The market has been jerking down since the high on April 26, 2010, but most people don't want to believe that it's going to be a big bear market -- particularly since big bear markets usually usher in depressions. Yet there's one thing that Robert Prechter has been clear about over the years: that we are indeed headed for a deflationary depression that will outdo the one that many of our grandparents lived through in the 1920s and '30s. In 2009, Wiley published a second edition of his classic best-selling book, Conquer the Crash: How to Survive and Prosper in a Deflationary Depression. No one likes to hear this kind of talk when the economy is strong and the markets are reaching new highs. But when the economy looks like it's fumbling and the markets begin to show signs of faltering (flash crash on May 6, anyone?), then people become more open to listening. A deflationary depression will be difficult to live through, but Prechter explains that it's better to prepare than to be taken by surprise and lose your life's savings. Here's a Q&A with a journalist from early in the 2000s in which he discusses why he thinks that the upcoming depression will be worse than the Great Depression.
* * * * *
Excerpted from Prechter's Perspective, 2004
Q: You say that the coming stock crash will lead to a depression. If so, wasn't the 1987 crash wrong? The economy has gone on to record activity and new highs.
Bob Prechter: Not all crashes lead to depressions. The 1962 crash, for instance, which was Primary wave 4 of Cycle wave III. The 1987 crash was in almost the same position as that one: Primary wave 4 of Cycle wave V, although because of its large price movement, I didn't realize it at the time. That corrective pattern did lead to a recession, though, in 1990-91. But the coming crash will be different. It will be much larger, part of a grand Supercycle bear market.
Q: What time period does the current long-term pattern in the markets have the most in common with?
Bob Prechter: The 1720 peak. That's when the investment manias associated with the South Sea Bubble in England and the Mississippi Scheme in France ended.
Q: Will the bear market be similar to the one that followed that peak?
Bob Prechter: Similar, yes, but while the bear market of the 1700s produced 64 years of a zigzag pattern, a very simple down-up-down shape, this one is likely to be a sideways pattern, which will manifest as plummeting major declines punctuated by tremendous rallies back to near or slightly past the old highs. If you take a look at the Dow Jones Industrial Average chart from 1966 to 1982, you can get an idea of what I'm expecting. But it will occur on a larger scale.
Q: What about the accompanying economic turmoil? How quickly will depression arrive?
Bob Prechter: Because the economic changes that are occurring are of such a very large degree, they will occur in a fashion different from the slam-bang progression of typical recessions of the past 50 years. I think the economic expansion in force since 1991 is ending, and we will then have another contraction, which is deeper than the last. After it's gone on for a while and economists actually recognize it, you will undoubtedly hear continual reiterations that it's just a "mild recession." Any recoveries will be met with fanfare and assurances that a new boom is under way. But any bounce will just be a bear-market rally against the larger trend. When the bottom is reached, the economic devastation will be front-page news, just as it was in 1933.
Q: Do you see the same thing happening globally?
Bob Prechter: A Grand Supercycle bear market and depression will be worldwide, for sure. That's too big a degree to have only local implications.
Q: Many people would indignantly say, "Today is not like 1929."
Bob Prechter: They're right. It's worse.
Q: Worse than in 1929. Why?
Bob Prechter: Because it seems better, of course. People are more optimistic than ever before, at least as far back as our data go. And look at the results. When but at a major top in worldwide social mood would you ever have had the Berlin Wall come down, communism rejected, sanctions lifted on South Africa and the idea of a "new world order"? This type of psychologically induced event on the world stage, including Mideast, IRA-English and Bosnian peace agreements, 20 American free trade agreements in 34 months and, in October 1995, a photograph commemorating the largest gathering of national leaders in world history, has continued right through today with the normalization of trade ties with China.
Q: This is bad news?
Bob Prechter: It's a huge top. At the bottom, international tensions will be high and include active conflict, as always. That will be bullish … which means for the future.
Q: What will be the prime indication that the great economic contraction is about to start?
Bob Prechter: The stock market will be the main indication. When the Dow heads down in a big way, we'll be off the cliff.
"A Deadly Bearish Big Picture" -- That's how Bob Prechter titled his most recent Theorist, which outlines exactly why the bear-market rally is done -- and what it means for investors like you. Read more about it
here.