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"It Ain't Nearly Over"


- So Says Bob Prechter, But He Maps Out Survival Plan  


The following excerpt was taken from an interview with Bob Prechter, author of

Conquer the Crash:

You Can Survive and Prosper in a Deflationary Depression

This Q&A was conducted by veteran interviewer Kathryn M. Welling, formerly of Barron’s and now with Weeden & Co., an international institutional brokerage firm headquartered in Greenwich, CT.

June 28, 2002 DJIA 9,243  

[   ]

What’s the point of your new book (Conquer the Crash) —depressing as many people as possible?

  Quite the contrary. What I am trying to do is get people to safety, rather than being outrageously exposed to the risks in today’s markets.  


Risks? What risks? For all the frauds and volatility, the Dow was still hanging tough in the 9,000-10,000 zone—at least until Wednesday.

It all depends on your timeframe. One of the reasons I am putting my book out now is that I think people do still have time to act. The Dow is still relatively near 10,000. People say you have to hold stocks for the long term. But you can also hold cash. Not necessarily for the long term, but certainly while the major trend is down.  


Did you say “cash?”  

“Cash isn’t trash.”  


Let’s get serious here. We are, depending on how you figure it, as much as three or even five years into this bear market. Loads of damage has been done. Why come out with a book about conquering a crash now?  

Well, when I want to tell people that I have been bearish for a while, I explain that the top occurred in April of 1998 when the A/D line and the Value Line Geometric Average topped out. But most people date the top, as I would, as the first quarter of 2000, when the major averages peaked. I guess a few people even have noticed that the Value Line Arithmetic and the S&P 600 mid-cap indexes did not top until April 2002. But any way you want to look at it, the market has had at least three major tops in the last four years—and I think we are bumping up against that third and last top. If you look at all three as part of one distribution pattern, as I do, then we are at the peak of the right shoulder. Which means this is actually a very good time to become bearish, if you haven’t already.  


So it’s still not too late? Which implies lots more downside—

Well, it would have helped most people to turn bearish earlier. The problem is that no one, in 1999 or 2000, outside of my own readership and a few others’ would have been at all interested in selling. I’ve already published all of my ideas for protecting your investments and also for profiting from short-selling in my newsletters and on my website. There are many ways to do it. But to get the message to the general public, the only way to succeed with a book is to publish it when at least there is a glimmer of acceptance of your thesis— when it has a shred of credibility—and you can’t do that at a major top. People are buying “Dow 36,000” books at that point. It would be useless to wait another two years, because we should be working our way into the bottom around that time. I think this is an excellent time to publish a book for the average person who has just begun to wonder if maybe stocks do not always go up forever, year-after-year, at a double-digit rate.  

Order Conquer the Crash now 

and you can download  

Chapter One 

Click Here

Current special discount applies


Maybe. But people have really been sold on the idea that they’re invested “for the long-term.”  

Yes, and that is exactly what this book is written to address. There are two chapters in it that explore the current, still-outrageous overvaluation in the market and also the current, still extremely bullish public sentiment.  


There’s no chance I can get you to call the nastiness we’ve been witnessing “the bottom?”

No. Well, we may be making a short-term one, but nothing more. We’ve got a really high level of short sales by the commercials in the S&P and we still have a pretty high level of longs in the S&P by the small traders, which represent the public. Those are the kinds of indicators that you would want to see in the opposite position before calling a major stock market bottom—and I would be more than happy to do that, if indicators like that were bullish. But in fact they have gotten worse since the top in 2000. Another indicator that is widely recognized as having gotten substantially worse is the P/E ratio.  


So you are going to stick to being a contrarian.

That got me in quite a bit of trouble in the 90’s. When people ask why, after predicting a massive bull market, I didn’t stay a screaming bull all the way, my response is that I really have a problem with sticking with a crowd that I think is really stupid. That proved a drawback because every century or so you can get the kind of sustained overvaluation that we had in the 1990s. But I think the piper has to be paid, and so I am very patient.

In studying all of the major manias, I had to go back to tulips to find a more outrageous overvaluation. I was fascinated to find, by the way, that none other than Graham and Dodd wrote that the focus of investors in the Roaring ’Twenties was improperly placed, not on earnings relative to stock price or earnings relative to the size of the company or profit margins, but only on the question of whether earnings went up in each reporting period. It just goes to show you that very little changes. We’re going through a repeat scenario— except for extent, which this time is much greater, and duration (this mania lasted much longer), which was my big problem.  


Okay, your first reason for warning about a crash now is the Elliott wave cycle. But gosh knows that can be interpreted in myriad ways. Its timing is anything but precise, as you’ve certainly demonstrated.

Actually, many times it is. There were long periods in the ’80s when a lot of the patterns I saw worked out to the day. The thing I like the most in this book (it is probably only going to make me happy, not anybody else) is a comparison of the advance from 1921 to 1929 to the move, shown immediately underneath, from 1974 to 2000. They look almost identical in virtually every wiggle. The thing about the Elliott wave pattern, which we say in every paper and every book, is that its timing is elastic and its extent is elastic. What stays the same is form. I did recognize at the time that from 1974, we essentially were living through

the 1920s. What I did not anticipate was that the move would be a triple in both time and price. It took three times as long and went three times as high on a percentage basis. But the form was the same, so even I am still learning about the Elliott wave at my old age. If you look at the Elliott wave on a chart of the global bull market—the world stock index—it traces out the textbook pattern. We have had the first leg down. Maybe we will have some recovery. Maybe we will be lucky and get a summer rally. That’s fine. It just means that whoever really does want to protect himself or herself is going to have a window of opportunity to do it. But I certainly would not delay. During the mania every surprise was on the upside, and during this bear market the bigger surprises are going to occur on the

downside when people are not looking, so you have to be early.  

Order Conquer the Crash now 

and you can download  

Chapter One 

Click Here

Current special discount applies



Just a rally? Most people are still trying to catch the bottom.

Right. People always say bearish is bad. First, I don’t believe that, philosophically. But okay. Say you are a bull and you like stock bargains. Can you imagine the opportunities that you would have had if, in December of 1968, you had exited the stock market and done absolutely nothing but collect interest until October or December of 1974? By then, stocks that had previously been selling at 85 were down to three-quarters of a dollar. After that, when they went to 19, you made real money. In the 1990s, people would try to buy stocks at 140 and hope they went to 190—which was not exactly a great return from a percentage point of view. But if you can buy extremely undervalued stocks, at or near the lows of a major debacle in stock prices, you can make more than enough for you and all your progeny. And thereby, of course, ruin their characters. There are several historical examples

of wealthy dynasties founded by people who held cash through the Crash of ’29 and after, finally buying in 1932 or 1933, and building fortunes that lasted through generations. I would not necessarily recommend that but it is better to make money than lose it.  


But that (horrors!) implies doing more than a little market timing.

Well, let me cross my fingers and ward off the vampire.  

But will that work on all the academic studies saying timing is a crock?

They were all done in the late ’90s  

Using data going all the way back to—

1982, generally. But if they were done by real historical types, they might have used data back to 1949. Just outrageous. There actually are some studies coming out now that show market timing is doing pretty well. My interest is in the social psychology of this, and you can generally say that when markets go down or sideways for a long period lasting years, market timing becomes popular and cycles become an important topic among people. Harvard economics professors issue statements such as, “The most important economic tool in the history of the world is the Kondratieff Wave Cycle.” But then, after long periods of advances in bull markets, you get the opposite. People say, “Cycles don’t exist. Market timing is a waste of energy. You should only buy and hold.” Those are phenomena that are

part and parcel of where you are in the cycles. Anyway, it was in October of 1982 that I said we are going to have to switch from a timing mentality to a buy and hold mentality. Little did I know that I should have held a lot longer—but at least I had the idea at a good time.  



If only you had paid more attention to your own advice.

Well I got a lot out of it, but yes the bull market went a whole lot further and longer than I thought. But I don’t know that I should have to be defensive. I don’t remember anyone else coming out with big number predictions about the bull market until the Dow crossed about 5000.  


Now your prediction couldn’t be more opposite. And your book makes specific suggestions about ways for investors to find shelter from the bear

market/deflation/depression you see?

Exactly. I don’t just say “go to cash,” because the questions today are what cash and where do you keep it? Two incredibly important questions. We know from history that at the bottom of major market crashes, they tend to close banks.  


Let me guess, you don’t suggest a safe deposit box in a New York City bank.

No. The fireplace would be safer in the winter. In fact, the book lists the two safest banks in each state. Also, some of the safer banks in the entire country. None of the major money center banks made those lists. The safer banks tend to be small. They tend to be rather conservative. They tend to have a lot of Treasury bills in their holdings because, believe it or not, some bank managements actually are somewhat concerned and not willing to speculate in derivatives and lend out all of their money to questionable enterprises.


Order Conquer the Crash now 

and you can download  

Chapter One 

Click Here

Current special discount applies


In other words, you suggest some of the sleepiest banks in the country—

Yes, although as we found out in the S&L debacle, some of the ones that look sleepy from the outside can have an orgy going on inside. So you do need to check the figures. But I also think that if you have substantial capital to protect, you should look overseas at truly conservation-oriented banks, most of which are found in Switzerland and Singapore. It doesn’t hurt to be conservative. There is nothing to lose by using these as a safe haven. Of course, you still need a transactional bank, too. Then there is the big question of which currency to be in. That is going to require people to have a market opinion and make a decision. Just to take this one step further, I don’t think it is a bad idea —even though I am not really bullish on the precious metals —to have a position in gold and silver and perhaps platinum, as well. In fact, it is foolish in a world of paper currencies not to. For one thing, it is currently legal.  



Are you implying that may change?

Well it is good to take opportunities when you have them. For example, back in 1998 I recommended to my subscribers that they look into a bank which at the time was ranked by more than one source as the single safest bank in the United States. I opened an account there and a number of subscribers did as well. Then, a few years later it announced that they were taking no more out-of-state accounts. They are conservative and want everything under their little umbrella. So those doors closed. Unless you act when you can, you may find some doors closing to you.  


Let’s switch focus to institutional investors. Your economic and market forecasts imply very rough times ahead for portfolio managers.

Very difficult. But the first thing they can do is protect their own cash. Believe me, I sympathize with, for instance, mutual fund managers who have to be heavily invested all the time; in organizations where being a “bear” means somebody who is only 92% in stocks. It will be very difficult to weather the kind of thing I see developing simply by being a good stock picker. 

There is an old adage that says 60% of stocks go up in a bull market and 90% go down in a bear. That is an over-generalization, but it does roughly indicate how difficult it would be to choose stocks that buck the trend to a degree that would keep you from losing money. It is not easy. But there are managers who will hedge with options, for example. Of course, that is a cost, as well. But if you can do that with leaps or options and you are willing to bear the cost of rolling your hedges over for 2, maybe 2 ½ years, your fund will do a lot better. Of course, if you are a hedge fund manager, you don’t have a problem because you can play the downside as well. There are many managers who are very good at that. In fact I have a great strategy in the book for people who don’t agree with me. It’s a market neutral strategy whereby you pick some of the best money managers in the country or in the world who have proven their ability to pick stocks on the long side and give those managers half of your capital. Then you give the other half to managers that have a proven track record of picking overvalued, ridiculously priced stocks for selling short. So whichever turn the market takes, one side should make a lot of money, and presumably the other manager won’t lose a lot because of his expertise. So there are many ways to approach this without just saying, “short General Electric,” which was a great idea in late 2000.  


I’m getting the impression you’re not a big fan of banks and financial stocks here.

I really am not a stock picker, but one group that has benefited from the credit bubble is the banking group, and at some point they will also reap the other side of the bell curve.  


Order Conquer the Crash now 

and you can download  

Chapter One 

Click Here  

Current special discount applies


You devote several chapters to the Fed and the credit bubble’s role in setting the stage of the deflation you see developing.

I tried to adopt a neutral tone in that discussion, avoiding hyperbole and epithets or anything of that sort. What I tried to do was relate, as they say, the true history of money in the United States. And the Fed plays a major role as the money and credit engine. It is not quite as nefarious, certainly from the point of view of intention, as many of its enemies declare.

Most of the people in the Fed and most of its fans among economists believe it is there to do good things. But it isn’t doing good things in the long run because every major credit inflation has always ended in a commensurate bust. And this is the greatest credit inflation probably in the history of man.  


Isn’t it supposed to act as a governor on the system, smoothing things out?

That’s supposedly one of its jobs. But the story of the Fed from the beginning is a history of making credit easy to obtain. It rarely purposely goes in and makes credit difficult to obtain. It only does that, in fact, when it is forced to the wall as it was in the early ’80s, for example, by the inflation trend. Another of the Fed’s jobs is to monetize government debt so the government can get money for nothing.  


No small matter. Most folks are absolutely convinced that the Fed would do whatever it takes to fend off another depression or deflation—and that it would inevitably succeed.

I have no doubt it would try, but what we have now is a massive amount of credit

outstanding relative to the actual money— and today money is really only the federal reserve notes in circulation.  


Which are nothing but government IOUs.

That is the tricky part because the dollar itself is nothing but a credit against future tax returns, and you’re only promised another dollar in its place. In other words, the dollar is actually a mental construct, whereas through much of history, money was physical. The Fed’s primary role used to be creating Federal Reserve notes to monetize the federal government’s bonds. And by monetize I mean turn it into money. So the government borrows, but in actual fact gets free money in return that it can go out and spend. Yet the borrowing never goes anywhere because it is a reserve of the Federal Reserve Bank. But that role has actually diminished substantially. 

The much greater role of the Fed in the last 25 years has been to facilitate the expansion of credit. It used to be that banks were required to hold a certain percentage of their deposits as reserves. They could not lend them out.

Very quietly in the early 1990s, the Fed de facto removed the requirements to hold reserves. They did that by saying, “You need to hold reserves only against checking accounts.” So every night, banks sweep their checking accounts into other accounts—and so they don’t need any reserves. This has allowed banks to lend out all of their deposits. What then happens is that those loans get deposited in other banks, and those other banks say, look, we’ve got all these new deposits. Isn’t this nice? And they lend them out, so the multiplier becomes infinite. The only question is how much debt service can the economy stand? I think the answer today is “no more.” We are at the limit. But as I say in the book, money is

a big ocean. Central bankers are pretty ingenious. 

Maybe there is something I am missing. But I doubt it. We have just witnessed the termination of the great mania of the 1980s and ’90s. All prior great deflations were preceded by exactly such a mania.  

Reprinted with permission, copyright 2002, welling@weeden, all rights reserved. 

For more information, please see or call 203-861-9814.  


Order Conquer the Crash now 

and you can download  

Chapter One 

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Current special discount applies


A Financial Crisis You See Coming

Is a Crisis You Can Avoid

“Prechter’s advice will surely be used in my own investing.”

- Lawrence G McMillan,

The Options Strategist  

It’s also the greatest opportunity of your life.

What if Japanese investors in 1989 had a book to prepare them for that nation’s looming economic DEFLATION and 12-year bear market? What if American investors in 1929 had a book to prepare them for the stock market CRASH and The Great Depression? They could have used the forecast to prepare themselves — even to come out ahead. Robert Prechter just published a book that will prepare YOU for the crisis in our financial future — a deflationary depression that will wipe out the portfolios of most stock market, bond market and real estate investors.

Conquer the Crash first presents the economic facts that show why a massive deflation is inevitable. The second part is practical — virtually each of the 21 chapter titles explains "How To," "What To" and "Should You."  

Learn more by going to today.

Hurry. Our analysis indicates that this massive deflation is already



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