The Final Thrust

We are on the verge of embarking on the final thrust and put in the final high for 2012 before the markets head lower in earnest in the second half of the year and beyond. Many markets in the Western World (with the exception of France) have been tracing out a complex structure from the October 2011 low. We are approaching the business cycle high point, on course to be reached on June 24, 2012.

Here is an updated intermediate term chart of the DJIA:

The 3 month triangle, Minute wave [x] of Minor wave B, is complete with Minute wave [z] poised to start. Notice that the DJIA found support on the middle blue trend line, which is the inner trend channel line associated with Minor wave B. The triple zigzag should be completed on June 24, 2012 with an upside target of 13625.

Here is a chart showing the 3 month triangle in the context of the larger term picture in the DJIA:

The advance from the October 2011 low is Minor wave B of a larger expanded flat, Intermediate wave (W). At the upside target of 13625, Minor wave B will be 1.618 times the length of Minor wave A. After the final thrust is completed, then Minor wave C of Intermediate wave (W) will unfold and last for around a year with a downside target of 8500 on June 2013.

Many other markets in the Western World are also tracing the same pattern in which Primary wave [W] of Cycle wave x ended in February 2011 with Primary wave [X] now in progress and on course to continue until June 2016.

Here is an updated chart of the DAX:

Unlike other markets, Minor wave B in the DAX traced a simple zigzag and retraced just enough of Minor wave A for Intermediate wave (W) to be a regular flat. Minor wave C of the larger flat is in progress now. The DAX should put in a Minute wave [ii] bounce while the final thrust unfolds in the DJIA before heading lower in a larger third wave sell-off. The downside target for the DAX at the end of Intermediate wave (W) is 3625 to be reached in June 2013.

Here is an updated chart of the FTSE, which is following the wave path of the DJIA quite closely:

As with the DJIA, the FTSE is also tracing a triple zigzag from the October 2011 low. The FTSE is yet to fulfill the requirements for a flat. The minimum upside target for Minor wave B is 5966, the level in which Minor wave B retraces 90% of Minor wave A. Notice that the FTSE found support at the bottom blue trend line, which is part of the outer trend channel associated with Minor wave B. A final thrust should propel the FTSE to at least 5966 to complete the triple zigzag. A five wave decline, Minor wave C, is in the forecast once the final thrust is completed. The downside target for Minor wave C is around 4100, the price level that would make Minor wave C 1.618 times the length of Minor wave A.

There is already a lot of extreme optimism and bullishness. As I suggested in the previous blog entry, economists and analysts will be making large extrapolation leaps for both the stock market and the economy:

1 -- An analyst from BNP Paribas Fortis is forecasting that the DJIA will hit 100,000 (!) within the next 10 years. The analyst is basing the forecast on central banks pumping enormous amounts of money into the markets.

2 -- Federal Reserve worship has reached unprecedented levels with most analysts believing that the Federal Reserve can keep the markets propped up indefinitely.

3 -- Some analysts are even seeing the economic cataclysm in Greece as bullish for the United States economy under the rationale that the economic cataclysm will lead to investors seeking a safe haven in US treasury securities.

4 --  All eyes are on the Facebook IPO, soon to be unveiled. There is almost universal optimism that the IPO will be bullish for the economy and the job market. Facebook's mountain top experience is nearing an end, as suggested in an earlier blog entry. The other side of the mountain is already visible with a long term decline in the future. The seeds of the decline have already been sown as 59% of Facebook users do not trust Facebook to keep their information private. A big social mood decline associated with Primary wave [X] (2011 - 2016) down can easily turn public mistrust into a scenario where people pull the plug on their Facebook accounts by the tens of millions.

In spite of a pervasive atmosphere of exuberant optimism, we are already seeing hints of the next stage of the Crisis of the Western World:

1 -- There is evidence of a bank run in progress in Greece as $894 million were withdrawn from banks in the country in one day. This could easily be a precursor to bank runs in Spain, Portugal, Ireland, and Italy within the next 12 to 36 months as the debt crisis in Europe continues to spread.

2 -- Hollande has been sworn in as the new president of France after an election on May 6, 2012 in which Sarkozy was thrown out of office by angry voters. In spite of talks between Hollande and Merkel in the aftermath of the election aimed at keeping the EU together, Hollande ran on a platform of spending to stimulate economic growth. With social mood poised to go south in the coming months and years, there will be strife and discord between Hollande and Merkel, much like the strife and discord that has been unfolding between President Obama and House Speaker Boehner, and the result will be the same -- large scale political gridlock -- effectively shutting down any attempt to fight the economic cataclysm that is unfolding.

3 -- The United States is dealing with its own version of the PIIGS -- namely Illinios, California, Texas, New Jersey, and Florida. California's budget deficit problems have been making the news again with the deficit expanding to $16 billion with even more budget cuts on the horizon. Keep in mind that California is over three times the size of Greece, so the implications of California going under will certainly result in a deflationary vortex that will drag down the rest of the United States within a matter of months, if not weeks.


The second half of 2012 will go to the bears. Once the final thrust is completed on June 2012, the markets will head lower in earnest for the rest of the year and continuing to decline until the next business cycle low point is reached in June 2016.

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.

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.

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.

Politics

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.

A View of the Great Tribulation

The worst part of the Grand Supercycle degree bear market is decades into the future, but we are already starting to see some glimpses of what the period will be like when we get there.

According to Living Planet Report, humans will need two Earths by 2030 if the current trend of resource consumption continues. The trend, however, will change with "The Great Deflation" unfolding in full force in the coming months and years. Resource consumption will greatly slow down during the worst part of "The Great Deflation" which will change the timing of when resource consumption goes critical. The critical event would likely occur in 2042.

The worst part of Grand Supercycle wave [IV] will start in 2042, which would be Supercycle wave (c). In many ways, 2042 - 2055 will be a lot like 1770 - 1784 -- wars, revolutions, uprisings, authoritarianism, and religious persecution, all unfolding on a global scale. However, it will be worse this time around because there are issues that human civilization will be facing that were never an issue back in the 1770 - 1784 period : Global warming, which will cause a lot of havoc on its own, the fear of an asteroid impact (2007 VK184) in 2048, and chronic resource shortages. That's why I refer to the period of Supercycle wave (c) as "The Great Tribulation" as it will be a period of very hard times for humanity.

First of all, a chronic resource shortage will crash the global economy, resulting in manufacturing corporations and businesses closing their doors, which will eventually help push the unemployment rate to 75% (U6) in the United States by 2055, with similar unemployment levels in Europe as well.

Second, a chronic resource shortage will result in a massive chasm between the upper class / rich and everyone else as essential commodities such as food and water get priced out of reach of all but the top 5%.


Given the negative social mood that will be present during "The Great Tribulation", a chronic resource shortage could easily be used as a justification for starting a war. In addition, it could be more than a coincidence that the start of the chronic resource shortage corresponds with the start of Supercycle wave (c), which is the year 2042.

On the long term, I expect that the start of Grand Supercycle wave [V] in 2055 will be characterized by governments making some very hard choices about resource consumption that will help run the global economy in a more resource efficient manner.

Our Current and Future Path

Here is an update on our current position within the larger Elliott wave sequence. The larger picture still remains the same. With the blow-off top possibly in its final days, it's time to assess where we are and where we are going.

The long term trends have not changed, as shown by our current position at the largest degrees of trend:

Ultra Millennium wave ((III))    1400 - 11000+  Modern and Future Civilization

Super Millennium wave ([1])    1400 - 4400+    Modern and Future Civilization

Millennium wave ((1))              1400 - 2233      Modern Civilization

The Millennium degree trend is still up.

Within Millennium wave ((1)), it is clear that the first three Grand Supercycle waves have already completed. We are in a Grand Supercycle degree bear market, which started in 2000.

Here's a chart of the DJIA from 1915 to 2055, showing the projected wave path of the DJIA in the years and decades ahead.

Given that Grand Supercycle wave [IV] must stay within the trend channels associated with Millennium wave ((1)) with perhaps a throw-under at the end of the correction, I lean heavily towards a flat. The bear market is just getting started and we are yet to enter the heart of the abyss. The bear market should end in 2055, which would also correspond with a Kondratiev cycle low point.

Within Grand Supercycle wave [IV], we are still in the initial leg down, which is Supercycle wave (a). It is clear that Supercycle wave (a) is unfolding as an expanded flat, with Cycle wave a and Cycle wave b completed and Cycle wave c in progress. Since an expanded flat is a 3-3-5 pattern, we should expect Cycle wave c to unfold as a five wave impulse. Within Cycle wave c, only Primary wave [1] is completed and we are very close to completing Primary wave [2].

Here is a chart of the DJIA from 1998 to 2021, showing the projected wave path of Supercycle wave (a).

The projected wave path of Supercycle wave (a), of course, paints a picture of deflation unfolding with increasing momentum over time. It is for that reason that I call the period "The Great Deflation". So far, "The Great Deflation" has been unfolding in a punctuated fashion. This will change with the start of Primary wave [3] down, when deflation will unfold in full force.

Here is a chart of the DJIA from 2007 to 2015, showing the portion of Cycle wave c that has unfolded so far, plus a projection for a portion of Primary wave [3] down. Expect Primary wave [3] to last 55 - 60 months. The bear market is projected to continue sliding down the "Slope of Hope" until Oct 2013, when the center of Primary wave [3] is reached.

The point of recognition is arrowed on the chart. That's when economists and market analysts start to realize that a major depression is in progress. Until the center of Primary wave [3] is reached, there will be numerous calls for a bottom and reassurances of recovery by economists, market analysts, and politicians. In the early part of Primary wave [3] down, economists will likely say that "it's just a double dip recession".

Another aspect of "The Great Deflation" is a great bull market in the US Dollar that started in 2008.

Here's a chart of the US Dollar Index from 1998 to 2021, showing the projected wave path of the rest of Cycle wave I.

As shown in the chart, the down trend in the dollar, which started in the 1700s, ended in 2008. The 300 year bear market in the dollar is clearly too big to be a Grand Supercycle degree correction, it is most likely Millennium wave ((2)). The projected wave path of the US Dollar Index also paints a picture of deflation unfolding with increasing momentum over time.

While Primary wave [3] down unfolds in the stock market, economy, and job market, Primary wave [3] up will unfold in the US Dollar Index. The end of "The Great Deflation" will correspond with the peak of Cycle wave I in the US Dollar Index. 13 years is definitely a reasonable duration for a Cycle degree advance within a larger bull market, and in addition, retrace the 32 year ending diagonal (1976 - 2008) within the guideline range of 10 - 15 years.

We did not have a "Great Recession" that recently ended. The current bear market is not in the same league as the Great Depression, so we are not in the "Second Great Depression" either. We are in a major depression. I think that the Crisis of the Roman Republic is a better comparison to the magnitude of the bear market that is unfolding and the hard times that are coming. I propose to call the current period, Grand Supercycle wave [IV], the "Crisis of the Western World".

Racing for the Bottom

The precursors of the coming Palin Administration Period are already unfolding. With the continuation of austerity measures unfolding at the state level, it is becoming very clear from a socionomic perspective that a massive bear market is unfolding.

In a deflationary collapse, tax revenue dries up, and governments respond with austerity measures which means that essential services and safety nets get cut back or even purged altogether. As the worst of "The Great Deflation" is still yet to unfold, the austerity trend is still in its infancy.

In the latest series of developments, Michigan, Missouri, and now Florida, have passed legislation aimed at cutting back on unemployment benefits. Here's the chain of events that have unfolded so far:

1 -- In March 2011, Michigan became the first state to cut unemployment benefits, reducing the standard duration from 26 weeks to 20 weeks. The change would take effect in January 2012. There is more information about the development here. Just before Gov. Rick Snyder signed the bill into law, the National Employment Law Project expressed concern that other states would start working on similar legislation.

2 -- In April 2011. Missouri became the second state to cut unemployment benefits. The reduction is the same as in Michigan, but the law would take effect immediately upon signing into law. Gov. Jay Nixon signed the bill into law a short time later. There is more information about the events in Missouri here.

3 -- In May 2011, Florida is set to become the third state to cut unemployment benefits when Gov. Rick Scott signs HB 7005 into law. The cuts go substantially farther than in either Michigan or Missouri. The duration of unemployment benefits would be cut to as little as 12 weeks. Additionally, the new law will require potential workers to provide detailed documentation of five employer contacts per week. There is more information about the development here. In response to the imminent signing of HB 7005 into law, Christine Owens, the Executive director of the National Employment Law Project, made a statement about the potential destructive impact of the new law.

The trend that we see here is what is known as "the Race to the Bottom". Expect this trend to not just continue, but accelerate in the coming months and years. As Primary wave [3] down unfolds, the effects of "The Great Deflation" will result in tax revenue that rapidly dries up. This will lead to increased austerity measures at the state level.

The actions of Gov. Rick Snyder, Gov. Rick Scott, and Gov. Jay Nixon, all at the state level, is a precursor to what the Palin Administration will do at the federal level in 2017. As the worst part of "The Great Deflation" unfolds with Primary wave [5] down in force, unemployment benefits will be purged at the federal level by the Palin Administration sometime in 2017. By then, federal tax revenue will have almost completely dried up.

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.

Economic Corrective Periods

While we wait for Primary wave [3] down to start, we'll look at the different types of economic corrective periods that take place over the course of human civilization. There are generally only two terms that are used in economic circles: "recession" and "depression", although the terms "major recession" and "major depression" are used from time to time. There is a third term that should be used -- "dark age", which is reserved for economic corrective periods that are clearly too big to call a depression.

It's best to classify economic corrective periods in terms of the Elliott Wave Principle. After all, the economy follows the stock market and thus traces out the same wave path as the stock market does (in terms of real money). It's cleaner that way. There is already a basis for this type of classification, as depressions have already been linked to Supercycle degree bear markets.

In general:

Primary degree bear markets result in recessions
Cycle degree bear markets result in major recessions
Supercycle degree bear markets result in depressions
Grand Supercycle degree bear markets result in major depressions
Millennium (and larger) degree bear markets result in a dark age

Now for the descriptions in detail:

Recession

A recession is a relatively small economic corrective period that generally lasts about 1 year. Recessions result from Primary degree bear markets. The unemployment rate (U6) generally reaches a high of 6% to 9% at the end of the period. Recessions occur every 7 years on average. Recessions never result in deflation. Almost all losses in the job market in a recession are from service and retail jobs as lower demand temporarily results in layoffs. Banks and government are generally unaffected by recessions. Recessions can be identified as far back as the early 1800s.

Here's a list of all the recessions that occurred since 1932:

Primary wave [2]     1946 - 1948          Recession

Primary wave [4]     1960 - 1962          Recession

Primary wave [2]     1977 - 1980          Recession

Primary wave [4]     1986 - 1987          Panic (Recession in 1990 - 1991)

Major Recession

A major recession is a moderate sized economic corrective period that generally lasts 4 years. Major recessions result from Cycle degree bear markets. The unemployment rate (U6) generally reaches a high of 12% to 15% at the end of the period. Major recessions occur every 25 years on average. Major recessions result in more protracted job layoffs over a longer period of time, and declining professions suffer substantial losses. Around half of major recessions result in deflation, as was the case for the major recession of 1918 - 1921 and the major recession of 1937 - 1941. Corporate earnings generally take a substantial hit during major recessions. Periodic bank failures generally occur during major recessions, although the strongest banks are still unaffected. Governments take a moderate hit on their tax revenue, but are generally able to adapt without much trouble. Major recessions can be identified as far back as the Renaissance.

Here's a list of major recessions from as far back as the 1500s:

Renaissance (4 of 6 major recessions identified)

Cycle wave II       1514 - 1520      Major Recession

Cycle wave IV     1587 - 1600      Major Recession

Cycle wave II       1660 - 1667      Major Recession

Cycle wave IV      1676 - 1695     Major Recession

Industrial and Technological Revolutions

Cycle wave II        1800 - 1810     Major Recession

Cycle wave IV       1826 - 1830    Major Recession

Cycle wave II        1875 - 1881     Major Recession

Cycle wave IV       1918 - 1921     Major Recession

Cycle wave II        1937 - 1941     Major Recession

Cycle wave IV       1966 - 1974    Major Recession

Depression
  
A depression is a large economic corrective period that generally lasts 8 to 15 years. Depressions result from Supercycle degree bear markets. The unemployment rate (U6) reaches a high of 20% to 30% at the end of the period. Depressions result in a moderate deflationary collapse and a substantial destruction of wealth. Layoffs are even more protracted as deflation results in a cascade of defaults in both the private and public sectors. Bank failures and bankruptcies are generally widespread with only the strongest banks and corporations surviving through the period in one piece. Depressions usually result in trade wars, currency wars, and austerity measures as tax revenue substantially dries up from rising unemployment. Depressions occur every 75 years on average, and can be identified as far back as the Roman Period. The two most recent depressions are well characterized.

A list of depressions follows:

Roman Period

Supercycle wave (II)     600 BC - 580 BC    Depression

Supercycle wave (IV)   509 BC - 493 BC    Depression

Supercycle wave (II)     343 BC - 338 BC    Depression (Uprising of Latium allies in 

                                                             Latin war)

Supercycle wave (IV)   265 BC - 242 BC    Depression (First Punic War)

Supercycle wave (II)     54 - 68                   Depression (Year of the four emperors, 

                                                             plus Nero)

Supercycle wave (IV)    162 - 177              Depression

Modern Civilization  (4 of 6 have unfolded, the last 2 are in the future)

Supercycle wave (II)     1470 - 1484            Depression

Supercycle wave (IV)    1637 - 1648           Depression

Supercycle wave (II)      1835 - 1859          The Long Depression

Supercycle wave (IV)    1929 - 1932           The Great Depression

Major Depression

Major depressions are massive in duration and severity, generally lasting 40 - 80 years. Major depressions result from Grand Supercycle degree bear markets. The unemployment rate (U6) generally goes as high as 50% to 70% at the end of the period. Major depressions result in a severe deflationary collapse that is accompanied by rapid destruction of wealth. The high unemployment is due to a massive cascade of debt defaults that causes virtually all corporations, banks, and businesses to implode. Trade wars, currency wars, and austerity measures are severe in magnitude as tax revenue rapidly dries up. Major depressions generally occur every 300 years and can be identified as far back as the Late Bronze Age.

Late Bronze Age (1 of 2 identified)

Grand Supercycle wave [IV]     1200 BC - 1053 BC   Major Depression

Roman Period

Grand Supercycle wave [II]       407 BC - 390 BC    Major Depression

Grand Supercycle wave [IV]     135 BC - 30 BC      Major Depression (Crisis of the 

                                                                       Roman Republic)

Modern Civilization

Grand Supercycle wave [II]      1720 - 1784         Major Depression

Grand Supercycle wave [IV]     2000 - 2055        Major Depression

Dark Age

A dark age is an extremely massive corrective period in the economy and job market. A dark age results from a bear market of Millennium or larger degree and generally last 150 years or more. The unemployment rate (U6) reaches 95% - 99% at the end of the period. A dark age results in a deflationary collapse of extreme magnitude in which virtually all wealth is destroyed. In a dark age, there is a total collapse of infrastructure and even the largest and most resilient of corporations, banks, and businesses implode, as well as a breakdown of government at all levels. A dark age generally occurs every 1000 years and can be identified as far back as the Neolithic Revolution period.

A list of dark ages from 10000 BC follows (not all are identified)

Super Millennium wave ([2])   c7000 BC - c6800 BC    Dark Age

Super Millennium wave ([4])   c3500 BC - c3200 BC    Dark Age

Millennium wave ((4))               933 BC - 700 BC         Dark Age

Ultra Millennium wave ((II))      337 - 1400                   Dark Ages

As indicated before, there is a major depression in progress. So far, the major depression has unfolded in the form of the economy collapsing in terms of real money (GDP in terms of gold) since it started in 2000. The reason why the nominal and real GDP continues to rise is that the dollar has been devalued as a result of government, banks, corporations, businesses and even individuals getting leveraged to the hilt with credit and debt. When Primary wave [3] down starts, the economy will start collapsing in nominal terms as well. More on that later.