EPISODES / WEEKLY COMMENTARY

You Can’t Stop The Wave, So Learn To Surf

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Feb 07 2024
You Can’t Stop The Wave, So Learn To Surf
David McAlvany Posted on February 7, 2024
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  • Elliott Wave Theorists Steven Hochberg & Peter Kendall
  • The Greatest Risk In 24 Is Equities, The Great Opportunity – Safety
  • Visit Elliottwave.com/david

“You’ve got major portions of the world that are contracting or at least lagging, and you’ve got the United States that is at new all time highs. And usually you have the saying that a rising tide lifts all ships, but when all ships aren’t rising, there’s something wrong with the tide, and I think the tide is going out. And that’s the problem that we have right now for investors is I don’t think they recognize the vulnerability and risks in the market right now.” —Steven Hochberg

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.

David, I was 24 years old and I remember reading the Wall Street Journal article about a guy named Robert Prechter. It’s the first time I ever heard about Elliott Wave Theory, and it was right after the crash in October of ’87, and they were saying, “Hey, this is one of the guys who actually called it.” And I thought, “Wow, that’s amazing,” because at that time Reagan was in office, it was blue skies everywhere. The Soviet Union was starting to crumble, there was no reason to be bearish. But Prechter was there, going, “You know what? Just like I read waves in the ocean, I read waves on charts, and that wave says we’re going to have a crash.”

David: Well, and it’s remarkable that both of you share an interest in mathematics and music. There is something highly analytical about the practice, and no surprise that there’s been others who’ve said, “Wow, this is fascinating.”

Stephen Hochberg and Pete Kendall join us today, and we extend our conversation, the one we had two, three months ago with Robert Prechter. They do similar work and work with Robert in the same office.

Kevin: I read the article. I didn’t do anything about it, I was just intrigued. But Steve Hochberg and Pete Kendall, they saw the same types of things and they said, “You know what? I think we’re going to commit our life work to it.”

And Dave, before you actually bring them on to talk to them, I’d like to say that they are going to offer some samples of their work at www.elliottwave.com/david. And Elliott Wave is spelled with two L’s and two T’s. That’s elliottwave.com/david and they’ll be happy to share some of their work.

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David: This builds on our conversation with Robert two, three months ago, the podcast that we did, exploring a few market dynamics with him, which today we have the opportunity to expand on a little bit more.

At the end of that conversation, he suggested that we bring on Steven Hochberg and Pete Kendall. You’re part of the Elliott Wave universe, if you will, of writers and analysts, and love to get your opinion. I’ve read your work, I’ve read his work for years now. And if we could start maybe on a personal note, what is it that fascinates you about the markets and how did you land on Elliott Wave Theory as a basis for a lot of your analysis?

Steven: This is Steve Hochberg. I actually started right out of college back in the early 1980s. I left a local brokerage and, “Hire me. I need a job.” And they did. And it turns out that I was a horrible broker. I hated the job, asking people for money, but what was so interesting was that I got immersed in the markets at a very young age and a lot of my colleagues that I was working with at the time were reading outside analysis besides the analysis that our brokerage firm put out. And one of the newsletters they were reading was a thing called the Elliott Wave Theorist put out by Robert Prechter. And that’s how I first got immersed in it.

And it was so fascinating to me because our brokerage house was saying one thing and Bob was saying another thing, and everything that Bob was saying made sense to me logically. And it turns out that he entered a trading championship back in the early eighties and he won it with a 444% return in three months, which was a record at the time. And I said, “I need to find out what that guy’s doing, because I need to be doing that.”

Well, after my short career as a broker, I went back to school and got my master’s degree and I contacted Bob and I said, “I’d really like to come work with you.” And all of this stuff just is fascinating to me. It makes sense how mood interacts and expresses itself through various ways, and that’s how I made my way down to Georgia and joined Bob at the firm. And the rest, like they say, is history.

David: What about you, Pete?

Pete: I have to retrace my steps. I’m not positive of this, but I’m pretty sure that what attracted me first off was that the markets are a humility machine. They’re literally structured to do the opposite of what the consensus expects.

If you look at the indicators, Investors’ Intelligence Advisors, for instance, the survey that they do every week, the most extreme percentage, seemingly intelligent pros, the market always does exactly the opposite of what they expect when they least expect it. Investment managers are the same way. They’re supposed to be the smartest guys in the room, but whenever they get short, they leverage. They borrow to buy stock. Almost invariably stocks go down. So this is intriguing to me.

And then somewhere about the same time as Steve, actually, I encountered the Elliott Wave theory. I didn’t actually put this together for a while, but it turns out that it incorporates that into the structure of prices. In other words, you have a formula for how you get to those extremes. That’s what kept me in it. The actual thing that really hooked me though was the depth of its use.

In September 1985, Barron’s published a front page story and it was on this aspect which is always kind of the back page in our letter, and wasn’t at the time in Bob’s letter, applying the Elliott Wave principle to the culture at large. And it could do it with great depth, and I was just really roped in by that, and eventually moved to Gainesville and have been there for 30 years.

David: Well, I’ve always been super fascinated by the socionomic theory of finance and just this conglomeration— I think maybe I have ADHD, and so I just can’t stay focused on one theme long enough. But socionomics seems to jump from emergence theory and information theory and psychology, and it brings together so many different things that it’s really super interesting to me.

Pete, you said there’s this “borrow to buy” and that’s an expression of confidence in the market. We’re about $700 billion in margin debt today. Roll the clock back to mid 2021, early 2022, is the market— The everything bubble was peaking. We were actually close to a trillion dollars in borrowed money, so we’re not quite to those peaks. You took the broad array of assets to outrageous levels. We put in peaks in most equity indices on a range of miscellaneous assets. Business media would like to portray the 2022 decline as a completed bear market. Now we can sit back and enjoy a new bull market. Can you help us take that apart a little bit?

Pete: I would go back to the margin debt figure that you just talked about. It’s down a little bit, and the S&P’s at a new high, but that’s actually quite common. And in the olden times when people were more interested in technical analysis, they would say, “Well, that’s what happens to margin debt at a big top. It doesn’t confirm the high.” And we’re going to talk about that again and again today. These are important places where you don’t have harmony that is central, we think, to a healthy stock market.

David: You need a harmony, and when you see non-confirmations, that’s telling you something. It’s something you take note of, not necessarily a trigger for a decline, but you’re seeing something that is divergent. And if you’re not paying attention to that, it could really hurt you.

Pete: Yeah, that takes us all the way back to the beginning, Dow Theory.

Steven: Right. The major top throughout history, let’s start with Dow Theory, which is the juxtaposition of the closing price between the Dow Industrials and the Dow Jones transportation averages. It’s probably the oldest technical analysis tool there is, and it jibes oftentimes with the message of the wave principle. And at major tops you have these divergences, diffuse emotion of hope really diffusely over many months and goes through different sectors, is how you characterize a market top, a major peak. Right now we have a Dow Theory bear market signal in place. They confirmed each other on the downside last September, and now they’re diverging, notably on the upside. The Dow industrials are at a new high. The transports made a new high or their all time high was in November of 2021.

But it’s not just Dow Theory. There’s so much diffuseness and divergence in the market right now. And we compare that to prior tops. For example, at the 2007 peak, we had the bank index top in February of 2007. Then the financials came and peaked in May of 2007. The Dow Jones composite peaked in July of 2007, and then finally the Dow and the S&P and the Nasdaq all peaked in October of 2007. So you have these broad array of sectors that are moving away from the main trend, which is how market tops occur.

And in 2000 is such a great example too, where the Dow shot up and peaked in January, but the NASDAQ and the S&P kept rallying until March. In fact, the New York Stock Exchange composite didn’t peak until September of 2000, and then the whole market just collapsed thereafter. S&P lost half of its entire value.

What we do is we look through history and we look for the same types of psychological manifestations that are happening not only in the market but in culture and around us, and divergences at a high are a key indicator to us that the trend is very unhealthy right now.

David: In your view, we’re putting in a long-term secular top in the equities market. And so what happened in 2021, and subsequently in 2022, is a part of a longer narrative. It’s not like, “Okay, that chapter’s over, let’s move on. Brighter days ahead.” There’s actually something unfolding here so that when you see disharmonies, when you see the bear market signals, when you see the non-confirmation, it ties into a larger narrative. There’s a really big narrative if you’re talking about the super cycle, and maybe you can touch on that where you’ve got the miniature movements of the market even down to the daily and minute by minute. But as you step back from what happens in the micro, there is a macro picture. How does Elliott Wave look at that macro picture in terms of super cycles, grand super cycles, things like that? And where do you think we are?

Pete: You’re leading us to it. We could ignore it if you want, but we don’t. We talk about it. One of the beautiful aspects of the Wave Principle is that it’s practical in nature. What happens across the short term in terms of the wave pattern also happens over longer periods. There’s what we call degrees of trend. Really, in a day you could get a full cycle, five waves up and three waves down, but you will also be working on longer stretches, the longest of which is the grand super cycle, then a super cycle, on down to intermediate, and then come down to micro levels.

But anyway, you’re asking me to focus on the biggest one that we can comprehend, really, is a grand super-cycle. And here again, we see this long-term [unclear]. There’s another way to measure the stock market, and he calls it the Dow divided by real money, which is gold. In those terms, we actually topped in 1999. When you divide the Dow by gold, it topped I think in the middle of 1999 and it’s now lower than that level.

David: 43:1 was the ratio then, and it’s flirted with the 20s. So we’re half the level.

Pete: And then in ’07 we had another big top, and you had tops in certain things that still are down from those levels, Russia and China, and what do you have with Russia and China? You have deep economic problems and other social problems that are emanating there and show you that you’re in a much different place than you were in 2000. Actually you have a whole generation of investors who have lived in a world where the Dow is continually making new highs. You have the magnificent seven, and they see a world where we’re still generating price highs, and they’re as bugged about them as they were in 2000, as indicated by the sentiment indicators. In a way, a bear market has made a lot of headway and it hasn’t disturbed the euphoria. It’s just an amazing thing.

David: I’ve loved that indicator just in terms of greed and fear and the abandonment of gold in the context of greed reaching its apex. And that was 1999. 43 ounces of gold for a cross section of the Dow dropped to 6:1 at its low and is roughly 20:1 currently. That’s pretty interesting, that it’s only half its previous value. And to your point, there’s something about real money telling you a story of degradation within the value structure of the financial markets, which goes underappreciated, which goes unobserved for those pricing things in nominal terms.

Market mood features prominently in your writing, maybe you could weave together, Steven, the mood, the sentiment, the price action, and what do you surmise from current sentiment indicators?

Steven: Well, the whole basis of what we do is based on social mood. And the key point is that social mood motivates social actions. In other words, people aren’t acting randomly. It’s mood in the aggregate that forces them or leads to the actions that they take.

For example, when people are upbeat and happy, they buy stocks. They go and watch upbeat movies. Fashion gets very sexy, hem lines come up. People listen to pop music. And the same thing happens on the downside when mood becomes very negative and pessimistic. People sell stocks, they contract businesses. They listen to downbeat music. Colors get very dark. And it’s like you said, it’s all woven together. And well, here we are at basically new all time highs in some indexes—the blue chip index. It’s not that some other indexes aren’t confirming, but we’re seeing unbelievable long-term measures of optimism.

And, in fact, in Bob Prechter’s most recent Elliott Wave Theorist, which was a speech he was giving, he went through all these massive indicators of long-term optimism. And social mood manifests itself at different degrees of trends. So you have these long term periods of optimism, but even on a shorter term basis like, for example, we probably follow a hundred indicators at Elliott Wave International and a lot of them are based on sentiment. And when we flip through the chart books, so to speak, we see like, for example, short-term, the CNN Fear and Greed Index is now in extreme greed, and we see that money managers are leveraged net long. I mean, these are indicators that a lot of investors are really super bullish. Yet, what we’re seeing in terms of the price structure of the market is something that’s fractured and diffused.

So you have this dichotomy, and to us, that’s a pretty clear signal that we’re in this topping process that we think is going to resolve to the downside with those indexes that are at new highs joining the ones that are not at new highs. And I think an entire complex is going to start going down, resuming what we think is a bear market that started back in 2021.

David: So when you describe the financial markets as fractured, you’re kind of talking about that harmony which needs to be there which is not there. For example, Russell 2000, still significantly below the NASDAQ 100, the S&P 500, the Dow Jones Industrial Average, so some are moving higher, some have not caught up.

And so the question there is, do they catch up, or does everything else which is higher catch down? Is that what you’re getting at when you describe the market as fractured?

Steven: Yeah. What’s so fascinating is the Dow is at a new all-time high, is 38,000, but the colloquial kind of definition of a bear market is something that’s down 20%. Well, that’s the Russell 2000. So you have the Russell 2000 is, literally, down, as we speak, 20% from its all-time high in November of 2021, with something like the Dow at new all-time highs, or the S&P. Even within the market structure, for example, the NASDAQ 1000’s at new highs, but the NASDAQ composite, a broader measure, it hasn’t even gotten to its November 2021 highs. So when I talk about fractured markets, that’s kind of what we’re talking about.

And Pete brought up China, too, which is just fascinating to me because here you have the second-largest economy in the entire world, and the Shanghai Composite actually peaked in 2007, 17 years ago, and they haven’t had a new all-time high since then.

So you’ve got major portions of the world that are contracting or at least lagging, and you’ve got the United States that is at new all-time highs, and usually you kind of have the saying that a rising tide lifts all ships. But when all ships aren’t rising, there’s something wrong with the tide, and I think the tide is going out. And that’s the problem that we have right now for investors is I don’t think they recognize the vulnerability and risks in the market right now.

David: Just as the US has been the marginal source of growth in supply for the oil markets, so China in recent years has been the marginal source of growth in terms of GDP growth. So you described China and the problems they’re having in their equity markets and their real estate markets even more pervasively and on a grander scale.

But just in recent weeks, you’re talking about a $300 billion bail-in for the equity market. You can only buy, you cannot sell. I mean, it’s really a fascinating mix. When you think about command and control dynamics meet market trading, best thing you could do is probably say, “Okay, I’m gone.” And that’s what you saw in the most recent foreign direct investment numbers. First time in, what is it?, decade and a half, two decades, where money’s leaving China—for good reason.

So I agree there’s a very divergent world where the US economic figures— Although sometimes you can, and perhaps we did, see some playing with the GDP figures here in an election year. I don’t know if you looked at the way they treated the non-durable goods and— Amazing what you can tinker with with a statistic. But we have, nevertheless, headline numbers that are very positive here. Meanwhile, the reality in China, wow. Wow.

Pete: Can I give you the latest on China, which— We have to ask the question, “Well, how long can this go on?” And the answer might be, well, it could go on indefinitely. It already has gone on this long.

But what’s a little bit different right now is, and we’ll emphasize in our next issue that these two headlines: “When Stocks Crash, China Turns to Its National Team,” meaning the government, and “China’s Bold Stock Market Rescue Plan Leaves Investors Skeptical.” People aren’t buying it, all of a sudden, and I think perhaps there’s a significant change, and we’ll have to wait and see.

David: You know, when you talk about mood, there was an anecdote shared at a recent wedding that’s just kind of fascinating. Businessmen in China for years—and it was only five years ago that there was such exuberance in downtown Shanghai that it’s routine to see dozens of people jaywalking as they cross the street.

And what’s changed from then to now is everyone realizes they’re being watched. They realize that CCTV is a big deal and no one will break the law. No one will cross the street. So you went from this bold confidence just a few years ago to now caution, and you know that everything, every action is consequential. Just as again, kind of a support perhaps. It’s my version of socioeconomics for the day.

Steven: Yeah.

Pete: It’s good. I like that. That’s an interesting observation, and I agree with you there, probably very significant.

David: Let’s take a jaunt through a number of asset classes. You all explore these things on a routine basis, and I encourage folks to go to the elliottwave.com/david to look at some of your reports. Thank you for offering just a sampling of that for our listeners.

But you go through a series of charts in each of your big reports and in all your weeklies as well. Let’s take a look at, in kind of rapid fire succession, stocks, fixed income, currencies, gold, silver, energy, commodities. Starting with stocks, we’ve had tech leadership heavily impacted on the downside in 2022. Now they came roaring back. What are your general observations on the equity market’s relative outperformance? Maybe you can tie in some history to what you see today versus patterns that are there in the past period of ’66 to ’68 and 2000. Let’s start with stocks and then move on.

Pete: Yeah, well, you mentioned ’68 and 2000. Of course, those are very relevant because they were also— and I guess ’68 to slightly lesser degree. But they had technology components, which, socioeconomically, is one of our top themes, I think, when we look back at history. We’ve been talking about it since 2000, and it is this simple fact that technology always blossoms at the top.

I remember this all the way back to ’84 when I was really new to the market, then we had a little tech bubble. What happened there, though, was the tech bubble ended and the market, the Dow, stayed strong. Now, as in 2000, the tech bubble is just running on without the senior leadership, and to the point where it’s seven stocks, the Magnificent Seven. Maybe this is significant. It’s the Magnificent Six, all of a sudden, because Tesla’s getting hammered. Do we have to go to one, one tech stock? I don’t know. I don’t think so. I think maybe this is good enough.

David: Well, and year-to-date, it’s been predominantly Nvidia and Microsoft leading the pack. And if you’re looking at their contribution, sort of dragging the S&P 500 higher, you could even argue the two are taking—

Pete: You’re right, it’s actually two. And what they want, to clump it into seven so it’s not as few, but it is just those two.

Steven: I just read a statistic the other day. It was that 17% of the S&P 500’s gain this year is due to those two stocks, Nvidia and Microsoft. So what does that say about the health of a market when you basically have two stocks that are driving it to new highs? Again, another clear indication in our estimation that the stock indexes are highly vulnerable to a decline.

David: And in part you would say that because in looking back, when you see a narrowing of leadership, that has presaged a decline. I think it’s really interesting that you all are saying that tech blossoms at the top. Part of that is because there’s so much free money floating around people are willing to take risks that in earlier parts of the cycle they just won’t take.

But it’s also kind of an interesting parallel when you think about investors having their minds blown by new things, and all of a sudden the imagination runs wild. And that’s what we have with the AI craze.

Pete: I think that’s almost the bigger part of it, to be honest with you. The creativity is a part of it. You’re in a bull market, people are creating new things and ideas. You know, it’s just a remarkable thing how you get some of the very biggest breakthroughs. The television in ’29, for instance, I guess it was ’28, but close enough.

My favorite illustration is in 1835, there was something called the electrical euphoria. This is where they had kind of discovered the potential of electricity, and over the course of the next bull market, it would flow into people’s houses over the next supercycle. But 1835 was the end of a supercycle, [unclear] the rise from the late 1700s up to 1835. And then you had this innovation blossom.

The other thing that happened in 1835 was the invention of the telegraph. You know, that’s pretty remarkable. You went from— Information could travel at the speed of a boat or a horse, and then, all of a sudden, it was nearly instantaneous. And so, yeah, people’s minds ran away with them and they bid up stock prices. But it wasn’t until 1846 when things were back in the bull market that they started to commercialize the telegraph, as an example. Things just go haywire and ideas can’t get back and things don’t happen as fast as you would expect.

In 1929, you could see this in the stock of RCA. It priced in its gain right up through the 1960s. It didn’t get back to those highs until the 1960s. And television in the interim became a big part of that bull market and how they commercialized it, and they sold TVs and they created the whole world of television entertainment, and it didn’t exist, but they priced it all in in 1929, only to have it priced out again by 1932.

David: Well, pricing in, I mean you think of Nvidia today, 80 years, it’s priced in. I mean, you’re the happy owner of 80 years of today’s revenue. Kind of remarkable that we can get that enthusiastic.

Steven: Right. You make a great point. For example, AI is now the buzzwords in the futures. Well, AI may indeed be transformationable. It may indeed be the future. It may change everything we do and how we look at things. But that doesn’t mean that the stock prices you’re going to make money on, and we’ve seen that at prior peaks, like Pete’s example of RCA in 1929. I mean, the technology was a breakthrough technology, but you didn’t make money on that stock for years and years and decades.

And I think the same thing is happening right now, is that they’ve priced in, like you said, so many years of earnings and expectations that fair market share of those expectations, it’s going to resolve the technology process. It’s still going to be there years from today.

So as Pete was saying, in 1929 RCA had the breakthrough with their technology in television, but people who bought that stock didn’t make money for decades after that. And I think the same type of psychology and thinking and problems are going to be attending the AI boom and evolution right now. Whereas AI might indeed be the technology of the future and maybe here decades from now, a transformational technology, the stock price, as you mentioned, has just priced in all of that future earnings right now. And the bear market, I think, is going to solve that, take care of that, and reorient people, the market goes down.

David: All right, so market shorting. You all know that, yeah, I’ve worked with Doug Noland for the last six years, and he’s great in that space. What do you think about market shorting, either as a hedge or as an opportunity? If we are to the point of excessive valuation, do you prefer to stay in cash and buy stocks when they’re cheap again, or do you step out opportunistically?

Steven: Yeah, I think that you’ve got to really know what you’re doing if you’re shorting stocks, and the average person, it’s a little bit difficult for them. Obviously, if you have someone like you and Doug, who are professionals and know what they’re doing, that’s probably the much more preferable way to go than to try to do it by yourself because it’s very risky.

David: It’s hard work.

Steven: And you have to understand the risks, the downsides, and the opportunity.

David: Okay, so fixed income. We talked about equities and we talked about the run on imagination, which knows no bounds on the upside.

But when you talk about fixed income and interest rates, we thought that there was a limit to imagination that was the zero bound. Then, all of a sudden, a few years ago, we go negative. Not just in real terms, but in nominal terms, so the imagination gets blown on the downside.

What’s your view of the US rates market of the outperformance of high-yield bonds here recently and credit spreads being non-existent? Tell us your view on bonds and whether or not they are the best place to be, or if they might go through a period of—as they have in the past, many, many decades ago—certificates of confiscation in another cycle?

Steven: Right. So we had a 39-year bull market in bonds and yields from 1981 through 2000. And in 2000, like you said, rates went to effectively zero. We remember that the country of Austria was selling hundred-year bonds, and I think the coupon on it was something like 1% or maybe even less than that, which is insane. And you had negative-yielding bonds, which is even more insane. That’s all over. That has ended, and we’ve turned the corner into what we think is going to be a long-term bear market in bonds.

And so our view is to try to stay short-term because there’s some value in short-term bonds, like the six-month US Treasury bill. You can get over 5% interest on your money right now, and that’s actually historically a very good return for essentially zero risk. At the end of six months, if rates go higher, you can roll it over, and if rates go longer, you can lock in a different bond instrument, maybe a little bit longer term. But in terms of interest rates, I think we are in a secular trend, a long-term trend of rising interest rates, and so you want to be careful about how long you lock in money for in that environment because the value of your bond’s going to go down as rates go up.

Now in terms of credit spreads, what we find interesting, and Pete and I were just talking about this the other day, is that spreads have narrowed, but they haven’t gotten back to the 2000 extremes. And again, this is kind of a divergence, an internal divergence we’re seeing because credit spreads typically move with stock prices. They trend in reverse together. So here again we have an internal divergence where some stock indexes are at new highs, but credit spreads are not at new lows in terms of below their 2020 lows, which was the all time extreme. So I think that’s an interesting kind of internal indicator that we’re looking at. We’re probably going to talk a little bit about that in upcoming issues of our newsletter.

David: Well, and I know you are looking at technical analysis and Elliot wave stuff probably more than fundamentals, but if you were to say, on the basis of your prognostication on going into long-term bear market and bonds, that implies higher rates for much longer period of time. We’re talking not quarters, but maybe even decades. If that’s the case, then you look at the equity market and you look at how balance sheets have been managed and how you’ve been able to finance growth with ever cheaper money. Now that plays in reverse. I mean we even see it now at the national level. Our debt—no big deal to have $20, $30 trillion in debt as long as you can keep your thumb on rates. But if rates start to move higher—boom! Trillion dollars in interest. This next year is probably going to be a trillion two, more than our defense budget by time and a half. I mean this is amazing, but how does that impact corporations going forward?

Pete: I just want to interject that it seems to me that the economy’s been stronger than everybody thought it would be, including us, but I want to say that there’s a tailwind from those low rates. In many cases, those rates are still on the book, and the economy’s still running on that energy, but that’s gone. It’s not there anymore. I was just trying to get us up to speed with where we are right now and why the economy is doing as well as it is.

Steven: Let me just interject also that the economy tends to follow the stock market, so the fact that the Dow is at a new high and the S&P is at a new high leads us to believe that you’re probably going to see decent economic numbers going forward for several more quarters until the main indexes roll to the downside. And once they do that, the economy will naturally follow it.

David: Yeah, I mean, and that’s the nature of financial conditions. They feed on themselves.

Pete: The stock market is one of the leading economic indicators in the index, but as far as we’re concerned, you can throw the others out and let’s just deal with the stock market because it’s historically all big tops. Either coincidentally the economy follows or it follows later. It doesn’t lead the way. So the economy doing well is not news. It’s where we should be, given where the S&P is. I think there’s seldom been a better advertisement for the wave principle than what took place in 2020.

Honestly, over the years, if there’s ever a market where I see these guys, Bob and Steve, kind of look at each other and go, “I don’t know what’s going on in bonds.” I’ve heard that a lot over the years, but on this occasion they both were saying, “There’s something interesting going on in bonds, Elliot wave-wise,” and we even put out an issue, which is very rare, that was both an Elliot Wave financial forecast as well as an Elliot Wave Theorist, and they said, “Bonds have turned. This is a 30-year turn. This is a big deal.” And they were exactly right, and they did it strictly using the tool that we have at hand, the Elliot Wave principle.

David: That’s one that you printed back in 2020. Is that perhaps one that we could make available to our listeners?

Steven: We could look into that.

David: I just think it’s such a critical issue because what has kept the world as we know it afloat is ever-declining interest rates and ever-loosening financial conditions. If this is something where you now have headwinds versus tailwinds from the credit markets, that’s massively consequential to every asset class.

Steven: Right, exactly.

Pete: Yeah. And thanks for reminding us. We’ll have to remember to keep emphasizing that because it’s very true.

David: Currencies, there’s a lot of money that’s borrowed in yen and placed all over the world. Maybe that’s the currency to look at. The RMB is well defended today, but with the amount of chaos, as we described earlier, developing within the Chinese financial markets, maybe the RMB is something to look at. The euro was thought to give the dollar a run for its money in terms of a world reserve currency. What’s your favorite chart? As you look at yen, RMB, euro, US dollar, what’s your favorite chart, and which one do you think is most consequential in the quarters and years ahead?

Steven: For us, without a doubt, it’s the US dollar. That’s going to be really the key. And what’s been interesting to us is that the dollar has been trending opposite the US stock market since the highs in November of 2021 and the NASDAQ in January, 2022. For the most part, as stocks were rallying, the dollar goes down, and as stocks decline, the dollar goes up. And I think what’s happening there is that people are looking for safety, and when the US market starts going down, they start moving into what they think are safe assets or assets that will hold their value. Currently, it’s the US dollar, and eventually it’s going to be gold.

Eventually everyone’s going to be moving into gold in a major way. The chart of the currency that really intrigues us right now is the dollar. Now, I think the dollar could have a little bit more weakness, maybe over a short or intermediate term basis, but I think that weakness is going to resolve into what I think is going to be a major wave of advance in the US dollar. So that’s what we’re keeping our eye on at this point. And I think all the other currencies are kind of playing off the dollar. They’re flowing against or for what the dollar is going to be doing. I think that’s really going to be the key going forward.

David: Okay. This presents an interesting sort of analytical problem because on the one hand, if the dollar’s moving higher, most traders would say that’s negative for gold. You can say, well, there’s an exception going back to ’75 to ’80 where you had the dollar stabilized, move sideways, even move higher in that period. And it certainly didn’t put a dent in the price of gold as it was marching to $875. How do you get rid of the cognitive dissonance? Tell me what your thoughts are in terms of gold and silver. I think you’re bullish there, but you’re also bullish on the dollar. That’s interesting.

Steven: Yeah, so I think that the dollar and gold usually move opposite each other, but not all the time. And I think if you look back, for example, back in the mid ’80s, around ’88, ’89 into ’90, both of them were trending together. And the dollar was going down, gold was going down at that point. And so there are periods where they tend to move in consonance with each other. I understand that kind of argument that if the dollar goes down, gold goes up; gold goes down, dollar goes up. But I think we’re entering a period where people are going to want safety, and that’s the overriding issue.

Now, I don’t think it’s going to be a long-term trend where both of them move together longer term. That’s just not their history. But I do think there’s going to be an intermediate term period where the dollar rises and gold rises because people want to get into assets that they perceive to be safe because other assets are going to be going down in value. And so that’s kind of our play right there. Now maybe they don’t line up exactly, maybe the dollar has a rally, gold comes down a bit, and then the dollar rolls over, and then gold goes up. But I think for a period of time they’re both going to be rising together. And then we’ll just kind of have to watch the waves and see what the waves tell us because they’ll tell us when they’re ready to move apart again.

Pete: We generally don’t like to get it into market analysis, but one thing I would point out is there’s this thing called bitcoin, and it is central to the party atmosphere. And we definitely think that when stocks turn definitively, bitcoin will head down even further than it has in recent days. So we think that that is not a safe investment. That’s not safety in our book, but maybe what people will be doing is moving to something that’s a little more permanent, like gold. We know they’ll still want to buy something because people just have to buy. That’s their nature right now. And in the beginning of the bear markets that will continue to be. At the bottom they might not want to buy anything, but they’re going to want to buy something.

David: And if it becomes more apparent that rates are moving higher, they’re either going to cluster on a safe haven basis into short-term Treasurys, or what are your other viable alternatives? If there’s pressure out there, all of a sudden your credit spreads are widening, you can’t really look at a broad array of fixed income as an alternative. Where do you go? Where do you go for safety?

Steven: Right. You go for safety in gold and short-term Treasurys, and yeah, that’s where you’re going to look for assets that traditionally hold their value and will give you a return of your money, maybe not a huge return on it. Or if gold really does move to the upside strongly, you’ll get a good return on your money.

David: Tell me about, in terms of wave analysis, where do you see the metals resistance, price targets, support? Some are arguing that on the basis of current COTs, you could actually see some pressure come into the metals in the short term. What’s your view?

Steven: That’s interesting that you just brought that up because Pete and I were talking about that earlier. I was saying the COT data is not that supportive for gold at this point, but usually what happens is when you get in these big bull markets and these big bull trends, it just runs right over the COT data. People get bullish and they stay bullish, and the market goes up. And we saw that from probably about 2019, 2021. We saw that in the big rise up into the tie that gold had back in 2011, 2012. But you’re right, I mean right now I think that we had a big spike on a short-term basis back in early December when spot prices I think went to $21.35. And we’ve been consolidating from there.

Short term, there could be some more downside to gold. I’m not 100% positive on that. But if we do get that, I don’t think it’s the start of a big bear market. I think it’s much more of a consolidation and an opportunity for the bulls to look to where they could start positioning. But longer term, I think, boy, in terms of Elliot wave just targeting, you’re talking thousands of dollars higher in order to complete the fifth wave that we’re in that started back in, was it September of 2022?

David: All right. I think you’re just feeding my confirmation bias. I thank you for it.

Tell me on energy, what do you see in the oil markets? I don’t know that I’ve seen any recent charts from y’all on oil net gas or things like that, but I’m curious if you have a view on energy.

Steven: I don’t have a strong view at this point on the oil market—

Pete: [Unclear], but I think it’s leading the economy. I think that energy prices will come down as the economic growth peters out across the world. You’re seeing it in China now, and our point is that China’s the leader, and the world will catch up to China, including the United States eventually. But again, the stock market will let us know when that’s nearby, and I would say it could be two quarters away or maybe just a quarter. But within our economy, we’ve got plenty of little changes, like a 20% decline in commercial real estate. That’s telling you something. We think is a hint of further problems for oil as well as the economy at large.

David: Okay. We talked to markets. I want to come back to maybe a little bit more theory and sort of the observations and the connections that you make. Social expressions of mood are intriguing. And I’m curious what sits at the top of your list today. As y’all are bantering back and forth in the office, the social expressions predictive of future market dynamics, what catches your fancy today, the automobile shape, the height or lack thereof in terms of skirt length? I mean, there’s all these strange but curious but really helpful in the end connections. What’s the top of your list?

Pete: It’s interesting that you put it that way because, like I said, I was drawn to the end of this approach to the markets because it did seem to have these applications that are extra market. But I was initially, Bob didn’t, and I was a little bit suspect of using them to make observations about the market. So going with short skirts and saying, “Well, the market’s going to go down because they can’t get any shorter.” But in fact, at this point, one has to say, they really can’t get any shorter. Bob showed in his latest issue, there are no skirts. This is a style. And we were talking about it today, and he’s noticed it first in July when the S&P made a high, and it was celebrities and maybe on the runway, but now it’s on the street, and it’s weird because it’s winter, so what’s going on? We say, “Yeah, socioeconomically it fits perfectly with a high in the S&P that might not go very much higher because you can’t get any less skirts than that.”

David: Well be careful what you print because your subscriptions may go through the roof. Just saying.

Pete: Yeah, right.

Steven: We can only hope.

David: So tell us about the two-year cycles of peak optimism.

Pete: And this is another one where, honestly, when I first noticed it was 2000, and there was a change in the Mid-East. He went from Camp David accords imminent in the early part of the year to problems in Gaza, a lot of rioting. And I’m not sure if that was an [unclear] ultimately, but it kept going for about three years, which is basically coincident with the trend in stock prices. So then it happened again in 2006 and ’07, and now it’s happened again. We see turmoil in the Mid-East. Honestly, I can’t recall exactly when it started, but it’s certainly extreme now— Actually, it’s more extreme than it’s ever been, and we think it’s symptomatic of where we stand with the wave count.

Like I said at the beginning, I was a little bit suspect of it in 2000 because the Mid East, the Dow Jones, they’re not the same market, let’s say, but it’s there and you can trace it back in history into the twenties. And it’s just a pattern that appears that you have to say it’s meaningful because it keeps showing up historically. It is an ancient source of tension, and it’s not like the West doesn’t have interest in the Mid East. So it’s one of these things. It works.

David: So these things are patterned. One of the patterns that you’ve mentioned is the two-year cycle of peak optimism. Steven, you want to talk about that a little bit?

Steven: Yeah. Something that Bob really noticed and he wrote about in the Elliott Wave Theorist, but it goes back a number of years, and we’ve seen a huge rise into a peak in January of 2018, that ended what we call a third wave and led to a fourth wave, which was a downward correction in the market. And then two years later into a high in January, February of 2020, that was the second two-year peak in optimism. And we had that famous market meltdown from February, 2020 into March, 2020 where the Dow actually fell the fastest it’s ever done in its history after reaching an all-time high. It just melted down, I think it was 38% or so in a matter of weeks.

And then we started rallying back up, and two years after that January, February, 2020 high, what happened again while we were in January, 2022, and the S&P and the Dow were making another two-year high in this optimism. That led, of course to the bear market that we still think is underway, but at least the first wave down or the first leg down into October of 2022. And guess what? We’ve rallied now up here into 2024, January, 2024. We’re right in the window, the three to four week window of this next optimism high, the cycle high for optimism. We are multidimensional when we look at our analysis, we’re looking at sentiment, optimism, we’re looking at momentum, we’re looking at divergences. Well, this is just one more piece of the puzzle in our estimation that leads us to believe that we’re much closer to the end of this rally than we are to the beginning or even the middle of it.

David: Yeah. And of course, that flies in the face of what the news media would like to present. We’re entering, according to them, into a period not unlike the roaring twenties, and comparing this year as like the 1921 period, which I thought, that’s stupid. That was a depression year, if I’m recalling correctly. But yeah, it’s interesting the way people see things. Many investors and many news media outlets prefer to look in the rearview mirror. It seems that what you’re doing is taking chart patterns and suggesting that there’s significant change on the horizon. Let’s look ahead and see if anything in the present and in the past speaks to the future.

I want to come back to something that Pete was talking about a moment ago. We were talking about the Middle East and what you see in one area and what it signifies. And we talked about, again, the socioeconomic cultural things. We’ve got the headquarters for JPMorgan Chase, newly built, 60 stories, 270 Park Avenue. Here we are, grandest ever period of financial assets, outperformance. That’s what we’ve had over the last 5, 10, 20 years. Does that presage a new period of underperformance as they ring the bell with the biggest and nicest headquarters ever?

Pete: Certainly history says so. There’s a building next door to the New York Stock Exchange that used to be called the Irving Trust Building. Now it’s owned by some Chinese investors, but at the time it was built, it was 1910, and it was the tallest financial building in the world. Of course, in ’29, the building that Donald Trump now owns that’s just up the street from there, that was [unclear]. It would’ve been the world’s tallest, not the tallest financial building, were it not for the subsequent construction of the Empire State Building. But the point is, the financial towers reach monumental levels at tops. And of course that’s happened more recently and now you see it with the JPMorgan building, the tallest financial building in this hemisphere, and then also the hedge fund. There’s another one that’ll be almost as tall that’s being built by a hedge fund. So you have a double signal there. And we think it means that financial companies are in for a troubled decade.

David: I think the hedge fund is Citadel, which even in the name would have a bit of irony.

Pete: Yeah, another irony.

David: Yeah. Well, this is a question I don’t know exactly. Maybe you’ll have to help me with this. There’s more and more news headlines and articles that are being written by AI. I don’t want to critique AI or say— This is just a reality. Bloomberg can crank out articles on anything and it’s not being written by people anymore. And the headlines are being written by AI. How do you think that has or will impact the lag time between the shift in social mood and market moves?

Pete: I think that AI will have human qualities. It is created by humans, and it will exercise the will of social mood. I don’t think it will change it at all, actually. I think we’ll get the same over-enthusiasm at highs and AI will hate equities at lows just like people do.

Steven: Yeah. Because the programs are just programmed by people, whether they’re learning on their own, the basis of it is still human thought. So I agree with Pete 100%. I don’t think that there’ll be any change in terms of patterns that we see because psychology is psychology. And whether it’s programmed to manifest itself through some computer simulation or whether it’s done directly by humans, it’s still going to manifest itself within social mood, within the culture, and within patterns that the stock market trace out.

David: A couple of things that come to mind. We’ve always had an information lag and that’s allowed for trading to occur. Who has the information? Who has it sooner? We’ve seen high frequency traders even position their computers as close to the exchanges as possible. It seems to me that you could have an ever-shrinking informational arbitrage, and that could really just— Maybe the long-term effect of AI generating information is an increase in volatility or a quickening of volatility. Maybe it’s the same volatility, but just faster. We used to wait for the evening news, and now we’ve got a Twitter feed. So we react in real time—or not quite in real time—but we act faster because we’re not waiting until the 6:00 o’clock news. I just wonder if we don’t see cycles shrunk in time. Is that possible?

Steven: Yeah, it might be. But what you’re describing is short-term emotion, and that releases itself very quickly, but it doesn’t change the longer-term patterns and how they form. So you can have short-term increases in volatility that do not change the overall structure of the market because the market is a fractal. So there’s infinite variability within a certain form. For example, think of a tree. A tree branch will have infinite variability in the small branches that come off it, but when you step back, it’s still a tree. And I think that’s the same way in the market. I think that’s what you’re describing is either short-term fluctuations and emotions might be quick or coming quicker because of this information, but when you step back, the patterns are still going to be the patterns. Humans are still human. You get more excited as the trend goes up in a patterned way, and you get more pessimistic as the trend goes down in a patterned way. And I don’t think that’s going to change.

David: No, that’s super helpful. Just the differentiation between short-term emotion and the patterns that play out over a longer timeframe. That’s really helpful. Well, we’re getting ready to wrap our conversation today. I think we could go for hours. I’ve really enjoyed this. If you had to pick, what’s the greatest risk in 2024, what’s the greatest opportunity?

Pete: Well, I think the stock market is the biggest risk. It’s where people have their money. People are so conditioned to be in it. But the headline that grabbed me today is— We were discussing what we’re going to cover in the next issue. And the headline that stuck out to me is, “This Isn’t Your Father’s S&P 500, Don’t Worry About Valuation.” And the risk is so great because it’s a whole generation of people that think that way: “My father’s valuations don’t matter.” I think they do. I think we can get back to planet earth, and that valuations will actually go past the earth and back towards the sun. As Bob has shown, they’re out there by Pluto right now. But there is a thing called gravity, and it’ll start to take hold in 2024, and it’s going to be a little bit mind bending for a lot of people. So I’d say that’s the biggest risk.

David: And what about the greatest opportunity Pete?

Pete: Well, it’s got to be the same one, on the short side. That’s opportunity for the person who can claim it. The short side of the market would be that biggest opportunity, stock market.

David: Steven, how about you, your view? Any different?

Steven: Yeah. I think the greatest risk without a doubt is equities at this point. I think 2024 is not going to be anything like 2023. And if you’re in stocks right now, you really have to take a close look at your portfolio to make sure that you’re accounting for the vulnerability of a major market stock sell-off. And I think all the indicators are pointing in that direction.

In terms of opportunity, I think we have a stellar opportunity for safety, to be safe. And it’s one of the things that we really have been emphasizing to our readers is that you actually can make money being safe right now. And you couldn’t say that two to three years ago because interest rates were at 0%. So trying to convince people that they needed to be safe was such a flog because they were just sitting there in money market funds or CDs earning zero.

Well, now you got a three or six month T-bill that’s over 5% so you can be safe and actually earn something on your money. Or you can buy small amounts or whatever, whatever’s good for you of gold and know that you’ve got real money, historical real money. So I think the greatest opportunity going forward, not only this year, but well into the next year also, is to be safe and look for safe investments that are short term, that give you liquidity that you need so that when the time comes to buy stocks for 50% off or whatever they go to, you’ll have that opportunity and you won’t have to worry about the market going down.

David: Well, gentlemen, thanks for joining us and let’s do this again sometime. This has been really fun. I love talking with Mr. Prechter and I love talking with you guys too. This has been an event.

Pete: Look under better circumstances in six months or so.

David: Yeah. Well, www.elliottwave.com/david, and you all put together a smattering of things that introduce our listeners to your way of looking at the markets and discerning trends within them. Thank you for your generosity there, and we look forward to being in touch.

Steven: Thanks, David. We really appreciate talking with you today.

Pete: Thanks, Dave.

*     *     *

Kevin: Well, Dave, how interesting. Probably my favorite quote was that the market is a humility machine.

David: If you don’t have it, it will serve it up in high doses. Great to be involved with it. You may learn the hard way, and I think that’s really the nub of what we talked about today, is pay attention because there’s so much pride, there’s so much hubris, there’s so much blindness in the confidence that is implicit to the market structure and mood today that maybe that’s what’s next. A little bit of humility.

*     *     *

You’ve been listening to the McAlvany Weekly Commentary with our guests today, Steven Hochberg and Pete Kendall. You can find us at mcalvany.com, and you can call us at (800) 525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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