Do stocks still face deflationary collapse?

There is a saying in the investment world; stock markets have predicted nine out of the last five recessions. Something similar is true of depressions and Mr. Prechter. Let’s just go by facts. 

Drops in GDP, employment levels and trade are serious but no worse than any of the previous recessions. I lost my last paying job in the last recession in 1990 and I can definitely tell you that this one is not worse than the 90, 80 or even the 70’s recession. In the thirties, unemployment went to 20% and GDP dropped by 10% per year. Sure, we could get there but that is assuming all this money being thrown at the problem worldwide will not work. I doubt that. 

But Stock markets don’t follow the economy. We will have ups and downs as he suggests. But does the SP500 go to 333, or the DOW to 4000? That would mean earnings of the 500 largest companies will drop by 50%, which means all manufacturing, computer, software, oil and gas and agriculture will drop by 50%.  I doubt that too.

I do agree that government bonds are overpriced and stocks have become quite risky for now. I think that most US companies will still be around except GM and Chrysler although even they will survive in a different form. This tells me that we should be okay with good quality corporate bonds and preferred shares which pay good dividends.

 

Debt is a problem and toxic debt at the banks and mortgages which may still be in trouble will keep the economies in a soft mode for some time but does that mean people who are making a lot of money (per capita 40K +) will stop buying iPhones and plasma tv’s? Problem loans will have trouble for the banks again and they will react the same way as they did last six months or so. And yes, people will dump stocks but end of the world? Not really…

This is a probability game, so there is always a chance that every one panics and does the wrong thing with a depression to follow. Chance is less than 5% in my opinion. This is also known as the Black Swan event. So keep some cash handy to buy things if he does turn out to be right.  I think chances are most who follow Prechter will end up regretting having missed one of the better opportunities’ to buy. Gloom and doom sells newspapers and letters.

Another saying in my world; even a broken clock strokes true twice a day.

Here's the original link if you want to verify this article:
http://uk.reuters.com/article/companyNewsMolt/idUKTRE54D4IL20090514

Stocks still face deflationary collapse: Prechter