I certainly wouldn’t want to try to use the EWP to make a living. It’s not that easy, and the rules and guidelines, while not “loosely defined”, imo, (and much more extensive than what Wikipedia lists) don’t turn probabilities into certainties. Yet, at the longer-term scale, I think it makes sense to consider what it has to offer along with other context, especially at a juncture like this where being prepared for the worst (when “the worst” really would apply) can make a big difference for individuals, families, small businesses, and communities.

The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method’s loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.

After all, there’s no point in not ‘predicting’ a cataclysmic event until after it’s happened. Having an idea of what’s ahead can help us see it when it’s happening, so we don’t mistake it for a lesser event while in the midst of it.

Preferably, we will take the warnings seriously and adequately prepare in advance. Some of us have done that. Those who haven’t still have some time: on the order of months to a year before the (just-beginning?) downward wave 1 finishes and the corrective wave 2 rebounds part way up to yesterday’s high (assuming that holds up) and is then followed by the swift downward wave 3 (all at Cycle level, one degree below Supercycle) over the course of the subsequent year or so. Negative impacts on the broader economy will likely lag by several months to a year or so. And by “negative”, I mean Great Depression scale.

My purpose in regularly sharing my thoughts on this subject has been to familiarize people—including our local government representatives—with what’s happening. Many of us don’t pay attention to what’s happening with our financial investments (retirement funds in particular) and get complacent when the headlines say it’s all good and/or getting better, which is the peak optimism that accompanies a market top.

As I said to the mayor when I met with him a few months ago, there’s no good time to talk to people about this. So I just started as soon as I realized that too soon was better than too late. That was back in December. What I thought might be an eleventh-hour alarm turned into a 6-month-long heads up. So be it.

This is part of the big-picture context within which the county board will be making its decisions about issuing additional debt.

Update: The high (S&P 500) on last Wednesday appears to be the top of the third sub-wave, followed by the sideways fourth and the upward fifth that peaked yesterday morning. That would complete the double-zigzag Supercycle B wave that began in March 2009.

If instead yesterday’s top is the end of the third sub-wave (wave counts aren’t always clear until some time passes), a fourth (the drop that started yesterday) and fifth would follow over the next month and a half or so. (Other timing indicators point to May—that is, yesterday—being a more likely period for the top, which also fits with the currently high sentiment indicators of a significant top.)

Whether it has already begun or doesn’t for several weeks, the downward Supercycle-degree C wave will be of one higher degree than the C wave that included the crash of 2008. (The B wave that’s wrapping up was one degree higher than the B wave that spanned from the bottom in 2002 to the top in 2007. The crash of 1987 was also part of a C wave that was several degrees lower than this one that’s getting underway. See comment #3.)

The wave principle (as it’s called—and it’s not mine) wasn’t constructed but rather observed. It describes the historical movements of stock market indexes as well as many individual stock, bond, and commodity prices over time, which play out according to rules and guidelines that make them predictable to a certain degree.

The Fed can do what it does, but it can’t control social mood and the decisions of millions of people. In the context of QE, the waves no doubt play out differently than they would otherwise, but they’re still a reflection of social mood—the most immediate one, in fact, since people can buy and sell in a matter of a very short time.

One might say that like every other influencing factor, the Fed’s actions are ‘baked in’. In this case the waves might extend longer but there won’t be a sixth wave, for example—five is still the limit (with special exceptions for extensions and combinations). So one might also say that the Fed has simply postponed the inevitable. Robert Prechter, Jr. addresses this subject more extensively in his book, Conquer the Crash.

And now that the second sub-wave continued up even higher this morning I’m even more humbled (or is it humiliated?) :-) Trying to predict the next movement at that scale is just fun (unless, of course, your livelihood depends on it). At the Supercycle scale, though, the big movements affect all our lives significantly.

After several ‘false tops’, humility is in order. It’s a valid count, though. If it’s not the top of the fifth wave, it’s likely the top of the third, with the fifth to come in due time. If it breaks below 1623.40 (the bottom of the previous fourth wave of one lower degree) by the middle of next week, that would indicate that it was the fifth wave and that the uptrend that began in 2009 had ended.

Today, the third sub-wave downward is beginning in the S&P. It will likely fall rapidly over the next several hours after completing the upward corrective second sub-wave around 1658. It’s going sideway below that line currently.

The way the current situation could be less costly than the bonding scenario (but still very challenging) is if the market downturn is not just a downturn in stocks but also a broad, deep deflationary event, which is what we are ”due’ for.

In that scenario, property values would drop as well, unemployment would increase, and wages would fall. Foreclosures would multiply again. The tax base would be greatly reduced, stressing the county’s ability to pay off existing debt. (Debt would be the main challenge since costs in real time would also be dropping due to deflation.)

The kicker would be that most investments would not just “underperform”, they would lose most of their value (principal). Bonding would put the county in a position of needing to make a positive return on the held funds. That would be extremely challenging in a deflationary collapse. Corporations would be going bankrupt, which would devalue not only their stocks but their bonds as well. Municipalities would be defaulting on bonds in large numbers. Only the most secure bonds might retain their full value, and the bond-rating agencies have demonstrated that they are not truly good judges of which are most secure.

So even the held funds could be at risk of being lost due to this timing. By that I mean that the deflation that history has shown will likely occur over the next several years would coincide with the county receiving a lump sum. Much of that could be lost in the first wave (of five) down, which would occur over the next year or so. Much of what’s left could be lost in the longer third wave (the “crash”) a few years from now. In order to get a decent return you have to maintain your principal, and neither would be easy.

The best approach for the county (and the city, as well as individuals) would be to protect its financial assets in the form of cash (which goes up in value during deflation—”cash is king”—the dollar has already begun its rise) and pay off existing debt.

While investing in dollars would be safe, it wouldn’t help with bond interest payments because those are also dollars (i.e., the return on cash is 0%)—the burden on taxpayers would still be greater with the additional bond interest payment debt, and the risk of default would be high.

If the county has the discipline to hold cash and limit other investments to US Treasury notes (short term, since interest rates will continue to rise, though it could be a while before they top 4%—that’s also assuming that the federal government doesn’t ultimately default, but at that point we might be ready to throw in the towel on this whole money idea anyway), bonding could possibly work out.

But then there’s that future risk you referred to. Would a board two years or so from now at the top of the second (corrective, upward) wave in the stock market think that a recovery was underway and that they needed to get higher returns? Most likely. Then the crash (wave three) would come and wipe out most of that riskily invested principal. (Maybe I take back what I said earlier about minimizing future risk.)

Getting to your question of whether the more-insulated general fund scenario makes sense, the reason I think it doesn’t is because of the above and, specifically, because you overlook the potential for negative returns (i.e., loss of principal). That’s where I was referring to an unrealistic alternative—you can’t have a glass that’s half full if you don’t have a glass.

The current situation is clearly challenging. Pretending that it’s not would most likely make matters worse. You’re not doing that. The challenge for you is to not pretend that matters (beyond our control) couldn’t get drastically worse. The probability that they will is high. That means more risk.

Smith is arguing that the only uncertainties are vagaries of the stock market, which apply both to this scheme and to the existing trust funds. But the proposal will actually cost more upfront, and does not have a guarantee – except that the county is guaranteed to have to pay the interest! Meanwhile, the VEBA and WCERS future contributions are also only actuarial estimates. They might actually decrease. By continuing to pay the excess needed out of general funds, the county maintains a flexibility of response.

I’ll look forward to the further exposition of the plan, with information provided by Monday’s press conference. I understand that the Chronicle was present.