Some of the characteristics of an economic deflationary period are:

- debt burden across all aspects of society

- reductions in lending

- reductions in spending

- debtors earn less money

- defaults rise

- increase in unemployment

Sandra Pianalto, President and CEO, Federal Reserve Bank of Cleveland, had the following to say about the current economy and its outlook:

And although we have weathered the worst of the financial crisis, we are still learning a lot about the effects of our policy tools on the economy as the recovery takes hold. I continue to bring a greater degree of judgment to the forecasting process than I ordinarily would in more certain times. And I am not alone in this regard. Since the onset of the crisis, most of my colleagues on the FOMC have reported greater uncertainty about their projections for economic growth and inflation compared with historical norms...

However, my outlook is that our journey out of this deep recession will be a slow one because we face two primary headwinds that I expect will temper growth for awhile. The first is the effect of prolonged unemployment, and the second is a heightened sense of caution on the part of consumers and businesspeople. Let me explain the power of these headwinds, beginning with prolonged unemployment...

The second powerful headwind in this recession is a heightened sense of caution, driven by a deep uncertainty about where the "new normal" or baseline might be. A whole generation of Americans who began their working careers in the mid-1980s had experienced only long periods of prosperity punctuated by just two very brief downturns. Those experiences encouraged an expectation for relatively smooth growth. Now everyone's expectations have shifted as a result of this long and deep recession...

People's attitudes about their own prospects have fundamentally changed. In a recent survey by Ohio's Xavier University, 60 percent of those polled believe attaining the American dream is harder for this generation than ones before. And nearly 70 percent think it will be even more difficult for their children. Many people are now just aiming for "financial security" as their American dream...

This has led many people to delay major purchases until their circumstances are clearer. While home sales have risen slightly as of late, overall sales have fallen by more than two million since 2006. Car sales are also still down to an annualized rate of under 12 million instead of the 16 million or more seen in the years before the downturn...

Businesses are also cautious. Business leaders base many decisions on forecasts, and they tell me that they are attaching the same high degree of uncertainty around their projections as I am. Most business leaders say that they're not planning significant hiring until there's more clarity about how the recovery is going to progress and about policies relating to health care, energy, the environment, and taxes. This caution translates into fewer job opportunities, fewer equipment purchases, fewer building projects--and on and on...

Let's begin with current inflation. Recent evidence I am seeing puts momentum on the side of disinflation, at least in the short run. Measures of core inflation have been falling during the past year. Core inflation measures are fairly good predictors of near-term inflation because inflation itself tends to move sluggishly. At the Federal Reserve Bank of Cleveland, we track two measures of inflation--what we call the "trimmed mean" and the median CPI series. Both of these series have been on a disinflationary path since the middle of 2008, and the prices of roughly 50 percent of the items we track in our market basket of consumer expenditures have been declining over the past three months. In this economy, companies are really holding the line on prices to boost their sales, and they can do that profitably in part because labor costs are so restrained...

In fact, the data show that labor costs have fallen by nearly 5 percent since the fourth quarter of 2008, and many of my business contacts continue to talk about wage and price reductions, not increases...

Let me bring all the elements of my outlook together. For the next couple of years, I expect employment levels to remain well below what I would consider full employment. Similarly, I expect inflation to only gradually drift up from its currently low level but nonetheless remain subdued. In my view, this outlook warrants exceptionally low levels of the federal funds rate for an extended period of time.

Read Pianalto's full remarks here.

Pianalto does not accept that we're in a deflationary spiral but she does portray a forecast that is deflationary in nature.

Consider the following from the The Elliott Wave Theorist, Oct 2003:

The Federal Reserve System will be discredited and then abolished.

An example of the 'discredited' phase:

Will Rep. Alan Grayson, who allowed passage of the multi-billion dollar Health Care bill, which the U.S. can’t afford, ask the Fed to bail-out the Health Care industry when it falls?

And an example of abolishing the Fed, or attempts to anyway since the forces against ending the Fed are strong. Here is the latest from Sen. Ron Paul, who authored the bill (Audit the Fed – HR 1207 and S 604) to end the Fed:

The process towards ending the Fed will accelerate when the realization that the bail-outs did not work and when the deterioration of the economy into a depression overwhelms the social fabric, all around the world.

The firm's history suggests its vulnerability in periods of negative social mood.

April 23, 2010

By Elliott Wave International

In the November 2009 issue of Elliott Wave International's monthly Elliott Wave Financial Forecast, co-editors Steven Hochberg and Peter Kendall published a careful study of Goldman Sachs history -- and made a sobering forecast for its future.

In this special three-part series, we will release the entire Special Report to you free of charge. Part III is below. You can find the entire series here: EWI forecasts Goldman Sachs company troubles.

Special Section: A Flickering Financial Star, Part III

With the market's downtrend recently in abeyance, these transgressions failed to capture the imagination of the public or the scrutiny of law enforcement. But the extreme recriminatory power of the next leg down in social mood suggests that Goldman's dealings will become a lighting rod for public discontent.

In January 2008, Elliott Wave Financial Forecast noted that Goldman's success relative to the rest of Wall Street pointed "to the eventual appearance of a much larger public relations problem in the future. In the negative-mood times that accompany bear markets, conflict of interest charges will come pouring out." The recent revelations about Paulson's and Friedman's actions are exactly that to which we were referring. Additional claims against Goldman -- including front-running its clients and profiting from inside information -- are already too numerous to mention. As the bear market intensifies, the firm will attract scrutiny as easily as it brushed it off in the mid-2000s.

Based strictly on the form of its advance, a July 2007 issue of The Short Term Update called for a peak in Goldman shares at $234. Goldman managed one more new high to $250 in October 2007; it then fell 81 percent to a low of $47 in November 2008. The stock market's wave 2 rise brought Goldman back to $193 on October 14. Its affinity for marching in lock-step with the DJIA strongly suggests that Goldman will decline to below its November 2008 low.

Another key socionomic trait is for the most successful recipients of bull-market goodwill to be singled out for special treatment in the ensuing decline. Even fellow financiers are taking aim. In a not-so-veiled reference to Goldman, one Wall Street titan said that big profits made by investment banks are "hidden gifts" from the state, and resentment of such firms is "justified." Let the bloodletting begin.

Let the Buyers (of Stock) Beware

Goldman's heavy involvement in the hedge fund industry is another bull market asset that will become a huge liability in the next wave lower. In January, when some minor insider trading charges were brought forward, Elliott Wave Financial Forecast stated that they were only a first puff of "what promises to be a huge mushroom cloud." The next much larger puff, and its ability to quickly envelop the financial markets, was put on display as the hedge fund Galleon Group went from insider trading charges to complete liquidation in a matter of days. The headlines are already pointing to a potential chain-reaction: "Galleon Wiretaps Rattle Funds as Insider Trading Targeted." Reports indicate that the Galleon investigation actually began in November 2007, one month after the start of Cycle wave c.

Back in 2007 when Elliott Wave Financial Forecast talked about the "conspicuously tight knit" nature of hedge fund participants, we added that in bear market times, these "men will turn on each other out of a need to survive." According to reports, that is exactly what happened. The central witness "who brought down the hedge fund" suffers from "financial woes" and "is working with law enforcement in hopes of receiving a lighter sentence." The bear market is already squeezing the most aggressive bulls from every angle. New legislative and administrative initiatives are being proposed, and in some cases enacted, that will reduce executive pay at bailed-out financial institutions by up to 90% and attempt to shift the cost of bailouts from taxpayers to other large financial companies. The most far reaching "reforms" probably won't take effect until later, when the decline is over or nearly so.

Finance led the way down in 2007; so we shouldn't be surprised by its apparent willingness to do so again. ... This time however, the decline will be a third wave at Primary degree, which should be far more intense than the initial Primary-degree decline from October 2007 to March 2009. Stay tuned.

The firm's history suggests its vulnerability in periods of negative social mood.

April 21, 2010

By Elliott Wave International

In the November 2009 issue of Elliott Wave International's monthly Elliott Wave Financial Forecast, co-editors Steven Hochberg and Peter Kendall published a careful study of Goldman Sachs company history -- and made a sobering forecast for the firm's future: "Goldman Sachs will experience an epic fall."

In this special three-part series, we will release the entire Special Report to you free of charge. Part II is below. You can find the entire series here: EWI forecasts Goldman Sachs company troubles.

Special Section: A Flickering Financial Star (Part II)

Despite careful stewardship, Goldman's reputation faltered as stocks fell in 1969-1970. When the Penn Central Railroad went under, it was revealed that Goldman sold off most of its own Penn Central holdings before the June 1970 bankruptcy. This was another case of shifting standards, as Goldman's customers were all institutions dealing in unregistered commercial paper. They should have known the high odds of failure, as the railroad’s stock was down almost 90% when it finally failed.

As Cycle wave IV touched its low in October 1974 (S&P; see historic chart in Part I), a jury ruled, however, that Goldman "knew or should have known" that the railroad was in trouble. But Goldman Sachs company survived the negative judgment and grew quickly as the Cycle wave V bull market took off beginning in 1975.

As the chart shows, its rise to 2007 was meteoric. It was in this period that Goldman "reinvented itself" as a "risk-taking principal." By 1994, Goldman Sachs: The Culture of Success (by Lisa Endlich) says compensation policies had tilted so heavily toward risk taking that one vice president noted, "everyone decided that they were going to become a proprietary trader." In that year, the firm suffered its first capital loss in decades as stocks sputtered, but, within a year, the Great Asset Mania was in full force and Goldman's appetite for risk took off with that of the investment public.

In 1999, the last year of a 200-year Grand-Supercycle-degree bull market, Goldman Sachs, appropriately, went public, becoming the last major Wall Street partnership to do so. As Bob Prechter's Elliott Wave Theorist said at the time, "Some of the most conspicuous cashing in has come from the brokerage sector, which has a long history of reaching for the brass ring near peaks."

The Partnership notes that by May 2006, when a wholesale financial flight to ever-riskier financial investments was in its very latter stages, Goldman had "the largest appetite and capacity for taking risks of all sorts, with the ability to commit substantial capital." As other firms felt the sting of an emerging risk aversion, Goldman profited by shorting the subprime housing market and putting the squeeze on its rivals. The firm earned $11.6 billion in 2007, more than Morgan Stanley, Lehman Brothers, Bear Stearns and Citigroup combined. Merrill Lynch lost $7.8 billion that year.

Another bull market initiative explains Goldman's relative strength since 2007. It dates back to the hiring of a former U.S. Treasury Secretary, as the Dow peaked in Cycle III in 1968 (see chart in Part I). This was the firm’s first foray into the upper reaches of the U.S. government. In wave V, the flow of talent went the other way and tightened the bond, as executives regularly moved from Goldman to Washington. This process was aided in part by a Goldman policy that pays out all deferred compensation to any partner who accepts a senior position in the federal government.

In May 2006, Henry Paulson, Goldman's chairman, left to become Secretary of the U.S. Treasury. Over the course of wave V and its aftermath, when government was increasingly relied upon as the buyer of last resort, these associations proved valuable to Goldman. Eventually they will weigh heavily upon the firm, but the value persists for now because the government is playing its socionomic role and clinging tenaciously to the expired trend.

Another important late-cycle development is Goldman's all-out effort to court, rather than avoid, conflicts of interest. From the 1950s through the early 1980s, Goldman leaders assiduously avoided even the perception of a conflict of interest between the firm’s positions and those of its clients. Goldman's current leader, Lloyd Blankfein, "spends a significant part of his time managing real or perceived conflicts." Says Blankfein, "If major clients -- governments, institutional investors, corporations, and wealthy families -- believe they can trust our judgment, we can invite them to partner with us and share in the success."

The strategy paid off big in 2008 when Henry Paulson, who was still in charge at the Treasury, helped the taxpayer step in to rescue Goldman. According to a Vanity Fair article by Andrew Ross Sorkin, Paulson had signed an ethics letter agreeing to stay out of any matter related to Goldman. In September 2008, however, Paulson received a waiver that freed him "to help Goldman Sachs," which was faltering under the financial meltdown of a Primary-degree bear market.

It may be that the best interests of Goldman are perfectly in line with those of the nation, but in the combative atmosphere of the next downtrend in social mood, we are quite sure that voters will not see it that way. Also, the potential for self-enrichment already appears to have overwhelmed a key player. The latest headlines reveal that another former Goldman Sachs chairman, Stephen Friedman, negotiated the "secret deal" that paid Goldman Sachs $14 billion for credit-default swaps from a bankrupt AIG. He did this as chairman of the New York Fed while also serving on the board of Goldman Sachs.