During the 1980s, Bob Prechter won numerous awards for market timing as well as the United States Trading Championship, culminating in Financial News Network (now CNBC) granting him the title, "Guru of the Decade." In 1990-1991, he was elected and served as president of the nation-al Market Technicians Association in its 21st year.

He has also published a seminal book on Elliott wave analysis titled, “Elliott Wave Principle – Key To Market Behavior,” three books on the major practitioners of wave analysis, and books on his own views in Prechter's Perspective and At the Crest of the Tidal Wave. 

Interview with Bob Prechter - Part 3

Your historical market studies and research into the Wave Principle have led you to believe that stock prices are preparing to crash. We’ve heard some of your arguments for why this is already happening.

But in Conquer the Crash you also give a good deal of attention to discussing and helping readers prepare for a severe monetary deflation. Can you tell us more about this?

First I want to make sure that everyone understands what deflation really is. A common misunderstanding is that inflation occurs when the prices for goods rise, and deflation occurs when they drop. That’s not exactly true. General price changes are merely effects of a change in value of the money itself – not the other way around.

So what causes changes in the value of money?

Changes in monetary valuation are caused by changes in mass psychology. The same is true for the stock market. A severe deflation like the one we are now facing has always required a certain economic pre-condition: A major buildup of credit, which is itself the result of a certain state of social psychology.

Our economy today rests upon masses of consumer and corporate credit. Today, the U.S. owes a collective $30 trillion in debt. That’s nearly 3 times our annual GDP. We’ve become entirely dependant on it.

The economic theory that has seen the U.S. economy grow progressively larger and more powerful since World War II is that a wide-spread facilitation of credit will stimulate production, which will in turn create jobs and generate more capital to be re-invested in the economy.

That’s a model that’s been successful for economies around the world thus far. Where do you see the problem with it?

It’s gotten way out of hand. The Federal Reserve Board allows our banks to lend out all of their deposits (and in some cases, even more than 100%). This money, once loaned, is allowed to be re-loaned many times over, multiplying the amount of debt.

What this means is that we’ve got great multiples more credit afloat in our economy than we have actual money. It’s terrifying, but true.

As strong as our economy may still seem to everyone, it’s actually rife with weakness. The only thing keeping it afloat right now is a mass societal consensus that it’s going to be O.K. How long can that hold?

As the stock market continues to decline, people will continue to lose their jobs and production will decrease. Knowing that there’s not enough money out there to cover all the endangered debt, banks will begin to panic. They will become desperate to retrieve their liquid assets. When the general ability to repay debt decreases, so will banks’ willingness to lend more.

This is what will finally trigger a massive deflation.

But wait. Won’t the Fed prevent this from happening?

That’s a huge misconception. The Fed will be powerless to stop it.

Realize that the Fed doesn’t actually lend money to consumers. It merely sets the interest rates at which banks lend each other money. The hope is that banks will take these lower rates as a cue to pass the  lower rates down to the consumers, thus facilitating more credit – but it can’t guarantee that this will happen.

In 2001, the Fed lowered its discount rate from 6 percent to 1.25 percent. That’s the heaviest cut in such a short time ever. But what if this strategy fails, as it did in Japan? It certainly hasn’t ”saved the economy” so far. What will they do if the economy continues to contract? Lower the rates to zero?

Then what?

When people are losing jobs and the purchasing power of the dollar is rising, consumers won’t want to borrow money that they will have to pay back with much more valuable dollars later on. Also, having been burned by bankruptcy and loan defaults, banks will be considerably less willing lend this money in the first place.

This will have disastrous effects on our credit-based economy.

Scary. So what should we do to protect ourselves from this possibility?

Depending on your circumstances, there are a number of ways that you can first protect yourself from a deflationary crash, and then actually profit from it.

Most important, get out of debt. Because the value of the dollar will be rising, one of the best investments you can make now will be to hold cash.

What about the other markets?

Conquer the Crash explains exactly what you should do in regard to bonds, real estate, stocks, commodities, precious metals, insurance, and more.

It won’t be necessary for you to keep your money in a coffee can under the bed. There are a number of “Safe Banks” around the world that, because of their conservative policies, you will be able to trust with your money. Conquer the Crash lists several.

Also, you’ll learn about “inverse index funds,” an interesting way to short the market on its way down. And it tells you exactly how risky real estate investments are and what you should do about them now. 

Obviously those with substantial personal fortunes stand to benefit from the wealth-protecting measures you outline in Conquer The Crash. But do you have to be wealthy to take advantage of the strategies in this book?

Absolutely not. Conquer the Crash offers strategies for financial protection in two different tiers.

For investors with deeper pockets, it offers international-level protection by giving advice about safe banks and precious metal storage. For the average investor, or even for those with no money in the markets at all, there are countless chapters devoted to important concerns like, “What to do with respect to your employment” and “What to do with your pension plan.”

A lot of the advice is preventative. It tells you what not to do. And it’s going to be very important not to make mistakes. Only one or two missteps and you may find yourself in a very dangerous financial position along with the masses.

Final words?

The publisher will make most of the money from sales of this book. Anything we make will be spent on getting the word out about the crash. I know this disaster is coming, and I want to do everything that I can to protect people from it.

Read Conquer the Crash, and then have your friends and loved ones read it. You can read it in a day, and it may keep you weathered from a storm that will be blowing for years to come.

 Part 1     Part 2      Part 3