 This essay by Mark Galasiewski originally appeared inThe Elliott Wave Theorist in January 2007 |
“Boom” Times
On October 9, 2006 the North Korean government tested a nuclear bomb and in the process became the first country to do so in 8 years. Politicians and the media immediately claimed that the event had “destabilized the region” and represented a “threat to international security.” With all due respect for the gravity of the situation, we’d like to point out the backward causality in those statements. For years we have maintained that the detonation of nuclear bombs, while it may stir transient emotions, has no effect on the social mood; rather, social mood determines the penchant for exploding nuclear devices. Destabilization and threats preceded the test, setting the conditions that led to it.
Figure 1
Figure 1 is an update of a chart that The Elliott Wave Theorist first published in 1995. The thin line is the inflation-adjusted Dow Jones Industrial Average. The heavy line is an inverted graph of the annual number of nuclear weapons tests worldwide. The correlation (R) of the raw nuclear test data shown in the chart to the log of annual closes in the DJIA is -90%, with a p-value of 10-12. When using detrended data, we obtain R = -59% and p = 10-4. These results are highly statistically significant.
Consider this strong correlation while reading our explanation in this excerpt from The Elliott Wave Theorist’s 1999 essay, “Socionomics In a Nutshell”:
The reason is this: As social mood becomes more positive, people become more confident, trusting and content. They feel little need to prepare a defensive or offensive force. As social mood becomes more negative, people become more fearful, distrusting and angry. They are impelled to prepare to defend themselves or attack an enemy. As in politics and economics, if you would like a view to the future in this area, just watch our most responsive and precise reflector of social mood, the stock market. Its trends will tell you when to expect more or fewer nuclear explosions, and whether they are more likely to be deployed defensively or offensively. The blackest moods of this century occurred in 1932 and 1942, the latter time providing the social impetus to develop the nuclear bomb in the first place.
Notice that for the last eight years the testing line held flat at the zero level. Once you understand the real cause of international aggression, it comes as no surprise that such a long period of nuclear peace coincided with a global financial mania, as evidenced at least in part by the 8 years of net advisor bullishness recorded by Investors Intelligence (see Fig. 1). Although the Dow Jones Industrial Average hit a new all-time high last year, on an inflation-adjusted basis it is still below its year 2000 high. The other major indexes, the S&P 500 and the Nasdaq, are down in real and nominal terms. When you consider our view that the orthodox top of the bull market occurred in 2000 and a stealth bear market has been in force since, the blast from the “hermit kingdom” last year falls in line with our wave interpretation. The bear market of the past seven years has much further to go. If our stock market outlook is correct, the North Korean test last year is analogous to China’s test of a hydrogen bomb in 1967 during the bear market rally that followed the initial decline in 1966. The current bear market rally is at least one degree larger than that. As The Elliott Wave Theorist added in 1999, “In the past two decades, there has been no Elliott wave correction large enough to induce anything beyond nuclear weapons testing. The next ‘C’ wave of larger than Cycle degree will undoubtedly impel the use of nuclear weapons for offensive purposes.” So North Korea’s October nuclear test indeed may, as Japanese Prime Minister Shinzo Abe predicted, “mark the beginning of a new, dangerous nuclear age.”■
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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.
