Monday, April 30, 2012

Business Cycle High Point Ahead

We are approaching an important juncture in the stock market and economy, namely the next business cycle high point that is on course to be reached around June 24, 2012. The short term trend in the stock market is still up. However, the top alternate count as suggested from an earlier blog entry has emerged as the preferred count, which would put the orthodox high of the Primary-degree advance from the March 2009 low in February 2011.

Here is an updated chart of the DJIA, starting from the orthodox high on February 2011:

In the second phase of "The Great Deflation", the corresponding structure -- Cycle wave x -- started in March 2009 and is unfolding as a complex structure with Primary wave [W] complete in February 2011 and Primary wave [X] down in progress with Primary wave [Y] starting in June 2016 and continuing until 2021.  Primary wave [X], as per the preferred count, would itself be a complex structure. The expanded flat structure that unfolded from February 2011 to October 2011 would be Minor wave A of a larger expanded flat, Intermediate wave (W), in which Minor wave B of the structure is in progress and is unfolding as a triple zigzag.

Within Intermediate wave (W) in the DJIA, Minor wave B is on course to reach 1.618 times the length of Minor wave A, which would give an upside target of 13625. In the S&P 500, a more likely relationship is Minor wave B = 1.382 times the length of Minor wave A, which gives an upside target of 1452. Both of the upside targets should be reached around June 24, 2012.

After the business cycle high point is reached, markets will head lower with Minor wave C of Intermediate wave (W) unfolding as a five wave structure that will take around a year to complete with a downside target of around 8500 in the DJIA and 850 in the S&P 500, both to be reached around June 2013.

Here is a longer term chart of the S&P 500 showing how Primary wave [X] is likely to unfold with the structure reaching completion in June 2016:

Look for the Federal Reserve to step in with a third round of quantitative easing once the DJIA falls below 10000. QE3 is likely to be launched later this year, but after the November 2012 general election takes place. The market action in Intermediate wave (X) will create the appearance that QE3 is succeeding in propping up the stock market. The markets will put in a lower high around June 2014 before a long hard fall, Intermediate wave (Y) follows, unfolding as a zigzag and taking the markets down to the lower trend line shown in the chart, which connects the October 2002 and March 2009 low points. The markets should find support at the lower trend line shown in the chart at the next business cycle low point in June 2016.

When the business cycle high point is reached later this year, the economy is expected to decline in nominal terms as well as real terms. Last week's reading on the nominal GDP of the US economy came in at 2.2% for the first quarter of 2012. Considering that the Bureau of Economic Analysis (BEA) has used a GDP deflator of just 1.2% in the last 6 months, it's no surprise that the economy continues to decline in real terms. Considering that the actual inflation rate is around 7% (as per Shadow Government Statistics), production of goods and services in the United States is essentially at the same level it was in 1982, with the bear market erasing 18 years of economic growth as of today. In many nations of the Western World, there is already a resumption of economic decline in nominal terms with many nations in Europe reporting that their nominal GDPs are declining.

The US Dollar Index is also supporting the idea of a business cycle high point around June 24, 2012 as the dollar has already completed a Minor degree leading diagonal with a retracement in progress. Here is an updated chart of the US Dollar Index:

As pert the main wave count, Minor wave 2 down is in progress, unfolding as a complex structure (expanded flat - expanded flat - zigzag) and should be done in late June 2012. The start of Minor wave 3 up in the US Dollar Index corresponds very well with the start of the five wave decline in the stock market (Minor wave C in the DJIA and the S&P 500). The US Dollar Index continues to paint a picture of a deflationary collapse in the economy as most of the debt in the world is denominated in dollars, and the deflating of the credit bubble would make the dollar more valuable as there would be fewer dollars in the global economy.

Monday, April 23, 2012

A Runoff Election in France

As a preview to the main attraction in the United States in November 2012, a runoff election is scheduled to take place in France on May 6, 2012 in which Sarkozy (the incumbent) will square off against Hollande (the challenger) for the position of President. Sarkozy has been president of France since 2007.

The reason why the runoff election in France is important is that it provides potential clues (from a socionomic perspective) to how the November 2012 election in the United States will play out. On May 6, 2012, we will be approaching a business cycle high point -- which means that the intermediate term trend in social mood is still bullish, while social mood is expected to become increasingly bearish in the second half of 2012.

Here is an updated chart of the CAC-40, which reflects the social mood in France:

As the updated chart shows, the CAC-40 is tracing out an regular flat for Supercycle wave (a) as per the main wave count with Cycle waves a and b complete and the first two subwaves of Cycle wave c completed with Primary wave [3] down in progress. While the DJIA took out the May 2011 high, the CAC-40 is still well short of doing so, indicating that the rally from the October 2011 low is a bear market rally, namely Minor wave 2 of Intermediate wave (1) of Primary wave [3] down, in which there was a standard 61.8% retracement of Minor wave 1 down. In addition, Minor wave 2 unfolded as a 5-3-5 zigzag. From the peak of Minor wave 2 up, the CAC-40 has given back a substantial portion of the gains in a five wave decline (Minuette wave (i) down) that is close to completion. The CAC-40 should get a bounce (Minuette wave (ii) up) with a rally up to around 3500 in June 2012 before resuming the larger downtrend (Minor wave 3 down).

The top election issues in France are the same as in the United States: the economy and jobs. While Sarkozy finished the first round in second place with 25% of the vote behind Hollande (28% of the vote), there are still a lot of votes up for grabs in the runoff election on May 6, 2012. It will be a very close election -- the CAC-40 is still early enough in Primary wave [3] down that Sarkozy should still be able to win re-election --- but it will be a very tough fight to the finish.

So far, social mood has held up better in the United States (as indicated by the DJIA) than it has in France (as indicated by the CAC-40). A Sarkozy win in France would therefore bode well for Obama winning re-election in November 2012 from the perspective of the socionomic perspective. How the runoff election on May 6, 2012 is therefore a very important indication of social mood in the western world.

Sunday, April 15, 2012

Update on the Road to Plutocracy

This is an update to the earlier blog entry in which there is a case to be made that there is a full-scale plutocracy in the forecast for the United States. More developments in the last several months strengthen the case for a coming plutocracy. The Unites States has clearly become more plutocratic over time on President Obama's watch, continuing the multi-decade trend that goes all the way back to the Reagan Administration Period. The case for a plutocracy is also compatible with the Elliott Wave Principle, as plutocracies fit the character of a large degree wave B in the economy, within a bear market of at least Supercycle degree.

Here are some of the latest developments that bear evidence of a coming plutocracy:

1 -- The wealth gap between the rich and the working class in the United States continued to widen during the Obama Administration Period, continuing the trend that also played out during the Bush 43 Administration Period. The gap between the rich and the working class in the Unites States is now comparable to places such as Serbia, China, and Rwanda. Even now, people on the low end of the top 1% make over 10 times as much ($250,000 a year) as a typical worker ($25,000 a year).

2 -- The top 1% have captured 93% of nominal GDP growth during the Obama Administration Period, compared to 65% during the Bush 43 Administration Period and 45% during the Clinton Administration Period. Working class wages accounted for 20% of the nominal GDP growth under Clinton, falling to 6% under Bush 43 and then dropping below zero (1% in 2010, dropping below zero in late 2011) under Obama. We are now seeing the effects of President Obama's economic policies, and the result is a larger chasm between the top 1% and the bottom 99%.

3 -- There is more evidence that President Obama has cast his lot with the top 1% -- in February 2012, he put up a proposal to cut the corporate tax rate from 35% to 28%. This is the same type of voodoo economics that was implemented by Reagan and Bush 43. Indeed, the advent of voodoo economics (also known as trickle-down economics) corresponds to the start of Cycle wave V (1974 - 2000).

4 -- The poverty rate continues its relentless rise with extreme poverty hitting record highs. This trend underscores the extreme weakness of economic fundamentals. The actual poverty rate in the United States is likely closer to 30% as the official poverty rate thresholds are not indexed to the actual inflation rate. This also reflects persistent weakness in the job market -- while the economy has created 2.7 million jobs from the low on December 2010, virtually all the jobs created have been part-time jobs that pay minimum wage with no benefits.

5 -- Another effect of the coming plutocracy is food hardship -- over a third of US households have had difficulty putting enough food on the table at some point in the last 12 months due to food prices rising relative to wages. This scenario is not surprising since commodities have been rising faster than stocks (It's all the same market in a deflationary environment and a robust bear market rally is unfolding now) and will continue to do so until the "Extend and Pretend" phase (Cycle wave x) ends. Couple this with persistent wage deflation and its no surprise that food is getting more expensive for the typical household.

6 -- Homelessness is on the rise with people that were previously successful ending up on the streets after losing their jobs and the subsequent long-term unemployment that followed. This trend is a precursor to what will come in the future -- every major city in the United States surrounded by "Obamavilles" in the suburbs as "The Great Deflation" continues to unfold, a parallel of the "Hoovervilles" that appeared during the Great Depression.

7 -- President Obama is also pushing for a "super-NAFTA" in which more free trade agreements are implemented extending all the way to South America. The effect of a super-NAFTA is quite predictable. Back in the 1992 election when Bill Clinton proposed NAFTA, Ross Perot warned about a "giant sucking sound" that would take place is NAFTA were to be implemented. Ross Perot's prediction was since fulfilled in the aftermath of NAFTA going into effect in 1994 -- slowly at first, but now a deafening roar as millions of living wage and family wage jobs continue to be outsourced every year. The effect of a super-NAFTA would therefore be the loss of all remaining living wage and family wage jobs as corporations find new places for cheap manufacturing and labor. The advent of a super-NAFTA would play a strong role in purging the last of the family wage jobs on Main Street by 2015 with the last of the living wage jobs on Main Street purged by 2020.

It is very clear that the United States is on the road to becoming a full-blown plutocracy. The trend has accelerated during the Obama Administration Period. Some people already characterize the United States as a plutocracy, but there is a case to be made that the country is currently in a transitional period where there exists a hybrid of democracy and plutocracy. The transitional period started in 2000, corresponding to the start of Grand Supercycle wave [IV] and the start of "The Great Deflation". The US economy stopped creating family wage jobs in 2000 and stopped creating living wage jobs in 2007. The transitional period will continue for the duration of Supercycle wave (a) until the nadir of "The Great Deflation" is reached in 2042. During Supercycle wave (a), everyone will take a massive hit from the deflationary collapse in the economy. The deflationary collapse will unfold in full force with the start of Cycle wave y in 2021 in which 90% of corporations and businesses implode by the time the bottom is reached. However, the bottom 99% will lose ground faster then the top 1% will, so the wealth gap will continue to widen.

Given the road that the United States is currently on, it does not matter whether Mitt Romney or Barack Obama wins the November 2012 election -- whoever wins, we (the 99%) lose. Both Romney and Obama have cast their lot with the top 1%, ensuring that the inevitable road to plutocracy will continue.

Every plutocracy has an engine, and the one that is coming in the United States is no exception. The driving force of the future plutocracy has already been identified -- Koch Industries and its extension, the American Legislative Exchange Council (ALEC). The structure for the coming plutocracy is already being built and the stage is already being set. ALEC was founded in 1975, just a short time after the start of Cycle wave V (1974 - 2000). Koch Industries was founded in 1940, but its political activism started in 1977 with the founding of Cato Institute, also a short time after Cycle wave V (1974 - 2000) started. The socionomic model explains why ALEC and the political activism of Koch Industries appeared when they did -- that was when the social mood of the United States population became favorable for the organizations to carry out their political agenda.

Big Oil will certainly survive through "The Great Deflation" intact. With the advent of Supercycle wave (b) in 2042, alternative energy will drive the "Green Technology Revolution" in Canada, Western Europe, Japan, South Korea,  Australia, and Brazil. However, alternative energy will never take root in the United States -- the Koch-ALEC cabal will have a strong enough stronghold on the government (both state and federal level with many lawmakers being members of ALEC) and the country to shut down all forms of alternative energy in the country through unprecedented lobbying power. At the beginning of Supercycle wave (b) in 2042, all the oil companies will be folded into Koch Industries and all the corporations and large businesses that managed to make it through the deflationary collapse of the economy will be folded into ALEC. With the merging of corporate power into the Koch-ALEC cabal in 2042, a full-blown plutocracy is born. The top 1% will pull away from the working class at a greatly accelerated clip with living and economic conditions on Main Street comparable to the 1930s.

The appearance of a plutocracy from 2042 to 2076 fits the character of Supercycle wave (b) as B waves are technically weak with weak breadth (only a small cross section of stocks take part in the advance in the stock market, only a small cross section of the populace will take part in the return to prosperity in the United States). Just as fifth waves are weaker than third waves, B waves are weaker than fifth waves by every measure. The nominal GDP of the United States is likely to hit new highs by 2076, but virtually all of the increase will go to the top 1%.

The Koch-ALEC cabal will be unstoppable until the plutocracy peaks in 2076, corresponding to the beginning of Supercycle wave (c). It is very likely that the Koch-ALEC cabal will start overplaying their hand in 2074, thereby sowing the seeds of their own destruction, as we approach the peak of Supercycle wave (b). Once Supercycle wave (c) -- "The Great Tribulation" --- starts, the Koch-ALEC cabal will suffer damage from their own seeds of destruction, exposing more and more cracks in the formerly impenetrable armor. A combination of the plutocracy taking damage from their own seeds of destruction and bearish social mood associated with Supercycle wave (c) motivating the 99% to take their country back will eventually bring about the downfall of the plutocracy in 2118 as the Grand Supercycle degree bear market reaches its epic climax.

Thursday, April 5, 2012

Next Phase of Housing Collapse Ahead

Even as optimism over a possible housing recovery continues to unfold in the mainstream media, there are signs that the next phase of the housing meltdown is about to come underway with a new wave of foreclosures in the pipeline. In spite of the housing market undergoing a larger decline than the decline that unfolded during the Great Depression, we are still seeing calls for a bottom and a recovery in the housing, such as calls for a recovery as published on the Wall Street Journal. The fact that we are still seeing calls for a recovery is an indication that the housing market is still sliding down the "Slope of Hope" (there is more hope for a recovery than there is fear of a fall even as prices continue to decline).

Ever since the housing bubble burst in 2005, real estate prices have been in a long term decline as the bubble continues to deflate. Just as progression does not unfold in a straight line, bear markets do not unfold in a straight line. With every bounce that has unfolded within the larger decline in the housing market, there have been attempts to call a bottom and a recovery. There has been a bounce in the housing market in the last few months, which economists and journalists have taken as a sign that a recovery is unfolding, but is really yet another dead cat bounce that will soon give way to new post-bubble lows.

The bottom is still a long way down. Before there can be a bottom, there has to be a point of recognition that the housing market is in a long term bear market trend. The point of recognition may not come until around 2025 (the center of Primary wave [A] of Cycle wave y within a W-X-Y structure for Supercycle wave (a)).

The next wave of foreclosures is coming, which is apparent even to the mainstream media as banks pick up the pace of foreclosures after a slowdown last year following the "robo-signing scandal". There is also a large shadow inventory backlog that must be worked through before any real housing recovery is possible. However, the next wave of foreclosures is likely to be much worse than what is being forecast by economists and the mainstream media as the effects of a social mood decline following the business cycle high point in June 2012 will usher in the next decline in the job market as around 10 million people lose their jobs between June 2012 and June 2016, which will greatly increase the number of people losing their homes through foreclosure and accelerate the decline of real estate prices.

At the climax of the meltdown in housing, which is expected to occur around 2042 as "The Great Deflation" comes to its epic conclusion, there will be a historic buying opportunity as people that successfully make it through the deflationary collapse without getting financially wiped out will be able to buy the house of their dreams for pennies on the dollar. At the climax of the deflationary collapse, there is expected to be a lot of disdain for real estate with bearish sentiment pervasive in the mainstream media and the political arena.