This is the initial Q&A exchange between Bob Prechter and David Black, a free lance journalist from Atlanta.ÿ The article subsequently appeared in the April 1998 issue of Atlanta Magazine.
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ÿ
ÿ I am interested in your goals, the arc of your career and how you
perceive the future.
ÿ What matters to me is establishing the fact that social systems follow certain mathematical laws, just as do physical systems. The two sets of laws are different. I disagree with the conventional wisdoms, i.e., (1) that social mood and history are random or (2) that they simply follow physical laws of cause and effect, but are too complex to predict. Knowing the actual structure of social forces allows a framework for study that can yield useful knowledge about the social future, both general and specific.
I am finally beginning to make headway at this mission, but not through the media. In November, I made a presentation to the 21st International Conference on the Unity of the Sciences (ICUS) in Washington, D.C. Among the speakers were the scientists who discovered quarks and quasi-crystals. It generated enough interest that I have been invited to speak in 1998 at another forum, the International Society for the Interdisciplinary Study of Symmetry (ISISS) in Israel, another gathering of scientists from every field. My fieldis sociology, and I think that what R.N. Elliott discovered in the 1930s, which is being supported sixty years later by the new fields of fractal geometry and chaos, is of bedrock importance. It is to the successful study of aggregate human behavior what Newton's discoveries nearly 300 years ago were to the successful study of physics.
ÿ
ÿ Can you generally describe for the non-professional where we are now, primarily in terms of the U.S. stock market and also the global economy? Where are both of these headed in the near future? What significance do you attach to the market hiccup in October?
ÿ The U.S. stock market is in the grip of an investment mania. A mania
is a persistent uptrend that attracts the public in large numbers and
leads to historic overvaluation. In the past 300 years for which data is available, no major stock market in the Western world has been as
overpriced as U.S. stocks are today. The Japanese Nikkei index was
valued slightly higher at its 1989 high, and it has dropped 65% since
then. On the basis of dividend yield, U.S. stocks are 75% more expensive now than they were on the top day in 929. People dismiss yield as irrelevant today, but that is simply a psychological imperative. People always dismiss indicators of value in manias. All manias end below where they started. I do not know where or when the high will be. All I am sure of is the ultimate outcome.
ÿ
ÿ Will the economic troubles in the Far East affect our market?
ÿ The situation in the Far East should not necessarily be construed as
having predictive value. After all, Japanese stocks topped on the last
day of 1989, fell 65%, and threw that country's economy into deep
recession. Since the day that market topped, the Dow has tripled. So
there was no effect. Social mood is independent of cause and effect.
However, technically speaking, the more components of a market that drop out of an old trend, the closer it is to reversal. On a world scale, all of Asia has now dropped out of the bull market. That makes the world bull market that dates back to 1974 a much thinner one, and therefore one closer than ever to reversal.
ÿ
ÿ If I may be permitted to simplify, you have been generally very
bearish about the stock market for most of this decade. In 1992, you
told Barron's we were stair-stepping into a depression and some of your forecasts are terrifying. Yet, the market risen steadily during that time. To the lay investor, that translates into the conclusion that you have been, to put it bluntly, wrong for a number of years. How do you answer that? Is being right or wrong in this kind of context really the point of what you are trying to do?
ÿ Sure, I'd like to be right all the time on markets, but I'm not. I
hope this is not a revelation to anyone. Here is how I see it:
In the 1990s, I have consistently missed the extent of the stock mania, which is what some people gripe about. It is a perfectly justifiable gripe, in context. The context is that The Elliott Wave Theorist is the only publication that predicted a mania in the first place, using exactly that term, in 1982-1983, after 17 years of a sideways trend. Manias are so rare that they barely happen once a century, and never has anyone announced one before it took place.
Suppose it is the early 1600s, and someone observes that tulip bulbs,
which have traded between 15 and 30 cents for two decades, are about to undergo a mania that will take prices to $10 and then all the way back to 30 cents. People dismiss the outlook as delusional. Prices climb year after year, finally reaching $10. Then they go to $15. Then $20. The forecaster is judged stubborn, wrong and delusionally bearish for having missed the last doubling. Prices finally peak out at $30 and then collapse to 15 cents. What was more harmful, missing the final phase of advance or missing the overall message of the big picture? Was the forecaster wrong or did he have a unique insight? Is it valid to expect him to have told you at the outset that the high would be $30? If he had an insight, is the method worth investigating?
Obviously, if this analogy is to apply to today's stock market, then the aftermath, whenever it comes, has to reflect original expectations, and that is something that remains to be seen.
The context also includes looking at other markets. The Elliott Wave
Theorist is the only publication (that I know of) that has consistently predicted the bear market in gold. In contrast, we turned bullish on silver when it bottomed at $3.51 in 1993. At The Crest of the Tidal Wave (1995) predicted deflation at a time when the only fear was inflation. Suddenly, we are beginning to see international discussion of the possibility of deflation. These are sea-change trends, and I think the Wave Principle gives advance warning often enough that there is nothing more valuable.
That is all the defense I am willing to play. If I bothered answering
every sideline critic, I wouldn't have time to do what's important.
ÿ
ÿ Your company does a lot of forecasting in markets and assets other
than stocks. Are those markets more significant than U.S. stocks? If so,
why?
ÿ Currencies and bonds account for more money than stocks, so they are
more important on a financial basis. On a sociological basis, stock
averages, which reflect people's aggregate valuation of their own
productive enterprise, are more important. The averages reflect social
mood, which is the main shaper of history.
ÿ
ÿ Is it fair to say that at the end of the day, you are struggling to
make sense out of something that is essentially unknowable? If so, that is quite an intellectual challenge. What drives you to try? Where does money fit into the equation? Is it just a way of keeping score, of testing your theories and understanding, or is it the main reason for doing everything else?
ÿ
ÿ The stock market is knowable, but it is knowable only on the basis of probability or contingency. You can know that there is a 70% chance of something happening, but that is not certainty. OR you can know with virtual certainty that something will happen, but not be able to say exactly how and when it will develop. For instance, my co-author and I first called for the Dow to quintuple in 1978, but it took four more years for it to begin to happen. Similarly, I am convinced that the coming bear market will retrace the entire bull market. As in 1978, it is taking longer to begin than I thought. But as with the bull market, I think the fact that it will happen is more important than the details (which are important, just less so). People who think otherwise will not be on the sidelines when it matters.
ÿ
ÿ As an analyst, you are primarily known for reliance on technical
numbers and historical trends, but then you also seem to pay attention
to and place some emphasis on more subjective readings of cultural
indicators, like music, movies and fashion. It seems usually the case
that analysts are one or the other. How do you reconcile these two
approaches and blend them together?
ÿ The stock market is one reflection of social mood. People communicate ebullience by buying stocks, wearing certain fashions, voting for certain candidates, and buying certain types of music. People communicate depression by behaving in opposite ways. When there is a preponderance of activity at one end of the scale, it suggests a social mood extreme. We usually don't use popular cultural trends as predictors of the stock market. They are coincident trends. In 1985, I simply pointed out the correlation.
Political and economic news lags social mood trends because such actions result from mood change, and the mood has to be well along before social actions are taken. For instance, peace treaties and reconciliations abound at major tops, whereas wars occur during or immediately after the second down phase of a bear market. Economic activity lags mood trends as well, so after stocks rise, the economy expands, and after they fall, it contracts. Forecasting the tenor of social action such as this ultimately matters more than where stock prices are going, and it is a lot easier to do.
ÿ
ÿ What does your reading of today's cultural indicators tell you about
the markets?
ÿ Recent articles describe a cultural phenomenon that reflects a time
very late in an extended bull market in social mood and its results:
affluence (which is good) and the belief in never-ending affluence
(which is bad). It is very much a Gatsby era. There are countless
examples from every field, but any detailed presentation would probably have to be condensed beyond recognition, so let's omit this topic.
ÿ
ÿ I have read that you have a keen interest in mass consumer psychology and I am interested in what you think about the current belief among mainstream investors that any significant drop in the stock market is an opportunity to buy?
ÿ It is a manifestation of extreme social ebullience. As an indicator in its own right, it is very bearish. In the 1970s and 1980s, no such
conviction EVER took hold, that despite a rise of 250% in the DJIA. In
the 1990s, the Dow is up about the same percent, but the level of
bullish conviction is far higher. People do not adopt quasi-religious
attachment to stocks except when it is very late in the game. They
loathe, fear and avoid them when they are a bargain. It may sound like a paradox, but is true by definition and cannot be otherwise.
Finance and economics are fundamentally different. In economics, when
the price of an item rises, people buy less of it. In finance, when a
price rises, people want more of it. And vice versa on the downside.
This fact is profoundly important to a proper understanding of the two
fields, which most people think are one and the same.
ÿ
ÿ Researchers claim that investors, particularly small ones, suffer more from their losses than they enjoy their successes. Do you agree?
ÿ Yes, but it is true of professionals as well.
ÿ
ÿ Why do you think that is?
ÿ Because people think that making money is normal and just, and losing money is abnormal and unjust. Why bother to cheer normality? This is why huge market collapses bring anger, recrimination and after-the-fact lawmaking to prevent what has already occurred. This is happening in Asia now, and will happen in the U.S. a few years into the bear market.
ÿ
ÿ Do you think there is a better market for pessimism than optimism?
ÿ Definitely not. Today anyone who has consistently sold products to
optimists, particularly in the 1990s, has his own Lear jet. You usually can't get rich predicting a change in trend, even if you are right. The way to get really rich is to play to the crowd. Tell them what they want to hear. Pessimists did make a lot of money briefly in 1979-1982 and even had a book or two on the New York Times bestseller list. The very few optimists could barely sell a few thousand copies of their "obviously out-of-touch-with-reality" forecasts. Today, there are fifty "how-to" bullish books, all selling like Beanie Babies.
An example of pessimism not selling: In At The Crest of the Tidal Wave, I predicted another major down-wave in gold and mining shares. The shares were at an all-time high. Right now, gold is a few dollars from an 18-year low and mining stocks are down as much as 70%. Yet being right on the downside brings zero interest in our work and not a penny of income. The people making the most money since the high in 1980 are the perennial optimists on gold, because that is what the customers want to hear. At the bottom, no one will want any bullish information, but if I recognize its approach, that is what I am going to publish, and it won't sell much.
ÿ
ÿ Do you think that the flocking of Americans to the stock, bond and
commodity markets during the last decade is, on balance, a good thing?
Or are they producing distortions that will result in problems
eventually? Are we playing a fools game?
ÿ Well, suppose the public rushed into rocket design or surgery. Would
that be a fools' game? Do you think they would all succeed? Should they?
If you wouldn't undergo surgery performed by a team randomly selected
from the phone book or ride in a jet plane they designed and built, why would you assume that a similar group would be competent at financial speculation? Consistently successful speculation is as difficult as these fields, if not more so. When a huge number of untrained people appear to do well at it, the operation isn't over.
ÿ
ÿ What is your opinion of the quality of investment advice that most
middle-class people get?
ÿ Most of it is a direct reflection of recent trends and speaks naught
of the future. Conventional extrapolation is fine as long as last year's trend continues, and devastating when it doesn't.
ÿ
ÿ If you could get people to remember one or two things about investing, what would they be?
ÿ One thing: Don't do it. Unless you make it your lifelong passion,
commitment and business, you will regret it. Today there are people
crowding the streets of Asian cities demanding the closing of stock
exchanges, the hanging of bearish speculators and all else. They want to know who is accountable, and they will not look in the mirror. There is not a single professional speculator out in those streets. They are all novices who do something else for a living.
ÿ
ÿ In the late 1980s, you had a very high public profile in the sense
that reporters from mainsteam magazines must have always been calling.
Was that an uncomfortable time for you personally? I have seen some
quotes from back then that suggested maybe you were uncomfortable with
the fact that your comments could sometimes move markets.
ÿ What I was uncomfortable with was the insistence that my comments
could move markets, which is absurd. (It would be nice if it were true, because then by definition, I could never make an error, right?) The idea went with the guru image. The same media seemed quite happy later to jump on errors as a sin, yet they didn't see the contradiction. You can't wrestle sexy ideas out of the media with logic.
I stopped doing media appearances in late 1988, at the peak of my best
forecasting period. I quit for two reasons, first because by charting my subscription levels, I decided that my persona was due for a "bear
market" (which has happened) and second because I found out after ten
years on the airwaves that I did not really succeed in getting people
interested in the Wave Principle per se. Interviewers seem mostly to
care about where the market is going and who the guru is, who is in and who is out, the same old tempest. The basic human interest story is rise and fall (and on rare occasions, comeback). But the basic human story, over history, is the grand discovery and accumulation of knowledge. It doesn't sell many ad spots.
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ÿ I read a lot in the mainstream press written by people, who, in trying to explain why the economy and the stock market have done so well for so long, suggest that the rapidly forming global economy is a different animal, so different that it can't be adequately measured or understood by using the same old statistical yardsticks. What do you think of that argument? Is there anything fundamentally different now than 20 years ago?
ÿ No. Everything you read on this subject is RETROSPECTIVE. Nobody
talked like this in 1982, 1984 or 1988. In fact, the prevailing wisdom
was the OPPOSITE (which was therefore bullish). Perhaps it does not
impress you as much as me, but it is amazing how self-confident people
can be in explaining the past for us (and then often claiming that the
explanation is a forecast by saying it will continue). There has never
been a major top in history that was not accompanied by "new era" talk.
About such claims I don't ask, is it true? I ask, does this conviction reflect ebullience or fear?
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