Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Stock Market Last Believers: Government Grabs the Bag with Both Hands

Stock-Markets / Stock Markets 2013 Jan 24, 2013 - 05:13 PM GMT

By: EWI

Stock-Markets

The following is a sample from Elliott Wave International's new 40-page report, The State of the Global Markets -- 2013 Edition: The Most Important Investment Report You'll Read This Year. This article was originally published in the October 2012 issue of The Elliott Wave Financial Forecast.

When government gets into the act of speculation, the top is usually way past having occurred. Government is the ultimate crowd, every decision being made by committee. It is always acting on the last trend, the one that is already over. (For example, the Federal government passed securities laws to prevent the 1929 crash...in 1934.) -- The Elliott Wave Theorist


In November 1999, The Elliott Wave Financial Forecast demonstrated the usefulness of this socionomic precept when the Glass-Steagall Act -- the post-1929 crash statute the U.S. government adopted to "purportedly protect" the financial industry from itself -- was effectively repealed. Citing the government's role as "the ultimate bag holder," EWFF stated, "The U.S. government may have just provided one of its greatest-ever demonstrations of this principle." That was four months after the all-time high in the Real-Money Dow (Dow/gold), and two months before the all-time high in Dow/PPI. Both indexes have been in a bear market ever since.

On Sept. 1, 2012, the U.S. Federal Reserve upped the ante in the latest test of our "ultimate crowd" theory when it introduced QE3, an "open ended" $40-billion-a-month mortgage-buying program. The U.S. central bank further stated that it intends to keep the Fed Funds rate at effectively zero for the next three years. In time, the Fed's herculean effort to stimulate the financial markets and the economy, with the sanction of government, will illuminate the authorities' role as the last believer in the old trend even more brilliantly than Congress' passage and repeal of Glass-Steagall, at the beginning and end respectively, of a Supercycle-degree bull market. To understand how social mood's long-term positive trend influenced the Fed's actions, we need to travel back to the central bank's creation, which occurred in the wake of a major downside reversal in mood.

The Federal Reserve was established (not at all coincidently near a major bottom in 1914) at least partially as a response to the Panic of 1907. In an effort to prevent financial panic from ever happening again (pipe dream #1), the Fed was mandated to restrain the "undue use" of credit in the "speculative carrying of or trading in securities, real estate or commodities." (Sound like a familiar mix?) When runaway financial speculation burst forth in the late 1920s, the Fed rose to the challenge, or at least tried to. In "The Stock Market Boom and Crash of 1929," economist Eugene White wrote, "The Federal Reserve had always been concerned about excessive credit for speculation. Its founders hoped the new central bank's discounting activities would channel credit away from 'speculative' and towards 'productive' activities. Although there was general agreement on this issue, the stock market boom created a severe split over policy." According to economist Murray Rothbard, Herbert Hoover and Federal Reserve Board Governor Roy Young "wanted to deny bank credit to the stock market." In August 1929, within days of the Dow's ultimate peak, the Fed acted, raising the discount rate to 6%.

As our opening quote from the Theorist notes, government moves by consensus only, so it did not make structural changes deemed capable of preventing another crash until 1934, two years after social mood ended its negative trend and the stock market bottomed. In a bid to strengthen the government's capacity to curtail "overtrading," the Securities Act of 1934 also gave the Fed power over brokerage firms' margin requirements. In the early stages of the bull market, the Fed did not wait long to use its authority. In April 1936, it raised the initial margin requirement on NYSE shares from a range of 25 to 45%, to 55%. Considering that the unemployment rate at the time was 15% -- nearly double its current level -- this act represents an exceptionally conservative stance. Stocks retreated for a time, only to race back to new highs three months later. The Fed responded by "doubling reserve requirements (against deposits) from August 1936 to May 1937," right up to and briefly past the March 1937 Cycle wave I stock peak. Economists Christina and David Romer state that the Fed was "motivated by fear of speculation and inflation."

The all-important upper line of the Supercycle-degree trend channel that dates back to that 1937 peak is shown on the chart on the next page (download the full report for access to the charts). After the next touchpoint, the Cycle wave III peak in February 1966, a speculative binge accompanied the Dow's double top in 1968-1969. The Fed felt compelled to act again in June 1968 by raising margin requirements to 80%, once again "to curb speculation." The Fed also pushed the discount rate to 6% in April 1969. In 1970, then-Fed Chairman William McChesney Martin famously stated that his job was "to take the punch bowl away when the party is getting good."

By 1974, with the DJIA touching the bottom channel line, the Fed acknowledged the bearish trend of Cycle wave IV by reducing NYSE margin requirements for stock purchases to 50%, where they remain today.

In 1984, a Fed study "cast significant doubt on the need to retain high initial margins to prevent excessive fluctuations of stock prices." When the Great Asset Mania finally pushed the Dow through the top of its Supercycle-degree channel line in 1996, Fed-mandated margin hikes were taken completely off the table. In December 1996, after the Dow made its first decisive break through the top of the channel, then-chairman Alan Greenspan issued his famous "irrational exuberance" comment, citing "unduly escalated asset values." Yet, unlike his predecessors, he did nothing to change margin requirements. A margin debt explosion in early 2000 "prompted some policymakers to debate the idea of changing margin requirements to stem possible speculative excess," but a Federal Reserve paper issued the day after the S&P's March 23, 2000 peak ("Margin Requirements as a Policy Tool") quashed the idea: "The bulk of the research indicates that changes in requirements do not have a significant permanent effect." Ultimately, though, the Fed stayed true to its historical pattern of raising the cost of credit near the end of upside extremes along the trendline, hiking the discount rate to 6% in May 2000.

In 2006, with the Dow once again pushing to new highs above the top of the trendchannel and the real estate mania at peak pitch, the Fed raised the discount rate one notch higher, to 6.25%. In a critical change, however, it did not wait for the Dow to reverse course before easing again. In the first stage of a bear-market prevention effort that continues to this day, the Fed reduced the discount rate to 5.75% in August 2007, two months ahead of the Dow's October peak.

Various government-sanctioned financial bailouts also coincided with the developing stock market reversal. The almost instantaneous impulse to "do something" represented a historic departure from previous behavior. EWFF's November and December 2007 issues noted that government bailouts generally "appear successful because they tend to come at lows," and added that the 2007 bailouts were "too close to the market's peak" to work. The word "appear" is actually the key to that forecast, because it is a reference to the actual cause of the market's reversal: a change in the direction of social mood. This change is far more powerful than any action the Fed might take to induce a desired market outcome. What matters is not the specific action that the Fed may take, but the fact that it feels compelled to act by virtue of the social pressures under which it operates.

In the case at hand, the Fed's long-standing objectives have been reversed. Instead of exercising its original mandate to restrict excessive speculation, the Fed is doing everything in its power to keep buyers' animal spirits alive, even as the Dow is at its 75-year upper trendline.

The open-ended nature of the promise to provide quantitative easing indefinitely and the stated objective of creating a wealth effect in the form of higher stock prices are unprecedented. "Fed Aims to Drive up Stocks," says a September 14 Washington Post headline.

Here's the basic plan in Bernanke's own words: "If people feel that their financial situation is better because their 401(K) looks better, they're more willing to go out and spend, and that's going to provide the demand." Never mind the foolishness of the demand-theory of economic growth.

Just as The Elliott Wave Theorist theorized in 1991, the Fed is getting into the act of speculation with the top long past. It will pay a steep price for goosing the old trend near its end and for fighting the new trend as it begins.


Robert Prechter is the founder and president of Elliott Wave International, the world's largest financial forecasting firm. The rest of EWI's 40-page report, The State of the Global Markets - 2013 Edition: The Most Important Investment Report You'll Read This Year, is available for download. Follow this link to download the full report - for free.

This article was syndicated by Elliott Wave International and was originally published under the headline . EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules