Jeff Macke recently interviewed Robert Prechter, president of Elliott Wave International. Macke pointed out that Prechter foresaw last August’s credit downgrade and wanted his latest opinion on the prospect for another event of this magnitude.
Prechter stated eventually another credit downgrade is likely given the amount of borrowing and lack of a plan to re-pay the debts. Prechter said he believed this was a normal course of business for governments all over the world. Some are worse than others (Greece, Spain and Italy), but the U. S. is on the same path, Prechter added.
Eventually interest rates are going to have to respond to all this borrowing, said Prechter. The one word hardly anyone uses these days is “deflation,” and it is the reason we’re seeing record low interest rates according to Prechter. Deflation explains the 40% drop in real estate over the past six years, along with the 40% drop in commodity prices and explains why the stock market is “caving in.” Low money velocity and falling consumer prices can also be attributed to deflation. Poor credits such as Greece have experienced higher rates and Prechter believes before this deflationary period is over, the same thing will happen in the U. S.
Prechter said countries including the U. S., Japan, and Switzerland have been viewed as safe havens, but eventually the debts are going to be too big for the world to handle.
Macke asked if there was a trigger that would result in yields spiking to which Prechter responded a change in social mood. Prechter said we’ve been in a 12 year topping process pointing out the NYSE index topped out last year.
Prechter said we’re heading into another period of pessimism where people will be afraid of debt instead of embracing it.
Last week, as a guest columnist of Yahoo Finance’s Exchange, Prechter wrote about the deleterious effects of deflation:
That’s right: Ten-year Treasury notes pay out less than 1.5% annually, their lowest rate since the founding of the Republic. Treasury bills yield essentially zero, their lowest level ever. The velocity of money failed to rise during the past three years of partial economic recovery, and it recently made new lows. Real estate prices have fallen 45% in the past six years. Commodity prices — as measured by the CRB Index — are down 45% in just four years. This group includes oil and silver, two of the most hyped investments of the past decade. Remember in March when articles quoted analysts calling for $5, $6 and $8-per-gallon gasoline? In just three months since then, gas prices have fallen 13%, knocking the CPI into negative territory.
Deflation also explains why European loans are at risk, why Germany is tapped out, why Greeks are protesting in the streets and why U.S. corporations’ overseas profits are down. Deflation lets you make sense of the world.
What is deflation? Economists define it three different ways, but I find only one definition useful: Deflation is a contraction in the overall supply of money and credit.
Why must deflation occur? Answer: There is too much unpayable debt in the world.
Prechter goes on to describe why deflation is an unstoppable force and creates an environment where cash is king.
Source: Yahoo! Finance