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Apparently disgraced market gurus don�t just fade away�.
on August 7, 2002
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?
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 ½% 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.