Prechter's Views Still Germane  

I started reading another doom & gloom book yesterday.  It’s Robert Prechter, Jr.’s 2002 CONQUER THE CRASH.  I know, I know.  Too much focus on the glass half full.  Still I don’t want anything to sneak up on me, on us.  Immediately upon starting Bob’s book, I was impressed.  I mean I read one of his previous books, co-authored with A.J. Frost explaining the Elliott Wave Principle many years ago and it wasn’t such an easy read.  Anyway, I just started this one and I even kept reading it during the Celtics first playoff game last night so you can imagine I can’t put it down.  More to come later but here’s a key point.

Since Prechter views things in gigundo time frames, in supercycles, he starts off his book comparing such.  Thus the first point he makes is that in the larger scope of things, today’s US economy is weaker than people think and proves it.  Today’s long term economic cycle, which he calls wave V, the period roughly from 1975 on to today, has had less oomph than the previous long term economic cycle upward, from 1942 to 1966, which he terms wave III.  Consider the evidence.  The US Gross Domestic Product growth rate has been +3.2% this time around, in wave V, versus the more robust +4.5% growth in wave III.  Similarly this time Industrial Production is +3.4% versus +5.3%.  Capacity Utilization has been at 84.4% this time versus 91.5%.  The Unemployment Rate in this long term up cycle has averaged 6.6% versus 4.9% in the previous cycle.  Household Liquid Assets in the latest cycle were 93% of liabilities, versus 161% the previous cycle.  The Federal Debt is 58.6% vs. 43.9%.  Consumer Debt is 97% versus previously 64%.  Total Debt as a percentage of GDP is 269% versus 148%.  The Federal Budget Deficit, the Current Account Trade figures, the Personal Savings Rate are all much worse off in this cycle, 1975 to now than versus the previous up cycle, about 1942 to 1966.  Finally today the US is a net debtor versus a net creditor. 

Now Prechter adds in some other important points in the early pages of his book.  First, that really bad economic times come along only rarely, about once a century.  They come after sharply rising stock markets and that the last two really bad economic periods have come when the last economic up cycle had less oomph to it (like the current 1975 to now period).  And, finally and importantly, that really bad times economically come along after major and negative psychological mood changes by society and investors.  Prechter states that  “ …psychological trends create economic trends.”  Hmm, psychology turns first.

Schwartz View:  Mr. Prechter’s opening salvos are that this cycle or wave upward, 1975 to current, has had less vigor than the previous up cycle, from 1942 through 1966.  He also reports that during this latest up cycle, the economic expansion has waned intra-cycle as well.  Now his book came out in 2002 and since and no major economic downturn has occurred.  So let’s take a look around us.  Updating the above data to today, I’d say the data is at best the same, more likely much worse.  We know the last couple years have produced negative savings rates, as one example, the first time since the 1930s.  Debt has soared, we know that too.  Etc.  My point is that nothing positive has occurred over the last few years.  Things are in fact more negative since societal and investor psychology has taken a major change for the worse over the last nine months or since the housing bust, asset-backed credit crisis has emerged.  So we still have to be on close watch for a severe economic contraction ahead.  Let’s not get complacent!