546: Why Companies Fail, Conquer the Crash, Elliott Wave

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Thanks for joining me today. Today we are going to have the return of the Elliot Wave Theory. Yes, the Elliot Wave Theory. We have not talked about this in many, many years. We had Robert Prechter, who has written several books, or a few books at least, about the Elliot Wave theory and its relation to the debate of what will happen in the future. Inflation, deflation, et cetera, et cetera. And why do I say et cetera, et cetera. Everything else is kind of some flavor of those two. Really. Those are the two basic economic maladies. Throw in stagflation, which is kind of a combo. Sort of. Kind of maybe. Anyway, enough of that. We've talked about it before, but before we get to our guest today, as we talk about Conquering the Crash. Well, really, the book name is Conquer the Crash, but we are conquering it right now. And I just wanted to share something from one of my Mastermind meetings. And it was a discussion about the four primary reasons. The four primary reasons that any company fails. The four reasons a company fails. No, not Coronavirus. That's not one of the four. Okay. And this is exactly the same for a person because as an individual, we are basically running our own companies. You are running YOU Inc. You Incorporated. Right? You are in any endeavor, whether it be parenting, just living the good life, or staying away from the bad life, or trying to improve your life, or managing your career or your business. You are the CEO of uinc. You are the Chief Executive officer. So these four things that were said in the sense that they apply to companies, also applies to all of us as individuals. ME Inc. Okay. Or ME llc or U Inc. Or U llc. I don't know which one. Would you be a corporation or an llc? Or would you be an LLC taxed as an S corporation? If you did the S election, that's a Bunch of stuff for our legal and tax experts. And we've done many other episodes on that. Okay, what are the four reasons? What are the four reasons? Number one reason is fear. And you've heard that old acronym for fear, False education, Appearing Real. And you've also heard we have nothing to fear but fear itself. We have nothing to fear but fear itself. So fear, that's one of the reasons companies and people fail. Well, why? Why would fear make us fail? Because typically, fear is a crippling emotion. Okay? And if we are crippled, that means we can't do certain things, we can't act, or it will just take away our motivation to act and to do something. And the key to success in any endeavor is act on things. You know, we all have ideas. They're the world's full of ideas. Ideas are a dime a dozen. But the ability to act on them and execute on those ideas, that is key. And fear, the number one reason companies and people fail prevents us from doing that. Number two, and it's related to the last one, but it's a little different. Mindset. What? What is your mindset? As we are going through this time of crisis, which is also a time of great opportunity. Let me give you one more example of so many. There are so many, but this is just a little one. And the reason I mentioned is because it happened to me last night. Last night I checked my email and I got an email from my dog's veterinarian, okay? And many of you, of course, have met my famous dog at our live conferences and so forth, and on Venture Alliance, Mastermind, Ret Treats. Coco comes along a lot of times, right? And peruses the audience and goes and greets everybody. It's kind of fun. How many conferences do you go to where they have a house dog? Right? Pretty rare. Anyway, we got to keep things unique, right? But mindset. Well, listen to this. So my vet sends this email saying, download the tele veterinary app on your phone. And I instantly download this because this is a thing I've been wanting for a long time. Telemedicine. And you know, your own doctor for your own medical care probably is just starting to use telemedicine. But the technology is not new. This technology has existed for many, many years. But creative destruction is happening because of the crisis. People and companies are forced to innovate. They are creatively destroying the old way and adding in new ways. Well, why is this significant? Because our mindset, whether it's scarcity or abundance, the two basic mindsets are scarcity or Abundance. And that doesn't just apply to money. It applies to everything. It applies to recognition and self esteem. It applies to love. Do we think love is scarce or abundant? And depending on our mindset of whether love or money are scarce or abundant, we're going to act in a certain way and that mindset will determine our results. In a company, it's the mindset of everybody commonly referred to as the company culture. Right. Different companies obviously have very different cultures, and we have a culture inside each of our minds. As president and CEO of you Incorporated, what is your mindset? So the telemedicine app. The vet is now doing telemedicine. Well, it's about time. But what I noticed is that the exam fee, $40. I'm pretty sure that's the same price I paid last time I took the dog to the vet live. And when I did that, the vet had to have a big staff there and a big piece of real estate they were paying for and all this overhead. Well, what do you want to bet that this telemedicine makes the vet more profitable than before? See, some veterinarians could be thinking, well, oh, it's over. You know, this crisis has put me out of business. Many restaurants obviously have definitely struggled. It's over. It's put me out of business. Or I can retool and I can start serving food to go. I can start doing things differently. I can create that cookbook I always wanted to create or that YouTube channel on my famous recipes and get a bunch of followers and sell them something. Creative destruction crisis is an opportunity. Riding the dangerous wind. So all these opportunities come out of this. But if we're too fearful, if we're cowering in fear or we have the wrong mindset, we're going to miss the opportunities. Okay, number three, lack of connections. Lack of connections. So do you have connections that you need to get through a crisis to get things done? Do you have connections? Do you have important friendships and acquaintances and business connections? And here's a particularly different thing I want you to think about. And you can look this up because by no means am I going to explain it. Very well, Fair warning. But the concept of loose ties or weak ties, look that up. Okay, don't Google it because Google's evil. Bing it. Okay? Bing up. Or no, actually, what? You don't bing it because Microsoft's evil too. Duck, duck, go it. Because that's the best search engine, DuckDuckGo. Okay, so look it up. Look up weak ties in the context of friendship. And there are all of these studies coming out about the importance of what's called weak ties. In other words, weak friendships, just acquaintances. Right. That those things actually bring a person more in life than the strong deep ties, the deep friendships. I know it may sound shallow. There's this old thinking that, well, you know, it's better to just have a few good friends than a lot of weak friendships. Right? That is absolutely untrue. That has been proven wrong. Why is it wrong though? Well, the thing is, if you have just a few good friends. And by the way, I'm not marginalizing the idea of good friends, they're certainly important and family relationships and so forth, you know, that's great. But here's the problem with it. Your thinking becomes stultified where you only think like this small little group of people. But if you get yourself out there and you've got a lot of connections, you're taking in a lot more. And guess what? It's like multi level marketing. All those connections have connections. And they have found that when it comes to networking and getting a new job or starting a new business or finding a new romance, the best way to do that is to have a lot of weakness ties, not a few strong ties. Because you expose yourself to a larger world, a larger pool of resources. Okay, okay. So connections, having connections, number four. And finally, systems and processes. Right? Lacking them is what I really mean. Lacking systems and processes. And when it comes to real estate investing, by the way, I must point out that we can help you with all four of these things. That's what we're here to do. We're here to help you overcome fear because there are huge opportunities. Just don't be investing in those bad cyclical, high density markets. Obviously help you get your mindset right. We certainly do that. Every 10th episode is a show of general interest topic of general interest, usually on mindset. And number three, we certainly have community and connections and resources and a network. We're here to help you with that. And systems and processes, we talk about that kind of stuff all the time. Tools that you can use to better self manage your properties or manage your managers. How about realestatetools.com and propertytracker.com and those great tools that we have available to give you better systems. So those are the reasons people and companies fail. Number one, fear. Number two, mindset. Number three, lack of connections. Number four, lack of systems and processes. And I should have said for number two, bad mindset. You get the idea. You guys are smart, you understand what I'm saying? So there you go. Okay, without further ado, let's get to our guests. But listen, if you need us, reach out. We're here for you. We are investment therapists, okay? And our investment counselors are investment therapists, too. And so if you have any issues, if you're struggling with anything, if you're looking at more properties and you don't know what to do, whether you should buy them or not, the best deal, or is that the best deal, reach out to us. You're having a question or a problem about property management, financing, asset protection, you know, self directed IRA, 1031 exchange. 1031 exchange alternatives. We are here to help you with the whole ball of wax, as they say. Right? The whole thing, the whole enchilada. We're here to help you with. Okay? 1-800-hartman. You can reach us by phone or jasonhartman.com without further ado, let's get to our guest and let's talk about Elliot Wave Theory.

It's my pleasure to welcome Steve Hochberg. He is the chief market analyst with Elliott Wave. And we had, I believe, the founder of Elliott Wave, or at least I don't know if he's the founder or not, but Bob Proctor on many years ago. And it's great to have Steve here to talk to us about what is going on in the financial world. Crazy time, huh, Steve?

Sure is, Jason. And good to be with you today.

Yeah, good to have you. So just so I can correct myself there, what is Bob Prechter's position? I know he's a student of Elliott Wave, of the theory. Right. He did not make the theory, I guess, but the organization, Elliott Wave International. Right. Distinguish that.

Right? Yeah. So the theory, the principle, as we call it, the Elliott Wave principle, was developed by a man named Ralph Nelson Elliot back in the 1930s. And he discovered that social mood, or let's say crowd behavior trends and it reverses in recognizable patterns. And he chronicled these patterns throughout different markets, bond market, gold market, stock market. And he came to realization that he wasn't just looking at news events that affect stocks because he was seeing the same patterns develop, bonds and metals, so forth. But he realized that there was a natural development to the social psychology of individuals that when they get together in crowds or herds and that they form these patterns that are consistent across markets. This was controversial until several years ago, or a little bit longer than that, when there's been some recent studies, that pattern formation is fundamental to complex systems. And certainly the financial markets are complex systems. The way Bob Proctor came Into it is he came into the markets back in the 60s and 70s. He graduated from Yale University and he was always interested in the markets. And he started investigating Elliott and he was really the one who brought the wave principle from Wall street into Main street and started the firm Elliott Wave International back in the late 70s. And we are the largest market forecasting firm that uses the Elliott wave principle as our main model. So here we are today in 2020.

Right. And the book Conquer the Crash was originally released back when maybe 2008, but now you've got an updated version for 2020. Right.

We came out. Right. We just published the updated version of 2020. A lot of the things that we talked about really came to fruition with the credit crisis in 2007, 2008. And what we've done is we've updated a lot of the figures and some of the thought processes in the Conquer the crash 2020 just came out last week. It's a great read and I think it will really help people prepare for what's going on in the financial world right now.

Right, okay, so this is hot off the press now. What are you folks thinking in the macro sense? We are in a very weird time. No one would deny that since 1918 we've never had a pandemic, at least not that it really affects the US Economy. Take it wherever you want at first and we'll go from there. Sure.

I think the US Economy had some really interesting and very strong economic numbers late last year. The market was at all time high. What we call crowd psychology or social mood was very elevated relative to historic norms. But there were some underlying problems that were going on. And we had been talking about this in our newsletter.

Let's just talk specifically about markets themselves because I think the markets are a leading indicator in the economic numbers that you read about tend to be a lagging indicator. But if you look at things like the small cap sector, they topped out in 2018 stocks. Right. And they weren't participating in the rally that was being much more concentrated in just a few basic blue chip shares and the big ones that everyone owns, Amazon, Netflix and so forth. And that narrowness is a problem for technical analysts like us because we like to see broad based movements in the market which tend to be very healthy. That was one problem we were seeing a lot of the these divergents were popping up. The Dow Jones transportation average had topped way earlier and was not confirming what the Dow industrials was doing. And that's something that people who are familiar with Dow theory might be interested in. But there's also some things going on in the credit market. For example, credit spreads had gotten very narrow, showing a lot of optimism. And then they started diverge a little bit. And the yield curve, which is the three month US treasury bill yield minus the ten year US treasury note had in inverted. And that was a key indicator to us back in 2019, several months ago that we were talking about because prior to every single recession, or let me think last seven recessions, prior to last seven ones, the yield curve inverted and then un inverted. So when it's once an inverts, meaning that the 10 year yield goes below the three month yield and then the curve un inverts is when you tend to have economic and financial troubles come to the forefront. So all this was happening in the background and we were talking about in the letter and we thought that it was leading to the end of this pattern that we were counting in terms of elliott waves. The market was topping and ready to go down and it held up. December, January and then finally on February 12th the Dow peaked out. And on February 19th the S& P peaked out. And of course we know what happened over the last several weeks where the dow is down 38%. So a lot of people are blaming this on.

But from our perspective it was just time. It was time for the market to go down. And COVID 19 was the excuse that people were using to say, well look, this is a pandemic induced decline. But from our perspective things were building way before the pandemic came onto the scene.

I agree there was a lot of talk about the everything bubble long before any of this. Certainly when we look at real estate markets, because most of our listeners are interested in real estate, we divide the world in three basic categories. Linear, cyclical and hybrid markets. The cyclical markets, the high flying markets, the markets that represent 75% of the case Shiller index, the markets that are expensive, they were already in trouble before this. They were showing definite signs of weakness for the last couple of years and rightfully so. I thought they were completely overvalued and I said that many times. But it's interesting how the dynamics are shifting dramatically. And let's just look at real estate a moment if we can. You've got a chapter in Conquer the Crash about it. Commercial real estate of virtually every type is in serious trouble. We already had a retail apocalypse going on for many years and shopping centers, shopping malls were suffering greatly. There was already a huge work at home trend, but now it's basically a requirement for billions of people around the world. So the home office movement has been accelerated, the online shopping movement has been accelerated. There's virtually no business whatsoever for hotels or tourist type properties right now. That will come back over time. Of course, housing is the center of the universe.

And that's where everybody is as we speak, aren't they?

Exactly. I think you make an interesting point about just the stratification of the real estate market. But real estate is a function of credit and you really need credit to keep the market flowing as smoothly as possible.

It is a credit based asset and other assets are credit based too. But real estate most certainly is. Yeah, go ahead.

Right. And so that's the problem that we're seeing right now is that credit, which is a function basically of psychology, I mean, the more optimistic the crowd is, the easier the credit flows and the more pessimistic the crowd becomes, more difficult it becomes to extend credit, to take credit, to use credit to buy, you know, to buy things. And so we're in a period right now, I think, where people are retrenching in terms of mood. I think mood is turning more negative. That's going to affect the amount of credit flowing through I think our real estate markets now. And like we've seen, real estate is not homogenous, but you have to be really careful and really picky and choosy and choose wisely on the direction you want to go in the real estate market at this point in time.

Yeah, and we talked a little bit before about my prediction that there's going to be a mass migration out of the urban high density areas that also most of the time almost always happen to be expensive cyclical markets. So it's like kind of a one, two punch for them, but a migration into these lower density markets. I mean, look, that's my theory, it's not yours, but I'd love to hear your comments on that.

No, I think that's insightful. I mean, it's because there's going to be changes as the markets change and the markets are changing right now. And I think that's an insightful comment that maybe you want to be focusing on areas if you want to be in real estate that are not prone to these wildly cyclical movements like the ones you said. That doesn't mean you're going to make tons of money. I think, I think in a lot of these smaller markets the price movements are less up and down. But in terms of just utility of living there, of course, I mean, that's just, I think that's a really interesting way to view it and an interesting point you're making.

It's also interesting. The work at home movement is I look at the millions and millions of people and I've looked at some stats on this, who have roommates. And you know, the typical roommates are living together because they can't afford their own place. And I predict that employers, for the jobs that are left, by the way, will, and I hate to laugh at that, but almost half the time do. It's so scary what's going on. In some cases will offer people an allowance to work at home. They'll give up their office spaces in many cases. And the typical roommates where there's two people living in a two bedroom place, they're going to split. And that doubles the demand for housing. Now we'll see if there's a. On another note, if there's a coronavirus baby boom or a coronavirus divorce boom, I don't know which because people are so fed up with each other spending all this time together or maybe they're making love and they're gonna have a kid, one or the other. Either way, you increase demand for housing or the size of housing and even the home gym movement. So there's all these interesting dynamics that are going on. 84% of the United States is urban. You know, and of course that definition varies as to what the density is. But I would say the metric is if you live in a building not that has an elevator, and I'm talking about an apartment building or a condo complex, but where you really need to take an elevator. In other words, it's more than three stories maybe, right? Or, you know, three stories, you take the stairs easily. That's considered high density. And I think, I think this is a sea change in mentality. You guys talk a lot about the social side of things and how people go out into the marketplace and they share their emotions and they share their feelings with each other and that really influences the financial markets. I don't know, I could be wrong about this, but I think people are going to be worried about this for a generation. I think everybody's going to become a germaphobe to one degree or another.

Yeah, I mean, I was already a germaphobe before this started.

I know we were in the minority before because we had ocd and now we're cool, right? That's a good point. Having OCD is cool now and being a loner is cool too.

I think mood in general, and when I say we call it Social mood. A lot of people will call it crowd psychology and behavior. I think it waxes and wanes. We were in a period where it was waxing all the way up to February of this year as we were making new all time highs in the Dow industrial, which happens to be a great measure of mood because people can express themselves instantaneously by buying and selling stock. So that's one of our, we call it a socio meter. One of our great socio meters is to figure out what the crowd psychology is doing. By looking at the market, we can really tell based on the patterns it traces. But our way of thinking is a little bit different than the way normal people, not normal, other people, think about the market. For example, a lot of people will say that say recessions cause businessmen to be cautious, which sounds very logical, but the way we look at it is that cautious businessmen cause recessions. So we're always looking at the mood first and the action that results from the mood. And people might say talented leaders make the society happy. And the way we look at it, we say a happy population picks talented leaders. So we're trying to ascertain the mood. And the mood is going to go swing back and forth between extreme optimism and extreme pessimism. And as it does, it traces out these patterns, these Elliot waves. And so what we try to do is kind of figure out we can't really know the future. The future is unknowable. But we can kind of ascertain where we are right now in the development of that pattern between optimism and pessimism. If we're accurate about that, it implies something about the future. That's how we at Elliott Wave International, how we go about forecasting. We're trying to figure out where are we right now within the development of this movement between optimism and pessimism. And if we can figure that out, then it means something about the future. So I think right now we've had maximum optimism. We had all time highs in the Dow and the S and P in February. We've plunged in a matter of weeks down 38% in the Dow. I think this is the opening salvo of this movement from extreme optimism over to extreme pessimism. And once we get down to extreme pessimism, when no one wants to even talk about stocks or there's just deep pessimism throughout society, that's the basis and the groundwork for that next major rally. So it's kind of this almost pendulum back and forth. And I think that's where we are right now, within the Development of this social psychology as we move forward.

Okay, how long does that take? Vaccine? That's the magic question, right? How long does it take for that pattern to happen?

That's an interesting question and it's a difficult one to answer because an Elliot wave is what we call a hierarchical fractal. And very simply that means it has self similar patterns at all degrees of scale. So when you're looking at for example a yearly chart of a Dow, you can kind of see these same patterns that you would see on a weekly chart or a daily chart or an hourly chart or even a one minute tick chart of the Dow.

I'm curious, by the way, one question. Why do you keep mentioning the Dow? How come you like the Dow better than the S and P? Just curious about that.

Great question. Because the Dow is the single best indicator of mood. The Dow itself may have 30 stocks, but it's not an index made up of 30 stocks. What it is is an idea. It's an ephemeral state of mind. So that when you ask someone what did the market do today? What do they, they naturally say, oh, dow is up 1,000 points. The Dow is down 1,200 points. They don't say the S and p was up 33 points. Well, some traders might who are intimately familiar with it. But the Dow is a concept, it's an idea of what a market is. And that's really why we look at the Dow. We found out just by looking at patterns throughout history that it is the single best representative of social psychology, of mood, of what people think of the market. And that's why we use the Dow over other indexes.

Well, can you just elaborate a little more on that? I mean, why is the Dow a concept and not the S and P? The S and P is the broader index that seems like, I mean when you look at the American economy and about 70% is on the S and P, that reflects consumer confidence. It reflects all kinds of stuff. It seems like the S and P would be the better choice. Why am I wrong about that?

Well, it's not that the S and P reflects social psychology too. It's the Dow is better. And I think it's better because throughout history, going back to the late 1800s, it is what people refer to when they talked about the market. So it's got 200 plus years behind it of being the bellwether for individuals when they think about the market. It's not that these other indexes don't reflect them, they do. It's just they're not as. As good a reflection of crowd psychology as the Dow Industrials are.

Okay. Okay, good to know. Go on with what you were saying though. You were talking about the time frame. I believe maybe you finished that. I'm not sure.

Right. So it's really because it's a fractal and there's different patterns at different degrees of scale. There's going to be mood is moving across the spectrum at all levels, at all degrees. So for example, on a monthly degree, I mean, we just had basically a one month decline and we hit a peak level of pessimism on a monthly basis. We're now in what we think is a pretty good counter trend rally, a bear market rally from the low on March 23rd. So at that degree, we've kind of hit the bottom and now we're going up in this countertrend move. But on the next larger degree, if you look at it on say, a weekly scale and you go all the way back to say, 2009, you can see we've completed this pattern in our opinion, and now we're correcting the entire move up from this 2009 low to 2020 high. So at that degree of scale, we're not anywhere near the low. To answer your question, if I could, is when do we get to the bottom? Well, we get to many bottoms, but the ultimate bottom at the degree of scale that you're thinking about and the ones that investors think about because we don't live forever, is probably months or maybe a year or two away for before we get to the ultimate low in the market.

This will be continued on the next episode. Thank you for listening and happy investing.

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