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Conquer The Crash

The second edition of Robert Prechter's 2002 New York Times bestseller Conquer The Crash was released last week with 200 pages added to the original tome. A student of Ludwig von Mises and the Austrian School of economics and leading proponent of the Elliot Wave Theory, Prechter is the prognosticator of an upcoming depression that will be more severe than that of the 1930's, or at least this is what his research leads him to believe. If you are not familiar with the Austrian School of economics or the Elliot Wave Theory, a brief explanation will tell you the former believes in free-market capitalism and the latter is a form of technical analysis engaged in the prediction of long-term business cycles. A subtitle for the book is "you can survive and prosper in a deflationary depression" and in essence Conquer The Crash is a survivalist bible for financial Armageddon.

The first 270 pages of the book is an exact reprint of the first edition of Conquer The Crash where Pretcher predicted the bust of the banking system this past year and a half and how to avoid financial loss in the economic apocalypse. The remaining 200 pages updates safe havens for your finances and reprints excerpts from his newsletter The Elliot Wave Theorist from 2003-2007. What is interesting to note in the latter half of the book is that he reevaluates the upcoming low for the DOW Industrial Average from 1000 to 400, based on Elliot Wave patterns, at least from his calculations. He postulates that we are at the end of the fifth wave of an Elliot Wave Cycle (five waves complete the cycle), and we will now go back to test the low of the DOW Industrial Average that was put in at the beginning of the wave in 1974.

What differentiates Pretcher from other bears is that most bears believe we are heading for an inflationary period while Pretcher predicts we are at the outset of a deflationary spiral. In fact, he seems to be a lone voice in the wilderness with his stance. Deflation, as you may recall, is a contraction in the volume of money and credit relative to available goods - prices go down. As Prechter states in March 2007: "The size of today's credit bubble is so huge that it dwarfs, by many multiples, all previous bubbles in history. The developing deflation will be commensurate with the preceding expansion, so it will also be the biggest ever.". Throughout the book he emphasizes that this will be the biggest deflation in history by a huge margin.

One thing that perplexed me about Conquer The Crash is that Prechter reprints excerpts from his newsletter from 2003-2007 and the book was published at the end of 2009. That is a two year gap. I would have liked to have seen his take on the market during the crash in the latter half of 2008 and the early part of 2009. Like the author, I too am a bear and believe that the market is overvalued. Prechter notes "P/E ratios for the S&P 500 have ranged from around 7 at bear market bottoms to the low-to-mid 20's at bull market tops.". With the S&P 500 P/E ratio currently over 20, a correction here is warranted if history has anything to say about it.

Along with others, I have certain misgivings with technical analysis like the Elliot Wave Theory because where you place your range lines on graphs is entirely arbitrary. It can be very easy to massage the data. However, the book is chock full of charts and graphs and it is interesting to see where the range of price movements lie for the major indexes over the long-term. We are clearly in the upper echelon of valuations if you track them over a hundred year period. Many of us bears are betting that the market will retest the lows of March 2009, but most of us feel it is a stretch to believe the DOW Industrial Average will be going down to 400 like Prechter predicts. If Prechter is right, there will be blood on the streets and that can't be good for anybody.