Reviews: Business and Investment
The Science of History and Social Prediction
by Robert R Prechter Jr
Pioneering Studies in Socionomics
by Robert R Prechter Jr.
New Classics Library ISBN 0-932750-57-5
Two Volume Set: $59 US at Amazon
Nils Bohr the scientist once stated,
Prediction is hard, particularly the future.
Prechter Jr founded The Elliott Wave Theorist back in 1980
based upon the foundations of R.N. Elliott, discoverer of the Wave Principle
some sixty years ago. Since then, he has been an industrious and massive
promoter of the Elliott Wave principles and something of a financial
guru on Wall Street. This has developed, in turn, into the Science
of Socionomics combining social economic practice with predictive
economic theory. (The science of social analysis based on socionomic
In the past, like those who bet on horses at the track, investors looked
to previous form to predict the future. In racing, form will tell you
everything about breeding, speeds, temperament, track conditions, left-hand
turns, right- hand turns, sprints, genetics and will also inform you
about the jockeys, trainers and betting odds. Even so, equipped with
all this information and your own eyes to check the condition of the
horse on the day, you can still lose everything.
Socionomics is about two things. Recognising and believing that Elliotts
Wave Theory exists, and that sociology can influence the way you invest.
Prechers central theme is that Elliotts insight is the idea
that financial markets have a law of patterned self-familiarity governed
by the Fibonacci sequence (0,1,1,2,3,5,8,13,...).
(Fibonacci lived around the year 1200 and he studied the breeding habits
of rabbits, honeybees and plants. This in turn spurred on Henry Dudeney
at the turn of the 20th century who studied cows in the same way.)
Prechter, like Elliott before him, is seeking the perfect form
book. The key to the alchemists cupboard that will enable him
and others who follow him, predict the stock market and make a fortune.
Indeed, many, 'The Economist' magazine included, have stated that the
market may not be random. Elliotts idea is that price changes
in stock market indexes produce a limited number of definable patterns,
or waves. Each wave at each degree (or size) become components of the
waves of the next higher degree. Five waves generating net movement.
Three steps forward, two steps back. 5-3 in a Fibonacci sequence. The
model can produce some success in forecasting stock trends. More importantly,
Prechter examines social moods and trends in human attitudes, which
he claims precede compatible changes in history and culture. In basic
terms, the Fibonacci sequence and the Elliott Wave are a manifestation
of a type of growth pattern found throughout nature. Growth and decay,
expansion and contraction and are therefore with close observation of
mood and trends - predictable.
The first volume 'The Wave Principle of Human Social Behaviour' is a
very comprehensive and detailed text book that goes a long way to prove
Elliot Wave Theory is a very useful tool in predictive financial forecasting.
There is much here to convince the sceptic that there is a real science
behind this concept, written in an accessible style. The case studies
are interesting and valid. (I was interested in how the Elliot Wave
accurately predicted not only the highs and lows of the market but as
to whom would and wouldnt win elections. George Bush seniors
defeat to Bill Clinton fits the model perfectly and it would seem, the
son may also suffer a surprise defeat based on how social mood influences
markets and politics. We await Nov 2004 with interest.)
The second volume Pioneering Studies in Socionomics is more
recent, published in 2003 and is loaded with case studies. The central
theme is punched home repeatedly. Social mood underlies the state of
the economy, not the other way around. Rising stock prices do not improve
peoples moods, peoples improving mood makes stocks rise.
War does not (as commonly believed) move stock markets up, the mood
that governs stock determines the propensity for war.
Prechter and his co-editor of 'The Elliot Wave International ' Peter
M Kendall ask us to examine social trends and moods. For example, they
look at the world of rock music, cinema, fashion, and food to extrapolate
trends and moods in society. They interpret these changes in moods as
where the markets are going along wave principles.
It is certainly true that a propensity towards love songs in the charts
indicates a rising good mood and therefore a rising market. Equally,
bleak depressing movies and heavy metal dirges could indicate a downwave.
The art is finding the upward swing or the market turn before everyone
Recently, we have had Missy Elliot and Madonna advertising Gap. Here
we have a huge clash of icons. Interpreting it is interesting. Is Madonna
there because her career is over? Is Missy Elliot there just for the
money. The ad has been badly received in the USA and along with Madonnas
albums, films and just about everything else underperforming, she is
a waning star cashing in on her icon power. But wait, Gap isnt
stupid. They could have gone for someone younger, or in Missys
case, thinner. They didnt because of demographics. Gap customers
arent 13. They are 30 plus. They grew up with Madonna. In actual
fact Gap sales are rising. With Madonna and Missy Elliot fronting the
new cord range, the core customers feel reassured that Gap is OK to
shop in again.
Prechter and Kendall observe all these things. They ask the questions
about the popularity of Coke or why Macdonalds is tanking in the market
place. Is it that these companies have lost the will to live or is it
mood swings? America has moved on from sugar water and fatty burgers.
Americans are getting fatter yes, but many want to be leaner,
fitter, eat more healthily. Is it a fad or a permanent market swing?
The Wave principle will enable you to understand that change.
Right now following a campaign by environmentalists against gas guzzling
SUVs, hundred of thousands of Hummers and Dodge Rams and Durangos
are being attacked by activists. The original compaign was to persuade
people to stop buying by trucks to go to the Mall in. However, following
the War in Iraq and rising energy prices (up nearly a dollar a gallon
on a year ago) the guilt by association movement has taken an ugly twist.
The mood has changed. Now more people can see that buying gas-guzzlers
hurts their pockets. More importantly, activists have crossed the line
from mere protest to active physical damage. Why? The mood has changed.
(Pity the manufacturers like Ford, Chrysler, Porche, GM, VW all bringing
out newer, bigger, even less fuel efficient cars right now. How fast
can they turn the ship around to more efficient models? Remember compact
cars? How the Japanese came in and trashed the big three during the
fuel crisis in the seventies. Would you want to be invested in these
companies right now? Those attacks on Hummers could spread to all kinds
of superfluous vehicles and GM and Ford are very exposed to this kind
of mood switch.
The stock market may be rising in 03, but jobs growth is patchy.
The popular war against Iraq is killing US soldiers on a
daily basis. More killed in the peace than in the war now. Americans
scent another Vietnam, which in turns reminds them of recessions and
bad times. If George Bush Jr isnt on the phone to Robert Prechter
to see where he stands on the Elliott Wave, he should be. It is still
the economy stupid and America is now billions in debt thanks
to this war, and unnecessary trade sanctions (such as Steel and Beef
- although steel sanctions might be lifted by early 2004 in the wake
of European retaliation and the fact that it is in fact driving up costs
in the USA.) The USA is also in the process of relocating much of its
manufacturing to China, where people will work for two bucks a day.
China in five years could be the world largest producers of cars and
they will be demanding more and more oil contracts from the Middle East.
What mood will America be in if it cant get oil because China
bought it first? What price oil in that tight market? If you think mood
doesnt affect what we do or buy or think, ask a New Yorker about
what he feels about the blackout August '03 or being told it will happen
To respond to that - a real socionomics student will also think about
how much energy could be saved if America had long lasting light bulbs
or energy saving legislation in place on computers, all electronic devices.
They will think about the companies who make those products as well
as companies that can manufacture and distribute electric power more
A political mood for making things more energy saving could be an investment
bonanza for some companies. Change the politics, change the mood.
The difficulty comes in interpreting social mood to predict the stock
market. You can study every trend and still come to the wrong conclusion.
Is it possible to tax Lattes and expressos in Seattle? Obviously not,
voters rejected it, even though the revenue was earmarked for day-care
for kids. Can taxing other unhealthy things be be a way to go? A Macdonalds
Big Mac tax, a Donut tax. This is exactly what Prechter
is discussing. The implication is that an acceptance of a tax on lattes
means that the mood is for social responsibility would be prevalent
and that could mean a Democratic victory at the next election. A defeat
could mean that Bush and selfishness reign supreme. Look at the popular
uprising against Governor Gray Davis in California. Now that Arnie is
in charge how do you read the signals for California? Is it still the
economic engine of the USA, if not, where are the companies that make
the wealth fleeing to? Use the predictive theory to help you decide
which pharmaceutical company to invest in. We know that there is a new
killer flu strain out there; who is best able to cope with it and get
a 'fix' to market and stall a pandemic.
Predictions involve two levels of complexity: the general character
of coming events and the specific events themselves. The primary aspects
of the social dynamic are its formological imperative, which governs
the former, and its chaotic process, which governs the latter.
In a Chapter 'World Peace, World War, Fibonacci and Elliott' he discusses
the impact of Sept 11th on Americas mood and fortunes. Certainly
we are living with the consequences of that event. The war on Iraq and
rising terrorist atrocities around the world can be plotted into the
Elliott Wave pattern. Reassuringly he doesnt feel that a major
world war could arise until 2034 (plus or minus two years.)
Nevertheless, a war of constant attrition and rising acts of terror
could continue for many years before then. Given a literal interpretation
of Fibonacci given that the Korean War lasted three years and Vietnam
lasted 8, the next war could last 21 years. That war may have started
on Sept 11th 2001. I am not sure that anyone or any civilisation could
survive such a thing given the highly developed means of destruction
we have at our disposal.
Better to judge that the mood for war could change and as a result bring
a change at the top. Americans could elect people more able to negotiate
and less inclined to spill blood.
There is no doubt that reading Prechters books could be useful
and you learn a great deal about the invisible yet utterly intrinsic
importance that social trends and moods have in shaping the wealth of
the nation. It is not just a case of watching housing starts or counting
cars produced. The educated investor has be socially aware, clued into
every facet of human life, be aware of trends and changes in places
like China and Japan, as well as Europe. It is not an easy solution,
no quick short cut to riches. Read the case studies and about how the
Elliot Wave works and you will be a better investor, able to spot dangers
and make the most of opportunities in downwaves and upwaves. Thats
no bad thing. It may not help you bail out of Boeing before the top
execs are decimated, after all - there's little to protect any investor
from insider trading, but you can examine the 'culture' of business
within a company and what they will or won't do to get business. Enron
Every serious investor should read these works.
Sam North - Editor
all rights reserved