Robert Prechter Sticks With Grand Super Cycle Deflation Forecast

Robert Prechter, of Elliott Wave International fame, for the past several months has been forecasting an end to what he considers a bear market rally from the lows of March 2009. Once the bear market rally is over Prechter expects that the grand super cycle will once again kick in and that the eventual market lows will challenge those of March 2009, and probably exceed those lows. His long-term forecast for the stock market is therefore rather grim indeed.

Thus far, of course, Prechter’s forecast has not been realized as the current market rally has extended to nearly the 11,000 point level on the Dow. This move has taken the market averages to near the upper level of the rally range forecast by Prechter. He therefore has not modified his forecast and thinks that an over extended market rally is near a reversal point and that in time much lower prices will be realized.

This forecast differs markedly from that of most market analysts and talking head gurus who in general are talking about the resumption of a bull market. In fact, the glowing bullish forecasts have reached the level and exuberance that prevailed immediately prior to the sharp fall from about the 14,000 Dow level. As just about any market technician can tell you the current market is overextended by any indicator. A good technician would have to tell you that at the very least a correction of 10 to 20% is most likely from current levels.

Robert Prechter takes a much more dismal view of market conditions. He feels that deflationary forces are taking hold which will completely overpower the governments of the world effort’s to reinflate markets. Robert Prechter is sticking with his grand super cycle deflation forecast.

His forecast certainly seems probable when one considers the unfinished business of debt liquidation and delevering that the US, UK, Spanish, Portugal, Iceland, Dubai, Greece, Italian, and other economies face over coming months and years. While over the past few months Iceland, Dubai, and Greece have been at the forefront of the sovereign debt issue, those troubles pale compared to future problems that will be experienced by the UK and US as they struggle to finance and reduce their tremendous debt burdens.

The liquidation of debt, efforts to prevent default, and in some cases eventual default, is certainly deflationary in nature. Greece is a good current example of deflationary forces at work as the Greek government has been forced to cut back on public sector spending, including cuts in pensions for government workers as well as reductions in salaries, as it struggles to reduce government expenditures. A large number of workers confronted with an immediate 10 to 20% reduction in income will quickly result in a hit to Greece’s GDP output. When people have less income they are forced to cut back on discretionary spending.

Deflationary forces are also evident within the US economy as excessive debt at the state and local level are beginning to force cutbacks in public employment and services. In some states, budget considerations and constraints are so severe that even essential public services, such as police and fire protection and education are being cut back. Only the federal government, which has the ability to create what is called money from thin air, is still expanding the federal government payroll.

It would therefore seem, that while Robert Prechter is making his stock market forecast based upon his understanding of Elliott wave principles, there are powerful deflationary forces at work that would seem to make his grand super cycle deflation forecast one that should be taken seriously.

Perhaps I should mention that Robert Prechter was correct in 1987 in forecasting a sharp market correction when most forecasters could only see smooth sailing ahead. The track record of his company, Elliott wave International, has been far better than most over an extended period of time. Perhaps you should at least consider that the stock market is overextended and is due for a sharp correction, and perhaps the swift downside action and revenge of an awakened big bad bear market.