Speaking with Financial Sense Newshour’s Jim Puplava on Thursday, Robert Prechter of Elliot Wave Theory fame said he doesn’t think central banks can continue re-inflating the popped credit market bubble past Election Day. He believes that market forces will conspire against the politicians and collapse the system before November. Sign-up for my 100% FREE Alerts
“I think the third big mania of the last dozen years is pretty much topping in 2011, 2012,” said Prechter. “And last year, the big metals run I think ended, and this year is just kind of a double top type of echo, very similar to the 1999, 2000 highs in stocks and ’06, ’07, ’08 highs in real estate, the Dow and commodities. So it’s another sort of two-year topping process and I think it’s very long in the tooth, and it’s probably your third and last chance to get out of traditional investments.”
The retreat of the small investor from the stock market, he said, will not turn around, suggesting that, this time is really different from previous cycle rebounds. According to Prechter, don’t expect the sidelined cash from mom-and-pop investors to take equities higher.
“People think that the public has to see it coming before this thing ends, but I don’t think that’s going to happen.”
He points out that the market’s rebound from the low of 666 in the S&P in March 2009 was orchestrated by the Fed through unprecedented low interest rates and trillions of dollars of credit to financial institutions and hedge funds. But, as the counter rally to the Kondratiev super cycle fades this year, the resumption of the Winter Season of the K-wave will overwhelm central banks.
“Central banks and governments have managed to try to shore up all of the bad debt, or at least a lot of the bad debt, in the world,” Prechcter said. “Now that’s working because the cycle turned up in 2009, so you’ve got enough optimism so that investment bankers and hedge funds and speculators are availing themselves this free credit and leveraging it up 30 times <chuckles> and buying the stock market.
“So while there’s plenty of liquidity becoming a narrower and narrower expression in terms of where investment people have decided to put that liquidity to work, the seven-and-a-quarter year cycle, which bottomed in 2009, tops in 2012, it bottoms in 2016. It may take its sweet time topping out as it did in ’06, ’07 and ’08, and again, in 2000, which held up virtually all year before it turned down. But the ultimate conclusion for all this, I think, lies ahead, and we’ve not solved any of the debt problems.”
Prechter also cited that optimism is too high when matched up with the underlying fundamentals and an unresolved financial crisis. With trillions pumped into the financial system from all of the G-8 nation central banks, GDP, trade and employment show no signs of a robust economic recovery. That, he said, shows the powerful effects of debt destruction and deflationary pressures that come with a Kondratiev Winter.
“The first problem is that things are looking good,” Prechter explained. “How did they look in the first quarter of 2009? They were scaring economists to death, and now you’re seeing articles that everything is okay, we’re out of the woods, everything is great. When’s the best time to buy, and the best time to not get involved?
“One would think, after a three year recovery that the economy would be just roaring along, interest rates would be back to normal, trade would be ballooning, everyone would be employed. We have the opposite situation despite all of the inflationary credit that’s been created by the central banks, despite all the spending by government, we still have an extremely sluggish economy.”
With the counter-trend rebound within a grander trend of deflationary collapse nearing its end, the next downturn of the economy will make bailing out sovereign nations nearly impossible, both in terms of the mathematics and politics, according to Prechter.
“As far as Greece is concerned, I think that’s a central bank failure,” he continued. “Somehow the media, or investors, decided that was just fine and the problem was resolved. But what happened was, Greece defaulted on $100 billion worth of debt.
“Despite three years of recovery, where they couldn’t defend $100 billion worth of Greece’s IOUs. And Greece still owes 260 billion euros worth. How many people think they’re going to pay that off? So there are plenty more defaults to come. And one can only imagine how they will be flooding out once the trend turns down, social mood and the financial markets and the collateral starts to shrink even more. That’s going to be the time when the defaults really flooding in.”
Prechter believes that conventional economic thought doesn’t take into account the behavioral characteristics of market participants during the Winter period of the Super Cycle. After confidence in the economy wanes for as long as it has since 2008, investors may stay on the sidelines a lot longer than most people now believe.
“Well, this is what the economic theorists such as the Keynesians and monetarists never planned for, that is, changes in human behavior, changes in mass psychology,” said Prechter.
“You not only have misery in Greece, you have near rebellion. People are angry, they’re taking to the streets, and as you pointed out, there are largest percentage who are unemployed,” he added. “They have nothing better to do. The higher that unemployment figure goes in Greece, the more people that will be available to be out in the streets rioting, and throwing politicians out of office and changing how they they’re doing things.”
He added, that in Germany, the will of the German people for additional bailouts won’t be there, leave future expiring debt with no political solution similar to the one executed with Greece. The public has grown tired of bailouts.
“Eight percent of the populous was against this last bailout. I think it would be nearly impossible for Germany to pull off yet another bailout of Greece,” Prechter explained. “I think at this point they’re past the point of no return politically. I don’t think they can do another one.
“They’re doing everything they can as technocrats to stop it, yet the best they can do is tread water. The S&P is no better than it was 13 years ago. I think once this last cycle rolls over, I think the whole system is gonna implode, and that’s why you want to make sure that you’re not laden in your portfolio with risky debt instruments or the traditional investments such as stocks, commodities and real estate.”
Unlike many analysts who believe the Fed must continue to “print or die,” Prechter remains as one of the few analysts who claims that the Fed and other central bankers will have to cut short the printing presses for political reasons.
“It’s a weird limbo situation . . .,” said Prechter. “The ultimate resolution I don’t think is going to be runaway inflation on the upside . . . I think it’s going to be a deflationary implosion.”
He added, “What I think is going to happen is it’s going to come soon that most people are thinking. They say. ‘Okay, the Fed will keep everything up until Election Day. We don’t have to worry until the end of the year. Everything’s fine. At least we have another year. I don’t really believe that.” “I don’t think it can hold up much longer at all.” Sign-up for my 100% FREE Alerts