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In this three part
interview, Elliott Wave International president Robert Prechter discusses
his new book, “Conquer The Crash: How To Survive and Prosper in a
Deflationary Depression.”
During the 1980s,
Bob Prechter won numerous awards for market timing as well as the United
States Trading Championship, culminating in Financial News Network (now
CNBC) granting him the title, "Guru of the Decade." In 1990-1991, he was
elected and served as president of the nation-al Market Technicians
Association in its 21st year.
He has also
published a seminal book on Elliott wave analysis titled, “Elliott Wave
Principle – Key To Market Behavior,” three books on the major
practitioners of wave analysis, and books on his own views in
Prechter's Perspective and At the Crest of the Tidal Wave.
Part 2
Part 1 |
Part 3
To
someone not educated in both monetary trends and the Wave Principle, the
coming of a second Great Depression is an idea that’s very hard to
swallow.
Understandably. Deflation and depression
are exceedingly rare. As I mention in the forward to my new book,
sustained deflation hasn’t occurred for 70 years, and the last one was
so brief that it only lasted 3 years.
During the past two centuries, there have
been just two depressions; one in the nineteenth century, and one in the
twentieth. Most economists now believe that deflation and depression are
utterly impossible in our modern economy, if not ever.
But there’s an enormous wealth of
historical evidence that suggests that this rare event is about to
occur.
What
evidence?
Let me begin by stating an undisputed
fact that every first year economics student learns about stocks: A
stock certificate may have an objective value on one basis or another,
but is still only worth what someone else is willing to pay for it.
When we look at a 100 year chart for the
Dow, we’re not looking at a record of the prosperity of the corporations
involved. We’re looking at an intimate record of what people felt that
stocks were worth. When the Dow crashed in 1929, it wasn’t a reaction to
a sudden drop in corporate profits. That came afterward.
Bear markets are a fear-based mass
psychological phenomenon, which changes the value of the shares.
So how
does that relate to today’s market environment?
It doesn’t matter that today’s Dow index
comprises different companies from those in 1929. Human beings’
hard-wired, cyclical impulses of fear and hope have remained the same.
Keeping in mind that a stock chart is a
record of mass psychological impulses towards fear and hope, let’s
compare two charts; one from 1929, and one from today’s markets:
That’s uncanny, isn’t it? Though they
were trading stocks of different companies, investors in 1929 and
today’s investors have shown amazingly similar habits of valuation.
Stock prices are determined by impulsive
human nature in a interacting in a social setting. Because human nature
does not change, history tends to repeat itself, even in stock prices.
For
those not already immersed in the Wave Principle, do you have more
historical evidence to support your claim?
I conducted a research into famous
market manias and their aftermaths. Here’s what I found:
A bull market mania is a rare event that
produces a powerful, persistent rise with remarkably fewer, briefer
and/or smaller setbacks. They occur at times of historic overvaluation
and usually involve broad participation from the public.
Of the most extreme cases of
overvaluation in history was the Dutch Tulip bulb mania in the 1600s. I
mean, it’s a pretty flower – but the bulbs weren’t made of gold. When
people finally realized this, a mass psychologically-induced wave of
fear sent prices to below the point where the mania began. That’s
another important characteristic of a market mania.
And we all witnessed the same
psychological patterns with the Nikkei wipe-out throughout the nineties.
We’ve seen it happen elsewhere, but still can’t believe that it could
happen here.
As you look at each of these charts and
think about the specifications of a market mania, (powerful price runs,
broad participation, rampant, unrealistic optimism) doesn’t it seem
likely that that’s exactly what we experienced in the great market boom
of the mid to late nineties?
Well,
some people said it was a New Economy.
Yes, just like the New Era of 1928 and
the Japanese Miracle of 1989.
Look, I don’t expect these arguments to
convince everyone outright that we’re staring down the barrel of the
greatest financial disaster of our lives – but shouldn’t they should
give you reason to stop and think?
That’s all I’m asking of anyone. Don’t
stay convinced of something merely because popular consensus refuses to
question it. The crowd has been wrong many times before – and it will be
wrong again.
 Can
you tell us more about some of the evidence presented in your new book, “Conquer
The Crash?”
To me, the most convincing arguments rely
on discussions of the Wave Principle. But I also spend 5 big chapters on
monetary trends and the Federal Reserve. There is important information
there that 1 person in 10,000 properly understands.
(Editor’s
Note: Read more about monetary trends and surprising facts about the
Federal Reserve in Part 3 of our interview.)
Part 1 |
top | Part 3
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