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2001 Repeated? How Stock Market Predicts Wars and Terrorism
History shows that social violence tends to FOLLOW stock market declines.

By Mark Galasiewski, Editor, Asian-Pacific Financial Forecast
Fri, 05 Dec 2008 13:15:00 ET
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Below is an excerpt from EWI's just-published, December issue of The Asian-Pacific Financial Forecast. (Online now; here's what's inside.)

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Current events in Asia bear an eerie resemblance to those of late 2001. Here's a brief list of recent events that draws parallels to that time:
 
  • Asian-Pacific stock markets have collapsed by 50% or more this year.
  • Measures of trader sentiment are at all-time lows.
  • Al Qaeda-inspired terrorists executed major attacks on American targets ahead of this year's stock market lows.
  • Copycat terrorists executed attacks on high-profile targets in Mumbai, India, last month.
  • The U.S has escalated its hunt for Osama Bin Laden in Afghanistan and Pakistan.
 

This chart of India’s SENSEX graphically illustrates the similarity of the two periods. In August 2008, EWI's Asian-Pacific Financial Forecast (APFF) first identified a connection between the sudden increase in Islamic terrorist activity and the decline in Pakistan’s stock market. For that reason, we proposed using the Karachi Stock Exchange 100 (KSE-100) as a proxy for the social mood in Islamic Central Asia. Then, the October 2008 APFF published a Special Report on violence in Afghanistan and Iraq, showing how Al Qaeda-inspired attacks have tended to occur after major declines in the KSE-100. (APFF subscribers can read an excerpt from “The Waves of War” report on the Subscribers page of elliottwave.com now.) 


Invest in India, China, Japan, Australia or elsewhere in the region? Read the latest forecasts inside the new, December Asian-Pacific Financial Forecast. Online now, yours risk-free.
 
Last month, the November issue of the APFF pointed out that measures of Asia's stock market sentiment, momentum, volatility and breadth were hitting multi-year extremes. The technical and social environment seemed so similar to the 2001 post-low period that we warned of a possible repeat of violence in the region; excerpt:
 
"The most spectacular violence of 2001 in the Asian-Pacific region—the U.S. invasion of Afghanistan and the terrorist attacks on India’s Parliament—took place weeks and months, respectively, after the September lows in the region’s stock markets. The recent escalation of grassroots violence in Afghanistan, Pakistan and India show the potential for a sequel to those violent events." -- November 2008 Asian-Pacific Financial Forecast.
 
The recent terrorist attacks on ten high-profile targets in Mumbai, which killed almost 200 people, are precisely the kind of events that we feared might occur, based on the pattern we've observed.
 
Various possible explanations for the violence in Mumbai have been offered. Some have said it was a reaction to the recent elections in Kashmir, or even the United States. Many, in India in particular, suspect involvement by the ISI, the Pakistani Intelligence agency. But from an Elliott wave perspective, there is a more obvious reason: As the above chart demonstrates, the violence is a product of the collapse in social cohesion that has followed the declines in Asia's social mood, as measured by the regional stock markets.
 
History shows that social violence in all forms – political, military and economic – tends to follow stock market declines. What’s more, the severity of that violence is usually proportional to the severity of the decline. We could not have predicted the location, or exact timing of these tragic events. But their general timing and scale make sense, given the severe declines in Asian stock markets over the past year.
 

Read more in the just-published, December Asian-Pacific Financial Forecast, risk-free for 30 days. Here's what's inside.

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