A “Precondition” for Deflation is Being Met

Robert Prechter’s Last Chance to Conquer the Crash says:

Deflation requires a precondition: a major societal buildup in the extension of credit and the simultaneous assumption of debt.

With that in mind, look at this Nov. 15 Bloomberg headline:

US Household Debt Jumps Most Since 2008 …

Specifically, households added $351 billion in debt in Q3 and this brings the total to $16.5 trillion, according to the Fed.

Don’t be surprised if delinquencies rise fast as the economy contracts.

The Elliott Wave Financial Forecast warned about this back in April 2019 – even before interest rates jumped.

In February [2019], EWFF described record-high U.S. household debt as a “pernicious” threat that will eventually wreak havoc with the U.S. economic order. Many of these borrowers are already coming up short. According to Bloomberg, U.S. student loan delinquencies hit a record high of $166 billion in the fourth quarter of 2018. The story is the same for auto loans. The Federal Reserve stated on February 12 [2019] that a record 7 million Americans were 90 days or more behind on auto loan payments. … Delinquency rates as a percentage of total outstanding balances are also significant. Student loan delinquency rates are at the high end of their range and much higher than during the last credit crisis. Auto loan delinquencies are approaching their former highs of 2009, despite a supposedly hot U.S. economy. The total amount of credit-card debt is said to be more contained, but it rose to a new record high of $870 billion in the fourth quarter, surpassing the peak registered in the fourth quarter of 2008. In the last quarter of 2018, consumers added $56.1 billion in credit card debt to the total outstanding, 35% more than the post-Great Recession average for a fourth quarter. The increase was the fastest among household credit categories. Credit-card users are obviously back to their old ways; delinquencies will rise fast in the next contraction, as the average consumer’s margin of safety is razor thin. According to USA Today, the average American has less than $4,000 in savings, while the rainy-day fund of 57% of U.S. adults is less than $1,000.

What makes household debt even more precarious now is that the economy is weaker than it was in 2019.

Plus, as we all know, interest rates have risen substantially. So, the implication is clear: the debt bubble appears to be much closer to bursting.

Europe Braces for Serious Economic Slump

European consumers haven’t been very happy.

Indeed, consumer confidence tumbled to its lowest level ever in September, according to the European Commission.

It’s climbed some since then, even so, there’s this Nov. 16 headline (CNBC):

 Euro zone predicted to have a deep recession and a difficult, slow recovery

The chief economist for an investment bank in Germany opined that the Continent’s economy will show deterioration in Q4 2022 and Q1 2023.

Elliott Wave International’s monthly Global Market Perspective has been keeping track of Europe’s economy.  Here’s a chart and commentary from the November issue:

The power of the new bear market is also clearly visible outside of the stock market. In manufacturing, for example, economists tend to view orders minus inventories as a forward-looking gauge of economic performance. The view makes sense, because if orders increase amidst low inventory, manufacturers will need to ramp up production to meet demand. The problem is that manufacturers ride around on the same waves of optimism and pessimism that get reflected first in stock prices, which is why orders-inventories are now deeply negative in the UK, Germany, France, and the eurozone. In fact, the only two weaker readings in the past 20 years occurred when the global financial crisis hit in late 2008, and when the world’s economies closed in early 2020. Here, too, we believe that these low-water marks will be surpassed before the bear market is over.

Big-Time Bankruptcy in the World of Crypto

As you might imagine, an economic depression will bring widespread bankruptcies.

Indeed, in Robert Prechter’s Last Chance to Conquer the Crash, he offered a suggestion for those seeking steady employment when times are tough. Here’s part of what the president of Elliott Wave International said:

There will be a boom in bankruptcy services in a depression; maybe you can keep out of debt by helping others manage theirs.

Well, some of those who already handle bankruptcies have their hands full with a major crash in the crypto world (ABC News, Nov. 11):

What FTX’s bankruptcy filing means for the future of digital currency

Crypto trading platform FTX is filing for bankruptcy and its CEO has resigned.

FTX was valued at $32 billion earlier this year.

The August Elliott Wave Financial Forecast warned about the froth in cryptos and had a section titled “The Exchanges Tell the Story.” Here’s a quote:

In bull markets, financial exchanges are celebrated houses of commerce enjoying popular exaltation. In bear markets, they are necessary evils that need to be curtailed. This very dependable correlation is the reason we’ve tracked a dramatic turn in the valuation of crypto exchanges over the course of the last 15 months. In classic fashion, crypto exchanges bathed in celebrity associations at the final highs. Some attached their names to major sports venues such as the FTX Arena in Miami and the crypto.com Arena in Los Angeles. The share price of each of those exchanges is down significantly in 2022. [In July, we showed] declines of more than 90% in Voyager Digital and Coinbase Global from early 2021 when the Elliott Wave Financial Forecast identified them as candidates for steep falls. These selloffs attest to the potential for further declines in crypto… [emphasis added]

Bank Employees Fear Layoffs as Mortgage Volumes Nosedive

The deflation of the housing boom has employees at a major U.S. bank worried about their jobs.

Here’s a Nov. 2 CNBC headline:

Wells Fargo mortgage staff brace for layoffs as U.S. loan volumes collapse

Get this: The volume of mortgages is down about 90% from just a year earlier. As the article notes, this big slowdown has left some of those on the mortgage staff with little to do.

Elliott Wave International sees evidence that this is only the beginning of another housing bust.

Review this chart and commentary from Robert Prechter’s book, Last Chance to Conquer the Crash:

Although real estate prices on average exceeded their 2006 highs, the recovery has been thin, as housing starts have slackened and transaction volume is down. Underlying weakness in a recovery is characteristic of terminal advances.

The next wave down in real estate prices will be even deeper and more prolonged than that of 2006-2012. When the institutional investors who bought properties in bulk finally give up on their holdings, there will be a glut of homes on the market, which will contribute to the price decline. In a few years, much of the newest batch of mortgage debt will become worthless.

Apprehensive Office Workers Cling to Their Jobs

A while back, workers were quitting jobs in droves at the slightest unhappiness, hoping to find nirvana at another place of employment around the corner.

Well, it appears the “Great Resignation” has lost a lot of its steam.

Here’s an October 6 news item from the Wall Street Journal:

People Still Quit Jobs, but More Office Workers Are Staying Put

Jitters about a cooling labor market appear to be eroding some professionals’ confidence

An Oct. 27 CNBC headline had a similar message:

Great Resignation quitters got big raises—now, they’re worried about their job security

The September Elliott Wave Financial Forecast discussed that workplace shift as it showed this chart and said:

Employment is still near historic highs, but as the Elliott Wave Financial Forecast pointed out in July and August, that’s starting to change. The August Theorist posited that the coming depression will change workers’ historically unprecedented decisions to quit their jobs. The chart shows the Bureau of Labor Statistics’ U.S. Employment quits rate. The reversal from a high of 3% in November and December is the largest since the Covid plunge in early 2020 and suggests that resignations, voluntary ones at least, will become rare very soon.

Conglomerate in China Faces Mounting Deflationary Pressure

Fosun International Limited, a multinational conglomerate headquartered in Shanghai, is selling off assets as it faces a major debt crisis.

Here’s an October 20 Financial Times headline:

Fosun divestments near $5bn as debt pressure mounts

At the same time, the conglomerate’s share price has tumbled.

The October Elliott Wave Financial Forecast showed this chart and said:

This chart shows Fosun’s 67% decline from May 2021. In the face of “refinancing uncertainties,” the yield on Fosun’s dollar debt is above 30%. After being downgraded by Moody’s in late August, the company said it will cut costs and sell assets. In other words, deflationary pressure is mounting. The more Fosun and others try to dig themselves out, the more intense those pressures will become, and the harder their debts will be to repay.

Fosun’s woes are reflective of China’s larger economic issues.

Three weeks after the October Elliott Wave Financial Forecast published, Fosun’s shares are trading even lower.

Job Seekers May Face Increasingly Tough Times

What a contrast!

It wasn’t so long ago that workers were quitting their jobs in droves with the belief that a “better” job could be easily obtained down the street.

Now, there’s this Oct. 12 headline from the Tribune News Service:

Survey: Experts see massive hiring slowdown and surging unemployment a year from now

The Elliott Wave Financial Forecast has been ahead of this story. The July issue noted:

Bloomberg reported on June 21 that employers in various industries are “dialing back their once-breakneck hiring plans.” “There is a stealth slowdown,” says a recruiting consultant. “There is an erosion of power of the job candidate.” That was fast. Only three months ago, The Elliott Wave Financial Forecast discussed the “great resignation” in which a more “idealistic generation” of workers will “set about demanding a utopian world.” The Elliott Wave Financial Forecast countered that the belief in such demands was “just about perfect for a fifth wave of Supercycle degree.” According to a June 15 headline in MarketWatch, a transition “From Great Resignation to Forced Resignation” is already in place.

Relatedly, a month and a half later, the August Elliott Wave Theorist provided a historic look at the cost of labor. Here’s a chart and commentary:

The cost of labor relative to real (CPI-adjusted) GDP has risen by 6.7 times [from 1948 to 2020], as you can see in [the chart]. Thanks greatly to the bear market in commodities of 2008-2020, the ratio between real labor costs and commodity prices rose by the same multiple. … With labor having become nearly seven times more expensive relative to goods, one can understand why businesses have been driven to automate and why there are no more “full service” gas stations.

Young Adults in China Embrace Frugality

Worries over the economy have many young adults in China embracing a penny-pinching mindset.

As an Oct. 1 Fortune headline says:

China’s millennials and Gen Z are falling out of love with consumerism and fueling a new ‘frugal living’ social media movement as reality bites

One group called “Crazy Money Savers” is on a Chinese website and the group has over 600,000 subscribers.

The October Elliott Wave Financial Forecast says this frugality in China is a deflationary development and mentions another entity devoted to saving money:

With average salaries falling, “young people prefer to save than splurge.” Popular social media posts show viewers how to make 10-yuan ($1.45) dinners and live off $1600 yuan a month. A new entity called the Low Consumption Research Institute has 150,000 members. It’s founder “is cutting spending and selling her belongings on second-hand sites to raise cash.” According to a People’s Bank of China study, 60% of Chinese say “they are now saving more rather than spending,” which is up from 45% in 2019.

Recent Elliott Wave Financial Forecast issues have covered other Chinese social changes that are consistent with a new bear market order, such as a mortgage boycott, which continues to spread. According to Reuters, in mid-September, potential Chinese homebuyers are boycotting payments on 343 real estate projects under construction, up from 318 in July. They are also “ratcheting up their demands.” Some developers and cities are trying to quell the unrest with window dressing efforts to re-start stalled projects, but future homeowners are adamant about a return to full construction. One would-be homeowner said, “If we don’t see material results, we’ll go to Beijing.” In March, the Elliott Wave Financial Forecast discussed the “lie flat” movement in which young Chinese “opt out of the struggle for workplace success” and adopt an “indifferent attitude toward life.” The movement, known in Chinese as “tang ping,” became popular in 2021. In March 2022, another Chinese term emerged, “bai lan,” which translates to “let it rot.” Bai lan is “a more negative term,” explains a Shanghai sociology professor. “Bai lan is where young people refuse to put further efforts [in life] because they just can’t see any hope in doing so.” CNBC points out that the “anti-hustle mentality” is the “antithesis of success in China.” Wikipedia calls the movements “the Chinese equivalent of the Hippie counter-culture,” which coincided with the end of Cycle wave III in the late 1960s. In case you forgot, that time saw the onset of a 16-year bear market in the real value of U.S. stocks.

U.S. Consumer Debt Climbs to an All-Time High

As we’ve discussed before in these pages, the one factor that prior episodes of deflation have in common is an unsustainable buildup of debt.

With that in mind, consider this Sept. 26 news items from Bloomberg:

Consumer Debt Hits Record for Most Americans, Except the Wealthy
Liabilities for bottom 90% jumped $300 billion over past year

The inability of many people to pay back their loans will likely result in widespread defaults.

Earlier this year, in March, The Elliott Wave Theorist noted:

In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. That is a rare thing, which is why deflation is a rare thing.

In the same month, The Elliott Wave Financial Forecast provided this perspective. Here’s a chart and commentary:

With the help of supplemental indicators such as … the five-wave form of JPMorgan Chase’s stock chart, the socionomic case for a new era of defaults is even stronger. In time, the new negative mood will make it impossible for some consumers to repay what they owe. Eventually, the most affected banks will fail. As financial survival becomes an open question, financial stocks across the board will reflect the uncertainty.

Bonds: No Safe Haven During a Deflationary Crash

Many investors are under the mistaken notion that bonds will nearly always provide a cushion against a big drop in the stock market.

Yet, the Dow Industrials has been in a downtrend since near the start of 2022, and as I write on Sept. 23, the index is trading below 30,000 – hitting a fresh intraday low for the year.

On the same date, there was this headline (CNBC):

2-year Treasury tops 4.2%, a 15-year high as Fed continues to jolt short-term rates higher

Robert Prechter’s Last Chance to Conquer the Crash had already provided this warning:

[The chart below] shows what happened to the Dow Jones 40-bond average, which lost 30% of its value in four years [in the last deflationary crash]. Observe that the collapse of the early 1930s brought these bonds’ prices below — and their interest rates above — where they were in 1920 near the peak in the intense inflation of the ’Teens. …

Conventional analysts who have not studied the Great Depression or who expect bonds to move contracyclically to stocks are going to be shocked to see their bonds plummeting in value right along with the stock market.

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