Click on the graphic for a larger view.
We first threw up this chart of the New York Stock Exchange Index back in December of 2006 if you want to dig through the archives. As part of that post we highlighted an Andrews' Median Line analysis on the Index as supporting evidence of just how extremely overbought the market was on a twenty five year analysis. It may be difficult to remember now but Wall Street was incredibly bullish at that time. We highlighted that fact a month or so later citing the projections of Wall Street "experts" that was overwhelmingly positive. Soon thereafter the market peaked and had one of the biggest collapses in history.
Let's briefly review some key points necessary to understand this graphic. The NYSE Index is considered the institutional index. It's where large money investors have historically done business. It is the broadest American index most representative of the global economy today. The chart above is of the NYSE Index starting with the bull market starting in 1982 till today. Overlaid on the chart are Andrews' Median Lines in red.
Andrews' Median Lines are meant to contain price. In other words, they are a form of regression shown visually. They are drawn by selecting three points (A, B and C) on a chart. For this graphic we start by selecting the end of a multi-decade bear market in 1982 (A) which is considered the start of the greatest bull market in history. We then select the price peak in 2000 (B) which was the end of that bull market. Finally, we select the price low in the post 2000 bear market (C). I've got software which then automatically draws the median lines but if you were to draw them manually like Andrews did eighty odd years ago, here's how you would do it: Connect lines B and C. Determine the midpoint of that line and draw a line from A through the midpoint. Then draw lines parallel to the that midpoint line from points B and C for the upper and lower median lines. There you have it.
Now, the reason we chose the points we did for this Andrews' Median Line analysis is because the bull market for the American economy ended in 2000 While it may seem counter intuitive, the 2003-2007 rally could easily be explained as a bear market rally. Although we seldom witness it, bear market rallies can indeed surpass old market highs as the NYSE Index did by surpassing the 2000 peak this past cycle. As we have written many times, the 2000 stock market collapse was driven by an underlying economic collapse in the United States that had been building for many years. We are still in the middle of that economic collapse but it has been hidden by an ever-growing debt bubble, the war machine, a truly massive mergers & acquisitions bubble, a real estate bubble, a finance industry bubble, a private equity bubble, massive growth in government spending and a temporary dynamic
we now call globalization. None of these create any wealth but in fact are simply transfers of wealth, thus leading to the substantial concentration of wealth that has accelerated over the last decade. The entire world, be it bull or bear, incorrectly believes 2000's stock market peak was followed by a minor recession. And that the cause of this crisis is a housing bubble stoked by Alan Greenspan lowering rates below the market in 2001 and 2002. First it was remarked to be a subprime problem. But then we saw prime mortgage defaults outstrip subprime. Now we see the entire world unraveling. With the world now starting to reveal itself, doesn't a root cause of this crisis being a housing bubble seem absurd? Because it is. I will eventually prove all of this with substantial data and an analysis of economic principles you won't find anywhere else. Because apparently no economist understands sound economic principles. But I'm well ahead of myself. In other words, I don't see discussing that data in detail any time in 2010. And if I do, not until very late in the year. Although if you have been with me from the beginning, you should be able to string hundreds of posts together to see where this will eventually lead.
I am a firm believer in the natural phenomenon of ABC patterns as we have discussed numerous times. It's often difficult to accurately predict them, especially in the shorter term. The patterns though are clearly identifiable once they have revealed themselves. Fortunately, for the purposes of this post, a very substantial market dynamic has indeed already revealed itself. That is the 2000-2003 ABC correction pattern marked in blue on the chart above.
So why do I like the ABC pattern? Well there are a few reasons but one we have mentioned on here is that it can be viewed as a time-independent Fibonacci representation of the Fibonacci (or logarithmic) spiral. We can then more easily use this representation in lieu of the spiral to analyze markets.
(Although Fibonacci spirals can also be used. But that's beyond the scope of this blog as they introduce time dependency and I don't typically talk about time dependency on here. What do you expect for free?
) On that note, we have likened this crisis to that of a hurricane, itself a Fibonacci spiral pattern. That is, a front end storm(A), followed by the eye of the storm(B) (a period of low volatility and perceived recovery
) then again followed by the back end storm's most powerful wave(C). That is, ABC. In other words, the storm itself can be represented as an ABC pattern. This phenomenon is similar to the dynamics of a tsunami and, in fact is a pattern that repeats itself quite regularly throughout the natural universe. What's more important is this pattern has repeated itself time and again in financial markets including the onset of the Great Depression. I believe it will also likely manifest itself on some level with the onset of the new depression the world is just starting to enter.
Why would we expect financial market or seemingly what many perceive as a man-made phenomenon to be any different than that of a natural storm or natural phenomenon re a Fibonacci pattern? We are indeed in an economic storm. And are we not simply a small but representative component of the natural cosmos? Are we not impacted by the same forces of the universe that affect our planet, even if we don't understand or most often even recognize them? Would then natural patterns not be applicable to human behavior, markets and economics? Of course they would. Of course they are.
There is some reason to assume some market patterns of today will parallel that of the post 2000 market collapse. ie, The Federal Reserve flooded the market with liquidity post 2000 in an attempt to stave off an economic collapse. They did so because the American economy was collapsing. As we have noted before, many business leaders were contacting the government and the Federal Reserve post 2000 stating the economy was literally collapsing, something that has never been widely reported or understood. After the initial pulse downward post 2000, many became bullish again believing the crisis has passed. The market then punished those who had believed the storm had passed in 2001 with a slaughter into 2002 and early 2003. I bring this up because it is representative of the intellectual capture of just about everyone on Wall Street. An entire system of people who are completely deluded by a false sense of reality better known as conditioning or brainwashing. Wall Street is modern society's Pavlov's dog.
Again, the 2000-2003 pattern is the exact same one we witnessed with the onset of the Great Depression. The pulse lengths were different for various reasons. Most of which I believe are explainable.
As a parallel to the post 2000 collapse, in today's world we see the exact same dynamics of central bankers dropping rates and flooding the financial market with liquidity. This has been followed by a period of rising markets and a perception the economy has recovered by both bulls and many bears. (Nearly 90% of economists now discount any chance of a double dip. A very, very bad sign for a professional lemming community void of critical thought which entirely missed the first collapse.
) But instead of today's pattern being a U.S. phenomenon, these dynamics have occurred globally in an attempt to save the global economy. ie, We are witnessing the exact same pattern of behavior by central banks and politicians as post 2000 but on a global scale. Global synchronized tomfoolery driven by the political idiots of the G20 who are attempting to save the status quo. (How often have we remarked that G20 economic crisis meetings were ridiculous notions by ridiculous bureaucrats which would accomplish nothing? How many G20 leaders were able to stop the volcano from erupting in Iceland? That's the same number that will be able to stop this economic storm.)
So because of this commonality in patterns and behavior, we might expect the equity and commodity
markets to follow a similar pattern to that of equity markets post 2000. So far they have. In fact, the outline on the graphic in blue from the 2007 peak to the 2009 bottom through the rally of today is an almost exact pattern match in scale to that of the post 2000 collapse and 2001 rally. And if we continue to follow that same pattern, we are nearing a very, very substantial top and a return to volatility. A return to the economic storm.
The next cycle down, regardless of whether the pattern follows through in the manner we have shown, will put the final nails in global finance and globalization as we have written of ad nauseam. It will reveal the massive bubble that is China and commodities. (China's economy has actually been collapsing for well over a year now and if you understand capital flows, you know what I am talking about. If not, well then just sit back and watch. And as we have rebutted recent remarks by new China bears, China is not just experiencing a real estate bubble. It is far, far more severe than that. Massively more severe. Again, people focusing on real estate are well too reliant on correlation equaling causation. The world is seldom as it is seen. ie Too many people think with their eyes and not their brain.
) It could very well mean an end to the European Union as we know it. It will also take down the status quo who have created this economic Frankenstein. A Frankenstein that the status quo is protecting at all cost with other people's money. It could also fulfill our thesis that President Obama is a modern-day Herbert Hoover, (both brilliant men perceived as saviors but both atrocious leaders beholden to the status quo. Sacrilege to the true believers in our current savior, as it would have been sacrilege to Hoover's true believers in 1928 and 1929.
) And the potential rise of a third party Presidential candidate in 2012 we wrote of early last year. And of course a global storm of economic collapse in emerging markets that we have been writing about for years. And finally it will play quite nicely into our thesis that economic recovery will be a process driven by localization. And, of course, our long running thesis that the United States will eventually dominate the global economy unlike it has in generations. (Note: I would not expect bond markets to follow a similar patten because dynamics are driven by a debt-fueled response to this crisis which does not match the pattern post 2000. Maybe we'll cover what pattern I expect the bond market to follow in another post.
So to summarize, if we look at the ABC pattern of the correction post 2000 (highlighted in blue
), and we use the same ratios to the post 2008 collapse, we get a new projection. (also highlighted in blue
), We also get a downside target. There is no irony that downside target would give us a decline similar in scale to that of 1929. How often have we mentioned over the years that this market is more expensive than 1929 and this is the biggest global bubble in history? I was never convinced we could rally quite this high, and in fact, if we did get a substantial rally we wrote that it would likely fail in the 1,000 to 1,100 level of the S&P. The NYSE following a peak in the S&P of 1,000 to 1,100 off of the 2007 peak is shown in the orange pattern drawn side-by-side the blue ABC pattern in the 2007 peak to today. Price is now between these two projection patterns, (blue and orange
) and that could be why we are witnessing greater volatility. In other words, just as happened near the peak of the upward thrust in the post 2000 collapse, we are getting closer and closer to a top somewhere in here as liquidity continues to drain out of the global economy. (Remember, all of these projections are price only. There is no time projection included in any of this post so the graphic is not to be interpreted with any time component. ie, It is not indicating we will see price lows in 2010.
The overall pattern of the NYSE matches up nicely with the downside target we have for the S&P. Our original downside target has been 400-450 for the S&P but given the size of this crisis swelled due to government bureaucrat incompetence, we changed that target soon after the market collapsed to that of 200-450 on the S&P. Using the pattern on the chart above, we would expect a downside S&P target of around 300-350, although I did not selected my downside target for the S&P using this methodology but instead based on fundamental valuation metrics. That two completely separate analyses align quite closely simply adds more concern I have for the future of financial markets.
This analysis looks quite ridiculous doesn't it? Well, I wouldn't bet my life the pattern above will work out perfectly. That would be too easy. It is simply a guesstimate. But I do believe fundamentals support a coming drop in financial assets which will be enormous. And I do believe we will meet or come very close to our downside target in both the NYSE and S&P. I just don't know if it will be a reasonably straight shot down either via another collapse or a steady drop as post 1929. Or if there will be fits and starts along with way. Of course, most every major macro projection we have written on here was hilarious at the time we originally posted it. Not so hilarious now. Almost all of our macro projections have either started to come to pass or are already in full bloom. Remember, five years ago when the world was partying hard and the intelligentsia were extolling Pax Globalia, we wrote, "This is the biggest bubble the world has ever seen. The world will literally shudder and shake when this cycle ends."
And so it should be with the biggest global economic storm in recorded history.