7/9 Weekly Commentary

The rally at the end of the day was impulsive.   The market is much choppier after the peak this morning. This is indicative that Monday the market will need to correct and I will enter long again.  The futures count continues to be easier to classify and is that Minuette1 is complete or will be with one more high.  The new high was trivial and is still at weekly resistance. 

Counting the cash markets during this rally has been more challenging.  I am continually reconciling different counts between the cash and futures markets.   Here is the reconciled cash count, which should be the last revision:

Here is the expanded view of the count today:

Monday the 5-minute, 380-unit M/A starts out at 10,003.  I expect a 38% retracement to around this level.  It could be that with the weekend the market corrects in the first few hours. I cannot short while I1 is rising so I am content to wait.

In the longer view, we are in Sub-Minuette5 of Minuette1 of an ABC upward correction which is Minute 2 in progress. I1 is trending up until 7/21, but is not on a buy signal.  The current wave count only allows a rally to 10,593. If this is exceeded then the entire decline from 4/26 is an ABC concluding last Thursday and will allow a correction of the decline from 4/26.  I don't think this to be the case.

This being a Weekly Commentary I will put on my editorial pants and go out on a limb.  I remain apolitical throughout the week but I am bearish on the market and for what I believe are good reasons.  The following should be read with a sceptical eye and tolerance for some controversial statements.  Well, here goes:

The long view of a deflationary depression can't avoid it's impact on the political structures around the world. The world except for BRICs has been in a slowly accelerating deflationary depression since 2000. The slowdown is a symptom of excessive debt. It's effect on human consciousness has been an inward reversion to conserve rather than expand. Thus, the multiplier is not multiplying regardless of how much is added to the monetary base. This phenomenon is occurring not just in the US, but in Europe and most of Asia as well.

The weakness inherent in capitalism is it's reliance on populist approval and the inevitable propensity of government to expand debt in order to appease the popular will. The US flavor also appeases big business. The US Capitalist State has increased it's scope by serving these two masters to the point that it approaches fascism, the limits of public debt as well as the limits of government involvement in the economy. In this phase both public debt and private debt have expanded to a self-liquidating extreme. Socialist thought expands it's reach whenever the limits of monetary expansion revert to debt liquidation and human suffering. The predominant opinion is that socialism was crushed with the Soviet Union collapse and the opening of China. Socialism still exists as an ideal alternative in the minds of many and socialists believe their day will come if/when capitalism fails. "World Government" is their ideal. The Soviet Union collapsed as a result of the capitalist debt expansion phase before it reached it's limits. China opened up when it's experiment yielded fruit after 50 years of western debt expansion and inflation left it with a bloated cost base (in other words as it was approaching it's limits).

The world is now growing at a snail's pace. China will revert to more centralist/protectionist modes of socialism as the world deflates. Europe will experience suffering as it grapples with it's debt and deficits. Germany will be increasingly pitted against socialism, which will gain as the suffering reaches a critical point. Japan has been combatting long-term deflation with steady debt expansion and is approaching a debt liquidation phase. The US has not yet entered into it's austerity phase, but is struggling in the quicksand of the debt expansion limit under it's first true socialist president.

If this is a prolonged period of depression then many democracies will be replaced by fanatical structures on both ends of the political spectrum. Socialism and fascism are the forms that people can understand, both centrist and both inevitably dictatorial. So the world will go through the debt liquidation, then the chaos of political disintegration and fragmentation. The longer and deeper the deflationary debt liquidation the more politically unstable the world becomes.

In a model capitalist environment the liquidation will open the doors for a new era of capitalist expansion without (initially) the government involvement that we have known for generations. However, the oil and water shortages which are imminent will limit the spontaneous recovery from debt liquidation. Unless I miss something the world is in for a prolonged period of economic weakness. This period extends beyond the 5-year period of I1 weakness that will affect the stock market. This could take thirty to fifty years.

All three political systems recognized as the universe of options will not succeed in this environment. A second weakness of capitalism will prove to be it's absolute inability to control population growth. As the deflation goes on military answers to providing water, food, and oil will be increasingly utilized for populations sized for ever-expanding resources. The cutover to alternative energy will take decades to accomplish and will occur in the midst of great confusion. Thus, political systems will come into being and be dissolved in desperate attempts to manage the transition to lower resource utilization. "World Government" will be tried and will be rejected by most of the world. The remaining socialist state will be inadequate for the enormous challenge it faces and will fail.

Finally, existing countries will merge into eco-systems containing complimentary resources. Language and national pride will be sacrificed to share resources. Prolonged economic weakness will result in per-person resource conservation and population decreases, whose mixture will determine the political structure utilized. I believe that a more enlightened capitalism will emerge as the dominant form in those parts of the world containing adequate balance of water, food, and mineral wealth. In order for this to occur there must be a realization that:
a) democracies exist to serve voters vested with ownership interests in productive enterprise. Voters and residents will have different rights within the same political system. Vesting is the only way to prohibit the something-for-nothing nature of populism and debt creation inherent in today's democracies.
b) democratic governments exist to live within the confines of strict monetary and fiscal regimen imposed upon them by their vested voters with functional areas sharply proscribed by founding documents
c) the world's resources are finite and rationed by market prices allowed to freely reflect relative scarcity
There is an ocean of experience to be learned from in order for this realization to occur.