The Wave Principle of Human Social Behavior
The Wave Principle of Human Social Behavior
and the New Science of Socionomics
R.N.Elliott's announcement of his discovery of the Wave Principle sixty years ago was
a major breakthrough
in sociology. To summarize Elliott's achievements, he discovered that the stock market displays fractal geometry,
he discovered and described the component patterns and how they link together, he recognized (with the help
of Charles Collins) the basis of the patterns in Fibonacci mathematics, and he concluded from all this evidence
that human social progress regulates itself according to natural laws of growth and expansion that are
found throughout the universe.
As Robert Prechter explains herein, this simple yet profound formulation reveals
that, on the whole, the endogenous ebb and flow of social mood that propels mankind's progress follows a robust fractal and spiral design that closely resembles the development of all kinds of living
forms. The practical value of the Wave Principle is that it forms the basis for a new
science, the science of socionomics.
Socionomics is the study of the formological imperative of human
which in turn is the engine of culture
and history. Because people have an impulsive nature that rules in collectives, and because that nature is
mass emotional change has a fair degree of predictability. As a result, its
product, social action, does so as well.
[Article] How to Apply Socionomics Properly
2011, Alan Hall, Article, Socionomics Theory, The Socionomist
By Alan Hall, originally published in the September 2011 Socionomist
While socionomic theory is relatively straightforward, applying it can be a challenge. Expressions of social mood
in myriad ways, and often they are difficult to measure. Misapplying socionomics can lead not only to errors
but also to misconceptions about the theory’s utility. On the other hand, learning to apply the model properly can
help you anticipate a social system’s tendencies as well as understand its past and present.
Let’s briefly review some sociometers and then examine the core ideas necessary to use them.
Sociometers Vary in Utility
There are no perfect sociometers. As Robert Prechter explained in “Sociometrics—
Applying Socionomic Causality to Social Forecasting,” in the September 2004 issue of The Elliott Wave Theorist:
Sociometers are selective measures of certain types of social actions, not mood itself, and probably always will
be. Therefore, unlike a thermometer, they are not perfect gauges of what they attempt to measure, which is the underlying
Sociometers vary widely in utility because they differ in data quality, breadth of social expression, the relative
speed at which the manifestation of mood becomes observable, and the extent to which they indicate the tenor (positive
or negative direction) and character (specific traits such as optimism/pessimism) of social mood.
Prechter wrote, “In every case, then, socionomic data are impure, inexact, relative and/or limited.”1
Stock indexes are the benchmark sociometers because they are broad in scope, contain plenty of clean data
and rapidly reflect social mood. The cash stock markets are the best sociometers most of the time.Yet, even nominal equity indexes can be improved upon at times. Prechter explains,
Some sociometers are expressed as ratios. The DJIA, for instance, is commonly quoted in terms of dollars.
One may also quote it in terms of gold or the PPI (which I often do) or anything else. Sometimes using multiple ratios provides more information.
I am impressed, for example, how well the constant-dollar Dow has matched other expressions of social mood
over the past half century. In other historical times, money and gold were equal or the money supply was constant, making
choices among such graphs moot.1
As a socionomist, you must choose the most appropriate sociometer for the social environment you intend to measure.
When applying the theory, socionomists should keep the following key points in mind:
Social mood motivates social actions, not the other way around. People frequently apply the basic physics model of causality
—action and reaction—to human affairs. In other words, they assume that external events “impact” society’s mood in the same
way one billiard ball impacts another. Under the physics model, for example, recessions make businesspeople cautious,
whereas socionomics argues the opposite: cautious businesspeople cause recessions. One must apply the counter-intuitive
socionomic insight—that changes in social mood regulate changes in social expressions—to understand and use sociometers
properly and conduct useful socionomic analysis. Prechter wrote,
I find myself upon occasion having to work hard at dispelling old contradictory thought patterns in order to re-establish mental
integrity on the more difficult challenges of the socionomic insight. … The average person’s resistance to the socionomic
insight is so formidable that it compares to having one’s view of existence challenged. I believe that the reason for this resistance
is the easy naturalness of the idea of event causality: It works in physics, so people assume that it must operate in sociology.
This deeply rooted assumption is stronger than piles of evidence to the contrary.2
Even practicing socionomists must fight the impulse to explain phenomena via backwards causality.
Socionomics is a tool for understanding the tendency of the social system, not a crystal ball for predicting specific events.
Socionomic analysis can help provide a probabilistic assessment for the future of a complex, dynamic social system. It cannot
tell you exactly which events will occur as a mood trend develops, but it can tell you the tenor and character they likely will
express. For example, Chapter 14 of The Wave Principle of Human Social Behavior (1999) lists many of the categories of
behaviors and the emotions that society tends to display in response to social mood. Here are a few examples:
Concord/Discord: A rising mood leads to a substantial consensus in politics, culture and social
a falling mood leads to a divided, radical climate.
Inclusion/Exclusion: A rising mood leads to expressions of social brotherhood and acceptance among races,
religions and political territories … .
A falling mood leads to apartheid, religious animosity, cavalier cruelty, secession [and]
independence movements …
Confidence/Fear: A rising mood leads to speculation in the stock market and in business.
A falling mood causes risk aversion
in the stock market and in business.
Knowledge of the mood-driven tendencies of society, used in context, may clue you to the likelihood of specific
events. For example, the October 2003 issue of The Elliott Wave Theorist attempted a number of specific forecasts
based on the conjecture that a large-degree negative social mood trend was under way.
Several of these predictions, quoted
below, have already happened, and others are trending:
Wave (a) of the bear market in social mood will bedevil more than one
The U.S.will increase restrictions on immigration.
Society will label the Federal Reserve chairman a fool who is greatly responsible
for the collapse.
Politics will become far more polarized, splintered and radical.
The U.S.will shut down its space program.
The Drug War will turn more violent. Eventually, society will decriminalize possession
of recreational drugs.
The suicide rate will go up.
The birth rate will continue to fall in the U.S. and Europe.
Fannie Mae and Freddie Mac will shut down.
Society will discredit and then abolish the Federal Reserve System.
As you can see, the proper application of socionomics enables you to envision specific events
that may occur under certain mood states. It does not, however, say that those events must happen.
Socionomics is more than a theory of stock price fluctuation. The Elliott Wave Principle
is a model for explaining stock price
fluctuation based on changes in social mood. Socionomics is a broader theory that describes the relationship between social
mood and many kinds of social action, including changes in how society values stocks. Stock indexes are useful tools when
conducting socionomic analysis because they provide a quantified and nearly instantaneous measure of social mood.
Fringe social manifestations are less important than central ones. A basketball analogy is useful here. Coaches tell defending
players to watch the belly button of offensive opponents. The idea is that by focusing on the center of mass, which moves the
least, they are less likely to be fooled by head fakes, feints and limb or ball movements. A socionomist must watch society
similarly. Soft sociometers, such as characteristics of fashion, music or movies, can offer valuable information, but the stock
market is more precise.
The stock market and the economy are fundamentally different. Financial and economic behaviors have different motivations
and produce different results. In the economic marketplace, the law of supply and demand in the context of opposing desires
between producers and consumers produces price equilibrium. This same law is irrelevant in the financial context, where
speculative buying and selling reigns, buyers and sellers frequently switch roles, and demand is uncertain and subject to herding.
This produces wild and continuous price fluctuation. Prechter and Wayne Parker wrote in the Journal of Behavioral Finance,
If the law of supply and demand were regulating financial markets, prices and relative values for investments would be as stable
as those for shoes and bread. … When certainty about personal valuation applies, people maximize utility and markets seek
equilibrium. When uncertainty about others’ valuations applies, people herd and markets are dynamic.3
Socionomists must collect and compare data properly. Sociometers must be theoretically defensible. It is true that for some
socionomic studies the lack of data can make it necessary to compare one country’s stock index to another’s production index.
But where data are available, compare apples to apples.
Extreme expressions of social mood signal increased potential for trend change, not trend continuation. Investors tend to buy
near market peaks and sell near lows because they are most aligned with the collective sentiment at the extremes. In financial
markets, opinion convergence and sentiment extremes therefore tend not to presage trend continuation but rather imminent
reversal. Likewise, other extreme social manifestations signal that a mood trend may have reached an extreme and is ripe for
There is a “relative temporal relationship between immediate social actions, which can constitute sociometers, and lagging social
actions, which often constitute news.”1 Stock purchases tend to lead slower indicators of mood, such as economic indicators,
war, legislation and the like, for the reasons described in Prechter’s explanation of varying lag times among different types of
Social mood is never completely positive or negative but always a mix. For example, when social mood turns down from a major
top, everyone’s mood does not shift suddenly to the negative extreme. Rather, pessimism emerges and begins to increase
within the mostly optimistic mix of social expression. The reverse is true at a bottom. The important item to watch is the aggregate
trend of social mood’s predominant expressions.
The social mood trend waxes and wanes in the fractal pattern described by Elliott waves. So, depending on the sociometer,
small-degree positive expressions of mood constantly occur within larger-degree negative trends and vice versa.
As socionomics continues to move from the stage of being ignored to that of being criticized, it becomes ever more important
for those of us applying socionomics to do so consistently and properly. Among many examples of the theory’s utility is the
November 1982 issue of The Elliott Wave Theorist (EWT), which forecast an asset mania: “The next few years will be profitable
beyond your wildest imagination. … Tune your mind to 1924.”
Conquer the Crash, Robert Prechter’s 2002 best-seller, contained many of the startling financial media stories that broke in 2007–2011.
EWT also nailed the 2009 bottom in stocks. In all of those cases, socionomics also forecast the social climate that would result.
The Socionomist has done likewise, forecasting moves toward drug legalization, a rise in secessionism and
authoritarian conflict, widening rifts in the EU andMideast violence.
Socionomics has demonstrated its value as a social forecasting tool, but as with any tool, the operator must understand it and
use it correctly in order for it to be effective.
1 Prechter, R. (2004, September). Sociometrics—applying socionomic causality to social forecasting. The Elliott Wave Theorist,
Retrieved from http://www.socionomics.net/2004/09/sociometrics-applying-socionomic-causality-to-social-forecasting.
2 Prechter, R. (2003). Pioneering studies in socionomics.Gainesville,Georgia: New Classics Library. Chapter 26.
3 Prechter, R., & Parker, W. (2007). The financial/economic dichotomy in social behavioral dynamics: the socionomic perspective.
The Journal of Behavioral Finance, 8(2), Retrieved from http://www.socionomics.net/pdf/JBF_Financial-Economic-Dichotomy.pdf.
4 Prechter, R. (1982, November). The Elliott Wave Theorist)
The biggest hook, always, is the so-called "fundamentals," or extramarket
onditions, as will be discussed in Chapter 12. One reason why even discussing
economics, politics and news is misleading to a proper investment decision is that there is enough of it to justify any
conclusion. That being the case, the decision about what news to focus upon typically becomes an emotional-based
one. The Elliott Wave Theorist explained in 1983:
Part of the character of a fifth wave of any degree is the occurrence of psychological denial on a mass
scale. In other words, the fundamental problems are obvious and threatening to anyone who coldly analysis the
situation, but the average person chooses to explain them away, ignore
them, or even deny their existence. This fifth wave should be no exception, and will be built more on unfounded
hopes, than on soundly improving fundamentals such as the U.S. experienced in the 1950s and early 1960s. And since this fifth wave, wave V, is a fifth wave within a larger
fifth, wave (V), the phenomenon should be magnified by the time the peak is
reached. By that time, we should be hearing that the global debt pyramid is "no longer a
problem," that the market and the economy have "learned to live with high interest
rates," and that computers have ushered in a "new era of unparalleled
As forecast, investors today are focusing only on the positive aspects of the background
conditions, They see the good news, such as the reports of record earnings pouring out of Wall Street, the low inflation rate and an administration that wants Japan to open up its market further to U.S.
goods. They conclude that "steady growth with low inflation in an expanding global market is the best of all possible worlds for
stocks." The fact that the economy lags stocks is ignored, the fact the administration is careening toward a trade war is
ignored. This optimism focus on only the favorable fundamentals is, despite claims to the
contrary, bearish for stocks, since anyone who would make a decision to buy on such a basis has, for the most
part, already done so.
The bearish side of the news is no less read, but it is not welcome. To any warning such as that contained in this
book, the majority says indignantly, "Today is not like 1929." Well, they are right. Today's hidden fundamentals are in fact far worse that those of 1929. The U.S. has lost its place as the fastest growing economy in the
world, the dollar is weak, trade deficits have been relentless, the Federal budget deficit is
huge, and the level of debt among citizens, corporations, and the federal state and local governments is of historic
proportions. Taxes are so high that most working families have more money taken from them in taxes then they spend on food, clothing and
shelter, while the combined governments of the U.S. spend more money than every foreign country in the world put together excluding Japan. If
anything, these figures are conservative, as they exclude the costs
regulation, inflation, countless hidden taxes, and estate taxes. Today,
federal, state and local governments, for the first time in history of the
country, employ more people in the United States than all the manufacturing industries of the country
combined. This is not an insignificant fact, as ultimately, manufacturing supports all
wealth. The fact that manufacturing has been hit so hard and goverment has swollen so much reveals deep structural
damage. Although none of these observations are perceived as current events or acknowledged as legitimate
fundamentals, they are certainly poised to be important in shaping the next phase of current
events. By the time those events are manifest, the "fundamentals" hook will be out once
again, but next time baited for bears.
(The Wave Principle of Human Social Behavior, Robert R. Prechter 1999)
Social Mood Is the Real Governor of the Federal Reserve
For more than two decades, Elliott Wave International has been tracking the relationship between interest rates set
by the marketplace and interest rates set by the U.S. Federal Reserve. The link we identified — that the market leads
and the Fed follows, not the reverse — continues to hold, as we'll show in a moment. This observation supports the
dea that mass social mood is an important influence on interest rates and that, by extension, social mood also
strongly influences the Fed.
Now there has emerged a fascinating, more direct way to observe mood's influence on the Federal Reserve.
Let's begin with an update of EWI's 2007 chart showing that the market leads the Fed. The continuous line is the
three-month U.S. T-Bill yield set by investors and the dashed line is the Federal Funds Target Rate set by the
For an in-depth analysis of the socionomic influences on today's interest rates as well as EWI's forecast for a long-term reversal in rates,
see the June 6 Elliott Wave Theorist/Financial Forecast Special Report. (Theorist and Financial Forecast subscribers:
Log in at my.elliottwave.com; non-subscribers call Customer Service for prices.)
The FOMC Laughter Index
Since 1974, the Federal Open Market Committee (FOMC) — a group within the Federal Reserve that oversees the Fed's buying and selling
of United States Treasury securities — has produced five-year-delayed transcripts of their meetings.1 Beginning in November 1976,
the transcripts include "[Laughter]" notations. As far as we can tell, The Daily Stag Hunt website in January 2012 was the first to publish
a chart showing a portion of the laughter data.2 We have expanded on the idea, charting every "[Laughter]" notation and plotting them against
the Dow to assess how they align with social mood (see Figure 4).
The first significant laughter occurred in 1979-1980, soon after Paul Volcker became Federal Reserve Chairman. Those chuckles immediately gave way
to the longest dour spell in the data — a 17-month span indicated at the bottom of the chart — that coincided with the interest rate extremes shown in Figure 3. This period includes the final low of the triple bottom in stocks of 1974/1980/1982.
A burst of laughter accompanied Alan Greenspan's August 11, 1987, appointment as Fed chairman. The Maestro arrived just two weeks before the August 25 major peak in the stock market; the subsequent negative social mood drove the September-October stock market crash and cast a pall
on the Fed's meetings.
February 1991 brings the only record of the FOMC committee "hooting" with laughter. At first glance, this seems strange, as the economy remained mired in a recession at the time. The hooting therefore had no rational basis, and anyone trying to predict the Fed's mood using the conventional event-driven model would have forecast a somber meeting. But in fact, a Primary-degree period of negative social mood — labeled Wave 4 in the chart
- had just ended, and a large-degree positive trend in social mood was under way. The Dow had already begun rising sharply toward new all-time highs in wave (1) of 5 of V. The Fed was simply expressing society's ebullience. Here is an excerpt from the meeting's transcript:
MR. HOSKINS. You're probably all waiting for my stainless steel strip index, but I'm not going to give it to you because I've latched onto a new one: the Smuckers Index! I had a chance to talk with Paul Smucker, an elderly gentleman who has been through many business cycles and he told me that apple butter sales remain relatively soft and that's a good sign because during deep recessions apple butter sales soar. [Laughter] So, I'll be reporting to you
on apple butter.
CHAIRMAN GREENSPAN. It sounds to me as though business is in a jam! [Laughter/hoots]3
The Fed's mirth trended higher for the next 15 years as social mood shot toward a historic positive extreme. In June 1999, seven months before the 2000 peak in the Dow, Alan Greenspan made remarks that showed he assumed — naturally but wrongly — that the prevailing optimism would continue. In fact, the extreme optimism, especially regarding technology, was a socionomic signal that a reversal was nigh. His comments book-ended a joke about his own age, prompting laughter from his fellow committee members:
CHAIRMAN GREENSPAN. We have no evidence at this stage of which I am aware, however, that indicates the acceleration in productivity has ended.
All of our experience and courses in Econometrics 101 induce a visceral antipathy to such persistence in productivity gains, especially for me since
I have the oldest gut in this room. [Laughter] What is increasingly evident is that something seems to be happening that none of us has ever witnessed before—perhaps a once-in-a-century structural shift in how goods and services are produced. People in the front lines of business operations, such as Jack Welch of GE and Lou Gerstner of IBM, say this is a true revolution. They have seen nothing like this in their experience. And I venture to say that
if we get on the phone with a number of business people who have been around a long time, we are going to hear this view from all of them. No one is saying that this accumulative, technology-driven productivity growth is showing any signs of slowing.4
In August 1999, four months before the 2000 stock market peak, FOMC member Alfred Broaddus also linearly extrapolated then-current economic conditions into the future. And then he, too, went for the laughs:
MR. BROADDUS. Mr. Chairman, … we see relatively few signs of any deceleration in activity in our region. … Car sales remain at an exceptionally high level. One of our bank directors recently told us that new car loans at his bank were at an all-time high. … As you may know, BMW has a big new plant in Greenville, South Carolina. … people down there like to say that in South Carolina BMW stands for Bubba Makes Wheels! [Laughter]5
The FOMC's laughter subsided after the social mood began trending negatively in 2000. Then it surged again as mood also pushed the markets — especially real estate — to new highs in wave b in the Dow (2002-2007). Approaching the peak of the housing bubble, the Fed was in an especially jovial and confident mood, unaware that a huge stock-market crash lay just ahead. In the January 2006 meeting, Fed President William Poole thanked Alan Greenspan for his "extraordinary influence" on Poole's life and then made a recommendation:
MR. POOLE. I have a suggestion for a title for your first book. … "The Joy of Central Banking." [Laughter] And I suggest that your second book be "More Joy of Central Banking." [Laughter]
CHAIRMAN GREENSPAN. "How to Be a Joyous Central Banker, Even Though We Don't Have Hearts." [Laughter] … Thanks very much, Bill.
Later in that same meeting, the Chairman and Vice Chairman engaged in mutual appreciation and over-the-top sappiness:
CHAIRMAN GREENSPAN. Vice Chair, [it's your turn to speak].
VICE CHAIRMAN GEITHNER. Mr. Chairman, in the interest of crispness, I've removed a substantial tribute from my remarks. [Laughter]
CHAIRMAN GREENSPAN. I am most appreciative. [Laughter]
VICE CHAIRMAN GEITHNER. I'd like the record to show that I think you're pretty terrific, too. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative. [Laughter]6
Socionomics not only explains why the Fed was so jolly at these peak [laughter] times but also has great practical utility in using such observations in real time to predict a change of social trend. Contrary to the Fed's optimism in 1999, Prechter's The Wave Principle of Human Social Behavior went to press at that very time and showed explicitly in Figure 5-12 that the stock market was about to reverse course. Contrary to the Fed's record [laughter] in 2006, Hochberg and Kendall of EWI called for a major peak in real estate prices at that time.
An Elliott Wave in FOMC Laughter
We surmise that if social mood propelled the occurrences of FOMC laughter and if social mood moves in Elliott waves, then the laughter data should produce an Elliott wave. Indeed, smoothing the data by plotting a 12-month moving average reveals an Elliott pattern that counts complete in November 2007, about a year after the peak in Fed jocularity. Figure 5 shows the labeled graph with the Fed laughter data backset six months to reflect the center of the moving average. The top line is the Case-Shiller index for U.S. house prices, which peaked in July 2006 just three months prior to the October 2006 record high of 65 laughter notations. This is more strong evidence that social mood regulates the mood of the Federal Open Market Committee members.
Again, the Fed transcripts are released after a five-year delay; we sketched a [Laughter] notation forecast in Figure 4 based on what we already know about the social mood. The forecast says that as post-2007 data become available, we will see fewer [laughter] notations until the first half of 2009, and then more [laughter] after that—though not to 2006-2007 levels. The peak of the positive social mood extreme, along with "The Joy of Central Banking," has passed.
The Socionomics Institute studies social mood and its role in driving cultural, economic and political trends. The Institute's analysis is published in the monthly research review, The Socionomist. Learn more at http://www.socionomics.net/?reference=yh
1Transcripts and other historical materials. Federal Open Market Committee. Board of Governors of the Federal Reserve System. Retrieved from http://www.federalreserve.gov/monetarypolicy/fomc_historical.htm
2Akin, K. (2012, January 12). The correlation of laughter at FOMC meetings. The Daily Stag Hunt. Retrieved from http://www.dailystaghunt.com/markets/2012/1/12/the-correlation-of-laughter-at-fomc-meetings.html#entry14562168
3Meeting of the Federal Open Market Committee, February 5-6, 1991. Federal Reserve. Retrieved from http://www.federalreserve.gov/monetarypolicy/files/fomc19910206meeting.pdf
4Meeting of the Federal Open Market Committee, June 29-30, 1999. Federal Reserve. Retrieved from http://www.federalreserve.gov/monetarypolicy/files/FOMC19990630meeting.pdf
5Meeting of the Federal Open Market Committee, August 24, 1999. Federal Reserve. Retrieved from http://www.federalreserve.gov/monetarypolicy/files/FOMC19990824meeting.pdf
6Meeting of the Federal Open Market Committee, January 31, 2006. Federal Reserve. Retrieved from http://www.federalreserve.gov/monetarypolicy/files/FOMC20060131meeting.pdf
Alan Hall is a lead researcher for the Socionomics Institute. He began studying Elliott wave analysis and socionomics after meeting Bob Prechter in 1995 and came to write for Elliott Wave International in 2006. Hall has traveled widely, and has authored socionomic studies on Russia, European housing, war, stocks, commodities, commodity prices and environmentalism, epidemics, eugenics, secessionism and authoritarianism. He does a wide variety of research aimed at demonstrating the utility of socionomic theory. He received his degree in Fine Arts from Berry College, emerging into the 1970s bear market. He has enjoyed a wide variety of job experiences that span from outdoor therapeutic counselor to decades as a custom homebuilder/designer.
Think Lower U.S. Trade Deficit Is Bullish for Stock Market?
The latest figures show that the U.S. trade gap has narrowed, and many see that as a bullish sign
By Vadim Pokhlebkin
Wed, 02 Jan 2013 14:00:00 ET
"The U.S. current account trade deficit narrowed in the July-September quarter to the smallest level since late 2010..."
(December 18, AP)
Before you join the crowd in thinking that shrinking trade gap is good for the U.S. economy and bullish for the stock market, read this excerpt from Robert Prechter's February 2010 Elliott Wave Theorist. Over the years, Bob's Theorist has dispelled many market myths; this is one of them.
Over the past 30 years, hundreds of articles -- you can find them on the web -- have featured comments from economists about the worrisome nature of the U.S. trade
deficit. It seems to be a reasonable thing to worry about.
But has it been correct to assume throughout this time that an expanding trade deficit impacts the economy
negatively? Figure 8 answers this question in the negative.
In fact, had these economists reversed their statements and expressed relief whenever the trade deficit began to expand and concern whenever it began to shrink, they would have accurately negotiated the ups and downs of the stock market and the economy over the past 35 years. The relationship, if there is one, is precisely the opposite of the one they believe is there. Over the span of these data, there in fact has been a positive -- not negative -- correlation between the stock market and the trade deficit.
It is no good saying, “Well, it will bring on a problem eventually.” Anyone who can see the relationship shown in the data would be far more successful saying that once the trade deficit starts shrinking, it will bring on a problem. Whether or not you assume that these data indicate a causal relationship between economic health and the trade deficit, it is clear that the “reasonable” assumption upon which most economists have relied throughout this time is 100% wrong.
Around 1998, articles began quoting a minority of economists who -- probably after looking at a graph such as Figure 8 -- started arguing the opposite claim. Fitting all our examples so far, they were easily able to reverse the exogenous-cause argument and have it still sound sensible. It goes like this: In the past 30 years, when the U.S. economy has expanded, consumers have used their money and debt to purchase goods from overseas in greater quantity than foreigners were purchasing goods from U.S. producers. Prosperity brings more spending, and recession brings less. So a rising U.S. economy coincides with a rising trade deficit, and vice versa. Sounds reasonable!
But once again there is a subtle problem. If you examine the graph
closely, you will see that peaks in the trade deficit preceded recessions in every
case, sometimes by years, so one cannot blame recessions for a decline in the
deficit. Something is still wrong with the conventional style of
1929, Deflation Started in Europe Before Overtaking the U.S.
An economic downturn in one major area of the
globe is likely to affect another.
What Happens in Europe Will Not Stay in Europe
By Elliott Wave International
In fact, even during the Great
Depression (long before the phrase "global economy"),
exporting to America.
But one historic export was not the kind that the
U.S. welcomed. Read
in Nature: The Golden Ratio and the Golden Spiral
If you've studied the financial markets, even
for a short time, you've probably heard the term "Fibonacci numbers."
The more you learn about Fibonacci, the more amazed you will be at its
By Elliott Wave International
The ratios and relationships derived from this mathematical sequence are
applied to the markets to help determine targets
and retracement levels.
Did you know that Fibonacci numbers are found in nature as well? Even our
are examples of Fibonacci. Read more about the fascinating
phenomenon of Fibonacci in nature. Read
Die Wissenschaft entdeckt das Elliott Wave Principle
Das Elliott Wave Principle ist eine detaillierte Beschreibung wie Finanzmärkte funktionieren. Es erklärt wie die Schwingungen der Massenpsychologie in einer natürlichen Abfolge von Pessimismus zu Optimismus und umgekehrt erfolgen und somit erkennbare Muster bzw. Strukturen (Elliott Wave Pattern) bilden. Jedes "Pattern"
hat spezifische psychologische Wirkungen, wobei es darauf ankommt, in welcher Position sich im Kontext der Progression des Gesamtmarktes das Pattern befindet. Dies gilt sowohl für die Vergangenheit, die Gegenwart
und die Zukunft."Phenomena of mass action (are) under impulsions and controls which no science
has explored." (Bernard Baruch)
Neue Entdeckungen auf den Feldern der Komplextheorie, Fraktal Geometrie, Biologie und Psychologie geben
mehr und mehr Hinweise darauf, daß das Wave Principle eine richtige Beschreibung
von Finanz- und sozialer Wirklichkeit (social reality) ist. Dieser Report gibt einen Überblick der neuesten Entdeckungen und
Forschungs- ergebnissen. Benoit Mandelbrot, ein IBM Forscher und
früherer Professor an der Harvard Universität, Yale und
dem Einstein College of Medicine hat Pionierarbeit geleistet und erbrachte den Beweis daß Fraktale überall
in der Natur vorkommen.
Der Begriff "Natur" beinhaltet die Aktivitäten der Menschen, als Mandelbrot begann, die Preise für Baumwolle (Cotton) zu studieren und 1999 eine Studie veröffentlichte, die eine multifraktale
Struktur der Finanzmärkte beinhaltete.Dieser Auszug aus einem Artikel The New York Times zieht ein Fazit im Hinblick auf Finanzfraktale:
"Tägliche Fluctuationen des Aktienmarktes werden (von Ökonomen) einseitig behandelt, während große und bedeutende (Trend-) Wechsel die Prosperität oder Depression bringen werden
mit einer anderen Ordnung der Dinge in Zusammenhang gebracht . In jedem Falle,sagt Mandelbrot, meine Meinung ist: Laßt uns die Dinge aus einem anderen Blickwinkel betrachten, abseits
der Geometrie. Was dabei herauskommt, scheint an einem zusammen- hängenden, in sich schlüssigen Verlauf zu scheitern."Drei Physiker erforschten den Aktienmarkt im Hinblick auf log-periodische
Strukturen und folgten daraus, daß R.N. Elliott's Modell des Finanzmarkt-Verhaltens ihren Forschungen entspricht. Die 1996 veröffentliche Studie im französischen Journal of Physics,
"Stock Market Crashes, Vorgänge und Abbildungen" von Didier Sornette und Anders Johansen, damals noch an der Hochschule Laboratoire de Physique de la Matiere Condensee an der Universität
in Nizza, Frankreich und Mitarbeiter Jean-Phililppe Bouchand. Die Autoren machten dieses Statement:"Es ist in der Tat erstaunlich, daß die log-periodischen Strukturen, die hier dokumentiert sind, einige ähnliche Strukturen mit den "Elliott Waves", einer technischen Disziplin der Aktienmarkt- analyse aufweisen.
Die Technische Analyse der Finanzmärkte kann weit gehenst definiert werden, als
eine Studie die "graphs of stock prices as a function of time", also grafisch die Aktienkurse als eine Funktion der Zeit darstellt um die Daten der Vergangenheit zu analysieren und darauf Rückschlüsse
und Informationen für den zukünftigen Verlauf zu bekommen. Die "Elliott Wave" Technik ist wahrscheinlich die berühmteste
(most famous) in diesem Feld. Wir spekulieren, daß die "Elliott Wellen" eine
Signatur der verborgenen kritischen Struktur des Aktienmarktes sind." (Sornette, D., Johansen, A., und Bouchand, J.P. (1996), "Stock market crashes, precursors and replicas." Journal de Physique 1
France 6, No.1, pp. 167-155)Mandelbrot's Arbeit unterstützt diese Aussage. Zum Beispiel jeder Aspekt von Mandelbrot's generellem Modell, daß im Wissenschaftsmagazin Scientific American veröffentlicht
wurde, unterstützt und geht konform mit Elliott's spezifischem Modell vom Verhalten des
Aktien- marktes und kein Aspekt von Mandelbrot's generellem Modell konterkariert Elliott's Modell. Vorsichtig
ausgedrückt kann man sagen, daß die Studien von Mandelbrot unter einer Anzahl anderer moderner Studien die Wahrscheinlichkeit erhöhen,
daß R.N.Elliott's Fraktalmodell der Finanzmärkte richtig ist.
Elliott's Entdeckung von speziell hierarchisch aufgebauten Preismustern im Aktienmarkt ist fundamental. Wenn der Analyst das Muster (Pattern) beschreiben und richtig interpretieren kann, hat er die
Essens des Objekts. Je genauer man das entstehende Muster identifizieren kann, desto besser kann man erkennen, was es letztendlich ist und danach handeln. Das erfordert allerdings ein Höchstmass an Geduld und Ausdauer.
Abgesehen davon, entdeckte R.N. Elliott die speziellen Muster oder Preisbilder und die hierarchische Struktur der Finanzmärkte fünfzig Jahre bevor die neue Wissenschaft der Fraktale entdeckt wurde.
Die Idee, daß Finanzmärkte eine spezielle Form und identische Preismuster bilden ist bis heute eine revolutionäre Entdeckung geblieben, weil viele
Finanz- marktforscher und Chaostheoretiker dieser Haltung ablehnend gegenüber stehen.
Eine Studie der Psychologie in der Ökonomie ist nicht nur interessant, sondern auch höchst aufschlussreich. Eine eingehende Beschäftigung mit ihren Ausführungen würde das "abnormale" Verhalten
der Märkte erklären. Im Verhalten der Menschen ist eine Tendenz zu erkennen, eine sich immer weiter steigernde emotionale Stufe (Welle) zu erreichen, die einen Höhepunkt erreicht und dann zusammenbricht.
Eine starke Korrelation des Individiums und der Masse während Perioden von Boom und Depression ist von Psychiatern bestätigt. Es gibt beides, eine
Periode ähnlicher Normalität. Während einer solchen Phase, agieren die manisch-Depressiven in ruhiger und prosaischer Art und Weise. Während der exaltierten Phase werden ihre mentalen Aktivitäten von Gier und Habsucht bestimmt. Wenn die Krise in der
exaltierten Phase erreicht wird, beginnt eine absteigende emotionelle Phase, die in einer schweren Depression endet. Der Abwärtstrend beginnt mit einer kaum wahrnehmbaren Phase von Verlust an Vertrauen
und geht über in eine Phase der Angst und endet mit einer großen Furcht vor der Zukunft. Hier komplettiert sich der Zyklus und von diesem Punkt an kann sich wieder Zuversicht, Vertrauen und ein
hoffnungsvoller Blick in die Zukunft etablieren.
Der französische Ökonom, Pigou hat psychologische Fehler und ihren Zusammenhang mit Boomzeiten und Depressionszeiten ausführlich erklärt. Er meint, daß ein Fehler im Optimismus in der gesamten Kommune dazu tendiert, ein bestimmtes Level an psychologischer Interdependence zu erreichen bis es zu einer Krise führt. Der Punkt ist, daß diese Phänomene mit großer Regularität sowohl im Business
Cycle als auch im Zyklus der manisch-depressiven Phase vorkommen. Alle Menschen, so scheint es, scheinen Subjekt dieser variierenden Stimmungen zu sein und ihnen unterworfen zu sein. Ich
(Pigou) habe ein Stimmungsbarometer des massen- psychologischen Verhaltens entworfen, daß Monate vor einem Stimmungswechsel warnt. Es ist kein Preisindex, wie der DJIA, nichtsdestoweniger ist der
Aktienmarkt ein guter Indikator. (Educational Bulletin Q, Psychology,
April 20, 1943. Aus Ralph Nelson Elliott's Market Letters, p.182) 1955 veröffentlichte Garfield Drew sein Papier
"New Methods For Profit in the Stock Market"
Er schreibt u.a.: (Das Elliott Wave Principle)...diese Hypothese scheint die Wirren der Zeit besser als anderes (better than anything) in dem weiten Feld des "long-range" Forecasting überstanden zu haben.
In den Jahren 1947-1949 gab es sehr widersprüchlich Vorhersagen über den Verlauf des Aktienmarktes, aber die Basistheorie (EWP) war ganz korrekt in der Vorhersage, daß die nächste bedeutende
Bewegung im DJIA nicht nur aufwärts, sondern daß der DJIA
auch das vorherige Hoch von 1946 übertreffen würde. Ein anderer interessanter Punkt, den das
Wave Principle vorhersagte, war seine "bullish position"
im Jahre 1953. Abgesehen davon wie die kleineren Trends klassifiziert oder eingeordnet wurden, zusammengenommen ergab sich, daß der Bullmarkt nicht im Januar 1953 endete und
daß der DJ Industrial Average ein neues Hoch erreichen würde, ohne sehr große Korrekturen zu durchlaufen. Natürlich, dieses Verhalten resultiert auch aus dem Fakt heraus, daß der DJIA Anfang 1954
das 300-level erreichte und das zum erstenmal seit 24 Jahren. Schiller's (1990) Studie des Crash von 1987 ist ein gutes Beispiel für die Diskrepanz zwischen der Meinung von Investoren und was diese in Wirklichkeit gemacht haben:Sie haben ihre Aktien verkauft.
Schiller's Forschungen ergaben, daß der meist genannte Grund für den Verkauf der Aktien war, daß die Investoren der Ansicht waren die Aktienkurse wären zu hoch (overpriced) und das große institutionelle Investoren verkauft haben, als der Markt "stop-loss" Punkte erreicht hatte. Diese Idee klingt verständlich und ist weitgehend mit der fundamentalen Analyse oder rationalen Handelstechniken zu vereinbaren. Schiller's Forschungen haben jedoch ergeben, daß an dem Tag des Crash,
eine erstaunliche Anzahl von 43% seiner zufälligen Auswahl von institutionellen Investoren ungewöhnliche Symptome von Angst, Konzentrationsschwierigkeiten, einen erhöhten Puls, Drücken in der Brust
und feuchte Hände bekamen. Im Kontrast zu den Angaben der Investoren, sie hätten mit "ruhiger Hand" und jederzeit "Herr der Lage" gehandelt, fand Schiller heraus, daß die Investoren "erhöhte Aufmerksamkeit
und Gefühle" bewegt hätten und sie schließlich rein intuitiv gehandelt hätten. Mit anderen Worten: Sie haben im Kollektiv gehandelt und sind der kollektiven Panik verfallen. Schließlich ergab Schiller's Studie, daß
es trotz intensiver Suche "keinen, aber auch nicht den geringsten exogenen Auslöser" für den Crash gab.
Kurz: Es gab keine negativen Nachrichten oder Ereignisse zu diesem Zeitpunkt.
Walker (1998) bestätigte, daß die Wirtschafts- und Finanzprofessoren immer noch die Gründe für den Crash von 1987 diskutieren, warum und aus welchen Gründen der Crash von 1987 geschehen konnte. Exogene Ursachen des sogar viel größeren und dramatischen Crash von 1929 sind bis heute nur
sehr ausweichend begründet worden. Die weitverbreitesten Erklärungen dazu haben Galbraith (1954) und Kindleberger (2000) abgegeben. Beide führen den Crash auf "endogene" psychologische Faktoren zurück, wie z.b. eine "Mania". Wenn Ökonomisten nicht einmal im Nachhinein erklären können, wie solche historische Markteinbrüche geschehen konnten, sollten wir höchst vorsichtig mit den täglichen
Begründungen und Rationalisierungen im Hinblick auf das Verhalten des Marktes sein. Nachrichten sind nicht nur unnötig für das Geschehen am Markt, sie sind irrelevant.
Shiller, Robert J. "Speculative Prices and Popular Models", Journal of Economic Perspectives, 4,2, Spring, (1990), pp.55-65
Walker, T. "Identifying Sell-Off Triggers is Difficult."
Atlanta Journal-Constitution, August 6, 1998, p.F3
Galbraith, John Kenneth. The Great Crash 1929, New York, Houghton Mifflin Company, 1954
Kindleberger, Charles P. Manias, Panics and Crashes: A History of Financial Crisi, 4th ed. New York: Basic Books, (originally published in 1978, 1978/2000)
When Does Deflation Occur ?
Defining Inflation and Deflation
Webster's says, "Inflation is an increase in the volume of money and credit relative to available goods,"
and "Deflation is a contraction in the volume of money and credit relative to available goods."
To understand inflation and deflation, we have to understand the terms of money and credit.
Defining Money and Credit
Money is a socially accepted medium of exchange, value storage and final payment. A specified amount
of that medium also serves as a unit of account.
According to its two financial definitions, credit may be summarized as a right to acces money. Credit can
be held by the owner of the money, in the form of a warehouse receipt for a money deposit, which today
is a checking account at a bank. Credit can also be transfered by the owner or by the owner's custodial
institution to a borrower in exchange for a fee or fees - called interest - as specified in a repayment contract
called a bond, note, bill or just plain IOU, which is dept. In today's economy, most credit is lent, so people
often use the terms "credit" and "debt" interchangeably, as money lent by one entitiy is simultaneously
money borrowed by another.
Price Effects of Inflation and Deflation
When the volume of money and credit rises relative to the volume of goods available, the relative value
of each unit of money falls, making prices for goods generally rise. When the volume of money and credit
falls relative to the volume of goods abailable, the relative value of each unit of money rises, making prices
of goods generally fall. Though many people find it difficult to do, the proper way to conceive of these changes
is that the value of units of money are rising and falling, not the values of goods.
The most comon misunderstanding about inflation and deflation - echoed even by some renowned economists -
is the idea that inflation is rising prices and deflation is falling prices. General price changes, though, are simply
The price effects of inflation can occur in goods , which most people recognize as relating to inflation, or in
investment assets, which people do not generally recognize as relating to inflation. The inflation of the 1970s
induced dramatic price rises in gold, silver, and commodities. The inflation of the 1980s and 1990s induced
dramatic price rises in stock certificates and real estate. This difference in effect is due to differences in the
social psychology that accompanies inflation and disinflation, respectively, as we will discuss briefly in
Chapter 12. The price effects of deflation are simpler. They tend to occur across the board, in goods, and
investment assets simultaneously. [ Chapter 9, Conquer The Crash, 2003 Robert R. Prechter jr. ]
Chapter 9 Excerpt
By Robert Prechter, 2002
A trend of credit expansion has two components: the general willingness to lend and borrow and the general ability
of borrowers to pay interest and principal. These components depend respectively upon
(1) the trend of people's confidence, i.e., whether both creditors and debtors think that debtors will be able to
(2) the trend of production, which makes it either easier or harder in actuality for debtors to pay.
So as long as confidence and productivity increase, the supply of credit tends to expand. The expansion of credit
ends when the desire or ability to sustain the trend can no longer be
maintained. As confidence and productivity
decrease, the supply of credit contracts.
The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes
from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from
expansion to conservation. As creditors become more conservative, they slow their
As debtors and potential debtors become more conservative, they borrow less or not at all. As producers become
more conservative, they reduce expansion plans. As consumers become more conservative, they save more and
spend less. These behaviors reduce the "velocity" of money, i.e., the speed with which it circulates to make
purchases, thus putting downside pressure on prices. These forces reverse the former trend.
The structural aspect of deflation and depression is also crucial. The ability of the financial system to sustain
increasing levels of credit rests upon a vibrant economy. At some point, a rising debt level requires so much energy
to sustain -- in terms of meeting interest payments, monitoring credit ratings, chasing delinquent borrowers and
writing off bad loans that it slows overall economic performance. A high-debt situation becomes unsustainable
when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse
to underwrite the interest payments with more credit.
When the burden becomes too great for the economy to support and the trend reverses, reductions in
spending and production cause debtors to earn less money with which to pay off their debts, so defaults
Default and fear of default exacerbate the new trend in psychology, which in turn causes creditors to reduce lending
further. A downward "spiral" begins, feeding on pessimism just as the previous boom fed on optimism. The resulting
cascade of debt liquidation is a deflationary crash. Debts are retired by paying them off, "restructuring" or
In the first case, no value is lost; in the second, some value; in the third, all value. In desperately trying to raise cash
to pay off loans, borrowers bring all kinds of assets to market, including stocks, bonds, commodities and real estate,
causing their prices to plummet. The process ends only after the supply of credit falls to a level at which it is
collateralized acceptably to the surviving creditor
Toward a New Understanding of Growth and Recession,
Boom and Depression
December 2001, by Herman Cortes Douglas
"This expansion will run forever." So said an MIT professor of Economics in The Wall Street Journal. Think about it.
A respected leader in the field comes to a conclusion about economic behavior that defies the entirety of history. Since
that article appeared on July 30, 1998, we know that its breathless conclusion also failed to accommodate the future.
Nor was this opinion unique at the time. Ninety-eight percent of economists in The Wall Street Journal's New Year's poll
of 2001 said they expected continued expansion throughout the year. This type of forecasting error is hardly a first for academic economists. Examples of our profession's failure to anticipate
economic contractions are legion and span its entire history. The Economist reiterated in its November 29, 2001
issue, "Economists have a dismal record in predicting recession." Some instances have been so glaring and instructive that they beg
A Brief Review of Major Failures in Economic Forecasting
The most famous and respected economists of the 1920s, the crash that preceded the Great Depression was utterly
unexpected. Fourteen days before Black Tuesday, October 29, 1929, Irving Fisher, America's best-known economist
and Professor of Economics at Yale University, declared, "In a few months I expect to see the stock market much
higher than today." Fisher, a consummate theoretician, a founder of econometrics, and a pioneer in index number
analysis, was also a successful capitalist, having invented the c-kardex file system, which he sold for a staggering sum. He had
such faith in his economic analysis that he is reported by his son to have lost an estimated 140 million of today's dollars
in the crash. British economist John Maynard Keynes, a renowned father of macoeconomics who had amassed fortune
in the financial markets for both himself and Cambridge University , was caught unprepared, shedding a million of today's
pounds sterling of his net worth.
Days after the crash, the Harvard Economic Society reassured subscribers, "A severe depression such as 1920-21 is
outside the range of probability. We are not facing a protracted liquidation." In 1932, after a string of failed optimistic
forecasts, the Society closed its doors. New societies, at universities, central banks and independent "think tanks", have since sprung up. Do they know any
more about macroeconomic forecasting than their predecessors?
Since the Great Depression, we have had immense improvements in science and technology. Given seven additional
decades of data collection and progress in econometric techniques, on might presume that the forecasting tool of macroeconomics have become vastly more effective than their predecessors of 1929. Yet as
recently as 1988, some leading economists went on the record about the profession's lack of progress. Writing in The
American Economic Review, the journal of the American Economic Association, Kathryn Dominguez, Ray Fair, and
Matthew Shapiro reported that a modern economist, armed with the latest and most sophisticated econometric
techniques, and even using voluminous data that was unavailable in 1929, would have had no idea in 1929 that the
Great Depression lay around the corner. Real results continue to bear out the implications of this conlusion. For example, as one writer observed, "It is hard to
imagine any article with worse timing than, say, "Asia is Bright Future," which appeared in the
November/December 1997 issue of Foreign Affairs. The article, by two Harvard professors, appeared as East Asian economies were already
melting down and as Japan was staggering through one of the three recessions it has suffered in a decade of financial
difficulty. Consider its disutility in light of the fact that the year 1974, a full 23 years earlier, would have been the best
time for such a forecast, while 1997, late 1997 at that, was the worst time since the onset of World War II to have made it.
President Herbert Hoover, reflecting in his Memoirs on economists' consensus prior to the Depression for which the
public so often blamed him, complained, "With growing optimism, they gave birth to a foolish idea called the
'New Economic Era'. That notion spread over the whole country. We were assured we were in a new period where
the old laws of eonomics no longer applied." Seven decades later, our MIT professor's prognostications about the
"New Economy" echoed those same follies. The justification once again was that we had conquered the business
cycle: "As we have the tools to keep the current expansion going," he wrote, "we won't have (a recession.) We have the
monetary and fiscal resources to keep one from happening, as well as a policy team that won't hesitate to use them for
continued expansion." If that were true, then Japan, with its own dedicated "policy team" of macroeconomists and its
world-class kit bag of macroeconomic "tools," would have prevented the prolonged stagnation that was as evident in
1998 as it is still now.
Mysteries Loaded with Suspects
The Minneapolis Fed, in October 2000, invited some sixty noted economists to a conference to present papers on the
Great Depression. The event attracted a number of macroeconomist luminaries, including University of Chicago
professor Robert E. Lucas Jr., the 1995 Nobel Laureate, and professors from the University of Minneapolis, UC
Berkeley, Princeton, Carnegie Mellon and other top universities. All that talent brought to bear notwithstanding, the
report on the conference in the Minneapolis Fed Review, The Region, concludes on a rather disappointing note.
When economists review the facts surrounding the Depression, it says they "each time come up with another explanation.
The Great Depression is.... a mystery that is loaded with suspects and difficult to solve, even when we know the
ending. By and large the explanation of this failure is that economists have been leaning on so-called macroeconomic fundamentals
to attempt such predictions. Have they ever succeeded? The historical data say that they cannot succeed; financial
markets never collapse when things look bad.
In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the
vast majority of economists always proclaim the economy to be in excellent health just before it swooms. Despite these
failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same
macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even
in retrospect, if it cannot explain or understand an outcome even when we know what it is, has it a prayer of doing so when the goal is assessing the
future? Apparently not. As Lucas candidly observed years ago, "Economic reasoning will be of no value in cases of uncertainty."
We have learned from Nobel laureate Friedrich von Hayek, his mentor, Ludwig von Mises, and from Frank Knight, a
Professor of Economics at the University of Chicago who taught several Novel Laureates, that uncertainty is normal
and pervasive. Given that the future is always uncertain, is Lucas saying tat "economic reasoning" has no forecasting
value whatsoever? Reasoning per se is not at fault, more and more, it appears that reasoning is founded. There is a
different but correct set of fundamentals.
Toward a New Understanding
What are economists missing? What did they once learn but later forget or neglect? What new studies shed light on the
subject? For answers, I suggest looking to the following three subsets of empirical observations that have emerged from
1) Debt drives the business cycle
Well known to economists but oddly ignored is the fact that large, sustained increases in money and private sector
debt accompany economic booms. Conversely, important contractions in money and private sector debt accompany
economic contractions. Fluctuations in private debt levels correlate with stock indices and economic activity in general,
especially with respect to trends lasting years or decades. These observations are consistent with the monetary
(Milton Friedman) and Austrian (Mises and Hayek) theories of the business cycle, but economists have ceased putting
them to practical use. In 1933, Irving Fisher highlighted the correlation in an article in Econometrica,
"Debt-Deflation Theory of Depressions," which most economists have neglected. Similarly, in a lifetime of work ignored by mainstream
economists, post-Keynesian economist Hyman Minsky focused on the financial instability created by expanding
indebtedness. In the major boom that ended with the 20th century, private sector debt accumulated at a blistering pace and hit very high levels,
especially near the end. Economists again paid scant attention to this phenomenon and again paid the price by missing
2. Market indices trace patterned paths
Ralph N. Elliott, author of The Wave Principle in 1938 and suceeding works, established in the mid 1930s that financial
markets trend and reverse in recognizable patterns. Their structures are clear and definite in form, although not fixed in
time or amplitude. Market movements have different degrees. Patterns of smaller degree link together to form similar
patterns at larger degree. Thus, Elliott established that markets are hierarchical. In recent years, physicists who have studied financial markets have
discovered aspects of market behavior that are compatible with this
insight. [Arneodo, A. et al. (1993). "Fibonacci sequences in diffusion-limited aggregation."
In J.M.Garcia-Ruiz et al. (Eds.) Growth patterns in physical sciences and
biology. New York: Plenum Press.]
For the past three decades, Robert R. Prechter, Jr. has applied and extended these principles to a wide variety of social
phenomena. Perhaps most important, his latest book, The Wave Principle of Human Social Behavior and the New
Science of Socionomics, has established that markets are "robust fractals," termed quasi-fractals by physicists Arneodo
et al. The existence of self-affinity in price patterns at all scales indicates fractal ordering, but if Elliott is right, they are
intermediately ordered fractals in contrast to the indefinite fractals described by Mandelbrot. They have "a qualitative
specificity of form akin to that of self-identical fractals such as nested squares as well as a quantitative elasticity akin to
that of indefinite fractals such as clouds and seacoasts," says Prechter.
Because of the form specificity of robust fractals, there is an element of predictability in markets, not in spite of, but
because of, their complexity. As one recent example, physicists Anders Johannsen and Didier Sornette found that
markets proceed unabatedly toward a crash, "anticipating [it] in a subtle self-organized and cooperative fashion,
releasing precursory fingertips, observable in stock market prices." Yet at such times, everything looks rosy to
mainstream macroeconomists because stocks have been rising persistently, and output, employment, and other
standard indicators appear healthy. Economists relying on such "fundamentals" invariably extrapolate the good times into the future ("the crudest form of technical analysis"), rather than recognize their true import in a patterned world.
If we economists are to advance or craft, we will have to abandon the widespread illusion that financial markets are
random walks, as many top business schools, unfortunately, continue to preach, against formidable evidence such as
that reported by Andrew W.Lo and A.Craig MacKinley. Markets proceed relentlessly according to a robust fractal,
whose components or phases Elliott designed as "waves." The new theoreticians and social physicists find themselves in
good company with classical analysis. Phythagoras's doctrine called for inquiry into pattern rather than substance to
determine the essence of things. Such inquiry is now bearing fruit in the macroeconomic field.
3) Changes in economic variables follow stock market fluctuations
Changes in the stock market indices precede - they do not follow - changes in economic fundamentals or news about
them. Thus, they are a leading indicator of economic activity. Eight decades
ago, Wesly Mitchell and the National
Bureau of Economic Research recognized this phenomenon, but an inability to recognize different degress made the
breakthrough loss helpful that it might have been. If the changes in markets are
hierarchical, then so are the economic changes that follow. This explains why declines in
stock indices of very high degree anticipate depressions, while drops of lesser degree anticipate recessions and milder
downturns. Paul A. Samuelson, 1970 Nobel Laureate, famously quipped,
"The market has anticipated five out of the
last three recessions," completely missing the hierarchical nature of
markets. It was a clever but inaccurate remark.
Understanding the hierarchy and chronology of stock market and economic events will allow macroeconomists more
accuracy in prediction.
A New Basis for Theory and Modelling
Only two academic economists - Friedrich August von Hayek and Ludwig von Mises - correctly forecast the market
break of 1929 and the ensuing Depression. Did economists adopt their Austrian
theory? Alas, no. They adopted the
economics of Keynes, and not the best economics of Keynes.
In a world of uncertainty, expectations are a critical variable in most financial
decisions. Some notable economists have
acknowledged that the mental variability of human beings in this regard is missing from the conventional
model. "It is
acutely uncomfortable," 1987 Nobel Laureate Robert M. Solow wrote
recently, "to have so much room for invention."
If you know where to look, though, you will find a growing body of new work that displays an impressive empirical
understanding of aggregate expectations, so its lack is in no way inevitable if we put our minds to it.As Solow
intimates, a solid concept of expectations is crucial. We may be close to that
goal. Certainly if stock markets
are patterned, so must be the causal forces driving them. Citing the prior work of Paul Montgomery of Universal
Economics and Paul MacLeans of the National Institute of Mental
Health, Prechter presents an intriguing hypothesis
regarding the forces behind expectations. He proposes that this key macroeconomic variable may derive from
pre-rational thought patterns that drive the fundamental impulse of human social cooperation in a context of
uncertainty. Th emotions that governs expectations, he says, are essentially a
"first case," generated by impulsive portions of the brain associated with
Yale economics professor Robert
J.Schiller, a leading voice in the new field of Behavorial Finance, concurs at least the extent of
saying, "Solid psychological research does show that there are patterns of human behavior that suggest anchors for market
that would not be expected if markets worked entirely rationally. If so, consider an alternative to mainstream
macroeconomics' idea that each individual is a "representative
agent" with rational expectations, responding
meachanically to exogenous changes in news about economic fundamentals to create in the aggregate a random
walk in the stock market and the economy. Perhaps we should entertain the contrasting assumption that endogenous
changes in aggregate expectations - in confidence and mood, in optimism and pessimism - are at least a force, if not
the driving force, behind stock prices and the economy.
The economy expands and contracts not because of random
shocks, as suggested by mainstream business-cycle theory, but because optimism and pessimism in societies naturally
trend and reverse in the form of a robust fractal.With this new
insight, we may begin to suggest a consistent theory of business
cycles: Naturally expanding optimism
during a boom stimulates hiring, expansion, investment and
speculation. Euphoria in the latter stages encourages
excessive credit extension and cavalier financial risk-taking. When optimism reaches a natural
extremity, the boom ends
and pessimism takes over. Companies lay off employees, investors recall their
capital, lenders recall loans, banks tighten credit, bankrupties accelerate and a major contraction
ensues. When pessimism has run its course, debt has been
liquidated to low levels, financing has become conservative, the stock market has reached its
nadir, the society is ready
There are no "new eras" or
"new economies" and no conditions upon which the patterns of social behavior will
disappear. The indication that a major change is actually beginning comes with a major trend change in the stock
market, which is
a proxy for a major change in expectations. The model has some predictive value because the necessary precursors
for a major change in trend are a state of extremity in the volume of debt and a potentially completed wave pattern
of changes in expectations at high degree. Recall the sweeping certainty of the quotation that begins this
article, the guarantee in 1997 of
"Asia's Bright Future" and the Harvard Economic Society's assertion in 1929 that "A severe depression such as 1920-21 is outside the
range of probability" and will "not" happen. As it
happens, our new model also explains why conventional
macroeconomists are so certain just before they are most wrong. Because economists lack useful tools to guide
them, they are powerless to resist getting caught up along with everyone else in the optimism at the peak or the
pessimism at the bottom. Or, as Prechter asserts, "the prevailing social mood has full rein to affect the tone of their
[p.256-263, Pioneering Studies in Socionomics, Robert
Feedback as Characteristic of Financial Markets and Society
Like societies as a whole, financial markets are a quintessential example of systems whose results feed back into the system as new cause. As the most widely followed market index in the
world, the Dow Jones Industrial Average not only reflects the pulse of
investors, it affects the pulse of investors. Not only do investors' decisions make the Dow move in a
direction, but the direction of the Dow often causes investors to make those very
decisions. Every day, investors watch the same ticker tape, read the same
newspapers, listen to the same financial television shows and watch the same market indices go up and down. The same
information, opinions and emotional expressions are absorbed and reflected by millions of people involved in the
market. It is almost as if the participants are in a town square, and an orator trying to wip up revolution is standing on a
balcony, making the crowd's emotions wax and wane with each change in
content, tone and volume. In the case of markets, however, the orator and crowd are mostly one and the
same. Much of Wall Street's information, such as price level, direction, speed of price change and
volume, is self-generated, and just like a mob, the financial community feeds off its own
emotions. The reason is that every market decision is both, produced by information and produces
information. Each transaction, while at once an effect, becomes part of the market and, by communicating transactional data to
investors, joins the chain of causes of others' behavior. This process produces a mass feedback
loop, which is governed by man's unconscious social nature. Since he has such a nature, the process repeatedly generates the same
Stock averages even allow the crowd to monitor itself, like fashion-conscious people watching each other at a shopping mall. In their function as
monitors, averages such as the Dow Jones Industrial Average must be maintained as a
standard. Let us explore this idea as it relates to the integrity of the
DJIA. There is an oft-cited and not unreasonable objection to using the Dow in analysis or
forecasting, which is that its components are not constant. For instance, Dow Jones & Co. replaces stocks in its averages from time to time, and occasionally one of the stocks
split. Either event changes the relative weightings of the indvidual issues in the
average. Many people call such changes "distortions," implying that this stock average is a rubber
yardstick. A spokesman for Dow Jones & Co. who maintains the Dow
averages, admittedly a partisan on this issue, says, "The components, may change with the
times, but what the Dow represents remains constant." The precision of the DJIA's long-term wave structures and price relationship over the years supports this view
unequivocally. The constancy of the Dow is also revealed by its continually constructing long-term parallel trend channels according to Elliott's
observation. The constancy of the Dow is a necessity in accounting for the success of three specific forecasts recounted in Chapter 5. There are others on the
record. For instance, even though Dow Jones & Co. substituted MMM for Anaconda in its primary average 1976, the 1977-1978 decline still took the Dow exactly to a 0.618 retracement of the 1974-1976
advance, reaching a target I published in advance , as detailed in Chapter 4 of Elliott Wave
Principle. Despite several splits and substitutions, the Dow's rise from 1974 nevertheless topped in 1987 within 0.07% of a level that made the 1974-1987 advance in percentage terms precisely equal to that of 1932-1937, fulfilling a wave relationship that
A.J. Frost called for nine years in advance in Elliott Wave Principle.
Because of all this experience, it is clear to me that investors have a complex emotional relationship with the Dow as such, as an entity in
itself, much as fans remain loyal to a sports team dispite the continual replacement of individual
players. Professional investor's actions reflect this loyalty when they adjust their portfolios after a change in Dow
(or S&P) components. They make such adjustments either to mimic what Dow Jones & Co. did or under the assumtion that other people will do so. Each of these reasons conforms to the herding
(The Wave Principle of Human Social Behavior, 1999 Robert R.Prechter jr.)
ELLtoday Analyse from over ONE
YEAR AGO !!
S&P 500, daily chart,
May 2008-January 2009
© ELLIOTT today, January 30,2009
Elliott Wave Analysis
The prefered wave count shown last week stood the test and must not be
altered. Minute wave (ii) retraced 52.51% of the preceeding decline of Minute wave (i), a common retracement
level. Minute wave (iii) down should be
more spectacular and should again surprise the media. One reason is the breaking of the former lows of November
2008. The chart displays the downmove of the S&P 500 Index and shows the details on daily
bars. As you can see, not only
do the waves subdivide (1,2,3,4,5) but it also travels within a parallel trend
channel. Minor Waves 2 and 4 sport alternation by taking different forms, (zigzag and double
three), thus satisfying the most common guideline of
impulse wave formation.
Here is the point of
discussion: The herding impulse rather than the rational neocortex , drives the decisions of most
financial market participants. Both the herding impulse and its attendant emotions are hard-wired nearly identically into
people's unconscious minds. Whatever certain individuals may decide
rationally, such decisions are diverse, and the herding impulse is
ubiquitous. Thus, in the aggregate, individual rational decisions tend to cancel out, leaving herding impulses to
determine the market's overall trend. The Wave Principle
describes the order and pattern of human herding. As emotions attending
the herding impulse become more heightened, people's neocortexes become less effectual and so produce less
independence. Ironically, then, emotional markets are more orderly than non-emotional markets because they more purely reflect the
aggregate impulse to herd.People feel and therefore almost universally believe that emotional markets are
disorderly, but that
is only because their limbic systems at such times give off emotions that create stress, which is what makes people respond
to the impulses in the first place. Minute wave (ii) may not be complete and could morph into a more complex
pattern, as is
typically for second waves. If it happens , this would not alter the implications for Minute wave (iii) down.
From the high of August 11, 2008 at 1313,15 - 741,02 = 572,13 or 43,57%
Low of November 21,2008 of 741,02 - 943,85 = 202,83 or 27,37%
And the ratio is 43,57% / 27,37% = 1.5918 or inverted 0.62818 which is phi = 0.618.
Minor Wave 2 lasted 26 days, Minor wave 3 lasted 100 days and Minor wave 4 lasted 45
days. Minor wave 1 declined from August 11 to September 18 which is 37
days. Intermediate wave (2) took a timespan of 56 days (Fibonacci 55
!!). Fifth waves often run equality in time and price especially when the third waves
extends, as it is in this case.
The just started fifth wave
down should fall below 741 and with respect to time may bottom between February 13, 2009 and March 2, 2009.
This is NOT a forecast, it is just a possibility compared with historic
© ELLIOTT today, January 30,2009
In the 1938 Alfred Hitchcock
movie, The Lady Vanishes, the mistaken psychiatrist is told: "You must think of a fresh
theory." Doctor Hartz responds: "It is not necessary. My theory was perfectly good.
The facts were misleading."
Wie in jeder langen
Hausse erfasste mit der Zeit grenzenloser Optimismus die
Börsenspieler, aber bald auch breiteste Bevölkerungsschichten.
Täglich lasen die kleinen Leute in der Zeitung von raschen
Börsenerfolgen explodierenden Grundstückspreisen und neuen
gigantischen Spekulationen. Und wo sogar die großen, illustren Namen
der Hochfinanz und des Hochadels im Spiel waren, sollte man da
So berichtete der einige Jahre später in Konkurs geratene
Eisenbahnkönig Strousberg in seinen Memoiren: "Meine Dienstboten
selbst, die sich mit den Jahren einige hundert Taler erspart hatten,
waren trotz meiner Warnung nicht zu halten und merkwürdigerweise
beteiligten sich die armen Leute fast immer an den allerfaulsten
Unternehmungen. " So "merkwürdig" war das eigentlich
gar nicht, denn natürlich wurde gerade für diese Projekte am
lautesten Propaganda gemacht, um den Börsenlaien den Mund wässrig zu
Schließlich erfaßte der Spekulationsboom die gesamte Bevölkerung
und in einem Spottgedicht hieß es:
"Es jobbert der Jude, es jobbert der Christ, es jobbern die
Krämer und Schreiber, es jobbert der Gastwirt,
der Prokurist, der Rechtsanwalt und sein Kopist, es jobbern die Kinder
Die berühmte "Dienstmädchen-Hausse" begann sich zu
entfalten, die immer unweigerlich zum Zusammenbruch führt. Doch noch
war es nicht soweit, besonders 1872 und auch noch in den ersten
Monaten des Jahres 1873 hatten die Optimisten Hochkonjunktur. Allein
in Preußen wurden 1872 fast 500 neue Unternehmen gegründet. Dabei
war es keine Seltenheit, so wird berichtet, dass die Gründer Fabriken
für ein- bis zweihunderttausend Mark kauften und darauf ein
Aktienkapital von einer Million ausgaben. Solange sich immer neue
Käufermassen auf diese neuen Papiere stürzten und dadurch die Kurse
permanent stiegen, störte solche Überkapitalisierung niemand. Was kam es schon auf ein paar Prozent
Dividende mehr oder weniger an, wenn man mit halsbrecherischen Termingeschäften sein Geld in wenigen
Wochen spielend verdoppeln
oder verdreifachen konnte.?
Zudem war es durchaus nicht so, als würde die Spekulation
jeglicher Grundlage entbehren, denn auch die Industrie befand sich
dank des überbordenden Baubooms, der großen Staatsausgaben und des
großen Optimismus in einem kräftigen Aufschwung. So stieg zum
Beispiel in Deutschland von 1870 bis 1873 die Roheisenproduktion um 60
Prozent. Nur leider eilte die Spekulation auch diesen an sich sehr
guten Zahlen noch meilenweit voran, das zeigte sich am deutlichsten in
der Baubranche. Dank steigender Löhne und immer größerer Zahl von
Arbeitern in den Städten, bestand durchaus Interesse und Bedarf an
Wohnungen. Die neu gegründeten Baufirmen beeilten sich denn auch, die
Beseitigung der Wohnungsnot zu ihren ureigensten Anliegen zu machen.
Zudem hiess es in ihren Anzeigen und Gründungs- prospekten so,
allerdings sah die Wirklichkeit ganz anders aus.
Ein Zeitgenosse berichtet:
"Hatte irgendeine Baugesellschaft an irgendeinem
unzugänglichen Punkte der Umgebung Wiens einige tausend Quadratklafter Baugrund zu fabelhaften Preisen erworben,
sofort eine Baugesellschaft gegründet, deren Aktionäre dieselben zu
doppelten und dreifachen Preisen aufgehalst wurden."
Diese Spekulationen brachten am Ende die Mieten auf eine Höhe, dass die in Wien erscheinende "Deutsche Zeitung" monierte,
die Baufirmen würden Paläste bauen "als wäre die Majorität der
Wiener Bevölkerung aus der glücklichen Kaste der Millionäre."
Die gleiche Zeitung berichtete auch oft und ausführlich von den
Tricks der gerissenen Großspekulation, die ihre faulen Papiere auf
die ahnungslosen Kleinanleger ablud. Dabei half die Presse kräftig mit. Natürlich konnte dieser Superboom nicht
ewig so weitergehen. Die Spekulation funktionierte schließlich nach dem Prinzip,
das jeder Käufer
für sein Grundstück oder seine Aktie einen Abnehmer finden musste,
der einen noch höheren Preis zu zahlen bereit war, als man selbst
bezahlt hatte. Solange das klappte, war alles wunderbar und jeder
konnte sich mit dem schnell und leicht verdienten Geld
in neue gewagte Transaktionen stürzen. Irgendwann aber mussten die
Preise so hoch sein, dass sie niemand mehr so leicht bezahlen konnte,
dann würde ein Windstoß genügen, den ganzen spekulativen Turmbau
zum Einsturz zu bringen.
Dass eine mächtige Hausse oft ganz plötzlich und ohne große
Vorwarnung zusammenbricht, lässt die Zeitgenossen nach Anlässen und
Gründen suchen, die den überraschenden Trendumschwung erklären
sollten. Auch über das Ende des Gründerbooms gibt es eine Menge
solcher Geschichten. Eine nette Anekdote dieser Art spielt in den
hektischen Tagen der Wiener Börse wo sich zu dieser Zeit die
Spekulationen nur so jagten. Als der Vertreter der
Rothschilds im dicksten Getümmel der Makler erschien, bestürmten ihn
die Börsianer mit einer Vielzahl von angeblichen todsicheren
Aktientipps. Schließlich wurde ihm von einem besonders wild
gestikulierenden Spekulanten ein Aktienpaket für eine halbe Million
Gulden angeboten. "Eine halbe Million?" fragte darauf der
Agent der angesehenen Rothschilds, "soviel sind alle
neugegründeten Banken zusammen nicht wert." Die Geschichte
machte die Runde und verursachte einen gehörigen Kassensturz.
(Die großen Spekulationen der Geschichte, 1982)