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How reliable is super-bear Bob Prechter as a forecaster?

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Bob Prechter is the most pessimistic of forecasters for 2010 and predicts a complete meltdown of the US stock market. Yet it is only fair to note that he has been predicting market meltdowns that either just did not happen, or were far less dramatic than advertised for more than 30 years.

In an appendix to ‘Conquer the Crash, Second Edition’ he proudly displays his first forecast from 1978. It forecast a dramatic surge in stock prices into the 1980s and then a massive market crash in the early 90s.

1990s crash?

What happened was not so far off up to the 1987 crash, or correction as Prechter correctly had it; but the surge in the stock market in the 1990s followed by a double top in the 2000s was nothing like his prediction, and the really big 90s crash was totally missing.

You can also pick back through his latest book for many examples of doom-laden warnings that just did not happen. And you can find an occasional flash of genius, like getting the 2008 oil spike spot on, except that the overshoot in prices was characteristically overdone.

The analysis is also wonderful stuff, a range of thought that sets people thinking. But does it have much more objective value than that? Perhaps.

Followers of the inflationist versus deflationists should read Prechter. However, his use of language is up with the best of lawyers and at several points he appears to twist what most of us might think as inflation into being deflation.

Hyperinflation and deflation

For example, while it is true that asset prices usually deflate in relative terms in a hyper-inflation, could that really then be said to be a deflation? This is trying to have your cake and eat it.

However, having read his latest book from cover to cover it is rather harder to take his current predictions at face value than before reading this volume. There have been too many false alarms and too many overshoots.

The best that can probably be said is that Prechter has made some very good directional calls in his time and made a serious contribution to our understanding of markets and of course business cycles. The actual predictions seem almost always over-exaggerated and sometimes plain wrong.

Factor that conclusion into his recent super-bearish forecast and you get a significant slump in stock prices but not a total wipe-out for 2010.

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Written by Peter Cooper

February 9, 2010 at 8:29 am

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