Reviews: Business and Investment

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Socionomics: The Science of History and Social Prediction by Robert R Prechter Jr Pioneering Studies in Socionomics by Robert R Prechter Jr. New Classics Library ISBN 0-932750-57-5 Two Volume Set: $59 US at Amazon Nils Bohr the scientist once stated, ‘Prediction is hard, particularly the future.’

Robert Prechter Jr founded ‘The Elliott Wave Theorist’ back in 1980 based upon the foundations of R.N. Elliott, discoverer of the Wave Principle some sixty years ago. Since then, he has been an industrious and massive promoter of the Elliott Wave principles and something of a financial guru on Wall Street. This has developed, in turn, into the ‘Science of Socionomics’ combining social economic practice with predictive economic theory. (The science of social analysis based on socionomic insights.)

In the past, like those who bet on horses at the track, investors looked to previous form to predict the future. In racing, form will tell you everything about breeding, speeds, temperament, track conditions, left-hand turns, right- hand turns, sprints, genetics and will also inform you about the jockeys, trainers and betting odds. Even so, equipped with all this information and your own eyes to check the condition of the horse on the day, you can still lose everything.

Socionomics is about two things. Recognising and believing that Elliott’s Wave Theory exists, and that sociology can influence the way you invest. Precher’s central theme is that Elliott’s insight is the idea that financial markets have a law of patterned self-familiarity governed by the Fibonacci sequence (0,1,1,2,3,5,8,13,...).

(Fibonacci lived around the year 1200 and he studied the breeding habits of rabbits, honeybees and plants. This in turn spurred on Henry Dudeney at the turn of the 20th century who studied cows in the same way.)

Prechter, like Elliott before him, is seeking the perfect ‘form’ book. The key to the alchemist’s cupboard that will enable him and others who follow him, predict the stock market and make a fortune. Indeed, many, 'The Economist' magazine included, have stated that the market may not be random. Elliott’s idea is that price changes in stock market indexes produce a limited number of definable patterns, or waves. Each wave at each degree (or size) become components of the waves of the next higher degree. Five waves generating net movement. Three steps forward, two steps back. 5-3 in a Fibonacci sequence. The model can produce some success in forecasting stock trends. More importantly, Prechter examines social moods and trends in human attitudes, which he claims precede compatible changes in history and culture. In basic terms, the Fibonacci sequence and the Elliott Wave are a manifestation of a type of growth pattern found throughout nature. Growth and decay, expansion and contraction and are therefore with close observation of mood and trends - predictable.

The first volume 'The Wave Principle of Human Social Behaviour' is a very comprehensive and detailed text book that goes a long way to prove Elliot Wave Theory is a very useful tool in predictive financial forecasting.
There is much here to convince the sceptic that there is a real science behind this concept, written in an accessible style. The case studies are interesting and valid. (I was interested in how the Elliot Wave accurately predicted not only the highs and lows of the market but as to whom would and wouldn’t win elections. George Bush senior’s defeat to Bill Clinton fits the model perfectly and it would seem, the son may also suffer a surprise defeat based on how social mood influences markets and politics. We await Nov 2004 with interest.)

The second volume ‘Pioneering Studies in Socionomics’ is more recent, published in 2003 and is loaded with case studies. The central theme is punched home repeatedly. Social mood underlies the state of the economy, not the other way around. Rising stock prices do not improve people’s moods, people’s improving mood makes stocks rise. War does not (as commonly believed) move stock markets up, the mood that governs stock determines the propensity for war.

Prechter and his co-editor of 'The Elliot Wave International ' Peter M Kendall ask us to examine social trends and moods. For example, they look at the world of rock music, cinema, fashion, and food to extrapolate trends and moods in society. They interpret these changes in moods as where the markets are going along ‘wave principles’.

It is certainly true that a propensity towards love songs in the charts indicates a rising good mood and therefore a rising market. Equally, bleak depressing movies and heavy metal dirges could indicate a downwave. The art is finding the upward swing or the market turn before everyone else.

Recently, we have had Missy Elliot and Madonna advertising Gap. Here we have a huge clash of icons. Interpreting it is interesting. Is Madonna there because her career is over? Is Missy Elliot there just for the money. The ad has been badly received in the USA and along with Madonna’s albums, films and just about everything else underperforming, she is a waning star cashing in on her icon power. But wait, Gap isn’t stupid. They could have gone for someone younger, or in Missy’s case, thinner. They didn’t because of demographics. Gap customers aren’t 13. They are 30 plus. They grew up with Madonna. In actual fact Gap sales are rising. With Madonna and Missy Elliot fronting the new cord range, the core customers feel reassured that Gap is OK to shop in again.

Prechter and Kendall observe all these things. They ask the questions about the popularity of Coke or why Macdonalds is tanking in the market place. Is it that these companies have lost the will to live or is it mood swings? America has moved on from sugar water and fatty burgers. American’s are getting fatter yes, but many want to be leaner, fitter, eat more healthily. Is it a fad or a permanent market swing? The Wave principle will enable you to understand that change.

Right now following a campaign by environmentalists against gas guzzling SUV’s, hundred of thousands of Hummers and Dodge Rams and Durangos are being attacked by activists. The original compaign was to persuade people to stop buying by trucks to go to the Mall in. However, following the War in Iraq and rising energy prices (up nearly a dollar a gallon on a year ago) the guilt by association movement has taken an ugly twist. The mood has changed. Now more people can see that buying gas-guzzlers hurts their pockets. More importantly, activists have crossed the line from mere protest to active physical damage. Why? The mood has changed. (Pity the manufacturers like Ford, Chrysler, Porche, GM, VW all bringing out newer, bigger, even less fuel efficient cars right now. How fast can they turn the ship around to more efficient models? Remember ‘compact’ cars? How the Japanese came in and trashed the big three during the fuel crisis in the seventies. Would you want to be invested in these companies right now? Those attacks on Hummers could spread to all kinds of superfluous vehicles and GM and Ford are very exposed to this kind of mood switch.

The stock market may be rising in ‘03, but jobs growth is patchy. The ‘popular’ war against Iraq is killing US soldiers on a daily basis. More killed in the peace than in the war now. Americans scent another Vietnam, which in turns reminds them of recessions and bad times. If George Bush Jr isn’t on the phone to Robert Prechter to see where he stands on the Elliott Wave, he should be. It is still ‘the economy stupid’ and America is now billions in debt thanks to this war, and unnecessary trade sanctions (such as Steel and Beef - although steel sanctions might be lifted by early 2004 in the wake of European retaliation and the fact that it is in fact driving up costs in the USA.) The USA is also in the process of relocating much of its manufacturing to China, where people will work for two bucks a day. China in five years could be the world largest producers of cars and they will be demanding more and more oil contracts from the Middle East. What mood will America be in if it can’t get oil because China bought it first? What price oil in that tight market? If you think mood doesn’t affect what we do or buy or think, ask a New Yorker about what he feels about the blackout August '03 or being told it will happen again.

To respond to that - a real socionomics student will also think about how much energy could be saved if America had long lasting light bulbs or energy saving legislation in place on computers, all electronic devices. They will think about the companies who make those products as well as companies that can manufacture and distribute electric power more efficiently.

A political mood for making things more energy saving could be an investment bonanza for some companies. Change the politics, change the mood.

The difficulty comes in interpreting social mood to predict the stock market. You can study every trend and still come to the wrong conclusion. Is it possible to tax Lattes and expressos in Seattle? Obviously not, voters rejected it, even though the revenue was earmarked for day-care for kids. Can taxing other unhealthy things be be a way to go? A Macdonalds ‘Big Mac’ tax, a Donut tax. This is exactly what Prechter is discussing. The implication is that an acceptance of a tax on lattes means that the mood is for social responsibility would be prevalent and that could mean a Democratic victory at the next election. A defeat could mean that Bush and selfishness reign supreme. Look at the popular uprising against Governor Gray Davis in California. Now that Arnie is in charge how do you read the signals for California? Is it still the economic engine of the USA, if not, where are the companies that make the wealth fleeing to? Use the predictive theory to help you decide which pharmaceutical company to invest in. We know that there is a new killer flu strain out there; who is best able to cope with it and get a 'fix' to market and stall a pandemic.

Precher writes:
Predictions involve two levels of complexity: the general character of coming events and the specific events themselves. The primary aspects of the social dynamic are its formological imperative, which governs the former, and its chaotic process, which governs the latter.

In a Chapter 'World Peace, World War, Fibonacci and Elliott' he discusses the impact of Sept 11th on America’s mood and fortunes. Certainly we are living with the consequences of that event. The war on Iraq and rising terrorist atrocities around the world can be plotted into the Elliott Wave pattern. Reassuringly he doesn’t feel that a major ‘world’ war could arise until 2034 (plus or minus two years.) Nevertheless, a war of constant attrition and rising acts of terror could continue for many years before then. Given a literal interpretation of Fibonacci given that the Korean War lasted three years and Vietnam lasted 8, the next war could last 21 years. That war may have started on Sept 11th 2001. I am not sure that anyone or any civilisation could survive such a thing given the highly developed means of destruction we have at our disposal.

Better to judge that the mood for war could change and as a result bring a change at the top. Americans could elect people more able to negotiate and less inclined to spill blood.

There is no doubt that reading Prechter’s books could be useful and you learn a great deal about the invisible yet utterly intrinsic importance that social trends and moods have in shaping the wealth of the nation. It is not just a case of watching housing starts or counting cars produced. The educated investor has be socially aware, clued into every facet of human life, be aware of trends and changes in places like China and Japan, as well as Europe. It is not an easy solution, no quick short cut to riches. Read the case studies and about how the Elliot Wave works and you will be a better investor, able to spot dangers and make the most of opportunities in downwaves and upwaves. That’s no bad thing. It may not help you bail out of Boeing before the top execs are decimated, after all - there's little to protect any investor from insider trading, but you can examine the 'culture' of business within a company and what they will or won't do to get business. Enron studies anyone?
Every serious investor should read these works.

Sam North - Editor
editor@hackwriters.com
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