Robert Prechter Warns of Many Signs Of Deflation

Economics / Deflation Feb 18, 2010 - 01:07 PM GMT

Bob Prechter Points Out The Many Signs Of Deflation Yes, You Heard Us Right

By Nico Isaac

Everywhere you look, the mainstream financial experts are pinning on their "WIN 2" buttons in a show of solidarity against what they see as the number one threat to the U.S. economy: Whip Inflation Now.

There's just one problem: They're primed to fight the wrong enemy. Fact is, despite ten rate cuts by the Federal Reserve Board to record low levels plus $13 trillion (and counting) in government bailout money over the past three years -- the Demand For and Availability Of credit is plunging. Without a borrower or lender, the massive supply of debt LOSES value, bringing down every exposed investment like one long, toppling row of dominoes.

This is the condition known as Deflation.

And, in a special, expanded November 19, 2009 Elliott Wave Theorist, Bob Prechter uncovered more than a dozen "value depreciating" developments underway in the U.S. economy as the two main engines of credit expansion sputter: Banks and Consumers. Off the top of the Theorist's watch list are these "Continuing and Looming Deflationary Forces":

A riveting chart of Treasury Holdings as a Percentage of US Chartered Bank Assets since 1952 shows how "safe" bank deposits really are. In short: today's banks are about 95% invested in mortgages via the purchase of federal agency securities. Unlike Treasuries, IOU's with homes as collateral have "tremendous potential" to fall in dollar value.
Loan Availability to Small Businesses has fallen to the lowest level since the interest rate crises of 1980. In Bob Prechter's own words: "The means of debt repayment [via business growth] are evaporating, which implies further deflationary pressure within the banking system."
An all-inclusive close-up of the Number Of Banks Tightening Their Lending Standards since 1997 has this message to impart: Since peaking in October 2008, lending restrictions have soared, thereby significantly reducing the overall credit supply.
Both residential and commercial mortgages are plummeting as home/business owners walk away from their leases at an increasing rate.
The major sources of bank revenue -- consumer credit and state taxes -- are plunging as more people opt to pay DOWN their debt. Also, a compelling chart of leveraged buyouts since 1995 shows a third catalyst for the credit binge -- private equity -- on the decline.

All that is just the beginning. The November 2009 Elliott Wave Theorist includes 13 pages of commentary, riveting charts, and unparalleled insight that make it impossible to ignore the deflationary shift underway in the financial landscape. For that reason, we have compiled the most timely insights from the entire, two-part Theorist in a special article for Club EWI members. In our opinion, this bundle of exlusive Theorist excerpts are "the most important investment report you'll read in 2010."

Elliott Wave International's latest free report puts 2010 into perspective like no other. The Most Important Investment Report You'll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Comments

truthhurtsss
18 Feb 10, 21:47

broken clocks

blah, blah, blah......

yah, yah, yah.....

A broken clock tells the time correct twice a day......

(For other readers' sake: I'm not against deflation nor inflation per se. Money can be made from the markets in both directions. It is "broken clock" advice that will soon empty your pockets, especially dished out by egotists. What conclusion can one make about a "prediction" made in 1987 and still going strong??? "Prediction or forecast" about another Depression and DJIA going to 250 or whatever in 1987 and still going on after more than 2 decades. I've told these guys that, unfortunately, all of us mortals do not have that long an economic useful lives like those guys at EWI. I've seen a handful of my friends made paupers shorting the S&P from the 1980s following EWI's advice. One guy now spends his empty retirement fishing while another is in religious pursuit. A third guy stopped early enough with the realistion that "an egoistic person cannot make good judgement".)

"An egoistic person cannot make good judgement" - Author unknown.

Martin Truther
19 Feb 10, 17:43

Tired of this old argument

People, please! A net credit liquidation is NOT in itself the same as deflation, and vice versa. Net credit liquidation, however, is much more likely to lead to deflation than the other way around, all things being equal. Ongoing and persistent deflation encourages all economic entities to shun debt and leads to increasing debt default (thinking here of the real estate market). At least that's the classical analysis.

Interventionist (i.e. Keynesian) actions by central banks can have a limited effect in muting price inflation/deflation via the money supply. But they have little power to influence credit liquidations caused by collapsing asset bubbles.

These are the reasons why the Great Depression was "great" (think about stocks purchased on the margin) and why we are balanced on a knife edge of inflation/deflation. Using a tool as blunt as monetary policy to control asset deflation can have unpredictable consequences.

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