Monday, September 07, 2009

Robert Prechter and Jim Puplava: A Great Inflation / Deflation Debate (Free Audio)

I hope you had a good, long holiday weekend. I sure did...I mentioned at the end of the week that I'd be blogging when I wasn't drinking beer. As you can probably infer from my lack of posts, I managed to put back a few with some good friends!

Back in the saddle now, I listened (twice, actually) to a fantastic interview and inflation/deflation debate as Jim Puplava chatted with Robert Prechter on his Financial Sense Newshour. Here's the link to the interview:

Note: It's the September 5, 2009 post that you want to look for. And as a bonus, he also interviewed Neil Howe, author of The Fourth Turning! I've got that one next on my iPod, and will do a post on that afterwards.

Despite gold approaching $1,000, and the equity markets rallying north of 50% over the past few months, Prechter is holding strong to his deflationary stance. In fact, he goes as far as to say he can't see a hole in the deflationary argument!

Listening to Prechter's answers, I have to say it's real tough to poke a hole in his line of reasoning, which is always very thorough, and usually contrary to popular opinion.

Here were a few of the highlights for me:
  • Prechter actually called the Fed's actions "fairly conservative" - not quite as conservative as the 30's, but conservative nonetheless.
  • He believes that the Fed can do NOTHING to prevent deflation. Basically, because we have a credit bubble. And as that credit goes away to money heaven, even if the Fed were to print the money to replace it, at best that would be a wash.
  • The core of his argument is that most debt outstanding will go unpaid. The lenders are carrying the value of this debt on their books at values that are not realistic. He says in 2007, the world woke up to the fact that these debts will go unpaid, triggering the onset of deflation.
  • He's not at all concerned with the current rally - in fact, he predicted it (I can vouch for that - I've been a subscriber of his since the spring).
  • Prechter is not quite as bearish on gold as he's been in the past. In fact, he admitted it will likely strike a new high during this move. He also now thinks that gold will hold up better than most assets, and even recommends a GoldMoney account for diversification purposes.
  • He's looking at 2010 to be a huge year for deflation.
  • When Puplava asked for a historical example of a fiat currency of a debtor nation that did not suffer from inflation or hyperinflation, Prechter cited four examples of credit bubbles in history, saying that everytime a credit bubble ends, it results in deflation (with Japan being the most recent example).
  • Prechter posits the question: if inflation is a threat and a repeat of the 70's, why aren't interest rates at 5, 10, 15%?
  • He also says that social mood has permanently turned towards a deflationary mindset. Thus, the Fed is "pushing on a string", and zero interest rates will not reinflate anything (a la Japan). (Brett note: I read a similar social mood comment about the Great Depression, that inflation "did not take" despite the Fed's best efforts, because of investor's mindsets).
I'd highly recommend you set aside an hour of your time to listen to this interview. Puplava's a super sharp investor, and also currently in the inflation camp - so he tosses a lot of good questions towards Prechter.

As you probably know, I've been in the deflationary camp for the past couple of months - though I am always rechecking my assumptions.

Side note: If you're interested in reading a recent newsletter from Prechter, they are actually giving out the July issue for free until this Wednesday - you can check that offer out here.

It really feels like this whole inflation/deflation debate is going to come to a head soon. Prechter believes the next wave down will be more powerful than the first, and also that it will be quite soon as now.

On the other side of the fence, we've got gold making a solid run at $1,000 (and I'm wiping the egg off my face right now from selling out in June). And some really sharp gurus predicting hyperinflation and insisting that the rally has been driven by printed money - as evidenced by the fact that bank stocks have led the charge, and they are usually the first to lead in inflationary wave.

Actually I find it interesting that since March, Prechter's script has been identical to that of the inflationist point of view. The inflationists say the rally is being led by the banks, which is typical. It will then spill over into other areas (gold, etc), and away we go. Prechter and his guys, on the other hand, say that this rally was due to happen, but it's a false hope, being driven by crap (banks, etc), and it's about run it's course.

So we seem to be at a fork in the road of sorts. The next turn may be the game decider! We'll stay tuned in for more clues here.

Sugar Money Looking For a Home?

I got a ring on Thursday from my commodity broker in Chicago - I have an IRA managed by his firm, that's separate from the one featured in this blog. I asked him what he thought of cotton - he still likes the trade, citing the fact that cotton traded up towards 90 cents fairly recently.

He also mentioned that the sugar trade is looking a bit long in the tooth, and that fund money may flee sugar soon looking for the next big ag trade - which could be cotton. Check out the money running for the sugar exits already!

Sugar traders are stampeding for the exits!

Positions Update

No new trades. I still like the buck. And still holding cotton to see what happens from here.

While I am currently in the deflation camp, I also realize it's very possible that I'm wrong! So we'll keep an eye on the charts.

As always, thanks for reading!

Cotton continues to range trade.

Open positions:

Current Account Value: $24,386.64

Cashed out: $20,000.00
Total value: $44,386.64
Weekly return: 2.1%
2009 YTD return: -52.1% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000


Mike said...

I find it interesting how bearish Prechter is on gold. During the Depression the gold price performed very well. From a fundamental perspective I think a much stronger bullish than bearish case can be made for gold. Here is a further discussion on the gold price amid the govt's Keynesian policies.

Brett Owens said...

He was definitely less bearish on gold in this interview than any other one I've heard.

The point he made here is that gold is fairly priced now because the market prices it everyday. In the Depression, the price of gold was artificially depressed heading in because it was pegged to the dollar.

So it was easy for FDR to "devalue" the dollar by removing that artificial peg - hence boosting the price of gold in dollar terms.

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