Page 1 of 12

Barron’s mid-year Roundtable: Synopsis & Commentary

June 21, 2014

In Barron’s mid-year Roundtable, the Bulls see a mere 5% gain in the S&P for 2014,

right where the Market is now despite a volatile summer, which could leave stocks at

least 10% lower. The Bears on the other hand foresee a double–digit decline, one

expects the Market to get killed, another a sharp drop.

Now that interest rates have dropped, Bill Gross, President of PIMCO, has far too much

credence in the Fed’s ability to keep the inebriated economy from stumbling. Like a

sloppy drunk, our economy has guzzled far too much from the Fed’s metaphoric

punchbowl – artificially low interest rates. Gross, like Jeffrey Grundlach, the other Bond

king, sees rates continuing to drop linearly, even as they have reversed to give back the

entire capital gains year-to-date. Unlike us, he doesn’t expect the party to end anytime

soon, nor the bubble to burst with a bang. Mr. Big is blind to the charts, and as you may

recall, he has been wrong allot lately.

Bill Gross in a singular moment of brilliance he attributes the reason for our current

predicament to technology, which has displaced many workers, whose spending

formerly drove the US economy. “Without the consumer (who once accounted for 70% of

US GDP), capitalism can’t exist”. His next comment he refers to a “new neutral” where

stocks return 5% per annum, and bonds 3-4%. We vehemently disagree; long-dated

bonds have already returned over 12% year to date, we locked-in 10% of the 12% and

reversed into inverse bonds, which have topped our performance scoreboard for several

days. The Diag > overlaps waves 1 & 4, building a base from which to launch the

Page 2 of 12

Spike, back to the all-time highs in Bonds. In the Chart below, notice that the Diag > has

preceded the last two Spikes in Bond prices, to coincide with free-falling stock market.

Figure #1 20-year+T-Bond Price

The minimum short-term drop in T-bond prices, TLT, above is 105, but more likely is the level

of 102.

Page 3 of 12

If you recall, Barron’s panel of experts is the same group which 6 months ago was

engaged in a spirited debate as to whether the economy would grow 3 or 4% in 2014.

Since then, 1stQ GDP was revised minus 1%! The National Debt is 102% of GDP, as

you may have read in This Time Is Different: Eight Centuries of Financial Folly by

Carmen M. Reinhart and Kenneth Rogoff (Aug 7, 2011), History relates that whenever

national debt rises above 90% of GDP, there’s no avoiding default. What’s more, a

shrinking economy has not yet been factored into the equation. It’s unthinkable for the

economy to continue shrinking. Guess what, the 1stQ can’t be blamed on the weather,

Europe experienced a similar economic contraction.

A Global deflationary spiral, is well on the way. While investors have no difficulty

extrapolating other trends to the moon, somehow a shrinking economy, accompanied

by severe deflation gets selectively excluded. Central Bankers are bluffing, while

holding their breaths, hoping & praying this final experiment will work…

According to Scott Black, founder and President of Delphi Management in Boston “the

Market will continue to rise; because it is liquidity driven, there’s little downside risk”. Neither

Empress Yellen, nor ECB Emperor Mario Draghi have any clothes on, they are bluffing! As

Alan Greenspan admitted in his farewell tome, The Map & the Territory despite

appearances to the contrary, much of the time he didn’t have a clue as to what was

going on….the week before the collapse of Lehman, Goldman Sachs was similarly

forecasting an expanding GDP….this time is NO different! As the tongue in cheek

mantra: “This time is Different” has seduced the collective unconsciousness prior to

every single financial crisis spanning eight centuries studied by Reinhart & Rogoff. The

Market is only superficially different, its Boom & Bust Essence, which mirrors collective

psychology, remains unchanged since the dawn of mankind.

The Bond Market reflects anemic Global economy

As Brian Rodgers¸ chairman and CIO of T. Rowe Price, astutely puts it “the bond

market knows more about the pace of the global economy than the rest of us do.”

According to Rodgers low yields suggest sluggish growth at best. He foresees a rocky

period in late summer/early fall.

Page 4 of 12

Disappointing Growth Worldwide

Felix Zulauf, President of Switzerland-based Zulauf Asset Management, has a distinctly

global perspective, only matched by Marc Farber from Hong Kong. Zulauf sees

disappointing growth worldwide. He concludes that given five years of unprecedented

global credit expansion, this is by far the weakest economic recovery ever. The

“weakest economic recovery” is echoed by several of the panelists. From an Elliott

perspective, a Bear Market Rally is a false recovery: a forced, unsustainable sucker’s

rally. Until two, substantially lower, troughs in Waves (A) & (C) complete, to wring-out

the excesses of the past, the Bear Market will persist, despite an intervening (B) Wave

contra-trend rally, analogous to the Roaring 20’s.

Timing for a double-digit “correction” by Late Summer

Zulauf expects a double-digit correction (corresponding with our forecast dive to Dow

10,500, before the first major bounce) by late summer. Again the late summer timing is

something in which many panelists agree. Felix perceives that fear of a correction has

reversed into fear of missing a rally.

In Zualuf’s opinion, T-bonds will fall back to yield something in the 2% range. Here

again we witness misguided linear extrapolation. Although 10-year bonds will culminate

in a price Spike to reflect yield near 1.8%, yields must first rise to the area of 3%, in the

typical corrective head-fake, as inversely-related price of bonds drops back to the

December-January lows. Essentially, the entire bond rally year-to-date must be

retraced. For this reason we are opportunistically positioned to profit in inverse bonds.

Below, inversely related yield must drop to overlap wave (i) of the Diag II, marked by the

dashed green line, to herald the beginning of a long Bear Market in Bond prices and a

concurrent Bull in yield.

Page 5 of 12

Figure #2 T-bond Yield

China GDP plunge – upside correction in commodities

I suspect Zulauf makes use of technical analysis, otherwise his projections could not be

so consistently precise. However all forms of technical analysis may often concur,

nothing beats our advanced & refined New Wave-Elliott. Zulauf expects a 5-15% drop in

Chinese GDP lasting five years, which could mean the loss of 50m jobs. In this sense

we are ahead of the curve, stating our intention to short China through the inverse ETF,

YANG, several weeks ago, while concurrently holding the MSCI Emerging Markets

Index long for the final leg of an upside correction. The puzzle comes together quite

nicely when you fuse the divergence between China and the aggregate Emerging

Markets, in conjunction with commodities. Emerging Market producers of Natural

resource commodities will benefit at the expense of China, the world’s largest

commodity consumer. Below are the Shanghai Stock Exchange diverging from the

other Emerging Markets. Shanghai Exchange currently at 2000 will likely drop to 200.

Page 6 of 12

Figure #3 Shanghai versus MSCI Emerging Markets

Below you see YANG the inverse Shanghai ETF in the final stages of completing its a-b

reversal. We will soon initiate purchases, even before we reverse to long Emerging

Markets. Once the Relative Strength Index, (RSI) drops below 30, from the current 35,

we will begin scaling-in. From a low of 18, YANG has a minimum upside of 150.

The Transition from Bear to Bull in this Inverse China ETF, is identical to the reversal to

a long-tem Bull Market in the $VIX Volatility index.

Page 7 of 12

Figure #4 Yang Inverse China

Like the answers provided by the I-Ching Oracle, Zulauf also offers the expected

changes in China ten years hence. By then, he expects the excesses of the past will

have been digested.

On this point we heartily agree, while the mature Developed Markets are unfurling at

Supercycle Degree, China is relative teenager progressing at Cycle Degree, where Bear

Markets are 50% shallower and shorter. Our Elliott perspective: from the Cycle Wave I

peak in 2008, China will likely plunge for a total of 13 years, to trough the A-B-C Cycle

Wave II in 2013. As opposed to develop markets with larger aging populations which

must be supported by fewer taxpayers, China’s demographics will be far more favorable

to jolt forward as the world’s largest financial power. Just as Britain ceded the title to the

US in the 19th Century, the US will soon be obliged to hand over the economic baton to

China for the next several centuries.

Page 8 of 12

Figure #5 TVIX is the Volatility ETF beginning a long Bullish upside

Without the economic pie (GDP) growing, countries are cheapening their currencies to

gain an exchange-rate advantage, not the least of which is the US, through a series of

QE cycles. Felix echoes our feelings regarding the sudden mass realization that the

“Emperor has no clothes”, and neither does this feigned economic recovery have legs to

stand on once the taper completes withdrawing its monetary crutches. Like us, Felix is a

believer in the Austrian School of Economics, to fix problems; you let those who can’t

compete go out of business, so that the assets may be recycled into more productive

investments. Our Fed takes the opposite approach. By providing financial crutches to weak

businesses and banks “too big to fail”, it hopes they will become stronger, before the

subsequent financial crisis. Such attempts to create Keynesian Utopias inevitably fail

because they are diametrically opposed to essential human nature.

Market Breadth is sorely lacking for any kind of Recovery

Fred Hickey, editor of the High-tech Strategist, starts his discussion by echoing Zulauf’s

conclusion “this is the worst “recovery” in modern history”, based on asset inflation.

Page 9 of 12

Markets lacking breadth are characteristic of terminal 5th waves, just prior to a dramatic

corrective reversal. Economic Expansions require a long 3rd wave where the breadth1,

meaning most stocks are rising, as measured by the advance/decline line on rising

volume. When volume dries up, it indicates that most of the cash available for

investment has been already committed. When there’s no one left to buy inflated

markets, they collapse. Without the Fed’s artifice2 this market would have likely

continued its trajectory to trough in 2008.

According to Hickey, Investor’s Intelligence which measures professional sentiment are

at a record Bullish high, while Individual Investors demonstrate even dangerous

complacency.

When Markets get killed; inverse ETFs make a Killing!

Hickey “expects the broader Market to get killed”, in the same way markets reacted

after QE1 & QE2 were withdrawn. When Markets get killed; inverse ETFs make a killing!

Like Felix Zulauf, Hickey favors the Free Market approach (x-the Fed), reasoning that

“we can’t avoid the pain forever”. From our perspective, putting off paying the Piper only

compounds the price we must eventually pay. Hickey anticipates “having lots of cash

on-hand to buy stocks at bargain prices, before the Fed steps-in”. Instead of having lots

of cash, we will be reversing from short positions, having profited handsomely from the

initial Dive, in Inverse Funds. What few individuals realize is that Bear Markets in long

stocks create commensurate Bull Markets in inverse ETFs, complete with all the thrills of

a Big Bull only faster driven to accelerate by fear & gravity.

Regarding gold, Hickey expects increased demand from India, with the lifting of

restrictions on buying gold, while supply remains constant, to shift in the equilibrium

price higher. He expects gold to rise to $1600 this year, from the current $1250, and

$2000 within a year.

In our Gold chart below $Gold, the spot gold prices are found on the R y-axis, UGL the

ETF on the L. The dashed green lines are the upside magnet points. After the wave ii

retracement, likely rising to $1400 in wave b before dropping back to $1200 in wave c,

wave iii will likely reach $1525

Page 10 of 12

Figure #6 Spot Gold on the R y-axis; UGL the Gold ETF on the L y-axis

The gold chart above shows the spot price in red, while UGL the long ETF in blue with

the prices on the left y-axis. Most likely the upside b will reverse into c to complete wave

ii quite a bit lower, so we are scaling out at least a partial position slightly above the

current prices. Abby Cohen, Senior investment strategist at Goldman Sachs, insists that

1stQ stats were a fluke resulting from weather than inventory levels…she still expects

3% GDP growth… rather than naively blind, I prefer to think she’s “towing the line” to

promote Goldman’s trading volume & commission income stream. As Alan Greenspan

famously stated in his book The Map & the Territory, on the eve of Lehman’s going

belly-up, to usher-in the Financial Crisis, Goldman was still forecasting economic

expansion…this time is no different - all the more reason to doubt such rosy forecasts.

Page 11 of 12

Marc Farber’s “Different View” concurs with Exceptional Bear’s forecast

Marc Farber, editor of the Gloom, Boom & Doom Report from Hong Kong, states from

the outset that he has “a different view” than the herd of optimistic economists,

obviously referring to Abbey Cohen’s perception through rose-colored glasses. He

unequivocally states the stats point to a weakening economy, having nothing to do with

the weather. Farber cites such forecasts of strong economic growth go against the grain

of rising bond prices. In the absence of stock buy-backs, Farber claims US Corporate earnings

would be down! Adding to the probability, there’s been no significant correction since the

fall of 2011. Farber expects the Market to drop sharply. Farber warns of a “painful

readjustment in the US”…among his observations: entitlements are too high; Government

spending accounts for 42% of GDP, this stat is at variance with Stephanie Pomboy’s

70% Consumer spending, perhaps this is historical average as opposed to than the

current figure.

Farber cites an inverse relationship between the size of government and economic

growth. Mark ends his interview referring to a credit bubble in China. In his opinion, the

credit bubble could be offset by QE, however from the charts above, this is most

unlikely.

1The ratio of the number of advancing stocks to declining stocks

2Substantial evidence that the Fed’s Open Market Operations “bought the Market” through

blanket futures in 1987 & 2008. The Fed is falsely confident that it can always resurrect the

market by buying blanket futures - their “Ace in the Hole”. Founded on the false assumption that

it reversed the 1987 Crash, when in fact, the 1987 Crash was already played out by the time the

Fed stepped-in. The 1987 Crash was an integral part of a Diag II, the most bullish of all price

patterns, to herald the beginning of a long bullish trajectory ended in 2000. Since 2000 we have

been in Bear Territory where a far larger Diag II points to a culmination at ~Dow 572, the

previous 4th wave of one lesser degree. Yet the Fed’s dramatic distortions resulted in all stocks

climbing concurrently on rising volume, were misinterpreted to mean the dawn of a new Bull

Market in 2009. The rather than reversing the Crash, the breadth of buying on heavy volume

magnified the kick-off of the long, Bear Market Rally simulating a bull, however the low current

volume indicates it’s on its last legs, with little cash left available to support it. Compare the

volume in Yang above to the current Dow.

Page 12 of 12

The magnitude & direction of the current Bearish Diag II indicates a proportional downside,

far greater than the upside ended Supercycle (III) Bull Market in 2000.

If you subscribe to Stockcharts, please vote daily your vote is critical, this link

will take you directly to our page …you have 3 votes daily.

Eduardo Mirahyes