Government is the Ultimate Crowd

Editor's Note: The following three paragraphs are excerpted from Friday's edition of Elliott Wave's Short Term Update, written by Steve Hochberg. This update is part of a package that I subscribe to that includes the Elliott Wave Theorist & Financial Forecast. It is the kind of perspective that you won't find in the MSM, which is why I value it so much. It is excerpted here with permission, with my own emphasis added in bold:

I won’t go over all the news headlines, as you will undoubtedly be inundated with it all tonight and through the weekend. As you read these stories keep in mind the key point: deflation cannot be reversed by banning short selling or ”quarantining” bad debts from the books of financial institutions or simply trying to white-wash them away via taxpayer takeover. The bad debts are far too large. And despite the government’s machinations of the past year, including today’s announcements, stocks, commodities and precious metals are still down, more or less together, from their respective peaks. What the U.S. government did today was simply alter who pays for a good portion of the worthless paper—you and I. Collateral values are not worth what many think they are worth and credit is contracting, no matter who holds the IOUs.

I do however, want to make one quick point with respect to those who believe that today’s government announcement “saves the day.” Government is in many ways the ultimate crowd, with nearly every decision being made by committee. As such, it is always the last to act. In fact, it is more accurate to say that government reacts, not acts, most times to a crisis that has already occurred. For instance, The Glass-Steagall Act of 1933 (which spawned the FDIC) was passed, in many respects, to prevent the 1929-1932 crash. Stocks rose more or less for 60+ years thereafter. Glass-Steagall came to be universally regarded as an anachronism and was finally repealed in the form of the Financial Services Act of 1999. At the time, EWFF made the following forecast in our November 1999 issue: “So, after totally missing the bear market it was supposed to prevent and protecting banks and insurance companies from six decades of rising prices, the U.S. government will free banks and insurers to take part in a financial consolidation that promises to be one of the biggest in history.” As it turns out, the new “freedom” for banks and insurers was enacted just in time for Cycle wave a, the 2000-2002 decline when the major stock indexes lost 38%-78% of their value.

So today’s government announcement of the suspension of short selling in financial shares and others appears designed to prevent a decline that has already occurred. Bear Stearns is already bankrupt, as is Lehman Brothers and IndyMac. Merrill Lynch already was down 84% in a year and a half before it ran into the arms of BAC, Fannie and Freddie were already down over 90% before being nationalized, while AIG had already declined 98+% prior to the bailout. As EWFF said last month, in bear markets, bailout lows are erased, as the market continues down. This will be the case with yesterday’s low, whether right now or after a rally leg for a few weeks. In the end, government does not create market trends, it reacts to them and their recent actions will only exacerbate the problems that have been building over at least the past half century.

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