Straight Talk With Bob Prechter, Part IV

[CrackSmokeRepublican]

Straight Talk With Bob Prechter, Part IV

A series of Q&As with EWI founder and president
By Editorial Staff

Mon, 04 Oct 2010 12:30:00 ET

This is Part IV of our multi-part series of questions and answers with Robert Prechter, the world's foremost authority on Elliott wave analysis. (Excerpted from an hour-long June 19, 2010, interview with Jim Puplava's Financial Sense Newshour.)
We are posting a new part every business day, so come back to elliottwave.com tomorrow for more. (Here are Part I, Part II and Part III.)
 
...Jim Puplava: I want to come back to that period, because we saw, beginning with Hoover, widespread intervention of government. We had a lot of pronouncements from the Secretary of the Treasury to the President to the head of the Federal Reserve to prominent people such as John D. Rockefeller. His famous saying was: "Me and my son went down to the floor and started buying." There was this kind of hope, I guess, in the sense that government could fix a problem, and I believe that we're still in the hope that government can fix the problem. Look at this tragedy in the Gulf of Mexico and everybody's turning to Washington, like Obama is going to put on a deep sea diving suit and go down a mile below the ocean and plug the hole. Are we in that similar type period were people are looking at government and saying, "OK, fix this"?
 
Robert Prechter: We are in that period on steroids. Back then, in October 1929, people didn't turn to government right away; they turned to private bankers. There was a banking consortium of the big banking guys who said, "We're buying stocks here," and you'd get these half-day rallies where the market would go up like 12 percent and then close unchanged. This time we have a much bigger gorilla, two gorillas actually: the Treasury and the Fed. They're saying, "We're going to make money available for nothing, and we're going to give credit for nothing, and we're going to bail everybody out that's possibly having trouble." It's a similar consortium, but this time it's much bigger and it's all public. Last time it was at least partly private. Today no one turns to the private sector for answers to these systemic problems. They think the government can solve them all.
 
So, government right now, to me, is the naked king riding down the street on a horse, and people haven't noticed that he's not wearing clothes yet. But they will by the time it's over. As I see it, in 1929 to 1932, the lesson people took away from that time -- which Franklin Roosevelt exploited -- is that private interests failed. And this go-round, by the time it's over, I think people are going to conclude that government has failed. They already are very sour on government, but the deeper we get into this cycle the more people are going to realize that the government doesn't know what it's doing. There's nothing it can do to alleviate the problem.
 
And even deeper than that, it is the cause of most of our problems today. We can go through the litany, but it was government that created all of these credit-pushing agencies that ballooned up the real estate market and made houses impossible to afford so that people had to borrow 99 percent of a house just to live in one. Congress created Ginnie Mae and Fannie Mae and Freddie Mac and the Federal Home Loan Banks, and every one of them was pushing credit on the public and forcing up housing prices and making it incredibly hard to buy a house for cash. It's doing the same thing with the price of education by pushing student loans.
 
All this credit is the problem, and now everybody owes money and no one has any money to pay it off. The banks are ruined; they've lent out everything. The paper that they hold, most of which is mortgages, is becoming worth less every day that they hold them. They're trying to liquidate homes, and they can't liquidate them fast enough, and when they do they're getting 40 cents on the dollar if they're lucky. In my view, most of the banking system is already bankrupt; people just haven't lost confidence yet.
 
This upturn in the cycle has allowed people to regain some confidence. You know, back in February of 2009 people were starting to get afraid, very afraid, but it was brief. That was the bottom of the 7¼-year cycle, and this time around, they're going to feel just fine for probably another couple years even as stocks fall. (See Part III for more -- Ed.) But eventually it's going to lead to a banking crisis, and I don't think the FDIC has the resources to handle it.
 
JP: You know, one thing that happened in the markets between '29 and the bottom of '32, there were some very astute investors, such as Bernard Baruch. And one investor that everybody knows is Jesse Livermore; he made a fortune shorting the markets in the '29 crash, but he got back in stocks in 1931-1932 and got wiped out. Is this going to be a difficult market to navigate?
 
RP: This is exactly what's happening today. If there were some smart people out there that said "Let's short them" in '08, they're not going to short them this time around because many people have decided that we're in a real recovery and the most we can do is double-dip. But as happened to Jesse Livermore, the '29 crash was simply the first shot across the bow.
 
The real destruction occurred from April 1930 to July 1932. Stocks lost over 80 percent of their value over that period. I think that's exactly the kind of environment we're in, and it's going to fool the smartest people on the planet. If you ask the people in the administration, the smartest people on the planet are running the Fed and the Treasury. I think they're going to get fooled. They think they can guarantee all this debt and get away with it; they're even talking about how they're going to make a profit. There's no way that's going to happen. They're going to dig themselves deeper and deeper into the hole until they finally blink. They're going to realize that if they're going to maintain any credibility with creditors on the face of the earth, they're going to have to stop.
 
[Part V is now online. Topic: socionomic reasons for deflation]
 
Come back tomorrow for another part of the "Straight Talk With Bob Prechter" series. Or, you can read the rest of it now, free, inside Club EWI. All you need is a free Club EWI password.
 
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