Don't get too comfortable with the relatively flat markets of 2011, there's a big storm coming our way. This is the view of Robert Prechter, founder and president of Elliott Wave International. In the attached video Prechter compares the current phase of the market to the late stages of the 1929 - 1933 period in U.S. history; a time marked by extreme volatility eventually ending in tears.
"One of the things that happened in 1929 was that a consortium of the biggest banks in the country tried to stop the market from going down," notes Prechter. Those banks failed of course, just as Prechter says they did when the Central Banks tried to prevent the coming financial meltdown in 2008 by offering essentially free credit.
The timing is only different, he says, because "banks these days are much bigger than they were in 1929." In the 20's institutions were reliant on client money to lead their bailout attempts. Today Central Banks have the ability to call on future, often overstated, tax revenues and are unencumbered by anything such as a gold standard when attempting to ward off the human desire to hide under the covers, financially speaking.
Prechter also draws parallels to April of 1930, 1937, and other periods in which relatively brief recoveries dissolved. Pick a tool, any tool, and Prechter says it suggests a stock market going lower. "Patterns, sentiment indicators, or momentum are all saying the same thing: This is a bear market rally."
According to Prechter, not all the Central Banks in the world trump international trends towards a cautious, negative mood already impacting all things financial. This trend, the inverse of those giddy days of the 1990's when all things seemed possible (even Internet stocks and the Euro!), causes predictable behaviors in the masses. They tend to sell stocks, stop spending, and start revolting against current leadership; all of which should sound familiar to those who read the newspaper.
It's an environment confounding to bulls and bears alike. At the beginning of 2011, Prechter notes, the bulls were betting on a sharp recovery in stocks and "got hurt quite a bit." Commodities were a bad bet, hurting "hyper-inflationist" bears.
"Both camps didn't want bonds and bonds are the only things that had a great year, 18% plus total return on the year so far," Prechter notes. He thinks bonds fit the "deflationary scenario" that will hit us "in the next four or five years." At that point, he says we'll wipe the slate clean, get rid of the bad debt, and start all over again.
In other words, if you don't identify with the anger being expressed around the world, check back in with us half-a-decade from now when we're on the other side of a complete and utter meltdown. Prechter is willing to bet you'll be part of those identifying with the disenfranchised by then.
- Robert Prechter