The Long Crisis

Posts Tagged ‘depression’

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.

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Robert Prechter has been in the forecasting business a long time. His career got a big boost in 1987 when he was one of the few forecasters who warned that the stock market was set up for a big crash just before the scary crash of 1987. More recently in March 2009 he advised his subscribers to cover their short positions just before the massive rally of 2009 took off.

Now Prechter warns that the current “Worst is Over” optimism sets up a volatile third Elliot Wave surprise. Prechter states that “The Dow has just entered the lower end of its upside target range we cited back in April; the S&P is close behind. Restored optimism for a lengthy recovery at worst – a new bull market at best – is one of several signs of an important peak. All the same markets that recovered together have now set the stage to decline together.”

Robert Prechter and his team of first class forecasters at Elliot Wave International are also warning that the US and the world economies are facing something far more serious than a recession.

If you haven’t yet given Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so. You can download for free his 60 page well written document as to why the US is already in the early stages of a long term deflationary period, (can you think depression?) by going to Deflation Survival Guide.

As with any forecaster who has been around for awhile Robert Prechter is not always right with the timing or content of his forecasts. However, there are few forecasters who can match his long term record. And he always provides valuable insights into what’s going on and what to expect in stock markets, bonds, and foreign exchange.

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As those Long Crisis readers know who actually read most of the posts here I am expecting a long Japan like L shaped depression that may last for ten to fifteen years, perhaps even longer. Even that is not a completely accurate description of what I expect as that implies that we will eventually return to the level of economic and social structure activity that we were at in 2006 before the bottom started falling out. I doubt that will be the case.

I was reading James Howard Kunstler’s blog on Monday of this week and find that in an article posted om March 30,2009 named “Under a Fluorescent Moon” Mr. Kunstler has already done a lot of the heavy lifting, more accurately heavy thinking, as to what America and average Americans will face in the years immediately ahead.

The following is a chilling account as to where America is likely headed:

“What’s going on now is nature’s way of telling you that America’s standard of living has to be reduced by something between 20 and 50 percent. You can have it in the form of a compressive deflationary depression, including widespread bankruptcies… or you can have by way of inflation, in which money loses its value. But there’s one basic qualification to this: the way down is not symmetrical with the way up. That is, it’s really not just a matter of ratcheting down to a standard of living half of what it was, say, in 2006, because in the event all the various complex systems that support everyday life enter failure mode before our society re-sets at a theoretically lower level of equilibrium.

By this I mean our methods for getting food, for moving about the landscape, for deploying capital, for trading and manufacturing, for schooling, doctoring, and running public services all destabilize and, to some degree or other, fail to deliver their contribution to normal daily life. Banking (capital deployment) is already mortally wounded. It remains to be seen how this will affect the food supply half a year ahead in the harvest season. Capital is as big an “input” for our method of farming as diesel fuel or fertilizers made from methane gas. The failure of banking will combine with city and state insolvency to crush public transit, law enforcement, fire protection, and whatever flimsy local safety nets exist to keep the ultra-poor and helpless from die-off. The lowering of living standards by 20 to 50 percent essentially eliminates all but the must critical commerce, meaning that most of the stores in the malls and strip malls lose their customers and shed employees, while the mall and strip mall owners lose their rents, and the bankers lose performing commercial real estate loans. As all this occurs, tax revenues go way down, schools can’t pay their employees or buy diesel fuel for their yellow bus fleets. More people lose the ability to carry health insurance. Hospital emergency rooms are overwhelmed. Health care descends to Third World levels. Meanwhile, pensions are destroyed, the elderly live on dog food and ketchup. . . .”

There is no doubt that the old world order is well on its way out and that a new world order is in the process of forming. This process will likely continue for many years. As the transition is taking place we can expect that social order and the government will break down under the stress. In order to survive we all had better start learning new skill sets.

Those with a college degree had better realize that unless the degree is in agriculture not much else will matter. The people who will have the best chance for survival will be those who have hands on skills at carpentry, hunting, farming, fishing, weaving, sewing, and the like, including the survival skills and means to defend themselves and their families. Happily, the big shot bankers, corporate executives, politicians, and all around paper shufflers who got us into this mess will likely perish.

If the angry displaced masses don’t lop off their heads they will likely perish anyhow as they will not have the skill sets to look after themselves.

It will be difficult for many Americans to cope with a 50% reduction in living standards but there will be those who will be able to manage it and prosper. They will emerge as the new leaders in local communities. Going local will be a major component of the new order. A bankrupted central government in Washington will be disgraced, depleted, and not very relevant to everyday life.

For those able to adapt the new order may not be so bad after all.

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