From Faith to Failure: Abenomics

After decades of deflation in Japan, we thought there was hope and the deflating money supply and falling prices were gone. But during the last two quarters we once again witnessed relentless deflationary pressure in Japan despite record stimulus that promised inflation. Well, inflation is missing in action. Deflation still rocks the nation! Surprised?

Why the biggest monetary stimulus effort in the world did NOT stop deflation in its tracks

11 20 14abepic From Faith to Failure: Abenomics

When Shinzo Abe became the Prime Minister of Japan in December 2012, he was regarded with the kind of reverence that politicians dream about. He was featured in a hit pop song (“Abeno Mix”), hailed as a “samurai warrior,” and featured on the May 2013 The Economist cover as none other than Superman.

But in the two short years since, Abe as Superman has been struck down by the superpower-zapping force of economic kryptonite. On November 17, government reports confirmed that Japan’s brief respite from a 20-year long entrenched deflation was over as the nation’s 2nd & 3rd quarter GDP shrank 7.2% and 1.6% respectively.

In the words of a November 20, 2014 New York Times article:

I’d say it’s time to call Abenomics a failure. All that is left is disappointment.

Why did Abenomics fail? That’s the one question “being asked in a shell shocked Japan,” observes the same New York Times piece.

Their shock is understandable. Shinzo Abe spearheaded the boldest and biggest economic stimulus campaign to revive growth and reduce debt not just in Japan’s history, but in the world’s. To give you an idea of its magnitude, consider this:

Abe greenlit daily quantitative easing interventions by the Bank of Japan equivalent to $15 billion per day.

– VS. –

At its peak, the U.S.’s QE program authorized “only” $85 billion a month.

Japan’s QE was three times larger than the Fed’s! According to the mainstream analysts, there was no way the strategy could fail:

“With Abenomics, Japan Catches a Sense of Revival… The architect of this resurgence is Prime Minister Shinzo Abe. His plan reflects a breadth of vision and coordination that no leader until Abe seemed interested in.” (Washington Post, May 24, 2013)

But, despite its historic size and the widespread faith in its success, Elliott Wave International’s team of analysts foresaw an entirely different outcome — namely, Abenomics would not be the alchemical instrument of economic change:

January 22, 2013: The Bank of Japan ups its inflation target rate to 2% and makes an “open-ended commitment to buy assets until the target is in sight.”

February 2013 Elliott Wave Financial Forecast: “In the area of central bank intervention, the ‘juice’ continues to flow… The effort to escape gravity illustrates just how detached central bankers remain from the reality that their efforts are imprudent, unfair, and doomed to fail.”

February 2013: Abenomics is hailed as the catalyst for the yen’s collapse.

March 2013 Asian Pacific Financial Forecast: “Most conventional observers are convinced that Japanese Prime Minister Abe’s New Liberal Democratic Party (LDP) administration has caused the yen to plunge… simply by promising to do whatever it takes to stop Japan’s deflation.”

“Conventional observers are just doing what they always do: looking back to around the start of a financial trend, finding a significant event from around that time… and then assuming that the event caused the trend.”

Chart of JPY/USD shows, however, that the yen completed a large-degree fifth wave in November 2011, one year BEFORE Abe even took office!

11 24 14yen From Faith to Failure: Abenomics

May 18, 2013 The Economist cover of Abe as superman writes: “Mr. Abe is electrifying a nation that had lost its faith.”

May 2013 Elliott Wave Financial Forecast: “Faith in the power of central banks to stem the ebbing tide of [deflation] remains strong. Ultimately, however, all of these efforts will fail.”

June 2013 Elliott Wave Financial Forecast: “As Japan’s economy teetered, Japanese Prime Minister Shinzo Abe instituted an unprecedented spending and monetary easing scheme despite a gross public debt that projects to a whopping 230% of GDP. It follows at least a dozen prior ‘stimulus’ efforts all of which failed. This effort is simply larger, so it will prove to be an even more spectacular failure.”

It’s been 2 year since Abenomics began, and the November 20 New York Times article confirms “its failure.” Since its inception:

  • Japan’s government debt has increased to 250% of GDP
  • The index of Japanese industrial output is 96.8, the exact same reading as 1989
  • Real household income has fallen by 6%
  • And Japan has an 11 trillion yen trade deficit -vs.- a 5 trillion yen trade surplus in 2010

Now, EWI’s educational resource team has put together a new, free report titled “What You Need to Know Now About Protecting Yourself From Deflation” that explains why

“The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation fromexpansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all… These behaviors reduce the velocity of money, the speed at which it circulates to make purchases, thus putting downside pressure on prices. These forces reverse the former trend.”

A deflationary psychology has been entrenched in Japan for the last 20 years. It is now arriving in Europe. You will be inundated by news reports from all four corners of the globe on deflation’s progress, and what the world’s monetary authorities are doing to ensure it will remain a temporary, contained and manageable event.

The worst thing you could do is rest on their promises.

Our new, 11-page report “What You Need to Know Now About Protecting Yourself From Deflation” is 100% free. It takes your understanding of this complex economic shift to a radical level AND gives you the ultimate advantage of knowing how to thrive during economic downturns.

The best part is, the entire report is now available to you free — simply by joining Club EWI and its rapidly expanding community.Go ahead and click here for instant access!


This article was syndicated by Elliott Wave International and was originally published under the headline Abenomics: From Faith to Failure. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Can Europe’s Deflation Be Like Japan?

While the stock market has recently seen all time highs in the the United States, despite Federal Reserve’s quantitative easing runs, inflation has been mute. In fact there is talk that FED may just keep printing money if deflation continues to be a concern! Across the ocean, money printing has continued for some years as well, but deflationary forces still cause enough worries. Late the mainstream media started to ask the taboo question: Can Europe go into a deflationary period like Japan had after 1990?

Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named

The Continent is now teetering on the edge of a “Japan-style” deflation. Here’s our take on it.
It’s happened. The one economic comparison Europe has dreaded more than any other; the name that’s akin to Lord Voldemort for investors has been uttered: “deflation.”

And it’s not just “deflation.” You can still spin that term in a positive light if you get creative enough. Say, for example,

“Falling prices during deflation actually encourage consumers to spend.”

But once you add the following two very distinct words, there’s no way to turn that frown upside down. And those words are“Japan-style” deflation.

Japan has languished in a deflationary cycle pretty much since the late 1990s, its once booming economy reduced to ‘lost decades’ of stagnation. Europe is now teetering on the edge.” (Sept. 19, Associated Press)

Which begs an obvious question: Weren’t Europe’s central banks supposed to prevent this very scenario from happening via their unprecedented, 4-year-long campaign of “money-printing,” bond-buying and interest-rate-slashing?

The answer to that question is… yes. Those actions were indeed supposed to boost inflation.

What’s more, no one can say the European Central Bank didn’t utilize every available tool in their arsenal to try and accomplish that end. The problem is they were fighting a losing battle.

And, we are both happy and sad at the same time to report that from the very beginning, when the first rate cut was loaded into the save-the-economy cannon, we at Elliott Wave International foresaw that Europe’s retreat toward deflation was unavoidable.

Here’s a quick recap of what led us to that conclusion.

– 2011 –

January 2011: The “D” word is way off the mainstream radar. Soaring oil, grain, and commodity prices has fueled widespread fears of runaway inflation. Writes one January 22, 2011 LA Times article:

“Around the world, many countries aren’t confronted with the debilitating forces of deflation, but the opposite — inflation. Annualized inflation in the euro zone rose above the 2% target rate for the first time in more than 2 years.”

February 2011: The European Central Bank unveils its brand-new Long Term Refinancing Operations (LTRO), extending nearly half a trillion euros in 3-year loans to banks at negligible interest rates — to stimulate the economy (and inflation).

July 2011: U.K.’s consumer price index declines, prompting a sigh of relief, not a shudder of fear from the Bank of England, who says “we can now breathe a little easier.”

(VS.)

Our August 2011 European Financial Forecast:

“We maintain our stance, however, that the looming threat is not inflation but deflation. Far from a sense of relief, the Banks’ paramount feelings should soon develop into an unrelenting dread.”

September 2011: U.K.’s consumer price index peaks at 5.2% and officially sets the downtrend in motion.

– 2012 –

January 2012: The Bank of England adds another 50 billion pounds to its asset purchase program, bringing its 3-year campaign of “money-printing” to 325 billion. The European Central Bank is less than 14 years old, yet total assets at the ECB breach 3 trillion.

February/March 2012: U.K. producer price inflation comes in higher than expected, prompting one U.K. economist to say: “PPI: Another wake-up call for apoplithorismosphobes,” the clinical term for those who fear deflation. The economist goes on to recommend that sufferers “seek therapy.” (March 12 Wall Street Journal)

(VS.)

Our July 2012 European Financial Forecast:

“Our models say that inflation rates will keep failing until they’re again measuring the rate of deflation as they last did briefly in 2009.”

August 2012 European Financial Forecast makes the first comparison of Europe to Japan:

“European leaders,” by slashing rates and printing money “seem determined to replicate Japan’s experience. Their efforts will not stop consumer price deflation.”

– 2014 –

May 2014 European Financial Forecast:

“The chart shows that British CPI accelerated lower after falling from a counter-trend peak of 5.2% back in September 2011, with year-over-year price growth just ticks above its late-2009 low.

9 29 14eurdefl1 Can Europes Deflation Be Like Japan?

“More than half of the 28 EU nations either teeter on the brink of deflation or have succumbed to falling prices already.

“The following chart shows that economic stagnation has reached even Germany, Europe’s most robust economy.”

9 29 14eurdefl2 Can Europes Deflation Be Like Japan?

September 2014 European Financial Forecast:

“In a related phenomenon, the press has now jumped on the slew of similarities between Europe’s flagging economy and Japan’s… Clearly, the parallel paths of the two regions have become impossible for the press to ignore.

“The central bank’s latest deflation-fighting contrivance is a €400 billion package of targeted LTRO loans, which are designed to compel banks to lend to ordinary business owners. Also like Japan, the ECB has slashed its main refinancing rate to 0.15% and now charges for banks’ overnight deposits. The result? Shown below, Europe’s largest economy, Germany, just contracted 0.2%; French economic output has ground to a halt; and Italy just entered its third recession since 2008.

9 29 14eurdefl3 Can Europes Deflation Be Like Japan?

The world has finally woken up to the possibility of a Japan-style deflation in Europe — years after the writing was already on the wall.

Now, you need to prepare for what’s to come.

The best part is, Elliott Wave International’s Founder and President, Robert Prechter, as written a book that can help you do just that. And you can read 8 chapters of Prechter’s bestseller, Conquer the Crash, free.


3230 CG Aff2 CTC2 Can Europes Deflation Be Like Japan?

8 Chapters of Robert Prechter’s Conquer the Crash — FREE

This free, 42-page report can help you prepare for your financial future. You’ll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more.

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Gold Price Direction

Where is the gold price heading? Will gold keep crashing? Since hitting a record high of $1921.50 per ounce in September 2011, gold prices have erased 30% in value. By the end of day on October 3, 2014, gold prices were circling the drain of a 15-month low.

After such devastation, the global community of gold analysts, advisors and investors finds itself scattered as an anthill colony after being stepped on by a giant bear paw. This recent Forbes article captures the divisiveness among gold watchers:

“‘Survey Participants Split Over Gold Price Direction‘ as a potential decline in the U.S. dollar competes against ‘geopolitical reasons’ for prices to bounce.”

This magnifies an important point, namely:

Mainstream financial analysis uses news events to gauge where prices may be headed. The problem with this strategy is that it does not anticipate trend changes — it only reacts to the changes that have already happened, almost always leaving you one step behind.

Naturally, this reliable unreliability leads to uncertainty among those invested in the market’s trend.

Elliott wave analysis takes a radically different approach. Rather than looking outside the market for clues into future price action, Elliotticians look to the price charts themselves. There, they identify fixed and finite patterns which shape the market’s near- and long-term character.

You can use gold’s 3-year-long sell-off as a prime example. Back in 2010-2011, gold’s bullish “fundamental” picture was allegedly in the bag. The U.S. Federal Reserve just launched its $1-trillion-a-year quantitative easing program, which was widely expected to fuel gold’s inflationary fire. An August 25, 2011 Gallup Poll confirmed:

“Americans Choose Gold as the Best Long-Term Investment.”

Elliott Wave International, however, saw a different outcome for gold on the metal’s price chart: an impending decline. In theSeptember 2011 Elliott Wave Financial Forecast, our analysis included the following chart, which showed gold prices at or near the end of a decade-long, 5-wave advance.

Gold’s wave structure is consistent with a terminating rise. [Elliott waves progress and therefore top out in 5 waves]. As this monthly chart shows, prices exceeded the upper line of the channel formed by the rally from the 1999 low in what Elliott terms a throw-over. A throw-over occurs at the end of a fifth wave, and represents a final burst of buying. The pattern is confirmed as complete once prices close back under the upper line, which currently crosses $1650.”

10 6 14goldchart Gold Price Direction

So, that was then. What about now?

Today, the mainstream is divided between opposing fundamental forces. But at the San Francisco Money Show in August 2014, Elliott Wave International’s chief market analyst Steve Hochberg identified a very compelling reason to form a united front in gold’s future — an Elliott wave triangle pattern.

You can hear the exact point when Steve shared this exciting development to his audience via this clip from his Money Show presentation:

Steve goes on to explain how pinpointing this triangle helps him lay down a forecast for “what gold is going to do from here on out.”

Would you believe that gold prices should “rally” for a year, maybe even two??

Would you also believe you can watch Steve’s entire Money Show presentation on gold (not just the 30-second preview featured here!), FREE?

Well, you absolutely can. For a limited time only, Elliott Wave International is releasing Steve’s Money Show presentation on gold — in two 5-minute long videos.

This very special offer is FREE to all Club EWI members. Simply complete your free Club EWI profile and get instant access to Steve’s presentation >>

Prepare for the Stock Market Crash

How to Prepare for the Coming Crash and Preserve Your Wealth

Bob Prechter first released Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression during a stock-market high in 2002, and it quickly became a New York Times–bestseller. Now he has updated the book with 188 new pages for a second edition, and it looks like it, too, will be published near a stock-market high. John Wiley & Sons plans published the new edition in late October. Visit Elliott Wave International for information on how to order the new edition from major online retailers.

As was widely reported in the dark days of late February and early March 2009, Prechter called for the start of the biggest stock market rally since the 2007 high. He recommended speculators close the S&P short position that he recommended at 2007 top. Since then, the S&P has soared more than 80 percent in 2 years and seems to have topped in 2011. During the rally Prechter has called virtually all the minor tops to get in short positions for speculators. As of October 2011, his last short at the stock market top and the gold short has paid off. In his monthly newsletters, Prechter continues to remain bearish and thinks market will continue to decline with lower highs and lower lows with many bear market rallies that will make it look like a bull market.

The first edition of Conquer the Crash, which was published in early 2002, was “on the mark” with regard to our current economic environment — so much so that it’s uncanny. Prechter’s message has been good for investors who kept their money safe and for speculators who profited from declines. And he still expects a great buying opportunity ahead for those who can keep their money safe until it arrives. Here is a short list of some of the accurate predictions he made in 2002 that have come to fruition:

Credit Deflation

“Usually the culprit behind [simultaneous stock and real estate] declines is a credit deflation. If there were ever a time we were poised for such a decline, it is now.” Chapter 16

Bailout Schemes

“If [governments] leap unwisely into bailout schemes, they will risk damaging the integrity of their own debt, triggering a fall in its price. Either way … deflation will put the brakes on their actions.” Chapter 32

Banking and Insurance Stocks

“We will see stocks going down 90 percent and more … [and] bank and insurance company failures….” Chapter 14

Collateralized Securities

“Banks and mortgage companies … have issued $6 trillion worth of [securitized loans]…. In a major economic downturn, this credit structure will implode.” Chapter 19

Derivatives

“Leveraged derivatives pose one of the greatest risks to banks….” Chapter 19

Mortgage-Backed Securities

“Major financial institutions actually invest in huge packages of … mortgages, an investment that they and their clients (which may include you) will surely regret…. Chapter 16

Fannie Mae and Freddie Mac

“Investors in these companies’ stocks and bonds will be just as surprised when [Fannie and Freddie’s] stock prices and bond ratings collapse.” Chapter 25

Banks

“Banks are not just lent to the hilt, they’re past it. In a fearful market, liquidity even on these so called ‘securities’ [corporate, municipal, and mortgage-backed bonds] will dry up.”… One expert advises, ‘The larger, more diversified banks at this point are the safer place to be.’ That assertion will surely be severely tested….” Chapter 19

Insurance Companies

“The values of insurance company holdings, from stocks to bonds to real estate (and probably including junk bonds as well), will be falling precipitously…. As the values of most investments fall, the value of insurance companies’ portfolios will fall…. When insurance companies implode, they file for bankruptcy….” Chapters 15, 24

Real Estate

“What screams ‘bubble’ – giant, historic bubble – in real estate today is the system-wide extension of massive amounts of credit to finance property purchases…. [People] have been taking out home equity loans so they can buy stocks and TVs and cars…. This widespread practice is brewing a terrible disaster.” Chapter 16

Rating Services

“Most rating services will not see it coming.” Chapter 25

Political Leaders

“A leader does not control his country’s economy, but the economy mightily controls his image.” Chapter 27

Short-Selling Ban

“In a bear market, bullish investors always come to believe that short sellers are ‘driving the market down’…. Sometimes authorities outlaw short selling. In doing so, they remove the one class of investors that must buy.” Chapter 20

Psychological Change

“When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation….” Chapter 9

Confidence

“Confidence has probably reached its limit. A multi-decade deceleration in the U.S. economy … will soon stress debtors’ ability to pay…. Total credit will contract, so bank deposits will contract, so the supply of money will contract….” Chapter 11

Falling Tax Receipts

“Governments … spend and borrow throughout the good times and find themselves strapped in bad times, when tax receipts fall.” Chapter 32

“Retirement programs such as Social Security in the U.S. are wealth-transfer schemes, not funded insurance, so they rely upon the government’s tax receipts. Likewise, Medicaid is a federally subsidized state-funded health insurance program, and as such, it relies upon transfers of states’ tax receipts. When people’s earnings collapse in a depression, so does the amount of taxes paid, which forces the value of wealth transfers downward.” Chapter 32

“The tax receipts that pay for roads, police and jails, fire departments, trash pickup, emergency (911) monitoring, water systems and so on will fall to such low levels that services will be restricted.” Chapter 32

For more information on the new second edition of Conquer the Crash, visit Elliott Wave International. Bob Prechter has added 188 new pages of critical information to his New York Times bestseller.

Bob Prechter’s “Conquer The Crash”: Eight Chapters For Free

When EWI President Robert Prechter sat down to write the first edition of Conquer The Crashin 2002, the idea that the United States would enter a period of what news authorities coined “economic Armageddon” several years later was unheard of.

Flashing back, the major blue-chip averages were rebounding off a historic bottom, the notorious dot.com bust was making way for a powerful housing boom, Fannie Mae’s chief executive was named “the most confident CEO in America,” then President George Bush was enjoying a 60%-plus approval rating, Gulf War II hadn’t begun yet, and when it did, a “quick and easy victory” was supposed to follow, and the Federal Reserve was largely credited with slaying the big, bad bear via the sharp blade of monetary policy.
Five years later, the tables turned. The U.S. housing market endured its worst downturn since the Great Depression; Fannie Mae’s CEO was ousted amidst a mortgage crisis of incalculable damage. George W. Bush left the oval office with a record low approval rating of 25%, and the expected “cakewalk” victory in Iraq became a “quagmire” and national dilemma.

Anticipating these and other “shocks” to the global system is the unparalleled achievement of “Conquer The Crash.” Here, the following excerpts from the book put any doubt to rest:

  • Housing: “What screams bubble – giant historic bubble – in real estate is the system-wide extension of massive amount of credit.” And “Home equity loans are brewing a terrible disaster.”
  • Bonds: “The unprecedented mass of vulnerable bonds extant today is on the verge of a waterfall of downgrading.”
  • Fannie Mae & Freddie Mac: “Investors in these companies’ stocks and bonds will be just as surprised when the stock prices and bond ratings collapse.”
  • Politics: “Look for nations and states to split and shrink.” And — “The Middle East should be a complete disaster.”
  • Credit Expansion Schemes “have always ended in a bust.” And — “Like the discomfort of drug addiction withdrawal, the discomfort of credit addiction withdrawal cannot be avoided.”
  • Banks: “Banks are not just lent to the hilt, they’re past it. In a fearful market, liquidity even on these so called ‘securities’ [corporate, municipal, and mortgage-backed bonds] will dry up.” (176)

If the tools in Bob Prechter’s analytical toolbox, namely Elliott wave analysis and socionomics (Prechter’s new science of social prediction based on the Wave Principle), enabled him to foresee these “sea changes” in the economic, social, and political landscape — the only question is: What else do the pages of the “Conquer The Crash” reveal?

Well, your opportunity to find out just got a whole lot easier. Right now, you can download the 8-chapter Conquer the Crash Collection, free. It includes:

Chapter 10: Money, Credit And The Federal Reserve Banking System
Chapter 13: Can The Fed Stop Deflation?
Chapter 23: What To do With Your Pension Plan
Chapter 28: How To Identify A Safe Haven
Chapter 29: Calling In Loans & Paying Off Debt
Chapter 30: What You Should Do If You Run A Business
Chapter 32: Should You Rely On The Government To Protect You?
Chapter 33: Short List of Imperative ‘Do’s’ & ‘Don’ts”

Visit Elliott Wave International to learn more about the free Conquer the Crash Collection.

How to be safe in an economic crash

People worry. Sometimes it helps, sometimes there is nothing we can do. I came across some research on the subject of worry. Here’s how it was presented:

Things People Worry About:

  • things that never happen – 40%
  • things which did happen that worrying can’t undo – 30%
  • needless health worries – 12%
  • petty, miscellaneous worries – 10%
  • real, legitimate worries – 8%

Of the legitimate worries, half are problems beyond our personal ability to solve. That leaves 4% in the realm of worries people can do something about.

I thought about our gigantic national debt and weak economy. These seem to fit into both subcategories of “real” worries. You can’t do much as an individual to solve the nation’s debt and economic problems, yet you can prepare for a worsening economic downtrend.

Do we see evidence for an economic turn for the worse?

Well, consider that the evidence is so overwhelming that it took 456 pages of the second edition of Robert Prechter’s book, Conquer the Crash, to cover it. And since that book published, Prechter has consistently devoted his monthly Elliott Wave Theorist to the facts and evidence behind his forecast.

Here’s a chart from the book that was updated by Elliott Wave International in March 2012:

1929CreditBubbleAndNow How to be safe in an economic crash
  • The downturn from 2008 is critically important, as it shows that after an almost unbroken 60-year climb, the contraction is underway. It surely has much further to go, because it is still a third higher than it was at the outset of the last debt deflation in 1929.
  • The Elliott Wave Financial Forecast, March 2012
  • The rating agencies are well aware of what the above chart means. You probably know that Standard & Poor’s downgraded U.S. debt from the nation’s long-standing triple-A to AA+. Now, another rating agency has taken their rating even lower:
  • Rating firm Egan-Jones cuts its credit rating on the U.S. government to “AA” from “AA+” with a negative watch, citing a lack of progress in cutting the mounting federal debt.
  • CNBC.com, April 5
  • Robert Prechter’s bestseller, Conquer the Crash, provides practical information about what you can do to protect your finances in the coming economic implosion. And right now, Elliott Wave International is offering 8 lessons from Conquer the Crash in a free 42-page report that covers:
  • What to do with your pension plan
  • How to identify a safe haven
  • What you should do if you run a business
  • A Short List of Imperative “Dos” and Don’ts”
  • And more

In every disaster, only a very few people prepare themselves beforehand. Discover the ways you can be financially prepared and safe.

Get Your FREE 8-Lesson “Conquer the Crash Collection” Now >>

Why Do Traders Fail?

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through February 6, Elliott Wave International is offering a special 45-page Best Of Traders Classroom eBook, free.

I think that, as a general rule, traders fail 95% of the time, regardless of age, race, gender or nationality. The task at hand could be as simple as learning to ride a bike for the first time or as complex as mapping the human genome. Ultimate success in any enterprise requires that we accept failure along the way as a constant companion in our everyday lives.

I didn’t just pull this 95% figure from thin air either. I borrowed it from the work of the late, great Dr. W. Edward Deming, who is the father of Total Quality Management, commonly known as TQM. His story is quite interesting, and it actually has a lot to do with how to trade well.

Dr. Deming graduated with degrees in electrical engineering, mathematics and mathematical physics. Then, he began working with Walter A. Shewhart at Bell Telephone Laboratories, where he began applying statistical methods to industrial production and management. The result of his early work with Shewhart resulted in a seminal book, Statistical Method from the Viewpoint of Quality Control.

Since American industry spurned many of his ideas, Deming went to Japan shortly after World War II to help with early planning for the 1951 Japanese Census. Impressed by Deming’s expertise and his involvement in Japanese society, the Japanese Union of Scientists and Engineers invited him to play a key role in Japan’s reconstruction efforts. Deming’s work is largely responsible for why so many high quality consumer products come from Japan even to this day.

In turn, Japanese society holds Dr. W. Edward Deming in the highest regard. The Prime Minister of Japan recognized him on behalf of Emperor Hirohito in 1960. Even more telling, Deming’s portrait hangs in the lobby at Toyota headquarters to this day, and it’s actually larger than the picture of Toyota’s founder.

So why do people fail? According to Deming, it’s not because people don’t try hard enough or don’t want to succeed. People fail because they use inadequate systems. In other words, when traders fail, it’s primarily because they follow faulty trading systems – or that they follow no system at all.

So what is the right system to follow as a trader? To answer this question, I offer you what the trader who broke the all-time real-money profit record in the 1984 United States Trading Championship offered me. He told me that a successful trader needs five essentials:

1. A Method
You must have a method that is objectively definable. This method should be thought out to the extent that if someone asks how you make decisions to trade, you can quickly and easily explain. Possibly even more important, if the same question is asked again in six months, your answer will be the same. This is not to say that the method cannot be altered or improved; it must, however, be developed as a totality before implementing it.

2. The Discipline to Follow Your Method
‘Discipline to follow the method’ is so widely understood by true professionals that among them it almost sounds like a cliché. Nevertheless, it is such an important cliché that it cannot be ignored. Without discipline, you really have no method in the first place. And this is precisely why many consistently successful traders have military experience – the epitome of discipline.

3. Experience
It takes experience to succeed. Now, some people advocate “paper trading” as a learning tool. Paper trading is useful for testing methodologies, but it has no real value in learning about trading. In fact, it can be detrimental, because it imbues the novice with a false sense of security. “Knowing” that he has successfully paper-traded during the past six months, he believes that the next six months trading with real money will be no different. In fact, nothing could be farther from the truth. Why? Because the markets are not merely an intellectual exercise, they are an emotional one as well. Think about it, just because you are mechanically inclined and like to drive fast doesn’t mean you have the necessary skills to win the Daytona 500.

4. The Mental Fortitude to Accept that Losses Are Part of the Game
The biggest obstacle to successful trading is failing to recognize that losses are part of the game, and, further, that they must be accommodated. The perfect trading system that allows for only gains does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Trading is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! Remember, you don’t have to be perfect to win in the markets. Practically speaking, this is why you also need an objective money management system.

5. The Mental Fortitude to Accept Huge Gains
To win the game, make sure that you understand why you’re in it. The big moves in markets come only once or twice a year. Those are the ones that will pay you for all the work, fear, sweat and aggravation of the previous 11 months or even 11 years. Don’t miss them for reasons other than those required by your objectively defined method. Don’t let yourself unconsciously define your normal range of profit and loss. If you do, when the big trade finally comes along, you will lack the self-esteem to take all it promises. By doing so, you abandon both method and discipline.

So who was the all-time real-money profit record holder who turned in a 444.4% return in a four-month period in 1984? Answer: Robert Prechter … and throughout the contest he stuck to his preferred method of analysis, the Elliott Wave Theory.

TradersClassroom Why Do Traders Fail?
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Jaguar Inflation

FED rate is at 0% and some people are worried about inflation that may come as the recovery takes hold. Some other people believe deflation is the problem and FED rate should stay at 0%. So, is it really the FED who sets the interest rates in an economy?

Utimately, FED does not control the interest rates. The market does. During inflationary boom, due to demand for money, interest rates rise. FED follow the market by adjusting the FED rate. Central banks simply follows the markets. Federal Reserve does not control the markets. Below is an analogy that explains why credit can deflate despite all the efforts of FED to re-inflate it. When it does happen, it’s timing is based on a shift in social mood, and not based on FED policy.

Jaguar Inflation – A Layman’s Explanation of Government Intervention

This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechters FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.

The following article was adapted from Robert Prechter’s NEW Deflation Survival eBook, a free 60-page compilation of Prechter’s most important teachings and warnings about deflation.

By Robert Prechter, CMT

I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy.

Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn.

Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can’t afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars — at best — returns to the level it was before the program began.

The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone’s delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit.

Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers’ windows, but then it ends. Nobody wants any more credit. They don’t care if it’s free. They can’t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can’t afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit — at best — returns to the level it was before the program began.

See how it works?

Is the analogy perfect? No. The idea of pushing credit on people is far more dangerous than the idea of pushing Jaguars on them. In the credit scenario, debtors and even most creditors lose everything in the end. In the Jaguar scenario, at least everyone ends up with a garage full of cars. Of course, the Jaguar scenario is impossible, because the government can’t produce value. It can, however, reduce values. A government that imposes a central bank monopoly, for example, can reduce the incremental value of credit. A monopoly credit system also allows for fraud and theft on a far bigger scale. Instead of government appropriating citizens’ labor openly by having them produce cars, a monopoly banking system does so clandestinely by stealing stored labor from citizens’ bank accounts by inflating the supply of credit, thereby reducing the value of their savings.

I hate to challenge mainstream 20th century macroeconomic theory, but the idea that a growing economy needs easy credit is a false theory. Credit should be supplied by the free market, in which case it will almost always be offered intelligently, primarily to producers, not consumers. Would lower levels of credit availability mean that fewer people would own a house or a car? Quite the opposite. Only the timeline would be different.

Initially it would take a few years longer for the same number of people to own houses and cars – actually own them, not rent them from banks. Because banks would not be appropriating so much of everyone’s labor and wealth, the economy would grow much faster. Eventually, the extent of home and car ownership – actual ownership – would eclipse that in an easy-credit society. Moreover, people would keep their homes and cars because banks would not be foreclosing on them. As a bonus, there would be no devastating across-the-board collapse of the banking system, which, as history has repeatedly demonstrated, is inevitable under a central bank’s fiat-credit monopoly.

Jaguars, anyone?

To learn more on deflation, it’s causes and effects, download Prechters FREE 60-page Deflation Survival eBook or browse various deflation topics like those below at www.elliottwave.com/deflation.

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-seller books Conquer the Crash and Elliott Wave Principle. He is the editor of The Elliott Wave Theorist monthly market letter since 1979.

News and Earnings Are Not What Moves Stocks

Sometimes you know that a company earnings will be good. You buy the stock and you wait for the earnings announcement. Stock goes up until the good news are out. And then it sells off and you are frustrated. Sometimes you see the market crashing in the morning, the media says “home builders are in trouble”. You should the builders. Then in the afternoon market rallies and the news headline reads “FED optimism rallies stocks, traders shrugged home builder news”. Why does this keep happening in our day to day trading?

How News Are Interpreted by the Markets:
Same Day. Same Event. Same Market. Different Story!

“There is no group more subjective than conventional analysts.” — Robert Prechter. 

Elliott wavers sometimes hear the criticism that patterns in market charts can be “open to interpretation.” For example, what looks like a finished 1-2-3 correction to one analyst, another analyst may interpret as 1-2-3 of a developing impulse, with waves 4 and 5 on the way.

Does this happen? Absolutely. (Although, there are always tools an Elliottician can employ to firm up the wave count.) But here’s the real question: What’s the alternative?
Typical alternatives amount to analysis of the “fundamentals”: Jobs, interest rates, CPI, PPI, what Ben Bernanke said on Tuesday — it all goes into the pot. Result? Well, if you think it’s clear and unambiguous, guess again. Here’s a fresh example.

Find out what really moves markets — download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn’t. You might be surprised to discover it’s not the Fed or “surprise” news events. Learn more, and download your free ebook here.

On the evening of February 18, in a surprise move, the Federal Reserve raised its discount rate — the interest rate at which it lends money to banks. The next morning the S&P futures were pointing lower; everyone was bracing for a weak day — because, as conventional thinking goes, higher interest rates are bad for business, the economy, and ultimately for the stock market. Friday morning, stocks indeed opened lower and major news headlines confirmed:

  • Wall St opens weaker after Fed move
  • … Investors Wary After Fed Move
  • Stocks Open Lower After Surprise Fed Move

But around 11am that same morning, the DJIA turned around and moved higher. Now look at what the headlines from major sources were saying after lunch on February 19:

  • US stocks bounce back; Fed move viewed in positive light
  • US Stocks Up A Bit On Fed Discount Rate Increase
  • Stocks Higher After Fed Move

What was a “bearish move” by the Fed in the morning morphed into a “bullish” one by the afternoon! Same event. Same market. Same day. Completely opposite interpretation!

This brings to mind the answer EWI’s President Robert Prechter once gave when asked about the objectivity of Elliott wave analysis. Bob said:

“I always ask, ‘compared to what?’ There is no group more subjective than conventional analysts who look at the same ‘fundamental’ news event — a war, the level of interest rates, the P/E ratio, GDP reports, you name it — and come up with countless opposing conclusions. They generally don’t even bother to study the data. Show me a forecasting method that is totally objective or contains no human interpretation. There is no such thing, even in a black box. To answer your question more specifically, though, properly there should be no subjectivity in interpreting Elliott waves patterns. There is a set of rules and guidelines for that interpretation. Interpretation gives you only the most probable scenario(s), not a sure one. But people mislabel probabilistic forecasting as subjectivity. And subjectivity or bias can ruin that value, just as in any other approach. Sometimes we screw up. But in contrast to the outrageously improbable (if not downright false) wave interpretations or other types of forecasts we often see from others, we are as close to an objective service as you’re going to find. We hire analysts who know the rules of Elliott cold.”

Find out what really moves markets — download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn’t. You might be surprised to discover it’s not the Fed or “surprise” news events. Learn more, and download your free ebook here.

 

Vadim Pokhlebkin joined Robert Prechter’s Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor’s in Business from Bryan College, where he got his first introduction to the ideas of free market and investors’ irrational collective behavior. Vadim’s articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people’s collective investment decisions.

Earnings: Is That REALLY What’s Driving The DJIA Higher?

The idea of earnings driving the broad stock market is a myth.

It’s corporate earnings season again, and everywhere you turn, analysts talk about the influence of earnings on the broad stock market:

  • · US Stocks Surge On Data, 3Q Earnings From JPMorgan, Intel (Wall Street Journal)
  • · Stocks Open Down on J&J Earnings (Washington Post)
  • · European Stocks Surge; US Earnings Lift Mood (Wall Street Journal)

With so much emphasis on earnings, this may come as a shock: The idea of earnings driving the broad stock market is a myth.

When making a statement like that, you’d better have proof. Robert Prechter, EWI’s founder and CEO, presented some of it in his 1999 Wave Principle of Human Social Behavior (excerpt; italics added):

  • Are stocks driven by corporate earnings? In June 1991, The Wall Street Journal reported on a study by Goldman Sachs’s Barrie Wigmore, who found that “only 35% of stock price growth [in the 1980s] can be attributed to earnings and interest rates.” Wigmore concludes that all the rest is due simply to changing social attitudes toward holding stocks. Says the Journal, “[This] may have just blown a hole through this most cherished of Wall Street convictions.”
  • What about simply the trend of earnings vs. the stock market? Well, since 1932, corporate profits have been down in 19 years. The Dow rose in 14 of those years. In 1973-74, the Dow fell 46% while earnings rose 47%. 12-month earnings peaked at the bear market low. Earnings do not drive stocks.

And in 2004, EWI’s monthly Elliott Wave Financial Forecast added this chart and comment:

market top and earnings News and Earnings Are Not What Moves Stocks

Earnings don’t drive stock prices. We’ve said it a thousand times and showed the history that proves the point time and again. But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful backdrop for a downturn in stock prices. This was certainly true in 2000, as the chart shows. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings (and the trend of higher earnings) got killed.

So if earnings don’t drive the stock market’s broad trend, what does? The Elliott Wave Principle says that what shapes stock market trends is how investors collectively feel about the future. Investors’ mood — or social mood — changes before “the fundamentals” reflect that change, which is why trying to predict the markets by following the earnings reports and other “fundamentals” will often leave you puzzled. The chart above makes that clear.

Get Your FREE 8-Lesson “Conquer the Crash Collection” Now! You’ll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Learn more and get your free 8 lessons here.

 

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theoristmonthly market letter since 1979.

Earnings Do Not Drive Stock Prices – See The Proof in This Chart

A free Club EWI report exposes the TEN most misleading myths of Wall Street, including this one: “Earnings drive the stock market.”

Since the time of buttonwood trees, Wall Street has had its own version of the Ten Commandments – the cornerstone principles of conventional economic wisdom. The first of these writ-in-stone notions is the widespread belief that earnings drive the stock market.

By this line of reasoning, knowing where a market’s prices will trend next is simply a matter of knowing how the companies that comprise said market are expected to perform. On this, the recent news items below capture the public’s devoted following of earnings data:

  • “Stocks Rebound As Investors Await Earnings.” (Associated Press)
  • “US Stocks Drop As Earnings Data Fall Short” (MarketWatch)
  • “Sideways Market Looks For Direction: Earnings Could Point The Way” (MarketWatch)

In reality, though, much of this belief is based on faith, not facts. While earnings may play a role in the price of an individual stock, the stock market as a whole marches to a different drummer.

You get this ground-breaking revelation in the FREE report from Club Elliott Wave International (Club EWI, for short) titled “Market Myths Exposed”. In Chapter One, our editors shatter the smoke-screen surrounding the widespread notion that “Earnings Drive Stock Prices” with these enlightening insights:

“Quarterly earnings reports announce a company’s achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes.”

And — There is no consistent correlation between upbeat earnings and an uptrend in stock prices; or vice a versa, downbeat earnings and a decline in stocks. Case in point: During the 1973-4 bear market, the S&P 500 plummeted 50% while S&P earnings rose every quarter over that period. Here, “Market Myths Exposed” provides the following, visual reinforcement: A chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998.

SP500 earnings News and Earnings Are Not What Moves Stocks

As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded the March 2009 bottom in stocks.

“Market Myths Exposed” dispels the top TEN fallacies of mainstream economic thought. The misconception that “Earnings Drive the Stock Market” is number one. The remaining nine are equally capable of knocking your socks off and most importantly, helping you protect your financial future.

Get the free 33-page Market Myths Exposed eBook now Learn why you should think independently rather than relying on misleading investment commentary and advice that passes as common wisdom. Just like the myth that government intervention can stop a stock market crash, Market Myths Exposed uncovers other important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, inflation and deflation, and more! Protect your financial future and change the way you view your investments forever!

EUR/USD: What Moves You?

It’s not the news that creates forex market trends –
it’s how traders interpret the news.

Today, the EUR/USD stands well below its November peak of $1.51. Find out what Elliott wave patterns are suggesting for the trend ahead now — FREE. You can access EWI’s intraday and end-of-day Forex forecasts right now through next Wednesday, February 10. This unique free opportunity only lasts a short time, so don’t delay! Learn more about EWIs FreeWeek here.

What moves currency markets? “The news” is how most forex traders would undoubtedly answer. Economic, political, you name it — events around the world are almost universally believed to shape trends in currencies.

A January 14 news story, for example, was high up on the roster of events that supposedly have a major impact on the euro-dollar exchange rate. That morning, the European Central Bank announced it was leaving the “interest rate unchanged at the record low of 1% for an eighth successive month.” (FT.com)

The euro fell against the U.S. dollar after the news. But could it have rallied instead? You bet. In fact, traditional forex analysis says it should have. Here’s why.

Analysts always say that the higher a country’s interest rates, the more attractive its assets are to foreign investors — and, in turn, the stronger its currency. Well, U.S. interest rates are now at 0-.25% and in Europe, at 1%, they are 3 to 4 times higher. Isn’t that wildly bullish for the EUR? Apparently not, and wait till you hear why — because in today’s announcement ECB president Jean-Claude Trichet warned that European recovery would be “bumpy.” Ha!

By no means is this the first time a supposedly bullish event failed to lift the market. On June 6, 2007, for example, the ECB raised interest rates. Bullish, right? But the euro didn’t gain that day, either — the U.S. dollar did.

Watch forex markets with these “inconsistencies” in mind and you’ll see them often. In time you realize that it’s not news that creates market trends — it’s how traders interpret the news. That’s a subtle — but hugely important — distinction.

So the real question becomes: What determines how traders interpret the news? The Elliott Wave Principle answers that question head-on: social mood — i.e., how they collectively feel. Currency traders in a bullish mood disregard bad news and buy, leaving it to analysts to “explain” why. Bearishly-biased traders find “reasons” to sell even after the rosiest of economic reports.

If you know traders’ bias, you know the trend. How do you know? Watch Elliott wave patterns in forex charts – it’s reflected in there, on all time frames.

Today, the EUR/USD stands well below its November peak of $1.51. Find out what Elliott wave patterns are suggesting for the trend ahead now — FREE. You can access EWI’s intraday and end-of-day Forex forecasts right now through next Wednesday, February 10. This unique free opportunity only lasts a short time, so don’t delay! Learn more about EWIs FreeWeek here.

 

Vadim Pokhlebkin joined Robert Prechter’s Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor’s in Business from Bryan College, where he got his first introduction to the ideas of free market and investors’ irrational collective behavior. Vadim’s articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people’s collective investment decisions.

EUR/USD: Often, Basic Elliott Wave Analysis Is All You Need

Watch this classic video from Elliott Wave International’s Chief Currency Strategist, Jim Martens, to see how useful the basics of Elliott wave analysis can be. Jim explains how the same basic pattern that R.N. Elliott discovered back in the 1930s is often all you need to make informed market forecasts.

Then access Jim Marten’s intraday and end-of-day Forex forecasts, completely free from Elliott Wave International. The independent market forecasting firm is offering free access (a $199 value) through February 10. Get your free Forex forecasts now.

EUR/USD: Often, Basic Elliott Wave Analysis Is All You Need

Watch this classic video from Elliott Wave International’s Chief Currency Strategist, Jim Martens, to see how useful the basics of Elliott wave analysis can be. Jim explains how the same basic pattern that R.N. Elliott discovered back in the 1930s is often all you need to make informed market forecasts.

Then access Jim Marten’s intraday and end-of-day Forex forecasts, completely free from Elliott Wave International. The independent market forecasting firm is offering free access (a $199 value) through February 10. Get your free Forex forecasts now.

Don’t stop here! Get Jim Marten’s intraday and end-of-day Forex forecasts FREE through February 10. Get your free Forex forecasts..

 

Bin Laden is dead, but stock market is down. Why?

Interest rates, oil prices, trade balances, corporate earnings and GDP: None of them seem to be important, or even relevant, to explaining stock price changes
May 3, 2011

By Elliott Wave International

On the morning of May 2, the financial headlines were abuzz with the news of Osama Bin Laden’s death and its positive impact on the stock market:

“Stock Market Celebrates Killing of Bin Laden” (The Wall Street Journal)

But despite a positive open, stocks closed lower on May 2. Undoubtedly, in the days ahead we’ll hear analysts explaining how Bin Laden’s death is not that “bullish” of an event, after all.

On that same note, MarketWatch.com ran an interesting story on May 2 that quoted from a research paper which found “little evidence that non-economics events have a big effect on the stock market.”

Here at EWI, we go one step further and say the following: Economic events have little impact on the stock market, too.

Don’t believe us? Read this excerpt from a free Club EWI resource, the 50-page 2011 Independent Investor eBook, and judge for yourself.

The Independent Investor eBook, 2011 Edition
(Excerpt; full report here)

…Economists’ Claim #5: “GDP drives stock prices.”

Suppose that you had perfect foreknowledge that over the next 3¾ years GDP would be positive every single quarter and that one of those quarters would surprise economists in being the strongest quarterly rise in a half-century span. Would you buy stocks?

If you had acted on such knowledge in March 1976, you would have owned stocks for four years in which the DJIA fell 22%. If at the end of Q1 1980 you figured out that the quarter would be negative and would be followed by yet another negative quarter, you would have sold out at the bottom.

Suppose you were to possess perfect knowledge that next quarter’s GDP will be the strongest rising quarter for a span of 15 years, guaranteed. Would you buy stocks?

Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929. GDP was positive every quarter for 20 straight quarters before the crash and for 10 quarters thereafter. But the market crashed anyway. Three years after the start of 4Q 1987, stock prices were still below their level of that time despite 30 uninterrupted quarters of rising GDP.

These two events are shown in the figure below:

gdpvsstocks News and Earnings Are Not What Moves Stocks

It seems that there is something wrong with the idea that investors rationally value stocks according to growth or contraction in GDP. …
Claim #6: “Wars are bullish/bearish for stock prices.” … (continued)

Keep reading the 50-page Independent Investor eBook now, free — all you need is a free Club EWI password. Get yours now to gain independent perspective to the financial markets.

DOW Jones Index Priced in Gold

DOW Priced in Gold: What Does It Mean for the Long-Term Trend?

Of the many forward-looking market indicators we at EWI employ, one of the most interesting tools (and least discussed in the financial media) is the DJIA priced in gold — “the real money,” as EWI’s president Robert Prechter calls it. What implications might the present position of Dow/gold have for the long-term trend of the nominal Dow? In this video, Elliott Wave International’s Steven Hochberg shows you several revealing charts that answer this question.

(Discover why deflation is the biggest threat to your money — download your FREE 90-page eBook now.)

FREE Download: Deflation eBook.
Newly updated for 2010, Prechter’s 90-page eBook reveals why deflation is the biggest threat to your money right now. You will learn how to prepare for deflation, survive it, and maybe even prosper during it, so you’ll be ready for the next buying opportunity of a lifetime when deflation is over. Free Download: Deflation eBook.

 

Why You Should Care About DJIA Priced in Gold

By Vadim Pokhlebkin

The following article is provided courtesy of Elliott Wave International (EWI). For more insights that challenge conventional financial wisdom, download EWI’s free 118-page Independent Investor eBook.

Of the many forward looking market indicators we at EWI employ, one of the most interesting tools (and least discussed in the financial media) is the DJIA priced in gold — “the real money,” as EWI’s president Robert Prechter calls it.

We’ve been tracking the Dow/Gold ratio for many years and it has serves our subscribers well. It’s not a short-term timing tool, yet in the longer term, as our January 6 Short Term Update put it, “the nominal Dow eventually plays catch up to what is transpiring in the Dow/Gold ratio.”

Here’s a good example. Remember when the nominal DJIA hit its all-time high? October 2007, just above 14,000. At that time, most investors expected new highs still to come. But our Elliott Wave Financial Forecast warned five months prior, in May 2007:

dow priced in gold vs nominal djia DOW Jones Index Priced in Gold

One key reason [for a coming top in the DJIA] is the undeniable bear market status of the Dow Jones Industrial Average in terms of gold, the Real Dow…

Notice, by contrast, the relative strength of the Real Dow versus the nominal Dow, the index in terms of dollars, from 1980 to 1982. By August 1982 when the Dow denominated in dollars bottomed, the Real Dow was rising strongly from its 1980 low… The nominal Dow soon played catch-up, and they both rallied more or less in sync until 1999.

Now, instead of soaring the Real Dow is crashing relative to the nominal Dow. In fact, it’s barely off its low of May 2006. This dichotomy reveals the weakness that underlies the financial markets’ push higher. When mood turns and credit inflation reverses, the ensuing drop in the nominal value of the market should be dramatic.

“Dramatic drop” did indeed follow: Between October 2007 and March 2009, the DJIA lost 53%, high to low.

For more information, download Robert Prechter’s free Independent Investor eBook. The 118-page resource teaches investors to think independently by challenging conventional financial market assumptions.

 

Vadim Pokhlebkin joined Robert Prechter’s Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor’s in Business from Bryan College, where he got his first introduction to the ideas of free market and investors’ irrational collective behavior. Vadim’s articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people’s collective investment decisions.

What Can Movies Tell About the Stock Market

What Can Movies Tell You About the Stock Market?

The following article is adapted from a special report on “Popular Culture and the Stock Market” published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. Although originally published in 1985, “Popular Culture and the Stock Market” is so timeless and relevant that USA Today covered its insights in a Nov. 2009 article. For the rest of this revealing 50-page report, download it for free here.

This year’s Academy Awards gave us movies about war (The Hurt Locker), football (The Blind Side), country music (Crazy Heart) and going native (Avatar), but nowhere did we see a horror movie nominated. In fact, it looks like Sweeney Todd, The Demon Barber of Fleet Street was the most recent to be nominated in 2008, for art direction (which it won), costume design and best actor, although the last one to win major awards for Best Picture, Director, Actor and Actress was The Silence of the Lambs in 1991.

Whether horror films win Academy Awards or not, they tell an interesting story about mass psychology. Research here at Elliott Wave International shows that horror films proliferate during bear markets, whereas upbeat, sweet-natured Disney movies show up during bull markets. Since the Dow has been in a bear-market rally for a year, now is not the time for horror films to dominate the movie theaters. But their time will come again.

In the meantime, to catch up on why all kinds of pop culture — including fashion, art, movies and music — can help to explain the markets, take a few minutes to read a piece called Popular Culture and the Stock Market, which Bob Prechter wrote in 1985. Here’s an excerpt about horror movies as a sample.

From Popular Culture and the Stock Market by Bob Prechter

  • While musicals, adventures, and comedies weave into the pattern, one particularly clear example of correlation with the stock market is provided by horror movies. Horror movies descended upon the American scene in 1930-1933, the years the Dow Jones Industrials collapsed. Five classic horror films were all produced in less than three short years. Frankenstein and Dracula premiered in 1931, in the middle of the great bear market. Dr. Jekyll and Mr. Hyde played in 1932, the bear market bottom year and the only year that a horror film actor was ever granted an Oscar. The Mummy and King Kong hit the screen in 1933, on the double bottom. These are the classic horror films of all time, along with the new breed in the 1970s, and they all sold big. The message appeared to be that people had an inhuman, horrible side to them. Just to prove the vision correct, Hitler was placed in power in 1933 (an expression of the darkest public mood in decades) and fulfilled it. For thirteen years, lasting only slightly past the stock market bottom of 1942, films continued to feature Frankenstein monsters, vampires, werewolves and undead mummies. Ironically, Hollywood tried to introduce a new monster in 1935 during a bull market, but Werewolf of London was a flop. When film makers tried again in 1941, in the depths of a bear market, The Wolf Man was a smash hit.
  • Shortly after the bull market in stocks resumed in 1942, films abandoned dark, foreboding horror in the most sure-fire way: by laughing at it. When Abbott and Costello met Frankenstein, horror had no power. That decade treated moviegoers to patriotic war films and love themes. The 1950s gave us sci-fi adventures in a celebration of man’s abilities; all the while, the bull market in stocks raged on. The early 1960s introduced exciting James Bond adventures and happy musicals. The milder horror styles of the bull market years and the limited extent of their popularity stand in stark contrast to those of the bear market years.
  • Then a change hit. Just about the time the stock market was peaking, film makers became introspective, doubting and cynical. How far the change in cinematic mood had carried didn’t become fully clear until 1969-1970, when Night of the Living Dead and The Texas Chainsaw Massacre debuted. Just look at the chart of the Dow [not shown], and you’ll see the crash in mood that inspired those movies. The trend was set for the 1970s, as slice-and-dice horror hit the screen. There also appeared a rash of re-makes of the old Dracula and Frankenstein stories, but as a dominant theme, Frankenstein couldn’t cut it; we weren’t afraid of him any more.
  • Hollywood had to horrify us to satisfy us, and it did. The bloody slasher-on-the-loose movies were shocking versions of the ’30s’ monster shows, while the equally gory zombie films had a modern twist. In the 1930s, Dracula was a fitting allegory for the perceived fear of the day, that the aristocrat was sucking the blood of the common people. In the 1970s, horror was perpetrated by a group eating people alive, not an individual monster. An army of dead-but-moving flesh-eating zombies devouring every living person in sight was a fitting allegory for the new horror of the day, voracious government and the welfare state, and the pressures that most people felt as a result. The nature of late ’70s’ warfare ultimately reflected the mass-devouring visions, with the destruction of internal populations in Cambodia and China.

Learn what’s really behind trends in the stock market, music, fashion, movies and more… Read Robert Prechter’s Full 50-page Report, “Popular Culture and the Stock Market,” FREE

Popular Culture and the Stock Market

By Robert Prechter, CMT

Popular Culture and the Stock Market

Both a study of the stock market and a study of trends in popular attitudes support the conclusion that the movement of aggregate stock prices is a direct recording of mood and mood change within the investment community, and by extension, within the society at large. It is clear that extremes in popular cultural trends coincide with extremes in stock prices, since they peak and trough coincidentally in their reflection of the popular mood. The stock market is the best place to study mood change because it is the only field of mass behavior where specific, detailed, and voluminous numerical data exists. It was only with such data that R.N. Elliott was able to discover the Wave Principle, which reveals that mass mood changes are natural, rhythmic and precise. The stock market is literally a drawing of how the scales of mass mood are tipping. A decline indicates an increasing ‘negative’ mood on balance, and an advance indicates an increasing ‘positive’ mood on balance.

Trends in music, movies, fashion, literature, television, popular philosophy, sports, dance, mores, sexual identity, family life, campus activities, politics and poetry all reflect the prevailing mood, sometimes in subtle ways. Noticeable changes in slower-moving mediums such as the movie industry more readily reveal changes in larger degrees of trend, such as the Cycle. More sensitive mediums such as television change quickly enough to reflect changes in the Primary trends of popular mood. Intermediate and Minor trends are likely paralleled by current song hits, which can rush up and down the sales charts as people change moods. Of course, all of these media of expression are influenced by mood changes of all degrees. The net impression communicated is a result of the mix and dominance of the forces in all these areas at any given moment.

Fashion:

It has long been observed, casually, that the trends of hemlines and stock prices appear to be in lock step. Skirt heights rose to mini-skirt brevity in the 1920’s and in the 1960’s, peaking with stock prices both times. Floor length fashions appeared in the 1930’s and 1970’s (the Maxi), bottoming with stock prices. It is not unreasonable to hypothesize that a rise in both hemlines and stock prices reflects a general increase in friskiness and daring among the population, and a decline in both, a decrease. Because skirt lengths have limits (the floor and the upper thigh, respectively), the reaching of a limit would imply that a maximum of positive or negative mood had been achieved.

Movies:

Five classic horror films were all produced in less than three short years. ‘Frankenstein’ and ‘Dracula’ premiered in 1931, in the middle of the great bear market. ‘Dr. Jekyll and Mr. Hyde’ played in 1932, the bear market bottom year, and the only year that a horror film actor was ever granted an Oscar. ‘The Mummy’ and ‘King Kong’ hit the screen in 1933, on the double bottom. Ironically, Hollywood tried to introduce a new monster in 1935 during a bull market, but ‘Werewolf of London’ was a flop. When filmmakers tried again in 1941, in the depths of a bear market, ‘The Wolf Man’ was a smash hit. These are the classic horror films of all time, along with the new breed in the 1970’s, and they all sold big. The milder horror styles of bull market years and the extent of their popularity stand in stark contrast. Musicals, adventures, and comedies weave into the pattern as well.

Popular Music:

Pop music has been virtually in lock-step with the Dow Jones Industrial Average as well. The remainder of this report will focus on details of this phenomenon in order to clarify the extent to which the relationship (and, by extension, the others discussed above) exists.

As a 78-rpm record collector put it in a recent Wall Street Journal article, music reflects ‘every fiber of life’ in the U.S. The timing of the careers of dominant youth-oriented (since the young are quickest to adopt new fashions) pop musicians has been perfectly in line with the peaks and troughs in the stock market. At turns in prices (and therefore, mood), the dominant popular singers and groups have faded quickly into obscurity, to be replaced by styles which reflected the newly emerging mood.

The 1920’s bull market gave us hyper-fast dance music and jazz. The 1930’s bear years brought folk-music laments (‘Buddy, Can You Spare a Dime?’), and mellow ballroom dance music. The 1932-1937 bull market brought lively ‘swing’ music. 1937 ushered in the Andrews Sisters, who enjoyed their greatest success during the corrective years of 1937-1942 (‘girl groups’ are a corrective wave phenomenon; more on that later). The 1940’s featured uptempo big band music which dominated until the market peaked in 1945-46. The ensuing late-1940’s stock market correction featured mellow love-ballad crooners, both male and female, whose style reflected the dampened public mood.

Learn what’s really behind trends in the stock market, music, fashion, movies and more… Read Robert Prechter’s Full 50-page Report, “Popular Culture and the Stock Market,” FREE.

6869 alb bear What Can Movies Tell About the Stock Market

Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

How Punk Rock and Pop Music Relate to Social Mood and the Markets

March 10, 2011

By Elliott Wave International

We can now add the recent uprisings in North Africa and the Middle East to the category of life imitating art — specifically, music lyrics. Those who lived through the 1980s might be forgiven for hearing an unbidden snatch of music run through their heads as they watched first Hosni Mubarak and now Moammar Gadhafi try to hold onto power — “Should I Stay or Should I Go” by The Clash. In Libya, where Gadhafi has used air strikes and ground forces against the rebels, The Clash’s other huge hit from 1981, “Rock the Casbah,” describes the current situation so well it’s almost eerie:

The king called up his jet fighters
He said you better earn your pay
Drop your bombs between the minarets
Down the Casbah way

Punk rock played by bands like The Clash, X, The Ramones, and the Sex Pistols had that in-your-face, defy-authority attitude that crashed onto the scene in Great Britain and the United States in the ’70s and ’80s. It’s interesting that the lyrics can still ring true 30 years later, but even more trenchant is how the prevailing mood is reflected by the music of the times, as seen in this chart that Robert Prechter included in a talk he gave last year.

popmusicandstockmarket What Can Movies Tell About the Stock Market

Popular culture reflects social mood, and the stock market reflects that same social mood. That’s why we get loud, angry music when people are unhappy with their situation; they want to sell stocks. We get light, poppy, bubblegum music when they feel happy and content; they want to buy stocks. In a USA Today article about music and social moods in November 2009, reporter Matt Frantz made clear the connection that Elliott Wave International has been writing about for years:

  • The idea linking culture to stock prices is surprisingly simple: The population essentially goes through mass mood swings that determine not only the types of music we listen to and movies we watch, but also if we want to buy or sell stocks. These emotional booms and busts are followed by corresponding swings on Wall Street.
  • “The same social elements driving the stock market are driving the gyrations on the dance floor,” says Matt Lampert, research fellow at the Socionomics Institute, a think tank associated with well-known market researcher Robert Prechter, who first advanced the idea in the 1980s. [USA Today, 11/17/09]

In the talk he gave to a gathering of futurists in Boston, Prechter explained how the music people listen to relates to social mood and the stock market:

  • When the trend is up, they tend to listen to happier stuff (see chart). Back in the 1950s and ‘60s, you had doo-wop music, rockabilly, dance music, surf music, British invasion — mostly upbeat, happy material. As the value of stocks fell from the 1960s into the early 1980s, you had psychedelic music, hard rock, heavy metal, very slow ballads in the mid-1970s, and finally punk rock in the late ’70s. There was more negative-themed music. [excerpt from Robert Prechter’s speech to the World Future Society’s annual conference, 7/10/10]

Which brings us right back to punk rock. Although there’s lots of upbeat music in the air now, we can assume that after this current bear market rally, we will hear angrier music on the airwaves as the market turns down. It might be a good time, then, to pay attention to what the markets were doing the last time punk rock blasted the airwaves. Here’s an excerpt from “Popular Culture and the Stock Market,” which is the first chapter of Prechter’s Pioneering Studies in Socionomics.

  • The most extreme musical development of the mid-1970s was the emergence of punk rock. The lyrics of these bands’ compositions, as pointed out by Tom Landess, associate editor of The Southern Partisan, resemble T.S. Eliot’s classic poem “The Waste Land,” which was written during the ‘teens, when the last Cycle wave IV correction was in force (a time when the worldwide negative mood allowed the communists to take power in Russia). The attendant music was as anti-.musical. (i.e., non-melodic, relying on one or two chords and two or three melody notes, screaming vocals, no vocal harmony, dissonance and noise), as were Bartok’s compositions from the 1930s.
  • It wasn’t just that the performers of punk rock would suffer a heart attack if called upon to change chords or sing more than two notes on the musical scale, it was that they made it a point to be non-musical minimalists and to create ugliness, as artists. The early punk rockers from England and Canada conveyed an even more threatening image than did the heavy metal bands because they abandoned all the trappings of theatre and presented their message as reality, preaching violence and anarchy while brandishing swastikas.
  • Their names (Johnny Rotten, Sid Vicious, Nazi Dog, The Damned, The Viletones, etc.) and their song titles and lyrics (“Anarchy in the U.K.,” “Auschwitz Jerk,” “The Blitzkrieg Bop,” “You say you’ve solved all our problems? You’re the problem! You’re the problem!” and “There’s no future! no future! no future!”) were reactionary lashings out at the stultifying welfare statism of England and their doom to life on the dole, similar to the Nazis backlash answer to a situation of unrest in 1920s and 1930s Germany.
  • Actually, of course, it didn’t matter what conditions were attacked. The most negative mood since the 1930s (as implied by stock market action) required release, period. These bands took bad-natured sentiment to the same extreme that the pop groups of the mid-1960s had taken good-natured sentiment. The public at that time felt joy, benevolence, fearlessness and love, and they demanded it on the airwaves. The public in the late 1970s felt misery, anger, fear and hate, and they got exactly what they wanted to hear. (Luckily, the hate that punk rockers. reflected was not institutionalized, but then, this was only a Cycle wave low, not a Supercycle wave low as in 1932.)
  • In summary, an “I feel good and I love you” sentiment in music paralleled a bull market in stocks, while an amorphous, euphoric “Oh, wow, I feel great and I love everybody” sentiment (such as in the late ’60s) was a major sell signal for mood and therefore for stocks. Conversely, an “I’m depressed and I hate you” sentiment in music reflected a bear market, while an amorphous tortured “Aargh! I’m in agony and I hate everybody” sentiment (such as in the late ’70s) was a major buy signal.

Popular Culture and the Stock Market. Read more about musical relationships to social mood and the markets in this 40-page-plus free report from Elliott Wave International, called Popular Culture and the Stock Market. All you have to do to read it is sign up to become a member of Club EWI, no strings attached. Find out more about this free report here.

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