Planet Yelnick

Good Deflation and the Greenspan Indian Summer

The recent stock drop worldwide is a warning shot across the bow of the Fed, to come to grips with the growing imbalances in the world economy.  The borrowing of 8% of US GDP from the rest of the world is not a sign of strength of the US economy but a transfer of wealth to the rising economies in Asia.  What we are seeing is the coming to an end for the Greenspan Indian Summer, this period of unexpected growth and prosperity that the Fed created by flooding the economy with liquidity after the stock market crash from 2000-2002.  Greenspan is fairly clear (for a central banker) that he was attempting to stave off the deflationary depression that normally follows the bursting of an asset bubble - the so-called Kondratieff Winter, which is a bit obscure in mainstream economics but was mentioned by name by Greenspan.  The latest Fed chairman is a self-acclaimed expert in deflationary depressions, and got the nickname Helicopter Ben for a speech he gave in which he said the Fed could always prevent a Kondratieff Winter by helicoptering in money and dropping it on the economy.  But did their inordinate fear of deflation, and misreading of the current situation, cause them to over do it?  Let's take a deeper look.

YE$, The Dollar Gets Interest-ing

Keep watching the Dollar.  We have reported how central banks have been shifting to a basket of currencies, predominately the Yen, Euro and Dollar (YE$), rather than the Dollar alone as the reserve currency, here and here; but now the shift is accelerating.  This will force the Fed to protect the Dollar, and raise rates.  The dramatic market shifts worldwide reflect this expectation.  And they have been dramatic - many markets have crashed, all are seriously down.  The Dollar has bounced a bit off its recent low in the Dollar Index, but has not yet made a run up as EWI and a few other ewavers have been expecting, and remains at risk of turning down and falling faster than the Fed (and other central banks) can prevent.  Indeed, behind the scenes it appears a lot of pressure is being put on the US to rebalance - borrow less from abroad, increase domestic savings, protect the Dollar. 

Dollar Bottom? Elliott Soup!

After a precipitous fall, below most pundits' support levels, the Dollar has managed a tickle of an impulse wave back up.  The most likely scenario over the rest of the year is for stocks to fall much further, albeit with a possible retest of the recent highs first, and the Dollar to rebound as the Fed continues to increase short-term rates.  The STU has been pointing out that all markets have become linked worldwide, with the Dollar going countertrend.  Hence they are looking for the Dollar to go quite a ways back up (more than 10% on the Dollar Index) while stocks take their four-year cycle dip (more than 10% down).  Let's take a look at what other Ewavers are predicting, and what this means. 

Watch the Dollar

Watch the Fed tomorrow  - will they raise rates and stop the slide of the Dollar?  We are nearing the moment of truth for Greenspan's liquidity approach.  Can the Fed thread the needle?  If Bernanke raises tomorrow, which pundits expect, and continues to raise this summer, he risks tumbling into a recession later this year (combo of high oil prices and now high interest rates - 6% is the magic level that crushes the animal spirits of a bull market).  If he keeps rates flat, he risks a Dollar tumble and continued flight to gold/silver and a basket of currencies overseas. Prechter expects the Dollar to bottom shortly - so implicitly he expects the Fed to raise rates, although he would be loathe to say so as he makes the case for the Dollar bottom off the wave pattern, not fundamentals. 

82W5?

If you want something to debate, try this.  Prechter has not announced his conversation to a gold bull, even though we have gone past his $661 target.  Gold is about at the level Neely believes will be a peak ($675), so Prechter may be holding on for a collapse 'close enough' to his call.  Hochberg is still writing the STU, and is marshalling more evidence that the pretty impressive runup in the Dow will end within the next 2 weeks - another Prechter limit, in time.  And yet they are prepared to declare the Dow in 82W5, which still can let them argue the end is nigh, albeit higher than nigher.  Here is the question to the readers:  the P/E ratio never went low enough for 2002 to have been a lasting low.  John Mauldin did an excellent summary of this problem here.  How can this rise be anything other than a counter-trend rally in a larger bear market, that now seems destined to continue into 2014? 

Alas! Poor Yelnick!

Whoa!  I go away from this site for a week, and the comments get out of control.  (And yes, I do have a day job which has nothing to do with Prechter or Elliott Wave or other forms of Mystic Prognistication).  I encourage readers to comment, and use this as a forum to share perspectives on markets.  I do hope the conversation will be elevated, and for the most part it has been.  And I enjoy the clever posts - and some of the fake EWI announcements are quite clever.  But some of you have been flogging a dead horse a bit too much - yes, Prechter has been wrong over and over, and was wrong a week ago, and yet remains stubborn as a mule about it even as his followers lose boatloads off his advice.  No need to endlessly nag us or SHOUT at us, or sneak in scatological puns at us.  Especially the latter, as my kids tell me they read this site.  Maybe they are just humoring the old man, but I would like to give them the chance and not have the comments put them off.  I remove the ones that go too far, or are disguised trackback spam.  I may have to block the offenders.  So please keep it at a higher level.