Jason interviews Robert R. Prechter, Jr., CMT, President of Elliott Wave International (EWI), the world’s largest market forecasting firm.

EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. Mr. Prechter began his professional career in 1975 as a Technical Market Specialist with the Merrill Lynch Market. He has been publishing The Elliott Wave Theorist since 1979. He is also Executive Director of the Socionomics Institute, a research group. Mr. Prechter has won numerous awards for market timing, including the United States Trading Championship, and in 1989 was awarded the “Guru of the Decade” title by Financial News Network (now CNBC).

He has been named “one of the premier timers in stock market history” by Timer Digest, “the champion market forecaster” by Fortune magazine, “the world leader in Elliott Wave interpretation” by The Securities Institute, and “the nation’s foremost proponent of the Elliott Wave method of forecasting” by The New York Times. Narrator: Welcome to the American Monetary Association’s podcast. Where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman: Welcome to the podcast for The American Monetary Association.

This is your host, Jason Hartman and this is a service of my private foundation, The Jason Hartman Foundation. Today we have a great interview for you, so I think you’ll enjoy it. And comment on our website or our blog post. We have a lot of resources there for you, and you can find that at AmericanMonetaryAssociation.org or the website for the foundation which is JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

Start of Interview with Bob Prechter

Jason Hartman: It’s my pleasure to welcome Bob Prechter to the show. As I mentioned before, Bob is the president of Elliott Wave International and he has a long standing career, and some excellent insights into markets. The Elliott Wave principle is a form of technical analysis that basically attempts to forecast trends in financial markets and other activities. It was developed in the 30s by Ralph Nelson Elliott. And he was an accountant who basically developed this theory that has a lot of support and a lot of backing to it. I think you’ll really enjoy this interview. It’s really insightful, and what’s especially interesting is the stuff where we don’t talk about money necessarily, but we talk about socionomics and social trends.

So let’s listen in and enjoy the interview, and we will see you very soon for show number 80. I want to welcome Robert Prechter to the show. He’s from Elliott Wave, and he’s from Atlanta, Georgia. And bob, it’s great to have you on the show.

Bob Prechter: Well thanks for having me.

Jason Hartman: Good. Tell us a little bit about your background, and then I want to get into Elliott Wave Theory and talk about your book.

Bob Prechter: Well I started on Wall St in 1975 and I went to work for Bob Farrell who ran the technical department at Merrill Lynch in New York City. I stayed there three and a half years, was completely itching to get out on my own, but I learned a lot there. It was a great place to be, and particularly New York City because that was the only place that I could find a copy of R.N. Elliott’s original writings. And he’s the guy who originally wrote two books on what he called The Wave principle, and what some other people today call Elliott’s Wave Principle. And they were in the New York Public Library on microfilm, and that really got me started. Because there was so much there that people weren’t talking about. So much in the way of detail and a completely thought out model of how stock market behaves and financial markets in general behave. That was the treasure trove that got me started. I met a man named A.J. Frost who was from Canada, and his partner Hamilton Bolton that kept the wave principle alive in the 50s and 60s. And in 1978 we wrote a book together. That was back when the DOW was at triple digits, if anyone can remember that. And we were saying this is a tremendous buying opportunity. We’re finishing a long sideways bare period. We’re calling it the fourth wave, that four and five wave up move. So there’s a big bull market coming. And we were very aggressive in calling for the market to get as high as three or four thousand. And it turned out it actually tripled from there.

Jason Hartman: Oh wow, who knew? That was a very sage prediction.

Bob Prechter: Well, somewhat but I have to tell everybody, we make mistakes too. During the 90s I thought that things were way overdone. I got bearish early. But I’d rather be out early than try to get out too late.

Jason Hartman: A lot of people are probably echoing that sentiment right now I would assume. Including the person you’re talking to, actually.

Bob Prechter: Yeah, well everybody’s experienced some difficulties I think.

Jason Hartman: Yeah, no question about it. Tell us how Elliott Wave Theory works, and what is so special about it. What does a Elliott Wave theorist do as they’re looking at markets?

Bob Prechter: Well the Wave Principle is a model. It says that the stock market is, to use a fancy term, an iterated hierarchical fractal. What that means is there is an essential pattern or a wave structure that appears at all degrees of trend, whether you’re watching a daily chart, a weekly, a monthly, a yearly and so on. The smaller patterns add together to create larger patterns with essentially the same basic shape. We didn’t know the word fractal when R.N. Elliott came up with this in the late 30s and early 40s. But since then we’ve coined that word. Mandelbrot coined that word, wrote a book about it. And apparently, as he has shown, there are fractals throughout nature and we think that this is an engine of social behavior and human beings. When human beings interact with each other they share their emotional states, we call it social mood. It seems to go through stages from extreme pessimism to optimism and back again. And those show up as buying and selling on the New York Stock Exchange. They also show up in other areas such as what clothes people choose to wear, and how high women’s hemlines are and how much production is going on in the economy. So it just effects everything.

Jason Hartman: Yeah, I’ve heard the jokes about that. When the dresses get shorter, that means a bull market is coming, when the dresses get longer a bear market is coming.

Bob Prechter: Well actually it’s a coincident indicator, so the higher the market goes generally the higher the hemlines, and the lower it goes the lower the hemlines. So when they get to extreme levels, that’s when you start saying well that’s a useful indicator. We must be near bottom or top. So it’s sort of frivolous but there’s some truth to why that happens.

Jason Hartman: Really? That’s amazing. So, how does it differ from other theories? There are so many theories on markets, and especially the stock market. Technical analysis, fundamental analysis, charting. This is all along sort of the charting lines. Is that correct?

Bob Prechter: Well, it differs from all of the theories because it’s the only form based model theory of the stock market. There aren’t any others. Among academics there are some currently popular models that evolve from the random walk model. Now that was the only other one that was a form based model. It says basically, there is no form. Prices just wander around. And since then, there have been statistical studies showing that in fact, the stock market does have what is called stylized statistical facts. Which means for example, big moves happen more often than they would in a bell curve. They call these stat tales. There’s also, volatility tends to cluster. When the market gets volatile it tends to stay that way for a while, and when it gets calm is tends to stay that way for a while. Random walks don’t do that. So what they are doing now is trying to use statistics to modify the random walk. If it was not completely random, we found these events. But those are statistical models. They’re not form models. And the wave principle model actually has all the same statistics that the stock market does when you apply or when you test them for these various statistical facts. That’s a very cool thing because it tells us that our model is very close to what’s really going on in the stock market.

Jason Hartman: So what is the model telling us now?

Bob Prechter: Well, one of the interesting things about the wave principle model is even in discussing it you almost cannot help but put out a forecast, because when you’re explaining the form, you show it, and it’s rarely complete on that day. It’s usually in progress somewhere. And that’s what we did in our 1978 book Elliott Wave Principle. We said we’re finishing the fourth wave and we’re going to have a giant fifth wave on the upside. Well, I wrote this book Conquer the Crash in 2002 because that fifth wave finally ended in the first quarter of 2000, and we’ve been in a bear market ever since. And we had the first wave damage. We called it A wave, ending in 2002. That was a 50% hit in S & P prices. And then there was a big recovery in the middle. Sometim