by Alexandra Lienhard
Updated: September 22, 2017
As the Germans go to polls this weekend, Brian Whitmer, the editor of our European Financial Forecast, explains how the quiet election in Germany mirrors the low market volatility. You'll also learn what the "quiet markets" suggest about the outcome of the election.
Alexandra Lienhard: Today on ElliottWaveTV, I'm talking with Brian Whitmer, who edits Elliott Wave International's European Financial Forecast and contributes to the Monthly Global Market Perspective. Hi, Brian. Good to see you.
Brian Whitmer: Hey, Alex. Nice to be here.
AL: So Brian, we're looking at Europe. There's arguably nothing more pressing right now than Germany. So what are your thoughts right now? What stands out for you about Germany and the upcoming election?
BW: Yeah. Well, the first thing -- it's a very quiet election season. I'm not the first person to point that out. Angela Merkel, the CDU party, is way ahead in the polls. As far as what stands out, I think there's a couple of popular misconceptions. The New York Times expressed one of them last month when they said that German voters-- they described them as universally afraid of change. They're about to elect Merkel to a fourth term. She's been in power since 2005. And The Times was saying that this is kind of a paradox, that Merkel is someone who has actually brought some fairly major changes to Germany. And I don't really see this as a paradox at all. There are times in history when voters want change, and they'll elect almost anyone who promises that change. And then there's times when voters want to keep the status quo. And that pendulum swings more or less with the trend in social mood. And so stocks are up right now. Mood is optimistic. The economy is doing great. And Merkel's reputation benefits from that. So really, a runaway victory for Merkel is really exactly what we should expect right now given this trend in stocks and the trend in social mood. So Brian, given all that, what is the market telling you? Yeah. So that said, I think Merkel may look back and rue the day she decided to seek a fourth term. And I say that because German shares are completing a very large degree wave pattern since 2009. And we've walked through all these charts before. This is the DAX since 2009 here. And what we have is a five-wave advance here-- a one, two, three, four, five. And this chart here -- what's really important here is that once this final fifth wave completes, once five waves up from that low completes, that's not just going to complete a pattern since 2016. That's going to complete this entire pattern since 2009. And so stocks are headed in for a very important top here. I think what's key is how voters are going to look back. Once mood has been trending negatively for a while, once stocks have turned back down, how will voters review Merkel in light of that negative mood trend?
AL: So if I understand you correctly, the bull market in Germany is not quite done yet, but there is something disquieting, so to speak, that's concerning you, something that's troubling you. What is that?
BW: Yeah, exactly right. Disquieting is a great word choice, by the way. I think it's really interesting how this quiet election in Germany-- how it really mirrors this low volatility condition, the quiet that we've seen in financial markets. And we've talked before about various gauges of volatility. We've looked at the VIX, the VFTSE, which is the UK equivalent. I've got a chart of the VDAX here, the German equivalent. The same kind of pattern stands out--periods of low volatility inevitably lead to periods of high volatility and to various crises. We've got the Asian crises back here, 9/11, the '08 financial crisis, various debt crises in Greece, Portugal, Italy, Spain. We've got the Brexit vote. That corresponded with volatility. And once again, today we're experiencing a 20-year low in volatility. This is a technical condition that just cannot last. Investors have gotten conditioned to thinking that nothing can go wrong. And historically, that's precisely when things start to go wrong. And Brian, it looks like low volatility can linger for a while at first. Is that a fair assessment? Yeah. There's nothing to say that stocks are going to peak tomorrow and start crashing. Like we saw in the mid 2000s, you can have long stretches of low volatility. But I think the longer that markets remain complacent and the longer that--the more habituated investors get to thinking that the market can only rise, the greater the coming crisis will be. And on the heels of that, you're sounding the alarm about the ECB as well. Yeah. The ECB, I think, is really setting itself up for a disaster. If we look at the balance sheet at the ECB, we can see that they've really been fighting one crisis after another for almost a decade. All of the arrows on this chart here represent some kind of emergency measure taken by the ECB. Back here in '07, even, we had short-term liquidity measures. Then we had rate cuts and covered bond buying, then finally unlimited liquidity in '09. Then we had all these financial stability mechanisms in the European Stability Facility. Draghi came out in 2012 with his "whatever it takes" speech where he said they'll do whatever it takes to save the eurozone. And we still have-- we had negative deposit rates. Then deposit rates went even more negative. And we've had quantitative easing now since 2015. It's running at $60 billion a month. So an emergency is supposed to be a temporary condition. You deal with things, they go back to normal. In this case, the ECB has been fighting this emergency for 10 years and counting. That tells me something bigger is going on here. This is not your standard recession and recovery. It's bigger than that. And our view is that the ECB is basically out of ammunition at this point at the worst possible time with another major downturn in the economy. That will follow the next decline in stocks. And you can count on that. And this time, there's not going to be a whole lot that Draghi or his successor can do about it.
AL: Well, Brian, as the old expression goes, it's hard to emerge from an emergency. Thanks for talking today.
BW: Thanks for having me, Alex.
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