Commodity Prices and Inflation:
What's the Connection?
Daily Article by Frank Shostak | Posted on 7/1/2008
The latest data show that the yearly rate of growth of the US consumer price index (CPI) climbed to 4.1% in May from 3.9% in the month before. Most economists and Federal Reserve policy makers attribute this to sharp increases in commodity prices.
In his speech at the Federal Reserve Bank of Boston, Fed Chairman Bernanke said,
Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities.[1]
There is almost complete unanimity among economists and various commentators that inflation consists in general increases in the prices of goods and services. From this it is established that anything that contributes to price increases sets inflation in motion. A decrease in unemployment or an increase in economic activity is seen as a potential inflationary trigger. Some other triggers, such as increases in commodity prices or workers wages, are also regarded as potential threats.
If inflation is just a general increase in prices, as popular thinking has it, then why is it regarded as bad news? What kind of damage does it do?
Mainstream economists maintain that inflation causes speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources. Inflation, it is argued, also undermines real economic growth.
Why should a general increase in prices hurt some groups of people and not others? And how does inflation lead to the misallocation of resources? Why should a general increase in prices weaken real economic growth? If inflation is triggered by other factors, then surely it is just a symptom and can't cause anything as such.
We know that a price of a good is the amount of money paid for the good. From this we can infer that for any given amount of goods, a general increase in prices can only take place in response to the increase or inflation of the money supply.
Most economists, when discussing the issue of general increases in prices, which they label inflation, never mention the word money. The reason for that is the lack of a good statistical correlation between changes in money and changes in various price indexes such as the CPI. Whether changes in money cause changes in prices cannot be established by means of statistical correlation. We suggest that a statistical correlation, or lack of it, between two variables shouldn't be the determining factor in establishing causality. One must figure out by means of reasoning the structure of causality.
The Essence of Inflation
Historically, inflation originated when a king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process the king would falsify the content of the gold coins by mixing it with some other metal and return to the citizens diluted gold coins. On this Rothbard wrote,
More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of "pounds" or "marks," but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.[2]
Because of the dilution of the gold coins, the ruler could now mint a greater number of coins for his own use. (He could now divert real resources to himself.) What was now passing as a pure gold coin was in fact a diluted gold coin.
The expansion in the diluted coins that masquerade as pure gold coins is what inflation is all about. As a result of the increase in the amount of coins, prices in terms of coins now go up (more coins are being exchanged for a given amount of goods). What we have here is inflation, i.e., an expansion of coins. As a result of inflation, the ruler can engage in an exchange of nothing for something. Also note that the increase in prices in terms of coins results from the coin inflation.
Under the gold standard, the technique of abusing the medium of exchange became much more advanced through the issuance of paper money unbacked by gold. Inflation therefore means here an increase in the amount of paper receipts resulting from the increase in receipts that are not backed by gold yet masquerade as the true representatives of money proper: gold.
The holder of unbacked receipts can now engage in an exchange of nothing for something. As a result of the increase in the number of receipts (inflation of receipts) we now also have a general increase in prices. Observe that the rise in prices develops here because of the increase in paper receipts that are not backed by gold. Also, what we have is a situation where the issuers of the unbacked paper receipts divert to themselves real goods without making any contribution to the production of goods.
In the modern world, money proper is no longer gold but rather paper money; hence inflation in this case is an increase in the stock of paper money. Please note we don't say, as monetarists do, that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.
We have seen that increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This is what sets in motion the misallocation of resources, not price increases as such.
Real incomes of wealth generators fall not because of a general rise in prices but because of increases in the money supply. When money is expanded — i.e., created out of "thin air" — the holders of the newly created money can divert to themselves goods without making any contribution to the production of goods. As a result, wealth generators who have contributed to the production of goods discover that the purchasing power of their money has fallen since there are now fewer goods left in the pool — they cannot fully exercise their claims over final goods since these goods are not there.
Once wealth generators have fewer real resources at their disposal, this will obviously hurt the formation of real wealth. As a result, real economic growth is going to come under pressure.
General increases in prices, which follow increases in money supply, only point to an erosion of real wealth. Price increases, however, didn't cause this erosion.
Likewise, it is monetary inflation, and not increases in prices, that erodes the real incomes of pensioners and low-income earners. As a rule, they are the last receivers of money — often called the "fixed-income groups."
According to Rothbard,
Particular sufferers will be those depending on fixed-money contracts — contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long-term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are "taxed."[3]
Can Increases in Commodity Prices Cause Inflation?
We have seen that, according to Bernanke and most economists, it is increases in commodity prices such as oil that are behind the recent strong increases in the prices of goods and services.
If the price of oil goes up, and if people continue to use the same amount of oil as before, people will be forced to allocate more money to oil. If people's money stock remains unchanged, less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come down. Remember: a price is the sum of money paid for a unit of a good. (The term "average" is used here in conceptual form. We are well aware that such an average cannot be computed.)
Note that the overall money spent on goods doesn't change; only the composition of spending has altered, with more on oil and less on other goods. Hence the average price of goods or money per unit of good remains unchanged.
Likewise, the rate of increase in the prices of goods and services in general is going to be constrained by the rate of growth of money supply, all other things being equal, and not by the rate of growth of the price of oil.
It is not possible for increases in the price of oil to set in motion a general increase in the prices of goods and services without corresponding support from the money supply.
Can Inflation Expectations Trigger a General Price Rise?
We have seen that as a rule a general increase in the prices of goods can emerge as a result of the increase in the amount of money paid for goods, all other things being equal. The key then for general increases in prices, which is labeled by popular thinking as inflation, is increases in the money supply, e.g., the supply of US dollars. But what about the situation when increases in commodity prices ignite inflation expectations, which in turn strengthens the rate of inflation? Surely then inflation expectations must be also an important driving factor of inflation? According to Bernanke inflation expectations are the key driving factor behind increases in general prices,
The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.[4]
Once people start to anticipate higher inflation in the future, they increase their demand for goods at present thus bidding the prices of goods higher. Also, according to popular thinking, workers expectations for higher inflation prompt them to demand higher wages. Increases in wages in turn lift the cost of producing goods and services and force businesses to pass these increases on to consumers by raising prices.
It is true that businesses set prices and it is also true that businessmen, while setting prices, take into account various costs of production. However, businesses are ultimately at the mercy of the consumer, who is the final arbiter.
The consumer determines whether the price set is "right," so to speak. Now, if the money stock did not increase, then consumers won't have more money to support the general increase in prices of goods and services.
Also, because of expectations for higher prices in the future, consumers will not be able to increase their demand for goods at present and bid the prices of goods higher without having more money. Consequently, the amount of money spent per unit of goods will stay unchanged.
So irrespective what people's expectations are, if the money supply hasn't increased, then people's monetary expenditure on goods cannot increase either. This means that no general strengthening in price increases can take place without an increase in the pace of monetary pumping.
Imagine that somehow the Fed did manage to convince people that central bank policies are aimed at stopping inflation and maintaining price stability, yet at the same time the central bank also increased the rate of growth of money supply. Even if inflationary expectations were stable, that destructive process would be set in motion, regardless of these expectations, because of the increase in the rate of growth of money. People's expectations and perceptions cannot offset this destructive process. It is not possible to alter the facts of reality by means of expectations. The damage that was done cannot be undone by means of expectations and perceptions.
Some economists, such as Milton Friedman, maintain that if inflation is "expected" by producers and consumers, then it produces very little damage.[5] The problem, according to Friedman, is with unexpected inflation, which causes a misallocation of resources and weakens the economy. According to Friedman, if a general increase in prices can be stabilized by means of a fixed rate of monetary injections, people will then adjust their conduct accordingly. Consequently, Friedman says, expected general price increases, which he calls expected inflation, will be harmless, with no real effect.
Observe that, for Friedman, bad side effects are not caused by increases in the money supply but by its outcome — increases in prices. Friedman regards money supply as a tool that can stabilize general increases in prices and thereby promote real economic growth. According to this way of thinking, all that is required is fixing the rate of money growth, and the rest will follow.
The fixing of the money supply's rate of growth does not alter the fact that money supply continues to expand. This, in turn, means that it will lead to the diversion of resources from wealth producers to non–wealth producers. The policy of stabilizing prices will therefore generate more instability through the misallocation of resources.
Can Inflation Emerge While Prices Stay Unchanged?
Now, if for a given stock of goods an increase in the money supply occurs, this would mean that more money is going to be exchanged for a given stock of goods. Obviously then the purchasing power of money is going to fall, i.e., the prices of goods are going to increase (more money per unit of a good). In this case the general increase in prices is associated with inflation.
But now consider the following case: the rate of growth in money is in line with the rate of growth in goods. Consequently, the prices of goods on average don't change. Do we have inflation here or don't we? For most economists, if an increase in the money supply is exactly matched by the increase in the production of goods, then this is fine, since no increase in general prices has taken place and therefore no inflation has emerged. We suggest that this way of thinking is false since inflation has taken place, i.e., the money supply has increased. This increase cannot be undone by the corresponding increase in the production of goods and services.
For instance, once a king has created more diluted gold coins that masquerade as pure gold coins he is now able to exchange nothing for something irrespective of the rate of growth of the production of goods. Regardless of what the production of goods is doing, the king is now engaging in an exchange of nothing for something, i.e., diverting resources to himself by paying nothing in return. This diversion is possible because of the increase in the number of diluted coins, i.e., the inflation of coins.
The same logic can be applied to paper-money inflation. The exchange of nothing for something that the expansion of money sets in motion cannot be undone by an increase in the production of goods. The increase in money supply — i.e., the increase in inflation — is going to set in motion all the negative side effects that money printing does, including the menace of the boom-bust cycle, regardless of the increase in the production of goods.
According to Rothbard,
The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware.[6]
Conclusion
Contrary to the popular definition, inflation is not about a general rise in prices but about increases in money supply. The general increase in prices as a rule develops because of the increase in money. The harm that most people attribute to increasing prices is in fact due to increases in money supply. Policies that are aimed at fighting inflation without identifying what it is all about only make things much worse.
When inflation is seen as a general increase in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes.
In this framework, not only does the central bank have nothing to do with inflation but, on the contrary, the bank is regarded as an inflation fighter. On this Mises wrote,
To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase. They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices.[7]
_____________________________
Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global. Send him mail and see his outstanding Mises.org Daily Articles Archive. Comment on the blog.
Notes
[1] Ben S. Bernanke. "Outstanding Issues in the Analysis of Inflation." Speech at the Federal Reserve Bank of Boston June 9, 2008.
[2] Murray N. Rothbard. What Has Government Done to Our Money?
[3] Murray N. Rothbard. What Has Government Done to Our Money?
[4] Ben S. Bernanke. "Outstanding Issues in the Analysis of Inflation." Speech at the Federal Reserve Bank of Boston June 9, 2008.
[5] See Friedman's Dollars and Deficits, Prentice Hall, 1968, pp.47–48.
[6] Murray N. Rothbard. America's Great Depression. 153.
[7] Ludwig von Mises. Economic Freedom and Interventionism. 94.
General Motors (GM) Chart of June 28,2008
Again, Five-waves down from the top !!
DAX [Chart of March 14, 2007] © ELLIOTT today, posted April 17,2008
Chart: futuresource.com Elliott Wave analysis called for a decline to the "previous fourth wave support..."
DAX Chart of January 23, 2008 © ELLIOTT today, posted April 17,2008
Chart: futuresource.com
EUR/CHF
© ELLIOTT today, April 5,2008
Chart: futuresource.com
R.N.Elliott’s Discovery
In the 1930s, Ralph Nelson Elliott discovered that aggregate stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form, but not necessarily in time or amplitude. Elliott isolated and defined thirteen patterns, or “waves”, that recur in market price data. He named and illustrated the patterns. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns at the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.
Many areas of mass human activity display the Wave Principle, but it is most popularly applied to stock market averages. There is voluminous, meticulously tabulated data on fincancial markets because people deem them important. Actually, the stock market is far more significant to the human condition than it appears to casual observers and even to those
who make their living by it. The level of aggregate stock prices is a direct and immediate measure of the popular valuation of man’s total productive capability. That this valuation has a form is a fact of profound implications that should ultimately revolutionize the social sciences.
While Elliott progressed to the recognition of patterns and their linkage by a painstaking process of cataloging the minute details of price movement, we will forego such exercises and proceed directly to a description of the overall pattern.
The Five-Wave Pattern
In markets, progress ultimately takes the form of five waves of a specific structure. Waves (1), (3), (4) and (5) actually effect the directional movement. Waves (2) and (4) are countertrend interruptions. The two interruptions are apparently a requisite for overall directional movement to occur. Elliott noted three consistent aspects of the five wave form. They are: Wave two never moves beyond the start of wave one, wave three is never the shortest wave, and wave four never enters the price territory of wave one. The stock market is always somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed.
Source: Elliott Wave International
The Elliott Wave Financial Forecast
March 31,2000 Broadstreet
The following chart (Pioneering Studies in Socionomics, (c) 2003, Robert R.Prechter) of annual gross
revenues for Broadway theaters paints a revealing portrait of the correlation between a rising social mood
and the demand for popular stage shows. Over the last half century, Broadway's box office performance
has ebbed and flowed with the Cycle-degree trends in the stock market. Just like stocks, ticket sales had
a long rise to a double top in 1966 and 1668 (attendance topped in 1966 and revenues in 1968 ) a major
bottom in 1974 and another long advance through the end of the 1990s. Broadway's recent take suggests
that a trend change is at hand. Projections for the year ending May 31 call for little more than a slight
increase of $1 million. This slowing would fit our Elliott wave case for stock market downturn of at least
Cycle degree.
Lending support to this quantitatiive assessment is the more qualitative analysis that appeared in the
August 1997 issue of the The Elliott Wave Theorist. A study of New York City's theater district at past
peaks revealed a clear tendency to finish long advances with a flourish of activity and showmanship.
"Entertainment industry histories covering the Supercycle peaks of 1835 and 1929 show that flashy
but shallow drama is a recurrent theme in fifth waves of Cycle degree. " The same word, "spectacles,"
continually surfaces in descriptions of Broadway's earlier fifth wave peaks and its latest era. "You have
two kinds of shows on Broadway - revivals and the same kind of musicals over and over again, all
spectacles," laments Stephen Sondheim, who was recently tabbed "the Broadway musical's last great
artist." "Broadway today is more than ever about spectacle than real drama or real emotions, more
about giving audiences an 'experience,' " Like the figures for Broadway ticket sales, this more
subjective confirmation of a fifth wave als carries a clear sign its impending demise. "Cats, the longest
running production on Broadway history will close June 25," says The New York Times. "Cats fundamentally
reshaped the Broadway landscape by ushering in the era of megamusicals: big flashy spectacles that
required little theatrical sophistication or knowledge of the English language to appreciate." Cats came
to Broadway on October 7, 1982. When the curtain falls June 25,Cats many critics will undoubtedly
applaud, but probably not for long. "In 1930," Times Square, a history of the NYC district notes, "the
frivolity of the 1920s gave way to a serious, if not grim tone." By 1932 only six years shows were playing
on Broadway. That compares to an all-time high in 1928 of 294! The show will go on, but not without drastic
changes in tone and reductions in number.
Elliott Wave International
The Elliott Wave Theorist
March 27,1998
A Socionomic Study of Restaurants
Munching on Evidence of a Grand Supercylce Peak
When people feel good, they like to got out, be seen, eat well and dring socially. This makes restaurants
a focal point for the expression of a bull market mood. In our town, chain restaurants now seem to spring
up a row in time, which led us to dig the following highlights in the history of the restaurant industry.
Data show that the urge to eat out has been synonymous with the urge to buy stock for the duration of the
Grand Supercycle bull market . The first true restaurant was the Grande Taverne de Londres, which was
established in Paris around 1782, approximately the year that we believe Supercycle wave (I) began.
Delmonico's , the first American restaurant, was established dring the final leg of Supercycle wave (I).
Between its establishment and the stock top of 1835, the Delmonico brothers and two other proprietors
became the first to "operate multiple restaurants, which functioned as a complex organism - the use of the
same name, almost duplicate menus, and similar genetic consistencies to create clones," according to the
book, From Boarding House to Bistro. Through the middle of the 19th century, restaurants became more
common, but the choppy stock market conditions were reflected in a high failure rate. Of the 497 different
addresses in New York City from 1950 to 1860, only 11, or 2% , were open under the same proprietor in
both years. True chains appeared after the Civil War, as Supercycle wave (III) began its steady advance. In
1875, in the middle of wave (III), the Harvey House, which ultimately grew to a highly standardized family of
50 restaurants, revolutionized the industry. "Like the Delmonicos, Fred Harvey was at the right spot at the
right time," records American Eats Out, a history of the restaurant business. " [His] effect was immediate,
populist, and spread through the entire country, [setting] the course of culinary history."
In the bull market of the 1920s, cafeteries, speakeasies and White Castle hamburger joints rapidly across
the country. Howard Johnson, Marriott Corp. and countless other "white box" hamburger stands tapped into
the mass appeal that White Castle had uncovered. The nest "revolution" was called "fast food," which
From Boarding House to Bistro dates to 1949, the exact year of the start of Supercycle wave (V) in
inflation-adjusted stock prices, when the McDonald brothers established a walk-up hamburger stand.
In many ways, "McDonald's story was a reenactment of the [White Castle system] in the 1920s."
In 1954, as the "third of the third wave" entered its acceleration phase, Ray Kroc bought the francise rights,
capturing what may be America's No.1 brand name by introducing speed, efficiency and mass marketing
to the industry. McDonald's capped off a decade of rapid growth with the first major offering of a restaurant
stock in 1965, a few months before the wave III peak.
Through the first 200 years of the Grand Supercycle bull market, the relatively fragmented and faddish nature
of the industry kept most eateries from being listed on the stock exchange. McDonald's still makes up almost
80% of the S&P restaurant index because it remains one of just four well-established restaurant-chain stocks.
Appropriately, however, in this final decade of the advance, the public has assumed much of the risk that is
inherent in catering literally to tastes. In the 1990s, the number of restaurant stock offerings has mushroomed
into the 100s, financing an unprecedented boom in restaurant-industry growth. Almost 45% of the money spent
on food now is spent in restaurants. In some multi-purpose establishments, dining has been upgrated to a
full-sensory experience known as "entertainment." At the Rainforest Cafe, patrons are treated to an
"environmentally conscious 'family adventure' featuring live tropical birds, simulated nature sounds, waterfalls,
aromatic scents and a gift shop retail area." Plane Hollywood packages its fare around the aura of celebrities from
movies, sports and music. Both are publicly traded.
The stock market is an advance-warning device, so it is of interest that the stocks of these two companies have
fallen substantielly. In fact, it's hard to find a restaurant stock that is still participating in the bull market. Even
McDonald's is struggling to regain "it's golden touch." Over the last two years, McDonald's shares have been flat
versus a 70% gain in the S&P. Suddenly, "the company that once seemed a half-step ahead of pop culture" cannot
even "construct an appealing new lunch sandwich." Our view is that McDonald's and the restaurant business are
powerful reflections of a positive social mood. The quantity, diversity and increasing complexity of restaurants reflect
the same aspects of the bull market. The inability of their stock prices to match the bull market hints of a coming
retrenchment in the industry. That , in turn, portends an end to the long term economic uptrend that has supported
their success. (Pioneering Studies In Socionomics, 2003, Robert R.Prechter jr.)
McDonald (MCD) open chart
[Details only to subscribers !!!] (Carl H.Lachmann)
A TRACK RECORD OF WP APPLICATION TO THE STOCK MARKET Part I
This essay by Robert R. Prechter, Jr. originally appeared in The Elliott Wave Theorist in December 2004.
According to leading physicists and mathematicians who propose a fractal nature to financial markets, forecasting specific market developments is impossible. You can get an idea of this viewpoint from two quotations from eminent scholars in this area:
Coastlines are good examples of random fractals. Stock prices are comparable to coastlines.
—Edgar E. Peters (1991, p.51)
I agree with the orthodox economists1 that stock prices are probably not predictable in any useful sense of the term.
—Benoit Mandelbrot and Richard Hudson (2004, p.6)
The conclusion that forecasting specific developments within the stock market fractal is impossible derives from the assumption that financial markets – like clouds, rivers and coastlines — form indefinite or “random” fractals, which have no specifiable or anticipatable pattern. In contrast, The Wave Principle of Human Social Behavior (1999) offers a new hypothesis: that price movements in the stock market form what is termed in that volume a robust fractal, which, while quantitatively variable, is a hierarchical iteration of a certain form, such as occurs in trees. Most fundamentally, the form in financial markets is the iteration of alternating movements of 5 and 3 waves of a certain description. At the next level of complexity, it comprises linked repetitions of five essential price patterns — termed impulse, flat, zigzag, triangle and diagonal triangle — which occur at specific points in the development of the wave structure. The description of this form and its sub-patterns constitutes a model of the stock market called the Wave Principle (WP). WP is described and illustrated in detail in the literature (Elliott 1938, 1946; Frost and Prechter 1978/2005; Prechter 1999).
What we may call the “Indefinite Fractal” model of Mandelbrot (1999) improves upon the Random Walk model and economists’ bell-curve assumptions regarding risk by quantifying more accurately the frequency of extreme events in financial markets. It has nothing to say about when such events will occur, however, so it has no real-time, practical forecasting value. Both of these models are compatible with the idea that movements in markets are unpredictable in terms of specific events, paths or patterns. Some models from the financial profession (such as the Cyclic model, which postulates that markets are the product of periodic, harmonic time cycles) do presume specific patterns and predictability, but they have not yet been adequately chronicled and assessed.
A Note On Some Models That Purport To Describe Financial Markets
A reasonable measure of the validity of various models of the stock market is how well they describe the past. Historical stock market prices and random walks yield very different results on randomness tests;2 in other words, random walks do not describe historical stock prices well with respect to what these tests measure. The Indefinite Fractal model of Mandelbrot successfully describes the stock market but only as far as it attempts to do so, which is not very far. It is limited to a mathematical expression of its “roughness.” WP postulates a specific form, and in doing so it subsumes the useful aspects of the Indefinite Fractal model.
Competing models from the financial profession sometimes fail adequately to account for past market action. For example, cycles sometimes repeat at a certain frequency and then inexplicably change frequency or disappear. WP, in contrast, accounts well for detailed stock market movement over for the past 90 years and for all U.S. and English stock market data, which go back over 300 years, at large degrees of trend.3 WP’s results on randomness tests, moreover, are nearly identical to the results for historical stock market prices,4 implying a possible affinity between the WP model and past stock market action, at least in terms of what these tests measure.A Useful Model for Forecasting Financial Markets
A more revealing question is how well various stock market models describe the future. Few models of stock market behavior can claim to be successful in specific market forecasting. The Wave Principle has a documented 70-year history of application. How has it fared? One way to test this question is to identify crucial turning points in the stock market and investigate whether WP provided an analyst at the time with enough information to make a correct assessment of future market prospects. Figure 1 shows the stock market for the past seven decades. On it are marked the major and intermediate turning points from 1937 to the present.5 This study begins in 1937 because that year contains the first turning point to which any Elliottician’s outlook pertained.
Computations to determine major turning points are based upon daily closing readings in the Dow Jones Industrial Average (DJIA) or in the DJIA divided by the Producer Price Index, an index called the “constant-dollar Dow,” and are rounded to the nearest one percent. A Major Bottom is defined as any price point that (1) follows a price decline of at least 40 percent without an intervening lower price point and (2) precedes a price rise of at least 200 percent without an intervening lower price point. A Major Top is defined as any price point that (1) follows a price rise of at least 200 percent without an intervening higher price point, (2) precedes a price decline of at least 25 percent (i.e., to an intermediate bottom) without an intervening higher price point and (3) precedes a price decline of at least 40 percent that allows for intervening higher price points but not by more than one percent per ensuing year.6 Figure 1 marks the Major Tops and Bottoms that occurred either in the DJIA or the constant-dollar Dow. The only time that these two indexes differed significantly from each other was in the 1968-1982 period. The DJIA made a Major Bottom in December 1974; the constant-dollar Dow made a Major Bottom in 1982 (see Figure 12).
Computations to determine intermediate turning points are based upon daily closing readings in the DJIA7 and are rounded to the nearest one percent. An intermediate bottom is defined as any price point that (1) follows a decline of at least 25 percent without an intervening lower price point, (2) precedes a rise of at least 30 percent without an intervening lower price point and (3) is not a Major Bottom. An intermediate top is defined as any price point in the DJIA that (1) follows a rise of at least 30 percent without an intervening higher price point, (2) precedes a decline of at least 25 percent without an intervening higher price point and (3) is not a Major Top. I have added one instance (called “update”) to this list: the low in 1953. The reason is that this year marked the return of an Elliottician to the forecasting scene after a five-year hiatus, and his publication that year presented both a near term and long term perspective on the stock market based on WP, confirming and updating the outlook presented at the Major Bottom of 1942. Figure 2 [Fig_2.gif] Overall, our test period contains 6 major turning points and 15 intermediate ones, which are marked in Figure 1. Figure 2 shows those same major and intermediate turning points marked with the success or failure of the opinion that the recognized expert Elliottician of the time offered in print. The details of these market forecasts are listed in Table 1.
To summarize, WP provided a basis for a successful market opinion for 6 out of 6 major turning points at which an Elliottician expressed an opinion in writing, a 100 percent accuracy rate. It is 5 out of 5 if we discount the inferred opinion of 1937 (see full discussion on pp. 5-6). WP provided a basis for a successful market opinion for 11 out of 15 intermediate turning points for which comment is available or inferable, a 73 percent accuracy rate. If we discount the three inferred outlooks, then the result is 8 out of 12, a 67 percent accuracy rate. (The evidence for my inferences is fully provided in ensuing discussions.) The exceptionally accurate assessment of 1953 (not to mention many others) is not counted in these totals. In four of the five cases of error (every one except intermediate o), the Elliottician involved accurately assessed the wave structure at one larger degree but simply missed the smaller-degree turn.It is fortunate for our purposes that during the first 60 years since the WP’s discovery in the 1930s, there has been only one noted Elliottician publishing at a time. The only exception was 1975-1979, when both Russell and Prechter were commenting intermittently, but in that case the two practitioners were in complete agreement. In other words, for this study we are not choosing, and indeed cannot choose, among competing market outlooks based upon WP, as there were none.8 Table 2 lists the times when each analyst was publishing market forecasts based upon WP.
The track record in Table 1 is not a matter of simply recording a bullish or bearish statement. Analysts issue such statements all the time, and they change their minds often enough that someone could easily produce well-timed “accurate” excerpts from written material on such a basis. The most important column in this table is the one labeled, “If yes, degree understood?” A “yes” in this column means that the Elliottician of the time correctly assessed the relative price extent and/or the degree label (which amounts roughly to the same thing) of the forthcoming move in the opposite direction. This is no mean feat; compared to the quality of most forecasts, getting the degree of a new or coming trend right — after correctly forecasting or recognizing the change in direction in the first place — is a rare achievement. (Keep in mind that by the data, and virtually by definition as well, these market turning points are junctures at which most economists, analysts and investors share a strong conviction that the old trend of largest degree will not reverse direction.)
The notes on the right side of Table 1 state in capsule form some insights that the forecasters added to their outlooks. These insights are not culled from countless varying statements but rather were the essence of the Elliottician’s forecast at the time. Attending this study are excerpts from the published market outlooks, to provide detail and context. Appendix A and the endnotes provide every necessary reference for those who wish to peruse the original material in full. The reader is invited to study the original material to satisfy himself that the added assessments in Table 1 and the related excerpts are fair and accurate.
These data show that WP is an exemplary model for market forecasting at crucial market junctures. I am aware of no competing model that has offered — or can offer — any such value. One reason for this accuracy could be that WP accurately models the stock market.12
Excerpts from the Published Record
On the following pages appear the essence of each Elliottician’s forecast at each of the Major turning points, 1 through 6. (The most pertinent portions are marked in bold print.) This material shows that the forecasts of the past 70 years are consistent, not only with WP in general but also with the ongoing assessment of the market’s progress within the model. The analysts explained each time where the market was within the idealized WP structure and therefore what to expect in terms of market behavior. For the most part, subsequent market action proved the conclusions correct.
Major 1: March 1937 Top, R.N. Elliott (Implied Bearish)
There is no record of R.N. Elliott’s outlook for the stock market in March 1937, but, as cited in Table 1, his market assessment of the time is implied. On November 28, 1934, Elliott sent a letter to investment counselor Charles J. Collins introducing his model and added, “Incidentally, permit me to forecast that the present major bull swing will be followed by a major bear collapse. This is not an opinion but simply the application of a rule.”
It is clear from this otherwise vague language that in referring to “the present bull swing” Elliott was not yet bearish. Figure 3, showing the DJIA from the 1932 low through November 1934, illustrates the market’s wave labels that Elliott implied at the time. “The present major bull swing” refers to the as-yet-unfinished five-wave “impulse” pattern upward from 1932. Based on an application of WP, he would have turned bearish no earlier than late 1936 and would have been bearish at the peak. Figure 4 shows the subsequent “major bear collapse” of 1937-1938 and thereafter.
Elliott’s first publication confirmed that he maintained the view of the market’s position that he implied in 1934. Near the end of his 1938 book, published in August, he stated flatly, “March 31 was the bottom of wave A of the bear market,” shown as wave A in Figure 4. (This observation attends the juncture labeled “intermediate a” in Table 1.) This comment clearly indicates by the tenets of WP that he expected the rally in force at the time, wave B, to be followed by a lower low in wave C. As you can see in Figure 4, he was correct. Therefore, we may presume that his view of the five waves up/three waves down pattern beginning at the 1932 low was consistent during this period and grant that at the 1937 high he was likely to have been bearish and to have understood the degree of the turn. If you believe that this assessment assumes too much, you may mark this juncture N/A in Figure 1. One thing is for sure from his writing and his model: He would certainly not have joined the majority of investors and analysts in being bullish at the 1937 peak given that he was expecting “a major bear collapse.”
Major 2: April 1942 Bottom, R.N. Elliott (Bullish)
Elliott’s outlook in 1941 and 1942 was unequivocally bullish for decades to come, and he was correct. He issued his forecast in the midst of World War II and despite the conventional view among economists that there would be “a post-war depression.” Below are his comments from August 1941, which he reiterated in October 1942, six months after the bottom.
August 11 and 25, 1941
Ralph Nelson Elliott, recognizing the end of the wave (IV) corrective process
(later labeled wave II of (V)) and forecasting the entire wave (V) advance:
The earliest available stock record is the Axe-Houghton Index, dating from 1854. The essential “change” characteristics of the long movement from 1854 to September 1929 are shown in the accompanying graph [Figure 6]. The wave from 1857 to 1929 may be either Supercycle wave (I), (III) or (V), depending upon the nature and extent of development of the country before 1854.13 There is reason to believe, however, that the period from 1857 to 1929 can be regarded as Supercycle wave (III). The market since 1929 has outlined the pattern of a gigantic thirteen-year triangle [Figure 5] of such tremendous scope that these defeatist years may well be grouped as Supercycle wave (IV) of an order dating back to as early as 1776. My observation has been that orthodox triangles appear only as the fourth wave of a [five-wave trend].14
Nature’s inexorable law of proportion accounts for the recurrent 0.618 ratio of swing-by-swing comparison, [as you can see from] the following tabulation of important movements since April 1930:
The Cyclical Relativity of Market Trends
Wave Dates Points Change Ratio
No. From To From To
R April 1930 July 1932 296.0 40.5 255.5
S July 1932 March 1937 40.5 196.0 155.5 155.5/ 255.5 = 60.9%
T March 1937 March 1938 196.0 97.0 99.0 99.0/ 155.5 = 63.6%
U March 1938 Sept. 1939 97.0 158.0 61.0 61.0/ 99.0 = 61.6%
Avg. 62.0%
These ratios and series have been controlling and limiting the extent and duration of price trends irrespective of wars, politics, production indices, the supply of money, general purchasing power, and other generally accepted methods of determining stock values. This feature proves that current events and politics have no influence on market movements.
Since the causes of this phenomenal market behavior originate in the relativity of the component cycles compressed within the triangular area, it is distinctly encouraging to be able to point out that the rapidly approaching apex of the triangle should mark the beginning of a relatively long period of increasing activity [i.e., price increase] in the stock market. Triangle wave E [shown as ) on the chart] is well advanced, and its termination, within or without the area of the triangle, should mark the final correction of the 13-year pattern of defeatism. This termination will also mark the beginning of a new Supercycle wave (V) (composed of a series of cycles of lesser degree), comparable in many respects with the long [advance] from 1857 to 1929. Supercycle (V) is not expected to culminate until about 2012.15 (See dashed line in the graph [Figure 6].)16
Note: The DJIA touched its low eight months later, in April 1942, during the darkest days of World War II. It has not looked back since.
Major 3: February 1966 Top, Charles J. Collins (Bearish)
Observe from Collins’ assessment that he identified with exceptional precision the end of the third wave from 1932. So while he expected a sizable bear market carrying the DJIA into the 500s, he knew that a bigger decline, one akin to 1929-1932, would not occur until the fifth wave ended later.
First Quarter, 1966; published in April
Charles Joseph Collins, identifying the end of wave III and forecasting the extent of wave IV:
In the count of Supercycle wave (V) from 1932, I find that two Cycle waves have been completed and a third may have completed in January 1966 or, if not (see subsequent discussion), then it is in the process of completion. These Cycle waves are illustrated in [Figure 7].
Figure 7 [Fig_7.gif]
Cycle wave III, beginning 1942, which is the wave of current interest, I break down as shown in [Figure 8]. Incidentally, the upward slant of Primary wave 4 between 1956 and 1962 carries inflationary implications.
Primary wave 5 (1962-1966?) of Cycle wave III is shown in [Figure 9] by giving the monthly swings of the Dow Industrials. Since Intermediate wave (3) of this Primary wave extended, it would appear that Intermediate wave (5), and thus Primary wave 5 as well as Cycle wave III, ended in January 1966, as the market has subsequently developed a downthrust.
The third wave of Primary wave 5 extended, and Elliott states that an extension will be retraced twice. Such being the case, this would call for the “C” wave of Cycle wave IV to carry back at least to 770-710 on the Dow, in other words, to the approximate area within which the extension of Intermediate wave (3) began (see points 1 and 2 of [Figure 9]). The decline could carry further, however, under Elliott’s rule that the correction of a wave should normally carry back to around the terminal point of the fourth wave of the five lesser waves that characterized the swing. The terminal point of the fourth Primary wave of Cycle wave III (see [wave 4 in Figure 8]) was established in 1962 at 524 on the Dow. Purely as a speculation, might not the “A” wave of Cycle wave IV carry to the 770-710 area, the “C” wave to around the lower 524 point, with a sizable intervening “B” wave?17
Note: This was a successful call of the Cycle degree top that had just occurred after 24 years of rise. It was also a successful forecast of the extent of the first decline into the 1966 daily closing low, which was 744.31, and also an excellent forecast of the ultimate low eight years later in 1974 at 577.60, basis daily closing figures.
Major 4: December 1974 Bottom, Richard Russell (Bullish)
Richard Russell identified the end of wave IV from 1966 to 1974, which he identified throughout as one large bear market. A bigger story than the opinion expressed below, however, is his graphic depiction of the final wave down in the bear market (his first one attends the market juncture labeled “intermediate j” in Table 1), which he updated repeatedly until the bottom.
Figure 10 shows one of his graphs, from November 9, 1973, just days after the DJIA peaked in a counter-trend rally. So he not only called the low in 1974 but forecasted it. The DJIA bottomed on December 6. Here is his commentary from 14 days later:
December 20, 1974
The extent of the damage brought in by the bear market is shown in this chart [Figure 11]. This unweighted chart shows the disastrous story of the last number of years. There’s been only one worse collapse in Wall Street history.
The 1‑2‑3 notations should be clear to all who followed my earlier discussion of the Elliott Wave Principle. Bear markets come in major 1‑2‑3 waves. According to the chart, this major downward zigzag could be completed.18
Major 5: August 1982 Bottom, Robert Prechter (Bullish)
The bull market that began in 1974 took so long to get going that inflation pushed the constant-dollar Dow to a new multi-decade low in August 1982. Four weeks after the low, Prechter sketched out the future and called for the DJIA to quintuple from the August 1982 low in wave V.
September 13, 1982
Robert R. Prechter, Jr., identifying the onset of wave V and projecting its substantial extent:
This is a thrilling juncture for a wave analyst. For the first time since 1974, some incredibly large wave patterns may have been completed, patterns that have important implications for the next five to eight years. The technical name for wave IV by this count is a “double three,” with the second “three” an ascending triangle. [See Figure 12.] This wave count argues that the Cycle wave IV correction from 1966 ended last month (August 1982). The lower boundary of the trend channel from 1942 was broken briefly at the termination of this pattern. A brief break of the long term trendline, I should note, was recognized as an occasional trait of fourth waves, as shown in R.N. Elliott’s Masterworks.19
The task of wave analysis often requires stepping back and taking a look at the big picture and using the evidence of the historical patterns to judge the onset of a major change in trend. Cycle and Supercycle waves move in wide price bands and truly are the most important structures to take into account. [They indicate that] a period of economic stability and soaring stock prices has just begun. One must conclude that a bull market beginning in August 1982 would ultimately carry out its full potential of five times its starting point, thus targeting 3885.20
Figure 12 [Fig_12.gif]
Note: Here Prechter identified the end of a 16-year period of loss for the constant-dollar Dow a month after the DJIA’s bottom at 777 and projected a climb to what was then generally perceived as an unattainable height.
November 8, 1982
Robert Prechter, continued:
Surveying all the market’s action over the past 200 years, it is comforting to know exactly where you are in the wave count. [See Figure 13.]
April 6, 1983
Robert Prechter, continued:
A normal fifth wave will carry, based on Elliott’s channeling methods, to the upper channel line, which in this case cuts through the price action in the 3500-4000 range in the latter half of the 1980s. Elliott noted that when a fourth wave breaks the trend channel [as this one did in 1982; see Figures 13 and 14], the fifth will often have a throw-over, or a brief penetration through the same trend channel on the other [i.e., top] side.
What might we conclude about the psychological aspects of wave V? As the last hurrah, it should be characterized, at its end, by an almost unbelievable institutional mania for stocks and a public mania for stock index futures, stock options, and options on futures. In my opinion, the long term sentiment gauges will give off major trend sell signals two or three years before the final top, and the market will just keep on going. In order for the Dow to reach the heights expected by the year 1987 or 1990, and in order to set up the U.S. stock market to experience the greatest crash in its history, which, according to the Wave Principle, is due to follow wave V, investor mass psychology should reach manic proportions, with elements of 1929, 1968 and 1973 all operating together and, at the end, to an even greater extreme.21,22
Note: A financial mania is a rare event, occurring on average about once a century. As far as I am able to determine, this is the only prediction of a financial mania ever attempted. It came to pass, even to the expected extent, as in the 1990s, speculation, valuation (by dividend yields, price/earnings ratios and book values) and the breadth of stock ownership reached an “even greater extreme,” by a substantial margin, than those of 1929, 1968 and 1973. Also as anticipated, the DJIA produced a “throw-over” of the upper channel line of the Supercycle-degree advance and met its upper channel line at Cycle degree (see Figure 14). On the error side, the entire process took a decade longer and carried higher than Prechter projected. In 1982, he had projected a quintupling from 777, and after the DJIA achieved that multiple, it tripled to reach its high in 2000.
Major 6: January 2000 Top, Robert Prechter (Bearish)
Prechter published a detailed analysis and wave interpretation in December 1999, explaining the “Grand Supercycle” degree of the peak. He identified this juncture as the culmination of the entire Supercycle structure that Elliott, Bolton, Collins, Frost, Russell and he had negotiated, which was wave (V) of a larger five-wave structure dating from the late 1700s. Whether this assessment is correct remains to be revealed by the ultimate extent of the bear market.
Reducing the impact of Prechter’s analysis is the fact that he had forecasted tops at numerous times during the 1990s. (For details, see View from the Top.)
Robert Prechter in The Elliott Wave Theorist, December 1999
An Overview of the Long Term Elliott Wave Case for Stocks
Evidence at Supercycle Degree
By “Supercycle” degree, we mean the size of wave that has taken the Dow Jones Industrial Average up from its low at 41.22 in July 1932 up to the present. [Figure 14] shows that we can certainly label the Supercycle advance as a five-wave structure. Evidence at Cycle Degree
By “Cycle” degree, we mean the size of wave that has taken the Dow Jones Industrial Average up from its low at 577.60 in December 1974 up to the present. This wave, like so many Elliott waves, has taken a classic shape. ...The trend channel for Cycle wave V shown in [Figure 15] is constructed according to Elliott’s primary approach, which is to connect the lows of waves two and four and then draw a parallel line touching the top of wave three. The action during 1997-1999, moreover, has been quite similar to that of 1928-1929. Prices have clustered near the upper trendline, breaking through it briefly in what Elliott called a “throw-over.” As noted often in these pages, a throw-over is more likely when a market first slips below the lower trendline early in the wave’s development, as this one did in 1982.
Evidence at Grand Supercycle Degree
By “Grand Supercycle” degree, we mean the size of wave that has taken stock prices up from their low in 1784 up to the present. [Figure 16] shows our depiction of the Grand Supercycle advance. ...While comparative statistics are hard to come by, [Figure 17] shows one measure that supports our case for a top of no less than Grand Supercycle degree in the making. Here, stock valuation is expressed in terms of annualized dividend yield so that the lower the dividend payout, the higher stocks are priced, and vice versa. Note that the degrees of terminating Elliott waves correlate with the varying extremes in dividend yield. Cycle degree extremes have produced over- and undervaluation at about 3% and 6.5% yield respectively, while Supercycle degrees have produced more extreme figures. Now look at 1999, where the dividend yield for the DJIA is only 1.5%, the lowest in the history of the data. Since we have record of a Supercycle overvaluation on the chart (in 1929), and since this one is higher, it must reflect a developing top of higher than Supercycle degree, i.e., one of at least Grand Supercycle degree.
Note: The constant-dollar Dow fell 40 percent from its high in 2000, fulfilling the requirement for listing this peak as a Major Top. The S&P 500 Composite and the Wilshire 5000 indexes fell 49 and 50 percent respectively from 2000 to 2002, and the NASDAQ fell 78 percent. The DJIA fell 38.7 percent from 2000 to 2002; according to Prechter’s assessment based on WP, the bear market has far further to go.
An upcoming issue will present details of the intermediate turning points, excerpted from the original publications.
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ENDNOTES
1 One should be cautious of agreeing with “orthodox economists” on anything at all relating to finance.
2 See working paper “Idealized Elliott Waves and Random Walk Tests,” by Robert R. Prechter, Jr. and Deepak Goel (2004), posted at http://socionomics.org/papers/idealized_waves.aspx.
3 “Cycle” degree and above.
4 See Endnote 2.
5 Hard as we may try to quantify movements in the stock market for the purposes of statistical studies, quantitative definitions can be inadequate and misleading. A perfectly defined concoction of aluminum pipes does not define actual living trees any more than quantitative parameters define waves in the stock market. The Wave Principle is a hierarchical fractal of a specific yet variable form, which requires description and whose relationships rest on relativity, not specific values. Turns of Cycle degree such as in 1937, 1966, 1974 and 1982 have one implication, turns of Supercycle degree such as in 1932 (or in 1942 by Elliott’s assessment) have another, and turns of Grand Supercycle degree (such as Prechter believes attends 2000) have another. These turns are not equally important as implied by the term “Major” but rather are quite different in terms of expected outcome. In each case documented here, WP practitioners understood the degree, i.e., the relative size, of each turn that they identified or forecasted. This is why Elliott in 1942 correctly called for decades of rise, why Bolton, Collins, Frost, Russell and Prechter called for specifically limited market movements of designated extents and why Prechter in recent years has been calling for the largest bear market since at least 1929-1932. A statistical study of this type cannot fully express the value of WP. Expressing it properly would require a detailed discussion of wave degrees, and the reader would have to possess a detailed knowledge of WP. Perhaps one day we will have the proper tools to model WP, in all its richness, mathematically. For the time being, to the extent that one can mathematically model another robust fractal — actual trees — with equations, one should be able to model actual waves.
6 This parameter takes care of the fact that a bear market sometimes contains a slight new high in a market index. Such new highs are not where an investor wishes to change his investment position. If, for example, an index rises persistently over a 10-year period and then goes sideways for 10 years, an investor would want to exit his investment at the initial peak, not at a minor new high six years into the new sideways trend, which would result in foregoing substantial opportunity cost.
This parameter does not affect our test results. Without it, the Major Top of 1966 would become a Major Top in 1973, at which time the DJIA exceeded the 1966 high by five percent. As you can see from Table 1, the assessment at that time was also correct.
7 Constant-dollar prices are hardly relevant at the intermediate level, so I did not include the C$D in these computations.
8 In the late 1980s, the popularity of WP swelled, and a handful of other “market letter” publishers began to use WP as a primary analytical tool.
9 After Elliott’s death in January 1948, Garfield Drew, in New Methods for Profit in the Stock Market, commented on Elliott’s market outlook in 1948 as reported by stock broker John C. Sinclair, Elliott’s “collaborator” at the time of his death.
10 Russell sometimes quoted or conferred with Frost, but his call at the 1974 low appears to be his own. Having learned WP from Bolton, he had commented on it very briefly nine times from 1964 to 1970. From 1976 to 1979, he mentioned WP infrequently, and when he did so sometimes cited the opinions of others. He published a few more comments in 1980, quoting Prechter. Russell also analyzed gold in WP terms from 1973 through 1980. All his WP comments are on the record, as listed in Appendix A.
11 Prechter began publishing Elliott wave reports irregularly for Merrill Lynch in 1976 and then began publishing monthly in 1979 as The Elliott Wave Theorist.
12 If you, the reader, know of any competing stock market model that has provided a basis for a superior forecasting record judged by criteria similar to those in this report, or if you disagree with my representation of the WP track record, please contact me with such information.
13 Data prior to 1854 were unavailable at that time.
14 Elliott accomplished this forecast with very limited data, encompassing only 1857 to 1942. He could not see the entire Grand Supercycle wave structure up to that time, which began in 1784. He could see the triangular nature of the corrective process from 1929, which shows up in PPI-adjusted “constant dollar” data. Triangles, he had already observed, appear only in the fourth wave position. From his intimate knowledge of how smaller patterns had linked together, then, he knew where the market was in its larger pattern despite having only a partial recording of it. Frost and I later attained the pertinent back data and validated his conclusion in Elliott Wave Principle.
15 Elliott’s “2012” forecast was an offhand remark that meant, “it will be the same degree, and therefore about as long, as Supercycle wave (III).” 2012 is the year when the two waves’ lengths would be exactly the same. He did not actually expect that precise a match, which is why he said, “about 2012.” What he meant to convey was that he was predicting a Supercycle rise closer to seven decades rather than a Cycle degree rise closer to one decade or a Grand Supercycle closer to twenty.
16 Elliott, Ralph Nelson. (1941, August 11). “Market apathy – cause and termination.” (Educational bulletin). And (1941, August 25). “Two cycles of American history.” Interpretive Letter No. 17. Republished: (1993). R.N. Elliott’s Market Letters (1938-1946). Prechter, Jr., Robert R. (Ed.). Gainesville, GA: New Classics Library.
17 Collins, Charles J. (1966). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994). The Complete Elliott Wave Writings of A. Hamilton Bolton. Prechter, Jr., Robert R. (Ed.). Gainesville, GA: New Classics Library.
18 One might say that his use of the word “could” was equivocal. I do not, given the preceding two-year context. Regardless, in early January he said that a new bull market had begun.
19 See R.N. Elliott’s Masterworks, Figure 18, p. 110.
20 Prechter, Jr., Robert R. (1982, September 13). “The long term wave pattern — nearing a resolution.” The Elliott Wave Theorist.
21 Prechter, Jr., Robert R. (1983, April 6). “A rising tide — the case for wave V in the Dow Jones Industrial Average.” The Elliott Wave Theorist.
22 Prechter’s comments from this time are reprinted in the Appendix to Elliott Wave Principle.
Additional Source Material
In addition to the sources cited in the Notes and Appendix A, the following works are referenced herein:
Frost, Alfred John and Robert R. Prechter, Jr. (1978). Elliott Wave Principle — Key to Market Behavior. Gainesville, GA: New Classics Library.
Mandelbrot, Benoit. (1999, February). “The Multifractal Walk Down Wall Street.” Scientific American.
Mandelbrot, Benoit and Richard L. Hudson. (2004). The (Mis)Behavior of Markets. New York: Basic Books.
Peters, Edgar E. (1991). Chaos and Order in the Capital Markets. New York: John Wiley & Sons, Inc.
Prechter, Jr., Robert R. (1999). The Wave Principle of Human Social Behavior and The New Science of Socionomics. Gainesville, GA: New Classics Library.
Prechter, Jr., Robert R. (2002). View from the Top. Gainesville, GA: New Classics Library.
APPENDIX A
SOURCES OF ORIGINAL MATERIAL
Major 1: Elliott, R.N. (1934, November 28). Letter to Charles J. Collins. Reproduced (1978/2005): Elliott Wave Principle. Frost and Prechter. Gainesville, GA: New Classics Library, p. 14.
Major 2: Elliott, R.N. (1941, August 25). “Two Cycles of American History.” Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 204-210.
Major 3: Bolton, A. Hamilton. (1966). “The Elliott Wave Principle of Stock Market Behavior: 1966.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. New Classics Library, pp. 355-366.
Major 4: Russell, Richard. (1973-1974). Dow Theory Letters. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Prechter, Jr., Robert R. (Ed.). Gainesville, GA: New Classics Library, pp. 211-234.
Major 5: Prechter, Robert R., Jr. (1983, April). “Long Term Forecast Update, 1982-1983.” The Elliott Wave Theorist. Republished (1995/2005): Elliott Wave Principle. Gainesville, GA: New Classics Library, p. 203.
Major 6: Prechter, Robert R., Jr. (1999, December). “An Overview of the Long Term Elliott Wave Case for Stocks.” The Elliott Wave Theorist. Republished (2002): View from the Top. Gainesville, GA: New Classics Library, pp. 75-90.
in**t a: Elliott, R.N. (1938). The Wave Principle. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, p. 144.
in**t b: Elliott, R.N. (1939, April 11, through 1940, April 8). Interpretive Letters and Confidential Bulletins. Republished (1993): R.N. Elliott’s Market Letters (1938-1946). Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 46-66, particularly the graph on p. 64.
in**t c: Elliott, R.N. (1946). “The 1942-1945 Bull Market.” Nature’s Law. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Jr., Ed., New Classics Library, pp.302-303; also R.N. Elliott, Interpretive Letters and Confidential Bulletins, April 28, 1942 through July 23, 1946. Republished (1993): R.N. Elliott’s Market Letters (1938-1946). Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 132-139.
in**t d: Elliott, R.N. (1946). “The 1942-1945 Bull Market.” Nature’s Law. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Jr., Ed., New Classics Library, p. 303, final sentence. Also, Drew, Garfield. (1948). “A Final Forecast by the Late R.N. Elliott.” New Methods for Profit in the Stock Market (2nd edition). Boston: Metcalf Press.
update: Bolton, A. Hamilton (1953). “Elliott’s Wave Principle: 1953” The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 39-45.
in**t e: Bolton, A. Hamilton. (1961-1962). “The Elliott Wave Principle.” The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 220, 228, 233.
in**t f: Frost, Alfred John. (1962, December). Unpublished paper. Published (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Prechter, Jr., Robert R. (Ed.). Gainesville, GA: New Classics Library. pp. 67-72.
in**t g: Collins, C.J. (1966). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994). The Complete Elliott Wave Writings of A. Hamilton Bolton. Prechter, Jr., Robert Rougelot. (Ed.). Gainesville, GA: New Classics Library, p. 353.
in**t h: Frost, Alfred John. (1968). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Prechter, Jr., Robert R. (Ed.). Gainesville, GA: New Classics Library, pp. 133-134.
in**t i: Frost, Alfred John. (1970). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Prechter, Jr., Robert R. (Ed.). Gainesville, GA: New Classics Library, pp. 158, 163-164.
in**t j: Russell, Richard. (1973). Dow Theory Letters. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Prechter, Jr., Robert R. (Ed.). Gainesville, GA: New Classics Library, pp. 215-221.
in**t k: Prechter, Jr., Robert R. (1977, February). “The Elliott Wave Principle: Application to Today’s Market.” The Elliott Wave Theorist. Not available in book form; for labeling, see Fig.4-13 in Elliott Wave Principle, p. 134.
in**t l: Prechter, Jr., Robert R. (1978, March). “The Elliott Wave Principle: Update.” The Elliott Wave Theorist. Excerpted in Elliott Wave Principle, pp. 133-135.
in**t m: Prechter, Jr., Robert R. (1981, April 12). The Elliott Wave Theorist.
in**t n: Prechter, Jr., Robert R. (1987, October 5). The Elliott Wave Theorist.
in**t o: Prechter, Jr., Robert R. (1987, October-December). The Elliott Wave Theorist.
DAUERSTRESS FÜR WALL- STREET- BROKER
Börsenprofis im Psycho- Crash
Wie verkraften Broker die Achterbahnfahrt der Börsen? Nicht gut, besagen US-Studien. Ausgerechnet die Finanzprofis, die am meisten Geld bewegen, sind am häufigsten psychisch gestört. Die Folgen: Isolation, Wutausbrüche - und die regelmäßige Flucht in den Vollrausch.
Spiegel online, 20.August 2007
Socionomics is the science of history and social prediction. It is field of study encompassing the origins and effects of an endgenous human social dynamic called the Wave Principle, a specific sequence of progress and regress that regulates the complex system
of collective mood and social trends on this basis: that the character of social, political, cultural, financial and economic trends are the product of collective human psychology, which is based upon
an unconscious herding impulse deriving from pre-rational portions of the brain. "The Wave Principle reveals that the human social experience follows a form that derives from the tension between the opposing dualities of progress and regress. Its ruling ratio is phi, the same number that governs nature's arbora and spirals, making it fundamental to nature's arrangements".
(S.83 The Wave Principle of Human Social Behavior, R.Prechter 1999).
Understanding socionomics requires comprehending the contrast between two postulations:
(1) The standard presumption: Social mood is buffeted by economic, political and cultural trends and events. News of such events affects the social mood, which in turn affects people’s penchant for investing.
(2) The socionomic hypothesis: Social mood is a natural product of human interaction and is patterned according to the Wave Principle. Its trends and extent determine the character of social action, including economic, political and cultural trends and events.
The contrast between these two positions comes down to this: The standard presumption is that in the social setting, events govern mood; the socionomic hypothesis recognizes that mood governs events. In both cases, the stock market is seen as an efficient mechanism. In the first instance, it presumably revalues stocks continually and rationally in reaction to events; in the second, it revalues stocks continually and impulsively as the independent social mood changes. We will now investigate five presumed “outside forces” to see which of these views and their relationship to the stock market can be supported by the standard presumption and which ones are supported by the socionomic hypothesis..
False Gods
By Bill Bonner
In a remarkable interview in Barron's this week, David Richards said that he thinks the world economy is on the road to even greater heights of glory. One of the reasons given is that the "Theology of Capitalism" is sweeping the globe.
Everywhere you look, people seem to be bowing down to the holy ghosts of Smith and Keynes...and reciting the Gospel according to Markowitz. And like the other great secular theology of our time, global climate change, the faithful ask few questions. Instead, they become true believers without so much as going blind, like Paul, or winning an important battle, like Clovis. Too bad. Because there are a lot of questions that need to be asked.
What is this new god? What sacrifices does he require? What are this new religion's solemn rites? What are its feast days and holidays? Who are its sinners, its saints, its Lucifers and its prophets?
In the interest of helping Rude Awakening readers understand this new faith, here we offer a brief explanation:
We begin with the history of the cult. In the beginning, there was the word. And the word was 'money.' But what was money? Ah, there, we have our first and most important holy mystery. In the past, more or less from the beginning of time until August 15, 1971, money was rare and difficult to reproduce. The Yap islanders, for example, used large, carved stones to represent wealth. Most of the rest of the world used gold and silver.
Since 1971, however, the high priests of the new money cult produced a kind of miracle, equivalent to the virgin birth and the wedding feast at Cana combined. That is to say, they produced money with no connection to anything rare or valuable. In the words of St. John Maynard Keynes himself, they created money "out of thin air." This miracle has had the whole world agog ever since. Today, the world's entire economic and financial system operates on this faith-based money.
Thin air was never more forthcoming. No one knows where the money comes from or what it is worth; but everyone is happy to take delivery. Indeed, the multitudes worship it...and pray for it. Muslims go to mecca; Jews have their Wailing Wall; these mammon-worshipers dream of nothing more than getting a job on Wall Street and getting lucky in Las Vegas.
It is upon this miracle money that the whole faith rests. Saint Alan of Manhattan owes his reputation to it. Goldman and Merrill Lynch can trace much of their success to it. Asia's huge export boom was made possible by it. But so were the booms in leveraged buyouts...and subprime mortgage lending. If Christ had not risen from the dead, he would be just another prophet. And if Alan Greenspan had not created trillions of dollars worth of new credit from nothing, the present boom would have not reached the Hindenburg Bubble proportions it is today.
In this sense, the new creed is more like a 'cargo cult' than a sophisticated religion. After WWII, anthropologists discovered isolated groups of savages in the South Pacific who were worshipping crashed U.S. Army cargo planes. The planes had brought them food, clothing, tools, cigarettes and alcohol. The islanders saw these things as gifts from heaven, and developed religious beliefs around them. So too does the modern Theology of Capitalism look to the skies over its central banks for cash. If the money ever seems to run short, U.S. Fed chairman Ben Bernanke is on record saying he will drop it from helicopters!
This week and last, capitalism's markets shook like the Western Front in 1914. The archbishops of the new church put on their purple robes and rushed to reassure the world. Like priests in the trenches of WWI, their faith was reinforced by the bombs bursting around them. Our new gods will never abandon us they said. Why? Because now we are all believers in the Theology of Capitalism! This reminds us of Mr. Angell's popular book put out in 1910, which argued that peace in Europe was guaranteed, because all Europeans had become capitalists. Since they traded with each other for so many good things, none would ever want to go to war. Well, now that even the Russians and Chinese believe in the Theology of Capitalism what could go wrong? We will have peace, prosperity and high asset prices forever and ever, amen.
Capitalism, of course, has been with us for millennia. You can look at cuneiform inscriptions in Egypt and find evidence of capital investment, trade and speculation. Capitalism has been alternately enriching and ruining people ever since. Grinding, churning, innovating, and evolving...always unstable, capitalism is always driving forward in what Schumpeter called a process of 'creative destruction' – sometimes squeezing the rich, as though through the eye of a needle...sometimes rewarding the meek...and always punishing those who expect to get something for nothing. To the extent it is understood as the free movement of privately owned capital, capitalism is a harsh, unforgiving Old Testament kind of god. For as soon as a man gitteth, along comes a new wave of destruction to taketh it a way from him. And in a crisis, he might just as well cling to an exploding hand grenade. That is why, as soon as a fellow is flush, he wants nothing more than to put a stop to capitalism forever. He asks his legislators for protective tariffs. He implores his leaders for import duties and exchange controls. He begs his central bankers to fix interest rates at a more commodious level.
The old capitalism is dead, say converts. This is a New Testament faith; the tooth and claw jungle of capitalist evolutionary competition has been transformed into a healthy, stable and cooperative eco-system – like the Baltimore Public Zoo. Now the animals are in their cages. Lions will lie down with lambs...and suckers will all get an even break.
We're all believers now. Hallelujah.
[Joel's Note: In times of yore, sacrilege was punishable by torture and even death. Fortunately for us, today's ignoble, insolent gold worshippers have little more to suffer through than public mockery. When faced with a choice between unquestioning faith and sound reason, we gravitate toward the latter. Faith, in today's financial realm, exists in the form of paper...and derivatives of paper. Reason exists in the form of gold – shiny, tangible, valuable gold.
For an entirely new way to invest in gold, check out the following Wealth Insurance Report. You may
have to endure some mockery from those relying on paper IOU's but it will be a small price to pay.
(Source: The Rude Awakening, August 14,2007
Market-Made Shock Waves
The Daily Reckoning
London, England
Thursday, July 2007
---------------------
Shocking investors back to their senses...could the Chinese trigger
a worldwide equity sell-off?
The world is drowning in liquidity...consumers continue to pay the
price of easy credit policies...
Look up, dear reader. There, over The Daily Reckoning headquarters in
London - in the building with the golden balls on the roof - is our
Crash Alert flag...flying proudly.
Why bother? The stock market looks healthy. The problem in the housing
market is "contained" in the subprime sector. And M3 is growing at 13%
per annum - the fastest rate in 30 years. With all that new money coming
into the system, how can prices do anything other than float higher?
But the risk of loss is always at its highest on the precise moment
that most people judge it of least concern. Most likely, there will be no
crash tomorrow...nor the day after. But there are some things you are better
off preparing for, even though they may not happen for a while.
When money and credit are free and easy, people become free and easy
with them. They begin spending more than they should...and investing
recklessly. Eventually, there is a shock...a tipping point...a moment
of desperate reality, in which people feel the ground give way beneath
their feet. They look down and panic.
What kind of a shock? It could be almost anything. Sometimes it is a
war...sometimes a bankruptcy...sometimes a market shock - such as a
sudden increase in the price of oil...or the collapse of a stock market. Then
investors, as if they shared a single mind, begin to worry not about
the return ON their money; they are concerned about the return OF their
money.
What could cause a shock today? Any number of things.
1) The Chinese stock market is getting hit hard. Its CSI 300 Index is
down 17% in the last three weeks. Brokerage account openings have dropped by
two-thirds. Could global hot money...and local cold cash...turn bearish
on Chinese shares? Could Chinese officials say something particularly
stupid? Could the market fall another 20%...50%? Could this trigger a worldwide
equity sell-off? Yes to all those questions.
2) The dollar is in trouble. On Wednesday, it hit its lowest level
against the pound (GBP) in 26-years. It is now near its lowest level ever
against the euro (EUR). Trillions worth of dollars now sit in foreign vaults -
while reserve managers openly talk of diversifying away from
greenbacks.Foreigners don't have to abandon the dollar en masse to knock it
down...all they have to do is to let up on their purchases of
dollar-denominated assets - such as U.S. Treasuries. Could it happen?
Could the shock cause a crash in major financial markets?
Why...yes...again.
3) All paper currencies are dangerous. The dollar is not the only paper
currency in the world whose supply is growing rapidly. Practically
every central bank is printing up its own money in vast quantities - trying
to keep up with the U.S. brand. This is why the world has so much
"liquidity." It's why so many assets are rising in price so steeply.
But could investors suddenly become fearful of so much monetary inflation?
Could consumer prices shoot up...as asset prices already have? Could
the world's people want to get rid of their paper currencies in favor of
other stores of value - notably gold, as The Wall Street Journal warns in an
article entitled "Money Meltdown"? And could this lead to a worldwide
crash? Yes...yes...yes.
4) A Milan-based bank, Italease, has just seen its derivative portfolio
blow up. So has Bear Stearns (NYSE:BSC). Large lenders are getting
skittish of complex debt instruments...just as more deals than ever
before come to market. So far this year $1 trillion in deals have been done in
the North America - a rate of deal-making nearly 50% higher than the
year before. What happens if the wheeler-dealers don't find the credit
they're looking for? What would investors think if even one of these mega-deals
blew up badly?
Reports Bloomberg: "The world's biggest bondholders have had their fill
of leveraged buyouts...
"TIAA-CREF, which oversees $414 billion in retirement funds for
teachers and college professors, is boycotting some debt offerings used to
finance LBOs. Fidelity International, a unit of the world's largest mutual fund
company, and Lehman Brothers Asset Management LLC, the money-management
arm of the third- biggest bond underwriter, say they're avoiding debt
from buyouts.
"You cannot do fundamental analysis and believe that those are
creditworthy companies," says an analyst.
"More securities than ever have the lowest rankings, with CCC ratings
assigned to 26.5 percent of the new debt, according to New York-based
Fitch Ratings. That compares with 15 percent in 2006 for debt that
Fitch says has a 'high default risk.'
"Traders demand 3 percentage points in extra interest to own U.S. junk
bonds rather than government debt, compared with a record low of 2.41
percentage points on June 5, Merrill Lynch & Co. index data show.
Heavenly Boom - or Hellish Bust?
The Daily Reckoning
London, England
Friday, June 29, 2007
The International Herald Tribune reported the results of a group of the
biggest M&A deals over the last few years. Only three out of seven of
them had a positive effect on the companies involved. Unicredit bought
Capitalia for $30 billion this year. So far the shares are down 10%.
AstraZeneca bought Medimmune for $15 billion, another deal done this
year. So far, the result is a 9% loss.
Looking further back, it was a very big deal when Daimler bought
Chrysler in '98 for $36 billion. That has cost the combined firm $12.6 billion
of market cap since then. And after Glaxo Wellcome bought SmithKline
Beecham in 2000, shareholders lost 25%. Or, how about this...thanks to the
dealmakers in 2001, Allianz bought Dresdner Bank. You'd have to be
pretty thick to miss making money in the financial industry over the last six
years, during the biggest financial bubble in the history of the world,
but when the magicians have worked their wonders on the combined firm,
it had lost 40% of its value.
In the first five months of 2007, the hustlers earned $25 billion doing
deals of this sort. But when Boston Consulting Group looked at the
results of similar transactions - 3,200 of them - it found that nearly 60% of
them actually reduced shareholder returns.
Takeover activity rose 38% in the first half of this year, compared to
the same period a year ago. A breathtaking $2.5 trillion is changing hands
as a result. How much of it will really "add value"? Not much.
A FLOOD IN THE WORLD MARKETS
by Dr. Hans Sennholz
Central banks live by a simple financial principle: Whenever economic activity stagnates or declines, they quickly lower their interest rates and expand their credits. But when business seems to improve, they hesitate and vacillate in removing the rate cuts. The consequence is a permanent addition to liquidity. According to calculations of the German central bank, between the end of 1997 and September 2006 the stock of world money nearly doubled, but nominal economic production rose only by some 60 percent. Such an imbalance is bound to either cause consumer prices to rise or create price bubbles in stock, loan, or real estate markets. When they finally burst they are likely to inflict many personallosses and force businesses to repair and readjust.
Every week we may hear and read about new corporate mergers and acquisitions. Flush with cash, private equity firms are ever ready for more deal making, bidding for and acquiring another company. The merger and acquisition boom is buoying stock prices across the board, which is benefiting most investors. Moreover, as some corporations are being taken private and others are engaged in stock buybacks, thereby reducing the overall supply of corporate shares, the stock market is enjoying an extraordinary boom, which many investors hope will never end.
Some economists are scofing at such optimism; they like to point at the bursting of the bubble in 1929, which led to the Great Depression of the1930s. They also remember the bursting of the Japanese bubble in the early1990s, which kept the Japanese economy depressed for nearly a decade. And they cannot forget War II and postwar monetary policies which, by the beginning of the 1970s, had flooded the world with U.S. dollars. Some countries finally removed their currency ties to the dollar, and the oil-exporting countries cut their supplies of oil, which caused raw-material prices to soar. In the early 1980s, it took major Federal Reserve restraint to restore some measure of stability and several yearsfor business to repair some damage and allow the American economy to expand again.
At the present, government planners and central bankers are making the same mistakes all over again. They all seem to like low interest rates, thereby rendering capital less expensive. When real interest rates are depressed, as has been the case all over Europe and in the United States early in the present decade, the economy loses a sense of direction, which may allow even unproductive producers to remain in business. In the longrun, without the guidance of true market rates of interest, economies lose efficiency and productivity.
In a free economy, interest rates play a role similar to those played by prices and wages. They all spring from the people’s choices and value judgments, giving rise to “demand and supply” and guiding producers in their decisions. The market rate of interest is a gross rate usually consisting of three distinctive components: the pure rate, the depreciation rate, and the debtor’s risk premium. The pure rate is the very core stemming from man’s very nature which forces him to view economic phenomena in the passage of time. He ascribes a lower value to
future goods and conditions than to present provisions; the difference is the pure rate. The depreciation component appears whenever government orits central bank inflates, thereby depreciating the currency; the rate of currency depreciation determines the size of the component. The debtor’s risk premium, finally, reflects the reliability and trustworthiness of
the debtor.
Central bankers rarely pay attention to the market rate. Their policies are guided by popular doctrines calling for stimulation of national employment and income. They seem to be unaware that all rates other than market rates give false signals to producers and consumers alike; they cause maladjustments. Rates that are lower than market rates promptly increase the demand for credit. With all recent rates below the market rate it cannot be surprising that total American debt has surged by several trillion dollars. Last year, household debt alone rose by more than one trillion dollars. The federal government itself has been adding more than two billion every day. The Federal Reserve System, together with some 7,900 commercial banks, provided the funds; and foreign central banks and commercial banks invested their dollar earnings in nearly one-half of the federal government’s debt.
Such credit expansion, unsupported by genuine savings and capital formation, generates illusionary gains making people believe that they are more prosperous than they actually are. Stock and real estate prices soar, tempting people to spend their gains, improve their homes and build mansions. Actually, they all - businessmen and stockbrokers, executives and workers - may consume their material substance. But no matter how low the Federal Reserve may set its rate, the boom is bound to come to an end as soon as the maladjustments inflict losses on business. As more and more businesses face difficulties or even fail, the readjustment begins,
forcing them to respond to the actual conditions of the market.
Today, the Federal Reserve is doggedly ignoring the market rate of interest. It continues to direct the credit expansion, which not only has turned housing into a large bubble and rekindled the stock market but also has given rise to a voluminous foreign trade imbalance. Both domestic andf oreign maladjustments are inflicting growing pains on commerce and industry.
Some economists are convinced that central banks may have a ready escape from the dilemma: they may gradually return to higher rates of inflation which forces all fixed-income receivers and bond holders to bear the most losses. Optimists even like to point to the impact of globalization, which seems to limit the inflationary effects to real estate and the booming mergers-and-acquisitions market. But most economists are fearful of a recession which is a normal part of a business cycle. Fear may take hold of the minds of businessmen, production may be curtailed, and unemploymentmay rise. Government is bound to embark upon employment programs and assume increased public welfare responsibilities. It may even reduce some taxes, increase its budget, and force its central bank to lower interest rates another notch. The rate of inflation is bound to soar.
A few pessimistic economists are convinced that a devastating economic cataclysm lies ahead. They usually point to three threats that may have aserious impact on the American economy. There is the burgeoning tower of public and private debt resting on a foundation of greed and overindulgence. There are a multimillion dollar list of promises to a retirement system and a vast building of government guarantees and promises that are bound to be unkept. There even is a world of complex derivatives, the value of which depends on something else, such as stocks, bonds, futures, options, loans, and even promises. They all, according to these economists, will be the victims of the coming cataclysm.
This economist, who has observed central bank policies since the 1950s, is in basic accord and feels sympathy for these pessimists. They seem to have a clear view of the principles of money markets and the policies conductedby governments ever since they discarded the natural money order, that is, the gold and silver standards. But these pessimists tend to ignore the countless ruses, devices, and strategems used by government officials and central bankers to hide the consequences of their policies. Long before there will be a financial Armageddon, there will be a myriad of government regulations, controls, edicts, and rulings that hide the consequences of monetary policies. Policies will be readjusted frequently to cover the
actual effects. Given the public confusion and unfamiliarity with monetary policies and their consequences, a large majority of the public is likely to accept official explanations and welcome the regulators and controllers.
After a short period of price and wage controls, the voices of reason, which at the present are barely audible, may be heard again. They may even be allowed to get the American economy moving again, by abolishing the myriad of price and wage controls and allowing wages and prices to readjust to market forces. They may even have to conduct a currency reform, that is, issue new money at various ratios to the old. Most countries all over the globe have suffered currency reforms in recent decades; it would be a new experience for Americans.
This trend of policy and its harmful effects is contravened by the worldwide movement toward globalization. As trade doors open all over the globe and business capital is free to move to friendly countries enjoying rapidly rising levels of productivity and living, it will be difficult for American political controllers and regulators to hold on to their powers and move toward a command system. They cannot douse the light of economic freedom shining in so many places.
Regards,
Dr. Hans Sennholz
for The Daily Reckoning
P.S. We cannot tell what the future will bring, but we must always
prepare for it. This economist is bracing for a gradual increase of political
controls over economic life, leading to countless maladjustments,
distortions, and stagnations.
Editor’s Note: We couldn’t agree more with Dr. Sennholz - you never
know what’s around the corner. Hope for the best and plan for the
worst...especially where your retirement is concerned.
THE SECOND SKYSCRAPER BOOM
by Christopher Hancock
On the corner of Fifth and 34th Street rests the epitome of American
progress.
Considered by some as the Eighth Wonder of the World, the Empire State
Building was erected at the height of the Great Depression...pieced
together with Indiana limestone and adorned with aluminum and
chrome-nickel steel.
At the time, it stood as the tallest building in the world, at over
1,400 feet. Construction consumed 60,000 tons of steel...10 million
bricks...1,172 miles of elevator cable...6,400 windows...60 miles of
waterpipe and over 3,500 miles of telephone and telegraph wire.
Even with all that, the building took only 14 months to complete,
costingless than half of its original $50 million budget.
But the world's tallest skyscraper is much more than the world's
top-quality office space. It symbolized the progress of a nation
rebuilding - a beacon of economic growth.
The strength of its image became universal.
One could argue the construction of the Empire State Building was a
turning point for the U.S. economy and morale during the heart of the
Great Depression, ushering in the world's first skyscraper boom.
Soon, skyscrapers began popping up throughout the American landscape:
In Atlanta, Dallas, Houston, Charlotte...the World Trade Center in
'72...theSears Tower in '73. Every U.S. skyline you see today grew in a span of
about 40 years.
These buildings required miles and miles of steel beams...hundreds of
thousands of tons of cement...The IDS center in Minneapolis required
enough reflective glass to provide two pairs of sunglasses for each
resident of Minnesota and one pair for each resident of North and South
Dakota.
The Sears Tower, the nation's tallest building, contains 2 million
cubicfeet of concrete and 76,000 tons of steel. And its foundation spans two
entire city blocks.
Few people ever stop to think about the massive amounts of steel and
cement that go into these structures. But those who did - especially in
the early 1900s - could have made a fortune, especially those invested
insteel.
Between 1904-1930, shares of U.S. Steel rose an average of 66% a year!
Ofall the components used in skyscrapers, steel grasps my interest the
most.
Steel products are used in everything from the construction of
buildings, bridges, railway rolling stocks, industrial pipes and tanks to numerous
automobile parts and Campbell's Soup cans. So when a major macro-event
like a building boom increases demand, supply becomes even tighter as
other industries involved in general infrastructure and development
compete for the same fundamental resource.
Right now, the world's "second skyscraper boom" is currently under way,
and to no one's surprise, it's happening in the newest region of
massiveeconomic growth...Asia.
If steel production per person in China were to climb to U.S. levels,
itwould mean that China's aggregate steel use would double by 2031, to a
level equal to the current consumption of the entire Western world. And
when you add in developing countries like India, Malaysia, Indonesia
andVietnam, the numbers become staggering. We'll get to the specific
figuresin a minute.
Unlike the general use we see here in the U.S., high-rise buildings in
Asia will provide much more than Grade A office space...These buildings
will be the bedrock for the region's rapidly emerging middle-class
housing.
Roughly 50% of the world's population lives in the region of the world
experiencing the most dynamic growth. Last year alone, these economies
accounted for more than half the world GDP. They now churn out 43% of
Tue world's exports and hold 70% of the world's foreign exchange reserves.
And while real wages in the developed West are either flat or falling,
wages among the up-and-coming nations of Southeast Asia continue
growing.
So the world's latest member of the "middle class" will begin demanding
spacious, convenient living in the immediate future.
Buying commercial real estate in Asia today is a lot like investing in
American real estate at the end of World War II.
You may remember the Levittowns that shot up across the United States
over50 years ago. These carefully planned neighborhoods provided affordable
housing for the thousands of young soldiers returning home from the
war.But more importantly, these planned neighborhoods served as the new
modelfor America's booming middle-class suburban lifestyle.
The emerging markets of Southeast Asia are currently experiencing a
similar transformation. Except they're not peppering the landscape with
tree-lined streets and 2.5-bedroom, 1.5-story ranch houses. High-rise
apartment complexes are the new Levittowns of Asia.
You could easily move into one of these buildings and never find a need
toleave. These buildings include everything from grocery stores and
retailoutlets to fitness centers with swimming pools.
Asian developers are utilizing this high-rise housing model for one
specific reason: Land is scarce. Most Asian economies lack the
expansiveterra firma we in the West find so readily abundant.
Take Singapore, for example...It's roughly 3.5 times the size of
Washington, D.C., with an economy greater than New Zealand's and a
growthrate double that of the United States'.
Hong Kong is another example: It's only six times the size of our
nation'scapital, with an annual GDP on par with Argentina and Portugal.
The point is...land is, and always will, be the most valuable asset in
places like Hong Kong, Shanghai, Tokyo, Taipei and Singapore. These
Asiancities lack the land for urban sprawl we in the U.S. see in places like
Chicago, Washington, Houston, Los Angeles, Charlotte and Atlanta.
So when you can't build out, you build up. And that's exactly how these
Asian economies are making their magnificent growth possible.
I travel back and forth to Asia a couple of times each year. Whether
I'm in Hong Kong, Bangkok, Shenzhen or Shanghai, the landscape is
Constantly changing.
It's dynamic...exciting...like nothing the world has ever seen. You
Feel like you're watching a flipbook in real time as thousands of cranes
blanket the landscape lifting I-beam after I-beam to new heights. One
ambitious plan calls for a 200-story high-rise on the edge of Hong
Kong's Victoria Harbor. That's twice the size of the Empire State Building.
In Hong Kong, for example, prime locations in the coveted Central
District are running so thin that the government has commissioned even more land
reclamation, stretching the island even further into the blue waters of
Victoria Harbor.
The need to build up instead of out also explains why seven of the
world's 10 tallest buildings are now found in Asia. And there is plenty of room
and desire to build more.
DAX & Social Mood (c) ELLIOTT today, 14.Dez 2006
Artkel einer großen deutschen Tageszeitung, erschienen am 14.Dezember 2006
mit dem Titel: "Aufschwung 2007" und die
"Die Aussichten sind günstig" heisst es, "Wirtschaftsinstitute und Wirtschaft überschlagen sich mit guten Nachrichten: RWI und Ifo-Institut erhöhen ihre Prognosen für 2007, der Deutsche Industrie- und Handelskammertag rechnet mit 200.000 neuen Jobs." Und weiter heißt es:
"Der kräftige Konjunkturaufschwung in Deutschland, sind sich die Wirtschaftsforschungsinstitute einig, wird im kommenden Jahr nicht abreißen." Wegen günstiger Investitionsbedingungen und des positiven internationalen Umfelds werde die Wirtschaft um 1,9 Prozent wachsen, teilte das Rheinisch-Westfälische Institut für Wirtschaftsforschung (RWI) heute mit. Bislang waren die Forscher von 1,7 Prozent ausgegangen. Für das laufende Jahr gehen sie von 2,5 Prozent aus. Auch das Münchner Ifo-Institut sagt für 2007 ein Plus von 1,9 Prozent voraus, das Kieler IfW sogar eines von 2,1 Prozent. Auch der Bankenverband erhöhte seine Prognose von einem auf bis zu 1,5 Prozent. Nach Angaben des Ifo-Instituts ist die Auslandsnachfrage die treibende Kraft des Booms in Deutschland. Diese habe trotz der diesjährigen kräftigen Aufwertung des Euro gegenüber dem Dollar aufgrund der schwungvollen Weltkonjunktur erneut sehr kräftig zugelegt. Anders als im Vorjahr sei aber auch die Binnenkonjunktur in Schwung gekommen.
open chart
Chart: futuresource.com
"Crude at $60, trade concerns pummel stocks."
"Oil slides, but so do stocks"
"Lower rates, falling crude push Dow up"
"Stocks slip on falling energy prices"
Socionomics explains: The Uselessness of News Even to the Clairvoyant
Champions of news causality truly have a fundamental problem, which is that no investor really knows the implication of any piece of news. This fact is hidden by the ease with which financial news writers can retrospectively pull out from the plethora of news on any given day a story that appears to justify whatever market movement occurred. The reverse order of things is not so accommodating. If you could construct a time-machine mailbox that would generate The New York Times a full day early but with news about the stock market omitted, you would be just as unable to forecast the next day's market action as if you had nothing at all to read. Riots, peace pacts, summits, earthquakes, destructive hurricanes, price changes in commodities, assassinations, triumphs of statesmanship and political scandals - nothing of this sort has more than a momentary effect on the stock market, much less any predictive value. This week, an economics writer for the Atlanta Journal-Constitution said quite accurately, "If history is any guide, the stock market could go either way today in the wake of the U.S. air strike against Afghanistan and Sudan." (Walker, T. (1998, August 6) "Identifying sell-off trigger difficult." The Atlanta Journal-Constitution, p.F3)
Correct! Kudos for an economic writer who bothered to look at the record before opining. In August, the Atlanta Journal-Constitution ran an article that reviewed a 42-year history of surprise news and the stock market entitled, "Identifying Sell-Off Trigger Difficult." That is to say, it is difficult even in retrospect to make any connection between dramatic surprise events and what the market does. The biggest decline in the period studied was the 1987 crash, about which the article quite accurately says, "Scholars still debate the reasons why." Imagine scholars endlessly debating about things that history proves have no valitidity! That is what so many scholars do because their ideas of financial market causality, rationality and efficiency are all wrong, yet they see no alternative. Once you understand that news is not causal, that even if you got it in advance, you could not forecast the stock market, then you realize that there is no satisfactory news-related explanation for the market's behavior on Black Monday, last Tuesday or next Thursday, either, or on any market day at all, or any week, month, year, decade or century. It does not take a dedicated market student long to observe the acausality of news to the stock market. A socionomist observes, and more important, understands, the reverse causality. As R.N. Elliott said: "At best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend."
(Elliott R.N., (1946). Nature's Law). (The Wave Principle of Human Social Behavior, 1999 by Robert R. Prechter)
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Chart: technical-investor.de 
Chart: tradesignal.com Another example of a dramatic reversal after a diagonal triangle has been completed. 
Socionomics: Market Psychology Those are familiar with Socionomics will have an idea what the main arguments against any further decline not to speak of an end of the "great rally" from March 2003 will be. Speculative environments come along at most only once in a generation, as a horde of new, inexperienced players is then available to descend upon the stock market scene. Members of the general 
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