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Conquer The Crash: You Can Survive and Prosper in a Deflationary Depression, written by Robert Prechter, Jr., tells us why economic and financial calamities are around the corner and how you can survive. The book has four major sections:
You may buy the book from the Elliott Wave International bookstore. |
Review of Conquer The Crash - Summary
In Conquer the Crash Robert Prechter, Jr. methodically lays out the case for an imminent stock market crash and ensuing economic depression. The time was 2002 and the U.S. stock market was on the downside after it had peaked in 2000.
In Book One: Why a Stock Market Crash, Monetary Deflation and Economic Depression Are Likely To Occur Soon, Prechter uses Elliott wave analysis, macro economic analysis based on extensive data, an analysis of investor psychology, and an appreciation of economic and stock market history to arrive at his assertions.
As of December 2006, his financial nuclear winter has not set in, but as he says at the end of Chapter 6: The Significance of Historically High Stock Market Valuation, "Those of us dedicated to objective financial analysis aren't always right. But those who rely on extra-large helpings of trust, faith, hope and 'gut instinct' always regret it." Time will tell if Prechter's warnings are correct but in the meantime much can be learned from him about the workings of our financial system, the economy and the stock and commodities markets. Conquer the Crash should be in your library along with Elliott Wave Principle, the definitive work on Elliott waves.
Book Two: How To Protect Yourself and Profit from Deflation and Depression is a roadmap detailing how to preserve your wealth during a depression. Chapter 33: A Short List of Imperative "Do's" and Crucial "Don'ts" is a good place to start. It lists 19 actions to take immediately and eight to avoid. For example, own some gold, silver and platinum but generally speaking, don't own stocks.
Chapters 14 through 32 discuss essential steps that people should take to protect their financial assets including: avoid real estate investments, payoff mortgages and other debts and keep cash on hand.
Even though the U.S. stock market and economy have held their own as of December 2006 and Prechter's prognostications have not come true, the book remains an important book for retail investors to read and study. Just because his bleak scenario has not happened does not mean that it couldn't. His work tells us to be vigilant and to be skeptical of continuing rosy stock market and economic forecasts. And very importantly, we must be prepared to act quickly and decisively before the party ends.
The book has prompted me to review my portfolio and make adjustments accordingly. For now adding more cash and buying long-term put options will work for me.
Book One - Part I: The Case for Crash and Depression
In eight chapters Prechter presents his case for a stock market crash
and severe economic depression. The logical sequence of his rigorous analysis
makes Part I flow very smoothly.
Chapter 1: Myth Exposed includes lists of data to support Prechter's contention that economic growth in the United States is slowing even as the stock market is soaring. He compares current times with the 1920s in the U.S. and Japan in the 1980s when stock markets were surging but their economies were slowing.
Chapter 2: When Do Depressions Occur? shows a chart of stock prices from 1700 to 2002 that includes two depressions since 1840. Each depression occurred after a multi-year period of prosperity and rising stock prices. Stock price declined sharply and rapidly to herald the depressions.
Chapter 3: When Do Stock Markets Turn From Up to Down? gives a brief glimpse of the Elliott Wave Principle to tell us that bull markets end with the fifth wave when "Market breadth and the economy improve, but not to the levels of wave 3. Optimism creates lofty valuations." Prechter concludes that in 2002 the stock market is in the fifth wave, thus a major downturn is imminent.
Chapter 4: The Position of the Stock Market Today presents six great charts showing long-term price patterns with Elliott wave interpretations. Prechter states that the advancing wave which began seven decades ago has a high probability of ending.
Chapter 5: Evidence from Stock Participation and Economic Performance examines in detail the stock market advance from to 1974 to 2000 and concludes that indeed it is the fifth wave.
The nuances of dividend yield, book value and price to earnings ratio are the subject of Chapter 6: The Significance of Historically High Stock Market Valuation.
Chapter 7: The Significance of Historically Optimistic Psychology is one of my favorite chapters. As the technology bubble collapsed in 2000, I witnessed many friends and family members unable to sell their stocks simply because they believed that prices couldn't keep falling. They watched helplessly as their huge gains evaporated. Prechter does an outstanding job presenting the psychology behind huge bull markets. The charts and graphics portraying the bullish mania are among the best in the entire book.
Be sure to study the seven charts of famous market manias in Chapter 8: Implications for the Stock Market and the Economy. I love charts and these are the best.
Book One - Part II: The Case for Deflation
The next four chapters explain how our money system works.
Chapter 9: When Does Deflation Occur? offers a very clear definition of credit, debt, inflation, deflation and the mechanisms that drive an economy into a deflationary period.
In Chapter 10: Money, Credit, and the Federal Reserve Banking System learn how money creation and the extension of credit have fueled the wave V advance of stocks.
Chapter 11: What Makes Deflation Likely Today? spells out the magnitude of U.S. debt in numbers and charts. Prechter argues deflation occurs when expansionary psychology turns negative and debtors can no longer repay their loans. His charts show, "the astonishing extent of indebtedness today among corporations, governments and the public, both in terms of total dollar's worth and as a percent of GDP."
In Chapter 12: Timing Deflations: The Kondratieff Cycle Prechter uses a Kondratieff cycle analysis to state, "I conclude that deflation - a contraction in the total volume of money and credit - is probably due just about now."
In Chapter 13: Can the Fed Stop Deflation? Prechter concludes, "The lack of solutions to the deflation problem is due to the fact that the problem results from prior excesses. Like the discomfort of drug addiction withdrawal, the discomfort of credit addiction cannot be avoided." He argues that little can be done by way of monetary and fiscal policy to stem the inevitable collapse of the stock market.
Book Two: How To Protect Yourself and Profit from Deflation and Depression
Book Two includes 21 easy-to-read chapters which tell us how to survive a deflationary depression. Rather than review each chapter, I have included a brief summary of Prechter's recommended actions: avoid stocks, most bonds, real estate investments, collectibles and commodities. Instead own gold, silver, platinum. Put cash in safe banks in Treasury-only money market funds or buy short-term Treasury bills directly from the U.S. government. Convert you pension plan to cash. Pay off your mortgage and all debt - repaying debt with deflated dollars is very difficult.
He tells us that selling stocks and commodities short and buying long-term put options are appropriate strategies if we understand their risks. And he warns us to beware of rosy company ratings and bullish stock recommendations from brokers.
The final part of Book Two includes names, addresses, and Web sites for consultants, companies, mutual funds, newsletters, gold, silver and coin dealers and more that you will find useful as you plan and execute your bear market survival plan.
Conquer the Crash would be a great addition to your investment library. To purchase it and other Elliott Wave based books please visit the Elliott Wave International bookstore.
Also, be sure to view History's Hidden Engine, a free entertaining and informative video all about the Elliott Wave Principle and much more.
Reviewed by Richard Howard.
Posted December 20, 2006.
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