The Long Crisis

Posts Tagged ‘Robert Prechter’

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.

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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.

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In an interview with Reuters, Robert Prechter, president of research company Elliott Wave International in Gainesville, Georgia and known for predicting the 1987 stock market crash, said that the next leg of the bear market in stocks has probably begun. Prechter further says that stocks as well as gold and corporate bonds are likely to slide as the U.S. economy suffers long-term weakness.

For investors in stocks this is “the last chance to get out with the Dow in quintuple digits,” Prechter added. Prechter is forecasting a long-term deflationary environment for the US economy which may last until 2014 to 2015. Prechter is a highly regarded financial analyst and is considered a leading authority in the application of Elliott Wave theory.

According to Prechter there is a very good probability that the highs have been seen in the Dow Jones industrial averages and that the rally from the lows from March 2009, even though the rally retraced about 53% of the losses from the all-time high, was merely a rally in a long-term bear market. Prechter compares the advance to one that occurred in 1931 in 1932 that advanced an almost identical 52.9% before the market collapsed to new lows.

Prechter is forecasting that wave three of the bear market has probably started and before the bear market has been completed the March lows of March 2009 will be taken out. Wave three is the wave that travels the furtherest in the shortest amount of time. Many traders will be taken completely off guard as the wave begins and will suffer heavy losses as the wave progresses.

Prechter is forecasting that the likely bear move will be violent and extremely severe. According to Elliott wave theory, as explained by Prechter, the current bear market involves a super bear cycle and will be the most severe for at least the past 200 years. The ensuing wave of deflation will take no prisoners, and will decimate stocks, bonds, commodities, as well as real estate. In fact, the deflation will be so severe that he thinks the only investment that makes sense as an asset class will be cash.

In regard to the US dollar, Prechter forecast that a deflationary period of depression will bring strength to the currency. The reason for this is that in a depression bankruptcies, structured settlements, foreclosures, and debt liquidation, create losses and take dollars out of circulation. For example, if a real estate project worth $100 million goes into foreclosure and eventually sales for $50 million dollars, the difference of $50 million is simply lost.

The money does not appear in anyone else’s account, it has just disappeared into money heaven. The fact that a depression causes dollar destruction means that the remaining dollars have more value. In a depression, cash becomes king. Those who have cash find that their cash becomes more valuable as they can purchase just about everything at lower prices.

While it is far too early to say with certainty that Robert Prechter is once again right with his forecast the price action of the last several days strongly suggest that he must be taken seriously. For the stock market to fall about 555 points on the Dow, only to rally today by 23 lousy points, is extremely bearish price action. Over the past two weeks weakness in the gold market and commodities in general have correlated with renewed strength in the dollar. All of this price action is in line with Prechter’s forecast.

If Robert Prechter is correct about this being wave three in a bear stock market the next few weeks, and indeed all of 2010, will likely be an extremely painful period for stock market bulls. A wave 3 in a bear market typically will have sharp sell-offs followed by weak rallies, each followed by another sharp sell-off, until the wave is eventually completed. The price action of the past four trading days will conform to that pattern if another sharp sell-off takes place.

The price pattern of the next few days will be critical. Any further sharp brutal sell-off would be fair warning that we are in a wave three of a bear market. If Prechter is correct about this being the beginning of a bear super cycle the year 2010 will be one long remembered by stock market traders. Unfortunately, it will only be short sellers that will be able to talk about 2010 with a smile on their faces. Those who are long stocks during such a cycle will probably never want to talk about stocks again.

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