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

Robert Prechter Jr. is well-known in stock market circles for his Elliott Wave predictions over the years have had their success and failures. This is Prechterýs third and latest book (At the Crest of the Tidal Wave (1995) and The Elliott Wave Principle (1978)). His current book is really two books in one printed on different colored paper! Even if you do not agree with Prechterýs view of the world, you should certainly understand his arguments and make your own decisions.

Part I (135 pp.) focuses on why he believes a stock market crash will occur in the near term, as well why deflation and economic depression are high probability scenarios. Although deflation and depression are rare occurrences, Prechter believes that they are at the brink. His goal is writing the book is to provide insight into defining both events and make you believe that they can happen, and eventually make you believe that they are likely to happen.

Prechter compares the period 1942-1966 (called Wave III) with the economic expansion of 1974-2000 (Wave V). He points out that the most recent period had much weaker economic fundamentals and performance than the prior period, although by stock market standards Wave V had an increase of 1930% on the DJIA compared to 971% during Wave III. In his analysis he provides comprehensive statistics on GDP, Industrial Production, Capacity Utilization, Unemployment rate, householdýs liquid assets, federal and consumer debt, prime rate, federal budget deficit, personal savings among others. Prechter then defines depression and its relationship to the stock market. One of his key observations is that ýmajor stock market declines lead directly to depressionsý.

Prechter depicts the five waves evident in the stock market using four charts. He points out that the five-wave pattern occurs even taking into account major news events such as Hitlerýs rise to power and the end of the Vietnam war. Prechter provides four signs of a market top and explains the Elliott Wave characteristics of each of the five waves.

Prechter presents his case for the existing stock market precarious situation (as of March 2002) by covering Wave V in great detail. He spends considerable time examining the fifth wave from 1974 to 2000 compared to previous waves. The case for the historically high stock evaluation is made by focusing on the low dividend yield, outrageously high book value, and high P/E ratio. Prechter then covers how psychology plays a major role in a stock market advance and decline. He reviews the psychology of he economists, brokerage strategists, money managers, public, and the media.

Prechter believes that the upcoming bear market will be the most devastating since the great depression and perhaps since 1720-1784. If this occurs, he indicates that the U.S. will experience another depression. He forecasts that the DJI will plummet to 777, the August 1982 low, if that average follows the pattern of the prior manias (e.g., Nikkei; DJI 1929-32; Gouda tulip bulbs (1634-1722); and the South Sea Company (1719-1722)). Lastly, he makes the case for deflation, and discusses the Fed and banking system.

Book Two provided Prechterýs advice for protecting yourself and profiting from the upcoming depression. His recommendations include:
1. Have safety of principal by being in cash or high-quality short-term U.S. Government treasuries (T-bills) or money market mutual funds that invest in these types of instruments.
2. Sell your home (if you have a large mortgage) and rent instead.
3. Find a safe bank (using Weiss Ratings, Inc., for example) and keep your money there.
4. Do not own or invest in stocks, options or futures.
5. Consider buying inverse mutual funds (such as Rydex Tempest that double short the S&P 500) and Rydex Venture (double short NASDAQ 100). ProFunds also offers bear funds. To invest in any of these funds, Prechter cautions that you must be a short-term timer to be successful.
6. Buy physical gold and silver metals.
7. Cash out your whole life insurance policies and convert to term insurance from the safest firms (based on Weiss Ratings, Inc., for example)

Prechter provides a very sobering view of the future that few individuals will heed because of its negative and extreme consequences. But if this book makes you think about the safety of your financial nest eggs, retirement funds, insurance policies, etc; then at least you can decide to take some steps to protect yourself. If the stock market can manage to rally 20-40% from the lows of July 2002, then perhaps you should consider cashing in your remaining equity and mutual funds positions before the ýrealý bear market takes hold as Prechter envisions. I know I will be doing that and then using my charts and technical indicators to tell me when to get back in. Itýs shame that Prechter did not publish this book in March 2000 when the market was at its peak. He would have saved most investors, who believed his work, a great deal of money if they had followed his recommendations.

Whether you agree with Prechterýs view of the world, you will certainly agree with this quote:
ýTo be successful in life, or at least learn something along the way, you have to think for yourself.ý

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

A lot of what drives market activity--and what creates opportunities for profitable trades--is herd behavior. When prices start to go up, the bullish sentiment spreads, and as soon as a crowd gets involved, a rally is underway. When fear sets it, it gets contagious and the market crashes.

But the really big opportunities come from the ability to step outside of the herd's expectations and see things from a different perspective. If you have the wisdom and the courage to go against the popular belief, you can reap substantial rewards, especially if your timing is right. And someone who demonstrates that ability to defy the herd is someone worth paying attention to.

Robert R. Prechter Jr. is a good example. As the world-renowned popularizer of the Elliott Wave Principle, he has repeatedly revealed his capacity for original and insightful thinking. Along the way, he has time and again come up with startling forecasts for the markets and for the economy, sharing perceptions that boggle the minds of the more pedestrian pundits who are hopelessly locked into linear thinking.

In 2002 Prechter published a watershed book, Conquer the Crash, in which he made some astonishing predictions that defied the popular logic of the time, when the focus of the financial experts was on buy-and-hold strategies in the stock market, speculation in real estate that could presumably only go up in value, and on hedging investment positions with sophisticated derivatives as a kind of portfolio insurance.

And what did Bob Prechter predict? The implosion of collateralized securities. The collapse of Fannie Mae and the crumbling of major banks. The failure of bond-rating services to issue timely warnings. The advent of bailout schemes from the government. And an extremely rare, simultaneous plunge in real estate prices, commodities, and the stock market.

Oddly enough, as one after another of Prechter's forecasts were precisely reflected in the financial news of recent years, he didn't get much attention in the mainstream press. Maybe it was because his book also featured another prediction--that we are facing a deflationary depression.

While some would argue that deflation is impossible under the present circumstances, it might be prudent at least to consider that possibility, especially considering the stunning accuracy of Bob Prechter's other predictions. And if you're willing to take a peek at that scenario, Prechter has just the thing for you--a brand-new edition of Conquer the Crash!

All of the analysis and insight from the original edition is included in the new second edition. But Prechter has added 188 pages of entirely new material, and every one of the book's pages is worth reading and re-reading, even if your copy of the original edition is coffee-stained and dog-eared.

There are plenty of fresh gems between the covers. Here are just a few samples:

"It is not the case that Fed chairmen are either fools or geniuses, as their records appear to imply. They do, however, preside over eras that make them appear to be one or the other."

"I hate to challenge mainstream 20th century macroeconomic theory, but the idea that a growing economy needs easy credit is a false theory. Credit should be supplied by the free market, in which case it will almost always be offered intelligently, primarily to producers, not consumers."

"Those waiting to get rich in the stock market, however, have just been kidnapped, trussed up and thrown in the trunk of a car heading to Bankruptcy City. . . . Just look at this 25-year trendline, which just burst like an Army Corps levee."

"One of the biggest scams ever perpetrated is the idea that the stock market has made people rich over the past 80 years. Almost the entire gain in the Dow is due to debasement of the currency."

Even more important, though, the new edition of Conquer the Crash does more than just make dire forecasts and describe an ever-more-likely scenario of extended economic catastrophe. It also provides sound, specific strategies not just for surviving a wave of deflationary depression, but also for turning the troubled times ahead into an enormous opportunity for profit and personal prosperity.

Note the word "specific" here. Conquer the Crash not only offers clear theoretical insights and extraordinary strategic thinking; it also provides a treasure trove of references and useful resources, including websites, phone numbers, and the names of sound banks, insurers, gold dealers, advisors, and other individuals who can help you with your plans for prosperity during a deflationary depression. There's also an access code for a special online question-and-answer forum for readers of the book.

So here's the bottom line. Get a copy of Conquer the Crash immediately. Then read it, and put the strategies it suggests into action. If Bob Prechter's forecasts somehow turn out to be wrong, you won't really be any worse off--in fact, you'll wind up with a more solid grasp on your own financial future. But if he turns out to be right, you'll not only be able to make it through the coming depression--you'll also be able to reap some very big rewards as we hit bottom in a time of unprecedented opportunity.

*****

By the way, here's what I had to say about the original edition of this book back in 2002:

"How much time is left?"
That's the question that kept ringing through my mind as I finished reading Bob Prechter's new book, Conquer the Crash.
"How much time is left? And how fast can I take appropriate action?"
There's definitely a sense of urgency created in this insightful and wonderfully readable book. While it's not specifically about equities trading or financial astrology, the topics that provide the usual focus for Financial Cycles, it's required reading for market astrologers, active traders, and anyone else who wants to enhance his or her prospects for economic survival in the years ahead.
Prechter, the world's preeminent authority on Elliott Wave theory, makes an extremely convincing argument, not only that we are headed for a major market crash and a widespread depression much bigger than the one 70 years ago, but also that we will experience severe deflation, halting and reversing the inflationary trend that has been a bedrock assumption in virtually all financial planning throughout our lives. He examines market history, social psychology, and the prevailing money myths to create a startlingly clear vision of some pretty scary situations that demand serious attention.
Along the way, he illuminates the workings of the Federal Reserve, assesses the impact of increasing terrorism, examines the outlook for government, and makes suggestions for employers, collectors, and prospective retirees. And while he isn't writing about financial astrology, he does provide vital insights into the workings of economic and social cycles-not only Elliott Wave, but the Kondratieff long wave as well.
That's not to say that this is a technical book written only for seasoned analysts or would-be experts. In fact, the opposite is true. It contains some of the clearest, easiest-to-understand material I've ever read on Elliott Wave. But more importantly, its real charm, and its usefulness, comes from the fact that Bob Prechter is writing for average folks who probably haven't really given much thought to what might happen to the economy in the years ahead. And while some of the insights in Conquer the Crash are scary enough, this isn't really a doom-and-gloom piece. It's chock full of practical tips for specific actions you can and should take right now. You'll find valuable guidance here, not only on how to handle the stock market ("The opportunity to make money on the downside in a deflationary crash can hardly be overstated"), but also on real estate, bonds, insurance, banking, annuities, and precious metals. And the actions Prechter suggests aren't vague generalities-you'll find easy-to-read check lists of the particular things you can do in various situations, plus specific names of financial and research institutions that can provide additional help, along with toll-free phone numbers, URLs, and other contact information.
All at once, Conquer the Crash manages to be gripping, thought-provoking reading, a handy reference book, and a stirring call to personal action. As Prechter notes, he certainly gets into "concerns that most investment counselors view as little different from paranoia. As the old saying goes, I may be paranoid, but that doesn't mean there isn't someone following me. In the final analysis, it is better to be safe and wrong than exposed and wrong."
Robert Prechter deserves a lot of respect for the outstanding work he has done over the years in his analysis of social and economic trends. He never hesitates to define his point of view clearly, and he's never afraid to risk taking a stand. As a result he is one of those truly rare commodities in today's hype-filled age: a genuinely original thinker. Conquer the Crash is a delightful case in point.
If Bob Prechter is right, the only question is how much time is left for you to take appropriate action. And if it turns out that he's wrong, taking the actions he suggests won't endanger your financial security or severely impact your current lifestyle in any negative way. So what have you got to lose? I strongly suggest that you get your hands on a copy of this book, read it, and pay very close attention to what it says.
-Tim Bost
[...]

If you are an experienced reader of financial publications and would like to read a view that is very different but presented with arguments and reasoning - this is a good book to read. A different view will likely shine a new light to known facts and pull some new ones that you have not considered recently. Even if you don't agree with the author, such reading has high value if facts are presented well. These are. You should keep in mind though, that author stresses that he foresaw long bull market before many, knew its characteristics, etc. But his own advisory service (tracked by Hulbert Financial Magazine) has very poor results. He is way behind broad market on a "regular investors" portfolio and dramatically negative in his "trader" portfolio. His performance looks very consistent bad during a good 20 years period. So, in fact, you would look like a true hero if you took all his "trader" advises and did just opposite! Note, that it is not just stock picking that is bad. Timing-only returns are even worse. So, remember, your brain cannot retire yet. Given that - it is a good reading, good perspective to consider.

If you are just starting to read financial publications - you might not appreciate the fact that there are thousands of financial publishers at any given time. All, yes, all of them are smart. Really smart. Finance has so many dimensions that it is possible to argue any number of views at the same time - all well grounded and reasoned. When you are starting, anything you read impresses you, looks totally convincing and even evident. Moreover, you will have a feeling that you can make a confident use of newly acquired knowledge. This is why it is NOT good first reading for you. Before you have your brain active - you need some measured background reading. It is simply NOT POSSIBLE to judge from common sense - it takes decades to build common sense in finance. This is a radical view, expressed by rather radical author, practicing non-scientific ideas. His ideas cannot be proven or disproven because he talks about things that happens ones in a century or once in 3 centuries! So, keep in mind a simple fact - this particular man was right big time once but he himself was not able to make any use of his seeing into future. His theory was with him all along but help none either. In fact, you were better off not hearing his advices! I'd keep doing just that. This does not mean I dislike (or like) his prognosis. He may be right and he maybe wrong. He might be right in direction but wrong in the extent. Or any combinations. There is nothing in his book or in his performance so far to make it anything but a pure guess.

First, I have been reading Robert Prechter since the early 90s, and he certainly makes a persuasive argument with his Elliot Wave analaysis. Problem is, he has been wrong on shorter time frame swings many times during the 90s, so it comes down to the reader to make up his own mind. To dismiss him as a "gloom-n-doomer" is ignorant and silly, yet to blindly follow him is also naive. The truth is probably somewhere in the middle. His 1995 book "At the Crest of the Tidal Wave" made a much more persuasive argument for an inevitable severe market downturn and subsequent depression. This follow-up 1992 book, "Conquer the Crash", was probably intended for the masses who ignored his earlier work. His 1995 book was SO persuasive that I missed the 1995-2000 bull market because I was convinced that Prechter could also time the market. He can't. And yet I still am convinced that most of his conclusions are correct. (The jury is still out on the severity of it.) Look around, after you take your blinders off: Good-paying jobs are leaving the U.S. for India, China etc. The US government has to adjust the unemployment figures by removing from it those who have given up looking for work. And many of those who do find work are taking 30-50% pay cuts. Consumer debt (mortgages, home equity, credit cards) are rising and rising. State, local and federal government debt is still rising. Corporate debt continues to rise. The dollar is dropping in value. Corporations' liabilities (health care and pensions) are rising and rising. Government liabilities (social security and Medicare) are still rising. How will this all play out? Who and how will debt be paid? Even Harry Dent, in his popular 1992 book "The Great Boom Ahead", and his follow-up "The Roaring 2000s" predicts the "Mother of all Depressions" to arrive around 2010, when the baby boomer's spending spree winds down, and they begin retiring. So think about it, the eternal pessimist Robert Prechter and the eternal optimist Harry Dent BOTH AGREE on the inevitable arrival of an economic depression. They only disagree on the timing. So somewhere between now (2003-2004) and 2010 the U.S. and the world will fall into the consequences of their multi-decade debt build-up and the demographics of an aging population and a blind government. The long-awaited depression will arrive. Argument settled.