Is Prechter’s "Conquer the Crash" Now Relevant? Maybe So… In a Perfect World

Robert Prechter, president of Elliott Wave International, which publishes analysis of global stock, bond, currency, metals and energy markets, and author of the 2002 book “Conquer the Crash” came out with his revised edition of his book with 180 or so pages of real time calls he has made.  I’m sure he wouldn’t write the book if what he said in those newly added pages hadn’t come true.

Prechter was on CNBC yesterday talking about how he had called DOW 10,000 back in March 2009 when it was at its lows, and that he presently is calling for the DOW to fall again.  He’s also calling for the dollar to go up “big for a year or two.”

Flashback To 2002

The original version of Conquer the Crash, came out in 2002.  Prechter was calling back then for a deflationary depression, but we all know what happened.  Prices of everything went up.  Oil, gas, food, you name it, everything went up in price.

In 2002, Prechter’s predictions didn’t account for the bubble we experienced with the housing market caused by the manipulation of interest rates lower by the Fed.  This manipulation in turn caused a second bubble in the stock market when individuals mined wealth they could spend from the new found equity in their homes….if they were foolish enough to borrow it.

The problem though, in the 2002 version of Conquer the Crash, Prechter wasn’t recommending readers buy real estate or stocks.  Those who took his advice would have missed out on some unbelievable opportunities if they bought stocks or real estate and more importantly sold, locking in profit and wealth.  And worse, those who took Prechter’s advice to short the stock market would have got killed.

However, in his 2002 book, Prechter did recommend physical gold and silver, not gold mining stocks during a “deflationary depression” that he was predicting.  He was worried about government nationalizing gold mines but he said that “owning gold shares at the top of a Kondratieff economic cycle when inflation is raging is fine.”  It wasn’t Elliott Wave Theory that told him to buy gold, but external reasoning.

This is living proof that over the shorter term, Elliott Wave Theory, which Prechter espouses, cannot account for Fed intervention.

In a perfect world, Elliott Wave Theory, seems to work.  A perfect world means one in which the Fed isn’t intervening much, free markets are allowed to do what they do and Congress is on a hiatus from causing problems like approving tax payer bailouts, declaring wars or threatening to.

Flash Forward to Today

Since March of 2008, we’ve had pretty much a perfect world.  Prechter was right.  The timing of his book coming out is probably meant to tell everyone he was right.  But based on his 2002 versions advice as noted above, he wasn’t.

However, it seems that Prechter’s revised book, Conquer the Crash, if it still contained the advice from 2002, would be good advice for investors today.  That is, as long as there are no external influences that pop up.

If what Prechter now says about the dollar is true, that it will go up “big” like he said on CNBC yesterday, then gold should fall in price and thus the gold mining stocks.  Gold and the U.S. Dollar have been almost a perfect inverse of each other since 2000.

If we have the crash in the DOW stocks that he is now predicting, then gold mining stocks, like last year, would most likely fall as well.  Gold and the gold mining stocks have had a nice run since November of 2008.

Does Peter Schiff Disagree?

Peter Schiff however seems to think that the dollar will continue to tank and U.S. stocks would only be rising because of the falling dollar which has been the pattern of late.  Both gold and stocks have been rising with the falling dollar.

Will a rising dollar change Schiff’s mind about stocks moving higher?  I don’t think so.  I think he’ll still be negative on U.S. stocks because of the long term fundamentals of the U.S. dollar and the U.S. economy.

GDP is not growing outside of government spending and there is no way Schiff can consciously put people’s money in U.S. Dollar based assets knowing the value of the dollar will fall in the future.  He is long term bearish on the U.S. till he sees government stop their spending and/or cutback/eliminate programs.  I agree with his reasoning at this point in time.  The U.S. Dollar, long term, is in trouble.

Peter Schiff, however, is not a trader.

For now, Schiff and his clients have been reaping the rewards of his advice.  Foreign markets and gold have overall been doing better than the U.S. stock market.  However, as the U.S. markets fall, which both Prechter and Schiff agree will occur, Treasuries will become more valuable as people still view them as a safe haven.  The dollar rise will bolster this scenario if Prechter is correct.  U.S. corporations can’t compete internationally with a higher dollar.  U.S. stocks will fall even further.

At some point though foreign stocks will be deemed too expensive.  That point could be closer than we think.  Without the U.S. consumer buying, who is buying right now?  Outside of the necessities to live, not many.  I don’t see how foreign stocks won’t get hurt but they will have their own countries consumers who will keep buying and of course their own governments who want the game to continue with additional stimulus packages.  The foreign market decline could possibly be delayed compared to the U.S. stock market decline, but it will come.

You don’t hear too many people talking about a foreign stock bubble but most foreign markets have had a nice run, much further than the U.S. market.  The Hang Seng almost doubled.  The Jakarta Composite Index more than doubled.  Korea was up over 60%.  Does anyone expect this trend to continue?  Why?  What fundamentals are there supporting this conclusion?

Schiff’s clients are primarily in foreign income producing investments and gold.  They will probably stay there through any stock market declines as they did last year.  To think that the problems are U.S. centric however is wrongheaded IMO.  Long term, every nation will eventually rush to lower the value of their currency so their goods are cheaper and thus attract demand.  This will lower the value of the foreign stocks as well.  Even if the stock prices stayed the same, the purchasing power of the foreign currency price of the stock will buy you less tomorrow than it would today.  It’s what happened with the DOW over the last 10 years.

Ask yourself, how often in my lifetime have I seen the stock index of a country go up 50% to 100%?  Then ask yourself, if I just inherited $100,000, would I blindly invest in these indexes today?  Why?  Hopefully this article puts things into perspective.

This is Why I’m Not Really a Believer in a “Buy and Hold” Strategy

There is nothing wrong with taking profit now and waiting for the right opportunities to present themselves.  We’ve had a nice run.  Lock in the profit.  The old saying goes, “you can’t go broke taking profit.”

If anything my brain is more in the mode of looking for good places to short right now rather than to go long.  Yes, I’m “conservative.”  That’s why I recommended people consider getting out of the stock market leaving some profit on the table.  The Russell 2000, a better indication of what’s going on with stocks was trading at 548 then, and is trading at 575 today.  Investors would have left 12% return on the table from it’s high, (4.6% as of today….if they sold….), but they would have locked in 37% returns from the lows.

No one times these markets perfectly. I’d gladly give up 12% to earn 37%.  Buy and hold folks never sell and will ride that 12% at the top, down to 4.6% at present, and into losses in the future.  Buy and hold folks never lock in profit.

Mutual fund folks want you to stay fully invested at all times so they can collect their fees.  There is an incentive for them to recommend advisors tell their clients to “buy and hold.”

As time goes by, I will explain this philosophy of taking profit more.  It will be included in a chapter of my book “Fed Up!” dealing with investing.

Where to Short or Keep an Eye on Opportunities to Short?

We just had the $8,000 first time home buyers credit extended for 14 more weeks and the home buyer stocks are up big today.  Something to keep an eye on for shorting opportunities.  The government can only keep the housing market propped up for so long with this free (taxpayer) money for home buyers.  Home Builder stocks will get hit.  Do your homework and start following these stocks.

Professor Peter Navarro, PhD, who writes the “Always a Winner” blog recently called a market top.  His latest advice to readers is to double short the Russell 2000 with TWM currently priced at 30.43.

I’m not against such advice.

Disclosure:  I hold no positions in the above.  I am not a financial advisor (I used to be).  I only write about the markets.  Consult your financial advisor for any advice on what to do with your money.