Deflation | timiacono.com

Broken Clock to be Right Again?

In this item at MarketWatch, Peter Brimelow brings us details of the latest investment performance of the folks at Elliott Wave, a group that comes about as close as you can get to being perma-bears and, of course, perma-deflationists.

One bear feeling good about deflation call

An investment letter that dodged the crash of 2008 is a current top-performer. It’s feeling good about its long-standing deflation prediction.

The Elliott Wave Financial Forecaster, edited by Steve Hochberg and Pete Kendall, is fifth of just nineteen of the 180-plus investment letters monitored by the Hulbert Financial Digest to have beaten the market in 2011 through September—up 5% by HFD count versus negative 9.86% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

This is, frankly, pretty unusual. EWFF has been relentlessly bearish for so long that many investors think it was always so, and any favorable mention gets vitriolic response.

Needless to say, 2008 was a great year for EWFF, especially because it also made one of its brief excursions into bullishness in time to catch the subsequent bounce. See April 2 column.

You can still see this in HFD’s monitoring: over the past five years, EWFF was up an annualized 0.7% versus negative 0.75% annualized for the total return Wilshire 5000.

But further out, the cost of prolonged bearishness has been horrific. Over the past fifteen years, for example, EWFF is down negative 3.43% annualized versus a gain of 5.4% annualized for the total return Wilshire 5000. It’s worth noting, however, that EWFF closes the gap significantly on a risk-adjusted basis.

Still, in the face of the 2008 crash, and the savage slump this summer, few investors can wholly repress the fear that, just maybe, the Elliott bears might ultimately be vindicated.

Well, not as long as there are people like Ben Bernanke with his hand on the printing press… As noted here on a number of occasions before, I’ve long thought that Elliot Wave Theory is nonsense and, basically, lost all respect for Bob Prechter when he predicted that the gold price would never surpass $400 an ounce about a decade ago.

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Once again, it’s time for those who dared to prognosticate a year ago to look back on what they were thinking at the time and, in many cases (like mine), take their lumps. Recall that over at the old blog in Predictions for 2010 I went out on a limb and made some very specific predictions about what we’d see in 2010. As it turns out, that specificity wasn’t such a good idea. It seems that the results were much better in previous years when the accuracy of the predictions was a little more open to interpretation. Oh well, live and learn.

For anyone who might be interested, here’s a recap of the last four years of annual prediction reviews:

As always, these are interesting to look back upon if for no other reason than to see where we’ve been. It’s funny to think about predicting the housing bubble would not pop in 2006 and that it would in 2007 (as measured by home price declines). One thing is certain, it did pop and has stayed popped despite the best efforts of the government and the Federal Reserve to re-inflate it.

This year, it looks like the Fed ruined many of my predictions at the Jackson Hole conference over the summer when they started talking about printing money and the prices of just about everything that doesn’t show up in the consumer price index began to rise.

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Consumer Prices – Housing Gets a Zero

The Labor Department reported that consumer prices rose 0.1 percent in November following an increase of 0.2 percent in October and, on a year-over-year basis, inflation is now running at a modest 1.1 percent.

It’s pretty amazing when you think about it and, truth be told, the best of all possible scenarios for the Federal Reserve who, yesterday, affirmed its plans to print upwards of another $1 trillion to buy U.S. debt through the middle of next year. You see, commodity prices are up more than 20 percent on average this year  – energy costs are more than 10 percent higher, corn and wheat are both up 42 percent, and soybeans are up 24 percent – yet, the consumer price index is only one percent higher.

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Chris Martenson was on tech ticker the other day and, when asked whether we’ll see in-flation or de-flation in the period ahead he replies with a resounding “Yes”.

Says Martenson: “The Continuous Commodity Index is absolutely screaming inflation at this point in time over the past eight or nine year timeframe, but, at the same time, we’re seeing houses decline in price, we’re seeing a number of other things – asset prices – move lower, which, I think is what the Fed is most concerned about at this point in time. So, I think we’re going to see both”. He’s also convinced that a double-dip recession is imminent.

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