well, let me add some REAL gloom...Prechter predicts doom, utter destruction and civil unrest:
Prudentbear.com: Bob, thanks for taking time out for this interview. I suspect most visitors to our site are familiar with your work and your call for a massive stock market correction. But for the others, could you talk a bit about why you've come to believe that markets unfold in patterns?
Bob Prechter: Here's the way I see it. Many people desire to belong to and be accepted by the group. Many people also have a tendency to let others think for them in fields they find intellectually difficult. These traits serve to make their unconscious minds dominate their conscious minds, especially in emotionally charged social settings. When the market panics, for instance, most investors are not panicking individually in isolation, but in response to the panic of others. The same is true of their buying, but that is a slower process and therefore less obvious. When the unconscious mind dominates, it does not do so randomly ( as that would mean no thought at all ) , but in patterns peculiar to it. Those patterns show up in price movement and reflect the Wave Principle. I presented a lot of evidence for this conclusion in The Wave Principle of Human Social Behavior.
PB: Before we get to where you see the stock market going, can you talk a bit about where you see the market today?
Bob: Sure, but first let's talk a bit about bull and bear markets. Typically, bull and bear markets flow into one another. A bull begets a bear, and vice versa. At rare times in history, each of these may have an exceptional offspring. For a bear market, the exceptional offspring is a decline to worthlessness. Instead of a bull market emerging where it typically would, the bear market accelerates and carries to oblivion. An example might be the financial and social decline that took place in Rome in the 400s. No bull market followed; it was the end of the market itself.
For a bull market, the exceptional offspring is a mania. That is, instead of a bear market emerging where it typically would, the market recovers and carries to the stratosphere. If the difference in the two phrases of rising prices were only quantitative, there would be no real difference; one would simply discuss degree. But there is a qualitative difference between a bull market and a mania.
PB: So a mania is not just a "big bull market?"
Bob: Not at all. It is something else, and it not only behaves differently, but it resolves differently as well, which is why the difference is worth knowing. Normal market behavior is the result of a chaotic feedback system, which produces a fractal movement. As long as the society involved is viable, the long-term direction of the stock market remains up, but it is interrupted by setbacks of various sizes. The frequency of those sizes is roughly proportional to the time between them; i.e., roughly speaking, 1% setbacks happen weekly, 15% setbacks happen annually, 50% setbacks happen twice a century, and so on. As long as the market exhibits this "breathing" phenomenon, it is healthy. The first aspect of a mania is that it produces a powerful, persistent rise with remarkably fewer, briefer and/or smaller setbacks. In studying such times in market history, we find that manias typically involve broad participation by the public and end at times of historic overvaluation by all traditional measures. These three aspects of manias are well known by financial historians.
PB: What are some others?
Bob: There are several that are not so well-known. One is that they are born of long-term bull markets, which is to say that every mania is preceded by a long period of oft-corrected rising prices. When the time is right, the public begins to acquire the understanding that "the long-term trend is always up" and increasingly acts as if, and ultimately presumes that, every
degree of trend is always up. When is the time right for this mindset? Simply stated, it is right when the market enters a fifth wave in advance of Supercycle or larger degree. Most
people do not even recognize manias as such when they are in them ( which is why they are possible ) .
PB: Has the U.S. been a bull market or a mania?
Bob: Starting in 1982, the U.S. stock averages have exhibited all four signs of a mania: emergence following decades of oft-corrected rising prices ( and a price plateau, as in the 1920s ) , wide public participation, brief and minimal corrections, and historic overvaluation. Those are four reasons to rank it among the greatest manias of all time. It is certainly the greatest stock mania of all time.
PB: What makes this mania among the greatest?
Bob: The first is the depth of participation. In the U.S., public involvement in the market has probably set a record for any nation in history. Two Gallup polls reported that 61% of households have a direct or indirect ( through corporate pension plans ) stake in the stock market . At over 60%, the share of households' financial assets that are in stocks is the greatest ever as well. Indeed, the mania for stocks is global, including even the former and current bastions of Communism. Second is the duration of the mania. This is the main reason I turned bearish way too soon, despite my own description 14 years ago of what the investment environment would be. Other manias have lasted far less time. The tulip mania lasted three years, the South Sea Bubble two years. The rises in the Value Line index and the coin market lasted only two years. Until the 1980s, the longest recorded mania had been the 1920s' eight-year rise. Based on wave relationships in normal bull markets and the 1920s experience, The Elliott Wave Theorist in 1982-1983 forecasted either a 5-year or 8-year advance, peaking in 1987 or 1990. While these years marked near-term tops, they did not see the end of the mania. Indeed, from a psychological standpoint, it was just getting started. The Japanese experience from 1974 to 1989 lengthened the historical record for manias, to 15 years. Now the U.S. stock mania, which began in August 1982, has reached 18 years in length. Third, this mania has something very rare: official sanction. Alan Greenspan, chairman of the Federal Reserve Board, a quasi-government agency ( despite its official description ) , specifically stated on January 14, "We have the responsibility to prevent major financial market disruptions through the development and enforcement of prudent regulatory standards and, if necessary in rare circumstances, through direct intervention in market events." Indeed, the start of the runaway phase of the current mania emerged after the market's digestion of the rumor that the Fed had intervened in the stock market on October 20, 1987 to stop the panic. No U.S. agency had ever done that before. It put stock investing in a new light. The mighty Fed had exhibited a vested interest in stopping declines, a fact that was not lost on the psyche of investors. In the same spirit, Congress and the Securities and Exchange Commission have repealed or relaxed numerous laws and rules governing investment that had been in place since the 1930s ( in response to the aftermath of the last mania ) .
PB: Official sanction in the good old free-market U.S.A?
Bob: Two of the greatest manias of recorded history, the South Sea Bubble in England and the Mississippi Scheme in France, both of 1720, were initiated by government action. From an Elliott Wave standpoint, the current mania ends a two-century advance, the same "Grand Supercycle" degree rise that ended with the South Sea Bubble, which is why I forecasted a mania in the first place. Manias of this degree apparently prompt government officials
to join the fan club.
PB: What prior mania do you feel is most similar to our current situation?
Bob: It shares aspects of several. It is much like the 1920s because people made exactly the same excuses with respect to stock price rises being based on steady earnings increases rather than dividends and corporate value. It is much like the Nikkei's rise because of its duration. It is much like the South Sea Bubble because of the absurd advances in stocks of companies that have no real worth.
( Click here for a slide presentation of some of history's greatest market manias. )
PB: What factors have heightened the mania in the last year, or make you believe the mania is closer to ending?
Bob: The main signal that the mania is near an end is its increasing thinness. We're down to a couple of dozen stocks now. Also, price jumps of IPOs are now just ridiculous instead of absurd. When the market turns down, IPOs will not just recede; they will virtually stop.
PB: I take it, then that your outlook for stocks is negative?
Bob: I think the rise in U.S. stocks is in a terminal phase and faces a historic trend change. Most stock markets worldwide are likely to follow suit. Major stock declines have always led to recessions or depressions, and this time should be no different. Social unrest will follow in many areas of the world. The bond market is not a haven, as it topped out in 1998. The quality of investment debt overall is the lowest in human history, and bond investors will have to pay for an error in judgment.
PB: Any bonds you would own for defensive purposes?
Bob: Any bond that is not guaranteed to stay AAA will fall in price, which means that yields for most bonds will go way up. I'm sure some bonds will stay AAA and provide a haven, but I have no way of predicting which ones they will be. So I think bonds will be risky. Your best refuge, for a while anyway, is T-bills. As yields rise, you will make more money each month that you roll
them over.
PB: Obviously you disagree with the bulls who think today's "high-tech" advances have changed the economy and that recessions and bear markets are a thing of the past. But why shouldn't our "high-tech" progress keep us optimistic about the future?
Bob: Because it's the other way around. Our rising optimism is driving the pace of progress in various high tech areas. It is a relationship that we have traced back to 1835 when, amidst a feverish wave of technological innovation known as the "electrical euphoria," the stock market put in the great peak of Supercycle ( I ) . In addition to the railroad, one of the great breakthroughs that was introduced at that time was the telegraph. Think about that for a moment. Information went from a virtual standstill to almost instantaneous over a distance of a thousand miles. Now that's a revolution. Does it remind you of anything? Well, after Morse unveiled his invention, the market did not materially exceed its high of 1835 until the 1860s.
PB: How do you see the economy reacting to the bubble bursting, in inflation, deflation or stagflation?
Bob: The economy is going to contract like never before. All mechanisms that have
helped fuel the rise, such as leverage, in-kind compensation ( options instead of cash ) , venture capital funding, etc., will be motors of the contraction. I'm not as sure as I once was about the monetary implications, but I still think that we will have a violent deflation first, then a huge domestic inflation due to repatriated dollars.
PB: You argue that social moods drive the stock market. Are these moods reflected in other aspects of society?
Bob: You bet. Let's take men's hairstyles as an example. Today the " shorn sheep " look is in. In the 1970s, hair was shoulder-length. In between those times, moderate length was in. What I've just described is the progression from the bottom ( in the 1970s ) to the top of a long bull market in social mood. It's a fifth wave, however, so there is a considerable amount of divergence ( I see lots of lawyers with pony tails, for instance ) . But the dominant men's hairstyle is still pretty short. In time, the bear market will cover up men's ears again. The social mood is also reflected in hemlines, which were very long at the market bottoms in 1921, the 1930s and the 1970s. Skirts were very short in the late 1920s and late 1960s. Just as they are today. Social mood trends are also reflected in movies and even politics. For example, strong and persistent trends in the stock market determine whether an incumbent president will be re-elected in a landslide or defeated in one. In every case where an incumbent remained "in" office in a landslide, the stock market's trend was up. In all cases where an incumbent was re-elected by a landslide, the stock market's trend was down. Never has an incumbent won re-election in a deeply falling stock market or lost in a landslide despite a strongly rising stock market.
PB: At market peaks, bulls always argue that "it's different this time." Why is this mistake consistently repeated?
Bob: People's beliefs about trends are not scientific but emotional. When markets gyrate, people believe in cycles. When they go down for a long time, they believe in doomsday. When they go up for a long time, they believe that cycles are dead and the only direction is up. If people were different in terms of being intellectually independent and commonly expecting trend change, then financial markets would be far more stable.
PB: If we are careful and the Fed keeps its "hot hand , " can we avoid the bear market you see coming?
Bob: Being "careful" now cannot avert the coming social change. People have been "uncareful" for a long time, and their actions will have consequences. Still, individuals can take steps to insure the safety of their own capital and later, their personal safety as well.
PB: Do you mean we could have civil unrest?
Bob: It is certain.
PB: Should people be scared by such an outlook?
Bob: Lots of people will tell you that a bull market is good and a bear market is bad, but that's not true. Part of our message is that markets go up and markets go down. The key is not to judge the trends as good versus bad, but rather to be ready for them and take advantage of them. So I say: Being wrong is bad; being right is good. |
