Robert R. Prechter Jr., the founder of Elliott Wave International spoke on CNBC in the last week of January where he discussed his view about extreme optimism and valuations in the market concluding that the best investments now are in cash equivalent investments and the U.S. dollar.

During the January 26, 2010 interview Prechter went on to state that gold will also crash in the upcoming sell off and it is likely that real estate, commodities and stocks will all drop in the near future.  In general he predicts a collapse in most all risk assets.  Of course, this makes bank CD investments, bank savings accounts and bank money market accounts attractive investment choices. does not endorse Mr. Prechter’s view but since he has made these comments the value of the dollar has risen and the stock market has been in a decline.  The Obama debt that keeps growing and growing combined with the fears last week over European debt markets, especially the Greece budget fiasco, gives more credence to investing with an eye towards concern for the downside.

Prechter has been a bear on the markets for some time and may have lost some credibility.  However, his assessment regarding extreme optimism which was clearly in the air with most market gurus in the past few months seems worthy of attention.  Prechter’s assessment of extreme optimism, extreme valuation, low dividend yields and high P/Es does not seem far off the mark.

The market historically shivered and ducked for cover when budget deficits were half or more than what we are looking at currently.  And that is just the federal budget; the majority of the states are in horrendous financial shape as it appears they have refused to make the necessary cut backs required during a recession of this magnitude.  Personally, I believe strongly in Keynesian theory regarding deficit spending during periods of significant economic contractions. 

The problem currently is that the state and fed spending is not Keynesian, long term counter cycle investments.  Extending unemployment, sending money to the states, increasing troops in Afghanistan, heath care, have nothing to do with long term employment projects.  Nuclear power plants … about a 10 year interest free loan to Exelon and let a private enterprise build 5 new nuclear power plants.  10 year project, 1000’s of jobs, produces a commodity cheaply and cleanly for 30+ years, that’s an investment.

Chia debt Obama is another issue for another day. 

Some companies are turning far more cash in the past few quarters than they had in the previous year but how much is based on consumer spending in the U.S.  Unofficially, many of the CEOs on CNBC that produce goods for the U.S market speak of little to no growth in the domestic market.  Even John Chambers of Cisco which gave out extreme optimistic guidance spoke more of international demand. 

Whether Prechter rises once again or not with his bearish forecast, there is ample data to support caution and a greater allocation of investment funds into cash equivalent assets such as certificates of deposits and money market accounts.

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