Monday, July 12, 2010

Prechter and Perilous Predictions

Robert Prechter is still predicting disaster, Jim Gust reminded us. Prechter foresees the Dow plunging down under 1,000 in this decade. Wow!

The prediction that won Prechter his original fame, made in 1983, was bullish. It sounds tame now: A DJIA of over 3,600 by 1987 or '88. But recall the historical context:

After hitting 1,000 in the mid 1960s, the Dow could not regain that level until the fall of 1982. Even then the Dow needed a lot of help from the declining value of the dollar. Who on earth could expect the Dow to soar above 3,600 in a mere handful of years?

By 1987 the Dow had indeed soared, not to 3,600 but to 2,600. To many investors that height was terrifying. On October 5th, Prechter himself flinched. "Sell," he told his clients, "sell!"

Two weeks later, the stock market was a shambles. Had Prechter made a great call? Or had he yelled "fire" in a crowded theater?

George Soros leaned toward the latter view, according to The New York Times:

''I was stunned by his comments, just as everyone else was,'' Mr. Soros said. [Robert] Prechter had predicted for years that the Dow Jones industrial average would crest next year at 3,686. In his view, investors would pour into the stock market the same way they had into all sorts of markets periodically for thousands of years, indulging in a buying frenzy that would ignore underlying values in the belief that tomorrow would bring a bigger fool willing to pay even more than the ridiculous price of today.

''Mr. Prechter's reversal proved to be the crack that started the avalanche,'' Mr. Soros said yesterday.

Even Warren Buffett sees more lean years ahead for stock investors. But the Dow plunging to below 1,000? Don't bet on it.

If the worst does happen, at least we have Mr. Prechter to shoulder the blame.

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