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Depression will deflate most markets
Prechter interview: 'Deflation destructive to economy'

By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:08 AM ET Sep 6, 2002
SAN FRANCISCO (CBS.MW) -- Economic forecaster Robert R. Prechter is confident a global depression will wreak havoc with stocks, bonds, real estate and money markets.

Prechter says a "deflationary depression" has already started and will gain momentum over the next 2 1/2 years as banks stop lending, borrowers default on their loans and an unprecedented expansion of worldwide credit stops in its tracks.

"Deflations are quite rare, so if you are going to forecast one you have to have your dominoes lined up," says Prechter in a televised interview with CBS MarketWatch. "Deflations are destructive to the economy and to investments on the way down."

Prechter, president of Georgia-based Elliott Wave International, in his 1978 book, "Elliott Wave Principle," was among the first to forecast a tremendous rise in stock prices. His 10th book, "Conquer the Crash," makes a compelling case for a vast and rapid deflation of monetary assets.

"Bob Prechter has been the consummate market technician for over 30 years," says Jeff Hirsch, editor of Stock Trader's Almanac and Almanac Investor Newsletter.

"He's one of the smartest guys I know, and a real gentleman," says Paul F. Desmond, an award-winning technical analyst and president of stock-market researcher Lowry's Reports Inc.

Recently, Prechter is facing the scorn of some subscribers and individuals who criticize the timing of his calls and his reliance on 1930s author Ralph Nelson Elliott's theories about economic waves and fractal patterns in financial markets.

"As a past subscriber to Prechter's Elliott Wave (newsletter), here is my take on him. He was wrong then and I believe he is wrong now," says Jerry Dorfman, an individual investor. "He missed the boom so why not be there for the bust?"

Mark Hulbert, editor of newsletter rating service Hulbert Financial Digest, describes Prechter as "one of the best stock market timers of the decade of the 1980s, up until the crash of 1987. Since then, with few exceptions, he has been aggressively bearish."

Hulbert, who has been rating financial newsletters since 1982, says Prechter's performance "is therefore mixed. On the assumption he went into cash while bearish, his overall record is creditable. On the assumption he went short, his performance over the last two decades is a huge loss."

Prechter, in person and in his new book, is forthright about his misses. "After identifying the start of the great bull market," he says," even I never imagined that the stock mania would last as long or go as high as it did."

Prechter's "Conquer the Crash" book is subtitled," You Can Survive and Prosper in a Deflationary Depression." His case for a major depression is built on three centuries of financial data, economic trends, central bank strategies and investor sentiment.

He predicts the Dow Jones Industrial Average will fall to the triple-digit level, or below 1,000. The Dow (INDU) is now above 8,000. His timeline for a Dow crash is almost certainly imminent, says Prechter, who sees a slight chance such a horrific fall could occur in future decades.

In the interview, Prechter says:

"Only the largest stock-market declines lead to depressions ... and those are the ones that follow ... a big amount of credit and a large mania of stocks that gets the public involved. I think the United States is in the middle of one of those."
"The last major area will be a fall in real estate. The real-estate frenzy we saw this summer was a replay of the stock frenzy we saw in 2000. We went back 200 years looking at the major peaks and found the real-estate market tended to peak nearby, usually with a two-year lag."
"What's going to happen when the stock market finally bottoms? You'll be able to go in there and buy stocks that used to trade at $85 a share for maybe half a dollar or a quarter of a dollar."
"I'm not fully sure what will happen with gold and silver. Precious metals do not go up in deflationary periods unless there are price controls on them, as (gold) did in the '30s. The price of silver went down with everything else. I have five reasons why you should own (gold) anyway."
Prechter also questions the safety of most money-market funds and bank deposits, which bankers have squandered on expensive real-estate loans that will plummet in value. The 53-year-old forecaster recommends a number of safe-money reports that rate banks by their lending reserves.

At the heart of Prechter's case is the credit expansion of the 20th century. By some estimates, American households, companies and the government owe $30 trillion worldwide, an amount that is three times the country's entire yearly economic output. "The Fed (U.S. Federal Reserve) has thought for some time it could avoid a (credit crash)," he says.

Prechter advises investors to seek only money-market funds with short-term Treasury bills in their portfolios. He envisions a wholesale collapse of nearly every form of paper, including stocks, corporate bonds and municipal bonds. "A lot of people think they're in cash equivalents when they're in money-market funds," he says.

He suggests that investors investigate cash accounts in other countries with reputations for fiscal soundness, including Switzerland and Singapore.

"Go ahead and panic, beat the rush," Prechter says. "If you do it early, you're not being paranoid. You're being prudent. We're only half way through this bear market."