Robert R. Prechter, Jr.

"Conquer The Crash 2006 Update"
and preview on Bob's new book
"How to Forecast Gold and Silver Using the Wave Principle"

Expert Page  |  Conquer the Crash  |  How to Forecast... |  Website

JIM PUPLAVA: Joining me on the program this week is Robert Prechter, Jr. He’s the founder of Elliott Wave International and he’s a chartered market technician. He has authored or co-authored 13 different books, including his newest book How to Forecast Gold and Silver Using the Wave Principle.

You know, Bob, I want to go back a decade where we saw books like Bankruptcy 95, Surviving the Great Depression by Ravi Batra. We didn’t have a depression in 1990, the US didn’t go bankrupt in 95. I know it surprised me – has it surprised you that the debt bubble has progressed and lasted this long?

ROBERT R. PRECHTER, JR.: That would be an understatement – Yes. What can I say? The Japanese stock market, real estate market and economy peaked in 1989. The rest of the world seems to have had an extension, an extension that has lasted an enormous amount of time. [1:27]

JIM: Prior to your gold book, which just came out about a month ago, you wrote a book in 2003 Conquer the Crash, then you came out with an update in the paperback. Could you bring us up to date in terms of changes in events since Conquer the Crash was first published?

BOB: Well, it was finished in March 2002, and came out I think in May of 2002, and that was when the market had rebounded all the way back to 10,600 from where ever it was [just above 8000], and was ready to plunge another 30%. So I thought my timing was great, you know. The market went down for a number of months and we got into a recession, and I thought, “this looks like the beginning of something important.” It turned out to be very similar to the 1990 experience in terms of a recession along with the ’87 experience in terms of the market. In other words, the market based on the S&P, went down 50%. In 1987, it crashed about 35 to 40% depending on where you take your readings, and it was a very swift recession. So I’m beginning to think that those two periods were essentially the same degree, and at least in Dow terms, we’re in the 5^th wave of the old bull market now.

But it’s very important to understand that all of the serious averages – the broader ones like the S&P and the NASDAQ – are not going to come anywhere near the highs of 2000. And no matter where the Dow peaks out, I am quite convinced that it will not make a new high in real terms, so I think it will be very much like the 1968 or ’73 highs relative to the high of 1966. If you put those peaks of the late ’60s into the ’70s, on an inflation-adjusted basis, you can see the high was in February 1966 – and none of the ensuing peaks made a new high.

So I think in a subtle way we started a bear market in 2000, but it’s had a reprieve, partly because of the continued expansion of credit, as you pointed out, which mostly found its way into the housing market. Now the housing market has given up the ghost. I think commodities have probably peaked and the last thing left is this 5^th wave in stocks. [3:56]

JIM: Let’s talk about the effectiveness of this monetary policy. Despite a booming credit market, if you follow the economic recovery – which you wrote about in Conquer the Crash – since 2002 the recovery has been anemic in job creation, industrial production and growth in personal income. It seems to me Bob, what the Fed seems able to accomplish is nothing more than asset bubbles: we got stocks in the 1990s, and in this century real estate, bonds and mortgages.

BOB: You’re exactly right. If you take a look at the averages in terms of their components, you find that some of the stocks that some of the stronger stocks since the high of 2000 are in banking and insurance, and a number of the weaker stocks are in manufacturing. So we’ve been talking about this, I think you and I and others, for at least 5 years – the idea that the manufacturing base of the country has been stagnating, can’t compete on a global scale and the only thing that seems to be left is this money shuffling. So if you’re in the money shuffling business, you’re still doing all right, but it’s the last desperate basis for any kind of GNP number, and I think in many ways it’s a phony because it’s really not part of growth.

The whole idea of the banking system and insurance companies and so forth is to grease the wheels of production, not to be the wheels of production. So at a grand level it’s a joke, it’s a big joke, and unfortunately the joke’s going to be on the people that think that they can save themselves from the ultimate downturn by investing in these companies. But for the time being they look pretty smart. [5:47]

JIM: One thing that we haven’t seen is the deflation that I believe you still think is coming. Why do you think that has happened? In other words, we were worried about deflation in 2003, now everybody’s worried about inflation. We seem to have bubbles in a lot of asset categories today. Do you still see deflation coming?

BOB: Absolutely. The short answer to your question – the reason it hasn’t occurred yet – is because we didn’t have the 5^th wave in the Dow. I thought it had ended in 2000. And we’re not going to get it until the last blue chip average rolls over and gets into a serious bear market where it’s losing 20, 30, 50 or 60 percent, which is definitely coming; it’s just taking a long time to get here. In other words, back then we were in 1928 relative to the 1929 high. [6:39]

JIM: What about the consumer price index, which I think is higher than is widely reported? It seems to me [it is] manipulated, whether you’re looking at geometric weightings, substitutions, or these hedonic adjustments.

BOB: Yeah. What can you do but chuckle? You know, it’s the old story of letting the wolf guard the hen-house. You can’t have the government releasing the figures that report upon itself. And of course, the inflation that government generates when it goes into debt and sells the debt to the Fed and so on, is something they don’t want the average American to understand. So in order to get away with it, they have come up with ways – all sorts of ways, intriguing ways…clever is a good word – of manipulating the actual statistics.

If you really want to understand the rate of inflation, the best way to do it is to take something very basic and ask what it costs so many years ago and what does it cost today. A good example – when I was a kid my Dad would sometimes take me down to the farmer’s market, which back in those days was south of Atlanta, and you could buy 5 huge watermelons for a dollar. That’s 20 cents a piece. Well, today, you can’t get a whole one for under about 7 or $8. So do the math and you’ll know what the real inflation rate is. And you can do that with about half a dozen different things. And you can’t use anything where technology has really had a big role because the natural role of technology is to bring prices down. So you have to take something that is pretty equal over time. And I don’t think the CPI or even the PPI is really representative of the amount of inflation that’s happened. [8:30]

JIM: One thing that I saw when I first got in the business in the late 70s, the bond market was really the vigilantes over inflation. If you take the reported inflation index today, which we both believe is underreported, how can we have bond yields at 4.6%? Is the bond market asleep on this?

BOB: No, this has been part and parcel of my whole argument all along. And I think this is one area where we’ve been right, because for the past 3 years we’ve said that this is a reliquification rally – everything is moving on liquidity. And confidence is behind the move in liquidity. So, as long as people’s confidence remains high – and I’d like to talk about that in a moment because the level is unbelievable – they can justify buying absolutely everything. They buy stocks, they buy bonds, they buy junk bonds, which are even more risky, they buy real estate, commodities – and they’re all happy about it, and they all think, “we’re fine, don’t worry, the economy is steady so I can own the bonds, the prices are going up so I can own commodities.” It’s a completely untenable situation but I also believe that it is the precursor to a move in utterly the opposite direction. And I think you’re going to see all these markets go down just like they did from 1929 to 1932; that’s what I believe is coming. But the optimism is the secret behind it all, and I’ve never seen anything like it. [10:07]

JIM: If you were to make your case for deflation right now, what would be the key factors supporting that view?

BOB: The credit bubble: the fact that we do not have currency inflation as much as we have credit inflation. And credit bubbles have always imploded. The amount of dollars out there that are greenbacks – actual cash – is miniscule compared to the dollar value of credit instruments. So in my view the Fed is utterly powerless to prevent the ultimate deflation of the credit bubble. And some people say, “Well, they can print money.” Fine, that would just make the credit bubble collapse faster as soon as bond holders realize that’s what they were doing. There’s no way out of it. So that’s the argument.

It seems to me you’re also implying, “what are the signs?” And we don’t have any yet, because we haven’t turned down in the 5^th wave in the stock market. I think we might have peaked in oil – I put out a report on oil in July; we may have seen the tops in gold and silver. I think I called silver very well; gold went way beyond where I thought it would, but now it’s back into a reasonable area. So I think there are signs. Just like in the housing area, there was a tremendous speculation all supported by credit. Credit is behind all of the asset bubbles – not cash, as say in Weimar Germany in 1923; that was a different situation. It’s all IOUs; somebody’s collecting interest on that and someone on the other end is promising to pay. And when all of that collapses I think we’ll see deflation. [11:44]

JIM: Now one thing we have seen over the last two decades – and this gets back to this credit bubble – is the emergence of the United States over the last half-century moving from a manufacturing-based society to a service-based society, but also we got a rise over the last two decades of the financial economy in the US that seems to deal in credit and speculation. It seems that it’s this part of the economy that seems to be most receptive to Federal Reserve stimulus.

BOB: At this point, yes. In the early days of monopoly money, bank lending officers were conservative, and they tended to make loans to businesses. And businesses create what are called self-liquidating loans: they borrow money in order to make money. If they succeed in making money, they can pay off the loan – it’s self-liquidating. What’s happened in the last 30 years is that bankers have preferred to lend to consumers and speculators—consumers up until the ’90s began, and speculators ever since. So they have been lending money to people so they could buy cars, lately of course it was homes, and everything all the way down to electronics like VCRs and DVDs players and things like that – people are buying them on credit cards. In the past 4 years there has been a very strong lending to hedge funds, so that they can leverage up even more.

If you look at that progression from businesses to consumers to speculators you can see the loans are no longer self-liquidating. That means somebody else has to go make money: that consumer has to make money somewhere else to pay off the loan for the car, the loan itself per se isn’t going into anything productive. And speculators of course can lose all of that money in a flash. So the bankers are taking huge risks, and you throw that on top of a burst real estate bubble where the bankers have all of their money now, and I think the ingredients of a credit collapse are right there to be had. But they will not precipitate deflation until confidence finally turns down. And even through the biggest drop in 40 years in the S&P confidence never flagged. [14:02]

JIM: You know one thing and I want to get back to this confidence level that surprised me. During the month of August I took a month off, and we hit the malls on the weekends and what I was really surprised, and maybe we’re different in California, maybe it’s the same in your neck of the woods, but the malls were busy. Talking to the retailers, [it was] one of the best summers they ever had. And I did not expect to find that, I thought with the housing market coming down, with interest rates going up, people would be more circumspect. And yet on the day you and I are talking the retail sales report for September came out better than expected; retailers are increasing their forecasts for the 4^th quarter and profits for the year. It appears right now that the American consumer is still hard at work on consumption.

BOB: Absolutely, and this is what I brought up before. We’ve been in a period of sustained peak optimism for longer than at any time in recorded history. When we go back to October of 1998 – that’s 8 years ago, almost to the day –there have been only 9 out of 413 weeks when there have been more bears than bulls among advisors. Just 9!

If the market had been going up the whole time that would be one thing, but this has all been in the same relative area on the Dow and the S&P and included a 50% drop in the S&P and over a 70% decline in the NASDAQ. It’s as if people are drugged. They will not come down from that euphoric, confident state of mind.

And just look at the last week and a half, which has been just as amazing. We’ve gotten the daily sentiment index figures and found that in the last 7 days – and we haven’t gotten today’s but I guarantee you it’s there, too, so we now have 8 straight days – when the bullish percentage among S&P and NASDAQ traders is 90% or higher. That has never happened. And one of the numbers was 95%, which is the highest daily figure ever recorded. There was one other in July 1999, and I don’t know if anybody realizes it, but that was the all-time high in the Dow in terms of gold. So right at the peak in the real value of the Dow was the last time we had even a one day reading like this one – but back then the ratio fluctuated a lot. We’ve never had 8 straight days at 90% or higher. So optimism is pinned to the ceiling. As a technician I can hardly imagine where any more fuel would come for buying the market. You know, you would think with that much optimism people’s money is already in there. But I’m open-minded, I’ve seen the market press past extreme readings numerous times in the last 8 years, so I have to give the market leeway, and it’ll tell us when it’s ready to come down. The first day we have 9 or 10 to 1 negative advance-decline ratio I’ll figure is the kick-off. [17:08]

JIM: Let’s move back to the investment markets, I want to talk about that the Dow because on the day you and I are speaking the Dow hit another record.

BOB: That’s a phony record as you and I well know, though.

JIM: It’s 13 stocks up, and 17 down. I’ve even seen now some forecasts coming out of Wall Street that next year they expect the S&P to hit a new record.

BOB: Look, I wouldn’t say it’s impossible because of everything we’ve seen in the last 8 years, but people have to realize that nominal records don’t mean very much. Today, the Dow buys less than half of the gold, half of the copper, and half of all kinds of things than it could buy in 2000. So the run up to 2000 was one in which people ignored all other types of investments – particularly in the commodity area. So the rise in real purchasing power for the Dow Industrial Average ended in 1999. And I think there’s no way in the world the Dow is going to record a new high in real terms. So this is a completely phony new high. You know, it’s getting a lot of headlines, and it may go further, but it’s not real. It’s very much like those highs we talked about in 1968 and 73 – in real terms they were lower. And back then, those were a precursor to a real bear market. [18:26]

JIM: Let’s move on to the commodity market. Since hitting a high in May at around 365, we’ve seen the CRB index pull back to about 600, which is about 18%. Your thoughts on commodities.

BOB: Well, I put out a very bearish report on silver when it got to 14.80. It held up for approximately another month and then finally started down. I waited and waited, and finally in July of this year I put out a 16-page detailed report on oil, and that’s down 20% from there. So like most of the markets we’ve been watching over the past 10 years, every one of them – whether it’s the commodities we just listed or the stock market, or bonds of any grade, or real estate – everything was pressed way beyond normal levels. You would look at it and say, “This ought to be enough from a historical point of view,” and yet a year later it’s higher, another year later it’s higher again, until finally it’s exhausted. So it looked to me that we had a beautiful pattern in silver, and it looked just like the move up in the 1970s, although of course much smaller. It took exactly the same shape. And the oil market completed a wave pattern at its top and also had worldwide optimism at that price – I’ve never seen anything like it. So I said it’s finally time to publish there.

So I’m feeling pretty good on a couple of markets, but the one that everyone watches the most, which is the nominal Dow Industrial Average – or whatever stock average happens to be at a new high; they don’t seem to look at the weaker ones – I’ve been wrong. I didn’t think it would make a new high. But it’s only making it on a nominal basis.

I’d have to say that we’re probably getting a rolling top. I can’t imagine real estate getting yet another phase of bubble. I don’t think commodities will, either, because I think people loaded up, including the hedge funds, and I think there’s a lot of liquidation coming there. I think they were way overpriced – at least that’s my view of where they got. So I think there’s one domino left, and that’s the blue-chip averages, and whenever they decide to peak, which I think ought to be in the next few minutes to the next few months, I think we’ll roll over. I don’t think the commodities will make a new high, and then finally everything will be going down together. [20:50]

JIM: I want to talk about, in respect to commodities, the role of China and India in terms of their markets and the growth in consumption that these countries are going through. If you look at marginal increase in demand globally, but then if you look at India and China specifically, that seems to be where the largest growth is coming from. Any views in terms of China and India and their relation to commodities? Will that have any impact in your mind?

BOB: None. People use stories to justify psychological events such as manias, but to me it has nothing to do with fundamentals. They’re looking at each other, and they’re following each other in a herd. If gold responded to fundamentals, it wouldn’t have gone down for 20 years during which time we had non-stop inflation in the money and credit supply – from January 1980 all the way into 2001 – and gold kept going down. People were not interested in it. So it’s not a matter of physics where just because the money supply goes up, gold goes up – and vice versa. It has to do with where people are paying attention and where the crowd is focusing its attention. The main thing that propels markets is what the crowd is thinking. [22:09]

JIM: You know I saw a report on commodities that did strike me as odd, and that was despite the run up in commodity prices – whether it was energy, copper – going back to the beginning of this decade, and [despite a] substantial increase in exploration budgets, whether in the mining sector or energy, there hasn’t been a huge supply response. Does this argue, in any way, for a different outcome?

BOB: Are you saying the manufacturing and mining companies are not bringing forth more copper and metals and so on?

JIM: Yes.

BOB: Ok. I think it’s due to the underlying fact that our manufacturing sector is falling apart. It can’t even operate. When you look at General Motors and find that they’re absolutely hamstrung with union contracts, they can’t compete with foreign auto makers. If you try to get any kind of manufacturing facility going in the United States, you’ve got to answer to red tape, laws, and all sorts of things that keep people from going in to it. You have to set up medical plans and pension plans and all of these sorts of things, rather than just saying, “Hey, Charlie I’ve got a job for you, would you like to take it?” Charlie says, “Yeah, I could use the money.” That’s the way it used to be, and now it’s so difficult that I think most people don’t even want to bother.

Now, how much that affects manufacturers in other countries I’m not sure, because I know there’s some metal production in South America and Canada – but Canada is somewhat hamstrung as well. I think this is part and parcel of global socialism, which makes it extremely difficult to do anything productive. So you’re getting the money world chasing what’s left of goods and producers in terms of shares and ownership, but in reality it’s not stimulating production – at least not outside of the computer and software areas, that I know of.

To add one more thing – I think this situation is a precursor to the ultimate downturn. In other words, this inability to generate a truly productive response to easy credit is telling us that when the cycle rolls over, all of these manufacturing firms that are holding on by their fingernails are going to implode and shut down. [24:30]

JIM: I want to move on to something that is kind of troubling, and that is if we take a look at this year, our current account deficit is going to be close to 900 billion; if you look at our budget deficit, it could be 300 billion, 500 billion or 700 billion depending on which set of books you’re looking at. What is to stop the Fed from monetizing the debt, or for that matter, other central banks from printing the money and buying our debt and absorbing much of it? Certainly one would have thought with a current account deficit of 6% of GDP, that we would be in a serious dollar problem by now.

BOB: Yes, and we’re not. And the answer is the same as we’ve been talking about: confidence is high. People are perfectly happy to take the money. Now, they’re not thinking very much. I think this goes back to what I said 5 minutes ago about herding and crowd behavior. They look around and say, “Well, everybody else is partying, I guess I should too.” They’re really not thinking very hard about what they’re doing. And that’s the whole idea of crowds, and why we’re aghast at the fact that confidence has held up all this time despite tremendous underlying deterioration of the so-called fundamentals – you know, the financial and manufacturing base of the country and so on.

So, I think it’s normal that markets are crazy; that’s the way they are. And when people finally turn in the other direction, they will panic together as a herd as well. Nothing anyone does is going to save it. And the downtrend will go past normal valuations, way past them on the downside. And people will say, “This doesn’t make sense, people are undervaluing land, they’re undervaluing stock shares, are they crazy?” And the answer is, well, yes. And they will be crazy in the downward direction until they’re exhausted on the downside.

So, the second half of your question – can the Fed just monetize this? – my answer is yes, that’s what it’s been doing. As long as confidence holds up it can monetize debt with no serious negative effects. But when confidence turns down, then the answer is no – the Fed can’t monetize it. People will look at every action that the Fed takes and see it in a bearish light. If it don’t monetize, they’ll say, “Oh, they’re tightening, I’m afraid for that reason.” And if they start monetizing it more they’ll say, “Oh, they’re ruining the dollar, I’m afraid for that reason.” So, once the psychology changes, everything will change, and the Fed governors will no longer be heroes, they’ll be goats. But until that happens you and I just have to sit here and watch the circus. [27:02]

JIM: If you look at a chart of interest rates, and I’m going to move here next, and you go back like 40 or 50 years, it looks like climbing a mountain. You had this 30 to 40 year climb of interest rates culminating in like in the 80-82 range, and then from that period we’ve been coming down the mountain. It almost looks to me like we’re going to be climbing that mountain again. Your views on interest rates.

BOB: I think they’re going lower. And I think that mountain is a classic picture of the Kondratieff cycle, and we’ve been in through over and over and over again. The question is: have we hit the bottom yet? And a lot of people say, “Yes, we have, and rates will only go higher from here.” But I think that’s the psychology of a declining interest rate that isn’t over yet, number one; and number two, I don’t think anyone can plausibly argue – at least not to my way of thinking – that the Kondratieff cycle has bottomed. It always bottoms in a depression, and we haven’t had it yet. When we get it, I think interest rates will be at zero, just like they were in Japan for a long time and will be again. So it’s a normal Kondratieff wave in terms of interest rates on AAA paper. It’s just not over yet. [28:16]

JIM: So that would almost imply if they’re going lower, one place to be in terms of investments – bonds?

BOB: No. See, that’s the big irony of this point in the cycle. It’s the one time when most bonds issuers will default. Now, in the meantime, have you noticed that when we had a tough time in 2001, 2002 and stocks were collapsing, that’s when interest rates came down? Ok. Well, now they’ve gone up while we’ve been in recovery. So if we’re right that a depression is coming, they’re going to go down again. But the trick is this – I’ve been writing about this since 1995, and I’m almost boring myself by saying it again – the only bonds you can own are the ones that will absolutely and certainly remain AAA through the depression. And I don’t know of any bond that I could say that about. Back in 1929, you could have said, “We’ll buy US Treasuries. They’re not going under; we can own these through the depression; they’ll be fine.” And people did, and they were fine. But if they owned a B corporate, it might have gone to zero – many of them did.

This time it’s going to be a much, much bigger collapse from a much weaker base. So I think you could see defaults of municipal and corporate bonds, easily 50% of all that have been issued and probably much higher than that. So you don’t really want to own them. That paper will show higher and higher rates as they go down to zero. But those few bonds that really are AAA will be going down to zero percent yield. Those may initially include governments, but I think eventually people are going to realize that the government itself is going to have trouble paying off those bonds, and that’s going to be a very interesting situation. [30:05]

JIM: What about gold during this cycle? What’s your view on gold and silver today?

BOB: Silver and copper have extremely reliable track records of beginning to go down a year or two prior to recessions. Silver acts mostly like an industrial metal – I know a lot of people think it’s a precious metal, but I think it behaves much more like an industrial metal. When it goes up, you can be sure there won’t be a recession, and when it goes down, you can bet that one is approaching. You can look at the cycles going all the way back to 1980, and that’s what they tell you. So I think silver is probably telegraphing a recession, maybe a year or two from now; copper hasn’t turned down yet—it could even make one more new high, looking at the Elliott wave count.

So, we’re kind of in limbo. We need silver, copper and stocks all going down to tell us for sure that the economy is going to contract. And that’s why I’m not so surprised by reports saying that retail sales were strong because we haven’t had all 3 components roll over. And when they do, that’ll tell us it’s the end of the line for the economy. The next contraction won’t be a recession, it’ll be a depression. [31:18]

JIM: What would cause you to change your opinion or reassess your assumptions? Sometimes we make forecasts like we started out our conversation with the books that were coming out in 95 – like Bankruptcy 95 and Depression – and if you looked at the government budget deficits back then, and the way things seemed to be going, one would have had a hard time thinking ten years out that we would be even in a bigger credit cycle, or bigger bubble. Is there anything that would change your mind?

BOB: No. Two things to say: One, it has surprised me that the bubble has grown since 2000, because I thought that that was the end of the stock run; well, it wasn’t. So the bubble has continued to grow. But at least as important is the idea that you can’t reason from fundamentals to markets; you can’t look at the fundamentals and say, therefore the market will do such-and-such. It’s the markets that tip you off when the fundamentals are going to change. So we continue to have expansive credit because there is a lot of confidence, and the stock market is the barometer of that confidence. The new high in the Dow tells us it’s still there. So until we get the Dow peak in place and behind us and we’re clearly heading lower, maybe down 20% from the high, then you and I can get together and say, “OK, the chickens are now finally going to come home to roost.” The credit bubble, the derivatives bubble, the political promises bubble – all of these things are finally going to deflate and collapse and be seen for what they really are, which is unsupportable. But until people believe that or begin to worry about it, they will continue. [32:54]

JIM: Given where your views are, what would you advise investors to do then?

BOB: Well, my main suggestion has been to stay in cash. You know we have a pretty good interest rate right now; you can make 5% doing nothing. If you try to speculate in commodities you’re going to get killed eventually. And I think most of the public got interested in oil at above $70 when the hurricanes were hitting and all of that nonsense, and they’re going to lose money just like they always do. I think people in the stock market are feeling that they haven’t kept up with these announcements that hit the papers in the last few days about the Dow being at a new high because they may own stocks that are nowhere near highs.

It’s very tough to make money; you have to almost make a living out of it. So back in 1982 I was very bold in saying, “Look, this is a once in a lifetime buying opportunity—you need to be fully invested for a great bull market.” But at this stage of the game I think you’re playing with fire, even if the Dow goes another 10% higher, for example. I think the risk way outweighs the potential reward.

So for most people, I’m advocating something very, very conservative and very, very easy to do which is to hold safe cash equivalents. And right now, that means Treasury bills; we’re still pretty bullish on the dollar, so I’m OK with the Treasury bill. In Conquer the Crash, I recommended the Swiss franc– the government equivalent of T bills in Switzerland. The Swiss franc from that point soared for two years – so that worked out well. If you’re going to do any portfolio shifting and you’re more or less a conservative investor, the only question is what currency do I want to earn my interest rate in?

If you are a serious and seasoned speculator, I think the collapse that’s coming in the stock market can make you rich. And the key is to be short when it heads lower and not go broke prior to that time. I think it was your favorite economist and mine, John Maynard Keynes, who said the market can be irrational longer than you can stay liquid. So if you’re an aggressive short seller, you’re going to have to be very nimble and make sure that the last group of fools buying stocks doesn’t wipe you out before the downturn. [35:23]

JIM: I want to move on to something that is a new science that you are pioneering – it’s called socionomics. What is it, and how can it assist investors in understanding markets and the world we live in?

BOB: Well, after watching the Wave Principle operate for a number of years, I began to wonder why it was there. It’s obvious that outside news events can’t be creating a patterned market, so what is it? I think the only reasonable answer is that it’s a psychological phenomenon, and it’s a result of the herding impulse that each one of us has. It has kept different species alive, so we’ve evolved with a herding impulse. It’s a very primitive tool. If antelopes all run together, the odds of an individual getting attacked by a predator go down. So it’s a useful thing as a blunt tool in certain matters of survival.

But in the modern world we have financial markets, and the herding impulse is exactly the reason why many people do very poorly in the markets, because we all react to each other and it’s very difficult for somebody to be independent – truly independent – of the crowd and behave opposite to that very deep, compelling, unconscious herding impulse.

Well, from that, I began to think, “If people are sharing a mood, like a herd, going from optimism to pessimism as a group, it must have other implications.” Stock trading is not the only thing that human beings do. So I started looking around and saw that many aspects of social expression seem to parallel the stock market. It is true of economic production with a lag; it is true of different themes in popular music, in films and television. I began to realize this mood is probably the motivating factor that makes society go through the cultural changes that it goes through. And that’s why, even as a technician, I’m more interested in what the psychological state of the crowd is than what the fundamentals are, because that’s the driving factor for all of these trends in finance as well as the cultural trends.

It’s fascinating study, and it’s interesting to people even if they don’t care that much about finance. I’ve got a couple of books on it, and we’ve submitted a paper to an academic journal that has been accepted for publication. So we’re trying to make progress to slowly get this idea out.

One of the core aspects is the difference between finance and economics. Economics I think is not the same as finance; and buying and selling in the shoe store and at Wal-Mart is not the same as buying and selling investments. In the first instance, people are asking themselves, “What is the personal utility of the item I’m thinking of buying?” and that is a very objective question that you can answer for yourself. But in the stock market, for example, people are asking, not “What is this worth to me?” but “Wwhat is it worth to everybody else, and what is it going to be worth to them tomorrow?”

When you put yourself in that situation and are facing a question like that, you have entered a new realm. It’s not a realm of certainty such as you have when you decide whether to buy a new pair of shoes or not. You’re in a realm of deep uncertainty; you don’t know what the future is; every little rumor is making you doubt your decision, so what do you do? You follow the crowd. You resort to that herding impulse that we all have. And that’s the driving factor behind financial markets, and that’s why finance and economics are utterly different. And we’re making a case for it as best we can.

JIM: Let’s talk about your new book, How to Forecast Gold and Silver Using the Wave Principle.

BOB: Well, except for a couple of recent years when I wasn’t so hot, gold and silver have actually been the best markets of my career. I thought that the period from late ’79 all the way through 2001 was one of the trickiest periods for any market, because it was mostly a bear period with lots of large rallies. I thought we did such a good job on it, and it really shows the Wave Principle off to its best value, so I thought, “You know, people could learn from that.” So I took every word I had written on gold and silver, and it’s all in real time – I mean you’re just sitting there taking the ride through those two decades with me, saying, “What do you think now and why?” And every step of the way, it’s explained. So someone who wants to pick up where the book leaves off should be able to do their own analysis and be on the right side most of the time.

So that was the idea for it. It’s a specialty item; it’s certainly not going to appeal to very many people – I feel we’ll be lucky to sell 200 copies. It’s a very fat book. It’s notebook paper size so it’s 8 ½ x 11 pages – very large pages. And it’s 500 pages long, but it’s nice readable type; every single graph is there in full. So if you have any wacko specialists who care about gold and silver enough to want to call it themselves, you know, it should be in their library. [41:05]

JIM: Well, I’m looking forward to getting a copy.

Bob, a final question. In your deflation scenario, you feel that after deflation will come hyperinflation. In my scenario, I see hyperinflation then deflation. Do you still see hyperinflation coming after the crash?

BOB: Well, the hyperinflation part is a pure guess based on politics. It has nothing to do with reading markets. I think the markets are telegraphing deflation, and I’m very confident about that. Hyperinflation to me is going to be the natural political response. I mean these people in Congress are so irresponsible – except to themselves and their families, of course. They always get reelected so they’re doing that correctly. I mean, it’s working for them as individuals but it’s not working for the country. Anyway, to save their own skins I think the most likely thing is that they will turn to the Treasury, whether they keep the Federal Reserve System or not, and say, “Let’s print, let’s get the machines going and print those greenbacks and spread them around.” 

But I could be wrong about that – I’d say there’s a 1% chance that after the deflation people could look at the Federal Reserve and say, “What an unbelievable mistake we made in creating that monster monopoly called the Federal Reserve System to manipulate money and credit,” and dissolve it – and start over with honest money. But as I say, it sounds like a fantasy land, so I’m giving that a 1% probability.

There’s nothing that says we have to go into a hyperinflation, but I think the odds are huge that we will. In the meantime, again, I don’t see how we can hyperinflate first because I think it would panic the credit market, which is 30 times or 50 times the size of the cash market. And I think they would all sell, and that would be deflation.

But I guess we’ll see. So far, neither one of us has gotten our scenarios. There’s been mild inflation in the background, which has continued. One of these days I guess, one of us will throw the towel in. [43:13]

JIM: Well, Bob, as always it’s a pleasure to have you on the program. The name of the book once again. Tell people also if they would like to find out more about Elliott wave, how they can find you.

BOB: Ok, I’d like to mention a couple of things. The simplest thing is to visit our website at www.ElliottWave.com – everything is there. We have free articles every day on market subjects; we have free courses if you want to teach yourself the Wave Principle, and you never have to give us a dime. There’s a lot of cool stuff on there for nothing. You have to sign up for our, called club EWI, and yes, we do take your email address and occasionally send you something now and then. So that’s the first step.

If anyone wants to learn a little bit about what I think and why in terms of what’s coming, I still think Conquer the Crash is a timely book, and the second half tells you exactly what you should do and how to do it in terms of getting yourself ready for this big downturn that – whether it’s inflationary or deflationary – you and I both see coming.

Anyone interested in the gold book should just go to our store and click on “books” and they’ll find the How to Forecast Gold and Silver book. And if they’re interested in socionomics, I hope they’ll go on Amazon, or our website, either one, and look over my two-book set, which is called Socionomics, and it’s spelled just like it sounds. [44:42]

JIM: All right, Bob. As always it’s a pleasure to have here to have you on the program. I hope you’ll come back and talk to us once again.

BOB: Well, you know, you’ve been a great host over the years. It’s always a pleasure to talk to you. I hope you continue to take a month off now and again and do some fishing. And when the sparks are really flying I would love to get together again and talk.

JIM: I’d love to have you back. Bob, all the best to you. Thanks once again.

BOB: And you too.