Robert Prechter's Latest Predictions for the Rest of 2010 (Protect Yourself Now!)

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.

Ed. Note: You can also read a full transcript of the interview here, courtesy of our friends at Elliott Wave International.

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 everythingwould 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).

For more specifics on Prechter’s Deflation Investing Strategy, I’d recommend you check out this article.

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.

Ed. Note: You can also read a full transcript of the interview here, courtesy of our friends at Elliott Wave International.

Further Reading: 5 Things You Should Know About Investing During Deflation

Latest Stock Market Outlook from Jim Rogers, Marc Faber, Richard Russell & More!

With the markets looking as turbulent as they've been in the past 15+ months, the financial gurus are out in full force. We've got links below to the latest commentary from our favorites - Jim Rogers, Marc Faber, Richard Russell, Bob Prechter, and more.

Also below are links to important investment trends that you should be keeping an eye on!

Richard Russell: Expect Downside Action in Stocks
If the May 7 lows are violated, look out below!

Why We Shorted the S&P 500 This Week
An update on our latest trade

Robert Prechter: These Technical Indicators Have Me Worried
These 8 "rarely" line up on the same side of the trade

Marc Faber's Outlook on China
There's a crash coming!

David Rosenberg's Latest on the Money Supply
What inflation? Wake me up in a few years.


Excellent Economic Outlook Analysis for US
David Galland Separates Economic Fact From Fiction


Gold Vending Machines in Abu Dhabi
More signs of a top!


Deflation is Alive and Well
So says the US dollar

The Outlook for Crude Oil
What do the technical indicators reveal?

Jim Rogers' Latest Thoughts on Euro and European Bailouts
Why he'd look at silver right now, too

Latest CPI Numbers
Still no inflation to be seen

Germany to Ban Naked Short Selling
Revealing charts on how that worked out for US, Australia

Marc Faber's 3 Favorite Commodity Picks
These picks may be tracing out a "historic low"

Why Robert Prechter Sees a Major Market Top Right Here

Spent part of my weekend reading Bob Prechter's latest newsletter, which is always thought provoking.  The folks on his team were kind enough to allow us to republish this article from the April issue of Bob's Elliott Wave Theorist.

In terms of technical and sentiment analysis, I think Prechter is second to none.  He's been bearish for some time no doubt - it looks like his previous warnings and premonitions are coming to roost now.

What Do These 8 Technical Indicators Mean for the Markets?
May 10, 2010

Editor's Note:    The following article is excerpted from Robert Prechter's April 2010 issue of the Elliott Wave Theorist. For a limited time, you can visit Elliott Wave International to download the full 10-page issue, free.

By Robert Prechter, CMT

Technical Indicators

It is rare to have technical indicators all lined up on one side of the ledger. They were lined up this way—on the bullish side—in late February-early March of 2009. Today they are just as aligned but on the bearish side. Consider this short list:

1. The latest report shows only 3.5% cash on average in mutual funds. This figure matches the all-time low, which occurred in July 2007, the month when the Dow Industrials-plus-Transports combination made its all-time high. But wait. The latest report pertains only through February. In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than in 2007! We will know for sure when the next report comes out in early May. Regardless, the confidence that mutual fund managers and investors express today for a continuation of the uptrend rivals their optimism of 2000 and 2007, times of the two most extreme expressions of stock-market optimism ever.
2. The 10-day moving average of the CBOE Equity Put/Call Ratio has fallen to 0.45, which means that the volume of trading in calls has been more than twice that in puts. So, investors are interested primarily in betting on further rising prices, not falling prices, and that’s bearish. The current reading is less than half the level it was thirteen months ago and its lowest level since the all-time peak of stock market optimism from January 1999 to September 2000, the month that the NYSE Composite Index made its orthodox top. The 30-day average stands at 0.50, the lowest reading since October 2000. It took years of relentless rise following the 1987 crash for investors to get that bullish. This time, it’s taken only 13 months.
3. The VIX, a measure of volatility based on options premiums, has been sitting at its lowest level since May 2008, when wave (2) of ((1)) peaked out and led to a Dow loss of 50% over the next ten months. Low premiums indicate complacency among options writers. The quants who designed the trading systems that blew up in 2008 generally assumed that low volatility meant that the market was safe, so at such times they would advise hedge funds to raise their leverage multiples. But low volatility is actually the opposite, a warning that things are about to change. The fact that the options market gets things backward is a boon to speculators. Whenever options writers are selling options cheap, the market is likely to move in a big way. Combined with the readings on the Equity Put/Call Ratio, puts right now are a bargain.
4. In October 2008 at the bottom of wave 3 of (3) of ((1)), the Investors Intelligence poll of advisors (which has categories of bullish, bearish and neutral), reported that more than half of advisors were bearish. In December 2009, it reported only 15.6% bears. This reading was the lowest percentage since April 1987, 23 years ago! As happens going into every market top, the ratio has moderated a bit, to 18.9% bears. In 1987, the market also rallied four months past the extreme in advisor sentiment. Then it crashed. The bull/bear ratio in October 2008 was 0.4. In the past five months, it has been as high as 3.4.
5. The Daily Sentiment Index, a poll conducted by Trade-Futures.com, reports the percentage of traders who are bullish on the S&P. The reading has been registering highs in the 86-92% range ever since last September. Prior to recent months, the last time the DSI saw even a single day’s reading at 90% was June 2007. At the March 2009 bottom, only 2% of traders were bullish, so today’s readings make quite a contrast in a short period of time.
6. The Dow’s dividend yield is 2.5%. The only market tops of the past century at which this figure was lower are those of 2000 and 2007, when it was 1.4% and 2.1%, respectively. At the 1929 high, it was 2.9%.
7. The price/earnings ratio, using four-quarter trailing real earnings, has improved tremendously, from 122 to 23. But 23 is in the area of the peak levels of P/E throughout the 20th century. Ratios of 6 or 7 occurred at major stock market bottoms during that time. P/E was infinite during the final quarter of 2008, when E was negative. We will see quite a few quarters of infinite P/E from 2010 to 2017.
8. The Trading Index (TRIN) is a measure of how much volume it takes to move rising stocks vs. falling stocks on the NYSE. The 30-day moving average of daily closing TRIN readings has been sitting at 0.90, the lowest level since June 2007. This means that it has taken a lot of volume to make rising stocks go up vs. making falling stocks go down over the past 30-plus trading days. It means that buyers of rising stocks are expending more money to get the same result that sellers of declining stocks are getting. Usually long periods of low TRIN exhaust buying power.

For more market analysis and forecasts from Robert Prechter, download the rest of this 10-page issue of the Elliott Wave Theorist free from Elliott Wave International. Learn more here.

Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Stock Market Crash Alert! Here's How To Invest In Deflationary Times

So what the heck took so long?

At last - deflation has returned - and markets are falling apart once again.  It was one helluva rally - we can only imagine what the next leg down of this mess will bring.

In order to review the investing protocol and keep us sharp as a sharper, nastier wave of deflation sets in, I penned a piece over at Contrary Investing that reviews how to investing during deflation.  

A Brief, Unapologetic History of Goldman Sachs - Part 1

While the consensus opinion in America right now about Goldman Sachs is along the lines of "screw those a-holes!" - exactly how'd we get to this point?

The history of Goldman Sachs (aka Golden Slacks, aka Government Sachs, etc) is a very interesting one, especially when intertwined with the ebbs and flows of the stock market and social mood in America.

In this guest piece, Vadim Pokhlebkin brings together a very insightful history in the investment bank we all love to hate. Enjoy Part I, and come back later in the week for the completion of the trilogy!

***

Goldman Sachs Charged With Fraud: Who Could Have Guessed? Part 1

The firm's history suggests its vulnerability in periods of negative social mood.

By Vadim Pokhlebkin

April 16, (Reuters) - Goldman Sachs Group Inc was charged with fraud on Friday by the U.S. Securities and Exchange Commission in the structuring and marketing of a debt product tied to subprime mortgages.

Shocked? Most of the subscribers to Elliott Wave International's monthly Elliott Wave Financial Forecast probably weren't. In the November 2009 issue, the EWFF co-editors Steven Hochberg and Peter Kendall published a careful study of Goldman Sachs' history -- and made a grim forecast for the firm's future.

In this special three-part series, we will release the entire Special Report to you. Here is Part I; come back tomorrow for Part II.

Special Section: A Flickering Financial Star
At the Dow’s all-time peak in October 2007, Goldman Sachs Group Inc., was the undisputed heavyweight champion of the financial markets. And, thanks to its bailout by Warren Buffett and the U.S. Treasury as well as the liquidation of rivals Bear Stearns and Lehman Brothers, its reign lives on. Come December, earnings and bonuses will reputedly approach the record levels of 2007. If the market can hold up, it might happen. But as the stock market retreat grabs hold, Goldman Sachs will experience an epic fall.

To understand the basis for this forecast, we need to review the firm’s history in light of socionomics.

At the beginning of the last century, Goldman Sachs originally made a name for itself with its first initial public offerings, United Cigar and Sears Roebuck. The deals came as the stock market made a multi-year top in 1906. Within months, the panic of 1907 was on, and a U.S. Interstate Commerce Commission investigation of the Alton Railroad Company bond offering, in which Goldman participated, was in full swing. According to The Partnership, Charles Ellis’ history of Goldman Sachs, the deal was “long remembered as ‘that unfortunate Alton deal’.” The bond issue allowed a considerable cash surplus to be paid out to shareholders in the form of a one-time dividend, a standard financial maneuver in the preceding bull market. In fact, the deal was unknown to the public until it came before the ICC in 1907. “Then, probably to the surprise of the syndicate, the verdict was practically unanimous against them. They were tried before the bar of public opinion and found guilty,” said author William H. Lough in Corporation Finance. Lough added that syndicate members “ought not be too severely criticized for they merely acted in accordance with the custom of the period.”

So it goes when social mood, and concurrently the market’s trend, changes; customary Wall Street devices are invariably recast as the instruments of evil financiers.

Another bear market problem is that Wall Street firms are just as susceptible to negative mood forces that tear away at even the most close-knit social units. From 1914-1917, a major rift emerged between the founding Goldman and Sachs families, and the Goldman side of the partnership left the firm. The tension endured through several generations, and as late as 1967 it was said that “hardly any Goldmans are on speaking terms with any Sachses.”

Larger degree social-mood reversals create larger bear-market complications. The firm’s biggest and most devastating setback came after the Supercycle degree top of 1929.

Goldman Sach's Bull Market Successes, Bear Market Messes

Leading up to the market high, Goldman Sachs Trust Company took off, playing a role in the then-financial mania similar to the one that hedge funds perform today. With the help of successively higher levels of leverage, GSTC issued a quarter billion dollars worth of new shares the month before the September 1929 peak (many of which were held in its own account), leaving it completely exposed to the decline that followed. The firm survived only because a quick-witted former mailroom employee, Sidney Weinberg, took charge and used the stock market rally in early 1930 to jettison many of the firm’s equity positions. Weinberg also turned out to be an investment banking savant. While the firm made no money for the next 16 years, he served on the war production board and carefully cultivated key relationships in business and government. In the middle of Cycle wave III in 1956, Goldman completed the largest IPO in history, delivering Ford Motor Company into the public’s hands.

The firm was not yet a major force on Wall Street, but by hiring MBAs from top schools, fostering a reputation for fair dealing and maintaining a partnership structure that aligned the ownership of its principals with the long-term success of the firm, Weinberg laid the foundation for rapid growth. In the words of Gus Levy, Weinberg’s successor, Goldman Sachs was “long-term greedy.” Another Levy secret was to be certain that positions exposing capital were “half-sold” before they were entered into.

Come back tomorrow for Part II of this three-part Special Report from Elliott Wave International (EWI). In the meantime, get more free and insightful analysis from EWI in the Market Myths Exposed eBook. The 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. You will uncover important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, investment bubbles, inflation and deflation, small stocks, speculation, and more! Learn more about the free eBook here.

PLUS -- don't miss Bob Prechter's just-published forecast for 2010-2016 in the new, April Elliott Wave Theorist. Get it here.

Vadim Pokhlebkin joined Robert Prechter's Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor's in Business from Bryan College, where he got his first introduction to the ideas of free market and investors' irrational collective behavior. Vadim's articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people's collective investment decisions.

Ed. note - I am an EWI subscriber and affiliate - I highly recommend their work.

Contrary Investing Weekly Wrap: Fear is Dead; Delinquencies Skyrocket; Marc Faber - and more!

No Fear, Again: Market Participants Are Opting For Extra Yield, Risk Be Damned

Last week, a buddy from college sends me an email:

"Hey, I got a little bit of cash sitting around, earning next to nothing in a savings account. Anything you'd recommend to get this cash working for me?"

"Not really - everything looks pricey right now...hey, does that mean you paid off your law school loans?" I asked.

"Actually no," he informed me.

I suggested he may want to work down the debt first, no matter how low the interest rate.

Meanwhile, California pension funds are still counting on a cool 8+% annual return to deliver on existing obligations - based on historical returns, of course, which only includes the greatest bull market of several generations.

Anyone want to take the other side of that bet?

Not to be outdone, junk bond funds are back in vogue once again. And of course, the crappiest quality bonds are the hottest!

Chart courtesy of EconomPic Data.

It's hard to believe that this time last year, we were talking about how Return OF Capital was the new Return On Capital!

So is everything rosy again, or is this "reach for extra yield" mentality exactly what a bear market bounce is supposed to engender during it's final phases? My bet is on the latter, but in any case, we should find out soon!

Nothing To See Here - VIX Hits 18-Month Low

Volatility on the S&P is nowhere to be seen these days - perhaps the market crash was merely a figment of our imaginations!

The VIX is low, and it continues to head lower.

(Source: Yahoo Finance)

As you can see from our experience in 2008, when the VIX breaks out, it breaks out in a big way. So a breakout on the VIX would be a good cue for us to start slamming the PANIC button as hard as humanly possible.

But for now, all is calm in the markets, as February's drop now looks like a pebble tossed in the pond in hindsight.

The VIX could continue to head lower - who knows - but one would have to expect a spike in our future again sooner rather than later.

Scary Chart of Delinquency Rates Skyrocketing

Can you spot the trend?

Chart courtesy of http://www.calculatedriskblog.com/

Hat tip to friend, reader, and monetary expert Dave for sending this gem along.

For further reading on the real estate trainwreck, check out this interview with real estate entrepreneur and guru Andy Miller.

The Hidden, Historic Bubble That Could Burst Any Day

Of course we're talking about...

...all at once now...

Muni bonds!

Yay! Of course, municipalities far and wide have no way to pay back their increasing deficits amidst falling tax revenues.

Of course you knew this already, being an astute reader and no doubt a contrarian thinker. But the mainstream press is even starting to catch on.

The Contra Costa Times reports:

Declining income from property, sales and other taxes coupled with growing pension obligation debts and the residual effects of the financial meltdown are inflating a dangerous bubble in the $3 trillion to $4 trillion public bond financing market.

If the bubble bursts, agencies will be unable to borrow, and would cancel or postpone public projects such as school construction or building roads and highways. At worst, governments could default and upend the historically safe municipal bond market.

"This is the most serious municipal debt crisis in U.S. history, including the Depression," said Denver-based attorney Jeff Cohen, who represents bond issuers and buyers. "Arizona has huge problems. So do Nevada, Illinois, New York and New Jersey. And California has the same credit rating as Kazakhstan."

Small to mid-size public agencies, in particular, have been hit hard, said Cathy Spain, director of the Center for Enterprise Programs at the National League of Cities.

Not only has public agencies' income dwindled, but they can't even buy the bond insurance that would lower their borrowing costs. Most of the bond insurance companies, who participated in the mortgage-backed securities shenanigans, spiraled out of business during the bank meltdown.

Get your popcorn ready - this should be a doozy!

Also check out Robert Prechter's thoughts on why you should run, not walk, from these "safe" muni bonds.

Why Marc Faber Is Predicting A Large Correction Right About...Now

About a month ago, Marc Faber told Bloomberg that we could easily see a correction of 20% if the S&P topped 1150 and approached 1200.

Well, it seems like we're just about there, so we'll see how Faber's near term musings fare in the weeks ahead.

You can check out a video of Faber's Bloomberg interview here.

Some other thoughts from Faber:

• He thinks the Euro is very oversold, and can rally to 1.40 before going lower

• Doesn't see anything much good about the Euro, or the Dollar, for that matter

• Debt monetization is inevitable in the long run

• He likes precious metals and Asian currencies - says "most currencies are sick"

• Better to be in stocks than bonds over the next few years, because he expects increasing inflation

Faber's book Tomorrow's Gold is excellent by the way - if you haven't read it, and you are a Faber fan, I'd definitely recommend you pick up a copy.

Interestingly Faber was a deflationist when he wrote the book almost 10 years ago, and has since flipped to the inflation camp, because he believes that sovereign printing presses will overwhelm broader deflationary forces.

Further reading: Why Marc Faber sees no way around US inflation.

A Few More Links, In Case You Missed Them

• Sir John Templeton's Final Memo: We're Screwed

• How to Answer Your Census, Christopher Walken Style - Hilarious Video

• Robert Prechter's Deflation Primer - What You Should Know

My Current Positions and Market Outlook

The trend of all markets still (yes, still) appears to be up, but the risk appears to be predominantly to the downside. The only trend that appears to have changed for certain is that of the dollar, which is currently taking a breather after a multi-month rally.

The US dollar's trend is officially UP. It's well above it's 200-day moving average.

(Chart courtesy of StockCharts.com)

If the dollar is indeed the linchpin of the financial equation, then we'd expect the other markets to roll over one-by-one in turn here. We shall see if things play out this way.

(PS - Here's why I concur with folks who believe the dollar is the linchpin of the global financial markets).

I am still in wait and see mode, with no long or short futures positions.

Have a great week in the markets!

A Deflation Primer: Guru Robert Prechter Explains the Basics That You Must Know

Regular readers know that while we are more sympathetic to the deflation argument, at least in the near term, we keep our ears open to the inflation camp as well. And that's not hard to do, as some inflation believers become quite hostile at the mere muttering of deflation!

For my money, the guy with the strongest argument still is Mr. Deflation himself, Robert Prechter. In this guest piece, Bob eloquently explains what you need to know about deflation, and why the Fed, contrary to popular opinion, is actually powerless to stop it...

***

Surviving Deflation: First, Understand It

Deflation is more than just "falling prices."

By Robert Prechter

The following article is an excerpt from Elliott Wave International's free Club EWI resource, "The Guide to Understanding Deflation. Robert Prechter's Most Important Writings on Deflation."

The Primary Precondition of Deflation

Deflation requires a precondition: a major societal buildup in the extension of credit. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way: "In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following: (a) All were set off by a deflation of excess credit. This was the one factor in common."

"The Fed Will Stop Deflation"

I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn.

Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can’t afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars -- at best -- returns to the level it was before the program began.

The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone’s delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit. Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers’ windows, but then it ends. Nobody wants any more credit. They don’t care if it’s free. They can’t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can’t afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit -- at best -- returns to the level it was before the program began.

Jaguars, anyone?

***

Read the rest of this important 63-page deflation study now, free! Here's what you'll learn:

• What Triggers the Change to Deflation
• Why Deflationary Crashes and Depressions Go Together
• Financial Values Can Disappear
• Deflation is a Global Story
• What Makes Deflation Likely Today?
• How Big a Deflation?
• More

Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

Ed. note: I am a paid-up and satisfied EWI subscriber and affiliate.

Why the Markets Could All Crash - Soon!

Who in their right mind

Would want to be long right now?

Get out or get short!

Why the Markets Could All Crash - Soon

Investing is a largely probabilistic endeavor. It's nearly impossible to know exactly how the future will unfold, so instead we play the probabilities, in an effort to weigh the risk versus potential reward of a position.

And you ALWAYS have a position, whether you like it or not. All in cash? Well, that's a position too. There's nowhere to run, nowhere to hide.

Today these words hold more meaning than anytime since the Great Depression, as we sit on the precipice of perhaps an even Greater Depression. Will the government be able to inflate away its debt (and your savings) - or, will deflation exact a measure of ironic revenge on the Keynsians once and for all?

Weighing the risk/reward to the market at this point, I don't see much except for downside. I believe the trend turned down a few weeks ago, and that this has merely been a countertrend rally, a correction, within a larger move downwards.

If that hypothesis is correct, then we should see a sharp move down in the next week or two. If we see new highs, then I'm wrong.

But I think that's a low probability, given that we're rallying on low volume days, and dropping on higher volume days. This rally from last March's lows appears to be, finally, running out of steam.

Of course the market is always the final arbiter. But if I were a betting man - wait, I AM a betting man! And I'm betting on a decline real soon.

Bob Prechter: "Quite Sure" March Lows Will Break, Deflation Taking Hold

One guy not impressed by the S&P's resilience is "Mr. Deflation" Bob Prechter, who accurately called the S&P's rally above 1000 when things were looking bleakest last February, just before the markets actually bottomed.

What's Prechter got to say now? Here's a short bit he did with the guys at Yahoo Tech Ticker, where he talks about the latest inflation numbers, or lack thereof, among other cheery things:

More from Prechter: How to Act Contrary to "Market Herding"

Hat tip to good friend and occasional guest author JL for the heads up on the Prechter interview!

Everyone Hates the Euro!

A few months ago, everyone hated the dollar. Now, everyone hates the Euro!

Well, you can't blame either sentiment - both currencies are indeed "circling the bowl", albeit at different rates.

About a month ago I thought the Euro was a good short candidate, citing that there was not much attractive about it. I probably wouldn't initiate a new short position today though - it's been getting absolutely pounded, and everyone is bearish on it.

It could go down further from here, but I think the easy money has been made, at least in the short term. We'll sit back and let it correct up.

I am short the Euro via the EUO ETF, and I'll probably hand onto that, as it's more of a medium term position. But I'm not buying more right now - sentiment is just too negative.

2010 has been a good year to be short the Euro, thus far - chart of EUO, the short Euro ETF.

(Source: Yahoo finance)

Dr. Copper's Looking Green in the Face

Copper could be heading for a catastrophic collapse, writes resource expert Matt Badiali for Growth Stock Wire:

It's not often a major stock or commodity gets set up for "catastrophe," but when it does, I stand up and take note.

Most investors and traders aren't much interested in catastrophe. They won't short a vulnerable asset when a crisis is looming... and they won't buy it just after the crisis... when the asset is very cheap.

This is a shame, but it's why most people lose in the stock and commodity markets. And it's why they're going to miss a big opportunity coming to the copper market soon. Here's the story...

Put simply, speculators, rather than real demand, account for a great deal of the 120% rally in copper prices over the past 12 months. Many of those "hoarders" are in the People's Republic of China.

You can read the rest of Matt's article here.

Matt's colleague, astute trader Brian Hunt, also noticed something amiss with copper's price action - a potential 1-2-3 trend change:

And don't forget to watch copper as a "must hold" asset for the inflationary bullish case. Copper is an essential ingredient in cars, refrigerators, power lines, and electronics. However the economy is performing – good, bad, ugly – you'll see it reflected in copper prices. As you can see from the chart below, copper suffered a major decline in late January/early February (1). It has since made an effort to climb back to its old high, which failed (2).

We now have a situation where copper is set up for a classic Vic Sperandeo 1-2-3 trend change, just like the euro experienced in December. If copper turns lower – and blows through its recent low around $2.85 per pound (3) – the E-Z-Credit stimulus boom is withering.

Vic Sperandeo describes the 1-2-3 trend change in his excellent book Trader Vic - which was actually recommended to me by Brian. It's a great read if you love trading and the markets.

Improvements to the Blog - On the Way!

I've been sick of the Blogger platform for some time, and finally have decided to get things moved over to Wordpress. Blogger hasn't improved one bit since I started using it over 4 years ago - unfortunately, typical for a Google acquisition.

Stay tuned for details. Also, feedback and suggestions are also very welcome (you can email me at brett(at)commoditybullmarket(dot)com).

My Trading Activity - Still Short the S&P (Twice)

Still short baby - I have to admit, I didn't think we'd see the S&P north of 1100 again, nor did I think that second short position would ever be underwater.

It was tempting to cover one with the S&P at 1050, but I still believe the overall trend has changed - so in a bear market, you want to short the rallies, not cover on the drops.

For what it's worth, I think this is an excellent time to get short. I could be wrong - certainly wouldn't be the first time - but the risk/reward of a short position here appears very attractive to me.

Still double short the S&P.

How much longer can the S&P continue to defy gravity?

(Source: Yahoo finance)

Have a great rest of the week in the markets! Comments are always welcome and very much appreciated.