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The Herbert Hoover of the Coming Hard Times
Watching the recent trials and tribulations on Wall Street as investment banks, insurance companies and hedge funds try to wind their way out of loans and positions gone bad is like watching a bedroom farce, such as Georges Feydeau's "A Flea in Her Ear." Everyone thinks that the husband (read "bankers") has been cuckolded, but no one knows quite how it will all turn out. Bob Prechter almost wrote the script for the current show playing on Wall Street and around the world in his various writings for The Elliott Wave Theorist. For instance, a year and a half ago he wrote about how the Fed would prove to be impotent in the face of a serious credit deflation:
"It is highly likely that the next eight years or so will test the nearly universally accepted theory—among bulls and bears alike—that the Fed can control anything at all. The Great Depression made it look like a gang of fools, as will the coming deflationary collapse. We have predicted unequivocally that the new Fed chairman will go down as [Herbert] Hoover did: the butt of all the blame." (Theorist, June 2006)
As the Fed now scrambles to keep up with the housing implosion, seriously wounded debt markets and contracting employment, newspaper editors are beginning to write that the Fed is failing in its job. Here's where a prediction from Prechter about Fed Chairman Ben Bernanke's fate becomes more interesting. Read this piece that he wrote when Bernanke was about to become head of the Fed two years ago to see the parallels he draws with earlier Fed presidents' tenures in the job.
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Excerpted from The Elliott Wave Theorist, November 2005, by Bob Prechter
The Coming Change at the Fed
The consensus appears to be that the long-term expansion in the credit supply will continue or even intensify under the Fed chairmanship of Ben Bernanke. One reason many people share this belief is their recollection of Bernanke’s November 2002 speech, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” in which he likens the Fed’s printing press option to dropping money from helicopters. There are reasons to believe, however, that the outcome will not be as the majority expects.
One reason that Bernanke is likely to preside over a deflation in credit is that everyone believes the opposite. Investors have poured money into commodities, precious metals, stocks and property in the belief that if anything is certain, it is death, taxes and inflation. When the majority of investors thinks one way, it is likely to be wrong. This is basic market analysis….
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… Let’s look at some history. Public figureheads have a way of representing eras. This is certainly true of entertainment icons and politicians. The history of Fed chairmanship implies a similar tendency for changes of the guard to coincide with changes in social mood and therefore stock prices and the economy. Figure 1 [not shown] depicts our social-mood meter—the DJIA—since the Fed’s creation in 1913, marked with the reigning chairmen according to a list on the Fed’s website.
The first chairman, Hamlin, presided over a straight-up boom. As it ended, Harding took over and presided over an inflationary period that accompanied a bear market, exiting just as a new uptrend was developing. Crissinger took over at the onset of the Roaring Twenties, and Young presided over the boom, the peak and the rebound into 1930. Meyer took over just as confidence was collapsing and left the office in early 1933 at the exact bottom of the Great Depression. The next three chairmen struggled through the choppy years of the 1940s. Then Martin presided over virtually the entire advance from the early 1950s through 1969, exiting just before the recession of 1970. Burns and Miller presided over a bear market and exited as the new uptrend was developing. Volcker, after weathering an inflation crisis, presided over the explosive ’80s. Greenspan has presided over the manic ’90s and the topping process. The next chairman will have his own era. Given the eras that have immediately preceded the coming change in leadership, the odds are that this new environment will be a bear market.
The chairmanships of 1967 to the present are remarkably like those of 1913 to 1930. Figure 2 [not shown] shows the two eras, with the latter time expanded variously to show the similarities in form. When we place the chairmen on this graph, we can see that
Martin = Hamlin,
Burns = Harding,
Miller = none listed,
Volcker = Crissinger
Greenspan = Young.
If this progression continues, then Bernanke = Meyer, the man who presided over the “deflationary collapse” years of the Great Depression….
… Like the entrenched belief in continued inflation, there is a widespread expectation of smooth sailing under Bernanke. Summing up the prevailing view, an economist says, “Bernanke is universally admired and respected by people who have seen him on the inside of that institution. The bottom line is that this is excellent news for the Fed and for the economy.” A nationally known economist adds, “We need a Fed chairman who is steady, solid and sticks to basics. Ben Bernanke is the right person at the right time.”
This general conviction will set up the vast majority to be fooled and ruined. There is a vocal minority who views him as a potential disaster, but the only danger they see under his leadership is excessive inflation. With virtually everyone prepared for either good times or severe inflation, bad times and deflation will catch them all off guard.
It is not the case that Fed chairmen are either fools or geniuses, as their records appear to imply. They do, however, preside over eras that make them appear to be one or the other. I am firmly of the opinion that Ben Bernanke, well educated by Harvard and MIT though he is and fine fellow though he may be, is doomed to suffer a historically bad image as chairman of the Federal Reserve. If for some reason he leaves the post prematurely, his immediate successor(s) will suffer that fate. The trend in social mood will continue to determine the chairmen’s degree of success, not the other way around….