No there is no typo in the title. Robert Prechter who is a famous proponent of “Elliot Wave" technical analysis is predicting the Dow will drop 90% to 1,000 within the next six years. Before we examine Prechter's track record of previous market calls, another item must be discussed. How did Prechter come up with this number? According to Prechter:
Readers sometimes ask if I am serious about the Dow eventually falling below 1000. People can understand that the Dow can fall in terms of gold, but they are so convinced about coming hyperinflation that they consider the idea of the nominal Dow in triple digits to be simply out of touch with reality.
The primary reason I believe the Dow is going to fall that far is its Elliott wave structure, which calls for it. But I can also see a monetary reason for this event. The tremendous inflation of the past 76 years has occurred primarily by way of instruments of credit, not banknotes. Credit can implode.
The only monetary outcome that will make sense of the Elliott wave structure is for the market value of dollar-denominated credit to shrink by over 90 percent. Given the eroded state of capital goods in the U.S. and the depletion of manufacturing capacity, it is not hard to see why all these IOUs have a deteriorating basis of repayment. The future has already been fully mortgaged; it's time to pay. But there is no money to pay, only more IOUs, which cannot be paid, either. So the credit supply (after a brief respite) will continue to shrink, which means that wealth, and therefore purchasing power, will disappear along with it. In the broadest sense, this change will constitute a collapse in the "money supply."
Such a monetary background would be consistent with the Dow falling below 1000 in nominal terms. It is one of the reasons that Conquer the Crash is subtitled How To Survive and Prosper in aDeflationary Depression. To be sure, the central bank does have the capacity to print banknotes. But I expect that the final implosion in credit value will be so swift that the authorities will not act in time to counter it. They will continue to try to maintain the fictions of full face value for IOUs until they fail spectacularly to keep up the scam. Then they will start to scramble, but it will be too late.
The paragraph contains a link to two of Prechter's books, and is followed by a promotion to sign up for three of his newsletters for only $60!
Jason Zweig wrote an article in the Wall Street Journal that nailed this exact point. He has theory as to why Prechter is making such outlandish statements. Zewig points out:
An extreme forecast doesn't merely grab your attention; ironically, it may strike you as even more convincing than a moderate prediction. A classic psychological experiment at the University of Michigan showed that 54% of people preferred an extreme prediction about stock prices to a more-temperate one. They apparently believed that a forecaster must have high confidence and a solid rationale in order to justify making a dramatic prediction.
So, while Dow 1000 may or may not be a good forecast, it isn't bad marketing for newsletters that cost $19 a month, as Mr. Prechter's do. Extreme predictions tend to be popular at market turning points: Back in early 2000, a bullish book called "Dow 36,000" hit the best-seller lists—right before the bull market went into the abattoir. Nowadays, you can buy a used copy for one penny online, if you don't mind paying $3.99 for shipping.
Zweig also mentions that another controversial money "guru", Robert Kiyosaki has gotten in on the act, predicting the Dow to decline to 5000.
I have no evidence to back up my statement that Prechter is making his predictions purely for profit. There is no way to prove what is going through his head. However let us look at some previous predictions of his, and whether he is worth listening to.
Here are some other notable predictions from Prechter fromhttp://www.cxoadvisory.com/individual-gurus/robert-prechter/
In case anyone thinks I am cherry picking data, let us take a look at Prechter's long term record.
From Peter Brimelow in MarketWatch (4/26/02): “Exactly how much Elliot Wave forecast fans lost depends on whether they actually went short the market when Prechter turned bearish. In that case, they are in a deep hole: down 99.2 percent over the last 15 years.
Besides the fact that Prechter is probably looking to make a profit, and has a terrible track record it is important to look at this specific prediction and see if it is logical.
Jason Zweig states:
Like all technical analysis, this forecast looks at past prices, not future earnings. A 90% drop in the Dow (if the weighting of its 30 companies didn't change) would leave only one of the components—IBM—trading above $10 a share. Alcoa, Bank of America, General Electric andPfizer would be under $2 apiece, in danger of being delisted by the New York Stock Exchange.
To get to Dow 1000, the earnings of these leading companies would have to fall by a punishing amount—and investors would have to price them at record-low multiples of those ravaged earnings. Take Pfizer: One way it could lose 90%, says Jeffrey Yale Rubin, director of research at Birinyi Associates, is if its earnings shrank by 70% and its stock traded at a price/earnings ratio of 2.3.
For the whole index, one path to 1000 would be a 65.6% fall in earnings and a P/E of 5, Mr. Rubin says. Earnings fell further during the Great Depression, and the Dow's P/E touched 5.3 in 1979, but never have the two measures gone so low in tandem.
Before their valuations could hit such absurdly low levels, public companies would go private. If Coca-Cola ever traded at five times its earnings, Warren Buffett would buy the whole company faster than you could spell "Vanilla Coke Zero."
When I asked Mr. Prechter if such valuations were realistic, he replied that earnings and dividends must fall drastically to parallel previous bear-market lows. He added that deflation and "social unrest" will "change the perceived value of holding stocks." In that case, a market crash would be the least of your worries.
Conclusion: Prechter has an awful long term track record. His current prediction does not fit any sound logic. And although it cannot be proven he is likely making sensational predictions in order to boost sales of his numerous books, and newsletters. I do not like to be overly critical of individuals, but what I like even less are people who give awful financial advice.
Long: KO
Readers sometimes ask if I am serious about the Dow eventually falling below 1000. People can understand that the Dow can fall in terms of gold, but they are so convinced about coming hyperinflation that they consider the idea of the nominal Dow in triple digits to be simply out of touch with reality.
The primary reason I believe the Dow is going to fall that far is its Elliott wave structure, which calls for it. But I can also see a monetary reason for this event. The tremendous inflation of the past 76 years has occurred primarily by way of instruments of credit, not banknotes. Credit can implode.
The only monetary outcome that will make sense of the Elliott wave structure is for the market value of dollar-denominated credit to shrink by over 90 percent. Given the eroded state of capital goods in the U.S. and the depletion of manufacturing capacity, it is not hard to see why all these IOUs have a deteriorating basis of repayment. The future has already been fully mortgaged; it's time to pay. But there is no money to pay, only more IOUs, which cannot be paid, either. So the credit supply (after a brief respite) will continue to shrink, which means that wealth, and therefore purchasing power, will disappear along with it. In the broadest sense, this change will constitute a collapse in the "money supply."
Such a monetary background would be consistent with the Dow falling below 1000 in nominal terms. It is one of the reasons that Conquer the Crash is subtitled How To Survive and Prosper in aDeflationary Depression. To be sure, the central bank does have the capacity to print banknotes. But I expect that the final implosion in credit value will be so swift that the authorities will not act in time to counter it. They will continue to try to maintain the fictions of full face value for IOUs until they fail spectacularly to keep up the scam. Then they will start to scramble, but it will be too late.
The paragraph contains a link to two of Prechter's books, and is followed by a promotion to sign up for three of his newsletters for only $60!
Jason Zweig wrote an article in the Wall Street Journal that nailed this exact point. He has theory as to why Prechter is making such outlandish statements. Zewig points out:
An extreme forecast doesn't merely grab your attention; ironically, it may strike you as even more convincing than a moderate prediction. A classic psychological experiment at the University of Michigan showed that 54% of people preferred an extreme prediction about stock prices to a more-temperate one. They apparently believed that a forecaster must have high confidence and a solid rationale in order to justify making a dramatic prediction.
So, while Dow 1000 may or may not be a good forecast, it isn't bad marketing for newsletters that cost $19 a month, as Mr. Prechter's do. Extreme predictions tend to be popular at market turning points: Back in early 2000, a bullish book called "Dow 36,000" hit the best-seller lists—right before the bull market went into the abattoir. Nowadays, you can buy a used copy for one penny online, if you don't mind paying $3.99 for shipping.
Zweig also mentions that another controversial money "guru", Robert Kiyosaki has gotten in on the act, predicting the Dow to decline to 5000.
I have no evidence to back up my statement that Prechter is making his predictions purely for profit. There is no way to prove what is going through his head. However let us look at some previous predictions of his, and whether he is worth listening to.
Here are some other notable predictions from Prechter fromhttp://www.cxoadvisory.com/individual-gurus/robert-prechter/
| S&P 500 Index | |||||
| Date | Comments re: Robert Prechter at MarketWatch | 21-Day Return | 63-Day Return | 126-Day Return | 254-Day Return |
| 4/2/09 | “…based on our projections, the bear market is more than halfway done in time. It is less than halfway done in price, however, as the steepest portions of the decline lie ahead.” | 8.7% | 10.7% | 26.7% | 41.7% |
| 3/4/09 | “Some measures of investor pessimism have reached extreme levels, suggesting the decline has reached its latter stages. But it’s not over yet.” | 17.0% | 32.5% | 43.2% | 59.7% |
| 1/30/03 | In Prechter’s view, the worst part of that decline — the so-called third wave of the Elliott Wave theory — is somewhere just ahead of us. | -1.2% | 8.6% | 16.9% | 34.5% | - |
| 10/17/02 | The 30-stock Dow Jones Industrial Average will lose half its value in the next six months to about 4,000 on the blue-chip index, says Prechter. When it’s all over several years from now, the Dow will trade below 1,000… | 3.5% | 4.0% | 1.6% | 19.0% |
In case anyone thinks I am cherry picking data, let us take a look at Prechter's long term record.
From Peter Brimelow in MarketWatch (4/26/02): “Exactly how much Elliot Wave forecast fans lost depends on whether they actually went short the market when Prechter turned bearish. In that case, they are in a deep hole: down 99.2 percent over the last 15 years.
Besides the fact that Prechter is probably looking to make a profit, and has a terrible track record it is important to look at this specific prediction and see if it is logical.
Jason Zweig states:
Like all technical analysis, this forecast looks at past prices, not future earnings. A 90% drop in the Dow (if the weighting of its 30 companies didn't change) would leave only one of the components—IBM—trading above $10 a share. Alcoa, Bank of America, General Electric andPfizer would be under $2 apiece, in danger of being delisted by the New York Stock Exchange.
To get to Dow 1000, the earnings of these leading companies would have to fall by a punishing amount—and investors would have to price them at record-low multiples of those ravaged earnings. Take Pfizer: One way it could lose 90%, says Jeffrey Yale Rubin, director of research at Birinyi Associates, is if its earnings shrank by 70% and its stock traded at a price/earnings ratio of 2.3.
For the whole index, one path to 1000 would be a 65.6% fall in earnings and a P/E of 5, Mr. Rubin says. Earnings fell further during the Great Depression, and the Dow's P/E touched 5.3 in 1979, but never have the two measures gone so low in tandem.
Before their valuations could hit such absurdly low levels, public companies would go private. If Coca-Cola ever traded at five times its earnings, Warren Buffett would buy the whole company faster than you could spell "Vanilla Coke Zero."
When I asked Mr. Prechter if such valuations were realistic, he replied that earnings and dividends must fall drastically to parallel previous bear-market lows. He added that deflation and "social unrest" will "change the perceived value of holding stocks." In that case, a market crash would be the least of your worries.
Conclusion: Prechter has an awful long term track record. His current prediction does not fit any sound logic. And although it cannot be proven he is likely making sensational predictions in order to boost sales of his numerous books, and newsletters. I do not like to be overly critical of individuals, but what I like even less are people who give awful financial advice.
Long: KO
