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Best of the Exchange: Record Oil Prices, The Elliot Wave and How It's Going to End


Minyans make sense of bad news rallies.

With the launch of The Exchange, Minyans now have a forum in which to express their viewpoints, comment on articles and meet other like-minded financial souls. Minyanville publishes "A Best of the Exchange" each Friday to highlight the many insightful posts and discussions going on behind the scenes.

Become part of The Exchange and let your voice be heard!

(Editor's Note: Some of the following posts have been modified slightly from their original form.)

Professor Shedlock isn't convinced inflation is here to stay. In fact, he's been in the deflationist camp for a long time but lays out the case for why oil prices are moving the way they are ... and where they're headed.

Minyan Joe:

The phenomenon of businesses drawing on their credit lines while they can, and then putting the proceeds into money markets is a recent one. The explosive rise of M3 has been going on for years. I think M3's huge growth has had and will continue to have an ongoing effect in propping up asset classes.

I just read that Wells Fargo (WFC) is tightening up on its credit lines for small businesses. Other banks are probably doing the same thing. If Mr. Shedlock is correct, we should see M3 start to drop.

Minyan Sonny:

You simply cannot separate demand/supply from monetary inflation. Too much money chasing too few goods and services. Monetary inflation causes demand to increase via credit and money creation.

Think of a small town. Everybody wins the lottery. What happens to demand for goods and services? Supply problems exacerbate the problem - yes. But demand? You cannot say some demand is legitimate and some is not. Too much money chasing too few goods and services. This does not imply that monetary growth is excessive at present because inflation within the system from the last twenty six years is simply migrating from asset class to asset class. (bonds, stocks, housing, commodities)

So even though monetary policy may be deflationary, the past inflation can rear its head in some areas. In fact, I would argue it has to ... until it's destroyed via credit destruction.

New to the 'Ville is Professor David Waggoner, an ardent believer in the Elliot wave principal. Professor Waggoner provides a primer on Elliot waves, but not everyone is convinced they hold the truth about market movements.

Minyan Orvin:

Every time Elliott waves fail to predict something, the theorist "blames himself" and tries to rescue the entire theory by "placing what happened in a larger wave context" that he failed to see. In this way, the theory is constantly updated and evolving -- always correct in retrospect.

Waves that should have been turning points (but turned out not to be) are merely recategorized by the theorist as sub-events of even greater events. Imagine a mathematical function in which you could just add a new, unknown variable every time the function didn't predict the next desired value properly. How convenient!

Stock prices move because individuals are making subjective decisions. There is no way that any Elliot wave theory can predict that John Joans suddenly had to sell 100k worth of IBM because his son needs emergency surgery.

Extending this lack of predictive power to millions of other subjective market participants does not create a "bell curve" of errors that miraculously vindicates Elliot wave theory. While there may be very clear wave patterns found in nature, these do not "map" in any functional way onto the price actions of stock markets. Or at least, we have no reason to believe that they do. And if one of them ever did, then by definition any trading advantage would disappear quickly. Just my opinion....

Professor Waggoner responds:

While individuals are autonomous, the aggregate behavior of a group produces repeating patterns of behavior. The formula for any deterministic system is that if you know the laws, and you know the present conditions, you can predict the future. In the Elliott wave principle, the most elusive variable is the present condition.

Back from paternity leave and running on fumes from grabbing two hours of sleep at a time, Professor Depew gives the 'Ville an explanation for why you can't afford college now.

Minyan Ken:

When I was a freshman in 1972-73, tuition room and board at the small New England liberal arts college i attended was $3900. My dad made about $25,000 a year. So it was about 15% of his salary.

Next year, 2008-09, tuition room and board will be $49,500. that is an annual average increase of 7.3% per year for 36 years.

The equivalent salary to pay that is about $300,000.

That's why you can't afford college.

Minyan David:

That was hilarious. I think that's the funniest thing I've read on the Web since the General Mills "I'm downgrading your stock to mean" article. Which was, I think, the same day as the last SLM call.

Taking yesterday's Five Things #5 into perspective and remembering the last SLM call makes me realize why an unprofitable quarter should have been expected. Lord was unbelievably incompetent sounding on that call. I will try and listen to this call to see whether he's got his act more together now.
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