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The U.S. dollar is the current center of the global financial community’s attention, and it will likely stay in the spotlight for a while. That could be good for the forex market – and you, a forex trader.

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*Who is Jim Martens?
Jim Martens was first introduced to the Wave Principle in 1985. Since then, he’s built an impressive resume, having worked for such firms as Bank of New York and Nexus Capital Limited, a George Soros-affiliated hedge fund. Since 2005, Jim has been Elliott Wave International’s senior forex analyst – and one of the best teachers of the method.

By Susan C. Walker, Elliott Wave International
April 11, 2008

Each year, the NCAA college basketball tournament winnows its starting field of 64 teams to the Final Four teams who play for a chance to become the national champion. Congratulations to the University of Kansas and the University of Tennessee, this year’s men’s and women’s basketball champions.

The structure of the NCAA tournament got me to thinking. Wouldn’t it be great if we could set up brackets for our own investments the same way – start with 64 equities, bonds, mutual funds, commodity futures, metals, etc. Then let them duke it out against one another to see which ones emerge as the “Investment Final Four”?
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Click here to download a free 5-page report from Elliott Wave International with even more information on which investment does best during recessions. The report, excerpted from Bob Prechter’s Elliott Wave Theorist, includes in-depth historical analysis and six eye-opening tables.
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Since most of us have neither the time nor the money to act as our own version of the NCAA (which might stand for the “National Coordinator of Asset Allocation”), it’s worth knowing that Bob Prechter of Elliott Wave International has already set his mind to the task. He has specifically explored which investments do best in times of recession and which do best during economic expansions. But instead of starting with a field of 64 investments, he researched the three most popular investments – gold, the Dow, and Treasury bonds. We can call them the Treasured Three, rather than the Final Four.

Gold and Recessions

Since economists and even Ben Bernanke, chairman of the Federal Reserve, now admit that it looks like the U.S. economy has entered a recession, many people may wonder whether they need to change the mix of their investments. In particular, as some prices keep going up – notably for food and gas – the threat of inflation makes people more interested in gold as an investment, since it’s usually seen as a bulwark against monetary inflation.

It is this conventional wisdom that piqued Prechter’s curiosity. He wanted to find out whether it would hold up to a reality test. As he writes in The Elliott Wave Theorist, “I have often read, ‘Gold always goes up in recessions and depressions.’ Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data.”

So he and another Elliott wave analyst ran the numbers, reviewing the behavior of these three key investments during recessions following World War II, from February 1945 through November 2001. This is what they learned:

Gold was not the best investment during recessions in terms of total return.

The winner of this tournament was actually Treasury Notes, which had a total return of 9.96%. In contrast, gold had a total return of 8.80%, and the Dow came in at 6.89%. But that’s not all – once they figured in the transaction costs for each investment (at a 2008 level), gold fell from second to third place as a worthwhile investment during recessions. The total returns with transaction costs came out this way:

1. T-Notes 9.82%
2. Dow 6.85%
3. Gold 4.80%
This result turns conventional wisdom on its head. It’s also worth being aware of as you invest in 2008. Here’s how Prechter sums up the results:

The Best Investment During Recessions

The most important question, however, is not whether the Dow beat gold or vice versa but whether making either investment would have been better than taking no risk at all. Table 3 [see free report provided by Elliott Wave International] shows that ten-year Treasury notes beat both gold and the Dow during recessions since 1945, and they did so far more reliably. T-notes provided a capital gain in 10 of the 11 recessions, and of course they provided interest income during all of them. And the transaction costs are low….

So if you want to make money reliably and safely during recessions and depression, you should own bonds whose issuers will remain fully reliable debtors throughout the contraction. Of course, as Conquer the Crash [Editor’s note: Bob Prechter’s best-selling business book] makes abundantly clear, finding such bonds in this depression, which will be the deepest in 300 years, will not be easy. Conquer the Crash forecast that in this depression most bonds will go down and many will go to zero. This process has already begun. This time around, you have to follow the suggestions in that book to make your debt investment work. [The Elliott Wave Theorist, March 2008]

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

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About Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

Everyone wants to know, “Is the worst over for stocks?” If you’re familiar with Bob Prechter and his work, you won’t be surprised that his short answer is “NO.” But … it’s his long answer that is much more compelling, including insights into what you should be doing NOW to prepare for what’s still to come.

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Have you ever looked back on an investment and asked yourself, “What in the world was I thinking?!” The obvious reply is “Yes!”, and that is because…

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* The News
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* The “Easy Way”

By Susan C. Walker, Elliott Wave International
January 7, 2008

In the bleak midwinter,
Frosty wind made moan,
Earth stood hard as iron,
Water like a stone…
(From “A Christmas Carol” by Christina Rossetti)

Shawn Colvin sings a beautiful song based on this poem by Christina Rossetti, reminding us of the bleakness of midwinter. That is exactly where the housing market seems to be now – facing its very own bleak midwinter of falling prices, rising mortgage rates and growing inventories.

The latest report of the S&P/Case-Shiller home price index shows that the price of houses fell 6.7% in October, year over year. That is the largest year-to-year decline drop since April 1991. Think of it – if you had bought a home for $300,000 in October 2006, it is now worth about $280,000. And suppose you just got a new job and need to move? You are going to have trouble selling it at that price, too, thanks to so many foreclosed homes on the market. One realtor in Phoenix explained to a Wall Street Journal reporter that local residents are now competing with foreclosed homes selling for $50,000 to $100,000 less than other houses on the market. “The sellers now are having to reduce their prices by 20% to 30% to compete,” she says. (Wall Street Journal, “Pace of Decline in Home Prices Sets a Record,” 12/27/07)

At a meeting of the New York Society of Security Analysts on January 7, U.S. Treasury Secretary Hank Paulson said this about the U.S. economy: “We will likely have further indications of slower growth in the weeks and months ahead.”

Paulson and central bankers at the U.S. Federal Reserve recognize that they, too, face their own bleak financial midwinter. It’s not just the mayhem brought on by the subprime mortgage debacle, the implosion of the housing market and the ensuing credit crunch; nor is it that the U.S. economy lurches toward a recession and hard times.

No, it is something bigger than that. Public opinion or social mood, as we call it here at Elliott Wave International, has shifted from positive to negative. When that happens, financial heroes find themselves falling from their pedestals onto frozen earth hard as iron.

Exhibit A - The headline of a recent article on Bloomberg: “Paulson Gets Diminishing Return with Bush, Like Powell, O’Neill” and the lead: “Henry Paulson escaped the Nixon White House with his reputation enhanced. He won’t be so lucky this time around.”

Exhibit B - The lead from a recent column by David Ignatius in the Washington Post:

“When airport rescue crews are worried that a damaged plane may have a crash landing, they sometimes spread the runway with foam to reduce the probability of fire on impact. That’s what the Federal Reserve and other central banks are doing in pumping liquidity into severely damaged financial markets. Make no mistake: The central bankers’ announcement Wednesday of a new coordinated effort to pump cash into the global financial system is a sign of their nervousness….”

Nervousness is in the air now. Investors are anxious about the markets; everyone is worried about the housing market. Our Elliott Wave Financial Forecast December issue explains how housing starts (and stops) are intimately tied to recessions: “One key indicator of success in pre-dating economic downturns is housing starts, which are approaching the 1-million-a-month level that has preceded all recessions of the last 40 years.”

And the Fed is nervous, too. So much so that it announced a credit giveaway with four other major central banks (the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank) in mid-December to try to bolster the financial system and the banks that keep it humming. The Fed reports that banks have been stepping up to its auction window each week to purchase $20 billion. Unfortunately for the banks, most of this “liquidity” isn’t that liquid. It has to be paid back within 30 days, with interest of about 4.65%.

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Editor’s note: Elliott Wave International has agreed to make available to our readers a 2-1/2-page excerpt from Bob Prechter’s Elliott Wave Theorist in which he describes exactly how the Fed’s latest effort to shore up banks’ balance sheets has become “High Noon for the Fed’s Credibility.” Click here to read the Theorist excerpt.

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Just how bleak is the future for central bankers if this recently implemented plan doesn’t work? Bob Prechter explains in his just-published Theorist:

“Nevertheless, this is probably the single most important central-bank pronouncement yet. But it is not significant for the reasons people think. By far most people take such pronouncements at face value, presume that what the authorities promise will happen and reason from there. But the tremendous significance of this seismic engagement of the monetary jawbone is that if this announcement fails to restore confidence, central bankers’ credibility will evaporate.”

“At least that’s the way historians will play it. But of course, the true causality, as elucidated by socionomics, is that an evaporation of confidence will make the central bankers’ plans fail. The outcome is predicated on psychology.”

The “socionomics” Prechter refers to is a new social science he has introduced that studies how humans behave in groups within contexts of uncertainty – where fluctuations in social mood motivate social actions. It explains that rather than an event happening that affects social mood (for example, falling home prices make people feel bad), what really happens is that social mood changes first from positive to negative and then lousy things happen (for example, unhappy people make home prices fall). If you can adopt this point of view, then you can see that, in poetic terms, we are fast approaching a bleak midwinter for the economy and the financial markets.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

2007: The Year of The Financial Flameout
12/31/2007 12:50:58 PM

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Editor’s Note: The following is an excerpt from the January 2007 Elliott Wave Financial Forecast. A new special section with a new theme for 2008 is online now. DETAILS>>

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By Steven Hochberg and Peter Kendall
Editors for The Elliott Wave Financial Forecast

As EWFF has noted in the past, financial firms survived the plunge of 2000-2002 and thrived through the rebound of 2002-2006 by pushing clients, and increasingly their own capital, into riskier investments. By amplifying the leverage and rechanneling the speculative intensity of a Grand Supercycle peak from technology in 2000 to housing in 2005 and commodities in 2006, financial firms kept the fire alive. Thanks to hedge funds, leverage and financial engineering have been pushed into every available asset class. When hard assets, such as copper and silver, which were abandoned in favor of paper assets in 1980, were pulled into the fervor and pushed into exponential uptrends, the end was near. The May 11 peak in the Reuters/Jefferies CRB Index of commodities appeared to be the last bubble, but financial engineers found a new object of investor affections—themselves. Recent issues of EWFF reveal some of the myriad ways in which Wall Street became the focal point of speculation. The street’s fabulous year-end bonuses are the latest example (see Cultural Trends below for the emerging bear market response). Of course, the financial industry’s position so close to the center of the mania can only mean one thing; it is only a matter of time before it joins tech stocks, real estate and commodities in the great turn lower.

A sure sign of a financial zenith is the recent massive media acknowledgment of the liquidity boom that underlies the Great Asset Mania. The Wall Street Journal and Newsweek opened the year with major articles extolling the virtues of a “world awash in cash.” “Let The Good Times Roll,” says Newsweek. “The world has been building toward this critical moment for some time. It’s no accident that financial markets have flourished. Now regulators, central banks and markets around the world are poised to make moves that could turn an expansion into an explosion.” Newsweek is exactly right and wrong at the same time. It is a “critical moment,” but the “explosion” will come in the opposite direction than the media now project. This is clear by the evidence that it offers for a further boom. Newsweek, for instance, again cites the bullish implications of the global bidding frenzy to own financial exchanges. But as EWFF explained last month—and previously in 1999 when the major U.S. exchanges announced public offerings—a century of NYSE seat price history shows that extremes in the demand for exchanges come at major peaks.

The other incredible expanding story is the “staggering” size and volume of corporate acquisitions. Newsweek and countless other articles find the rash of “bigger and bigger” deals “Phenomenally Positive” for the stock market. Even though he “is not in the business of predicting where stock markets go,” a M&A specialist says, “It really props up the market.” Another article reveals that private equity firms now have enough cash to “fund the acquisition of every company on the NASDAQ and the London Stock Exchange.” But as noted here last month and at the peak in 2000, one of the key signs of a peak in stocks “is the folly surrounding corporate takeovers.” It can’t get much crazier than this.

Even the most pessimistic economists and central bankers see little sign that the liquidity boom, and the benign financial environment that it has fostered will disappear soon. Confidence in the current environment stems from financial innovations and new financial players that have helped disperse risk more quickly and more broadly than ever before. While the argument that things are different has always been dangerous, many economists now subscribe to the brave new cycle, or a cycle in which the ups and downs have become much more muted, largely thanks to the stabilizing influence of new financial technology.

A cycle that doesn’t cycle? We heard the same thing in January 2000 when belief in the New Economy grabbed hold amid assurances that the business cycle had become an anachronism. This time, “financial innovation” replaces technology as the holy grail of economic growth. Our chart shows that the influence of finance has been growing for three decades, but only now is its “magnitude and persistence” itself the reason for the boom. The psychology is so powerful, and dangerous, that many of the financial system’s most fundamental weaknesses are listed as strengths: it’s “easier for the less creditworthy to borrow than ever before;” “the biggest banks don’t hold much debt, having sold it on to others;” securitization has distributed debts “far and wide, so no single holder has significant exposures;” derivatives insure “the holders of debt against losses.” But the pervasive spread of risk doesn’t mitigate it, it simply intensifies it and snares everyone.

The Journal even suggests that one factor making it different this time is “How easy it is to borrow money.” This certainly keeps the economy juiced, but it also explains why the trend must eventually reverse and hints at the extent of the eventual damage. Today’s bullish buzz concentrates on the process by which liquidity is created, whether via the yen carry trade, Federal Reserve repos or the securitization of bizarre credit instruments. This focus completely misses the point, in our opinion. Regardless of the process, the psychological foundation of liquidity is confidence. We cannot stress this point strongly enough. When investors are optimistic, confidence remains high and liquidity expands. When this optimism goes away, the spigot will run dry, no matter what the “reasons” that people may place on it. People are bullish because they are bullish. But they celebrate the condition and come to view it as a “self-sustaining” virtue only when it is nearly over.

Dear Steve (Hochberg) and Pete (Kendall),

I have been a subscriber to your service for quite some time, and have always found it informative. Your analysis of the markets, interest rate movements, etc. are much appreciated. However, I have to tell you that your December 2007 issue was absolutely the best you have written in a long time.

The December issue of the “pictures of a bear market” and your work on the dollar sentiment clarified emphatically what I have been telling my clients for some time. But the best, in my opinion, was the little chart and associated write up on the bond market. Showing how 1.) the credit spread in High Yield U.S. Corp bonds over Investment Grade U.S. Corporate bonds is greater now than in 2005, at the height of the housing mania, and 2.) how ineffective the Fed’s much ballyhooed rate cuts are was just inspiring. Now that people have seen what a little taste of the credit crunch is like (late summer ’07 to now), and knowing that “somebody” knew something in 2005 to keep the spread high to compensate them for risk, this chart is just awesome in its implications.

No, the market will not move down in a straight line, but smart investors better “batten down the hatches” as there are rough seas ahead … much worse than we’ve seen so far.

I am a market technician and know how much work it takes to produce your service. I also appreciate how you are willing to say what you believe is going to happen to give your readers advance warnings unlike the worthless talking heads on TV. You are so correct … having the media declare a “10% correction” recently was useless to anybody who believed them. Where was the media in October at Dow 14,200? They were feeding at the bullish hog trough as much as possible. That pretty much displays my disgust for these people who will forever put “lipstick on this pig” as the classic commercial went.

Anyway, keep up the fine work.

Richard L., CFP, CPA
Dayton, Ohio
Los Angeles, Ca

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