20 Questions with Robert Prechter: Devaluation Won't Work

By Elliott Wave International

The following article is an excerpt from Elliott Wave International’s free report, 20 Questions With Deflationist Robert Prechter. It has been adapted from Prechter’s June 19 appearance on Jim Puplava’s Financial Sense Newshour.

Jim Puplava: In 1933 at the bottom of the crisis, the Roosevelt administration comes in. In its first week they declare a bank holiday, they reopen the banks with the FDIC, they sever gold, they come in with massive fiscal stimulus and they devalue the dollar substantially. The result was from 1933 to1937 we have positive CPI, economic growth, a robust stock market. If fiscal and monetary measures fail to revive the economy and the market, could the government try devaluation to change the deflationary outcome the way they did 1933?

RP: Well, you have to have a benchmark in order to devalue a currency. Our currency isn't pegged to anything, so I don't understand even what the term devaluation would mean. What would they do to do create a devaluation?

Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money -- and even profit -- in today's environment. Read ALL of Prechter's candid answers for FREE now. Access the free 20-page report here.

JP: Maybe they come out with a formal saying: the dollar is now worth a half a euro, X amount of yen or it’s a formal statement. They just declare it formally.

RP: Yeah, but everybody already knows what it's worth, because it's floating freely against these other currencies. And they certainly couldn't fix it to a lesser currency like the euro. And then the managers of this other currency would simply make another decree and negate it. That’s not going to work.

Let's take your example, because it's very important. The whole idea of the government being ahead of the curve is bogus. You know the collapse was from September 1929 down to July 1932, right? The government did not act until it was over. They waited for the bottom of the collapse—of course—and then they finally decided they're going to do something about it. So, months after the low in 1932, they finally shut the banks and pass laws such as Glass-Steagall, which created the FDIC, and the Securities and Exchange Act, and that sort of thing, to bring confidence back into the banking system. I think the same thing is going to happen here. They're going to try the same old stuff, more and more lending, more and more borrowing—which is the problem, not the solution—until everything collapses, and then they'll go, “Oh maybe we should try something else,” and by that time we'll already be at the deflationary nadir, and it'll be time to look for an inflationary outcome.

My whole thesis is exactly along those lines. We want to stay prepared for a deflationary crash, and when it’s over, we're going to convert whatever money we have to stocks, and raw land, and gold, and whatever else we want to buy. That's when—if the government makes a political decision to inflate through currency printing—it would make the decision. They're not going to make it before the bottom. The government has never acted before the bottom, never acted in a new way. Right now these bailouts and other schemes are simply pressing the accelerator harder on what we've been doing since 1913.

Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money -- and even profit -- in today's environment. Read ALL of Prechter's candid answers for FREE now.

Big Bear Markets: More Than Falling Stock Prices

 Many infamous authoritarian regimes emerged during or after big bear markets

By Elliott Wave International

Fear and uncertainty that drive a severe bear market are the same emotions which can set the stage for authoritarianism, in most any nation.

"Bear markets of sufficient size appear to bring about a desire to slaughter groups of successful people. In 1793-1794, radical Frenchmen guillotined countless members of high society. In the 1930s, Stalin slaughtered Ukrainians. In the 1940s, Nazis slaughtered Jews. In the 1970s, Communists in Cambodia and China slaughtered the affluent. In 1998, after their country's financial collapse, Indonesians went on a rampage and slaughtered Chinese merchants." - Bob Prechter, Wave Principle of Human Social Behavior, p. 270

Why do authoritarian tendencies emerge only during bear markets in stocks?

"As society becomes more fearful, many individuals yearn for the safety and order promised by strong, controlling leaders." - The Socionomist, May 2010

Learn How to Anticipate and Prepare for Political Conflict and War, Bull Markets and Bear Markets. The 118-page Independent Investor eBook covers a vast array of investment topics and exposes myths that mainstream investors accept as fact. Once you learn the real cause of conflict and war, you might be surprised how the stock market plays a key role in forecasting major social events. Click here to download the 118-page Independent Investor eBook for FREE

Bob Prechter's new science of socionomics explains that stock market fluctuations mirror trends in people's collective mood. In simple terms, when the market is buoyant, it indicates positive social mood; the opposite when a bear market takes over.

The fascinating part is that because the stock market and social mood trend closely together, a forecaster can apply Elliott wave analysis to both -- and predict both.

Generally, widespread brutalities and wars do not follow the first phase of a bear market. Extreme violence, when it does occur, often follows the worst part of the market's downturn -- like the end of the Great Depression, a negative social mood period that ultimately ushered in World War II.

But even during the first phase, a negative social mood grows. So, if a forecaster determines correctly where in the wave structure social mood resides, he can make educated forecasts about what will follow in society -- given what has happened before under similar social mood trends.

Authoritarianism is a subject of heated discussions these days, which makes it a timely topic for a socionomic study. The latest, two-part issue of the monthly Socionomist gives you just that: A look at historic trends and specific forecasts for the years ahead.

Learn How to Anticipate and Prepare for Political Conflict and War, Bull Markets and Bear Markets. The 118-page Independent Investor eBook covers a vast array of investment topics and exposes myths that mainstream investors accept as fact. Once you learn the real cause of conflict and war, you might be surprised how the stock market plays a key role in forecasting major social events. Click here to download the 118-page Independent Investor eBook for FREE

Prechter Called the Uptrend 'Out' in April

By Elliott Wave International

Even non-sports fans have heard by now about the recent debacle known as Baseballgate.

With two outs in the ninth inning, a first-base umpire called "SAFE" when the runner was clearly "OUT." But this was no ordinary missed call; it cost Detroit Tigers pitcher Armando Galarraga a perfect game.

And as the blogosphere flooded with memories of other historic slip-ups that cost "so and so" star "this and that" honor. Demands for the commissioner of baseball to reverse the bad call grew louder by the hour.

It was indeed a very bad call. But the biggest, baddest call of all was not made on a sports field. It was made in the field of finance -- specifically on the stock market. To wit: The mainstream umpires of finance stood near first base, and in April made this emphatic call for the uptrend in stocks:

"SAFE!!"

Call Your Own Shots -- Remove Dangerous Mainstream Assumptions from Your Investment Process. Elliott Wave International's FREE, 118-page Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Click here to learn more and download your free, 118-page ebook.

In case you missed the event, here's an instant replay:

"Stocks Remain In A Powerful Bull Market." (April 10 Bloomberg)

"Stocks Haven't Lost Their Appeal As The Market Goes Up, Up, And Away." (April 21 US News & World Report)

"You can use any number of words to describe this bull market. Frothy is not one of them. This market is reasonably priced." (April 21 AP)

"US Stocks Post Longest Winning Streak Since 2004. The recovery should be sustainable and that will drive the market." (April 24 Bloomberg)

"All the economic reports are pointing up... despite lingering worries over debt problems in Greece. Right now, there is virtually no evidence of a top." (April 30 USA Today)

Yet from its April 26 peak, the DJIA turned down in a jaw-dropping 1000-plus point selloff. The market suffered its worst May since 1940.

The markets have no commissioner to reverse the bad call of the financial mainstream. But at least one team of analysts remained ahead of the most game-changing moves in the world's leading stock market, including a forecast that called the rally "OUT" in April 2010. Consider the following insight from EWI President Robert Prechter:

On April 16, Prechter published his April Elliott Wave Theorist titled ""Deadly Bearish Picture." Notice the dates.

"We can project a top...between April 15 and May 7, 2010. It is rare to have technical indicators all lined up on one side of the ledger. They were lined up this way -- on the bullish side -- in late February-early March of 2009. Today, they are just as aligned, but on the bearish side."

April 26 marks the high for the DJIA, followed by the devastating drop on May 7 -- exactly within the date range Prechter's forecast called for.

Call Your Own Shots -- Remove Dangerous Mainstream Assumptions from Your Investment Process. Elliott Wave International's FREE, 118-page Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Click here to learn more and download your free, 118-page ebook.

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Bigger Than A '10% Correction'?

 Every Big Bear Grew From a Cub

May 26, 2010

By Elliott Wave International

The famous "10% correction" that market pundits talk about sounds so nice and tidy, so predictable and tolerable. It's as if this "cute little correction" came neatly wrapped, looked like an M&M candy character, and smiled at you and your family after you open the box.



If only it were so.



"If all the market ever did on the downside was dip 10% once every two years, then investing would be easier than shooting fish in a barrel. Obviously, this is not the case. The fact is that the stock market's movements are a fractal. Declines come in widely varying sizes." - The Elliott Wave Theorist, December 2001



There is no way to know in advance whether a particular market downturn will fall 11%, 35% or 89%. Even the Wave Principle only forecasts probabilities -- not certainties.



Read Part One of Robert Prechter's Latest Two-Part, April-May Theorists FREE

The April-May Theorist series entitled "Deadly Bearish Big Picture" reveals a lucid picture for 2010-2016. It's the flipside of Robert Prechter's February

2009 Forecast for a 'Sharp and Scary' Rally. Click here to download the 10-page part one for FREE now.



One thing that is certain -- every bear market reached a 10% drop before prices fell even further.



And another near-certainty is that too many money managers will use the phrase "buying weakness" when the market falls 10%. On May 7, after the Dow Jones had fallen several hundred points in a few days, two money managers being interviewed side by side said in effect, "Buy." Not a word was said about caution. Not a word was offered about even the possibility of a major trend change in the market.



On the other hand, it was refreshing to hear a representative of a fund family say, "I don't know why anyone needs to be a hero, and try to catch the bottom."



You may be tempted to jump back in because the market has recently "corrected." Yet consider what EWI's Short Term Update subscribers read on May 7 -- ". . .we would caution that some of history's largest stock declines have occurred only after stocks were deeply oversold."



Two key features of the Elliott Wave Principle is its ability to establish a price target for the current trend, and a time range.



In his latest Elliott Wave Theorist (a two-part April-May issue), Robert Prechter tells why market participants should look far beyond a mere 10%-15% move in the now-unfolding trend.



Read Part One of Robert Prechter's Latest Two-Part, April-May Theorists FREE

The April-May Theorist series entitled "Deadly Bearish Big Picture" reveals a lucid picture for 2010-2016. It's the flipside of Robert Prechter's February

2009 Forecast for a 'Sharp and Scary' Rally. Click here to download the 10-page part one for FREE now.

The Federal Reserve Does NOT Control the Market

FREE eBook reveals why the Fed is powerless to change the economic course

By Elliott Wave International

As the world's leading stock markets continue to play stomach-hockey with investors via one triple-digit turn after another, the mainstream community takes solace in this core belief: No matter how uncertain things become, the Federal Reserve can at any moment swoop in to set the economy right.

In reality -- the Fed has no such power. This is the revelation of Elliott Wave International's newest complimentary resource from Club EWI: the 35-page eBook titled "Understanding the Fed." Including excerpts from the selected works of EWI President Robert Prechter -- including his 2002 book "Conquer the Crash" and several past "Elliott Wave Theorist" publications -- this riveting report exposes once and for all the most dangerous myths about the Federal Reserve.

Chapter 3 (of the 8-chapter anthology) attends to the "Potent Directors Fallacy" -- i.e., the false notion that the central bank is in control of the U.S.'s money, market, and economy -- and offers this "Conquer the Crash" insight:

"For recent examples of the failure of the idea of efficacious economic directors, just look around. Since Japan's boom ended, its regulators have been using every presumed macroeconomic 'tool' to get the Land of the Sinking Sun rising again, as yet to no avail. The World Bank, the IMF, local central banks, and government officials were 'wisely managing' South East Asia's boom until it collapsed spectacularly in 1997. In America, the Federal Reserve has lowered its discount rate from 6% to 1.25%, an unprecedented amount in such a short time... What will it do if the economy resumes its contraction; lower rates to zero?"

Note: The underlined sentence above was written in 2002. Today, that forecast has come to fruition after the Fed's rate-slashing campaign since September 2008 has brought rates to the zero level.

Chapter 3 then goes on to explain WHY the Fed's monetary policy failed to lift the hot-air balloon of the economy out of the violent credit and housing downdraft. Here, the eBook writes:

"The Fed's ultimate goal is to influence public borrowing from banks. During economic contractions, banks become fearful. At such times, low Fed-influenced rates cannot overcome creditors' disinclination to lend and/or customers' unwillingness or inability to borrow. Thus, regardless of assertions to the contrary, the Fed's purported 'control' of borrowing, lending, and interest rates ultimately depends upon an accommodating market psychology and cannot be set by decree."

Once again, flash ahead to today and the disintegration of optimism and shift toward conservation can be seen in the following data from February 2010:

Year-over-year bank credit was (negative) - 6.8% vs. 10% in 2007

Loan availability to small businesses plunged to the lowest level since interest rate crisis of 1980, thus drying up a major means of debt repayment.

The number of banks tightening their lending standards has soared, while consumer credit and tax revenue is plunging.

And, residential and commercial mortgages are plunging, as more and more home/business owners are walking away from their leases.

In Bob Prechter's own words: Once you can assimilate the truths contained in this eBook, "you will have knowledge of the banking system that one person in 10,000 has."

Do you want to really understand the Fed? Then keep reading this free eBook, "Understanding the Fed", as soon as you become a free member of Club EWI.

Prechter Describes The "Stunning Long-Term Elliott Wave Picture"

By Robert Folsom, Elliott Wave International

Please join me to consider a time in the stock market that lasted just under three years: 32 months, to be precise.

During this period a series of powerful rallies stand out clearly on a price chart. The shortest of these rallies was four weeks, the longest more than five months.

I can even list seven of these rally episodes, with the number of calendar days and percentage gains.

1. 152 days +52%

2. 28 days +11%

3. 77 days +19%

4. 69 days +27%

5. 31 days +30%

6. 35 days +39%

7. 28 days +27%

Get Robert Prechter's Latest Analysis -- Click Here to Download His 10-Page Market Letter FREE

For a limited-time, you can download Robert Prechter's April 2010 Elliott Wave Theorist, the first in a two-part series entitled "Deadly Bearish Big Picture," for FREE! Click here to learn more and download your free Theorist.



This information obviously seems to paint a bullish picture: The stock market was in double-digit rally mode during 43% of the total calendar days in question.



But in fact, those rallies were the days when the bear was catching his breath. The market was the Dow Jones Industrials; the overall period was from November 1929 to July 1932. It devastated investors. The Dow lost 80% of its value. Yes, that includes the rallies listed above.



I said that these rallies stand out on a price chart, and indeed they do -- it's just that the declines stand out even more. There's virtually no "sideways" action. Prices moved rapidly in one direction or the other.



You can see the chart for yourself in the first issue (April issue, page 4) of the two-part series Bob Prechter has published in The Elliott Wave Theorist. Part One was in April, "A Deadly Bearish Big Picture." The final sentence of that issue said Part Two "will update the stunning long-term Elliott wave picture."



Bob just published Part Two. It completes the "Big Picture" he has now delivered to subscribers.



The past doesn't "define" the present or the future, but it sure does provide context. No analyst alive today understands this better than Bob Prechter.



Believe me when I say that the charts and analysis in this two-issue series are unique. The word "stunning" only begins to describe what you'll read

Wave Principle Crash Course: There's No Going Back

For over ten decades, the mainstream financial world has embraced the view that external news events drive trend changes in the markets. In less than ten minutes, EWI's senior tutorial instructor Wayne Gorman shatters that very idea into a fine dust, swept away into thin air.

In part one of his exclusive, three-part Club EWI video series "Why Use The Wave Principle," Wayne first assesses the pitfalls of relying on macroeconomic models to forecast; namely: "An investor is lured into the market at just the worst time, when it's time to sell, and forced out just at the best time to buy."

As for real world examples of this happening, Wayne spans three hundred years of financial history to reveal how the most pivotal economic, political, and environmental events failed to alter the course of their respective markets. Here, the free video includes groundbreaking charts on these (and more) well known episodes:

The S&P 500 and Enron from 2000-2002: The stock market ROSE and continued to proceed upward AFTER the largest US corporate scandal and bankruptcy ever (at the time).

The Dow Industrials and GDP quarterly data from 1970 to early 2000s: After the release of major negative GDP numbers, the market for the most part ROSE, just the opposite of what most market analysts and investors expect.

The Dow and profound political events over the last 80 years: In the 1930s and 1940s, a series of negative incidents -- i.e. Hitler rising to power, World War II, and the Holocaust -- preceded a powerful uptrend in stocks all the way into the 1960s.

Stock market charts of the five countries most affected by the 2004 Indian Ocean Tsunami (India, Indonesia, Malaysia, Sri Lanka, and Thailand). Four out of the five ROSE after the natural disaster...

Believe it or not, we've only scratched the surface. In his myth-busting, free video "Why Use the Wave Principle," Wayne Gorman presents a total of 40 charts that capture failed fundamental analysis of the world's leading financial markets. Wayne recalls this expression from a famous, Nobel Prize winning economist:

"Economic reasoning will be of no value in cases of uncertainty."

And he offers this response:

"But isn't that what we have in financial markets: cases of uncertainty? We need a different type of reasoning, one that will help us to avoid the pitfalls shown on the previous charts. That's why the Wave Principle is so important. It offers a unique perspective and a market discipline of rules and guidelines that help investors avoid buying at tops and liquidating at bottoms. It helps to explain and understand trends before they happen."

The flaw in Economic 101, cause-and-effect theory is one of the easiest things to prove. But it's also one of the hardest things for many investors to accept. Now is the time to do so. Watch the free "Why Use the Wave Principle" video in its entirety today at absolutely no cost. Simply sign on to join the rapidly expanding Club EWI and take advantage of the amazing educational benefits membership has to offer.

Bob Prechter Points Out The Many Signs Of Deflation

Yes, You Heard Us Right

February 18, 2010

By Nico Isaac

Everywhere you look, the mainstream financial experts are pinning on their "WIN 2" buttons in a show of solidarity against what they see as the number one threat to the U.S. economy: Whip Inflation Now.

There's just one problem: They're primed to fight the wrong enemy. Fact is, despite ten rate cuts by the Federal Reserve Board to record low levels plus $13 trillion (and counting) in government bailout money over the past three years -- the Demand For and Availability Of credit is plunging. Without a borrower or lender, the massive supply of debt LOSES value, bringing down every exposed investment like one long, toppling row of dominoes.

This is the condition known as Deflation.

And, in a special, expanded November 19, 2009 Elliott Wave Theorist, Bob Prechter uncovered more than a dozen "value depreciating" developments underway in the U.S. economy as the two main engines of credit expansion sputter: Banks and Consumers. Off the top of the Theorist's watch list are these "Continuing and Looming Deflationary Forces":

A riveting chart of Treasury Holdings as a Percentage of US Chartered Bank Assets since 1952 shows how "safe" bank deposits really are. In short: today's banks are about 95% invested in mortgages via the purchase of federal agency securities. Unlike Treasuries, IOU's with homes as collateral have "tremendous potential" to fall in dollar value.

Loan Availability to Small Businesses has fallen to the lowest level since the interest rate crises of 1980. In Bob Prechter's own words: "The means of debt repayment [via business growth] are evaporating, which implies further deflationary pressure within the banking system."

An all-inclusive close-up of the Number Of Banks Tightening Their Lending Standards since 1997 has this message to impart: Since peaking in October 2008, lending restrictions have soared, thereby significantly reducing the overall credit supply.

Both residential and commercial mortgages are plummeting as home/business owners walk away from their leases at an increasing rate.

The major sources of bank revenue -- consumer credit and state taxes -- are plunging as more people opt to pay DOWN their debt. Also, a compelling chart of leveraged buyouts since 1995 shows a third catalyst for the credit binge -- private equity -- on the decline.

All that is just the beginning. The November 2009 Elliott Wave Theorist includes 13 pages of commentary, riveting charts, and unparalleled insight that make it impossible to ignore the deflationary shift underway in the financial landscape. For that reason, we have compiled the most timely insights from the entire, two-part Theorist in a special article for Club EWI members. In our opinion, this bundle of exlusive Theorist excerpts are "the most important investment report you'll read in 2010."

Elliott Wave International's latest free report puts 2010 into perspective like no other. The Most Important Investment Report You'll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

Robert Prechter on Herding and Markets' "Irony and Paradox"

To anyone new to socionomics, the stock market is saturated with paradox.

February 11, 2010

By Editorial Staff

The following is an excerpt from a classic issue of Robert Prechter's Elliott Wave Theorist. For a limited time, you can visit Elliott Wave International to download the rest of the 10-page issue free.



Market Herding

Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do. Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.



Irony and Paradox

To anyone not versed in socionomics, everything the stock market does is saturated with paradox.



— When T-bills sported double-digit interest rates in 1979-1984, investors saw no reason to abandon their T-bills for stocks; when T-bill rates were low in the 2000s, investors saw no reason to put up with the “low yield” of T-bills and sought capital gains in stocks. The first period was the greatest stock-buying opportunity in two generations, and the second period was the greatest stock-selling opportunity ever.



— When long-term bonds yielded 15 percent in 1981, investors were afraid of Treasury bonds even though they were about to embark on the greatest bull market ever; in December 2008, when the Fed pledged to buy T-bonds, rising prices appeared so strongly guaranteed that the Daily Sentiment Index indicated a record 99 percent bulls, just before prices started to fall.



— When oil was $10.35 a barrel in 1998, no one made a case that the world was running out of black gold; but when it was 7-8 times more expensive, some three dozen books came out arguing that global oil production had peaked, a theme that convinced investors to begin buying oil futures…about a year before the price collapsed 78 percent.



— In the second half of the 1990s, the idea that stocks would always be the best investment “in the long run” became popular just as a long period of superior returns was coming to an ignoble end. A new study... shows that as of today the S&P has underperformed safe, boring Treasury bonds for the past 40 years, since 1969.



— Just when nearly everyone -- including world-famous investors -- finally panicked and conceded in February-March 2009 that the financial and economic worlds were in dire shape, the market turned around and shot upward in its fastest rally in 76 years.



And so on. The exogenous-cause model fools investors exquisitely. One reason is that rationalization follows upon mood change. Mood change comes first, and attempts at reasoning come afterward. Socionomists recognize that social mood is primary and has consequences in social action, so we never have to wrestle with paradox. This orientation does not mean that we are always right. It means only that we are not doomed to be chronically wrong.



To succeed in the market, you must learn initially to embrace irony and paradox, at least as humans are unconsciously wired to interpret things. Once you get used to the world of socionomic causality, the irony and paradox melt away, and everything makes perfect sense...





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Read the rest of this classic Elliott Wave Theorist issue now, free! You’ll get 10 pages of Bob Prechter's unique insights on:



Why Finance and Macroeconomics Are Not Subsets of Economics

How Correct Are Economists Who Forecast Macroeconomic Trends?

The “Beat the Market” Fallacy

Stock-Picking Geniuses or Just a Bull Market?

Index Funds and Diversification

Market Confidence vs. Certainty

Observations on Corporate Earnings

Why Being a Bear Doesn't Equal "Doom & Gloom"

More

Visit Elliott Wave International to download your free 10-page issue.

Why You Should Care About DJIA Priced in Gold

 January 11, 2010

By Vadim Pokhlebkin

The following article is provided courtesy of Elliott Wave International (EWI). For more insights that challenge conventional financial wisdom, download EWI’s free 118-page Independent Investor eBook.

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Of the many forward looking market indicators we at EWI employ, one of the most interesting tools (and least discussed in the financial media) is the DJIA priced in gold -- "the real money," as EWI's president Robert Prechter calls it.

We've been tracking the Dow/Gold ratio for many years and it has serves our subscribers well. It's not a short-term timing tool, yet in the longer term, as our January 6 Short Term Update put it, "the nominal Dow eventually plays catch up to what is transpiring in the Dow/Gold ratio."

Here's a good example. Remember when the nominal DJIA hit its all-time high? October 2007, just above 14,000. At that time, most investors expected new highs still to come. But our Elliott Wave Financial Forecast warned five months prior, in May 2007:

One key reason [for a coming top in the DJIA] is the undeniable bear market status of the Dow Jones Industrial Average in terms of gold, the Real Dow...

Notice, by contrast, the relative strength of the Real Dow versus the nominal Dow, the index in terms of dollars, from 1980 to 1982. By August 1982 when the Dow denominated in dollars bottomed, the Real Dow was rising strongly from its 1980 low... The nominal Dow soon played catch-up, and they both rallied more or less in sync until 1999.

Now, instead of soaring the Real Dow is crashing relative to the nominal Dow. In fact, it’s barely off its low of May 2006. This dichotomy reveals the weakness that underlies the financial markets’ push higher. When mood turns and credit inflation reverses, the ensuing drop in the nominal value of the market should be dramatic.

"Dramatic drop" did indeed follow: Between October 2007 and March 2009, the DJIA lost 53%, high to low.

For more information, download Robert Prechter’s free Independent Investor eBook. The 118-page resource teaches investors to think independently by challenging conventional financial market assumptions.

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Vadim Pokhlebkin joined Robert Prechter's Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor's in Business from Bryan College, where he got his first introduction to the ideas of free market and investors' irrational collective behavior. Vadim's articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people's collective investment decisions.

Individual Investors Have Jumped Into Another Fire

 By Robert Prechter, CMT

The following article is an excerpt from Robert Prechter's Elliott Wave Theorist.

First they bought into the “stocks for the long run” case and got killed. Then they jumped on the commodity bandwagon and got killed. Many investors are buying back into these very same markets, but others are running to what they perceive as safe “yields” in the municipal bond market. So far this year, individual investors have “poured a record $55 billion” (Bloomberg, 11/12) into muni bond funds, with the pace running $2b. per week in August and September; many other investors are buying munis outright. These must be the people who tell us that they can’t live without “yield” and also cannot imagine their city, county or state government going bust. But as Conquer the Crash warned and as The Elliott Wave Theorist has reiterated, the muni bond market is heading for disaster.

Municipalities have borrowed more than they can repay, they have pension liabilities that they cannot meet (up to a trillion dollars’ worth, according to Moody’s), and tax receipts are falling. The only reason that states haven’t failed yet is the so-called “stimulus package,” which took money from savers, investors and taxpayers—thereby impoverishing the people who live in the various states—and gave it to state governments to spend so they would not have to cease their profligate spending. But political pressures will eventually cut off this gravy train. In the 2010-2017 period, the muni bond market will become awash in defaults. The leap in optimism since March, which has shown up in every financial market, has fueled a retreat in muni bond yields to their lowest level since 1967 and narrowed the spread between muni bond yields and Treasuries.

This rush to buy municipal bonds is occurring right on the cusp of a dramatic decline in their values. While many individuals are loading up right at the peak so they can participate in the next major market disaster, smarter investors, such as insurance companies Allstate and Guardian Life, are getting out. Subscribers to our services, we trust, own not a single municipal IOU. Our recommendation for investors is 100 percent safety, and such a program does not include muni bonds. If you are a recent subscriber, please read the second half of Conquer the Crash as a manual on how to get your finances safe.

Get Your FREE 8-Lesson "Conquer the Crash Collection" Now! You'll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Learn more and get your free 8 lessons here.

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Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Popular Culture and the Stock Market

December 11, 2009

By Robert Prechter, CMT

The following article is adapted from a special report on "Popular Culture and the Stock Market" published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. Although originally published in 1985, "Popular Culture and the Stock Market" is so timeless and relevant that USA Today covered its insights in a recent Nov. 2009 article. For the rest of this revealing 50-page report, download it for free here.

Popular Culture and the Stock Market

Both a study of the stock market and a study of trends in popular attitudes support the conclusion that the movement of aggregate stock prices is a direct recording of mood and mood change within the investment community, and by extension, within the society at large. It is clear that extremes in popular cultural trends coincide with extremes in stock prices, since they peak and trough coincidentally in their reflection of the popular mood. The stock market is the best place to study mood change because it is the only field of mass behavior where specific, detailed, and voluminous numerical data exists. It was only with such data that R.N. Elliott was able to discover the Wave Principle, which reveals that mass mood changes are natural, rhythmic and precise. The stock market is literally a drawing of how the scales of mass mood are tipping. A decline indicates an increasing 'negative' mood on balance, and an advance indicates an increasing 'positive' mood on balance.

Trends in music, movies, fashion, literature, television, popular philosophy, sports, dance, mores, sexual identity, family life, campus activities, politics and poetry all reflect the prevailing mood, sometimes in subtle ways. Noticeable changes in slower-moving mediums such as the movie industry more readily reveal changes in larger degrees of trend, such as the Cycle. More sensitive mediums such as television change quickly enough to reflect changes in the Primary trends of popular mood. Intermediate and Minor trends are likely paralleled by current song hits, which can rush up and down the sales charts as people change moods. Of course, all of these media of expression are influenced by mood changes of all degrees. The net impression communicated is a result of the mix and dominance of the forces in all these areas at any given moment.

Fashion:

It has long been observed, casually, that the trends of hemlines and stock prices appear to be in lock step. Skirt heights rose to mini-skirt brevity in the 1920's and in the 1960's, peaking with stock prices both times. Floor length fashions appeared in the 1930's and 1970's (the Maxi), bottoming with stock prices. It is not unreasonable to hypothesize that a rise in both hemlines and stock prices reflects a general increase in friskiness and daring among the population, and a decline in both, a decrease. Because skirt lengths have limits (the floor and the upper thigh, respectively), the reaching of a limit would imply that a maximum of positive or negative mood had been achieved.

Movies:

Five classic horror films were all produced in less than three short years. 'Frankenstein' and 'Dracula' premiered in 1931, in the middle of the great bear market. 'Dr. Jekyll and Mr. Hyde' played in 1932, the bear market bottom year, and the only year that a horror film actor was ever granted an Oscar. 'The Mummy' and 'King Kong' hit the screen in 1933, on the double bottom. Ironically, Hollywood tried to introduce a new monster in 1935 during a bull market, but 'Werewolf of London' was a flop. When filmmakers tried again in 1941, in the depths of a bear market, 'The Wolf Man' was a smash hit. These are the classic horror films of all time, along with the new breed in the 1970's, and they all sold big. The milder horror styles of bull market years and the extent of their popularity stand in stark contrast. Musicals, adventures, and comedies weave into the pattern as well.

Popular Music:

Pop music has been virtually in lock-step with the Dow Jones Industrial Average as well. The remainder of this report will focus on details of this phenomenon in order to clarify the extent to which the relationship (and, by extension, the others discussed above) exists.

As a 78-rpm record collector put it in a recent Wall Street Journal article, music reflects 'every fiber of life' in the U.S. The timing of the careers of dominant youth-oriented (since the young are quickest to adopt new fashions) pop musicians has been perfectly in line with the peaks and troughs in the stock market. At turns in prices (and therefore, mood), the dominant popular singers and groups have faded quickly into obscurity, to be replaced by styles which reflected the newly emerging mood.

The 1920's bull market gave us hyper-fast dance music and jazz. The 1930's bear years brought folk-music laments ('Buddy, Can You Spare a Dime?'), and mellow ballroom dance music. The 1932-1937 bull market brought lively 'swing' music. 1937 ushered in the Andrews Sisters, who enjoyed their greatest success during the corrective years of 1937-1942 ('girl groups' are a corrective wave phenomenon; more on that later). The 1940's featured uptempo big band music which dominated until the market peaked in 1945-46. The ensuing late-1940's stock market correction featured mellow love-ballad crooners, both male and female, whose style reflected the dampened public mood.

Learn what's really behind trends in the stock market, music, fashion, movies and more... Read Robert Prechter's Full 50-page Report, "Popular Culture and the Stock Market," FREE.

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Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.