by Patrick Wood
The Federal Reserve is scared to death of deflation. I have been waiting for responses from the Feb. 29th headline, “Bernanke warns lawmakers country headed for ‘massive fiscal cliff’”, but there has been none. As radical as that sounds, wouldn’t you think that it would start a national discussion?
According to Bernanke,
“Under current law, on Jan. 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases… I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date… All those things are hitting on the same day, basically. It’s quite a big event.”
The idea is this: The combination of higher taxes plus reduced government spending will push the economy off the cliff. When consumers don’t spend, government must make up the difference. This is exactly why the Fed has encouraged government spending over the last 3 years. Increased spending is the only remedy for deflation.
The Fed was originally created to stimulate and control inflation, and it has many tools at its disposal to do so. However, there have never been tools or policies that would control or mitigate deflation.
Bernanke is too late in expressing these sentiments. The forces of deflation are already in control and cannot be nullified by any means except for letting it run its course. Still, the thought of a “massive fiscal cliff” is a perfect description of what is ahead.
The university system (thanks to government enablement) is bankrupting an entire generation of young people even before they get a chance to be productive in the workforce. Student loan balances at the end of Q3 2011 were measurably higher than either total credit card debt or total auto loans ($870 billion vs. $693 and $730 billion). Of those who are out of school and need to make payments, 27 percent are past due. While the average balance per overall student (former and current) is $23,300, recent graduates are walking into life with balances exceeding $100,000.
Except for magnitude, the student debt debacle is just as severe as the sub-prime debt crisis of 2006 – 2008. Unemployment among this young generation is double the overall unemployment rate, making it virtually impossible for most to retire their debts in the first 10 years of post-college life.
It should be noted that the education system in America is a business monopoly. No competition is allowed and price increases cannot be resisted. Politicians have capitalized on this by creating a web of debt to create complete dependence upon government.
Tuesday’s sharp drop in stocks and metals are signaling that the next phase of the bear is in force. In stocks, 90 percent were down with 90 percent of volume being down volume. All the major averages have now experienced drops out of their respective channels. In the S&P 500, the upward wedge has clearly been terminated. In the NASDAQ 100, it has clearly fallen out of its steep upward channel.
The above chart shows how the NASDAQ 100 bumped up against its longer-term top trend line prior to reversing sharply.
More importantly, the NASDAQ, DJIA, S&P 500 and Russell 2000 have all displayed impulsive 5-wave patterns down, indicating a change of trend. If this were not the case, we would have seen a 3-wave correction before resuming the uptrend.
The dollar has rallied strongly and has completed a clear 5-wave advance, confirming a change of trend direction.
Gold and silver both broke sharply on Tuesday, confirming Prechter’s “All-the-same” market theory. As stocks work lower, metals and commodities will follow. In particular, watch for sharp drops in oil as well.
For anyone invested (long) in stocks, metals or commodities, there is a very serious risk of capital loss straight ahead. Although no market moves in a straight line, prices should be considerably lower by year end. My loose targets for the next 12 months or so are as follows: Silver — low $20’s; gold — $1,300-$1,400; DJIA — 8,000 – 8,300; oil — $75/bbl.; US dollar — 88 – 90. It is too early in the decline to offer measured or calculated targets, but after the first intermediate wave down is completed, I will take a closer look.