Deflationary Depression Next Says Forecaster Robert Prechter

It should be obvious to all who follow the financial news that we are living in unique and very dangerous to your financial health times. The stock market rally from the March 2009 lows has caused a lot of investors to lower their guard and to once again start wild speculation.

In July, Ben Bernanke told a town hall meeting, “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.” According to New York Times columnist Paul Krugman in that regard he’s succeeded. Bernanke’s desperate rescue of the financial sector in tandem with the Obama Administration’s stimulus plan prevented a “full replay” of the Great Depression, the Nobel Prize-winning economist writes.

Robert Prechther says it will probably not be so fast and easy. Like President Bush declaring “Mission Accomplished” in 2003, Elliott Wave International founder, Bob Prechter thinks Krugman and Bernanke are premature in declaring victory over the credit crunch. Prechter, who famously predicted the 1987 stock market crash, tells Tech Ticker “the march towards depression, which is being fueled by a deflationary trend, is pretty well intact.”

Prechter believes that massive deleveraging from consumers, governments, and financial institutions, has a long way to go. In fact, governments around the world are adding to the over leveraged problem by throwing tremendous sums of cash that they do not really have at the world economy in a desperate attempt to reinflate the old popped credit driven bubbles. This hyperactive effort will fail as it is working against super cycle deflationary forces that will naturally run their course and will only make conditions worse.

You should be very careful about believing what you have heard about recovery and inflation, “we’ve only seen the first phase,” of the downturn according to Prechter. Next to come, is “a credit implosion” that will once again destroy the value of stocks, commodities and especially real estate. “The biggest area of overvaluation because of credit extension is the real estate area,” he says. “And if you’ll notice that’s the area that’s had the weakest of any kind of attempt at a recovery.”

When this next phase of “deflationary depression” happens the only investment advice he can give is: safety first. “Make sure as an individual you’re in the safest possible investments so you can ride this out.” And as discussed in a previous segment, that means investing in dollars or dollar equivalent assets.

It is a good idea to remember that in a depression “Cash is King”. With so many investors now thinking that the dollar is doomed the big surprise may be that a powerful deflationary credit implosion occurs and that pure fear makes the US dollar once again a refuge currency.

It’s a strange world we live in. The worse that the world economies become the more likely it is that the dollar will once again become cash king.