 This essay by Mark Galasiewski originally appeared in The Elliott Wave Theorist in August-September 2006. |
A little over two months ago, the stock markets of the world were hitting multi-year highs. Several Middle Eastern stock markets had already fallen by double digits—some by more than 50%—but the world outside of Iraq was relatively quiet and peaceful. Then in early May the major world indexes turned down. That minor drop reflects a downturn in social mood within a larger bear market of Grand Supercycle degree. This change has generated an explosion in violent conflicts worldwide.
July 4: North Korea fires a missile into the Sea of Japan. July 10: Japan announces consideration of a “pre-emptive” strike against North Korea. July 10: Sectarian violence kills 50 Sunni Muslims in Baghdad. July 11: A train bombing in Mumbai, India kills over 200 people. July 12: The Lebanon-based terrorist group Hezbollah kills several Israelis and captures two Israeli soldiers. July 13: Israel fires missiles at Beirut and blockades Lebanon by land, sea, and air. July 14: A suicide blast kills three people in Pakistan. July 14: Israel strikes Hezbollah’s Beirut offices and the road to Syria; Hezbollah guerillas fire over 700 rockets at Israeli towns. July 14: Sixteen people die in a clash between Sri Lankan rebels and government troops in the worst violence since 2002. July 18: Fighting between leftist guerrillas and the army in Colombia forces hundreds of civilians to flee their homes. July 21: Somali Muslims declare “Jihad” on Ethiopia after Ethiopian troops cross the border between the two countries. Middle East violence has continued to escalate in recent days. Does this clustering of violent events have significance for market followers? It does for students of socionomics.
The U.S. market has proved to be a reliable forecaster of coming periods of global peace or conflict. Specifically, major declines in the U.S. stock market have forewarned of major international conflicts. A bear-market in U.S. stocks, Cycle wave II, ran from 1937 to 1942; WWII started in 1939, two years into the bear market. Cycle wave IV occurred from 1966 to 1974; the Vietnam escalation and the Yom Kippur War occurred several years after it started. The bear market labeled Primary wave 4 of Cycle wave V took place from 1987 to 1991; the Gulf War started in 1990, and the US entered the war in January 1991, on the final day of Primary 4. Cycle wave V ended in 2000, and the attack on the World Trade Center occurred a year and a half later, in 2001, and led to the Iraq War, which began three years after the high. The chronology supports socionomics. The bear market starts, indicating a trend toward negative social mood, and sometime afterward conflict begins or escalates. Occasionally, wars start right near the top of a “B” wave within a bear market, as with the Gulf War. War is not the cause of the mood decline; the mood decline is why people fight.
In 1982, the Elliott Wave Theorist anticipated the Cycle wave V bull market, and the positive social mood that would attend it, thus boldly predicting “no international war for at least ten years.” Thirteen years later, At the Crest of the Tidal Wave (1995) warned of the social changes that would eventually accompany the reversal of that positive mood trend:
A long term trend toward a positive social mood always leads to times of peace and political cooperation, such as we enjoy today. An extreme trend change in social mood toward the negative always leads to calamities. The average level of conflict during the bear market will be far greater than it was during the bull market and will lead to periods of turmoil, not just in financial markets, but in society.
As the first leg of the bear market that began in 2000 began to accelerate, socionomists forecasted coming effects of the unfolding negative mood trend. In an interview conducted on August 2, 2001 by Franklin Sanders’ The Moneychanger (P.O. Box 178, Westpoint, TN 38486) and published the same month in The Elliott Wave Theorist, before the WTC attack that shocked the world, Bob Prechter predicted, “The Middle East should be a complete disaster. You’ve got at least three major religions in that area that all dislike each other, and the truce of the bull market has already been tenuous, so that area is going to blow up.” Five weeks later, the first major expression of the swelling negative mood forces came to pass. Suicide bombers attacked the United States on September 11, 2001, just 6 trading days from that year’s low in the DJIA. The event fulfilled one of the specific forecasts outlined in At The Crest of the Tidal Wave (1995): “Foreigners will commit terrorist acts on U.S. soil.” About two weeks after that low, the United States attacked Afghanistan. The U.S. Congress authorized war on Iraq on the day of the 2002 bottom, and the U.S. invaded Iraq one week after the orthodox end of Cycle wave a (or Primary 1). These international conflicts of major significance took place at or near the bottoms of major waves within that initial decline, not at or before the peaks, as the common belief about causality seems to have it.
The most destructive initiating actions usually take place during the bear market, typically near its lows. The continuing conflict during the ensuing rally stems from the mood at that initial negative extreme; such follow-through is typical of most wars, including the Civil War, World War II, and the Vietnam War. Eventually the positive mood trend indicated by the stock market advance either ends or tempers the conflict. In the current conflict, bombings in Jakarta, Madrid, London, and even Iraq in 2003-2005 were relatively limited both in number and degree. There were some expressions of positive mood during the rally as well. For example, Iraqis held a democratic election. It was just on March 29, 2006 that Israeli Prime Minister Ehud Olmert, following his electoral victory, addressing Palestinian leader Mahmoud Abbas, said, “We are prepared to compromise, give up parts of our beloved land of Israel, remove, painfully, Jews who live there, to allow you the conditions to achieve your hopes and to live in a state in peace and quiet.” What changed in just three months? The trend of social mood.
The violent events of this month have occurred in rapid succession and in unrelated areas of the world. Because they represent a larger and stronger wave degree than the previous waves of the 1970s and 1930s, they are occurring sooner in the decline and will ultimately be more destructive. Contrarians may think it is time to buy now that “blood is running in the streets,” but it is way too early. Violence is the dominant trend in the third or “C” wave of a major decline in social mood, such as 1939-1942 and1968-1970. We don’t like to imagine the extent of the violence that will attend the next major bottom. But our research into the nature of wave degrees indicates that it will make the terrorism and war events of the past several years look like target practice.
Chapter 16 of The Wave Principle of Human Social Behavior demonstrates that wars have consistently developed in “C” waves of corrections of Cycle degree and higher. The worst atrocities of the Vietnam War occurred during and after Primary wave C of a Cycle-degree correction. World War II erupted during Cycle wave c of a Supercycle-degree correction (in constant dollars). Already we are seeing dramatic results. This is because the Supercycle degree correction is occurring within a correction of Grand Supercycle degree. For Americans alive today, the degree of the negative mood trend now unfolding is unprecedented, and presumably the extent of the conflict will be as well.
So fasten your seat belts. This bear market and the dangerous social actions it will engender have only just begun.■
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Most economists, historians and sociologists
presume that events determine society’s mood. But socionomics hypothesizes
the opposite: that social mood regulates the character of social events. The
events of history—such as investment booms and busts, political events,
macroeconomic trends and even peace and war—are the products of a naturally
occurring pattern of social-mood fluctuation. Such events, therefore, are not
randomly distributed, as is commonly believed, but are in fact probabilistically
predictable. Socionomics also posits that the stock market is the best available
meter of a society’s aggregate mood, that news is irrelevant to social
mood, and that financial and economic decision-making are fundamentally different
in that financial decisions are motivated by the herding impulse while economic
choices are guided by supply and demand. For more information about socionomic
theory, see (1) the text, The
Wave Principle of Human Social Behavior © 1999, by Robert Prechter;
(2) the introductory documentary History's
Hidden Engine; (3) the video Toward
a New Science of Social Prediction, Prechter’s 2004 speech before
the London School of Economics in which he presents evidence to support his
socionomic hypothesis; and (4) the Socionomics Institute’s website, www.socionomics.net.
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The Socionomist enables you to see trend-shaping waves of social mood, as reflected by the stock market — and capitalize on them. The June issue looks at phases of social mood and features a “Research Roundup,” which highlights five academic studies that shine a light on important aspects of socionomic theory. Mood Riffs topics include “quiet luxury,” loneliness, the Writers Guild strike and efforts by countries to trade in currencies other than the U.S. dollar. Read the June issue when you become a Socionomics Premier Member.
