THE stock market has been thrilling lately. Thanks to the marvel of the mobile Internet, I’ve been able to check my account balances throughout the day, just for the pleasure of watching them rise — which is probably a sign that something’s wrong.
"Being bearish in recent months was wrong," says the market forecaster Robert Prechter, "but I think it was prudent."
Investing isn’t a sport, after all. As Benjamin Graham, the father of value investing, put it years ago, “The investor’s chief problem — and even his worst enemy — is likely to be himself.” Taking too much joy in a bull market can be just as dangerous as panicking mindlessly in a market fall.
In need of an antidote for my buoyant mood, I turned to a man whose outlook is as bleak as an ice storm — Robert Prechter, the veteran market strategist, who makes garden-variety bears look like pussycats.
I last spoke to Mr. Prechter about six months ago, just before the Fourth of July weekend, and he predicted a market crash of monumental proportions — perhaps the biggest decline of the last 300 years. Within six years, he said, the economy would be mired in a great depression, shattering millions of lives and devastating anyone foolish enough to hold stocks.
So far, though, the market hasn’t fallen. It has climbed, delightfully so, for those of a bullish persuasion. As measured by the Standard & Poor’s 500-stock index, it has risen more than 30 percent since his gloomy pronouncement.
Did the powerful rally surprise him? “It certainly did,” he said. In a lengthy e-mail, however, he pointed out that he hadn’t said the big crash would take place overnight.
Does he still believe that the catastrophe is coming? Oh, yes, he said, adding that, if anything, the recent good news for investors has made the outlook over the next several years much worse. “The market,” he said, “appears much more dangerous today than it was last summer.”
Mr. Prechter, based in Gainesville, Ga., is a social theorist and technical market analyst with a very unconventional approach. It is based on his own version of the Elliott Wave Theory, which originated in the writings of Ralph Nelson Elliott, an accountant who found repetitive patterns, or “fractals,” in the stock market of the 1930s and 40s. The market still moves in cycles, large and small, Mr. Prechter says, based mainly on “social mood,” which, in turn, influences the economy.
The current cycle will lead the unwary to ruin, he says, “We are in a long-term bear market that started in 2000.” He says the rally that has been so enjoyable for stock investors is just a mini-cycle in that longer swoon.
“I think the bear market will end when most debtors default and the media change from calling it a great recession that’s over to calling it a great depression that isn’t,” he says.
Part of his argument will be familiar to anyone who follows the financial news. We are living “in a world saturated with debt,” he says. “Newly conservative regulatory policies have been clamping down on bank credit,” he adds. “State and local governments will soon cut spending and borrowing, and when the federal government finally cuts spending and borrowing and the Fed — either from within or without — is forced to stop” its quantitative easing program, the game will be up.
Of course, his picture of the world differs markedly from those of mainstream market analysts. For example, I chatted on the phone last week with Tad Rivelle, the chief investment officer for fixed-income at TCW in Los Angeles, who also says he sees trouble coming in the Treasury market. The Federal Reserve’s unorthodox monetary policy — the near-zero short-term rates and the large-scale purchases of Treasury securities in the Fed’s quantitative easing program — will need to be unwound, leading to a spike in yields over the next year and a half, he said.
But he took a measured view. Whether rising yields have a severe impact on the economy will depend largely on government fiscal policy, Mr. Rivelle said. “If policy makers in Washington do what they need to,” and make credible cuts in the budget deficit, he said, the economy can have a “slow moderate recovery over the course of a very long time.”
Similarly, James W. Paulsen, the chief investment strategist at Wells Capital Management in Minneapolis, also focused on the Fed. “The key investment question over the next two years is whether the Fed’s policy will lead to excessive inflation,” he said. He also said that “we will probably have a market correction at some point this year.” But he remains relatively sanguine. It is likely, he says, that inflation will be moderate, and that the overall trend for the economy and the stock market will be quite positive.
MR. PRECHTER proudly marches to a different drummer. He says he is sorry that people who have listened to his advice over the last six months have had to watch from the sidelines while others prosper. “Being bearish in recent months was wrong, but I think it was prudent,” he says.
Danger is lurking, he warns, and not just in stocks, but also in bonds and commodities and other asset classes. “I have no interest in investing in any traditional financial market,” he says. “They are all dangerously over-owned, overpriced and overleveraged.”
If you do hold stocks, this isn’t the time to just sit back and watch your account balances rise, he says. “I believe deeply that opting for maximum safety is the right thing to do,” he says. “I think bulls are about to lead people over a cliff.”
Read Full Article »