"You say good-bye, and I say hello," sang The Beatles on their Magical Mystery Tour album from 1967. Anyone who grew up in the '60s and '70s can remember all the lyrics to Hello Goodbye. Here's our brief list of what we're saying good-bye to from the watershed year of 2008, as well as what we're saying hello to in 2009.

 

 

-          conspicuous consumption

-          gas guzzlers

-          TV reality shows (well, we can dream, can't we?)

-          nasty, divisive election campaigning (hurray!)

-          the surge in Iraq

-          hedge fund hegemony

 

 

-          the new austerity, where you actually wait to buy something until you have the money

-          nasty, divisive election promise-breaking (boo!)

-          the surge in Afghanistan

-          hedge fund horror stories

 

 

-         clearing brush and riding mountain bikes as presidential fitness pursuits

-         a fat Sunday newspaper filled with ads

-         believing that the geniuses on Wall Street knew what they were doing

-         investment banks (They are all commercial banks now with more oversight.)

-         feeling rich and using your house as an ATM to draw out cash

-         junk mail that used to fill your mailbox, now that credit card companies are no longer trying to hand out credit

-         complacency about the future – whether it be retirement years or the survival of the U.S. economy

 

 

-          basketball in the White House – swoosh!

-          a struggling newspaper industry thinning its ranks

-          prosecuting Wall St. swindlers like Bernie Madoff

-          going to the credit union to refinance your house at a lower mortgage rate

-          feeling poor now that investments, 401(k)s and houses have lost 20%-50% of their value

-          new taxes being imposed by state legislatures

-          more spam in your email inbox offering get-rich-at-home schemes

-          fear about what the future holds and whether financial markets will recover

 

So, now that we've said hello to 2009 and good-bye to 2008, let's take a look at what Bob Prechter predicted back in 2003 for the year we're about to enter and beyond. Of the more than 100 forecasts Bob made, based on his reading of the Wave Principle and how it plays out in social mood, I have picked three per category to list. (To get the whole list, please check these stories: What the Bear Market Has in Store Part 1, Part 2, Part 3.)

 

Finance
- Stock markets around the world will continue to fall. Ultimately, the averages will drop more than 90 percent.
- Real estate values will fall more than they did in the 1930s and 1940s.
- Bearish speculators will make a lot of money, and safety-minded investors will see their purchasing power rise.

 

The Economy
- The trend toward economic contraction that began in 2001 will continue to develop into a depression.
- A record number of manufacturing companies in the U.S. will fail [1/2/09 update: Manufacturing falls to 28-year-low, in Institute for Supply Management's industrial production index.]

- China will have a severe economic setback along with the rest of the world, but it will be a “wave 2,” from which the country will emerge as the economic leader of the world.

 

Politics
- Government will ration goods and services in which it is or becomes involved (such as gasoline, vaccines, medical care, electricity, water, food, etc.).
- Third parties will gain political clout and win local elections. Libertarians, greens and others will capture many local offices and probably at least one state government.
- At least one of the two major parties will disappear or re-form.

 

Other Social Trends
- The suicide rate will go up.
- Well-off people will adopt fashions that conceal rather than accentuate their wealth.
- The Olympic Games will be cancelled at least once, if not terminated altogether.

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See the future for yourself with the Elliott Wave Financial Forecast. Every Monday, Wednesday and Friday, you will scan the same charts that our Short Term Update analyst, Steve Hochberg, uses to provide his short-term forecasts. Mid-month, you will receive insights about the financial markets and the economy from Bob Prechter himself in the Elliott Wave Theorist. Then, at the end of the month, you will get the latest mid-term outlook of all the major financial markets, the economy and cultural trends from Steve Hochberg and Pete Kendall in The Elliott Wave Financial Forecast. Read more here.

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Still speaking about the shape of the future, Bob Prechter looked ahead in his March 2008 issue of The Elliott Wave Theorist to describe how the price adjustments the financial markets are now experiencing would happen. There is no better way to understand how valuable this kind of analysis is without reading it for yourself.

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A Portent of How Coming Price Adjustments Will Occur
According to lore, the stock market is supposed to be a “discounting” mechanism, meaning that it anticipates future events and moves ahead of them. This notion is fatally flawed, as explained briefly in The Wave Principle of Human Social Behavior (pp.331-332) and more fully in Pioneering Studies (pp. 379-384). The market does move ahead of events, but the reason is that it records the changes in social mood that motivate social actions, which manifest as events.

Lately, however, markets have failed to turn quietly and slowly ahead of events, as they usually do. The sub-prime mortgage meltdown provides a case in point. The Elliott Wave Financial Forecast described the market’s change in July 2007 from fully valuing these mortgages to considering them nearly worthless as being so swift that it was as if someone “flipped a switch.” Conquer the Crash came out in March 2002. So five years before the “switch” was flipped, someone studying the situation could see the tremendous risk in weak debt. Moreover, the housing market topped in 2005, so two years before that change, anyone attuned to the implications of the end of a record housing bubble could have made the decision to bail out of sub-prime mortgages. But the market did not budge. Optimism remained entrenched. It was not until some lone, unknown seller offered up one of these mortgages for sale in July 2007 that the market suddenly acted as if the mortgages were toxic.

We have just had another such event. Conquer the Crash covered the structural weaknesses in debt and insurance companies and expressed the utter certainty that rating services would be behind the curve. So, of all things, insurance companies that insured debt, thereby jacking up the bonds’ ratings, would have to be one of the most dangerous of all investments. Yet investors’ optimism was so persistent and blinding that they bid up shares of the two biggest debt insurers, MBIA and AMBAC, in 2003…2004…2005…2006…and even into 2007! AMBAC peaked on May 18, just shy of two years after housing prices topped nationwide. We were stunned at the complacency. Then, in a blinding fury, these two stocks fell 93 percent on average, in a matter of months.

When optimism toward a market continues unrestrained despite deteriorating conditions, the only possible resolution is a “light-switch” type of reversal. When bulls have committed capital to a market and borrowed more to keep investing, and when the rising prices fund even more borrowing to keep them going, there is simply no cushion when the trend reverses. There is no cash on the sidelines waiting to scoop up bargains; it has all gone into investments and the loans that back them. In addition, there is no contingent of bears waiting for an entry point, and there are no short positions to cover. So there is nothing to stem a free fall.

In the case of these two stocks—as with the sub-prime meltdown and to some degree the real estate reversal—the stock market abdicated its traditional role of turning quietly and sneakily ahead of events. The level of optimism associated with a Grand Supercycle top must be keeping investors so intoxicated with optimism that they hold onto that feeling until they simply cave in. There is precedent for this profile: The 1929 peak was a spike, and the 1720 peak was a spike.

Do not assume, though, that the stocks in Figure 5 [not shown] are “reacting” to events. The crashes in these two stocks are still way ahead of events and most people’s stated opinions. If you can believe it, the two major rating services are still confirming their AAA ratings of these two companies. But the market has spoken: These ratings will go the way of the dinosaur, and these companies will go under. These events have yet to happen, so once again the market is ahead of events.

I had long thought that the great bear market in stocks might be swift, because over the past 300 years the bigger the investment mania, the faster has been the ensuing collapse. The peaks of 1968 and 1835 led to deep bear markets of six and seven years, respectively. The wilder Roaring ’Twenties, capping an 87-year rise, led to a deeper bear market, yet it was faster, lasting less than three years. The even more dramatic South Sea Bubble, which peaked in 1720, led to a still deeper bear market, yet it was even faster, lasting only two years. So given that the past 10 years of topping has produced the craziest overvaluation, the largest number of bubbles and the most persistent period of market-related optimism ever, by a huge margin, I am more than ever expecting a swift resolution. It would also make sense from a political perspective: The coming deflation needs to be swift enough to out-run the actions of the Fed and Congress. If it happens fast, they won’t be able to act quickly enough to turn the credit deflation into a currency inflation before the former trend has run its course.

Take a good, long look at Figure 5 [not shown]. This might turn out to be the profile of the stock averages when the big capitulation hits. It could happen now, or, if the averages somehow manage to reach a temporary bottom soon and scrape their way to another new high it could happen later. But with the ideal year of 2012 (+ or – 2 years) for a bottom looming near, the potential for a breathtaking, relentless and swift deflationary plunge in stock prices—and housing and commodity prices as well—is moving from a possibility to a probability.

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See the future for yourself with the Elliott Wave Financial Forecast. Every Monday, Wednesday and Friday, you will scan the same charts that our Short Term Update analyst, Steve Hochberg, uses to provide his short-term forecasts. Mid-month, you will receive insights about the financial markets and the economy from Bob Prechter himself in the Elliott Wave Theorist. Then, at the end of the month, you will get the latest mid-term outlook of all the major financial markets, the economy and cultural trends from Steve Hochberg and Pete Kendall in The Elliott Wave Financial Forecast. Read more here.

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