October 25, 1995
"Apocalypse next? Author predicts major disaster."
By Marc Faber
(Marc Faber discusses warnings of an impending great
THE first time I met Robert Prechter was at a meeting of the
Market Technicians' association in New York in the early 1970s.
Over time we became good friends and a few years ago he invited
me to speak at one of his seminars in the United States.
I have to confess that when I first met Robert, I had not
heard of the works of Ralph Nelson Elliott which form the basis
of the Elliott Wave Principle.
However, I subsequently became interested in the subject and
when Robert Prechter, together with Alfred Frost, published the
Elliott Wave Principle in 1978, I read it with great interest
and, also, a lot of scepticism.
Today, it is hard to believe how pessimistic investors had
become in the late 1970s about the outlook for stock prices.
Inflation was accelerating, oil prices were shooting up, and
the Cold War was in full swing. Gold and silver prices were soaring
while financial markets were in disarray. The whole world was
speculating in gold 24 hours a day. Investors flocked to gold
seminars at which the gold bugs predicted it would rise to US$
3,000 (S$ 4,230) while stocks and the US dollar would tumble.
The Dow Jones hovered around 800 points after having exceeded
1,000 for the first time in 1966 -12 years earlier. I can assure
you that in 1978, not many people believed that stocks "always
go up in the long term".
After all, mutual funds had suffered net redemption since
1971 and many US brokerage firms had to close their doors or
merge because of low volume -in 1978 the average daily NYSE volume
was 28 million shares -as well as negotiated commissions.
Investor sentiment was then so bearish that hardly anyone gave
much weight to Mr. Prechter's forecast, based on the Elliott
Wave, of the Dow Jones rising to 2500-3000. In the 1983 edition,
this target was revised to 3500-4000, a prediction which was
then taken with equal disbelief.
Today, the mood is obviously quite different. Investors believe
that stocks will always go up and outperform cash and bonds,
while gold is totally out of favour. Confidence in equities is
so high that, for 58 consecutive months, US equity mutual funds
had net inflows.
At the same time, the public has become accustomed to the
idea that any decline is a great buying opportunity -as was provided
by the October 1987 crash, or the 1990 Gulf War. Communism is
dead, capitalism and market-based economies with financial markets
are in fashion, the global economic outlook is perceived to be
bright, and renowned strategists talk about a "perfect world"
Thus, it should come as no surprise that Mr Prechter's latest
book - At the Crest of the Tidal Wave -A Forecast for the Great
Bear Market - will meet with total incredulity among the investing
People will read it and find it "very interesting".
But since everybody believes that stocks will rise further -even
Mr Prechter concedes that the Dow Jones could still rise to the
5200-5500 range within the next few months -not many will act
upon his predictions. Many "experts" will likely dismiss
it as "ridiculous".
In Forecast for the Great Bear Market, Mr Prechter, based
on his interpretation of the Elliott Wave Principle, expects
"almost everything" to decline massively in value over
the next few years. This includes stocks, bonds, gold, real estate
and collectibles, but not the US dollar, which will rise because
of a credit contraction.
The Elliott Wave stipulates, based on complex wave counts
and Fibonacci numbers, that the US stock market is at present
"at the crest" of the fifth wave which will be followed
by a "Grand Supercycle degree bear market" which will
carry the Dow Jones "to its expected target within the range
of the previous Supercycle fourth wave, between 41 and 381 on
And since no "Supercycle degree decline in stock prices
on record has failed to produce a depression", Mr Prechter
argues that the coming deflationary depression will also wreak
havoc in the real estate and commodities markets.
But the bad news does not stop there. While a deflationary
depression should, under normal conditions, be favourable for
bonds, Mr Prechter's Elliott Wave counts suggest that bonds will
not escape the coming collapse. This he attributes to massive
defaults, including the one by governments.
According to Mr Prechter, "rising interest rates in a
deteriorating economy will be a total mystery to most investors".
In a strongly deflationary environment, gold is not expected
to perform well either. The wave principle has an ideal price
target for gold of between US$ 112 and US$ 182.
In the case of gold and silver, however, Mr Prechter allows
for an alternate wave count which suggests that the precious
metals will not fall to new lows before rallying. "With
silver having fallen 93 per cent, this possibility must be entertained."
And what should we think of his apocalyptic forecasts?
As indicated earlier, Mr Prechter's forecasts sound as far-fetched
today as his prediction of the Dow Jones in 1978. All I can say
is that Robert Prechter is no lunatic and, most certainly, not
He is one of the most thorough observers of stock, commodities
and currency markets I have ever met, and has an enviable forecasting
In the early 1980s, he recognised the disinflationary environment
to come which would propel stocks sharply higher at a time investors
had lost faith in equities. Then, in August 1987, he advised
his clients to liquidate their stocks -not a bad call considering
the global stock market crash that occured two months later.
And while the Elliott Waves are open to a number of different
interpretations and alternate counts, they cannot be dismissed
Personally, I agree with Mr Prechter that the next bear market
will be devastating and will bring about a very nasty global
recession. It will also shake an entire generation's confidence
in the cult of equities and mutual funds, as well as other financial
But I have my doubts whether some of his price targets will
be fulfilled. I rather believe that in the next recession, governments
will immediately reflate massively, which will quickly lead to
rising inflation rates and, eventually, hyperinflation. As a
result, I doubt that the Dow Jones could fall much below 1000
-the level from which the bull market started in the early 1980s
-and, according to Mr Prechter, a strong support level.
At the Crest of the Tidal Wave is a well-written, highly interesting,
book full of insights into many different markets.
Regardless of whether you agree with Mr Prechter's views or
not, much can be learnt from this book with its many historical
graphs. I cannot imagine anyone regretting a purchase. I have
little doubt that At the Crest of the Tidal Wave will become
a classic in financial literature and many future generations
will talk about the fact that Mr Prechter's warnings were almost
totally ignored by the investing public in 1995.
(Marc Faber is a money manager based in Hongkong.)
At the Crest of the Tidal Wave- A Forecast for the Great Bear
Market. By Robert Prechter, Jr.; 465 pages.; New Classics Library.