Worries about the U.S. economy and financial markets snowball every day. In this torrid summer of 2010, we welcome all the economists, financial forecasters and other pundits who have begun to add more snow to the snowman that Bob Prechter started building years ago when he wrote
Conquer the Crash in 2002 (new edition in 2009,
available here). Here's a sample of how Prechter has prepared readers for a long downturn in financial markets accompanied by deflation.
* * * * *
Excerpted from the January 2010 issue of The Elliott Wave Theorist by Robert Prechter
Starting in 2010:
The Biggest Down Wave Ever for Financial Assets
in an Environment of Runaway Deflation
“If someone would have said to me in December 1999 that the next decade would usher in a handful of wars, terrorists attacks, and a stock market that would be lower at the end of 2009 than 1999 while the investment community—professionals and non professionals alike—would be as giddy about the future of stock prices as they were in 2000, I wouldn’t have believed it.” –an Elliott Wave Theorist subscriber
The decade-long collapse in real values for stocks as well as the credit implosion, economic contraction, terrorism and war of the past decade are consistent with our Elliott wave case that in 1999-2000 the direction of social mood changed from positive to negative at Grand Supercycle degree. We were pretty much bearish throughout the worst decade ever for the S&P. Reports talk only about the S&P’s poor performance in nominal terms, but in real terms it was the worst decade for stocks since at least the 1720s as the Dow plunged 83% in terms of real money (gold).
But this is not the end of the story. The fact that investors are still giddy — which is an apt word for today’s readings on sentiment indicators — is consistent with our Elliott wave case that the bear market has barely begun. The year 2010 should get people to understand what we have been saying throughout this time: (1) the peak in 2000 was not just the end of a Primary-degree bull market but the peak of a Grand-Supercycle-degree wave that lasted over 200 years, and (2) the current bear market will prove to be the deepest and longest since the 1700s.
…
A “Prechter Point” of Cycle Degree Should Occur This Year
The very center of the wave structure — the most volatile point in an impulse — should occur in 2010 when the market reaches wave iii of (iii) of 3 of 3 of (3) of 3. In a bull market, this point in the wave structure marks the time at which investors in the aggregate stop worrying about downside risk and begin projecting ever-higher levels (for example, by writing books about stocks for the long run and Dow 100,000).
In a declining impulse wave, such as the market is in now, the same point marks the time at which investors in the aggregate stop focusing on the market’s upside potential and start worrying about how far down it will go. This is a very rare event at Cycle degree, and its upcoming occurrence will be stunning enough to set records for financial panic.
I used to call this spot in the wave structure the “point of recognition,” but the Elliott wave model and socionomic theory make clear that investors in the aggregate never consciously recognize anything. It is more accurately described as the point of change in net social mood and directional rationalization.
That’s a mouthful, so I’m just adopting a vanity short-cut and calling it the “Prechter point.” Here is how it comes about: From the start of a bull market, investors become increasingly less pessimistic and therefore act to make stock prices go higher. The center of the wave is when optimism becomes the dominant expression of social mood. From the start of a bear market, investors become increasingly less optimistic and therefore act to make stock prices go lower. The center of the wave is when pessimism becomes the dominant expression of social mood. Thus, as prices rise in a bull market, most investors still worry about downside price potential until the “third of the third” wave occurs, after which they focus on — and rationalize — upside price potential.
Conversely, as prices fall in a bear market, most investors focus on upside price potential until the “third of the third” wave occurs, after which they focus on — and rationalize — downside price potential. Much academic literature equates such biases with levels of concern about “risk,” but investors in the aggregate never evaluate risk and never consciously take risk. Unconscious herding makes investors feel that they are taking non-risky actions, and rationalization comforts them with assurance that whatever action they take is the sensible thing to do….
As wave 3 of c passes its midpoint, expect very bad news to be rampant. Remember how you felt on 9/11? Remember how you felt in October 2008? Those were the centers of wave a and wave 1, respectively. The center of wave c will be scarier than they were.