Sunday, July 8, 2012

Economic Slope of Hope

We are now seeing evidence of the declining portion of the business cycle unfolding even in the United States with weakening manufacturing and the job market continuing to display signs of exhaustion. Even as the economic indicators (even the official ones published by the BLS) show signs of deterioration, economists and analysts remain stubbornly bullish -- in both 2010 and 2011, when the economic indicators showed signs of declining momentum, the fear of a double dip came up, but there is no fear of a double dip this time around -- just more bullishness. The economy is sliding down the slope of hope, both in the United States, and the rest of the western world.

A number of developments have come into play, solidifying the case for an economic slope of hope:

1 -- In June 2012, manufacturing in the United States as indicated by the ISM index entered into contraction territory with a reading of 49.7. The index stayed above 50 during all of 2010 and 2011. This is a very strong indication that the declining phase of the business cycle is in force. Considering that the ISM in the rest of the Western World has stayed below 50 for an extended amount of time, it is very likely that manufacturing will continue to contract in the months and years ahead. Economists reacted to the numbers by taking a bullish position with the belief that the Federal Reserve will step in with QE3 to keep the economy propped up.

2 -- The job market continues to show signs of exhaustion with just 80,000 jobs created in June 2012 after creating 69,000 jobs in May 2012. Even with a weak jobs picture, economists are still making very large extrapolation leaps such as the prediction by the Department of Labor for careers such as health care to expand by 18% to 30% from 2010 to 2020. Also making a large trend extrapolation leap is Georgetown University's Center on Eduction and Workforce, which is predicting that the health care industry will create 5.6 million jobs by 2020. The fact that people are making large extrapolation leaps in the job market with predictions for more job market growth is very indicative that a reversal is just around the corner. In spite of extreme bullishness on the outlook of the job market by economists and analysts, there is a lot of weakness underneath the surface:

2a -- Full time jobs have been getting harder to find. This strongly supports the supposition that the job creation trend in the United States has been primarily due to the destruction of family wage and living wage jobs with part time minimum wage jobs created in their place.

2b -- Job openings are on the decline as businesses and corporations once again focus more on limits and preservation (bear market trait), rather than progress and production (bull market trait).

2c -- Large scale job layoffs are making a comeback with Best Buy laying off 2400 workers and Nokia laying off 10,000 workers. This is just the start of what should be a very persistent trend of large scale layoffs that will continue until June 2016 and result in 10 million (or more) people losing their jobs as Primary wave [X] down (Feb 2011 - June 2016) of Cycle wave x up (2009 - 2021) unfolds.

3 -- Economists are already fishing for a bottom in the United States economy with many analysts extremely bullish on the housing market and optimistic that the Federal Reserve will step in with QE3 on any hints of further weakness.

The stock markets are also indicating that the declining phase of the business cycle has arrived. The orthodox high points are already in for all of the major market indexes, including the DJIA. The "final thrust" that started to unfold from the June 4, 2012 low has morphed into a double zigzag, which means that Minor wave C down of Intermediate wave (W) down of Primary wave [X] down (2011 - 2016) has arrived.

Here is an updated intermediate term chart of the DJIA:

Minor wave B up in the DJIA unfolded as a triple zigzag and as a bearish rising wedge. The downside target for Minor wave C down is roughly 8500 to be reached in June 2013.

Here is an updated intermediate term chart of the S&P 500:

Minor wave B up in the S&P 500 (and the Wilshire 5000) unfolded as a double zigzag and peaked sooner than the DJIA. The downside target for Minor wave C down in the S&P 500 is roughly 850 to be reached in June 2013.

Minor wave C down has begun in all of the major indexes with Minute wave [i] down completed in early June 2012 and Minute wave [ii] up in progress. The stock market is expected to remain elevated in a trading range (12200 - 13200 for the DJIA, 1200 - 1380 for the S&P 500) before heading lower in earnest later this year with Minute wave [iii] down unfolding as a massive waterfall decline.

The declining phase of the business cycle is unfolding, but economists and analysts are expected to remain stubbornly bullish even as the economy, the stock market, and the job market resume their larger downtrend. The business cycle low point will be reached around June 2016 with a downside target of 5500 for the DJIA and around 550 for the S&P 500.

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