September 15, 2021
Back in March 2020 the stock market has sharply declined and the culprit is said to be the corona virus. The FED raced to take unprecedented action, by printing money outright and reducing the FED rate to 0 and promising practically unlimited printed money. Why? We will explore here.
Once the virus is gone, it will all be fine.
The virus is still here and things look already fine. Or are they not?
Perhaps the virus is the pin that popped the debt bubble. Actually repo markets were in trouble back in fall 2019 and were already on life support by the FED. The FED printed money in a rush to stop deflation. But after so much printing of trillions of dollars, where is the runaway inflation? Or is the money supply still deflating and the FED is trying to patch it?
The virus is not the problem. The virus is still here. People are still dying. The problem is debt that we have accumulated for decades. Entire world cannot borrow in lock step, inflate the money supply as debt and then hope that all will be fine when the pay back time arrives! Read Conquer the Crash to understand the deflation problem.
Debt bubble?
When we borrow, banks create money. And we promise to pay back with interest. Without further borrowing, aka further money creation, entire money supply is not enough to pay the outstanding debt.
Is it a good time to buy a home? Rates are really low. Prices are sky high.
Home prices will fall in a deflationary crash. With a deflating money supply, it will get harder to pay outstanding debt and foreclosures will increase. Read more on Housing Crash page.
Should I buy Gold?
With a deflating money supply, the race is to find US dollars. People promised to pay US dollars with interest. They did not promise to pay Gold or Oil, or Stocks, or Homes. Prices will fall as borrowers will sell everything to find US dollars to pay their debt. After major deflation, and excessive money printing, there will likely be a time to invest in Gold. Details in Gold or US Dollar? page.
Should I invest in bond funds instead of stocks?
In a deflationary crash, stocks and bonds can fall at the same time. Bond rates can go up due to default risk and bond prices can fall. Details in Stocks vs Bonds page.
Once the virus is gone, will the stocks be a good value?
The stock market was a major bubble before the corona virus, almost reaching year 2000 levels in some ways. With the virus stocks went even higher. With the credit deflation, stocks will crash back to normal levels. It may be that once the virus is gone, the crash comes. Don’t be surprised.
The fundamentals look good and everything is fine. Why would there be a deflationary depression?
At the market top of 1929, did anybody see a fundamental reason about why it would come to be the Great Depression?
Here is the case for another Great Depression
Prepare Now for a Brutal Austerity — Here’s Why
Here’s what’s holding together a “global house of cards”
When financial times get tough, you hear the phrases “tightening our belts,” “cutting back” or “making do with less.”
Those are common phrases to describe the word “austerity.”
If spending and borrowing had been done with moderation when times were good, then the tough times would not be as tough — or austere.
Instead of “moderation,” the best word to describe what’s going on in the U.S. now is “excessive,” as these headlines attest:
- Consumers boost spending in June (Marketwatch, July 30)
- … Corporate Debt Is Ballooning (Forbes, August 4)
- A blowout in government borrowing … (Bloomberg, August 19)
Individuals, corporations and governments find it difficult to be financially frugal when interest rates are exceptionally low.
Here’s what the August Global Market Perspective, a monthly Elliott Wave International publication which covers 50+ worldwide financial markets, has to say:
We have little doubt that it will take a long period of austerity to correct the world’s multigenerational debt binge. …
The chart illustrates the interest-rate environment that holds together this global house of cards. In July, the average interest rate across 20 [advanced] economies fell to 0.5%, a new low (by far) dating back at least a century.
Indeed, according to at least one source, rates are as low as they’ve been in 50 centuries.
Let’s return to the August Global Market Perspective:
This chart is a version of one published by Sidney Homer and Richard Sylla in their 2005 book: A History of Interest Rates. Astoundingly, it shows a potential 5,000-year low in both short-term interest rates and long-term interest rates.
When interest rates start to rise, and it becomes difficult to service debt, a brutal austerity will be the order of the day.
As you might imagine, the best course of action — especially at this juncture — is to refrain from assuming debt and to save as much cash as possible. When austerity reigns, cash will be king.
Another course of action is to learn what the Elliott wave model suggests is next for interest rates (or bond yields).
If you need to brush up on your knowledge of the Elliott wave model, or are new to the subject, you are encouraged to read the Wall Street classic, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter. Here’s an excerpt from the book:
What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott’s highly specific rules reduce the number of valid alternatives to a minimum. Among those, the best interpretation, sometimes called the “preferred count,” is the one that satisfies the largest number of guidelines. Other interpretations are ordered accordingly. As a result, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree on both the list of possibilities and the order of probabilities for various possible outcomes at any particular time. That order can usually be stated with certainty. Do not assume, however, that certainty about the order of probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances do you ever know exactly what the market is going to do. You must understand and accept that even an approach that can identify high odds for a fairly specific event must be wrong some of the time.
You can prepare yourself psychologically for such outcomes through the continual updating of the second best interpretation, sometimes called the “alternate count.” Because applying the Wave Principle is an exercise in probability, the ongoing maintenance of alternative wave counts is an essential part of using it correctly. In the event that the market violates the expected scenario, the alternate count puts the unexpected market action into perspective and immediately becomes your new preferred count. If you’re thrown by your horse, it’s useful to land right atop another.
Here’s the good news: You can access the online version of the book for free when you join Club EWI — the world’s largest Elliott wave educational community (approximately 350,000 worldwide members and rapidly growing).
You can join Club EWI for free and enjoy access to a wealth of Elliott wave resources on financial markets, trading and investing. All the while, you are under no obligations as a Club EWI member.
You can have the book on your computer screen in just a few minutes by following this link: Elliott Wave Principle: Key to Market Behavior — unlimited and free access.