Prepare for deflation, act now

The stock market rally extended this week following last week very weak nonfarm payrolls. The message from the job report was similar to that from the ADP employment report, employment in the US is falling sharply. We already knew that many sectors of the economy were slowing but this was not reflected in the job numbers. Now that job creation is falling fast, alarm bells are ringing.

The slowdown is intensifying, and the next move in interest rates will be down. This is why people are buying stocks, at this stage they believe the Fed will come to the rescue by cutting rates and if necessary the Fed will do QE again. What they don’t realise is, this time the Fed won’t save the economy and the market will crash. I don’t think the crash will be sudden, it will be a slow process, a slow change in sentiment.

For many years those who study Elliott wave have predicted that the stock market is doomed, the position of the Elliott wave suggests the stock market will crash and this will be followed by deflation. The bursting of the debt bubble is deflationary, this is the worst scenario for the global economy and it is about to unfold right before you, with serious consequences for you, your family and your friends. You must take action now, you must be prepared for deflation.

Last week’s job report reminded us that despite all the efforts of the central banks since 2009, the global economy is decelerating as Elliott wave predicted. I always believed that the crisis started in 2007 and the economy was going into deflation, but the central could not let it happen. So they intervened with vast amount of stimulus (QE). What the stimulus has done is boost asset prices and weaken the global economy. Statistics show that global GDP was stronger prior to 2007. Therefore the Fed has failed to put the economy back on track.

When the Fed raised rates last year the markets collapsed, now if the Fed lowers rates it will be game over, the Fed will lose credibility. The Fed is trapped, it can’t raise rates and is reluctant to lower them because it will be an acknowledgement that deflation is winning. Since 2009 the Fed objective has been to stop deflation at all cost. QE was an emergency measure aimed at creating enough inflation to fight deflation. It worked but temporarily. In the end it will fail, too much of QE is deflationary.

deflation

Latest inflation data from the CPI came in lower than expected at 1.8%. Inflation has been falling since the 2.9% recorded a year ago, which is what you would expect in a deflationary environment. The Fed said recently that QE is no longer an emergency measure, indeed, it shows that QE was not a one off event, it will be needed again because deflation is winning.

The thing is, if QE did not stop deflation the first time, why do you think it will stop it the second time? I think the Fed knows the next crisis is coming, but they won’t admit it. Their job is to maintain stability in the financial markets. Admitting that they are losing the battle with deflation will precipitate the stock market collapse. This crisis will be deflationary and the stock market will collapse, like it did in December but this time the turmoil will be more intense.

The Fed is losing the battle with deflation, and when investors realise this, they will lose confidence in the central bank and the government. They won’t buy when the Fed becomes dovish, they won’t buy when the government tries to manipulate the markets. But right now investors still trust the Fed, that is why markets are rallying. As the economic numbers continue to disappoint, this trust will evaporate.

If you are a long term investor you can short now. If you are a short term trader, there is still some upside to trade, but we are nearing the start of a massive stock market decline. This is confirmed by the position of the Elliott wave and the fact that we live in a period of extreme optimism. History repeats itself.

Sentiment was extremely bearish after the decline in December and we got some good news (the manipulations by the Fed / Trump). Now sentiment is increasingly bullish and my indicator forecast that sentiment will reach extreme bullish sometime in July. At that moment we will get some bad news, may be the Fed won’t lower rates and Trump will escalate the trade war. The stock market will fall. Whether this decline is the start of the collapse remains to be seen. It will probably be another large decline like in December that will lead to a rally going into 2020.

As always, there will be short term opportunities to trade, rallies that last a few weeks to a few months. This strategy has been designed to catch the short term moves in the blue chip shares. You can join the service for just £10 here:

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