http://www.youtube.com/watch?v=JdxkVQy7QLM

There are lots of people that follow Elliott theory, and they come up with different predictions using the same guidelines and rules. The real question is there such a thing as a Grand Super Cycle spanning centuries as Prechter believes, or is it more just a simple short term technical no more useful than any other such as a moving average etc.

Some technical analysts are just better at predicting, just as some musicians are better at improvising and anticipating where things are headed, amazing the audience who could study music theory for years and never be able to produce the same results. So there’s always a human talent/element that can’t be quantified. But I know enough to pay attention to them even (and enjoy) if I couldn’t reproduce it myself.

Whether or not there is such a thing as Grand Super Cycle, well, I guess we’ll find out in the next few years!

Fascinating post. Thanks. I scanned the wikipedia article, looking for a concern that immediately occurred to me while reading your post: human consciousness always complicates apparent regularities of behavior (driven by instinct or whatever). Lo and behold, the wiki article noted this as one of the primary objections to the usefulness of any such principle:

In efficient markets, knowledge of the Elliott wave principle among investors would lead to the disappearance of the very patterns they tried to anticipate, rendering the method, and all forms of technical analysis, useless.

As soon as someone tells you how the future will unfold, this creates a sort of “feedback” (music analogy intended) that interferes with the prediction. No doubt awareness of the interference would create a “second-degree” of feedback, with the obvious danger of an indefinite regress. Perhaps one could compute, with enough knowledge of human cognitive limitations, when the regress would be likely to stop… But, of course, that would only start another series of feedback/interference loops…

I have a friend (a fellow philosopher) who has suggested that economics is not a science at all. A science should be reasonably predictive, and economics is not (he argues). More radically, he’s playing with the idea that lack of predictive utility entails lack of explanatory utility as well. That seems to me to be going too far, but it’s an interesting (“deflationary”) hypothesis about economics. If it’s correct, it would seem to apply to any social science that views itself as predictive…

What has fascinated me most is that after taking economics in college and reading many explanations of its “cause” since then, the reality that I see is nobody has any real idea what caused it. Economic theory goes thru fashions just as everything else does. Keynesian thought is now back in fashion after having been “discredited” in the 1980/1990s. In desperation, even die hard republicans are turning to those ideas once again as they submit to anything to stave off another depression.

And, after reading about it for almost my entire life, it is painfully obvious that we have no clue what really causes depressions, let alone how to prevent or cure them. But what intrigues me so much is that whatever they are, they are purely man made disasters. There have been many throughout history, not just the “Great” one everybody thinks of.

When I lived in Atlanta, I became aware of stock analyst there named Robert Prechter who had “called” the 1987 crash right down to the day, and had been making amazing predictions based on something called the Elliott Wave Theory.

The theory in a nutshell is that humans are a herd animal driven by waves of transmitted emotions, which evolved for survival reasons, but also follow predictable mathematical actions/reactions that thru the decades can be mapped in the stock market as well the arts. The stock market of course gives the most quantitative representation, but Prechter (also a musician) has expanded on Elliott’s original theory to explain shifting tastes in music and film etc., and in fact music is based on the same fibonacci waves, fractals and patterns that drive the overall collective moods.

It’s all fascinating stuff, and I’ve been something of a disciple for the past 20 years or so. The Elliott explanation of the economy makes much more sense to me than any other, and unfortunately, all of this, if Prechter is right, is only the beginning of what will surely be called Great Depression II (just as World War I was originally just called the Great War).

On a personal level, while believing this theory had merit, I had a hell of time going against the prevailing collective wisdom of the financial gurus: diversify, diversify, blah blah blah. Standing aside and watching other people’s portfolios zoom was so seductive that I couldn’t help but doubt the theory and was drawn in somewhat myself. Fortunately, not as much as I might have been without it, but painfully just the same.

Greed is as powerful as fear, and certainly equally blinding. Detaching from the herd is almost impossible no matter how much we all like to think of ourselves as individuals and free thinkers. We’re psychically wired into the collective mood.

So, even though I can say I saw it coming and was able to minimize the damage personally, I’ve also realized that I’m part of the herd and I’m trying to embrace that as well. (That, by the way, is the main reason I joined the Fellowship. Not so much for any spiritual reason, but to accept that as much as we all want to be individuals, we’re ultimately not and need each other to get by in some form or another.)

The short term good news is that if Prechter’s calculations are correct, we’re very near the bottom of this first wave down. My own spreadsheet is showing that we’ll have some choppy up/down stuff for a few more days, then a final plunge to probably about 627 on the S&P 500 which should be somewhere in the mid to high 6000s on the DJIA. Prechter is projecting somewhere between March 10 – 18 for the final bottom, although Elliott theory isn’t nearly as useful when projecting dates as it is for index levels. If the theory holds, then we will have some very sharp upward moves that could bring everything back up to as much as 76% recovery depending on how the waves form.

The bad news, is that once this huge upward correction is over, if Prechter is right, we’ll plunge once again, but much, much further down. I can see this as a very possible outcome as the aging boomers see their portfolios reinflate and decide that they aren’t going to be so greedy this time, and cash out before getting all the way back up to the top, hoping to preserve what they need for retirement and not gamble anymore, which of course will spark the huge panic as the memories of this recent wave down will be all too fresh. And, worse, this will ultimately lead to global wars once again as the anger rolls out and the denial/bargaining phases exhaust themselves (to borrow from the psychologists view of the cycle of emotions).

Anyway, just remember you heard it here first! ;)

If interested, this wikipedia overview of the theory is a nice summary and a very fair overview. BTW, notice the similarities to basic music theory.

http://en.wikipedia.org/wiki/Elliott_wave