Wednesday, March 3, 2010

Prechter's Armageddon

Blogger's comment engine was apparently snagged for a few days. Comments reappeared this morning and are all posted (hopefully). If any are missing, I haven't seen them, sorry.

As readers of this blog probably know, Bob Prechter is the guy who smuggled EW analysis away from the smart money and delivered it to The People in the 1970s.

In the late-30s/early-40s, R.N.Elliott discovered the EW insight, the fractal, and single-handedly unlocked a major part of how Nature works in his astonishing work titled, Nature's Law, The Secret of the Universe. Perhaps more astonishingly, one cannot find RNE's work on the shelves of any Library, or in any book store. If nothing else, the early discovery of the fractal and how nature uses them to generate complexity from simplicity makes this book invaluable to the scientific community. But magically, RNE's highly profitable masterwork had apparently vanished from the face of the Earth.

Bob learned of EW theory as a professional trader in the back rooms of large trading houses, and immediately realized the value of sharing with the world (he located the original on microfilm in the basement of the Met NY Library, if memory serves). To this day, the only way to read RNE's original book is in a back chapter of one of Bob's first offerings (I have no affiliation).

Bob is a brilliant guy with an amazing track record. His first big public call was in 1982, when he predicted that an enormous Wave 4 was now complete (from the mid-1960s to early 80s), and that a massive inflation was coming. He said you could do no wrong investing in paper stocks, almost anything would do. His 1982 chart (with the Dow bobbling beneath 1,000) projected a surge to Dow 4 to 5,000. Needless to say, professionals laughed at him until they wet themselves, after all, we were in a major recession at the Dow had scarcely topped 1K in all of stock market history. When the market surpassed Bob's call in a few short years, he began warning of a major top, the Wave 5 top formation.

"Pro's" drunk on inflation that they were way too stupid to predict, laughed again. Bob was a few years early, the market went crazy, we experienced a final bout of hyperinflation as the ending phase of the 1932-2000 Wave 5 of an even bigger 5 slowly fell into place. But Bob was exactly right. When viewed in the proper multi-century context, that he always framed but few were smart enough to wrap their minds around, Bob's calls will plot within a few pixels of precision.

As the 1990's big bang boomed, Prechter counted out the final form of the mega-top in 2000, accurate within a week or two. Again, an amazing call that few saw coming, and most people laughed so hard they lost everything.

This is when I learned EW theory as a direct result of Bob's work, and not a second too early. Luckily, I had done well as a lemming during the boom, but now I understand it was pure luck. Since then, I've often disagreed with Bob's calls on the margins, but for the most part, the few good EW'ers that are alive tend to agree in the macro.

Recently, Bob issued a warning in July 2007 when the Dow hit 14,000 that Wave B was complete and the mother of all C waves was forming. Again he pointed out that you could do no wrong, by going short this time. He issued a cover call at 6,500 (after I did :) and another short call at the recent peak. Bob is really good, assuming ones understands the inherent risks involved with attempting to call a multi-century top (maybe longer) to the penny.

Bob recently published some free video interviews/updates/warnings on his website. Essential viewing for anyone who doesn't fully understand what is coming:


  1. FDR I feel your points.

    Stocks - Bad
    Bonds - Bad
    Cash - Not sure how you feel about cash but if I had a 10 year outlook on cash it is bad. It is true that maybe the U.S is not as bad as EU or otherplaces, however it has never been in my view to invest in an asset class because it is "less bad" than other asset classes. If you add up all the U.S debt (on/off balance sheet) our debt-gdp ratio is higher than that off Greece. That is not dollar positive.

    Anyways, I happen to like gold. I know you don't like gold but I don't see any problems with it. I feel like every morning I wake up I find a new reason to hold it.

    If I had $100 in cash money, a hundy, a hondo, a benji and I wanted to do something with it (for 10 years) where could I put it that would give me the best rate of return?

  2. Google Books seems to have the R.N. Elliott book:'s+Law,+The+Secret+of+the+Universe&source=bl&ots=dqO3Ab3q3Z&sig=wHV5rpoXLAWuZ-2GUlBGl2_R1C0&hl=en&ei=x5aPS5-TG4z40wSyiJnrDA&sa=X&oi=book_result&ct=result&resnum=9&ved=0CCgQ6AEwCA#v=onepage&q=Nature's%20Law%2C%20The%20Secret%20of%20the%20Universe&f=false

  3. "Google Books seems to have the R.N. Elliott book:"

    Excellent link, thank you for posting it.

    That is actually Bob's book, R.N. Elliott's Masterworks: The Definitive Collection which I linked above, under "first offerings." Interesting that Google has it readable online.

    Bob resurrected RNE's work in latter part of the book. Bob footnotes his own commentary to keep RNE's ideas "pure."

    Personally, I think the best read of EW Theory is simply digesting RNE's original writings, which to my knowledge can only be found in Bob's book. Although Bob learned about EWs in the back rooms of Wall St.

    I wouldn't bother much with the modern "extensions." I think many of the new EW extensions are way off, in my opinion, as the creators fail to comprehend the fundamental nature Elliott's insight.

    Bob's varied works don't fall into that category, his are generally very thoughtful and valuable as he a brilliant guy. But he is not a genius (no offense, neither am I) and RNE was. I find RNE's raw theory both "simpler and truer" than the modern bolt-ons.

    That time period produced an alarming number of geniuses. Must have been something in the water.

  4. "If I had $100 in cash money, a hundy, a hondo, a benji and I wanted to do something with it (for 10 years) where could I put it that would give me the best rate of return?"

    Your mattress.

    Seriously, listen to the the last remark in the last video, Bob has it exactly right. Most people probably don't realize that he is recommending cash and Treasury equivalents, not because those are "safe" but becasue they yield very high rates of return in a deflation.

    E.g. the mattress buys 50% more stock and real estate than it did about two years ago, a cool 100% percent rate of return.

  5. Hi FDR,

    Thanks for analyzing Prechter's latest views. If I want to invest a huge chunk of my savings into treasury, what would be the best choice for me? Least risky is 1st priority, good returns is 2nd.

    I visited and found product-menu of Treasury Bills, Notes, Bonds, TIPS, I-Savings Bonds, E Bonds, EE Bonds.

    Thanks again for your great blog.

  6. Dividends picking up, M&A for cash picking up, and companies buying their stock proves this market is heading higher FDR

  7. "Dividends picking up, M&A for cash picking up, and companies buying their stock proves this market is heading higher FDR"

    Dividends heading higher is always a sign the market is going lower. At market peaks, dividends are virtually non-eixistant at around 2%, because people are happy with cap gains. At major market bottoms, dividends can hover around 30% (talking Great Depression lows). Today we're around 3%.

    Remember the M&A flurry at the last major W2? It was at Dow 11.8K and everyone was waiting and waiting and waiting on the turn lower. Bears were bailing left and right, just like today. Then the stimulus bill passed and sent the market to 6.5K within a few months.

    Interesting that the health care bill is set to pass as early as next week, with little hidden gems like an increase in the capital gains tax from 15% to 22.5%, and a similar income tax bracket increase. Just saying... look out man, its coming.

    Any of these major news events could trigger it. It doesn't matter what the news is, EWs tells us that a major change is imminent and it will be interpreted as a major selling event. The same event would be a major buying event if the wave were on the other foot.


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