By David Calderwood, November 2002
A new science holds the key to predicting the future.
Pioneering Studies in Socionomics [New Classics Library, 2003] by Robert R. Prechter, Jr.
Few business days go past without some new report or government statistic being released into the milieu of data that churns through the business media. An entire cottage industry of economist-prognosticators exists to collate and interpret that data, spending countless hours examining the economy’s entrails to divine the future path of the economy and, by inference, the major stock averages.
There’s only one problem. It’s been painfully obvious for over three years to most market participants that this approach has been less than stellar. Almost none of those who today talk about the “technology bubble” actually called for a top in 2000, the recession of 2001 wasn’t recognized until it was half a year old, and in spite of a chorus of calls for an incipient recovery it seems plenty of skepticism remains about economic prospects. The reason for this forecasting disconnect is obvious, according to Robert Prechter, Jr.
Prechter’s newest book, Pioneering Studies in Socionomics [New Classics Library, 2003] offers voluminous support for a revolutionary concept. It reverses the direction of causality that underpins the entirety of orthodox market prognostication with a radical thesis: Instead of the economic statistics leading the market, the market (or more properly the aggregate social mood it measures) determines economic behavior that leads to the statistics.
Though a simple statement, this is heady stuff when its full ramifications are considered. This is exactly what Pioneering Studies in Socionomics does, sometimes in minute detail. Its illustrations of this reversal of causality cannot be casually dismissed, nor should they be ignored by anyone who believes timing matters in business, politics, investing, or every other aspect of life.
Socionomics is Prechter’s term for the application of Ralph Nelson Elliott’s Wave Principle market model to a wider array of social phenomena. In the 1930s and 1940s, Elliott made a close observation of stock market behavior and found a repeating pattern throughout his charts. He called it the Wave Principle and went on to suggest that it played a role not just in financial market behavior but human behavior in general. Prechter has taken this principle and, along with colleagues both within and without his Elliott Wave International market forecasting firm, developed it into an early stage science in its own right. Pioneering Studies in Socionomics is a compilation that represents their work, a series of related studies going back into the 1980s and forward to 2002. Most were published as part of Prechter’s Elliott Wave Theorist newsletter. Sequential dating of some studies offers a particularly detailed timeline for their conclusions, allowing readers to assess the validity of the observations in retrospect. The result borders on amazing.
The book splits the works into nine major sections, ranging from popular culture and sports to macroeconomics, social conflict, and the corporation. For those who are interested in the tenor of future events, there’s just about something for everyone.
Pioneering Studies is quite a departure from Prechter’s other recent work, Conquer the Crash. While the latter deals almost exclusively with the financial arena, this latest book leaves the world of finance and ventures out into the wider arena of human endeavor, providing a larger chronicle of observations than Prechter’s more theoretical Wave Principle of Human Social Behavior, first published in 1999. Noting that certain social outcomes occur against a backdrop of specific market behaviors, socionomics attempts to make objective forecasts for the kinds of events that should occur as the market and its social mood “Pied Piper” follow their tortuous path through time.
That “torturous path” is where the greater controversy rages. Adherents of Elliott Wave methodology believe that markets follow a fractal pattern and that the market’s current position in the wave pattern can often be estimated with a significant level of confidence. Knowing “where you most probably are” gives tremendous guidance in discerning the likeliest path for future market action. Detractors observe that there are always multiple, correct interpretations of where in the pattern the current market resides, so they claim application of the process to forecasting is simply too subjective to be useful.
Prechter’s socionomics hypothesis starts with the Wave Principle and so raises two separate questions. Does the stock market reflect aggregate social mood, which precedes and drives social outcomes as varied as fashion, war and peace, economic activity, and even sex, according to socionomics, or are all these social factors dependent upon outside influences like unemployment rates and durable goods orders that can be discerned and used for forecasting in the orthodox method? And even if social mood is the driver of social outcomes, is the social mood patterned and therefore subject to forecast by analyzing the stock indexes, or is the path a “random walk” that precludes accurate forecasting at all?
The answer to the first question, as far as economic forecasting is concerned, can be determined by simply turning to the article titled, “Socionomics in a Nutshell.” If a picture is worth a thousand words, the graph found in figure 1 is a picture equal to the sum of all the words uttered each year by economist-prognosticators. It bears a graph of the Dow Jones Industrial Average from the late 1920s to 2000 with shaded bars depicting periods of recession. With one exception (1946, which supports neither case), every recession during the period coincides with or follows a significant decline in the Dow. With this single graph, Prechter shows that asking an economist to forecast the direction of the market using economic statistics is about as silly as asking a passenger to predict how hard the driver will press the accelerator pedal ten seconds in the future by watching the speedometer now. All that is needed is to watch the stock market. If it’s rallying, economic expansion will follow, while persistent, larger-scale declines presage economic contraction.
Other studies show how the market is a leading or coincident indicator of changes in popular music, fashion, and politics. The discussion of horror movies and their relationship to bear market psychology is fascinating, especially when Prechter connects the dots between the early horror of the 1930s (i.e. Frankenstein and Dracula) and the bear market of the late ‘60s and early ‘70s (Night of the Living Dead, Texas Chainsaw Massacre, and the entire slice-and-dice genre). It further becomes clear that in the entertainment industry, just like stock speculation, the path to success is not paved by following the script of what worked before, if the trend in the market has changed direction.
The second question, whether the market and the social mood that controls it are patterned and potentially subject to forecast, will remain controversial. Only a subset of the studies contained in Pioneering Studies in Socionomics actually deal with specific application of the Wave Principle. Those that do, however, make a compelling case for its utility. One interesting example is Prechter’s analysis of Major League Baseball.
Under the topic “A Historic Extreme in Baseball Emotions”, Prechter reprints a series of sections from issues of his Elliott Wave Theorist again, this time offering a timeline of commentary on the national pastime. Beginning with a selection from November 1, 1991 he demonstrates how extremes of emotion associated with the game were indicative of peaking popularity. A subsequent section, dated October 30, 1992 is titled, “A Top in Baseball”, and three months later, Prechter published a graph of MLB ticket sales that followed textbook Elliott wave patterns. The message was unequivocal—the ballgame was most probably near a major-league reversal in fortune. Prechter’s advice was just as strident. “If you’re an investor, take profits on baseball cards. If you’re a player, sign a long-term contract. If you’re an owner, sell your club. If you’re a real fan, you’ll still find yourself griping about baseball sometime in the 1990s.”
By 1994 the strike was on and the forecast on its way to fulfillment. A later installment on the topic, this time provided by Pete Kendall, shows up from the April 2001 Elliott Wave Theorist. It discusses why the late ‘90s rally in ticket sales to similar aggregate levels vs. 1993 is labeled as a bear market rally. Cited reasons include lower ticket sales per team and the fact that actual desire to attend games was so low that scalpers were selling some of the best seats in the house for big discounts. Coincident with this observation on ticket sales is a graph depicting the Nielsen Ratings for the World Series and All-Star Games from 1990 to 2001, showing Elliott-perfect five wave declines. The conclusion for baseball? Sadly for fans, MLB’s bear market is a long way from over. The conclusion for socionomics? If you were an owner in late 1992, Prechter’s forecast could have been worth tens of millions.
The application of socionomics in the book is not always quite so light. The best illustration of this is the inclusion of a special report originally issued the afternoon of the terrorist attacks on the World Trade Center and Pentagon. The report offers quotes from previous forecasts that explained what form the stock indexes would take during the early stages of a major bear market, using previous bear market charts as illustrations. The charts of the S&P 500 and Nasdaq composite from the first twenty months of the current bear market are shown to have virtually identical forms. These forms were obviously predictable well in advance of their occurrence. The report goes on to say,
“An Elliott wave analyst can even put a fine point on when the best and worst social times will occur. The Wave Principle of Human Social Behavior explains that wars always erupt during or immediately after ‘C’ waves in bear markets of Cycle degree or larger. More important, the bigger the corrective process, the bigger the war.”[Emphasis in original.]
Here is where even those only peripherally concerned with stock speculation should take note. The corrective process that began in earnest in 2000 appears to Prechter to be a whale of a correction, since he graphically traces the preceding rally phase all the way back to the founding of the United States.
“Do you recognize the value of this information? Most people understandably fret over whether or not an action is ‘a one time event’ and speculate on whether ‘the worst is over’ without any idea of how to answer these questions. Socionomics can answer them, and it does. Right now, we can say with confidence, we are at the beginning of a long period of social unrest, and while it will wax and wane with the waves, overall it will intensify. The best time to prepare was two years ago, but it is not too late to do so now.” [Emphasis in original.]
The ultimate verdict on the value of socionomics will be rendered by history, though given a quick perusal of business periodicals and TV financial channels, economist-prognosticators are in no danger of becoming an endangered species.
For some, the value of early preparation is worth the opportunity cost, even if the worst doesn’t occur—the Y2K anti-apocalypse comes to mind. (As an aside, Prechter’s group forecast it as a non-event, since—as we all remember quite well—the markets rallied into the end of 1999.) Those persons will likely find Pioneering Studies in Socionomics immediately persuasive. Others may require a more personal lesson in its accuracy before abandoning the orthodox view. If the bear market persists and social landscape becomes ever more volatile, new converts may increase in proportion to the significance of individual investment losses.
We might do our descendants a tremendous service. Late in the 1990s Prechter's group published an observation about an extremely short miniskirt worn by a model in a fashion show. The hemline actually ended above the top of the young woman's legs, signifying an extraordinarily strong "the market is topping" sign according to their interpretation. Extrapolating on this success, if an opportunity arises to contribute to a time capsule that might be opened in 2200 to 2300, give or take a few decades, here's a suggestion: Toss in a copy of Pioneering Studies in Socionomics along with a tip to look out for the end of the next really big rally. If the dress code for casual Fridays evolves to "clothing optional," it might be time to cash out of the stocks and start a company that builds bomb shelters.
David C. Calderwood is a businessman, student, and author of the novel “Revolutionary Language,” selected January 2000 Freedom Book of the Month at Free-market.net.