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24 May 2012

Get Ready for the Rest of the Crash

Position Yourself for the Rest of "Conquer the Crash"
The earlier you prepare, the better
May 23, 2012

By Elliott Wave International

To this day, I wonder why Robert Prechter's book Conquer the Crash has not been more widely recognized. It described in advance much of what happened in the 2008 financial crisis.
Published in 2002, the book provided detailed descriptions of then-future economic scenarios. They were detailed vs. general. Prechter was specific in a way that would prove right or wrong; there was no gray.
This is from the book:
There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks' debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients' potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.
Conquer the Crash, second edition, (p. 179)
That's just one excerpt about one topic in a 456-page text. Perhaps you see why I believe the book deserves more credit. Yet even that one paragraph from the book turned out to be a virtual mirror of what came to pass. And much of what he predicted is unfolding today: the JPMorgan trading fiasco, massive withdrawals at Greek banks, downgrades of Italian and Spanish banks and much more. Those are just a few headlines.
The broader point is that Conquer the Crash prepared its readers. Around the time the book's second edition published in 2009, the Chicago Sun-Times remarked
And the credit implosion is still not over. Please take a look at the chart:

In the Conquer the Crash quote in the first part of this article, you'll notice the last three words are "deflation and depression."
The world has yet to completely pass through these economic valleys.

It's not too late to prepare yourself for what's ahead
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09 May 2012

What to Make of the Stock Market

The Manic-Depressive Stock Market: What to Make of It
The psychology of the market may be teetering on the edge
May 2, 2012

By Elliott Wave International

The stock market: one week it acts like Dr. Jekyll, the next week it's Mr. Hyde.
That shift can even occur in the course of a single session.
These dramatic fluctuations appear to be impulsive; and we know that impulse does not flow from cold reason. Even so, the Efficient Market Hypothesis would have us believe that investors are constantly applying reason and logic to reach some objective market pricing, via the latest news or measure of stock market valuation.
The February 2010 Elliott Wave Theorist provides insight:
The Efficient Market Hypothesis (EMH) and its variants in academic financial modeling...rely at least implicitly but usually quite explicitly upon the bedrock ideas of exogenous cause and rational reaction. Stunningly, as far as I can determine, no evidence supports these premises...
EMH argues that as new information enters the marketplace, investors revalue stocks accordingly. If this were true, then the stock market averages would look something like the illustration shown [below].
We know that the market does not unfold in the way illustrated above. But we do know that the market has unfolded like this:

So in 2000, did a sudden burst of logic lead investors to realize that the NASDAQ was over-valued?
No. Technology stocks had absurd price/earnings ratios long before the NASDAQ top.
The NASDAQ's abrupt switch from Hyde to Jekyll stemmed from investors' collective unconscious. Consider the gazelle that runs in panic because others are: it does not pause to rationally survey the landscape. It explodes in a burst of speed that reaches 90 km/hr within seconds.
Decades ago, multimillionaire stock market operator Bernard Baruch said
...the stock market is people. It is people trying to read the future. And it is this intensely human quality that makes the stock market so dramatic an arena, in which men and women pit their conflicting judgments, their hopes and fears, strengths and weaknesses, greeds and ideals.
This psychology of the marketplace unfolds in waves. That is what we study.

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