Expert Commentary

First Waves of a New Bear Market

The Beginning of Deflation

Good day to you. Murray Gunn here, and today I am looking at deflation.

The decline in asset markets that Elliott Wave International has been forecasting has begun in a most dramatic fashion with stock markets around the globe plummeting over a very short time scale. Some might call it a crash, others a panic. We call it the first waves of a new bear market that should take the major stock indices much lower in coming months. It's not just stocks, though. Oil, metals, junk bonds and muni bonds are all declining, too.

This asset-price deflation is a sure sign that a contraction in the economy is coming and will inevitably lead to a period of debt reduction -- certainly in the private sector -- and that is what is known as Debt-Deflation.

These periods have been associated with very difficult economic periods, and this time should be no different.

Debt-Deflation often coincides with falling consumer prices, too, and this chart shows a measure of what people expect consumer price inflation to be.

US Price Inflation Expectations

When it is below zero, as it was in 2008, people expect declining consumer prices.

Notice that even when it recovered after that, there was still a downward bias to inflation expectations.

This downward bias has now given way to a steep fall, and this means that people are expecting consumer price inflation to slow down sharply.

Our fractal-based model expects the economy to go into a long slump, and so we anticipate that deflation will start to become the dominant theme in the markets.

Stay tuned to EWI and to help you through.