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“The Most Dangerous Pattern in Finance” Foretells a “Major Contraction”

“The ECB’s balance sheet growth is inherently unsustainable”

by Bob Stokes
Updated: January 13, 2022

A hockey stick formation on a chart shows a sudden sharp increase after a relatively brief quiet or stable period.

That "stable period" represents the blade of the hockey stick and the nearly vertical rise represents the long handle.

Elliott Wave International's Global Market Perspective adds that the hockey stick is "the most dangerous pattern in finance."

In the just-published January issue of this monthly publication, you can see the hockey stick pattern in a chart of the European Central Bank's balance sheet as a percentage of gross domestic product. Here's that chart and commentary:

ECB

Last year, the European Central Bank was so confident in its ability to manage the business cycle that it purchased an additional €150 billion in assets... Every asset added to the ECB balance sheet represents a future liability for eurozone governments... Ever since Europe's sovereign debt crises began in 2010, the ECB has loaded its balance sheet with peripheral sovereign bonds and risky corporate loans that will rapidly decrease in value during a bear market. If we include the €250 billion in assets purchased in 2020, the ECB has produced a pattern that market technicians colloquially refer to as a "hockey stick." At €851 billion, or 81.6% of the eurozone's GDP, the ECB's balance sheet growth is inherently unsustainable. A major contraction is coming.

This anticipated contraction will likely occur on the heels of the next recession. And, the next recession will likely follow the next significant downturn in European stocks.

As a past Global Market Perspective noted:

The economy follows the stock market's lead.

The Elliott wave model can help you get a solid handle on "what's next" for European equities.

The Elliott wave analysis that you will find in the January Global Market Perspective will help you to prepare for what's ahead -- not only in Europe -- but also in the U.S. and the Asian-Pacific.

Follow the link below for timely insights.

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