Rising Tide of Bearish Social Mood

As we head towards the low point of Minor wave 1 down within the much larger Primary wave [3] down, we continue to see a rising tide of bearish social mood. The rising tide is manifesting itself in many ways, from continued protests, increased strife and discord in the political arena, increasing recognition that a trend change has taken place in the economy, and yes, more downgrades from Moody's.

Here is an updated chart of the DJIA, with Minute wave [v] of Minor wave 1 down in focus.

We entered the strongest portion of Minute wave [v] down on late Tuesday, with Minuette wave (iii) in progress and on track to continue until around October 4, 2011 with a target of 10100 in the DJIA.

For many months, I had been predicting that Minor wave 1 down would end in early October 2011. It is now possible to make a more precise forecast -- Minor wave 1 down should end around October 10, 2011 with a target of 9950 for the DJIA and 1025 for the S&P 500.

The rising tide of bearish social mood has been manifesting itself in many ways in the last several days:

1 -- A large protest has been unfolding in Wall Street in the streets of New York City. The protest, which has involved  over a thousand people, have been part of a campaign "Occupy Wall Street" with the aim of calling for structural economic reforms and calling out the misdeeds of the wealthy. Even though the protest has been relatively peaceful, police have blocked demonstrators from reaching the New York Stock Exchange, and a number of demonstrators have been arrested.

2 -- We face the threat of another government shutdown as the GOP and the Democratic Party continue their game of chicken over disaster aid to communities affected by Hurricane Irene.

3 -- Attacks in the political arena have become more aggressive in the last several days as President Obama takes his jobs legislation campaign directly on Rep. John Boehner's home turf, and the GOP stepped up attacks against Obama with insistent accusations of "class warfare". Yesterday, Elizabeth Warren blasted the GOP's class warfare charge as well as their tax cuts for the rich.

4 -- As evidence of increasing recognition of a trend change in the economy, George Soros is now saying that "the double-dip recession is in progress in the United States". In the context of the larger picture, however, the trend change won't be recognized by economists and analysts until the center of Intermediate wave (1) (of Primary wave [3] down) is reached, which should occur around May 2012.

5 -- Moody's downgraded three of the "too big to fail banks" on Wednesday, with Bank of America, Wells Fargo, and Citigroup Inc, all having their credit ratings lowered.  The downgrade indicates that the banks are in worse financial shape now than they were before the TARP bailout in 2008. No downgrade occurred in 2008. The downgrade is also an indication that the Obama Administration will end up bailing out the "too big to fail" banks around May 2012. The original TARP was launched just before the center of Primary wave [1] down was reached in October 2008. Look for the Obama Administration to launch TARP 2 around May 2012, near the center of Intermediate wave (1) of Primary wave [3] down.

The DJIA, S&P 500, and the Wilshire 5000 should hit the lows of the year around October 2011, then they rally for the rest of the year, completing Minor wave 2 up around early January 2012.

Government Shutdown in Minnesota

Yesterday, a government shutdown has begun in the state of Minnesota. From a socionomic perspective, a government shutdown is the result of division, discord, and polarization in the political arena. This would indicate that a government shutdown is far more likely to happen during a bear market than during a bull market. Not too long ago, the United States government went on the brink, averting a government shutdown by just 90 minutes.

I would even theorize that the duration of a government shutdown is correlated by the degree of the bear market and where we are in the bear market. Larger bear markets have the potential of producing government shutdowns with a longer duration. For example, Minnesota had a government shutdown in July 2005 that lasted 8 days. There have been a number of government shutdowns at the state level in the last 10 years, such as the New Jersey shutdown in 2006. All of them lasted from a few hours to a few days.

The reason for the short duration of the government shutdowns within the last 10 years is because social mood was trending positive with Cycle wave b up (2003 - 2007) unfolding. Increasing willingness to compromise and increasing ability to reach a consensus in the political arena meant that any government shutdown that unfolded would be brief.

Politics is much more polarized now than it was in 2007. Social mood is going south with increasing momentum as Cycle wave c (2007 - 2021) starts its next leg (Primary wave [3]) down.

Given where we are in the bear market, I am predicting that the government shutdown that is currently in progress in Minnesota will last at least 21 days, with a substantial possibility of lasting a month or more. Another aspect of the development is that both Tim Pawlenty and Rep. Michele Bachmann endorsed the government shutdown, calling it an act of fortitude for the state GOP to stand firm. The shutdown could have a substantial impact on the state's economy, and indeed, 23000 state employees have already been laid off.

In the longer term perspective, the trend of increasing polarization in politics will continue until 2021. The result of increased polarization, of course, will be government shutdowns lasting several months and occurring with greater frequency at both the state level and federal level. A shutdown of the United States government is in the forecast for 2012 with a duration of 4 to 6 months.