled state legislature not only passing legislation that strips collective bargaining rights, but also greatly expanded the powers of emergency financial managers.

Most recently, the Wisconsin Supreme Court ruled in favor of the union stripping bill authored by Gov. Scott Walker, saying that the law can go into effect. The ruling resulted in massive protests at the state capital. In New Jersey, Gov. Chris Christie is pushing for an anti-union bill that will restrict collective bargaining rights, which is already sparking protests in that state.

Voter suppression legislation

A large number of states have already undertaken legislation aimed at voter suppression under the pretense of stopping voter fraud. This is unfolding most strongly in red states, but even purple states are going in that direction as well.

The most common form that the voter suppression efforts have unfolded is the addition of an ID requirement to be able to vote. It didn't stop there as a number of states have also excluded college IDs as a valid ID. Some states, such as Kansas, are even going as far a requiring a birth certificate to vote.

Much of the information on the voter suppression developments has come from the Rachel Maddow Show, as well as the Maddow Blog. The full information about the voter suppression trend can be found here.

The trend started in 2008 with Indiana passing a law requiring IDs for voting. The law was challenged in court and ended with the US Supreme Court upholding the law. With Primary wave [3] down in progress, this trend is accelerating as social mood trends downward. Voter suppression is considered a form of increasing authoritarianism as it represents a social trend in the direction away from democracy. Expect this trend to accelerate in the months and years ahead.

Anti-abortion legislation

This trend has been unfolding at a very fast clip. In the last several months, a number of states, mostly those controlled by the GOP, have been passing legislation aimed at restricting access to abortion and family planning. So far, thirteen states block abortion coverage in their public health care systems, several states passed laws requiring ultrasounds, several states passed laws increasing the waiting period, with South Dakota being the most extreme case with a 72 hour waiting period, and three states -- Indiana, Kansas, and North Carolina -- have defunded Planned Parenthood. Most recently, Louisiana introduced a "person-hood" bill that would effectively outlaw abortion altogether.

This development all comes down to what is really at the core of this social trend -- desiring power over people -- which is again characteristic of bear markets. Expect this trend to intensify in the months and years ahead, with more and more states going as far as defunding Planned Parenthood.

We are about a month and a half into Primary wave [3] down in social mood, and we are already seeing the effects of declining social mood in the political arena. As we go deeper into Primary wave [3] down, we will see an acceleration of increasing authoritarianism at the state level, especially in the red states.

Wednesday, June 15, 2011

The Great Deflation in Housing

For the last several days, there has been talk in the media about the decline of the housing market and how it is now worse than the decline that took place during the Great Depression. The latest article from CNBC is here. Yet, for all the decline that has taken place since the bursting of the housing bubble in 2005, we are still seeing calls for a bottom and recovery.

We didn't have a double dip in the housing market with a temporary bounce that was mostly fueled by the home buyer tax credit that was passes by the Obama Administration in February 2009 as part of the $787 billion stimulus package. The bounce would actually be characterized as a bear market rally within a larger downtrend. The bounce has since been fully retraced and a resumption of the larger downtrend is unfolding.

The long bear market in housing is a strong argument against the idea of a "Great Recession" that ended in 2009. The bear market is unfolding not only in the form of falling home prices, but also in the form of rising foreclosure rates that continue unabated.

The reason why we still see calls for a bottom in housing is that the housing market is sliding down the "Slope of Hope", in other words, the bear market in housing is still in its early stages and is just getting started. The deflationary collapse in the housing market is part of a larger picture, that is, we are in a major depression.

Expect the housing market to continue collapsing as "The Great Deflation" begins to unfold in full force. The consequence of a collapsing housing market is that by the time the bottom is reached in 2021, virtually every home owner with a mortgage debt will be miles underwater on their mortgages. Expect at least a 90% decline in house prices during the course of "The Great Deflation", which would take house prices down to levels not seen since 1960.

By the time the deflationary collapse of the housing market is done in 2021, entire neighborhoods are going to look a lot like the abandoned city scenes from the movie I Am Legend with bushes, weeds, and trees reclaiming homes that fall into foreclosure.

For those who are able to make it through "The Great Deflation" without getting financially wiped out, there will be an unprecedented buying opportunity that will make it possible to buy a high-end house for cheap.

Saturday, June 11, 2011

The Next Leg Down

We now have confirmation that the next leg down, Primary wave [3] down, has begun. This means that the bear market rally that had been unfolding for the last 2 years has ended, and we are seeing a resumption of the larger downtrend.

Back in early April 2011, I had predicted how Primary wave [3] down would unfold once the bear market rally ended. The posts can be found here: Part 1, Part 2, Part 3.

First is a chart of the last 2 1/2 years, showing the bear market rally:

Notice the trend line break in early June 2011. Trend channels are an integral part of technical analysis, and they generally define a region where an advance or decline takes place. In the case of a 3 wave advance, the lower trend channel starts at the beginning of the advance (which would be the March 2009 low in this case) and continues through the low point of either wave B or wave X within a larger advance. Notice that the lower trend channel associated with Primary wave [2] up acted as support with the trend line touched in Sept 2010, Mar 2011, and May 2011, before finally breaking down in early June 2011.

The significance of the trend line breach is enormous. It is indicative of a trend change from up to down at Primary degree in the stock market, and within a short time, in the economy and job market as well.

Here is a chart of the DJIA, showing a close-up of the decline from the peak.

Notice that the initial decline from the top started with a leading diagonal for Minute wave [i]. This was followed by a 50% retracement of the initial decline in Minute wave [ii]. After the upward move, downward movement resumed, going through the lower trend channel associated with Primary wave [2] in the process. The most likely scenario in the short term is Minute wave [iii] unfolding as an extended third wave.

The decline from the peak that has unfolded so far point to a 5 year duration for Primary wave [3] down, with the low point around May 2016.

The hard times that unfolded during the period that people identify as the "Great Recession" is a teaser-trailer preview of the hard times that will come during Primary wave [3] down. The last decline, Primary wave [1] down, which people identify as the "Great Recession" was a moderate strength downward impulse. The next leg down, Primary wave [3], down, which will last 5 years, will be a very strong downward impulse.

I'll summarize some of the expectations for Primary wave [3] down:

Stock market, economy, and job market

1 -- The DJIA will fall to around 2200 by the end of the period. The S&P 500 will fall to around 220 by the end of the period.
2 -- October 2013 will be a Cycle degree "point of recognition", which is the center of Primary wave [3] down. This will be characterized by "The Great Panic of 2013" which will be a magnitude larger than the "Panic of 2008".
3 -- The center of Primary wave [3] down will be characterized by large scale bank runs. The Obama Administration will respond be declaring a "bank holiday".
4 -- Upon reaching the center of Primary wave [3] down, economists and analysts will realize that a major depression is in progress.
5 -- The economy will wipe out 36 million jobs in the United States, pushing the unemployment rate (U6) to 40% by the end of the period.
6 -- Deflation will unfold in full force.
7 -- The last of the family wage jobs will be purged by 2015.
8 -- Nominal GDP will fall faster than gold.
9 -- Rising interest rates will cause a massive cascade of debt defaults, causing businesses and corporations to fold. This will result in rapidly rising unemployment.
10 -- Health insurance premiums and college tuition will go parabolic.
11 -- A bull market in the US Dollar will unfold.


1 -- The GOP will continue to accelerate farther to the right.
2 -- Government shutdowns with a multi-month duration will unfold in the political arena starting in 2012.
3 -- The trend towards increasing authoritarianism will accelerate at the state level, especially in states controlled by the GOP.
4 -- Obama's approval rating will decline, reaching a low of 4% by 2016.
5 -- The Tea Party will increase in size and influence. Sarah Palin's political influence will increase as magical thinking becomes more widespread.
6 -- Obama will win the 2012 election by a narrow margin. Republicans retake the Senate and increase their majority in the House. (Alternate scenario -- Obama wins by a landslide and the Democratic Party has a large majority in the House and Senate. This could happen if Medicare is the top voter issue).
7 -- The United States defaults on its debt in 2014 due to rising interest rates making the existing debt too heavy of a burden to bear.
8 -- Extended unemployment benefits will not continue beyond the end of 2011.

Social Trends

1 -- The movie industry will continue to decline. Opening weekends for event movies will fall to $25 million (domestic) by the end of the period. This trend will be driven by wage deflation and rising unemployment.
2 -- Horror movies will over-perform relative to other genres with increasing frequency.
3 -- Hard rock music, such as music that dominated the charts in the early 1970s, will become more popular.
4 -- Bright colors will increasingly go out of style.
5 -- Racial and religious tensions will become more explosive over time.
6 -- By the end of 2011, the majority of Christians will embrace the "2012 Nibiru the world is coming to an end" meme.
7 -- Protests such as those that took place in Wisconsin in March 2011, will increase in size and extent as attacks against collective bargaining rights, abortion rights, unionization, Medicare, Social Security, and unemployment benefits escalate.

The next leg down is upon us. As Primary wave [3] down unfolds in the coming months and years, we will be faced with hard times and come under severe testing. "The Great Deflation" is now starting to unfold in full force.

Tuesday, June 7, 2011

Job Market Fundamentals

Last Friday, the latest job report showed that the US economy created only 54000 jobs in May 2011. This report obviously sent shock waves throughout the media. It is worth noting that 62000 of those jobs were created by McDonalds.

Combine the data with the trend of rising jobless claims (which bottomed in late April 2011 at 393000, 4 week moving average), falling consumer confidence, and the latest poll showing that 57% think the recovery hasn't started yet, and we see a strong indication that the bear market rally in the job market is getting exhausted. With the May 2011 numbers, the economy has created around 1.8 million jobs starting in January 2010 -- close to a 23.6% fibonacci retracement of the 8.4 million jobs that were lost from 2007 - 2009.

Before I go into forecasting the future of the job market, I'll bring up a historical perspective of the job market starting from the lows of the Great Depression in 1932. The easiest way to look at the strength of job market fundamentals is to look at it from the perspective of how easy or hard it is for people to support a family. It turns out that the difficulty level of raising a family is related to where we are in the Elliott Wave sequence. This all comes back to the fact that the job market follows the stock market.

1932 - 1937, Cycle wave I

"First waves in bull markets are seen as a recognition of survival and a new beginning."

During this time, the New Deal was unfolding as the FDR Administration launched a number of large scale initiatives aimed at putting people back to work. The FDR Administration passed the Fair Labor Standard Act (which sets a minimum wage at the federal level), the Glass-Steagall Act (increased regulation on banks), raised taxes on the rich and upper class, and implemented Social Security.

Job market fundamentals increased during this period. The chasm between the rich and middle class steadily narrowed over time due to tax hikes on the wealthy and the creation of unions that gave people increased bargaining power. The middle class grew stronger during this period. Living wage and family wage jobs increased in abundance during this period.

1942 - 1966, Cycle wave III

"Third waves in bull markets are characterized by breadth and strong momentum."

During this period, unions were strong and the middle class prospered. During this time, there was a strong productive capacity and many participated in the benefits of economic growth. Family wage jobs were abundant during that time and it was relatively easy to support a family. The chasm between the rich and the middle class remained constant with CEO's making around 40 times the wage of the typical worker. During this period, tax rates on the upper class and the rich went as high as 91%, which created a strong incentive for corporations and businesses to reinvest most of their profits into infrastructure.

The middle class peaked in 1966. The poverty rate in the United States reached its lowest point during the end of this period.

1974 - 2000, Cycle wave V

"Fifth waves in bull markets are less dynamic than third waves and are characterized by decreasing breadth and momentum over time. Optimism reaches lofty levels."

The early phase of this period is easily associated with the advent of "trickle down economics" and "voodoo economics" during the Reagan Administration Period. The first tax cuts for the rich and upper class were passed during the Reagan Administration Period in 1981. In the years that followed, more tax cuts were implemented in 2000 and 2001 during the Bush 43 Administration Period. Unions were steadily weakened and the Glass-Steagall Act was repealed in 1999. The implementation of NAFTA in 1994 opened the door for corporations to outsource jobs to low wage nations on the globe.

During the early part of the period (1974 - 1987), it was still easy to support a family. As the period progressed, job market fundamentals weakened as creation of family wage jobs slowed. The chasm between the middle class and the rich steadily widened, with CEO's making 300 times the wage of the typical worker by 2000. By 1994, it became much harder to support a family and it became necessary for both parents to work to make ends meet. Living wage jobs continued to be abundant during this period.

This was a time where people focused on finance to get rich, with a much smaller number of people benefiting from economic growth.

In 2000, we ended a Grand Supercycle degree advance, ushering in a major depression in the economy.

The first phase of the major depression is "The Great Deflation", which is mostly characterized as a severe deflationary collapse in the economy. "The Great Deflation" is associated with Supercycle wave (a) and spans from 2000 to 2021.

2000 - 2002, Cycle wave a

The economy stopped creating family wage jobs in 2000. This represents the first leg down in the massive bear market. This period heralds the start of a 300 year event (by comparison, the Great Depression is a 75 year event), a Grand Supercycle degree bear market and its associated economic decline, classified as a major depression.

The dot-com bubble imploded during this period, which helped stop the creation of family wage jobs.

2002 - 2007, Cycle wave b

"B waves are even weaker than fifth waves in both breadth and momentum and are characterized by complacency, aggressive euphoria, and denial."

This period is where the chasm between the rich and the working class reached unimaginable levels, with the CEO to worker wage ratio reaching 1600 to 1 by the end of the period. The economy is no longer creating family wage jobs. A moderate amount of living wage jobs (up to $50,000 a year in 2010 dollars) were created during this time interval. It became difficult to support a family during this period even with both parents working. Many families tapped into their home equity to keep their heads above water and many families racked up a lot of credit card debt. Outsourcing of jobs to China and India accelerated during this time.

2007 - 2021, Cycle wave c

"C waves in bear markets are devastating in their destruction."

Oct 2007 - Mar 2009, Primary wave [1]

The so-called "Great Recession" is identified as Primary wave [1] of a much larger corrective period. This is a moderate strength downward impulse and the second leg down overall. The economy lost 8.4 million jobs during this time interval. Job losses started out slow and then accelerated, reaching 800,000 a month in the closing months of 2008 and the opening months of 2009. The unemployment rate reached 17% (U6) by the end of this period with job seekers outnumbering job openings by 6 to 1.

Mar 2009 to May 2011 (?), Primary wave [2]

Job market fundamentals are even weaker than during 2002 - 2007. Economic fundamentals are so weak that the creation of living wage jobs has stopped. Over 90% of jobs that were created during this time interval are low-wage service and retail jobs. The one event that exemplifies this period more than anything else is one million people applying for 62000 job openings at McDonalds in May 2011. In the later part of the period, we saw the advent of businesses and corporations paying newly hired workers only 25% to 40% of the previous starting wage even as worker productivity reached unprecedented levels.

A total of 1.9 million jobs would be created during this period, close to a 23.6% fibonacci retracement of the previous losses. No living wage or family wage jobs were created during this period, with the highest paying jobs at $30000 a year in 2010 dollars. Unions were substantially weakened during this period. It became very hard to support a family during this period.

Additionally, we saw the advent of the long-term unemployed, which will be greatly amplified during Primary wave [3] down.

With the historical perspective on the job market and its underlying fundamentals, we are now in a position to forecast how the job market will shape up in the coming years and decades.

2011 - 2016, Primary wave [3]

After the completion of the bear market rally, the larger downtrend resumes. This is a very strong downward impulse with massive damage inflicted on the economy and job market. Even professions that were previously unaffected by the so-called "Great Recession" are hit with substantial job losses.

Businesses, corporations, governments at all levels, and even individuals are leveraged to the hilt with credit and debt. When debt defaults start unfolding on a massive scale, the result is a deflationary collapse unfolding with full force. The last time there was a major depression, over 90% of corporations folded due to a massive cascade of debt defaults. This will result in the loss of 36 million jobs, pushing the unemployment rate to 40% (U6) by the end of the period.

It will be almost impossible to support a family during this period. The last of the family wage jobs will be purged by 2015. It will be almost impossible for the unemployed to land a job as there will likely be over 30 job seekers for every job opening.

2017 - 2021, Primary wave [5]

After a short respite period, the larger downtrend resumes. By the end of this period, the unemployment rate reaches 60% (U6) with the last of the living wage jobs purged by 2020. The economy will have lost 70 million plus jobs by the end of "The Great Deflation".

Social Security, Medicare, unemployment benefits, and the minimum wage law will certainly be repealed by the Palin Administration in 2017. By the end of "The Great Deflation", only states that are solidly blue (such as Massachusetts and Vermont) will still have a minimum wage statute, along with unemployment benefits and a functional health care system.

Economic and living conditions will rapidly decline to the level of the 1930s by the end of "The Great Deflation" as tax revenue almost completely dry up at all levels of government. The ranks of the long-term unemployed (in the United States) will be larger than Germany in terms of population by 2021.

After "The Great Deflation" ends, a very long reprieve period commences. The period, the "Green Technology Age", is identified as Supercycle wave (b).

2021 - 2042, the "Green Technology Age"

This period is likely to be a larger version of 2002 - 2007. No family wage jobs are created during this period. Living wage jobs are created during the periods where fundamentals are strongest, namely in 2024 - 2027 and 2037 - 2040, which correspond to the Primary degree third waves of Cycle waves a (2021 - 2029) and c (2034 - 2042). It will be very hard, if not impossible, to support a family during this period, except for those in the top 2%.

A total of 45 million jobs will be created during this period, reducing the unemployment rate (U6) from 60% to 35%. The United States will have a full fledged Plutocracy during this period. Plutocracies are generally associated with large degree B waves within bear markets of Supercycle or larger degree. This is because the upper class and the rich generally peak during B waves.

Prosperity during this period will heavily depend on being able to go through "The Great Deflation" without getting financially wiped out.

The final phase of the major depression, Supercycle wave (c), is identified as "The Great Tribulation". The job market implodes again under the weight of massive debt defaults, which will eventually push the unemployment rate (U6) up to 75% by the end of the bear market. In addition to debt defaults, there will also be chronic resource shortages and global warming to contend with.

Friday, June 3, 2011

Deflation at the Box Office

One of the areas of the economy where "The Great Deflation" is getting the upper hand is the movie industry. A robust movie industry depends on robust economic growth. Domestically, annual revenue has grown from $2.5 billion in 1980 to $10.5 billion in 2010. During that time, we were mostly in a bull market as Cycle wave V unfolded starting in 1974 and ending in 2000. Even after the bull market ended in 2000, optimism continued to dominate, allowing revenue to rise for a while longer in nominal terms.

From 1975, when the first blockbuster movie, Jaws, was released in theaters, opening weekend records would regularly fall every couple of years. This trend continued all the way to 2008 when The Dark Knight claimed the opening weekend record with $158 million.

Here is a chart showing the highest opening weekend by year from 1975, plus a forecast all the way to 2022.

As we can see, there was a relentless uptrend in opening weekends from 1975 all the way to the top in 2008. The uptrend appears to exhibit a wave structure as well with Primary wave [4] down corresponding with a Primary degree bear market in the S&P 500 and the Value Line Index, which also unfolded during that time. From the low point in 1990, the advance unfolded in five waves all the way to the top in 2008. Within the final advance, Primary wave [5] up, the peak of Intermediate wave (1) corresponds to the opening weekend record of $72 million set by The Lost World:Jurassic Park in 1997, the peak of Intermediate wave (3) corresponds to the opening weekend record of $114 million set by Spider-Man in 2002, and the peak of Intermediate wave (5) correspond to the opening weekend record of $158 million set by The Dark Knight in 2008.

Notice that the trend channels associated with Primary wave [5] up broke down in 2010, which indicates a trend change at Grand Supercycle degree as far as opening weekends for movies is concerned.

Another indication of "The Great Deflation" getting the upper hand in the movie industry is inflation adjusted revenue over time. Here is a chart showing inflation adjusted revenue from 1980 to 2010.

Notice that inflation adjusted revenue peaked in 2002, with a steady decline after the peak. Another interesting observation is that the peak in inflation adjusted revenue occurred at the same time that Spider-Man claimed the opening weekend record, marking the peak of Intermediate wave (3).

The correlation is not coincidental. This is where "wave personality" comes into play. Third waves are characterized with strong breadth and strong momentum. Fifth waves are less dynamic than third waves and are characterized with decreasing breadth and momentum over time. Inflation adjusted revenue is the "breadth indicator" in the movie industry.

This may be related to the strength of the economy. In 1998 - 2000, the economy was still growing, which allowed for a robust movie industry to thrive. In 2000 - 2002, "The Great Deflation" already started to unfold, but economic conditions were still favorable, allowing inflation adjusted revenue to continue a bit longer until reaching a peak in 2002. That would be the first tipping point in which wage deflation started to have an effect on the ability of "average Joe and Jane" to go to the movies.

As wage deflation continued to unfold, more and more people were faced with having to make choices about which movies to see in the theater. When faced with such limitations, the tendency to gravitate towards the event movies such as Inception, Transformers 2, and Toy Story 3 in 2010. The effect is quite observable as event movies continue to make money, but smaller scale movies do worse than expected, which results in decreasing breadth. As wage deflation continued to unfold, people went to theaters less, which resulted in fewer movies making money. This created a divergence where inflation adjusted revenue steadily declined while opening weekend records continue to fall. This divergence culminated with The Dark Knight in 2008.

The period from 2003 - 2008 really does exhibit the characteristics of a wave 5 with a divergence between opening weekends and inflation adjusted revenue. This is not much different from the case where the stock market rises as the advance-decline line falls.

After 2008, the next phase started with "The Great Deflation" getting the upper hand on the movie industry. Even with the advent of 3D, the relentless influence of "The Great Deflation" proves too much to overcome. In late 2009, with Avatar having a legendary run for the record books, a 3D bubble was ignited as movie studios started to convert all of their movies into 3D. If there is an obvious example of herding, this would be it. The 3D bubble would last for several months, allowing Alice in Wonderland, How to Train Your Dragon, Clash of the Titans, and Shrek Forever After to make money. In June 2010, during Toy Story 3's run in theaters, the 3D bubble burst. In the months that followed, movies with 3D started to bomb with increasing frequency, with Mars Needs Moms being the most dramatic case. As of now, it seems that we are approaching a "point of recognition" as movie pundits are starting to realize that 3D is falling out of favor.

The movie industry has been sliding down the "Slope of Hope" since 2008. In 2010, there was speculation that Iron Man 2 would break the opening weekend record.  This year, expect a lot of speculation over the possibility of Harry Potter and the Deathly Hallows Part 2 possibly breaking the opening weekend record. Expect a lot of speculation in 2012 over the possibility of The Dark Knight Rises breaking the opening weekend record. Expect a lot of speculation in late 2013 over the possibility of The Hobbit: There and Back Again breaking the opening weekend record if the "point of recognition" isn't reached by then. This phase of the decline will continue until 2013 or 2014, when the center of Primary wave [3] down in the DJIA is reached. Until the "point of recognition" is reached, people will continue to speculate about the possibility of new opening weekend records.

With "The Great Deflation" having the upper hand in the movie industry, The Dark Knight represents the top of a Grand Supercycle degree bull market in the movie industry. No movie in the next 25 years will break the opening weekend record. With rising unemployment and wage deflation unfolding, fewer and fewer people will be able to go to the movies as "The Great Deflation" progresses. By 2022, opening weekends for event movies will fall to $4 million to $6 million.