Friday, July 13, 2012

Update on the 2008 Parallel

This is an update to the earlier blog entry "Prelude to 2012" in which a forecast was made that the collapse of MF Global was the prelude to more seismic shocks that will come in 2012. History is indeed repeating itself even though the wave paths have turned out to be different.

Here is a chart of the S&P 500 from 2007 - 2009 with the events labeled:

Notice that the collapse of Bear Stearns took place early in what is now labeled Primary wave [C] down (Oct 2007 - Mar 2009) of Cycle wave w down (2000 - 2009). Six months later, the dam burst open in September and October 2008 with the collapse of Lehman Brothers and Washington Mutual, along with AIG, Freddie Mac and Freddie Mae, and the largest banks all getting a bailout, all as the "Panic of 2008" unfolded.

History is repeating itself again. In November 8, 2011, MF Global collapsed as the bear market rally off the October 4, 2011 low unfolded. The collapse of MF Global was seen as a parallel of the collapse of Bear Stearns. There are a number of recent events that strengthen the case that 2011 - 2016 is a parallel of 2007 - 2009:

1 -- Stockton, CA files for bankruptcy -- Stockton, CA became the largest US city to file for bankruptcy as soaring pensions and contractual obligations became too heavy of a financial burden for the city to carry. The city was unable to reach a deal with creditors to address a $26 million budget shortfall.

2 -- Scranton, PA is bankrupt for all practical purposes -- The city mayor reduced the wage for all city workers, including police and firefighters, to minimum wage as the city's cash reserves rapidly depleted. This move has sparked furor from a number of unions that are now vowing to sue in federal court including a motion to hold the mayor in contempt of court for violating a judge's orders to pay full wages.

3 -- San Bernardino, CA became the third large city in California to file for bankruptcy -- The city is facing a budget shortfall of $45.8 million, has already stopped paying some of its vendors, and is close to being unable to make payroll. The city benefited from the housing boom of the early 2000s, but since suffered as the housing bubble continues to deflate.

4 -- The LIBOR rate fixing scandal has rocked the financial world in the last several days -- At the center of the scandal is the British banking giant Barclays manipulating interest rates on trillions of dollars of credit derivatives. In the aftermath of the scandal, U.K. regulators have launched a criminal investigation into the rate manipulation behavior. A few days later, the scandal expanded in scope with a number of the largest banks including Bank of America, JP Morgan Chase, and Citigroup also involved. A number of cities and states in the US are now in the process of suing the banks over the economic impact of LIBOR manipulation. This is already being described as one of the biggest bank frauds in the history of modern civilization.

Here is an updated chart of the S&P 500 from 2011 - 2016 with all the important events labaled:

We are still in the early part of Primary wave [X] down (2011 - 2016) of Cycle wave x up (2009 - 2021), meaning that the "dam bursting open" event is yet to unfold in the future and it will be associated with a Primary-degree "point of recognition". The next set of shocks should come from Europe with the "Panic of 2012" unfolding later this year as the stock markets in Spain, Greece, and Italy reach the center of Intermediate wave (1) of Primary wave [3] down, which would correspond to the center of Minor wave C down of Intermediate wave (W) down (February 2011 - June 2013) in the DJIA, S&P 500 and the Wilshire 5000.

The dam should burst open in late 2014 after the popping of the education bubble in June 2014. Look for the Obama Administration to launch TARP 2 to bail out the banks in late 2014 -- especially plausible even now as the "too big to fail" banks were never downgraded in 2008 but have been hit with a series of downgrades since late last year, indicating that the banks are in worse shape now than they were in 2008. With the job market also collapsing during that time (10 million workers in the US lose their jobs between now and June 2016), college graduates won't be able to find employment after graduating from college. The issue is in crisis mode even now as over half of recent college graduates are unemployed. Student loan debt is already past the $1 trillion mark and continues to grow as the college bubble continues to inflate at an exponential clip. In 2014, with the next leg of the job market collapse well underway, look for the Obama Administration to do a student loan bailout to the tune of $1.7 trillion in late 2014. There are already a few people that recognize the possibility of a student loan bailout, such as the article on Bloomberg Businessweek.

The most powerful seismic shocks are yet to rock the financial world as the Primary degree decline (Primary wave [X] down) is still in the early stages. The largest shocks that will hit during the Primary degree decline in social mood should take place in late 2014.

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