U.S. Economy Is Struggling - But Not Why You Think

Pete Kendall, the co-editor of Elliott Wave International's monthly Financial Forecast (new, August issue goes live this Friday – Ed.), tells you that although stocks recently hit new all-time highs, there is a great slackening in the economy – but not for the reasons you commonly hear about in the news.

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[Editor's note: A text version of the interview is below.]

Alexandra Lienhard: I'm Alexandra Lienhard with ElliottWaveTV and today I'm talking with Peter Kendall, Pete is the co-editor of our Financial Forecast newsletter. Pete, every month you [and co-editor Steve Hochberg] follow the U.S. economy and many more economies in your newsletter, but I'd like to start today and talk a little bit about how the U.S. economy is looking. Can you tell me about that?

Peter Kendall: Sure, first of all, hello. Thank you for coming here and being with us today. The U.S. economy – there's a very important chapter in the book that many of our subscribers have already read -- Conquer the Crash.. It's the first chapter, where Bob [Prechter] makes the case for this being a historic fifth wave – and last wave -- in the stock market’s rally going back decades, and therefore it's less robust fundamentally than wave 3, certainly, in the 1960s and 70s. Now come forward from when Conquer the Crash was first published, that was a full 10 years ago, at least. And we see that the economy is struggling even more, even though we're in what we call a fifth of a fifth, the very last portion of the rally. You can see just how this final thrust in stocks is not generating the kind of economic fundamentals that wave 3 did, in the end of 2000.

We show a chart [in a recent issue of the Financial Forecast], which I think we can put up here. You'll notice that even as we crest past to new all time highs, just this last month, the fundamentals, the GDP, have been racing downward. This is a 10-year rate of change in the U.S. GDP and it's really racing towards the zero line at this point in time, so it shows that things are really slackening. There's a great slackening in the economy and it has very deep meaning.

Alexandra: That's a very long-term cycle that most people might not be aware of. Now you mentioned the economy is still struggling. Is the current environment that we're in an extension of the great recession of 2008?

Peter: Well what we have is kind of a kickoff. I was recently noticing that in the movie Frankenstein, when the monster comes alive, Frankenstein says, seven different times, 'It's alive!' And there were two other charts that we showed in the latest Financial Forecast issue. One is corporate investments, and its long-term chart shows you is that there was a big recession during which corporate investments really crashed to a level that has never been seen – at least not since the Great Depression. That shows up on the chart. And that was, we think, a kickoff to what we can expect in the next recession, which should rate as a depression.

Alexandra: And one of your strongest arguments is that deflation is growing around the world. Is this still the case, and what evidence do you have for that?

Peter: We think it is the case. Every month, we have more and more to work with. My favorite headline – which may or may not appear in the next issue – it's basically, 'whew, that was a close one' and it relates to deflation in Mongolia.

Alexandra: I like that insider preview!

Peter: Mongolia, really? They have deflation even in Mongolia? It just tells you that there's a great deal of breadth to this. While people are going to consistently say, 'Well it's over, that was a close one.' We're just steadily marching to it on a long-term basis. We should have outright deflation possibly by the end of the year.

Alexandra: And what about the U.S.? Are you seeing any signs of deflation in the United States?

Peter: You have to tune into the next issue!

Alexandra: A cliffhanger! Thanks, Pete. I appreciate you talking today.

Peter: Thanks for having me.

To learn more about Peter Kendall's forecasts and analysis, click here.