I recently came across an AP article about an Arizona tomcat that has been stuck in a tree for eight days. No matter what the owner and other volunteers do -- putting food and water at the base of the tree, using loud noises to spook it out, and climbing ladders that are too short to reach him -- "Brutis" can't make his way back down.
The current predicament of the U.S. economy feels pretty similar. In the last two years, the frisky spirit of the speculative marketplace shinnied up, and up, and up the under-regulated, overly leveraged "branches" of growth -- and now, the animal is stuck in the tangled arms of a credit scheme gone wrong, growing weaker by the day.
Thus far, every "rescue" ladder has been too short, every rate cut left at the base of the tree too un-stimulating, and every scare tactic too late.
Which begs the question: Do the financial Powers have the necessary equipment to save the economy and bring it back down slowly, and safely?
Well, let's do a little spot check: The Federal Reserve has fired more rounds on its bailout bazooka than Rambo in hopes of keeping the leading pillars of the U.S. economy afloat. This extension of virtually unlimited credit, says Fed Chairman Ben Bernanke, will stave off another Great Depression.
Is he right? The short answer: N-O.
In forty years of U.S. history, there has been ONE single requirement for a financial bailout to pull off a meaningful recovery: A bull market in social mood, as reflected by a rising stock market. Here, the September 2008 Elliott Wave Financial Forecast’s close-up of major government bailouts versus the “Real” Dow (i.e. measured in terms of gold ounces) since 1966 speaks volumes.
One look at this spellbinding picture and the there’s no going back: During the sustained bear market of 1966-1982, bailouts that coincided with apparent stock market lows were always ultimately followed by lower lows.
Conversely, government-backed rescues beginning in 1982 to the 1999 peak worked like a charm – because they overlapped with higher stock market highs, reflecting the raging bull market in our collective spirits.
Flash ahead to October 2007: The nominal Dow (as measured in U.S. dollars) catches up to the Real Dow on the downside. And, the Fed's previously cautious stance on bailouts becomes one of reckless abandon -- culminating in the October 3, 2008 passage of the $700 billion "Emergency Economic Stabilization Act."
On the same exact day, the October 3, 2008 Short Term Update warned: equities would keep their bearish promise. In STU’s own words:
“All the ‘uncertainty’ over the government’s rescue plan has been removed with today’s passage. Now all we have is the ‘certainty’ of the stock market’s cycle. The ‘bill’ that just passed is thought to somehow address the market’s problems. It won’t, nor can it.” The Dow will “decisively break down from current levels.”
Since then, the Federal Reserve has approved the allocation of $8 T-T-Trillion in bailout money, to every fledgling industry from banking to brokerage firms. Not to mention a temporary (maybe?) ban on short selling for over 900 companies listed on the NASDAQ -- AND -- TEN interest rate cuts (500 basis points) to a record low. YET -- the share price of every "rescued" company has continued to plummet, including the Dow Jones Industrial Average, which is down more than 40% from its October '07 peak.
In the words of the October 2008 Elliott Wave Financial Forecast:
“Bernanke is trying to calm the waves by raising up sunken ships. Any instrument at his disposal still rests upon the sand we call social mood, which is simply too powerful to be nudged in the direction desired by any central banker.”
What's the answer, then? Wait until social mood improves. Act now to find out where we are in the larger Elliott wave picture.