The bear is back
"The stair-step decline in the major stock averages should pick up speed as bearish cyclical forces intensify. The global nature of the decline and its spread to other asset classes confirms that liquidity is drying up fast, as forecast. Eventually, this reversal should produce financial instability on an unprecedented scale."
- The Elliott Wave Financial Forecast for the month of July
In the first half of the year, investors in the USA received a record fiscal and monetary stimulus in the form of tax cuts, increased government spending, a continued housing boom and a 25 percent year-on-year surge in quarterly earnings, yet the indices are stubbornly grinding lower even though optimism remains at record highs.
According to Investors Intelligence (www.chartcraft.com), the percentage of bullish investment advisers hit 56.1 percent on June 25, the third straight week in which the figure surpassed the 50 percent level. Longer-term readings show that bullishness has never left. The 21-week average never dropped below 50 percent for a full year, which means that we have had the longest stretch of bullishness since the end of the first leg of the bull market in 1976. The 26-week average of bulls minus bears is now higher than it was at any point in the 1990s mania for equities. This is reflected in mutual fund cash levels that UBS estimates are at around 3.7 percent, a new record low for any bull or bear market.
With the U.S. markets in decline, the Jabberwockies keep on reiterating that China and India are the world's future growth engines and that their growth is sucking up vast amounts of natural resources that will inflate the values of commodities.
Yet India's Sensex index fell by more than 30 percent from its January 2004 high, and China's most comprehensive major average is down 38 percent from its all time high of June 14, 2001. If China and India are the world's growth leaders, then why aren't their stock markets booming?
When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors or potential debtors become more conservative, then they borrow less or not at all.
The shift from expansion to conservation has started. The Federal Reserve's estimate for net credit market debt growth in 2004 calls for a decline from over 20.4 percent in 2003 to 6.2 percent in 2004. The Fed sees a reduction of $500 billion in borrowing by government sponsored entities (mainly Freddie Mac and Fannie May, the quasi-government mortgage lending giants) but an 80 percent increase in U.S. government debt; a 16 percent increase in borrowing by households; a 20.4 percent increase in corporate debt; a 277 percent increase by banks; and a 540 percent rise in lending to brokers, dealers and other funding corporations.
But when the Fed hiked its rate up by 25 basis points, the bond market raised the 10-year Treasury yields by 100 basis points within two weeks - that is, by a full percentage point. This abrupt surge of long-term rates has effectively choked the mortgage refinancing bubble, presenting policymakers in the Fed with far more credit tightening than they really wanted.
In his London speech, Greenspan cited that "the rise in rates... has induced a dramatic fall in mortgage refinancing." According to the Mortgage Bankers Association (MBA), mortgage-financing activity in the United States in the week ending June 4 was down 68 percent compared to a year ago. And the MBA's Refinancing Index plunged by 85 percent year-on-year.
As Dr. Kurt Richebächer points out, the mortgage refinancing bubble has been the U.S. economy's lifeline. Consumer spending posted a new historical record in the sense that it outpaced total economic growth. With an overall increase of $625.8 billion, for the first time in history it exceeded the simultaneous GDP growth, up $581 billion. The consumer achieved this with a debt surge of $1.7 trillion.
But this lifeline has been badly damaged. What is unfolding here is not just gradual credit restraint. There appears to be a savage credit crunch in the offing, and nobody seems to even notice.
The fate of the mortgage refinancing bubble and its further impact on the economy is presently the single most important issue facing the U.S. economy. All other major GDP components are much too weak to take over as the new locomotive. Consider that nonresidential business investment contributed just 0.30 percentage points to real GDP growth in the first quarter of 2004. Consumer spending remains so predominant that any weakness on its part would instead pull down the other components.
A hint of such a decline is being registered by the Economic Cycle Research Institute's leading weekly index of U.S. economic growth. At the beginning of the year, it was close to a 20-year high, but has now suffered the sharpest drop since the last quarter of 1987, falling from 11.8 to 3.1.
Another indication of a coming reversal in global trade is given by the Baltic Dry index, which is the global ship brokers' best assessment of the cost of transporting various bulk cargos, such as coal, grain and iron. This index peaked on February 4, 2004 and has been collapsing since then, indicating that the liquidity spike that extended into virtually every corner of the global economy has now reversed.
As the credit bubble deflates, financial stocks will come to mirror the path that technology stocks took from March 2000 to September 2001, and all bourses and all sectors will be affected.
The demise of the equity culture will, once again, be blamed on "corporate malfeasance," as a whole wave of new scandals is about to hit the headlines. In addition, the Sarbanes-Oxley Act, which was signed into law in July 2002 and tightens financial controls and makes key executives personally responsible for the accuracy of corporate accounts, will start to bite into corporate budgets in mid-November.
Make no mistake - the Bear is back, and this time it will last far longer and go a lot lower than before. Cycles repeat.
- The Elliott Wave Financial Forecast for the month of July
In the first half of the year, investors in the USA received a record fiscal and monetary stimulus in the form of tax cuts, increased government spending, a continued housing boom and a 25 percent year-on-year surge in quarterly earnings, yet the indices are stubbornly grinding lower even though optimism remains at record highs.
According to Investors Intelligence (www.chartcraft.com), the percentage of bullish investment advisers hit 56.1 percent on June 25, the third straight week in which the figure surpassed the 50 percent level. Longer-term readings show that bullishness has never left. The 21-week average never dropped below 50 percent for a full year, which means that we have had the longest stretch of bullishness since the end of the first leg of the bull market in 1976. The 26-week average of bulls minus bears is now higher than it was at any point in the 1990s mania for equities. This is reflected in mutual fund cash levels that UBS estimates are at around 3.7 percent, a new record low for any bull or bear market.
With the U.S. markets in decline, the Jabberwockies keep on reiterating that China and India are the world's future growth engines and that their growth is sucking up vast amounts of natural resources that will inflate the values of commodities.
Yet India's Sensex index fell by more than 30 percent from its January 2004 high, and China's most comprehensive major average is down 38 percent from its all time high of June 14, 2001. If China and India are the world's growth leaders, then why aren't their stock markets booming?
When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors or potential debtors become more conservative, then they borrow less or not at all.
The shift from expansion to conservation has started. The Federal Reserve's estimate for net credit market debt growth in 2004 calls for a decline from over 20.4 percent in 2003 to 6.2 percent in 2004. The Fed sees a reduction of $500 billion in borrowing by government sponsored entities (mainly Freddie Mac and Fannie May, the quasi-government mortgage lending giants) but an 80 percent increase in U.S. government debt; a 16 percent increase in borrowing by households; a 20.4 percent increase in corporate debt; a 277 percent increase by banks; and a 540 percent rise in lending to brokers, dealers and other funding corporations.
But when the Fed hiked its rate up by 25 basis points, the bond market raised the 10-year Treasury yields by 100 basis points within two weeks - that is, by a full percentage point. This abrupt surge of long-term rates has effectively choked the mortgage refinancing bubble, presenting policymakers in the Fed with far more credit tightening than they really wanted.
In his London speech, Greenspan cited that "the rise in rates... has induced a dramatic fall in mortgage refinancing." According to the Mortgage Bankers Association (MBA), mortgage-financing activity in the United States in the week ending June 4 was down 68 percent compared to a year ago. And the MBA's Refinancing Index plunged by 85 percent year-on-year.
As Dr. Kurt Richebächer points out, the mortgage refinancing bubble has been the U.S. economy's lifeline. Consumer spending posted a new historical record in the sense that it outpaced total economic growth. With an overall increase of $625.8 billion, for the first time in history it exceeded the simultaneous GDP growth, up $581 billion. The consumer achieved this with a debt surge of $1.7 trillion.
But this lifeline has been badly damaged. What is unfolding here is not just gradual credit restraint. There appears to be a savage credit crunch in the offing, and nobody seems to even notice.
The fate of the mortgage refinancing bubble and its further impact on the economy is presently the single most important issue facing the U.S. economy. All other major GDP components are much too weak to take over as the new locomotive. Consider that nonresidential business investment contributed just 0.30 percentage points to real GDP growth in the first quarter of 2004. Consumer spending remains so predominant that any weakness on its part would instead pull down the other components.
A hint of such a decline is being registered by the Economic Cycle Research Institute's leading weekly index of U.S. economic growth. At the beginning of the year, it was close to a 20-year high, but has now suffered the sharpest drop since the last quarter of 1987, falling from 11.8 to 3.1.
Another indication of a coming reversal in global trade is given by the Baltic Dry index, which is the global ship brokers' best assessment of the cost of transporting various bulk cargos, such as coal, grain and iron. This index peaked on February 4, 2004 and has been collapsing since then, indicating that the liquidity spike that extended into virtually every corner of the global economy has now reversed.
As the credit bubble deflates, financial stocks will come to mirror the path that technology stocks took from March 2000 to September 2001, and all bourses and all sectors will be affected.
The demise of the equity culture will, once again, be blamed on "corporate malfeasance," as a whole wave of new scandals is about to hit the headlines. In addition, the Sarbanes-Oxley Act, which was signed into law in July 2002 and tightens financial controls and makes key executives personally responsible for the accuracy of corporate accounts, will start to bite into corporate budgets in mid-November.
Make no mistake - the Bear is back, and this time it will last far longer and go a lot lower than before. Cycles repeat.
