Do Not Be Fooled, Another Major Economic Collapse Could Be Coming Sooner Than Many Think

By: Robert McHugh | Sat, Aug 1, 2009
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Stocks Markets world-wide are in a Grand Supercycle degree wave {IV} Bear Market. This is a huge Bear Market, meaning either in terms of time, or in terms of decline, it will be one for the ages. We believe it will be relatively short in time, but deep in decline. This Bear Market can take shape as one of three patterns, a massive sideways Triangle, a Flat, or a catastrophic Zig-zag. If it is a Triangle, it will be a pattern of five supercycle waves, and the low price has been reached on March 6th, 2009. That is the best case scenario. However, our fear is that we are going to get a Zig-zag pattern, with a potential downside target close to zero. Maybe zero to 1,000 in the Industrials, and zero to 100 in the S&P 500. Here is what we see:

Stocks are in the final wave of the eye of a hurricane of a Bear Market. The eye is the calm before the second half of a terrible storm. Once this spring/summer rally finishes, we expect a severe stock market decline again. That decline should be the end of the Bear Market that started in late 2007. This Bear Market is a Grand Supercycle Bear Market, one for the ages. The first part of the storm was wave (A) down, which lasted from October 2007 to March 2009. The Second of three parts, the eye, wave (B) up, started on March 6th, and this rally could last several more months. Wave (B)'s top could arrive around the 11,000 to 11,500ish area for the Dow Industrials. The third and likely final part will be wave (C) down, and will hurt.

Back in the Great Depression of 1929 through the 1930's, we saw a similar Zig-zag pattern. There was a crash in 1929, followed by a nice rally, but then the most devastating part of the market collapse followed into the 1930's. That Bear Market was a Supercycle degree wave (IV). The current Bear Market is one degree larger, which means it should be worse. There is great risk to the status quo political structure of governments internationally should this Bear Market follow the Zig-zag pattern. That is why gold is an attractive component investment for diversified conservative portfolios, as it has been considered a monetary equivalent throughout the ages, surviving the rise and fall of fiat currencies of nation state powers.

Fundamentals are a mess at this time in the U.S. economy, regardless of all the hoopla nonsense we hear from the mainstream financial press, who hope to jawbone this economy to health, so their ratings rise. Truth is, we have close to a 10 percent admitted unemployment at this time, with the actual rate much higher if you include discouraged workers no longer seeking employment. Unemployment will get worse. A lot of good folks are collecting severances or unemployment checks, which have expiration dates. This means consumer spending, which accounts for 70 percent of GDP, is not going to rise much any time soon. Comparative corporate earnings reports that we hear "beat expectations" are beating pathetic expectations, not robust expectations. A lot of the earnings improvements are due to labor cost savings from downsizing, not growth.

Health insurance has been the topic dujour the past few weeks. From the Secretary of Health and Human Resources' own lips, the United States is now spending $2.5 trillion on health care, about 17 percent of GDP. So where are we headed? Will 50 percent of all jobs in America eventually be either in the healthcare industry or the government? That is no framework for a prosperous nation.

Commercial Real Estate is facing a looming credit crisis as lenders will be reluctant, or not have the liquidity, to lend for new projects. Loan renewals are at risk of being rejected.

The point is, risks remain high.

The above chart shows the Supercycle Degree wave (IV) decline that kicked off the Great Depression of the 1930's. The point we want to make here is that the initial crash was merely wave A down of an A-down, B-up, C-down move that lasted in full about three and a half years.

Wave A down lasted about three months, from September 1929 through November 1929. Wave B-up corrected half the decline from Wave A down, and lasted about six months into April 1930.

At that point, it was a critical error to assume the worst was over. In fact, it was far from over. A catastrophic Wave C-down started in April 1930 and lasted into the summer of 1932. That two plus year decline was destined to wipe out more than the crash did, and take prices down to the point where the total damage from wave (IV) was 90 percent from its wave (III) peak in 1929.

The economy then was stuck in the throes of the Depression for the rest of the decade, only to be pulled out by the onset of World War II in the early 1940s, all the associated spending that war required.

The point here is we cannot be fooled by this Grand Supercycle degree wave (IV) that started in October 2007. Wave (A)-down is over, and Wave (B)-up is underway. However, a catastrophic Wave (C)-down is coming, just like one did in 1930 through 1932.

As a note: Most Depressions throughout history led to massive wars. The Depression of the 1850s led to the Civil War. We can only hope that will not be the case this time.

The above chart is a closer look at the big picture. The "Sell" signal in our long-term PTI signal warns that there is substantial downside coming. This fits with early 2009's development where both Industrials and the S&P 500 fell decisively below their 2002 lows, confirming we are in Grand Supercycle wave {IV} down.

If Grand Supercycle wave {IV} down forms a Zig-zag pattern, it means time-wise, the Grand Supercycle wave could be short relative to other Grand Supercycle degree waves, however price-wise the decline will be dramatic, and therefore worthy of Grand Supercycle degree status. Above, we show the Zig-zag scenario. Under this scenario, a multi-month bottom occurred in March 2009, Wave (A) down. Wave (B) up is underway. This rally should consist of three waves, A-up, B-down, C-up within wave (B)-up. Wave C-up of (B) up is underway.

The bad news is, that once this wave (B) rally finishes, maybe by late 2009, a nasty decline will follow, the third leg of the Bear Market, wave (C) down.

We have found huge Head & Shoulders Top patterns in formation for the U.S. Dow Industrials, the U.S. Russell 2000 small cap index, Germany's DAX, Japan's Tokyo NIKK, and Australia's SPASX200. These patterns are not yet confirmed, but will be with declines below the horizontal necklines shown in these charts, requiring a 30 percent drop from here. Once/if those necklines have been broken, there is a high probability that the downside targets will be approached. Those downside targets are close to zero, believe it or not. This is horrific if in fact these patterns confirm.

These patterns add to the body of evidence that a catastrophic wave (C) down is coming later in 2009 into 2010. These patterns, if confirmed, mean the Zig-zag scenario will likely unfold. This tells us that catastrophic wave (C) down will have world-wide impact, and most likely be accompanied by terrifying news events. What those events would be are anyone's guess at this point.

We can only hope these patterns will not be confirmed, that we will not see prices fall 30 percent from here. But, honestly, these patterns are forming well, and there is great risk we will see 30 percent declines.

If we study the quality of the Head & Shoulders pattern shown above for the Dow Industrials, at first glance you may say it is slanted right, and the left shoulder is too wide in comparison to the right shoulder, so the pattern is lacking the prototypical formation. But, if you go to the technical analysis textbooks out there, you will actually see that a slanted formation leaning to the right, with a right shoulder that is weaker than the left is actually the more textbook perfect formation for a topping pattern. You see both patterns where the neckline is horizontal, and where it leans down and to the right. What would not be as probable is if the neckline leaned upward to the right. But that is not what is occurring here. Prices will tend to follow the declining neckline. So, in conclusion, this pattern development is ominous.MAKE SURE YOU HAVE SUFFICIENT CASH, GOLD, AND OTHER ESSENTIALS FOR THE CHAOS THAT COULD BE COMING.

There are now some studies suggesting that the total bailout of the U.S. economy may exceed $20 trillion. That is about one and a half times one year's GDP. Criticism of the recent Central Planner Bailout programs is that they are failing to trickle money down to households, as spending plans are being effectuated too slowly, and fall short of meeting the average household's needs. Seriously, does anyone see much in the way of infrastructure spending going on? Is there any resultant non-government job growth from the Central Planners' bailout plans? The major problem with the Central Planners' stimulus programs is they simply have replaced bad assets in a handful of large corporations with cash from the Fed or Treasury. This is essentially keeping large institutions alive, but not getting money into the hands of small businesses or consumers. A $13 trillion tax rebate program would instantly revive this economy, a refund of three years income taxes to every household, with a minimum payment of $50,000. Half the rebate should be required to pay back debt, which would clean up credit markets, and restore capital levels, asset quality, and liquidity of lenders. It is a no brainer, but political agendas and power grabs will dismiss this common sense solution.

If the Central Planners exercise a massive income tax rebate to all households soon, we believe that the catastrophic market decline the charts included herein portend could be avoided, and a best case scenario sideways Triangle for the Grand Supercycle {IV} Bear Market would be more likely. If they do not, the probability of a catastrophic wave (C) down event is higher than anyone should be comfortable with.

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Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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