The Issuance of SPACs Gets Smacked

When social mood transitions from positive to negative, investors interest in an array of financial assets begins to wane.

Consider Special Purpose Acquisition Companies (SPACs), which are initial public offerings that raise money with the intention of acquiring an as-yet unidentified firm or firms. This is why these investment vehicles are also known as “blank-check” offerings.

The speculative fervor that had surrounded SPACs has simmered down – way down.

Here’s an August 3 CNBC headline:

SPAC market hits a wall as issuance dries up and valuation bubble bursts

The Elliott Wave Financial Forecast has repeatedly warned that the SPAC market would deflate.

Indeed, as far back as September 2021, the monthly publication provided historical context when it showed this chart and said:

Blind pools are nothing new. They originated in England about 280 years ago. The first known blind pool included a statement in the prospectus offering shares “of a company for carrying on an undertaking of great advantages, but nobody to know what it is.” They also surfaced in America during the stock market boom of the 1920’s.

This history links blind pools with the onset of two of the most important bear markets over the past 300 years: the Grand Supercycle bear market of the mid-1700s and the Supercycle wave (IV) bear market of 1929-1932, which ushered in the Great Depression. Apparently, there’s just something about the last moments of the biggest bull markets that attracts investors to investments that are, by design, lacking in transparency.

… So far [in 2021], 419 SPAC IPOs took in $122.8 billion in proceeds; the chart shows the meteoric rise from just one SPAC deal in 2009.

Expect a Rough Road Ahead for Retailers

The U.S. economy shrank by 0.9% in Q2. That follows a contraction of 1.6% in Q1.

On top of that, U.S. consumer confidence fell in June.

All of this does not bode well for retailers. Here’s a July 26 Yahoo! Finance headline:

Here comes a ‘flurry’ of retail bankruptcies, former retail CEO warns

The CEO says that if the 2022 holiday season is lackluster for retailers, expect a lot of bankruptcies in Q1 of 2023.

The monthly Elliott Wave Financial Forecast has been on top of this unfolding retail story. These charts and commentary were in the June issue:

Retail is suddenly another economic quagmire to watch, as May brought word of disappointing earnings and lower expectations for the balance of 2022. These charts show the hit taken in the shares of Walmart and Target. It turns out consumers are not as resilient as the experts said they were in late April. In fact, Wall Street wrote off the first quarter’s “surprise [GDP] contraction” as “misleadingly weak,” because consumer spending was “quite sturdy,” as one financial publication put it. The May issue of the Elliott Wave Financial Forecast begged to differ, citing a “consumer funk” which should now intensify.

“Contraction is Underway” in China

It’s common in China for people to start paying a mortgage before the construction of an apartment or home is complete.

However, there have been big delays in completing building projects. On top of that, real estate values have been sinking.

Homebuyers in at least 80 Chinese cities are fed up. Here’s a July 18 Fortune headline:

The great Chinese mortgage strike: Thousands of homebuyers are refusing to pay their home loans as growing boycotts spread online

The real estate sector makes up close to 24% of China’s GDP, so turmoil in real estate means trouble for the entire economy.

The July Elliott Wave Theorist, a monthly Elliott Wave International publication since 1979, showed this chart and said:

Page 1 [of the July Theorist] suggested the possibility that U.S. mortgage payers might just walk away from their obligations one day. It’s already happening in China.

The Elliott Wave Financial Forecast (another Elliott Wave International monthly publication) has consistently warned that China’s financial situation—especially as it relates to real estate values and property loans—is precarious. Bonds issued by developers have been falling all year and are now trading at 20 to 40 cents on the dollar. … This week’s new low in Chinese bank stocks (above) further confirms that a contraction is underway.

Why is it happening? Mortgage payments are the basis of banks’ income. When people stop making mortgage payments, banks lose money. China is now dealing with a nascent “stop paying mortgage” movement:

Consider These Prospects for a Deflationary Depression

Yes – the cost of living has risen substantially during the past year and a half or so.

And an opinion writer for Marketwatch acknowledges this. Even so, he says to expect deflation down the road (July 14):

The most recent headline CPI came in at 9.1% so it might seem odd to think that the risk of disinflation and deflation is rising.

But while the CPI is a rearview-looking indicator, many forward-looking indicators are starting to tell a very different story – a story of falling demand and falling prices.

Relatedly, Elliott Wave International President Robert Prechter explains why “deflationary crashes and depressions go together” in his book, Last Chance to Conquer the Crash:

A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow. A depression is characterized in part by a persistent, sustained, deep, general decline in production. Since a decline in credit reduces new investment in economic activity, deflation supports depression. Since a decline in production reduces debtors’ means to repay and service debt, a depression supports deflation. Because both credit and production support prices for financial assets, their prices fall in a deflationary depression. As asset prices fall, people lose wealth, which reduces their ability to offer credit, service debt and support production.

Further, in his just-published July Elliott Wave Theorist, Robert Prechter says:

I don’t think the economy is in a recession. I think it is in a depression. It will develop over the next three years.

The economy usually lags downturns in stock prices by three to twelve months. September 1929 was one of the few times the economy turned down in tandem with stock prices. The year 2022 is probably on the same path.

A depression is not obvious in its first, second or even third quarter. It becomes obvious at the bottom. But the entire period of contraction is still a depression.

“Deflationary Forces” Are Gathering Steam

The topic of inflation is top of mind with many people.

A July 8 headline on the website of the World Economic Forum says:

Inflation is the world’s biggest worry, according to a new poll

Yet, be aware that signs of a developing deflation are evident.

Here’s just one example (Washington Examiner, July 5):

Commodity prices drop in sign that inflation may be peaking

Here’s what Elliott Wave International’s thrice weekly U.S. Short Term Update had to say on July 7:

Investors are rightly concerned about the performance of the stock market, where the DJIA is down 20% from its January 5 peak to June 17, the S&P 500 is down 25% from its January 4 peak to June 17 and the NASDAQ 100 index has declined 34% from its November 22, 2021 peak to June 16. But perhaps an equally important story is being conveyed by the behavior in industrial and precious metals, where the declines since March 7 have been substantial. In just this four month span, Copper, the metal with the supposed Ph.D., is down 30%, zinc has fallen 40% and aluminum has declined 42%. … [G]old is down 16% since its March 8 high, while silver is down 30% over the same period. Platinum is also down 30% over roughly the same period and Palladium has declined 49%.

The March 14, 2008 issue of The Elliott Wave Theorist presented a detailed study demonstrating that gold prices have tended to perform far better during economic expansions than during contractions, opposite the widely accepted belief that gold and silver soar when financial turmoil hits. While some pundits argue that the economy is strong and that the U.S. will avoid a recession, the metals, both precious and industrials, are signaling the opposite: the economy is weakening. Recall that first quarter U.S. GDP, which was originally reported as minus 1.5%, was revised downward last week to an annual pace of minus 1.6%. The decline in the metals, as well as the stock market, suggest the headline numbers will eventually get worse. Additionally, commodity prices such as grains are deteriorating. Soybeans have declined 26% over the prior 24 trading days, Corn has declined 31% over the past 45 trading days and wheat is down 42% over the past 82 trading days. Crude oil has also declined 27% since peaking on March 7. Add these large percentage selloffs to the 2/10 U.S. Treasury yield curve, which inverted yesterday for the second time since early April, and the ingredients are all there for an economy that is contracting. … Deflationary forces are intensifying. [emphasis added]

Famous Stock Picker Says Economy is Already in Recession

New York Federal Reserve president John Williams recently said that the economy is slowing but an official recession may not be in the cards.

However, well-known money manager Cathie Wood of ARK Invest has taken a different stance.

This June 28 Marketwatch headline sums it up:

Cathie Wood warns U.S. is already in a recession

A recession is defined as two consecutive quarters of declining GDP. U.S. GDP declined by 1.6% in Q1 (yes, revised downward –again) and economic observers now await the official data for Q2.

Elliott Wave International looks to the stock market as the best economic indicator. In other words, the economy follows the stock market.

The stock market has been in a downtrend so a recession (or worse) would not be surprising.

This chart and commentary from Robert Prechter’s landmark book, The Socionomic Theory of Finance, provide insight:

As the stock market fell in Q1 1980 and again in 1981-1982, back-to-back recessions developed. As the stock market rose from 1982 to 1987, an economic boom occurred. After stock prices went sideways to down from 1987 to 1990, a recession developed. As stock prices resumed rising, the economy resumed expanding. As the stock market fell in 2000-2001, a recession developed. As the stock market recovered in 2002-2007, an economic expansion occurred. As the stock market fell in 2007-2009, a recession developed, and it was commensurate with the size of the drop: The largest stock market decline since 1929-1932 led to the deepest recession since 1929-1933. As the stock market has recovered since 2009, an economic expansion has developed. In all cases but one, the stock market either turned down before the recession began or turned up before the expansion began. The lone exception was in 2002, when the Dow made a new low after the official end of the recession in 2001. Data show that a setback in GDP growth into that later bottom just barely missed creating a recessionary quarter. (It is important to understand that socionomic causality does not predict that each stock market decline will produce an official recession as defined by the NBER; it predicts that stock market declines and advances will reliably lead rather than follow whatever official recessions and recoveries do occur.

An Update on the Deflation of Netflix

As revenue shrinks at Netflix, more heads have rolled at the subscription-based streaming service of movies and television shows.

A June 23 Variety headlines says:

Netflix Begins Second Round of Layoffs, 300 Positions Cut

About a month ago, around 150 employees were let go.

The layoffs are also occurring amid a deflation in the company’s stock price.

The May Elliott Wave Theorist provided this chart and eye-opening perspective:

Netflix is down 70% from its high. Many people think it can’t go lower. Is this an indication that stocks are near a major bottom?

[The chart] shows the stock’s price history. From its low at $0.35 in 2002, Netflix doubled eleven times in 19 years to reach 700.99. Since then, it has been cut in half twice. There is certainly room for more halvings. If you want to monitor the milestones, they are: 700.99, 350.50, 175.25, 87.62, 43.81, 21.91, 10.95, 5.48, 2.74, 1.37, 0.68 and 0.34.

Keep in mind that this is a picture of a stock that has been aggressively bid lower since November 2021. Many stocks are still near highs and have far more room to fall than Netflix.

Slow U.S. Car Sales Ominous for Economy

Many U.S. motorists are saying: “The car I have now will do just fine.”

Indeed, these motorists are keeping their cars longer than ever. S&P Global Mobility recently stated that the average U.S. vehicle hitting the highways is 12 years and 2 months old. That’s the highest number in the more than 20 years the data has been tracked. 

Related, a June 14 Fox Business sub-headline says:

Total US vehicle sales projected for 13.1 million transactions in 2022, falling below 17 million average

As you might imagine, this does not bode well for the economy.

The monthly Elliott Wave Financial Forecast has been ahead of both developing stories – the U.S. car market and the economy.

Here’s a chart and commentary from the December 2021 issue:

The chart … shows buying conditions for vehicles from queries issued by the University of Michigan’s monthly consumer sentiment survey since the mid-1950s. Since the mid-1960s, a decline in consumers’ view of car buying conditions invariably preceded every economic contraction. The measure has never experienced a more dramatic plunge than in recent months. Economic headwinds are likely much closer than economists realize.

This warning about the economy was prescient. U.S. GDP contracted by 1.5% in Q1 2022.

U.S. Housing Market: “Worst Contraction Since 2006”

You probably recall the bursting of the U.S. housing bubble which occurred 16 years ago.

U.S. housing prices had topped in 2006 and that was followed by the subprime mortgage “meltdown” which shook the financial world to its core.

Here in 2022, there’s this headline (Markets Insider, June 10):

The US housing market is seeing its worst contraction since 2006 as mortgage applications crumble, says Freddie Mac economist

The Elliott Wave Financial Forecast pointed out reminders of the prior housing boom-and-bust back in April in a section titled “A True Fact: The Spirit of ’06 Is Thriving.”

Here’s a chart and commentary from that section:

The latest housing mania carries a “last chance to get in” vibe that even the boom of the mid-2000s failed to muster. Many experts say the price gains of recent months are just a beginning. Zillow’s latest housing price forecast is for year-over-year home price growth to increase to 22% by May. A Facebook post from a local real estate broker highlights a CNN Business story that the broker first posted in 2021. The story, about a house that drew 76 all-cash offers, is headlined “The Housing Madness Shows No Sign of Slowing.” Says the bullish broker, “I warned you then. Is it slowing this year? All arrows point to no.” We disagree. In fact, many of the arrows that matter most are now pointing down. In addition to the … over-the top bullish sentiment, there is now a clear trend reversal in the S&P Supercomposite Homebuilding Index, shown above. In September 2005, the Elliott Wave Financial Forecast pointed to a similar reversal in the same index and stated that home prices would eventually follow. Prices peaked in August 2006.

Government Spending and Debt Suggest “Calamity” Ahead

In October, the Dow Industrials were still climbing (the senior index later hit a high in January).

That same month (October), Robert Prechter mentioned several indications of an elevated social mood in his Elliott Wave Theorist, including this:

Governments feel rich and are spending like drunken sailors …

All that spending has racked up a lot of debt. And, as noted before in these pages, all major deflationary episodes have been preceded by unsustainable levels of debt.

With that in mind, on May 26, the Committee for a Responsible Federal Budget (a nonpartisan group) said that the federal debt is likely to reach 125% of gross domestic product in the next 10 years unless there’s a dramatic course correction.

On May 31, a Washington Examiner headline addressed the mounting federal debt:

New budget numbers show US careening toward calamity

And a “calamity” may be the only thing which will force governments to curtail spending in any meaningful way.

As Robert Prechter’s must-read Last Chance to Conquer the Crash says:

Cutting government spending is a good thing, but politics will prevent its happening prior to a crisis.

That crisis will likely be accompanied by a big bear market in stocks.

Think about the 2007-2009 bear market. The financial crisis which unfolded in conjunction with that stock market downturn was the worst since the Great Depression.

Indeed, the Great Depression followed the downturn in stocks which began in 1929.

Be aware that here in 2022, the Elliott wave model suggests that the next bear market may rival that of 1929-1932.

Let’s conclude with this quote from the May 2022 Elliott Wave Theorist:

There has never been a Grand Supercycle-degree top in U.S. stocks, because the last peak of that degree occurred in 1720, when there were no American stocks. Only the record of British stock prices reveals it. So, recent issues of EWT have looked to the Supercycle-degree top of 1929 for guidance on how a Grand Supercycle top might form.

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