Prelude to a 21st Century Depression?

There are some learned people in the field of market analysis who believe that we are about to enter what could be described as one of the worst financial depressions in history. I believe we could be just about to experience a stock market correction' that could be worse than the 'crash' of 1929, which led to the depression in the 1930's. Whether you believe them or not, analysts such as Robert Prechter Jnr. (President of Elliott Wave International, please see http://www.elliottwave.com/info/ to learn more) has an impressive track record of getting his predictions right when it comes to major stock market events. As a subscriber to his newsletters and theories I have to say that the evidence for an impending and devastating crash is compelling. The similarities prevalent just prior to the 1930's crash (and others) are striking.

Reasons (not) to be cheerful part 1:

Stock markets across the board are looking very bearish indeed. Apparently this crash will not be localised to any particular Country, but will be both Universal and Global in scope. Moreover, the extent of the drop will be so severe that the consequences can scarcely be imagined by the uninformed masses. Soaring unemployment, bankruptcies, home repossessions, and business failures and significant numbers of corporations both large and small going bust are just some of the forthcoming attractions of the impending deflationary depression.

Robert Prechter is author of numerous books on the subject of Elliott Wave Theory including The Elliott Wave Principle in 1978 and has been anticipating this event ever since. He reckons that when we hit the bottom of the current bear market the IMF, The World Bank and the United Nations will be forced to shut down. If this all sounds a little 'extreme', then that is because it is simply the result of what the evidence suggests.

Fig1. Dow Jones - Head & Shoulders Formation

Reasons (not) to be cheerful part 2:

1. Technical (A)

There is a massive 'Head & Shoulders' Top Formation on the Dow Jones (see fig.1 - Monthly chart) which is almost complete. We have just come off the top of the right shoulder. This was the recent 'Flash Crash' on May 6th. If (or more likely, when') the neckline is penetrated then the drop will be substantial from there. We are currently above 10,000 at the time of writing.  (Update: correction, yesterday – Friday June 4th – we witnessed one of the most intense selling days ever with the Dow Jones ending 320+ points lower at 9931).  The medium to long term implications of this are profound.

2. Economic (Eurozone) – Sovereign Debt Crisis

The UK Centre for Economics and Business Research says Greece should exit the Euro.  On Friday 28th May, Fitch downgraded Spain to a AA+ credit rating from AAA. It could therefore only be a matter of time before Portugal, Italy, and possibly even France follow suit.  Francois Baroin (French Budget Minister) already stated that France 'should not take its AAA ating for granted'. We've also just heard some disturbing news coming out of Hungary. Don't be under any illusion that the UK and the US are immune from the Sovereign Debt problem.

3. Banking Crisis

This is not over by a long shot. In fact the situation with the banks is only going to get much worse. Unbelievably, the Banks don't seem to have learned the lessons that almost brought the financial system down in 2008. Amazingly, they are still being allowed to carry on as usual. The banks are caught in a 'catch 22' scenario whereby the governments are trying to put pressure on them to lend more to businesses and house buyers to kick-start the economy. But this is precisely what got them into trouble in the first place. However, this time the Governments will not be in a position to bail them out. Governments are in way too much debt already. For example, the scale of existing US debt is so enormous that they will ikely never be able to repay it. Some facts and figures:

This basically amounts to $42,160 worth of net debt for every single US citizen.

Countries Total Public debt**

(i.e. The Cumulative Total of all government borrowings less repayments that are denominated in a country's home currency) :
   

Japan:	200.4%
Greece:	122.6%
Italy:	119.2%
Germany:	79.7%
Portugal:	79.2%
UK:	77.5%
USA:	59.8%
Spain:	55.02%
Saudi Arabia:	20.8%
China:	19.0%
(**source: C.I.A, Eurostat, World Bank, US Treasury)

4. Technical (B) – Volatility is 'off the chart'

At the moment, we are seeing frightening volatility levels in the markets which are extreme, and far from the norm in a healthy market. For example, in the Dow Jones (1st June) there were massive swings of over 200 points in each direction, and Friday 4th June 300+ points down. Of course this is great for a day traders, but it is certainly not normal. This level of volatility is a classic symptom of a market in trouble and was evident just prior to previous stock market crashes. We've seen the same thing in the FTSE and S&P 500. These markets are gearing up for something very big.
 

5. Technical (C) - Elliott Wave Theory

(Ralph Nelson Elliott 1871 - 1948)

Robert Prechter could be considered as one of the World's foremost experts on Elliott Wave theory. By using this principle, Bob has successfully predicted the major stock market moves of recent times including the bottom in 2009, and it's subsequent rally. Bob is now calling for the top formation we are now witnessing. Even if you put to one side the news in the economy, the banking crisis and other factors which many analysts believe affect the markets, Elliot Wave theory eflects changes in the social mood of nations. Something that Bob Prechter describes as 'socionomics'. It is Elliot Wave theory which currently suggests that we are experiencing the beginning of a major bear market decline which will last for years.

These are just a few of the reasons that give weight to an imminent depression I've outlined above, and there are many more indicators all lined up and pointing in the same direction. Whatever happens it is time for people to be, at the very least cautious, about the assets they own in which they are investing. If you don't have any assets, at least be aware of what could be about to happen. I for one will not be touching shares with a barge pole for a very long time to come, if ever.