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Prechter's optimism; don't count on K-wavesSteven Lachance In most circles, Robert Prechter is known as a perma-bear: all doom and gloom, all the time. In the early eighties, in contrast, he was dismissed by the mainstream for having the audacity to forecast a quadrupling of the Dow from the then 1,000-or-so-level. Never a fence sitter or word mincer, he declares himself presently to be a shout-from-the-rooftop bear. Deflation and depression in all their shocking ugliness. But alas, even Prechter sees light at the end of the tunnel in the form of the seemingly natural transition from the winter to the spring phases of the Kondratieff cycle. This deterministic logic is groundless. For investors and savers, it is potentially misleading with disastrous consequences. In man's world, spring is not the inevitable consequence of winter. Perhaps Prechter is tailoring his message to the mood of his readers. He had been warning of the onset of a depression when exuberance was the rule. To make this message, now vindicated by events, palatable, he held out the promise of fire-sale prices for valuable assets for those who protected their wealth through the winter. Springtime, in his view, would be an unprecedented opportunity to buy everything from property to paintings if you just squirreled away the cash through the winter. To be sure, bust follows boom when the boom is artificially induced by debt, leverage, and speculation. The bust, however, does not by some natural inevitability give way to an eventual boom. Nikolai Kondratieff, himself, did not give his observations any predictive powers. He was a statistician as well as an economist and knew full well that two or three cycles do not make a law, or even a tendency. Before you start salivating over all the fire-sale prices awaiting us at the depths of the present depression, consider that the cycles of capitalism that Soviet economist Nikolai Kondratieff was commissioned by Stalin to investigate do not apply if the economy in question ceases to be based on free-market principles. Are free-market principles at work in Bernanke's Federal Reserve or Paulson's Treasury? Not only does a committee of bureaucrats fix the price of money, the entire credit apparatus of the United States has been socialized. Ravi Batra's crony capitalism of the nineties has given way to central planning with no fundamental difference from Moscow's Gosplan. Kondratieff, who was executed by firing squad in 1938, would be hard pressed to discern any coherent patterns to economic ebb and flow now, only arbitrary, politically inspired gyrations. Hope for spring does not spring eternal from barren ground. By assuming the arrival of a new spring in the Kondratieff context, Prechter is assuming the return to free markets. That may happen, but at this point it is no more than conjecture or wishful thinking. Perhaps even he cannot fully separate himself from traditional American optimism. Depression is now a reality, as Prechter had predicted for many years. What comes next, though, is a story yet to be written. The Chinese have long said that when man talks of the future, the gods laugh. Plan accordingly. Steven Lachance Steven Lachance is a financial translator based in Tokyo. Over the last decade, he has worked for major European and Japanese investment banks, including Deutsche Bank Group, Commerzbank, Nikko Solomon Smith Barney, and Mizuho Securities.
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