I don’t know about you, but I’m paying more for my gasoline and medical expenses, and it seems like my neighbor’s house is selling for more than he paid for it a few years ago. What’s more, it’s no secret that interest rates will soon be going up. Add all that to increasing commodity prices around the world, and . . . well, if it looks like a duck, walks like a duck and quacks like a duck, you have to surmise that there may be something to this idea of inflation.

However, market contrarian Robert Prechtor and financial forecaster Peter Kendall cast another light on things. They see an indicator of deflation, not inflation, just around the corner.
The picture they paint is different from the runaway inflation we faced in the 1970s, when the prices of hard assets (precious metals, real estate) went opposite that of the stock and bond markets, a typical response to inflationary pressures. Today, commodity prices and financial asset prices seem to be moving together.

Prechtor and Kendall attribute this to the expansion of liquidity (easy money, or more money in circulation). They believe expanded liquidity has driven up the prices of all investment classes. When liquidity contracts, they believe the prices of all asset classes will fall together. At that point, they predict the Bull will go to its knees as psychology changes from expansive to defensive.

To buttress their theory, they cite historical examples of similar price movements that were followed by severe deflation. Going back to the 1830s, they point out a liquidity spike that preceded a subsequent depression. The Great Depression followed a soaring stock market and an expansion in credit.

Specifically, in 1837, an unexpected drop in cotton prices began a decline that took everything with it. Real estate prices fell and the stock market dropped off the table. Prechtor and Kendall claim the same scenario is set to play itself out today. If you believe them, you will be following their advice to hoard your cash along with a generous helping of U.S. Treasuries.

Several years ago, I heard Prechtor debate Harry Dent, the demographic trend-following Bull author of The Great Boom Ahead. While their debate showed some similarities (e.g., both use the Elliott Wave as a basis for long-term trend forecasting), there were many differences in their views.

One major difference is that Prechtor tends to rely only on historical data and pattern analysis for his forecasts. Dent combines a good deal more economic and fundamental analysis, taking into account demographics and consumer spending data to make his case. As a result, his analysis tends to relate more to current situations, current policies, and current events, while Prechtor is bound to and by history.

The chilling part of their debate, however, was that both agreed we are in for a wicked downturn in the financial markets, equal to what we experienced during the Great Depression. The only difference between their forecasts is that of timing. Prechtor sees this decline coming any day—and has been saying so since the early 1980s. Dent sees it coming sometime in the second decade of this century, following a strong growth in the markets.

Neither forecast is good news. Take your pick!