What Recessions? It's a Wonderful Life

By Elliott Wave International

Fund managers see no risk of a U.S. recession. Have they over-indulged on the eggnog?
"I don't have your money. It's in Tom's house...and Fred's house." This is a quote from George Bailey, the fictional bank manager in the 1946 classic movie, It's a Wonderful Life. George was replying to customers of the bank who were demanding their money back. Unfortunately, the deposits had been invested, and the bank did not have enough money to pay everyone out. As I have said to my 14-year-old daughter every year over the past decade when we settle down to watch this feel-good Christmas movie, it's probably the simplest, and therefore best, lesson about understanding the complexities of the fixed-fractional banking system. (As you can imagine, this just exacerbates the fact that, in her now-teenage eyes, I am boring, embarrassing dad.)
George Bailey did not expect all his customers to demand their money back at once. It may be a fictional story, but it accurately reflects the complacent psychology of financial institutions as an economic cycle tops out. The latest example of such complacency comes from the most recent Bank of America Merrill Lynch Fund Manager Survey. Expectations that global growth will improve in the next year jumped to a net 29% of respondents in December, the biggest two-month gain on record, and a big turnaround from the middle of the year when there was intense fear of a global recession. The survey shows that fund managers now see the least risk of a recession since the middle of 2009. That was, of course, when the U.S. was already in recession, despite central banks' machinations to inject liquidity into the financial system. The Fed has again begun pumping billions of dollars into the system since September, but the difference is that the U.S. has not experienced a recession as it did in 2008-2009. Are people just blindly accepting that the Fed will be able to keep the stock market propped up? Perhaps.
Indeed, some investors believe that because the yield curve has turned positive again, then all is well and there's no need to worry. On the contrary, the chart below shows that when the yield curve inverts and then turns positive, it is precisely the time to worry that a recession may be dead ahead.
It's a Wonderful Life ends with George Bailey realizing that there are much more important things in life than business. By this time next year, currently cock-a-hoop (adj.: boastfully, if not defiantly, elated) investors might be feeling the same way.

It's a commonly held misconception that a positive yield curve swing is a good sign for the economy, but the evidence proves otherwise. Want to see EWI's President, Bob Prechter, tackle and disprove other commonly held beliefs that could hinder your investing? Good!
Get instant, free access to Prechter's speech to the International Federation of Technical Analysts. It shows you “What Really Moves the Markets.” Watch Now

Investors: Are You in Danger of Emotion-Driven Decisions? You're Not Alone.

Or...Your Defense Against FOMO

By Elliott Wave International

As the winter holidays draw near, many of us will fall victim to the affliction we call "S.N.O.M.O." -- the Sudden Need of More Objects (to own, play with... and eventually, store in the basement).
Lists and budgets are no match for SNOMO once we take our first steps into a big-box store with its flashing signs and blazing blue lights. Within minutes, a powerful urge takes over and suddenly we're leaping in front of an old lady with a cane for the last cat-massage combing kit despite not knowing a single person who owns a cat, self included.
Our friends at Elliott Wave International assert that the same fear and emotion driving holiday shoppers to make irrational purchases ALSO drives the year-round speculation by investors in uber-hyped "it" markets.
To investors and traders, this phenomenon is known as FOMO -- the Fear of Missing Out. And we can't cure shoppers' SNOMO, for investors the ultimate defense against the sudden need of more is Elliott wave analysis.
The Wall Street bestseller and ultimate resource guide on all things Elliott., Elliott Wave Principle -- Key to Market Behavior writes:

"The Wave Principle exists partly because man refuses to learn from history, because he can always be counted upon to be led to believe that two and two can and do make five.

"He can be led to believe that the laws of nature do not exist (or more commonly, 'do not apply in this case') ... and that the fears which reason supports will evaporate if they are ignored or derided."

Essentially, the Wave Principle acts as a mood-stabilizer to man's innate fears of missing out on the next big thing. It provides a defined forecasting method for looking at markets, including a clear set of rules and guidelines, which govern the extent and direction of trends.
One of the starkest examples of Elliott waves combatting investor emotion comes via the recent history in bitcoin. In late 2017, the cryptocurrency had gone from a "fake," "fringe" novelty to the new darling of Wall Street -- after rocketing in 2017 alone from below $1000 per coin to above $20,000 by December of that year.
Every major company from Apple Store to Zappos to Playboy began accepting Bitcoin as a payment medium. Average citizens were literally mortgaging their homes to buy the "hottest new investment trend" (Dec. 12 Forbes). And mainstream analysts were re-upping their bullish bitcoin forecasts for the year ahead, as these headlines from December 2017 reveal:

• "Bitcoin could easily reach $40,000 by the end of 2018." (CNBC)
• "Bitcoin: Mystery Investor Bets a million it hits $50,000." (Forbes)
• "Bitcoin Will Surge Above $100,000 in 2018" (CNBC)

As one Wall Street bitcoin strategist summarized in a December 22, 2017 article: "Make no mistake - the long-term bull market is firmly intact." (The Street)
The pressure to get in on Bitcoin before the next thousandth-percent price surge could be felt the world over. Investors collective emotion was at an all-time high, and most speculators espoused the sentiment alluded to in Wave Principle -- Key to Market Behavior -- namely; that the rules of nature and gravity didn't apply to bitcoin.
By stark contract, Elliott Wave International’s December 2017 Elliott Wave Financial Forecast took an objective stance based on bitcoin’s completed bullish Elliott wave pattern and identified the hallmarks of a late-stage bubble, issuing this warning to crypto-crazed investors:

"A rising sea of euphoria, ever-higher price projections and the capitulation of financial sophisticates only reinforce our stance:

"We are more convinced than ever that bitcoin will disappoint its late-coming enthusiasts."

Result: From its December 2017 peak of near $20,0000 Bitcoin plummeted 70%-plus to below $6000 per coin in just two months! (By the end of 2017, bitcoin was trading near $3000, an 80% crash.)
In fact, the first quarter of 2018 was the worst period for cryptocurrencies in history. Here again, Elliott Wave Principle -- Key to Market Behavior offers singular insight into the psychological machinations of this type of market's reversal:

"Panics are sudden emotional mass realizations of reality, as are the initial upswings from the bottoms of those panics. At these points, reason suddenly impresses itself upon the mass psyche, saying, 'Things have gone too far. The current levels are not justified by reality.'

"To the extent that reason is disregarded, then, will be the extent of the extremes of mass emotional swings and their mirror, the market."

For any investor, fomo begets disappointment and regret. Yet, nobody is immune. In October 2017, JP Morgan Chase's CEO called bitcoin a "fraud" and said, "If you're stupid enough to buy it, you'll pay the price." Two months later, amidst the crypto hype and glitz, the bank started prepping its clients for investing in bitcoin futures on the Chicago Mercantile Exchange.
A new bitcoin-like "it" market is born every day. Whether you approach those markets led by emotion, or by a clear Elliott wave discipline, is your choice. All free Club EWI members get instant, no-cost access to the complete Elliott Wave Principle -- Key to Market Behavior the minute they sign up. Join them today and learn to keep your emotions in check with Elliott wave analysis!