Tag Archives: Robert Prechter

Prechter: “The Trend Is Exhausted”

Robert Prechter explains what’s the real problem with today’s market

By Elliott Wave International

What is the real problem with today’s market? Watch this excerpt from Robert Prechter’s special, video issue of the August 2011 Elliott Wave Theorist. Prechter shows you how the buildup of dollar-denominated debt has brought us to what he calls a critical market juncture.

Get even more information about current market trends and how to prepare for what’s ahead with our new 14-page investing report. See details below.

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This article was syndicated by Elliott Wave International and was originally published under the headline Prechter: “The Trend Is Exhausted”. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Robert Prechter Explains The Fed, Part III

The world’s foremost Elliott wave expert goes “behind the scenes” on the Federal Reserve

By Elliott Wave International

This is Part III, the final part of our series “Robert Prechter Explains The Fed.” (Here are Part I and Part II.)

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

How the Federal Reserve Has Encouraged the Growth of Credit

Congress authorized the Fed not only to create money for the government but also to “smooth out” the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our “fractional reserve” system, banks were authorized to employ that new money as “reserves” against which they could make new loans. Thus, new money meant new credit.

It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand (“in reserve”) to cover withdrawals. When the Fed increased a bank’s reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the “multiplier effect.” This process expanded the supply of credit well beyond the supply of money.

Because of competition from money market funds, banks began using fancy financial manipulation to get around reserve requirements. In the early 1990s, the Federal Reserve Board under Chairman Alan Greenspan took a controversial step and removed banks’ reserve requirements almost entirely. To do so, it first lowered to zero the reserve requirement on all accounts other than checking accounts. Then it let banks pretend that they have almost no checking account balances by allowing them to “sweep” those deposits into various savings accounts and money market funds at the end of each business day. Magically, when monitors check the banks’ balances at night, they find the value of checking accounts artificially understated by hundreds of billions of dollars. The net result is that banks today conveniently meet their nominally required reserves (currently about $45b.) with the cash in their vaults that they need to hold for everyday transactions anyway. [1st edition of Prechter’s Conquer the Crash was published in 2002 — Ed.]

By this change in regulation, the Fed essentially removed itself from the businesses of requiring banks to hold reserves and of manipulating the level of those reserves. This move took place during a recession and while S&P earnings per share were undergoing their biggest drop since the 1940s. The temporary cure for that economic contraction was the ultimate in “easy money.”

We still have a fractional reserve system on the books, but we do not have one in actuality. Now banks can lend out virtually all of their deposits. In fact, they can lend out more than all of their deposits, because banks’ parent companies can issue stock, bonds, commercial paper or any financial instrument and lend the proceeds to their subsidiary banks, upon which assets the banks can make new loans. In other words, to a limited degree, banks can arrange to create their own new money for lending purposes.

Today, U.S. banks have extended 25 percent more total credit than they have in total deposits ($5.4 trillion vs. $4.3 trillion). Since all banks do not engage in this practice, others must be quite aggressive at it. For more on this theme, see Chapter 19 [of Conquer the Crash].

Recall that when banks lend money, it gets deposited in other banks, which can lend it out again. Without a reserve requirement, the multiplier effect is no longer restricted to ten times deposits; it is virtually unlimited. Every new dollar deposited can be lent over and over throughout the system: A deposit becomes a loan becomes a deposit becomes a loan, and so on.

As you can see, the fiat money system has encouraged inflation via both money creation and the expansion of credit. This dual growth has been the monetary engine of the historic uptrend of stock prices in wave (V) from 1932. The stupendous growth in bank credit since 1975 (see graphs in Chapter 11) has provided the monetary fuel for its final advance, wave V. The effective elimination of reserve requirements a decade ago extended that trend to one of historic proportion.

The Net Effect of Monetization

Although the Fed has almost wholly withdrawn from the role of holding book-entry reserves for banks, it has not retired its holdings of Treasury bonds. Because the Fed is legally bound to back its notes (greenback currency) with government securities, today almost all of the Fed’s Treasury bond assets are held as reserves against a nearly equal dollar value of Federal Reserve notes in circulation around the world. Thus, the net result of the Fed’s 89 years of money inflating is that the Fed has turned $600 billion worth of U.S. Treasury and foreign obligations into Federal Reserve notes.

Today the Fed’s production of currency is passive, in response to orders from domestic and foreign banks, which in turn respond to demand from the public. Under current policy, banks must pay for that currency with any remaining reserve balances. If they don’t have any, they borrow to cover the cost and pay back that loan as they collect interest on their own loans. Thus, as things stand, the Fed no longer considers itself in the business of “printing money” for the government. Rather, it facilitates the expansion of credit to satisfy the lending policies of government and banks.

If banks and the Treasury were to become strapped for cash in a monetary crisis, policies could change. The unencumbered production of banknotes could become deliberate Fed or government policy, as we have seen happen in other countries throughout history. At this point, there is no indication that the Fed has entertained any such policy. Nevertheless, Chapters 13 and 22 address this possibility.

Do you want to really understand the Fed? Then keep reading this free eBook, “Understanding the Fed”, as soon as you become a free member of Club EWI.

This article was syndicated by Elliott Wave International and was originally published under the headline Discover the Dynamics of Using Moving Averages. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Robert Prechter Explains The Fed, Part II

The world’s foremost Elliott wave expert goes “behind the scenes” on the Federal Reserve

By Elliott Wave International

This is Part II of our three-part series “Robert Prechter Explains The Fed.” You can read Part I here — and come back later this week for Part III.

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

… Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise.

In Chapter 9 [of Conquer the Crash], I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt.

As you can see, defining the dollar, and therefore the terms money, credit, inflation and deflation, today is a challenge, to say the least. Despite that challenge, we can still use these terms because people’s minds have conferred meaning and value upon these ethereal concepts.

Understanding this fact, we will now proceed with a discussion of how money and credit expand in today’s financial system.

How the Federal Reserve System Manufactures Money

Over the years, the Federal Reserve Bank has transferred purchasing power from all other dollar holders primarily to the U.S. Treasury by a complex series of machinations. The U.S. Treasury borrows money by selling bonds in the open market. The Fed is said to “buy” the Treasury’s bonds from banks and other financial institutions, but in actuality, it is allowed by law simply to fabricate a new checking account for the seller in exchange for the bonds. It holds the Treasury’s bonds as assets against — as “backing” for — that new money. Now the seller is whole (he was just a middleman), the Fed has the bonds, and the Treasury has the new money.

This transactional train is a long route to a simple alchemy (called “monetizing” the debt) in which the Fed turns government bonds into money. The net result is as if the government had simply fabricated its own checking account, although it pays the Fed a portion of the bonds’ interest for providing the service surreptitiously. To date (1st edition of Prechter’s Conquer the Crash was published in 2002 — Ed.), the Fed has monetized about $600 billion worth of Treasury obligations. This process expands the supply of money.

In 1980, Congress gave the Fed the legal authority to monetize any agency’s debt. In other words, it can exchange the bonds of a government, bank or other institution for a checking account denominated in dollars. This mechanism gives the President, through the Treasury, a mechanism for “bailing out” debt-troubled governments, banks or other institutions that can no longer get financing anywhere else. Such decisions are made for political reasons, and the Fed can go along or refuse, at least as the relationship currently stands. Today, the Fed has about $36 billion worth of foreign debt on its books. The power to grant or refuse such largesse is unprecedented.

Each new Fed account denominated in dollars is new money, but contrary to common inference, it is not new value. The new account has value, but that value comes from a reduction in the value of all other outstanding accounts denominated in dollars. That reduction takes place as the favored institution spends the newly credited dollars, driving up the dollar-denominated demand for goods and thus their prices. All other dollar holders still hold the same number of dollars, but now there are more dollars in circulation, and each one purchases less in the way of goods and services. The old dollars lose value to the extent that the new account gains value.

The net result is a transfer of value to the receiver’s account from those of all other dollar holders. This fact is not readily obvious because the unit of account throughout the financial system does not change even though its value changes.

It is important to understand exactly what the Fed has the power to do in this context: It has legal permission to transfer wealth from dollar savers to certain debtors without the permission of the savers. The effect on the money supply is exactly the same as if the money had been counterfeited and slipped into circulation.

In the old days, governments would inflate the money supply by diluting their coins with base metal or printing notes directly. Now the same old game is much less obvious. On the other hand, there is also far more to it. This section has described the Fed’s secondary role. The Fed’s main occupation is not creating money but facilitating credit. This crucial difference will eventually bring us to why deflation is possible.

[Next: Prechter explains “how the Federal Reserve has encouraged the growth of credit.”]

Come back later this week for Part III of the series “Robert Prechter Explains The Fed.” Or, read more now in the free Club EWI report, “Understanding the Federal Reserve System.”

This article was syndicated by Elliott Wave International and was originally published under the headline Robert Prechter Explains The Fed, Part II. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Robert Prechter Explains The Fed, Part I

The world’s foremost Elliott wave expert goes “behind the scenes” on the Federal Reserve

By Elliott Wave International

The ongoing financial crisis has made the central bank’s decisions — interest rates, quantitative easing (QE2), monetary stimulus, etc. — a permanent fixture on six-o’clock news.

Yet many of us don’t truly understand the role of the Federal Reserve.

For answers, let’s turn to someone who has spent a considerable amount of time studying the Fed and its functions: EWI president Robert Prechter. Today we begin a 3-part series that we believe will help you understand the Fed as well as he does. (Excerpted from Prechter’s Conquer the Crash and the free Club EWI report, “Understanding the Federal Reserve System.”) Here is Part I.

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

An argument for deflation is not to be offered lightly because, given the nature of today’s money, certain aspects of money and credit creation cannot be forecast, only surmised. Before we can discuss these issues, we have to understand how money and credit come into being. This is a difficult chapter, but if you can assimilate what it says, you will have knowledge of the banking system that not one person in 10,000 has.

The Origin of Intangible Money

Originally, money was a tangible good freely chosen by society. For millennia, gold or silver provided this function, although sometimes other tangible goods (such as copper, brass and seashells) did. Originally, credit was the right to access that tangible money, whether by an ownership certificate or by borrowing.

Today, almost all money is intangible. It is not, nor does it even represent, a physical good. How it got that way is a long, complicated, disturbing story, which would take a full book to relate properly. It began about 300 years ago, when an English financier conceived the idea of a national central bank. Governments have often outlawed free-market determinations of what constitutes money and imposed their own versions upon society by law, but earlier schemes usually involved coinage. Under central banking, a government forces its citizens to accept its debt as the only form of legal tender. The Federal Reserve System assumed this monopoly role in the United States in 1913.

What Is a Dollar?

Originally, a dollar was defined as a certain amount of gold. Dollar bills and notes were promises to pay lawful money, which was gold. Anyone could present dollars to a bank and receive gold in exchange, and banks could get gold from the U.S. Treasury for dollar bills.

In 1933, President Roosevelt and Congress outlawed U.S. gold ownership and nullified and prohibited all domestic contracts denoted in gold, making Federal Reserve notes the legal tender of the land. In 1971, President Nixon halted gold payments from the U.S. Treasury to foreigners in exchange for dollars. Today, the Treasury will not give anyone anything tangible in exchange for a dollar. Even though Federal Reserve notes are defined as “obligations of the United States,” they are not obligations to do anything. Although a dollar is labeled a “note,” which means a debt contract, it is not a note for anything.

Congress claims that the dollar is “legally” 1/42.22 of an ounce of gold. Can you buy gold for $42.22 an ounce? No. This definition is bogus, and everyone knows it. If you bring a dollar to the U.S. Treasury, you will not collect any tangible good, much less 1/42.22 of an ounce of gold. You will be sent home.

Some authorities were quietly amazed that when the government progressively removed the tangible backing for the dollar, the currency continued to function. If you bring a dollar to the marketplace, you can still buy goods with it because the government says (by “fiat”) that it is money and because its long history of use has lulled people into accepting it as such. The volume of goods you can buy with it fluctuates according to the total volume of dollars — in both cash and credit — and their holders’ level of confidence that those values will remain intact.

Exactly what a dollar is and what backs it are difficult questions to answer because no official entity will provide a satisfying answer. It has no simultaneous actuality and definition. It may be defined as 1/42.22 of an ounce of gold, but it is not actually that. Whatever it actually is (if anything) may not be definable. To the extent that its physical backing, if any, may be officially definable in actuality, no one is talking. …

Do you want to really understand the Fed? Then keep reading this free eBook, “Understanding the Fed”, as soon as you become a free member of Club EWI.

This article was syndicated by Elliott Wave International and was originally published under the headline Robert Prechter Explains The Fed, Part I. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

“Market Manipulation” Is Not Why Most Traders Lose

Elliott Wave International

A look at EWI president Robert Prechter’s requirements for successful trading

November 5, 2010

By Elliott Wave International

How often have you heard analysts refer to a down day on Wall Street as “traders taking profits”? Sounds great, but the sobering fact is that most traders — in futures, commodities, or forex — lose money.

Any book on trading will list for you the many reasons why most traders lose. Yet some traders do win; some even set records. In 1984, Elliott Wave International’s founder and president Robert Prechter won the U.S. Trading Championship, setting a new all-time profit record of 444.4% in a monitored real-money options account. Later in his monthly Elliott Wave Theorist, Prechter published a Special Report “What A Trader Really Needs To Be Successful” with 5 important insights for would-be market speculators (including the explanation of why “market manipulation” is not why most traders lose.)

Here’s a quick excerpt — and to read Prechter’s Special Report in full, free, look below.


“What A Trader Really Needs To Be Successful” (excerpt)
By Robert Prechter

Ever since winning the United States Trading Championship in 1984 (see footnotes, p.4), subscribers have asked for a list of “tips” on trading, or even a play-by-play of the approximately 200 short term trades I made while following hourly market data over a four month period. Neither of these would do anyone any good. What successful trading requires is both more and less than most people think.

In watching the reports of each new Championship over the past three years, it has been a joy to see what a large percentage of the top winners have been Elliott Wave Theorist subscribers and telephone consultation customers. (In fact, in the latest “standings” report from the USTC, of the top three producers in each of four categories, half are EWT subscribers!) However, while good traders may want the input from EWT, not all EWT subscribers are good traders. Obviously the winners know something the losers don’t. What is it? What are the guidelines you really need to meet in order to trade the markets successfully?

When I first began trading, I did what many others who start out in the markets do: I developed a list of trading rules. The list was created piecemeal, with each new rule added, usually, following the conclusion of an unsuccessful trade. I continually asked myself, what would I do differently next time to make sure that this mistake would not recur? The resulting list of “do’s” and “don’ts” ultimately comprised about 16 statements. Approximately six months following the completion of my carved-in-stone list of trading rules, I balled up the paper and threw it in the trash.

What was the problem with my list, a list typical of so many novices who think they are learning something? After several months of attempting to apply the “rules,” it became clear that I made not merely a mistake here and there in the list, but a fundamental error in compiling the list in the first place. The error was in taking aim at the last trade each time, as if the next trading situation would present a similar problem. By the time 16 rules are created, all situations are covered and the trader is back to square one.

Let me give you an example of the ironies that result from the typical method of generating a list of trading rules. One of the most popular trading maxims is, “You can’t go broke taking a profit.” (The brokers invented that one, of course, which is one reason that new traders always hear of it!) This trading maxim appears to make wonderful sense, but only when viewed in the context of a recent trade with a specific outcome. When you have entered a trade at a good price, watched it go your way for a while, then watched it go against you and turn into a loss, the maxim sounds like a pronouncement of divine wisdom. What you are really saying, however, is that in the context of the last trade “I should have sold when I had a small profit.”

Now let’s see what happens on the next trade. You enter a trade, and after just a few days of watching it go your way, you sell out, only to stare in amazement as it continues to go in the direction you had expected, racking up paper gains of several hundred percent. You ask a more experienced trader what your error was, and he advises you sagely while peering over his glasses, “Remember this forever: Cut losses short; let profits run.” So you reach for your list of trading rules and write this maxim, which means only, of course “I should NOT have sold when I had a small profit.”

So trading rules #2 and #14 are in direct conflict. Is this an isolated incident? What about rule #3, which reads, “Stay cool; never let emotions rule your trading,” and #8, which reads, “If a trade is obviously going against you, get out of the way before it turns into a disaster.” Stripped of their fancy attire, #3 says, “Don’t panic during trading” and #8 says, “Go ahead and panic!” Such formulations are, in the final analysis, utterly useless.

What I finally desired to create was a description not of each of the trees, but of the forest. After several years of trading, I came up with — guess what — another list! But this is not a list of “trading rules”; it’s a list of requirements for successful trading. Most worthwhile truths are simple, and this list contains only five items. …


Read the rest of Prechter’s report now, free! Here’s what you’ll learn:

  • Why a trading method is a “must” for your success
  • What part discipline plays in your trading success
  • Why “market manipulation” is not why most traders lose
  • How to gain trading experience
  • More

This article was syndicated by Elliott Wave International and was originally published under the headline “Market Manipulation” Is Not Why Most Traders Lose. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.