Conquer the Crash - You Can Survive and Prosper in a Deflationary Depressionby Robert R. Prechter Jr.
If you did not read Robert Prechter's At the Crest of the Tidal Wave (1995), you might have become the victim of any one of a dozen financial debacles. You might have held junk bonds, which have been collapsing ever since. You might have invested in commodities, which have fallen to new lows. You might have slaved over a demanding job that paid you in stock options
If you did not read Robert Prechter's At the Crest of the Tidal Wave (1995), you might have become the victim of any one of a dozen financial debacles. You might have held junk bonds, which have been collapsing ever since. You might have invested in commodities, which have fallen to new lows. You might have slaved over a demanding job that paid you in stock options that are now worthless. You might have speculated in Internet stocks, which went bust. If you are a vendor, you might have sold equipment to dot-com companies for I.O.U.s that were never paid. If you live in Argentina, you might have kept your money in a local bank and one day awakened broke. If you worked for Enron, you might have watched every nickel of your retirement savings evaporate. If you own a business, you might have let economists convince you that no recession was possible just before the economy contracted and slammed you up against the wall. Maybe for you, it's too late.
But for most people, this book is timely. It is being published at another peak in social optimism, with the stock market rallying, the Dow back above 10,000, economists unanimously bullish and commentators assuring us that the recession is over. If you think that all is well and your finances are safe, read this book before it's too late for you.
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Read an Excerpt
When Do Depressions Occur?
Depressions are not just an academic matter. In the Great Depression of 1929-1933, many people lost their investments, their homes, their retirement plans, their bank balances, their businesses - in short, their fortunes. Revered financial professionals lost their reputations, and some businessmen and speculators even took their own lives. The next depression will have the same effects. To avoid any such experience, you need to be able to foresee depression. Let's see if such a thing is possible.
An economic contraction begins with a deficiency of total demand for goods and services in relation to their total production, valued at current prices. When such a deficiency develops, prices for goods and services fall. Falling prices are a signal to producers to cut back production. In response, total production declines.
Economic contractions come in different sizes. Economists specify only two, which they label "recession" and "depression."
Based on how economists have applied these labels in the past, we may conclude that a recession is a moderate decline in total production lasting from a few months to two years. A depression is a decline in total production that is too deep or prolonged to be labeled merely a recession. As you can see, these terms are quantitative yet utterly imprecise. They cannot be made precise, either, despite misguided attempts to do so (more on that later).
For the purposes of this book, all you need to know is that the degree of the economic contraction that I anticipate is far too large to be labeled a "recession" such as our economy has experienced eleven times since 1933. If my outlook is correct, by the time the contraction is over, no economist will hesitate to call it a depression.
Depressions and the Stock Market
Our investigation into the question of forecasting begins with a key observation: Major stock market declines lead directly to depressions. Figure 2-1 displays the entire available history of aggregate English and American stock price records, which go back over 300 years. It shows that depression has accompanied every stock market decline that is deep enough to stand out on this long-term graph. There are three such declines, which occurred from 1720 to 1784, 1835 to 1842 and 1929 to 1932.
To begin to orient you to my way of thinking, I would like to explain Figure 2-1's title. The stock market is modern society's most sensitive meter of social mood. An increasingly optimistic populace buys stocks and increases its productive endeavors.
An increasingly pessimistic populace sells stocks and reduces its productive endeavors. Economic trends lag stock market trends because the consequences of economic decisions made at the peaks and nadirs of social mood take some time to play out. The Great Depression, for example, bottomed in February 1933, seven months after the stock market low of July 1932.
So psychological trends create economic trends. This causal relationship between psychology and the economy is the opposite of what virtually everyone presumes, so do not be alarmed if you find it counter-intuitive. Chapter 3 will elaborate on this theme.
If you study Figure 2-1, you will see that the largest stock-market collapses appear not after lengthy periods of market deterioration indicating a slow process of long-term change but quite suddenly after long periods of rising stock prices and economic expansion. A depression begins, then, with the seemingly unpredictable reversal of a persistently, indeed often rapidly, rising stock market. The abrupt change from increasing optimism to increasing pessimism initiates the economic contraction.
The graph shows that these reversals do not appear after every period of rising stock prices but only after some of them. If you are guessing that maybe one of the hints of reversal is a slowing economy in the face of such advances, you're right. We'll learn even more about this factor in Chapters 3 and 5.
Hierarchy in Finance and Economics
You might be interested to know that almost every smaller stock market decline observable in Figure 2-1 also led to an economic contraction. The severity of each contraction is related to the size of the associated stock market decline.
Unfortunately, this hierarchy in economic trends is difficult to display because conventional quantitative definitions of recession get in the way. Sometimes the economy just fails to breach the arbitrary definition of "official recession" that economists use, so their graphs show no recession when in fact the economy contracts, corporate earnings fall, and economic indicators weaken. In some cases of brief or small stock market declines, the economy simply slows down without actually having a "negative" month or quarter, but an effect occurs nevertheless.
Modern attempts to quantify the term "recession" by absolute size are flawed. It would be as if botanists decided to define "branch" or "twig" by length and width. The result may denote an "official" branch or twig, but the definition would obscure the actual continuum of sizes attending parts of trees. Likewise, attempted quantifications of the term "recession" derive from and foster misunderstanding with respect to the hierarchical nature of economic expansion and contraction. It would be far better for economists to adopt the perspective of the Wave Principle, a model of hierarchically patterned financial market change, which we are about to encounter in the next chapter.
All We Need
Such discussions aside, Figure 2-1 is all we need for our purposes. It shows that the biggest stock market declines follow long periods of advance of like degree. They lead to economic contractions so dramatic that nothing gets in the way of their being noticed and recorded as "depressions." Now let's see if we have the means to anticipate their arrival.
Meet the Author
Robert Prechter is President of Elliott Wave International, which resides at www.elliottwave.com. EWI is a forecasting firm servicing institutional and private investors around the world, providing long-term as well as intraday analysis on stock markets, currencies, interest rates, commodities, and social trends.
Since 1978, Prechter has published ten financial books, which have been translated into as many as a dozen languages. Every month, he writes thoughtful market commentary in The Elliott Wave Theorist. He is currently developing a new Web site dedicated to the elucidation of what he terms socionomics, the new science of social prediction.
Prechter attended Yale University on a full scholarship and graduated in 1971 with a degree in psychology. He began his career as a Technical Market Specialist with the Merrill Lynch Market Analysis Department in New York City.
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The 2nd edition of this book gets a 4.9 out of 5.0 from me. It's not the essence of its candid prediction that has come mostly true, but of explaining the social economic picture that was the root cause of the issue. Preacher did not get the exact time-line precisely correct and I have read numerous reviews criticizing him on this. We bought ourselves an extra 5 years of "Good Times", before what Preacher addressed finally unfolded. If you are interested in learning more about social-economics and how this effects the financial picture today and going forward this is an excellent-book to read. It' honest, candid and has turned out to depict a very accurate picture of what has unfolded thus far, since the first edition was released almost 8 years ago.
Another great book by Prechter. The evidence presented in this book is sound and obviously well researched. For those of you with open minds, I would strongly recommend it. For those of you who cannot accept the truth or reality, there is always the book DOW 40,000. There you can escape into fantasy. The timing of the book is a little late, but let's face up to the facts: Did anyone really want to read this a year or two ago in such a bullish environment? Not likely!! Keep up the great work Robert, one day you will go down in history for your research and the new science of socionomics. I look at the financial world a lot differently now. I have no losses to recover and only sound investments. Thank You for your insights.
Prophets of doom have always made entertaining reading. In his latest fire-and-brimstone warning, Robert R. Prechter, Jr., an experienced forecaster of long-term economic and social trends, says financial Armageddon is just around the corner. While his technical analysis (¿Wave Theory¿) may appear to be stock-market astrology, readers may appreciate his examination of the basic functions of money and credit, his argument that worldwide central banking has fundamentally altered these functions, and his perceptive comparisons of the late 1990s with the Roaring Twenties. Prechter might have appealed to a broader audience by toning down his graphs and technical talk, and focusing instead on his investment suggestions: If the market turns down, you¿ll save your skin, but even in a bull market, keeping your money safe can¿t hurt. We recommend this book to anyone looking for bear-market investment advice, as well as those interested in technical analysis or an opinionated view of business and market cycles.
Prechter presents a very compelling analysis to support his extremely pessimistic view of the near term future. This book is an important work. Even if his predictions do not materialize, the possibility must be considered. As much I as do not want to believe Prechter, this book gives the reader much to ponder. My relatively conservative approach to the stock market makes me think I have a reasonable amount of protection for my portfolio. But Prechter's expectation that the Dow Jones Industrail Average will plummet to under 1000 puts that belief in jeopardy. Each reader must decide for himself how much protection is required. Read this book, then make your decision. Your financial life may depend on that decision.
This book offers reasons as to why we are heading into a deflationary depression. After reading his explanations, the arguments this book makes seem logical and convincing as similar arguments made by the same author in 1987 and 1995 in the book 'at the crest of the tidal wave'. One of the biggest weaknesses of this book is its timing.The book was published June of 2002 after the markets dropped by up to 70% (as in the Nasdaq) and investors have already suffered heavy losses. This makes me wonder whether the author wanted to avoid being wrong for a third time by waiting two years after the start of the collapse to publish the book.When you are predicting events timing is critical. Even though the authors arguments seem convincing , there are equally legitimate arguments to the fact that the market downturn we are presently in is related to misguided Federal reserve policy. The Fed pumped money into the system between 1998 and late 1999 creating a lending spree by banks to startup businesses and then pulled the plug by increasing rates and starving startup companies for capital. This resulted in slowing orders to other companies and a domino effect. Such an argument does not point into a depression. So which one is true? For me it does not matter. What I am interested in is how to recover my losses in the market. If you have lost 30-70% of your money in the market , would you be willing to liquidate and place your money in your mattress based on a single person predictions that could be wrong as they have been before?. What I am mainly looking for is how to recover my losses over time and learn from my mistakes so as not to have the same thing happen again. I found other books that show you how to deal with recovering your losses and be a smarter investor such as 'Financial freedom through trading' by Van Tharp and 'Generate thousands in cash on your stocks without selling them' by Elias to be much more useful in taking action now to recover losses . This book is an interesting read but I would recommend that you take the gloom and doom predictions with a grain of salt