Robert Prechter: Expect “Deflationary depression”.

The president of Elliot Wave International Robert Prechter explains why we are headed towards “Great Deflation” and new “Great Depression”. August 11, 2009.

Take cover, here comes the ‘Great Deflation’.

Bob Prechter, founder of market forecasting firm Eliot Wave International and best-known for predicting the 1987 stock market crash, has another dire prophesy. Tuesday on Tech Ticker, he announced that the “Great Deflation” has — dun, dun, dun — begun, and that what will inevitably follow is a deflationary depression.

The next big phase, he contends, is the credit implosion, in which debtors will be scrambling for dollars to pay off their debt rather than consuming. And without more consumption, everyone seems to agree a recovery is impossible.

Overall, Prechter’s thesis runs counter to the conventional wisdom that the market is stabilizing and that if there’s anything to worry about, it’s inflation thanks to the trillions that have been pumped into the market by the Federal Reserve.

However, Prechter would argue that things are happening just as he predicted in his 2002 book, “How to Conquer the Crash.” Indeed, as he wrote, commodities, real estate and equities have fallen precipitously in unison, and there are a slew of debt instruments on the market.

But we’re still not clear on why that means there will be a deflationary depression, or how his thesis fits in with the recent rally in commodities and stock prices.

To the latter, his explanation is that in 1929, at the start of the Great Depression, stock prices dropped 50%, then rebounded 50%, only to drop another 85%. But how that is a sufficient explanation for three, disparate asset classes is beyond us.

One thing he said that rings particularly true is that market watchers always have a pitch: “They give you a story at the bottom and a story at the top.”


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