A view on the Greater Depression – part 2

By Doug Casey

Prechter buttresses his case for deflation with a chapter on the Kondratieff Wave, a theory put forward in the 1930s by a Russian economist, positing a long wave of expansion and contraction, lasting roughly 54 years. I discuss Kondratieff myself in CI90’s; I won’t go back over it here.

The big question, of course, is: How much faith should one put in mechanistic wave theories? I’m somewhat agnostic, but think there’s a lot to be said for the approach. It helps provide a frame of reference, and a historical overview. It acknowledges the fact that human nature is a constant and that people will always be subject to the foibles of mass psychology.

So, cycles of mania and panic will always repeat – at least about every generation – because everybody has to learn his own lesson. And, of course, the EWT and Kondratieff Wave theories are far from the only cyclical theories with investment implications out there.

I am, for instance, a big proponent of the theory of the business cycle. And long time readers will recall I also did a very favorable review of “The Fourth Turning” in June 1997, which propounds a generational-cyclical theory of history. You may recall that the authors of that were just about spot-on in predicting the Forever War. And they were right, I think, for many of the right reasons.

The bottom line, as far as I’m concerned, is that Prechter (although his method of coming to his conclusion is somewhat different from my own) is absolutely right about what’s in store for us in the years to come: A catastrophic depression, most likely deflationary, possibly followed by hyperinflation. The only question is what you should do to prepare for it – a question he answers in the second half of the book.

What to do?

Stocks, real estate, most bonds and collectibles are a very bad idea in Prechter’s view – I completely agree. He likes cash (T-Bills, deposits in only the safest banks, and actual physical currency) – I completely agree.

Where we differ is gold. He advises having a good position in the metal, but mainly for reasons of security, not profit. He believes that the metals have probably bottomed, but doesn’t see much upside in a deflationary environment, when cash (meaning the dollar) is king.

That’s not because he doesn’t see gold as money – we’re in complete agreement there. And he believes the gold stocks will perform more like stocks than gold – although he doesn’t build much of a case for that view, other than to say they’re great at the top of the cycle when inflation is raging, but that we’re looking at deflation now.

I urge you to read this book. You’ll have read similar things in my books, and in my newsletter. But you need to hear it in a different way, from a different source. I find all too many readers are rather complacent about the potential for a true once-in-a-lifetime economic disaster. They recognize it intellectually, but perhaps out of a natural sense of optimism are hoping we’ll just muddle through. I think this is the time for action, and suggest you panic now, to beat the last-minute rush.

One more note on “Conquer the Crash.” Prechter has assembled scores of some of the best charts I’ve ever seen – and most of them are rare and unusual. Some go back 300 years to illustrate points. Those showing price action of stocks and commodities during past booms and depressions are so good that they alone are worth a lot more than the price of admission.