Prepare Now for a Brutal Austerity -- Here's Why

Here's what's holding together a "global house of cards"

By Elliott Wave International

When financial times get tough, you hear the phrases "tightening our belts," "cutting back" or "making do with less."

Those are common phrases to describe the word "austerity."

If spending and borrowing had been done with moderation when times were good, then the tough times would not be as tough -- or austere.

Instead of "moderation," the best word to describe what's going on in the U.S. now is "excessive," as these headlines attest:

• Consumers boost spending in June (Marketwatch, July 30)
• ... Corporate Debt Is Ballooning (Forbes, August 4)
• A blowout in government borrowing ... (Bloomberg, August 19)

Individuals, corporations and governments find it difficult to be financially frugal when interest rates are exceptionally low.

Here's what the August Global Market Perspective, a monthly Elliott Wave International publication which covers 50+ worldwide financial markets, has to say:

We have little doubt that it will take a long period of austerity to correct the world's multigenerational debt binge. ...

The chart illustrates the interest-rate environment that holds together this global house of cards. In July, the average interest rate across 20 [advanced] economies fell to 0.5%, a new low (by far) dating back at least a century.

Indeed, according to at least one source, rates are as low as they've been in 50 centuries.

Let's return to the August Global Market Perspective:

This chart is a version of one published by Sidney Homer and Richard Sylla in their 2005 book: A History of Interest Rates. Astoundingly, it shows a potential 5,000-year low in both short-term interest rates and long-term interest rates.

When interest rates start to rise, and it becomes difficult to service debt, a brutal austerity will be the order of the day.

As you might imagine, the best course of action -- especially at this juncture -- is to refrain from assuming debt and to save as much cash as possible. When austerity reigns, cash will be king.

Another course of action is to learn what the Elliott wave model suggests is next for interest rates (or bond yields).

If you need to brush up on your knowledge of the Elliott wave model, or are new to the subject, you are encouraged to read the Wall Street classic, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter. Here's an excerpt from the book:

What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum. Among those, the best interpretation, sometimes called the "preferred count," is the one that satisfies the largest number of guidelines. Other interpretations are ordered accordingly. As a result, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree on both the list of possibilities and the order of probabilities for various possible outcomes at any particular time. That order can usually be stated with certainty. Do not assume, however, that certainty about the order of probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances do you ever know exactly what the market is going to do. You must understand and accept that even an approach that can identify high odds for a fairly specific event must be wrong some of the time.

You can prepare yourself psychologically for such outcomes through the continual updating of the second best interpretation, sometimes called the "alternate count." Because applying the Wave Principle is an exercise in probability, the ongoing maintenance of alternative wave counts is an essential part of using it correctly. In the event that the market violates the expected scenario, the alternate count puts the unexpected market action into perspective and immediately becomes your new preferred count. If you're thrown by your horse, it's useful to land right atop another.

Here's the good news: You can access the online version of the book for free when you join Club EWI -- the world's largest Elliott wave educational community (approximately 350,000 worldwide members and rapidly growing).

You can join Club EWI for free and enjoy access to a wealth of Elliott wave resources on financial markets, trading and investing. All the while, you are under no obligations as a Club EWI member.

You can have the book on your computer screen in just a few minutes by following this link: Elliott Wave Principle: Key to Market Behavior -- unlimited and free access.

This article was syndicated by Elliott Wave International and was originally published under the headline Prepare Now for a Brutal Austerity -- Here's Why. 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.

How "Hot" Stock Market Ideas Can Burn Investors

The Meme Stock Index sees a 36% decline since January

By Elliott Wave International

On July 30, this headline appeared on a well-known investment website:

It's Definitely Possible to Make a Fortune Off Meme Stocks

And, it's definitely true that many investors, especially newbies, have tried.

As you probably know, "meme" stocks may be loosely defined as stocks that become a white-hot focus of interest due to social media hype. The price of these shares can skyrocket within a short period of time. However, as you might imagine, these highly speculative issues can just as quickly turn southward.

Indeed, take a look at this chart from the recently published August Elliott Wave Financial Forecast, a publication which provides Elliott wave analysis of major U.S. financial markets. The accompanying commentary is below the chart:

Legions of new investors continue to chase the latest hot ideas. ... Meme stocks are [a] mutant strain reflecting bullish enthusiasm despite price weakness. This chart shows a steady decline in an index of 35 meme stocks. Despite a decline of 36% since January, many headlines in July insist that the "Meme Stock Revolution" lives on.

This is from an August 10 CNBC article:

Short seller Jim Chanos said retail investors are not considering all the downside involved with speculative trading in so-called meme stocks.

Yet, let's pivot from here and state that all stock market trading is speculative, even with the so-called "blue chips." In other words, the main stock market indexes can significantly decline just like the meme stock index.

So, while "traditional" investors may largely steer clear of meme stocks, many of them may be unprepared for a possible trend turn in the Dow Industrials and the S&P 500 index.

Why will the majority likely be unprepared? Well, consider this quote from a July 18 Wall Street Journal article:

Throughout 2021, a range of surveys, fund-flow figures and options activity have shown investors big and small to be exceptionally bullish.

The best way to avoid getting caught flatfooted when an inevitable trend change occurs is to see what the Elliott wave model is revealing about the broad market's price pattern.

If you're unfamiliar with the Wave Principle, or need to brush up on your knowledge, you can read the online version of Frost & Prechter's Elliott Wave Principle: Key to Market Behavior -- 100% free!

Here's a quote from the first page of Chapter 1 of this Wall Street classic:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

All that's required for free access to the book is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join. Members enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading. You are under no obligations as a Club EWI member.

Just follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free, unlimited and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline How "Hot" Stock Market Ideas Can Burn Investors. 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.

Stocks: What to Make of Wall Street's Sky-High Optimism "

I believe that the market moves in whatever direction hurts the most participants"

By Elliott Wave International

The U.S. stock market has been in an uptrend since March 2009 -- so, more than 12 years.

To add icing to the cake, there's this notable factoid (CNBC, August 16):

S&P 500 doubles from its pandemic bottom, marking the fastest bull market rally since WWII

So, after such a historic run, one might think that many Wall Street analysts would say that it's time to take at least some chips off the table.

Well, not so. Look at this astounding August 14 Bloomberg news item:

Wall Street Is the Most Bullish on Stocks in Almost Two Decades

So, what should one make of this uniformity of thinking and historic bullishness among Wall Street analysts?

Let's turn to Robert Prechter's landmark book, The Socionomic Theory of Finance:

Consensus regarding the future course of financial-market prices has an awesome power to become ossified in the wrong direction at markets' major turning points.

The dictionary defines "ossified" as "having become rigid or fixed in attitude or position."

That's the very attitude that prompted Dave Lutz, head of ETFs at JonesTrading Annapolis to say:

"I'm a believer that the market moves in whatever direction hurts the most participants. If all the analysts on the Street are bullish, I'd be very cautious."

That quote is from the same Bloomberg news item mentioned a moment ago, and Elliott Wave International agrees with that view.

After all, history shows that most investors, including professionals, are "surprised" at major turning points in the stock market.

The same patterns of investor psychology have played out time and again. Elliott waves are a direct reflection of these patterns.

Here's what's important to know:

The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

That's a quote from Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior.

You can get the details of how the Wave Principle helps investors to forecast the price paths of financial markets by reading the online version of the book -- 100% free!

All that's required for free access is a Club EWI membership, which is also free.

In case you're unfamiliar with Club EWI, it's the world largest Elliott wave educational community. Members enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading.

You can have the book on your computer screen in just a few minutes by following this link: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks: What to Make of Wall Street's Sky-High Optimism. 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.

U.S. Housing Market: Not "a Bubble This Time Around"?

Here's what usually coincides with a big decline in real estate prices

By Elliott Wave International

You probably know that the U.S. housing market has been red hot.

A certified financial planner wrote a July 20 article for Kiplinger, mentioning the record price levels in many areas of the country, and then added a personal observation:

I witnessed the price rise first-hand. I recently returned from a family vacation in the North Carolina mountains, where many homes now sell for double or triple the price compared to just a couple of years ago.

Stories abound of buyers signing contracts on homes without even doing a walk through. Some real estate agents are advising buyers to forgo inspections, saying they will just slow the process.

Yes, it's a maniacal residential real estate market.

Indeed, here's what the recently published July Elliott Wave Theorist, a monthly publication which provides analysis of financial markets and cultural trends, had to say:

Two excerpts from an article posted last week on the property market in my local area sum up the prevailing view:

First,

"It's the craziest market that I've seen in 25 years of experience," [Mr. X] said.

But,

[Mr. X] said he believes there will not be a bubble this time around, unlike the situation that unfolded in 2008.

It is ever the same: "I remember a top yesterday, and there may be a top in some distant future tomorrow," but there is never a top today!

The same type of psychology applies to stocks. Indeed, the trends of the real estate and stock markets tend to be strongly correlated.

This chart from Robert Prechter's 2020 edition of Conquer the Crash has been shown before in these pages, and it's a good time to show it again. Here's the brief commentary:

Real estate prices have always fallen hard when stock prices have fallen hard. The chart displays this reliable relationship.

So, if you want to get a good idea of when home prices will likely tumble, keep an eye on the Elliott wave pattern of the stock market.

You can learn about the Elliott wave model for analyzing and forecasting financial markets by reading Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

You can access the online version of the book for free once you become a member of Club EWI, which is the world's largest Elliott wave educational community.

Club EWI membership is also free.

Here's the link to get started: Elliott Wave Principle: Key to Market Behavior -- free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline U.S. Housing Market: Not "a Bubble This Time Around"?. 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.