Everyone Else Puts The Cart Before The Horse
It has taken me a long time to grasp the theory of the new science of "socionomics,"
and I am sure you will be having difficulty as well. In the last issue I
illustrated it with the bead of water trickling down the window pane. Just
as the unseen force of gravity is pulling that bead of water down to the
bottom, despite the lumps and bumps on the way, so an unseen force is driving
the mood of the herd, despite the lumps and bumps along the way, in an overall
direction that cannot be changed by the interruptions (economic events,
etc.), except temporarily, just like the raindrop. What is that unseen force
in the case of the collective social mood? What causes crowd psychology
to move forward in waves of optimism punctuated by waves of pessimism? Does
the herd mentality cause economic events or do economic events change
the social mood?
Here is the technical explanation, as per Elliott Wave International:
-
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.
-
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
the economic, political and cultural.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.
What does that mean when translated into English?
If "nature" is so perfectly patterned, why can’t humanity be the same? For
example, if you look at an atom under a microscope (so I am told), you will
see a central nucleus, with electrons flying around it, but never crashing
into each other. If you look at the solar system, you see the same pattern
— a central star with planets orbiting around it but never crashing into
each other. The pattern is the same even though the size is vastly
different.
If you look at a chart of sharemarket trading for one day, you will see
a distinct pattern of five waves up, three waves down (or vice versa). If
you look at a chart of the sharemarket for the last 70 years, or even more,
you will see the same pattern. Only the size is different.
Is it not possible that something is driving this phenomenon? If so, what
is this unseen force?
The phenomenon is spectacularly illustrated in Robert Prechter’s latest
book Conquer The Crash. Look at the chart he shows on page 36. Is
that not incredible? The top line covers an 8-year period (from 1921
to 1929) and the bottom one covers a 26-year period (1974 to 2000).
The size (as in time) is different, but the pattern is the same.
What caused that to happen? Economic events? Hardly. Investors in the sharemarket
have no control over interest rates, wars, political events, GDP growth,
retail sales, inflation, industrial production, consumer spending and confidence,
etc. The chances of economic statistics repeating themselves so perfectly
(and the "market" reacting identically each time) over 8 years and 26 years
respectively is about the same as the chances of the unabridged Oxford dictionary
resulting from an explosion in a printers shop.
That pattern is not of economic events. That is a pattern of crowd behavior,
which clearly repeats itself over and over. What causes it to do that?
The conventional belief is that people (as a crowd) react to economic
(and political and cultural) trends and events, and this is reflected in
the sharemarket, which represents the crowd’s own assessment of its aggregate
productive capacity. For example, if the Federal Reserve lowers interest
rates, the sharemarket goes up, because everyone knows that lower interest
rates mean lower costs and therefore higher profits for corporations listed
on the stock exchange. The economic event (the fall in interest rates)
causes the herd to react. That’s the conventional view.
But hang on. Something’s wrong with that view. On November 6 the Fed lowered
interest rates by a "surprise" half of one percent, and the sharemarket
fell. In fact, since January 2001 the Fed has lowered interest rates
12 times, from 6½% to 1¼%, the lowest level for 40 years, and the
sharemarket (S&P 500) has fallen 50%! What’s that about the herd reacting
to lower interest rates by pushing the sharemarket up?
So something is clearly wrong with the conventional hypothesis that the
sharemarket, which reflects the social mood, reacts to economic events.
Aha! But that’s because the sharemarket is smarter than the real world.
Some say the sharemarket is nine months ahead of the economy. This is because
investors, who all want to get in (or out) before everybody else does, peer
ahead and try and guess what the economy will be doing in six months or
12 months time. Then they base their buying or selling decision on what
they see in the future.
Oh, yeah? The sharemarket has been falling for nearly three years now. What
can they see that the Fed can’t? And three years is a lot longer than nine
months. Whatever they "saw" in the first quarter of the year 2000 must still
be happening.
In November 2000, the US economy hit the brick wall, to the absolute surprise
and dismay of everyone, including the Federal Reserve. By the following
January, Alan Greenspan was panicking and furiously cutting interest rates.
You mean the herd saw that 9 months before Greenspan did? You have to be
joking. The herd still believes that Greenspan can "save" the U.S. (and
the global) economy. One of the reasons that the sharemarket fell after
the most recent Fed easing (according to the "talking heads," the "experts"
on TV, radio and in the newspapers) was that "if the Fed slashed interest
rates by ½% and not just ¼% the Fed must know something that
we don’t."
No, the sharemarket herd is not smarter than the Fed. And the Fed is not
smarter than the unseen force that drives the sharemarket. What is that
unseen force?
Unconscious Herding Instinct
It is the "unconscious herding instinct" of the crowd. Think about
it. How many people who own shares in Coca-Cola or IBM or Enron or BHP or
ANZ really know what is going on at the top in those companies? (Obviously,
if they had known about Enron they would not have stayed in the stock.)
How many people really know what goes on in the White House? The Federal
Treasury? The Federal Reserve?
The answer is that no one does. So why do they buy shares? They trust
others. What others? The crowd. They trust the rest of the herd,
including politicians, bankers, auditors, economists, business leaders,
media analysts, etc. who, they figure, must know more than they do. That
is, they transfer their individual thinking to the collective.
This is the "unconscious herding instinct." If everybody else is buying
shares (or property or gold), then it must be "safe," because "they" must
know what they are doing. The sharemarket, therefore, reflects the crowd
view.
But the "crowd" is not a thinking, reasoning animal. On the contrary. People
go mad in crowds. So why do crowds act the way they do?
This is where socionomics comes in. Past patterns of crowd behavior suggest
that it is patterned and structured, as Prechter’s chart indicates. The
great sea of humanity moves forwards and backwards in waves, as if driven
by an invisible force. The collective social mood swings between periods
of optimism and pessimism in waves that are, to some extent, predictable.
The collective social mood is reflected first in the sharemarket. Then later
it shows up in the economy.
So economic events do not cause the herd to react. The herd’s mood swings
ultimately cause the changes in the economy. The sharemarket is not nine
months ahead of the economy. If anything, the economy is nine months
behind the collective social mood. The "unconscious herding instinct"
of the crowd is the unseen force that drives the sharemarket and, eventually,
leads to economic events.
This is not easy to grasp, but it is very important.
Elliott Waves
Although Elliott wave analysis is proving to be stunningly accurate, it
is not easy to grasp on the first or even second time around.
When I suggest that the pattern of the sharemarket is always strikingly
similar, I do not say identical. Not all trees are identical. Nevertheless,
it is not easy to confuse a tree with a house or an aeroplane. A tree is
a tree. Similarly, not all waves look identical. But they are usually strikingly
similar. A fifth wave is a fifth wave. A fifth wave will always look like
a fifth wave in shape, but it might last for five minutes or 100 years.
The larger the degree of the wave cycle you are looking at, the larger
the impact on the sharemarket and the economy.
Graham Dyer's Newsletter
P.O. Box 244 Helensvale Gold Coast Qld 4212 Australia
Phone 07-5529 7900 Fax 07-55297611
email: graham.a.dyer@bigpond.com.au
VOL 19 NO. 11 (DECEMBER 2002)
editor@hackwriters.com