Given that an inflationary trend had been dominant for three decades, this was a bold statement indeed. Prechter said it just a few years after President Gerald Ford had encouraged people to wear "WIN" lapel buttons (Whip Inflation Now). Everyone was worried about the high cost of living.

 

The last thing on most economists' minds was disinflation. Yet that is largely what has unfolded in the years since.

 

What led Prechter to forecast disinflation? Here's what he says in the second edition of Conquer the Crash (p. 113):

 

 

The cycle he referred to is the Kondratieff cycle, named after Russian economist Nikolai Kondratieff. In 1925, he proposed that industrial economies follow a recognizable pattern of change in prices and production. Prechter goes on to say that "...this cycle is primarily one of liquidity, not price, so rising and declining trends in prices for money, labor and goods are an effect of the cycle, not a cause."

 

The average Kondratieff cycle is 54 years, so one cannot expect precise timing; yet it remains a useful analytical tool. For example, the Kondratieff cycle has been "spot on" when it comes to forecasting the overall trend of Treasury bond yields.

 

In 1979, the 30-year Treasury yield was around 10% and rising. But as this chart from Prechter's Conquer the Crash indicates, that rising yield trend was bound to reverse:

 

 

When Conquer the Crash first published in 2002, the Treasury bond yield was around 5.5%. While the consensus was that interest rates would rise—either by economic boom or by runaway inflation—Prechter stuck to his argument that disinflation would resolve in deflation, not inflation, and predicted that interest rates on reliable debt would continue to fall. Well, the 30-year Treasury bond yield is around 3% today.

This chart from our own Short Term Update shows you what T-bond yields have done over the past 6 months or so: 

 

A lower yield trend goes hand in glove with disinflation.

 

On the positive side, falling yields mean bond prices rise -- and a broad bond index just recently beat the performance of stocks over the past 30 years: 11.03% vs. 10.98%. An investment strategist told USAToday (1/5), "No one thought the tortoise could catch up, and it just did."

 

If you are wondering what other surprises are ahead for bonds, the economy and stocks, our new, January Elliott Wave Financial Forecast gives you a lot of answers. You get it 100% risk-free.

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