Brian Whitmer is the new editor of Elliott Wave International’s monthly European Financial Forecast, which brings you forecasts of the FTSE, DAX, CAC and other European bourses, plus commentary on the important social trends in Europe.
Vadim Pokhlebkin: Brian, in Part I of our interview, you said that reason you like to focus on Europe is because “there’s no better place to apply the Elliott Wave Principle and study socionomics.”
Brian Whitmer: Yes, that’s the biggest reason. But also, the U.S. markets sometimes feel like they get analyzed to death. Smaller, niche markets are more fun to study, in my opinion. Europe is full of them, and this is where some big opportunities can go unnoticed. My colleague Chris Carolan, who edits our European Short Term Update, regularly forecasts the markets that you hardly ever hear about – like the Netherlands' AEX stock index, Belgium's BEL20, Austria's ATX or Eastern Europe's CECE Index (which includes Hungary, Poland and Czech Republic). That's just some of Europe's "hidden" markets; we focus on others, too.
VP: I find Chris Carolan’s observations eye-opening sometimes. Did you see, for example, what he wrote in the March 9 issue (online now – Ed.) about the “de-coupling” of European markets?
The European Short Term Update, March 9:
Separation: An interesting aspect of the financial collapse has been the uniformity of the decline across the stock indices of various countries. I suspect that this tendency may reflect on the extremely emotional nature of all trading in recent months. It is also a tendency that may be ending. I’m noticing that there is increasing separation between the outlooks for different indices. Some markets are no longer declining and may possibly be showing constructive patterns, while others are not only still falling sharply, but have wave structures that do not appear complete.
Chris is basically saying what you said in Part I: That although various global stock indexes have been synchronized, sooner or later, they would diverge again – and looks like they are.
BW: Exactly. But let me go back to why I like European markets. The continent is fascinating from a socionomic perspective. Socionomics postulates that in any society, trends in the stock market, economy and culture change due to fluctuations in the mass (or social) mood of the citizens. The best indicator of social mood is the stock market. We've observed that positive social trends – such as unity, peace, tolerance – are prevalent in bull markets, while negative social expressions like xenophobia, anger and divisiveness dominate in bear market times. What's more, the stock market is the leading indicator of social change. Thus, by trying to forecast where Europe's stock market is headed next, we can try to forecast the EU’s future.
And we have. We have long followed the European Union’s rise to prominence. The very fact that the EU and its common currency came into being already speaks to the epic scale of the social mood rally in the late 1990s. After all, it’s no secret that the EU includes some countries which were arch enemies not that long ago. But all that gave way to a parade of handshakes and forgiveness a decade ago.
Now, sadly, it’s very likely that the Grand Supercycle-degree decline in social mood will have an equal, but opposite effect. We are now beginning to see tears in Europe’s societal fabric. Boundaries are being reestablished. Protectionism is on the rise. Anger and violence is breaking out in almost every country.
VP: I’ve also read reports saying that “Europe’s monetary union is about to fall apart” and that the crisis can “split Europe into rival camps.” Socionomically, do you think that the EU will survive this bear market – as a union?
BW: We have long said that the EU’s integrity would be tested by the coming bear market. As early as May 2005, EWI’s founder and president Bob Prechter made this forecast in his Elliott Wave Theorist: “During the bear market, the independent nations of Europe will rediscover their borders and rekindle the animosities that kept them apart for centuries.”
VP: It’s amazing how quickly bear markets can turn the unthinkable into reality, isn’t it.
BW: It is – which is why it’s important to take precautions and follow Europe’s markets closely, even if you don’t trade them actively. In the past, both Asia and Europe have provided some timely forewarning to U.S.-based investors. For example, we’ve long tracked Japan’s deflation and used it to map (often with stunning accuracy) the U.S. present experience with the same problem. So far, the two countries’ deflationary experiences have been remarkably similar.
In the same way Europe can give us an early “preview” of the societal breakdown that attends a social mood downturn of this magnitude – one that could very easily migrate to the States. Demonstrations, protests and violence of all sorts are breaking out throughout Europe right now, and it’s not much of a stretch to forecast similar tensions arriving in the U.S., especially as economic and political pressures continue to build.
VP: And if a U.S.-based investor does decide to trade Europe’s markets, how easy is it, logistically?
BW: It gets easier all the time. Every day it seems like there’s a new vehicle that allows you to trade a new market, or even a specific niche of that new market. Of course, just because it’s easy to put on an overseas trade doesn’t always mean it’s a good idea.
Having said that, probably the best way to trade Europe’s stock indices that Chris Carolan and I forecast is via futures contracts. They are perfect for holding a position (long or short). But, futures are understandably intimidating to inexperienced traders. Active futures trading is best left to professionals. For the less experience speculators, there are mutual funds, ETFs and even individual stocks – especially those that mimic a stock index. You just have to be aware of the currency risk when “putting your money to work” in a foreign country.
VP: Thank you very much for your time, Brian.
BW: It’s good talking to you.