How To Understand Social Mood & Market Behavior

How To Understand Social Mood & Market Behavior6/29/2007 1:55:08 PM
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Which came first, the chicken or the egg? Can't answer that classic conundrum? Then, how about this: Which comes first, the news event or the social psychology? In this excerpt from Prechter's Perspective, Bob Prechter answers a reporter's questions to get to the heart of which comes first.
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Excerpted from Prechter's Perspective, published 2004
Over the years, you've extended your stock market studies to the economy, popular culture and social trends. On Wall Street, it is common for observers to consider the market's performance to be a by-product of politics in Washington or the latest global crisis, with such phenomena cited as causal explanations for market behavior. According to you, the correct temporal relationship is the other way around. The market precedes social change, because the market is a "coincident register of mass emotion." Is there really a foundation for making such sweeping observations?
Bob Prechter: Yes. Exactly. Almost everyone believes that social actions cause changes in social psychology. If that is true, then events must be so perfectly determined that they create the Elliott wave patterns we see in the markets. For people to claim that the latest idea from the White House or the latest law passed by Congress or the latest statistic on the trade deficit or earnings or war or natural disaster has any effect on the market's pattern, that such things are determinants of stock prices in any way, is suggesting a far more radical view of the harmony of the universe than I am. In other words, to argue that events cause the state of social psychology is to argue that events are patterned, which is determinism. In that case, free will is invalid, in which case no one could make money from the Wave Principle, which we have shown can be done.
On the other hand, if social psychology guides the tenor of social actions, then it is only mass psychology, which is apparently a process governed by the unconscious mind, that need be patterned to produce structure in markets. Its patterns underlie social behavior, and behavior ultimately produces results in the form of social action that are viewed as important events.
So given moods, or wave counts as you call them, always produce the same events or similar junctures in the count?
Bob Prechter: No. Social events are manifestations of a patterned social mood, but the moods may be manifest in countless ways. Social actions are an outlet for the patterns of mass psychology, expressing it in diverse ways that give rise to the myriad events of human history.
You don't consider fundamentals?
Bob Prechter: On the contrary, socionomists, as I call us, are the only ones who do so properly. The patterns of social psychology that occur naturally are the fundamentals of the market. They are what cause what most people think are the fundamentals.
On Wall Street, analysts contemplate the ramifications of events in Washington, Tokyo and all points in between as much as the people who make their livings there. Then they proceed to build a market opinion from an initial observation about a political or social event that they see happening. They say, "The Democrats are going to win, and the president is going to do such-and-such, and that's going to cause stock prices to…."
Bob Prechter: Right. And they have about as much success predicting markets as economists have predicting the economy.
Isn't it possible that there is no pattern – that the five-wave subdivisions in the market since 1932 are an accident?
Bob Prechter: That's the typical response from Wall Street observers: "Another coincidence." When patterns of this tremendous size continue to work out time after time, it becomes a matter of faith to continue to believe that the Wave Principle is not reflective of stock market behavior.
It's an elegant idea, but in the workaday world of Wall Street, the average broker or economist or reporter is going to say, "Ellio-huh? The Fed just raised interest rates."
Bob Prechter: And what do they say when the market goes up despite a rise in rates?
They don't talk about it.
Bob Prechter: Right. They find a different event they perceive as positive and say the market went up today because of that. It's easier than saying it's because a given wave pattern may or may not be in effect. A rise in rates is a matter of fact. That's something a broker can sell, an economist can speculate upon, a reporter can write about and an investor can grasp, all without doing any research.
The logic may be compelling, but the implications that flow from this idea demand an enormous re-ordering of one's mindset.
Bob Prechter: Yes, and accepting it as depicting reality is a bigger step. I am confident that people will take this step, though. I may present a radical theory of social causality, but it is the only one that makes sense.
The Wave Principle presents a profound truth: sometimes the dynamics of social psychology are impelling the mass mood toward optimism, and sometimes toward pessimism, regardless of all news. Events do not shape the market: it's the forces behind the market that shape events. Events are results, and when you know what they result from, that is, social mood trends, you can often predict the general tenor of such behaviors. If one knows the species of a tree, he can predict what kind of fruit it will bear. Events are the fruits of a bull or bear market in social mood.

Inflation Fears: Real or Bogus Market Mover?

Inflation Fears: Real or Bogus Market Mover?6/21/2007 6:56:46 PM
When stocks drop sharply in the course of three trading days – as they did earlier this month on June 6-8 – news commentators try to supply the reason. This time around, "inflation fears" seemed to win the lottery. However, Bob Prechter, debunks that reason in the June 15 issue of his Elliott Wave Theorist, which is excerpted for this Prechter's Market Perspective column.
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Stocks Tumble on Global Inflation Fears—June 07, 2007, Fox News
Investors are getting a case of inflation jitters —June 7, 2007, Business Week
Inflation Fears Again Chill the Markets—June 8, 2007, New York Times
Stocks decline…inflation fears citedJune 8, 2007, Atlanta Journal-Constitution
According to economists and news commentators, the stock market fell on June 6 through 8 on “inflation fears.” Charts of the S&P 500, gold, silver, the US dollar and the S&P 500 Homebuilding Index show that the stated reason for investors’ fear is utterly bogus. As stocks fell on those days, gold cracked to its lowest level since January, and silver fell as well. Did investors sell gold and silver because of inflation fears?
At the same time, the US dollar had its second-biggest two-day jump of the year. Did investors buy the dollar because of inflation fears? Real estate prices were falling as well. We can’t blame inflation fears on the fall in bond prices, which can fall either on fears of inflation or fears of default brought on by deflation. Thus there is no basis upon which to argue that fear of inflation is the fundamental reason that investors sold stocks on June 6-8.
To be sure, investors, economists and others did feel fearful on those days, but these charts prove that the reported reason for their fear cannot be the real reason. It may also well be that stock sellers said they feared inflation. But these graphs prove that any such statement on those days could have been the result only of rationalization. Fear indeed motivated investors to sell, but their fear derived from a turn—however brief—toward negative social mood, which caused investors to sell stocks, bonds, gold, silver and real estate all at the same time.
Here are more ironies.
Credit inflation, deriving from an optimistic mood, has been holding the stock market up. Stocks have risen in dollar terms since 2002, and the dollar has been weak for most of that time. So inflation has been bullish for stocks, not bearish.
A slight social mood change toward the negative has also been motivating lenders, borrowers and legislatures to curtail the expansion of credit and debt, thus acting to turn the tide – though not yet decisively – toward deflation, the very opposite of the cited reason for the stock market decline.

Futures: Double Zigzag, Single Opportunity6/15/2007 10:08:43 AM
By Nico Isaac
When you hear the word “zigzag,” what images come to mind?
A bolt of lightning
A sewing stitch
The path Paris Hilton’s party wagon takes down Sunset Boulevard
Well, in the world of Elliott Wave analysis, a zigzag is an important corrective pattern, primarily for its ability to earmark the end of an overly extended trend AND onset of a move in a new direction.
As for an official definition of the shape in question, Elliott Wave Principle – Key To Market Behavior delivers the goods in full:
“A zigzag is a simple three-wave pattern labeled A-B-C, in which the top of wave B is noticeably lower than the start of wave A. Occasionally, zigzags will occur twice or at most three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening “three” or “x”, producing what is called a double (or triple) zigzag.”
Also to bear in mind are these Zigzag Rules to live by:
Wave B NEVER moves beyond the start of wave A
Wave C is often the same length as wave A
Wave C almost always terminates beyond the end of wave A.
Now for the best part: In the June 12 Daily Futures Junctures, editor Jeffrey Kennedy presented this labeled close-up of a major MEATS market that shows a double zigzag at work in real time.

As you can see, the resolution of the zigzag pattern initiated a u-turn to the upside. And, according to Jeffrey Kennedy’s chart, this is just the start of the advance in prices.
So, what are waiting for? Check out the complete Daily Futures Junctures publication today via a risk-free subscription.
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The coming collapse of the US dollar

The coming collapse of the US dollar
M R Venkatesh
The skew in the global financial system -- commonly called 'global imbalance' -- seems to be fast spiralling out of control.
For some time now economists have been engaged in the mother of all debates: whether the US dollar would collapse by as much as 40% when compared to other currencies (some are even betting on the US dollar going belly-up) or whether there would be an orderly devaluation -- that is, a gradual revaluation of other currencies vis-�-vis the US dollar.
In effect, the question that is confronting us is not 'whether' but 'when' and by 'how much.'
This global imbalance can be understood in economic terms by simply examining the massive size of America's twin deficits -- trade and budgetary. Put modestly, Americans have been living way beyond their means, consuming much more than what they could possibly afford and, in the process, borrowing far beyond their capacity for too long.
This was facilitated by a policy of maintaining weak currencies across the world, notably in Asia. This policy of maintaining a competitive exchange rate for their currency to boost exports has resulted in a race to the bottom amongst various countries.
Nevertheless, this arrangement suited countries, both Asian (with a huge unemployed population) and American, (as it provided cheap imports for its huge consumption binge).
While the going was good, everyone profited and expected the arrangement to continue indefinitely. Unfortunately, linearity as a concept has limited appeal in real life, much less is global macroeconomics.
No wonder, of late, countries are discovering that this arrangement has its limitations. The current account deficit of the United States translates into current account surplus of exporting countries. To cover this deficit, US borrows: this corresponds to the forex reserves of exporting countries. The crux of the issue is that no other country, barring the US, has such a huge consumption pattern and an ability to absorb this huge export surplus.
In substance, countries are producing their goods, exporting it mostly to the US, and parking the resulting export surpluses with the US to facilitate US to finance its imports!
Clearly, the global imbalance is a by-product of this mindless competition by various countries to devalue their own currencies and the reckless consumption in US. Naturally, it is indeed tempting to blame US consumption for this crisis. However, one must hasten to add that the emerging economies -- notably Asian countries, especially after the1998 currency crisis -- with their fixation for weak currencies, are equally to be blamed.
The net result? Well, consider these facts:
By mid-May 2007, the US National Debt stood at approximately at mind-boggling $8.85 trillion -- i.e. approximately $28,000 for every American.
The basic structure of the American economy is that the deficit of the US government is 4% of the GDP and the household sector 6%, which are offset by a domestic savings of 3%, largely from corporates, leaving a substantial national deficit of 7% to be covered by the capital flows from the rest of the world.
The current account deficit of the United States for 2006 is estimated to be in excess of $850 billion. This approximates to 7% of its GDP. Surely, even for the US, this is unsustainable.
In order to ensure that this money is routed into America and to sustain its gargantuan borrowing programme, the US has repeatedly raised its interest rate to its current levels of 5.5%. While the very size of the US debt makes any further increase in interest rates virtually impossible (as it would make borrowings uneconomical), any cut in interest rates to stimulate its economy and make it competitive would mean that the US may not get the money it requires to sustain itself.
On March 28, 2006, the Asian Development Bank [Get Quote] is reported to have issued a memo, advising members to be ready for a collapse of the US dollar.
Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money (that is the aggregate of US dollars circulating in the entire world -- technically called 'M3') in the US economy. This is the worst possible signal that the US Federal Reserve could have sent to the world.
Suspended sense of disbelief
Obviously, what aids and sustains the US dollar is a 'suspended sense of disbelief' amongst countries about the value of US dollar. Yet, common sense tells us that the excess supply will obviously result in a fall in the value of any product. The US dollar is no exception.
Late Iraqi leader Saddam Hussein was fully aware of this paradigm. Seeking to exploit the inherent weakness of the US dollar, Saddam wanted to trade his crude in Euros, which would have lead to a lower demand for the US Dollar and thereby triggered a dollar collapse. And those were his 'weapons of mass destruction -- WMD.'
And if some analysts are to be believed, Venezuela and Iran too possess the very same WMD. Naturally, it requires some specious arguments and military intervention to protect the US dollar. Never in the history of mankind has a national army protected the national currency so vigorously as the US Army has done is the past decade or so.
What is bizarre to note here is that despite the fact that crude is produced mainly in the Middle East; officially it can be purchased in dollar terms from one of the two oil exchanges situated in New York and London. Obviously, should Iran carry out the threat to commence oil trade in Euros or better still an oil exchange, the US dollar would come under tremendous pressure.
The US dollar is akin to the promissory note of a defunct finance company. It is common knowledge that a currency, when not backed by anything precious is just a piece of paper. When US abandoned the Gold Standard in early 70s, countries habituated by then to the US dollar under the Bretton Woods arrangement continued to accept the US dollar as an international currency without demur as the world was not prepared for any other alternative. Else, the global economy would have collapsed by 1971.
But the diplomatic silence did not solve the problem. It merely postponed it and it has come back to haunt us.
Post gold standard, by a tacit approval of the Organisation of Petroleum Exporting Countries (OPEC) and strategic manoeuvring, the US had ensured that its currency is implicitly backed by crude, instead of gold. This explains the American 'geo-political and strategic interests' in the Middle East.
But over time even this was found to be insufficient and consequently the oil standard of the 70s gave way to an implicit multiple commodity standard of today. Naturally, commodity prices -- including crude prices -- have soared in the past few years. Unfortunately, this arrangement too is failing the US. No wonder, the US dollar increasingly resembles a promisory note of a defunct finance company.
It is no coincidence that global trade in most commodities, including oil, is denominated in US dollars as the respective international exchanges are located in the US. To what extent are the prices of these commodities manipulated to protect the US dollar is anybody's guess.
However, it may not be out of place to mention that a barrel of oil which cost less than $10 to produce is sold approximately at $70 in the international market.
But as commodity prices go up it has lead to inflation across the globe. No wonder, countries are forced to increase their interest rates to fight inflation.
This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.
Doomed if it does, damned if it doesn't
Meanwhile, countries are increasingly realizing that the value of the US dollar that they are holding is fast eroding, whatever be the 'officially managed exchange rate.' And if fewer people want the US dollar -- as for instance when oil is traded in Euro the demand for the US dollar will fall -- it would trigger an avalanche.
No wonder, the US Fed is unwilling to make public the M3 figures, as it does not want the holding position of the US dollar to be publicised.
Interestingly, in such a doomsday scenario, some economists are still betting on central banks of other countries to defend the US dollar. It would seem that the US has 'outsourced' even this sovereign function to the central banks of other countries. After all, should the US dollar collapse, the biggest losers will not be the US but those who have US dollar-denominated forex reserves.
Naturally, countries holding US dollar reserves are caught on the horns of a serious dilemma -- should they seek to correct the global imbalance, it could result in the imminent collapse of the US dollar, and should they continue to defend the US dollar, they would be a long-term loser as the current arrangement has seeds of self-destruction.
While every central banker is conscious of this fact and thereby seeks to postpone the inevitable while nervously looking for his counterpart in any other country to break ranks and thereby trigger the collapse.
Surely, the emperor is without any clothes. There are only two possibilities from here on: Either we are witness a global meltdown of the US dollar, or allow controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.
The author is a Chennai-based Chartered Accountant. He can be contacted at mrv1000@rediffmail.com