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The Crash of '98 Continues

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The Crash of ’98


By Martin A. Armstrong

August 14, 1998

Copyright Princeton Economic Institute

While our clients have been amazed that our computer model called for the peak in the stocks markets as July 20th, 1998 more than 4 years ago, some visitors to this site have sent their emails of disapproval. We have even received a nasty email suggesting that our forecast was perhaps self-fulfilling due to the fact that so many institutions rely on PEI models. Quite frankly, what we find more shocking is how the vast majority of analysts and commentators can still be bullish even with technical models aside. The more compelling fundamentals behind the decline in the world share markets is none other than the fact that world news is overwhelmingly disturbing. How anyone cannot see the seriousness of events building in Russia, China and Asia as a whole and their potential impact upon global economy is simply blind faith. We cannot expect the world to continue upward and onward just because we wish it to do so. There has NEVER been a bull market that was not followed by a correction. We do NOT see the end of the world – merely a correction that might be 2 years in duration if government gets its act together. The faster the decline in the early stages, the higher the probability that we will also see a final low sooner rather than later.

With the closings achieved as of today (Friday, August 14, 1998), a sharp continued decline appears to be inevitable. If this weekend brings more chaos in Russia, next week may bring a significant continued decline throughout Europe; Asia and US share markets. From our perspective, there is no debate whether or not our computer has once again succeeded in predicting what many consider impossible. Nonetheless, the precise turning points of the Economic Confidence Model have been etched in stone since it was first discovered back in 1971. The dates do not change for July 20th or for the peak of the next business cycle due on February 24th, 2007. The more compelling question among those who have become students of this mode remains the next 4.3 years into the bottom of this current business cycle due on 2002.85 (November 6th, 2002) following the US congressional elections at that time.

In our upcoming World Capital Market Report due next week, we will discuss these issues with the target dates that lie ahead. We will also look at the fundamental differences between major bear markets and mere short-term corrections. As for our critics, this same model accurately predicted the 1987 Crash to the day and that new highs would be made going into 1989. I personally gave seminars for many brokerage houses around the world to relay that message in Europe, North America and Australia. So we do not have a history of calling for bear markets. In fact we have a track record of being very unbiased. But this very same model also succeeded in predicting the major high in the Nikkei back in 1989 for the last week of December, which has also been well documented by the Japanese press as well. It has also been well documented by the press and numerous organizations at which I have spoken over the past 4 years that this same model called for a low in the US and European share markets in 1994 and that the Dow would rally to test 10,000 by July 20th, 1998. In fact, many in London found that forecast quite amusing 3 years ago because we put a specific date of July 20th for the potential high. These issues said, this correction in the share markets may be very different from anything we have seen since 1987. There are some serious risks that exist, which could result in a real bear market.

For now, new highs do not appear to be likely given the fact that the US market has now elected 3 Weekly Bearish Reversals for the first time in nearly 8 years. This indicator provided by our models has clearly differentiated the current decline from that of even just last October when no sell signals were achieved beyond the daily timing models. Thus, we must remain objective looking for a test of the Dow in the mid-6,000 range before a reversal of fortune can be expected.

While there will be hate-mails from some, we all must realize that many analysts who are employed by brokerage houses do not enjoy the freedom of speech that others in the analytical community cherish. Those who do have the courage to change their views should not be ridiculed when they try to speak the truth even when the truth is not what everyone would like to hear. We cannot forget the analyst who was fired because he warned about Trump’s bonds before his troubles. While he was sacked by the brokerage house for speaking the truth, in the end he was proven to be correct.

The majority never wants to hear about a bear market. Everyone wants to be told how much money they can make effortlessly forever. Nonetheless, it is always the bear market that eventually distinguishes independent analysis from that, which is viewed to be only a token cost of doing business as a means to sell a product.

For now, we remain bullish on the US bond market at least going into 1999. The US economy will also suffer the least decline when the final low print has been established. The greatest danger remains that of Europe where optimism over the coming Euro has blinded many to the problems faced today by the world economy as a whole. We must be most concerned about Europe for it is this region that is showing the highest tendency to unfold into a bear market of significant proportions.

As of the close of Friday, August 14, 1998, the percentage declines for those markets that peaked precisely on July 20th, 1998 stand as follows:

US Dow Jones Industrials…. 11.21%

S&P 500 Cash……………… 11.47%

S&P 500 Futures…………… 11.78%

British FT100 Futures……… 14.00%

German DAX Cash………… 15.94%

German DAX Futures……… 16.09%

French CAC40 Futures…….. 14.12%

Swiss Futures………………. 13.15%

So far our forecast for a decline in Europe that would outpace that of the US market has begun. The above table illustrates that as of August 14th, the US market has declined the LEAST. Given the fact that the European markets have gained the most on the upside due to the view of the coming Euro, we will also see the greatest tendency for a bubble top to form within German and French markets in particular. A collapse in Russia will have a far greater impact upon Europe than the United States. It is European banks that hold 90% of the exposure to Europe compared to US banks.

For now, we remain bearish as we look ahead to the weeks of August 17th and September 7th/14th as the next key targets for turning points ahead. The most concerning factor that we must consider is that there has been no significant rally whatsoever since the July 20th peak. This warns that despite the bullish outlooks that prevail, real selling is taking place and far less bottom picking has emerged. The phrase “buying opportunity” appears to be falling on closed ears. While at some point in time there will be a 7-10% recovery from an initial low, the risk of a second leg down still remains quite high by mid September.