Principles and Prognosticators

Tricky times we're living in right now. Uncertainty seems to be the prevailing forecast. Volatility in the financial markets has reached, in recent weeks, record levels. Most of the popular TV pundits don't have a clue what's going to happen next, and opinions range from "we've seen the worst of it and we're turning the corner" to "this is only the beginning of a long, painful shift in the way the world functions" to "prepare for the Apocolypse".

Current events affecting my livelihood, particularly the deteriorating economy and slumping stock market, sparked an interest in doing some research on these subjects, including the history of the markets. This research lead me to the websites of some current market historians, as well as some theorists who also happen to be prognosticators of future market events.

One such group of theorists, followers of the Elliott Wave Principle, I found particularly interesting. The Elliott Wave prinicple provides the foundation for the study of Socionomics.

In a nutshell, the theory proposes that man is born with some endogenous mechanism that dictates the collective social mood, and these moods rise and fall according to a particular pattern (waves), and that these waves have a particular form. They propose that the stock market is the most immediate measure of current social mood, and you can trace the wave patterns in the Dow Jones Industrials, the S&P, the gold markets, etc. All of the markets will follow this form.

R.N. Elliott is credited with forming the primary postulates of this theory. In the 1930's, Elliott discovered that the stock market prices trend and reverse in recognizable patterns. Furthermore, these patterns are fractals (he didn't use the word "fractal", but he proposed the concept). A fractal is, to quote Wikipedia, generally "a rough or fragmented geometric shape that can be split into parts, each of which is (at least approximately) a reduced-size copy of the whole,"[1] a property called self-similarity. The term was coined by Benoît Mandelbrot in 1975 and was derived from the Latin fractus meaning "broken" or "fractured." A mathematical fractal is based on an equation that undergoes iteration.

Fractals are the basis for a lot of mathematical mumbo jumbo that I won't go into here, but as it pertains to the stock market, it is significant.

If the theory holds true, it means that you can look at the well-documented history of the stock markets, going back to the 1700's, and trace these patterns right up until today. Which also means you can see what the pattern calls for next.

I don't know about anyone else, but if I know what's going to happen next, I'm in a hell of a lot better position to prepare for it.

But the theory is only a theory, right? I mean, no one can really predict what's going to happen next. No one has a crystal ball.

But these guys have been right about a lot of stuff. I mean, a lot of stuff.

Five years ago, Robert Prechter, the world's leading expert on Elliott Wave theory, made some predictions. Actually, he made 100 predictions, and if these interest you, you can find them on the Elliott Wave Principle website. Here are just a few:

Finance:

Stock markets around the world will continue to fall. Ultimately, the averages will drop more than 90 percent.

Real estate values will fall more than they did in the 1930s and 1940s.

Debt packages made of mortgage-backed bonds, auto loans and credit card debt will become viewed as unworthy investments.

The dollar will lose its place as the world’s reserve currency. Either gold, a currency backed by gold (such as the Islamic dinar), or the Chinese yuan will take its place.

The total amount of credit outstanding worldwide will decline substantially.

The Federal Reserve chairman will be labeled a fool who is greatly responsible for the collapse.

Fannie Mae and Freddie Mac will shut down.

“The rich” will be vilified, and their property will be increasingly taxed and seized.

The Economy:

The trend toward economic contraction that began in 2001 will continue to develop into a depression.

The unemployment rate in the U.S. and in most countries around the world will rise and eventually exceed 25 percent.

A record number of manufacturing companies in the U.S. will fail.

Politics:

The occupation of Iraq by the U.S. will progress from a quagmire to a financial, political and public relations disaster.

The Third World War, which began on 9/11/01, will escalate.

Separatist movements will gain momentum. Many will successfully establish new geopolitical entities.

Fears about technology will lead to restrictions on its development.

Politics will become far more polarized, splintered and radical.

Other Social Trends:

Religion will become increasingly popular. Its advocates will become increasingly passionate. Religious intolerance will increase.

Science will be turned to manipulative or malevolent purposes.

New brutal sports will be introduced and gain popularity.

The U.S. space program will be shut down.

Hemlines will fall, and bright colors will go out of style.

Cults and other escapist communities will be established.

These are just a few of the predictions Prechter made in 2003. Some of them are pretty radical, but many are proving prophetic. It makes for very interesting reading.

The idea of a pre-determined collective social mood seems pretty farfetched on the surface, but if you take a closer look, maybe not so hard to believe.

I'm not saying I buy it without question, but I'm reading a couple of books on the Elliot Wave Principle and paying attention to what's happening.

Maybe I'll make some predictions of my own. I'm a prognosticator in training.