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Dow 1000???!!

Dow 1000???!!

No there is no typo in the title. Robert Prechter who is a famous proponent of “Elliot Wave” technical analysis is predicting the Dow will drop 90% to 1,000 within the next six years. Before we examine Prechter’s track record of previous market calls, another item must be discussed. How did Prechter come up with this number? According to Prechter:

Readers sometimes ask if I am serious about the Dow eventually falling below 1000. People can understand that the Dow can fall in terms of gold, but they are so convinced about coming hyperinflation that they consider the idea of the nominal Dow in triple digits to be simply out of touch with reality.

The primary reason I believe the Dow is going to fall that far is its Elliott wave structure, which calls for it. But I can also see a monetary reason for this event. The tremendous inflation of the past 76 years has occurred primarily by way of instruments of credit, not banknotes. Credit can implode.

The only monetary outcome that will make sense of the Elliott wave structure is for the market value of dollar-denominated credit to shrink by over 90 percent. Given the eroded state of capital goods in the U.S. and the depletion of manufacturing capacity, it is not hard to see why all these IOUs have a deteriorating basis of repayment. The future has already been fully mortgaged; it’s time to pay. But there is no money to pay, only more IOUs, which cannot be paid, either. So the credit supply (after a brief respite) will continue to shrink, which means that wealth, and therefore purchasing power, will disappear along with it. In the broadest sense, this change will constitute a collapse in the “money supply.”

Such a monetary background would be consistent with the Dow falling below 1000 in nominal terms. It is one of the reasons that Conquer the Crash is subtitled How To Survive and Prosper in aDeflationary Depression. To be sure, the central bank does have the capacity to print banknotes. But I expect that the final implosion in credit value will be so swift that the authorities will not act in time to counter it. They will continue to try to maintain the fictions of full face value for IOUs until they fail spectacularly to keep up the scam. Then they will start to scramble, but it will be too late.

The paragraph contains a link to  two of Prechter’s books, and is followed by a promotion to sign up for three of his newsletters for only $60!

Jason Zweig wrote an article in the Wall Street Journal that nailed this exact point. He has theory as to why Prechter is making such outlandish statements. Zewig points out:

An extreme forecast doesn’t merely grab your attention; ironically, it may strike you as even more convincing than a moderate prediction. A classic psychological experiment at the University of Michigan showed that 54% of people preferred an extreme prediction about stock prices to a more-temperate one. They apparently believed that a forecaster must have high confidence and a solid rationale in order to justify making a dramatic prediction.

So, while Dow 1000 may or may not be a good forecast, it isn’t bad marketing for newsletters that cost $19 a month, as Mr. Prechter’s do. Extreme predictions tend to be popular at market turning points: Back in early 2000, a bullish book called “Dow 36,000” hit the best-seller lists—right before the bull market went into the abattoir. Nowadays, you can buy a used copy for one penny online, if you don’t mind paying $3.99 for shipping.

Zweig also mentions that another controversial money “guru”, Robert Kiyosaki has gotten in on the act, predicting the Dow to decline to 5000.

I have no evidence to back up my statement that Prechter is making his predictions purely for profit. There is no way to prove what is going through his head. However let us look at some previous predictions of his, and whether he is worth listening to.

Here are some other notable predictions from Prechter fromhttp://www.cxoadvisory.com/individual-gurus/robert-prechter/

S&P 500 Index
Date Comments re:  Robert Prechter at MarketWatch 21-Day Return 63-Day Return 126-Day Return 254-Day Return
4/2/09 “…based on our projections, the bear market is more than halfway done in time. It is less than halfway done in price, however, as the steepest portions of the decline lie ahead.” 8.7% 10.7% 26.7% 41.7%
3/4/09 “Some measures of investor pessimism have reached extreme levels, suggesting the decline has reached its latter stages. But it’s not over yet.” 17.0% 32.5% 43.2% 59.7%
1/30/03 In Prechter’s view, the worst part of that decline — the so-called third wave of the Elliott Wave theory — is somewhere just ahead of us. -1.2% 8.6% 16.9% 34.5%
10/17/02 The 30-stock Dow Jones Industrial Average will lose half its value in the next six months to about 4,000 on the blue-chip index, says Prechter. When it’s all over several years from now, the Dow will trade below 1,000… 3.5% 4.0% 1.6% 19.0%

In case anyone thinks I am cherry picking data, let us take a look at Prechter’s long term record.

From Peter Brimelow in MarketWatch (4/26/02): “Exactly how much Elliot Wave forecast fans lost depends on whether they actually went short the market when Prechter turned bearish. In that case, they are in a deep hole: down 99.2 percent over the last 15 years.

Besides the fact that Prechter is probably looking to make a profit, and has a terrible track record it is important to look at this specific prediction and see if it is logical.

Jason Zweig states:

To read the remainder of this article on GuruFocus.com click here .

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  • http://orvinfive.blogspot.com Orvin Five

    I enjoyed this article. I also have an essay explaining why the most essential assumption of Elliott Wave Theory (stock prices are analagous to natural patterns) is wrong, based on logic alone. It’s at orvinfive.blogspot.com. -Regards

  • http://arichlife.passionsaving.com Rob Bennett

    I will not comment directly on the prediction because I have not studied it in sufficient depth to feel able to offer intelligent comment. But I will say that, if we got to DOW 1000, we would not be here anymore. I do not believe that our economic and political systems can survive the loss of confidence they would experience in such circumstances.

    What I believe is going to happen is that things are going to continue to drift downward over time (sometimes moving rapidly, sometimes moving slowly or even in the reverse direction for a bit) until things get bad enough that we become serious about solving the problem. I believe that, when we start looking seriously for solutions, they will become visible to us (they’ve been there all along, but for various reasons we have not felt comfortable exploring them) and we will turn things around in a big way.

    There may come a time when people will come to believe that DOW 1,000 is not a bonkers predictor. The paradox is that it is that feeling of fear will bring about the changes in attitude that will launch us into the greatest period of economic growth and stock investing profits yet on record. Pain brings gain. It’s a hard to accept rule, but it is one that has been proven out in stock investing and in many other fields of human endeavor many times.

    It is never as bright as it appears to be when it appears to be bright. And it is never as dark as it appears to be when it appears to be dark. Former Philadelphia Phillies Manager Gene Mauch taught me that one. You can pick up solid investing insights in the strangest places!

    Rob

  • Gary L. Kaplan

    You have either the wrong quotes to prove Prechter wrong or you just don’t understand how markets work. 3/09. When markets reach an extreme of pessimism they turn. Here Prechter is saying we are getting near to a bottom, but have a little more to go. (bottom 4/9/09). This quote is remarkably out of context. The rest of the quote would be we are at a temporary bottom the market should have a sharp rally to over dow 10,000. At the point when everyone believes we are safe and politicians are taking credit for the recovery then the rest of this giant bear will resume. he pointed to the most likley stopping point for this bear market rally as a retracement of the decline fro late 2007 until march 9, 2009. the retracement levels likley, by the Elliott Wave Theory were .382%, half, or .618%. Turned out using intraday extremes to be a replacement of .618%. Every body else were out in the streets singing “Happy Days are Here Again”.

    Free Elliott Wave material abounds on the internet. There are several Elliott Wave books on Google books free and recent copies of the newsletters can be found with a little searching.

    Prechter’s forecasting service has withstood the test of time and money. The Elliott Wave Theory is the only Theory left standing after all the recent markets roller coaster. I made money recently when the short term forecast said there were 98% gold bulls and the market would turn and last year when there were an extraordinary 99% long term bond bulls He has twenty editors forecasting all of the different markets in the world, day by day and even intraday. Since 1977 you can buy a forecast by the month and cancel if you want, get your money back for that month. Now he has the largest service in the world and yet has never told anyone they would get rich quick.
    it is hard for perma-bulls to think that the market could go down anything like the 89% decline in 1929-1932. Prechter is forecasting the average will go down , not any individual stock. I almost agree that it is unthinkable Pfizer, Coke or GM could go down 90%. Sorry, I forgot about GM. Pfizer or coke somewhere in the fullness of time could be underpriced, even before -90% and be a good buy and go private. then they would be out of the Dow and not there to hold it up.
    Prechter is 100% not making these predictions to sell newsletters. If you follow the theory and the wave count a giant crash fits in here and he could not make another predicition.

  • rick

    Few people out there have as extensive a memory & thorough a reading of Prechter forecasts & books & newsletters over the past 30+ years as I do.

    First off I will agree with the basic conclusion – Prechter’s long term forecasting record is atrocious (except during most of the 1980’s) & every bold prediction he makes should be understood in that context.

    But to pick apart Jason Zweig a bit: he says he doesn’t cherry pick forecasts of Prechter – maybe he should. The 1st wrong forecast 4/2/09 isn’t a forecast as all Prechter publications said to expect higher prices at that point into at least that summer & he was correct. The 2nd wrong prediction for 3/4/09 was totally out of context as Prechter made a rare great call in late Feb & March 2009 calling almost the precise LOW of the Bear market when few others did (not bad for a perennial Bear) – his long term forecast for far lower prices a year or 2 down the road was irrelevant to his trading call at the time.

    Where Prechter missed the boat yet again was in July/August 2009 where he declared the brief Bull market or Bear market rally was over & he has incorrectly stayed with that call every month or so since then. & Yes Prechter was wrong in 2002/2003 at the bottom of that Bear market, he was wrong throughout the 1990’s Bull market. Most painfully after being considered an absolute genius as the lone wolf calling for the extreme positive forecast in the early 1980’s saying there would be an historic Bull market – & he was totally correct all decade, way ahead of the pack until the panic of 1987. From 1987 on he has steadfastly maintained his 2nd part of his 30 year old prediction; that after a 1920’s style Bull market (which we have had) we would then begin an historic Bear market/depression ala 1930’s or worse. So far the best you can say is he was sort of right on the first part, but has far too early like a broken clock waiting for his 2nd portion of the forecast.

    Where Zweig picks silly arguments over Coke going private if values fell or Buffet buying up values when cheap: Well one must 1st assume Prechter’s crash occurred & if it did then Buffet wouldn’t have any money to buy up anything as his own companies would be worth pennies on the dollar. I’m not saying it will happen & I think Prechter his been fabulously wrong for many years & destroyed his credibility; but if the Depression or contraction of credit occurs to the degree expected, then it is very easy to see 80% of companies in America going out of business, perhaps a failure of Western Gov’s & their currency systems altogether as Gov’ debt is defaulted upon & we move to more of a barter economy for a period. Certainly I wouldn’t dismiss the potential for an uncontrollable panic of the Western financial system & a massive Depression or attempt at massive inflation given the unpayable 10’s of Trillions in debt obligations that are held up without hard asset backing; only confidence holds the credit markets afloat and for now it should continue & Prechter is likely to continue to be wrong. I don’t think he makes his predictions to make money as the forecasts & theory basis has been unchanged. I have met Prechter & read his books & understand the theory he refined from RNElliott. I don’t agree, but his long term predictions were soundly based in the perhaps unsound theory of Elliott Wave & the forecasts were all made in the late 1970’s & have not wavered, for what it’s worth. Hard to find any long term forecasters out there with a great record of predictions years/decades in advance & Prechter has been no exception, just bolder & longer term than most. It will be an interesting decade ahead to evaluate Dent, Prechter & the extreme inflationistas on the other side who are equally without merit.

    just some comments … not meant to be combative….
    rick