state of global market report

State of theGlobal Markets

2015

2The State of the Global Markets 2015 Edition

TABLE OF CONTENTS

WELCOME . . . . . . . . . . . . . . . . . . . 3

UNITED STATES

OVERVIEW . . . . . . . . . . . . . . . . . . 4

INVESTOR PSYCHOLOGY . . . . . . . . . 4

THE STOCK MARKET . . . . . . . . . . . . 5

THE BOND MARKET . . . . . . . . . . . . 6

GOLD & SILVER . . . . . . . . . . . . . . . 7

U .S . DOLLAR . . . . . . . . . . . . . . . . . 8

ECONOMY & DEFLATION . . . . . . . . . 9

SPECIAL SECTIONS:Deflation Is Starting To Win 13Alert The Media: Margin Debt Shrinks 16 Financial Stability Board: Mission Accomplished 17A Luxurious Turn For The Worst 18Government Banks On Stocks 19Death Of A Mania Cluster 21

ASIA-PACIFIC

OVERVIEW . . . . . . . . . . . . . . . . . 23

SPECIAL SECTION:MSCI Emerging Markets 24

CHINA . . . . . . . . . . . . . . . . . . . . 25

HONG KONG & SINGAPORE . . . . . . 27

KOREA . . . . . . . . . . . . . . . . . . . . 29

TAIWAN . . . . . . . . . . . . . . . . . . . 30

INDIA . . . . . . . . . . . . . . . . . . . . . 31

JAPAN . . . . . . . . . . . . . . . . . . . . 33

AUSTRALIA . . . . . . . . . . . . . . . . . 34

EUROPE

SPECIAL SECTIONS:The Great Purge Ahead 35Another Sneak Peek At The Main Event To Come 36No One Is Coming To The Rescue This Time 38The Floodgates Open 40Europe: The Unhappiest Place On Earth 41Let The Central Bank Battles Begin 43Next Casualties Of The Credit Bubble 44

ECONOMY AND DEFLATION . . . . . . 45

A FEW MORE SANCTIONS FOR DEFLATION . . . . . . . . . . . . . . . . . 47

DEFLATION IS HERE AND NOW . . . . 49

CULTURAL TRENDS . . . . . . . . . . . . 50


WELCOME

Dear Reader,

Thank you for downloading Elliott Wave Internationals new report, The State of the Global Markets 2015 Edition.

We put together this report to get you up to speed with EWIs big-picture outlook for 2015 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 Prechters Elliott Wave Theorist.

As you read, you may notice our analysis doesnt mention the Sony hacking scandal, last years U.S. mid-term election or other news of geopolitical importance. Thats because we take the radical view that external events like these are in fact driven by the same hidden engine that also drives the markets internal price patterns. Therefore, such events do not significantly impact share prices as most people assert; they are rather parallel results of a shared cause: changing social mood.

Social mood is the common thread connecting everything we do at EWI. We observe 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 2015.

Thank you for reading,

The EWI Team

EDITORS NOTE: UPDATE ON EWAVES From The Elliott Wave Theorist, October-November 2014

Our EWAVES 1.1 computer program is powering more and more of the calls in Flash, our service that makes specific market calls for traders and investors.

Test results are strong. Real-time recommendations have been working well. We have mostly kept quiet during the building process and signals testing, but now we are ready to tell you more about it.

We have evaluated Elliott-wave analytical programs developed at other shops over the years, and all of them take short-cuts. But EWAVES is built as it should be. It analyzes only price patterns; it does not interpolate them from market indicators. It uses no methods other than the wave model. This means it is not quantitatively hamstrung

in any way. The market is a fractal, and EWAVES knows it. No other analysis program weve ever heard of does this.

Our strategy improvements have provided a significant leap in the value of the programs market calls. Thats why we recently started using them every day in Flash. We wanted to watch its market signals in real time for a while before announcing anything, and weve seen enough to justify a big jump in confidence.

Good as they are, the improvements in 1.1 have taken us only part of the way to our goal. The program is still in beta mode. We will complete the next big leap with version 2.0.

Learn more about the new EWAVES 1.1 and how we use it for Flash: www.ewaves.com/EWF-1407.

42015 Edition

OVERVIEWFrom The Elliott Wave Financial Forecast, December 2014

There is a mounting intensity to the long list of deflating asset prices, led by commodities. Against this backdrop, the Dow Jones Industrial Average is at a new high, one of the last holdouts. A Dow trend reversal will align the markets senior index with these other assets in a long-term bear market.

INVESTOR PSYCHOLOGYFrom The Elliott Wave Financial Forecast, December 2014

With so many once-bright investment ideas flaming outhouses, condos, commodities, gold & silver, oil, junk bonds and hedge funds, to name a fewone would think that the buy-and-hold ethos of the Mania Era would at least be under review. But it isnt. All it has done is become more focused while remaining as cherished as ever. On

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Follow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFF

November 14, USA Today quoted a popular refrain: For many people, this is a TINA marketmeaning There Is No Alternative. Money market funds yield nearly zero; bond yields are miserably low; and commodities are pumping mud. Your best alternative, it seems, is stocks. (Right. Buy whats way up. Whatever happened to buy low, sell high?) The consensus is nothing less than a wholesale rejection of the alternate explanation offered at the top of this newsletter. Heres another ratio that shows how completely detached the commitment to equities is from its historic norm. Weighing ICI equity mutual fund assets and ETF assets relative to money market assets, this ratio reveals that mutual fund investors favor stocks over risk free money markets by an incredible 4.29-to-1 margin. This record reading came in August. The graph also shows that lower peaks in the ratio preceded the market collapses of 1987, 2000 and 2007. In August 1987, the assets in equity mutual funds equaled those in money markets for the first time; the Crash of 1987 followed two months later. In 2000 and 2007, the ratio peaked at a higher 3-to-1 margin and was followed by Dow declines of 39%

and 54%, respectively. Now its at 4.3:1! This crazy ratio fits our outlook for a record collapse in stock prices.

Over the course of the last 12 months, weve also shown one sentiment reading after another posting multi-year if not record extremes. This follows the pattern at historic peaks, as record levels of optimism generally dont happen all at once. The reason is that stock market tops tend to be diffuse, with one sector after another topping and peeling away into a bear market. So, many sentiment extremes occur months ahead of the actual price peak in the blue-chip indexes, while others accompany the top and some follow shortly thereafter. The mutual fund cash-to-assets ratio, for instance, hit a record low of 3.3% in December 2013. The latest available reading of 3.6% in October is still historically low. In fact, it is more extreme than every monthly reading prior to 2008 except that in July 2007, which marked a high in the Dow Jones Composite Index.


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THE STOCK MARKETFrom The Elliott Wave Financial Forecast, December 2014

Thirteen years ago, we initiated the Economy & Deflation section of EWFF in order to chart the slow but steady progress toward one of the rarest economic events: an outbreak of deflation. At the time, the prospect of contracting monetary measures and negative economic output was considered an absurd notion. When the Fed dropped the Fed Funds rate to a then-historic low of 1% in June 2003, deflation remained impossible in the view of an overwhelming majority. Most pundits were certain that easy money would stoke inflation or even hyper-inflation. Despite historicby many multiplesfiscal and monetary stimulus and a Fed Funds rate that has remained at essentially zero since December 2008 with little net inflationary effect, the majority of economists still considers accelerating inflation to be the most probable future monetary condition. Yet years-long declines in asset prices have quietly and steadily indicated that deflationary forces are winning. Its been eight years since home prices topped, six years since commodities peaked, and three years since the precious metals began a bear market. All three asset groups are considered to be the inflation hedges. At each of these reversals, we kept subscribers from suffering considerable losses on the false assumption that inflation would carry each of these assets higher. These trends fall right in line with Conquer the Crashs long-term forecast for a deflationary depression. The world has been trending toward deflation for years, and its now rearing its head so that all can see it.

This year, EWFF warned in April about an imminent resumption of the decline in commodities, and in

May we explained the implication of an emerging underperformance by small-cap stocks relative to big-cap shares. For the past three years, we forecasted the twists and turns in gold. With respect to the global outlook, when a London bank issued an effusive report on a new super-cycle bull market in emerging markets and global trade in February 2011, EWFF stated the global boom must be over. The MSCI Emerging Markets Index peaked two months later and is still down 19% from that high. Monetary authorities in many countries have decided that devaluation is the best way to stimulate growth (WSJ, November 21). We have been super bullish on the U.S. dollar for quite some time, and last May it finally started taking off. As noted in October, the dollar rally and the emergence of a 1930s-style currency war are two key components of our long-term forecast for monetary chaos. Still, to our chagrin, there is one main holdout: U.S. blue-chip stock indexes. Declines that we forecast for the Dow Jones Industrial Average this year turned out to be short term only. The optimistic consensus is that stocks will continue to rally due to a record easy-money stance by global central banks. But holding this view is to see the glass as a quarter full. While the Dow rallies to new highs, raw material prices are tanking, and home prices, small-cap stocks, foreign shares, precious metals and many other assets lag far behind the stock market. When the glass is this empty, it pays to see it that way. In this case it indicates a developing deflation and therefore an approaching broad-based stock market decline. Our stance remains that deflation will ultimately carry the day even in equities.


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THE BOND MARKETFrom The Elliott Wave Financial Forecast, January 2015

One of todays riskiest investment beliefs is that the worlds central banks will prop up failing economies. Investor confidence in their ultimate success is so high that the government of Italy, whose year-over-year real GDP has been negative since the fourth-quarter of 2011, just sold 10-year bonds at a record-low yield of less than 2%. Yet clear signs of credit stress continue to build throughout global debt markets, despite policies of zero interest rates and massive quantitative easing. The next two charts show a crucial fact: Liquidity is waning, just as it did prior to the 2007 top. This chart shows a succession of higher highs and higher lows in the junk-to-Treasury spread, which EWFF anticipated last month. In other words, spreads are widening. We have been virtually alone in discussing this danger ahead signal. The divergence relative to the new highs in the Dow has been building since June, when the spread made a low. In 2015, U.S. stocks should catch up to this new trend by declining. The chart shows that the value of the high yield debt of emerging market and energy companies is crashing. It took two years, from mid-2012 to mid-2014, for high yield energy-company bonds to rally 20% and just five months to give it all back. Bear markets always unfold faster than bull markets. The perceived liquidity in any given market is based on psychology; when it turns from optimism toward increasing pessimism, bids dry up and values collapse. These trends will intensify in 2015.


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GOLD & SILVERFrom The Elliott Wave Financial Forecast, December 2014

Gold has rallied since the EWT/EWFF Interim Report of November 11 forecast a near-term bullish juncture. The report included an AP story that cited metals experts who trashed golds prospects. Since then, weve been bowled over by the number of similar stories, each one more pessimistic toward gold than the last. Theres not enough space to publish all of them, but the collection shown above captures the best of the bleak sentiment. Its a stunning reversal from the ebullience that surrounded golds peak in September 2011 and is consistent with the rally potential described in the Interim Report. This week was particularly volatile for gold. On Sunday, November 30, Swiss citizens rejected a law that would have required the Swiss National Bank to hold more of its reserves in gold. Conventional wisdom held that prices would plunge on the news. Gold spiked down to $1146.57 on the

voting results Sunday night but then surged nearly $75 on Monday. Second-wave lows are often attended by news that seems strongly bearish (see text, p.79), yet prices resist making new lows. Our forecast for a countertrend advance remains intact. The graph in the Interim Report shows golds wave structure. If prices decline below the November 7 low at $1131.85, it means the final subwave down is not yet complete.

Silver was even more volatile than gold this week. Prices dropped to $14.49 on Sunday night and then surged to $16.84 on Monday, a 16% low-to-high range in less than 24 hours! Similar to gold, silver is set for a countertrend rally. A reasonable near-term target range is $17.85-$18.90. [Note: achieved in January 2015]


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U.S. DOLLARFrom The Elliott Wave Financial Forecast, January 2015

In October, EWFF discussed the Return of the Currency Wars, noting differing countries attempts to devalue their currencies through expansionary monetary policies in the hopes of making their exports appear more price competitive. The trend is intensifying as Japans neighbors respond to the Bank of Japans stunningly aggressive quantitative easing program. The central banks of Norway, Switzerland and Sweden are also instituting similar easy-money measures. The European Central Bank has pledged to increase its quantitative easing if they can reach a consensus on January 22, the date of their next meeting. But as we said in October, it has been tried before, most notably in 1930, and it has failed. This time will be no different.

Against this backdrop, the U.S. dollar has soared, and the euro, nearly its mirror opposite, has plunged.


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ECONOMY & DEFLATION

From The Elliott Wave Financial Forecast, October 2014

Until now, deflation has quietly pressed upon the global economy. But its presence is starting to be felt in media accounts that compare different economies and financial instruments to those of Japan. In early September, a widely quoted Bank of America Merrill Lynch research report stated that China may be entering an asset-deflation phase that looks very similar to Japans in the 1990s. The report finds the same imbalanced growth, government stimulus, overcapacity, overwrought housing market and severely under-capitalized financial system that have plagued Japan since 1989. What Happens If China Becomes Japan? asked Bloomberg on September 16. On the other side of the world, people are drawing the same parallel. Back in August, Bloomberg noted that German Bund yields had dropped to just 1%, stoking fears that the euro zone faces a lost decade of economic stagnation similar to Japan. On Tuesday, Bloomberg updated its observation, saying, Similarities between the euro region and Japan are intensifying. According to the article, this is heaping pressure on central bankers to do something. But as Bank of Americas study notes, government intervention is just another parallel to Japan. At this point, Japans central bank has tried everything, including quantitative easing, similar to the program the U.S. Fed is now completing. With U.S. stocks now in retreat, it should not take long for the Federal Reserves failure to be exposed. On September 17, Richard Barley of The Wall Street Journal pointed out that the easing may backfire as the Feds easy-money policy simply led investors to discard the anchor of absolute value in favor of the siren song of relative value, storing up losses and volatility for the future. This is, of course, the catch. By artificially pulling demand for assets as well as goods and services forward from the future, the Fed only stockpiled added fuel for the deflationary fire. Now that deflation is engulfing nearly every major economy in the world, it should pull prices down across the board. On Thursday, the European Central Bank joined the fray and announced it will spend as much as $1.3 trillion over at least the next two years to boost inflation. Yet European stock indexes were uniformly down. The ECBs inability to spark at least a short-term rally hints at the coming, long overdue era of recognized Central-Bank impotence.

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The State of the Global Markets 2015 Edition

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Deflation has been evident for some time in global markets most sensitive to economic growth. Gold, silver and the broader commodity markets continue to plumb new depths. In July, EWFF showed a long-term chart of the CRB Index and argued that it was ready to resume its deflationary leadership: its down nearly 12% since then. Iron ore is another industrial staple. The chart on the previous page shows that after screaming to a 1500% gain from 1999 to February 2011, iron ore reversed dramatically. After rallying to a countertrend high in February of last year, its down another 50% and appears to be in the middle of a third wave. Eventually, iron ore should fall back to the $11 metric ton level, where it was in 1999. In a bet that higher volumes would more than offset falling prices, big producers expanded output in recent years. In an environment of global growth, Goldman Sachs estimated that global surpluses would rise from 52 million tons in 2015 to 295 million in 2017. As the economy contracts, the glut should be even more pronounced than anticipated. Similar stories will proliferate in other markets.

From The Elliott Wave Financial Forecast, December 2014

Many other countries are at the tipping point. As the chart below shows, a sum of the GDP of 25 different European economies is edging closer to outright contraction. On December 2, Bloomberg reported that Russia is entering a recession. Even Russias Deputy Economy Minister admits it. The ministers latest official forecast calls for a GDP decline of 0.8% in 2015 versus a prior estimate of 1.2% growth. Anecdotal evidence from Moscow confirms that things are unraveling fast. According to Bloomberg, ads appealing to cash strapped shoppers are everywhere. Nobody is buying, says an interior designer. My customers are in bad shape right now, and so am I.

In South America, the bellwether Brazilian economy is dormant, with GDP declining 0.24% in the third quarter. In Argentina, South Americas second largest economy, real GDP growth is down from 12% in 2010 to 0% for the quarter ended June 30, the latest available data. Since

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then, things have clearly gotten worse. Argentina defaulted on its sovereign debt in August (for a second time since 2000), and reports indicate that Argentinas economy is in such disarray that many are fleeing the country (Argentinas Economic Woes Prompt Exodus, USA Today, November 30).

Because they are so closely tied to industrial activity, commodity prices are probably the best indicator of deflations potential. In April, EWFF forecast a collapse for commodity prices, and we added in July that the potential for a major decline remains high. This next chart of the Rogers International Commodity Index, a global raw materials price index, shows that commodity prices complied with a sharp break lower, declining 21% over the past six months. Last week the index dropped dramatically, as falling crude oil prices contributed greatly to the decline. Many attributed the selloff in oil to a bad case of oversupply and insist that it will help the U.S. economy. In fact, two top Federal Reserve policymakers are among those making this exact case. But theres clearly a huge demand problem as well. The Washington Post reports that in Europe, petroleum consumption is down from 15.3 million barrels in 2009, to 14.3 million in 2013, to an even lower level in 2014. A recent MarketWatch column reveals that a diminished Chinese appetite for oil Plays Big Role In Oils Slide. The BP Statistical Review of World Energy for 2013 says that the U.S. outpaced Chinas growth in oil demand for the first time since 1999. In October, Chinese import demand for oil was up for the year, but it was down 2.5% from September. It is now on track to become a net exporter in the near future.

Headlines announcing oil price battles, such as OPEC Creating Price War, popped up as early as October 15 (CNBC). But additional Price Wars in everything from credit card rates, small cars, mortgages, taxi rates, smart phone prices, computer chips and wireless service have since followed. Some vendors are even rolling back prices in decades-long chunks. Heres an example from the Financial Times on November 18: Price War Forces First Fall in UK Grocery Sales in 20 Years. There are

phony price wars, and there are real price wars. This is a real price war, says a retail analyst.

Hinting of its eventual failure, the effort to whip deflation started long before these price wars appeared. In November, central bankers called in reinforcements. Japan, Europe and China all took unanticipated actions to inject various types of stimulus into their economies. For good measure, the European Central Bank issued a statement on November 21 saying it would broaden even more the channels through which we intervene. Temporarily, at least, these open-ended statements seem effective, as they allow analysts bullish imaginations to run wild. As we explained last month, however, these easing efforts wont work because the weight of the reversal in asset prices is far larger than any asset purchase or interest rate reduction central banks can undertake. In addition, this time, central bankers have made the critical mistake of calling out their reinforcements at the beginning of the battle. Japan did something similar in 2001 in the middle of its fight to stave off deflation: it delivered its first ever quantitative easing. It was the worlds largest central bank easing by orders of magnitude. Despite that effort and various other stimulus measures since then, the graph in the GDP chart shows that Japans economy has contracted in 13 out of 26 quarters since the middle of 2008.

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Investors still hold central banks in high esteem, but EWFF has been on record saying these institutions will fall from grace in the next phase of decline, when social mood becomes bleaker. Their gargantuan effort to stem the deflationary tide will undoubtedly play a role in ravaging their revered status. In addition to exposing their balance sheets to the risk from defaults and higher rates, central bankers are encouraging investors to do exactly the wrong thing at exactly the wrong time. In late November,

the head of the Bank of Japan told companies to Stop Hoarding Cash. Such admonitions will become more common as investment and consumer prices fall, which will only increase the size of the bulls-eye on central bankers backs. Quantitative easing will increasingly be cited as a contributing factor to deflation. Its not causal, of course, but it wont matter. The tighter the death spiral in prices becomes, the more damage it will do to central banks reputations.

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Figure 1

Figure 2

Special Section Deflation Is Starting To WinFrom The Elliott Wave Theorist, January 2015

Oil is down 61% in seven months. Bitcoin is down 86% in thirteen months. Commodities have made new lows for the past five years. Gold and silver made their highs over three years ago. The inflation rate is negative in Europe. And interest rates just went negative in Switzerland. But remember what economists and inflation forecasters have insisted all along: central banking guarantees that deflation is impossible. In the 1970s, Alfred Kahn took to calling recession a banana. Maybe someone will start calling deflation a mango.

OilOil has been making headlines for weeks. Many pundits have rushed to explain retrospectively the stunning decline in its price. But our call in June 2008 for a major top in oil came out six years ahead of these explanations, and our headlineDeadly Combinationin the May 16, 2014 issue came out just a month ahead of the onset of the latest plunge. At those times, no one was talking as they are today. On the contrary, back then (see chart) 91% of traders were bullish on oil, and Large Speculators had their biggest net-long position ever. The May 2014 issue predicted, the multi-year outlook is for much lower prices. Figure 1 is reprinted from the May 16, 2014 issue, and Figure 2 shows the same chart with prices updated. Figure 3 shows what has happened to investors in the Crude Oil Total Return Exchange-Traded Note (ETN).

On January 12, USA Today interviewed Saudi billionaire businessman Prince Alwaleed bin Talal. His very first comment was,

Saudi Arabia and all of the countries were caught off guard. No one anticipated it was going to happen. Anyone who says they anticipated this 50% drop (in price) is not saying the truth.

But the August 2011 EWT made a specific prediction shortly after wave b topped at $114 that summer: were in wave c down in both the CRB Index and oil, which means both of these indexes should fall to new lows below those of early 2009. In oil, that low was $34. The 2014 edition of Conquer the Crash (published last July) reiterated this call: Wave c should carry the price of oil below the 2008 low.

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Figure 3

Way back in July 2006, EWT explained that aside from financial reasons, economics would also facilitate a future lower price for energy. The reason is simple: High prices create incentives to increase supply. But you never hear economists say this when commodity prices are topping. At those times, the vast majority of them concoct fundamental explanations for why the trend will continue.

The July 2013 issue also explained that in major ABC corrections, Bearish fundamentals usually start falling into place during C waves. And, sure enough, six years after the all-time high in the price of crude and three-plus years into wave c, it has become obvious to analysts that the world is awash in oil. Talk of glut and oversupply is everywhere. The U.S., formerly highly dependent on other nations oil production, now produces more oil than any other country. So, experts say they can now see the reason oil has fallen: More supply made prices fall. But this formulation is incorrect; rather, high prices prompted more supply. Lower prices will likewise have consequences.

The supposed causes that economists are now citing have come into being well after oil topped in 2008 at $147.27/barrel. Recall that in 2008, oil crashed 78% in wave a, and no one knew why. Thats because fundamental events lag waves, so there were no fundamental causes in sight. There was no oversupply, no glut. Today, the Saudi Prince says that the reasons for oils fall are now so clear theyre a no-brainer. But the reasons given today are all lagging results, not causes, of the path of oil prices. Thats why they showed up half a decade after the top.

No bottom in sight for crude oil prices

USA Today, January 13, 2015

The media are suddenly full of headlines and quotes from economists saying, There is no bottom in sight for oil. This prediction is way too late to do any good. With the Daily Sentiment Index (courtesy trade-futures.com) as low as 3%

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Figure 4

bulls in recent days, the easy money on the short side has been made. In fact, now that bearish conviction has crystallized, oil is likely to rally.

At the bottom of wave c, which will coincide with the bottom of the depression, oil will sell for $10/barrel or less. Figure 4 shows why. We last showed this chart when

oil was still over $100 after peaking in wave b. Now its well into wave c. This is not a new prediction; it was our opinion when oil was topping in wave V at $147.27 in July 2008. Our comment then was, One of the greatest commodity tops of all time is due very soon. If we are able to catch the ultimate bottom, we will reverse that outlook.

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Special Section Alert the Media: Margin Debt ShrinksFrom The Elliott Wave Financial Forecast, December 2014

Margin debt doesnt always retreat ahead of stocks, but it happens frequently enough that the March 1998 issue of The Elliott Wave Theorist noted, As far back as 1980, EWT commented that a failure of margin debt to expand in an advancing market is the kiss of death to a bull trend. The chart shows how such a divergence played out ahead of the S&P 500 monthly closing price peaks in 2000 and 2007. Last February, margin debt expanded to a level 22% above that of July 2007. That was a full ten months ago. So, the sequence appears to be the same as it was at the last two major tops in stock prices. These figures reveal investors extraordinary willingness to climb out on a limb at a time of historic optimism. The fact that they are pulling in some of their investment debt is another sign that the limb is about to snap off.

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Special Section Financial Stability Board: Mission AccomplishedFrom The Elliott Wave Financial Forecast, December 2014

According to a November 14 Reuters story, a banking reform effort is substantially complete, or so says a global watchdog, the Financial Stability Board. The job of fixing flaws that led to the 2007-09 financial crisis is largely done, it says. In other words, regulators just closed the barn door on a six-year-old financial meltdown. Given the advanced state of the current financial euphoria, this all-clear is actually just another signal that the next decline, and its attendant wave of financial recriminations, is very close.

In May, June and July of 2000 and then again in February 2008, EWFF used a surge in financial scandals to confirm the initiation of an emerging stock market decline. Here again, gathering clouds of indictment are not hard to spot. They include bid-rigging allegations in the London interbank offered rate (LIBOR) and in foreign exchange and commodity markets. According to Bloomberg, no less than twelve investigations into the trading activities of major banks are now underway. Traders caught up in the rate-rigging probes argue that they were following long-standing banking practices, which is the classic bull

market defense. Unfortunately for the accused it wont work, because as EWFF explained in July, standard bull market trading practices become reviled and get punished in bear markets. In September, EWFF added that the larger scale of this peak means that the level of animosity is greater and that politicians will extract more than just their average pound of flesh. A recent study in the science journal Nature, Business Culture and Dishonesty in the Banking Industry, reveals the depth of the backlash. In the paper, three University of Zurich economic professors find that by putting financial gain above all, banking culture fuels greed and dishonesty and makes bankers more likely to cheat. If nothing else, this paper demonstrates a change in societys view toward bankers. According to a current Citigroup estimate, it will cost banks as much as $41 billion to settle the charges already leveled against them. At this point, financial scandal is so run-of-the-mill that some Wall Street firms seem to treat it as a fixed expense on their quarterly earnings statements. In the next phase, this will be much harder to do, as more and more of the charges will be criminal in nature.

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Special Section A Luxurious Turn for the Worst From The Elliott Wave Financial Forecast, November 2014

Luxury is another late-stage bull market accessory. We discussed this phenomenon in the opening chapter of The Mania Chronicles because it is a classic bubble trait that dates all the way back to the tulip bulb mania of the 1630s. In Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay noted that a side effect of the craze for tulips was that houses and lands, horses and carriages, and luxuries of every sort, rose in value. This chart of the Dow Jones Luxury Index reveals that luxury goods clearly participated in the last phase of the Great Mania. After rising to a new all-time high, however, the index stalled out in May of this year, and is following EWFFs February forecast for an imminent reversal.

According to luxury goods industry consultant Bain & Co., luxury sales will rise another 7% in 2014, but key growth markets are under pressure. Asia, once the industrys growth engine, is now a drag on trade, as Hong Kong protests and an anti-corruption drive in China sandbag sales. A clampdown on lavish spending

by government officials is crippling luxury goods firms. In London, prices of the most expensive homes have reversed. According to Bloomberg, the square-foot price of homes valued at more than $16 million is down 7.4% from 2013. But luxury-goods purveyors wont go down without a fight. In response to the waning demand, they are doing the logical mania-era thingraising prices. When revenues dipped 10% in August, Ralph Lauren Corp. moved on to higher end luxury goods. Luxury handbag maker Coach Inc. did the same in the face of a reversal in sales and a whopping 50+% markdown in the price of its stock. Historically, Coach bags sell for $200 to $400; now its website lists offerings at $1100 to $1300. Coach is betting [a] $595 floral printed leather handbag can end the slide in its sales. In the bull market, trading up to ever more elegant luxury items worked like a charm. In a bear market it will fail miserably, as luxury comes to be viewed as ostentatious and once-popular luxury-goods outlets become pawn shops.

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Special Section Government Banks on Stocks From The Elliott Wave Financial Forecast, November 2014

Heres a key principle concerning the role of government in bull and bear markets, as outlined in The Elliott Wave Theorist in 1991:

Government is the ultimate crowd, every decision being made by committee. It is always acting on the last trend. (For example, the Federal government passed securities laws to prevent the 1929-1932 crash...in 1934.)

The Federal government repealed that law, known as Glass-Steagall, in November 1999. The Grand Supercycle peak in stocksand the top to date in stocks real valueoccurred within a matter of weeks, in January 2000. Governments effort to bring back the old bull market started in 2001 with a bailout of Argentina. Citing a critical difference from prior bull market rescue efforts, the September 2001 issue of EWFF asserted that the stock market would fall straight through the effort to shore up that country. It did, as the Dow declined 30% through October 2002.

A similar short-term market plunge through a government-sponsored bailout initiative occurred on October 2. Thats when Mario Draghi, president of the European Central Bank, announced a quantitative easing program under which the central bank will buy $1.3 trillion in loans and mortgages, including some junk-rated assets from Greece and Cyprus. Draghi pulled the trigger even though the Euro Stoxx 50 Index has rallied for almost three years and, at the time of the announcement, was within 5% of its June high. In 2012, Draghis bold whatever it takes ad-lib was seen as a masterstroke that halted the downward economic spiral that had gripped the continent. This time he fired live rounds in the form of a long-awaited U.S. Federal Reserve-style QE program. But the blue chip European stock index gave him no respect; it fell. The Euro Stoxx 50 is still down 3% from its October 2 close. The performance is similar to what happened in November 2007, when a consortium of banks organized by the U.S. Treasury created a fund (called M-Lec) to rescue the hemorrhaging market for subprime loans. At the time, EWFF explained that the difference between bailouts in a healthy bull market and those in a major bear market

is that in a bull market the bailouts invariably come near major lows, when the market is ready to turn up anyway. In bear markets, however, pessimism is more persistent, and the stock market ultimately falls through even the most aggressive bailout efforts. EWFF also stated that the fascinating thing about the bailout attempt is that it was needed before the stock market even headed down. As we said here in April [2007]: Chrysler and Continental Illinois were too big to fail, the unfolding crisis will be too big to bail. The same goes for the ECBs latest scheme. Its already failing, and it should do so much more dramatically in coming months. The size of the bailout at $1.3 trillion also illustrates the strength of the unfolding bear market. In November 2007, the authorities expected to patch things up with a $100 billion fund. The ECBs full-blown QE is 13 times larger; nonetheless, it wont do the job.

Argentina rescue efforts continue to this day, as do various other rescue schemes. They will probably intensify as the stock market retreats. Since it is a bear market of high degree, the market will plunge through the levels at which authorities initiate these bailouts. A set-up to these coming failures appeared on October 12, as the most recent slide neared a bottom and world financial leaders promised bold and ambitious action to boost a global recovery. The impulse to prevent financial failure is stronger than ever, because the bear market is entering a more severe phase and governments and central banks have hitched their wagons to rising stock prices in myriad ways. In fact, as the remnants of the Great Bull Market pushed stocks to all-time highs in recent months, many central banks bought financial assets outright. According to the Official Monetary and Financial Institutions Forum, a central bank research group, 400 public-sector institutions in 162 countries own $29 trillion in market investments, including gold. The Peoples Bank of China is the worlds largest public sector holder of equities with a $3.9 trillion fund that holds equity stakes including important European companies. The Bank of Japan is becoming the largest shareholder on the Nikkei stock exchange, with $72 billion in equities. The bank is stepping up purchases of riskier assets to help support its fragile

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economy. The Chinese government is also trying to do something to get the worlds biggest population to buy more stocks. In addition to publishing stories advocating equity investment, the Chinese government is behind a reduction in fees on new investment accounts as well as holding investment seminars at big banks. In recent months, national pension fund assets in countries such as Canada and Japan have also been redirected into riskier investments, including stocks and real estate. Its a larger-scale version of governments and central banks embrace of gold in September 2011. Readers will recall that the

September 2011 EWFF reported that central bankers were buying the yellow metal with no intention of ever selling, no matter how badly they need the money. Gold topped two days later and is still down over 38% from that all-time high at $1921.50, despite even more government purchases. Global governments even more pronounced infatuation with stocks suggests an even more dramatic decline ahead. When those handswidely considered strong but in our view the weakest of alldecide to sell their financial assets years from now, it will create the final selling wave of the bear market.

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Special Section Death of a Mania ClusterFrom The Elliott Wave Theorist, October-November 2014

Over the past 15 years, optimists have encouraged all kinds of risky behavior, such as investing in:

stocks (for the long run) real estate (it never goes down) oil (the world has run out) commodities (China must have them) precious metals (gold is going to $10,000) hedge funds (quants have it all figured out) and junk bonds (the economy is just beginning to recover).

Usually the bullish cases people made for each market were based heavily on the expectation of unlimited credit expansion by central banks and therefore endless inflation and therefore uninterrupted prosperity. Despite sharp setbacks and doldrums in most of these markets, most economists and investors still agree that deflation is impossible because central banks wont allow it. But with all other markets languishing, it seems that investors are buying stock now because they cant think of anything else to do.

A common refrain is that the Feds QE has made stocks go up. We dont formulate causality that way. A wave of increasing optimism lasting five years has prompted investors to buy stocks (and a record amount of junk bonds). The Fed has accommodated this impulse, but it did not cause it. The conventional claim to causality is virtually invalidated by the slide in precious metals and commodities, both of which began, respectively, when the biggest QEs (#s 3 and 4) started. It is also invalidated by the real estate collapse of 2006-10, during which time the Fed lowered rates to zero and started a record expansion of its balance sheet, neither of which kept the plunge from occurring. More proof will come when stocks also turn down.

Incredibly, after I wrote that paragraph, the Finance Minister of Germany came out to say something that we have known all along and which is a key point in Conquer the Crash, which is that the authorities will run out of both the will and the means to keep deflation from occurring. Read this from Bloomberg:

Germany to Europe: Help Isnt on the WayAug 29, 2014 10:09 AM EDT By Mark Gilbert

German Finance Minister Wolfgang Schaeuble has bad news for anyone hoping the European Central Bank will ride to the rescue of the ailing euro region: Monetary policy has come to the end of its instruments. I dont think ECB monetary policy has the instruments to fight deflation, to be quite frank. What we urgently need is investments, regaining confidence by investors, by markets, by consumers.

The Ministers hopes, expressed in the last line above, cannot be fulfilled, for two reasons, both of which CTC also cited:

(1) Confidence will not increase, because optimism is already extreme and has been for fifteen years. On the contrary, the Elliott wave model suggests that confidence worldwide is about to plunge.

(2) Credit inflation cannot continue, because consumers, investors, governments and central banks are tapped out. They are tapped out because confidence has been high for so long that they have become indebted and leveraged to the hilt.

The article continues:

His comments, in an interview with Bloomberg Television today, coincide with figures showing annual inflation slowed to 0.3 percent in the euro zone this month. That was the weakest rate of growth since October 2009 and marks 11 consecutive months of prices growing by less than 1 percent. The deflationary danger policy makers have been denying for months may be upon them.

This adds to the gloomy outlook in Europe. One-, two- and three-year yields are negative in

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Germany, meaning investors are paying for the privilege of the perceived safety of German debt. A critical money-market rate, the Effective Overnight Index Average -- Eonia for short -- dropped below zero for the first time yesterday, reaching -0.004 percent.

Analysts are attributing that event to a combination of expectations for even lower ECB interest rates, and the start of yet another program designed to pump money into the economy. Next month, the ECB will start offering targeted longer-term refinancing operations, or TLTROs. Analysts estimate that banks will borrow 300 billion euros ($395 billion) in the initial TLTRO round, according to the Bloomberg Monthly Survey published on Aug 18.

Thats a far cry from the 850 billion euros ECB President Mario Draghi touted as a possibility earlier this month, though future operations may increase the take. Any treasurer who doesnt make use of this offer is making a big mistake, ECB policy maker Ewald Nowotny said yesterday. Whether the money will then make its way into the economy and revive growth remains to be seen.

The cover of this weeks Economist magazine features the leaders of Germany, France and Italy in a paper boat made from a folded euro, with Draghi at work bailing out water at the rear. The caption is That sinking feeling (again). While no-one is seriously discussing a break-up of the euro, Draghis two-year old pledge to do whatever

it takes to defend the common currency is being tested by the deteriorating economic backdrop.

Draghi is inching closer to quantitative easing. He departed from his scripted remarks at the gathering at Jackson Hole, Wyoming, last week to announce the imminent arrival of an asset-backed bond purchase program, and he said this week that the ECB has hired Blackrock Inc. to advise on the effort. It may be too little, too late. (Bloomberg)

While Draghi may be inching closer to QE, the U.S. Federal Reserve is scheduled to end QE in October. Since 2012, the Fed has taken on massive new debts in an attempt to reflate the monetary system. It is losing the battle. All it didall it could dowas encourage more debt. Debt is the problem, so the problem got bigger while the Fed got bloated. The Fed made a huge strategic mistake: It exhausted the ability to use one of its biggest tools, in a bull market. It should have waited until late in the next bear market to step in, which would have made it appear that the Fed stopped the decline. Now what will it do? Congress is breathing down the Feds neck (see article: www.elliottwave.com/wave/1409Fed), and it seems likely that when financial prices melt down this time, the authorities resolve will melt away, along with the Feds credibility and autonomy, if not its existence.

If you didnt convert to cash at the all-time highs for real estate in 2006, commodities in 2008, gold and silver in 2011, and the bond market in 2012, you have one last opportunity to exit a market at an all-time high, this one in stocks.

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2015 Edition

Asia-PacificASIAN-PACIFIC STOCKS

OVERVIEWFrom The Asian-Pacific Financial Forecast, December 2014

Recent stock price action in the BRIC markets challenges this observation from The Economist Explains blog on November 18: Investors have fallen out of love with emerging markets. Since the start of last year, emerging-market stocks have trailed their rich-world peers. Currencies are falling. The IMF recently cut its forecasts for emerging markets by more than for rich countries.

That quote certainly does describe the conventional wisdom of the past year or so, as well as the arguments supporting it. But, in classic contrarian fashion, stock prices in emerging markets have begun to defy the bearish consensus by turning up even as fundamentals remain bleak. For example, consider the BRIC markets. (See chart at right.)

The price of crude oil has plunged 38% in a little over four months, while iron ore has plunged 51% in less than a year to multiyear lows. Nonetheless, the benchmark indexes in Russia, an energy exporter, and Brazil, an energy-and-minerals exporter, trade above their 2014 lows by 33% and 14%, respectively.

Falling home prices and fixed-asset investment, and the collapse in iron ore prices supposedly augur a slowing Chinese economy; yet the Shanghai Composite has rallied 41% over the past five months.

And during the crisis in emerging market currencies last year, Indias rupee plunged 20% in just four months to a low in August 2013 the month an American bank branded India one of the fragile five economies. Since then, though, the Sensex has rallied 63%. Most analysts attribute the bull market to the reforms promised by Indias new prime

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF

minister, Narendra Modi. But, in fact, the Sensex achieved most of its gains before Modis Bharatiya Janata Party swept to victory in Indias May 2014 general elections.

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Special Section MSCI Emerging Markets IndexesFrom The Asian-Pacific Financial Forecast, December 2014

Two of MSCI's three USD-denominated regional emerging market indexes may be headed to new correction lows, as the chart shows. But our wave counts indicate that any additional downside in these indexes should be limited and that the corrections could end within the next several weeks. Here is more detail on each region:

The Emerging Markets Asia index displays the best relative strength among the three indexes, holding well above its 2011 lows.

The Emerging Markets Europe, Mideast, and Africa (EMEA) index is tracing out its final wave down within wave C of (2).

The Emerging Markets Latin America index is tracing out the final zigzag within its wave (2) triple zigzag correction.

We have long viewed the widening divergences among MSCIs three regional indexes since the 2011 lows to be longer-term bullish for all three. Our wave counts for those indexes and their local currency equivalents suggest that the divergences will soon end and that emerging markets will begin a broad uptrend globally in 2015.

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CHINA From The Asian-Pacific Financial Forecast, October 2014

The CSI 300 Index, which comprises companies traded on the Shanghai and Shenzhen stock exchanges, is testing resistance at the upper line of its trend channel. This channel has mostly contained its decline since the 2009 high. The db X-tracker CSI 300 China A-Shares Fund (US: ASHR), which we first mentioned in July, tracks the index.

The Shanghai Composite has regained the ground above the lower line of its trend channel from the 1990s. (See also long-term chart on the next page.) Wave D of a contracting triangle typically equals about 61.8% of wave B. That supplies a working target for the rally just above 2900.

Stimulus as sentimentA few days after the central government released particularly weak economic data in mid-September, it announced an $81 billion economic stimulus. As usual and as EWI has shown over the years government is the last one to recognize a financial trend.

Furthermore, governments tend to react to financial trends rather than to anticipate them, often enacting measures after market prices or economic indicators have deteriorated significantly. (A classic example is the passing of the Glass-Steagall Banking Act of 1933, which was enacted after the crash of 1929-1932 in the United States.) Chinas three stimulus packages in the last six years fit the bill:

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China enacted its 2008 stimulus of $581 billion just days after the end of wave A down in the Shanghai Composite.

It enacted a second stimulus of $157 billion in the final stages of wave C down, after which the index continued falling for three months.

And it announced the September 2014 stimulus of $81 billion, the smallest of the three, two months after the wave (B) low.

While there is precedent to show that stocks do not necessarily rally in the months following stimulus announcements (see discussion of Quantitative Easing in the United States in previous issues of Global Market Perspective), our wave counts suggest that Chinese stocks will continue to rally in wave D.

The moral of the stimulus story is that its best to view such government actions as manifestations of negative sentiment often seen after significant stock market declines, and occasionally near lows. In this case, we are treating Chinas stimulus announcement in September like any other negative sentiment indicator. For now, it supports our bullish wave count.

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HONG KONG & SINGAPOREFrom The Asian-Pacific Financial Forecast, October 2014

Pro-democracy protests shake Hong Kong Protestors hit the streets last weekend in Hong Kong in what Bloomberg calls the biggest clashes to rock the city for decades. (Bloomberg, 9/29/14) The demonstrations have been dubbed the Umbrella Revolution because the protestors have used umbrellas to defend themselves against the sun, rain, and police pepper spray. The conflict provides sentiment support for a low in the Hang Seng Index near the lower line of the indexs trend channel from the 1960s.

The biggest anti-government violence in the modern period in Hong Kong, the 1967 Leftist riots, occurred during the eight months surrounding the all-time low in the Hang Seng index in 1967. What started as a minor labor dispute snowballed into at least 188 rolling demonstrations and violent clashes with the police by pro-Communist and anti-colonial groups. Terrorists also planted as many as 8,000 homemade bombs and murdered some members of the press who opposed the violence. In total, 51 people were killed during the period. These events occurred against the backdrop of Chinas Cultural Revolution and rumors that China would invade and occupy Hong Kong. They also began in the final months of a bear market that lasted at least three years, over which time the Hang Seng Index declined at least 42% (monthly closing basis).

Almost half a century later, the anti-government conflict this time has been initiated, ironically, by pro-democracy groups. Organizers from the lead group, Occupy Central With Love and Peace, had originally intended to begin a peaceful sit-in on October 1. But student groups took action even earlier

by marching on the official residence of Hong Kongs Chief Executive last week. Some students feel the pace of Occupy Central is too slow, a standing committee member of the student group told Bloomberg. (9/28/14)

As we go to press, demonstrators have called for the chief executive to resign. Meanwhile, Chinas 1989 crackdown on students in Beijings Tiananmen Square remains the 800-pound gorilla in the room. That is the sword of Damocles hanging over Hong Kong right now, a Hong Kong civil rights lawyer told the Financial Times this week. The tanks coming in, the PLA [Peoples Liberation Army]. (9/29/14)

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The most violent anti-government clashes in Hong Kong in decades follow at least four years of no net progress in the Hang Seng Index as the index is testing support at a multidecade uptrend line.

We believe that the violence in Hong Kong will mark a low. But, like any other sentiment indicator, sometimes violence hits a historical extreme and then becomes more extreme as conditions continue to worsen. After the initial riots in 1967, for example, stocks continued tumbling for several more months before the 1964-1967 bear market ended.

From The Asian-Pacific Financial Forecast, November 2014Mass demonstrations in Hong Kong are long-term bullish

The Hang Seng Index has held up remarkably well during the ongoing pro-democracy protests. Both our wave count for the index and our studies of other global markets currently trading near long-term uptrend support lines suggest that the current protests will mark a low in Asia and emerging markets.

This chart supports that view. Its a list of major riots and demonstrations in Hong Kong (compiled by Bloomberg in Hong Kongs Cultural Revolution to Democracy Protests 1967-2014, 10/01/14) graphed against the Hang Seng Index. Notice that after each incident, the index has rallied for at least two years on a net basis.

Naturally, some incidents proved to be more reliably bullish than others, though, with the two earliest incidents preceding significant drawdowns:

After the initial riots in 1967, the index fell about 20% over several months before beginning a powerful bull market to the 1973 high.

Following the 1984 taxi driver road strike, the index initially rallied but then gave back those gains plus about 20% before beginning a strong bull market to the 1987 high.

The next six incidents worked almost immediately with drawdowns of less than 5%.

The Bloomberg list names the July 1, 2014, pro-democracy march as the start of the current demonstrations. Using that date, the current signal is valid so far but still unproven.

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KOREAFrom The Asian-Pacific Financial Forecast, November 2014

The KOSPI is testing the lower line of its trend channel from the 1960s, which runs through 1900 in November. The structure of wave (2) in the KOSPI is unclear, but we expect it will eventually resolve to the upside. Relative strength in the more speculative KOSDAQ Index in October supports our view that the KOSPI will resume its long-term uptrend in due course.

Brokers pains support stock gainsA Sept. 29 Bloomberg article on office vacancy rates in Seouls financial district provides anecdotal sentiment support for our view that the KOSPI will soon end its sideways trend of the past few years. Here are some interesting takeaways from the article:

Yeouido is home to the stock exchange and is known as Koreas Wall Street. The office vacancy rate in the area in the second quarter of 2014 shot up to 24.8%, the highest level in a data series dating back to 2002. By comparison, Seouls average vacancy rate is currently 13.6%, and office vacancies in Manhattan hit a post-global financial crisis high of 11.6% in 2010.

Individual investors account for about half of equity trading volume in South Korea and have sold a net $5.6 billion since the end of 2012. More than one-third of brokerages are losing money, and many have begun to reduce staff.

Now some customers ask me how to run a coffee shop, joked the owner of a coffee shop interviewed for the article. He then added, Theyre only half joking. Many lost their jobs this year and the reality is pretty serious.

If theres a silver lining to the story, perhaps it is that many finance workers who have lost their jobs may be hired back later as wave 3 up advances. But, for now, the record high vacancy rate in Seouls financial district is probably a good indication of how negative stock market sentiment in South Korea is at present.

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TAIWANFrom The Asian-Pacific Financial Forecast, December 2014

Wave 2 down in the Taiwan Index retraced 38.2% of wave 1 up. The index closed October and November near an uptrend support line drawn from the indexs 2008 low. The index should now be taking off in a third-of-a-third wave, which will see it blast through the forward extension of the B-D line of the 1990-2008 wave IV contracting triangle. That extended line runs through 9,400 in December.

The ruling Kuomintang (KMT) partys landslide loss in last weeks municipal elections provides sentiment support for our bullish forecast. The opposition Democratic Progressive Party won in 16 out of 22 city and county elections, nine of which had previously been held by the ruling party. I think the outcome surprised both parties, a political scientist at the Chinese Culture University in Taipei told AFP. It is a landslide defeat for the KMT as it did poorly even in areas it was expected to win. (11/29/14) The election results suggest that the anti-incumbency mood in the nation has hardly changed since late 2012, when President Mas approval rating hit a record low of 13% just days before the end of wave (2). We said then that the anti-government mood was bullish for Taiwanese stocks. It still is bullish.

Hon Hai Precision IndustryThe clear wave pattern in the price chart of the second-largest component of the Taiwan Index, Hon Hai Precision Industry, also supports continued advance in Taiwanese stocks. Hon Hai which is better known as Foxconn in the English-speaking world is the largest private-sector employer in China. It employs about 1 million people to manufacture more than 40% of the worlds consumer electronics for Apple and other major manufacturers.

We said in August 2013 that the stocks then-recent completion of its wave IV contracting triangle was bullish for Taiwanese stocks and probably Chinese ones as well ... [because] where Hon Hai goes, so go China and Taiwan. Since then, the stock has gained 52% in a wave V thrust, paralleling the one in the Taiwan Index. As the long-term bull markets in Taiwan and China continue, Taiwanese companies such as Hon Hai should benefit greatly from China continuing to be more open to foreign investment.

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INDIAFrom The Asian-Pacific Financial Forecast, December 2014

Indian stocks will continue to rise for months in wave 3.

Sentiment observationsSome anecdotal observations provide insight into the mood in India at present. The first two manifest the high and rising sentiment in India during wave 3 of (3) up:

An InstaVaani poll taken October 30 showed that 90% of urban Indians approve of the new prime ministers performance in office, up from 82% on August 15, according to Livemint. (11/4/14)

In India, public kissing is becoming a national movement, according to Global Post (11/19/14). The Kiss of Love movement erupted after a group of right-wing Hindu fundamentalists objected to a TV broadcast of a couple kissing in a caf on October 23. Over the next few weeks, PDA (public display of affection) advocates around the nation organized gatherings to flout Indias law against kissing in public. Global Post reports that pro-PDA movements have also erupted recently in Turkey, Morocco, Tunisia, and Saudi Arabia. From a social mood perspective, these protests are just another expression of the rising positive sentiment that will continue to drive prices higher across emerging markets.

And the third observation supports our forecast of higher prices:

The relatively low number of initial public offerings so far this year suggests that the uptrend has yet to become overheated. (See quarterly chart.) We expect that, by the end of wave 3 up, or shortly after the end, quarterly IPO issuance will exceed the highs it reached during waves 1 and (1) (of 3) up.

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Cognizant Technology SolutionsFor international investors, one U.S.-listed large cap stock may offer a way to ride the Indian IT boom. Cognizant Technology Solutions is an IT consulting and services company that is headquartered in the United States, but the majority of its employees are based in India. In September, the stock successfully tested the lower line of its multidecade uptrend channel for a fourth time. Last week, it broke out to new all-time highs in a third wave that parallels the one in the CNX IT Index. Since its initial public offering in 1998, the stock has both mirrored and far outperformed the CNX IT Index.

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JAPANFrom The Asian-Pacific Financial Forecast, December 2014

A divergence between the Nikkei 225 and the TOPIX Real Estate Index at the October lows marked the end of an 18-month sideways consolidation in Japanese stocks. The current rally should continue for months. We expect that the all-cap TOPIX Index should soon bust through the upper line of the declining trend channel since its 1989 high. Such an event would all but confirm that Japans multidecade bear market has ended. The line in December runs though 1470, which sits about 2% above current levels.

Sentiment considerationsWe saw last month how short sales as a percentage of total daily value traded on the Tokyo stock exchange hit a record 37% on October 30. The next day, the Nikkei immediately began its double-digit rally to the present supposedly on the back of two decisions, one by the Bank of Japan to increase its stimulus and the other by the nations pension fund to boost its allocation for local stocks. Notice that technical analysis saw the rally coming first. The short-selling percentage as of December 4 was 28%, which is still very high, even by the elevated standards of the past six years. Such astoundingly persistent levels of pessimism suggest that the bull market in Japanese stocks will continue.

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AUSTRALIA From The Asian-Pacific Financial Forecast, October 2014

Australian social critic Donald Horne coined the phrase the lucky country when he published his seminal analysis of Australia, The Lucky Country, in 1964. The book came out during an economic boom toward the end of a nearly 40-year-long bull market, and its title fit the mood of the times. Although Horne used the word lucky somewhat negatively (*see note below), the phrase has been popularly interpreted to mean that Australia is blessed with many advantages, including abundant natural resources, good weather and some separation from global problems.

Nearly 50 years later, we can add another reason for Australians to count their blessings: a history of relatively short and shallow bear markets in stocks.

According to the oldest Australian equity index we know of, which begins in 1875, bear markets in Australia have lasted no longer than five years. In addition, only one resulted in declines of more than 50% the 55% decline during the 1970-74 bear market (monthly closing basis). Even following the 1929 crash, Australian stocks fell only 46%, bottomed in 1931 a year ahead of other global markets and recovered to new all-time highs just five years after the 1929 top.

Australian stocks long-term trend channel is the oldest proven channel that we are aware of among global stock markets. Time will tell whether stocks will continue to rise within this trend channel.

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2015 Edition

Europe

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

Special Section The Great Purge Ahead From The European Financial Forecast, September 2014

Heres another once-raucous financial party that is ending in misfortune and regret:

High-Yield Hangover Hits Investors

After Bond Binge

Investors in sterling high-yield bonds are nursing losses after the busiest month for junk debt issuance in the British currency in 1 years.

Bloomberg, 8/7/14

In July 2014, UK companies sold investors more than 2 billion of debt, up from just 800 million the year before. Tellingly, too, the lowest-rated bonds attracted the strongest demand. In 2013, investors bought a record 475 million of the UKs lowest-ranked debt, and, this year, theyve purchased another 425 million of notes rated CCC+ or below a full seven steps below investment grade.

Change is in the air, however. Below is the British equivalent to the euro-denominated junk bond index that we published last month. It shows another sharp upward reversal after yields bottomed at 4.6% on June 20, 2014. According to Bloomberg, junk notes sold in the UK in July lost an average of 3.3%, and, over the first week in August, investors pulled more than $1 billion from exchange-traded funds that buy bonds. That exodus followed the largest monthly withdrawal ever from Pimcos short-term junk-rated ETF. Performance has been rubbish over the past month, says a London-based high-yield strategist, but the sub-par performance of junk bonds is also probably just beginning. In time, mounting pessimism will force

even the most principled gamblers to purge all risk assets from their portfolios. At some point, many stocks and stock indexes will see the bottom of a garbage bin, too.

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Special Section Another Sneak Peek at the Main Event To ComeFrom The European Financial Forecast, September 2014

Over the past four years, Europe has sketched out a blueprint for financial rescues that will likely guide bailouts across much of the worlds over-indebted banks, corporations and sovereign governments. In September 2013, EFF described it like this:

Much of Europe is de facto bankrupt already.... The only question is, who will get stuck with the bill. The Greek and Cypriot templates say that authorities will first inflict losses on bondholders as they should have from the start. Ultimately, however, they will force ordinary bank depositors to pony up.

European Financial Forecast,

September 2013

To be precise, taxpayers picked up the initial tab, as the EU organized a series of taxpayer-funded rescue facilities following the 2008 financial crisis. The real impact to bondholders began in February 2012, when Greek debtholders accepted a 50% haircut on the face value of their bonds in exchange for rescue funding. Ordinary depositors were spared until March 2013, when Cypriot authorities capped daily ATM withdraws, limited overseas transfers and levied bank deposits in response to the countrys banking collapse.

Today, the progression begins again, this time in Portugal, where authorities are rescuing the countrys second largest bank, Banco Espirito Santo (BES).

Banco Espirito Santo Collapse Is Wake up Call for Junior Bondholders

[O]nly senior debt holders and depositors were declared immune from loss-sharing. The one-week 75% plunge in a subordinated note issued by the lender vividly depicts the rate and severity of bond losses for any bank investor in cases where solvency requirements have been breached.

Bloomberg Intelligence, 8/18/14

The terms of the rescue call for BESs junior bondholders to share in the losses with stockholders, as Portugal will tap the 6 billion credit line that was set aside in 2011. For now, the rescue wont affect senior bondholders or bank depositors, but, like before, this arrangement should change at some point in the near future. Already, the crisis has ensnared several BES-affiliated holding companies, and, on August 19, the Wall Street Journal reported that Swiss banking conglomerate, Credit Suisse, had gotten caught up in the Espirito Santo mess. (WSJ, 8/19) According to the Journal, Portuguese regulators have

courtesy HussmanFunds.com

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uncovered at least four offshore investment vehicles that Credit Suisse used to sell billions of dollars of debt-laden securities to BESs retail customers. Predictably, those customers want BES to buy back the worthless securities. They say that they didnt understand what they were buying, and we dont doubt them. Its precisely the kind of financial carelessness that accompanies a major mood peak.

Meanwhile, the complacency clearly extends far outside European borders. The chart on the previous page, which comes from John Hussman of HussmanFunds.com, depicts a near-record number of global junk bond offerings (red line) in the second quarter of 2014, while proceeds from high-yield debt (blue bars) jumped to an all-time high over the same period.

European Central Bank president Mario Draghi says that Espirito Santos collapse affected neither the banking sector in Portugal, nor Portugal at large, nor other markets, and, so far, hes correct. Amazingly, Lisbons Public Credit Management Institute just locked in 800 million at 0.216% in 12-month treasury bonds the lowest rate for this type of security since the euros introduction in 1999. Meanwhile, the Portuguese government can still borrow10-year funds at just 3.2%. Investors remain convinced that, when push comes to shove, Europes stronger economies will rescue its weaker ones. We think its one of the most dangerous gambles going.

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Special Section No One is Coming to the Rescue This TimeFrom The European Financial Forecast, October 2014

A bear market of the magnitude we expect will impel society to swear off debt in all its varied forms. Even in these early stages of the downturn, the public is renouncing debt in subtle but important ways. Small- and medium-sized enterprises (SMEs), for instance, are the intended beneficiaries of TLTRO. But, at 12.9 billion this year, European loans to small businesses are just one-third of peak volume, while, in Spain, the total stock of loans is still 470 billion below its 2008 record of 1.87 trillion. (Bloomberg, 9/25/14)

Britains escalating war on payday lenders represents another early peek at how society is beginning to reject debt. Payday lenders offer short-term, high-interest loans to weaker borrowers who cannot obtain credit elsewhere. Government and consumer advocacy groups began targeting the industry after it doubled in size from 2008 to 2012, but the latest crackdown seems to be breaking new ground. In August 2014, the UK Financial Conduct Authority (FCA) forced Wonga, the countrys largest payday lender, to shell out 2.7 million in compensation to 45,000 customers related to questionable collection practices. Meanwhile, in a time of sweeping change for the payday lending industry, (FT, 9/9/14), the FCA has capped fees, limited daily interest charges, curbed lenders ability to reclaim debts, and restricted the number of times loans can be rolled over. The new rules are set to take effect next year, but a third of the UKs 210 payday lenders have already failed to apply for operating licenses. And thats on top of another 30 companies that surrendered their licenses or had them revoked previously.

On the Continent, this chart of ECB assets depicts another lender thats losing its battle with financial conservatism. Central banks expand their assets by purchasing securities or making new loans. In contrast, assets contract when commercial banks and lenders pay down their outstanding loans. Notice that ECB assets have plummeted 35% since June 2012, when Mario Draghi promised to do whatever it takes to save the eurozone. The reason? According

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to the Wall Street Journal, euro-zone banks have been repaying early some of the three-year ECB loans they received in 2011 and 2012.

Last month Draghi stated that he wants to push ECB assets back up to their all-time high of 3.1 trillion. As we pointed out in July 2014, that objective is probably impossible:

Once again, the trend in social mood remains paramount. As stocks turn down, credit deflation will intensify, loans will go unpaid, and the ECBs credit-pushing mechanism will break down. Because the sum of shaky loans is far greater today, the inevitable credit collapse should be far worse, too.

European Financial Forecast,

July 2014

One key facet depicted on the chart is that ECB assets are falling despite the central banks 440 billion European Financial Stability Facility and despite two previous rounds of LTRO funding worth nearly 1 trillion. Now, even some of Europes most influential powerbrokers seem to recognize that the ECB is impotent. During an August 29 Bloomberg interview, Germanys finance minister, Wolfgang Schaeuble, publically stated this taboo opinion: Monetary policy has come to the end of its instruments. I dont think ECB monetary policy has the instruments to fight deflation to be quite frank. The head of Germanys central bank agrees. Jens Weidmann opposed the ECBs decision to cut interest rates and launch its new loan programs, according to a report in the September 4 Wall Street Journal. The point is, central banks are now pushing a drug that nobody can afford. Its precisely what we meant in July 2014 when we stated, TLTRO does not signal proactiveness; it signals desperation.... As stocks fall, desperation will grow and Europes credit-addicted economy will fly completely off the rails.

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Special Section The Floodgates OpenFrom The European Financial Forecast, November 2014

Heres one more pernicious yet widely held view: Europe is running around two to three years behind the US ... mostly due to the US being about two to three years ahead of the eurozone in terms of monetary s t imulus . (Profess ional Pensions, 10/1/14) This bullish argument says that the United States is leading the worldwide recovery, and that European shares are positioned to play catch up in a big way.

In myriad ways, however, the data shows precisely the opposite: that Europe is, in fact, dragging the U.S. and other developed markets into the next more severe phase of deflation and depression. Take, for instance, this chart from the EUs statistics office. It depicts eight European countries (Bulgaria, Greece, Hungary, Italy, Poland, Slovakia, Slovenia and Spain) that are now mired in outright deflation and four more countries (Cyprus, Lithuania, Portugal and Sweden) that show 0% price growth over the past year. Meanwhile, none of the 28 countries that make up the European Union show inflation rates above the ECBs 2% target.

Record-setting ETF outflows is another potent sign that Europe is playing a lead role in the latest malaise. Over the past three months, investors yanked nearly $2 billion from the Vanguard FTSE Developed Europe ETF, the most ever according to Bloomberg data. Meanwhile, the iShares MSCI Italy Capped ETF (not shown) lost $293 million in the third quarter (also a record), and, at $50 million, the ishares MSCI Spain Capped ETF saw its first quarterly drawdown in more than two years. Even Germanys equivalent ETF just witnessed its third consecutive quarterly outflow.

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Special Section Europe: The Unhappiest Place on Earth From The European Financial Forecast, November 2014

Europe seems to be far ahead of everyone else in one final area: economic contraction. In August 2014, when Germanys weak second quarter was widely seen as a hiccup (WSJ, 8/14/14) EFF countered that the slowdown was heralding a far more serious malfunction:

The fate of the Great European Recovery now rests squarely on the shoulders of Germany, but if our bearish forecast for the DAX is correct, the German economy is about to buckle right alongside its neighbors.

EFF, August 2014

Today, as Germany risks slipping into a third recession since 2008 (CNN Money, 10/07/14), the IMF just lowered its estimate of eurozone growth to a mere 0.8%. Meanwhile, it cut its outlook for Japanese growth from 1.6% to 0.9%, and Brazil received the largest downgrade in emerging markets. Its economy will grow at just 0.3%. In October, CNN Money reported, The record is stuck. The world economy will grow by just 3.3% in 2014, little changed from last year, or the year before that. Just six months ago, [the IMF] was expecting that growth would accelerate to 3.7% this year.

Again, Europe is leading the world into depression, and in countless ways that most people cant yet imagine, stocks transition into Cycle wave c down will fundamentally alter the economic landscape. As Elliott Wave Principle states, declining C waves are usually devastating in their destruction.... Prices decline relentlessly, [and] fundamentals ultimately collapse in response. Walt Disney Companys forced 1 billion rescue of Disneyland Paris is a prime example. Disneyland Paris opened its doors in April 1992 but almost immediately fell into bankruptcy when the French real estate market collapsed in the early 1990s. After a rescue in 1994, the company rode the late 1990s bull market, turning its first profit in 1995 and becoming Europes top tourist destination in 1997 with more than 12 million visitors. In typical fashion, however, Disney greeted the seemingly endless bull market with an equally relentless expansion. The company built a state-of-the-art movie and entertainment complex in 1997, a second convention center in 1998 and, in 1999, it started construction on an entirely new theme park, the $530 million Walt Disney Studios.

Shown below, the project more or less capped the late-1990s investment mania, and the companys bull-market

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magic has been losing influence ever since. A second bankruptcy and debt restructuring followed the CAC 40s 2003 low; a third near-bankruptcy arrived in 2012; and despite 14.9 million visitors in 2013 (more than the Eiffel Tower and Louvre combined), the company is again struggling to invest in new attractions while servicing its massive debts. (CNN Money, 10/6/14) According to estimates, Disneyland Paris will lose 110 million in 2014, with the theme park hemo

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