This week was a harbinger for the near future. The financial crisis and riots in Greece are just the canary in the coal mine for the impending global credit panic and ensuing anarchy that will make 2008 seem like a picnic. Just as the collapse of New Century financial and two Bear Stearns hedge funds was the harbinger of the subprime crisis (totally ignored by Wall Street and the media) so too, Greece is advance warning of this next much deadlier stage of the unrelenting credit crisis. It will likely only take one sovereign default to trigger an avalanche of defaults among all countries that have borrowed heavily and rely on accommodating credit markets to rollover their debt e.g. Spain, Portugal, Italy, Ireland, UK, Japan and a host of Eastern European countries.
The Elliot Waves now show that we are at the forefront of the biggest market decline in U.S. history, aka "Primary 3" (P3). Primary 1 was the market decline that started in 2007 and ended in March 2009 wiping out over 55% of market value. Primary 2 was this past year's countertrend rally. P3 will reassert the downtrend and take the markets far below the P1 low, potentially erasing the past 40 years of stock market gains, according to EWI. Before you dismiss these folks and Elliot Wave Theory itself out of hand as "financial astrology", bear in mind that while their timing was early, they called for a major top in 2007, they precisely called the low in 2009 (to the week), and now have been early (as have I) for calling a top here in 2010. If they are right now again, then that would prove the overwhelming majority of financial forecasters to be drastically wrong once again, and the early timing of the call will be rendered wholly irrelevant by the sheer magnitude of the decline.
Initially here the markets *may* stair-step their way down, as investors continue to "buy the dip", however, the inevitable flight from risky assets will likely cause a cascading panic crash. Yesterday was a small taste of just such a crash, as the market lost ~7% in about 10 minutes and then quickly recovered. We were told that this was a "trading glitch", except there is still no proof of any erroneous trade. The fact is there was no glitch, the mini-crash was simply a function of sellers overwhelming buyers. It was a one-sided market to the downside, which is exactly what we should expect after a year long Fed sponsored liquidity-driven rally intended to prop up Wall Street and propagate the illusion of recovery. Computer trading programs further contributed the problem as up to 70% of market trading volume is now controlled by automated trading programs. Many of these programs use technical (price) indicators to determine the current direction of the market and then drive momentum in the direction of the prevailing trend. Now that the trend has turned down, these programs are clearly exacerbating downside momentum.
Contributing to the inevitable panic will be the realization that the Fed and Governments are powerless to do anything, since they already squandered their resources in 2008 bailing out the investor/speculator class at the expense of the Middle Class. This time there will be no bailouts, not only because they will be politically unobtainable, but also because the scale of the market collapse will dwarf government/Fed resources.
As expected, U.S. Government Treasuries were a safe haven and long-dated Treasuries massively outperformed even beyond my expectations. Already Nassim Taleb's "no brainer" strategy of shorting Treasuries has turned out instead to be a "no brain" strategy. I can't imagine recommending shorting an asset that has proven to be a safe haven throughout the past weeks' turmoil. That is a boneheaded move, even by Ph.D standards. Yes, Gold held up well also, but as I have explained before, I don't see gold being a liquid safe haven during extreme deflation, as the amount of dollars in circulation will collapse, causing the prices of all things dollar denominated to fall. Further to the point, the U.S. dollar screamed higher against all other major currencies (except JPY), which caused further turmoil in the markets, as Wall Street's hot money (hedge funds etc.) are still clearly positioned for the "reflation" trade (short dollar, long commodities, cyclicals, emerging markets).
In short, if you have not already stocked up on food and ammunition, now would be a good time to do so, post haste.
