I doubt that we were alone today (October 9, 2008) in Elliott Wave International's offices as we watched the stock markets plunge in the last hour of the trading day. The Dow is now down 40% from its market high almost one year ago to the day. It's the kind of sustained, jaw-dropping market movement that few people remember experiencing in their lifetimes.
All this while the Federal Reserve and central banks around the world lowered their rates a half a point in a coordinated effort to try to convince investors that they know what's going on and that they're going to put a stop to it. All this while the U.S. Treasury has been gearing up its program to put the $700 billion bailout plan in action. All this while the U.S. Fed has been pumping even more hundreds of billions of dollars into the system to get banks to lend again.
Can you say, G-U-L-P, it's not working? People have lost confidence, and the markets reflect their concern. Without confidence, the financial house of cards falls down. This is exactly what Bob Prechter writes in his best-selling business book,
Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression. Here's how our analysts, Steve Hochberg and Pete Kendall, explain what happens when the confidence game is up:
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"Finally, there is the whole point of the government’s extraordinary actions, the restoration of confidence. 'The government needs to step in and inspire confidence,' goes the oft-repeated refrain. Of course, the harder anyone tries to prop up confidence, the less confident people get. 'The only way it will work,' says columnist Jonathan Weil of Bloomberg, 'is if people like you, think other people like you, think other people like you, will think it will work.'
"Here’s how President Bush sees it: 'At first, I thought we could deal with the problem one issue at a time. The house of cards was much bigger and started to stretch beyond Wall Street. When one card started to go, we worried about the whole deck going down.'
"We did a double-take on this statement. Did the President of the United States describe the U.S. financial system as a 'house of cards?' Indeed he did, and, in doing so, he took the words right out of Conquer the Crash: 'Confidence is the only thing holding up this giant house of cards.' The presidential avowal of a position that was once considered by some to be among the most radical statements offered in Conquer the Crash goes straight to the book’s main point—at its core, it’s a psychological process. The deflationary depression therein described must surely be unfolding."