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"It
Ain't Nearly Over"
- So
Says Bob Prechter, But He Maps Out Survival Plan In New Book
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
http://welling.weedenco.com or call 203-861-9814.
Order
Conquer
the
Crash
now
and you
can
download
Chapter
One
Click
Here
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 elliottwave.com today.
Hurry.
Our
analysis indicates that this massive deflation is already
underway.
Here’s
what others are saying:
"Prechter
will go down in history as a legend for having predicted
the
secular bull market and now having provided a lucid
description
of the economic cataclysm that unfortunately lies
ahead.
Reading this book could make the difference between agony
and
comfort over the next twenty years."
-
David Tice, Prudent Bear Fund
"A
must-read book"
-
Martin D Weiss, Ph.D., author of the national best seller, the
Ultimate
Safe Money Guide
"Whether
you trade stocks, bonds, commodities or options, you
will
find valuable advice in this book. It will have a permanent
spot
on my own bookshelf next to Prechter's earlier classic, At the
Crest
of the Tidal Wave. Prechter's advice will surely be used in my
own
investing."
-
Lawrence G. McMillan, The Options Strategist
Visit
http://www.elliottwave.com/conquer
to
order.
Available
at all book outlets now. Better yet, order from the link below and
instantly download Chapter 1.
Copyright 2002 Elliott Wave International
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