We are not entirely sure that this can actually be a 5th wave expanding diagonal but we sure do prefer that to Jaws of this or that. We have sharpened the pencil to the point where today we can say that ,also on a semi-log scale, the Russell 2000 has reached the upper trend line. As always, a slight throw-over should be anticipated, but having said that, any sensible person should get out here and not risk giving back a good part, or most likely all, of this move from 350 to 1150.
These were two of the last holdouts that we could come up with. The Russell 2000 on semi-log scale, which so far has not made a new high and the FTSE . The clear 5-waves down, now some 4 months, ago still stands. Bernanke et al do not seem to be satisfied with the results so far. The Russell this year alone is up another 38% or precisely one percent for every week of the year to date (38). To get a similar reward you would need to own 10-year treasury paper for about 19 years which just goes to show how grotesquely things are being distorted. According to Bloomberg corporations in America are now the beneficiaries of about $700 bln. in annual interest cost savings compared to 5-years ago when rates were already manipulated down by Greenspan. It is now not that difficult to argue that the largesse of the Fed’s $85 bln. flows directly and in its entirety into the coffers of corporate America, without any discernable effect on unemployment. Why all this helps remains a mystery.
Speaking of patterns that were not recognized by Elliot, here is a variant on the theme of “running” triangles, in this instance an expanding one. The entire pattern could be construed as a wave 4. But there is no need to bend over backwards to accommodate unusual patterns, just juggle the letters a little. Call a 4, b 1, c 2,d 3 , e 4 and 5 5 and you have a perfectly good looking expanding diagonal triangle. On an arithmetic basis we are already there, on a semi-log scale we could have one more push up. Either way the next big move looks pretty ugly regardless of what kind of EW you subscribe to.
These charts are particularly instructive as they illustrate very well the absurdity of pumping up the stock market. Each successive leg up was (much) larger than the one preceding it. What we need now is a Bernanke2 and one day we will all be rich.
The answer is yes, we are there!
At the low in March 2009 this index was at 350, roughly. Today it exceeded 1050, which, if I am not mistaken is a factor of 3x in 4+ years. The Russell 2000 is,by the way, the quintessential small cap. index. Bernanke should run a banner all across the Fed. buildings announcing mission accomplished. But today we hear nothing of the sort. In fact should unemployment drop below 6.5% the Fed. may still continue to spike the punch-bowl if there are too many people leaving the workforce, which so far has been a primary source of dropping unemployment. This will never end. Even if budget cuts etc. cause the economy to grow at a lesser pace than otherwise, the Fed. reserves the right to increase stimulus. This is pretty circular as government spending at roughly a trillion above what is taken in each year is already excessively simulative so why the Fed. should feel obliged to step in is not at all clear. Taking both the deficit spending and the monetary stimulus combined one could argue that the US is now on a super-Keynes trajectory. That is if you leave out one of Keynes pet concepts, that of the Marginal Propensity to Spend (or Consume), MPS in short. The whole idea is that poorer people spend a larger proportion of their wealth/income than do richer people, therefore the government should redistribute income to the bottom which will then lead to a higher multiplier (bang for your buck) and with it correspondingly higher growth. A glance at a chart showing the wealth distribution in the US from TheUnderstatement.com shows how well this works;
According to this source the top 1% own 43% of all wealth. This is 2011 and their are other stats that put this number well north of 50%. 73% is owned by the top 5%. By stimulating the stock market and housing, the Fed. has made the rich richer and as a result of the very low MPS growth is gone. More stimulus, less growth. All pure Keynes.