Robert Prechter’s company, Elliott Wave International, specializes in an arcane form of analysis known as Elliott Wave Theory.
Prechter has achieved notoriety for his bold prognostications and is sometimes viewed as either a half-crazed crank or a genius. He predicted the bull market that took off in 1982, when many others had decided that stocks were a permanently bad bet. He also called the 1987 crash and predicted dire consequences for the late 1990s stock market bubble.
The present collapse is exactly the kind of problem he has predicted for years, especially since 2006.
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But he has been wrong on the timing of some of the major changes. He expected the 1980s stock boom two years before it began and called for the present collapse to begin in February 2007.
Q: Some generally wise commentators (Jim Rogers, Marc Faber, etc.) have for years argued that we are in the midst of a long-term commodity boom that is likely to continue until some time around 2020. These types of thinkers believe that the equity and commodity markets are inversely related and that we are likely to see strong commodities in periods of weak stock market prices. How does your long-held “all one market” view differ from this?
A: In the late 1990s, all investments began moving more or less together on the basis of liquidity, meaning the amount of credit that speculators could obtain. This was the sign that credit expansion had become the sole power behind the various investment booms. These orgies of speculation signaled the late stage of a historic credit inflation dating all the way back to 1933.
In the final phase of expansion, the dollar fell hard as dollar-denominated credit swamped the investment markets. The only thing left to happen was the final credit peak and the start of a crash in all investments. It took a period of three years for real estate (2005), stocks (2007) and commodities (2008) to peak out, signaling the last gasp of credit inflation. I have been saying all along: it will not be a repeat of the 1970s. It will be a repeat of the early 1930s, except a full degree bigger. Commodities will not save investors, and they will not move inversely to stocks and real estate. Now it’s all downhill for everything except cash and short sales.
Q: Is the present slump in both equity and commodity markets proof that it’s “all one market,” or could this simply be a leg-down setback in commodities that could be followed by a bigger leg upward, as some have suggested?
A: Commodities aren’t coming back. They are going to kill the bulls, just as every investment market is killing its true believers. The real estate believers are stuck. The stocks-for-the-long-run believers are stuck. The bond and mortgage investors are stuck. And now the believers in perpetual inflation are stuck in commodities.
Q: Is there a moment of truth coming in which the “long term commodities boom” versus “all one market” difference will be resolved? If so, when?
A: I think it was resolved two quarters ago, when the commodities topped out. But I would think the bullish believers would start to get nervous when silver and platinum drop more than 50 percent. And that’s already happened.
Q: Are commodities better investments in down equity times because, even if there’s a real collapse, at least with commodities you’ve got some physical thing in your hand? Or are they equally vulnerable to total implosion?
A: Yes, commodities are better because they are tangible and always worth something. And gold is money, so it will go down less or hold up better than any other commodity. But I do not advocate holding investments that lose value, even if they lose less than something else.
Q: How do you feel about being so right for so long on so many of these topics (I’ve been a reader of the Theorist since 2006) without being listened to by most folks in the investment world?
A: I was bearish too early and it was lonely, because everyone said that under the (United States) Federal Reserve System deflation was impossible. Not improbable; impossible. But my Conquer the Crash book is looking pretty good. Aside from stock and real estate collapses, it predicted a Fannie Mae implosion, insurance company bankruptcies, a collapse in mortgage backed securities, bailout attempts by authorities, and even a ban on short sales. We have seen them all. But the biggest surprises are yet to come. In the next phase, state and local bonds will start going south, and the economy will slide into depression. I also predicted that the Fed would be powerless to stop it. Almost no one agrees with that.
Q: What do you think is causing all this?
A: The root cause is the same thing that causes all financial trends: trends in social psychology, which is regulated by Elliott waves. A great wave of increasingly positive social mood ended in 1999-2000. We have been in a bear market ever since. In 2007, the stock market began to decline in what Elliotticians call wave C. This is the wave that allows no more pretending that everything is OK. This is the wave in which there is no place to hide except cash. And with fiat money, safe cash is hard to identify. That’s why I wrote a book about it.
Q: The government seems to be trying to shore things up.
A: The government created all the institutions that forced credit down America’s throat. In 1913, it created the Fed. In 1934, it abolished money. Then it created a slew of credit engines: the FDIC, Fannie Mae, Freddie Mac, Ginnie Mae, Sallie Mae, the Federal Housing Administration and the Federal Home Loan Banks. Anything government does just makes things worse. Anyone who looks to government to “save the system” is wasting his time. It’s a lousy system, anyway. Free-market money works way better than a state-run monopoly on credit.
Q: Can the crash be prevented?
A: No. Credit is speed, and speed addicts eventually crash. Period. There is no alternative. But an individual can save himself, his family, his money and his future if he gets safe and out of the way. The whole second half of my book tells you how to do that.
Robert Prechter is president of Elliott Wave International (www.elliottwave.com) and author of Conquer the Crash-You Can Survive and Prosper in a Deflationary Depression.
