The bailout drama in Cyprus had created an atmosphere of uneasiness and suspense in Europe for the last two weeks. The significance of the events has been dismissed by most people, even economists and political pundits, all pointing out the fact that because Cyprus makes up just 0.2% of the European Union's GDP, that the damage to the larger Eurozone would be minimal. However, the economy is global with a lot of working parts integrated together (and has been that way since the 1400s, but society is more connected now than back then), meaning that when one part sustains damage or goes down, a chain reaction can happen.
As will be demonstrated here, the drama in Cyprus is much more serious than many would think. What happens in Cyprus affects the European Union, and eventually, the entire Western World. The next phase of the "Crisis of the Western World" is approaching. The drama in Cyprus started when the two largest Cypriot banks became insolvent and needed a 10 billion euro bailout.
The stage for the Cypriot financial crisis was set with excessive exposure to the Greek debt crisis (through investment in Greek treasury bonds, which have been considered junk bonds) and the downgrading of the Cyprus economy to junk status. Moody's had downgraded the credit rating of Cyprus to junk status on March 2012, citing the need for the Cyprus government to inject more capital into the banks. In June 2012, Fitch downgraded Cyprus bonds to BB+, no longer qualifying as investment grade as far as acceptance as collateral by the ECB is concerned. A short time later, Cyprus requested a bailout from the European Union's Eurpean Financial Stability Facility or European Stability Mechanism.
The drama started on March 16, 2013 when the European Union agreed to a 10 billion euro deal with Cyprus. In the first action of its kind, the part of the terms of the bailout is a so-called "wealth tax" that takes up to 10% of deposits for all domestic bank accounts.
1 -- News of the "wealth tax" sparked a mini-bank run in which people attempted to pull their money out of the banks as fast as they can. Many local ATMs ran out of cash in a matter of hours. With the sudden scarcity of cash in Cyprus due to the bank closures, many businesses have stopped accepting credit card payments.
2 -- The Cypriot government rejected the terms of the bailout on March 19, 2013. In the aftermath of the failed vote, The Cypriot government declared a bank holiday that would eventually last over a week. When the banks re-opened on March 28, 2013, capital controls were were already in place setting limits on how much money can be withdrawn along with the deployment of police in the streets amid the fears of a bank run.
3 -- When the bank holiday ended in Cyprus, the damage was already done. Many businesses and aging retirees saw their savings wiped out by the "wealth tax", losing as much as 80% of their life savings overnight.
Many politicians, economists, financial analysts, and news pundits have shrugged off the drama in Cyprus as "not a big deal". The significance of the events in Cyprus is not recognized by most people. Confidence is an ironic thing --- it takes decades to build, but it takes only a few days to tear it down. Confidence is a very important part of keeping the banks fully functional. With the "wealth tax" genie now out of the bottle, the first crack in the dam (of confidence) has formed. The "wealth tax" has already caused some real damage to people in Cyprus and it has also caused many people in southern Europe to question whether their savings accounts and checking accounts are truly safe.
When people no longer feel that the money they have in the banks is safe, they become more likely to pull it all out. There is a reason why people stuffed their money under their matress in the 1930s during and shortly after the Great Depression (hint -- over 9000 banks imploded from 1929 to 1932).
There are very strong indications that the people at the top of the pyramid are oblivious to the cracks in the dam of confidence (see above). When a dam develops a crack, it becomes weakened and the cracks get larger over time. Eventually, the entire dam gives way and bursts.
There are already indications of more cracks in the dam of confidence that could form in the future:
1 -- Banks in Slovenia are in need of billions of euros of fresh capital and are struggling with bad loans that equal a fifth of the country's economic output.
2 -- There is already discussion of depositor haircut provisions for systemically important banks in Canada as part of the 2013 budget.
The first crack in the dam of confidence has formed. Over time, the cracks are expected to get larger, weakening the dam over time. When the dam bursting event takes place, the result is a full scale bank run throughout the Western World. The dam bursting event is most likely to take place in 2015 or 2016 and will start in Europe before spilling into the United States and Canada. The "tax wealth" genie is out of the bottle and it is going to be very difficult for people in high places to put it back in.
Showing posts with label Europe Debt Crisis. Show all posts
Showing posts with label Europe Debt Crisis. Show all posts
Sunday, March 31, 2013
Saturday, June 16, 2012
Increasing Turmoil in Europe
Social unrest has been on the rise in Europe with hot spots in Greece, Italy, Spain. All eyes are on the June 17, 2012 elections in Greece and their possible implications, but financial hardship has also been increasing in Spain and Italy.
As suggested in the previous blog entry, Spain's banks got a $125 billion (100 billion euros) bailout on Sunday afternoon (June 10, 2012). The bailout news resulted in a short lived euphoria that fizzled out by the end of the next day. The IBEX 35 gapped up by more than 5% only to close the entire gap within a few hours. All the other markets (including the US markets) also gapped up in the hours before trading on Monday (June 11, 2012) only to close their gaps by the end of the trading session.
The IBEX 35 tells the story of increasing social unrest and financial hardship in the peripheral nations of Europe that continue to unfold since the Greek debt crisis started to unfold in April 2010.
Here is a long term chart of the IBEX 35:
The IBEX 35 was created back in 1992. Since inception, the index peaked at around 16000 in April 2007 before starting the bear market trend that is still in force today. The index has fallen to a low of around 6000 last month before starting another bounce.
Here is a closer look at the IBEX 35 from 2009 to today:
Like all the other markets, the IBEX 35 reached a Primary degree low point in March 2009, which would be the end of Primary wave [1] down. The low point was followed by a bear market rally, Primary wave [2] up, that lasted less than a year and took the index from the upper 6000s to just over 12000. The IBEX 35 has breached the March 2009 low and the deflationary downtrend appears to be picking up momentum. The best count for the IBEX 35 is that a series of 1s and 2s is unfolding. A small wave 2 bounce is in progress now, which will quickly give way to new lows. The main count as shown on the intermediate term chart indicates that the center of Intermediate wave (1) of Primary wave [3] down will soon be reached.
The center of Intermediate wave (1) of Primary wave [3] down in Spain, Greece, and Italy is very likely a key event, as it will result in the "Panic of 2012". The coming point of recognition will likely result in Spain and Italy both needing a bailout, yet Spain and Italy are both too big to bail out. Without a bailout, Spain and Italy will default on their debts, resulting in a global ripple effect that rips apart the economies of the Western World, bringing out the next stage of the "Crisis of the Western World".
There are already a lot of precursor events unfolding that are indicating that the "Panic of 2012" will take place in Europe in the near future:
1 -- Nations in Europe have been hit with a barrage of credit downgrades in the last few days. On June 13, 2012, Spain's credit rating was downgraded by Moody's from A-3 to Baa-3. Just one day later, Spanish 10 year bonds hit the key 7% level. On Friday, June 15, 2012, Moody's cut the credit rating of 11 European banks and said that more downgrades will take place of Greece ditches the euro.
2 -- Italy's 10 year bond yield is also on the rise, hitting 6.25% and threatening to make the burden of the $2.5+ trillion debt an even heavier burden to carry as interest payments on the debt continue to rise.
3 -- The June 17, 2012 elections in Greece have been hanging like a dark cloud with many central banks gearing up for another round of intervention with the European Central Bank possibly cutting interest rates and Britain's central bank possibly infusing the markets with more money. Given the strong level of bearish social mood present in Greece, the most likely outcome of the election is a government that is plagued by strife and discord to a degree where a cohesive government is impossible.
4 -- The IMF (International Monetary Fund) has been urging Spain to raise its VAT, reduce salaries of employees, and reduce pensions and housing deductions as a solution to its debt crisis.
5 -- The Greek election has also resulted in substantial involvement of the EU as German officials continue to make a push in Greece for voters to keep the conservatives in power with all the usual fear-mongering -- a vote for the left would imperil the euro.
The larger Grand Supercycle degree bear market is already having an effect in Greece, and will soon have the same effects in the rest of the Western World. So far, Greece has proven to be a good leading indicator of what will unfold in the rest of the Western World as "The Great Deflation" continues to unfold. Greece's power grid is already starting to come under pressure and stress, in addition to the barter markets that started to come up last year. Also under pressure in Greece as a result of the bear market is the nation's health care system in which the debt crisis threatens to bring about the collapse of the nation's health care system as hospitals and clinics face possible closures as the financial crisis worsens. The events in Greece all point to a scenario where economic and living conditions in the Western World will decline to the level of the 1930s, some nations reaching that point sooner than others.
As suggested in the previous blog entry, Spain's banks got a $125 billion (100 billion euros) bailout on Sunday afternoon (June 10, 2012). The bailout news resulted in a short lived euphoria that fizzled out by the end of the next day. The IBEX 35 gapped up by more than 5% only to close the entire gap within a few hours. All the other markets (including the US markets) also gapped up in the hours before trading on Monday (June 11, 2012) only to close their gaps by the end of the trading session.
The IBEX 35 tells the story of increasing social unrest and financial hardship in the peripheral nations of Europe that continue to unfold since the Greek debt crisis started to unfold in April 2010.
Here is a long term chart of the IBEX 35:
The IBEX 35 was created back in 1992. Since inception, the index peaked at around 16000 in April 2007 before starting the bear market trend that is still in force today. The index has fallen to a low of around 6000 last month before starting another bounce.
Here is a closer look at the IBEX 35 from 2009 to today:
Like all the other markets, the IBEX 35 reached a Primary degree low point in March 2009, which would be the end of Primary wave [1] down. The low point was followed by a bear market rally, Primary wave [2] up, that lasted less than a year and took the index from the upper 6000s to just over 12000. The IBEX 35 has breached the March 2009 low and the deflationary downtrend appears to be picking up momentum. The best count for the IBEX 35 is that a series of 1s and 2s is unfolding. A small wave 2 bounce is in progress now, which will quickly give way to new lows. The main count as shown on the intermediate term chart indicates that the center of Intermediate wave (1) of Primary wave [3] down will soon be reached.
The center of Intermediate wave (1) of Primary wave [3] down in Spain, Greece, and Italy is very likely a key event, as it will result in the "Panic of 2012". The coming point of recognition will likely result in Spain and Italy both needing a bailout, yet Spain and Italy are both too big to bail out. Without a bailout, Spain and Italy will default on their debts, resulting in a global ripple effect that rips apart the economies of the Western World, bringing out the next stage of the "Crisis of the Western World".
There are already a lot of precursor events unfolding that are indicating that the "Panic of 2012" will take place in Europe in the near future:
1 -- Nations in Europe have been hit with a barrage of credit downgrades in the last few days. On June 13, 2012, Spain's credit rating was downgraded by Moody's from A-3 to Baa-3. Just one day later, Spanish 10 year bonds hit the key 7% level. On Friday, June 15, 2012, Moody's cut the credit rating of 11 European banks and said that more downgrades will take place of Greece ditches the euro.
2 -- Italy's 10 year bond yield is also on the rise, hitting 6.25% and threatening to make the burden of the $2.5+ trillion debt an even heavier burden to carry as interest payments on the debt continue to rise.
3 -- The June 17, 2012 elections in Greece have been hanging like a dark cloud with many central banks gearing up for another round of intervention with the European Central Bank possibly cutting interest rates and Britain's central bank possibly infusing the markets with more money. Given the strong level of bearish social mood present in Greece, the most likely outcome of the election is a government that is plagued by strife and discord to a degree where a cohesive government is impossible.
4 -- The IMF (International Monetary Fund) has been urging Spain to raise its VAT, reduce salaries of employees, and reduce pensions and housing deductions as a solution to its debt crisis.
5 -- The Greek election has also resulted in substantial involvement of the EU as German officials continue to make a push in Greece for voters to keep the conservatives in power with all the usual fear-mongering -- a vote for the left would imperil the euro.
The larger Grand Supercycle degree bear market is already having an effect in Greece, and will soon have the same effects in the rest of the Western World. So far, Greece has proven to be a good leading indicator of what will unfold in the rest of the Western World as "The Great Deflation" continues to unfold. Greece's power grid is already starting to come under pressure and stress, in addition to the barter markets that started to come up last year. Also under pressure in Greece as a result of the bear market is the nation's health care system in which the debt crisis threatens to bring about the collapse of the nation's health care system as hospitals and clinics face possible closures as the financial crisis worsens. The events in Greece all point to a scenario where economic and living conditions in the Western World will decline to the level of the 1930s, some nations reaching that point sooner than others.
Tuesday, January 17, 2012
European Debt Contagion Infecting the Core
The European sovereign debt crisis continues to unfold with the contagion starting to affect even the core European Union nations. The GDP of the European Union is now falling again even in nominal terms. Several days ago, the latest GDP numbers for Germany were released, showing that the nation's GDP declined even in nominal terms, along with Spain, Slovenia, and the UK. The European Union is also bleeding jobs again with rapidly rising unemployment in most of the peripheral nations in Europe, as well as a decline in manufacturing and factory orders even in Germany.
In the latest series of developments, Standard and Poors downgraded the credit rating of France and eight other European nations. A short time later, the Euro Zone bailout fund was downgraded from AAA to AA+. This is a very clear indication that the sovereign debt crisis in Europe is now infecting the core European Union nations.
Portugal is now following Greece on the road to an eventual default on its debt after having its credit rating downgraded to junk status by all three credit rating agencies, with Spain following close behind. Even as a Greek default looms in the intermediate-term horizon, economists and analysts remain steadfast on their optimistic outlook on the European economy, most dramatically demonstrated by the interview involving the Greek Prime Minister on CNBC.
There are a number of other developments in Europe showing the effects of a spreading debt contagion with even the core nations affected:
1 -- The latest poll is showing that 65% of people in Italy have an unfavorable view of the euro with a substantial portion of the population preferring a return to the lira. This underscores a social trend associated with bear markets, namely the tendency for people to identify with smaller social units.
2 -- The austerity trend in Europe is unfolding in full force even in France and Germany as their governments move to tighten their belts with higher taxes and spending cuts. The social trend of increasing conservatism has continued to increase in Europe, with Greece and Portugal the first nations to implement austerity measures (as they were the first to be affected by the debt crisis) with Spain, Ireland, and Italy following suit. This underscores another bear market trait, namely, increasing conservatism as bearish social mood increases.
3 -- Europe's $39 trillion pension bomb is on the verge of going critical, if it hasn't done so already.
In the western world, the effects of "The Great Deflation" are stronger in Europe than they are in the United States and Canada. In many ways, the developments in the western world are a parallel of the 1930s when Germany defaulting on its debt in 1930 marked the beginning of the third phase of the Great Depression. We are on that path again, and at the present time, the United States is the only developed nation on the planet that is still creating jobs. As with the 1930s, Europe is poised to lead the way into the heart of the abyss with the United States and Canada following suit a few weeks to a few months later as the worst part of "the Great Deflation" unfolds.
Social mood is also deteriorating faster in Europe than it is in the United States as the updated charts of the DAX, FTSE, and the CAC-40 illustrate. The DJIA and the S&P 500 have exceeded the late October 2011 highs, but the DAX, CAC-40, and the FTSE are still below the October 2011 highs, setting up an intra-market bearish divergence.
FTSE:
CAC-40:
DAX:
Social mood in France and Germany has been deteriorating faster than expected -- both indexes are tracing out a truncated C wave within a zigzag in the form of an ending diagonal. If the wave counts for the DAX and CAC-40 are correct, it is a very bearish development as C waves within zigzags almost never truncate, and it is a harbinger of a third wave unfolding as a very fast decline. This is something to really keep an eye on in light of all the economic and political events unfolding in Europe.
In the latest series of developments, Standard and Poors downgraded the credit rating of France and eight other European nations. A short time later, the Euro Zone bailout fund was downgraded from AAA to AA+. This is a very clear indication that the sovereign debt crisis in Europe is now infecting the core European Union nations.
Portugal is now following Greece on the road to an eventual default on its debt after having its credit rating downgraded to junk status by all three credit rating agencies, with Spain following close behind. Even as a Greek default looms in the intermediate-term horizon, economists and analysts remain steadfast on their optimistic outlook on the European economy, most dramatically demonstrated by the interview involving the Greek Prime Minister on CNBC.
There are a number of other developments in Europe showing the effects of a spreading debt contagion with even the core nations affected:
1 -- The latest poll is showing that 65% of people in Italy have an unfavorable view of the euro with a substantial portion of the population preferring a return to the lira. This underscores a social trend associated with bear markets, namely the tendency for people to identify with smaller social units.
2 -- The austerity trend in Europe is unfolding in full force even in France and Germany as their governments move to tighten their belts with higher taxes and spending cuts. The social trend of increasing conservatism has continued to increase in Europe, with Greece and Portugal the first nations to implement austerity measures (as they were the first to be affected by the debt crisis) with Spain, Ireland, and Italy following suit. This underscores another bear market trait, namely, increasing conservatism as bearish social mood increases.
3 -- Europe's $39 trillion pension bomb is on the verge of going critical, if it hasn't done so already.
In the western world, the effects of "The Great Deflation" are stronger in Europe than they are in the United States and Canada. In many ways, the developments in the western world are a parallel of the 1930s when Germany defaulting on its debt in 1930 marked the beginning of the third phase of the Great Depression. We are on that path again, and at the present time, the United States is the only developed nation on the planet that is still creating jobs. As with the 1930s, Europe is poised to lead the way into the heart of the abyss with the United States and Canada following suit a few weeks to a few months later as the worst part of "the Great Deflation" unfolds.
Social mood is also deteriorating faster in Europe than it is in the United States as the updated charts of the DAX, FTSE, and the CAC-40 illustrate. The DJIA and the S&P 500 have exceeded the late October 2011 highs, but the DAX, CAC-40, and the FTSE are still below the October 2011 highs, setting up an intra-market bearish divergence.
FTSE:
CAC-40:
DAX:
Social mood in France and Germany has been deteriorating faster than expected -- both indexes are tracing out a truncated C wave within a zigzag in the form of an ending diagonal. If the wave counts for the DAX and CAC-40 are correct, it is a very bearish development as C waves within zigzags almost never truncate, and it is a harbinger of a third wave unfolding as a very fast decline. This is something to really keep an eye on in light of all the economic and political events unfolding in Europe.
Monday, November 21, 2011
Social Mood Undercurrents
Even as the three month long reprieve period continues to run its course, we continue to see more and more undercurrents of bearish social mood underneath the surface, ready to erupt to the surface with the advent of Minor wave 3 down in January 2012.
The European debt crisis is still a concern even as it remains in remission (just barely, it is so fragile that it could give out at any time), yet there is evidence that the contagion is starting to spread all the way to the core of the European Union. There have been a number of developments in the last several days:
1 -- Interest rates on Spanish, Italian, Greek, Portuguese, and even French bonds continue to rise, making it more expensive to borrow. The effect, of course, is to make the existing debt a heavier burden to bear as the interest payments on the debt continue to rise. As taxpayer money continues to dry up in the coming months and years, a default is just a matter of time. The most likely scenario is for one or more of the PIIGS to default on their debt as we approach the center of Minor wave 3 down in March / April 2012. Greece is already perilously close to default.
2 -- The sovereign debt crisis has already taken a toll on governments in the European Union. The latest development is a massive wave of voter anger effectively removing the Socialist party from power in Spain and bringing conservatives into power by a substantial margin. This unfolded quickly on the heels of a government upheaval in Italy and Greece in which technocrats gained power. In addition, Greece is now facing the same type of strife and discord as the United States as partisan gridlock has put the country on the verge of a virtual government shutdown.
3 -- France is now facing the threat of a credit rating downgrade as Moody's has downgraded the outlook on the country's credit rating due to rising interest rates. This development is a very strong indication that the debt contagion is spreading to the core of the European Union. France is one of the last of the larger nations on the planet to still have a AAA credit rating.
4 -- The 2008 parallel continues to play out in the United States. On the heels of the collapse of MF Global and the bankruptcy of Jefferson County, Alabama, the city of Detroit, Michigan is on the verge of running out of cash, with bankruptcy to likely follow during the center of Minor wave 3 down. Another recent development is the US Postal Service bleeding cash at a rapid clip with default in the near future. The US Postal Service will almost certainly be in need of a bailout during the center of Minor wave 3 down.
We are about halfway through Minor wave 2 up with the "Santa-Claus rally" poised to start in early December 2011. Even as the reprieve period continues to run its course, undercurrents of bearish social mood simmer underneath the surface with financial fault lines in both Europe and the United States ready to go critical.
The European debt crisis is still a concern even as it remains in remission (just barely, it is so fragile that it could give out at any time), yet there is evidence that the contagion is starting to spread all the way to the core of the European Union. There have been a number of developments in the last several days:
1 -- Interest rates on Spanish, Italian, Greek, Portuguese, and even French bonds continue to rise, making it more expensive to borrow. The effect, of course, is to make the existing debt a heavier burden to bear as the interest payments on the debt continue to rise. As taxpayer money continues to dry up in the coming months and years, a default is just a matter of time. The most likely scenario is for one or more of the PIIGS to default on their debt as we approach the center of Minor wave 3 down in March / April 2012. Greece is already perilously close to default.
2 -- The sovereign debt crisis has already taken a toll on governments in the European Union. The latest development is a massive wave of voter anger effectively removing the Socialist party from power in Spain and bringing conservatives into power by a substantial margin. This unfolded quickly on the heels of a government upheaval in Italy and Greece in which technocrats gained power. In addition, Greece is now facing the same type of strife and discord as the United States as partisan gridlock has put the country on the verge of a virtual government shutdown.
3 -- France is now facing the threat of a credit rating downgrade as Moody's has downgraded the outlook on the country's credit rating due to rising interest rates. This development is a very strong indication that the debt contagion is spreading to the core of the European Union. France is one of the last of the larger nations on the planet to still have a AAA credit rating.
4 -- The 2008 parallel continues to play out in the United States. On the heels of the collapse of MF Global and the bankruptcy of Jefferson County, Alabama, the city of Detroit, Michigan is on the verge of running out of cash, with bankruptcy to likely follow during the center of Minor wave 3 down. Another recent development is the US Postal Service bleeding cash at a rapid clip with default in the near future. The US Postal Service will almost certainly be in need of a bailout during the center of Minor wave 3 down.
We are about halfway through Minor wave 2 up with the "Santa-Claus rally" poised to start in early December 2011. Even as the reprieve period continues to run its course, undercurrents of bearish social mood simmer underneath the surface with financial fault lines in both Europe and the United States ready to go critical.
Thursday, October 27, 2011
Two Months of Remission
The European debt crisis has gone into remission. A deal was reached yesterday in which banks took a 50% haircut in order to make Greece's debt sustainable. I had predicted the possibility of a remission in early October 2011 in the blog entry on October 7, 2011.
We may even see the European debt crisis go into remission for a short time.
We are also starting to see a lot of optimism as economists are calling for a new period of economic growth on Greece, which would lower the debt to GDP ratio and ultimately allow the country to get out from under the debt burden by 2021. Much of the optimism is characteristic of the expected personality of Minor wave 2, that is, optimism returns and people become convinced that better days are ahead.
There was also a deal reached on the expansion of the EFSF (the bailout fund) and a second bailout package to avert a Greek default.
Stock futures in Europe and the United States were rising rapidly as I write this, possibly marking the end of the first part of Minor wave 2 up. A large retracement of the rally is expected to unfold through most of November 2011, then a year-end rally in December 2011 with a target of 11930 for the DJIA and 1260 for the S&P 500 in early January 2012. The targets may turn out to be the orthodox peak of Minor wave 2. The most likely scenario for Minor wave 2 up is a flat or a double zigzag as the rally from the October 4, 2011 low will have unfolded in 3 waves.
In a flat scenario, Minute wave [b] retraces 90% (or more) of Minute wave [a], ideally dropping the DJIA to 10550 and the S&P 500 to 1085, then Minute wave [c] rallies but does not reach the peak of Minute wave [a]. In a flat, wave c does not have to reach the peak of wave a.
In a double zigzag scenario, Minute wave [x] retraces a large chunk of Minute wave [w] during November 2011, then a second zigzag, Minute wave [y], unfolds during December 2011 and early January 2012 to complete Minor wave 2, but Minute wave [y] does not reach the peak of Minute wave [w].
The European debt crisis is in remission. The remission will last around 2 months. The debt crisis is expected to return, worse than before, with the advent of Minor wave 3 down in January 2012. The bailout fund is expected to be overrun with impunity as the economic fault lines in Europe go critical. Italy and Spain are too big to bail out, and will go under after the UK defaults on its debt (possibly around March / April 2012), setting a chain reaction of defaults in motion. Even now, people in Greece have started to turn to bartering as "The Great Deflation" unfolds in full force in that country.
We may even see the European debt crisis go into remission for a short time.
We are also starting to see a lot of optimism as economists are calling for a new period of economic growth on Greece, which would lower the debt to GDP ratio and ultimately allow the country to get out from under the debt burden by 2021. Much of the optimism is characteristic of the expected personality of Minor wave 2, that is, optimism returns and people become convinced that better days are ahead.
There was also a deal reached on the expansion of the EFSF (the bailout fund) and a second bailout package to avert a Greek default.
Stock futures in Europe and the United States were rising rapidly as I write this, possibly marking the end of the first part of Minor wave 2 up. A large retracement of the rally is expected to unfold through most of November 2011, then a year-end rally in December 2011 with a target of 11930 for the DJIA and 1260 for the S&P 500 in early January 2012. The targets may turn out to be the orthodox peak of Minor wave 2. The most likely scenario for Minor wave 2 up is a flat or a double zigzag as the rally from the October 4, 2011 low will have unfolded in 3 waves.
In a flat scenario, Minute wave [b] retraces 90% (or more) of Minute wave [a], ideally dropping the DJIA to 10550 and the S&P 500 to 1085, then Minute wave [c] rallies but does not reach the peak of Minute wave [a]. In a flat, wave c does not have to reach the peak of wave a.
In a double zigzag scenario, Minute wave [x] retraces a large chunk of Minute wave [w] during November 2011, then a second zigzag, Minute wave [y], unfolds during December 2011 and early January 2012 to complete Minor wave 2, but Minute wave [y] does not reach the peak of Minute wave [w].
The European debt crisis is in remission. The remission will last around 2 months. The debt crisis is expected to return, worse than before, with the advent of Minor wave 3 down in January 2012. The bailout fund is expected to be overrun with impunity as the economic fault lines in Europe go critical. Italy and Spain are too big to bail out, and will go under after the UK defaults on its debt (possibly around March / April 2012), setting a chain reaction of defaults in motion. Even now, people in Greece have started to turn to bartering as "The Great Deflation" unfolds in full force in that country.
Thursday, September 15, 2011
Minor Wave 2 Begins in France and Germany
The initial decline from the peak of the Primary degree bear market rally has ended in the CAC-40 and the DAX. Minor wave 1 down in both France and Germany were completed two days ago. A strong kickoff (up over 330 points in two sessions for the DAX and up over 100 points in two sessions for the CAC-40) from the low indicates a trend change -- Minor wave 2 up has begun in France and Germany.
Here is a chart of the CAC-40:
Here is a chart of the DAX:
As Minor wave 1 down neared completion, Moody's downgraded the credit rating of two major French banks. The downgrade generated fears in the mainstream media that the debt contagion was starting to spill over into the core of the European Union.
Minor wave 2 up will be a sharp 3 wave rally with a 4 month duration, to be completed in January 2012. This represents a short reprieve period for the core of the European Union. By the middle of December 2011, the mainstream media and the politicians will be convinced that the core of the European Union is protected from the debt contagion that is plaguing much of Europe. In January 2012, Minor wave 3 down will start, and all pretense of containing the debt contagion will be shattered.
On the longer term, social mood is deteriorating faster in Europe than it is in the United States and Canada. The DAX, the CAC-40, and the FTSE 100 should breach the March 2009 lows no later than May 2012. In contrast, the DJIA, the S&P 500, and the Wilshire 5000 won't breach the March 2009 low earlier than July 2012.
Here is a chart of the CAC-40:
Here is a chart of the DAX:
As Minor wave 1 down neared completion, Moody's downgraded the credit rating of two major French banks. The downgrade generated fears in the mainstream media that the debt contagion was starting to spill over into the core of the European Union.
Minor wave 2 up will be a sharp 3 wave rally with a 4 month duration, to be completed in January 2012. This represents a short reprieve period for the core of the European Union. By the middle of December 2011, the mainstream media and the politicians will be convinced that the core of the European Union is protected from the debt contagion that is plaguing much of Europe. In January 2012, Minor wave 3 down will start, and all pretense of containing the debt contagion will be shattered.
On the longer term, social mood is deteriorating faster in Europe than it is in the United States and Canada. The DAX, the CAC-40, and the FTSE 100 should breach the March 2009 lows no later than May 2012. In contrast, the DJIA, the S&P 500, and the Wilshire 5000 won't breach the March 2009 low earlier than July 2012.
Tuesday, July 12, 2011
Too Big to Bail Out
Debt fault lines continue to spread and grow in Europe. Although most of the focus continues to be on Greece even after the second bailout was completed, there are many other nations in Europe that are facing a debt crisis of their own.
Greece, Portugal, Spain, Ireland, and Italy are already quite deep into Primary wave [3] down in terms of social mood. In Greece, Primary wave [3] down has been unfolding for over a year, and yet, it is still in its early stages as optimism about future economic prospects are still present. In the coming months and years, "too big to fail" is going to be replaced by "too big to bail out" as larger nations start to fold under the increasing weight of their debt burdens.
Recently, Spain and Italy are under increased financial stress from their debt crisis and will need a bailout in the near future. Analysts are now warning that Italy is following the same path as Greece. There are already fault lines taking hold in the UK as well, and protests erupted last month when the government attempted to implement austerity measures which made changes to pensions and raised the retirement age. The magnitude of the labor and work strikes that unfolded in the UK last month is indicative of the degree of the bear market, considering that we are still in the early stage of the bear market.
As I indicated 2 months ago, bailing out a small nation isn't much of a deal, but bailing out a large nation is far more difficult, if not impossible. Spain, Italy, and UK are all too big to bail out, which is why a default in Europe, followed by debt contagion, is inevitable. The most likely scenario is for the UK to default on its debt, most likely in the next several months, creating a global ripple effect. The chain reaction would commence and within the next six months, Greece, Spain, Portugal, Ireland, and Italy would all default on their debts. A debt default by Italy would also create a global ripple effect.
The fault lines are on the verge of going critical, and some economists are starting to recognize the implications. A cascade of debt defaults in Europe would indeed be a defining characteristic of the first half of Primary wave [3] down (2011 - 2013) in the DJIA, the FTSE 100, the DAX, and the CAC 40. A cascade of debt defaults in Europe could possibly result in the breakup of the European Union either in October 2013 (the center of Primary wave [3] down) or 2019 (the center of Primary wave [5] down), and the abolishment of the euro.
Greece, Portugal, Spain, Ireland, and Italy are already quite deep into Primary wave [3] down in terms of social mood. In Greece, Primary wave [3] down has been unfolding for over a year, and yet, it is still in its early stages as optimism about future economic prospects are still present. In the coming months and years, "too big to fail" is going to be replaced by "too big to bail out" as larger nations start to fold under the increasing weight of their debt burdens.
Recently, Spain and Italy are under increased financial stress from their debt crisis and will need a bailout in the near future. Analysts are now warning that Italy is following the same path as Greece. There are already fault lines taking hold in the UK as well, and protests erupted last month when the government attempted to implement austerity measures which made changes to pensions and raised the retirement age. The magnitude of the labor and work strikes that unfolded in the UK last month is indicative of the degree of the bear market, considering that we are still in the early stage of the bear market.
As I indicated 2 months ago, bailing out a small nation isn't much of a deal, but bailing out a large nation is far more difficult, if not impossible. Spain, Italy, and UK are all too big to bail out, which is why a default in Europe, followed by debt contagion, is inevitable. The most likely scenario is for the UK to default on its debt, most likely in the next several months, creating a global ripple effect. The chain reaction would commence and within the next six months, Greece, Spain, Portugal, Ireland, and Italy would all default on their debts. A debt default by Italy would also create a global ripple effect.
The fault lines are on the verge of going critical, and some economists are starting to recognize the implications. A cascade of debt defaults in Europe would indeed be a defining characteristic of the first half of Primary wave [3] down (2011 - 2013) in the DJIA, the FTSE 100, the DAX, and the CAC 40. A cascade of debt defaults in Europe could possibly result in the breakup of the European Union either in October 2013 (the center of Primary wave [3] down) or 2019 (the center of Primary wave [5] down), and the abolishment of the euro.
Friday, June 24, 2011
Debt Fault Lines Going Critical
As the next leg down in the larger bear market trend continues to unfold, we are seeing hints in both Europe and the United States that some debt fault lines are about to go critical, sending shockwaves through the global economy and setting off a chain reaction of defaults.
The latest developments continue on the theme that we are in a period comparable to the "Crisis of the Roman Republic". The period that we are in, identified as Grand Supercycle wave [IV], is a magnitude more severe than the Great Depression, is still in its early stages in spite of starting back in 2000.
In the last few days, Greece has been flaring up with massive social unrest as the nation goes on the brink of a default in spite of receiving a bailout last year. After surviving a confidence vote a couple of days ago, the nation's parliament is in the midst of passing a second round of austerity measures in order to get the bailout money. Earlier today, Germany walked out of the bailout deal, making a Greek bailout more problematic. There are already a number of analysts that realize that a Greek default is inevitable.
There are a number of nations in Europe that are facing a debt crisis of their own. Greece is in the worst shape, but Portugal, Ireland, Spain, Italy, and even Britain are riddled full of debt fault lines.
Not only is Europe riddled full of fault lines, but the United States is riddled full of fault lines as well. A number of states are on the verge of defaulting on their debts with Illinois, California, New Jersey, Pennsylvania, and Texas in the worst shape. A default by any one of the states will have a ripple effect that reverberates throughout the entire nation in the form of a chain reaction of defaults. The latest news on this front is from New Jersey as Gov. Chris Christie is poised to sign the union busting bill into law. As with Greece, the austerity measures that are poised to become law in New Jersey has resulted in mass protests as people take to the streets.
At the federal level, the debt ceiling has been turned into a political football. As predicted back in early May 2011, the game of chicken involving the debt ceiling has indeed unfolded like a hardcore suspense movie that has even made people in high places very nervous as evidenced by frantic lobbying by the US Chamber of Commerce and by virtually all of the banks. Just today, Rep. Eric Cantor walked out of the "Gang of Six" debt ceiling talks. So far, both President Obama and House Speaker Boehner have drawn a line in the sand in terms of what wont get cut from federal spending, and neither is willing to give ground.
In the near term, expect the game of chicken on the debt ceiling to continue for at least several more weeks, possibly until we get very close to the Aug 2, 2011 deadline, before the GOP and the Democrats finally reach a compromise (very reluctantly, I would add) and raise the debt ceiling.
On the longer term, expect the fault lines in both Europe and the United States to eventually go critical. In Europe, the nations to keep an eye on are Greece, Portugal, Ireland, Spain, Italy, and Britain. In the United States, the states to keep an eye on are Illinois, California, New Jersey, Pennsylvania, and Texas. One of those fault lines is close to going critical.
A debt crisis on both sides of the Atlantic underscores one of the reasons why I refer to the current bear market period as the "Crisis of the Western World". Deflation is already beginning to unfold in full force.
The latest developments continue on the theme that we are in a period comparable to the "Crisis of the Roman Republic". The period that we are in, identified as Grand Supercycle wave [IV], is a magnitude more severe than the Great Depression, is still in its early stages in spite of starting back in 2000.
In the last few days, Greece has been flaring up with massive social unrest as the nation goes on the brink of a default in spite of receiving a bailout last year. After surviving a confidence vote a couple of days ago, the nation's parliament is in the midst of passing a second round of austerity measures in order to get the bailout money. Earlier today, Germany walked out of the bailout deal, making a Greek bailout more problematic. There are already a number of analysts that realize that a Greek default is inevitable.
There are a number of nations in Europe that are facing a debt crisis of their own. Greece is in the worst shape, but Portugal, Ireland, Spain, Italy, and even Britain are riddled full of debt fault lines.
Not only is Europe riddled full of fault lines, but the United States is riddled full of fault lines as well. A number of states are on the verge of defaulting on their debts with Illinois, California, New Jersey, Pennsylvania, and Texas in the worst shape. A default by any one of the states will have a ripple effect that reverberates throughout the entire nation in the form of a chain reaction of defaults. The latest news on this front is from New Jersey as Gov. Chris Christie is poised to sign the union busting bill into law. As with Greece, the austerity measures that are poised to become law in New Jersey has resulted in mass protests as people take to the streets.
At the federal level, the debt ceiling has been turned into a political football. As predicted back in early May 2011, the game of chicken involving the debt ceiling has indeed unfolded like a hardcore suspense movie that has even made people in high places very nervous as evidenced by frantic lobbying by the US Chamber of Commerce and by virtually all of the banks. Just today, Rep. Eric Cantor walked out of the "Gang of Six" debt ceiling talks. So far, both President Obama and House Speaker Boehner have drawn a line in the sand in terms of what wont get cut from federal spending, and neither is willing to give ground.
In the near term, expect the game of chicken on the debt ceiling to continue for at least several more weeks, possibly until we get very close to the Aug 2, 2011 deadline, before the GOP and the Democrats finally reach a compromise (very reluctantly, I would add) and raise the debt ceiling.
On the longer term, expect the fault lines in both Europe and the United States to eventually go critical. In Europe, the nations to keep an eye on are Greece, Portugal, Ireland, Spain, Italy, and Britain. In the United States, the states to keep an eye on are Illinois, California, New Jersey, Pennsylvania, and Texas. One of those fault lines is close to going critical.
A debt crisis on both sides of the Atlantic underscores one of the reasons why I refer to the current bear market period as the "Crisis of the Western World". Deflation is already beginning to unfold in full force.
Friday, May 6, 2011
Fault Lines in Europe
A couple of days ago, Portugal accepted $116 billion in international aid. This was the third time in a year that a nation in Europe needed a bailout. Although many economists still believe that the damage has been contained and a possible contagion has been contained, there is strong evidence that the fault lines continue to grow in number and extent in Europe.
There is reason to believe that the events that have unfolded in Europe since March 2009 -- and even the United States for that matter -- are consistent with the characteristic of a large degree wave 2 in a bear market. On the outside, everything appears to be on the mend and a recovery appears to be taking hold. Underneath the surface, however, are fault lines that grow in size and number until they reach critical mass. During that time, economists and analysts start to believe in recovery and renewed growth as the later part of the bear market rally unfolds.
Here is what has happened in Europe in the last year:
April 2010 - May 2010: Greece goes into a debt crisis as yields on Greek bonds exceed 10 percent, making the debt too heavy of a burden to bear. Greece gets bailed out by the European Union in April 2010. Greece then attempts to implement austerity measures, which is then followed by mass protests in the streets.
June 2010: There is fear that Ireland, Portugal, Spain, and Italy would possibly default on their debt, creating the fear of debt contagion.
Nov 2010: Ireland gets bailed out as its deficit reaches 32% of its GDP.
March 2011: Portugal's government collapses, creating the fear of a debt default.
April 2011: Finland votes against bailing out Portugal, which is indicative that a Primary degree trend change in social mood is imminent.
May 2011: Portugal gets bailed out by the European Union.
The end game is unfolding. All eyes are now on Spain, yet fault lines are appearing in unexpected places. There are now indications that the United Kingdom will need a bailout in the near future. There is more information about the development here. Greece, Portugal, and Ireland are small countries. Its one thing to bail out a small country. Trying to bail out a large country is another matter. The UK is 7 times bigger than Portugal in terms of GDP. In other words, the UK is too big to bail out. A debt default is inevitable.
This is how the second leg down of the Great Depression got started. Germany defaulted on its debt in 1930, and the ripple effects that followed were global in scale. The next leg down of "The Great Deflation" could easily be precipitated by the UK defaulting on its debt, and the resulting ripple effect would be global, creating a chain reaction of defaults throughout the western world.
There is reason to believe that the events that have unfolded in Europe since March 2009 -- and even the United States for that matter -- are consistent with the characteristic of a large degree wave 2 in a bear market. On the outside, everything appears to be on the mend and a recovery appears to be taking hold. Underneath the surface, however, are fault lines that grow in size and number until they reach critical mass. During that time, economists and analysts start to believe in recovery and renewed growth as the later part of the bear market rally unfolds.
Here is what has happened in Europe in the last year:
April 2010 - May 2010: Greece goes into a debt crisis as yields on Greek bonds exceed 10 percent, making the debt too heavy of a burden to bear. Greece gets bailed out by the European Union in April 2010. Greece then attempts to implement austerity measures, which is then followed by mass protests in the streets.
June 2010: There is fear that Ireland, Portugal, Spain, and Italy would possibly default on their debt, creating the fear of debt contagion.
Nov 2010: Ireland gets bailed out as its deficit reaches 32% of its GDP.
March 2011: Portugal's government collapses, creating the fear of a debt default.
April 2011: Finland votes against bailing out Portugal, which is indicative that a Primary degree trend change in social mood is imminent.
May 2011: Portugal gets bailed out by the European Union.
The end game is unfolding. All eyes are now on Spain, yet fault lines are appearing in unexpected places. There are now indications that the United Kingdom will need a bailout in the near future. There is more information about the development here. Greece, Portugal, and Ireland are small countries. Its one thing to bail out a small country. Trying to bail out a large country is another matter. The UK is 7 times bigger than Portugal in terms of GDP. In other words, the UK is too big to bail out. A debt default is inevitable.
This is how the second leg down of the Great Depression got started. Germany defaulted on its debt in 1930, and the ripple effects that followed were global in scale. The next leg down of "The Great Deflation" could easily be precipitated by the UK defaulting on its debt, and the resulting ripple effect would be global, creating a chain reaction of defaults throughout the western world.
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