|By Alan M. Hall and Robert R. Prechter | Excerpted from the August 2009 Socionomist|
Here Alan Hall and Robert Prechter explore the radical idea that the Wave Principle governs speculative manias. Further, they evaluate the impact of four cyclical phases of social attitude –exuberance, panic, caution and transition – on the federal income tax rate, financial regulation, relative financial wages, total credit market debt and wealth inequality. Here is an excerpt of this landmark August 2009 article.
Two Mania Peaks and the Valley Between
Figure 2 shows our most sensitive and accurate sociometer, the Dow Jones Industrial Average, against five indicators of social behavior relating to wealth. We have divided the chart into five psychological phases: exuberance (1921-1929), panic (1929-1933), caution (1933-1954), transition (1954-1974) and back to exuberance (1974-2000/2007)…. These phases begin and end at specific, important points in the Elliott wave pattern that mark shifts in the progression of social psychology. All five of the social indicators displayed beneath the DJIA reflect these periods of social-mood change in roughly the same way.
Exuberance Phase – 1921-1929
Eighty-six years after the mania peak of 1835, speculative fever returned during wave V of (III),. The Cycle-degree fifth wave produced a steep stock rally and the frenzy known as the Roaring Twenties. Bernard Baruch, a famous investor, was one of the few who sidestepped the crash because he recognized the excesses of the mania as it peaked:
Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish…. My cook had a brokerage account and followed the ticker closely. (Bernard Baruch, Baruch, the Public Years, 1960)
The green-shaded segments of the five graphs in the bottom portion of Figure 2 reflect the euphoric social-mood environment of the 1920s. The government enacted a succession of large tax cuts (see graph 1) and kept financial regulation at low levels (graph 2). Relative financial pay rose (graph 3) as esteem for finance increased and as its growing complexity demanded skilled, specialized workers. By mid-phase, both the government and private banks were expanding credit (graph 4) to capitalize on and feed the financial-asset boom. In all the excitement, the soaring wealth inequality (graph 5) bothered few; everyone believed he was getting rich, or at least that he was about to get rich. The exuberant excess built a financial house of cards that topped out at the peak of wave V. The inevitable, positive extreme in social mood led directly to the next phase in the social sequence: panic.
Panic Phase – 1929-1933
From the peak of the mania in 1929, the Dow fell 89% to its 1932 bottom. The reversal in social mood had serious consequences. Record numbers of banks failed, industrial production declined 47 percent, GDP fell 30 percent, the wholesale price index declined 33 percent, and unemployment exceeded 20 percent. Robert Shiller’s nominal U.S. home price index shows a decline of over 30 percent from 1925-1933. According to the February 2008 U.S. News and World Report article, “Comparing Today’s Housing Crisis With the 1930s,” new home construction between 1925 and 1933 fell 90%.
In this in-depth eight-page study, learn the full story of how the Exuberance Phase (1921-1929), the Panic, Caution , Transition and Exuberance Phases each drove the federal income tax rates, financial regulation, relative financial wages, total credit market debt and wealth equality/inequality. Learn what to expect from today’s Panic Phase, and why Hall and Prechter claim it has the potential to dwarf its sister phase of the 1930s.
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Most economists, historians and sociologists
presume that events determine society’s mood. But socionomics hypothesizes
the opposite: that social mood regulates the character of social events. The
events of history—such as investment booms and busts, political events,
macroeconomic trends and even peace and war—are the products of a naturally
occurring pattern of social-mood fluctuation. Such events, therefore, are not
randomly distributed, as is commonly believed, but are in fact probabilistically
predictable. Socionomics also posits that the stock market is the best available
meter of a society’s aggregate mood, that news is irrelevant to social
mood, and that financial and economic decision-making are fundamentally different
in that financial decisions are motivated by the herding impulse while economic
choices are guided by supply and demand. For more information about socionomic
theory, see (1) the text, The
Wave Principle of Human Social Behavior © 1999, by Robert Prechter;
(2) the introductory documentary History's
Hidden Engine; (3) the video Toward
a New Science of Social Prediction, Prechter’s 2004 speech before
the London School of Economics in which he presents evidence to support his
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