Russia: How Financial "Complacency" Morphed into "Crisis"

By Elliott Wave International

It's been a tough year for Russia financially.

Of course, there's been the big collapse in oil prices, plus -- just like many other global stock indexes -- Russian stocks are well off their highs.

That's quite in contrast to 2019, when the RTSI index, a U.S. dollar-based index of 50 Russian companies, climbed 29%.

Shortly after registering that performance, Elliott Wave International's January Global Market Perspective, a monthly publication which covers 40-plus worldwide markets, showed this chart and said:

Complacency toward financial risk stands at unprecedented extremes.

Our global analyst's comment suggested that a change of trend was afoot, given that extremes in financial markets are akin to a rubber band that is stretched to the breaking point.

Well, here's an update on the RTSI from the just-published June Global Market Perspective. An EWI global analyst notes:

The RTSI index ... did worse than Europe's broader indexes, losing more than half of its value from February to March. The stunning crash was followed by [a] rally that has since retraced about 50% of the decline.

In addition to stock prices being well off their highs, Russia's economic output will contract at 6% this year and the jobless number is expected to double.

Plus, in April, the government projected that the budget deficit will hit 4% of GDP.

As the June Global Market Perspective also notes:

Russia's last financial crisis in 2014-15 also came on the heels of a decline in oil prices, and the crisis culminated on December 15, 2014, when the ruble suddenly plummeted against the euro and dollar. ... Russia is entering its current crisis from a much weaker financial position.

So, does this mean that the rally in Russian stocks is nearly over, or might the RTSI index climb the proverbial "wall of worry"?

Well, a March 27 Barron's headline suggests that investors will eventually be rewarded:

Russia's Stocks Are a Buy Only for Very Patient Investors

Elliott Wave International's global analysts provide their own perspective on the big financial picture, yet they are also focused on what's next for Russia financially and economically -- as well as many other worldwide markets.

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This article was syndicated by Elliott Wave International and was originally published under the headline Russia: How Financial "Complacency" Morphed into "Crisis". 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.

Deflation: Why the "Japanification" of the U.S. Looms Large

By Elliott Wave International

The U.S. faces the prospect of a Japan-like deflation.

Let's begin with a brief review of Japan.

Here's a chart and commentary from the 2020 edition of Robert Prechter's Conquer the Crash:

Japan had one of the strongest economies in the entire world, growing at a 9% rate for 20 years up to 1973, and then a pretty strong rate of about 4.5% through 1994. From there, it';s averaged about 1%. …

Economic growth in the United States today is weaker than Japan's was in 1989 when its bull market ended. The U.S. economy is dramatically weak relative to the amount of central-bank inflating.

Speaking of the U.S., here's a May 18 headline and sub-headline from Bloomberg:

America Is Becoming Japan, Not in a Good Way

The country could be on the brink of its own deflationary era.

Bloomberg referred to this prospect as the "Japanification" of the U.S.

But, getting back to that phrase "deflationary era" – what would that look like? What is deflation?

Well, many people erroneously believe that deflation simply means "falling prices." Yet, it goes well beyond that.

Let's return to the 2020 edition of Conquer the Crash for a fuller explanation:

A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people's desire and ability to lend and borrow. A depression is characterized in part by a persistent, sustained, deep, general decline in production. … Because both credit and production support prices for financial assets, their prices fall in a deflationary depression. As asset prices fall, people lose wealth, which reduces their ability to offer credit, service debt and support production.

Well, the U.S. has already experienced falling asset prices. Consider oil and other commodities, as well as the stock market – which, despite the recent rally, is still well off the highs.

Plus, and most importantly, there's been a credit market contraction and slackening production.

In April, manufacturing output declined 6.3%, according to the Federal Reserve. Moreover, industrial production dropped 5.4% and Q1 GDP fell 4.6%. The Q2 GDP number could show a much bigger drop. Current estimates range from a decline of 25% to 40%.

Also in April, the Credit Managers' Index from the National Association of Credit Management slid 8.3 points. That's after a drop of 7.2 in March.

Other deflationary pressures are also in place. As examples, producer prices have been sluggish, and according to the Atlanta Fed's U.S. wage growth tracker, wage growth peaked at 3.9% in July 2019 and fell to 3.3% in April 2020.

There's only been two major deflationary depressions in U.S. history. The first one extended from 1835 to 1843. The second one – known as "The Great Depression" – followed the 1929 stock market crash and stretched into 1933.

As you may know, other nations also suffered through the Great Depression.

Is another deflationary depression on our doorstep?

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This article was syndicated by Elliott Wave International and was originally published under the headline Deflation: Why the "Japanification" of the U.S. Looms Largey. 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.