Lend Half an Ear to This Doomsayer

Think the market is rotten now? It's about to get worse, much worse, according to Bob Prechter. Worried about Dow 8000? Prechter would tell you he can see Dow 800. (No typo there--that's Dow Eight Hundred.) Worse, perhaps, is that in Prechter's scenario, few of the familiar havens offer shelter. Downgrades will savage corporate bonds. Municipalities will default on their debt. Even Uncle Sam's credit status will be tested. Meantime, real estate will go bust. Forget contrarianism. "In this market," Prechter told me, "it's the bear who is your friend."

If few people today know the name Robert R. Prechter Jr., few investors 15 years ago didn't. A onetime Merrill Lynch technical analyst, Prechter and his newsletter, The Elliott Wave Theorist, began gaining renown in the early '80s. He correctly saw that a long trend of rising inflation was giving way to an era of disinflation. Prechter called the bear market's August, 1982, nadir and, working from his home in Gainesville, Ga., became an off-Wall Street guru. By 1987, The New York Times called him "both prophet and deity, an adviser whose advice reaches so many investors that he tends to pull the market."

That moment, however, would prove to be Prechter's zenith. Steadily bearish calls led his followers far astray from the 1990s' humongous stock market gains--his worst error, Prechter, who is now 53, readily conceded. Given this mixed record, it's a surprise to find Prechter's latest book, Conquer the Crash (John Wiley & Sons, $27.95) at No. 1 among Amazon.com's best-selling business and investing titles. "What I want to do is be an antidote," he told me. To most investment advisers, "it's only a question of, `Is it this group of stocks or that group? This sector or that sector? U.S. stocks or European stocks?' That's not where people should focus. They should be in something that's very unpopular right now: cash" (table).

Prechter comes to this conclusion less from economics than psychology, his major at Yale University. Later, while at Merrill, he picked up the "wave" theories developed during the Depression by an accountant named R.N. Elliott. These hold that market prices follow definite patterns driven by a natural rise and fall in human emotions. In this deterministic scheme, the higher that emotions--and markets--rise, the further they must eventually fall under the weight of an economywide accumulation of too much debt and the ensuing defaults.

So in his Elliott Wave charts, Prechter sees an inevitable stock market collapse that has already begun, an economic depression, and a breathtaking deflation in the prices of most every type of asset. Houses worth $500,000 today will wind up going for $150,000--or less. Banks and insurers will fail, so Prechter's book points readers to those with the safest balance sheets. Given such a climate, he thinks George W. will be another single-term Bush. "Most radical political developments occurred at or near social-mood bottoms, which also were major stock-market bottoms," he said.

Prechter doesn't expect his forecast to move money as it might have 15 years back. In that much, he's no doubt right. One successful short-seller with a taste for technical analysis told me he never looks at Prechter's work and knows no one who does. Timothy Hayes, a bearish strategist with perhaps the leading firm specializing in technical analysis, Ned Davis Research, said Prechter's view "sounds a little dire to me." More predictably, long-term bulls scoff. Wharton professor Jeremy Siegel, author of Stocks for the Long Run (McGraw-Hill, $29.95), told me he gives depression, deflation, and a banking collapse zero probability. "That cannot be repeated under any circumstance," he added. "I will bet any amount of money on that."

I've got my chips with Siegel's. So why bother paying Prechter any mind at all? Because on the critical role of market psychology, he's more right than Wall Street's Establishment usually admits. Why are stocks in companies that make cookies for your stomach more valuable today than those making cookies for your hard drive, when three years ago the reverse was true? Yes, it's prospects for profit growth. But it's also in large measure a matter of investor sentiment. I don't see bread lines around the corner. Yet in a bear market, it helps to take a look through the eyes of the most fearsome grizzly.

By Robert Barker

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