Thursday, May 14, 2009

Green Shoots! ....In 2016

This prediction came from famed analyst Robert Prechter who is the chief executive of Elliot Wave Int'l.

Mr. Prechter believes that we will see a deflationary economic collapse similar to what we saw during the 1929-1932 period of The Great Depression. According to his models, the S&P will bottom at around half of the March lows. That's 333 on the S&P folks! Let me note that Robert Prechter is no slouch. He is widely known and very respected. He became well known for predicting the 1987 crash.

Robert also predicts that this collapse will last through 2016. Here are a few quotes and a link to the piece.

" NEW YORK (Reuters) - Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression, he said.
The U.S. S&P 500 stock index's .SPX rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

"It's not the start of a new bull market," said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. "Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932," he told Reuters in a wide ranging interview. "It's a very rare event," he added.

"I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety," he said.

As in his 2002 book "Conquer the Crash," which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills.


Riskier assets such as commodities, corporate bonds, and stocks which are currently anticipating that the severe global economic downturn may be bottoming, are likely to have short lived intense rallies, but within an inexorable long-term decline that may last another seven years, he said.

As banks continue to accumulate losses and corporate earnings fall, "the difficulties will probably last through about 2016," he said. "There will be plenty of rallies along the way."

"Deflation is coming, it's going to lead to a depression. We're not at the bottom yet," Prechter said. "I think we are going to have bouts of deflation separated by recoveries."

Prechter also painted a bleak picture for commodities like silver and is largely unenthusiastic about gold, believing the precious metal made a major peak when it rose above $1,000 last year.
The benchmark U.S. 10-year Treasury note yield, which moves inversely to its price, hit a five-decade low of 2.04 percent in mid-December.

"People got very enamored with bonds and very enamored with gold and I don't like to be invested in markets that are over subscribed," Prechter said.

"The Treasury (Department) has taken on so much bad debt" at a time tax receipts are falling, that "there will be a slow, but very steady change in the way people will view the U.S. government," said Prechter. As a result, investors in Treasury notes and bonds will ultimately demand higher yields, he said.

The U.S. central bank will not be able to control the government bond market and prevent yields from rising, regardless of how much money the Fed uses to buy Treasuries, he added."

Quick Take:

Yikes! And I thought I was bearish. Robert makes me sound like a bull! If the S&P gets to 333 the S&P 500 will have to be renamed the S&P 250 because half of the companies that compose it will go under.

Not much else to say here. I see the exact same thing unfolding. Note that he did pooh pooh gold which I thought was interesting. However, any true deflationist usually does because they believe no one will have the money to afford it which results in plummeting demand and much lower prices.

I still believe hedging yourself with some gold is a smart move. As I said yesterday, owning gold is not an investment. Its for your own protection in case the US dollar collapses.

Got Jobs?

Initial jobless claims ticked back up after dropping last week:

My Take:

Ah yes....Add this to the other tumbleweeds that continue to flatten our economy. The uptick in initial claims tell you that companies are once again laying off at a higher rate. This pretty much blows up the green shoot theory that the economy is recovering. Initial claims should be dropping not rising in the green shoots scenario.

Wait until the GM and Chrysler layoffs hit. Chrysler dumped 3000 dealerships today. Anyone employed at these dealers will immediately be furloughed. Imagine what the claims number will look like once this reality hits.

Obama: Our Debt Load is Unsustainable

Gee really? Thanks for telling me...I hadn't really noticed.(scarcasm off)

Little question here Obama: Why are you spending $3.6 trillion this year if this is the case? Why are you allowing the Fed to expand its balance sheet to $2 trillion that we don't have. Why is our budget deficit now $1.8 trillion and growing by the day?

Put your money where your mouth is and stop spending! Perhaps then I will pay attention to this mindless babble. Anyone else beginning to think this guy is all bark and no bite? He reminds you of that guy who says all the right things but does nothing. Change we can believe in! Not! Sounds like just another politician to me.

Bottom Line:

Prechter is right on in my opinion. 2016 sure seems like a long ways away doesn't it? Ouch!

I think we will continue to see short term volatility in the markets as Ben throws the kitchen sink at deflation.

Stock prices will be difficult to gauge while Ben fights inflation because he is flooding the system with money. Stocks will move higher as a result at times because this money all needs to go somewhere. Some of it will assuredly end up in equities. The counterbalance to stocks moving higher is the obvious fact that the economy totally sucks! This will cause violent moves to the downside at times.

Longer term stocks will eventually collapse because inflation will begin to cripple the consumer as a result of higher prices. At this point Ben must pull his liquidity because he risks killing the consumer's purchasing power and thus the economy. This is the point at which you will see equities crash.

Until then stay nimble and don't marry your positions. I actually made a few small trades today. I bought some longer dated Sept. SPY PUTS and some long dated calls on GLD. I think the dollar will continue to slide in the near term which will push gold higher. I picked up the SPY's because things look very toppy to me here.

Until tomorrow!


johndaniels said...

Although he's been credible in the past, primarily based on previous trading chart based trends, we are in an entirely different animal now; because the markets are illegitimate. lately he's been changing his outlook with greater frequency; now he's done yet another 180 degree turn based on shorter term trends and historical chart patterns that may not be indicative of future events. Past success is not a predictor of future events.

beware giving too much weight too this guy; although it is interesting how they pay attention to sociology and its interaction with the markets.

he likes treasuries? makes too much sense. we all know the markets are counter intuitive due to manipulation... if we'e going into deflation, that means a strong dollar regardless of dollar performance.

just hold cash then.

John Maynes said...

Very interesting post. Like esp. your rant about the President of No Change. :-)

Jeff said...


Thanks for the heads up. I didn't know he had flip flopped. I haven't read all of his work but I know he has a big following.

Cash/FRN's would be the wise choice in deflation. I still think you need to hedge your bets with metals.

Like you said this is a different animal now. Its an animal that no one has figured out IMO which is why you must be diversified.

I rack my brain everynight on this crisis and I have yet to make sense of it all. I don't think the market has either. Its been very erratic recently.

I look forward to thee days in which we get past all of this.

Jeff said...



Yeah. President Obama is looking more and more like a great orator with zero substance.

I'll try to be patient. Its only been 3 months. He did inherit a nightmare.

Anonymous said...

Hi Jeff:

Regarding your sentiments about President Obama (i.e. "He reminds you of that guy who says all the right things but does nothing.")

My working hypothesis about Obama is that he is the Dr. Phil of America. I tend to hold my working hypotheses until proven wrong. So far this hypothesis is holding.


Jeff said...


What a great analogy. Dr. Phil turned out to be quite a big phony.

I am curious to see how he does over the next several months. His handling of the auto' companies is quite frightening if you as me.