30/06/2010 – 20 Questions with Robert Prechter: Signs Point to Deflation

Jim Puplava: Bob, I want to pick up from last
September. Since then we’ve had several quarters of positive
economic growth. Asset classes rose substantially, CPI turned
positive, gold has hit a new record, oil is close to $80 a barrel.
I guess a lot of our listeners would like to know, have these
events altered your views on deflation?

Robert Prechter: No, because we forecasted
these events, and we forecasted them at the bottom in March and
April of 2009. On February 23 in the Elliott Wave Theorist, I
said that we were almost at the bottom; that ideally the S&P
should get down in the 600s before turning up; and that the
Dow was going to rally from that low up to about 10,000. We
put that target out a few days after the low. The main thing
we said at the time was that it was going to be only a partial
retracement, in other words a bear market rally. By the end
of it, we said people would be bullish on the economy, there
would be positive economic numbers, investors would think we
have made the turn, the Fed would take credit for having saved
the financial system, and there would be optimism across the
board. All of this has happened. And going into April 2010,
few people in the fundamentalist or technical camp were looking
for a downturn.

The final thing I said was that Obama’s popularity would rise
into that peak, and on that one I was wrong. His ratings couldn’t
even bounce during that period, which I found very surprising.
But both Obama and George Bush’s popularity trends followed
the real value of stocks, not the inflated dollar price of
the stock market, which I find interesting.

As far as inflation and deflation go, we had deflation during
the down cycle in 2008. Commodities fell hard, the stock market
fell hard and real estate fell hard. But the recovery that we
were looking for in the first quarter of 2009 was expected to
be a reflationary, and it was. You saw a decline in credit spreads.
You saw a rise from the lows in commodity prices and stock prices.
All of that is perfectly normal. These are just waves ebbing
and flowing. But the long-term trend is still down, and as this
cycle matures we are going to see more and more evidence of deflation.

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