Robert Prechter’s Convictions have Austrian Undertones
The investment community has become polarized into two mutually antagonistic groups; the inflation people and the deflation people. Each group has its fair share of prejudices, and such prejudices are often assumed to be held by any ‘inflationist’ or ‘deflationist’.
Here, I put forward the contention that – as a contrarian investor – one shouldn’t be ‘loyal’ to either side. Further, in defiance of the perception of an antagonistic stand-off between the uber-deflationists (like Robert Prechter) and Austrian hyperinflationists, I’ll outline the links between Austrian economics and Robert Prechter’s convictions.
The Contrarian Strategy of Straddling ‘Stand-off’ Opinions:
When considering the dogmatism and shifting popularity in the inflation vs deflation debate, an insight from The Art of Contrary Thinking (one of my favorites and it’s very cheap), comes to mind:
The starting point for contrary thinking is the popular thought or opinion of the moment. However, if popular opinions swing about, it follows that we have to go off on another track for contrary calculations. Consistency is not possible when opinons and public whims change with every fresh news or trial ballon.
Let me illustrate with a communication from a reader. He argues for a positive contrary opinion at all times, whereas it may be necessary to straddle when opinions are a stand-off. At such times the situation is a “stalemate”.
I think that the above is entirely relevant to the current environment – arguably, the consensus opinion has shifted from extreme deflation fears during the 2008 collapse, to inflation worries by April 2010, to deflation fears again in June 2010 and now back up to inflation worries again here in April 2011. This is why I try to measure these grappling opinions on a weekly basis using google insights data. Moreover, this is why I’m always looking to integrate assorted convictions from both the inflation and deflation sides of the debate.
Robert Prechter’s Views are those of a Traditional Austrian Economist:
At elliottwave.com (which I strongly recommend), Robert Prechter documents his insights on markets in a very easy-to-understand way – but that shouldn’t take away from the depth and independence of what he says. It would seem that people grossly underestimate the intellectual merit of his work (just look at the way people slander him on youtube). Taking a closer look at his work reveals that he shares the convictions of a traditional Austrian economist. [Of course, this won’t be news for some – after all, he’s even an author at mises.org.]
His views on money and credit are often misunderstood. In truth, he regards (physical) Federal Reserve Notes and Fed Reserves as ‘money’, and all IOU claims upon such money as ‘credit’. In Austrian terms, we could say that he makes a distinction between ‘money proper’ and fiduciary media. With this in mind, we should note that he’s calling for a ‘credit collapse’ (i.e. an ‘IOU Money’ collapse or a Fiduciary media collapse). Such a contention does not grate against the traditional Austrian view that all booms must come to an end. As Ludwig von Mises put it in Human Action:
The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Indeed, Prechter even quoted this very passage in Conquer the Crash. In the same way as Mises, he separates money proper (FRNs & Fed Reserves) to unbacked claims on money (demand deposits – ‘IOU Money’). His contention is ‘merely’ that the inevitable is inevitable: that those claims on money (‘IOU Money’), will eventually be retired/destroyed/defaulted upon.
As to the timing, he has an interesting argument. In this free ebook, he likens the current monetary system to a world where the government are intent on producing enormous quantities of Jaguar cars. Basically, he says that eventually – even if Jaguars are being given away for ‘free’ – people will begin to refuse them. That is, a super-abundance of Jaguars inevitably pushes their value to zero. He contends that after 100 years of Federal Reserve-induced credit expansion, the price of credit is down to zero and people have had enough – the economy has reached its maximum capacity for leverage.
Perhaps because of the simplified clarity of Robert Prechter’s work, he has become subject to ridicule – particularly from the ‘inflationists’. In contrary fashion, I reject this mode of thinking – we should seek to integrate and straddle the convictions of the inflation and deflation people. Dogmatism is never an apt form of thinking when it comes to investments.
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012