[Article] Prechter, Casti Agree: Current Extreme in Fractal Pattern Indicates Approaching Downturn for Economy

In an interview last month on the Gabriel Wisdom Radio Show, Robert Prechter, president of Elliott Wave International, and John Casti, author of the well-received socionomics primer Mood Matters, said the wave of respite that began in March 2009 for financial instruments and in June 2009 for the economy appears to be exhausted, setting the stage for a renewed downtrend. This article features excerpts from the show, which was aired throughout the U.S. on the Business TalkRadio Network.

Gabriel Wisdom: I am delighted to have two great guests with me. I’m proud to say that I’ve had these gentlemen on my show individually in the past. Let’s start with Robert Prechter. Bob, what is your forecast going forward?

RP: Looking back to 1999-2000, the most important thing that happened, in my view, is that the social mood changed from up to down. We have actually had a major topping process in progress since 2000, including another high in 2007. However, in real, gold terms, stock prices peaked in 1999, and they have trended mostly down since then. According to socionomics, the stock market is a good meter of social mood. On the left side of that top, there were rising stock prices, increasing prices for homes, an expanding economy, an ebullient population, rising debt and credit being handed out like candy. And then on the right side of the peak in 2000 and 2007, there were declining stock prices, declining real stock prices, and a contraction in the economy, the most severe since 1929 to 1933. Rather than increasing debt and credit, we have had a credit crisis; and rather than rising prices for homes, there have been falling prices for homes. I think the engine for these changes is waves of social mood. We are now in a large declining phase. So the forecast is for continuing falling stock prices, continuing contraction in the economy, and a continuation of the other trends we have just talked about. There has been a respite from March 2009 to the present, a partial retracement, if you will. But that wave looks exhausted, as evidenced by all the extreme optimism that we see recorded. And since we are talking about waves of optimism and pessimism, when you reach an extreme, it is probably time for a reversal.

In Vienna with us is Professor John Casti. His new book is titled Mood Matters: From Rising Skirt Lengths to the Collapse of World Powers. John, how does the theory of socionomics relate to rising skirt lengths and the collapse of world powers?

JC: Well, it is pretty much what Bob Prechter just told you: In times of social optimism, people are looking forward to the future. The kinds of events that you tend to see you might label as “happy.” In that case, you get phenomena in pop culture such as fashions that show optimism: bright colors, rising skirt lengths and so on. On a much longer term perspective, you get the emergence of new world powers in periods of positive social mood, and you get fragmenting, or collapsing, world powers in times of negative social mood. And I think that in the U.S. today, as Bob just indicated, we are in the early stages of a negative social mood period. This negativism is showing up in the political arena, in the intermediate term perspective, and even in the longer term as waning global influence on the part of the United States.

Bob, your two-book set, Socionomics –The Science of History and Social Prediction, was very well received. It was also controversial. How does it help forecasters?

RP: Most people assume that everything will go in a straight line. That is economists’ method of forecasting. They say, “Our figures picked up a little bit for the third quarter, so we are going to raise our estimates for the fourth quarter,” or “The first quarter was a little weaker than we thought, so we are going to lower our estimates for the second quarter.” They are extrapolating everything they do linearly, and what John and I are exploring is a completely different way of extrapolating. It involves extrapolating in a fractal form, which is the reality of the market. Back in 1938, R.N. Elliott showed that the markets are a fractal. Later, Benoit Mandelbrot confirmed mathematically that Elliott’s observation–at least in general terms — was correct. That is why at certain extremes, instead of extending a trend into the future and saying that we are going to get more of the same, we try to predict change. We say, “No, we are going to get something new, something different.”

John, you are working on the development of early warning methods for extreme events in human society. What do you see coming? We know that Bob is expecting a deflationary depression. Where do you see things going?

JC: I see things going the same way that Bob does. Let’s put it simply: I see things going down for quite a while. As Bob mentioned a moment ago, if you do simple trend following, the problem is that you will never foresee the surprise. As far as your predictions are concerned, tomorrow is always going to be just like today except a little bit better or a little bit worse. That model allows for no turning points. The paradox is that everyone will agree that there will be surprises of some kind, but as soon as you actually try to identify any specific surprise, especially if it is a real surprise, they will say, “No, that is impossible, implausible; that could never happen. Just look where things are heading currently!” And so you have a kind of paradoxical situation. And the way out of that paradox is what Bob just said: You have to change your model; you must change your way of looking at the world. And socionomics gives you the chance to do exactly that. Incidentally, that is one of the main reasons socionomists get a lot of grief about their model. It is contrary to conventional wisdom.

[Ed Note: Comments were edited for clarity and reading ease.]