Research & Commentary

A Stunning Setup That Will Make You Ponder the Prospects for Deflation

There’s a stunning parallel between four charts of financial markets in 1929 and the same markets in 2017. See for yourself.

 

 

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[Editor’s note: The text version of this video is below.]

Yes, the stock market is levitating in record-high territory. And, it’s also true that the U.S. economy is in its eighth year of economic expansion.

Indeed, a July 7 New York Times article notes:

U.S. Labor Market Roars Back, Adding 222,000 Jobs in June

Wall Street economists had expected employment gains of 175,000.

So, as the song goes, “don’t worry, be happy,” right?

Well, let’s answer the question in this way: Optimism was also running high prior to the stock market tops in 2007, 2000 and even going back to 1929.

Of course, 1929 is a major milestone year. As most people know, the year kicked off the worst deflationary depression in U.S. history. But, that same year, before the stock market started its steep decline, Irving Fisher, a famous Yale economist, said:

“Stock prices have reached a permanently high plateau.”

The President of the New York Stock Exchange agreed:

“It is obvious that we are through with business cycles as we have known them.”

The point is that after a trend has been going on for awhile, it seems that it will continue to go on.

And today’s financial complacency might rival that of 1929. Here are sample 2017 headlines:

  • Stock Investors’ Breathtaking Complacency (Bloomberg, Feb. 17)
  • Stock Market’s Complacency Index Highest in 24 Years (New American, May 9)
  • Fear Not the Fear of Complacency in Markets (WSJ, May 15)
  • Wall Street’s ‘fear gauge’ at historical low as US stocks surge (Financial Times, June 2)

And the parallels in the chart patterns of major financial markets in 1929 and 2017 are nothing short of stunning.

Look at these series of charts from the just-published, July Elliott Wave Financial Forecast. The accompanying commentary is below:

The bottom four panels show peaks in real estate, commodities and bonds since 2006, and an impending high in stocks. The topping sequence is similar to that which occurred during the last peak of Supercycle degree, wave (III) in 1929. The current top is a Grand Supercycle degree peak, the progression of peaks in real estate, commodities and bonds should be followed by an even larger deflationary collapse than occurred in 1929-32.

The initial top in real estate occurred 11 years ago. In 1929, real estate topped 4 years ahead of the stock peak in 1929. … The form of the decline in commodities is remarkably similar to that preceding the 1929 stock market top. … Stocks seem to be levitating this time around, which should lead to an ever more violent reversal. Bonds peaked a year ago, in July 2016; so the situation appears comparable to 1929, when bond prices topped 18 months ahead of the stock market. This is a bearish portent, as it shows that few fear the growing potential for outright deflation.

EWI analysts are using the Elliott wave model to get a handle on when the next significant downturn will occur in the stock market. A rare deflationary period will likely follow. (The “preview” of which we already saw during the 2007-2009 financial crisis.)

And, let’s wrap up with this additional comment from the July Elliott Wave Financial Forecast:

The longer the top, the bigger the drop.

 

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