Risk Of Ruin

By: Joseph Russo | Fri, Feb 13, 2009
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The Silver Bullet Band
Groping in the dark for the golden gun with silver bullets, should they get their hands on it- the Fed, Treasury, and the political bodies at large, may soon discover they have been on their knee's pleading to engage in a willfully ignorant round of Russian roulette with a fully loaded revolver.

Inevitably, we envision this high-level failure of leadership bringing about an unprecedented opportunity for the US to raise the white flag on its irreparable financial system, and place disciplines from the Austrian school of economics to task in rebuilding its financial markets. In the interim, it is our hope (or fantasy) that the real (peoples) economy is somehow able to survive with vim and vigor while old school Wall Street deservedly crumbles amid a period of historic restoration.

Before a grand momentous occasion of this sort can save the street, the financial sphere must first hit the very bottom of the barrel. Where IS the bottom of such an epic and calamitous event? History suggests clearly that 80% to 90% declines from peak values are the norm. The sooner it hits rock bottom the sooner it is able to embark upon restoring prudent and sustainable growth path. It is scary, but that simple.

There IS no meaningful floor under the market - only the very bottom
Quite honestly, even we did not think the floor would fall out as quickly as it has. Below is an updated chart we presented nearly a year ago in a piece entitled V-for Vendetta.

Revisiting the Wilshire 5000
If one opens the "Vendetta" link and looks at the March 2008 version of the chart below it will become clear that we got it right, but failed to anticipate the gravity and speed in which the floor under the broadest representation of equity markets would collapse. As the updated chart graphically expresses, the "risk of ruin" is nearer than one might have conceived previously. Moreover, should it play out, we have now defined its target zones.

Below are a few of our prescient quotes from a segment within the Vendetta article, which provided briefings on the state of various markets at the time:

On the S&P 500: from March 10, 2008
The S&P is struggling franticly to hang onto its five-year reflationary uptrend from 2003. Despite a potential breach (and apart from an all-out-crash) this beloved benchmark equity index is likely to get some sort of reprieve from its most recent five-months of bear whipping.

On the NASDAQ-100: from March 10, 2008
The NDX is one of the first widely followed equity indices threatening to post an ominous five-month closing low beneath its five-year uptrend. The presidents "working group" must now do whatever necessary to insure a March close back above the mandated perpetuity of inflationary growth, or risk watching all of its fiat-managed equity indices stumble and fall.

On Gold: from March 10, 2008
Gold is frantically holding above its upper trend-channel eyeing the $1000 milestone, telegraphing to all of financial civilization the necessity to change its ways. So far, no one is paying serious attention.

Prescient Quote Outcomes:
On the S&P- After registering in an interim low of 1256.98 the week of 17-March, the S&P recovered more than 180-pts or 14.5% by mid-May. This was the rather generous and anticipated reprieve mentioned in our timely status briefing. The all-out-crash is still unfolding.

On the NDX- After registering in an interim low of 1668.57 the week of 17-March, the NDX recovered more than 380-pts or 23.2% by early-June. Whether or not this occurred with the aid of the presidents "working group" by September, all were watching in awe as fiat-managed equity indices stumbled and fell.

On Gold- From its 7-March 2008 close of 974.20, Gold went on to surpass the $1000 dollar milestone. In the week ending 17-March, Gold registered an interim high of $1033.90. Ironically, since the US Fed and Treasury still hold all the games poker chips gratis the reserve status of its fiat currency, Gold dipped 34% testing the 681 level in October 2008 as a combination of deleveraging and lemmings rushing to dollars reanimated signs of life in the otherwise dead US currency.

And still scratching our heads
We simply cannot comprehend the logic of leadership. In fostering an egregious 30-year span of hyper-like inflation, they suddenly stop the game, decree rule changes left and right, and then claim that we are facing a threat of a massive deflation, thereby mitigating any negative effects of their current radical plan, which is to embark on the largest inflationary effort ever attempted in the history of humankind.

Four months after its initial pounding, Gold is knocking on the door of $950, up some 40% from its lows, and is again approaching the $1000 milestone despite the continued surge in an otherwise worthless paper currency.

A reversion to the mean spells RUIN
The new normal, not yet defined, has potential to be truly incomprehensible. The old, so-called "normal" growth path that leadership is betting the ranch to salvage was an artificially created erroneous paradigm that is now just beginning to implode. By default, the US will take down the rest of the Globes financial markets in this extraordinary process of vile but necessary cleansing. The irreparable financial sphere is now poised to deliver itself a tsunami of forced-cleansing simply because of leadership's failure to exercise the wisdom and discipline to allow the system to cleanse itself.

And they all fall down
Many if not all Global Equity Indices now sport trendline trajectories, which if breached, portend total collapse. Contrary to the false paradigm of what we are now bombarded with as an essential kick-start quest to getting things back to the "old normal", a simple reversion to the mean will equate to a serious breach for many of these "risk of ruin" trendline trajectories. It is indeed time for truly radical about-face change. Radical enhancements to what caused the problem in the first place constitute no change whatsoever.

Thus far, all seems eerily calm as the powers that be have yet to find the golden gun laden with silver bullets. We should become more concerned after a convincing market rally, which gives off the appearance that their convoluted efforts are actually starting to work. Such a feat would indicate that they finally found their golden gun, and have begun spinning its big shiny barrel frantically, and with hubris of old, awaiting their turn to pull the trigger in the fatal game of fully loaded Russian roulette.

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Joseph Russo

Author: Joseph Russo

Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Joseph Russo

Since the dot.com bubble, 911, and the 2002 market crash, Elliott Wave Technology's mission remains the delivery of valuable solutions-based services that empower clients to execute successful trading and investment decisions in all market environments.

Joe Russo is an entrepreneurial publisher and market analyst providing digital online media solutions designed to assist traders and investors in prudently and profitably navigating their exposure to the financial markets.

Since the official launch of his Elliott Wave Technology website in 2005, he has established an outstanding record of accomplishment, including but not limited to, ...

  • In 2005, he elicited a major long-term wealth producing nugget of guidance in suggesting strongly that members give serious consideration to apportioning 10%-20% of their net worth toward the physical acquisition of Gold (@ $400.) and Silver (@ $6.00).

  • In 2006, the (MTA) Market Technicians Association featured his article "Scaling Perceptions amid the Global Equity Boom" in their industry newsletter, "Technically Speaking."

  • On May 6 of 2007, five months prior to the market top in 2007, though still bullish at that time, he publicly warned long-term investors not to be fooled again, in "Bullish Like There's No Tomorrow."

  • On March 10 of 2008, with another 48% of downside remaining to the bottom of the great bear market of 2008-2009, in "V-for Vendetta," using the Wilshire 5000 as proxy, he publicly laid out the case for the depth and amplitude of the unfolding bear market, which marked terminal to a rather nice long-run in equity values.

  • Working extensively with EasyLanguage® programmer George Pruitt in 2010 and 2011, the author of "Building Winning Trading Systems with TradeStation," he assisted in the development of several proprietary trading systems.

  • On February 11, 2011, he publicly made available his call for a key bottom in the long bond at 117 '3/32. Within a year and half from his call, the long bond rallied in excess of 30% to new all time highs in July of 2012.

  • For the benefit of members and his general readership, he responded to widespread levels of economic and financial uncertainty in the development of Prudent Measures in 2012.

  • He publicly warned of a major top in Apple on October 26, 2012 in the very early stages of a 40% decline from its all time high.

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TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/