What All Major Depressions Have in Common

Signs of deflation are visible but the public will be fooled
By Elliott Wave International

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt).
-- Conquer the Crash, 2nd edition (p. 88)

Has the United States met that precondition?

Well, consider that total credit market debt as a percent of U.S. gross domestic product was

• 280 percent in 1929 at the start of the Great Depression
• 380 percent in 2008

The current build-up of credit goes far beyond major -- it's unprecedented.

It's been rising steadily for 60 years. The slope literally looks like the side of a steep mountain.

Bank credit and Elliott wave expert Hamilton Bolton studied every major depression in the U.S. In 1957, he made this observation:

All were set off by a deflation of excess credit. This was the one factor in common...the signs were visible many months, and in some cases years, in advance. None was ever quite like the last, so that the public was always fooled thereby.

Let's read again from the second edition of Conquer the Crash (p.92):

A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people's desire and ability to lend and borrow...
The U.S. has experienced two major deflationary depressions, which lasted from 1835 to 1842 and from 1929 to 1932 respectively. Each one followed a period of substantial credit expansion. Credit expansion schemes have always ended in bust. The credit expansion scheme fostered by worldwide central banking...is the greatest ever...If my outlook is correct, the deflationary crash that lies ahead will be even bigger than the two largest such episodes of the past 200 years.

Is there evidence now that a deflationary trend is underway? Dear reader, the evidence is abundant and growing by the day.

To begin with, just a casual observation of our national economic life reveals a deep general decline in people's desire and ability to lend and borrow.

But there are many specific signs pointing to bankruptcy, default and a deflationary spiral.

Yet they're not grabbing the headlines. The "good" economic reports and levitating stock market are. The public will likely be fooled again. But make no mistake, the signs are there.

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This article was syndicated by Elliott Wave International and was originally published under the headline What All Major Depressions Have in Common. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Capital Safety: Is There Such a Thing as "TOO Safe"

See the latest capital safety tips from Robert Prechter in his new Elliott Wave Theorist
March 22, 2012

By Elliott Wave International

We all know that the stock market has been rising for 3 years. Many economic measures -- unemployment, consumer spending and confidence, etc. -- also show strong improvement. Yet is that a good reason to stay bullish on stocks?

What a silly question, some people might say. But before you give a reply, please take a look at these financial news headlines -- and then guess when they were published:

• Fed chief predicts economy will rebound despite housing woes (AP)
• IMF predicts an energetic world economy (StarTribune.com)
• US Treasury says economy strong...? (Reuters)
• Job Growth Strengthens Economy (Washington Post)
• Several Signs the Economy Is Reviving (New York Times)

Did they publish this week? Last week? Last month? No. All published in mid-2007, right before the global financial crisis cut the DJIA by 54%; S&P 500 and CRB Commodities Index by 57%; oil by 78%. Gold, emerging markets, and real estate also fell hard. Even bonds were no "safe haven," as 2009 was the worst year on record for U.S. 30-year Treasury bonds and 10-year T-notes: down 26% and 9.7%, respectively.

This chart shows you just how mistaken all that "strong fundamentals" optimism really was (courtesy: Bloomberg):

The lessons are obvious:

1. Don't be lulled by "improving fundamentals." As EWI president Robert Prechter points out,
   "You can't say, 'The economy looks good, so I'm bullish on stocks.' This approach...doesn't work at the turns."
   -- March 2012 Elliott Wave Theorist
2. The stock market knows how to surprise the unprepared majority of investors. It's never too soon to safe-guard your capital.

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Learn the Best Ways to Protect Your Capital with 8 Free Lessons from Conquer the Crash

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This free 8-lesson report (42 pages) from Prechter's bestseller, Conquer the Crash, gives valuable lessons that are critical to your financial survival, including:

• Should you rely on the government to protect you?
• What to do with your pension plan
• What should you do if you run a business
• A Short List of Imperative "Do's" and Don'ts"
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This article was syndicated by Elliott Wave International and was originally published under the headline Capital Safety: Is There Such a Thing as "TOO Safe". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The Three Phases of a Trader's Education

Learn Jeffrey Kennedy's tips for becoming a consistently successful trader
By Elliott Wave International

You've probably heard talk about "market uncertainty" in the financial news recently. But when are the market trends ever certain? The constant uncertainties contribute to your frustrations as a trader, and you need to have a method for dealing with the ups and downs. Every successful trader has one.

Since 1999, Elliott Wave International's senior analyst and trading instructor Jeffrey Kennedy has produced hundreds of trading lessons exclusively for his subscribers. One of these lessons, "The Three Phases of a Trader's Education," gives you Jeffrey's tips on becoming a consistently successful trader.

Here it is; we hope you'll find it helpful.

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The Three Phases of a Trader's Education:
Psychology, Money Management, Method

Aspiring traders typically go through three phases in this order:

1. Methodology -- The first phase is that all-too-familiar quest for the Holy Grail -- a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.
2. Money Management -- So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.
3. Psychology -- The third phase is realizing how important psychology is -- not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can't find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.

I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence -- fear of losing money and greed for more money.

Once the aspiring trader understands this psychology, it's easier to understand why it's important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.

Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.

When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I'm more than comfortable utilizing the same guidelines that many professional money managers use -- 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one's trade decision is incorrect, but it also insures longevity. It's one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.

When aspiring traders grasp the importance of psychology and money management, they should then move to phase three -- determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn't the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

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14 Critical Lessons Every Trader Should Know

Read more of Jeffrey Kennedy's lessons in his 45-page eBook, The Best of Trader's Classroom. Find out why traders fail and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more when you download your FREE eBook today!

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This article was syndicated by Elliott Wave International and was originally published under the headline The Three Phases of a Trader's Education. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.