Could he be right yet again?
February 13, 2003 11:47 AM   Subscribe

Could he be right yet again? : Interview with Bob Prechter (and another one) If he is, we're all in for a world of hurt. In this three part interview, Elliott Wave International president Robert Prechter discusses his new book, “Conquer The Crash: How To Survive and Prosper in a Deflationary Depression.” During the 1980s, Bob Prechter won numerous awards for market timing as well as the United States Trading Championship, culminating in Financial News Network (now CNBC) granting him the title, "Guru of the Decade." In 1990-1991, he was elected and served as president of the nation-al Market Technicians Association in its 21st year. He has also published a seminal book on Elliott wave analysis titled, “Elliott Wave Principle – Key To Market Behavior,” three books on the major practitioners of wave analysis, and books on his own views in Prechter's Perspective and At the Crest of the Tidal Wave.
posted by muppetboy (47 comments total)
muppetboy - congrats, you found a good one. Now you can bash at the skeptics with those impassioned rhetorical chunks of yours.
posted by troutfishing at 11:59 AM on February 13, 2003

ok. not that it will change anyone's mind... ;-)

seriously, i'm open to learning and changing my mind. i'm just thinking about elliott and various aspects of our floundering economy in this light because it makes the most sense to me. i'd love to be talked out of it.
posted by muppetboy at 12:02 PM on February 13, 2003

Scary stuff, but I don't doubt it. Japan's been in a deflationary situation since the late 80's, and have been thus far been unable to escape from it. The current interest rate is, what, one and a half percent? Al Green can't cut it much more, which means the incentives for banks to loan money are getting fewer and fewer. Bob Prechter claims we're riding on about $30 trillion in debt. I don't doubt that things are going to get very, very bad here.

Canada's looking mighty nice.
posted by Civil_Disobedient at 12:06 PM on February 13, 2003

Canada's likely going to be in the same, or very similar, boat. Though it does look nice, thank you.

I'm not an economist, but here's my theory on the economy: It's so immense, so complex and so subject to such an incredible number of factors that all theories are useless. It's like that old story of the four blind men trying to describe an elephant from touching it at four different places. They'll all be right in part but will never be able to succintly describe the whole or predict its actions.

There are general, basic rules to follow that will serve you well in just about any scenario (debt is bad, living simply and having marketable skills is good) but really, when next week or year arrives it tends never to be either as wonderful or as dreadful as the best and worst predictions. Or something like 9/11 invalidates all theories.

All the same, I've put a hold on the book at the Toronto Public Library (I'm 124th in the queue for 33 copies). It can't hurt to learn about this man's ideas. As I said, the blind man may have a few correct ideas about the elephant.
posted by orange swan at 12:27 PM on February 13, 2003

Prechter must be wrong. Duhbya told me if we give massive tax cuts to the wealthy and pork to the corporations it will stimulate the economy and everyone knows Duhbya restored honor and integrity to the White House so therefore must be telling the truth. Sorry Prechter but you're up against insurmountable odds my friend.
posted by nofundy at 12:30 PM on February 13, 2003

I work for Bob Prechter. I've been dying to post articles explaining his theories ever since I've been a Mefi member but have been woried that it could be construed as a conflict of interest.

Right or wrong, I can tell you from first had experience that he's a facinating man. I've been imersed (admittedly, over immersed) in his arguments, and I have to say, he makes an incredibly powerful case.

His basic theory on market behavior is that prices oscillate in recognizable patterns in accordance with fluctuations in mass psychology. He's radical becase he doesn't merely use the Elliott wave theory (which he didn't develop, only popularized) as an indicator amongst others -- his success in predicting the markets -- even on very short timeframes -- has been soley the result of a pure applicatio of this method.

In other words, when deciding whether the Dow will rally or decline in any given week, he ignores news and earnings reports completely. He makes the point that these indicators tend to chase the trend, rather than the other way around.

He's expanded this theory outside the realms of market forecasting as well -- he's made academic forages into the social sciences.

And he's a really nice guy.

He's been convinced that we're nearing a deflationary market crash for years now (too many; he's lost credibility as a result) but just between you and me, he recently called a staff meeting where he shared with us that he thinks that the Dow could be dropping beneath 5000 in a matter of weeks.

If you're intrested in learning more, his latest book is a good place to start.
posted by Pinwheel at 12:34 PM on February 13, 2003

pinwheel, i do think he has a compelling argument. but what are you supposed to do (besides taking your $ out of stocks) if we really are headed for a crash? what does he mean by safe banks, etc.?
posted by _sirmissalot_ at 12:39 PM on February 13, 2003

Well, his makes the terrifying point that if we have a massive credit contraction (which at this point seems inevitable), our big, corporate banks will suddenly go crazy to become liquid. As deflation sets in and people start to default on their loans, there could feasibly be a money supply problem ala It's a Wonderful Life.

The safe banks he mentions are institutions that back deposits with (gasp!) real cash and gold, and would thus be able to give you back anything you put in.

As for what one is supposed to do:

Assuming you believe that a severe market contraction or crash is forthcoming, then yes, cash out every stock you own (including your vulnerable 401k). Deflation will make the dollar one of the strongest investements you can own.

Don't buy real estate. Consider the property you own as a "consumption item."

For the most part, avoid bonds as well. When everyone makes a run for cash, the Fed may have trouble covering them.

Then, wait until everyone believes that the markets will stay fucked up forever. This will signal a bottom, and then you can have your pick of the best investment bargains of your lifetime.

If you really know what you're doing, consider shorting the S&P index with a protection stop that you're comfortable. Some people will get rich off of the crash itself.
posted by Pinwheel at 12:46 PM on February 13, 2003

And, wow, I only just now clicked through the first interview link. That was my interview with him.

I would suggest the reading the second interview first though; it's a more current explanation of his view on the markets.
posted by Pinwheel at 12:56 PM on February 13, 2003

I've heard Paul Krugman address this issue as well. Did Krugman get some of his points from Prechter?
Would euros be better than dollars as a safe haven?
Cashing out my 201k would be problematic as it is the only retirement option my employer offers. Should I invest in something more secure that is offered through a 401k plan instead?
posted by nofundy at 12:58 PM on February 13, 2003

Now, if only I had some cash. I'd really love to be able to hold onto it. It goes out as fast as it comes in. What happens then, to people and (thank god I don't have children) families in my boat?

On preview:
I see now. I'll be movin' in with nofundy.
posted by crasspastor at 1:01 PM on February 13, 2003

If Prechter's right, your 401k isn't a retirement option at all. Meaning that you won't be able to retire with that money when the markets are through with it.

(I believe that the 401k's rise to prominence was a big mistake. During the market boom of the 90s, people began to see the stock market as a benign, tameable beast. It's not. It should come with a warning label: Do not use unless you are a trained professional.)

For the moment, I'd invest in piggy bank. After 2 or 3 years it may be safe to go back into stocks as a retirement plan.
posted by Pinwheel at 1:04 PM on February 13, 2003

Ladies and Squirrels, start hoarding your nuts.
posted by cinderful at 1:08 PM on February 13, 2003

i've been thinking about the merits of cashing out my 401k and taking the penalty just to pay off my old credit debt. now it seems like a better and better idea; i'm going to need to find out if the IRS allows you to do that, though. pinwheel, thanks for this info -- but one question about the banks (or two) -- aren't FDIC insured good enough? and is there somewhere to find out whothe gold/cash backed banks are? besides buying the book, i mean
posted by _sirmissalot_ at 1:10 PM on February 13, 2003

pinwheel, i realize that following the nasdaq's demise is kindof passe, but what does prechter (and yourself) think about it's ultimate bottom? has it already fallen most of the way, or does it too end up at an unthinkable bottom (300, 500, 700?) ?
posted by muppetboy at 1:16 PM on February 13, 2003

Sirmiss: Do it. You'll be killing 2 birds with one stone. (And yes, I'm almost certain it's legal. You'll have to pay penalties on early withdrawal, but if you're inclined to prepare for the worst, that's the first step you should take.)

As for the banks, it depends on how much money you plan to invest and where you live. Email me, and I'll try to suggest something:

Muppetboy: You're right. It's already down 70% off the high - you wouldn't think it could take that much more of a beating. But it can. Consider Germany's equivalent tech index: It was obliterated all-together. Many of the Nasdaq's smaller companies will bankrupt and have to delist, so it depends on how they want to play it. It may just fold into the S&P or Willshire 500.
posted by Pinwheel at 1:20 PM on February 13, 2003

does prechter have any specific number for a bottom for the nasdaq where it would be below fair value again? (assuming it doesn't just disappear altogether)
posted by muppetboy at 1:22 PM on February 13, 2003

let me ask a more direct question and also make a disclosure. i'm currently shorting the nasdaq and have been for a while (using 2 year LEAPS because i prefer a greater time value). is there a good reason to expect the DOW to have a greater decline? when i read the prechter interview i got the feeling that this was the case as people have fled to the "high ground" of the DOW/S&P500 trusted companies. and since that's the last to fall, it falls the furthest. is that an accurate understanding of prechter's position?
posted by muppetboy at 1:25 PM on February 13, 2003

Before I post any stock advice, let pose your question to one of our analysts.

(And by the way, is this thread beginning to violate some mefi guideline or another? If anyone suspects that, please let us know.)
posted by Pinwheel at 1:29 PM on February 13, 2003

Apparently he's not cited an long-term target for the Nasdaq. This may be beacause he's uncertain about the index's future; I don't know.

I do know that he tends to recommend shorts on the Dow and S&P and I haven't heard him mention the Nasdaq before. Perhaps you could cover your short and invest in another index?

If you want to read his monthly market timing publications, check them out here. I can personally testify that we've been doing a great job timing the markets lately, expecially on an intermediate timeframe.
posted by Pinwheel at 1:38 PM on February 13, 2003

Before everyone gets too convinced by this guy, let's all take a moment to review the Efficient Market Hypothesis.
posted by boltman at 1:41 PM on February 13, 2003

Be aware, the Random Walk theory is under heavy, heavy fire from a number of different statistical research projects right now.
posted by Pinwheel at 1:49 PM on February 13, 2003

And for a little more context, check out this 4 year old article. I think Prechter's use of the Elliott Wave analysis is one of the best pieces of market understanding around, but I am still spooked by the Long Term Capital Management fiasco. Even the best theories can founder.
posted by Nicolae Carpathia at 1:54 PM on February 13, 2003

I don't totally buy it myself (especially in its strong and semi-strong forms), but given how often the supposed "experts" are totally, utterly wrong about the markets, I just think it's probably a good thing to keep in mind. I suppose it really comes down to how rational investors are on the whole.
posted by boltman at 2:01 PM on February 13, 2003

Very true. Bob has been very, very wrong for a long time now. The only way he'll ever vindicate himself is if he's eventually right. After that, it won't matter whether he was 5 or even 10 years too early.

As he says, he's trying to time a price pattern that's been over 200 years in the making. With that in mind, I think he deserves a pretty lenient margin of error.

(Thanks for the link to the Long Term Capital Management fiasco analysis. I look forward to reading it.)
posted by Pinwheel at 2:01 PM on February 13, 2003

that's a good point, boltman.

i think that the EM hypothesis is correct over the short term, with a couple of exceptions:

1. information is not always equally accurate to all participants

2. information is most definitely not available equally (for example, NASDAQ level II access and the more basic fact that not everyone pays equal attention)

3. someone has to be first and there are people who make their livings exploiting this (arbitrageurs)

but even beyond that, i think the EM hypothesis breaks down more and more the longer the timeframe gets. once you get to years and decades, there's a lot more mathematical possibility of prediction (just as the details of a chaotic system are impossible to predict while attractors can give some limited understanding).

over a very long timeframe, we can see that the EM hypothesis doesn't hold. if prices were truly a *random* and unpredictable walk, the buy-and-hold strategy (which is just a longer term trade!) that worked from 1974 to 2000 could not have succeeded. in fact, if prices were truly unpredictable, there would be no point in owning stocks at all because you couldn't on average make money on them.

the way i see it, the EMH says "you ain't gonna make money day trading (on average) (unless you have an information advantage)". i generally agree with that. i believe it is less right about longer term speculations and ultimately it is entirely wrong about long term investing.

if people were buying and selling something with no intrinsic value, the EMH would be exactly right. but companies do have intrinsic value and that value increases under certain conditions and decreases under other conditions. this makes the walk non-random even if it is not entirely predictable. what you get is an increased *probability* of predicting the market. when the risk/reward ratio is correctly assessed (and nobody can say when it is), investors and speculators can get rewarded for beating the EMH. why? their *interpretation* of the available information was better.
posted by muppetboy at 2:18 PM on February 13, 2003

I think the biggest problem with the EMH is that it assumes that investors trade like machines. The fact is, they don't.

Many, if not most, short-term trades are made in the middle of a shitstorm and end up coming more from the gut than the brain. The available information only plays a partial role. How much coffee that trader has had that morning might be equally as important as an earnings report.
posted by Pinwheel at 2:29 PM on February 13, 2003

"I suppose it really comes down to how rational investors are on the whole."


then there's the $27 million dollar sock puppet ad campaign and the fact that the whole nasdaq composite index was trading at what was it? 280 times earnings or something? we were all going to be millionaires! don't you remember that? it was just a couple of years ago. a p/e ratio of 280 means it would take 280 years to break even at the rate those companies were earning money. yup, exponential growth had already been factored in (based on what evidence exactly?). i fail to see any rationality coming FROM investors. it, unfortunately, has to be IMPOSED on them by market realities.
posted by muppetboy at 2:36 PM on February 13, 2003

if people were buying and selling something with no intrinsic value, the EMH would be exactly right. but companies do have intrinsic value and that value increases under certain conditions and decreases under other conditions. this makes the walk non-random even if it is not entirely predictable

Theoretically though, the fact that there is an intrinsic value to the company shouldn't change anything because the stock price is supposed to reflect the total value of the company over its entire life. Under EMH, as new information comes out relevent to the future value of the company, the stock price changes instantaneously to reflect this information. The idea is that since the vast majority of stock is held by highly sophisticated investors, enough of them are going to interpret the new information correctly that it will result in a "correct" assessment of the total value of a company over its life (given the information available). The amazing liquidity of the stock market insures that there is virtually no lag between the release of the information and the change in price. I do think the theory has problems, but I guess I don't see how expanding the timeframe would affect these basic principles.

on preview: yes, I wholeheartedly agree that the past 5 years demonstrates that psychology can have a huge effect on the markets. But is this the exception or the rule?
posted by boltman at 2:50 PM on February 13, 2003

my bad. i totally screwed up that post. i meant only to question the random walk theory over longer timeframes (the longer the timeframe gets, the less the theory works...). i think that's pretty accepted.

the EMH is acceptable but really ugly to me. and i accept it with the caveats i listed and with the big question mark that pinwheel put after the whole concept. do traders actually function rationally? that's a key question.

i think there is a lot more "monkey mind" in the stock market than we'd like to admit. and the effect of psychology on the markets occurs over such incredibly long periods that it's hard to notice because you can live half your life during a sentiment upswing. 1974-2000 is a very long period of time. i think elliott wave people argue that it's the rule. what happened in the last 5 years is just the final blowup of what's been going on since 1974.
posted by muppetboy at 3:05 PM on February 13, 2003

btw, what did you think of the two superimposed graphs at the top of part two of the interview? isn't that incredibly uncanny? i mean we have two periods in time there. different technologies, different companies, lots of differences in the technical aspects of the markets. and yet they behaved so incredibly similarly! what's the common driver if it's not human nature?
posted by muppetboy at 3:11 PM on February 13, 2003

I'm not a big fan of predicting the future from charts, or tea leaves. But the problems of too much credit and potential deflation are real. The problem I see with this interview is that it sounds like a huckster at work (and of course his publisher gets most of the money! they always do). His basic pitch is to put everything in cash. If you buy his argument, you should put all your 401K money into CD's or money market funds. I don't think you need a list of safe banks as long as the ones in this country are insured by the full faith and credit of the US govt, which can pick millions of pockets at any time it chooses. The chart that counts is that the stock market has an annual return of 10 to 12 percent, and you would have been ahead of the game if you dollar-cost averaged into stocks during the Great Depression. Of course, that's hard to do if you're unemployed or deeply in debt, so the advice to pay off all your debt asap is sound.
posted by Slagman at 4:37 PM on February 13, 2003

i could be wrong about this, but i don't think any banks are actually insured with the full faith and credit of the US government (US treasury bonds). they're insured by the FDIC, which is just a branch of the US government which has only so much capacity to "fix things". also, if you're a rich guy you might want to know that the FDIC only insures you to $100K (i believe this is per banking institution that you have money in, so you can spread the money around and get better coverage).

i'm not sure i agree that there will be banking failures on the scale that prechter suggests, but i'm definitely thinking about playing it safe just in case.
posted by muppetboy at 5:45 PM on February 13, 2003

oops i meant to say "(*LIKE* US treasury bonds)"
posted by muppetboy at 5:48 PM on February 13, 2003

Hi. Sorry to burst all the bubbles around here, but we're not in a recession. Yeah, I know, the government thinks we are.
Oh, and we're especially not in a deflationary recession. The danger of that happening is, in all likelihood and from all indications, over.

The Institute for Supply Management tracks the manufacturing and service sectors of the economy month-to-month in a publication called "ISM's Report on Business". Their numbers from the previous month are available in the first week of each month.

The numbers for the economy at large have been up for the past year. That's right. Since January of 2001. Can I emphasize that some more please? JANUARY OF 2001.

The overall Purchasing Managers' Index (which is an index based on purchasing decisions made by the manufacturing industry) for last month is at 53.9. When the PMI's greater than 50, the Mfg industry purchased more than they did the month before. Obviously, people don't purchase more than they did the month before if they're uncertain or they don't have orders to fill.

Incidentally, order on-time performance is down compared to last month. That means that orders are arriving late, because the manufacturing industry is closer to capacity than it was the month before. That's great news -- part of our economic growth is based on capital investment, and it looks like capital investment is going to go up based on these numbers.
On top of that, manufacturing and service costs are going up. Prices of raw materials, transportation, etc. are all going up. That's gotta be passed along to consumers eventually. You know what? You can't have a deflationary economy when prices are going up.
Let me repeat that again.

The only thing that isn't up is employment. There's a bunch of reasons for this, but the decrease in employment is probably due to continued industry consolidation. I've seen estimates that say new jobs are starting to be created again and we should see some sort of increase in available jobs in both manufacturing and service sectors in the next six months.

The recession we had was caused by y2k. Basically, manufacturing and service businesses overstocked on goods as a hedge against a possible interruption in supply caused by y2k. Then they had to use the stuff they bought and stopped buying. That's what caused the whole damned bubble economy. That's it. Not the dot-com boom; that was simply a result. It was a manufacturing oversupply.

Of course, this is really boring. And it's easier for the news sources to listen to hucksters selling books with sensational stories about deflation and all that stuff. And Bush needs a crisis to rule over while he's in power. *shrug* But we aren't in a recession.
posted by SpecialK at 9:35 PM on February 13, 2003

Wow. Be careful, people. Prechter's been doing his thing since before I became a stockbroker, which was back in 1982, and if he was always right, he would be richer than Gates by now. (He isn't.)

Some points of information (or corrections):
FDIC insurance applies neither to the bank nor to the "account"; it applies to deposits, and FDIC-insured deposits are backed by the full faith and credit of the United States. The insurance limit is $100K per account. That means you can have Bob's acct, Julie's acct, Bob and Julie's joint account, a family trust account, custodial accounts for each of their 11 kids, etc., and each account will be insured up to $100K.

One reason to concentrate on "safe" banks is that they're less likely to fold. If banks across the country start falling like dominoes, you'll at least have time to go to the teller window before your "safe" bank closes. A "safe" bank is not one that holds your cash in the vault. No banks do that, or they'd be out of business. A "safe" bank is one that has capital in excess of the minimum regulatory guidelines. Capital is cash or cash-equivalents, adjusted for liquidity and risk. FDIC insurance will make you whole up to $100K, but it might take a few days. Or weeks. And that can be inconvenient.

sirmissalot - don't take money out of your 401k to pay off your credit card bills unless it's absolutely the only way you'll ever get them paid off. On top of the money you withdraw becoming taxable income (state and federal), you'll pay a 10% tax penalty. If you decide you need to tap the 401k to pay off those credit cards, borrow the money out of your 401k. You have to pay yourself a "market rate" of interest on the money you're borrowing from yourself, which gives you the opportunity to pay yourself 10-12% interest into your 401k - where it will compound tax-free for years. Most employers allow you to pay back what you borrow from your 401k through payroll deduction, too.

Tax-deferred compounding (as in a 401k) is the most powerful tool you have at your disposal as an investor. If you're uncomfortable with the risk of the stock market right now, don't stop contributing to the 401k, just elect to put your contributions into a money market fund. Virtually all 401k plans offer a money market fund (and usually a US government securities-backed money market fund as well if you're really paranoid). Remember those dollars go into the 401k pre-tax!

US Treasuries are the safest thing you can invest in, deficit or no deficit. The government is the only borrower who can print money to pay you back if they have to. Sitting on a bunch of cash is just dangerous. Not only do you forego earning interest, meager although it may be, but cash can get stolen.
posted by JParker at 11:00 PM on February 13, 2003

I love stuff like this. Apocalyptic predictions of doom, and the wild-eyed prophets who make them, are typical of the bottom of bear markets. *cough*Joe Granville*cough*

"When blood runs in the streets, buy common stocks," is the reputed motto of the House of Rothschild. I don't know if we're at a bottom, but I'm positive we're closer to a bottom than a top.

US Treasuries are the safest thing you can invest in, deficit or no deficit. I'll disagree with that. Inflation can make hay of fixed-rate investments. Most of the folks here don't remember the double-digit inflation of the 1970's. People with money in savings accounts or bonds were decimated.

Over the past century, common stocks have blown away all other vehicles. Yes, there's a hell of a lot more volatility, and you shouldn't be buying them if you'll need the money in less than ten years, but over a lifetime of investing, nothing beats owning an index fund. Put your 401k or 403b in an S&P 500 index fund, and leave it there.

My US$.02.
posted by Slithy_Tove at 7:08 AM on February 14, 2003

"US Treasuries are the safest thing you can invest in, deficit or no deficit. I'll disagree with that. Inflation can make hay of fixed-rate investments. Most of the folks here don't remember the double-digit inflation of the 1970's. People with money in savings accounts or bonds were decimated."

I agree with that 100%. If you're in bonds, you want to put only cash you don't need for a little while in very short term bonds (so you can wait them out if the price drops). Deflation vs. Inflation is one major point on which I don't see Prechter's analysis as solid. The most solid thing I've heard is this: we're going to see price deflation in credit-based markets (big ticket items) and price inflation everywhere else.

"over a lifetime of investing, nothing beats owning an index fund"

Not according to Smithers and Wright. According to Smithers, the best thing to do is buy-and-hold stocks only when Q has a reasonable value. The book is fascinating and Tobin's Q (essentially a value that represents what it would cost to replace all of a company's assets) appears to be a wonderful market barometer. Smithers and Wright have applied this to the whole market history for which we have data. I recently downloaded the data for the S&P 500 and there's about a 30% decline required to get to fair value of Q. Since markets overshoot, we'll probably see a 40-50% drop. Not nearly as "apocalyptic" as the Prechter analysis, but pretty serious nonetheless.

"I'm positive we're closer to a bottom than a top."


"The recession we had was caused by y2k. Basically, manufacturing and service businesses overstocked on goods as a hedge against a possible interruption in supply caused by y2k. Then they had to use the stuff they bought and stopped buying. That's what caused the whole damned bubble economy. That's it. Not the dot-com boom; that was simply a result. It was a manufacturing oversupply."

That's a new one on me. You're saying that the dot com boom and the market top in 2000 were caused by *y2k*? don't you think hysterical valuations had anything to do with it? don't you think we just went through one of the largest speculative bubbles in market history? i find it very hard to see it any other way. speculate... inflate... POP! and now what we're suffering through is an enormous stock market correction. i could buy the notion that it doesn't go back to 1974 if you want to argue that, but i still see everything that's happened since about 1995 as one huge stupid misallocation of capital.
posted by muppetboy at 7:50 AM on February 14, 2003

"I love stuff like this. Apocalyptic predictions of doom, and the wild-eyed prophets who make them, are typical of the bottom of bear markets. *cough*Joe Granville*cough*"

Yes. But my feeling is that EVERYONE is an apocalyptic predictor of doom at the bottom of a bear market (at least one of the proportions that we're working through). If we were at or near the bottom, I think all of MEFI would be chiming in and commiserating about how we're all screwed forever and how we need to figure out an alternative to Capitalism (and i think that's about how bad DOW 1000 would be). Instead only a handful of people want to talk about it. Why is that? Could it be that blind optimism still prevails? When the whole CULTURE turns apocalyptic and nobody ever wants to own stock again... THEN we'll be at a bottom of one of the largest speculative bubbles in history.

I do see one way this could quite reasonably work out differently though... If the markets stagnate and "range trade" for many years while companies get back on their feet. Of course logic is perhaps against that... it's the whole risk/reward ratio thing. If it becomes apparent that stocks are going nowhere for a long time, people stop wanting to take the risk and a slide begins. But people are highly indoctrinated with this buy-and-hold thing, so who knows...
posted by muppetboy at 8:03 AM on February 14, 2003

muppetboy, I haven't read Smithers and Wright, and I don't know Tobin's Q, but I do know that it is difficult verging on impossible to come up with a robust measure of market valuation. Like other methods of market timing, valuation measures all seem to be based on optimizing past data, and as soon as they are proposed, promptly get blown up. The 1987 crashette took Black-Scholes options valuation theory out behind the barn and shot it, for example.

I think we're closer to a bottom than a top because this bear market has been going on for about 2 1/2 years now, which is pretty long for a bear market in a good economy, and because the NASDAQ has already been hit for, what, 80% off its highs? Hard for me to imagine it going down another 80%, short of Armageddon, and only then if the Beast wins a few rounds.

While the 'logic' of the bubble was false, some of what pushed the market in the 90's is still true: the Cold War is over, money that was tied up in military spending is now in the civilian economy. (I don't think the war on terror is going to make much of a difference; the kind of money you spend hunting terrorists is much smaller than the kind you spend preparing to take on Russia.) Market economies are developing all over the world, which will provide huge new markets for goods, and source of products, once they get rolling. I think the future is bright.

Right now we're in the doldrums because we're recovering from the and telecom debacles, and the prospect of war is hanging over our heads. But this, too, will pass.

On preview: I, too, have wondered why we're not seeing more market chatter on Mefi. I wonder if it may just be the age of the participants. Lot of folks in their late teens and early 20's, who just don't have the capital to care much about the market, yet.
posted by Slithy_Tove at 8:13 AM on February 14, 2003

You really should read about Tobin's Q. Intuitively, I think it's the most reliable indicator of value possible. Q answers the question "If I had to build this company (Smithers has expanded it to the whole market) from scratch, how much would it cost me RIGHT NOW?" What else could be a better mark of value? Smithers calculates Q for the markets for most of the 20th century and then shows how Q can improve your odds. I think he's right.

I agree that there's a lot of good stuff going on in the world. But that won't necessarily save us from our own doings. I certainly hope we're just in the doldrums as you say. I'd far rather lose the short interests I have and have everything be okay than see any part of what I think is coming.
posted by muppetboy at 8:29 AM on February 14, 2003

SpecialK, I agree with you that we're not yet experiencing deflation. I also think that Prechter is wrong about deflation across the board. I think what we're going to see is deflation in big ticket credit-purchased items. and INFLATION in the prices of day-to-day things. In many ways this is a horrible possibility. And the reason it may happen this way is the coming credit crunch and the collapse or partial collapse of the housing bubble. The whole idea of funding consumption on home mortgage loans is quite insane.

The problem I have with your manufacturing approach to Prechter's argument is that neither he nor I think this is a supply side problem. The problems are all on the demand side (which is 2/3 of the economy, after all) and with the credit markets. Our Republican administration has yet to realize even this basic fact because they're religious supply siders.
posted by muppetboy at 8:39 AM on February 14, 2003

"I think we're closer to a bottom than a top because this bear market has been going on for about 2 1/2 years now, which is pretty long for a bear market in a good economy"

why do you think this is a "good economy"?

"because the NASDAQ has already been hit for, what, 80% off its highs? Hard for me to imagine it going down another 80%"

but what if there's still not good investment value to be had at nasdaq 1200?
posted by muppetboy at 8:48 AM on February 14, 2003

SpecialK, I'm a little puzzled at your post. I don't think anyone claimed we're in a deflationary environment. Least of all Bob Prechter. Here are a couple of quotes from the second interview (which you should definitely read):

BOB: This could be one of the most important questions that we are going to talk about here. Number one, the money supply hasn’t contracted. You are absolutely right. Now in recent weeks, it has contracted, but it has done so a few times, and they haven’t turned into outright deflation yet. As some of my critics have said, they think this is evidence that we will not have deflation. Of course, what we are discussing here is not current reality but the future. I think the slowdown in money supply growth is very ominous for a change to deflation. I think the markets are telling us that we are going to see another big impetus towards deflation, because the stock market is now heading down again.

JIM: We also know that there are some limitations in terms of the Fed creating more credit. One thing you have to have with credit is a willing lender and a willing borrower. We are just beginning to see, at least in my opinion, signs of credit problems. We have had credit spreads widening between corporates and Treasuries. I don’t know exactly how much, but close to 11 or 13% of Fannie Mae loans are either in default or delinquent. Do we get to that point here shortly, where lenders start looking at this? I know in the corporate world, they aren’t wanting to make loans. Corporate paper has dried up. Although so far, banks are still willing to open up the spigot in terms of mortgages, refinancing homes and new credit for even bigger homes.

BOB: You hit the nail on the head. This is not a new trend. It has been going on for two years. In terms of lending, bankers have become radically more conservative towards institutions and individuals that they think are a credit risk, and number one is corporations. For the same reason we talked about a few minutes ago, bankers are completely comfortable in lending money for real estate and houses and re-financing. Why is that? Because they are still caught up in the house mania. They think that that those loans and values are going to be fine. Just as people three years ago thought they should load their 401k’s with mutual funds, which would be fine. The bankers’ psychology is absolutely deadly. They have already become more conservative in terms of lending to businesses that might produce something to stimulate the economy, and yet they are completely sanguine about lending money to support a price boom in property, which ultimately is going to collapse around them. It is really a doubly dangerous stance that they have taken and will ultimately have terrific implications for declining property prices and deflation.

Addendum per Mr. Prechter’s review of this transcription -

[I am, let’s say, 70% confident about deflation. But I am fully confident about crash and depression, because even if the Fed were somehow successful in creating inflation, it would not help the economy. “Printing money” seems to imply value creation, but printing notes just transfers – i.e., steals and distributes -- monetary value from savers to others. You can’t grow an economy by printing notes because it’s just a transfer of monetary value from people who are conscientious to others who are not. You might be able to grow inflation that way but not the economy. Credit is different because the lender thinks he still has the value and often does. Credit inflation is what we have had in recent decades, not money printing. It’s a key difference. So while the government and the Fed might be able to ruin the monetary unit, they can’t prevent the developing depression from taking place.]
posted by muppetboy at 9:02 AM on February 14, 2003

muppetboy: Will you please take a moment to email me?

Send to: Thanks.
posted by Pinwheel at 12:23 PM on February 14, 2003

The New Scientist had a short article a few months ago written about a scientist who had applied fracture dynamics tot he stock market and predicted a large stock market crash sometime this year.
posted by drezdn at 9:39 PM on February 14, 2003

That article was about Bob Prechter. It was written by a man named John Casti (a well-respected authority on the complexity theory), who has recently become interested in Prechter's ideas.
posted by Pinwheel at 11:25 AM on February 19, 2003

« Older visomat teletext   |   Always a Catch Newer »

This thread has been archived and is closed to new comments