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Friday, January 1, 2010

The Peak of Asset Mania and The Final Bubble.

In the past, I have presented some long term charts showing a 70 year Supercycle wave (V), shown in the blue channel below (its a few months old chart - I tweaked the labeling system since), where mankind's progress clearly shows a topping pattern at some very large degree.  We theorize that this is the final Supercycle top of a powerful Grand Supercycle wave [III]  that has run the course for about as long as America has existed, some 220+ years. This is of course what Robert Prechter has been theorizing on for the last several decades.  This is the very big long term view of how 5 wave structures build and become bigger 5 wave structures.

One concept of EW channeling is that in any 5 wave structure wave 1, 3, and 5 will meet on a trendline.  Often they do not, in fact more often wave 5 ends at the middle of a channel.

Regardless, if Supercycle wave (V), (shown to exist in the blue channel), had its cycle subwave V meet on the upper blue trendline, we can then theorize that the larger channel exists at this spot, at the most. After all, as 5 wave structures exists within larger 5 wave structures, channels also exist within larger channels. The problem is I cannot accurately chart and show the complete channel of Grand Supercycle wave [III] for I have no tool that would be sufficient to go back in time to the 1700's.  I am making educated guesses based on EW theory and mainly the principle of channeling.  I am basically supposing that Supercyle waves (I), (III), and (V) also connect on a channel line.  Thats the purple channel.

At any rate, Cycle wave V of Supercycle wave (V)'s blue channel took it to a peak in about 1996.  In other words, one could have surmised that Supercycle wave (V) should have ended at about 1996. And since channels exists within channels, you could have also surmised that Grand Supercycle wave [III] should have topped naturally also at this spot. But of course it did not. I suspect this is what Robert Prechter insisted on and is why he is lambasted to this day. He played the channel lines and could not forsee the massive overthrow that has been occurring since.

But why didn't the waves end there in 1996?  Wasn't that a sufficient Cycle wave V? Why didn't we just have our downturn in 1995- 1996? Would we not have been far better off had we not advanced so high?

In short: It extended. Cycle wave V extended. Which meant Supercycle wave (V) extended, which also meant the peak of Grand Supercycle wave [III] also was extending.

Waves of such advancing splendor on such a grand scale marshal social forces near its peak.  The multiplying effect of  the top of a powerful 220+ thrust is not easily reversed.  In short, this is where "asset manias" occur.  And the bigger the wave, I surmise the more powerful the mania.  Basically since the early 1980's and right on through until 2007, the underlying apparatus and structure of financial engineering was put in place to enable and carry out mankind's urge to participate in asset mania at a massive global scale. From the formation of options, derivatives and CDS, "dark pools" and High Frequency Trading, I'd say we exploited damn near every aspect of finance structure as we could. And then we formed the laws to make everyone play the game as much as possible. So the asset mania-enabling apparatus was put in place during cycle wave V of (V) of [III].

But it still takes "money" to pump a Ponzi.  How did we do that?  You darn well know the answer: Debt! Its at about this time that debt started to go exponential.  You remember Ross Perot and his charts in 1992 trying to warn America about its growing debt crisis. We pretty much blew that off.  It wasn't just the government who took on debt. Indeed, the government was just following the population. Individual households and corporations took on ever-increasing amounts of debt.  As the government is the last to a trade, they now have finally done the same in the past few years. But households are changing back to frugality and the government has yet to catch up. They will.

So in short the "overthrow" over the purple Grand Supercycle channel was enabled and created on borrowed money and borrowed time.  How long we can exist in this "bubble" state is finite. Most people are in denial.  We built our pension systems and made promises based on the near-certainty that the overthrow of the channel was a normal thing that would exist forever!

When Barney Frank puts in a $4T backstop in a "reform" bill, I mean, its really quite scary people!  There is no $4T dollars.  By even writing this into a bill is to begin the road of awareness to "hey we have Ponzi" going here.  Thats the way I read it and any intelligent 8th grader would understand it to be the same.

Of course we'll correct, and correct deeply, and that day is not too far off.  We are like the planted people in the movie "Motel Hell" mesmerized by the colored, lighted pinwheels.  It will end just as badly.  We overshot the channel line by far.  We did this by blowing debt bubbles. The tech and housing bubble were fine examples of our asset mania and now there is one final bubble in the scheme: Bonds (or debt itself).  Of course when this bubble pops, its all over as there can be no more bubbles when we pop the Ponzi of all Ponzis. And pop it will. You cannot cheat nature's laws.

And we promised monetary things like Social Security, healthcare and pensions and benefits based on a Ponzi formula... oh the coming bad social mood!

A correction in an EW channel should take you back to the lower channel line. If we surmise the larger EW purple channel I drew, then going back to that lower channel is a very far correction indeed.   Had we corrected in 1996, it wouldn't have been so bad would it?   But of course we would not have had our McMansions that uses $1000/month to heat and cool, 4 phones per household, 3 cable boxes and unlimited text messaging.   Nay, our "standard of living" would not have gone exponential.  Did we really earn our way to all of our excesses? No of course not, we borrowed, then gambled it and a few won by playing the system to a "T".

We need to find a way back to the lower purple channel line but it is a dangerous climbdown.  The bloated excesses of debt have yet to be de-levered. Instead we levered them more.  Underneath it all, I think Americans understand what has happened in a sense. They need only look at their personal balance sheets. If you were a lucky one to "get it while it was good" then good for you.  Its a game of limited musical chairs and there will be a  majority that go without and get crushed.

The chart below shows that we indeed made it back above the upper channel line in an attempt to re inflate the zaniness of asset mania bubbles.  We could only achieve this by one final means: Blowing up the very underlying apparatus that enabled the rest of the bubbles: bonds (or in reality, debt of all kinds). The final bubble pop will ensure that we can blow no more bubbles.  And it will result in the long over-due move to the lower purple channel line where we should have corrected all along.

The ride will be challenging to the nation and the world.  Indeed the entire world has also been caught up in the same asset mania bubbles and they too are blowing the final bubble of all bubbles in the form of massive borrowings.  No nation will be untouched. Thats why all the stock charts are rising and falling almost in unison.

The red dot area is where we "should" have had our peak of GS [III], but we actually were just apparently getting warmed up.  We overthrew a 220 year channel and it was great while it lasted.  The blue dot area is our current attempt to regain the high ground. It represents the final excesses of a warped system. A final slip beneath will result in a move to the lower channel. And a popping of the final bubble.

It was the advance/decline issues charts that gave me the idea for this post.  I think it perfectly represents what is happening for the past 15 years. Here as you can see, they too form little Elliott Waves and you can see asset mania started in earnest right at about in 1995-1996 just where we should have been starting a grand corrective wave, we said no, lets blow this thing up to the mother of all manias. Is it any wonder that we are still peaking on this chart at the top of a Primary wave [2] corrective wave back in the stock market?

We still yearn the asset mania! But it looks like a wave [5] peak at a very large degree is almost upon us.

And here it what I propose is the final wave in daily mode. There may be one more push up as you can see my alternate labeling.

It seems at times I am against capitalism but that is the furthest from the truth. True capitalism is the means to which fraudulent excesses are wrought from the system. We have warped capitalism to try and prevent any pain.  We have a fascist capitalism going.  Too bad true capitalism will get a bad name in the end.

The end result of course is that true capitalism will be abolished and a totalitarian system of the state will rise to power as it already has been for the past decades.  The bureaucrats are winning and people keep voting to drain the Treasury for their own benefit. But little do they realize there is nothing in the Treasury. Its an empty shell.  The final bubble. A Ponzi of historic proportions.

Putting a backstop of $4,000,000,000,000  into a reform bill is an incredible self-realization of the insanity of it all. Its really the beginning of the end.  Just ponder that figure. It is a big number.  And I suspect the people know it to be so underneath it all.

They will be made to become aware of the Ponzi.

And what is rule #1 about Ponzi schemes?  When they become self-aware, they collapse rather instantly.

That self-aware moment is approaching fast.
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