Economic Collapse Is Exactly Like East Coast Surfing, or, I Wouldn't Buy That For A Dollar

What will it take to make you believe that inflation is not coming? How about a true saints-and-fools mythology complete with secrets of the temple, Fibonacci sequences, a Scienza Nuova-type theory of historic cycles, and fractal regressions so tiny there could be a whole universe of them in your little fingernail?

Say hello to Elliott Waves:

Elliott Wave Principle measures investor psychology, which is the real engine behind the stock markets. When people are optimistic about the future of a given issue, they bid the price up.

Two observations will help you grasp this: First, for hundreds of years, investors have noticed that events external to the stock markets seem to have no consistent effect on the their progress. The same news that today seems to drive the markets up are as likely to drive them down tomorrow. The only reasonable conclusion is that the markets simply do not react consistently to outside events. Second, when you study historical charts, you see that the markets continuously unfold in waves.

Using the Elliott Wave Principle is an exercise in probability. An Elliottician is someone who is able to identify the markets structure and anticipate the most likely next move based on our position within those structures. By knowing the wave patterns, you'll know what the markets are likely to do next and (sometimes most importantly) what they will not do next. By using the Elliott Wave Principle, you identify the highest probable moves with the least risk.

Hocus pocus you say? These days psychopathological approaches to the economy make heap big business. Titles like Justin Fox's The Myth of the Rational Market; George A. Akerlof and Robert J. Shiller's Animal Spirits; and Richard Thaler and Cass R. Sunstein's Nudge all offer to make you part of the exclusive group of people who know that everybody except you is delusional. (Ask about my "Velocity of Money" seminars, and how my award-winning VoM technology, available at just $49.99, can Put You Where the Money's Going™.)

According to Robert Prechter, the founder of Elliott Wave International and the Brigham Young of Elliotticians, waves of buyer sentiment follow rising and diminishing sets that look suspiciously like the patterns of ocean waves off a sandy beach with a gentle grade. (A universal constant!) The highest wave happens when the last skeptic buys into the prevailing storyline; after that the whole story goes south, in smaller and smaller crests. These are reproducible in fractal geometry, so you can do a technical market analysis at the level of a whole year, in fractions of minutes, or anywhere in between. But hell, you don't need my two-minutes-of-wiki synopsis. Just watch Prechter explain why the now nearly unanimous bearishness on the dollar means you'll soon be stuffing bills in your bra:

Don't Believe The Hype: Why The Dollar Will Gain in Value @ Yahoo! Video

I want to believe, not because I understand jack-all about Elliott Waves (though I had a dream the other night that, no lie, I was having lunch in a diner with Hillary Clinton and Elliott Gould -- coincidence?). It just seems to me very probable that we are closer to the beginning of the Great Deleveraging than we are to the end, and that without the so-called lifeblood of easy credit, the economy in its current form can only contract, no matter what the government does. Prechter cites the credit unwind as his foremost reason for thinking inflation's still a ways off. I'd throw in the price of milk and eggs.

Save those dollars. You'll need them after your boss calls you into his office.

Comments

[Spartacus]

Fractal decomposition (this one probably using Daubechies basis functions) is meither a new nor a great idea, just another form of technical analysis that has already been tried. How it relates to investor psychology is beyond me. No, I'm not going to read the book.

[rand]

lets decompose those premises:

1. Investor psychology matters
2. markets move in waves
3. you can predict future direction of mkts by identifying patterns.

1 & 2 are true. 3 is complete and utter bollocks.

[Mango Punch]

This is why I'm a fundamental analyst...

[Warty]

I saw this movie. This will end in a self-lobotomy with a power drill.

[roy]

I saw this movie. This will end in a self-lobotomy with a power drill.

yep, but only after losing all your money.

[mdb]

This is just chaos theory, and many people have been trying to apply chaos theory to the stock market for a about 20 years. Nothing new here, just another attempt to apply the theory. Maybe it will work. I would bet no.

[Rich]

The only reasonable conclusion is that the markets simply do not react consistently to outside events.

And "events" are ...?

The father of fractals himself tried stuff like this a while ago; but I prefer just looking at the wonderful pictures.

[R C Dean]

Fundamental analysis tells you where to put your money.

Technical analysis, at best, tells you when to get in and out.

Now, I happen to have a sweet tooth for technical analysis, so I look at a lot of charts. I haven't seen a chart yet that didn't point to massive and accumulating weakness in the dollar, weakness that in all probability has barely begun to run its course because the manipulation of the T-bill market by Treasury and the Fed.

But my investment track record is teh suck, so there's that.

[The Wine Commonsewer (TWC)]

The dollar may or may not gain in value relative to other currencies. However, it is indisputable that there will be inflation. In fact, there is always inflation and has been for decades. The lunch at King's fish house that cost fifteen bucks is now forty. That's evidence enough.

What concerns me more than the inevitable price creep is how much inflation will be stacked upon the routine erosion of the dollar and how long it will last.

[Billy!]

These guys are friends with the "Dow 40,000" guys i assume.

[mark]

I'm going to go out on a limb and suggest that exports and imports have to equalize at some point, so the dollar has to weaken at some point.

You know I'm kind of glad that governments are going full steam into financial interventionism. When the correction comes it will be so much more painful, and the non-interventionists will be able to say "told you so". Whether that will actually lead to a change in policies is a different question.

[Graphite]

Tim Cavanaugh's reaction to Elliott Wave theory is exactly the same one I had when first presented with it four years ago: don't bother me with this metaphysical crap. But once I dug into the details it turned out to be a theory with some eminently rational premises, namely:

- In matters of finance and investing, most human beings deal with uncertainty by behaving as a herd and imitating the crowd, a process which leads to natural cycles of boom, bubble, and bust as optimism waxes and wanes.

- The stock market is driven by these endogenous swings in the crowd's mood, a growth process which, like many others in nature, proceeds in a fractal pattern (R.N. Elliott was the first to propose that markets behave as fractals, long before Mandelbrot came along and defined the term mathematically and showed that it exists in stock markets).

- Rather than possessing some special ability to foresee the future and "discount" it, the stock market leads developments in the economy because it is the most direct and immediate measure of a social mood, which also drives hiring and investing decisions with some time lags.

It's too bad that Cavanaugh makes it sound as though Prechter offers no fundamental explanation beyond "look at the waves" for why deflation and a period of dollar strength are likely. In his book Conquer the Crash he explains at great length why the historically-unprecedented level of debt in our economy cannot be unwound gradually and will lead to a rush to cash, especially that cash which has been most inflated with credit, the US dollar.

Elliott-inspired traders and investors are some of the best in the business, including Prechter himself, who still holds the record in the United States Trading Championship.

Prechter was making fun of Dow 36,000 back when most people were still using it as an investment thesis.

I don't know what kind of technical analysis says that the dollar is perched on the edge of a cliff, but given that the Daily Sentiment Index showed just 3% of traders were bullish on the dollar late last week, it's hard to see how any more bears are going to fit into that already very crowded pool.

[kevrob]

Prechter was publishing his Elliot Wave Theorist newsletter in the late 1970s, during the Nixon/Carter stagflation. I ordered tons of his books for customers during the 1980s. You could probably leaf through contemporaneous dead tree back issues of reason - no capitalization in the logo in those days - and find ads for Prechter's work.

This isn't new, just more of "what goes around, comes around."

Next, a post on Kondratiev cycles.

Kevin

[MattXIV]

There's actually a theoretical reason why this won't work.

All prices below are real not nominal and dividend payouts are assumped away for simplicity's sake.

The current price a security trades at is P(t)= Pexpected(t+dt)

So you can beat the market by identifying cases where P(t+dt)!=Pexpected(t+dt) and buying or selling appropriately.

The problem with this is that you need to come up with a Pexpected(t+dt) that's more accurate than the method the rest of the market uses to get Pexpected(t+dt). But if your method is more accurate, more and more people will begin to use it, so the market Pexpected(t+dt) will converge to your Pexpected(t+dt) and your method will no longer yield over market returns.

[R C Dean]

As Matt points out, the effectiveness of any technical trading system is eroded by broad distribution. Once enough people use a system, it gets priced into the market.

[Robert]

I'm doing some research assistance for a financial analyst who says the dollar inflation has already been under way for some time.

However, I look at my own debt (which projection of the present situation would predict I can never pay off), listen to the ads for 3rd party debt settlement, get phone calls soliciting same, and I conclude that a massive amount of credit is still being written off or down. Money is credit, and credit is money. I see deflation under way and continuing. Prices are up at the grocery store, but I think that's driven by factors specific to food.

See what Jim Davidson thinks. I haven't seen anything from him in a while.

BTW, any time a currency is hyperinflated, the result is an overall deflation. It ceases to be useful as money, so it leaves the economy. If you think in terms of inflation only of a given currency, that doesn't tell you much about the overall supply of money & credit. Of course if your assets are in that currency, that's still important to know, but as an indicator of the economy in general it may or may not mean much.

[magic]

thanks very sesli chat