Customer Reviews

Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression

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Let me get this off my chest first: I read every single review here at Amazon before I bought this book and I must say that the negative reviews; or more accurately the nasty ones, lead me to believe that the reviewers did not read the book. I say that because even if Prichter is wrong, and there is no upcoming "Deflationary Depression" and this decade is all blue skies just like the late 1990's were, any subsequent readers who followed his advice to the exact letter of the verbage would NOT lose any of their assets whatsoever. Therefore, how could this book do harm? At worst it educates the reader as to how to handle uncertain times. There is no bad or harmful advice in this book.

His advice is basically to pay off your bills, put your money in rock solid banks. Don't rely on the government to protect you, buy some precious metals, and get ready to profit once we are at the rock bottom by way of investment strategies that take advantage of the subsequent inflation post a "Deflationary Depression." What's harmful about being in cash?

Now the review: Prichter is confident that there is going to be a deflationary depression. A period of great contraction in our economy that drives down any and all inflated value out of any goods or services such as the depression the United States suffered through in 1929.

He supports his premise with monetary statistics such as the 30 trillion dollar credit bubble that America now has, and numerous other statistics that aren't that pretty.

Prichter also bases his premise for a "Deflationary Depression" on a controversial charting method known as "The Elliot Wave Theory". It's controversial in that some stock market analysts think it is merely conjecture, while other analysts feel it is an absolute, social, "fractal". (A "Fractal" is defined as a geometric shape that self repeats over and over into a larger shape. This can especially be observed in nature.)

As a result, the Elliot Wave Theory is believed to be an accurate way of charting graphs whereas the viewer trained in this principle can predict where that statistic is going to go based on Elliot Wave analysis. Whether this is nonsense or not, every major brokerage firm has an Elliot Wave analyst.

Prichter teaches the basics of this technique and supports his findings with background statistics such as market volume and breath.

The book is divided into two sections: Why a "Deflationary Depression" is going to happen, and the second part of the book covering how to profit and protect yourself when it does. At the very least this book is an educational exercise as to what to do if a "Deflationary Depression" or bear market occurs.

To repeat, his advice would do no harm if followed even if he is wrong. Challenge any reviewer who says otherwise.

Tony

Robert Prechter is expecting a devastating dose of deflation leading to a depression, and no collective body (read "government") can do anything about it. He is one of the "old-timers" who has survived the market's up and downs for more than 20 years, and his outlook on our situation is not to be taken lightly. Being high profile, his pronouncements make headlines, and it's all too easy to point to a previous mistake and write him off. However, his scholarship is second to none. He's been right in the past; he just may be right again. And if he is, most of us are in real trouble. Thus, his argument is too important to dismiss without a thorough reading.
Prechter starts with a good overview of his pride and joy, and the basis of all his study - The Elliott Wave Theory. His conclusion is that we are at the end of the 5th wave of the Grand Supercycle which reaches all the way back to 1700. We're talking big-time financial implications here.
To quote Prechter on describing the milieu we've just lived through, "Third waves are built upon muscle and brain. Fifth waves are built upon cleverness and dreams. During third waves, people focus on production to get rich. During fifth waves, they focus on finance to get rich." Sounds remotely familiar.
At the bottom of all our troubles is debt. Gobs and gobs of debt, piled as high as the eye can see. Deflation/depression results in a contraction of credit as debt gradually gets wiped out...one way or the other. It produces a line of falling dominos where less credit means less borrowing means less spending means less production means less employment...which means more liquidations which means more defaults as everything feeds on the downward spiral.
Prechter blames some of this on The Depository Institutions Deregulation and Money Control Act of 1980 which gave the Fed authority to monetize any government agency's (any government anywhere) debt. That power was recently noted in a speech on 21 Nov 02 at the National Economist's Club in DC by Fed governor Bernanke who said, "But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." Clearly, Greenspan & Co. don't plan to sit around while deflation envelopes us. Yet, Prechter contends that the Fed's action to drive rates downward, in addition to continually reliquefying the economy via debt, also participated in the initial phase of the deflationary process.
One of Prechter's most fascinating contributions on which he's written several books ("The Wave Principle of Human Social Behavior and the New Science of Socionomics," "Pioneering Studies in Socionomics," and "Socionomics: The Science of History and Social Prediction"), is that stock market crashes produce depressions and stock market booms produce eras of optimism and economic expansion. Not the other way around. The stock market is a discounting mechanism, leading the economy, not following it. He, correctly, I believe, perceives that stock market values are a function of investor (and public) psychology. When we feel good about ourselves, we bid prices up as is evidenced by expanding PEs. When we are down on ourselves, we sell stocks down to rock bottom prices, again evidenced by low PEs. Therefore, he measures the health of the whole system based on the health of the stock market. And that, he shows us, is in very bad condition - internally weak and grossly overpriced. He even puts a potential number at where the Dow Jones Industrial Average could eventually bottom out...all the way down to 777!
From the stock market, Prechter continues on to the economy, where debt, liquidity, GDP, production, unemployment, trade and budget deficits, etc. are all laid out for investigation, and the picture is one of weakness compared with the economic cycles that have preceded our current era. It is the portrayal of a gradually slowing economy.

All of this foreboding coincides with the Kondratieff Wave (Kondratieff Winter), producing this perfect storm of financial upheaval that's just around the corner.
After laying out why things are going to hell in a hand basket, Prechter proceeds to recommend a way out for the individual investor. He summarizes a list of investment precautions to take to protect yourself from potential calamity by surveying the various asset classes available to us today.
Bonds - Risky. AAA are safest but ultimately depend on ability to service debt.
Real Estate: Lack of liquidity. Prices will collapse with everything else.
Collectibles: Coins, maybe.
Stay away from commodities except gold and silver after they bottom out.
Money market funds are suspect.
Stocks: Only inverse index funds or going short.
Cash: All assets go down in deflation except cash. Short-term Treasuries. Outside US - hold bonds and notes of strong foreign entities. Protect against hyperinflation.
If you listen to Precheter, you will, as he cautions, not be any worse off if it doesn't happen as he predicts. But if he is right, then, at the bottom, you will be in perfect shape to buy stocks, real estate, etc. at bargain basement once-in-a-lifetime prices.
The book tells you why and how disaster could happen, with a lot of evidence on its side. Will it happen? No one knows how it will play out, but Prechter has done his best to ready you for the worst. Perhaps all we're waiting for is the last straw to break the camel's back, Precheter's "The Tipping Point."

First, obviously Prechter has been very wrong this year, not just on his predictions about the stock market but also his bearish views on gold. This is true both for this book and his newsletter. Still, this book is terrific, and offers valuable insight into how our fiat currency and banking system actually works. Prechter also presents good historical background on what happened during past crashes, and his social commentary is always fun to read. I'm not that keen on Elliott Wave theory, so I mostly glossed over those parts. There are also very practical advice on where to buy gold, bonds, etc., which would be useful to novices.

What Prechter has been predicting is rolling out before our very eyes. This book provides the reasons Prechter believes that the crash of the 30's was a walk in the park compared to what we will live through. In particular, he examines an area that not one in 10,000 of us understands according to Prechter. That's the role of the Fed in creating the most enormous credit bubble in world history. The changes our Congress made in the 90's gave the Fed the power to create virtually unlimited credit expansion and to monetize the debt of agencies and organizations on recommendation of the President. All this is why nobody talks about "printing" money anymore. The Fed just issues check books now.

Prechter believes that our social mood determines the fate of our markets. Knowing that, one can watch this whole economic disaster unroll and understand why.

You will miss a valuable education and new insights into the world of economics that may save your skin, if you miss this book.

Robert is a very glib person who the press understands and consequently they adore him.
How can one descibe The Federal Reserve System in a a few simple chapters when the world's leading econmists can't even predict interest rates ?
The Fed is more powerful than he thinks.
He is using scare tactics more than common sense.
The only truth or solid fact is that an investor can purchase 90 day US Treasury bills and keep rolling them over.
In 1960 TREASURY BILLS YIELDED .50% and in 1932 at one point they had a negavtive yield because the buyer was sure he could redeem the bills at par value.($1000) at maturity.
Save your money and find an honest banker or broker who charges a fair rate. ( $50 -$75). Cheerio!!!

Robert Prechter, Jr. was to the 1980's what Abby Joseph Cohen was to the 1990's-the market guru with the golden touch and the fanatical following.

I was in investment banking from 1977 through 1987 and Prechter was everywhere. His newsletter was the equivalent of "required reading". He was quoted extensively. He could-and did-move markets.

He achieved his status through dogged, unabashed bullishness in the very early 80's and burnished his reputation further by correctly calling the top of the market cycle in mid 1986. That's when the Midas touch deserted him-he hasn't been close to a correct call on the market since, having converted to a "doom and gloom" analyst and being a dogged bear throughout the 1990's. His last book predicted this bear market-a bit early.

Well, way early. At the Crest of the Tidal Wave: A Forecast for the Great Bear Market was written in 1995. He missed the mark by 7 years and a few trillion in market value but hey, whose counting?

Apparently not the people buying Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression, Prechter's attempt to exploit his bearish credentials of the past decade and a half to reestablish his status as market guru extraordinaire (Ms. Cohen, having blown several major calls lately, has left the title open for the moment for the taking).

So, is Prechter back? Is this the book that will keep you in the lead financially and save your fiscal bacon?

Probably not.

First of all, the likelihood we are entering a "depression" is highly doubtful. The unemployment rate-normally the preeminent statistic for judging downturns and depressions-has averaged about 5.5% during the recession we now "enjoy" By way of perspective, in the 1980's 5% unemployment was considered "full" employment. The 1990's changed that perception drastically, but that doesn't change history, which shows the "normal" level of unemployment in the recessions of the last century averaged around 8.5% and the average unemployment levels of the Great Depression hovered around 30%.

Moreover, the Fed is expanding the money supply at an ample rate and gives every indication of being positioned to do whatever is needed to avoid a deflationary spiral. Check out the inflation numbers for the past 24months. Inflation at the wholesale level is up about % overall and retail inflation is up about 1%. The absence of inflation is not the same as deflation folks. We are not in a deflationary economy, we are in a disinflationary economy (that is, the rate inflation has decreased markedly-but not disappeared altogether.)

Having said all that, there are a few basic points of useful information in the book. You don't have to be in a depression for a bear market to hurt a lot. Cash is King right now. Until the market hits bottom (look for the 60 day moving average of the S&P to have moved 5% above its trough), being in stocks is overly risky. Bonds are out. Rates are at historic lows, so returns are lousy and, moreover, bond yields long term have no where to go but up, so investments in bonds made now will depreciate over time (bond prices fall as rates rise).

Historically, a recession in post war America lasts about two years insofar as getting the statistics (such as the previously mentioned 60 day moving average on the S&P) back into a positive groove for equity investments. So the best advice is to hold your fire, hold cash or cash equivalents, and get back to investing sensibly early next year.

Byu which time, I predict, Mr. Prechter will have once again faded into the netherworld disgraced market guru's inhabit.

Mr. Prechter is best known as a popular advocate for the Elliot Wave principle. He continues this school of thought in this book.

The book is divided into two parts. The first part attempts to persuade the reader that the US economy is headed for a deflationary depression. The second part recommends actions to prepare and prosper during a deflationary depression. This specific edition of the book also includes an update written in 2004. (The original book was written in 2002.)

First of all, with any investment book review, it is important to understand the reviewer's biases. My belief is that the US will enter some type of unwinding, either through an extended securities bear market, or more severe overall imbalance. I maintain a minor belief in technical analysis but do not rely on it.

Elliot Wave analysis is, at its core, a technical analysis methodology. Elliot Wave claims to find a recurring pattern in short term, long term, and ultra-long term market price charts. What is gravely missing, however, is some sort of explanation or justification for its supposed utility. Many schools of technical analysis, for example, give plausible explanations for why "resistance levels" exist based on market or individual investor psychology. This is completely missing from Mr. Prechter's writings and thus he fails to distinguish himself from a long line of failed data miners.

This missing and crucial "why" is the most glaring hole in this book. While other writers attempt to prove a thesis through a chain of reasoning and supporting data, Mr. Prechter skips steps in his thesis. The holes are not glaring to a casual reader, but a person with some breadth in economic knowledge will easily spot large omissions.

For example, even if you accept the disjointed framework of technical and fundamental analysis, the fundamental arguments for deflation are seriously flawed. Note, also, that Elliot Wave principles claim only to predict the performance of securities. Thus, Elliot Wave is agnostic with respect to the inflation vs. deflation debate. Therefore, Mr. Prechter's arguments for deflation are purely fundamental in basis. This is where his loose foundation really comes apart. His understanding of the Federal Reserve functions are contrary to those written by many other writers and scholars, including many who share similar contempt for the Federal Reserve. This is rather crucial, because the specific authorities and obligations of the Federal Reserve can determine whether a presumed economic failure results in deflation or hyper-inflation. Convincing cases for deflation have been made, but Mr. Prechter does not offer one.

Where many market bears thoroughly argue and carefully build their conclusions, Mr. Prechter glosses over far too many details to arrive at this deflation conclusion and blatantly ignores examples that contradict his thesis. He uses the US depression of 1929 as his sole argument that monetary policy is powerless to prevent deflation, forgetting that Federal Reserve authority was much lesser back then. Meanwhile, he ignores the numerous historical hyper-inflation examples caused by monetarism, such as 1970's US "stagflation", the recent collapses of Argentinean and Mexican currency, or even popular historical cases such as the South Sea Company bubble and post World War One Germany. Mr. Prechter is either grossly ignorant or deliberately avoiding such cases. Neither speaks well for him.

Most importantly, he sets up his own case of why he is wrong. He admits that there is a small probability that he could be wrong and that hyper-inflation will set in. Mr. Prechter says that this would be indicated by a declining US dollar and a price of gold reaching above $400 per ounce. Both are now clearly true, yet in his 50-page 2004 appendix, he conveniently ignores this fact and chooses to emphasize only his market index prognostication.

The rest of his fundamental case rests on material already beaten to death by other bearish scholars. He writes about historical price to earnings ratios, the contrarian indications given by popular finance magazines and long-to-short ratios, for example. His fundamental arguments are not thoroughly presented and escape ridicule only because others have argued the case before him. He adds nothing new here.

Since the first part of the book is so poorly supported, the second part regarding how to survive a depression is irrelevant. His recommendations generally apply only to deflation and would not work in a hyper-inflation or zero-inflation economy.

When one supports an already argued case, the burden of proof is small. However, if one dares to present a different case as Mr. Prechter has done, one needs to cover all well known and reasonably applicable cases at a minimum. Mr. Prechter has failed in this regard and by his own criteria.

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.

Robert Prechter believes that stock market movements are highly predictable. Such movements supposedly follow various patterns (either waves or fractals) that can be uncovered using technical analysis. If this were the case, Prechter would have made a fortune in the stock market. Instead, he has made one selling books with really poor advice.

He positions himself as the Cassandra of the investment set. The only problem is Cassandra had insights, meanwhile he has none. Over 320 pages, Prechter pontificates about investment and economic theory, and geopolitics. Subjects in which he has no well grounded knowledge whatsoever.

Regarding fiscal policy, he mentions that the Feds have lowered interest rate to historically low levels to fight inflation. This is wrong. They lowered interest rate to fight off the risk of deflation.

He states that no one has taken precautions to fight against deflation, simply because the establishment does not believe it could ever happen. Again, this is all wrong. Alan Greenspan has been most concerned about deflation for the past couple of years. This is why he lowered short term rates to historically low levels.

Prechter mentions that the money supply is growing way too fast. He further attempts to explain that inflation is caused by the money supply expanding faster than the production of goods. Well, obviously the money supply has not grown too fast relative to goods over the past decade and a half, given that we have had exceptionally tame inflation during this period. Again the current risk right now is not runaway inflation, it is deflation.

Prechter states that the U.S. banking system credit underwriting is way too lenient. This will lead to a tsunami of loan and mortgage defaults, and real estate foreclosures. I have looked at the data, and this is nonsense. The balance sheet of both households and businesses are actually much stronger with a lower leverage than they were in previous decades. The risk of an onslaught of bankruptcies and foreclosure right now is very low. The cash flow of businesses are too sound for that to happen. Also, households have too much equity in their homes for foreclosures to take off nationwide. Similarly, the asset quality of banks currently is very strong. This suggests their credit underwriting standards are sound, and not so lacks as Prechter suggests.

Regarding his investment recommendation, Prechter is not anymore proficient than in economic theory. He recommends you get out of all bonds and stocks investments, and reinvest everything in cash and precious metals. This advice is nonsensical. By following such an investment mix, you will not keep up your purchasing power over time. And, you will have a significant exposure to an investment that is purely speculative (gold). Mr. Prechter is a "Gold Bug" such an investment strategy has been out of date for decades. Owning a bit of gold may be OK, but to make it a major portion of your stock portfolio is financially really dangerous. He even recommends that you cash out your retirement plan and reinvest it after incurring hefty tax penalties in cash and gold. This is because he considers that there is a high risk the Government will confiscate your retirement assets. That is just not a real possibility.

Regarding geopolitics, Mr. Prechter states that 9/11 was the result of a worldwide economic downturn. He has never heard of Wahhabism in Saudi Arabia that preaches the most extreme and violent interpretation of the Koran. Such Saudi Arabian Wahhabists accounted for 15 of the 19 terrorists of 9/11. The causes of 9/11 had nothing to do with an upcoming economic downturn. But, 9/11 certainly precipitated the worldwide economic downturn. Mr. Prechter confuses cause and effect here. And, thinks he is a contrarian genius because of it. I don't think so.

If you want to read books on investment theory, I suggest the excellent books by Burton Malkiel: A Random Walk Down Wall Street, and The Random Walk Guide to Investing. If you want to inquire about the causes of 9/11, I recommend Longitude and Attitude by Thomas Friedman.

People don't like being told there isn't such thing as a free lunch - especially when that's how they eat every day.

Fundamentally, behind the volumes of graphs and several weak attempts to link the sun, moon and stars to Elliot Wave Theory, that is the very important and practical lesson of Conquer the Crash. Free lunches eventually catch up to all of us - especially in an economic system that Precther argues is addicted to them. No book I've read touches on the variety of levels of this premise in a timely, relevant economic context as well as Precther. He's not perfect, but his certainly is a compelling argument if you decide to be open minded enough to consider the potential that all too often ends up being 20/20 hindsight: The Emperor may not wearing any clothes.

As for those who criticize Prechter as a crank or a broken clock that is right twice a day, keep in mind that the prevailing wisdom among academic economists, Wall Street, much of politics and government - e.g. the power structure - believes it is prudent to have leveraged our economic system exponentially based on the economic wisdom and theories of this guy:

"We will not have any more crashes in our time"

---- John Maynard Keynes, 1927

Maybe Precther is right, maybe he is wrong. Time will tell. Read the book. Make an educated decision for yourself instead of relying on ... T.V. or in a magazine. By all means, ignore most economics professors -- they are usually thinly veiled socialists.