How To Stay Safe in the Current Economic Climate

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How To Stay Safe in the Current Economic Climate

By Susan C. Walker
Fri, 17 Jul 2009 16:15:00 ET

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This week's financial reports from big banks like Goldman Sachs and Bank of America make it seem like all is right in the world again. But waves and cycles of sentiment always sow the seeds of the next downturn during an upswing; likewise, the next upswing during a downturn. Bob Prechter spoke of this very thing when he was interviewed by Barron's Tiernan Ray at the end of May 2009. He even made mention of what was likely to happen as markets turned up, something that is playing out right now. The important point for those who want to survive in the current economic climate is to keep their investments safe. Bob explains how in this excerpt.

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Excerpted from Barron's.com interview, published on May 26, 2009

Q: While the Federal Reserve's FOMC Wednesday [May 20, 2009] said the slump will be worse than originally expected in the next three years, others are convinced that the "less bad" data points could lead to a recovery in the second half of this year.

A: Social actions result from social mood change. When we recognized a temporary low in pessimism in late February/early March, we were able to predict changes that would result: stocks would rally, credit spreads would narrow, housing sales would pick up, and authorities would take bows for effective "liquidity" and "stimulus" programs. If it goes high enough, a consensus will probably develop that the bear market and recession are behind us. Then it will be time for the next wave down.

Q: You've been quoted as suggesting people invest in Treasuries, considering them "safe cash proxies," but you've also said skeptical things about Treasuries given massive borrowing and the threat of deflation. Which is it?

A: It's a matter of short rates versus long. The best investment stance for conservative investors has been simple: safety. My primary recommendation is safe-cash equivalents. This means Treasury bills, Swiss money-market claims, some New Zealand bonds, some gold and some cash. There has been no change there. Cash has been good. Today you can buy twice the house, twice the stock shares and twice the gasoline that you could a short while ago.

But long term, Treasuries are different. After 28 years of rising prices for T-bonds, the Fed announced in December that it would buy them. Part of the downturn in prices relates to an anticipated pick-up in the economy, which should in fact occur for part of this year; part is due to hyperinflation fears, which I think are misplaced; and part is due to early fears of eventual government default, which I think are not misplaced. If government rates go up, bond investors will lose money, while we bill investors will make money, at least until it's time to bail out of government debt entirely.

Q: Your remarks as quoted in the press seem to refer essentially to the U.S. economy. What is your view of the rest of the world's economic prospects?

A: It's a developing global depression. Economies and societies are so closely entwined in the modern world that social mood is much more pervasively shared than it was centuries ago. So the world had a boom together, and it's having a bust together. The canary in the coal mine was Japan, which reached impossible-to-maintain extremes of debt and investment values a decade earlier than other countries did.

Q: So in spite of this market run-up, there's more misery ahead?

A: If you stay safe, it's the opposite.

Where's Safety in a Social Safety Net With Holes?
The personality of a wave 2 rally is a powerful thing: Optimism returns to once-forgotten extremes, sidelined investors are drawn in by lower share prices, and the media happily trumpets the return of the good ole days … then the bottom falls out in a wave 3 "surprise." Not so for Elliott-minded investors aware of the "wave 2 trap." Take a sneak peek inside the 10th anniversary issue >>

Tags: liquidity, stimulus package, U.S. Treasuries, cash

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