The Elliot Wave Theorist (September 10, 2002)

10 Pages·2002·0.065 MB·English

by  Prechter R.

September 2002 issue
© September 10, 2002
Read the New Scientist, August 31, 2002 Issue
I hope you have read the cover story in the August 31, 2002 issue of New Scientist magazine entitled
“Living By Numbers” (titled inside, “I Know What You’ll Do Next Summer”), an excellent article on the
Wave Principle and socionomics. If you cannot find the magazine in your area, we have good news. One
week after publishing, feature articles are placed in the online New Scientist Archive. You can have full
access to the archives by signing up for a free 7-day trial subscription to the magazine at http://
archive.newscientist.com. The sign-up process requires name, address and email. Your 7-day trial username
and password are then sent to your email account. Also, we recommend subscribing to this fine publication.
Convention vs. Socionomics
At the start of a major-degree bear market, there will be two opposing approaches to forecasting. Here
are examples of the difference: A conventional analyst says, “The economy will expand indefinitely as long
as the Fed does not do something unimaginably stupid.” A socionomist says, “Soon, unemployment will rise,
wages will fall, stores and factories will close and farms and businesses will go under, and the Fed will be —
or at least will appear to be — stupid and ineffectual.” A conventional analyst says, “We’ll be fine unless
something unexpected happens, like war.” A socionomist says, “We will probably go to war.” A conventional
analyst says, “The recovery will get going strongly unless the government does something incredibly stupid.”
A socionomist says, “The government will impose protectionist tariffs, increase restrictions on business,
provoke foreign governments, spend more of the resources of productive citizens, create “make-work”
programs that stifle production, raise taxes and otherwise contribute to the downturn in countless ways.”
The conventional analyst says, “We’ll be fine politically unless some unexpected radical trend gains popularity.”
A socionomist says, “Politics will polarize and radicalize.” A conventional analyst says, “We’ll be fine as
long as people continue to get along with one another.” A socionomist says, “There will be labor conflicts,
racial conflicts, conflicts between the sexes, party conflicts, religious conflicts and class conflicts.”
After the bottom of the bear market, the scene will be the opposite. Conventional analysts will say, “The
economy is mired in depression, and there are no signs of recovery. We had better get used to it.” Socionomists
will say, “The economy is about to enter one of the strongest growth periods ever. Jobs will come back,
factories and stores will re-open and prosperity will return.” Conventional analysts will say, “This war will
never end, and if it does, we will probably lose.” Socionomists will say, “The coming uptrend will assure an
end to the conflict.” Conventional analysts will say, “There is no way out of the ill feeling between the
opposing forces of labor and management, government and business, haves and have-nots, religions and
races.” Socionomists will say, “A new era of increasing brotherhood lies ahead. Be patient.”
For High-Net-Worth Investors Only
A month ago, you received a page on the upcoming SafeWealth seminar in Switzerland. Even if you
cannot afford to attend, there was some good advice on that page, which read, “Any summer rally will only
draw more ill-advised investors back into the market at precisely the wrong time. Instead, you should use
any rally periods to your advantage to position for further decline.” When the Dow rallied back to 9000+
and the S&P to 950+, right to our maximum targets, the market gave us another great opportunity to position
for the downside. The primary way to take advantage of the recent respite — if you haven’t already — is
You can always get The Elliott Wave Theorist instantly upon release; for information, visit www.elliottwave.com.
The Elliott Wave Theorist — September 10, 2002
to make your finances safe. An average investor who has read Conquer the Crash and acted on it should
now be satisfactorily positioned.
If you have substantial assets to protect, you might wish to go a step further. From September 30 to
October 6, SafeWealth will provide first-class accommodations in Switzerland, multiple seminars, meetings
with CEOs and officers of ultra-safe financial institutions and private discussions to suit your needs. The time
to go is before the market crashes and the demand for such services skyrockets. The fee is $15,000 per
couple. The maximum attendance is 25, and there are several slots left. At this late date, they are accepting
sign-ups only by phone and email. If you want to attend, clear your schedule and call the SafeWealth Group
at (dial 011 from the U.S.) + 44-1753-554-461 between 9 and 5 London time, which is 4:00 a.m. to noon
Eastern time and before 9 a.m. Pacific time, or email [email protected]. They will provide
all the information you need. The sign-up deadline is September 16th, just a few days from today.
AN INTERVIEW WITH BOB PRECHTER (PART TWO)
On May 28, 2002, Jim Puplava interviewed Robert Prechter about his new book, Conquer The Crash. Jim is the host
of Financial Sense Newshour, a weekly Internet radio broadcast. Jim’s website www.financialsense.com is known for
its interviews and editorials from experts in financial and geopolitical fields.
TRANSCRIPTION OF INTERVIEW
Conducted May 28, 2002 (Dow 10,000+); posted June 1
Robert R. Prechter, Jr., author and CEO of Elliott Wave International
Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression
Editor’s Note: We have edited the interview in this transcription for clarity and readability. The original
real audio interview may be heard on Jim’s Ask The Expert page at www.financialsense.com.
JIM PUPLAVA: Where do we stand today in terms of depression?
BOB PRECHTER: I think it’s just started. The peak in the stock market was the first quarter of 2000.
We had some averages — only two — actually peak last month, in April, along with one Dow stock, MMM.
All the other Dow stocks had already topped out. That was the last one to go, in our opinion. If your listeners
know about that famous technical pattern called a “head and shoulders top,” the S&P made a left shoulder in
1998, it made the head in early 2000, and the rally up from September of 2001, right after the 9/11 attack, has
been the right shoulder. We’re now rolling over on that, so we’re due to be heading down quite relentlessly.
I think it’s already started.
JIM: What are the signs of this topping stock market? You just mentioned the “head and
shoulders” pattern, but give some of the other signs that a market is topped. We can talk about
market valuations. But what are some of the other more prominent signs?
BOB: Well, to me, the most important one is the wave pattern. The biggest signal that the bear market is
underway was the five wave decline in the S&P 500 and the NASDAQ index from March 2000 to September
2001. Those patterns are unmistakable. They say in no uncertain terms that the major trend is now down. In
fact, it was on 9/11 that I published a special issue and that said, “Don’t panic here, even though everybody
else is going to say this incident could kill the stock market. We are right near the end of five waves down and
we’re about to have the biggest rally since the bottom.” And that’s exactly what happened. But that rally is
probably over now. It gave you a terrific opportunity to get out if you were one of those people who said,
“Give me proof.” You had the proof — 5 waves down and 3 waves up — and now you need to be on the
sidelines. So the Elliott wave structure is number one.
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Psychology is number two, and this is crucially important. Generally in a bull market, when there’s a
reaction against the long term uptrend, people turn bearish. When a bear market begins and you get that first
leg down, instead of turning bearish like they did in the corrections on the way up, they welcome it as a buying
opportunity. You can see this happening today in all kinds of indicators, which show that we’ve seen an
increase in optimism from September, not skepticism. If we’d seen skepticism, we would suspect that the
market would be ready to keep going up. But we saw people put more money into the market. And boy, that
shows up in all kinds of things — from the P/E ratio to the consumer sentiment index.
JIM: Let’s talk about some of the market valuations. I find it amusing that Wall Street, which has
all these brilliant analysts, people that have gone to school, have studied finance and accounting,
doesn’t seem to know at least a little bit about market history. But if we take a look at the price to
earnings ratio — which is a little bit suspect — the price to book ratio, dividend yields, anything
that you would look at in terms of measuring the market in terms of whether it’s cheap or expensive,
this is a very expensive market. So I don’t know where they expect this market to recover from
or to go — to even more extremes?
BOB: That’s a good question. For example, let’s do just three in a row very quickly. The dividend yield on
the Dow got down to 1.5% in early 2000. In 1929, at the top minute before the biggest crash in the history of
the United States, the Dow was yielding just under 3%. So here we’ve gotten down to half that level, and, of
course, that means that your real income from dividends is zero by the time you’ve paid your transaction
costs or your money managers. And that’s in the Dow, where the yield was comparatively high. In the S&P
400 Industrials, it was only 1%. In the NASDAQ, it was virtually zero, so you were essentially paying fees
for the privilege of owning NASDAQ stocks. This is an extreme to say the least.
I try to teach people one very important thing that gets overlooked in the later stages of bull markets, and
that is that dividends are the only reason to own stocks. If nobody is ever going to pay you a nickel from that
company, why would you want to own any of it? You’re just making the CEOs rich and everybody else,
there’s no point. Now, a couple of other measures of valuation — the bond yield/stock yield ratio, for
example, which Paul Montgomery developed, shows you how much more high-grade corporate bonds were
yielding than high-grade stocks because people didn’t care about getting a dividend yield. It got up to 8 times
at the March 2000 high. Also, the book value of the S&P 400 was extremely low. Price was 10 times book
at that peak. The amazing thing is that at previous major tops it was only 2 times. So this is not just any old top.
We haven’t just seen something like 1966 or 1973. This is a monster. This is one that the next Charles
Mackay will be writing about in a history book.
I guess the last one we should mention is the P/E ratio. I spend several pages on this in the book because
it’s a very subtle point to be made, which I think — I hope — the readers of it will find very interesting. But
let’s just say that on a superficial level, markets tend to peak out when the P/E ratio is in the low 20s, meaning
20 times 12-month trailing earnings. And right now, it’s about 50. So prices are going to have to be cut in half
even to get them back to where a normal bull market normally tops.
JIM: Speaking of P/E ratios, what I call earnings obfuscation because some of the numbers that
are being bandied about as “this company beat estimates” or “this company’s earnings
grew”…we’re not talking, Bob, about earnings in the traditional sense, in other words, the bottom
line. What is thrown out there as earnings today can have any number of different meanings.
They’re not talking about the bottom line as you and I know from an accounting point of view. It
seems like there’s this game that’s being played where you had — and I’m not picking on a
particular company — but we had Applied Materials announce its earnings, and they beat earnings
by a penny! I think they made 3 cents instead of estimates of 2 cents. But their sales were down
46%! Their earnings were down 84%! And their profit margins were down 13%! Now, if you
listen to the commentator say that they beat estimates, it sounds as if things were doing well. In
reality, they were doing poorly.
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BOB: Exactly. You know, lawyers made a lot of money in the 1990s being called in at the eleventh hour,
in the final week, let’s say, before a company had to report its earnings, and being asked, “How can we juggle
these numbers in order to show a little bit higher earnings than we had in the last reporting period?” There are
so many things to say about this. Let’s forget for a moment that manipulation itself is a little bit like lying to the
public, and let’s say that it’s legal and that everything they did was fine. A lot of times, for example, they
would buy back their own stock in order to get the earnings per share up. The real point to me is always
psychological. I thought this was an amazing phenomenon. Here people are buying stocks, not based on what
the earnings are compared to the stock price or compared to the size of the company or compared to what
they ought to be earning. It was simply a matter of, “Did they earn more than they did last year? Oh good,
let’s buy some more!” Do you realize there was actually a time in history when that happened before? It was
in the late 1920s, and the people who wrote that up were none other than Graham and Dodd. I published that
as an issue of the Elliott Wave Theorist and as a chapter in a book I recently put out called Market Analysis
for the New Millennium. It just shows you, there’s nothing new under the sun.
JIM: Of course, the public psychology. Even, I believe, in 1930, there were comments coming
from government officials, prominent economists and Wall Street gurus of that time trying to
reassure the public that the best was just ahead and the market was going to come back. And we
see this very same thing going on today.
BOB: Yes, and I think your choice of time there is right where we are today. We’ve had the initial crash.
Although it was a slow one, it was a NASDAQ collapse of 75%. We’ve had the rally since September,
which is very much like the rally between November of 1929 and April 1930. I think, once again, that the
market probably peaked out in April and is ready, or has already begun, to head lower. And what do you see?
You see generally the economists and government officials and people like that telling you everything is fine.
There are a few mavericks out there who think well, maybe we’ll have a “W” or “double dip” recession. You
know, we’ll go down and have a little softness later in the year, and then we’ll be taking off. One of the great
ironies is that late last year, the consensus among economists was that the economy would bottom at the end
of the first quarter, and I think it topped at the end of the first quarter.
JIM: Now, what about this proposition put forth by Wall Street that the Fed has aggressively cut
interest rates and somehow — it’s called the “Greenspan Put” — that the Fed has put a floor
underneath the market? Why don’t you tell our listeners why the Fed is not going to be able to
stop this.
BOB: Well, first of all is the fact that interest rates collapsed. The Fed was right there as fast possible to do
its part. Rates fell dramatically throughout the entire year of 2001. This is not good news. This is terrible news
for two reasons. Number one, it indicates that deflation is around the corner — and we’ll be talking about that
in a minute. The other thing is, if you really believe that the Fed has the power, has the ammunition, to
regenerate an economy by lowering interest rates, they’re already under 2%, and as I say in the book,
“What’s next?” What’s the next rabbit it can pull out of the hat? It might be able to bring rates down to near
zero. But Japan did that years ago, and it didn’t stop their decline, didn’t stop their deflation, didn’t stop their
rolling recessions. So, this is not good news. Essentially, it means that the guys in the fort that are supposed
to be out there fighting for you just ran out of ammunition.
JIM: Given the fact that in the first part of your book you talk about the crash, the depression
and deflation, let’s move on to part two and how to protect yourself. I want to address the issue of
deflation because you talk about that being the key investment risk. So, let’s begin there.
BOB: Very few people know anything about deflation, and there are two reasons. Number one is that in
the 19th century, we would have them quite often, so people could get to know what a deflation was. You’d
have an expansion for 2 1/2 years, and you’d have a contraction for 1 1/2 years. Then you’d have another
expansion for a year or two and another minor contraction. It was a very healthy economy because it does
what I call “breathing.” It would expand and contract normally. If you’re a business person, once you had
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gone through three or four of those, you’d say, “Okay, I get it,” and you could plan around those things. What
we’ve had since the Fed was created is a climate of massive boom and tremendous bust. We had one boom
right after the Fed was created in 1913 that lasted to 1929, and then we had the incredible collapse over the
next four years into the depression lows of 1933. Ever since then, we’ve had nothing but inflation and
expansion, right from 1933 to the present. Deflation now is outside not just the memories of people who are
alive today, but you’d have to go back to their grandfathers, who are mostly deceased, in order to bring stories
of deflation to light. So most people today don’t even know what you’re talking about when you talk about
deflation. To summarize it, a deflation is a contraction in the total supply of money and credit. When that
happens, the nominal prices for virtually everything, from stocks to bonds to commodities, go down. Even
consumer goods go down in price in a severe deflation. That’s what I believe we are facing today.
JIM: Let’s talk about an investment that is being bandied about as a good place to be right now,
which is the bond market, because of lower interest rates or lower economic growth. Explain to
our listeners why bonds can get hurt in a deflationary environment.
BOB: There are two types of bonds. Bonds that have been issued by such strong issuers that there’s no
question that both interest and principal will be paid, that’s one group. The other group of bonds are those
issued by entities that are questionable as to whether they will pay all of the interest due and all of the
principal. The questionable end of the market is by far the largest. I would say that probably encompasses
95% of the debt outstanding today. That’s corporate, individual, governmental, including municipal, around
the world. We’ve already seen major countries in trouble trying just to pay the interest. Forget the principal on
the debt. So, if you observe the interest rate of bonds from these pristine debtors who are in terrific shape,
you’ll see that the interest rates are low. There’s no really serious price erosion. As for all the other bonds, at
some point during the depression, their holders begin to wonder, worry and eventually panic over whether
what is owed will eventually be paid off. If you’re privy to any junk bond chart, you can see that the prices of
junk bonds have been falling pretty relentlessly for the past 12 years. Now it’s beginning to spill over into the
medium-tier bonds issued by corporations. I think this is a smart market. I think this is the bond market
beginning to realize what my book is all about, that we’re heading into a depression. People need to get out of
them before everyone else realizes it.
JIM: Speaking of quality bonds, there are very few corporations today that carry a AAA rating.
As I recall, there are only about 7 or 8 of them.
BOB: Yes, and the worst of it is, how do you know that those ratings will remain AAA? They’re rated that
way under the current economy, and if this economy gets weaker, which I’m positive it will, those ratings are
likely to slip below AAA. But that’s an amazing statistic. I need to add that to my book.
JIM: Let’s talk about one of the last pillars, in my mind, that is still holding up this market. To
me, the bubble in the stock market simply found another place to land — which is real estate. We
had this boom. In fact I just read an article today where somebody was disputing whether this is a
bubble, saying it’s just a huge demand. The individual that wrote this article said that real estate
prices would remain high because government entities are making it hard for new development
due to urban sprawl. They’re trying to contain it, and that’s going to maintain the price of real
estate. I see this as the next bubble to pop. And once that does, that’s it.
BOB: I agree with you, and I think bubble is the correct term. Demand is one thing. There can be a
tremendous demand for bread and milk out of the grocery store when a hurricane’s coming. But people don’t
go out and systematically, decade after decade, borrow more money to buy bread and milk, as they do to
purchase real estate. The reason they do this is for two reasons. Number one, they want to consume something
today that they haven’t saved for. And the second reason is, they believe that the price always goes up, so
they’re willing to take a tremendous risk of debt in order to own something that they believe will continue to
rise. The problem is that every so often — and it isn’t that often, but it does happen, and when it does happen,
it’s very devastating — real estate prices go down, and they go down severely. The last time that we had
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anything like what I’m looking for here was in the early 1930s, and prior to that was the early 1840s. We’ve
had 8 episodes of severe real estate drops in the past 200 years, and I think we’re heading into our 9th one
right now.
JIM: Why is cash important in the midst of deflation or a depression?
BOB: Well, cash is the only thing that assuredly goes up in value during deflation. The reason is the credit
— which is considered by most people to be money, although it’s actually credit — begins to decrease, and
therefore the total amount of purchasing power in the economy goes down. Any time that the credit supply –
which people loosely call the money supply — contracts, there’s less purchasing power in the economy.
People can understand that when the government creates money and the Fed creates credit, and there’s
more and more of it, we get inflation, and the value of the dollar, or the purchasing unit, goes down. Therefore,
prices of goods go up and up. People are used to that. They have to realize that it can work in the other
direction. When the total amount of money and credit contracts, the prices of goods will actually start falling,
and that makes each unit of money — each unit of money or credit that survives that is — worth more. The
key is to be in money or credit that will not be destroyed. If you own a bond of a corporation or a municipal
government that defaults, you’re at zero. But if you have money that does not disappear, then suddenly you
have more buying power than you did before. A lot of my book is designed to steer people into areas where
they will be able to put their cash and keep it safe. And believe me, there aren’t many places in the world. A
lot of places that people think their money is safe are anything but.
JIM: I want to talk about safe banks. Certainly, people know about the bank holiday during the
midst of the depression when the banks were closed. The first thing that comes to mind, Bob,
when I look at some of the large banks’ portfolios, particularly the derivatives held by our largest
banks, is that they’re looking more like hedge funds than they are a prime safe bank.
BOB: Absolutely. Do you know — it was actually shocking to me to find out — that for nearly two
centuries, the courts in the United States have upheld an interpretation of bank deposits to mean not money
that you’ve delivered for safe keeping but money that you have lent to your bank? That means that if the bank
goes under, it’s, “Sorry Charlie. Well, you know, you lent it. It was your risk. Too bad.” You have no
recourse. You can’t sue them. They didn’t promise to safe-keep your money. They said, “Thank you for the
loan. Now we’ll go out and lend it again and try to make more money than we’re paying you for it.”
The key here is that you need to have your money in a bank that isn’t about to go under because its loans
are so at risk. Unfortunately, today in the United States, most banks by far have lent out a tremendous
percentage of their deposits, in some cases even more than 100% of what they have on deposit. The slightest
run or demand by depositors could cause these banks to shut their windows. Now, we all know about the
FDIC, and we can talk about that, too, but the point is that these banks are lent out to the hilt. They lent your
money out. The only way to get safe is to put your money either in a bank that has extremely high liquidity.
And there are a few in the world, a few that exist only to safeguard your money. Or, and I think this would
be the second best solution, you can take it out of the banking system and, at least for the time being, lend it
directly to the U.S. government by buying Treasury bills.
JIM: I think that’s a lot easier and will probably allow most people to sleep at night. In your
book, you talk about physical safety and about the government’s ability to protect you. Certainly,
if we look at the social mood, it is changing. It is getting more negative. They’re burning synagogues
overseas. We’re seeing the rise of anti-Semitism. You’re seeing it in the movies now with a lot
more negative portrayal and more horror movies. Public psychology changes. I wonder if you
might address the issue of physical safety.
BOB: Physical safety is important in a bear market. Most people worry about it early in a bull market. For
example, in the 1950s, we had bomb drills in school when I was a kid. People were building bomb shelters,
they worried about the atomic blasts, and of course we never had anything like it. The reason is that they
were concerned about the previous bear market of the 1940s, and they were protecting themselves against
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the bear wave that had already ended. At this point, we’ve entered a new bear market, very much like being
in 1930, and there are going to be extremely difficult times ahead. There will be wars, and you want to make
sure that you’re not in a country that’s embroiled in something that could endanger you physically. So I think
you need to have a global view, and I think you need to look around and make sure that you’re in the right
spot. If you happen to be living in the Middle East, I would look around, for example, at perhaps somewhere
else to live. If you’re living in a vulnerable area, you should perhaps decide if there’s some way you could
arrange your life to move somewhere safer. Now, some people feel that they can protect themselves by
taking a karate class or owning a gun or two because they fear social unrest. But when you look back through
the history of these periods, even though occasionally you’ll see urban riots or something like that, most of the
time, the risk to one’s person comes when governments get militant. They can turn on their own citizens, or
they can fight against another government. Those are the things you really have to watch out for the most.
JIM: I want to talk about the issue of gold because we’ve seen this recent rise in gold. You
believe that it’s possible that gold will drop to $200 an ounce. I want you to address those issues
because we’ve gotten a lot of e-mails on that one particular point about gold’s going to 200. I
would have to say in defense that I could think of two reasons, or two ways, that could happen.
Number one, there’s an outright war against gold fought by central banks dumping their reserves.
Or number two, in this market crash that you address in your book, a liquidity issue comes up. I
can remember buying shares from a hedge fund manager that got caught with a margin call. So, I
wonder if you might address the issue of gold in the short-term and longer-term.
BOB: Well, there are two things to consider. One is market opinion and the other is what you should do.
They don’t necessarily always follow precisely 100% one with the other, and I’ll tell you what I mean as we
go along here. In the depression of the 1930s, silver prices were free to float. Gold was not. It was fixed by
the government. Silver had a nice sharp rally in 1931 that lasted most of the year. But by the time the
economy bottomed in early 1933, silver had made a new low for the entire preceding fifteen-year period. It
bottomed, finally, in December 1932. A lot of people in 1931 thought that silver would be a hedge against the
depression. That’s why they bought it, and that’s why it had the rally, but eventually it went down and finally
bottomed near stocks. I think that’s likely to happen to all of the precious metals because today, none of their
prices are fixed by any government.
What usually happens in a severe deflation is that people have to survive financially. When they’re in
tremendous debt, and they have to make that one more payment, they’ll begin to sell things off in order to
make the payment. That means selling even things that are valuable. I think that’s one of the reasons why
commodities go down and goods go down. It’s going to include the precious metals. However, one important
aspect of the metals’ bear market is that most of it has occurred. Except for calling most of the rallies, I’ve
been bearish throughout the bear market. This isn’t anything new. Back when gold was at $700 an ounce, I
said it’s going to go way down under $400 and maybe eventually under $200. So, that trend is still in force, but
look at silver, down from $50 all the way to $4. That is a tremendous bear market. So in one sense, you might
say, “Who cares if it’s going to go down to $2.50 or $3.50 an ounce? This is cheap stuff.” So I really
recommend that people do own some gold and silver, not only because we’re very late in their bear markets
but also because it’s real money. Currently, real money is legal to own. That’s crucial, because when deflation
takes hold and depression really gets underway, governments begin to look around for ways to survive, and
they’re ruthless when they do it. So, if clamping down on the ability to obtain real money is going to be part of
that scenario, you want to make sure that you already have your investments in place. If they don’t allow the
transactions, for example, you wouldn’t be able to buy it at that point. Opportunity is an important part of the
precious metals picture.
JIM: Now, one thing about the markets — and of course Elliott Waves track this — is the
psychology that plays such an important role in the financial markets. Part of that is greed, and
part is fear. I wonder if we might talk about the fear element because fear to me is a much more
powerful emotion. It can drive things more to the extreme. Ultimately, where do you see the
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markets going? It would be hard for some people, right now, to say that the stock market could
lose 90 percent of its value, but that’s exactly what happened during the Great Depression in the
1930s. It wasn’t over with the crash in 1929. Where do you see the stock market going on the
downside? And where do you see gold going long-term?
BOB: You’re absolutely right that fear is a stronger emotion than hope. It certainly is more concentrated,
which is why it appears stronger. For example, commodities go up on fear. That’s why you have tremendous
price spikes in commodities. But stocks go down on fear, and that is the reason that they can fall so precipitously,
such as they did in the 1987 crash or the 1929 crash. The key is overvaluation because that is the benchmark
that tells you what the risk is. In 1929, the overvaluation was substantial. When we say stocks went down 90
percent, that’s really a complete understatement. What went down 90 percent is the Dow Jones Industrial
Average, which was composed of the premier industrial companies of the day. But a huge mass of stocks
during that time went down far more than that, by 99% or 100%. People forget about those issues because
they don’t know the names anymore. I think we have achieved an overvaluation, as we already discussed
earlier, with respect to dividends and the P/E ratio and book value and so on, and it’s far greater than it was
at the 1929 high. So I think there is more risk now than we had then. Eventually, as the decline snowballs,
feedback will generate more fear until it’s all cleaned out and stocks are the bargain of a lifetime. You know,
one thing I hope we can get to before this interview is over is what a tremendous, lifelong, life-saving,
opportunity people are going to have at the ultimate bottom. They can only get that if they’ve saved their
purchasing power during the bear market.
JIM: Well, what about gold? Where do you see that going?
BOB: Like I say, I was unequivocally negative on gold for 20 years. But last year I published a paper
saying that the psychology in gold had turned too negative. This was when it was down at $265 an ounce. I
said, “We are either at or approaching the bottom, and the most likely occurrence is an immediate period of
rally to be followed by one last leg down, but if I’m wrong, then we’re making the bottom now.” So, I think
we’ve had the rally that I’ve talked about, that it was going to occur one way or another. We’re seeing signs
right now that gold is getting a little tired. There seems to be a lot of bullishness about it. There is actually
vehemence. As you said, if you try to suggest that gold could have another leg down, people scream and
argue with you. That generally is not the case early in a bull market. Usually there are a lot of skeptics at that
point. So there’s some anecdotal evidence that the scenario of one rally and one final decline, which is
exactly what we saw in 1931 and 1932, is on schedule. But I also don’t think it’s that crucial of a question for
most people.
If you’re very wealthy, you should have a fair amount of your money in gold and silver. If you’re a
speculator, I wouldn’t chase it, unless it got to a point where you couldn’t ignore the fact that a new bull
market has started, and that’s at least $70 away on the upside [from $330 today]. So I’m keeping my powder
dry as far as getting completely into gold, as I think most people should. As far as how low it can go, I think
it could get down to about $180 an ounce, which would be the buy of a lifetime. But we’re running out of time,
and I don’t want to be too cute about it. I wasn’t too cute with the stock market. I got out way early because
I didn’t want to stay with the crowd, and I don’t want to be late here, either. Sometimes you can catch a
market for 90 percent of it’s move, and if you’re too cute at the end, you miss the turn. So, that’s why, in this
book, I say you really should have some gold and silver. It’s real money.
JIM: Let’s talk about the positive side of all of this. If the crash takes place, which I believe is
coming, in the depression that follows it, those who are liquid are going to have some of the best
buying opportunities of a lifetime. I can think of the story of Warren Buffett’s 1968 meeting in La
Jolla, California with Ben Graham. Ben Graham had lost half his clients’ money during the stock
market crash. They were looking at the stock market in the late 1960s, and basically Ben told him
to get out. Buffett went back, disbanded his partnership and stayed in cash. But when the ’73/’74
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The Elliott Wave Theorist — September 10, 2002
bear market came, he loaded up and bought, I think, what was it, 10% or 20% of The Washington
Post for $10 million. He had the buying opportunity of a lifetime, and much of the Buffett fortune
was made as a result of that buying.
BOB: That’s right. Then you have stories of the Kennedys and Bernard Baruch and people who did the
same thing in 1932. That is when you can make money. If you’re going to buy a stock at $112 a share and
hope it goes to $200, that may sound like big money to you, but it’s not. The real money is made when you can
buy stocks at 25 cents, a quarter of a point, and watch them go up to $19. That’s real money, and that’s the
kind of money that otherwise only super rich people can make. But you can do it only if you’re in cash and
you get out at the top and you protect that money all the way down. Then, when the last stock owner
despairs, you’ll be his friend by buying those shares from him. At that point, when the market finally turns
around, the capital gain multiples are unbelievable. That’s the massive magic of wealth creation in the stock
market. But you have to follow the old adage, “Buy low, sell high.” People always forget the “sell high” part.
JIM: In your book you said, in terms of your belief of the coming crash and the depression and
deflation that will follow it, that you’re very resolute in your opinion that this is going to happen. I
happen to go along with that. But let’s just talk about some of the naysayers that say, “Well yeah,
he predicted the bull market, but he got out early. He was wrong by getting out too early.” What
would you say to your naysayers today?
BOB: Well, I don’t play defense very much, and I always tell people, if that’s important to you, fine. But the
real thing people have to understand is this. Anybody who says, “Oh, so-and-so made a mistake,” is pretty
much an idiot. It’s like saying, “Joe Smith struck out last week.” You know, this is not a matter of perfection,
and anybody who thinks that calling the future is a matter of whether a person is going to be perfect or
imperfect doesn’t understand the game. It’s like baseball: It’s a matter of probabilities. Most economists
don’t have a clue. They’re telling you what was going on last week and last month. When they tell you what
their prediction is, you will see that it’s exactly the same as what the economy has been recently experiencing.
They have no tools at all to anticipate the future. I think I’ve got the tools to do a pretty good job, and I think
our batting average is very good. I think we’ve been good on most markets. So, people, you’re going to have
to pay your money and take your choice. You can listen to the economists. First, you might want to check out
their track records for calling recession. I think it would be a good idea to read some of the Elliott wave
literature for the last 64 years and decide how well we’ve done overall and compare that to anyone else’s
track record. I follow my own advice, but I don’t want to rope people into doing something they’re not
comfortable with. I think they need to read the book, and as I say at the very end of the Foreword “Read all
the evidence. Then the responsibility is yours.” You make up your own mind one way or another.
JIM: Also, I think in defense, that we can say, look at the track record of economists on the
second half recovery and the stock market rise that they’ve been predicting for 3 endless years.
Then I would say to anybody listening to this show, look at your portfolio and what’s happened to
it. I recommend that they owe it to themselves to pick up a copy of your book and read it because
all they hear about on television is bubble vision. It’s rah rah, the stock market’s going up, the
economy’s going up. You owe it to yourself, at least, to get the other side’s viewpoint. So, Bob, on
a worst-case basis, if somebody listened to you and followed your advice by reading this book,
they get liquid in cash, what’s the worst that’s going to happen?
BOB: Well, the worst that’s going to happen to average investors is they’ll make 2% or 3%, and that’s if
they’re in the safest imaginable instruments. On the other hand, a speculator could make several hundred
percent if he’s in the areas that I’m suggesting are going to do well because of a decline. He also assumes
risk, but then, if he’s a speculator, that’s his game. Now let’s ask the flip-side question, “What’s the worst
that can happen to investors if all these economists are wrong and the market does go down like it did in 1929
and 1932? Well, they’ll be wiped out.
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The Elliott Wave Theorist — September 10, 2002
JIM: I think that’s good enough. Bob, unfortunately, we’ve run out of time, but I do want to
thank you for joining us on the program. This is a fabulous book. When I read it, I gave it to my
wife, who spent a Saturday morning reading it, and I bought three copies for each of my sons.
BOB: Well, that’s great. Would you mind if I put in just a word for where people should order it?
JIM: No, absolutely, let’s do that.
BOB: You can get it at any bookstore, of course. But, if you come to our website, you’ll be able to
download the first chapter for free along with a purchase and we put it right through to Amazon’s pricing. It’s
the lowest price available anywhere. Anyway, that address is elliottwave.com/conquer.
JIM: Bob, speak for a moment about the updates of this book that you’re going to be maintaining
at your website.
BOB: Right. We have a site that, once you buy the book, we’ll let you in free for as long as we keep it up,
which, I guess, will be at least 2 or 3 years. It’s going to update you on where the safe places for your money
are and where the new money-making opportunities are on the downside. In fact, we just got an amazing
report on a change in Congressional laws that affect foreign annuities. We’ll be posting that very soon, and I
think that’s a good place for some people, at least if you’re in high brackets, to be protecting some of your
money. So we’re keeping it up to date. You know, a lot of books go out of date the minute you produce them,
and we want to keep this one alive throughout the period.
JIM: Bob, I think you’ve done a great service to the investing public in writing this book. I wish
I had written it myself. It’s well documented. If you don’t read this, you do so at your own peril. I
want to thank you for joining us on Financial Sense Newshour.
BOB: It’s been a long time since we last talked. Let’s not make it so long until the next one.
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