Of all the belief systems of Wall Street, few can claim the devoted following of the Efficient Market Hypothesis, the idea that stock prices adhere to the same laws of supply-and-demand that govern retail products. Once coined the theoretical “Parthenon” of economics, this notion has consistently endured the test of time —– until now. Academics and advisors across the globe are currently exposing crack after crack in the “Efficient” model so deep as to bring the entire theory crashing to the ground.

“The EMH is not only dead,” writes a July 29, 2010 news source. “It’s really, most sincerely dead.” (Minyanville)

As to what caused the theory’s collapse — one recent business journal offers this insight:

“Financial markets do not operate the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the prices of a financial asset rises, demand generally rises.” (The Economist)

Here’s the thing. SIX years ago, Elliott Wave International president Bob Prechter pronounced the exact same finding in his April 2004 Elliott Wave Theorist. (Read that full-length publication today, absolutely free by clicking on the hyperlink) In that groundbreaking report, Bob presented the compelling picture below that shows how investors increase their percentage of stock holdings as prices rise, and decrease them as prices fall:

The next question is why? Answer: Motivation: i.e. the purchase of goods and services is about need; while the purchase of stocks is about desire. Here, Bob Prechter’s 2004 Theorist takes the rein:

“The fact is that everyday in finance, investors are uncertain. So they look to the herd for guidance. Because herds are ruled by the majority — financial market trends are based on little more than the shared mood of investors — how they feel — which is the province of the emotional areas of the brain (limbic system), not the rational ones (neocortex)… Buyers, in a rising market appear unconsciously to think, ‘The herd must know where the food is. Run with the herd and you will prosper.’ Sellers in a falling market appear to unconsciously think, ‘The herd must know that there’s a lion racing toward us. Run with the herd or you will die.’”

Prechter and contributor Wayne Parker then expanded on his landmark observation in the 2007 Journal of Behavioral Finance. (Also available, absolutely free by clicking on the hyperlink)

In the end, it’s not enough to just tear down the long-standing EMH. One must build another, more accurate model up in its place. And in the 2004 Theorist, Bob Prechter does just that with the Wave Principle, which reconciles the technical and psychological sides of stock market behavior into this key point: Herding impulses, while not rational, are also NOT random. They unfold in clear and calculable wave patterns as reflected in the price action of financial markets.

As the mainstream media continues to jump on board Prechter’s Financial/Economic Dichotomy Theory, you can read both of Prechter’s original writings. Enjoy your complimentary access to the 2004 April 2004 Elliott Wave Theorist and the 2007 Journal of Behavioral Finance.

Read some of the latest nuggets directly from Robert Prechter’s desk — FREE. Click here to download a free report packed with recent quotes from Prechter’s Elliott Wave Theorist.

By Elliott Wave International

Stress test results for the biggest European banks were recently released, while the largest U.S. banks took their first stress tests in May 2009. But most people don’t really care how much stress their banks are under; they are more worried about their own stress levels. One thing that adds to personal stress is worrying about whether their deposits are in a safe place. Bob Prechter has encouraged people to find the safest banks for their money since he originally wrote his New York Times best-selling book, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression in 2002. This excerpt explains why banks of all sizes are riskier than they used to be (think about portfolios stuffed with derivatives, emerging market debt and non-performing commercial loans). You can also get a list of the Top 100 Safest U.S. Banks — two banks per state — that was just updated in late June with the latest available data by joining Club EWI and receiving EWI’s Safe Banks report.

* * * * *
Excerpted from Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression, by Robert Prechter

Many major national and international banks around the world have huge portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt. I cannot understand how a bank trusted with the custody of your money could ever even think of buying bonds issued by Russia or Argentina or any other unstable or spendthrift government. As At the Crest of the Tidal Wave put it in 1995, “Today’s emerging markets will soon be submerging markets.” That metamorphosis began two years later. The fact that banks and other investment companies can repeatedly ride such “investments” all the way down to write-offs is outrageous.

Many banks today also have a shockingly large exposure to leveraged derivatives such as futures, options and even more exotic instruments. The underlying value of assets represented by such financial derivatives at quite a few big banks is greater than the total value of all their deposits. The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.

Relying upon, or worse, speculating in, leveraged derivatives poses one of the greatest risks to banks that have succumbed to the lure. Leverage almost always causes massive losses eventually because of the psychological stress that owning them induces. You have already read of the tremendous debacles at Barings Bank, Long-Term [sic] Capital Management, Enron and other institutions due to speculating in leveraged derivatives. It is traditional to discount the representative value of derivatives because traders will presumably get out of losing positions well before they cost as much as what they represent. Well, maybe. It is at least as common a human reaction for speculators to double their bets when the market goes against a big position. At least, that’s what bankers might do with your money.

Today’s bank analysts assure us, as a headline from The Atlanta Journal-Constitution put it on December 29, 2001, that “Banks [Are] Well-Capitalized.” Banks today are indeed generally considered well capitalized compared to their situation in the 1980s. Unfortunately, that condition is mostly thanks to the great asset mania of the 1990s, which, as explained in Book One, is probably over. Much of the record amount of credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, consumers (via credit cards and consumer-debt “investment” packages), and so on, is not. One expert advises, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression.

There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks’ debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.

Financial companies are enjoying big advances in the current stock market rally. Depositors today trust their banks more than they trust government or business in general. For example, a recent poll asked web surfers which among a list of seven types of institutions they would most trust to operate a secure identity service. Banks got nearly 50 percent of the vote. General bank trustworthiness is yet another faith that will be shattered in a depression.

Well before a worldwide depression dominates our daily lives, you will need to deposit your capital into safe institutions. I suggest using two or more to spread the risk even further. They must be far better than the ones that today are too optimistically deemed “liquid” and “safe” by both rating services and banking officials.

Mainstream financial analysts always look for ways to explain market action through news stories and events. Conventional wisdom states that news and inter-market correlations cause market booms and busts, but such explanations rely on selective presentation of the data. In this video, Elliott Wave International’s Asian-Pacific Financial Forecast Editor Mark Galasiewski shows you how Elliott wave analysis was able to predict Hong Kong’s late ’90s mania and its aftermath in real time — without looking at the news or the market’s “fundamentals.”

Watch More about the Power of Elliott Wave Analysis in this FREE Video

Discover how Elliott wave analysis gives you a consistently logical explanation
– and debunk one of the major myths of what caused the Asian Financial Crisis
– in the free video, “The Real-Time Power of Elliott Wave Analysis:
Debunking the Myths of the Asian Financial Crisis.” Access Your FREE Video Now.

Here’s a forecast for you. Clear and direct. As quoted by a Reuters reporter in his January 15, 2009, article, entitled, “Global Lending Thaw May Yet Return to Deep Freeze.”

“‘This is a temporary respite and when it’s over, the stock market will make new lows…,’ says Robert Prechter, chief executive officer at research company Elliott Wave International in Gainesville, Georgia.” [Reuters, 1/15/09]

But there are lots of forecasts out there – for the economy, for the Dow, for the price of oil, for the chances of the Boston Celtics repeating as NBA champions – so the question arises, how can you tell a good forecast from a bad one?

Bob Prechter addressed that very question with another reporter in a Q&A originally published in the book, Prechter’s Perspective.

Editor’s Note: For more market insights from Bob Prechter, visit Elliott Wave International to download Prechter’s FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.

The following text was originally published in Robert Prechter’s 2004 bestselling book, Prechter’s Perspective.

By Robert Prechter, CMT

Q: In general, is there any way for a person to tell a good forecast from a bad one?

Bob Prechter: There is a subtle way to tell a potentially useful forecast from a useless one. Most published forecasts are at best descriptions of what already has happened. I never give any forecast a second thought unless it addresses the question of the point at which a change in trend may occur.

As an example outside the financial markets: a sportswriter for the Atlanta Journal-Constitution published his ratings (scale 1-5) for each of the players on the Atlanta Braves baseball team as a forecast of how they would perform in 1984. At the start of the season, he rated 1983’s Most Valuable Player a “5,” Atlanta’s slugger a “4,” and the right fielder a lowly “2″ due to bad performance in 1983 following two excellent years. Later in 1984, the MVP was batting only .215, and the slugger was batting a dismal .179, while the lowest-rated player, the right fielder, had hit 8 home runs and led the team in batting average and RBIs.

The point is not that the sportswriter was wrong in his predictions. The point is that he didn’t make any predictions, even though he thought he did and said he did. He was merely rating the 1983 Braves in retrospect. He ignored possible bases upon which to forecast the 1984 season, things like motivation, new developments or events in a player’s life, cyclic changes in playing success, etc. As with most forecasts, these things weren’t even considered.

Read forecasts carefully. If they are mild-mannered extrapolations of a recent trend, it’s probably the best policy to toss them aside and go search for something potentially useful.

Q: Obviously, the same holds true in finance.

Bob Prechter: All the time. When economists say, as they so often do, that they see “no reason to expect anything different” from the recent past, they mean it from the bottom of their knowledge. The linear projections they typically employ result in logic such as that expressed by an economist in a national newspaper, who said, “This rising consumer confidence is good news for the economy. Rising confidence spurs the economy, and the pickup in the economy then serves to heighten confidence.” By this line of reasoning, no change of direction could ever occur. That’s why, absent other knowledge, the only forecasts even worth your time considering are those that predict a change. Not because the forecaster is certain to be right, but because it shows that he is thinking and perhaps employing a tool that can anticipate trends.

Q: So the word “prediction” doesn’t necessarily apply to the future!

Bob Prechter: Right. And it’s those predictions about the future that are the tough ones. That’s why economists stick to predicting the past, which is a crafty solution. It leads to misery among the people who follow them, but it doesn’t seem to affect economists’ jobs, so it certainly keeps them happy!

Q: Do you think that predicting the economy is possible?

Bob Prechter: It is not only possible, it is downright easy compared with predicting the stock market. One economist has gotten a lot of chuckles by saying that the stock market has predicted something like 19 of the last 13 recessions. However, that is only a reasonable statement if you believe that a certain rigid definition of a recession is the only one that is viable. In fact, if you look at the ebb and flow of economic activity and generally realize that it lags stock market activity of between 0 and 12 months, you will find that there is no better single indicator of what the economy is going to do than the stock market. Not only that, but even 19 out of 13 is infinitely better than any economist has ever done.

……….

For more on deflation, download Prechter’s FREE 60-page Deflation Survival eBook or browse various deflation topics like those below at www.elliottwave.com/deflation.

• What happens during deflation?
• Deflation survival
• Why is deflation bad?
• Deflation personal debt
• And much more in Prechter’s FREE Deflation Survival Guide.

by Elliott Wave International

While many people spend time yearning for the financial markets to turn back up, a rare few have looked back in time to compare historical markets with the current situation – and then delivered a clear-eyed view of the future informed by knowledge of the past. One who has is Robert Prechter. When he thinks about markets and wave patterns, he goes back to the 1700s, the 1800s, and — most tellingly for our time now — the early 1900s when the Great Depression weighed down the United States in the late 1920s and early 1930s. With this large wash of history in mind, he is able to explain why he thinks we have a long way to go to get to the bottom of this bear market.

Here is an excerpt from the EWI Independent Investor eBook, which answers the question: How close to the bottom are we?
* * * * *
Originally written by Robert Prechter for The Elliott Wave Theorist, January 2009

Some people contact us and say, “People are more bearish than I have ever seen them. This has to be a bottom.” The first half of this statement may well be true for many market observers. If one has been in the market for less than 14 years, one has never seen people this bearish. But market sentiment over those years was a historical anomaly. The annual dividend payout from stocks reached its lowest level ever: less than half the previous record. The P/E ratio reached its highest level ever: double the previous record. The price-to-book value ratio went into the stratosphere, as did the ratio between corporate bond yields and the same corporations’ stock dividend yields.

During nine and a half of those years, from October 1998 to March 2008, optimism dominated so consistently that bulls outnumbered bears among advisors (per the Investors Intelligence polls) for 481 out of 490 weeks. Investors got so used to this period of euphoria and financial excess that they have taken it as the norm.

With that period as a benchmark, the moderate slippage in optimism since 2007 does appear as a severe change. But observe a subtle irony: When commentators agree that investors are too bearish, they say so to justify being bullish. Thus, as part of the crowd, they are still seeking rationalizations for their continued optimism, and one of their best excuses is that everyone else is bearish. This would be reasoning, not rationalization, if it were true.

But is the net reduction in optimism since 2000/2007 in fact enough to indicate a market bottom? For the rest of this issue, we will update the key indicators from Conquer the Crash that so powerfully signaled a historic top in the making. When we are finished, you will know whether or not the market is at bottom.

Figure 1 updates our picture of Supercycle and Grand Supercycle-degree periods of prosperity and depression. The top formed in the past decade is the biggest since 1720, yet, as you can see, the decline so far is small compared to the three that preceded it. There is a lot more room to go on the downside.

Figure 2 updates the Dow’s dividend yield. Over the past nine years, it has improved nicely, from 1.3 percent to 3.7 percent, near its level at previous market tops. If companies’ dividends were to stay the same, a 50 percent drop in stock prices from here would bring the Dow’s yield back into the area where it was at the stock market bottoms of 1942, 1949, 1974 and 1982. But of course, dividends will not stay the same.

Companies are cutting dividends and will cut more as the depression deepens. So, the falling stock market is chasing an elusive quarry in the form of an attractive dividend yield. This is a downward spiral that will not end until prices get ahead of dividend cuts and the Dow’s dividend yield goes above that of 1932, which was 17 percent (or until dividends fall so close to zero that the yield is meaningless).

Get the whole story about how much farther we have to go to a bear-market bottom by reading the rest of this article from EWI’s Independent Investor eBook. The fastest way to read it AND the six new chapters in EWI’s Independent Investor eBook is to become a member of Club EWI.

By Elliott Wave International

The following article is an excerpt from Elliott Wave International’s
free report, 20
Questions With Deflationist Robert Prechter. It has been
adapted from Prechter’s June 19 appearance on Jim Puplava’s
Financial Sense Newshour.

Jim Puplava: I want to come back to government
spending, but first I want to move onto the stock market. In
your last two Elliott Wave Theorist issues, you laid
out a scenario that would put the Dow and S&P, which in your
opinion may have peaked on April 26, as the top from here. You
feel that this top is the biggest top formation of all time,
a multi-century top and we could head straight down in a six-year
collapse that would end in 2016 that could see a substantial
portion of the S&P and the Dow wiped out in a similar way
that we saw between 1929 and 1933. Let’s talk about that and
the reasoning behind it.

Editor’s Note: The article you are reading is just
one small excerpt from Elliott Wave International’s FREE
report, 20
Questions With Deflationist Robert Prechter. The full 20-page
report includes even more of Prechter’s insightful analysis
on fiat currency, gold, the Fed, the Great Depression, financial
bubbles, and government intervention. You’ll learn how
to protect your money — and even profit — in today’s environment.
Read ALL of Prechter’s candid answers for FREE now. Access
the free 20-page report here.

RP: Yes, you’re exactly right. I did a lot
of work on technical forms, cycle forms and Elliott wave forms
in April and May and put them in a double issue. Let’s
talk about the cycles first.

The 7¼-year cycle has been quite regular since the first
bottom in 1980. The next bottom was at the crash in October 1987.
The next one was November 1994, which is when the economy went
through four years with lots of layoffs; it was a recessionary
period throughout until that cycle bottomed. The next one was
between September 2001, which was the 9/11 attack, and the October
2002 bottom. And the latest one was at the low in March 2009.
All those periods are 7¼ years apart, so we are in the
uptrend portion of the 7¼-year cycle.

However, notice for example that in 1987, the market went
up until August of that year and then bottomed in October,
just a couple of months later. So the decline occurred very,
very late in the cycle. This time it occurred a little bit
earlier in the cycle, topping in ‘07 and bottoming in ‘09.
In the current cycle, prices should peak the earliest of all
of them. It’s what we in the cycle prediction business call “left-hand translation.” The
market’s already gone up for about a year, and I think
that’s just about enough. I think we’re going to spend most of
the cycle going down. But the important thing to note is that
the next bottom is due in 2016. That means I think we’re going
to have a repeat of what happened between 1930—which was
the top of the rally following the 1929 crash—and the
July 1932 low. Instead of taking two years, it’s going to take
about six years.

It’s going to be a very long decline. It’s going to be interrupted
by many, many rallies, just as the decline from 1930 to 1932
was. And every time it bottoms and rallies, people are going
to say “OK, that’s enough; it’s over.” But it won’t
be over. It’s just going to be a long, long process. I think
you and I will probably be talking a few times during this
period. One of the interesting aspects of this process is that
optimism should actually remain dominant through the first
three years of the cycle. That will carry us into 2012. Even
though prices will be edging lower, most people are going to
think it’s a buy, and you shouldn’t get out of your stocks,
and recovery is just around the corner, probably for the next
three years. And then, for the final half of the cycle, the
final three years, that’s when you’ll get the capitulation
phase when everyone finally gives up.

Editor’s Note: The article you are reading is just
one small excerpt from Elliott Wave International’s FREE
report, 20
Questions With Deflationist Robert Prechter. The full 20-page
report includes even more of Prechter’s insightful analysis
on fiat currency, gold, the Fed, the Great Depression, financial
bubbles, and government intervention. You’ll learn how
to protect your money — and even profit — in today’s environment.
Read ALL of Prechter’s candid answers for FREE now. Access
the free 20-page report here.

By Elliott Wave International

Fear and uncertainty that drive a severe bear market are the same emotions which can set the stage for authoritarianism, in most any nation.

“Bear markets of sufficient size appear to bring about a desire to slaughter groups of successful people. In 1793-1794, radical Frenchmen guillotined countless members of high society. In the 1930s, Stalin slaughtered Ukrainians. In the 1940s, Nazis slaughtered Jews. In the 1970s, Communists in Cambodia and China slaughtered the affluent. In 1998, after their country’s financial collapse, Indonesians went on a rampage and slaughtered Chinese merchants.” – Bob Prechter, Wave Principle of Human Social Behavior, p. 270

Why do authoritarian tendencies emerge only during bear markets in stocks?

“As society becomes more fearful, many individuals yearn for the safety and order promised by strong, controlling leaders.” - The Socionomist, May 2010

Learn How to Anticipate and Prepare for Political Conflict and War, Bull Markets and Bear Markets. The 118-page Independent Investor eBook covers a vast array of investment topics and exposes myths that mainstream investors accept as fact. Once you learn the real cause of conflict and war, you might be surprised how the stock market plays a key role in forecasting major social events. Click here to download the 118-page Independent Investor eBook for FREE

Bob Prechter’s new science of socionomics explains that stock market fluctuations mirror trends in people’s collective mood. In simple terms, when the market is buoyant, it indicates positive social mood; the opposite when a bear market takes over.

The fascinating part is that because the stock market and social mood trend closely together, a forecaster can apply Elliott wave analysis to both — and predict both.

Generally, widespread brutalities and wars do not follow the first phase of a bear market. Extreme violence, when it does occur, often follows the worst part of the market’s downturn — like the end of the Great Depression, a negative social mood period that ultimately ushered in World War II.

But even during the first phase, a negative social mood grows. So, if a forecaster determines correctly where in the wave structure social mood resides, he can make educated forecasts about what will follow in society — given what has happened before under similar social mood trends.

Authoritarianism is a subject of heated discussions these days, which makes it a timely topic for a socionomic study. The latest, two-part issue of the monthly Socionomist gives you just that: A look at historic trends and specific forecasts for the years ahead.

Learn How to Anticipate and Prepare for Political Conflict and War, Bull Markets and Bear Markets. The 118-page Independent Investor eBook covers a vast array of investment topics and exposes myths that mainstream investors accept as fact. Once you learn the real cause of conflict and war, you might be surprised how the stock market plays a key role in forecasting major social events. Click here to download the 118-page Independent Investor eBook for FREE

.

The Senate version of financial regulation is bad for business on Wall Street and, according to the Wall Street Journal, could cut the profits of major financial institutions by roughly 20%. Find out why Robert Prechter thinks it’s also bad for the economy in the third excerpt from Robert Prechter’s May 20 interview with Yahoo! Finance Tech Ticker host Aaron Task.

Get Robert Prechter’s FREE 60-Page Deflation Survival Guide
With you in mind, financial analyst Robert Prechter scoured thousands of pages of his warnings and teachings about deflation. He then handpicked his most important deflation writings and compiled them into a special, unedited, 60-page Deflation Survival Guide. If you havent yet given Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Your 60-page Deflation Survival Guide Now FREE.

The euro’s recent loss has been the dollar’s gain, which means that it’s not the best time to buy the U.S. dollar. Meanwhile, the most popular alternative to currencies, gold, isn’t such a good buy either. Watch the second excerpt from Robert Prechter’s May 20 interview with Yahoo! Finance Tech Ticker host Aaron Task to hear what Prechter thinks is in store for the U.S. currency and gold.

For
more information from Robert Prechter, download
a FREE 10-page issue of the Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You’ll find out why the worst is NOT over and what you can do to safeguard your financial future. Hurry! This free offer expires June 7.