Robert Prechter - Deflationary Wave of Global Credit Problems to Tank Stock Markets | The Long Crisis

Robert Prechter, president of research company Elliott Wave International, in Gainesville, Georgia said this Friday that U.S. stock markets will erase their past six months of gains “in a matter of weeks,”. Prechter is a technical analyst and is best known for predicting the 1987 stock market crash.

Of immediate interest, is that this year Prechter is one of the few stock analysts who has been predicting a deflationary implosive wave of global credit problems that will overpower government’s efforts to reinflate the world economy. Sovereign debt issues that have so far severely impacted the economies of Iceland, Dubai, and Greece are all deflationary in nature. It appears that it is only a matter of time before sovereign debt issues extend to nations carrying extremely high debt burdens, such as the United Kingdom and the United States.

The problems in Greece are a perfect example of how attempts to control runaway sovereign debt can easily lead to a deflationary depression economic environment. In order to receive €110 billion in emergency funding from Euro zone member states and the International Monetary Fund the Greek government had to agree to severe austerity measures.

Further reductions in public employee salaries and pensions, increased taxes, and reduced public services, including fire and police protection, brought forth a wave of violence on the part of large numbers of the Greek population. Economists estimate that Greek GDP will fall by about 20% over the next two years. A reduction in GDP to that degree is clearly deflationary and as Greek government revenues fall will make it even more difficult for Greece to meet its debt obligations.

Very likely, Greece is in a deflationary sovereign debt crises spiral that will end in default and in the near term adversely affect additional euro zone member states, such as Spain and Portugal. The fear of a debt crises extending outward from Greece and contaminating other European nations as well as the UK and United States is very real. Credit markets are already beginning to freeze as banks are once again frightened of counter-party risk, not only corporate risk but sovereign risk.

Robert Prechter is forecasting a grand super cycle deflationary period that will not end until 2016. The violent downside action in the stock market this past week seems to be the beginning of such a cycle. According to Elliott wave theory the current market sell-off is the beginning of a third wave down that will surprise market participants by its volatility and severe decline.

Whether you are a Robert Prechter fan or not you should acknowledge that Prechter’s forecast for the US dollar to strengthen in a deflationary environment has been spot on. In addition, the violent decline in the stock market this past week, including the insane day when the Dow Jones industrial averages declined by 1000 points, then within the next 20 minutes rallied 650 points, seemed to fit Prechter’s forecast of the resumption of a violent, even catastrophic, bear market.

While Robert Prechter has been forecasting a grand super cycle deflationary stock market for the past few months, and was perhaps a bit early with his forecast, recent events suggest that his forecast should be taken seriously. At the very least, the prudent investor will take risk off the table in such a destructive deflationary wave environment.