Saturday, June 11, 2016

Review of Prechter's Perspective: Conversations with Bob Prechter, Legendary Market Theorist by Peter Kendall

We at Credit Bubble Stocks have an ambivalent opinion of Bob Prechter. As I mentioned four years ago in my review, his book Conquer the Crash led to a theoretical breakthrough for me about investor genotypes in an investing ecosystem.

Prechter's Elliott Wave Theory is probably trivially true. As David Aronson writes in Evidence-Based Technical Analysis, its ability to "fit any segment of market history down to its most minute fluctuations" is because of its "loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude," like epicycles in Ptolemaic astronomy.

However, many of Prechter's ideas stand on their own whether or not Elliot Wave Theory is true, and so today I was reading Prechter's Perspective, a book which is an extended interview of Prechter.

  • [T]he bond market is bigger than the Fed. The Fed cannot do whatever it wants anymore. If it acts, the market will make a judgment, and depending on the psychology of bond investors, they can support, neutralize, [or] reverse whatever the Fed attempts to do to affect the money supply. The market is in charge and the Fed knows it. Why do you think the Chairman keeps going on TV to explain what he's doing? 
  • Q: OK, maybe rising rates aren't always bearish. But we know [that] falling rates are bullish long term.
    A: If you had lived in the 1930s, you might conclude, as the consensus did, that falling interest rates are bearish for stock prices. [T]he biggest crash in our history, 1929-1932, was accompanied by falling short term interest rates. The recovery was accompanied by rising interest rates. At the time, the theory was that stocks and bonds compete for investment capital.
  • Most published forecasts are at best descriptions of what already has happened.
  • They weren't saying ["buy stocks for the long term"] twenty years ago. Now they tell us. What's really going on is they are predicting the past. 
  • The only way to guarantee that politicians will never again inflate is to introduce private money and ban legal tender laws. [...] The market place will choose the soundest forms of money, and competition will insure that the science of money is advanced. Compare the old telephone monopoly to cell phones and the Internet, and you'll get an idea of what would happen.
  • Q: Aren't there things that could be done to soften the downside of the cycle?
    A: Perhaps there are things that could be done but the real question is will they be done? [...] Society undergoes a pendulum-like swing, back and forth between prosperity and recession.
All great points. The idea of "predicting the past" is something we were just talking about this week to describe that ridiculous "housing eating the world" essay. As our correspondent wrote,
What Conor Sen did essentially was describe the current state of reality in such a way that it appeared like a prediction or forecast of the future. The familiar and undeniable fact of present reality seduced people into thinking this pseudo-prediction is implicitly accurate and inevitable.

In reality, reversion to the mean suggests a better bet is that something which is wildly expensive in relation to incomes and expectations actually gets cheaper over time, not more wildly expensive. You're going further and further out into outlier land, especially with regards to the time of origination of the trend versus the additional timeline granted in the forecast. If the "prediction" turns out to be true, its success can be explained as LUCK, not PRESCIENCE.
Advice to buy and hold stocks (or bonds) is the same. The returns on a 60/40 portfolio aren't going to be duplicated unless the 10 year bond yield becomes seriously negative and stocks become even more expensive relative to earnings and cash flows.



innerscorecard said...

"unless the 10 year bond yield becomes seriously negative and stocks become even more expensive relative to earnings and cash flows"

Now that you say it like that, it seems quite possible.

I guess the end point is when TINA/"shortage of stock"/Fed Model become fully consensus. They're inherently front-running strategies (like all strategies?) after all.

innerscorecard said...

bjdubbs said...

Is Sen even describing the current reality? He admits that wages are not increasing today (Weisenthal asked him that and he came up with a theory to explain away lack of wage growth), but that wages will have to increase.

Here is BLS projections for construction jobs in 2024:

That's below the highs in 2007.

Here's BLS on manufacturing jobs:

Again, below highs of 2007.

So basically, complete BS. He had a predetermined, Bloomberg-friendly conclusion (more immigration) and then . . . got hired by Bloomberg.

bjdubbs said...

Actually, BLS projects wage losses in manufacturing, as you would expect. So Sen is relying on the "all else equal" fallacy which imagines that every other sector of the economy will remain at its current level. But that is of course false, economy is dynamic . . . as retailers like Sports Authority disappear and McDonalds employees are eliminated by kiosks etc etc it's perfectly natural those workers will shift over to "growth" sectors like construction (growing at 1.2%/year, as projected by BLS). Sen's conclusion sounds counterintuitive because it is at odds with all well-known empirical evidence. But he is good at packaging it: he always includes a reference to 2007 ("like in 2007 . . . ") to make his predictions sound more momentous.

bjdubbs said...

*job losses in manufacturing

CP said...

Right, these guys are pro-immigration. Need to read Turchin!

whydibuy said...

Prechter is a joke and a bad one at that.
I still remember his visit to Rukeyser on Wall Street Week saying that the dow would revisit the 1929 low. It was one of the very few times Rukeyser flat out told a guest he was talking nonsense and was ridiculous. I think it was around '89. He never was invited back again after that silliness.
Prechter has been and always will be wrong. Why? Because his whole thesis is simply betting against the best country in the world. Bad bet.

Skeptic said...

Re - best country in the world

What's best about it? Transgender bathrooms? Firebombing civilians? Fattest population?

whydibuy said...

The dow was around 2900-3000 at the time Prechter made his call on Rukeyser's show.
Its at 18000 now. Any questions? Betting on the demise of the U.S. is a bad, no, stupid bet. Buffett also thinks the U.S. will do fine over this century and is happy to stay long U.S. stocks.