Robert Prechter was Jim Puplava's guest this week on the Financial Sense Newshour. You can listen to the entire interview here - it's almost an hour long, and it's fantastic.
Prechter last chatted with Puplava on his program last September, as part of an inflation/deflation debate series. That interview was also very good, and I'd recommend checking out our recap of their inflation-deflation conversation here if you missed it.
Since last September, we've seen gold rally north of $1200, we've seen US equities continue to rally, and we've seen economic pundits declare "the worst is behind us." So, has this changed Prechter's long-term view?
In a word - no. He still believes we're at the tip of a historic bear market plunge, which he believes will bottom out in 2016 (a date he reached via his Elliott Wave analysis). Along the way, he sees a series of fits and starts, as the bear market descends down what he deems a "Slope of Hope." In the last Depression, the real damage to wealth happened from 1930-1932 - a two year span - this time around, he expects the pain to be spread over an agonizing 6 year period.
Now, for some of Prechter's specific points:
Prechter on Gold
The yellow metal went higher than Prechter predicted last September, admittedly surprising him. But he cites 98% bullish sentiment for gold amongst traders currently, and negative divergences with silver and platinum (both have not yet exceeded their 2008 highs, and silver is still well off its all-time high), along with gold stocks (also below their 2008 highs) as reasons that he believes gold investors are best advised to stay on the sidelines right here. He likes gold as an eventual play – but thinks we’ll get a better price to “go long gold.”
Prechter on Hyperinflation
If the Fed had managed to ignite hyperinflation, he argues that everything would be soaring to new highs. Specifically bothersome to him are commodities - the CRB index sits at half its 2008 price (we discussed this last week). IF we were in a hyperinflationary environment, you'd expect everything across the board soaring to new highs. That's not happening right now. Commodities are off their all-time highs by 50% - similar deal with real estate, and stocks too.
Prechter on Debt
The crux of Prechter's deflation argument is that most of the current debt outstanding will go unpaid. He laughs at the Fed's supposed efforts to print a trillion dollars or two - it's not enough. He estimates there's a quadrillion dollars or more in debt outstanding in the world right now, and believes that there's not a sovereign entity that can print this much, because it would be politically infeasible.
To demonstrate this math, let me use an example from nearby Sacramento suburb Elk Grove, the foreclosure capital of the world right now. We have a couple of good friends who bought their house in Elk Grove in 2005 (near the peak of the housing market) for $350,000. Earlier this year, they wanted to get out (the town has really gone downhill since the peak), so the did a short sale, netting about $175,000. So the bank, which had this loan on the books for $350,000, had to write off 50% overnight. $175,000 flew away to "money heaven". That's deflationary.
Prechter on Government and Social Mood
I really enjoy his observations on social mood, in which he ties in pop culture and societal attitudes with stock prices. Over the next 6 years, Prechter believes that the social mood of society will accelerate to the downside. Much of the anger will be directed towards government, he thinks. So while FDR was able to capitalize on the negative social mood of the Great Depression to take power away from the private sector, he sees the opposite occurring over the next 6 years.
He cites current public disgust with government, which is running pretty high, and sees this trend accelerating as it becomes obvious that government economic fixes did not work and that the emperor “has no clothes.”
Prechter's Investment Recommendations
Cash - stay in cash, and stay safe. In terms of diversification, he suggests investors diversify their types of cash holdings. But, he does not advocate diversifying your holdings among different asset classes (the classic Wall St advice), as he expects everything across the board to get slammed again (just as they did in 2008).
Again, the link to Prechter's interview with Puplava is here - it's definitely worth a listen. Whether you are in the inflation or deflation camp, it will challenge your thinking - and that's always a good thing.
Further reading: 5 Things You Should Know About Investing During Deflation
Disclosure: Author is short the S&P 500