Robert Prechter Getting Desperate for Deflation, Martin Armstrong’s Revenge Revisited

By: Captain_Hook

Robert Prechter was out again this week reminding us all why deflation remains an immanent danger, and to dawn our crash helmets looking for ‘big declines’ in everything from stocks to gold. Of course anybody taking his advice seriously over the past 20 years has for the most part been on the wrong side of the trade for extended periods of time because he basically does not take into account just how desperate and crazy countervailing forces (the bureaucracy) to the primary trends he sees are, which is the case at present.

As an example of this, it should be noted the international brotherhood of central bankers and politicos have been out in full force over the past few days doing everything in their power to keep the dollar ($) falling in order to maintain the risk trade ($ carry trade liquidity), with both Europe and Israel talking about raising domestic official rates. You will of course hear no such talk out the US even though ironically both Europe and Israel are bigger economic basket cases than the US, which is designed to keep pressure on the $.

And the Japanese were out in full force this week as well announcing a huge stimulus package since they have been seriously slipping back into what appears to be deflation mode. You will remember just a few years back it was the yen carry trade with zero interest rates that was the central supplier of bubble blowing liquidity, and today it’s the US as central planners attempt to save their world. Of course eventually all of these efforts will prove folly, as was the case last year with the stock market collapse, and will be again, however it will likely not be what either the deflationists (Prechter and company) or inflationists envision, but a confusing mishmash of ups and downs caused by the ongoing conflict of man against nature – intervention set against gravity – which in the case of present circumstances is debt deflation. In this regard then, and although a good deal of volatility should be expected, Prechter will likely remain very wrong with respect to future prospects for gold, as sensible human beings are more like a rolling stone than moss, not taking into consideration degrees of intervention on the parts of both officials and individuals alike.

This understanding is well comprehended after reading Martin Armstrong’s latest, and for that matter in simply looking at his general circumstance, where both he and an increasing aggressive bureaucracy endeavoring to survive by any means, both becoming more desperate as process unfolds. Here, Martin attempts to sustain himself through his writing, and in response to this the bureaucracy attempts to shut him up by possibly moving him to a maximum-security facility that would act as a gag. Thankfully it appears this may be averted through the efforts of his friends and a growing army of sympathetic concerned citizens, however the Orwellians on his case will undoubtedly continue to make attempts in this regard.

Be that as it may, and in returning to chase of enhancing our understanding of ‘what is what’ when it comes to ‘the condition our condition is in’, according to Martin’s view of things moving forward, both stocks and gold will continue to power higher for some time, the former set to top in nominal terms sometime in 2012, and the later in 2016. The reasoning here is that as economic / political stability continue to deteriorate, and the larger bureaucracy reacts to this with increasing taxation, subterfuge, and controls in an attempt to pay for their socialistic ways, increasingly capital will flee from immoveable assets, with real estate at center, to moveable assets, with gold at center, and stocks included within the formula for a period of time as well. And you know what, he is likely more right than the deflationists without a doubt in my mind, however to be fair to Prechter, it’s difficult seeing new highs in the broad measures of stocks short of hyperinflation. In this regard it is of course not difficult seeing bureaucrats accelerating monetary largesse moving forward, along with gold, silver, and commodity prices benefiting from this longer-term, however to include stocks into this group with demographic constraints, share dilution, and a myriad of other profound factors bearing down in coming years, new highs in stocks is a stretch in my opinion.

Still, there is room for more gains in stocks moving forward, especially if the $ is destined for far lower trajectories (see Figure 2), so what do I know. Last year when precious metals shares were plumbing the lows I pointed out there may not be a larger degree corrective a – b – c sequence in the trade, not if we are currently in Super Cycle C higher, which we could be if the $ keeps falling. And if precious metals shares, where we will use the Amex Gold Bugs Index (HUI) for discussion purposes because of what it did the other day, takes out the exact double top at 510.58 it made (the top in March of last year was also exactly 510.58), then we will have our answer to this question, and it might happen sooner than later – who knows? That is to say I have no doubt it will happen, however most reactions in equities lower the likes of which we experienced into the March lows are normally retested to some degree, unless we are in a C wave. And of course we are in C waves in both gold higher and the $ down, so you know what, that which appears most unlikely to the majority could in fact occur once again, which in this case would be for the $ to keep falling straight away (allowing for a brief rally to work off overbought conditions), and precious metals (along with stocks to a lesser degree [think gold to equity ratios continuing to rise]) to continue powering higher as well. Here, it’s not that corrections in the primary trend will not occur, however they will occur when unexpected and be brief, which is necessary to correct sentiment and other technical constraints as process unfolds. This is when I would expect a more meaningful correction in equities / $, perhaps when the Dow hits the denoted time line on the chart below next year. (See Figure 1)

Figure 1

The talk is, as with money market mutual funds now, official guarantees (think FDIC) on bank accounts might be coming off next year in an attempt to steer capital into the bond market as rates become increasingly pressured higher, where both domestic and foreign demand is anticipated to wane otherwise. Without such a measure, and especially if equities remain firm, no matter how they try authorities will have a great deal of trouble keeping a lid on market / bond / mortgage rates, where it will be all over for equities if that were to happen. Such an outcome would likely bring on some degree of a ‘run on the banks’ anyway, which should be real trouble this time around with even the commodity based economies coming into more serious question. You will know it’s game on in this respect when the ratio plot below breaks out to the upside. That’s when the $ could rally despite the best laid plans of central bankers for a controlled decline, where the ‘risk trade’ associate with the $ carry will need to be unwound to some degree. This is when gold should correct from whatever high it vexes in coming weeks / months, somewhere between $1,300 and $1,500, all the way back down to test the breakout at $1,000 in US $ terms. The volatility should be interesting to say the least, whenever it arrives. (See Figure 2)

Figure 2

So, Prechter should be vindicated to a degree at some point moving forward, where hopefully for those who are short or in cash, it won’t be a decade of wrong calls this time around too, maintaining his long sanding as the ultimate contrary indicator. Further to this, and to give you a better idea of just how fluid the whole thing is, presently he is calling the rise in gold a running correction, which could prove to be correct for all intents and purposes, even if gold vexes $1,500 first early next year. Where he falls off his apple cart in this respect is he sees a potentially profound correction well below $1,000 as the Dow heads for a 1,000, where again, I have a great deal of difficultty seeing such an outcome with the $ technically in a position to fall somewhere between 30 and 50. It’s just not going to happen, however I could see a running correction back down to $900 or so if stocks cave in worse than anticipated next year, as per the chart below. (See Figure 3)

Figure 3

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Good investing all.

By Captain Hook

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