Before the end of 2009, shares should succumb to the great bear market worldwide, and a major bottom is scheduled for 2014-2016. “I expect it to be very much like 1929-1932, a relentless fall within a deflationary environment,” says Bob Prechter, president of Elliott Wave International.

CompareShares readers should remember our story back in October last year, “Elliott Wave theory spells doom and gloom for the sharemarket“. As we noted back then:

Elliott Wave theory is the brainchild of professional accountant Ralph Nelson Elliott, who wrote a series of papers in the 1930s and 1940s on his findings. In short, Elliott Wave theory advocates that sharemarket movements are largely driven by investor psychology – greed and fear, optimism and pessimism – that created price patterns or “waves” over time. The wave traces the behaviour – the buying and selling decisions – of the investment crowd as it swings from extreme pessimism at the trough of the cycle to extreme optimism at its peak.

“Social mood is the sole determinant of trends in aggregate stock prices,” notes Prechter. “There may be local, even rational reasons to buy and sell a particular stock, but the overall desire to buy or sell stocks in general is a function of social mood. Price in this context assumes honest money; in periods of debt-based, inflatable monopoly money the true aggregate price of stocks is often better revealed by using gold or a basket of commodities as a measure. But even in such environments, the price in currency tends to follow Elliott wave forms.”

Elliott Wave Theory’s major advocate today is Prechter, who uses such findings to forecast market movements to varying levels of accuracy, publicising his views in his books.

Jill Fraser hunts down Prechter from the US for an exclusive interview on his predictions for 2008.

Bob Prechter and the bear market

“A more specific answer regarding my bearish stance in recent years is that government laws encouraging and even mandating debt creation have served to distort the measuring unit used to express stock values. The real-money top in the stock market occurred in July 1999. The DJIA in terms of gold has fallen an incredible 73.5 percent so far, and it made another new low in March 2008. If the Dow had been priced in real money (as it was in 1929), it would be at 3100 today, and people would be saying how smart we were at Elliott Wave International.

“Instead people think that their stock prices have held up. But the truth is that shareholders can buy only 1/3 of the gold and much less gasoline, housing and food today with the shares they held since 1999. Shares have lost more purchasing power than at any time since 1929-32. And the bear market is not even close to over. Read the evidence in Conquer the Crash (his latest book) and make up your own mind.”

Prechter’s five-year forecasts

“I have a major bottom scheduled for 2014-2016, so sometime soon, before the end of 2009 shares should succumb to a great bear market worldwide. I expect it to be very much like 1929-1932, a relentless fall within a deflationary environment.

“In Elliott wave terms, a five-wave structure from the late 1700s is ending. This pattern argues for the biggest bear market in nearly 300 years.

“The reason I think the bear market will be so deep and serious is the wave structure. But there are also many indications of trend exhaustion, the main one being a historically unprecedented 10-year period of extreme optimism, as measured by investor and advisor polls, absurdly low interest-rate spreads, the debt bubble, and so on. Those things have already begun to shift.

“The timing conclusion derives from my time-cycle work. Back in 1983, I observed a 16.6-16.9-year periodicity in major changes of trend in inflation-adjusted stock prices. The latest period ended in July 1999, when the Dow/gold ratio peaked. The next bottom is due in 2016. Nominal prices will probably bottom in 2014, when the 4-year and my 3.3-year cycles bottom concurrently.

“So it should be a double bottom, not unlike the bottoms of 1980 and 1982. The first one was the low in the Dow/gold ratio, and the second one was the low in the Dow/PPI (i.e. Dow divided by the Producer Price Index). This time I expect lows in the nominal Dow and the Dow/gold ratio to be two years apart.”

Safe havens over the next five years

“The safest place to be for now is short-term government bills issued in fiscally responsible countries. My picks are Switzerland, Singapore and New Zealand. But I also think the U.S. dollar is overdone on the downside, so for the time being that currency should be in your mix as well.

“I would not invest in commodities; that trend looks exhausted, and if it’s not, it’s close to peaking. Commodity prices should fall along with stock prices in the next bear market because this time a debt collapse should be big enough to create deflation.

Mark Galasiewski, editor of Elliott Wave International’s Elliott Wave Asian Financial Forecast offers the following insights into Australian, Indian and China stocks.

Australian stocks: At its 2007 high, the ASX All Ordinaries entered a corrective phase that will likely last at least another year, if not longer. The decline since the 2007 high has been of the sort that would imply a retest of the all-time highs within the correction. But the current advance is a bear market rally, not the start of a new bull market.

Indian stocks: The Indian stock market will likely enjoy one more wave up to new all-time highs. But thereafter the prognosis is dismal, with the SENSEX (and CNX Nifty) likely to experience its largest decline since the 2000-2001 bear market.

Chinese stocks: As long as the Shanghai Composite stays above its April 2008 lows, the bull market in China remains intact. The index has so far declined in three waves since its 2007 high. At the April low, it bounced near the 61.8% retracement of the 2005-2007 decline. Both of these points argue that China’s correction is over and that the index is headed back toward new highs-perhaps not at the same pace as 2005-2007, but steadily nonetheless. Other than Japan, China may offer the best long-term opportunity among the major Asian markets at present. A break of the April low would negate this long-term bullish potential.