Friday morning (November 27) brought troubling news from Dubai:
"Late Wednesday, Dubai World, the city state's largest corporate entity asked creditors for a six-month stay on repayment of its $60 billion in debts." -- The Wall Street Journal.
Stocks around the world tumbled on Friday. This begs the question: Could this be this year's "Lehman Brothers" event? As we all know, mainstream financial pundits have almost universally blamed the 2008 Wall Street meltdown on Lehman's bankruptcy. Is Dubai this year's "Lehman"?
Regular readers of Elliott Wave International's publications already know the answer to that. Broad trends in financial market are not created by events, but by shifts in social mood, which reverses for endogenous reasons, not exogenous ones. Simply put, no "triggers" are needed for a market to reverse its course.
A more thorough explanation appeared in the October issue of The Socionomics Institute's monthly Socionomist:
The Persistence of the Exogenous Causality Fallacy
Last month we pointed out that conventional analysts frequently use exogenous events to explain changes in social mood. This tendency was on display again on the one-year anniversary of the Lehman Brothers bankruptcy. Newsweek reported that the bankruptcy 'seemed to be the direct cause of serious problems [in the financial sector].' USA Today printed a chart of the DJIA from September 12, 2008 to the present, with many economic events listed as 'causes' for the market’s gyrations; it also made the case that the Lehman bankruptcy triggered the financial crisis.
These reports somehow overlooked the fact the DJIA (and social mood) had been in decline for 11 months before Lehman’s bankruptcy. Did Lehman cause the financial crisis? No, its failure resulted from a trend that had already in place for between one and three years, based on graphs of stock and real estate prices. The bankruptcy was a result of the negative social mood, not the cause.
So, will Dubai become this year's "Lehman"? Only if Elliott wave patterns in global stock market charts suggest that market participants will interpret the news from Dubai as something catastrophic.
Will they? Read the latest Elliott wave analysis of the DJIA and other major U.S. indexes now in EWI's most popular publications, risk-free. Click here to get started now.