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The Jaws of Death

Wednesday October 30, 2013 14:30

I will be interviewing Dr. Robert McHugh on my radio show (in the not too distant future) about his new book titled, The Coming Economic Ice Age. I began reading his book recently and it looked totally familiar with what Richard Russell wrote in his daily letter on September 30. Here is what Richard  Russell had to say, relative to this formation:

“The formation consists of five waves, three up, and two corrective waves to the downside.

“The broadening formation is indicative of a market in turmoil, with sentiment swinging wildly from one way to the other. Incredibly, the broadening formation has appeared in every major bear market since 1929. It appeared prior to WWII in 1929. It appeared in 1957 and 1965-66. We saw a broadening top in 1987 and again in 1998-2000. The most recent broadening formation we saw was in 2004 to 2008.

“I have long speculated about the sentiment basis of broadening formations. Each broadening formation is made up of three rising waves and two corrective waves. As far as sentiment is concerned, I believe broadening formations are the result of wildly swinging reversals in sentiment from bearish to bullish -- and then bearish, and finally a huge swing back to extreme bullishness. This final wave of optimism is the market's kiss of death, since this final rising wave takes stocks far above known values.

“The current broadening formation is unique in that it is, by far, the largest broadening formation that I have ever seen. Note that wave D to E has not yet touched the upper trendline. Frankly, I don't know whether it is necessary for the Dow to make contact with the upper trendline in order to complete the formation.

“If the Dow is to touch the upper trendline of the formation, the Dow will have to advance to at least 16,000, which would be an all-time high. An interesting thesis here is that earnings alone are not the reason for the Dow advancing. What is driving this market higher is an increase in price/earnings. In other words, earnings have not been rising, but what has been boosting the market is investors' sentiment. Investors have been increasingly bullish on the market, and therefore, they have been willing to pay more and more for the same amount of earnings.

“I've written about this before. The major swings in stock prices are often a result of drastic changes in the price/earnings ratio. Investors become too bullish or too bearish about stocks. When they become too bullish, this thrusts stocks into the dangerously overvalued zone. The opposite is true when investors become too bearish. Charles Dow wrote that unless there was some special reason, stocks were overvalued when dividends sank below 3.5%.

“Back to the broadening formation: in past cases, the bear market associated with a broadening formation carried to the lower trend line of the formation.

“So let's consider that the current broadening formation follows the typical pattern. In that case, we might expect the Dow to top out anywhere from its current position to a level around 16,000 or even a bit higher. Assuming that a major bear market will begin from wherever the Dow tops out, we can assume that the Dow will decline to at least the right end of the lower trend line of the broadening formation. If that holds true, then we can expect the bear market will take the Dow down to at least 5,000. That would represent a horrendous loss, although not nearly as bad as the 1929 to 1932 bear market.

“I've searched my mind to try to understand what a bear market to Dow 5,000 might mean. In the first place, I think such a bear market could involve a new monetary system. I also think a huge bear market would see the balance of international power shift from the US to China.” - Richard Russell

I hope to talk more about this topic following my interview with Dr. McHugh in the near future. But with this kind of projected decline in stocks, combined with a global economy that in fact remains in a depression, it is not difficult for me to perceive a deflationary environment.

Deflation, when so much money has been created? Well, I have talked about that numerous times in the past. Recently, David Stockman opined that we are heading for a significant deflation. Another deflation propo­nent that I interviewed for my future October 22, 2013 radio show (http://www.voiceamerica.com/Show/1501) also thinks we are heading for a major deflationary environment that will be followed by hyperinflation. I’m talking about Michael Maloney of goldsilver.com, who I think is one of the most insightful Austrian school observers. Of course, we have talked to Ian Gordon on my radio show as well as in my newsletter.

Then there is the king of deflation, namely, Robert Prechter. The October 2013 issue of the Elliott Wave Financial Forecast just came out this week and here is a summary of what this letter is predicting:

“The Dow Jones Industrial Average managed to eke out a new high in mid-September by less than ½%. The rally was narrow in many respects and just a week and a half later the index was trading below its May close. The market’s structure allows for another high short term, but a decline through 14,000 would indicate that a bear market of historic significance is underway. The long-term trend in U.S. Treasury rates is higher, but a near-term correction is unfolding. After it runs its course, interest rates should rise to new highs. Gold and silver remain in down trends and that should result in new lows. The U.S. dollar should be particularly strong, relative to the Japanese yen, but it should also trade higher relative to a basket of most major world currencies.”


Unlike most other gold bugs, who hold a grudge against Robert Prechter’s bearish views on gold, I have no problem with what he has to say, because even Prechter believes gold will rise, relative to virtu­ally everything but the dollar. And that is very good news for the real price of gold and the gold mining industry. The chart on your left shows how the “real” price of gold rose, relative to the Rogers Raw Materials Fund following the Lehman Brothers deflationary event. With that, the major gold mining firms saw their profits rise dramatically. This is consistent with history. My conclusion is that our shares will do very, very well if the deflationists turn out to be right. With hyperinflation, it may be very difficult to find gold mining firms that do well. However, in a hyperinflationary environment, gold and silver bullion will be the best assets to hold. We want to own both of those metals, especially if the hyperinflation view turns out to be correct.

To receive free weekly samples of J. Taylor’s Gold & Technology Stocks, as well as other publications such as Resource Opportunities and Hard Rock Analyst Journal, please visit: http://www.newsstandexpress.com/s/Home.asp

By Jay Taylor


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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