Deflationary Crash Ahead

Elliott Wave International have just released a brand-new interview given by Robert Prechter. A devoted inflationist asks the leading proponent of deflation tough questions about fiat currency, gold, the Fed, the Great Depression, financial bubbles, government intervention and how to protect your money - and even profit - in today's environment. We have discussed the causes of deflation in our deflationary crash page. Prechter discusses the coming crash from the perspective of economic cycles, kondratieff wave, elliot wave theory and macro economic fundamentals.

July 2, 2010

By Elliott Wave International

The following article is an excerpt from Elliott Wave International’s free report, 20 Questions With Deflationist Robert Prechter. It has been adapted from Prechter’s June 19 appearance on Jim Puplava’s Financial Sense Newshour.

• Jim Puplava: I want to come back to government spending, but first I want to move onto the stock market. In your last two Elliott Wave Theorist issues, you laid out a scenario that would put the Dow and S&P, which in your opinion may have peaked on April 26, as the top from here. You feel that this top is the biggest top formation of all time, a multi-century top and we could head straight down in a six-year collapse that would end in 2016 that could see a substantial portion of the S&P and the Dow wiped out in a similar way that we saw between 1929 and 1933. Let's talk about that and the reasoning behind it.
• Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money -- and even profit -- in today's environment. Read ALL of Prechter's candid answers for FREE now. Access the free 20-page report here.
• RP: Yes, you're exactly right. I did a lot of work on technical forms, cycle forms and Elliott wave forms in April and May and put them in a double issue. Let’s talk about the cycles first.
• The 7¼-year cycle has been quite regular since the first bottom in 1980. The next bottom was at the crash in October 1987. The next one was November 1994, which is when the economy went through four years with lots of layoffs; it was a recessionary period throughout until that cycle bottomed. The next one was between September 2001, which was the 9/11 attack, and the October 2002 bottom. And the latest one was at the low in March 2009. All those periods are 7¼ years apart, so we are in the uptrend portion of the 7¼-year cycle.
• However, notice for example that in 1987, the market went up until August of that year and then bottomed in October, just a couple of months later. So the decline occurred very, very late in the cycle. This time it occurred a little bit earlier in the cycle, topping in '07 and bottoming in '09. In the current cycle, prices should peak the earliest of all of them. It's what we in the cycle prediction business call “left-hand translation.” The market’s already gone up for about a year, and I think that's just about enough. I think we're going to spend most of the cycle going down. But the important thing to note is that the next bottom is due in 2016. That means I think we're going to have a repeat of what happened between 1930—which was the top of the rally following the 1929 crash—and the July 1932 low. Instead of taking two years, it's going to take about six years.
• It's going to be a very long decline. It's going to be interrupted by many, many rallies, just as the decline from 1930 to 1932 was. And every time it bottoms and rallies, people are going to say “OK, that's enough; it's over.” But it won't be over. It's just going to be a long, long process. I think you and I will probably be talking a few times during this period. One of the interesting aspects of this process is that optimism should actually remain dominant through the first three years of the cycle. That will carry us into 2012. Even though prices will be edging lower, most people are going to think it's a buy, and you shouldn't get out of your stocks, and recovery is just around the corner, probably for the next three years. And then, for the final half of the cycle, the final three years, that's when you'll get the capitulation phase when everyone finally gives up.

• Jim Puplava: Bob, I want to pick up from last September. Since then we've had several quarters of positive economic growth. Asset classes rose substantially, CPI turned positive, gold has hit a new record, oil is close to $80 a barrel. I guess a lot of our listeners would like to know, have these events altered your views on deflation?
• Robert Prechter: No, because we forecasted these events, and we forecasted them at the bottom in March and April of 2009. On February 23 in the Elliott Wave Theorist, I said that we were almost at the bottom; that ideally the S&P should get down in the 600s before turning up; and that the Dow was going to rally from that low up to about 10,000. We put that target out a few days after the low. The main thing we said at the time was that it was going to be only a partial retracement, in other words a bear market rally. By the end of it, we said people would be bullish on the economy, there would be positive economic numbers, investors would think we have made the turn, the Fed would take credit for having saved the financial system, and there would be optimism across the board. All of this has happened. And going into April 2010, few people in the fundamentalist or technical camp were looking for a downturn.
• The final thing I said was that Obama's popularity would rise into that peak, and on that one I was wrong. His ratings couldn't even bounce during that period, which I found very surprising. But both Obama and George Bush’s popularity trends followed the real value of stocks, not the inflated dollar price of the stock market, which I find interesting.
• As far as inflation and deflation go, we had deflation during the down cycle in 2008. Commodities fell hard, the stock market fell hard and real estate fell hard. But the recovery that we were looking for in the first quarter of 2009 was expected to be a reflationary, and it was. You saw a decline in credit spreads. You saw a rise from the lows in commodity prices and stock prices. All of that is perfectly normal. These are just waves ebbing and flowing. But the long-term trend is still down, and as this cycle matures we are going to see more and more evidence of deflation.

Can the Government Prevent a Double Dip Recession?

There has been a lot of debate about what the government is doing to stave off a so-called double-dip recession. Some say it will cause runaway inflation; others say it’s simply delaying the inevitable. The man you’ll hear from below says DEFLATION is the true concern.

It’s true that Robert Prechter is a polarizing figure in the world of finance. Some write off his technical analysis theories as esoteric market hocus-pocus. Others swear by the natural order of the markets, which is why they believe Elliott waves and Fibonacci are the purest forms of technical analysis.

Whatever your opinion, it’s hard to deny that Prechter is on to something. Virtually no one has called the crisis like him.

MarketWatch columnist Peter Brimelow recently reported, “Over the past three years, [Prechter's] bearishness paid off handsomely. It’s up an annualized 5.25% against negative 8.12% annualized for the total return Wilshire 5000.”

Some might say it’s luck. Those familiar with Prechter’s writing call it unique insight.

After all, who else warned (as early as 2002, early enough to take action) about the impending tops in real estate, commodities and stocks or about defaulting pension plans, municipal bankruptcies and massive bank failures — plus a huge rally in the once-”doomed” U.S. dollar?

Only Prechter.

You can read what Prechter is saying now in a compelling new XX-page interview, where he’s asked tough questions about fiat currency, gold, the Fed, the Great Depression, financial bubbles, government intervention and how to protect your money — and even profit — in today’s environment.

Read Prechter’s candid answers for free, and find out where he thinks the markets are heading next.

Access the 20-page report now.

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