By Robert Barker The biggest grizzly in the market today may be Bob Prechter. His latest book, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression (John Wiley & Sons, $27.95), is riding atop Amazon.com's list of best-selling business and investment titles. It describes a truly horrible future for financial markets and society.
Anyone who doesn't recognize Prechter's name should know that through most of the 1980s, he reigned as one of the few market analysts with the power to move markets with the prescient calls he made in his newsletter, The Elliott Wave Theorist. So-called Elliott waves were developed during the Great Depression by an accountant named R.N. Elliott. They plot markets and the emotional undercurrents that, according to Elliott, drive them.
That discipline worked splendidly for Prechter in the 1980s. But a persistently gloomy outlook through the markets' steep ascent during the '90s undercut his credibility and list of followers. Surprised by his book's appeal now, I wanted to learn more about his current outlook and called Prechter at his home office in Gainesville, Ga. Edited excerpts of our conversation follow:
Q: You really see the Dow Jones industrial average sinking to 500?
A: Well, triple digits on the Dow. It will go from five digits to three.
Q: This is based, I know, on your study of Elliott waves. But how is someone who doesn't really "get" Elliott waves supposed to take this message?
A: This book is written for people who have no market sophistication. Maybe enough to be a casual investor [who knows] some of the basic terms. But I think that one of the useful aspects of this book is that I tried to write it completely in layman's terms. Short sentences. Very clear focuses on certain essential points. One easy-to-understand example of each one of those points.
Q: Do you expect your forecast to prompt a mass movement of money out of stocks and into cash?
A: No. But if there's anything that might prompt a person to move his funds, it's what I think is a well-reasoned and fully presented argument, which I try to do in the book. Right in the foreword, I say: Don't make up your mind based on who's giving the argument.
What they need to do is make sure that they think independently and look at both sides of the market -- upside potential as well as the downside potential -- and I think that I've made the case well enough that anyone can take a careful read of this book and make up his own mind.
Q: So you see a crash as imminent -- is that the right word?
A: I think we're in one now, but we're in the very early stages. The same thing is true of a depression. People say, well, we're not in a depression, and there are no bread lines and all that. But those are symptoms of the end. And the time to understand what's coming is closer to the beginning, and that's where I think we are.
Q: Do I understand your whole scheme correctly as a deterministic one? That there's no way out -- we have the cycles, the waves, and the waves are going to come regardless. We may not know the extent of the waves ahead of time, but they're going to come, and there's not much that anyone can do -- you've just got to stay out of the way of the waves.
A: That's right. The social aspect of waves is unquestionably deterministic. The important thing, though, is that individual behavior is not deterministic. You can use your rational faculty to investigate this phenomenon, realize that you're dealing with social cycles of human behavior, and, A) get out of the way if you're fighting a trend, and, B) use those trends to your advantage.
Q: You talk about the least risky securities perhaps being T-bills and note that it's not an impossibility for the federal government to default. But what kind of probability would you assign to that, and in your own portfolio would you not have a lot of your money in T-bills?
A: Well, I think the safest investments are actually certain types of Swiss bonds. The safest investments in the U.S. as I assess it are Treasury bills. I don't assign a high probability to a U.S. government default, even as large as this bear market is likely to be. But it's not an impossibility, and that's why I continue to say throughout this book, here are some suggestions for high levels of safety within your home country.
If you want maximum safety, you have to be willing to operate internationally to take advantage of some truly safe banks, truly safe insurance companies, long-term safe currencies, and safe depository institutions for precious metals such as gold, silver, and platinum. They're not in the U.S.
Q: You also touch on what happens to political leaders in a depression. Do you think then that George W. Bush is a goner as President?
A: If the markets go down substantially, then George Bush will lose the election. It doesn't matter what people think of his character. It doesn't matter whether there's a war on or not. If the markets are way down, I think he'll lose. Any President would lose in that situation, and all the Presidents who have been in that situation have lost.... At the moment I would say I think it George Bush is likely not to be reelected.... But...I also think that there will be enough bear market to vex more than one President.
Q: In your best guess do you think that this crash and depression will be worse than the 1929-32 experience?
A: What I've been saying is that the decline that has already begun is along the lines of the bear markets of 1929-32, 1835-1842, and 1720-1722. Now those were in the range of [down] 70% to about 97%.
Q: How should people invest then?
A: The main message I would like to get across is get safe. Be safe. If you talk to virtually anyone else out there today, you will get [a message] that is, in a nutshell: Rush out and take a huge risk.
[Stocks are] risky in normal times, but when you have a historical view of valuation, it's close to financial suicide to be putting your money into a bull market that has already run its course, that is one of the biggest in history in terms of overvaluing shares.... [You] should be in something that's very unpopular right now -- cash.
Q: How do you see the markets playing out?
A: Stock prices have just begun to go down. We could have a summer rally, or we could not. We're in a bear market. That's the first thing.
Q: This is all so depressing. Is it difficult to live your day-to-day life thinking about this?
A: The important thing to realize is that cycles have persevered throughout human history. The depressing thing is to get caught in them and be unprepared for what's coming. Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BusinessWeek Online