Elliott Wave investor Robert Prechter says a Depression-like shock is coming
Published: Apr 24, two thousand seventeen 6:52 a.m. ET
He tells Avi Gilburt in a Q&A that today’s mood of optimism will give way to a funk that will rival that of the 1930s
AviGilburt
A June two thousand fifteen profile of Robert Prechter, the world’s foremost proponent of Elliott Wave technical analysis, turned out to be the most popular investing story on MarketWatch for the week in which it was published.
One of the reasons is that, at the time, Prechter said the bull market in U.S. stocks was in a “precarious position” as a “mania” gripped investors, who shoved stocks to sky-high levels of overvaluation. The market has only risen since then, and it even got a bump from the November two thousand sixteen election of businessman Donald Trump as president.
I recently interviewed Prechter, who released a ground-breaking book, “The Socionomic Theory of Finance,” at the end of December. In the 813-page book, which took thirteen years to write, he proposes a cohesive model that takes into account trends in sociology, psychology, politics, economics and finance. I very recommend the book.
As I’ve explained here, Elliott Wave theory says public sentiment and mass psychology stir in five swings within a primary trend, and three flaps in a counter-trend. Once a five, or V, wave stir (the flaps are sometimes described in Roman numerals) in public sentiment is finished, it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply a natural cause of events in the human psyche, and not the operative effect from some form of “news.”
As one reviewer on Amazon wrote about Prechter’s fresh book: “This [cohesive] treatment permits a measure of prediction on the basis that social mood fluctuates in fractal sways, and skill of them permits one ‘to achieve some measure of success in forecasting the direction, extremity and character of financial, social, political, cultural and economic trends.’ ”
Here’s an edited version of the interview, in which Prechter gives his outlook for the U.S. stock market, the general theory of Elliott Wave analysis and his fresh projects.
Avi Gilburt: You’ve said that, once the stock market tops, you expect a major bear market and economic spasm to take hold. What is your general timing for this to occur?
Robert Prechter: The true top for stocks in terms of real money (gold) occurred way back in 1999. Overall prosperity has waned subtly since then. Primary wave five in nominal terms commenced in March 2009, and wave B up in the Dow/gold ratio commenced in 2011. Their tops should be almost coincident.
Gilburt: What do you foresee will set off this event?
Prechter: Triggers are a popular notion, borrowed from the physical sciences. But I don’t think there are any such things in financial markets. Sways of social mood create trends in the stock market, and economic and political events lag behind them. Because people do not perceive their moods, tops and bottoms in markets sneak right past them. At the top, people will love the market, and events and conditions will provide them with ample bases for rationalizing being intensely invested.
Gilburt: You’ve said we will be mired in a “depression-type” event. How long could that last?
Prechter: I don’t know. All I can say for sure is that the degree of the corrective wave will be larger than that which created the malaise of the 1930s and 1940s.
Gilburt: How are conditions going to switch from what we have now?
Prechter: The increasingly positive trend in social mood over the past eight years has been manifesting in rising stock and property prices, expanding credit, buoyant pop music, lots of animated fairy tales and escapade movies, suppression of scandals, an improving economy and — despite much opinion — fairly moderate politics. This trend isn’t fairly over yet.
In the next wave of negative mood, we should see the opposite: declining stock and property prices, contracting debt, angry and somber music, more intense horror movies, eruption of scandals, a contracting economy and political upheaval. That’s been the pattern of history.
It’s all relative, however, and it’s never a permanent condition. Just as people give up on the future, its brightness will comeback. The financial spasm during the negative mood trend of 2006-2011 was the 2nd worst in one hundred fifty years. Yet, thanks to the come back of positive mood, many people have already forgotten about it. Investors again embrace stocks, ETFs, real estate, mortgage debt, auto-loan debt and all kinds of risky investments that they swore off just a few years ago.
Gilburt: Where do you suggest people “hide” during this event for financial safety, and why?
Prechter: Short-term notes of the least unstable governments, held in the safest manner possible. The plan is to trade those investments for stocks, property and precious metals near the bottom. You can be tranquil and avoid suffering financially if you’re ready. The trick to maintaining individual prosperity is to avoid popular investments at the turns. It’s not effortless to do, but at a minimum, you need a fractal perspective on social trends as opposed to a linear one.
Gilburt: With the advent and proliferation of computer-executed trading, what effect have they had on Elliott Wave analysis, other than the speed at which trading is done?
Prechter: Virtually none. People build their errors of thinking into their programs.
Gilburt: How have markets switched, if at all, in the decades you have been analyzing Elliott swings.
Prechter: Markets have switched in superficial ways but not in any essential way. They still trace out Elliott flaps. But that doesn’t mean it has been effortless. Wave V from one thousand nine hundred seventy four has been unusually large in both price and time relative to sways I and III. The closest thing to it in the record is the 1932-1937 rise, in which wave five lasted fifteen times as long as wave one. Also, from one thousand nine hundred eighty seven to 2007, pullbacks were shallow and skewed upward in the Dow DJIA, -1.07% and S&P five hundred SPX, -0.76% which threw me off.
Some analysts credit the Fed’s inflating for these market attributes. But even as the Fed was expanding the money supply at a record rate, the 2007-2009 drop in the Dow was deeper than one would have expected for wave C of a Primary-degree vapid. So, that causal argument is spurious. Here in 2017, even the Dow/PPI is at an all-time high. I chalk it all up to Grand-Supercycle-degree optimism. That’s why we have record credit expansion, too, along with cooperation among members of the Federal Reserve Board and political support for the Fed. All that will switch when mood turns negative.
Gilburt: I have seen many analysts attempt to modify Ralph Nelson Elliott’s original structure, but none with any degree of success. If there were any aspect of Elliott’s structure to be its weakest link, where would you see the potential for such modification to find success in the future?
Prechter: You’re right. I have seen two attempts by others to switch Elliott’s fundamental observations, and I have not adopted either of them, because I don’t see them predominant prices.
I have suggested three variations on forms: the leading diagonal (in which the odd-numbered flaps can subdivide into five), the expanding diagonal and the skewed triangle. I remain skeptical about the legitimacy of all three of these forms. I suspect the patterns I described are more likely artifacts of imperfect mood recording than legitimate formations.
On the other mitt, over the years I and my colleagues have made a number of valuable observations about wave forms that Elliott never noticed. Some have become well-known, others not. They are:
1. Wave three is most often the extended wave.
Two. Peak acceleration occurs at the structural center of each wave, i.e. in wave three of three of Three.
Trio. In the stock market, fifth sways are always weaker than third flaps.
Four. B flaps of contracting triangles often reach a fresh price extreme.
Five. Even so, E flaps of triangles in the wave four position always end within the territory of the preceding third wave.
6. Dual flats are somewhere inbetween uncommon and non-existent; I’ve seen flat-X-triangle serve as dual three.
7. The barrier triangle is a more useful idea than the idea of independent ascending and descending triangles.
8. Zigzags often adhere to channels.
9. In zigzags, A swings tend to be steeper than C sways.
Ten. In flats, C sways tend to be steeper than A flaps.
Gilburt: While we use various technical indicators to support or demonstrate the weakness in any wave count, my beloved has been the MACD. Do you have any favorites that have been most useful to you over the years?
Prechter: Almost all momentum indicators provide the same basic information. There are hundreds of them, because they are effortless to construct, especially with computers. I don’t chart rates of switch anymore because I can tell what they look like just by looking at prices. But momentum analysis is not ordinary. In the stock market, slowing momentum almost always precedes reversals, but slowing momentum does not mean a reversal must go after. The one thousand nine hundred eighty five and 1989-1994 periods are classic examples. In each case, the market slowed its rise — looking terminal from a momentum standpoint — and then accelerated. In the very first case, I knew wave three of three was dead ahead, so I was truly bullish. The 2nd one threw me off. The most consistently useful momentum indicator is breadth. If I had to rely on only one momentum indicator, that would be it.
Gilburt: Do you have any specific time frames in charts that, in your practice, have provided the most insight into a specific market or commodity?
Prechter: No. Markets are fractals. Nothing quantitative is meaningful or useful.
Gilburt: There is a debate among various schools of thought as to what is more significant — price or time. What’s your perspective?
Prechter: What matters most is form. Form involves both price and time, albeit arguably price is the more definitive component.
Gilburt: I am sure you have seen a lot of time-cycle analysis in your career. In my practice, I have not truly seen any that have been better than 50/50. I am just wondering why you think we are incapable to develop the same accuracy percentages in timing models as we do in pricing models using Elliott Wave?
Prechter: I think the reason for your observation is that cycles are not the essence of markets. They are artifacts of the fractal form. They show up for a while and then vanish. Usually by the time someone recognizes a cycle and bets on it, it is poised to vanish. As you say, the success rate is about 50/50, so I don’t rely on them anymore.
I think Fibonacci ratios inbetween the prices and durations of related swings are meaningful. I wrote a book about Fibonacci relationships called “Beautiful Pictures.”
Gilburt: I have personally noted how I view socionomics as the ground-breaking work that will eventually lead market analysis into the future. But I also understand how old habits are hard to break, and most still despairingly cling to the old Newtonian-based exogenous-causation theories of market analysis. What sort of reception has the socionomic theory been receiving from the world of academia?
Prechter: It has had wisps of success. We have had several academic papers published, and another was accepted by a journal [recently]. A ranking member of the Academy of Behavioral Finance and Economics commented to me that the term socionomics was becoming part of the lexicon, which was encouraging to hear. Several professors at mid-level universities are including it in their courses, and several top professors have been kind enough to provide a good word for the book. But most economists don’t know socionomics exists, and most of them would dismiss it if they did. Socionomic theory explains why such a reaction is, generally speaking, imperative: People are built better to participate in sways of social mood than to analyze them. So it’s very hard to get the word out. People like you, who do unspoiled market analysis, have been the quickest to get it.
Gilburt: As fresh studies into the socionomic aspects of financial markets are performed all the time, are there any other resources for us to go after to build up continuing insight into this perspective?
Prechter: The Socionomics Institute puts out tons of interesting material. The website is utter of studies, articles, events and movies. People who like this field should become a member.
Gilburt: What are your top three arguments to present to those who do not believe in socionomics but still hold quick to the old exogenous-causation theories?
Prechter: It took eight hundred pages in “The Socionomic Theory of Finance” to present arguments. But I can make three brief statements:
1. Events and conditions that are often labeled “fundamentals” have no predictability with respect to the behavior of financial markets, so they cannot be causal. (See chapters 1, two and 22.)
Two. Financial markets differ in numerous fundamental ways from economic markets, implying that their behaviors spring from different causes. The key difference is that in economic markets the context is one of relative certainty with respect to one’s own individual values, which permits for rational decision-making, whereas in financial markets the context is one of pervasive uncertainty with respect to others’ future deeds, which prompts people to herd. (See chapters twelve and 13.)
Three. Postulating unconscious flaps of social mood as a hidden variable explains a persistently compatible relationship among myriad social deeds, from popular musical tastes to switches in the economy to political deeds to women’s fashions to trends in the stock market. (See chapters eight and Ten.)
Gilburt: Are you involved in any other projects?
Prechter: I’ve got two compendiums due out in book form in late spring: “Socionomic Studies of Society and Culture” — which will have our best work relating socionomic causality to trends in movies, music, TV, cars, skyscrapers, roller coasters and other joy stuff — and “Socionomic Causality in Politics,” which may not be as joy, but it’s significant.
Another project we have going is computerizing Elliott Wave analysis. It’s a elaborate task, but we know what we’re doing, and we’re getting it right.
On the business side, I have cut back. I’m down to about two speeches a year and pretty much retired from doing media. I’m still involved in macro business matters, but I have a excellent team treating the rest. I do the occasional Q&A, so permit me to say thanks for the chance.