Wave International
January 7, 2008
In the bleak midwinter,
Frosty wind made moan,
Earth stood hard as iron,
Water like a stone…
(From "A Christmas Carol" by Christina Rossetti)
Shawn Colvin sings a beautiful song based on this poem by
Christina Rossetti, reminding us of the bleakness of midwinter.
That is exactly where the housing market seems to be now –
facing its very own bleak midwinter of falling prices, rising
mortgage rates and growing inventories.
The latest report of the S&P/Case-Shiller home price
index shows that the price of houses fell 6.7% in October,
year over year. That is the largest year-to-year decline drop
since April 1991. Think of it – if you had bought a
home for $300,000 in October 2006, it is now worth about $280,000.
And suppose you just got a new job and need to move? You are
going to have trouble selling it at that price, too, thanks
to so many foreclosed homes on the market. One realtor in
Phoenix explained to a Wall Street Journal reporter
that local residents are now competing with foreclosed homes
selling for $50,000 to $100,000 less than other houses on
the market. "The sellers now are having to reduce their
prices by 20% to 30% to compete," she says. (Wall
Street Journal, "Pace of Decline in Home Prices
Sets a Record," 12/27/07)
At a meeting of the New York Society of Security Analysts
on January 7, U.S. Treasury Secretary Hank Paulson said this
about the U.S. economy: "We will likely have further
indications of slower growth in the weeks and months ahead.''
Paulson and central bankers at the U.S. Federal Reserve recognize
that they, too, face their own bleak financial midwinter.
It's not just the mayhem brought on by the subprime mortgage
debacle, the implosion of the housing market and the ensuing
credit crunch; nor is it that the U.S. economy lurches toward
a recession and hard times.
No, it is something bigger than that. Public opinion or social
mood, as we call it here at Elliott Wave International, has
shifted from positive to negative. When that happens, financial
heroes find themselves falling from their pedestals onto frozen
earth hard as iron.
Exhibit A - The headline of a recent article
on Bloomberg: "Paulson Gets Diminishing Return with Bush,
Like Powell, O'Neill" and the lead: "Henry Paulson
escaped the Nixon White House with his reputation enhanced.
He won't be so lucky this time around."
Exhibit B - The lead from a recent column
by David Ignatius in the Washington Post:
"When airport rescue crews are worried that a damaged
plane may have a crash landing, they sometimes spread the
runway with foam to reduce the probability of fire on impact.
That's what the Federal Reserve and other central banks
are doing in pumping liquidity into severely damaged financial
markets. Make no mistake: The central bankers' announcement
Wednesday of a new coordinated effort to pump cash into
the global financial system is a sign of their nervousness…."
Nervousness is in the air now. Investors are anxious about
the markets; everyone is worried about the housing market.
Our Elliott
Wave Financial Forecast December issue explains how housing
starts (and stops) are intimately tied to recessions: "One
key indicator of success in pre-dating economic downturns
is housing starts, which are approaching the 1-million-a-month
level that has preceded all recessions of the last 40 years."
And the Fed is nervous, too. So much so that it announced
a credit giveaway with four other major central banks (the
Bank of Canada, the Bank of England, the European Central
Bank and the Swiss National Bank) in mid-December to try to
bolster the financial system and the banks that keep it humming.
The Fed reports that banks have been stepping up to its auction
window each week to purchase $20 billion. Unfortunately for
the banks, most of this "liquidity" isn't that liquid.
It has to be paid back within 30 days, with interest of about
4.65%.
Editor's note: Elliott Wave
International has agreed to make available to our readers
a 2-1/2-page excerpt from Bob Prechter's Elliott
Wave Theorist in which he describes exactly how the Fed's
latest effort to shore up banks' balance sheets has become
"High Noon for the Fed's Credibility." Click
here to read the Theorist excerpt.
Just how bleak is the future for central bankers if
this recently implemented plan doesn't work? Bob Prechter
explains in his just-published Theorist:
"Nevertheless, this is probably the single most important
central-bank pronouncement yet. But it is not significant
for the reasons people think. By far most people take such
pronouncements at face value, presume that what the authorities
promise will happen and reason from there. But the tremendous
significance of this seismic engagement of the monetary
jawbone is that if this announcement fails to restore confidence,
central bankers' credibility will evaporate.""At least that's the way historians will play it.
But of course, the true causality, as elucidated by socionomics,
is that an evaporation of confidence will make the central
bankers' plans fail. The outcome is predicated on psychology."
The "socionomics"
Prechter refers to is a new social science he has introduced
that studies how humans behave in groups within contexts of
uncertainty – where fluctuations in social mood motivate
social actions. It explains that rather than an event happening
that affects social mood (for example, falling home prices
make people feel bad), what really happens is that social
mood changes first from positive to negative and then lousy
things happen (for example, unhappy people make home prices
fall). If you can adopt this point of view, then you can see
that, in poetic terms, we are fast approaching a bleak midwinter
for the economy and the financial markets.
Susan C. Walker writes for Elliott
Wave International, a market forecasting and technical
analysis company. She has been an associate editor with Inc.
magazine, a newspaper writer and editor, an investor relations
executive and a speechwriter for the Federal Reserve Bank
of Atlanta. Her columns also appear regularly on FoxNews.com.
