the Quantitative Easing Bubble

Bernanke's Bigger Bubble: QE-3 and the Coming Economic Crash
Why monetarist theory is flawed
October 18, 2012

Federal Reserve Chairman Ben Bernanke really means it this time.
He will rescue the economy.

Ben S. Bernanke for the first time pledged that the Federal Reserve will buy bonds until the economy gets closer to his goals ... . The central bank yesterday announced its third round of large-scale asset purchases since 2008, with the difference that it didn't set any limit on the ultimate amount it would buy or the duration of the program. ... Bernanke is "going to fight and fight until he sees a real improvement in the economy," said a co-head of global economics research at [a major bank]." He believes quantitative easing can help the economy, so he'll just keep at it until there's a real turn in the economy."

Bloomberg, Sept. 14

But we've all heard the definition of insanity: doing the same thing over and over and expecting a different result.
Why should we think QE-3 will work when the previous two failed? (Don't think they failed? Then ask yourself why we need a third one.)
Granted, this round of quantitative easing appears open-ended. And it includes a pledge to purchase $40 billion a month in mortgage-backed securities. But high interest rates don't explain the sluggish residential real estate market. Home purchases are slow for the same reason that many business owners haven't expanded. A Sept. 12 CNNMoney article quotes a former Fed economist:

"Businesses are not hesitant to invest and hire because interest rates are too high - they're hesitant because of the uncertainty surrounding their future prospects."

When the August jobless rate fell to 8.1%, the widely reported reason was because so many people gave up looking for work. U.S. business startups are at record lows. Food stamp rolls recently skyrocketed. Several U.S. municipalities are declaring bankruptcy. Ratings service Moody's just warned of a possible U.S. downgrade. And the national debt just surpassed $16 trillion.
Monetary policy will not fix what ails the economy. Robert Prechter explains:

Monetarist theory holds that each new dollar created can support many new dollars' worth of IOUs throughout the banking system through re-depositing and re-lending, a process known as the "multiplier effect".... Every aspect of this theory is flawed, from the assumption that credit is fundamentally good for the economy and should always expand to the bedrock theoretical assumption that human society is a machine where physics equations apply. Waves of social mood have no place in monetarist theory, but they can play havoc with the monetarists' supposed machine when they reach extremes or undergo unforeseen (what other kind is there?) reversals.

The Elliott Wave Theorist, September 2011

Few people foresee a major economic reversal just ahead. The fact that Fed policy has become "QE Infinity" (it already has a nickname) tells us that something is badly wrong with the economy. And that something is a massive credit bubble
Monetary policy cannot make the global credit bubble simply vanish. Only a deflationary crash can do that. The chart below reveals why.

Look how fast the debt deflation unfolded in 1929-1932.
Learn what EWI expects regarding today's much bigger credit bubble.
See more charts and read insightful commentary that will help you position yourself now for what's to come next.
The herd keeps looking for intervention by government entities to aid their investing decisions. It's time to break away from the herd and start investing independently. EWI is here to help ...

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Get Ready for the Rest of the Crash

Position Yourself for the Rest of "Conquer the Crash"
The earlier you prepare, the better
May 23, 2012

By Elliott Wave International

To this day, I wonder why Robert Prechter's book Conquer the Crash has not been more widely recognized. It described in advance much of what happened in the 2008 financial crisis.
Published in 2002, the book provided detailed descriptions of then-future economic scenarios. They were detailed vs. general. Prechter was specific in a way that would prove right or wrong; there was no gray.
This is from the book:

There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks' debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients' potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.

Conquer the Crash, second edition, (p. 179)

That's just one excerpt about one topic in a 456-page text. Perhaps you see why I believe the book deserves more credit. Yet even that one paragraph from the book turned out to be a virtual mirror of what came to pass. And much of what he predicted is unfolding today: the JPMorgan trading fiasco, massive withdrawals at Greek banks, downgrades of Italian and Spanish banks and much more. Those are just a few headlines.
The broader point is that Conquer the Crash prepared its readers. Around the time the book's second edition published in 2009, the Chicago Sun-Times remarked
And the credit implosion is still not over. Please take a look at the chart:

In the Conquer the Crash quote in the first part of this article, you'll notice the last three words are "deflation and depression."
The world has yet to completely pass through these economic valleys.

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the Hindenburg Omen . . is a Crash coming?

The Hindenburg Omen -- Omen-ous or Not?
Elliott Wave International Chief Market Analyst Steve Hochberg Sheds Light on a Feared Technical IndicatorAugust 24, 2010

By Elliott Wave International

On Aug. 12, volatile market action coincided with a technical signal called the Hindenburg Omen, whereby a relatively high number of new highs and lows in individual stocks occur at the same time.

This indicator instantly gained an enormous amount of media attention. So we sat down with Steve Hochberg, EWI's chief market analyst and close colleague of Robert Prechter, to ask him about the now-infamous Hindenburg Omen.

EWI: Steve, recently a market indicator called the Hindenburg Omen has been in the news, what is going on?

Steve Hochberg: Discussion of this indicator certainly has been everywhere. Someone emailed us and said they even saw it mentioned on the front page of the Drudge Report! Look, headline-grabbing names grab headlines. Essentially it measures the fractured nature of market action. Over the years, we've discussed numerous times in our publications how a fractured market is oftentimes an unhealthy market. The multiple non-confirmations registered at the recent August 9 stock high, which we talked about in the Short Term Update, are another manifestation of this bearish behavior. The message is consistent with how we view the Elliott wave structure.

EWI: Why are people interested in this particular indicator?

SH: That's a good question, and it speaks to a broader issue, viz., the "re-emergence" of technical analysis into the mainstream consciousness of market participants. In Prechter's Perspective, Robert Prechter discusses the timing of the popularity of technical analysis, of which Elliott waves, or pattern recognition, is the highest form:

"In long term bull markets, no one really needs market timing because the market is always going up. This was true during the 1950s and 1960s, a period of market strength. And it has been mostly true since 1982. From 1966 to 1982, though, the market was very cyclic, so investors couldn't sleep like babies with a buy-and-hold blanket like they do today."

The S&P 500 has a negative return over at least the past 12 years, so investors are naturally questioning the "broadly diversified, buy and hold" stance advocated by 90%+ of investment advisors. EWI subscribers are way ahead of the mass of investors because as the bear market progresses, the media should show increased focus on technical analysis, including patterns such as head-and-shoulders as well as trendlines, moving averages and, yes, even Elliott waves, just as they did during the last great bear market from 1966 to 1982. It will be an exciting time for those with even a cursory knowledge of the technicals.

EWI: So, what are you seeing now?

SH: Obviously we cannot give away our analysis, but the wave structure is clear, the myriad indicators we keep offer compelling confirmation and the market is accommodating our forecast. If readers have any interest in what this means for not only the stock market, but also all other markets, please give us a read to see if our work might be useful in helping to formulate your investment portfolio. We think it will be a worthwhile endeavor.

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter's desk -- FREE. Click here to download a free report packed with recent analysis and forecasts from Prechter's Elliott Wave Theorist.