Kondratieff Wave

By Elliott Wave International

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.

Why Devaluation Won’t Work

Prechter explains why devaluation of the currency won’t fix the economy and why deflation is the real threat. The political will to print money does not exist. It will only appear after deflation is apparant at the bottom.

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: In 1933 at the bottom of the crisis, the Roosevelt administration comes in. In its first week they declare a bank holiday, they reopen the banks with the FDIC, they sever gold, they come in with massive fiscal stimulus and they devalue the dollar substantially. The result was from 1933 to1937 we have positive CPI, economic growth, a robust stock market. If fiscal and monetary measures fail to revive the economy and the market, could the government try devaluation to change the deflationary outcome the way they did 1933?

RP: Well, you have to have a benchmark in order to devalue a currency. Our currency isn’t pegged to anything, so I don’t understand even what the term devaluation would mean. What would they do to do create a devaluation?

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.

JP: Maybe they come out with a formal saying: the dollar is now worth a half a euro, X amount of yen or it’s a formal statement. They just declare it formally.

RP: Yeah, but everybody already knows what it’s worth, because it’s floating freely against these other currencies. And they certainly couldn’t fix it to a lesser currency like the euro. And then the managers of this other currency would simply make another decree and negate it. That’s not going to work.

Let’s take your example, because it’s very important. The whole idea of the government being ahead of the curve is bogus. You know the collapse was from September 1929 down to July 1932, right? The government did not act until it was over. They waited for the bottom of the collapse—of course—and then they finally decided they’re going to do something about it. So, months after the low in 1932, they finally shut the banks and pass laws such as Glass-Steagall, which created the FDIC, and the Securities and Exchange Act, and that sort of thing, to bring confidence back into the banking system. I think the same thing is going to happen here. They’re going to try the same old stuff, more and more lending, more and more borrowing—which is the problem, not the solution—until everything collapses, and then they’ll go, “Oh maybe we should try something else,” and by that time we’ll already be at the deflationary nadir, and it’ll be time to look for an inflationary outcome.

My whole thesis is exactly along those lines. We want to stay prepared for a deflationary crash, and when it’s over, we’re going to convert whatever money we have to stocks, and raw land, and gold, and whatever else we want to buy. That’s when—if the government makes a political decision to inflate through currency printing—it would make the decision. They’re not going to make it before the bottom. The government has never acted before the bottom, never acted in a new way. Right now these bailouts and other schemes are simply pressing the accelerator harder on what we’ve been doing since 1913.

Long Decline Ahead

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.

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.

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.

By Elliott Wave International

Telegraph.go.uk, May 26: "US money supply plunges at 1930s pace… The M3 money supply in the U.S. is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history."

Deflation is suddenly in the news again. It's a good moment to catch up on a few definitions, as well as strategies on how to beat this rare economic condition.

And who better to ask than EWI's president Robert Prechter? He predicted the first wave of deflation in the 2007-2009 "credit crunch" and has written on this topic extensively.

We've put together a great free resource for our Club EWI members: a 63-page "Deflation Survival Guide eBook," Prechter’s most important deflation essays. Enjoy this excerpt — and for details on how to read the eBook in full free, look below.

What Makes Deflation Likely Today?
Bob Prechter, Deflation Survival Guide, free Club EWI eBook

Following the Great Depression, the Fed and the U.S. government embarked on a program…both of increasing the creation of new money and credit and of fostering the confidence of lenders and borrowers so as to facilitate the expansion of credit. These policies both accommodated and encouraged the expansionary trend of the ’Teens and 1920s, which ended in bust, and the far larger expansionary trend that began in 1932 and which has accelerated over the past half-century. Other governments and central banks have followed similar policies. The International Monetary Fund, the World Bank and similar institutions, funded mostly by the U.S. taxpayer, have extended immense credit around the globe.

Their policies have supported nearly continuous worldwide inflation, particularly over the past thirty years. As a result, the global financial system is gorged with non-self-liquidating credit. Conventional economists excuse and praise this system under the erroneous belief that expanding money and credit promotes economic growth, which is terribly false. It appears to do so for a while, but in the long run, the swollen mass of debt collapses of its own weight, which is deflation, and destroys the economy. A devastated economy, moreover, encourages radical politics, which is even worse.

The value of credit that has been extended worldwide is unprecedented. Worse, most of this debt is the non-self-liquidating type. Much of it comprises loans to governments, investment loans for buying stock and real estate, and loans for everyday consumer items and services, none of which has any production tied to it. Even a lot of corporate debt is non-self-liquidating, since so much of corporate activity these days is related to finance rather than production.

Figure 11-5 is a stunning picture of the credit expansion of wave V of the 1920s (beginning the year that Congress authorized the Fed), which ended in a bust, and of wave V in the 1980s-1990s, which is even bigger.

…it has been the biggest credit expansion in history by a huge margin. Coextensively, not only is there a threat of deflation, but there is also the threat of the biggest deflation in history by a huge margin. …