Most investors make money in a bull market, only to lose all profits
made–and sometimes more, in the readjustment that inevitably follows.

–The New York Times, September 22, 1929

I’m writing this piece as the Dow Jones Industrial Average appears to be close to completing a small degree correction (wave 2), after falling in bear market wave 1 some 2,000 points from its high of 29,951 reached October  3, 11 trading days ago. When this corrective wave is complete, wave 3 down gets underway, and it should be larger and more violent that wave 1.

This morning a friend said, “I know you’re not surprised by the drop, but the market’s gonna go up.” His opinion is in line with everyone else’s.

Here’s the chart of the Dow in 1929:

The first drop took place between mid October and the first week in November. The Dow fell from its high of 386.40, to 193.20, exactly 50% in about 3 weeks. From there, the market rallied into a recovery high of 303.90 reached in April 1930. From then, the Dow fell 89% to  a low of 41 in May 1932.

Will this happen again? We should be prepared for it. Why? Because this is what the analysts at Elliott Wave International have as the most likely market outlook dead ahead. In forecasting, it is generally agreed that anything can happen, but I would be loathe to dismiss this one.

A few months ago I posted an essay on Facebook. I won’t do that again because it will be no help to anyone who has not been thinking about this for a while. Unless someone has prepared for a crash, they will want to know what is going to make it happen, and it’s too late for that. Either you’re prepared, or you cannot believe anything I say about it. It just doesn’t make sense to the crowd and the crowd’s advisors.

I am prepared for the Dow Industrials to crash to 13,000 or below by election day.



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On The Mindset Problem

It has never been my objective in these essays to call the top of a bull market. It matters not if I managed that if I didn’t have the proper frame of mind to take action well before the turn actually happens. The hardest, most mentally debilitating period lies ahead for the vast majority of investors. This little break will not disturb them. In fact, If we go up a few hundred Dow points over the next few sessions, they will relax, “knowing” that the drop was a normal “healthy” setback.

Then comes a bigger drop, one that takes the Dow down below 20,000. They will have a bit of discomfort, but their advisor will make them feel better by trotting out reasons why they should be at ease.

At about Dow 17,000 the average investor will despair. Now she begins to think about maybe selling some “when it goes back up.” It never does. Bear markets do not let investors who stayed to the end off the hook.

I’ve been making the case, based on extensive evidence to be found in The Socionomic Theory of Finance, that this top is a Grand Supercycle top that will not bottom before it sees the Dow Jones Industrial Average decline to below 3,000-about 90% lower than it is today. Most investors, totally unprepared for this, will not get out until well below 13,000, if at all.

There is no place to hide in the circumstance. All categories of assets, including real estate, commodities, stocks and bonds will be totally obliterated.

And then there’s the matter of investment income. “That’s my retirement income,” he tells me. Is now, but won’t be if we have begun a Grand Supercycle Bear Market. Stocks will crash, and then there will be a depression which makes it impossible for companies to pay dividends. By the time the dividends are no longer there the stocks will hardly be worth selling.

And bonds? Don’t get me started. On his deathbed, the Baron Von Rothschild is famously held to have said to his survivors, “Never buy bad bonds in a good market!” And, while the story is probably apocryphal, it is absolutely on target. Almost all bonds issued by anyone other than the U.S. Government will ultimately default in a depression that will come at a time when the global financial system, by any measure, is more leveraged that ever in history.

I will never tell anyone what they should to do. I will tell you what we do: we hold one and two year Treasury Notes. We do not care that the interest rate is low. Rates are going to go up significantly in the crunch, because lenders will demand ever higher rates to compensate them for default risk.

My heart goes out to anyone heavily invested in anything other that very short maturity T Notes and T Bills. Push comes to shove, and they might not be the best place to be, but it’s the best I can do for us. We will roll these forward until a bottom good enough to reinvest comes. The analysts at Elliott Wave International have been estimating that it should be here about 2021-22.

Good luck!


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An Extraordinary Moment Dead Ahead

Everything unwilling to change, will die
Everything that changes, dies only a little

—Ray McManus, Red Dirt Jesus

I’m not gonna lie, I don’t know if the DJI topped today, or has another 300-500 points rally left before making its final top. What I do know is that the season is ripe for investors to pay a large price for their misplaced confidence in the stock market. Robert Prechter, who is not given to hyperbole, Wrote this for an opening sentence on yesterday’s issue of The Elliott Wave Theorist: Breathtakingly precarious conditions in the financial markets have prompted me to publish earlier than usual this month. To understand how historically risky things are, we will examine the positions of four major financial market sectors: commodities, bonds, real estate and stocks, and how they relate to each other. If Prechter and his team of socionomists’ analysis is on target, the next 3-4 years will be brutal in the economy, and in all markets.

The Dow Jones Industrial Average made a new high today. It is the last of the major averages to do so. In this respect, it follows the pattern of the 1929 top. Frederick Lewis Allen wrote, “At the end, it was the generals marching by themselves, the troops having abandoned the front long since.” The Elliott Wave pattern allows for some more rally, but it is not necessary. The breadth of the market has been extremely narrow most of this year. Two stocks, Amazon and Apple have accounted for 32% of the advance in the S&P 500 since March. It’s a very unhealthy market, and quite typical of the condition that precedes a crash.

Stock market valuations have never been higher. Nor has optimism, nor have bullish predictions been more extreme (Dow 100,000, is one of them). What shakes me up the most is the popularity of high yield (junk) bonds. Demand for them is so insatiable that they’ve been bid up to the point where there is little difference in yield between junk bonds and U.S. Treasury bonds. This situation is the best predictor of an economic depression that I know of.

Mike Tyson said everyone has a plan until they get punched in the mouth. Fully invested stock investors won’t believe it, but they’re about to get sucker punched. October is not a good month for stocks, generally, and overvalued markets have a history of crashing in  October-November. I wish my readers good luck and safety in the period ahead.



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My View, August 7, 2018

He: There is no reason the market has to do what you say.
Me: What is the reason for there to be no reason?
The conversation ended there.

The history of the market is the history of forgetting. Thucydides’ comment in his introduction to The Peloponnesian Wars (circa 401 B.C.E) was, “I hope these words will be judged useful to those who want to understand clearly the events that happened in the past and which, human nature being what it is, will at some time or other and in much the same ways, be repeated in the future. That is my reason. Over the past hundred years, a series of empiricists, including Robert Rhea, Ralph Elliott, A. J. Frost and Robert Prechter have observed that the stock market reflects the recurring boom/bust nature of human economic behavior in a discernible pattern of advances and setbacks. Now, the prospect of the largest setback in our lifetime is upon us.

From my Elliott Wave Principle studies, I conclude that on January 26th of his year, the Dow Jones Industrial Average completed the five wave pattern of a Supercycle bull market. I expect that a bear market of similar degree is now underway, a situation that is not recognized by the investment community at large.

It has been ninety years since the previous top of this magnitude. No investor alive has any recollection of the excruciating pain that followed, let alone any concern that such an event might happen today. Quite to the contrary, as is typical at major market tops, the prevailing investor sentiment today is complacency, which Merriam Webster defines as a sense of “self satisfaction especially when accompanied by unawareness of actual dangers or deficiencies.” We may hear lots of grousing about current events, but what matters to a serious market analyst is what people do with their money, and the great majority of individual and institutional investors remain fully invested with their percentage allocation to stocks the highest on record. Second highest, by the way, is to junk bonds, the riskiest of all investments to have in a severe downturn. They fall to zero.

In my April 7 essay, I said:

as I messaged to my distribution list last week, the abrupt reversal on April 2 presents a second scenario. Instead of a sharp correction preceding the next impulse wave down, there may be another partial retracement, carrying the Dow back up around 26,000 or so before beginning the next impulse wave down. This won’t happen if the Dow breaks below 23,300 soon. Either way, the next wave of selling will be a killer wave, dropping six or seven thousand points.

The chart I displayed showed the alternate path:

This is the current chart:

If my analysis is correct, a Wave 2 “Flat” correction should be complete with a final push up slightly above the A Wave high of 25,800.

The First corrective wave in a new bear market can retrace a good percentage of the Wave 1 down, reflecting the still very strong bullish investor sentiment. And bullish it is! More bullish than at the all time top, by some measures. This, too is typical.

The most recent advance in the correction, from May to the present, has occurred on steadily declining breadth and volume. These are characteristic features of corrective waves. In short, the stage is set for a horrific crash that, with intervening sharp rallies that stop at lower highs and then continue relentlessly to ultimately erase 80-90% of the values of the U.S. stock market. Further, in case you haven’t noticed, virtually all of the other markets in the world have already entered bear phases.

Realistic market forecasting must be done probabilistically. I have high confidence in this call, but if the market were to make new highs, I’d certainly reassess my position and post a new forecast.

We hold short term government notes and T Bills in our investment portfolios, and will until I see a solid bottom. As always, I make no recommendations about what you should do.





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What Corporate Insiders Are Doing (Again!)

You should be very angry if you own any stocks. Insiders, namely senior executives at major corporations are again doing what they have historically done at important tops: using corporate cash and borrowings to do stock buybacks for their companies at high prices, ostensibly to increase per share earnings by reducing the number of shares outstanding, while bailing out of their own personal holdings at record rates. Take a look at these charts:

As we see, buybacks at high prices are at record rates this year. Last time they did this was in 2007, just before the market fell apart.. Now look at what these guys are doing with their own holdings:

The red line is for Insider selling. They were big sellers in 2000, again in ’07, and again now.

Whatever you may think of the character of corporate executives using company cash to buy expensive stock, while getting out of their own stock, you have to admit their record of self-servingly selling at tops and buying at bottoms is impeccable. I think it’s scurrilous. It does the shareholder no good at all to have their companies loaded up with debt to buy stock at top dollar.

The notion that the company is reducing its share float is a damn lie. Said shares become treasury stock, which then can be issued to these sociopathic execs at a later date as stock options.

But then, it’s not illegal. Small comfort, right?


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Bear Market Resuming?

Based on my Elliott Wave Count, together with data on investor sentiment and momentum, I’m giving an eighty percent probability that the upward corrective action in stocks since the January 9th low is about over. If so, the next wave down should be severe, taking the Dow Jones Industrial Average down below 18,000 (presently 24,700 or so) to the next pause to consolidate the losses. I am looking at this pattern as a bear market of Grand Supercycle degree of trend. The ultimate low should be below 3,000, several years out.

I get arguments counter to my analysis from two sources: The financial advisory industry, and friends who are successful businessmen and professionals outside of the investment industry.

Banks, brokers and financial advisors are of one mind: citing the present strength in the global economy, they tell us the next biggest move in stocks will be up. I counter that with the historical truth: at major turning points everything looks great, and it is the market, not the economy that changes direction first.

Friends and acquaintances in non financial businesses are generally dismissive, if not outraged when they hear my view. “No, that’s not going to happen, Rod. We’ll have some adjustments, maybe, but nothing like you imagine.”

I don’t ask what form of analysis they use to come to their conclusion. I don’t think there is one. They just don’t “feel” like my forecast can be logical.

So, what about the 20% probability that I’m wrong? Well, there is an outside chance that the selloff since January 26th is just another correction in an ongoing bull market, and we will have another leg up. But getting to that conclusion puts all kinds of torturous requirements on the wave count. I’d really rather say I’m 100% certain a crash is coming in a few market hours. But that’s not a good way to think.

If I owned any stocks (I don’t), I’d use the February 9 low of 23,360 in the DJIA as my stop point, and liquidate everything I owned if it got below.

As long time readers know, I write these essays to help me frame reality for myself and to give my family and friends something to think about. I do not make recommendations. What you do with this information is your business.



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Wobbly Life At An Historic Top In The Stock Market

Not my favorite subject today, I’m not gonna lie to you. On January 26, 2018 the American stock market made the final top in the Grand Supercycle bull market that began in 1784. The previous top of similar degree occurred in 1720. England was the hegemon of that era, and her financial, political and social underpinnings failed her, resulting in a 100% collapse in the financial markets, and the failure of the Bank of England, in a bear market that crashed into 1722, resulting in a depression that persisted for sixty years until a second bull market emerged. That was the one that just topped.

America is the current nominal hegemon, and it doesn’t take much imagination or historical currency to see similarities with England at the inception of the eighteenth century. We might speculate on our nation’s future, given that the bear market just started will doubtless result in the severest imaginable stress on our institutions. Will America retain its position as the most powerful nation in the world? I’ll leave that one for others to noodle over. Right now, I want to state what my studies of Elliott Wave Principle and the analysis of the professionals at Elliott Wave International have as a probabilistic forecast for the next few years.

It’s a barn burner. When I pose it to my former colleagues, they want to take me out in the parking lot and shoot me. Not just because it is in their business interest for my views to be wrong, but because they sincerely believe that the stock market is in the path of, as a money manager just put it to a friend of mine, “A hundred year POSITIVE storm for stocks.” Why am I not surprised? As long as I’ve been in the market, they love ’em at the top, and hate ’em when they’re no good (when they should be buying them).

Here’s the chart of the current situation:

The first impulse wave in the new bear market, labeled 1, bottomed on February 9. Since then, the market has been in a corrective wave. Presently, we are labeling the February 27 top as top of wave two. But, as I messaged to my distribution list last week, the abrupt reversal on April 2 presents a second scenario. Instead of a sharp correction preceding the next impulse wave down, there may be another partial retracement, carrying the Dow back up around 26,000 or so before beginning the next impulse wave down. This won’t happen if the Dow breaks below 23,300 soon. Either way, the next wave of selling will be a killer wave, dropping six or seven thousand points.

And that’s just the beginning. After a more extended period of consolidation, a steady, persistent decline should take the market into a low below 3,000, which looks right now to occur in about 2021, give or take  year.

If you haven’t been exposed to the Wave Principal, you will naturally want to know what is going to make this collapse happen. The short answer is that the market’s ebb and flow reflect the natural rhythm of human social life, so the reasons are endogenous, not exogenous. In fact, the crash in the market will be accompanied by a range of other social calamities. They are all interconnected. In another essay, I’ll present The Socionomic Theory of Finance, in which the arguments are defended.

For now, I want it known that I don’t make recommendations. What you do with this information is your business. As I said, this is a forecast based on probability. My own presentiment is that the odds are high enough that Cindy and I will hold 100% cash equivalents (T Bills and short term T Notes) in investment accounts until a good bottom comes along.



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Two Views On What’s Next

On January 26 I posted an essay in which I said:

“…the market is in the process of coming to a catastrophic end.” (Newer readers can view the entire essay by scrolling down past this one.)

Shortly after reading my post, a reader emailed me to tell me that a money manager who manages endowment funds disagreed–strongly. The market, he said, was poised for a major rise, due to present conditions, which he described as a “Hundred year perfect POSITIVE storm for equities.”

On January 29th the market began a crash that caused the Dow Jones Industrial Average to fall 2,500 points.

The question is, whose gonna be right?

My assessment of the market is that the crash was the first impulse wave of a new bear market. The present reaction, therefore, is a wave 2 corrective wave. Corrective waves can retrace up to 100%  of the first wave down, but not exceed the high. This sometimes happens in slow rolling tops, but I do not believe this is one of those. Should this retracement make a new high, it would mean there is more to go on the bull market. I regard this as a low probability.

Here is how I see it now:

If my interpretation is right, the wave 2 retracement should stop around 25,600, give or take a hundred points. After that, wave three down would get underway and be violent again, crashing 5,000 points or more before the next pause. After that, much, much more decline would be coming. The source of this expectation is the Socionomic Theory of Finance, of which the Elliott Wave Principle is the foundational study. The decline will ultimately be a Grand Supercycle Bear Market. It will be an order of magnitude greater that the Bear market of 1929-1932, which was a Supercycle Bear Market.

On the other side of the argument are investment advisors, most of whom have the same view as the endowment fund manager. Investors Intelligence recorded only 12.6% bears (negative expectations) this month, the fewest bears in nearly 32 years.. The Daily Sentiment Index, an indicator of trader sentiment, hit 90.4% bulls in January, also the highest in the history of this index. According to an E-Trade survey of “experienced investors” in January, 80% of them believed the market would continue to rise. Banks and brokers are 100% bullish. The February investment report from my old firm was titled “Down, but not out.”

Individual investors have the heaviest portfolio allocation to stocks ever, and mutual funds the lowest allocation to cash. The sentiment of all participant sectors in the markets is at bullish extremes not seen in years. These lopsidedly bullish numbers are entirely consistent with major tops.

My allocation is 100% cash. It should not take long to find out who’s got it right.






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The Bull Market of 1932-2018

This wont take long: stock owners should be aware that the U.S. stock market is now in  the process of coming to a catastrophic end. Rising hundreds of points day after day turns an investment arena into a gambling den with no regard for sanity or value. A couple of weeks ago, the extent of the radical part of the advance, known as a “throw over,” looked similar to the final run up into the 1929 top, which reversed violently, cutting the market in half in days and, after a countertrend rally into early 1930, collapsed, ending in an 89% loss in the value of the Dow Jones Industrial Average.

Now, the shape of this run up is starting to look like the South Sea Bubble in the early 1700s. I will not be surprised if the market shoots up another two thousand points in just a few days. There is a valid Elliott Wave projection of 28,272 in Dow Jones Average. This is probabilistic, of course, not necessarily a firm target.

At this point, based on my studies, I allow for an acceleration in the rise, but fully expect that the top will be sudden and the reversal to be extremely violent. I do not think the reversal is very far out in time.

Who will be affected? Everyone who has stocks in retirement accounts or who will be depending on state and city government employee pension plans first. Later, businesses, professional practices, real estate investors and, well, everyone you know.

It is definitely a time to head into the bunkers. I believe that cash is the only thing to hold in investment accounts at a time like this.


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Bitcoin For Dummies

What is Bitcoin? Trying to read Wikipedia’s entry for Bitcoin will put you in a permanent state of confusion. Here’s the elevator answer to the question:

Bitcoin is a digital asset, that is, its existence is in the form of digital code. There is no physical specie. It is designed as an alternative for government issue money, serving as a unit of account, a medium of exchange, and a store of value.

Acquiring the stuff is complicated, but not impossible. Wikipedia estimates that there are over 5 million users/owners of Bitcoin, and several hundred thousand users of other cryptocurrencies (the generic term for the instrument). But the interest in these things  is  growing so rapidly that any number applied to owners  is going to be dated as soon  as it is cited.

How well does Bitcoin work as money? As a unit of account, perfectly. One Bitcoin has one million bits. As a medium of exchange? Over 100,000 businesses accept Bitcoins for goods and services. You can pay for pizza with Bitcoins at Papa John’s. As a store of value? Ah, there’s the rub.

The potential for Bitcoin to be a store of value lies in its scarcity. Only 21 million Bitcoins will ever be issued, so, as long as there is interest in owning cryptocurrencies, an owner can be assured that the coins will not be debased by more printing. However, whether it works for you depends on what you pay for it, and what it is worth when you want to sell it or use it to pay for something.

If you stick three thousand dollars in a bank account, intending to use it to pay for the rent on a vacation condo this summer, you don’t doubt that, come July, you’ll have three grand to give the B2B owner. But if you are holding Bitcoins for the purpose, you have no earthly idea how many  you’ll have to fork over for the transaction. Take a look at the history of price changes, expressed in dollars in this chart:

Pretty wild, wouldn’t you say? Here’s Wikipedia’s brief history:

The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts.[137][138] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[139] In the latter half of 2012 and during the 2012–13 Cypriot financial crisis, the bitcoin price began to rise,[140] reaching a high of US$266 on 10 April 2013, before crashing to around US$50.[141] On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242.[142] In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was under US$600.[143]

Since Wiki’s post (last August), the price has run up to $20,000 and back down to $10,000.

Bitcoin no longer serves as a storage of value. So why own it? These days, mainly to keep asset ownership and transactions totally private, out of the view of government. It is said that the deep drug industry owns tons of cryptocurrencies.

Most of the interest today is from folks who want to get rich buying and selling the stuff. Speculative interest is exploding, and the financial industry is making it easy–you don’t even have to buy Bitcoins, you can trade futures in them, Lovely.

Because of the volatility, it truly is an excellent trading vehicle for a competent trader. Not many of those around, but there is no dearth of wannabes. Good luck, if that’s you. Buy low, sell high–that’s the idea, anyway.



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