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Frost and Prechter on Nature's Law

|Includes: SPDR S&P 500 Trust ETF (SPY)

Stocks are nowhere near 2007 levels, the real estate market is in disarray, retail investors are set up for disaster in the bond bubble, gold and silver advocates have resorted to market manipulation theories to explain why prices haven't quintupled (as they "should" have), commodity speculators are still pretty sure that a demand surge is right around the corner, and so on.

Further, unemployment is bad and not improving, states and municipalities are broke (with sovereigns not far behind), tax revenues continue declining, and the debt-to-anything ratios are off the charts. 

And yet, sentiment surveys are aligning with the bullish extremes of 1999 and 2007, put/call ratios are touching levels last seen during the dot-com bubble, the VIX is back in snooze mode, momentum and volume have been anemic for months, economists are universally bullish (a true contrarian danger signal if ever there was one), and except for a few ardent holdouts, the bears are in full hibernation.

Perhaps most importantly, everyone once again believes that the Fed is in control, its policies working and its cheap credit making market declines impossible. (Never mind that Fed policies caused history's biggest debt bubble and that the Fed's infinite liquidity promises looked pretty powerless when the market crashed through all the bailout schemes in 2008.) 

Why then do we see so much relentless optimism in the face of so much relentless reality?  In Elliott Wave Principle, Frost and Prechter offer an explanation: 


[A]pparently it is one of nature's laws that man at times will refuse to accept the rest of its laws. . . .  The Wave Principle exists partly because man refuses to learn from history, because he can always be counted upon to be led to believe that two and two can and do make five.  He can be led to believe that the laws of nature do not exist (or more commonly, 'do not apply in this case'), that what is to be consumed need not be first produced, that what is lent need never be paid back, that promises are equal to substance, that paper is gold, that benefits have no cost, that the fears which reason supports will evaporate if they are ignored or derided.

No matter your feelings on the efficacy of Elliott Wave Principle (it's a religion to some and anathema to others), the above-quoted text feels apt in the current financial and economic climate.  In a nation founded by the most aggressive and reckless of speculators, people who would and did sacrifice everything to embark on a wild chase for prosperity, is it any wonder that we stand undaunted after the S&P's worst decade ever, that we choose to believe that our debt crisis can be solved with more debt, or that our pensions and politicians will make good on the free lunches they promised? 



Disclosure: No positions