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Whats Bigger Than a $1.4 Billion Mortgage Ratings Scandal?

The great inflated expectations for gold, oil, commodities and now stocks

By Elliott Wave International

Editors Note: You can read the text version of this story below the video.

On January 21, one of the biggest financial lawsuits in recent history came to a costly end. The accused, ratings behemoth Standard & Poors, agreed to a $1.4 billion settlement for inflating credit ratings on toxic assets, thus accelerating and exacerbating the 2008 subprime mortgage crisis.

Settlement aside, there is a far bigger issue here than business ethics or conflicts of interests, which is not likely to get a hearing in the court of mainstream finance.

Which is: The professionals who are supposed to assess investment risks are no better at it than you or I.

Case in point: Think back to November 30, 2001. The worlds largest seller of natural gas and electricity has gone from cash cow to dry bone. Its share price had plummeted 99%, from $90 to just under $1. YET the company continued to enjoy an INVESTMENT GRADE rating.

The companys name: Enron . Four days later, it filed for the largest bankruptcy in U.S. history.

Enron seems like a distant memory, but what about the subprime mortgage debacle? Moodys rating service slashed the ratings of 131 subprime bonds due to higher than expected defaults, in July 2007 two years after the market for non-traditional mortgages had already turned.

Spot a trend here? The experts failure to anticipate huge trend changes in companies, and in the overall economy. In the first edition of his business best-seller Conquer the Crash, EWI president Bob Prechter wrote:

The most widely utilized ratings services are almost always woefully late in warning of problems within financial institutions. They often seem to get news about a company around the time everyone else does In several cases, a company can collapse before the standard ratings services know what hit it.

So heres the question: What are the experts not seeing now that you and I need to prepare for?

What about gold? In 2012, with prices nearly reclaiming all-time high territory, the Federal Reserves quantitative easing campaign was supposed to keep the wind at golds back.

Ben Bernanke has just offered gold investors a gilded invitation to participate in the greatest secular bull market of our time. (April 14, 2012, Motley Fool)

Then this happened:

The same goes for the 2008 peaks in oil and commodities two more safe-havens that were supposed to benefit from the Feds money-printing campaign, but instead prices fell to lows not seen since the 2007 financial crisis.

So, that leaves the remaining outlier equities, which have climbed to record highs. And, according to the experts, the path of least resistance remains up. A December 14, 2014 article in the New York Times:

We dont see a lot on the horizon that could derail the U.S stock market in particular.

Our January 2015 Elliott Wave Theorist urges caution with this single chart of the S&P 500s year-end valuations since 1927. Every major peak of the last 90 years landed well outside the normal range: 1929, 1987, 2000, and 2007.

We believe the precarious placement of 2014 sends a similar message: The stock market and the economy are not in a new multi-decade recovery as economists believe, but very late in a transition phase from boom to bust.

Free online report from Elliott Wave International:

Deflation Rearing its Ugly Head in Subtle and Not-So-Subtle Ways Around the Globe.

You still have a small window of time to prepare for a scenario most investors dont even know is possible and now even more likely.