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
three part interview, Elliott Wave International president Robert Prechter
discusses his new book, “Conquer The Crash: How To Survive and Prosper in a
professional career, you’ve made a number of long-term market forecasts that
lie far outside of conventional opinion. Is there a reason why you have so
often stood outside the crowd?
I make my forecasts using the Wave
Principle. I don’t rely on any data external to the market. I study the
charts and interpret the waves as best I can. News is not helpful – in
fact, it’s counter-productive. I could do this on a desert island as long
as I had access to the charts. This method often places my forecasts
outside of public opinion because the majority relies on news, which is
always bullish at tops and bearish at bottoms.
Majority opinion cannot be any other way,
because the herding nature of human beings forms a popular consensus,
which creates the market’s trends and turns.
first big public forecast was made in 1978 in your book, “Elliott Wave
Principle – Key To Market Behavior,” which you wrote with A.J. Frost. Can
you tell us more about this forecast and the financial climate that it was
It’s easy to forget, but the late ‘70s were
a period of widespread financial worry. People were fairly resigned to a
gloomy view of the stock market and the economy. Inflation and gas prices
were skyrocketing, and interest rates were on their way to new all-time
highs. Portfolio strategists were calling for the final smash of the
secular bear market that began in 1966. A public opinion poll showed that
the U.S. public was more negative about “the future” than at any time
since the poll’s origination in the 1940s.
In 1978, the Dow moved as low as 740 but it
never came near the 1974 low at 577. In the book, I described, along with
A.J. Frost, “the current bull market in stocks…which should accompany a
breakout to new all-time highs.”
course it did.
Yes. We knew that wave 5 had begun and
would overcome the gloom.
called for the Dow to reach as high as 4000, people thought you were crazy –
just as some think of you today.
successfully forecast the crash in 1987, didn’t you?
Nobody specifically predicted a “crash”
before it started, including me. But I did tell people to sell, right when
the sentiment indicators showed the majority bullish. In fact, that was
one of the reasons I turned cautious. Then the Dow fell 900 points, which
back then meant something!
you also nailed gold and silver?
Yes, for over 20 years. They have been my
most consistent markets.
But allow me to caveat my own track record.
In the ‘90s I made the biggest mistake of my career. Even though I
predicted that “Investor mass psychology should reach manic proportions”
in the stock market, I never imagined that the mania would carry on as
long as it did. Wave 5 continued higher throughout the ‘90s, and I got off
turn you bullish?
Quite the opposite. I think my basic
interpretation of the long-term financial picture is correct. I’m not
timing a five or ten-year trend here; I’m attempting to pinpoint the
termination of a 200+ year move and a killer bear market. The higher it
went, the more bearish I got.
talk about your current long-term forecast. You’ve just written a book
All signals point to the fact that wave 5,
which is the final leg up of our great bull market, topped in early 2000.
Mass psychological trends are now fueling a corrective move that will
decimate stock prices.
I believe it’s time for people to prepare
for a vast economic disaster, which will include a deflationary crash and
an economic depression as bad or worse than the one suffered in the early
It is already in progress!
sure the world is ready for this.
Has it ever been? Disasters of this
magnitude always catch the general populace off guard. Today is no
exception – too few are even remotely prepared for this crash.
should we do?
My book is subtitled “How
To Survive and Prosper in a Deflationary Depression,” and it
will tell you exactly how to do just that. There’s still time to prepare
for this impending financial disaster, but not much. Once things really
get going, the panic will make it more difficult to protect yourself.
You’ve got to start preparing now.
Part 2 of Interview
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
But there’s an enormous wealth of
historical evidence that suggests that this rare event is about to occur.
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.
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.
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?
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
you tell us more about some of the evidence presented in your new book, “Conquer
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.
Interview with Bob Prechter -
Your historical market studies and
research into the Wave Principle have led you to believe that stock prices
are preparing to crash. We’ve heard some of your arguments for why this is
Conquer the Crash you also give a good deal of attention to
discussing and helping readers prepare for a severe monetary deflation. Can
you tell us more about this?
First I want to make sure that everyone
understands what deflation really is. A common misunderstanding is that
inflation occurs when the prices for goods rise, and deflation occurs when
they drop. That’s not exactly true. General price changes are merely
effects of a change in value of the money itself – not the other way
So what causes changes in the
value of money?
Changes in monetary valuation are caused by
changes in mass psychology. The same is true for the stock market. A
severe deflation like the one we are now facing has always required a
certain economic pre-condition: A major buildup of credit, which is itself
the result of a certain state of social psychology.
Our economy today rests upon
masses of consumer and corporate credit. Today, the U.S. owes a collective
$30 trillion in debt. That’s nearly 3 times our annual GDP. We’ve become
entirely dependant on it.
The economic theory that has seen the U.S.
economy grow progressively larger and more powerful since World War II is
that a wide-spread facilitation of credit will stimulate production, which
will in turn create jobs and generate more capital to be re-invested in
That’s a model that’s been
successful for economies around the world thus far. Where do you see the
problem with it?
gotten way out of hand. The Federal Reserve Board allows our banks to lend
out all of their deposits (and in some cases, even more than 100%). This
money, once loaned, is allowed to be re-loaned many times over,
multiplying the amount of debt.
What this means is that we’ve
got great multiples more credit afloat in our economy than we have actual
money. It’s terrifying, but true.
As strong as our economy may still seem to
everyone, it’s actually rife with weakness. The only thing keeping it
afloat right now is a mass societal consensus that it’s going to be O.K.
How long can that hold?
As the stock market continues to decline,
people will continue to lose their jobs and production will decrease.
Knowing that there’s not enough money out there to cover all the
endangered debt, banks will begin to panic. They will become desperate to
retrieve their liquid assets. When the general ability to repay debt
decreases, so will banks’ willingness to lend more.
This is what will finally trigger a massive
But wait. Won’t the Fed prevent
this from happening?
That’s a huge misconception. The Fed will
be powerless to stop it.
Realize that the Fed doesn’t actually lend
money to consumers. It merely sets the interest rates at which banks lend
each other money. The hope is that banks will take these lower rates as a
cue to pass the lower rates down to the consumers, thus facilitating more
credit – but it can’t guarantee that this will happen.
In 2001, the Fed lowered its discount rate
from 6 percent to 1.25 percent. That’s the heaviest cut in such a short
time ever. But what if this strategy fails, as it did in Japan? It
certainly hasn’t ”saved the economy” so far. What will they do if the
economy continues to contract? Lower the rates to zero?
When people are losing jobs and the
purchasing power of the dollar is rising, consumers won’t want to borrow
money that they will have to pay back with much more valuable dollars
later on. Also, having been burned by bankruptcy and loan defaults, banks
will be considerably less willing lend this money in the first place.
This will have disastrous effects on our
Scary. So what should we do to
protect ourselves from this possibility?
Depending on your circumstances, there are
a number of ways that you can first protect yourself from a deflationary
crash, and then actually profit from it.
Most important, get out of debt. Because
the value of the dollar will be rising, one of the best investments you
can make now will be to hold cash.
What about the other markets?
the Crash explains exactly what you should do in regard to bonds,
real estate, stocks, commodities, precious metals, insurance, and more.
It won’t be necessary for you to keep your
money in a coffee can under the bed. There are a number of “Safe Banks”
around the world that, because of their conservative policies, you will be
able to trust with your money.
Conquer the Crash lists several.
Also, you’ll learn about “inverse index
funds,” an interesting way to short the market on its way down. And it
tells you exactly how risky real estate investments are and what you
should do about them now.
Obviously those with substantial
personal fortunes stand to benefit from the wealth-protecting measures you
Conquer The Crash. But do you have to be wealthy to take advantage
of the strategies in this book?
Conquer the Crash offers strategies for financial protection in
two different tiers.
For investors with deeper pockets, it
offers international-level protection by giving advice about safe banks
and precious metal storage. For the average investor, or even for those
with no money in the markets at all, there are countless chapters devoted
to important concerns like, “What to do with respect to your employment”
and “What to do with your pension plan.”
A lot of the advice is preventative. It
tells you what not to do. And it’s going to be very important not to make
mistakes. Only one or two missteps and you may find yourself in a very
dangerous financial position along with the masses.
The publisher will make most of the money
from sales of this book. Anything we make will be spent on getting the
word out about the crash. I know this disaster is coming, and I want to do
everything that I can to protect people from it.
Conquer the Crash, and then have your friends and loved ones read
it. You can read it in a day, and it may keep you weathered from a storm
that will be blowing for years to come.
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.
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principle - what is it? Prechter
on Elliott Waves
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