Conquer the Crash - You Can Survive and Prosper in a Deflationary Depression by Robert R. Prechter, Jr.

From the Publisher

"A must-read book." --Martin D. Weiss PhD, author of the best-selling Ultimate Safe Money Guide

* Will deflation and depression really happen?

* What causes deflation and depression?

* Can the Fed prevent deflation?

Where can you find the few exceptionally sound banks, insurers, gold dealers and other essential service providers that can help you protect your wealth?

How should you arrange your finances and your life in order to survive the depression, prosper while it's happening, and take advantage of the unprecedented opportunity coming at the next major bottom?

Not one in ten thousand investors will think to ask these questions, even as their financial institutions may be lurching toward insolvency.

You will find the answers in this book

"This book outlines brilliantly and simply the rationale for how and why the bubble developed. Prechter will go down in history as a legend for having predicted the secular bull market and now having provided a lucid description of the economic cataclysm that unfortunately lies ahead. I urge you to read this book and give it to your loved ones. It provides great tactical advice on how to prepare yourself financially. Reading this book could make the difference between agony and comfort over the next 20 years." --David Tice, President, Prudent Bear Funds

Soundview Executive Book Summaries

Conquer the Crash is a survival guide for those who want to learn how to safely make it through a deflationary depression with their investment portfolios and personal finances intact. Robert Prechter, the president of a forecasting firm that serves investors around the world, has researched the topic of capital conservation and has emerged with the reason why the stock market bubble burst as well as tactical advice on how to be better financially prepared for the economic cataclysm that might be looming in the near future. Copyright (c) 2003 Soundview Executive Book Summaries

Product Details

• Table of Contents
• Read an Excerpt

Table of Contents

Read an Excerpt

When Do Depressions Occur?
Depressions are not just an academic matter. In the Great Depression of 1929-1933, many people lost their investments, their homes, their retirement plans, their bank balances, their businesses - in short, their fortunes. Revered financial professionals lost their reputations, and some businessmen and speculators even took their own lives. The next depression will have the same effects. To avoid any such experience, you need to be able to foresee depression. Let's see if such a thing is possible.

Defining Depression
An economic contraction begins with a deficiency of total demand for goods and services in relation to their total production, valued at current prices. When such a deficiency develops, prices for goods and services fall. Falling prices are a signal to producers to cut back production. In response, total production declines.

Economic contractions come in different sizes. Economists specify only two, which they label "recession" and "depression."

Based on how economists have applied these labels in the past, we may conclude that a recession is a moderate decline in total production lasting from a few months to two years. A depression is a decline in total production that is too deep or prolonged to be labeled merely a recession. As you can see, these terms are quantitative yet utterly imprecise. They cannot be made precise, either, despite misguided attempts to do so (more on that later).

For the purposes of this book, all you need to know is that the degree of the economic contraction that I anticipate is far too large to be labeled a "recession" such as our economy has experienced eleven times since 1933. If my outlook is correct, by the time the contraction is over, no economist will hesitate to call it a depression.

Depressions and the Stock Market
Our investigation into the question of forecasting begins with a key observation: Major stock market declines lead directly to depressions. Figure 2-1 displays the entire available history of aggregate English and American stock price records, which go back over 300 years. It shows that depression has accompanied every stock market decline that is deep enough to stand out on this long-term graph. There are three such declines, which occurred from 1720 to 1784, 1835 to 1842 and 1929 to 1932.

To begin to orient you to my way of thinking, I would like to explain Figure 2-1's title. The stock market is modern society's most sensitive meter of social mood. An increasingly optimistic populace buys stocks and increases its productive endeavors.

An increasingly pessimistic populace sells stocks and reduces its productive endeavors. Economic trends lag stock market trends because the consequences of economic decisions made at the peaks and nadirs of social mood take some time to play out. The Great Depression, for example, bottomed in February 1933, seven months after the stock market low of July 1932.

So psychological trends create economic trends. This causal relationship between psychology and the economy is the opposite of what virtually everyone presumes, so do not be alarmed if you find it counter-intuitive. Chapter 3 will elaborate on this theme.

If you study Figure 2-1, you will see that the largest stock-market collapses appear not after lengthy periods of market deterioration indicating a slow process of long-term change but quite suddenly after long periods of rising stock prices and economic expansion. A depression begins, then, with the seemingly unpredictable reversal of a persistently, indeed often rapidly, rising stock market. The abrupt change from increasing optimism to increasing pessimism initiates the economic contraction.

The graph shows that these reversals do not appear after every period of rising stock prices but only after some of them. If you are guessing that maybe one of the hints of reversal is a slowing economy in the face of such advances, you're right. We'll learn even more about this factor in Chapters 3 and 5.

Hierarchy in Finance and Economics
You might be interested to know that almost every smaller stock market decline observable in Figure 2-1 also led to an economic contraction. The severity of each contraction is related to the size of the associated stock market decline.

Unfortunately, this hierarchy in economic trends is difficult to display because conventional quantitative definitions of recession get in the way. Sometimes the economy just fails to breach the arbitrary definition of "official recession" that economists use, so their graphs show no recession when in fact the economy contracts, corporate earnings fall, and economic indicators weaken. In some cases of brief or small stock market declines, the economy simply slows down without actually having a "negative" month or quarter, but an effect occurs nevertheless.

Modern attempts to quantify the term "recession" by absolute size are flawed. It would be as if botanists decided to define "branch" or "twig" by length and width. The result may denote an "official" branch or twig, but the definition would obscure the actual continuum of sizes attending parts of trees. Likewise, attempted quantifications of the term "recession" derive from and foster misunderstanding with respect to the hierarchical nature of economic expansion and contraction. It would be far better for economists to adopt the perspective of the Wave Principle, a model of hierarchically patterned financial market change, which we are about to encounter in the next chapter.

All We Need
Such discussions aside, Figure 2-1 is all we need for our purposes. It shows that the biggest stock market declines follow long periods of advance of like degree. They lead to economic contractions so dramatic that nothing gets in the way of their being noticed and recorded as "depressions." Now let's see if we have the means to anticipate their arrival.