Home > European Markets
Europe: Deflation is a Global Story (Part I)
This is Part I of an interview with EWI’s new European editor.
Today, I sit down to talk with the new editor of Elliott Wave International’s monthly European Financial Forecast (EFF), which focuses on the trends in the FTSE, DAX, CAC and other European bourses, as well as important social trends in Europe. His name is Brian Whitmer.
Who is Brian Whitmer? He is the man who beat out 50+ other applicants for the job as the new EFF editor. He didn’t earn the spot just because of his talent for counting Elliott waves and interpreting the markets’ technical characteristics. What really won Brian the position is his ability to understand and explain the markets’ big picture and emotional underpinnings. Brian makes EFF more than just useful – he makes it interesting, even enlightening. I hope you’ll get a glimpse of his personality from this interview.
Vadim Pokhlebkin: Brian, you are the new editor of EWI's monthly European Financial Forecast. Why did you choose to focus on Europe's markets?
Brian Whitmer: Well, in my opinion, there’s no better place than Europe to apply the Elliott Wave Principle and to study socionomics*. The continent has it all. You’ve got the large markets in London, Paris, and Frankfurt – those usually display the cleanest Elliott wave patterns, and they are perfect to help paint the big picture. But Europe has the smaller markets, too – which add excitement. Just look at what has happened in Ireland, for instance. According to newswires, federal money promised to its banks equals more than twice the country’s annual economic output. As a percentage of GDP, gross debt will explode to 53% this year. According to Marketwatch.com, it costs almost $400,000 per year to insure a notional $10 million of Ireland’s debt against default – more than 16 times the cost of the same insurance last year.
And this is a country that was termed the “Celtic Tiger” as recently as last year. The description fits. The four Asian tigers’ long rise to prominence culminated in the late-’90s debt crisis. More recently, the Baltic tigers, Latvia, Lithuania, and Estonia, paid respect to the term. Sensational economies over the last decade weren’t really “tigers” after all – just contorted illusions created by debt. Illustrating this point, the Irish ISEQ stock index has collapsed almost 80% in just a few short months! I show this chart in the current March issue of my EFF:
Same story in Russia: down 80% from the May 2008 top. As Bob Prechter warns his phenomenally-accurate book, Conquer the Crash, “Make no mistake about it: [Deflation is] a global story.” The book takes an entire chapter to spell out the massive systemic risk associated with the world’s modern banking system – the risk that has obviously turned out to be very real.
You get a free copy of Bob Prechter’s Conquer the Crash with a risk-free subscription to EWI’s European Financial Forecast. Details.
Putting aside the obvious social ramifications of these drastic decline in social mood across Europe (as measured by its stock indexes), these are also exciting markets to trade.
VP: Interesting that you mention trading. There is a common notion among investors (especially those based in the U.S.) that, because the world's stock markets "all move together," all you need to succeed with your overseas portfolios is a good forecast for the DJIA, the world's benchmark stock index.
BW: Well, it’s not hard to see where that notion comes from. Lately, it has certainly seemed that markets are moving together – especially those in the U.S. and Europe. But that hasn’t always been true in the past, and it isn’t likely to continue forever: All intermarket correlations are time-dependent; none is absolute. If you remember, for example, in 2005, the DJIA finished the year with a 0.5% loss, while European and Asian stocks posted 20%-60% gains. Another good example that comes to mind is Japan. In the early ‘90s, Japanese equities lost almost two thirds of their value in 2-1/2 years and went on to languish throughout the decade even as world markets exploded higher. So, a “good forecast for the DJIA” would have wiped out an investor in Japanese stocks.
Today, it’s true that European and U.S. markets are nicely synchronized, but that won’t always be the case. At some point, markets will diverge again. It’s not a question of if, but when. We’re sliding lower and lower within a social mood decline the size of which we’ve not seen in a very long time. It’s going to be difficult for all of us to watch and live through a downturn of this magnitude. It can make you feel out of control. But good knowledge of the Wave Principle and socionomics* can lessen that discomfort immensely by keeping you prepared.
*Socionomics is the new study of social mood and its effects on human events pioneered by EWI’s founder and president, Bob Prechter. Learn more by watching this free online documentary, “History’s Hidden Engine.”