Prechter: "Very, Very Long Bear Market" Coming

It looks like we're heading for an ugly open today, so I wanted you to see this interview with Bob Prechter of Elliot Wave International from last Thursday. He contends that the fundamentals of the current market (the emperor has no clothes) are finally catching up with the technicals, and that we're headed for a deep and pronounced bear market. He recommends moving to cash, and I can't say I disagree:

 

I dunno. The 35 year cycle implies that the secular bull will begin around 2015-2017 with the DJIA at roughly 10-11K. In the meantime, though, you can pick up plenty of dividends in infrastructure, energy, and healthcare.

Bear in mind that Elliott Waves are still a form of technical analysis. The 35 year economic cycle is a little more fundamental and has its roots in population trends. When fundamentals and technicals disagree, fundamentals usually win over the long run.

Things will probably be as ugly for the next five years as they've been for the last ten, but we're discovering plenty of oil, finding ways to increase crop yields, and also figuring out how to use resources more efficiently. There's a lot more raw materials to support a healthy economy today than there were five years ago. Global warming will be problematic, but we've got drought-resistant and flood-resistant crops that we didn't have ten years ago, and it will hopefully be mitigated as we transition to an electric economy with wind and nuclear. (We are getting ready to bury enough U-238 in Yucca Mountain to meet the US's energy needs for the next 200 years.)

I was really nervous about the economy back in 2006. Today, I'm less worried. We have problems with government debt, but in the aggregate, we have more oil to run the economy, better crops to deal with global warming, and a better approach to energy. The short run might be bumpy (I'll leave that to the technical analysts), but the long-run picture looks much better today than it did in 2006 assuming the central banks follow the best course of action on monetary policy.

Prices did go up a bit and we got a little carried away. That said, I think a P/E of 13-14 is a very reasonably price for the DJIA right now. It would imply earnings growth keeping up with a little more than inflation, and my target has always been to beat inflation by 6.5% yoy over the course of my retirement portfolio. We're already down to 15.5x earnings on the S&P 500, and I think a lot of money that's been sitting on the sidelines is going to come in if we start to head south of 9000.

Just stick to boring stocks. If civilization is ending and the utilities, healthcare industry, and natural gas pipelines are all going bankrupt, you obviously won't have much use for dollars, anyways, so you might as well just buy.

 

Prechter has been abnormally good lately, I would definitely listen to his advice. I'm not sure if he can predict a bull market too well (his historical returns suck) but he predicted the top of the market recently, the bottom, and now the top again (in his opinion). With all the problems in the technicals in the market (P/E too high before, sovereign debt issues, etc.) I am not really sure if we needed him to tell us, but I do think he is right. His idea of the Grand supercycle seems a little crazy to me, but idk, I am not indoctrinated into Elliott Wave so much.

Reality hits you hard, bro...
 
Best Response
MMBinNC:
Prechter has been abnormally good lately, I would definitely listen to his advice. I'm not sure if he can predict a bull market too well (his historical returns suck) but he predicted the top of the market recently, the bottom, and now the top again (in his opinion). With all the problems in the technicals in the market (P/E too high before, sovereign debt issues, etc.) I am not really sure if we needed him to tell us, but I do think he is right. His idea of the Grand supercycle seems a little crazy to me, but idk, I am not indoctrinated into Elliott Wave so much.
Ok, that's fine, but it doesn't mean that utilities aren't RIDICULOUSLY cheap right now when they're yielding 6% and sporting P/Es of 8-10. It doesn't mean that European oil majors aren't ridiculously cheap at PEs of 5-6.

Elliott Wave or not, fundamentals almost always win in the long run. The Elliott Wavists are free to sell me fundamentally sound utilities yielding 10% and sporting 6-7 PEs if their predictions come true. Even if Prechter is right, I'll still come out well ahead in five years.

And where else are you going to stick your money? The doomers are, yet again, predicting doom for gold, silver, dollars, treasuries, euros, yen; just about everything. This is despite the fact that we've got plenty of raw materials and infrastructure for a healthy economy. Perhaps the only safe thing to do with your money is burn it; at least you won't have anything to lose that way.

I'm sick and tired of all this gloom and doom. Whenever something loses value, something else is gaining on a relative basis.

 

well i dont have a gold star, but here are some of my thoughts/ramblings...

I agree with IlliniProgammer that the fundamentals for certain stock sectors are still strong, but my main questions lie in the long-run influence of the Eurozone crisis and the US's expanding budget deficit. I typically take a long term view, so I usually don't look at technical analysis at all. What really troubles me is the threat of hyperinflation and the US govt's spending habits. I try to stay optimistic when possible, but it's hard to imagine a scenario where the govt doesnt go on another printing spree to pay off our large outstanding debt.

on the other hand, when looking at companies across various sectors, many of them look very cheap right now, especially given their strong earnings reports and growth potential. am i crazy, or do the past few weeks seem like too much of a short-term panic over Europe's debt situation? If most of the trading volume is attributed to traders with short-term outlooks, why does the market seem to be looking that far ahead from a macro standpoint?

maybe im misunderstanding this market correction, but id appreciate some other insight here.

 

Undoubtedly Mr. Prechter has been accurate recently, but if you look at his record on a longer term basis it's shoddy at best. He gained most of his notoriety for predicting the 1987 Crash and the 2007-2009 Meltdown that bottomed in March of last year. What's seemingly left glossed over in his record is that he stayed bearish from 1987 to mid 2000 where it would have been a costly proposition to stay out of the equity markets. I'm not debating that the guy is smart, but the whole Elliot Wave Theory is suspect at best. I'm a believer in technical analysis reflecting and possibly predicting short term price movements (i.e. MA crossovers, MACD, RSI, and even Fibonnaci), but Elliot Wave Theory's prediction capabilities are doubted even within the TA community.

 

It's not just Euro debt crisis fear selling, it's fear of war. North Korea/South Korea conflict is heating up as well as the Israel/Iran conflict, as well as bigger and badder battles in Afghanistan. And the bad news in the Gulf of Mexico keeps getting worse with regard to that oil spill. Add to that the expiration of the first-time homebuyer tax credit, which I believe will show pretty terrible pending sales in May--and then ADD to that the unfavorable labor market conditions. The whole world landscape just looks unfavorable for investors right now. Not to mention at least a month ago the common wisdom was that interest rates on the rise was imminent.

I've been sitting in cash and hard real estate assets since December 2007. I definitely have no intention of going to the stock market in the short-term, or maybe ever again.

Array
 

Obviously some sectors are still going strong, but as I mentioned the sovereign debt crisis (and as others mentioned the conflicts in Korea and even Iran heating up) will have an effect on the market that may negate the good fundamentals of those sectors not sporting horrifically high P/Es. The Elliott Wave theory seems to be able to predict the short term price movements (being MTM or YTY) fairly WELL. As mentioned it seems to fall short on a long term basis since Prechter was bearish for a decade of great expansion and then predicted the top in 2000 and again in like 2003. That is one of the many reasons that I am very cautious about the existence of a "Grand Supercycle" that started in the 1700's with the South Sea Bubble. seems ludicrous. Considering the basis of the theory lies in part within the bounds of the slightly ambiguous realm of behavioral economics it is fair to say that there are major faults in the theory. Those who realize this and combine it with their other analysis obviously will fair the best (Paul Tudor Jones comes to mind). I believe that he is right in this instance because the market today is heavily dictated by fear (I think more so than it has been in many many years) and also that the problems affecting the markets lie mainly in the realm of one of the largest components of GDP- the government.

Reality hits you hard, bro...
 
MMBinNC:
That is one of the many reasons that I am very cautious about the existence of a "Grand Supercycle" that started in the 1700's with the South Sea Bubble. seems ludicrous. Considering the basis of the theory lies in part within the bounds of the slightly ambiguous realm of behavioral economics it is fair to say that there are major faults in the theory.
People were saying pretty similar stuff in the '30s and '70s about the end of capitalism, arguing, "BUT THIS TIME, IT'S DIFFERENT." Both times, they were wrong.

The problem here is that we have an educated workforce and lots of natural resources. Take away all the products of the economy and leave us with just the human beings and the natural resources, and GDP will be back up to 60% of its original number in three years. In order for Prechter's predictions to come true- that we are going back to the dark ages- we will need to have a global nuclear war that causes all of the survivors to suffer amnesia. Short of that, modernity is here to stay. Civilization might experience a little turbulence over the next few years- as it does in every secular bear cycle- but there's not gonna be a crash.

The same people buying into this stuff were the folks who bought into environmental disasters destroying humanity in the '70s, nuclear war with Russia in the '80s, Y2K in the '90s, and Peak Oil disaster back in 2007. They were wrong every single time. But then they say, "BUT THIS TIME, IT'S DIFFERENT."

Listen to Prechter, but bear in mind that technical analysis has no bearing on reality. Claiming that there is a "super bubble" requires something rooted in the fundamentals, and the fundamentals seem to indicate that modernity can continue as long today without any new oil discoveries or new resources as it could during the '60s. Maybe Prechter is ignoring the fact that unlike a 1600s economy, a 1700s economy can:

-Allow smarter peasants to get off the farm and work as carpenters, boat pilots, and metalworkers, or even scientists, doctors, and engineers. -Understand how natural processes occur, rather than accept the Church's and Aristotle's flawed explanations about spontaneous generation and the four elements and have some hope of discovering the equation F=ma and electricity. -Use exchanges to get better price discovery and move capital to where it needs to go rather than just let it sit and rot in the fields.

Maybe that economy might be a little more prone to growth than the feudal, religiously-controlled economy that much of Europe still lived under in the1500s and 1600s. I dunno. Maybe the "bubble" is a result of the fact that we have electricity, the fact that a machine that takes 10 people six months to build today can do the work of 100 people 400 years ago for the next ten years. Maybe it has something to do with that. But no, we must be in a 300 year bubble. And before anyone tries to bring up the fact that doomers have made similar claims during every secular bear market and really, every single decade for the past 40-50 years, we hear the refrain we hear every decade from the doomers, "BUT THIS TIME, IT'S DIFFERENT!"

I can't prove that the growth we've experienced over the past 300 years will continue forever; that would imply energy consumption growing larger than the sun's net output in 10,000 years at a 1% growth rate. But it seems reasonable to believe that the economy can at least continue humming along with 0% GDP growth for decades and decades assuming no changes in technology and no new discoveries of resources. I am perfectly happy accepting a 6-7% net-of-inflation return on my investments, which I ultimately get when the S&P 500 has a P/E of 14 and GDP growth is 0.

There. I've done my ranting about doomers. Frankly, I think that anyone dumb enough to believe that civilization is coming to an end at this point should be offered a spot in a bomb shelter in exchange for their sterilization. This way, when my kids are slogging through the next secular bear market, maybe they will be a little less likely to hear the classic doomer excuse, "BUT THIS TIME, IT'S DIFFERENT."

 

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