Credit inflation, Deflation: Prechter Interview

[Jim Nickerson]

Available today @http://www.financialsense.com/Expert.../Prechter.html is an interview by Jim Puplave with Bob Prechter in audio format that is about 40 minutes long.

Prechter makes the argument that the present inflation is credit inflation, not a currency inflation as existed in Germany's Weimar Republic in 1923. He thinks when the credit inflation ends, it will end with deflation subsequently followed by hyperinflation. After the deflationary depression, he gives a 1% chance that the Federal Reserve could done away with and a real monetary base established, but that politicians being interested in their own welfare and being re-elected won't do away with the Fed thus the strong possibility of hyperinflation. He thinks the Fed will be powerless to stop his expectation of deflation. This is related to the size of the credit bubble. Credit is behind all the recent bubbles starting with Japan.

His reasoning for the markets' on-going recovery especially the DJI since 2002 is due to confidence and optimism of the public. From 10/98 to now there have been only 9 of 413 weeks when bears out numbered bulls in investment advisors (no reference to whose data). Regarding sentiment in last 8 days among traders the bullish percentage has been > 90% for eight consecutive days, nothing so bullish has never happened before.

He thinks the last domino to fall will be the blue chip averages, with real estate, commodities, gold having already topped out.

Interest rates will go lower and will ultimately bottom at zero percent.

Silver and copper go down a year or two before a recession. So far copper is not predicting a recession. Silver, copper and stocks all need to go down to forecast a recession/depression. The new nominal "high" in market says confidence still exists in the economy.

Advice is CASH. Still bullish on dollar at this time, but speaks of diversifying out of dollar at some point. Quote Keynes again with regard to shorting markets: Markets can stay irrational longer than one can remain liquid.

After deflation the 99% reason there will be hyperinflation will be purely a political response. He thinks poorly of politiicans and on this I believe his is correct, no if's and's or but's.

This was a worthwhile interview for me, better not rely upon my transcription rather check it for yourself.

[blazespinnaker]

Re: Credit inflation, Deflation: Prechter Interview

Yes, this is pure ka-poom.

We'll see. Recent uptick in mortgage applications may mean the housing bust has already bottomed and things may be less worse than they appear.

I think the market is betting on a soft landing as well. My experience has told me that it is risky betting against the market, even if it gets it wrong sometimes. (it gets it right more than I do)

[SeanO]

Re: Credit inflation, Deflation: Prechter Interview

Blaze - an increase in mortgage apps should be expected, anyone in an ugly option ARM that still has enough equity to refi into another ugly option ARM such that they can get back to an initial teaser rate and stay in their home will.

Also new home builders and desperate sellers are pulling out all the stops to move product. Both are just trying to get out before things get worse.

I personally don't see either of those as a sign of the bottom.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

Yes, this is pure ka-poom.

We'll see. Recent uptick in mortgage applications may mean the housing bust has already bottomed and things may be less worse than they appear.

I think the market is betting on a soft landing as well. My experience has told me that it is risky betting against the market, even if it gets it wrong sometimes. (it gets it right more than I do)

It struck me clearly that Prechter does not foresee just a period of disinflation, as talked about by EJ in Ka-Poom, but rather serious deflation that is refractory to attempts to stop it.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

Yes, this is pure ka-poom.

We'll see. Recent uptick in mortgage applications may mean the housing bust has already bottomed and things may be less worse than they appear.

I think the market is betting on a soft landing as well. My experience has told me that it is risky betting against the market, even if it gets it wrong sometimes. (it gets it right more than I do)

Because it seems reasonably established that the government's inflation measures are spurious because of adjustments, I continue to refer to John Williams' depictions http://www.shadowstats.com/cgi-bin/sgs/data of inflation which at the moment is updated to 9/17/06 and showed inflation to be a bit less than 11%, estimated from chart above.
Contrast that with what a member of this board, Finster, depicts in his FDR (which stands I think for Finster Dollar Rate of change) calculated from his FDI (Finster Dollar Index).


edit 1014/06 The above chart has by some manner changed from what I originally posted. I posted Finster's FDR chart. I cannot delete it, so I
have put it in again. Disregard the chart above.

For details regarding Finster's work see http://users.zoominternet.net/~fwuthering/FFF/FinsterFinancialForecast.htm and click on US Dollar link.

For anyone unfamiliar with the above FDR chart, minus numbers in Red represent the positive number for inflation. As of the chart's last update, now 10/7/06, that number may be around 7% inflation, but note that the trend now for three years has been disinflation. This to me is in sharp contrast to everything in the media wherein inflationary worries have been the dominant focus for some while. Williams' chart shows a definite worsening inflationary trend since 2004.

Who is correct? And what are the implications with regard to Ka-Poom?



Using the CPI through August 2006, the trend of inflation is down from its high of 4.7% yoy to 3.8% yoy in last reported data. Although slight, this is a bit of disinflation, and I presume whenever Williams' site is updated it will show a similar change.
[edit] Actually Williams chart is updated through the last CPI data release.

To attempt to put these depictions into the context of Ka-Poom, which in using CPI projections EJ theorized inflation rising to about 14% (first black box in Ka-Poom chart), it may be possible that inflation will not in any near time come close to approaching such levels when measured by the BLS's CPI before it goes through some significant disinflation or deflationary period. The reason is simply the government could not come close to affording the costs of such inflation. If Finster's FDR were to be a truer depiction of the current inflationary trend, i.e. disinflation, then perhaps the most significant thing in our futures is more disinflation or actual deflation as is predicted by Prechter.

What do you think?

[jk]

Re: Credit inflation, Deflation: Prechter Interview

jim, as i understand it finster's fdi includes asset prices, not just the cost of consumption. thus the drop in oil, gold, etc will show up as lower prices for the fdi.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

jim, as i understand it finster's fdi includes asset prices, not just the cost of consumption. thus the drop in oil, gold, etc will show up as lower prices for the fdi.

I had some problem finishing the post above yours, and may have added to it while you wrote your post.

If what you say is correct, and I do not disagree, then is it not possible that now we are in a disinflationary period? And regarding oil, if OPEC starts decreasing output, then prices may go right back up--but this is all short term whatever happens tomorrow, next week, month it all is short-term.

Finster's FDR shows a disinflationary trend in place for three years during which oil peaked in price, if oil were to stay down it would add even more to the disinflationary trend, wouldn't it?

[blazespinnaker]

Re: Credit inflation, Deflation: Prechter Interview

Blaze - an increase in mortgage apps should be expected, anyone in an ugly option ARM that still has enough equity to refi into another ugly option ARM such that they can get back to an initial teaser rate and stay in their home will.

Also new home builders and desperate sellers are pulling out all the stops to move product. Both are just trying to get out before things get worse.

I personally don't see either of those as a sign of the bottom.

I don't either Sean, however,

- Alan Greenspan spoke about it,
- there has been an uptick in pending sales with the NAR
- the UK flattened out after a peak as well, may follow a similar pattern
- mortgage rates are dropping rapidly
- refi's have seen serious growth but undeniably, there has been an uptick in real mortgage apps
- no significant job loss yet

I'm still betting on bust, but I am no longer as confident as I was before.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

I had some problem finishing the post above yours, and may have added to it while you wrote your post.

If what you say is correct, and I do not disagree, then is it not possible that now we are in a disinflationary period? And regarding oil, if OPEC starts decreasing output, then prices may go right back up--but this is all short term whatever happens tomorrow, next week, month it all is short-term.

Finster's FDR shows a disinflationary trend in place for three years during which oil peaked in price, if oil were to stay down it would add even more to the disinflationary trend, wouldn't it?

i think we're in the early innings of another "deflation" scare, such as we had a few years ago. commodities have pulled back and bond prices are up. the only outlier is the stock market, which seems to believe that a "soft landing" will allow corporate profits to keep expanding. if the equity markets tank and we get more bad news from the housing sector we'll have the whole "deflationary" scenario in place. [i'm putting "deflation" in quotes because i question whether it's anything of the sort, and i would guess that williams' numbers will show ongoing inflation throughout the episode.]

if indeed this is what's occurring, we can expect the fed to start dropping rates within the next 3-6 months, at which point we will enter a "poom" period with commodities taking off and the dollar dropping. i don't think we should hold eric to a literal interpretation of every zig and zag on his theoretical ka-poom chart. i would rather just say that it embodies the idea of disinflationary periods with deflation scares being followed by ever greater inflationary episodes.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

i think we're in the early innings of another "deflation" scare, such as we had a few years ago. commodities have pulled back and bond prices are up.

Looking right now at the things I look at in commodities (using $CRB @stockcharts.com) and DBC, USO, these charts may have bottomed for a while--all the charts to me are more positive than negative. So consider that perhaps the pullback is done for who knows how long. Whether deserved or not you can throw in GLD and SLV, and their charts too look positive coming off some sort of bottoms.

$TYX 30-yr rates seem headed back up, of course one sees the opposite in looking at $USB--the 30-yr bond price. And the $TNX shows the same as $TYX indicating that rates seem headed back up. What is causing this? The Fed is not, so I presume the "market" is the cause. Why? Smarter minds than mind perhaps can offer some opinions.

the only outlier is the stock market, which seems to believe that a "soft landing" will allow corporate profits to keep expanding. if the equity markets tank and we get more bad news from the housing sector we'll have the whole "deflationary" scenario in place. [i'm putting "deflation" in quotes because i question whether it's anything of the sort, and i would guess that williams' numbers will show ongoing inflation throughout the episode.]

What is happening right now in the equity indices is reminding me of Fall of 1999. I clearly remember thinking these markets cannot continue to go up and they did just keep going on up quite mightily. I personally do not see that something similar could not be under way now (though it is impossible for me to believe such percentage moves as occurred then from the Fall of 1999 to the first quarter of 2000 might occur from now over the next 6 months). There may be a pause in the bursting of the housing market and all the possible doom that could or will result. SeanO's thoughts:

Makes sense for refi's to be up... unbearable ARM adjustments are just starting to kick in, and folks are financing into new ARMs to buy another year or two of low neg am payments. I think this is more a sign of how long it will take to get to the bottom, then a sign of the bottom.

I think pending home sales are up because of the SIGNIFICANT push by many to get out while they still can. I think further research would show that most of these buyers are unsophisticated, using 100% financing, and are being slammed into deals by desperate Realtors and lenders. Again, I read this as a sign of more weakness to come, not a bottom.

Finally, I agree that the American spender is not yet tapped out, but I believe that this means the worst is still a ways off.

if indeed this is what's occurring, we can expect the fed to start dropping rates within the next 3-6 months, at which point we will enter a "poom" period with commodities taking off and the dollar dropping. i don't think we should hold eric to a literal interpretation of every zig and zag on his theoretical ka-poom chart. i would rather just say that it embodies the idea of disinflationary periods with deflation scares being followed by ever greater inflationary episodes.

Well, indeed, jk, what you think could be occurring might not yet be near to occurring, and perhaps whatever is driving up longer rates now will result in the Fed not being done with following the trend by further short-term rate hikes. The US Bonar seems headed up also now, it has a breakout. For the moment, and it may be just a moment, I do not see the Ka happening, the outlier in this to me is the inscrutible FDR. I am unwilling to dismiss whatever it truly represents, simply because Finster has not represented himself as a dumb guy in all that he has posted on this board.

I hope Finster is not ill or has not given up in contributing here, hopefully he is on vacation, like going over seas to open some accounts in other currencies or perhaps just for fun, but it would be nice if he returned and put forth his perspective on how his indicator suggests disinflation when not much else seems to agree.

[fightthepower]

Re: Credit inflation, Deflation: Prechter Interview

I don't see how the powers that be could allow deflation. The large investment banks, the Federal Reserve and the gov will to anything to hold power. If that means making the dollar worthless, so be it.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

I don't see how the powers that be could allow deflation. The large investment banks, the Federal Reserve and the gov will to anything to hold power. If that means making the dollar worthless, so be it.

Sixty-one percent of people who opined in the iTulip "Stock market this summer" poll did not believe the markets would be going anywhere except down, which they did a bit. That poll was dated May 20th, and I do not know if that is when it began or ended--it would be nice if one could tell--I would guess that is when it began. On 5/19 SPX was 1267 and on 9/22 it was 1315. I only mention this to use as an example that opinions can be wrong and being contrarian, it concerns me when some significant majority sees market outcomes the same way.

I've not been tabulating the results of everything I read, but it appears to me that there are significant numbers of people expressing similar belief that "the powers that be could not allow deflation." I'm no devotee of Bob Prechter, and I do not know squat about Elliot-wave-anything except that it exists, but what interests me is that Prechter, probably not being a total kook, has an opinion that there will be serious deflation, and I have no doubt his thoughts and knowledge about such are way beyond mine. From what I know deflation is a serious circumstance, if it weren't everybody would not be so sure that the Fed will do any or everything to prevent it, but to me the pertinent question is can something happen in this economy that lies beyond every effort of the Fed or any additional entities to assure that serious deflation does not occur?

I certainly do not know the answer, but if deflation is the worst thing that can happen, and everyone believes the Fed, which generally is spoken of in disgust and mistrust, will somehow be the knight in shining armor and "protect" us or itself, it to me seemingly is a setup for almost non-existent contranian opinion to ultimately prevail.

[fightthepower]

Re: Credit inflation, Deflation: Prechter Interview

Sixty-one percent of people who opined in the iTulip "Stock market this summer" poll did not believe the markets would be going anywhere except down, which they did a bit. That poll was dated May 20th, and I do not know if that is when it began or ended--it would be nice if one could tell--I would guess that is when it began. On 5/19 SPX was 1267 and on 9/22 it was 1315. I only mention this to use as an example that opinions can be wrong and being contrarian, it concerns me when some significant majority sees market outcomes the same way.

I've not been tabulating the results of everything I read, but it appears to me that there are significant numbers of people expressing similar belief that "the powers that be could not allow deflation." I'm no devotee of Bob Prechter, and I do not know squat about Elliot-wave-anything except that it exists, but what interests me is that Prechter, probably not being a total kook, has an opinion that there will be serious deflation, and I have no doubt his thoughts and knowledge about such are way beyond mine. From what I know deflation is a serious circumstance, if it weren't everybody would not be so sure that the Fed will do any or everything to prevent it, but to me the pertinent question is can something happen in this economy that lies beyond every effort of the Fed or any additional entities to assure that serious deflation does not occur?

I certainly do not know the answer, but if deflation is the worst thing that can happen, and everyone believes the Fed, which generally is spoken of in disgust and mistrust, will somehow be the knight in shining armor and "protect" us or itself, it to me seemingly is a setup for almost non-existent contranian opinion to ultimately prevail.

One thing that would cause deflation is a serious war. In that cast people would hold on to their money no matter what happens. Even with massive government spending on war goods, if the US mainland fell under a massive attack (WMD's) or sustained small attacks (on soft targets like shoping malls) people would stop spending.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

One thing that would cause deflation is a serious war. In that cast people would hold on to their money no matter what happens. Even with massive government spending on war goods, if the US mainland fell under a massive attack (WMD's) or sustained small attacks (on soft targets like shoping malls) people would stop spending.

iTulip should do a poll on how those who live or visit here see the terror risks on our mainland.

There is deflation of sorts already. I ordered a used copy of Prechter's book "Conquer the Crash, etc." from someone on the web. Cost .87 bonar and 3.96 bonars for shipping. Can't go wrong for that if it comes.

Perhaps this topic isn't interesting and thus no one other than fightthepower so far can even imagine an answer because the possibility seems too remote. Were that to be the case, then to me it speaks to the possibility, probability of the extreme sentiment that only significant inflation lies in our futures, thus reflecting the behavior of the crowd. It truly burdens me when too many people think the same way, hopefully I'll get over it or learn to cope.

[medved]

Re: Credit inflation, Deflation: Prechter Interview

Perhaps this topic isn't interesting and thus no one other than fightthepower so far can even imagine an answer because the possibility seems too remote. Were that to be the case, then to me it speaks to the possibility, probability of the extreme sentiment that only significant inflation lies in our futures, thus reflecting the behavior of the crowd. It truly burdens me when too many people think the same way, hopefully I'll get over it or learn to cope.

I think, in this case the opinion of the majority is not a contrarian indicator. The reason is simple, we are not talking about a free, or partially free market (where contrarian bets pretty often are the best in terms of risk/reward). Inflation is created and maintained by the government. No analysis of existing financial system will help here.

Imagine somebody in the 1900s trying to forecast economic trends. They would not be able to forecast the creation of the FED and consequent inflation created by it.

Nobody in the 1920s could forecast confiscation of gold and devaluation of the dollar.

Nobody in the 1960s could forecast US default on its Bretton-Woods obligations.

The examples above show, that nothing (Constitution, gold standard, international agreements, much less common sense) can stop the gov't from driving inflation higher and higher. If manipulating financial system does not work, they will intervene directly in the economy. We can only hope, we are still better off, than Weimar Republic, because ours is credit inflation. At certain moment this difference will disappear. We *are* going KaPoom, and the Poom will be huge with the subsequent huge deflation, but this time the prices will go down together with the political system.

m.