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The
Inglorious End of "Bull" Street
Riding High Before the Fall
by Robert B. Gordon,
Sc. D.
April 14, 2004
In
the fifth year of the greatest bear market in world history, our
financial industry is riding high, piling profits on profits given to
them on a silver platter by the Fed‘s benevolent low interest rates.
The brokerage and fund experts march across the "QNBC" stage
daily, offering one optimistic forecast after another to the great
detriment of the average American investor. This sorry spectacle is
heading for an inglorious end in my considered opinion. The profound
changes in "Bull" Street will be interesting to watch.
In my 2 1/2 years of writing on the Internet, I have received a modest number of e-mails from brokers across our nation telling that they are isolated as the only bearish broker in a large office. Similar stories come from a small minority of independent financial advisors. Further along this same line are the "horror" stories from individual investors placed into risky bull market securities by incompetent advisors.
Will the great financial industry ever learn of its errors in the current bear market? Yes, such learning is inevitable, but will it be far too late to save their misguided client’s assets? And we certainly expect to see a huge drop in the number of employees in our financial industry as this great bear market progresses.
WE LIVE IN A CYCLIC WORLD
From the words we hear on QNBC, it would appear that no one in our huge financial industry knows that all financial markets are cyclic in nature all of the time, not just occasionally. Our learned economics profession, in universities, government and business has never shown any understanding of the cyclic nature of booms, busts and depressions. It is reported that their record in forecasting recessions is only half as good as tossing a coin.
My very first essay in August 2001 titled "Dangers From Linear Thinking in a Cyclic World" has been republished on FSO and is well worth reading as its message is timeless. To this very day, there has been only a single paper by an ivory tower economist on the great value of the Elliott Wave Principle in forecasting recessions and depressions. Its author, Prof. Hernán Cortés Douglas of the Catholic University in Chile, gave me the privilege of reading a draft before publication. [Douglas Editorial] He also honored me by having one of my papers, "Wall Street’s Greatest Crime" translated into Spanish and made required reading for his class in Business Cycles. In this paper I quote many of the famous passages from the classic books on manias and crashes. They are fun to read, but the tragedy is that they keep reoccurring every several generations. Will the human race ever learn this lesson?
STOCK MARKET AND BUSINESS CYCLES FOLLOW A NATURAL LAW
Known only to a very tiny number of investors is the pioneering work done in the 1930s by Ralph Elliott, a retired accountant. Reportedly ill and seated in a rocking chair, he perused hundreds of stock charts over a limited time period and evolved a series of principles that dominate all stock charts in every currency and every time interval from seconds to centuries. His brilliant work was published during the Great Depression under the title of the Elliot Wave Principle.
His
followers have extended his work backwards to the London stock market in
early 1700. Elliott’s pioneering discoveries have been duplicated by
independent work in the mathematical field of fractal geometry.
Elliott’s laws are known to have a parallel in some phenomena found in
nature, like snowflakes and sea shells, since they all obey the Golden
Number series rediscovered by Fibonacci, a13th century mathematician.
Elliott
and his followers have developed a close relationship between stock
market crashes and the economic recessions and depressions that follow
them. To my knowledge, only one economist and one mathematician have
written papers on the Elliott Wave Principle in English, while tens of
thousands of economists advise governments and businesses with tools
that have been out of date since the 1930 Depression. In the meantime,
these scholars continue to win Nobel prizes for developing some arcane
mathematics with no practical use in the real world. How much longer
will it take for our Economics profession to use a very practical tool
that forecast the Great Stock Crash of 2000 years ahead. And virtually
no one in academia is currently expecting the world’s greatest
Depression to follow the Crash. Instead, we are told that a small
recession has ended and all is clear ahead. What rubbish!
WHO IS TO BLAME FOR THE COMING GREAT DEPRESSION?
The list of guilty is indeed very long, but surely our entire economic profession takes first place with no competition. They misread all the events of the 1929 Crash and Depression and are repeating them again today with no apparent knowledge of the guidance available from the Elliott Wave Principle. If this failure ever becomes public news, a once honored profession will be in disgrace.
But even worse than the ignorance in the Economic profession is the unbelievably stupid behavior in our brokerages and mutual funds selling products to uninformed public investors that only work in bull markets, which history tells us take only about half of every century. In our recent search for truly stable funds that can survive a severe bear market, we have been hard pressed to find more than a half dozen from a list of many thousands. Not only are the right funds not available, but the sales literature and slogans used by the enormous mutual fund industry are dead wrong for cyclic markets and only good for bull markets, which always end in a disaster for millions of uninformed investors.
In my considered opinion, the mad rush of giant fund companies for the savings of investors has blinded them from providing investments suitable for the long haul. Even the best of their literature is slanted towards their sales gains rather than the clients' long-term interests. I sincerely hope that the current mutual fund investigation is extended to cover much greater crimes than those involving timing of trades. The real crime and tragedy is the failure of the fund companies to provide suitable funds for long-term holding and the need to spend much more effort providing real education for their investors so they can survive infrequent and large bear market cycles such as we are now experiencing.
WHY THIS DEPRESSION WILL BE DIFFERENT
From
my reading of Robert Prechter’s great prophetic book At
the Crest of the Tidal Wave in 1995, I was fully warned of the huge
crisis ahead. I learned that we were nearing the end of a Grand
Supercycle Wave III that started in London in 1784. Preceding it for 62
years from 1722 was a severe bear market identified as Grand Supercycle
Wave II. From Ralph Elliott’s pioneering work, we know that Wave III
is the dominant and longest of each five wave sequence. We now know that
when it topped in 2000, it was 216 years old. Elliott also found that
waves II and IV were often about equal in length, so the current bear
market wave IV may last at least to 2062 if it duplicates Wave II.
Robert Prechter has predicted that this greatest of all bear markets may
actually last for the rest of the 21st century. Virtually no one outside
the small group of Elliott followers has any idea of this very real
possibility.
Also known to few people in government and business is the history of all previous market crashes. They typically end with the market prices below the starting level. Our 1929 bull market started at Dow 100, rose to 393 and fell to 31. SuperCycle Wave 5, which ended at the 2000 top, started in the mid-seventies at around DOW 500 and rose to 11,700, so it is reasonable from market history to expect this bear market to eventually bottom somewhat below 500 - a number incredible to anyone not familiar with the history of other major crashes.
I have been writing many articles for over two years to warn my readers about the very difficult times ahead and urged them to get their financial house in order. We have had some success in getting our readers to move from volatile equities to the few funds designed for stability in a great bear market. Since the second major down leg in this bear market may now have started, there is very little time in which to make all necessary changes. We urge all readers to get there financial affairs in good order right now.
THE DISTANT FUTURE OF "BULL" STREET
There is no point in guessing the timing for the end of this huge bear market, for it is unknowable. Surely this writer and many of my readers will be long gone from this world of toil and trouble when our great new bull market arrives. It took 25 years for the Dow to again reach its 1929 high. This time it could be 125 years, but there is no point in trying to guess. All we can conclude from Ralph Elliott’s pioneering work, and that of his small band of followers, is that it will probably last for decades, not just years.
We have some indication from Japan’s 14 year struggle with its depression that our world economic status is in a new era. One very important note should be made; this bear market is not a local problem for the U.S. All of the major European stock markets are in the same phase of extreme overvaluation as those in the U.S. and will surely join us and Japan in a huge World Depression. There is no point here in reminding readers of the total lack of readiness by our debt-loaded government and people to withstand even a short depression.
I was in high school and college during the first great Depression when this country was a creditor nation and we had 20% of our population living on farms and able to feed themselves. I find myself unable to even guess the magnitude of the problems ahead.
It is easy to predict that "Bull" Street will be a desolate area and that our mutual fund industry will be reduced to a small fraction of its current size. The 1973-74 bull market was so small compared to 1929 and 2000 that corrected for the level of GNP, the 73-74 mini-bear almost disappears. After it ended in 1974, there were net redemptions from mutual funds for nine years. I’ll let my readers guess how many decades of redemptions will happen this time.
THE ECONOMICS PROFESSION IN 2104
It would be nice to predict that the Econ 101 curriculum would cover the Elliott Wave Theory one hundred years from now, but I wouldn’t bet on it. Centuries ago, it took a very long time for Copernicus' discovery that the earth circled the sun to be universally believed. However, it is possible that enormous pressure will be applied to our once productive Economics profession to modernize their views sometimes during this century. I can only hope that this great miracle will come about.
Elliott’s great work not only brought science into the study of stock market cycles, but also connected stock crashes to the following depressions. If our Federal Reserve Chairman had learned of or been advised of this connection when he made his "irrational exuberance" speech some years ago, perhaps our recent history might have changed a bit.
More recent work by Elliott’s disciples has shown that there are important changes in both national and international societies that are caused by major bull and bear stock cycles. Robert Prechter has published two pioneering books in this new area of endeavor he calls Socionomics. He has proved beyond discussion that stock market actions rule important parts of our society; whereas conventional wisdom has been, and is, that important events in society influence actions in the stock market. This has now been proved to be false. Any news events, even major events, have only a limited effect on the market. The opposite effect, that of stock market cycles is dominant. Economic depressions have always followed major bear markets in stock. Any student of the stock market and economy, who is not handicapped by a Ph.D. in Economics, has known this connection since Elliott’s great work in the mid-1930s.
I have formed a habit of watching QNBC with the mute on so that I do not have to listen to every stereotype reason in the news that explains every small price change either up or down. Even an Elliott neophyte learns the truth about the dominance of the market action over what happens in society. Learning this one simple fact can give any novice investor a jump start to successful investing.
WHAT TO DO RIGHT NOW
The stock market appears ready to begin its second big leg down to lower levels. Equity growth funds that did well in the recent bear market rally will be big losers and should be sold. Bond yields will be rising and all longer-term bond funds will do poorly. As Robert Prechter has been predicting, precious metals may be entering a new decline to lower levels, so cut back on this asset class if you are over weighted.
At some point in the next major decline, uninformed, bullish investors may cause some panic selling which should not be of major concern to conservative investors. Please remember that in every bear market there are two waves up for each 3 waves down. Use these corrective waves to lighten up on anything you wish to sell or to increase any short positions.
Readers who own the Permanent Portfolio fund without the companion funds I have recommended should add them now in order to prevent losses from the 25% in gold and silver and the 30% in common stocks the fund holds. In its 33-year history, it has never had to combat a really severe bear market such as the one ahead. Addition of the funds I suggested several essays ago should provide considerably less volatility.
If at any point in the future you become concerned with price volatility in your portfolio, please do not torture yourself. Sell you assets down to a level where you feel comfortable. If that level ever equals zero, put all your assets in a Treasury money market fund and sleep well.
HELP NEEDED FROM MY READERS
Please copy this important paper and spread it widely among your family and friends. This may help some of those skeptics you have encountered. It might also do some good if you could address a copy to a broker you may know or the business editor of you local newspaper. It could also be helpful if sent to the top man in one of the leading mutual fund companies. They need to know what lies ahead for their firm. Here is a sample letter to send with my article:
Dear Mr. ABC, CEO xyz funds,
I am sending you herewith an article discussing the effect of the current bear market on the future of the mutual fund industry. Your company could, if you choose, take a leadership role in revamping your products to better handle the problems posed by this long bear market.
Sincerely, John Doe
For your information, I am sending a copy to Dr. John Hussman to receive his views and will publish any that I receive if he grants permission.
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© 2004 Robert B. Gordon, Sc.
D.
Dr,
Gordon's Editorial Archive
Robert
B. Gordon, Sc. D.
Sun City West, Arizona
April 14, 2004
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