Any economist that says we are in a period of disinflation has zero credibility, in my opinion.
Any market pundit that projects higher U.S. inflation in 2010 and a significant decrease in the unemployment rate has no idea what they are talking about, in my opinion.
Any U.S. politician that says the stimulus programs provided a firm support for economic growth, or that the "Cash for Clunkers" program boosted consumer demand is not someone worth listening to, in my opinion.
Finally, anyone who did not read Robert Prechter's Conquer the Crash, or doesn't subscribe to Elliott Wave International's services (and those of a small group of other analysts) was likely surprised by what happened on October 1, when the U.S. Treasuries zoomed upward as the DJIA saw its first material decline in six months. In percentage terms, the Dow's decline was insignificant -- yet bonds had one of their best single-day rallies since the summer low. Why is this important? Because it shows that people don't trust this market and are ready to run for the hills at the first sign of trouble.
The equity rally since March was based on stock undervaluations and hope. We at EWI also know that deflation will likely continue to exact its toll over the coming months as money supply and credit keep evaporating (along with hope).
Where can inflation even come from? Wage and pricing power are non-existent; the U.S. Treasury can print all the cash it wants, and the Fed can create additional reserves ad nauseum out of thin air, but the banks are not lending against devalued assets, and nobody wants to borrow to expand or create a business in this environment! That's exactly what Bob Prechter predicted in Conquer the Crash (Ch. 13; quote):
A defensive credit market can scuttle the Fed’s efforts to get lenders and borrowers to agree to transact at all, much less at some desired target rate. If people and corporations are unwilling to borrow or unable to finance debt, and if banks and investors are disinclined to lend, central banks cannot force them to do so. During deflation, they cannot even induce them to do so with a zero interest rate.
Sound familiar? This is not an output gap or the topping of an inventory cycle -- this is deflation, deleveraging of credit, a psychological phenomenon. This is a deep recession ("The Great Recession," as they call it now) with millions of Americans having lost their jobs, millions of homes for sale (at much reduced prices), millions of credit cards and mortgages in delinquency, tens of millions of square footage of commercial real estate standing empty, tens of millions of square footage of warehousing hollow, and a government fiscal approach that provides disincentives to take risk, create businesses and hire workers.
This is a false recovery. Round two of deflation is heading this way, and another crisis is coming. Elliott wave counts in the DJIA's and Treasury bonds' charts tell us that -- and have been, for some time now.
Bill Fox is the editor of EWI's intensive Interest Rates Specialty Service. Bill has been involved in the markets since graduating in 1988 from Vanderbilt University. He joined EWI in 1994; most of his subscribers are professional traders spread around the globe.
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