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« YE$, The Dollar Gets Interest-ing | Main | Bifurcation Ahoy! »

Wednesday, May 31, 2006


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Very interesting piece. Perhaps you would enjoy the book: "The Creature from Jeykll Island".

I am not sure I understand the logic behind the "Helicopter Strategy". Bernanke's notion is that he can print his way out of a Kondratieff Winter phase once interest rate cuts no longer provide any re-flationary effect. Correct? BUT ... if he prints, he destroys the bond market. If he destroys the bond market, he destroys all that easy credit that he tried to push in the first place! So the debt gets purged regardless of the printing strategy but gold certainly benefits by monetizing.

The movement is Gold has gone past the point where one can still consider this a fourth wave in a secular bear market. Rather, a new bull market must have started in 2001 and we are now in a wave 5 eventually to new all-time highs. So, overall, we are in an inflationary environment for at least the next decade or two. This means that there will be NO stock market crash in the sense of 1929.

If the move down that started in 2000 is the A wave of a massive fourth wave, then the move up from the 2003 low is a B wave and not even close to being finished. So, after a 4 year cyclical bottom within the next 6-12 months, we will get another run up to finish the B wave and then a final C wave to finish the correction by the time the 40 year cycle is due to bottom in 2014. It is during that final C wave phase that the 2002 lows are tested that we will see the deflation but it is unlikely to be as bad as the bears think because this is not the end of any grandsupercycle phase.

Finally, I am not sure anybody can really benefit from deflation because while prices for electronics and other goods and services may fall, don't governments tend to raise taxes in deflationary environments to support social programs and thus our biggest expense, taxes, rise?


EN, I have read ther Jekyll Island book. The Fed has failed in its prime missions - the Dollar is worth 4c since then, and they didn't stop massive bank failures in the early Depression. Bernanke's idea is that the Fed has several levers to increase liquidity (interest rates, open market activities, reserve requirements), and all could be used when the bad deflation starts without much impact on inflation or the Dollar since the purpose is to backfill for falling credit - it theoretically works if overall credit remains about the same.

What he is most worried about is the 'liquidity trap' of ther '30s, where banks had the ability to lend but had seen so many bank failures they held back. In that scenario the Fed cannot drop Dollars out of a helicopter, because they tried it in the '30s and the banks didn't lend. Pushing on a wet noodle so to speak. Sadly for the Fed, it was their failure to support the banks that caused this psychology - in other words, the Fed has a fourth lever beyond the three mentioned above which is to support failing banks, and they didn't use it back then. Compounding the problem were uncoordinated policies from FDR, particarly due to a political aversion to big banks and a romantic desire for small S&L's and regional banks (ala "It's a Wonderful Life"); big national banks could have withstood the runs that took many small banks down.

I agree with your overall view - this is a fourth wave from 2000 to probably around 2014, not the Big One down. Might break as a big flat; or might break as a triangle.

But we are not out of the deflationary depression risk. In 1873 we ended the first big RR bubble, and then had a slow slide and a 2d bubble before the deflationary depression of 1893-6. It was short and sharp, and so might this one be. It was also during a period of good deflation, a slow appreciation of the Dollar when the US returned the gold standard accompanied by massive productivity improvements in steel, railroads and similar technology.


Why we boom and bust? The only mistake the Fed made was not slowing the equity bubble that ended in 2000. There was no way the Fed could stop the correction that followed. Once the first mistake is made you have to pay for it. We are creating other mistakes because we don't want to suffer the full payback we should have for the tech bubble. Trillions of dollars of wealth disappeared. We now have a housing bubble. It will bust and we will have another correction. I can't think of any thing we can throw at the housing bubble to reduce the damage. Volcker fixed the economy because he was a smart man. His "lets pay now so we can benefit alot later attitude" worked too well. He left the country in such good financial position that was we think we can solve every problem because there was so much he fixed that can be broken.
A solutiton? Let try this. Housing appreciation and stock market appreciation should be considered inflation when the Fed sets its policy. When the total stock market capitalization increases. Thighten monetary policy. Maybe this would have toned down the equity bubble, maybe not. Rates should have been rising from 1995 to 2000. If Elliot Wave truly does work. We will never do something this logical.


It's so interesting to observe humans and their behaviors. Just a couple of days ago as I watched TV, the big news was the drop in the markets and how inflation and Walmart's slow sales were a big concern for the economy. Two days later the markets are right back where they were before the big drop and inflation concerns have gone away. It's magic, I tell you!


MC... in case you haven't studied history, we humans are complete and total idiots, so logic and rational thoughts are really not in the cards, so to speak.
Yelnick, you've been very quiet as of late with EWI's current views. Have they closed shop?

Eberhardt Reissner

The economy is essentially a loop. There are many trends that are both causes and effects of inflation. A great way to see this is through system dynamics, a computer-aided modeling of complex systems.

One important trend is a sharpening of the fuzzy line between NEED and WANT. Right now, people need ipods and cars and clothes and toys and electronics in addition to food, warmth and shelter.

When money is dumped upon a public that is afraid to spend it --because of low employment and high fear-- you get stagflation in the EXTREME. The things that rise the most in nominal terms are food and fuel. People move in with the inlaws, share the rent if they can, and eat cheap, filling foods like potatoes.

Despite helicopter drops, we might see nominal deflation in cars, electronics, clothes, toys, and most real estate while things like food and oil rise... and gold rises as people attempt to deal with an apparently incessant rise in those more important things.


In spite of all the well reasoned fundamental arguments why the market should crater, the market stubbornly refuses to do so...
It appears that the results of most wave counting efforts have been pointing in the same (wrong) direction for several years in a row now. A most convenient explanation is the nefarious Plunge Protection Team, supporting the markets through sinister interventions always at just the right time to cheat the bears out of well deserved profits.
Alas, there are so many more fairytales that explain everything and forecast nothing...
It is impossible to list them all.


I tend to agree with EN's comments, with the only addition that within the B up, we will see an abc sequence, where a is about to complete.


great post, yelnick


Elliott Wave Search Engine!


Does anyone actually believe the Grand Supercycle exists?



yawn:) watch the sky!


Seems crazy (to me, I'm a housing bubbler), but looks like FNM is beginning a large (multi-week) up-move, and TOL and the HGX are also heading higher. So long-term interest rates are headed down (even though I think the fed will raise once again) and the housing market (despite PHM's results Friday) wants to froth some more???

And what's with these long interest rates? They just _do not_ want to go up. They've practically ignored the gyrations in the fed rates. Now, 10 year rates are just hitting the upper end of a multi-year declining parallel channel... maybe they'll break up or just drop back to the lower end. The odds are the trend continues. And based on FNM, looks like others are figuring the same.

Just observations. Personally, I don't get it, but guess I don't have to.


Nostradamus: "Does anyone actually believe the Grand Supercycle exists?"

Does anyone actually believe EW's exist? I'm not an EW'er (and so am objective). I do think there is an underlying signature or form underlying biological progression and growth. I don't think the more arcane rules of EW are worthwhile which is why I don't spend precious time studying them -- I haven't seen the cost effectiveness from following its practitioners.

Nevertheless, what's appealing about EW (and which applies to its practitioners) is its long term, broad perspective on human history. There are clearly larger forces at work, such as population growth, resource depletion and technological advancement, and currents and eddies. And these larger forces are also clearly reaching a parabolic top. So, big, historical, thousands of years' significant, changes are occurring.


U.S. Wireless Online


I think EW is very useful at scales from intraday up to periods of 20 years. I don't think there is any logic to claiming however that there are waves in the stockmarket that are longer than the secular bulls and bears.

tony caldaro

GEM-X "Does anyone actually believe the Grand Supercycle exists?"
No, not in this corner. There isn't any historical data to verify it. We only started keeping daily records on market movement in 1885. The rest is conjecture.

RC: "Does anyone actually believe EW's exist? I'm not an EW'er (and so am objective)."

I'm an EWer and objective. Objective EW exists :)

Moominoid: "I don't think there is any logic to claiming however that there are waves in the stockmarket that are longer than the secular bulls and bears."

Totally agree!

sky is falling

could this be the start of something big? I vote... no.



And now watch the dollar bears get carted off........


tony c: "start of something big?"

My RUT short-term re-joined my mt, and lt signals on a sell. I sure didn't expect the upswing to end so fiercely (and lost profits on a long position I planned to exit this morning -- exits are always the key). This is the 2nd week in a row with a selloff after the weekend followed by a recovery the rest of the week, so this may play out again. But, my objective call is to go with the signals and patterns... bearish flag broken and continuing the trend; and... you ew'ers will laugh, but couldn't this be the start of a 3rd wave down in the RUT with the recent upswings the previous 7 trading days the completion of an abc (clearly an up-down-up)? So... yes, could well be not the start, but the resumption of something BIG.

Also... 10-year yields barely blipped up... still don't get the long term treasuries... is this anticipating a slowdown? Must be... that the fed will raise & keep inflation in check... and the yields are going to invert again.

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