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.

Climax of Exuberant Bullishness

It's all led up to the main event -- a climaxing of exuberant bullishness as the peak of Minor wave 2 is established. With markets continuing to rally throughout January 2012 on decreasing momentum and volume, exuberant bullishness continued to build to levels that few even thought possible. The reprieve period was originally expected to last 3 months with the markets doing a relatively standard 61.8% retrace of Minor wave 1 down, bringing the DJIA back up to 11930 and the S&P 500 back up to 1260 by early January 2012.

By late October 2011, bullishness started to make a return as we completed the first part of Minor wave 2 up. The peak of Minute wave [w] of Minor wave 2 up occurred on good news -- namely the European debt crisis going into remission when a deal was made in which banks took a 50% haircut on Greek debt. The rally off the early October 2011 low was so powerful that it triggered a Zweig Breadth Thrust signal.

Short term bearish sentiment started to return during Minute wave [x] of Minor wave 2 up, which unfolded during most of November 2011. Bear market rallies can be riddled full of pitfalls, and this one was no exception as many pitfalls showed up in November 2011 with rising interest rates in Italian, Spanish, and French bonds, mass crackdowns on Occupy Wall Street protesters by police, and the SOPA bill (now dead) moving through Congress at that time.

The last part of Minor wave 2 up was kicked off by a mass intervention of multiple central banks with the aim of shoring up liquidity. The DJIA shot up almost 500 points shortly before the intervention started and kicked off a massive wave of exuberant bullishness. In early December 2011, bullishness became dominant again with economists, analysts, and the mainstream media getting bullish on the economy and the job market.

By late December 2011, expectations for a three month long reprieve period were fulfilled.  Throughout the course of Minute wave [y] of Minor wave 2 up, there was increasing bullishness with increasing calls for more bull market, more economic recovery, and more job creation. Calls for the stock market to take out the 2007 highs were routinely unfolding as analysts became more optimistic under the influence of rising social mood. A waterfall decline was originally expected to start in January 2012, yet even as the reprieve period continued to go into overtime in January 2012, momentum and volume continued to weaken over time as the markets continued to float higher, continuing to signal that a sharp decline is ahead.

By late January 2012, extreme bullish sentiment was taken to the next level as capitulation started to set in. People that have been bearish were throwing in the towel as the markets continued to slowly float higher. The fortitude of even the most staunch of bears was being tested all the way to the core as the markets closed in on 12876 on the DJIA, 1370 on the S&P 500 and 14562 on the Wilshire 5000. Virtually everyone was convinced that the markets could only go up.

The last part of January 2012 marked the beginning of the climax as the mainstream media devoted an insane amount of time to the Facebook IPO as anticipation shot up into the stratosphere. From a socionomic perspective, there was a great deal of significance to the developments associated with the Facebook IPO as Minor wave 2 neared completion. This was Facebook's mountain top experience unfolding, much like Apple with its blowout earnings earlier in the month.

The climax of extreme bullish sentiment came with the jobs report that came out yesterday. It wasn't the rate of job creation or the official unemployment rate (U-3) that resulted in the reaction from the mainstream media and economists, for the economy was also creating jobs at the same rate in the first few months of last year. The mainstream media devoted around the clock coverage on the jobs report and the job market (a type of event that almost never occurs). Virtually everyone is convinced that the job market recovery will continue to unfold. As a testimony of the extensive news coverage devoted to the jobs report, there was coverage on Hardball with Chris Matthews, Nightly News with Brian Williams, the Rachel Maddow show, and CNBC. The markets shot up in an exhaustion gap in the morning hours before the jobs report was released and continued higher through the morning hours. The DJIA came within 6 points of hitting the May 2011 high before going lower and sideways for the rest of the trading session. Bullish sentiment climaxed as > 99% of analysts are strongly convinced of the inevitability of new highs in the stock market, as well as > 99% of economists and analysts convinced that the economy and job market can only go up. Exuberant bullishness has indeed reached an epic climax. From a socionomic perspective, such an event is a signal of a large degree peak with a reversal in the stock market, economy, and job market just around the corner.

The last time that exuberant bullishness climaxed was in May 2011 with the news of the assassination of Osama bin Laden. The event marked the peak of Primary wave [2] up and President Obama's approval rating briefly reached 61% in the aftermath of the event.  After the event took place, markets declined, unfolding as Minor wave 1 down within a much larger Primary degree downward impulse.

Increasing hard times are in the forecast for 2012 as we enter Minor wave 3 down in a matter of a few days at the most if we are not there already. The Minor degree bear market rally for the Wilshire 5000, the S&P 500, and the DJIA all appear to be complete.

Waterfall Decline Ahead

We are very close to the end of Minor wave 2 up, with the top around a week in the future. Expectations for a three month long reprieve period were fulfilled as markets made a rapid bounce off the early October 2011 lows and then stayed elevated for the rest of the year. It was a chance for people to enjoy the holidays while the economic and financial fault lines in the western world were temporarily stabilized.

As we approach the end of the three month reprieve period, the mainstream media has become extremely bullish. Expectations for economists, market analysts, and journalists in the mainstream media to become very bullish on the economy, job market, and stock market by the end of the year have been fulfilled. Since the last write-up in early December 2011 as the last part of Minor wave 2 up started unfolding, people have become even more bullish on the economy, stock market, and job market.

Here are some recent examples of extreme bullishness that has shown up in the mainstream media in the last few days:

1 -- Yahoo news uses the rising consumer confidence as a reason to be bullish on the economy in 2012, even though the long term trend of lower highs and lower lows in consumer confidence since the peak in 2000 is still intact.

2 -- Journalists working for MSNBC are extremely bullish on the US economy, making calls for the economy and job market to grow faster in 2012. This bullishness is also shared by virtually all the mainstream economists as well, who are all calling for increased economic growth.

3 -- Douglas Kass (well known investor) is extremely bullish on the stock market, making bold calls for new all time highs by the end of 2012. The video of the interview on CNBC can be seen here.

4 -- On the Kudlow Report yesterday on CNBC, there was abundant talk about stocks being "ridiculously cheap", which indicates extreme bullishness. Video of the news segment is here.

From a socionomic perspective, extremes in social mood signal a reversal of the current trend. Combined with our current position of being near the end of Minor wave 2 up, there is a strong reason to anticipate an imminent reversal in the stock market.

The DJIA continues to follow the 1930s parallel with the third phase of "The Great Deflation" being a parallel of the Great Depression. Here are some updated charts of the DJIA underscoring the parallel:

DJIA in 1929 - 1930:

DJIA in 2009 - 2012:

Notice that both of the bear market rallies put in a head and shoulders top. In both cases, the head and shoulders top formed with fibonacci relationships in terms of time with a fibonacci convergence at the right shoulder.

In the bear market rally that unfolded in 1930:

1 -- The right shoulder peak formed 1.5 months (3 time units) after the peak of the head.
2 -- The peak of the head formed 2.5 months (5 time units) after the peak of the left shoulder.
3 -- The left shoulder and the right shoulder are 4 months (8 time units) apart.
4 -- The right shoulder peak formed 6.5 months (13 time units) after the start of the bear market rally in November 1929.

Notice the fibonacci sequence  numbers 3 - 5 - 8 - 13 in the head and shoulders top.

In the bear market rally that unfolded in 2009 - 2012:

1 -- The right shoulder peaked 8 months after the head peaked.
2 -- The head peaked 13 months after the left shoulder peaked.
3 -- The left shoulder and the right shoulder are 21 months apart.
4 -- The right shoulder peaked 34 months after the start of the bear market rally.

Notice the fibonacci sequence numbers 8 - 13 - 21 - 34 in the head and shoulders top.

The sentiment in both of the bear market rallies is also identical as well. In both cases, economists, politicians, and the mainstream media were extremely bullish on the economy by the end of the bear market rally, with assurances from politicians and the mainstream media that the worst was over.

Here is a chart of the 1930 bear market rally with our current equivalent position arrowed on the chart:

We are currently at the equivalent of late May 1930. We are close to the end of Minor wave 2 up. After the reprieve period ends, Minor wave 3 down will start and is expected to take the form of a waterfall decline in the stock market with a duration of 4 months. The start of Minor wave 3 down is when the economy and stock market enters the heart of the abyss with "The Great Deflation" unfolding in full force, in the same way that the economy, stock market, and job market entered the heart of the abyss in early June 1930 during the Great Depression.

The downside target for the end of Minor wave 3 down is 7200 on the DJIA and 775 on the S&P 500, both to be reached in May 2012.

The Job Market and Social Mood

The job market entered a tipping point last month as the economy has stopped creating jobs. The tipping point took place after three months of increasing exhaustion in the job market in which the economy created less than 100,000 jobs per month. The number of jobs created in July 2011 was revised downward to 87,000. There is a large chance that the August 2011 number will be revised downward to reflect that the job market collapse was in fact commencing last month. In spite of the latest developments, people in the mainstream media continue to show a lot of optimism, which is associated with positive social mood that occurs in a big wave 2 in a bear market.

The next leg down in the job market is in progress, and the forecast is for the economy to wipe out 36 million jobs over the next 5 years, pushing the unemployment rate up to 40% (U6) by 2016. The mass destruction of jobs will unfold in tandem with Primary wave [3] down (2011 - 2016) in the DJIA and the S&P 500.

We are still in the early part of Primary wave [3] down (2011 - 2016). Here is an updated chart of the DJIA, reflecting the social mood of the United States population.

We are still on track to complete Minor wave 1 down by early October 2011. There is no question that Minute wave [v] down is in progress. A relatively fast downward impulse is in the forecast for September 2011. The projected downside target for the end of Minor wave 1 down is 10180 for the DJIA and 1040 for the S&P 500.

After the October 2011 low, markets will rally for the rest of the year with the peak of Minor wave 2 up to occur in early January 2012. The target for the peak of Minor wave 2 up is 11850 for the DJIA and 1250 for the S&P 500.

The projected social mood of the United States population during September 2011 is important here as it will determine the outcome of any attempt by the Obama Administration to pass a job creation bill. We already know about the jobs speech that President Obama is about to do on September 8, 2011.

As usual, we are seeing optimism associated with a big wave 2 in a bear market as the mainstream media continues to express optimism on the chances of getting a job creation bill passed through Congress. The optimism, however, is in contrast to the increasing polarization in politics that we have been seeing in the last 2 years as the GOP continues to accelerate farther to the right. The political arena is more polarized now than it was when the debt ceiling crisis was unfolding. As the bearish social mood continues to build throughout September 2011, the result is increasing polarization, increasing discord, and an increase in the "us vs. them" mentality in which people and groups attack opposing groups (the vitriol in the political arena last month testifies to this). With the effects of increasingly bearish social mood on the political arena in mind, there is no chance that a job creation bill will be passed through Congress.

Although many progressive groups have been urging the Obama Administration to directly intervene and put the unemployed back to work, there is no basis for such an event to happen. Let's consider a historical perspective on the matter of direct government intervention in the job market with the intent of putting people back to work.

1 -- The New Deal -- It was launched in 1933 by the FDR Administration after the Great Depression ended earlier that same year.

2 -- Reconstruction -- It was launched in 1865, after the Long Depression ended in 1859.

3 -- Hamiltonian Economic Program  -- It was launched in the 1790s, after the "Modern European Major Depression" ended in 1784.

The pattern is very evident -- direct government intervention aimed at putting the unemployed back to work took place after the bear markets ended. With that in mind, we should not expect the Obama Administration to intervene in terms of putting the unemployed back to work. The "Second New Deal", if it happens, is most likely to be initiated in the year 2060, after the current major depression ends in 2055.

Government intervention aimed at putting the unemployed back to work is not guaranteed anyways. The idea that governments can influence the economy is a product of the Keynesian economic model. Major depressions always result in dramatic changes in the character of nations and the character of a nation's government. A case of point is the Renaissance. Both of the economic depressions that occurred during the Renaissance are easily identified -- the first occurred from 1470 - 1484, and the second occurred from 1637 - 1648 in the aftermath of Tulipmania. In both of the cases, the government did not intervene to put the unemployed back to work after the depressions ended, but there was still a vigorous economic recovery that followed the end of the depressions. It is quite possible that the Keynesian economic model will get scrapped altogether in the late 2050s or early 2060s, being seen as a failed model that is riddled full of flaws.

Education Bubble Going Critical

This post is an update to a post on the education bubble that was put up several months ago, when only a small number of people and groups had awareness of the bubble. We are now seeing evidence that the education bubble is going critical -- either the bubble has burst or it is on the verge of doing so.

Exactly as I predicted several months ago, the collapsing job market played a central role in causing the education bubble to burst. With a collapsing job market, it was only a matter of time before a sufficiently large constituent of people start rethinking whether it is actually worth taking on a large amount of student loan debt.

Given that the collapse of the job market has barely started, it is very likely that the education bubble will unravel in the same way that credit bubble has -- slowly at first, then unraveling with increasing momentum over time. We are likely to see massive damage inflicted on the education system by 2016 as a direct result of the bursting of the education bubble. The nation's education system may not be recognizable in 2021 as most colleges and universities are expected to close their doors forever. Many universities and colleges will be abandoned in 2021, looking a lot like the city scenes from the movie I Am Legend.

The education bubble is falling apart from the top down, as Ivy League and law schools are getting hit the hardest early on, with attendance falling in law schools.

It isn't just the bursting of the education bubble that is significant. We are also seeing an epidemic of scandals associated with the education system. The most significant of the scandals is the Atlanta Public School cheating scandal that broke out in July 2011. Bear markets are when the skeletons come out of the closet as the mainstream media is more likely to look for scandals during that time. It isn't just public schools that have been involved in scandals, but a large number of charter schools have been involved in scandals as well. There is a large list of charter school scandals titled "Charter School Scandals".

The collapsing job market has also created "buyer's remorse" as some college and university graduates have been turning to litigation against their alma maters. Many of such people are those who graduated with a massive amount of student loan debt and unable to land a job.

The education bubble is going critical. Over the next 10 years, the education bubble will implode with increasing momentum, with devastating consequences for those whose livelihoods are tied to the education industry. The education bubble is falling apart from the top down. Ivy league and law schools are being affected now. Expect the implosion of the education bubble to affect public universities and colleges by 2013. By the time the implosion of the education bubble is completed in 2021, even K - 12 schools will have been dramatically affected. Many schools, colleges, and universities will close their doors forever.

Job Market Collapse Sparks Protests

The collapse of the job market is in progress, and there is increasing awareness of the issue. Even though we are yet to see a monthly job report that indicates that layoffs have resumed, layoffs continue to accelerate as more and more companies and businesses throw people out of work.

We are now seeing an outbreak of protests over the job market issue. A large number of protests have erupted in the last two weeks as outlined in the Daily Kos article on the many instances of constituents displaying their frustration at GOP town halls.

Here is a partial list of articles showing the large number of job market related protests that have erupted throughout the United States:

1 -- Ordinary Americans Continue to Deliver Progressive Messages at Republican Town Hall Meetings.

2 -- Members of Congress face job protests.

3 -- Invisible Town Hall Revolution Continues to Roll, with real impact on GOP.

4 -- Republicans at home face protests from liberal, labor groups.

5 -- Unemployed protest outside Fitzpatrick's office.

It isn't just Republicans that are getting the blame for the collapsing job market. People are blaming Obama as well, as evidenced by the latest gallop poll that indicates that Obama's approval rating on the economy dropped to a new low of 26%. Obama's overall approval rating is down to 39%, another new low. Even now, Obama is facing a great deal of criticism from unions and labor groups on the jobs issue as well as the debt ceiling deal.

It doesn't help that President Obama's proposals for creating jobs involves a substantial amount of magical thinking, as the proposal mostly revolves around creating more free trade agreements and extending tax credits to businesses and corporations.

The Obama Administration will attempt to pass a "jobs bill" after Labor Day. People in the mainstream media are optimistic that a jobs bill can be passed, but the optimism is mostly a product of optimistic social mood associated with a big wave 2 in a bear market. There is no chance of any type of jobs bill getting passed as polarization in politics will continue to increase with the GOP accelerating farther to the right over time, making compromise impossible.

As Primary wave [3] down (2011 - 2016) continues to unfold, expect protests to increase in size, extent, duration, and assertiveness. The protests at town halls are numbering from dozens to a few hundred now, but as social mood continues to become more and more bearish, the protests will increase in size, reaching 20,000 or more by early 2016 as more and more people take to the streets.

Current State of the Economy

The latest GDP numbers came out last Friday, and they point to the start of the next leg down in nominal terms. Although the initial estimate for the second quarter of 2011 came in at 1.3 percent as far as the nominal GDP is concerned, earlier quarters were revised downward. The nominal GDP growth for the first quarter of 2011 was revised downward from 1.9% to 0.4%. The GDP number for the second quarter of 2011 is virtually guaranteed to be revised downward in the coming months which would likely put it below zero. The US economy is now declining in nominal terms, not just real terms.

The nominal GDP does not tell the full story, and the rising GDP numbers since 2000 reflects the relentless devaluation of the dollar rather than economic growth. We must get the Real GDP, which is GDP after adjusting for inflation. We turn to Shadow Government Statistics to get the actual inflation numbers, which would then allow the Real GDP to be evaluated.

The government has changed the formula for evaluating the inflation rate and the unemployment rate a number of times, often for political reasons. There has recently been talk of the Obama Administration putting lipstick on the pig known as inflation with the chained CPI. This is the reason why we go to shadowstats.com to get the actual numbers.

Here is a chart of the Real GDP of the United States economy.

As the chart shows, the US economy has been steadily declining since 2000. So far, the US economy has erased 18 years of growth, and now produces the same amount of goods and services as it did in 1983. The chart clearly shows that we are in a major depression. The decline from the peak so far is almost as large as the decline that took place during the Great Depression, and yet, we are still seeing calls for a recovery, such as this one.

The US economy is still sliding down the Slope of Hope. As we get closer to the "point of recognition", we start to see signs of the coming event. People are starting to recognize the true magnitude of the bear market that we are in, as evidenced by this poll, which indicates that 39% of people think that the economy is in permanent decline.

The "point of recognition" should take place around October 2013, and it will be known as "The Great Panic of 2013". This would also be when economists and analysts start to recognize that a major depression is in progress. This would be the center of Cycle wave c (2007 - 2021).

It is also worth mentioning that the chasm between the rich and the working class is still growing larger, which is consistent with a bear market rally, rather than a real economic recovery.  In a real economic recovery, the working class would be gaining ground relative to the rich over time -- this did not happen in 2002 - 2007 and it is not happening now.

Here is a chart of the DJIA from 1974, showing the fraction of nominal GDP growth that went to corporate profits and wages. Notice the progressively weaker breadth after 2000.

The information on the chart comes from a study of the so-called "jobless recovery" following the 2009 low. Just 1 percent of the nominal GDP growth went to wages as of the fourth quarter of 2010. Virtually all of the nominal GDP growth went to corporate profits. In the first quarter of 2011, the fraction of nominal GDP growth that went to wages was actually negative. By comparison, 25% - 35% of nominal GDP growth went to wages in the economic recovery following the recessions that ended in 1982 and 1991, and following the major recession that ended in 1974.

Here is a chart relating "wave personality" to the economy and job market.

As I indicated in an earlier post on job market fundamentals, the weakening breadth that has been unfolding since the 2009 low in the DJIA is not consistent with a real economic recovery. A real economic recovery is associated with the start of a new bull market.

As I predicted, we are seeing a lot of talk about a "double dip recession". Expect this to continue until October 2013, when the "Great Panic of 2013" takes place. Expect President Obama to continue playing the "bump in the road" card even as the layoffs accelerate in the job market until October 2013.

Return to the 1930s

One of the implications of a Grand Supercycle degree bear market is an infrastructure that crumbles and falls apart over time as funding needed to maintain and build the infrastructure dries up. With rising unemployment and rising interest rates on existing debt, taxpayer dollars are going to dry up very rapidly. With a debt default in the forecast (most likely in 2014), the federal government won't be able to borrow the money to get a jobs program off the ground. The end result is that the infrastructure falls apart.

A write-up on the subject matter on the transportation infrastructure was done, which aims to show the consequence of underinvestment. The write-up is here. There is one issue with the information in the write-up -- namely, the results rely on linear extrapolation, which leads to over-optimistic forecasts at social mood peaks and over-pessimistic forecasts at social mood troughs.

Given that the bulk of "The Great Deflation" is still ahead of us, the infrastructure will in fact fall apart substantially faster than predicted in the write-up.

Since the current bear market is a fourth wave correction (Grand Supercycle wave [IV]), the guideline is that the correction will bring us back to levels associated with the fourth wave of one lesser degree (which would be the previous Supercycle wave (IV)). The fourth wave of one lesser degree is the Great Depression. The implication here is that economic and living conditions on "Main Street" will decline to the level of the 1930s within the next 7 years.

Consider what it means to return to the 1930s as far as the transportation infrastructure is concerned. The bear market will bring back dirt roads. By 2016, maintenance on most roads will stop. Many highways and freeways will simply fall apart and be overrun by grasses and bushes. Streets in the suburbs will become dirt roads. By 2021, the nation's transportation infrastructure will be comparable to what it was in 1932.

Canaries in a Job Market Collapse

First, it's the next leg down in the stock market. Now, it's the next leg down in the job market. Exhaustion signs have been seen in the job market in the last 2 months. Now, we are seeing evidence that the bear market rally in the job market has ended and the next leg down, associated with Primary wave [3] down in social mood, is now in progress.

Six days ago, we got news that Cisco Systems is planning to lay off 10000 workers. These types of events never occur in isolation. They are always associated with bear markets. This was closely followed by Goldman Sachs announcing plans to lay off 1000 workers and Boeing planning to lay off 510 workers.

Yesterday, another shocking development, which I think is a taste of what is yet to come in the months and years ahead, unfolded as Borders is liquidating and closing its doors for good, resulting in over 10000 people losing their jobs. Borders is an early casualty, as the Grand Supercycle degree bear market is going to claim a lot of victims before its over.

The last time we had a major depression, over 90% of corporations and businesses folded and closed their doors forever. We are already seeing early indications that an event of this magnitude will unfold again. A case in point is Wal-Mart, which has been declining for the last 2 years. If the so-called "Great Recession", a moderate strength downward impulse, can have this much of an effect on the largest corporations on the planet, just imagine what will happen when "The Great Deflation" unfolds in full force. The most likely scenario here is that the bear market will break the back of corporations and businesses, and even those that are perceived to be invincible, such as Wal-Mart, will shatter like glass. The South Sea Company was perceived to be invincible back in the early 1700s, yet, a 2 year deflationary collapse that unfolded from 1720 - 1722 caused the company to fold.

Wage deflation, rising interest rates, and a cascade of debt defaults will work together to break the back of corporations and businesses in the coming months and years. As corporations and businesses implode, the ranks of the unemployed will be rapidly increased.

A job market collapse is in progress. It will be slow at first, just as it was from 2007 - 2009. Over time, the losses will accelerate. The US economy is expected to wipe out 36 million jobs in the next 5 years, pushing the unemployment rate (U6) up to 40% by early 2016. Unlike the so-called "Great Recession", which hit manufacturing, retail, and service jobs hard, but left fields such as health care, science, and engineering virtually unaffected, the job market implosion in progress now will be broad and virtually every field will be hit with massive job losses.

Bears in Control of Job Market

Today, the latest jobs report showed that the US economy created just 18000 jobs in June 2011. The numbers for May 2011 were revised downward to 25000 jobs from 54000. Taken together in context of the larger picture, we are seeing clear evidence of a trend change in the job market. For all we know, the next leg down may have already started but confirmation won't come until August 2011 at the earliest.

The job market is clearly sliding down the "Slope of Hope" in terms of the larger picture. During June 2011, President Obama downplayed the weak job numbers, attributing it to a "bump in the road".  After the ADP report came out last Wednesday, economists and analysts boosted their expectations from 90000 to 175000 in terms of jobs created in June 2011 and then predicted that hiring would accelerate in the second half of 2011. After the job numbers for June 2011 came out, Obama again attributed the weak numbers as a "bump in the road" and started to blame the debt ceiling showdown, while at the same time, expressed optimism that hiring will accelerate in the next few months. The latest speech is here.

The next leg down in the job market is imminent if it hasn't started already. Earlier, we saw the beginning of the next leg down in the DJIA. The job market is now following suit. Once the next leg down starts, the (United States) economy will wipe out 36 million jobs in the next 5 years. The mechanism is already in place for mass job losses to take place, namely, the fact that businesses and corporations are leveraged to the hilt with credit and debt and rising interest rates will trigger a massive cascade of debt defaults as the existing debt burden becomes too heavy to bear. Even professions that are deemed to be hot (such as health care) will sustain massive job losses as their businesses fold.

Expect Obama to continue to play the "bump in the road" card for a number of months as the job market resumes its decline, and expect the GOP to get more aggressive in their attacks over time. Both Rep. John Boehner and Rep. Eric Cantor wasted no time using the latest job report to attack Obama's economic policies. 

The unemployment rate (U6) is at 16.7% and will soon surpass the highs seen in 2009 (17.5%). The unemployment rate (U6) is projected to rise to 40% by early 2016. Expect weekly jobless claims to surpass the highs seen in 2009, possibly reaching 900,000 or more by early 2016.

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.

State of the Economy

As the blow-off top in the Primary degree bear market rally enters what could possibly be its last days, exuberant optimism continues to grow in intensity. There is consensus among economists and analysts that the worst is over.

The latest development occurred yesterday with a jobs report that indicated that 244,000 jobs were created in April 2011. The report, of course, served as fuel for exuberant optimism. In response of the report, President Obama has put down the proverbial "Mission Accomplished" sign on the economy, declaring victory. There is more information about the development on this Daily Kos page, which also includes a video of the weekly address.

What we are seeing is the "seductive personality" of a large wave 2 (in a bear market) play out in the political arena. The rich, the upper class, bankers, and politicians are all partying like its 2007. There is a lot of exuberant optimism in the air, even more evident than it was in 2007. In a bear market, bullish sentiment is stronger at the peak of wave 2 than at the start of the bear market.

In terms of nominal GDP, the economy has been growing since 2009. To get the true state of the economy, one must look at GDP in terms of real money. Gold is considered real money. GDP in terms real money better reflects the true purchasing power of a nation's economic output. Nominal GDP (and Real GDP as well) is expressed in terms of dollars. The dollar is a fiat currency.

In terms of real money, the US economy peaked in 1999 (39 billion ounces of gold) and has fallen 73% from the peak, reaching a new low of 10.4 billion ounces of gold in the first quarter of 2011. Using the same measure, the US economy fell 48% during the Great Depression. By this measure, we are in a major depression, which has so far unfolded in terms of the loss of purchasing power.

"The Great Deflation" has been unfolding since 2000. Wage deflation has been unfolding for the last 11 years. There is more information about the development on this Daily Kos article. There are other places where "The Great Deflation" has been unfolding such as the declining housing market and the stock market in terms of real money (DJIA/gold ratio).

The only reason why economists still believe the economy is expanding is that GDP in terms of dollars continues to rise. However, the reason why the Nominal GDP and Real GDP continue to rise is that the dollar has been devalued into the ground as government, corporations, businesses, and even individuals get leveraged to the hilt in credit and debt -- which has resulted in a massive credit bubble that has been growing for 37 years and counting.

The bear market rally will soon come to an end, and the next leg down, Primary wave [3], will unfold. When the trend change occurs, "The Great Deflation" will unfold in full force, and the economy will decline in nominal terms as well as in real money terms. The economy (in terms of nominal GDP) will fall faster than gold will. The stock market will fall in nominal terms as well, and will also fall faster than gold, with a downside target of around 500 for the DJIA by 2021.

There is already awareness of the true magnitude of the bear market that we are in, as evidenced by a Gallup Poll done last month. There are more people that think that we are in a depression than those who think that the economy is growing. There is no doubt, however, that those who think that a depression is unfolding are making comparisons with the Great Depression. As I have shown many times, we are in a major depression, and I think that the Crisis of the Roman Republic is a better comparison to the hard times that we are going though right now.