Now that the Dow has had a good month in April -- the Wall Street Journal points out that with the 7.4% growth in April, the Dow Industrials "capp[ed] the best two-month percentage rise in seven years" -- it's easy to start being optimistic again. Remember all those books from the beginning of the decade about the Dow skyrocketing with titles like Dow, 30,000 by 2008 (didn't happen) and Dow at 36,000 (hasn't happened)? Well, Bob Prechter still has his eyes firmly fixed on a less optimistic scenario, one that most everyone would want to prepare themselves for. Yes, we're talking about the Dow going to below 1000. Here's an excerpt from his recent Theorist to explain how it can happen.
Yes, Below 1000 in Dollar Terms
Readers sometimes ask if I am serious about the Dow eventually falling below 1000. People can understand that the Dow can fall in terms of gold, but they are so convinced about coming hyperinflation that they consider the idea of the nominal Dow in triple digits to be simply out of touch with reality.
The primary reason I believe the Dow is going to fall that far is its Elliott wave structure, which calls for it. But I can also see a monetary reason for this event. The tremendous inflation of the past 76 years has occurred primarily by way of instrument of credit, not banknotes. Credit can implode.
The only monetary outcome that will make sense of the Elliott wave structure is for the market value of dollar-denominated credit to shrink by over 90 percent. Given the eroded state of capital goods in the U.S. and the depletion of manufacturing capacity, it is not hard to see why all these IOUs have a deteriorating basis of repayment. The future has already been fully mortgaged; it's time to pay. But there is no money to pay, only more IOUs, which cannot be paid, either. So the credit supply (after a brief respite) will continue to shrink, which means that wealth, and therefore purchasing power, will disappear along with it. In the broadest sense, this change will constitute a collapse in the "money supply."
Such a monetary background would be consistent with the Dow falling below 1000 in nominal terms. It is one of the reasons that Conquer the Crash is subtitled How To Survive and Prosper in a Deflationary Depression. To be sure, the central bank does have the capacity to print banknotes. But I expect that the final implosion in credit value will be so swift that the authorities will not act in time to counter it. They will continue to try to maintain the fictions of full face value for IOUs until they fail spectacularly to keep up the scam. Then they will start to scramble, but it will be too late.
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I suppose the DOW could descend to 1000 points. It has occurred in other nations as their economic systems failed.
ReplyDeleteA review of historical DOW charts reveal most inflated periods of economic excess usually retrace back to the point the bubble began.
This financial bubble began around 1985. You can observe this yourself by reviewing any number of available technical charts. It is obvious by the meteoric rise of the DOW in the following years.
If the market descends back to 1985 levels it would settle around 3000 or 4000 on the DOW.
It is impossible to cite exact times of these occurrences but you can certainly estimate general periods of excess and the following contractions.
The stock market represents the worst qualities of man. Greed and fear. Better to avoid it entirely. If you are an outsider the odds are stacked against you because the big winners have inside information and always have had that advantage. The one person out of ten that makes a profit yaps all day about his winnings while the nine other losers stay silent.
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