Graham Dyer's Newsletter

Everyone Else Puts The Cart Before The Horse

It has taken me a long time to grasp the theory of the new science of "socionomics," and I am sure you will be having difficulty as well. In the last issue I illustrated it with the bead of water trickling down the window pane. Just as the unseen force of gravity is pulling that bead of water down to the bottom, despite the lumps and bumps on the way, so an unseen force is driving the mood of the herd, despite the lumps and bumps along the way, in an overall direction that cannot be changed by the interruptions (economic events, etc.), except temporarily, just like the raindrop. What is that unseen force in the case of the collective social mood? What causes crowd psychology to move forward in waves of optimism punctuated by waves of pessimism? Does the herd mentality cause economic events or do economic events change the social mood?

Here is the technical explanation, as per Elliott Wave International:



What does that mean when translated into English?



If "nature" is so perfectly patterned, why can’t humanity be the same? For example, if you look at an atom under a microscope (so I am told), you will see a central nucleus, with electrons flying around it, but never crashing into each other. If you look at the solar system, you see the same pattern — a central star with planets orbiting around it but never crashing into each other. The pattern is the same even though the size is vastly different.

If you look at a chart of sharemarket trading for one day, you will see a distinct pattern of five waves up, three waves down (or vice versa). If you look at a chart of the sharemarket for the last 70 years, or even more, you will see the same pattern. Only the size is different.

Is it not possible that something is driving this phenomenon? If so, what is this unseen force?

The phenomenon is spectacularly illustrated in Robert Prechter’s latest book Conquer The Crash. Look at the chart he shows on page 36. Is that not incredible? The top line covers an 8-year period (from 1921 to 1929) and the bottom one covers a 26-year period (1974 to 2000). The size (as in time) is different, but the pattern is the same.

What caused that to happen? Economic events? Hardly. Investors in the sharemarket have no control over interest rates, wars, political events, GDP growth, retail sales, inflation, industrial production, consumer spending and confidence, etc. The chances of economic statistics repeating themselves so perfectly (and the "market" reacting identically each time) over 8 years and 26 years respectively is about the same as the chances of the unabridged Oxford dictionary resulting from an explosion in a printers shop.

That pattern is not of economic events. That is a pattern of crowd behavior, which clearly repeats itself over and over. What causes it to do that?

The conventional belief is that people (as a crowd) react to economic (and political and cultural) trends and events, and this is reflected in the sharemarket, which represents the crowd’s own assessment of its aggregate productive capacity. For example, if the Federal Reserve lowers interest rates, the sharemarket goes up, because everyone knows that lower interest rates mean lower costs and therefore higher profits for corporations listed on the stock exchange. The economic event (the fall in interest rates) causes the herd to react. That’s the conventional view.

The stock market may be rising in "03, but jobs are scarce. The "popular" war against Iraq is killing US soldiers on a daily basis. More killed in the peace than in the war now. Americans scent another Vietnam, which in turns reminds them of recessions and bad times. If George Bush Jr isn't on the phone to Robert Prechter to see where he stands on the Elliott Wave, he should be. It is still the economy stupid" and America is now billions in debt thanks to this war, and unnecessary trade sanctions (such as Steel and Beef.) It is also in the process of relocating much of its manufacturing to China, where people will work for two bucks a day. China in five years could be the world largest producers of cars and they will be demanding more an more oil contracts from the Middle East. What mood will America be in if it can't get oil because China bought it first. What price oil in that tight market? If you think mood doesn't affect what we do or buy or think, ask a New Yorker about what he feels about the blackout this August or being told it will happen again.

A real socionomics student will also think about how much energy could be saved if America had long lasting light bulbs or energy saving legislation in place on computers, all electronic devices. They will think about the companies who make those products as well as companies that can manufacture and distribute electric power more efficiently.

A political mood for making things more energy saving could be an investment bonanza for some companies. Change the politics, change the mood.

The difficulty comes in interpreting social mood to predict the stock market. You can study every trend and still come to the wrong conclusion. Is it possible to tax Lattes and espressos in Seattle? Come September 16th 2003 we shall find out. The revenue is targeted at day-care for kids. If this carries, can taxing other unhealthy things be far behind. A McDonalds"Big Mac" tax, a Donut tax. This is exactly what Prechter is discussing. The implication is that an acceptance of a tax on lattes means that the mood is for social responsibility is prevalent and that could mean a Democratic victory at the next election. A defeat could mean that Bush and selfishness reign supreme.

Prechter writes: Predictions involve two levels of complexity: the general character of coming events and the specific events themselves. The primary aspects of the social dynamic are its formological imperative, which governs the former, and its chaotic process, which governs the latter.

In a Chapter 'World Peace, World War, Fibonacci and Elliott' he discusses the impact of Sept 11th on America's mood and fortunes. Certainly we are living with the consequences of that event. The war on Iraq and rising terrorist atrocities around the world can be plotted into the Elliott Wave pattern. Reassuringly he doesn't feel that a major "world" war could arise until 2034 (plus or minus two years.) Nevertheless, a war of constant attrition and rising acts of terror could continue for many years before then. Given a literal interpretation of Fibonacci given that the Korean War lasted three years and Vietnam lasted 8, the next war could last 21 years. That war may have started on Sept 11th 2000. I am not sure that anyone or any civilization could survive such a thing given the highly developed means of destruction we have at our disposal.

Better to judge that the mood for war could change and as a result bring a change at the top. Americans could elect people more able to negotiate and less inclined to spill blood.

There is no doubt that reading Prechter's books could be useful and you learn a great deal about the invisible yet utterly intrinsic importance that social trends and moods have in shaping the wealth of the nation. It is not just a case of watching housing starts or counting cars produced. The educated investor has be socially aware, clued into every facet of human life, be aware of trends and changes in places like China and Japan, as well as Europe. It is not an easy solution, no quick short cut to riches. Read the case studies and about how the Elliot Wave works and you will be a better investor, able to spot dangers and make the most of opportunities in down waves and up waves. That's no bad thing. Every serious investor should read these works.

Sam North - Editor editor@hackwriters.com