Elliotwave - The State of the Global Markets 2013 Edition

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					  The State
 j of the i


              2013 EDITION
The State of the Global Markets – 2013 Edition


Welcome. .  .  .  .  .  .  .  .  .  .  .  .3

Preface. .  .  .  .  .  .  .  .  .  .  .  .  .4

The.World. .  .  .  .  .  .  .  .  .  .  .6
            Overview  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 6
            Special Section: A Rise in Oil Production  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 8
            Special Section: The Global Warming Panic is a Distant Memory  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 10

United.States. .  .  .  .  .  .  .12
            Overview  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 12
            The Stock Market  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 14
            Cultural Trends  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 14
            Special Section: Major Top in the Bond Market  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 16
            Special Section: The Government Grabs the Bag with Both Hands  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 24

Europe . .  .  .  .  .  .  .  .  .  .  .  .26
            Overview  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 26
            The Stock Market  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 28
            Cultural Trends  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 29
            Special Section: Transportation Losing Traction  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 30
            Special Section: Swapping Out Fear  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 32

Asia-Pacific . .  .  .  .  .  .  .  .33
            Overview  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 33
            Korea: Up On Gangnam Style  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 33
            An Elliott Wave Perspective on China’s Stock Market  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 34
            The End of India’s Malaise  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 35
            Australia: Resilience Down Under  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 36
            Special Section: Emerging Markets to Rally Further  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 38
            Special Section: Social Conflicts Occurring at Market Lows  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 39

The State of the Global Markets – 2013 Edition

Dear reader,


Thank you for downloading Elliott Wave International’s new report, The State of the Global Markets – 2013 Edition .

We put together this report to get you up to speed with EWI’s big-picture outlook for 2013 and give you a sneak peek
inside our regional monthly publications, The Elliott Wave Financial Forecast, The European Financial Forecast and
The Asian-Pacific Financial Forecast, as well as our flagship publication since 1979, Robert Prechter’s Elliott Wave
Theorist .

As you read, you may notice our analysis doesn’t mention President Barack Obama’s re-election, the fiscal cliff, Silvio
Berlusconi’s return as Italy’s premier and other news of geopolitical importance . That’s because we take the radical
view that external events like these have no significant long-term impact on the financial markets . Instead, we look at
the market’s internal price patterns and what really drives them: social mood .

Social mood is the common thread connecting everything we do at EWI . We believe that investors’ moods and their
resulting decisions to buy and sell are regulated by waves of optimism and pessimism that fluctuate according to the
Wave Principle .

Once you identify the current stage of social mood and put it into the context with the Wave Principle of human social
behavior, you can begin to formulate forecasts not only for financial markets; but also for the economy, political voting
preferences, war and peace, and even social trends in music, filmmaking, fashion and beyond .

Our sincere hope is that this report challenges your thinking about investing and encourages you to dig deeper into
the Wave Principle in 2013 .

Thank you for reading,

— The EWI Team

The State of the Global Markets – 2013 Edition

By Robert Prechter

In the first five months of 2012, there were twenty times as many Google searches on “inflation” as there were on
“deflation .” This is down from a ratio of fifty times in June 2008 . If any theme has been overdone over the past six
years, it is the theme of inevitable inflation if not hyperinflation .

Inflation reigned for 75 years, from 1933 to 2008 . People are so used to it that they cannot imagine the opposite
monetary environment . Bullish economists have been calling for recovery, which means more inflation, and bearish
advisors have been calling for a crash in the dollar, which means hyperinflation . No wonder those are the terms on
which most people have been searching .

But only one word allows you to make sense of what’s going on in the world, and inflation is not it . The secret word
is deflation .

Deflation explains:
       1 . why interest rates on highly rated bonds are at their lowest levels in the history of the country;
       2 . why the velocity of money is the lowest since the 1930s-1940s;
       3 . why huge sectors among investment markets are down 40%;
       4 . why the Consumer Price Index (CPI) just had its biggest down month since 2008;
       5 . why Europe is in turmoil .

Here are some details: Ten-year Treasury notes pay out less than 1 .5% annually, their lowest rate since the founding of
the Republic . Treasury bills yield essentially zero, their lowest level ever . The velocity of money failed to rise during
the past three years of partial economic recovery, and it recently made new lows . Real estate prices have fallen 45%
in the past six years . Commodity prices—as measured by the CRB Index—are down 39% over four years . This group
includes oil and silver, two of the most hyped investments of the past decade . Remember in March when articles quoted
analysts calling for $5, $6 and $8-per-gallon gasoline? In just three months since then, gas prices have fallen 15%,
knocking the CPI into negative territory . European stocks are way down, and although U .S . stocks levitated through
April, they are poised to join everything else on the downside .

Deflation also explains why European loans are at risk, why Germany is tapped out, why Greeks are protesting in the
streets, and why U .S . corporations’ overseas profits are down . Deflation lets you make sense of the world .

What is deflation? Economists define it three different ways, but I find only one definition useful: Deflation is a
contraction in the overall supply of money and credit .

Why must deflation occur? Answer: There is too much unpayable debt in the world .

As argued in Conquer the Crash, it ultimately does not matter what the authorities do; they can’t stop deflation . This
prediction is being borne out . Since 2007, the Fed has monetized $2 trillion worth of debt; the federal government
has borrowed another $7 trillion; and it has pumped out $1 trillion worth of student-loan credit . Yet real estate and
commodities slumped 40% anyway .

These drunken-sailor-type policies have indeed succeeded in nearly maintaining the overall volume of money
and credit . But in the long run you can’t fight a systemic debt overload by piling on more debt . The Fed and the
government are shifting the burden of trillions of dollars’ worth of debt obligations from reckless creditors onto
innocent savers and hapless taxpayers . The ploy might work if the public’s resources were infinite, but they aren’t .
Perhaps this policy temporarily prevented a series of big institutional disasters, but it was only at the ultimate price
of a gigantic public disaster .

The State of the Global Markets – 2013 Edition

Such actions have become politically less palatable . Some observers realize that the student-loan program of lending
at below-market rates is exactly the model the government used for housing loans, which ended in a spectacular bust .
Others know that the government cannot continue to borrow at the current pace and expect to stay solvent . Politicians
on both sides of the aisle are tired of the Fed’s bailing out of highly leveraged financial-speculation institutions . But
whether these policies continue or are curtailed is irrelevant to the outcome . If the government slows its borrowing,
the overall value of debt will fall . If the government maintains or increases its present pace of borrowing, interest rates
will eventually turn up, and the overall value of debt will fall . There is no escape from deflation .

Ironically, investors in the past decade have been doing exactly the opposite of preparing for deflation . Convinced of
perpetually rising prices, they have bought every major investment . They chased real estate up to a peak in 2006 . They
bought blue chip stocks into the high of 2007 . They pushed commodities up to a peak in 2008 . They chased gold and
silver up to highs in 2011 . And through spring 2012, they continued to buy stocks and commodities on any rumor that
promised inflation: European bank bailouts, Operation Twist, the Greek election, Group-of-8 summits, Fed meetings,
Bernanke press conferences, improved economic numbers, predictions of QE3, central-bank interest-rate cuts, you
name it . Meanwhile, the U .S . Dollar Index hasn’t made a new low for four years . During deflationary times, cash is
king, and by far most investors have chosen to own anything but cash .

Deflation is still not obvious to the majority . Even now, most economists expect continued recovery, mild inflation
and a rising stock market . Our work is 180 degrees apart from conventional thinking . It may be too late to get out at
the top, but there’s still time to learn how to sidestep the worst of the crunch .

People will be using the secret “d” word much more often over the next five years . By the end of that time, they will
also be using its cousin “d” word, depression .

                                                                                                               2013 Edition

     The World
Excerpted from the September 2012 Elliott Wave Theorist

Global markets and economies are mired in the early
stages of the biggest disaster ever . Most people think
both areas are in the early stages of a prolonged
recovery, but in fact they are on the cusp of the
second downturn, which will be of epic proportion .

The world is in the grip of a bear market . You
wouldn’t know it from watching the S&P and the
NASDAQ, but just about every other major market
average in the world has been falling, including
those of China, Japan, Europe, the BRICs, emerging
markets, and even the broad U .S . market, as shown
in the figure at right . And these indexes have fallen
far further in inflation-adjusted terms .

Global-equity hedge funds, run by the smartest
people in the business, have lost money for clients
over the past ten years . According to Income
Research & Management and Bloomberg, over that
time annual five-year returns have been up for 2
years, flat (0 .0-0 .8% gain) for 3 years, and negative
for 5 years . Given a positive 2007 drop-off, the year
2012 will probably show another negative five-year
return .

Our recommended short position in 2007-2009 gives
us a positive five-year stock market experience . But
we returned to a bearish stance too early . If we lived
in China, our timing would have caught the exact
top of the rally; if we lived in Europe, our current
trade would be at a profit, too; but we don’t live in
China or Europe . Only in the U .S . does the levitation
continue, and even then it’s only in the blue-chip
averages . The broad U .S . market, comprising all
NYSE stocks, topped out nearly a year and a half
ago, per the New York Composite Index shown at
the bottom of the figure at right .

Market perversity is on display here, as both bulls
and bears are suffering their own special water
torture . Many bullish fund managers have lost money

Follow this link for the most up-to-date analysis of global markets: http://www .elliottwave .com/wave/MIGMP             6
The State of the Global Markets – 2013 Edition                                                                 The World

                                                                leading on the upside will catch up quickly on the way
                                                                down . But in the meantime it’s an annoying situation, as
                                                                momentum-based sell signals are flashing continually but
since April 2011, because their portfolios tend to              the market has yet to succumb .
mirror the broad market . Garrett Jones reminded us
that the most-owned stocks among institutions are               Adding to the injury is that fact that all of these indexes
down by a full one-third since 2000, as shown by the            have been re-priced higher in dollar terms due to the
Institutional Index, a capitalization-weighted index            temporary re-expansion of dollar-based credits since
of the 75 most-owned stocks by institutions (see the            2009 . The next figure shows the real path of stock values .
figure above) . Yet aggressive bears who shorted the
S&P or NASDAQ have lost money, too, since the                   Most people seem to believe that the Fed has engineered
futures-related markets have risen .

It seems pertinent that only the indexes that one
can leverage in quantity with futures—the S&P
and NASDAQ—have risen over the past half-year .
Maybe this selectivity is for technical reasons, but
there might be another explanation . Institutions, not
the public, have driven the rally, and they can borrow
billions of dollars from banks to leverage their bets .
The divergent action among the indexes (see the
figure at top right) suspiciously fits the circumstance
that major investment banks can make a lot of money
by buying futures and then committing their own
and clients’ funds to buying stocks that push up
those particular underlying indexes . They could even
sell other stocks to make it happen . Employing that
strategy would account for the big differences in the
averages over the past half-year . The low volume and
volatility help serve up the opportunity . When the
current plateau of optimism ends, the indexes now

Follow this link for the most up-to-date analysis of global markets: http://www .elliottwave .com/wave/MIGMP             7
The State of the Global Markets – 2013 Edition                                                                  The World

the stock market rally . I also keep reading about how            The rally was due for natural reasons, i .e . a swing toward
ECB President Mario Draghi is making stock markets                more positive social mood, which our market forecasting
go up by announcing bond purchases . This is wrong . As           publications anticipated . But QEs and other policies do
shown in the figure on page 6, European stocks are below          provide big institutions with nearly unlimited credit,
their highest level since the ECB bond-buying programs            allowing them in optimistic times to put it to use . Doing
began . Likewise the largest debt-buying program the              so temporarily elevates prices beyond what they would
Fed ever undertook—a $1 .3 trillion binge—occurred                be if unlimited credit weren’t available . Optimism is
in 2008, and it failed to prevent the biggest bear market         necessary to allow the Fed and its banks to create credit for
since 1932 . The bear market ended three months after             financial speculation, which keeps the market levitating .
the Fed stopped the program . The Fed and the ECB are             Conversely, when pessimism returns—as it soon will—the
not the primary cause of optimism or rising stock prices .        reduction of leverage will add to selling pressures .

Excerpted from the November 2012 Elliott Wave Theorist

One bright spot in the news is that oil is becoming more plentiful . Since being reluctantly green-lighted by the Obama
Administration, drillers have found vast new oil fields in the Dakotas, where unemployment has fallen to less than 3%
due to the drilling boom . Current trends suggest that the U .S . will soon surpass Saudi Arabia as the world’s biggest
oil producer .

This development surprised a lot of people but not you . The July 25, 2006 issue of EWT offered financial and economic
reasons why the price of oil in the long run would not follow the path predicted in literally dozens of apocalyptic
books and hundreds of articles on so-called “Peak Oil .” Commentators from Ivy League professors to the New York
Times promoted the thesis that the world was running out of oil and had no energy alternative, thus portending an
energy shortage that would cripple the world . In the face of this onslaught, EWT presented this economic argument:

     The Economic Factor
     So far, we have discussed only the financial factor in the pricing of oil . The “Peak Oil” bulls never tire of listing
     economic forces that will cause oil to go up for decades and centuries . Never mind that we did not hear about
     this when oil was $10 a barrel; now it’s fashionable . But there is a far more fundamental aspect of economics
     that the bulls are ignoring .

     When a resource becomes scarce and expensive, do people bid it up to infinity and then revert to the Stone Age?
     No . Why not? High prices provide incentives . Free markets always offer alternatives .

     Let’s forget for the moment that there is in fact a debate about the extent of underground oil fields and that some
     geologists believe they are much more extensive than most people think . Let’s forget the debates about whether
     we can grow enough corn to propel automobiles .

     What people demand is not gasoline, and not even cars, but transportation . A comprehensive train system run
     on electric power provided by nuclear plants would work just fine . No fuel oil would be required . And pollution
     would be nearly eliminated .

     The only impediments to such a solution are superstition and politics . The free market could build the whole
     system in 30 years if government would let it, just as it built the stunningly successful internet and cell phone
     networks in just 20 years after the government ended AT&T’s communications monopoly in 1984 . Economic
     forces are reliable, but political ones are not . It is always possible for government to make energy production
     impossible, as it nearly does already in the United States with respect to exploration, drilling and refining . Had the
     free market been allowed to operate, there would be no crisis today . Even though politics is the only impediment
     to reasonably priced transportation, the “Peak Oil” devotees never talk about it . They cite natural resource limits
     and economics . But natural resource limits have never limited progress; they have only directed it .

Follow this link for the most up-to-date analysis of global markets: http://www .elliottwave .com/wave/MIGMP                   8
The State of the Global Markets – 2013 Edition                                                                 The World

     …So there are both short-term
     and long-term forces, working
     slowly perhaps but relentlessly,
     against an ever-rising oil price .
     It is not impossible for the world
     to go dark or for people to revert
     to the Stone Age, but it wouldn’t
     occur because of economic
     forces on oil prices; it would
     occur because of politics and
     war, the main immediate forces
     of setback in human history .
         —The Elliott Wave Theorist,
                             July 2006

As it happened, the cited geologists
were right, and the simplest solution
of all is coming into play: find more
oil . Alternatives from hydrogen
fuel cells to a process of turning
coal into oil have also arisen, and,
if government allows, they too will
contribute to the supply of energy .

The Elliott wave model is the best basis on which to            in May 2011 . So far that peak has held . There is a chance
forecast commodity prices, but Economics 101 is useful          that the rally isn’t over, but it’s slim . One reason is that
at the extremes, and this is a case in point . The economics    the rally into 2011 rekindled the peak-oil vision, which
behind the “peak oil” thesis guaranteed its own failure .       prompted investors’ hoarding of black gold in tankers all
The results of that fact are finally becoming visible .         around the world . When the owners of that oil see the price
Incredulous journalists are asking, “Who would have             fall further as more supply enters the pipelines, they will
thought…?”                                                      give up and sell their inventories, which will depress the
                                                                price even further .
To update the Elliott wave picture for oil: In June 2008,
a month from oil’s all-time high, EWT made a highly             Fundamentals generally lag way behind financial trends .
contrarian peak price argument for oil based on its nearly      In a bear market, fundamentals don’t become obvious
completed ten-year Elliott wave pattern and forecast that       until wave C gets underway . The fact that economic forces
“one of the greatest commodity tops of all time is due          are now joining financial forces in the battle against oil’s
very soon .” Oil subsequently crashed from $147 .27 to          high price fits our Elliott wave analysis that oil is already
$32 .40 in just five months in wave A of the bear market .      within wave C of a great A-B-C bear market, as shown
Three years later, EWT recognized the peak of wave B            in EWT since May 2011 and updated in the figure above .

Follow this link for the most up-to-date analysis of global markets: http://www .elliottwave .com/wave/MIGMP              9
The State of the Global Markets – 2013 Edition                                                                      The World

Excerpted from the November 2012 Elliott Wave Theorist

Speaking of energy, a non-event that recently had the media buzzing was the dearth of discussion of the global warming
issue during the U .S . presidential debates, not to mention nearly everywhere else on earth over the past year . This
is another social change predicted in EWT in the face of vicious opposition . This excerpt highlights the key points:

Sometimes scientists herd as much            of waxing social focus, rising panic          against investing in property, people
as investors do, and this study [by          and calls for government obstruction,         sporting a rather bemused expression
NASA] appears to be a case of extreme        one must acknowledge the likelihood           would coolly respond, as if instructing
expression following a long-established      of social-psychological forces behind         an alien who lacked understanding of
trend . I am not a climatologist, but I am   such a report and investigate whether         the way things worked on Earth, “They
a student of manias and herding, and         the data support the prediction .             are not making any more land” and
that is what the global-warming craze                                                      “it’s all about location .” They would
appears to be about .                        The crowd fearing global warming              say this with utmost calm . They had
                                             rejects as heretics professors and            thought about it and sifted through the
My purpose here is not primarily to          scientists who challenge all these            evidence . They were not hysterical but
make a case against man-made global          methods and conclusions, whether they         rational and thoughtful . At least, this
warming . My primary intent is to take       be at MIT or Stanford . Such rejection is     was the appearance of behavior at the
a look at the question from the point        akin to what happens near the end of a        individual level . At the collective level,
of view of a social psychologist to          financial mania, such as the peak of the      something else was going on . The
decide whether it appears to be the          real estate mania two years ago, when         number of people participating in the
result of hysteria . The points above        bears were dismissed as delusional .          real estate market was unprecedented,
establish that there are two sides to the                                                  and their borrowing, building and
global-warming question . Yet only one       GW advocates told me that doubting            bidding activities, collectively, were
has captured the public’s imagination        man-made global warming is akin               extreme . Advocates of man-made global
(and I choose that word consciously) .       to denying evolution, but the GW              warming may appear sober as judges
The global-warming scare is highly           movement has not a little taste of            individually, but they are participating
reminiscent of the Alar scare, in which      old-time religion in its accompanying         in a mass movement, complete with
Congress called upon the expertise of        admonition of humanity: Man is evil;          press releases, student rallies, pop
movie stars; the ozone-depletion scare       he is destroying the earth; he is “fouling    concerts, movie documentaries and an
and the acid-rain scare, which have all      his own nest,” as one scientist on the        underlying tone of moral crusade .
but vanished; the claim that pesticides      web says . Scientists are usually good
were making frogs lame (it turned out to     at their fields but not necessarily at        I think the current frenzy over the
be a virus); the rash of reports of devil    recognizing their own political, moral        subject is probably a symptom of
worshippers, who were never found;           and [philosophical] biases .                  peaking cycles in both climatic
the national child-care molestation                                                        temperature and social psychology .
                                             One thoughtful scientist took issue with      But unfortunately 70 years from now
hysteria, which turned out to be almost
                                             the term, “hysteria .” But the term applies   most of us won’t be around to know
entirely contrived; the panic in Europe
                                             here to social activity, not the overt        the answer . What I expect, based upon
over poison in Coca-Cola; and any
                                             behavior of any particular individual .       observing mass movements, is that this
number of like manias . Hysteria often
                                             In 2005, when I was speaking about            fear, too, will go away .
signals the end of a trend .
                                             real estate hysteria and warning people                  —The Elliott Wave Theorist,
There is powerful evidence of herding                                                                          June and July 2007
at the social level on the global warming
issue . Commentary on the subject is
even selling theater tickets . And like
all past social trends that were ending,     That was five years ago . Recently it has come to light—from globally
there is a rush to extrapolate . The         collected data reported by some of the very institutions that had passionately
temperature data from which modelers         promoted the case for man-made global warming in 2007—that the earth
at NASA derive their extrapolation           in fact hasn’t warmed at all since 1997 . One would think the case for
are scant, the projection is extreme         man-made global warming would be virtually closed from such contrary
and their tone is strident . When any
                                             evidence and that those who feared global warming would breathe a
writers, including scientists, extrapolate
29 years’ worth of temperature data
                                             happy sigh of relief and go home . Some of them have done just that . But
to predict an imminent apocalypse of         proponents remain vocal . This week a professor in a syndicated editorial
Biblical proportions in an environment       blamed the recent relative silence on the issue on “a profit-driven economic

Follow this link for the most up-to-date analysis of global markets: http://www .elliottwave .com/wave/MIGMP                      10
The State of the Global Markets – 2013 Edition                                                                 The World

system that demands and necessitates endless growth,                 electric companies, food processors and refineries . The
a global U .S . military presence that helps facilitate it           board has estimated that businesses will pay a total of
and the ecologically rapacious consumption it entails .”             $964 million for allowances in fiscal year 2012-2013 .
Whatever your opinion of these matters, all three of                 (AP, 11/15)
them were in place during the entire period of waxing
panic over the global-warming issue, negating the claim         Extorting a billion dollars annually from industry will
to their causing its opposite . He further charged, “In the     ultimately cause more pollution, as it did in communist
wake of extreme drought in much of the United States,           East Germany, where air became toxic and rivers caught
widespread wildfires in the western U .S ., and now             on fire . But California doesn’t yet shoot people trying to
Hurricane Sandy, Barack Obama’s and Mitt Romney’s               leave, so the first likely trend here is that businesses will
refusal to discuss human-induced climate change will            accelerate their exodus out of the state . Unfortunately,
undoubtedly go down as political recklessness of historic       there may be more action at the federal level as well . At
proportions .” If hurricanes, wildfires and droughts            a press conference on November 14, President Obama
were evidence of man-made climate change, man must              declared, “I am a firm believer that climate change is
have secretly industrialized the world millions of years        real, that it is impacted by human behavior and carbon
ago . Archaeologists are pretty sure that didn’t happen .       emissions . And as a consequence, I think we’ve got an
The main thing likely to go down as being of historic           obligation to future generations to do something about
proportion is the extent of fear about global warming that      it .” (11/14, as reported by Reuters) Mayor of New York
held sway in 2007 . I doubt it will return in our lifetimes .   Michael Bloomberg likes Obama’s position on this issue
                                                                so much that he endorsed the president for reelection . But
Further suggesting that the old trend is dead is that           Obama’s waste of billions of taxpayer dollars propping
government, always the last institution to join a herd, is      up so-called “clean energy” companies, along with
taking action . California passed a “cap-and-trade” law at      whatever new taxes and regulations the feds dream up,
the height of the panic in 2006 and is now implementing         will ultimately contribute to the trend toward national
it . Naturally, it involves taxing people:                      poverty, which will increase pollution, not reduce it . With
      Under the plan, the California Air Resources Board        any luck, the depression will distract various governments
      will auction off pollution permits on Wednesday called    from this destructive path . But, then again, destruction is
      “allowances” to more than 350 businesses, including       what depressions are about .

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                                                                                                                 2013 Edition

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Excerpted from the November and August 2012 Elliott Wave Financial Forecast

The extremes in optimism over the course of the stock market’s 2011-2012 top are nothing if not persistent . Individual
investors are generally thought to have sat out the rally from March 2009, but they were actually the first group of investors
to greet the topping process with open arms in late 2010 . On December 23, 2010, the weekly poll by the American
Association of Individual Investors reported 63 .3% bulls, an extreme that exceeded all weekly readings during 2007,
the year of the Dow’s all-time high . The parade of countertrend rally tops started two months later, when the Euro Stoxx
50 peaked and several more speculative indexes, such as the HFRX Hedge Fund Index and the Bloomberg IPO Index
topped (see first chart below) . In April 2011, bullish sentiment among investment advisors reached its climax, as the
ratio of bulls-to-bears hit 3 .65 in Investors Intelligence’s weekly advisor survey . This bull/bear ratio also indicated more
optimism than at any week in 2007 . As the second chart shows, the NYSE Composite Index reached its bear-market
rally high at the end of that month . In July 2011, as the Dow Transports hit their all-time high, the cash-to-assets ratio
in U .S . equity mutual funds, a measure of fund managers’ bullishness, hit a new all-time extreme of 3 .3% .

The recent stock market high saw even more investor groups reach bullish extremes, namely options traders and
newsletter writers and advisors . Market Vane’s Bullish Consensus, which surveys newsletters and advisors, jumped
to 70% bulls on September 14, a click past the 69% reading registered at the Dow Jones Industrial Average’s all-time
peak in October 2007 (see chart first chart on next page) . As the October issue of EWFF noted, the 10-day CBOE
index put/call ratio hit a record low on September 21, coincident with the NASDAQ high . The longer such bullish
extremes continue, the more meaningful the top becomes . The repeated extreme readings since 2010 are suited not to a

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temporary peak in the business cycle but to the end
of a multi-decade advance . And we’ve seen such
readings in three separate clusters (1998-2000,
2006-8 and 2010-12) over the past 13 years!

According to the Investment Company Institute,
mutual fund cash levels are just 3 .7% of total
assets, close to the record low . The all-time
extreme low of 3 .3% occurred in March and July
2011, when the NYSE and Value Line indexes
topped . In light of the economic and financial
deterioration that the bear market has already
produced—clearly evident in high unemployment
rates, municipal bankruptcies, falling real estate
prices, declining credit worthiness and record-
low U .S . government bond yields—current
expectations for a resumption of the bull market
are at least as unhinged from reality as they were
in 2000 and 2007 . The second chart here shows
that mutual fund managers have been more fully
invested over the course of the past two years than
at any prior period in history .

In the first several months of 2012, the terminal
phase of wave 2 produced a loud echo of the
Great Asset Mania . EWFF has described some
of the telltale psychology in the January to May
issues . The most recent installment should be the
last . If it were a movie sequel, it might be called
“Return to Silicon Valley .” Its effect is still roiling
through the headlines in a spate of stories about
the perks that technology firms lavish on their
workers . According to USA Today, “at a time
when much of the nation is experiencing job cuts,
belt-tightening and the strains of a generally sour
economy,” tech companies shower employees with
gourmet meals, free dry cleaning, massages, hair
cuts, shuttles and “snacks galore .” Facebook leads
the workplace makeover, replacing cubicles with
“shared work tables, couches, bars, cafes, eateries
and even pubs .” “Life’s A Beach for Tech Hotbed,”
says another USA Today headline . Naturally, the
latest and greatest perk, “unlimited vacations,” is
reserved for the end . According to MSNBC, tech
startups now allow employees to take “all the
vacation days they want .”

This “workplace revolution” may sound familiar .
EWFF charted the same progression at the
conclusion of the bull market in 2000 . Many
will remember it as beginning with the arrival
of “casual Fridays” in the late 1990s . The prior

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revolution reached a climax in May 2000, when junior              long breather from work,” EWFF noted one high-tech
analysts on Wall Street demanded and received “more               executive’s complaints about a lack of sleep and stated,
meal money, better laptop computers, casual dress codes           “These managers should be careful . Workers are on the
and access to the company gym on weekends .” The May              verge of more free (literally) time than they ever imagined
2000 issue of EWFF cited that victory as a sure sign              possible .” The same psychological turn will take place this
that conditions were “extremely ripe for a downturn .”            time, too . In our view, this is the last euphoric episode
The NASDAQ was already crashing . In July 2000,                   prior to a big Primary-degree stock market decline, so
when workers started to demand “the ultimate perk: a              the exhaustion that replaces it will be new and improved .

Excerpted from the November Elliott Wave Financial Forecast and August 2012 Elliott Wave Theorist

As EWFF has noted many times over the years, a healthy trend is one in which the constituent parts of the market in
question reach new extremes in unison . We have also pointed out that over the course of the great topping process the
stock market has been anything but synchronized . The NASDAQ peaked in 2000, while the Dow Industrials reached
their all-time high in 2007 . The third peak, which we think is completing now, has been the most disjointed of the
three, with most new all-time highs occurring in indexes of highly speculative stocks . The NYSE Composite left the
uptrend on April 29, 2011, more than a year and a half ago (see “Swirling Optimism” chart in the Overview section
above) . Stock markets can hover at elevated levels for a while, because the optimism engendered by a trend toward
positive social mood dissipates gradually . But such a shaky near-term finish within a much larger and equally shaky
13-year triple top suggests that the so-called distribution phase is complete or very nearly so . An era of epic financial
instability lies ahead .

Elliott wave forms indicate that the market will resolve with a huge bear market in nominal terms . Many people are
likening the Dow’s action of 2000-2012 with that of 1966-1982 and arguing that stocks are late in a sideways bear
market . If there were any indications that the 12-year bear market to date had crushed investors’ appetite for financial
speculation, we might entertain this possibility . But hope among investors is as strong as ever . Many commentators claim
that investors are pessimistic, but they aren’t . It is true that by most measures, investors are less optimistic than they
were in 1999-2000 and 2006-2008, a condition that is fooling observers into thinking they are witnessing pessimism .
But, historically speaking, financial and economic optimism are still exceptionally high as measured by low dividend
yields, record-low junk-bond yields and the low percentage of cash in mutual funds . Just watching the stock market
rise into every news announcement, economic number and Fed meeting shows that hope is as strong as ever .

Excerpted from the October 2012 Elliott Wave Financial Forecast

Deflation and the transition toward negative social mood are separate phenomena, but the changing package-delivery
landscape is a perfect example of how mood and monetary trend change work together at the largest macroeconomic
inflection points . Falling demand triggers lower shipping costs, which are further weakened by a sudden move away
from a long-standing, bull market preference for speed . The emerging slowdown is confirmed by several Fed Ex analysts
who insist it is not simply a matter of reduced budgets . “There has been a secular shift from ‘got to get it there overnight’
to more deferred products,” says one . “You’re seeing a demand for slow instead of a demand for fast,” says another .

High-speed trading is another arena in which the brakes are suddenly slamming on . In September, several articles
suggested that foreign governments are way out front with proposed or even adopted limits and that U .S . regulators
“have been slow to act .” One columnist called for a 100% tax on profits from “‘investments’ that mature in 60 seconds .”

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By late September, however, the word was out
that U .S . regulators are getting on board the
accelerating drive to decelerate the rapidity
of trading and establish a new “Speed Limit
for the Stock Market .” Early this week, an
SEC panel approved a “high-speed trading
kill switch .” According to the latest accounts,
even the high-speed traders now agree .
“High-frequency trading firms, long resistant
to tighter oversight of their businesses, are
beginning to change their tune” (WSJ, Oct .
1) . As The Elliott Wave Theorist pointed out
in 2007, “the need for speed” is a bull market
trait . The reference was to highway speeds,
but, apparently, if the turn is big enough, even
traders, who need speed to make money, will
get in line . Until very recently, economists
insisted that the evidence favored the high
frequency traders and “a solid body of
academic research that shows they increase liquidity .”           disciplines and lifestyles . “Slow is an idea whose time has
In the new trend, risk aversion is king and the evidence          come .” Wikipedia now lists 12 different categories of slow,
will show that the potential for catastrophic losses make         from slow gardening to slow parenting, fashion, science
it “just too dangerous .”                                         and money . Articles have gotten downright insistent . “Slow
                                                                  Down!” says a Times of India headline from September
Package delivery and stock trading are two industries             23 . To help their kids succeed, “Parents Should Slow
that have done nothing but go faster since the bull market        Down,” says another headline from the September 24
broke to definitive new highs in the early 1980s . Under          News Journal of Wilmington, Delaware . Here’s another
the psychology of a Grand Supercycle bear market,                 headline that points to an unmitigated reversal from the
however, a move in the opposite direction has gradually           bull market: “Slow Coffee Movement Spreading Fast .” As
gained traction . An early seed can be traced to 1989,            EWFF has often noted, coffee is the definitive bull-market
during the Primary wave 4 correction, when the “slow              beverage . An interesting subhead to the story notes that
food movement” emerged as a reaction to fast food . In            the meticulous, slow drip method is called “Third Wave”
1999, the last year of the Grand Supercycle bull market,          and it “Has Growing Following .” We couldn’t agree more .
it officially branched out with the establishment of the
World Institute of Slowness . By 2005, the book, In Praise        At this point, the restaurant industry does not seem to be
of Slow: Challenging the Cult of Speed, was heralding             the least bit threatened; in fact, it is booming . This chart
“a growing international movement of people dedicated             illustrates why . The S&P 500 Restaurant Index’s long rise
to slowing down .” “Sometimes it’s more of a click in             from 1990 shows that conventional dining is almost as
attitude than anything else,” says Carl Honoré, the book’s        highly valued as it has ever been . EWT explained why in
author . This is precisely our socionomic point . Things          1998 when it identified restaurants as a peak expression
really clicked for the movement at the outset of wave 1           of a bull market in social mood: “When people feel good,
in 2008 . The New York Times documented its arrival with          they like to get out, be seen, eat well and drink socially .
this January 2008 headline:                                       This makes restaurants a focal point for the expression of
              The Slow Life Picks Up Speed                        a bull market mood .” Apparently, restaurants are holding
                                                                  up until the bitter end . Here again, however, the five-wave
The article explained that the “slow food movement,”              form of the rise suggests that the small decline from April
emphasizing “above all the creation and consumption               could turn into something much larger . As the bear market
of products as a corrective to the frenetic pace of 21st-         progresses, tastes will shift to alternate, i .e . less expensive,
century life,” was starting to pop up across a wide range of      fare, and many will dine out less or not at all .

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Excerpted from a June special report jointly from the Theorist and Financial Forecast

U .S ..Treasury.Bonds
Our long term outlook for interest rates on U .S . Treasury securities has been a contrary opinion for many years . Most
commentators have been expecting either economic expansion or Fed-induced inflation to push bond yields higher .
Conquer the Crash predicted that long term rates on AAA-rated bonds would fall much further as the monetary
environment shifted from lessening inflation to outright deflation . Figure 1 shows the forecast from 2002, and Figure 2
updates the graph to the present .

                                                            Figure 1

                                                           Figure 2

In line with our forecast, the interest rate on the Treasury’s 10-year note has just plunged to the lowest level in U.S.
history . The decline from 1981 to the present is a stunning 91% . Figure 3 shows a close-up of the entire move .

Those predicting economic expansion or hyperinflation have been unable to explain this persistent plunge . Yet each of
these camps got exactly the “fundamentals” they expected: record monetization by the Fed (advocated by the monetarists)
and record spending by government (advocated by the Keynesians) . Rates ignored these events and continued to fall .

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                                                            Figure 3

For the past ten years, many high-profile investors have          bonds continued lower until 1931 . Then they soared, on
hated bonds . When interviewed, they would say that the           fears of default . Figure 4, published in Conquer the Crash,
one sure bet was that rates would rise and bond prices            shows what happened . (The chart shows rates inverted to
would fall . Those betting against bonds have lost a lot of       reflect bond prices .)
money, especially since 2009 .
                                                                  During the Great Depression, bond prices finally
Under the Elliott wave model, five-wave patterns occur in         bottomed, and interest rates peaked, in June 1932 (see
the direction of the main trend, and countertrend moves           Figure 4); stocks bottomed in July; and those years’ only
trace out three-wave patterns . Interest rates do not follow      freely traded (semi-)monetary metal, silver, bottomed
the Elliott wave model as well as stock averages, which           in December . Following expectations under socionomic
are more responsive to overall social mood . Rates are the        theory, the economy bottomed afterward, in the first
price of just one thing: money . But it is still interesting to   quarter of 1933 . If the same sequence occurs again, rates
see how many five-wave patterns unfolded in the same              should peak first, stock prices should bottom next, and
direction as the long decline over the past 31 years, as          individual commodities should make lows throughout
labeled in Figure 3 .                                             the period, with some of them bottoming last . Finally the
                                                                  economy will hit bottom .
In the Great Depression, interest rates on lower-grade
bonds trended lower until 1930, and those on high-grade           The preceding peak rate of inflation in that cycle occurred

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                                                           Figure 4

in late 1919/early 1920, so the time between the extremes         Investors think that the issuers of all the bonds they are
was just shy of 13 years . In the current cycle, the grand        buying will stay solvent and pay both interest and principal .
change from the maximum rate of inflation to a maximum            We don’t think so . We think the economy is still sliding
rate of deflation seems to be on track to consume                 into depression, and when that trend accelerates, investors’
approximately a Fibonacci 34 years (+ or – 1 year) .              waxing fears will cause them to start selling bonds, which
From as far back as 2001, using several time-forecasting          will lead to lower bond prices and higher yields .
approaches, EWT has forecast that the final stock market
bottom would occur in 2016 . This timing suggests a peak          Investor psychology should work like this: As positive
rate of deflation in or near 2015, a bit ahead of the low         social mood initially retreats, investors looking for a haven
in stocks . Although we tentatively expect the bottoming          buy bonds that they perceive to be safe . But as social mood
sequence to take place between 2015 and 2017, the                 continues to trend toward the negative, fear increases,
sequence per se is more certain than its timing .                 deflation accelerates, the incomes of businesses and
                                                                  governments decline, and bond investors begin to worry
One might think that interest rates will therefore fall until     about losing their principal due to bankruptcy and default
around 2016 . But they won’t . The reason is that borrowers       by bond issuers . That’s when they start selling bonds, and
are going to default .                                            rates begin to rise . Rates on the weakest issues rise first,
                                                                  but eventually fear spreads to holders even of formerly

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presumed safe paper . Finally, the economy contracts so           Buyer 20-bond index . Bond prices today seem poised to
severely that it reaches depression, wiping out many              do what their predecessors did: plunge .
debtors and, in the process, many creditors as well .
                                                                  In early 1932, prices on these bonds fell below—and rates
In the current cycle, low-grade bond yields have yet to           rose above—those registered at the preceding peak rate of
begin climbing . As shown in Figure 5 (again with the             inflation in 1920 . This is a good reason to expect interest
scale inverted), yields for the Baa group have been moving        rates on these bonds in coming years to rise above those
lower right along with those for Treasuries . Commentators        of 1981, i .e . above 16% .
are saying that investors’ sustained move into bonds is a
sign of fear . But in line with continued predictions of a        The question is, when will rates begin rising in this
“sustained but slow economic recovery,” bond buyers have          cycle? We think the answer is “now .” Evidence is rapidly
reached a state of epic complacency in the belief that all        mounting that the trend in interest rates on high-grade
of these bonds are safe . As we will see in Figure 9, the         debt is poised to reverse:
spread between rates on T-bonds and Baa corporates has              1 . As shown in Figure 3, the latest drop in yield has
been quietly widening for nearly a year . This is a subtle              traced out five waves into the June 1 low as bond
warning of trouble ahead for the high-yield sector . At this            futures hit a new all-time high of 152½ . This plunge
point, we still cannot place “peak” arrows on Figure 5 as               in rates should mark at least a bottom and probably
there are on the 1930s version in Figure 4 . But we should              the bottom .
be able to do so soon .
                                                                     2 . The public has been buying a lot of U .S . government
Figure 6 shows the history of the Bond Buyer index of                    bonds since 2002, as shown in Figure 8 . Investors
40 corporate bonds during the Great Depression . Figure 7                stayed enamored of government bond funds in
shows the history of its modern equivalent, the Bond                     2011 while selling into the stock rally . The public

                        Figure 5                                                                Figure 6

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     loved real estate at the top; it loved stocks
     at the top; it loved commodities at the top;
     it loved silver at the top; and it loved gold
     at the top . What do you think it means now
     that the public is heavily invested in U .S .
     government bonds?

  3 . The Commitment of Traders report shows
      that Large Speculators have become heavily
      invested in T-bond futures (see Figure 9) .
      Large Specs are not always wrong, but they
      are usually wrong when they follow a trend .
      The asterisks in Figure 9 show times when
      their buying or selling was in concert with
      the trend, and in those cases the market was
      approaching a reversal .

  4 . According to the Daily Sentiment Index
      (courtesy trade-futures .com), there were
      97% bulls among futures traders on June 1 .
      This is the third-highest reading on record .
      (It reached 99% in December 2008, at
      the spike high in T-bonds following Fed’s
      pledge to buy them .) The DSI reached 90%
      bulls in June 2011, and except for a brief                                           Figure 7
      period in January-March it has been near the
      90% level for much of the past year . This is
      both an extreme level and a lengthy period
      of bullish sentiment .

  5 . T-bonds have enjoyed their longest and
      biggest bull market on record . There are no
      guarantees in life or investing, but we are
      pretty sure that buying an extended market
      after three decades of rise is not a good
      idea . Regardless of whether our monetary
      and economic expectations turn out right,
      the bull market in bonds is aged and ripe
      for reversal .

If rates do begin to rise as we expect, most
observers will probably be fooled . Bulls on
the economy may take the new trend as a
sign of economic expansion . Those betting on
hyperinflation may take it as a sign that inflation
is ready to soar . But the real reason for the coming
rise in rates will be that investors will be selling                                       Figure 8
bonds and demanding higher rates due to fear of
default. We have seen this development already in
the debt paper of Greece and other weak debtors .
It should soon seep over to the stronger debtors .

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You might think that the U .S . government is the
strongest sovereign debtor . It isn’t . Eight other
governments pay lower rates on their 10-year
notes . The U .S . 10-year yield hit a low of 1 .438%
on June 1, its lowest level ever . But the yields on
comparable bonds elsewhere are lower: Singapore
1 .37%, Taiwan and Germany 1 .17%, Sweden
1 .11%, Denmark 0 .93%, Hong Kong 0 .88%,
Japan 0 .80% and Switzerland 0 .47% .

The coming fear of default will not be misplaced .
With a turn of Grand Supercycle degree behind
us, the unfolding depression will be deeper than
that of the early 1930s . Most debtors around the
world will default .

In January 2005, two months before the spread
between the 30-year U .S . Treasury bond yield and
the Moody’s Corporate Baa bond yield reached
its narrowest extreme in years, EWFF said,
“Typically, such complacency [toward riskier
assets] is a precursor to a large and persistent
move” in the opposite direction . By the end of
March, the spread between low-grade and high-
grade debt yields had begun to widen . EWFF that
month called for a move to record wide levels . In
the last quarter of 2008, the widest spread since
the inception of 30-year Treasuries in the 1970s
was achieved in conjunction with Primary wave
1 down in stocks . Figure 10 shows this event .

Like so many financial assets, high yield bonds
rose in 2009-2010 as stocks rallied in wave 2 .
                                                                                          Figure 9
In January 2011, EWFF noted that bond fund
managers were aggressively citing an improved risk
environment and touting junk bonds as a reliable place to         and NASDAQ . It is now on the verge of widening past its
grab a little extra yield . We countered with the following       October 4, 2011 level . The June issue of EWFF reiterated
assessment:                                                       that a move toward record widening remains the bedrock
     The perceived lack of alternatives is creating what may      of our bond market forecast . During Primary 3 down in
     be the costliest mistake in the history of investments—      stocks, the spread between low-grade and high-grade debt
     reaching for yield at the onset of a depression . When       should exceed the extreme reached in late 2008 .
     near-term manifestations of mood turn back toward
     increasing pessimism, this spread should widen to a          The recent spike in high-yield mutual fund inflows (per the
     historic extreme .                                           bottom graph in Figure 11) shows that investors continued
                                                                  to reach for yield through the final rally in stocks . It’s
The narrowing between rates on low- and high-grade                been said that junk bonds are simply equities in drag
debt reached its extreme in July 2011, three months after         since they are the riskiest class of debt securities, and this
the tops in the NYSE Composite stock index, the CRB               chart bears that label out . It sports tops in 1989, which is
Commodities index, foreign currencies and silver . As             close to a major peak in the Dow Transports; April 1999,
Figure 10 shows, the spread made a lower high in early            three months ahead of the peak in the Real-Money Dow
April 2012, coinciding with the highs in the Dow, S&P             (Dow/gold); and May 2007, just two months before the

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Dow Jones Composite average topped
and five months before stocks started
plunging . That bear market led to credit
spreads reaching the record levels
shown in Figure 10 .

Per Figure 11, however, the collapse
failed to drive total assets in high-yield
bond funds beneath their low of July
2002, no doubt because investors were
(and still are) perceiving all grades of
bonds as their new safe haven . From
that time forward, total assets in high-
yield bond funds more than doubled
and continued to expand right through
April 2012, our last available data
point . Total junk bond assets should
turn lower . The five-wave rally pattern,
shown by the labels in Figure 11, fits
our case that the impending downturn
will be bigger than any of the declines                                            Figure 10
over the past 30 years . In the not-too-
distant future, junk will finally live up
to its name .

Figure 12 shows the relentless, 8-fold rise in total
bond fund assets over the past 22 years . It is a
stunning picture, reminiscent of the 18-year rise
in stocks from 1982 to 2000 . The sharpest rally to
date began in October 2008, as investors sought an
alternative to stocks . We expect wave 3 to destroy
the belief in all havens except cash .

The long rise in retail demand for higher-yielding
bond funds supports our case for a historic retreat
from risky debt . According to the Investment
Company Institute’s long-term-bond fund
data, which go back to 1984, investors became
increasingly fond of more speculative bonds versus
U .S . non-mortgage, federal government bonds over
the course of the bull market . Figure 13 shows
the ratio of total assets in riskier funds holding
corporate, high yield and mortgage debt to assets
in non-mortgage, federal government bond funds .
In the 1990s, with the mania for equities at its
most intense, investors’ preference for riskier
bonds rose persistently . An initial high in the ratio
came in February 2000, one month after the Dow’s
peak and a month before the NASDAQ’s all-time
high . A decline followed, reaching a low in March
2003, when the World Stock Index bottomed . The
ratio’s ensuing rise ended in May 2007, as the                                             Figure 11

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accompanying rally in stocks neared its endpoint .
The most recent rise started in December 2008,
three months before the start of the latest advance in
stocks . It ended more than a year ago, with the assets
of riskier bond funds reaching a record 4 .7 times
those held in less-risky government-bond funds in
June 2011 . So, after faithfully reflecting the general
direction of the stock market through June 2011, the
ratio has failed to approach last year’s peak . This is
a key divergence from the pattern of events over the
course of the Grand Supercycle topping process and
another sign of the exhaustion that’s been overtaking
the financial markets since May 2011 . The ratio will
undoubtedly continue to head in its new direction .
This does not mean, however, that government
bond prices will continue to rally . The unfolding
deflation will be murder on the debt of companies and
governments alike . But most corporate and mortgage                                         Figure 12
bonds will perform worse than Treasury bonds, so
investors are likely to shift their preference from the
former to the latter .

During the coming collapse in the value of debt,
investors’ interest in diversified funds of all stripes—
debt, equity and commodity—will fall precipitously .
The drop will come as a shock, especially to those
who “rebalanced” from stocks and commodities to
bonds after the markets panicked in 2008 .

Generally speaking, if you are invested in long-
term debt, sell it . Avoid high-yield bonds like the
plague . Stay away from most municipal, corporate,
government agency and now even Treasury bonds .
A select few entities will be able to generate the
necessary cash flow to defy an otherwise universal
rise in yields . Discerning them will be difficult .
Good candidates seem to be the governments of
Switzerland and Singapore, the State of Nebraska and
Microsoft Corp ., but we are not complacent about any
of them . If you have substantial assets in long term
Treasuries and want to keep them, one good strategy
would be to sell short an offsetting amount of junk
bonds, thereby aligning your portfolio for a continued
widening of the spread between the two . If you wish
to hold any unhedged debt, make it short term debt .
T-bill rates have been stuck near zero, but if rates                                        Figure 13
overall begin to rise, bondholders will lose money
while bill holders will benefit by rolling continually          until the ultimate crisis . We have already recommended
into higher and higher yields . At the end, the U .S .          substantial holdings of outright cash . But at some point, it
government might default, so do not consider this a             will be time to convert even the safest debt instruments to
permanent strategy . It’s only a last debt-based strategy       cash and/or gold .

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The State of the Global Markets – 2013 Edition                                                            United States

Excerpted from the October 2012 Elliott Wave Financial Forecast

The Last Believers
When government gets into the act of speculation, the top is usually way past having occurred. Government is the
ultimate crowd, every decision being made by committee. It is always acting on the last trend, the one that is already
over. (For example, the Federal government passed securities laws to prevent the 1929 1934.)
                                                                                  —The Elliott Wave Theorist, 1991

In November 1999, The Elliott Wave Financial Forecast             bank’s discounting activities would channel credit away
demonstrated the usefulness of this socionomic precept            from ‘speculative’ and towards ‘productive’ activities .
when the Glass-Steagall Act—the post-1929 crash statute           Although there was general agreement on this issue, the
the U .S . government adopted to “purportedly protect” the        stock market boom created a severe split over policy .”
financial industry from itself—was effectively repealed .         According to economist Murray Rothbard, Herbert
Citing the government’s role as “the ultimate bag holder,”        Hoover and Federal Reserve Board Governor Roy Young
EWFF stated, “The U .S . government may have just                 “wanted to deny bank credit to the stock market .” In
provided one of its greatest-ever demonstrations of this          August 1929, within days of the Dow’s ultimate peak,
principle .” That was four months after the all-time high in      the Fed acted, raising the discount rate to 6% .
the Real-Money Dow (Dow/gold), and two months before
the all-time high in Dow/PPI . Both indexes have been in          As our opening quote from the Theorist notes, government
a bear market ever since .                                        moves by consensus only, so it did not make structural
                                                                  changes deemed capable of preventing another crash until
On September 14, 2012, the U .S . Federal Reserve upped           1934, two years after social mood ended its negative trend
the ante in the latest test of our “ultimate crowd” theory        and the stock market bottomed . In a bid to strengthen
when it introduced QE3, an “open ended” $40-billion-a-            the government’s capacity to curtail “overtrading,” the
month mortgage-buying program . The U .S . central bank           Securities Act of 1934 also gave the Fed power over
further stated that it intends to keep the Fed Funds rate         brokerage firms’ margin requirements . In the early stages
at effectively zero for the next three years . In time, the       of the bull market, the Fed did not wait long to use its
Fed’s herculean effort to stimulate the financial markets         authority . In April 1936, it raised the initial margin
and the economy, with the sanction of government, will            requirement on NYSE shares from a range of 25 to 45%,
illuminate the authorities’ role as the last believer in the      to 55% . Considering that the unemployment rate at the
old trend even more brilliantly than Congress’s passage           time was 15%—nearly double its current level—this act
and repeal of Glass-Steagall, at the beginning and end            represents an exceptionally conservative stance . Stocks
respectively, of a Supercycle-degree bull market . To             retreated for a time, only to race back to new highs three
understand how social mood’s long-term positive trend             months later . The Fed responded by “doubling reserve
influenced the Fed’s actions, we need to travel back to the       requirements (against deposits) from August 1936 to
central bank’s creation, which occurred in the wake of a          May 1937,” right up to and briefly past the March 1937
major downside reversal in mood .                                 Cycle wave I stock peak . Economists Christina and
                                                                  David Romer state that the Fed was “motivated by fear
The Federal Reserve was established (not at all                   of speculation and inflation .”
coincidently near a major bottom in 1914) at least partially
as a response to the Panic of 1907 . In an effort to prevent      The all-important upper line of the Supercycle-degree
financial panic from ever happening again (pipe dream             trend channel that dates back to that 1937 peak is shown
#1), the Fed was mandated to restrain the “undue use”             on the next chart . After the next touchpoint, the Cycle
of credit in the “speculative carrying of or trading in           wave III peak in February 1966, a speculative binge
securities, real estate or commodities .” (Sound like a           accompanied the Dow’s double top in 1968-1969 . The Fed
familiar mix?) When runaway financial speculation burst           felt compelled to act again in June 1968 by raising margin
forth in the late 1920s, the Fed rose to the challenge, or        requirements to 80%, once again “to curb speculation .”
at least tried to . In “The Stock Market Boom and Crash           The Fed also pushed the discount rate to 6% in April 1969 .
of 1929,” economist Eugene White wrote, “The Federal              In 1970, then-Fed Chairman William McChesney Martin
Reserve had always been concerned about excessive                 famously stated that his job was “to take the punch bowl
credit for speculation . Its founders hoped the new central       away when the party is getting good .”

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The State of the Global Markets – 2013 Edition                                                            United States

By 1974, with the DJIA touching
the bottom channel line, the Fed
acknowledged the bearish trend
of Cycle wave IV by reducing
NYSE margin requirements for
stock purchases to 50%, where
they remain today .

In 1984, a Fed study “cast
significant doubt on the need
to retain high initial margins to
prevent excessive fluctuations
of stock prices .” When the Great
Asset Mania finally pushed
the Dow through the top of its
Supercycle-degree channel line
in 1996, Fed-mandated margin
hikes were taken completely off
the table . In December 1996,
after the Dow made its first
decisive break through the top of
the channel, then-chairman Alan
Greenspan issued his famous
“irrational exuberance” comment, citing “unduly                   “appear successful because they tend to come at lows,”
escalated asset values .” Yet, unlike his predecessors, he        and added that the 2007 bailouts were “too close to the
did nothing to change margin requirements . A margin debt         market’s peak” to work . The word “appear” is actually the
explosion in early 2000 “prompted some policymakers               key to that forecast, because it is a reference to the actual
to debate the idea of changing margin requirements to             cause of the market’s reversal: a change in the direction
stem possible speculative excess,” but a Federal Reserve          of social mood . This change is far more powerful than
paper issued the day after the S&P’s March 23, 2000 peak          any action the Fed might take to induce a desired market
(“Margin Requirements as a Policy Tool”) quashed the              outcome . What matters is not the specific action that the
idea: “The bulk of the research indicates that changes in         Fed may take, but the fact that it feels compelled to act
requirements do not have a significant permanent effect .”        by virtue of the social pressures under which it operates .
Ultimately, though, the Fed stayed true to its historical         In the case at hand, the Fed’s long-standing objectives
pattern of raising the cost of credit near the end of upside      have been reversed . Instead of exercising its original
extremes along the trendline, hiking the discount rate to         mandate to restrict excessive speculation, the Fed is doing
6% in May 2000 .                                                  everything in its power to keep buyers’ animal spirits alive,
                                                                  even as the Dow is at its 75-year upper trendline . The
In 2006, with the Dow once again pushing to new highs             open-ended nature of the promise to provide quantitative
above the top of the trendchannel and the real estate             easing indefinitely and the stated objective of creating
mania at peak pitch, the Fed raised the discount rate one         a wealth effect in the form of higher stock prices are
notch higher, to 6 .25% . In a critical change, however, it       unprecedented . “Fed Aims to Drive up Stocks,” says
did not wait for the Dow to reverse course before easing          a September 14 Washington Post headline . Here’s the
again . In the first stage of a bear-market prevention effort     basic plan in Bernanke’s own words: “If people feel that
that continues to this day, the Fed reduced the discount          their financial situation is better because their 401(K)
rate to 5 .75% in August 2007, two months ahead of the            looks better, they’re more willing to go out and spend,
Dow’s October peak . Various government-sanctioned                and that’s going to provide the demand .” Never mind the
financial bailouts also coincided with the developing             foolishness of the demand-theory of economic growth .
stock market reversal . The almost instantaneous impulse          Just as EWT theorized in 1991, the Fed is getting into
to “do something” represented a historic departure from           the act of speculation with the top long past . It will pay a
previous behavior . EWFF’s November and December                  steep price for goosing the old trend near its end and for
2007 issues noted that government bailouts generally              fighting the new trend as it begins .

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                                                                                                                 2013 Edition

Excerpted from the November 2012 European Financial Forecast

European blue chips remain well beneath their 2011 top,
but at least one measure of complacency has surpassed this
prior sentiment extreme . The chart at right plots the iTraxx
European Crossover Index, which follows the movement
of credit-default swaps (CDS) on 45 sub-investment grade
corporations in Europe . It essentially shows a 180 degree
shift in sentiment — from credit traders’ persistent fear
about corporate defaults in early 2009 to their full-fledged
confidence in corporate debt today . In fact, the index fell
to new lows in October, meaning that credit traders are
more confident about corporate credit quality than at any
point in the index’s four-year history . Regardless of the
market’s near-term direction, one thing is certain: This
kind of complacency will disappear when stocks home in
on another long-term low .

Elsewhere, the aftereffects of a long uptrend in social
mood are also on display . In September, we showed a chart
depicting sinking sovereign CDS premiums and observed
that the sharpest declines were in the very countries where
funding conditions are a problem . Optimism has since
spread from the countries that will eventually need rescue
financing to the funding facility that will purportedly
provide the money . On October 2, Europe’s temporary
bailout fund, the European Financial Stability Facility
(EFSF), sold three-month bills at a negative yield of - .04% .
So, despite a steady deterioration in the European economy, fixed-income investors are not just eager to loan money
to the facility, they’re willing to accept a known loss over three months in order to do so . Long term, too, investors’
faith in the bailout fund seems virtually unshakable . “[A]cross all asset classes, investors were risk-on,” reported a
Barclays banker, who led the EFSF’s five-year, €5 .9 billion debt deal on October 16 . Indeed, this longer-term debt
issuance was twice oversubscribed, attracting orders in excess of €12 billion .

Many point to the allegedly limitless bond-buying program of the European Central Bank as the reason for traders’
returning confidence . “If you’re convinced that the central bank will respond every time markets tank, that puts a floor
under prices,” a London-based economics professor tells the Financial Times .

Until now, Germany’s finance ministers had been the biggest detractors of the plan . But as ECB president Mario Draghi
drummed up support for it, Germany’s customary caution evaporated . On October 24, Draghi “entered the lion’s den,”
(Reuters, 10/24) for a two-hour grilling in front of 100 politicians at the Reichstag building in Berlin . Two hours later, he
emerged unscathed, while the lions had turned into kittens . “Draghi Charm Drive Softens Edges of German Skeptics,”
reported CNN . “His answers were very convincing,” a senior German lawmaker told reporters after the meeting .

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The State of the Global Markets – 2013 Edition                                                                    Europe

Forgive us if we are not convinced . The plan is essentially
the same one presented in May 2010, when eurozone
authorities created Europe’s first €440 billion bailout
facility to deal with Greece’s first sovereign debt crisis .
For that matter, it’s the same plan that turned up again, in
March 2011, when Portugal’s debt bubble popped, and the
European parliament approved the EFSF’s successor fund,
the European Stability Mechanism (ESM) . Today, Spain
is flirting with bankruptcy, and Italy still struggles under
a higher debt burden than Greece, Portugal and Ireland
combined . Here again, uptrending stocks have buoyed
confidence, so authorities believe they can step in when
they’re needed, where they’re needed . A renewed market
downtrend will shatter this illusion .

At least one former optimist has become surprisingly
gloomy of late: the Bank of England . In a significant
departure from the optimism that pervades the Continent,
BoE governor Mervyn King warned in October that the
Bank’s “unorthodox actions” (FT, 10/24) were reaching
the limits of their effectiveness . As EFF has previously
discussed, the word unorthodox doesn’t begin to describe
the BoE’s actions following the 2008 financial crisis,
which include nine interest rates cuts and £375 billion of
quantitative easing .

We constantly read that the central bank’s policy is
accommodative, meaning that official bank rates are low
and should spur robust lending and borrowing across
Britain . This chart of Britain’s official bank rate back to      Translation: We’ll eventually have to turn off the stimulus
1900, however, shows precisely the opposite: that bank            spigot.
rates stayed low throughout the Great Depression and
still failed to stimulate the economy . Somehow, the BoE          In August 2009, EFF described the ultimate effect of
may have gotten this message and is starting to rethink the       money printing, which is to “warp free market prices and
effectiveness of its monetary policy . Said King in October,      distort the critically important information they provide .”
“I am not sure that advanced economies in general will            In fact, central bank stimulus is doubly negative, because
find it easy to get out of their current predicament without      it pushes investors and business owners to misallocate
creditors acknowledging further likely losses  . . . .”           even greater amounts of capital, thereby prolonging the
                                                                  eventual economic slump . The Great Depression was a
Translation: The Bank of England won’t bail everyone out.         torturously protracted affair for Europe . All the evidence
                                                                  suggests that today’s downturn will be an even longer,
King continued, “When the factors leading to a downturn           slower slog .
are long-lasting, only continual injections of stimulus will
suffice to sustain the level of real activity . Obviously, this
cannot continue indefinitely .”

Follow this link for the most up-to-date analysis of European markets: http://www .elliottwave .com/wave/MIEFF            27
The State of the Global Markets – 2013 Edition                                                                   Europe

Excerpted from the November 2012 European Financial Forecast

Europe’s main stock indexes have so far failed to commit resolutely in either direction, emerging from the traditionally
weak months of September and October unharmed . Stock market tops are almost always a protracted affair as optimism
leaks out of various sectors and indexes, one by one . So, today’s sideways trading must simply be endured .

For now, the clearest wave formation remains the five-wave decline and three-wave rally shown below in the CAC 40
and Euro Stoxx 50 . As depicted, the pattern conforms to numerous tenets of wave formation . Sentiment, too, supports
this interpretation, as stock market bulls have become at least as numerous as they were at the early 2011 peak, Primary
wave 2 . The pattern implies a renewed sell-off to begin soon .

The September 2012 EFF discussed Europe’s “dangerously splintering” markets, highlighting the rally’s historically
low volume, waning momentum and near- and long-term price divergences . To reiterate, this is not the kind of behavior
that signals a healthy long-term advance .

Likewise, a multitude of subindexes display the kind of staggered finish that signals exhaustion of a larger trend . The
chart at bottom right shows six subsectors of the FTSE 350 index . After dropping uniformly in 2008 and early 2009,
three of these critical industries — banks, construction and real estate investment trusts (REITS) — have merely

Follow this link for the most up-to-date analysis of European markets: http://www .elliottwave .com/wave/MIEFF       28
The State of the Global Markets – 2013 Edition                                                                    Europe

stumbled along near their 2008-09 lows . Two more sectors       certainly angling toward another long slide . The rally’s
— mining and financial services — recovered more of             narrowing scope strongly indicates that the advance is in
their 2008 sell-offs, but peaked nearly two years ago and       its late stages . The long-term bear market will publicize
have given back about half of their gains already . And         its return with a sell-off that reaches just about every stock
auto shares, while still levitating as a group, are almost      market index and indicator .

Excerpted from the October 2012 European Financial Forecast

During the bear market, the independent nations of Europe will rediscover their borders and rekindle the animosities
that kept them apart for centuries.
                                                                      —Elliott Wave Financial Forecast, May 2005

At this point, 13 years of downtrending mood isn’t only exposing the rivalries among the member nations of the
European Union; it’s also prying apart the provinces, principalities and semi-autonomous regions within the nation-
states themselves . In July 2011, EFF highlighted the Scottish National Party, saying that its historic May victory
all but guaranteed a referendum on Scottish independence . According to the Financial Times, the first minister of

Scotland, Alex Salmond, has promised to hold a referendum on independence in the autumn of 2014 . In Belgium,
the divide between the country’s Flemish-speaking and French-speaking regions has narrowed somewhat since
June 2010, when a leader of the Flemish nationalist party, Bart de Wever, won a “stunning electoral success” (NYT,
6/13/10) . In Italy, however, divides are opening up between Rome and the country’s heavily indebted southern regions .
Sicily, for instance, is one of five Italian regions with
special statutes on autonomy . Despite the region’s
massive €5 .3 billion in public debt, a June report by the
audit court (Economist, 7/28/12) found that Sicily has
more than five times as many public employees as the
government of neighboring Lombardy, which has twice
the population . Tensions here are about as high as they
are in nearby Sardinia, where a protest by Sardinian
workers in Rome turned violent in September .

The chart at right shows a clear separatist movement
rising in Spain . In fact, “Catalonia Is Not Spain,”
according to the banners at the September 11 Diada de
Catalunya, which commemorates the defeat of Catalan
troops during the War of the Spanish Succession . In the
past, marches to support Catalan independence have
never numbered more than 50,000, according to city
police . This year, pro-independence demonstrations
drew more than 1 .5 million, as Catalan President Artur
Mas promised to push for independence from Spain
unless the central government allocates a larger share
of tax revenue to the region . “The road to freedom for
Catalonia is open,” declares Mas .

If we’re correct that much of the IBEX’s bear market
remains ahead, Mas’s road to an independent Catalan
state should pick up significantly more traffic .

Follow this link for the most up-to-date analysis of European markets: http://www .elliottwave .com/wave/MIEFF            29
The State of the Global Markets – 2013 Edition                                                                          Europe

Excerpted from the November 2012 European Financial Forecast

Back in September, EFF presented a snapshot of Europe’s flailing shipping industry, noting that “weakness in shipping
often provides early warning for a broader economic decline, because bulk transport represents the first link in the
consumer-goods supply chain .” Today, it’s clear that the European car market provided another early tell . In January
2012, EFF discussed how the pending bankruptcy of Swedish carmaker Saab portended another dark road ahead for
Europe’s auto industry . Three months later, we showed a chart of collapsing EU car registrations and speculated why
the auto market seems especially sensitive to credit deflation:
     For one thing, most consumers tend to buy cars solely on credit, so auto sales quickly reflect changes in credit availability .
     In addition, new cars represent a discretionary purchase, meaning potential car buyers can usually forgo the purchase
     and still get by .
                                                                                  —European Financial Forecast, April 2012

The chart below adds detail to the industry’s snapshot that we showed in April . It depicts a three-month moving
average of individual registrations in Italy, Spain, France and Germany, as well as collective car registrations within
the 17-nation eurozone . Four of the five metrics just fell to new lows for the bear market, with the pace of deterioration
clearly accelerating . In fact, car deliveries plunged 11% in September, generating the largest year-over-year decline
in 19 years, according to the European Automobile Manufacturers’ Association (ACEA) .

Germany represents the car industry’s lone bright spot, as registrations have trended largely flat . But even here, demand
is drying up and desperation growing acute . For the third time this year, BMW reintroduced its “lease pull-ahead
program,” an incentive that lets lease owners skip up to three payments on new or used vehicles .

The move follows another widespread sales-boosting tactic called “Specialty Demo Allowance,” where car manufacturers
pay dealers cash bonuses (up to $7,000 in BMW’s case) to add cars to their demo fleets . Even though dealers are

Follow this link for the most up-to-date analysis of European markets: http://www .elliottwave .com/wave/MIEFF                  30
The State of the Global Markets – 2013 Edition                                                                   Europe

                                                         essentially selling vehicles to themselves, the
                                                         ploy allows them to chalk up transactions as if
                                                         they’re genuine sales . According to Bloomberg,
                                                         “self-registrations” now account for at least
                                                         30% of Germany’s new car registrations .

                                                         Industry experts see Europe’s car market shifting
                                                         into recession . We think that the professional
                                                         outlook still massively underestimates the
                                                         demand-reducing potential of the current
                                                         deflation . ACEA’s gloomy October 16 report
                                                         coincided with a moderate drop in Europe’s
                                                         top automobile- and tire-makers . The chart at
                                                         left, meanwhile, shows the share performance
                                                         of the six largest European automakers back
                                                         through 2005 . Notice that only BMW managed
                                                         to exceed its 2007 high, with Fiat, Daimler,
                                                         Renault and Volkswagen (Europe’s largest
                                                         automaker) down 50% to 70% from their
                                                         previous highs .

                                                         The bottom graph on the chart shows the brick
                                                         wall that Europe’s No . 2 automaker, Peugeot,
                                                         just crashed into . In addition to cutting 8,000
                                                         jobs and closing factories, Peugeot is frantically
                                                         selling assets in order to raise cash . In October,
                                                         the French government engineered a rescue
                                                         for Peugeot’s financing unit, Banque PSA
                                                         Finance, with analysts putting the tab at €4
                                                         billion in bank guarantees and €1 .5 billion in
                                                         new credit lines . Bloomberg calls the move
                                                         an “indirect bailout,” but the sheer size of the
                                                         rescue package is at least on par with Paris’s
                                                         previous intervention in its car industry in
                                                         February 2009 . Then, the French government
                                                         extended Peugeot and its smaller rival, Renault,
                                                         €6 billion in low-interest loans, seeking to
                                                         bolster the companies’ liquidity in the wake of
                                                         the 2008 banking crisis . This deterioration in
                                                         business followed by another bailout will spread
                                                         to innumerable other sectors and industries as
                                                         credit deflation intensifies .

Follow this link for the most up-to-date analysis of European markets: http://www .elliottwave .com/wave/MIEFF       31
The State of the Global Markets – 2013 Edition                                                                     Europe

SPECIAL.SECTION:.SWAPPING.OUT.FEAR                                          Over the past three years, as the credit
Excerpted from the October 2012 European Financial Forecast                 crisis secured footholds in former bedrock
                                                                            economies across the Continent, EFF has
                                                                            persistently directed readers’ attention
                                                                            to the source of credit deflation: a large-
                                                                            degree social mood decline . To be sure,
                                                                            the credit crunch won’t end until the bear
                                                                            market does . On the heels of a multimonth
                                                                            bounce, however, funding problems appear
                                                                            to be hibernating, economies appear to be
                                                                            breathing signs of life, and key financial
                                                                            players are positioning themselves for
                                                                            another financial springtime .

                                                                            Notice, for instance, the sinking costs
                                                                            to protect bondholders from a sovereign
                                                                            default . Credit-default swaps allow traders
                                                                            to hedge against (or, more directly, to
                                                                            gamble on) a debtor’s creditworthiness,
                                                                            so you would think that swap premiums
                                                                            in Europe would be rising . Yet, swap
                                                                            premiums are down across the board, with
                                                                            the sharpest declines showing up in the very
                                                                            countries where funding conditions are most
                                                                            problematic . The top four panels depict CDS
                                                                            premiums across four of the five PIIGS
                                                                            nations: Portugal, Italy, Ireland and Spain .
                                                                            CDS rates in Ireland, one of Europe’s earliest
                                                                            bailout recipients, fell beneath a two-year
                                                                            low, while Portuguese default protection
                                                                            is the cheapest since February 2011, just
                                                                            two months before Lisbon activated its €78
                                                                            billion financial aid package .

                                                                            Meanwhile, core European rates have also
                                                                            fallen precipitously . Observe that French,
                                                                            Belgian, Swedish and Dutch swaps are
                                                                            probing recent lows, while German rates slid
                                                                            below 50 basis points in September . Here, too,
                                                                            the last time derivatives traders paid this little
                                                                            for credit protection was July 2011, as the
                                                                            DAX teetered on the brink of a two-month,
                                                                            34% sell-off . “Another banana skin has
                                                                            been averted,” a currency strategist tells the
                                                                            Wall Street Journal . In fact, the diminishing
                                                                            cautiousness of credit traders suggests the
                                                                            opposite: that the financial floorboards are
                                                                            slippery again . The difference is that stocks
                                                                            stand to slide much further this time around,
                                                                            meaning that much larger pools of shaky debt
                                                                            will also hit the skids .

Follow this link for the most up-to-date analysis of European markets: http://www .elliottwave .com/wave/MIEFF             32
                                                                                                                      2013 Edition

Excerpted from the November 2012 Asian-Pacific Financial Forecast

The Asian-Pacific region sports a broad range of stock price patterns, and thus a broad range of expectations . The
Southeast Asian bulls, such as the Philippines, continue to power higher, well above their 2010 and 2011 highs . Others
such as Turkey and India are approaching their own 2010 and 2011 highs . Still others, such as Korea, have fallen back
in small-degree second waves . And at the other extreme, laggard Vietnam needs to decline several percent more as it
moves toward an intermediate-term low .

In contrast to peace overtures in Southeast Asia and Latin America, the tension between China and Japan over territorial
issues continues to grow . That negative social mood supports our forecasts for significant lows in Northeast Asia .

Excerpted from the November 2012 Asian-Pacific Financial Forecast

The KOSPI continues its stairstep advance in a series of
ones and twos . The index is now sitting on the long-term
uptrend line from its 1962 low (see chart at right) . If
it falls below its July wave 2 low of 1759, about 7%
below current levels, then the odds would increase that
the alternate count on the monthly chart is correct .

Sentiment support for a rally now comes from South
Korea’s Manufacturing Business Conditions Survey,
which in October fell to its second-lowest level of
the past decade . The worsening conditions associated
with wave 2 and wave 2 demonstrate Elliott Wave
Principle’s observation that fundamental conditions
during second waves are “often as bad as or worse than
those at the previous bottom .” The surveyed conditions
should eventually rise to record highs as Korean stocks
continue their advance in wave 3 .

The KOSPI’s gradual advance in the face of dismal
economic fundamentals fits the mixed mood of the
corrective period of the past two years . That mixed mood
is also evident in the sudden popularity of “Gangnam
Style,” a song and dance video by South Korean pop
musician Psy . Bloomberg columnist William Pesek hit
the nail on the head when he wrote, “Psy’s song and
ubiquitous video parody the tony neighborhood [of

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www .elliottwave .com/wave/MIAFF            33
The State of the Global Markets – 2013 Edition                                                                        Asia-Pacific

                              Gangnam] and poke fun at the              The financial crisis of 2008 and even the correction of
                                crass materialism that has              2011 probably brought back memories of the lost decade
                                 consumed a country that                of the 1990s and early 2000s in many emerging Asian
                                 just 15 years ago was beset            markets . Psy’s bouncy tune and horse-dancing marks a
                                 by economic turmoil . …                break from the mood of austerity while offering a preview
                                 By both celebrating this               of more positive times ahead .
                       phenomenon and mocking it, Psy
                      caught the bipolar nature of Korea’s
                     economy .”

Excerpted from a September special report from The Asian-Pacific Financial Forecast

Over the past half century, Chinese society has passed from a dark age to a golden age . From the misery of the Great
Chinese Famine (1958–1963) and the chaos of the Cultural Revolution (1966–1976), hundreds of millions of Chinese
people have lifted themselves out of poverty and into a world of progress where they believe they can succeed .

From an Elliott wave perspective, China’s boom of the past few decades exemplifies the growth phase of the natural
cycle of growth and decay inherent in all societies . China has experienced numerous such long-term cycles in its
history . The one that began in the late 20th century is just the most recent .

Ralph Nelson Elliott recognized a long-term cycle at work in American society when he discovered the Wave Principle
in the early 1930s . He recognized that the 1929–1932 collapse in U .S . stocks he had just witnessed was simply a natural
reaction to the boom of the prior several decades . His
discovery of wave patterns in stock prices led him to
conclude that the Great Depression was a large-degree
bear market — and that, therefore, a large-degree
bull market lay ahead . In their 1978 book, The Elliott
Wave Principle, Elliott’s intellectual descendents, A .J .
Frost and Robert Prechter, made a similar forecast
for American stocks and society near the end of the
1966–1982 bear market in the Dow Jones Industrial
Average .

Our long-term wave count for Chinese stocks finds
Chinese society today at a similar turning point . China
launched its modern stock market in 1990, which
provides us only about 22 years’ worth of actual index
price data . But using knowledge of historical events, as
Elliott did, we can estimate how prior waves progressed,
thus providing context for the picture as a whole .

This chart shows the likely pattern of China’s advance
of the past half century . Notice how the structure of the
advance conforms to Frost and Prechter’s depiction of
an idealized impulse wave whose middle waves are
extended (see next page) . This structure implies that a
multi-year advance in Chinese shares lies directly ahead .

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www .elliottwave .com/wave/MIAFF            34
The State of the Global Markets – 2013 Edition                                                                        Asia-Pacific

                                                                                    Source: Elliott Wave Principle (1978)

                                                                             The correction since the 2007 high in the
                                                                             Shanghai Composite is unfolding in wave IV as
           Source: Elliott Wave Principle (1978)                             a contracting triangle . This particular pattern,
                                                                             which often occurs as the fourth wave of a five-
Boom.Ahead                                                                   wave structure, is labeled a-b-c-d-e . Wave (C)
The long-term wave pattern in the Shanghai Composite                         of C down is developing as a textbook impulse
is the primary justification for our bullish forecast for                    wave, as wave 5 has fallen on slower momentum
China, but plenty of other technical evidence supports it .                  than did wave 3 .

Excerpted from the October 2012 Asian-Pacific Financial

Indian stocks also show a stair-stepping pattern of ones
and twos . The pattern is clearest in banking stocks in the
short term (see BSE Bank Index in weekly chart) and
in auto stocks in the long term (see BSE Auto Index in
monthly chart) . The pattern in the BSE Auto Index, which
continues to lead the market as it has since the early 2000s,
looks similar to the one it displayed just before it rocketed
higher in 2003 . If the Nifty falls below 5449, about 6%
below current levels, it would mean that the advance from
the June low is corrective rather than impulsive .

In September, we observed how bad the social gridlock in
India had become and said that the wave pattern in Indian
stocks would eventually resolve the nation’s leadership
crisis . The series of ever-smaller second-wave lows has
now broken the impasse . A week after the wave 7 low
in the BSE Bank Index, Prime Minister Manmohan Singh
risked the ruling coalition’s Parliamentary majority to
announce several controversial economic reforms with the
promise of more to come . Conventional observers credit
the announcement for driving stocks higher . A better way

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www .elliottwave .com/wave/MIAFF              35
The State of the Global Markets – 2013 Edition                                                                        Asia-Pacific

                                                                              We can see how deep the pessimism had become
                                                                              in the two magazine covers above . The week
                                                                              before the wave 7 low in the CNX Nifty, a sub-
                                                                              headline on Time magazine’s Asia cover said that
                                                                              “India needs a reboot” and questioned whether
                                                                              Singh was up to the job . Even as the Nifty shot
                                                                              up, The Economist last week published a 14-page
                                                                              special report, titled “Aim Higher .” It is critical
                                                                              of the government and shows how entrenched
                                                                              the pessimism remains . Paul Montgomery of
                                                                              Montgomery Capital Management has long
                                                                              observed how magazine covers tend to trumpet
                                                                              financial trends just as they are about to change .
                                                                              From that perspective, these two covers are
                                                                              blaringly bullish . By the end of wave 3 up in
                                                                              the Nifty, observers will again laud Manmohan
                                                                              Singh as a great reformer, as they did at the end
    to view the event is that extreme frustration at the                      of wave 1 up, and more people will talk about
    end of a three-year period of no net progress in India                    Indian dreams in a positive light .
    forced a change in Indian society .

Excerpted from the November 2012 Asian-Pacific Financial Forecast

The ASX All Ordinaries continues its third-wave advance . Key indexes continue to suggest that the advance from
the 2011 low is impulsive . In October, we saw how the ASX 200 Financials Index appeared to be leading the market
impulsively higher . That index is vying for pole position with the leading sector index, the ASX 200 A-REIT Index,
which in October exceeded its 2009 wave A high . The A-REIT index also recently hit its highest weekly momentum
so far in the rally from the 2011 low, which supports our view that the advance is a third wave .

A pattern in the stock price of Woolworths, Australia’s largest retailer and grocery chain, also suggests that the nation’s
economy is returning to growth after the corrective period . The stock recently rose impulsively above its 2010 high
after completing what may have been a three-wave correction . Two caveats to this forecast are that the stock’s wave
C failed to fall below the end of its wave A and that its correction since its 2007 high was quite shallow . Those flaws
may mean that the correction is not finished, or they may simply reflect Woolworths’ strong growth story . In fact, the
stock’s two prior corrections were also shallow .

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www .elliottwave .com/wave/MIAFF                  36
The State of the Global Markets – 2013 Edition                                                                        Asia-Pacific

“I don’t want anyone to rush out there and say I see the                said last week, reflecting the cautious optimism of the
sun coming up . I can see the early signs and time is a                 early stages of a new advance . (Sydney Morning Herald)
great provider of that confidence,” the company’s CEO

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www .elliottwave .com/wave/MIAFF            37
The State of the Global Markets – 2013 Edition                                                                        Asia-Pacific

  Excerpted from the October 2012 Asian-Pacific Financial Forecast

  Since the early 2000s, many emerging Asian markets have taken paths quite different from those of most developed
  markets . Of the 93 global stock markets tracked by Bloomberg, three of the four markets shown in the charts
  below — Indonesia, Thailand, and the Philippines — rank among the top five best performers in USD terms
  since the global stock market lows of October 2008 . These two charts show the main reason why . In the left-hand
  chart, you can see that these four Southeast Asian markets are advancing in third waves of Primary degree . In the
  right-hand chart, you can see that this world-beating performance should continue, because all are now entering
  third-of-a-third-wave rallies .

  There is a caveat to this aggressively bullish forecast: The wave (2) corrections during 2011 were quite shallow in
  these four markets, especially in global performer No . 1 Indonesia . But shallow retracements are common during
  powerful bull markets, as Indonesia’s 2002-2008 rally demonstrated . And recent price action shows Malaysian and
  Philippine stocks just now emerging from two-month sideways corrections, while Indonesian and Thai stocks recently
  hit new rally highs on the strongest momentum of their rallies since June . We will reassess the technical evidence
  at a later date, but for now the simple support lines shown in the weekly chart will serve as a rough measure of the
  uptrend’s health . The immediate bullish case would be challenged if the indexes fall below those lines .

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www .elliottwave .com/wave/MIAFF            38
The State of the Global Markets – 2013 Edition                                                                        Asia-Pacific

Excerpted from the October 2012 Asian-Pacific Financial Forecast

To understand how Israeli stocks could explode higher despite the government supplying gas
masks to half the population, one need only look at events from the perspective of social mood
dynamism . Fear — specifically, the fear that has attended the end of the corrective period — has
caused the government to go on the offensive against a historical enemy . The last time that
happened, when Israel attacked Hamas on Dec . 28, 2008, at the start of the three-week Gaza
War, a divergence between the Tel Aviv 100 and the Tel Aviv Banking Index marked the turn .
There was a divergence again this past summer . We don’t know whether Israel will in fact
attack Iran’s nuclear facilities, but from a socionomic perspective, it is primed to do so . Any
outbreak of violence now would simply lag the negative mood extreme .

We can say the same regarding the escalation of anti-Japan protests across China in September
about territorial issues . One observer interviewed by The Economist called them the “largest
such display since Japan established diplomatic relations with the People’s Republic in 1972 .”
(See The Economist’s cover .) These twin conflicts at either end of Asia provide the backdrop
for a classic contrarian investment opportunity in emerging Asian markets .

Recent price action indicates that the region’s developed markets will rally along with emerging
markets for a while longer before larger declines begin, and we have adjusted our wave counts accordingly . Still, on
the chance that we are wrong about a sustained advance in emerging markets, we have identified price levels that, if
breached, will signal that investors should re-evaluate .

The Elliott Wave Principle is a detailed description of how financial markets behave . The description reveals that mass
psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in
price movements . Each pattern has implications regarding the position of the market within its overall progression, past,
present and future . The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of
markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle .
While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no
time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader,
caller or viewer be justified in inferring that any such advice is intended . Investing carries risk of losses, and trading futures
or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial
margin funds . Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed . The
market service that never makes mistakes does not exist . Long-term success trading or investing in the markets demands
recognition of the fact that error and uncertainty are part of any effort to assess future probabilities . Please ask your broker
or your advisor to explain all risks to you before making any trading and investing decisions .

This report is published by Elliott Wave International, P .O . Box 1618, Gainesville, Georgia, 30503, USA .
Phone: 770-536-0309 . Fax: 770-536-2514 . E-Mail: customerservice@elliottwave .com . All contents copyright © 2013
Elliott Wave International . All rights reserved . Reproduction is illegal and strictly forbidden . Otherwise, feel free to quote,
cite or review if full credit is given .

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www .elliottwave .com/wave/MIAFF            39
The State of the Global Markets – 2013 Edition


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