Tuesday, July 6, 2010

Wave Patterns and Formations of History Rhyme…

You can ignore the rhythm and the rhyme if you like, but it’s there. It’s true that no two events in history play out the same way, but waves in the market are just like any other wave in nature, they do tend to look alike and come in cycles.

Many have pointed out the similarities between the Great Depression and today. Kondratieff, a wave cycle expert imprisoned in Russia for his beliefs, detailed an approximately 80 year economic cycle using the seasons of the year. Guess what, it’s been 80 years since the Great Depression. Modern books have detailed the psychology of the seasons and most who understand this cycle understand that we have entered what is known as “K-winter.”

People like Martin Armstrong, a wave cycle expert imprisoned in America for his beliefs, are oddly discounting the similarities stating that there will not be another Great Depression. Armstrong, for example, argues that the dollar rose during the Great Depression due to its backing with gold and that what you really saw was gold rising in value. I completely disagree with that analysis as every modern panic has also resulted in a surge in the dollar, this is the result of DEBT being denominated in dollars and is a mechanical process of assets that must first be converted into dollars before they can be converted into some other asset:

The other tell to the gold money lie is that the 1920s produced a “roaring” credit bubble despite being on the gold standard at the time. It is this credit bubble that is at the heart of the Great Depression, and it is the current and still remaining credit bubble that is at the heart of the current, mostly still unacknowledged, Depression.

Many who don’t understand the debt dynamic (per capita debt levels far exceed the roaring twenties today) are expecting a trip straight to hyperinflation, but regardless of the path, everyone sees the volatility and turmoil. But to me, the similarities between today and then are striking.

I won’t list all the commonalities here as most of my readers have heard them, but I do want to mention one that is bizarrely similar that you may not have considered yet – that of an ecological disaster occurring at the same exact spot in the cycle!

As the credit bubble forced “growth” in the economy, our expansion created RISK to the environment that went unrecognized. During the 1920s America was dramatically expanding agriculture, tearing out forests and plowing up the land. Our aggressiveness and lack of understanding of soil dynamics at the time led to what is known as the “Dust Bowl.” It took only a natural cycle draught to trigger the Dust Bowl once conditions were in place.

The Dust Bowl was a HUGE environmental disaster that was without a doubt contributory to the wave C down that began in the year 1930. And today we are beginning our modern day wave C and what do we have happening in the Gulf?

Coincidence? Could it be that history is rhyming in this regard because of our credit bubble actions? Absolutely. The credit bubbles cause rapid economic expansion and to fuel those expansions we pushed the boundaries of our knowledge to keep it going.

Fortunately, we learned our lesson from the dust bowl and agriculture radically changed their practices to prevent mass soil erosion. Will we learn our lesson in regards to oil? I sure hope so.

But in the mean time, the economy is profoundly affected as is the psyche of people during wave C. “Austerity” is the new buzzword, the world, still confined to the central banker debt money box is forced into the same patterns as then. When looking through the massaging of the numbers the economic statistics are very similar. We don’t see block long lines at the soup kitchen, but we do see 13% of our population on food stamps!

And boy, do the markets ever rhyme…

In 1929 there was a market crash – the DOW plunged 50% (wave A) and then bounced 52% (wave B).

In 2007 there was a market crash – the DOW plunged 54% (wave A) and then bounced 73% (wave B).

Of course the government’s wave A reaction was “STIMULUS.” The greatest stimulus in the history of the world BY FAR! Again, this is nothing new and is exactly the response during the Great Depression, only taken to a commensurate extreme with the extreme size of the credit bubble that brought us here. Like today, then there were even periods of GDP “growth.” The main difference today is that the trillions have bought us a longer time frame, that’s all, but it’s also brought us a guarantee of a much harsher future. ALL the misallocations eventually are corrected. We have only just begun correcting ours. In fact, I would contend that this wave is on a much higher order than the wave that produced the Great Depression – this is a monetary changing wave at a minimum, and is very likely to be a nation changing wave.

In regard to the markets, there is another pattern developing that cannot be ignored. In both 1929 and in 2007, the stock markets formed a classic Head & Shoulders top. In fact, in 2007 and early 2008, the DOW formed two classic H&S patterns, a smaller one and a larger one:

In 1929 there was a H&S top that formed and led to the plunge of 1929:

In 1930 we bounced in wave B, and then formed another H&S pattern:

In 2009 we bounced in wave B, and then formed another H&S pattern:

In 1929 the break of the neckline was retested. Today the neckline of the current H&S pattern is being retested. Oh, and for you Elliott Wave watchers, note the similarity in wave structure of both wave B's... many view today's wave B as a simple 5 wave movement, but there are more complex ways to count it as McHugh does. The 1930 wave is very similar and appears on the surface to contain 5 movements - hmmm.

Wave C during the Great Depression lasted a little over 2 years. It seems that our current waves are playing out larger, more volatile, and are taking more time.

While the market bottomed in 1932, the economy itself did not bottom until WWII which began in 1939, almost exactly one decade following the crash of 1929. This pattern is repeated throughout history, time and again, going all the way back to the Roman Empire.

When all was said and done, the market lost 90% of its value, top to bottom, upon reaching the bottom of wave C:

Today, should the DOW lose 90% of its value, top to bottom, wave c would bottom at 1,423.

Wave C itself took off 86% of the value of the DOW Industrials then. Were it to do that today, the DOW Industrials would bottom at 1,575.

Do you believe those who say it can’t and is not going to happen this time? Would you be willing to bet the entire future of your life on it?

Do I personally believe that is going to happen? Let’s put it this way… I don’t rule it out!

And at the same time that I don’t rule it out, I acknowledge that global debt levels are FAR, FAR in excess of what brought us the Great Depression. For that reason I believe that we are going to see unimagined change in the near future – it is my hope that change prevents further rhyming in the markets, but it is my fear that we will see all the events rhyme. The rhyming is uncanny to this point, so doing the same things and expecting different results is the definition of insanity. No, attempting to “print” to inflation is not new, it has been tried and tried throughout history. Try too hard and the result will only be further loss of confidence. Sorry to all the technocrats who think that this time it’s different, but being on the “gold standard” has meant exactly nothing over history too.

If you want to break the pattern, we must develop methods to first clear the debt from the economy without crashing it (Freedom’s Vision), and then we must develop methods for keeping the quantity of money (and credit) under control for the very long term (Freedom’s Vision).

Oh, and if your mind can’t comprehend the similar chart patterns above, or if you dismiss them for whatever “it’s different this time” reason du jour, then I invite you to go back and examine the thinking of “the greatest investment minds” of that timeframe and see how it worked out for them!

Rhymes, rhythms, and harmonies… all are created by waves that reside within the framework of nature.

Hello darkness, my old friend
I've come to talk with you again
Because a vision softly creeping
Left its seeds while I was sleeping
And the vision that was planted in my brain
Still remains
Within the sound of silence

In restless dreams I walked alone
Narrow streets of cobblestone
'Neath the halo of a street lamp
I turn my collar to the cold and damp
When my eyes were stabbed by the flash of a neon light
That split the night
And touched the sound of silence

And in the naked light I saw
Ten thousand people maybe more
People talking without speaking
People hearing without listening
People writing songs that voices never shared
No one dared
Disturb the sound of silence

"Fools," said I, "you do not know
Silence like a cancer grows
Hear my words that I might teach you
Take my arms that I might reach you"
But my words like silent raindrops fell
And echoed in the wells of silence

And the people bowed and prayed
To the neon god they made
And the sign flashed out its warning
In the words that it was forming
And the sign said "The words of the prophets are written on the subway walls
And tenement halls
And whispered in the sound of silence