Odds of a Crash Increase

imageAlthough markets in the U.S. are closed today, it is important to keep an eye on what’s going on elsewhere because of the precarious nature of U.S. markets.

For those unfamiliar with our analysis on the subscriber side of things here, we offer a unique way of looking at both global and domestic markets.

The Global Aggregate Index is a measure of how a number of key markets have performed – as an aggregate (add ‘em up and average) – since 1999.

This Index heralds the rise (and possible pending fall) of global corporatism.

For the domestic markets, we do something similar, and again, off a 1999 baseline.

The U.S. Aggregate is designed to reveal what stock brokers don’t like to talk about.  Because the U.S. Aggregate includes the NASDAQ-100 index as a component, we get a much clearer vision of how the rolling waves of boom and bust have rippled through the economy since 1999.

imageWhile I don’t usually lay this out in public, here is a zoom-out which emphasizes the precariousness of our current position:

We have some other data to look at.  Perhaps the most important is the series of panics and crashes that ran from about 1906 to 1929.   This is significant because in present times, the Fed has just raised; a strategy that was employed in 1928 with a series of small increases in the discount rate that we have talked about before.

There is another thing.

As we observe the chart above, we can see that although we appear to be in wave IV, there is another possible wave count.

In this version, the decline from the 2000 top of the Internet Bubble was a three wave affair which would be corrective in nature.  From the 2000 top (A begins) we decline until the post 9/11 aftermath in 2002-2003. 

Here, a B wave up begins.  If this is the case, it ran until the top of the Housing Bubble in the 2007-2008 period and then began to collapse as the C wave down.

Thus, we come to an alternate count from the bottom in 2009. 

Then, from the bottom in 2009 something else has occurred, but attempts to make this a five-wave advance (and complete) from the 2009 low fail for one simple reason:  It’s at article of faith in Elliott wave analysis that the third move is always bigger than the first move and that isn’t the case from the 2009 low.

We do know (based on years of study, and this is not financial advice) that a move much lower from here would be potentially catastrophic. 

The way this could play in coming weeks would be a modest decline from here (of another thousand or more points off the Dow) and then a sharp snap-back rally to the trend line bottom shown since 2009.

A failure to break through the trend would set up a horrific future for the whole planet instantlyAt a minimum, going down to 2009 lows, and lower, is in the cards.

Around here, we use a trading indicator (based on our Aggregate work) that flipped to cash or short a couple of weeks ago.  Going into the uncertainty of this week, that’s a comfortable view to have.

The only question is whether this is Wave IV  OR a larger 1 down, in which case we can relax for a while (*cash is the best sleeping aid there is) and await a bounce that should come back to near present levels.

The structural problem of calling Wave IV complete is that Wave IV is only 1.102 times the size of Wave II.

To summarize:  Trend line theory says if we don’t rally like hell by the end of this week, the odds increase dramatically that we will have further downside action.

That can take a further 10-20% off the U.S. market from present levels.  Should this eventuality come along, then we would likely see a massive rally from what would be a Big 1 down, as the 2 UP rally brings us back to about here – which is where the trend line is.

Then, failure to bust strongly through the trend line to the upside, would indicate a great opportunity to enter short positions as the next decline would take us from the present levels down to the 2009 lows.  From there a modest rally would be due, but then a fifth wave down would follow and the Dow would drop to the 1,000 area.

The Optimistic outlook – and the one I’m still hoping for – is that the U.S. Market spins on a dime right here.

I believe the Central Bankers of the World have no alternative but to print money like crazy and shovel it – helicopter it, as Bernanke might have hinted – in order to assure that we don’t see complete, utter collapse.

At least until Q2 of 2017.

Then, it would be game on for utter destruction.

The Good News (such as it is) is that with enough made-up money and Central Bank intervention, there may be enough paper gunpowder to get off one more round of stimulus.

To put it in medical terms, this would be the shot of adrenaline that will either kill or cure the patient, but only for another 18-months.

Even this optimistic view is a loaded mine field.  Because there is a well-documented possibility in Elliott Wave theory about a chart formation called a “fifth wave failure.”

Continuing the medical analogy:  The adrenaline shot might get us 18 months, but in a fifth wave failure, the patient’s heart explodes from the stress.  The same thing can happen in markets, except instead of coding out, we call it a Crash.

That’s how the playbook looks this morning.

In either of these cases, we are seeing some truly terrifying numbers.

The Baltic Dry Index, for one, is down to a mere 373.  In “normal” times when the economy is rolling, that index would be over 1,000 somewhere.  To be sure, there is a major influence on the BDI from energy prices, but that doesn’t account for such a deep decline.

On the global trade front, a more reliable trend can be evolved by looking at BOTH the BDI and the Harper-Petersen Harpex (container) index.

Back during the runaway portion of the Housing bubble (circa 2007-2008) the Harepex Index was smoking.  It hit a high of 1,402.

At the bottom of the Housing bubble collapse, the index dropped to a close of 275.

As of this week?  It is at 383 and momentum is to the downside.

One more critical indicator we watch:  Every few weeks the Association of American Railroads issues a press release summarizing how the flow of goods is doing on the railroads of North America.

This being a holiday, as all, you should have the time to glance through their latest press release:

“WASHINGTON, D.C. – Jan. 13, 2016 – The Association of American Railroads (AAR) today reported U.S. rail traffic for the week ending Jan. 9, 2016.

For this week, total U.S. weekly rail traffic was 498,160 carloads and intermodal units, down 3.7 percent compared with the same week last year.

Total carloads for the week ending Jan. 9 were 239,221 carloads, down 13.5 percent compared with the same week in 2015, while U.S. weekly intermodal volume was 258,939 containers and trailers, up 7.5 percent compared to 2015.

Five of the 10 carload commodity groups posted an increase compared with the same week in 2015. They included miscellaneous carloads, up 23 percent to 8,552 carloads; motor vehicles and parts, up 10.6 percent to 13,276 carloads; and chemicals, up 6.2 percent to 32,302 carloads. Commodity groups that posted decreases compared with the same week in 2015 included coal, down 30.7 percent to 75,112 carloads; metallic ores and metals, down 18.1 percent to 19,419 carloads; and petroleum and petroleum products, down 15.1 percent to 13,096 carloads.

For the first week of 2016, U.S. railroads reported cumulative volume of 239,221 carloads, down 13.5 percent from the same point last year; and 258,939 intermodal units, up 7.5 percent from last year. Total combined U.S. traffic for the first week of 2016 was 498,160 carloads and intermodal units, a decrease of 3.7 percent compared to last year.

North American rail volume for the week ending Jan. 9, 2016, on 13 reporting U.S., Canadian and Mexican railroads totaled 323,005 carloads, down 11.8 percent compared with the same week last year, and 327,314 intermodal units, up 6.8 percent compared with last year. Total combined weekly rail traffic in North America was 650,319 carloads and intermodal units, down 3.3 percent.

Canadian railroads reported 68,493 carloads for the week, down 8.3 percent, and 58,596 intermodal units, up 4.5 percent compared with the same week in 2015. For the first week of 2016, Canadian railroads reported cumulative rail traffic volume of 127,089 carloads, containers and trailers, down 2.8 percent.”

So What’s Going On?

I have explained this publicly several times.  Maybe you missed those articles.  But there is a HUMUNGOUS shift of lifestyles going on and two MASSIVE migrations.

The lifestyle shift is exemplified by the rise of “micro-homes.”  With soaring debt loading on today’s young people (student loans, Obamacare, etc.) there simply isn’t the money to invest in a traditional (large square footage) home.

I’ve been writing about micro housing for a long time, since from 1990 until 2001 I lived on a 40-foot offshore sailboat.  It was (and I’m being generous here) about 200-square feet.  Even so, there was a queen berth aft, vee berth forward, and two heads (bathrooms) with showers.  A galley to starboard and a couple of long settees where you could sprawl for television or reading and writing the earlier versions of UrbanSurvival.  Peoplenomics was born on the starboard settee.

Back to present: I mentioned that NYC was looking at micro homes for new apartment construction.  Then in December we read how 60,000 people have applied to live in New York micro-apartments.  Can you say “trend!”?  Stampede to deconsumption is more like it.

Young people today are down-sizing.  All the talk about climate change, economic collapse, and organic food is having a predictable effect.  People are changing their lifestyles around.  Marriages are fewer, singlehood is lasting longer.  Remember, most of the marrying age people today have lived through the terror of divorce.

The main thing happening is deconsumption.  Where a newly married couple in 1973 was buying a 2,400 square foot home in a planned neighborhood, today’s young people either don’t have the down payment or the monthly free cash flow to afford such luxury. 

Even if they do, they can’t then afford furnishing it. 

All of these factors are backing up into the supply chain.  And as the backup proceeds, what we see are a) falling prices and b) falling demand for goods from places like China.

China’s an interesting case to watch, too:  Their only option right now is to stimulate consumption and force-build a middle class.  If they don’t do that?  China could come tumbling down as the Former Soviet Union did.  Only this would have terrible implications for the Globalists.  It’s why China is making a big deal about ending its “One Child per Couple” policy.  It’s up to two, now.  That’s how much they need consumption.

There are two migrations underway, and one of them – the migration to Virtual Realms – is also power deconsumption.

The other (and government understands the deconsumption problem well) is illegal immigration.  Sure, we have borders and such, but with a collapse of lifestyle into micro house and deconsumption, what we need are more consumers and more tax generators.

Several readers have questioned whether this makes sense, after all, the newly arrived aren’t all going to create jobs.  But they do.

There are three avenues:

  • Productive and skilled immigrants can consume.
  • Unskilled immigrants provide for growing the government and its welfare programs.  Eventually the new arrivals vote democrat. They employ ESL teachers.
  • The criminals, meantime, create tons of corrections work, blow out profits in the for-profit prison corps and lots of jobs in security, police, judicial and rehab sectors. 

What’s not to love?  Homework assignment:  Is immigration Obama or political expediency?  If it were purely Obama we’d see impeachment motion.  The other corporate party is up to its ass in the same corruption.  They all have seen the secret forecasts of how bad things could get.

I didn’t mean to start writing a whole Peoplenomics-style report for you.  But this being a holiday and all, it is a fine time to plan out how you will keep your family housed, watered, and fed should the crap really hit the fan in the next two weeks.

Remember:  Crashes don’t happen from market PEAKS;  they happen from significant market failures at lower trend line boundaries.

Since we are there, good luck with your option planning.

Global Markets:

China was down modestly overnight: 1.45 percent on the Hang Seng.  Japan fell a bit more than 1 percent.

But in the former Europe, now Eurabia, the German DAXI, the French CAC-40, and the British Footsie were almost holding their own.

So see you Tuesday morning – the markets in the U.S. are closed today for Martin Luther King day (article on that in our Coping section).

Plan well, don’t panic. And remember, the herd is usually wrong…

To keep your mind off things, what don’t you go read the novel I wrote?  The least you could do would be email all your friends to read UrbanSurvival.com, then…

Comments

Odds of a Crash Increase — 18 Comments

  1. What software or service do you use to generate your US Aggregate Index charts?

  2. i’ve watched the story unfold over the years…it seems to be happening..but everyone that doesn’t think things can’t get any worse for them is in denial….there won’t be any shortage of food if you can afford it…government help may not come…family may help i hope so…depression isn’t fun…the few gold coins or dried food you’ve hidden wont’t sustain you through a long period of no employment…pray you don’t go through a depression…my dad did he never got over it

  3. Don’t know if I’m the first one to ask, but is it possible that since they seem to be breaking the rules of how everything else is supposed to work that they may have broken the wave theory parameters ?

    • I ask it that way because I was assuming it required “orderly” markets, in the generic term, which we obviously do not have at this particular point in time.

    • It doesn’t really matter, because it looks good in retrospect ;-); Before, while you’re trying to use it there are just too many IFS and BUTS. Sorry!

      Just stick with a simple 40 weeks moving average. It’s either, or in that case. (IMHO!)

      Good luck to all.

  4. The problem with Elliot Wave Theory is there is always an alternate interpretation to the first interpretation, and then a third interpretation, and etc. Then, after the fact, there is the realization of how it “obviously” “should” have been interpreted.

    • That is true, but if you only play third waves (and have the discipline to sit on your wallet other times) either up or down, you can do very well indeed. Most people don’t manage their money well – which is why they end up in big losing positions

  5. For me.. this is just a tremor before the earthquake..
    I am still predicting march of 2017…

  6. All this talk about Fed, Depression onset (Yep! I said it!), and how much fun we’re going to have made me listen to a song by Motorhead called “The Game.” Fits our economic situation to a T. G, if you don’t know the song (it’s metal so I’m guessing you don’t), at least check out the lyrics sometime.

    By the way, I’m one of those folks attempting to buck the trend and we want space for our family. Not sure we can get a 2400 home, but we’re trying hard for it and some land out in the country. I’m so sick of the city and the 4×4 metal lockbox-like feeling I have being in the middle of town.

  7. George,

    The Federal Reserve will by-pass the central banks in the next round of QE. They will try to expand the current credit bubble even further by giving directly to the consumers in the way of either a tax credit refund or adding funds directly to an individuals bank account. The last QE didn’t work out as the Feds plan since the central banks didn’t distribute the monies to regional and local banks, but held on to the funds to build their spread sheets. The money never real got down to the consumer on the street.

    The Fed now is asking the likes of Wells Fargo, BOK of Oklahoma and other financial lenders in the energy sector to not force any bankruptcies, but only force the sale of assets. What better way to avoid a reset and “kick the can down the road” a little further!

  8. And you say central banks and the Fed. I presume would print like crazy, which is little more than another QE, but what good could it do for it at the least according to Stockman would only get as far as the banks/wall street and none to the consumer.!!!

  9. I can visualize your graph from 1/12/09 thru 7/21/15 being compressed and it would look similarly to the time period of the original depression (blue line) of the time period between 7/21/02 thru 1/21/08. Coincidence??

  10. Alternate Elliot Wave counts make my eyes glaze over, my brain cells scramble and my ADD flare-up. Occam’s razor is the answer.

  11. A certain Canadian who writes a blog says the pressure behind-the-scenes on the US cabal members is reaching such a crescendo that they are cashing out their holdings ASAP and this is the real cause of the downward spiral. I don’t know, but it is entertaining to watch from the sidelines.

  12. In addition to downsizing housing, Americans are also downsizing income, and leisure time in part because of excessive government regulation. This is the road that puts a country into second world status. That doesn’t seem so bad at first glance, but it also puts one into a second world infrastructure, and a second world medical system at first world prices.

    And don’t forget the USA government at all levels, the most predatory in the world. That includes law enforcement, confiscating more property than criminals robbed and burgled, and who committed more acts of excessive violence against the populace than criminals. And nobody is tabulating the number who die in police custody or the correctional system.