The Mother of All Bubbles

It is very obvious that the credit bubble is still expanding even as it already exceeds the South Sea and Mississippi bubbles in size, magnitude, and duration. The credit bubble that is in play throughout the Western World (not just the United States) is literally the mother of all bubbles. The credit bubble did not burst during the "Panic of 2008", in fact, the bubble is over 40% larger than it was in 2007.

The credit bubble formed in 1974, at the start of Cycle wave V (1974 - 2000) up and continued to expand in size and area of influence. As we approached the peak of Grand Supercycle wave [III] (1784 - 2000), a series of smaller bubbles started to form. With a very long topping process in play, we have seen a series of smaller bubbles form and pop in succession even as the mother of all bubbles, the credit bubble, continues to relentlessly expand.

Here is a long term chart of the DJIA from 1997 - 2021 illustrating the topping process and the bubbles:

As the chart illustrates, the first of the smaller bubbles to form and go parabolic was the dot com bubble, also known as the tech bubble. The Nasdaq went parabolic in 1997 and shot up to a peak of 5132. More information on the dot com bubble is here. The bubble popped in 2000, ushering in the first stage of the Grand Supercycle degree bear market and associated major depression in the Western World. The DJIA and S&P 500 also peaked in terms of gold and PPI at the peak of the dot com bubble, and the peak has not been exceeded since. The aftermath of the bursting of the dot com bubble unfolded during Primary wave [A] of Cycle wave a and lasted roughly 34 months. The Nasdaq reached a low of 1108 on October 2002.

In 2003, The Bush 43 Administration and the Federal Reserve attempted to re-inflate the dot com bubble. With the credit bubble relentlessly expanding, the housing bubble started to go parabolic with the government taking part in the bubble. George W. Bush, during the 2003 state of the union address, said that "everyone should be able to afford a house". The parabolic phase of the housing bubble unfolded during Primary wave [B] of Cycle wave a in which the DJIA soared to over 14000 and the S&P 500 hit 1576. While the DJIA reached new highs in nominal terms (DJIA/$ ratio), it remained well below the 2000 high in real terms (DJIA/gold ratio and the DJIA/PPI ratio). The housing bubble popped during the 5 year rally. The popping of the housing bubble, and the sub-prime mortgage crisis that followed, would play a strong role in ushering in the "Panic of 2008", which unfolded during Primary wave [C] of Cycle wave a.

In 2009, the Obama Administration and the Federal Reserve started its attempt to re-inflate the housing bubble. The Obama Administration has thrown more than $7 trillion in cheap money into the economy, and the Federal Reserve has done a series of QE programs since March 2009. The money has pretty much stayed at the top of the pyramid, pumping up equity and commodity markets as well as causing the college bubble, the social media bubble, the Apple bubble, and the Google bubble to go parabolic. The current reflationary period, Primary wave [A] of Cycle wave b, is unfolding as a double zigzag with a projected peak in June 2014.

The rally off the March 2009 low is corrective and the rally has been unfolding with declining volume, with volume spikes during the Flash Crash and the large pullback in August 2011. The chart illustrates the bear market rally:

In bull markets, volume rises as the market rises, and falls during pullbacks. Volume is a very important momentum indicator. Even as the DJIA rose to new all-time highs in nominal terms, the DJIA is still far below the 2000 and 2007 peaks in real terms with the DJIA/gold ratio at 45.9 in 2000, ~16 in 2000 and it is at ~8 now.

Markets are expected to pull back for a few months, then soar again as the final stage of the Apple Bubble unfolds from July 2013 to June 2014. The chart of Apple illustrates the final stage of the bubble:

Apple's stock should fall to a low of $350 a share in July 2013. The structure is clearly corrective, unfolding as either a double zigzag or a triple zigzag. The final stage of the Apple Bubble is expected to unfold as an epic melt-up in the company's stock. Apple is a global corporate bellwether in the same way that the South Sea Company was a global corporate bellwether in the 1700s, so the influence of the bubble will be global. The melt-up is expected to have a very powerful influence, with many tech and social media companies taken along for the ride. The implication of the epic melt-up is a very powerful rally in equity markets with the DJIA hitting 17500 and the S&P 500 hitting 1900 at the peak of the Apple Bubble. It is worth noting that social media has morphed into a full blown bubble of its own, and Google has also turned into a bubble as well.

The Apple Bubble is expected to burst around June 2014 -- at a Kondratieff Cycle high point. The bursting of the Apple Bubble is expected to trigger the bursting of the Goggle bubble and the social media bubble, and the ripple effect will rip the job market apart throughout the Western World. The bursting of the Apple Bubble will usher in Primary wave [C] of Cycle wave w (2000 - 2019) in the Nasdaq and Primary wave [B] of Cycle wave b (2009 - 2021) in the DJIA and the S&P 500.

With a lot of three wave structures in the Nasdaq since the March 2009, the rally from the March 2009 low in the Nasdaq is very likely unfolding as an ending diagonal, as this chart shows:

The longer term chart of the Nasdaq shows a Cycle degree zigzag in progress, likely the first part of Supercycle wave (a) (2000 - 2042) in the index, which should unfold as a double zigzag:

The Nasdaq from 2000 clearly builds the case for the Apple bubble, the Google bubble, and the social media bubble bursting in 2014, while the college/student loan bubble and the credit bubble continues to expand all the way to the end of the "extend and pretend" phase of "The Great Deflation".

The mother of bubbles, the credit bubble, will continue to expand all the way to the end of Cycle wave b (2009 - 2021). Rising interest rates, combined with the continued addiction for debt throughout the Western World, will eventually cause the credit bubble to burst, which would also trigger the bursting of the college / student loan bubble. Just before the bursting occurs, the DJIA will reach 18750 and the S&P 500 will reach 2100. The bursting of the credit bubble will usher in the third phase of "The Great Deflation", Cycle wave c (2021 - 2042) of Supercycle wave (a) (2000 - 2042) in which a deflationary collapse of the economy throughout the Western World unfolds in full force.

Mapping The Great Deflation

The worst of "The Great Deflation" is still in the future. In the long term, we are on track to continue downwards in "The Great Deflation" until the low point of Supercycle wave (a) is reached in 2021. Currently, there is still a great deal of exuberant optimism, made even more evident with Minor wave 2 up (within the much larger Primary wave [3] down that is unfolding from 2011 - 2016) still unfolding. A case of point in the continued exuberant optimism with an analyst recently calling for Dow 100,000 by 2030 on CNBC.

On the short to intermediate term, we are in the early part of Intermediate wave (1) down, which is projected to continue until September 2012 with a downside target of 5800 on the DJIA. The center of Intermediate wave (1) down should be reached in March / April 2012 and result in the "Panic of 2012", giving rise to limited bank runs in which up to 5% of the western world population try to get their money out the banks as fast as they can. Here is a chart showing the initial Intermediate degree decline from the peak in May 2011.

On the longer term, Primary wave [3] down is projected to end around March 2016 with a downside target of around 1500 on the DJIA. The "Slope of Hope" phase of "The Great Deflation" continues until the center of Primary wave [3] down is reached, which is around October 2013. The Cycle degree "point of recognition" will result in the "Great Panic of 2013" which will likely be followed by large scale bank runs throughout the western world. Here is a chart showing the projected wave path of Primary wave [3] down.

The third phase of "The Great Deflation" started in 2007 and will continue until 2021. The third phase is labelled as Cycle wave c and is currently unfolding as a five wave structure. The downside target for the end of "The Great Deflation" is 530 in the DJIA and 48 for the S&P 500. Here is a chart of Cycle wave c of Supercycle wave (a) down.

The Nasdaq is taking a different path, but is still affected by "The Great Deflation". The 2007 peak in the S&P 500 and the DJIA is not confirmed by the Nasdaq, which peaked in 2000. Supercycle wave (a) is unfolding as a complex fractal in the Nasdaq. Here is a chart showing the projected wave path of the index during the rest of "The Great Deflation".

The preferred scenario for the Nasdaq is that Supercycle wave (a) is unfolding as a double zigzag with the low point in 2024. The reasoning for the double zigzag comes from the tendency of waves A and C to be related to each other (equality or a 1.618 ratio is most common) in a zigzag. The tech bubble started at roughly 55 in 1974, and bubbles are always fully retraced. Since the first zigzag does not retrace the entire bubble, a second zigzag is needed to take the index below the start of the bubble. The Nasdaq 100 should be on a similar wave path.

There is also a deflationary collapse in progress for commodities as well, and oil is a great example. Here is a chart of crude oil showing the projected outlook from 2008 to 2024.

As with the Nasdaq, the preferred scenario is a double zigzag for Supercycle wave (a). The first zigzag, labelled as Cycle wave w, should correspond with Primary waves [1], [2], and [3] of Cycle wave c in the DJIA. Next would be Cycle wave x, which would correspond with Primary wave [4] up (2016 - 2019) in the DJIA. A second zigzag would then unfold, forming a bullish divergence with the DJIA in 2024 (the DJIA does not hit a new low in 2024).

The deflationary collapse in crude oil will result in an oil supply crash as OPEC and Big Oil shut down production of oil from tar sands, shale, and deep sea drilling in an effort to put a floor on a falling market and protect their balance sheets. The oil supply crash is coming in 2017.