Additional References
October 2005
Back in the summer of 2004 when car buyers held out for discounts, The Elliott Wave Financial Forecast identified the development as “bad news for car companies and the overall economy.” The decision to wait for lower prices last July was a big deal because, as EWI has continually noted, deflation is a state of mind, and “a willingness to forestall purchases is one of its primary attributes.” Early this year, U.S. car companies pulled themselves out of a renewed sales slump by selling new cars and trucks to the public at the same low price offered to employees. After saying the program would end in August, GM extended it another month. But sales of new cars and trucks fell anyway, by 16.6% from the same month a year ago. The decline was attributed to “consumer fatigue with employee pricing deals.” In September, after initially extending the employee-pricing scheme, GM abandoned it for “everyday” low prices.
The same “fatigue” is registering in Wal-Mart’s stock price, which is at its lowest level in four years, as well as plunging consumer confidence, which just suffered its biggest point decline since the start of the 1990 recession. In another sign of surrender, credit card delinquencies rose to a record high of 4.81% in the second quarter. Our stock market section covers a host of different areas in which the free-spirited ways of the bull market are giving way to the sobering influence of a third wave of Primary degree. These declines signal its arrival in the consumer, who will probably complete the transition from impulsive spendthrift to cautious tightwad faster than most can fathom. Changes like the newly-restrictive bankruptcy laws will kick in and contribute to the coming new conservatism.
The U.S. President called for consumers to “pitch in” and avoid “a trip that’s not essential.” He is encouraging the White House staff to turn off lights, printers, copiers and computers when they leave the office, scaling back on his motorcade and cramming more reporters into fewer press vans. Presidents always fail as economic cheerleaders in bear markets. Nixon and Carter both resorted to conservation measures in the decline of the 1970s. The exhortations of Hoover and Roosevelt in Supercycle IV, a bear market that lasted through 1949 in inflation adjusted terms, is a better parallel. With consumer spending on food, housing, clothing and automobiles down 40% to 65% from 1929 to 1933, they did everything they could to get consumers buying again. Once the economy turns down, it probably won’t be long before Bush’s turn-out-the-lights effort gets cast aside for a 1930s style “get-out-there-and-spend” program.
EWFF, June 2005
This chart of consumer sentiment is a picture of the fuse being lit on one of the world’s larget bombs. EWFF has tracked the consumer’s arc through the nether reaches of extreme optimism since shortly before the Dow’s all-time high in 2000. In January 2004, when sentiment popped back above the “fateful 100 line,” EWFF identified the burst as a sure sign that a “knock-out punch is still ahead.” The key to that forecast was the 5-3 form of the action since the all-time highs. As it turns out, sentiment’s three-wave rally was complete at that time. The chart at right also reveals a close tie between consumers’ vitality and stock prices. Both the Dow and consumer confidence peaked in January 2000 and bottomed in March 2003, along with the European stocks and many U.S. averages adjusted for dollar weakness. The March peak for stocks has been accompanied by a decline of almost 10% in the confidence index. Since this is a third-wave decline for consumer confidence, a downside explosion that alters the face of the U.S. economy should occur over the next few months.
March 2005
Back in mid-2004, when rebates on many popular car models rose to $4,000 and $5,000, The Elliott Wave Theorist stated that the auto industry was “locked into a competitive rebate-offering death spiral. It’s a tug of war now, but deflation will win the contest.” The following headline from February 21 confirms that deflation is assuming control: “A Sticker Shocker: GM Slashes Prices.” The lowering of prices by up to $2000 on some of GM’s most popular SUVs in the middle of a model year is considered “highly unusual.” It is still the early stage of a trend that will surely lead to the failure of at least one of the two remaining U.S. car companies. This trend already mimics falling prices for everything from online brokerage commissions to couture. Oscar De la Renta is pushing a line of day suits that run for less $100.
As EWFF has emphasized in this section many times, it’s not the reductions themselves but the psychology behind them that is all-important. Back in August, for instance, after buyers anticipated a July rebate hike and waited to buy cars, we identified it as an emerging deflationary mindset in which consumers forestall purchases for lower prices. In recent weeks, this frame of mind has surely strengthened, as the “organized action of consumers,” has forced a range of businesses to cancel price increases. EBay, Hertz and U.S. air carriers reduced fees or backed down from announced increases. Meanwhile, the Internet is suddenly organizing itself as the medium for community-level exchanges that connect buyers directly to sellers. Fast growing, on-line trading posts, like craigslist.org, are a powerful conduit for falling prices. According to one study, craigslist has already cost California newspapers as much as $65 million per year in classified advertising revenue. The transaction volume through For Sale By Owner, an Internet site for home sales, is growing exponentially, reducing prices by sidestepping agency commissions.
Conquer the Crash
When Do Depressions Occur?
Depressions are not just an academic matter. In the Great Depression of 1929-1933, many people lost their investments, their homes, their retirement plans, their bank balances, their businesses — in short, their fortunes. Revered financial professionals lost their reputations, and some businessmen and speculators even took their own lives. The next depression will have the same effects. To avoid any such experience, you need to be able to foresee depression.
Defining Depression
An economic contraction begins with a deficiency of total demand for goods and services in relation to their total production, valued at current prices. When such a deficiency develops, prices for goods and services fall. Falling prices are a signal to producers to cut back production. In response, total production declines.
Economic contractions come in different sizes. Economists specify only two, which they label “recession” and “depression.”
Based on how economists have applied these labels in the past, we may conclude that a recession is a moderate decline in total production lasting from a few months to two years. A depression is a decline in total production that is too deep or prolonged to be labeled merely a recession. As you can see, these terms are quantitative yet utterly imprecise. They cannot be made precise, either, despite misguided attempts to do so (more on that later).
For the purposes of this book, all you need to know is that the degree of the economic contraction that I anticipate is far too large to be labeled a “recession” such as our economy has experienced eleven times since 1933. If my outlook is correct, by the time the contraction is over, no economist will hesitate to call it a depression. |
