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Steve Hochberg: Equities Overdue a Thrashing

Issue 49, June 2013

Equities are due to get walloped by at least 45 per cent as deflation overtakes central banks, according to Steve Hochberg, chief market strategist at technical analysts Elliott Wave International.

“The stock market’s advance has carried much higher and lasted far longer than we expected,” he says, but Hochberg maintains that equities are only enjoying a bear market rally. “It is similar to the rally from May 1970 to January 1973, which also made a new all-time high at the time.” By late 1974, he points out, the Dow Jones had lost 45 per cent of its value.

“The difference now is that the next wave down is scheduled to be of a larger degree, so the percentage decline should be larger too.” Led by unruffled market preacher Robert Prechter, Elliott Wave theory is based on the idea that markets are dictated by waves of oscillating sentiment. “Extreme opinions, widely shared, constitute the single best indicator of an impending change of direction,” Hochberg explains, citing net central bank gold sales at its price low in 1999 and net central bank buying at its peak in 2011.

He says that investors are engaged in a “dangerous” reach for yield. “The main reason everyone is focusing on stocks is because nearly every other asset is down.” Property he says topped in 2005, as did housing stocks. Neither commodities nor currencies, relative to the US dollar, have regained their 2008 highs, whilst bonds have sold off since 10-year US treasury yields hit a record low of 1.4 per cent in July last year.

“Yields have been rising, unevenly, ever since. Now all yields are on the rise: treasuries, municipal debt, junk bonds and mortgage rates.” He credits this to the rising risk of default rather than inflation expectations.

“When we step back and look at the entirety of the investment picture, it becomes obvious that central banks are losing their battle to create greater inflation. The markets are in control, as they always are, not government or world central banks.”

Hochberg’s recommendation is “to be safe. It’s very difficult to do in a deflationary environment, because nearly all assets will be declining.” He points to short-dated treasuries, US dollars on hand and physical gold as bomb shelter staples. “A lifetime buying opportunity is coming for nearly all assets, especially equities. But it is not now.”

“A lifetime buying opportunity is coming for nearly all assets, especially equities. But it is not now.”
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