It’s not like you need a doctorate in economics to understand the current financial situation. Some good common sense should work just fine.
While the current administration is whistling past the graveyard, telling us how peachy everything now is, while Fed chairman Ben (“We Saved the World from Disaster”) Bernanke somehow manages to keep a straight face parroting the same wishful sentiments, while unemployment and foreclosures rates rise relentlessly despite the cheeriness, while the dollar still flounders amidst international calls for a new reserve currency, while inflation, the consequence of trillions of bailout dollars finally making their way through the system, is starting to swell like a carnival balloon—while this entire picture is developing—it wouldn’t be terribly difficult to envision a struggling economy ahead, if not one that actually did a double dip into the dreaded recession/depression territory.
If it ever left that territory in the first place.
As obvious as that assessment may seem to many of us, so many more, believe it or not, are actually drinking the administration’s Kool Aid: They’re buying into the idea that we’re on the verge of a glorious boom cycle.
And, even more significantly, they’re putting their money where their optimism is.
Hurray for Stocks (Now Head Calmly for the Exits)
In other words, optimism for stocks and an economic recovery in general is inexplicably bullish right now.
That, however, at least in the context of the last few years, can be a rather ominous sign.
“The headlines on our daily S&P chart show the critical psychological transformation, from a fear that the economy was ‘the worst since the Great Depression’ to widespread assurances now that the ‘coast is clear,’” was how the respected Elliot Wave Theory recently depicted current investor sentiment (http://www.elliottwave.com/).
For this market-forecasting firm, the world’s largest incidentally, our recent transformation from fear to…well…greed comes as no huge surprise. It was back in April of 2009 that Robert Prechter, editor of the Elliot Wave newsletters, predicted that, “By the end of wave 2, many market followers and economists will proclaim that the bear market is dead and the boom is back.”
And now, today, we have such headlines as…
“Bernanke says recession ‘very likely over’”—Sept. 15
“Ride this new bull market to gains”—Sept. 12
“Great recession over”—Sept. 9
Eerily accurate prediction…but these headlines are just samples of the “confident proclamations” out there. Elliot Wave also reported “declarations of imminent recovery by everyone from George Soros, the IMF, Abby Cohen, more than 90% of economists polled by the Wall Street Journal and 75% of 2004 asset managers surveyed by Merrill Lynch.”
Investors take note: Widespread optimism like this constitutes a signal, to The Elliot Wave Theory and other analysts at least, that the very opposite is about to occur. And occur with a vengeance. “The door to the last, great selling opportunity is wide open at the moment. But it must be close to slamming shut because the headlines now anticipate higher levels just as adamantly as they saw no bottom in sight last February-March.”
Consistent with the market philosophy of Ralph Nelson Elliot, Prechter’s distinguished mentor, Elliot Wave believes that we’re at the end of the “Wave 2” transformation of the market before we suddenly enter “Wave 3,” a period where economic conditions turn wilder and more radical. “Third waves move far and fast. They make good opportunities for aggressive speculators, but can become a death knell for longer-term investors’ portfolios.”
More Bears in Bulls’ Clothing?
There are more signs to make a contrarian sweat. The Daily Sentiment Index (www.trade-futures.com) recently reached 89% stock bulls, while a Dogs Of The Dow (www.dogsofthedow.com) investor sentiment survey hit 71.1% for the coming twelve months.
All of this is like a slam-dunk to contrarians that things are about to turn bearish.
So how do these very same contrarians view gold and silver, given the nearly unanimous optimism over the precious metals? Predictably, Elliot Wave also believes that gold and silver are in for a correction.
The key word here is “predictably.”
What happens when even contrarian views become too anticipated or too popular? Does that blunt their overall efficiency? And at what point do overwhelming market fundamentals nullify (or, at least, postpone) such things as Elliot Wave dynamics?
Sure, you could use that same argument to counter virtually any contrarian prediction, including the foregoing one about stocks. Specifically, though, should such unprecedented events as a U.S. hyperinflation or the replacement of the dollar as the world’s reserve currency (or whatever constitutes Elliot Wave’s dreaded Wave 3) take place—once-in-a-lifetime economic calamities that would irresistibly favor gold and silver—would that cause the contrarian rulebook to be tossed out the window for the time being and for precious metals to “go stratospheric” anyway?
The well-known Chinese curse is, “May you live in interesting times.” Like it or not, we’re all fated to see the answers to these and other compelling questions in the “interesting times” just ahead.