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Update on Long Term Projection

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August 06, 2011 – Comments (8)

For anybody who is interested. Also for what it's worth, I had opened about 50 shorts on May 2 (via inverse ETFs) in my CAPS portfolio right at the top of this wave. And I closed them all on Friday, consistent with my views below.

Preface:

This might seem like an odd time to update my long term thoughts. We are in the middle of a panic (maybe even a crash), things are in turmoil. Both Republicans and Democrats made an absolute spectacle out of this idiotic debt ceiling debate, there is major nervousness about the EMU debt issues, there are concerns over economic slowing (GDP growth was low and revised down), etc. Some legitimate topics for concern.

But really, the market just needed to correct from the previous rally, that was driven mostly by margin (and some fundamentals, earnings were good the last couple of quarters) based on the rampant misconceptions of QE2: See Margin Debt, the Stock Market, and QE and Easily the best summary post of the effects of QE2 that I have yet read. Stocks were high mostly on a lot of speculative betting, the buying pressure leveled off, then stocks traded in a range for a couple of months waiting for a catalyst for a correction. I think the crux of the situation is no more complicated than that.

So whether today marked the low for the bottom of this wave or not, I tend to think we are near it. We already started to see some fear abate today in this panic right around some major support level for the stock market. I think when this wave does bottom it will be the end of an Intermediate wave down. Which is interesting as I see all kinds of 'impulse counts' down being armed on so many EW bloggers charts.

My position remains that this is not the 'Top'. I see 'P2' labels popping up all over the place now (after they missed it for months), see Regarding Tops and Sloppy / Misleading EW Practices. But I don't think this is P2 or anything equivalent.

However, I would have seriously considered changing my opinion if the US Government had gone into balanced budget mode, as either a compromise or because of lack of one (if there was no compromise, then the Treasury would have gone into its own balanced budget mode, since it can't make discretionary spending choices, those have to be approved by Congress). If that would have happened it would be the largest anti-stimulus measure likely ever seen. Trillions of dollars would have been sucked out of the economy. See this post for more: Regarding the Myth that Austerity promotes Fiscal Expansion.

But I don't think the macro supports that 'dire' view. For the next couple of quarters, it looks like the budget deficits will be mostly intact. Deficits will still be around 9% of GDP, which is approximately the same as last year (there are some cuts, but they are not huge). And as Warren Mosler pointed out: "The first half of this year demonstrated that corporate sales and earnings can grow at reasonable rates with modest GDP growth. That is, equities can do reasonably well in a slow growth, high unemployment environment." But there are cuts and other headwinds at work. So I still think the next year or so will not be a 'crash', but not 'growth' either. I think we will be mostly rangebound/sideways for the next year. I think it will make for some very ugly trading as people try to understand this environment.

Long term, however, I continue to not be optimistic. I am *very* long term optimistic and bullish about the US economy and American society and resourcefulness. But currently we still have a Financial System that truly is a parasite sucking much of the life out of the economy and giving no productive work back (see Why Deficit Spending and Creative Destruction are not Mutually Exclusive Positions). We still have deficit spending that is simply propping up Financials and the status quo, and is not being geared toward productive economic activity even though we can most definitely 'afford' it (see the previous link for some thoughts).

And perhaps the worst problem is that mainstream economists and politicians still don't understand our monetary system. The idiotic debt ceiling debate absolutely proved that. Everyone (except those of us in the tiny minority) seems to think that "Federal Government deficits = bad, Government surplus = good!" as a blanket statement, without any consideration to what is happening in the other two sectors of the macroeconomy. And so it seems to me that in the next couple of years a "balanced budget" or (God forbid) a "balanced budget amendment" will be passed before the economy is cleaned out. Those who advocate austerity to 'avoid a depression' will be the ones to cause it. Perhaps this isn't a foregone conclusion for the next decade, but it seems like an awfully big risk. (See this post).

So until I see evidence that both Financials are getting broken up and the industry forcibly altered from a 'Too Big Too Fail' condition and widespread understanding of how our monetary system actually works, I do think another economic crisis is likely and my long term projection reflects that possibility.

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Here is an update on my long term projection. It hasn't changed in the last several months, so there will be no new long term analysis in this post. Just some chart updates and references to my previous work so you can follow why I arrived at this projection.

-- Nov 2010: Abandoned the Primary 2 count and adapted my leading alternate count which was a Cycle X count - The Large Count

-- Jan 2011: Rethought the size of Cycle X with some historical analysis and comparisons. I lay out my thoughts for March 2009 - June 2011 (projection at the time) being only Primary W of Cycle X - The Large Count with Historical Perspective

-- Jan 2011: Macro thoughts that accompany my projection - Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?

-- Feb 2011: Long term context - Secular Bear Market Projection in Historical Context

-- Mar 2011: An in depth study and a comprehensive list of references and analysis of previous work. I highly recommend reading this post and following the references - First Derivative of the S&P 500, Long Term Study

-- May 2011: Count of the large structure (the top of this wave) being completed in real time - May 5 (and a Long Term View Update)

Rally from July 2010 - May 2011. It is corrective, not impulsive. Subsequent price action is also corrective, not impulsive



ENLARGE

Last two Primary Waves and upcoming Primary Wave projection



ENLARGE

Update on the BPSPX with regard to the last two cyclical bull and bear markets, and the current cyclical bull market (The BPSPX and the Secular Bear Count)



ENLARGE

Secular Bear Market Projection



ENLARGE

8 Comments – Post Your Own

#1) On August 06, 2011 at 1:42 PM, MoneyWorksforMe (< 20) wrote:

 I covered my shorts on Friday as well...

New highs? I'm not sure..we will need full blown QEIII and Europe to remain intact ...Europe continues to throw good money after bad to prop things up, but there will come a time soon, when it all just falls apart...The real underlying problems are not being fixed, and are steadily becoming worse...

I definitely agree we will see a rally from here in the short term...but I wont make any prediction above the 200DMA without knowing if Bernanke will be able to go full throttle with more stimulus....

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#2) On August 06, 2011 at 4:37 PM, awallejr (85.56) wrote:

Those who advocate austerity to 'avoid a depression' will be the ones to cause it. Perhaps this isn't a foregone conclusion for the next decade, but it seems like an awfully big risk

That is my concern.  Excellent blog.

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#3) On August 06, 2011 at 5:36 PM, binve (< 20) wrote:

MoneyWorksforMe ,

we will need full blown QEIII

As I have argued before (see here and here) QE is not inflationary nor does it give the banking system any more ammunition to do anything it couldn't do before. But because there are so many rampant misconceptions by nearly everybody calling it 'money printing' and 'massively inflationary', I agree a QEIII program in whatever form will spike another wave of risk taking and 'front running the Fed'. 

and Europe to remain intact

Yeah, there are some real concerns right now. The EMU, based on how the monetary system is designed, is really amplifying problems. All of the austerity implementation are pro-cyclical which are just forcing bad problems to become worse.

awallejr ,

Thanks awallejr! Yeah, this is a problem. There are loud voices calling for austerity, but they are not the majority. But it seems like the movement continues to gain more momentum, and in a couple of years time they might be the majority. No one can see the future (obviously) but this is an unwelcome trend.

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#4) On August 06, 2011 at 9:53 PM, scruffy4life (67.55) wrote:

Can you explain the Elliot Wave theory in a way Scruffy could understand.

Much obliged

[sniff!]

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#5) On August 07, 2011 at 12:44 AM, binve (< 20) wrote:

scruffy4life ,

Hey scruffy. This has some basic terminology: here..

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#6) On August 07, 2011 at 12:35 PM, ChrisGraley (29.70) wrote:

Flooding the market with money is not the only way to stimulate the economy.

We are now seeing the feedback from the market that we can't keep spending borrowed money.

A couple of more ratings downgrades will have a more gruesome effect than austerity. 

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#7) On August 09, 2011 at 5:24 PM, SultanOfSwing (97.45) wrote:

binve,

You keep this up and your cap will change colors so many times your head will spin!  :)  Something tells me you were near the top in CAPS at one point.

g/l!

SoS

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#8) On August 09, 2011 at 6:56 PM, binve (< 20) wrote:

SultanOfSwing,

You keep this up and your cap will change colors so many times your head will spin!  :)

Lol! Yep, I am starting to get dizzy :)

Something tells me you were near the top in CAPS at one point.

Yep, I spent a (brief) time at 99 before my score hit the crapper on some massively bad bets.

Good luck, Sos, thanks!.

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