January 30, 2012
(Note: The following article was written in May of 2011, but publication was delayed until now, as the situation had not yet progressed to the point that readers might have considered the pattern of events described below as even being within the realm of possibility. As the situation discussed in this article is now getting closer, the projections below may seem less fanciful.)
In high school history class, the Great Depression was explained. We were taught, essentially, that in 1929 there was a stock market crash, and after that, lots of people were desperately poor. Whilst this is true, the explanation is overly simplified to the point that there is no practical lesson we can learn from it.
Here’s what actually happened: In the autumn of 1929, the first in a series of waves occurred in the stock market — a downward wave. It was followed by a rally (upward wave), then a much deeper and longer downward wave. This third wave, in turn, was followed by a series of smaller upward and downward waves until the market hit bottom in 1932-33.
In studying these waves (Elliot Wave Theory), it becomes apparent that the same waves occur in any major market fluctuation, and the degree of downside is always relative to the degree of upside. The third wave is always the most extreme.
I anticipate that the third wave in the present series is imminent. It will be deeper and longer than the downward wave of 2008. The others will be smaller, but ultimately, together they will be more severe than the series of fluctuations from 1929-1932.
On the surface, it seems unlikely that financial downturns would behave predictably, but Elliott Wave Theory is based upon human nature. In any era, the reactions to events will be similar, as human nature remains the same, regardless of the era we live in. The present unraveling of the American Empire is remarkably similar to that of the Roman Empire and other empires in the interim.
A Little History
In 1933, the Glass-Steagall Act was passed in Congress. Its purpose was to create banking reforms to control speculation by banks, a root cause of the Great Depression. Ever since that time, economists and Congressmen alike have said, “Depressions are no longer a concern. There can be no more depressions.” They stuck to that position, while forgetting that the control of possible depressions was directly linked to the continued existence of Glass-Steagall.
Beginning in the 1980s, the major banks began work to eliminate the Glass-Steagall Act in order to recreate the opportunity for enormous profit, similar to what occurred in the late 1920s. Although their efforts met with resistance, then Chairman of the Federal Reserve Alan Greenspan helped to convince the government of the day to vote in favour of the repeal. The premise was that America was positioned to create a housing boom of historic proportions, making possible home ownership for millions of people who previously would not have qualified for a loan. It was further suggested that banks could not fulfill this opportunity without the repeal of Glass-Steagall.
Conservative Congressmen saw the benefits to both commerce and the banking industry in this concept. Liberal Congressmen saw the hope for millions of average people to have homes. Glass-Steagall was repealed with everyone’s blessing.
Unfortunately, few, if any, of those Congressmen who voted for this repeal bothered to learn why Glass-Steagall had been drafted in the first place, and the stage was now set for the Greater Depression.
A small minority of prognosticators have been harping on the prediction of a “Greater Depression” since the late 1990s. We anticipated that a housing bubble would develop, followed by a massive crash, and that the stock market would then also begin its crash. I believed that the warning sign that this was on the verge of occurring would be that “Teflon Alan” would resign as Chairman of the Fed at least one year prior to the disaster, as he would want to distance himself from it. This he did in 2006, leaving Ben Bernanke to hold the bag.
We also predicted that the crash would not come all at once; that, as always in history, it would be a series of waves. However, the majority of people would follow what they had been told by their high school history books. As soon as there was a rally of significant proportions (second wave), they would believe that recovery had arrived. They would believe this in spite of the fact that the massive debt still existed and, like a cancer, still required elimination before real prosperity could follow.
If we are correct, and the Greater Depression is in its first stages, the worst (by far) is yet to come.
What Goes Up Must Come Down
When a small bull market crashes, the crash is small. When a large bull market crashes, the crash is big. This concept is a simple one that anyone will accept. So, what happens when the largest bull market in over 300 years crashes?
And if the current rally, presently being described as a recovery, were to behave like the 1929-1930 upward wave, when would it end? When would we know that it is not a recovery, and is just a rally similar to the 1930 rally?
The answer, in my belief, is very soon.
The third wave in the collapse could have occurred as early as mid-2010, but the economy was artificially propped up by Quantitative Easing (QE). This type of action can postpone the eventual third wave, but not eliminate it. In fact, postponement only assures a deeper drop when the third wave does occur.
With the ending of QE2, many have been holding their breath to see what will happen next. They will not have to wait long, and the fall off the mountain will be directly proportional to the climb up the mountain. The market peak is imminent, and, based on Elliot Wave Theory, the subsequent fall (should it begin soon) may take six years, ending in 2018.
Why, Historically, a Large Collapse is Likely
Very few people who are alive today were around in 1929, so, understandably, the very concept of such a debacle seems like the work of overly-active and overly-pessimistic minds. For that reason, a further examination is needed as to what has led up to this occurrence.
- The mania up until 2008 was the biggest since the 1720-1784 mania. It should therefore result in a deeper decline than in 1929-1933.
- Declines following manias always carry below the starting point of the mania. The crashes following the Tulip Mania of the 1630s, the South Sea Bubble of the early 1700s and the Roaring Twenties bull market, all brought prices to below the level of the bull markets’ starting points. In this case, the mania-style bull market started in 1974.
- Thanks to the great rise in positive social mood during our present mania, the stock market remains historically overvalued in terms of dividends and earnings. (When people without jobs are provided with loans to buy multiple houses, with no money down, it becomes reasonable to believe that pigs have wings.)
- The greatest extreme in positive social mood in centuries has led to the greatest expansion of credit in history. This level of outstanding debt is unsustainable and will be unserviceable and unpayable. The trend toward negative social mood that has begun, and which is about to accelerate, will continue to curtail lending, leading to a tidal wave of defaults and a major deflation in equities.
- The trend toward negative social mood, concurrent with a collapse of the market, will lead to an economic contraction. Small bear markets lead to recessions; big bear markets lead to depressions. The recent mania was the biggest in nearly 300 years, so the depression will be correspondingly deep.
- As a by-product, this trend of major negative social mood will bring a frightening degree of social unrest. Under such conditions, people who, for years, had seen only increases in entitlements and suddenly find those entitlements disappearing, will not accept diminished entitlements quietly. If they do not receive what they had been promised, many will choose to take what they want from whomever they can. An inkling into this trend can presently be viewed by us from afar by examining a similar, more minor situation playing out in the streets of Europe.
- People will desire what they consider to be money, not stocks. A concurrent gold mania will occur. Gold, silver and other traditional, dependable commodities will become the basis of wealth, and fiat currency will decline in value dramatically.
This outlook is extreme and is difficult even to imagine. As mentioned previously, no one alive has ever seen anything like it, and it is understandable for us to say to ourselves, “It can’t possibly be that bad. At worst, we might have a double-dip recession, but we’ll get past it.”
However, all the above is based upon historical occurrences and consistent patterns.
It will be a ragged decline. The banking system will not deteriorate all at once; the crisis will occur piecemeal, with some events more devastating than others. Some communities will be harder hit than others. Those who are more independent of commerce (ranchers, small farmers) will not be as affected, as long as they can continue to produce. Those in or near large inner cities will feel the effects most greatly, particularly food shortages and crime.
As extreme as this prediction is, if it is correct, it may well begin within a year. If it does, it will be wise to be prepared to act as soon as possible for self-preservation.
There will be three factors that will be key to self-protection in such conditions:
- Become as liquid as possible.
- Keep your money in a form that will not inflate, such as precious metals, and in a location in which it will not be taken away by collapsing governments.
- Prepare a geographical location to escape to that is as unlikely to be affected as possible.
In Kansas, when there is a twister on the horizon, the family goes down into the storm cellar. Unfortunately, in disastrous economic times, the storm on the horizon is invisible, so it is human nature to hesitate.
Storm’s a-comin’. If you do not have the three preparations above taken care of now, it is already nearly too late. The reader would be well-advised to put these in place immediately to avoid losing what he has, and ending up as a casualty of the storm.