Bob Prechter Warns Market Correction "Larger Than The Malaise Of The '30s" Looms

Tyler Durden's picture

Authored by Avi Gilburt via MarketWatch.com,

I recently interviewed Prechter, who released a ground-breaking book, “The Socionomic Theory of Finance,” at the end of December. In the 813-page book, which took 13 years to write, he proposes a cohesive model that takes into account trends in sociology, psychology, politics, economics and finance. I highly recommend the book.

As I’ve explained here, Elliott Wave theory says public sentiment and mass psychology move in five waves within a primary trend, and three waves in a counter-trend. Once a five, or V, wave move (the waves are sometimes described in Roman numerals) in public sentiment is completed, it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply a natural cause of events in the human psyche, and not the operative effect from some form of “news.”

As one reviewer on Amazon wrote about Prechter’s new book: “This [cohesive] approach allows a measure of prediction on the basis that social mood fluctuates in fractal waves, and knowledge of them allows one ‘to achieve some measure of success in forecasting the direction, extremity and character of financial, social, political, cultural and economic trends.’ ”

Here’s an edited version of the interview, in which Prechter gives his outlook for the U.S. stock market, the general theory of Elliott Wave analysis and his new projects.

Avi Gilburt: You’ve said that, once the stock market tops, you expect a major bear market and economic contraction to take hold. What is your general timing for this to occur?

Robert Prechter: The true top for stocks in terms of real money (gold) occurred way back in 1999. Overall prosperity has waned subtly since then. Primary wave five in nominal terms started in March 2009, and wave B up in the Dow/gold ratio started in 2011. Their tops should be nearly coincident.

Gilburt: What do you foresee will set off this event?

Prechter: Triggers are a popular notion, borrowed from the physical sciences. But I don’t think there are any such things in financial markets. Waves of social mood create trends in the stock market, and economic and political events lag behind them. Because people do not perceive their moods, tops and bottoms in markets sneak right past them. At the top, people will love the market, and events and conditions will provide them with ample bases for rationalizing being heavily invested.

Gilburt: You’ve said we will be mired in a “depression-type” event. How long could that last?

Prechter: I don’t know. All I can say for sure is that the degree of the corrective wave will be larger than that which created the malaise of the 1930s and 1940s.

Gilburt: How are conditions going to change from what we have now?

Prechter: The increasingly positive trend in social mood over the past eight years has been manifesting in rising stock and property prices, expanding credit, buoyant pop music, lots of animated fairy tales and adventure movies, suppression of scandals, an improving economy and — despite much opinion — fairly moderate politics. This trend isn’t quite over yet.

In the next wave of negative mood, we should see the opposite: declining stock and property prices, contracting debt, angry and somber music, more intense horror movies, eruption of scandals, a contracting economy and political upheaval. That’s been the pattern of history.

It’s all relative, though, and it’s never a permanent condition. Just as people give up on the future, its brightness will return. The financial contraction during the negative mood trend of 2006-2011 was the second worst in 150 years. Yet, thanks to the return of positive mood, many people have already forgotten about it. Investors again embrace stocks, ETFs, real estate, mortgage debt, auto-loan debt and all kinds of risky investments that they swore off just a few years ago.

Safe havens

Gilburt: Where do you suggest people “hide” during this event for financial safety, and why?

Prechter: Short-term notes of the least unstable governments, held in the safest manner possible. The plan is to trade those investments for stocks, property and precious metals near the bottom. You can be calm and avoid suffering financially if you’re prepared. The trick to maintaining personal prosperity is to avoid popular investments at the turns. It’s not easy to do, but at a minimum, you need a fractal perspective on social trends as opposed to a linear one.

Algorithmic trading

Gilburt: With the advent and proliferation of computer-executed trading, what effect have they had on Elliott Wave analysis, other than the speed at which trading is done?

Prechter: Virtually none. People build their errors of thinking into their programs.

Stock market changes

Gilburt: How have markets changed, if at all, in the decades you have been analyzing Elliott waves.

Prechter: Markets have changed in superficial ways but not in any essential way. They still trace out Elliott waves. But that doesn’t mean it has been easy. Wave V from 1974 has been unusually large in both price and time relative to waves I and III. The closest thing to it in the record is the 1932-1937 rise, in which wave five lasted 15 times as long as wave one. Also, from 1987 to 2007, pullbacks were shallow and skewed upward in the Dow    and S&P 500 which threw me off.

Some analysts credit the Fed’s inflating for these market attributes. But even as the Fed was expanding the money supply at a record rate, the 2007-2009 drop in the Dow was deeper than one would have expected for wave C of a Primary-degree flat. So, that causal argument is spurious. Here in 2017, even the Dow/PPI is at an all-time high. I chalk it all up to Grand-Supercycle-degree optimism. That’s why we have record credit expansion, too, along with cooperation among members of the Federal Reserve Board and political support for the Fed. All that will change when mood turns negative.

Modifying the original theory

Gilburt: I have seen many analysts attempt to modify Ralph Nelson Elliott’s original structure, but none with any degree of success. If there were any aspect of Elliott’s structure to be its weakest link, where would you see the potential for such modification to find success in the future?

Prechter: You’re right. I have seen two attempts by others to change Elliott’s fundamental observations, and I have not adopted either of them, because I don’t see them dominating prices.

I have suggested three variations on forms: the leading diagonal (in which the odd-numbered waves can subdivide into five), the expanding diagonal and the skewed triangle. I remain skeptical about the legitimacy of all three of these forms. I suspect the patterns I described are more likely artifacts of imperfect mood recording than legitimate formations.

On the other hand, over the years I and my colleagues have made a number of valuable observations about wave forms that Elliott never noticed. Some have become well-known, others not. They are:

1. Wave three is most often the extended wave.

2. Peak acceleration occurs at the structural center of each wave, i.e. in wave 3 of 3 of 3.

3. In the stock market, fifth waves are always weaker than third waves.

4. B waves of contracting triangles often reach a new price extreme.

5. Even so, E waves of triangles in the wave four position always end within the territory of the preceding third wave.

6. Double flats are somewhere between rare and non-existent; I’ve seen flat-X-triangle serve as double three.

7. The barrier triangle is a more useful idea than the idea of independent ascending and descending triangles.

8. Zigzags often adhere to channels.

9. In zigzags, A waves tend to be steeper than C waves.

10. In flats, C waves tend to be steeper than A waves.

Useful indicators

Gilburt: While we use various technical indicators to support or show the weakness in any wave count, my favorite has been the MACD. Do you have any favorites that have been most useful to you over the years?

Prechter: Nearly all momentum indicators provide the same basic information. There are hundreds of them, because they are easy to construct, especially with computers. I don’t chart rates of change anymore because I can tell what they look like just by looking at prices. But momentum analysis is not simple. In the stock market, slowing momentum nearly always precedes reversals, but slowing momentum does not mean a reversal must follow. The 1985 and 1989-1994 periods are classic examples. In each case, the market slowed its rise — looking terminal from a momentum standpoint — and then accelerated. In the first case, I knew wave 3 of 3 was dead ahead, so I was really bullish. The second one threw me off. The most consistently useful momentum indicator is breadth. If I had to rely on only one momentum indicator, that would be it.

Markets as ‘fractals’

Gilburt: Do you have any specific time frames in charts that, in your experience, have provided the most insight into a specific market or commodity?

Prechter: No. Markets are fractals. Nothing quantitative is meaningful or useful.

Gilburt: There is a debate among various schools of thought as to what is more important — price or time. What’s your perspective?

Prechter: What matters most is form. Form involves both price and time, although arguably price is the more definitive component.

Improving accuracy

Gilburt: I am sure you have seen a lot of time-cycle analysis in your career. In my experience, I have not really seen any that have been better than 50/50. I am just wondering why you think we are unable to develop the same accuracy percentages in timing models as we do in pricing models using Elliott Wave?

Prechter: I think the reason for your observation is that cycles are not the essence of markets. They are artifacts of the fractal form. They appear for a while and then disappear. Usually by the time someone recognizes a cycle and bets on it, it is poised to vanish. As you say, the success rate is about 50/50, so I don’t rely on them anymore.

I think Fibonacci ratios between the prices and durations of related waves are meaningful. I wrote a book about Fibonacci relationships called “Beautiful Pictures.”

Reaction to socionomic theory

Gilburt: I have personally noted how I view socionomics as the ground-breaking work that will eventually lead market analysis into the future. But I also understand how old habits are hard to break, and most still desperately cling to the old Newtonian-based exogenous-causation theories of market analysis. What sort of reception has the socionomic theory been receiving from the world of academia?

Prechter: It has had wisps of success. We have had several academic papers published, and another was accepted by a journal [recently]. A ranking member of the Academy of Behavioral Finance and Economics commented to me that the term socionomics was becoming part of the lexicon, which was encouraging to hear. Several professors at mid-level universities are including it in their courses, and several top professors have been kind enough to provide a good word for the book. But most economists don’t know socionomics exists, and most of them would dismiss it if they did. Socionomic theory explains why such a reaction is, generally speaking, imperative: People are built better to participate in waves of social mood than to analyze them. So it’s very hard to get the word out. People like you, who do pure market analysis, have been the quickest to get it.

Education and resources

Gilburt: As new studies into the socionomic aspects of financial markets are performed all the time, are there any other resources for us to follow to gain continuing insight into this perspective?

Prechter: The Socionomics Institute puts out tons of interesting material. The website is full of studies, articles, events and videos. People who like this field should become a member.

Gilburt: What are your top three arguments to present to those who do not believe in socionomics but still hold fast to the old exogenous-causation theories?

Prechter: It took 800 pages in “The Socionomic Theory of Finance” to present arguments. But I can make three brief statements:

1. Events and conditions that are often labeled “fundamentals” have no predictability with respect to the behavior of financial markets, so they cannot be causal. (See chapters 1, 2 and 22.)

 

2. Financial markets differ in numerous fundamental ways from economic markets, implying that their behaviors spring from different causes. The key difference is that in economic markets the context is one of relative certainty with respect to one’s own personal values, which allows for rational decision-making, whereas in financial markets the context is one of pervasive uncertainty with respect to others’ future actions, which prompts people to herd. (See chapters 12 and 13.)

 

3. Postulating unconscious waves of social mood as a hidden variable explains a persistently compatible relationship among myriad social actions, from popular musical tastes to changes in the economy to political actions to women’s fashions to trends in the stock market. (See chapters 8 and 10.)

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VD's picture

Elliot Wave = LOL

 

fukoff with this crap already Tylers.

BaBaBouy's picture

Maybe one Day, one Decade, One Century he will be right ???

Uncertain T's picture

I read this guy's newsletter regularly in the 1980's ... He was regularly incorrect in his forecasts.

VD's picture

Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s....... Ralph died PENNILESS somewhere in Jersey....... 

JRobby's picture

Seems to miss an important factor: ???

CB's buying up EVERYTHING !!!

Oquities's picture

nail on head.   the purchasing of private sector assets with free govt. money to bolster banking balance sheets.  the capitalistic way to communism - use the printing press of CBs to gain state ownership.

baby_tone's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

OverTheHedge's picture

I'm also making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do..https://m.youtube.com/watch?v=Ya7z-l68gcc

 

SeuMadruga's picture

Yes, what really counts isn't Elliot waves, but Eccles tides...  ;-)

lickspitler's picture

In 1994 this guy faxed his subscribers, the dow has topped and we could retrace to the middle ages.  We ended the subscription that month.

AGuy's picture

FWIW: His analysis doesn't apply to broken markets. If there is any significant decline, Central banks will just do more QE and bailouts. Bankers and Politicians like to keep their jobs. If there was a deflation most of them would be unemployed, and standing in bread lines like the sheeple.

If QE and Bailouts fail, then they will turn to War and send the unemployed to go fight & die somewhere far away from home.

aus_punter's picture

Socionomics is 100% pure, unadulterated rubbish.  It has zero meaning other than providing light entertainment.

 

Prechter is worse than Gartman.  Genuinely no idea what's going on but is so deluded that he believes he has a secret formula. 

 

Anyone who could be bothered to track his forecasts would realise how totally useless they are

wisehiney's picture

This guarantees a giant equities rally.

Sirdirkfan's picture

Anyone with any sense has been leery of the spiking of the market since Obama's time.

A nation cannot survive on Zero inflation, and when the market crashes noone should be surprised, altho' we will not have a Depression since Mnuchin is a savvy manager and not, thank godness, an airhead FDR.

HillaryOdor's picture

"A nation cannot survive on Zero inflation"

LMAO.  Yeah I hate it when I go to buy food and it's the same price it was last year.  It's just devastating.  If food, rent, and medicine don't keep getting more expensive how the hell am I supposed to survive?

rrrr's picture

In ancient Greece there was zero inflation for more than a thousand years.

 

rrrr's picture

In ancient Rome there was an inflation rate of three percent for a hundred years, and it contributed greatly to their destruction.

ArthurDaley-OldieTimeTrader's picture

RRRR you know your history.. Well done you get an A+

VD's picture

if only ancient greece had cabal of criminals running the fed.......it would prob not have lasted 500yrs...

VD's picture

deep corp only kicked into high gear around circa the Renaissance ...

Helicopter Rides's picture

Well, he made a point about the cycles, if you read the pattern as a cycle you might be missing because it's just anecdotal, this applies only for keynessians tho

 

hopefully not for gold "hoarders" :3

JRobby's picture

"They" count on you dying. 

My plan is to defy them at every turn 

ElTerco's picture

If there is zero inflation, then your pay and return on investment will both fall. The only people who win in a *true* zero inflation environment are those sitting on a giant pile of cash (assuming a constant or growing population base).

canisdirus's picture

Not always. Some store of wealth will move around to productive sectors of the economy.

Of course, that's assuming a stable population. Whatever currency is used in a population needs to grow at the rate of the population for zero inflation/deflation.

Deflation isn't always a bad thing, either.

HooRAY4rSIDE's picture

Keep changing those wave counts until they suit your pre-fab models Bobby boy.

 

&, oh yeah, don't forget about that abc-x-abc-x-p1-p2-P3!!!OMFG!!!QE18!!! wave that seems to pop out of nowhere.

ebworthen's picture

We have passed the bounds of charting, indicators, measurement, and sanity:  http://www.usdebtclock.org/

fishpoem's picture

Great link! The World of Absurdity, second by second. Fun to watch...until it hits home that it's all REAL and that the numbskulls in Washington have convinced themselves that's it's nothing but play money that can be printed in piles higher than Everest.

Soul Glow's picture

Any way someone cuts it markets are overvalued.  If we use P/E, which was the staple for measuring value up until Glass Steagall was eliminated, markets are overvalued.  If we use a price index compared to GDP - and how funny is it that Yellen called the GDP numbers "noise" when everyone has been taught since middle school GDP is the best indicator as to the health of an economy - we get an over valuation of asset prices.  If we look at debt saturation compared to nominal income - and never mind inflation for now - we get an over valuation.  And if we view systemic inflation as a root cause of the overvaluation then we can see what would happen if/when deflation took hold as to a reversion of the mean.  If we take inflation to the next logical step, a hyperinflation, then we can understand what it would mean to the economy not to have a measurment of value anyone is used to.

With each of these in mind it isn't far fetched to also add them up and look at the sum being greater than the parts.  Always remember markets are momentum driven due to "animal spirits", behavioral prediction, and pattern recognition - the latter being most people can't recognize a pattern until the shit hits the fan.  So yes, we are facing a crash worse than ever before, and the more it is pushed into the future, the worse it will be.

alfredhorg's picture

Why should anyone listen to Prechter?  Why doesn't ZeroHedge write about someone with an actual track record of beating the best investing minds of Harvard, Yale, and Columbia for ten years:

https://howibeatgold.wordpress.com/2017/01/25/trash-dump-worker-invests-...

 

flaminratzazz's picture

I thought the market correction of the 30's was called a crash?

orangegeek's picture

Prechter has been calling a top since 2012.

 

Central banks Bobby, central banks.

 

Elliott wave is " you're wrong, until you are right by adjusting wave counts", much like today's accounting practices.

 

Prechter is a writer and publisher and a lousy analyst.

milking institute's picture

So is AVI GILBURT,a "writer" of useless articles that for some reason keeps getting published everywhere,blablabla.....

elephant's picture

correction: Prechter has been calling a top since the summer of 2009 - listen to his interview with Bartiromo on YouTube.

Dave the jew's picture

13 years to write a book on this treacherous financial obomination?? Why so long?! Lunacy!!! Probably lost 2 wives and 3 kids over it - idiot. Another form of entertainment brain washing this shit is becoming....

hsb1957's picture

It took him that long to write because he was waiting to release it during the second wave down after 2009.  

dark fiber's picture

I don't get it, what market, the central banks are the market.  In a previous article about gold manipulation, someone said that they will dump another $3B ar another $50B everyday if they have to.  They will do the same for every market.  They will buy $100B or a $100T more of anything to keep the shit show going.   They will buy everything in sight,  and when there is nothing left to buy, the central banks will setup their own funds and start buying and selling to each other.  They will never stop.  They will stop when the real economy begins to resemble Venezuela and the whole thing explodes in riots and flames.

ArthurDaley-OldieTimeTrader's picture

Relax Dark Fiber the day you expect is coming. Of that you can be certain.. GLTA. We're going to need all the good luck we can get..

zzzz88's picture

you guys comments prove that this guy may be right this time because you all try to deny the facts and respect the basic logic. very good. 

zzzz88's picture

i do understand you do not believe this will happen. i do not believe e waves or fib. but look at history, human beings make similar mistake again and again. my point is ------(very important)

 

in human history, the biggest bubbles are inflated by governments. south sea bubble, missisibi bubbles, kuwait stock bubble in 80s ....chinese re bubble, usa stock bubble.... the reason is that goverments have most resources, and average joes believe government will hold the bubble. 

 

clade7's picture

I know right?  Logic!  Plus, look at that confidently smug demeanor and that huge stack of paper!  Im a buyer of whatever this guy is selling!  And, he looks exactly like Anthony Bourdoin to boot?  Or whatever that traveling dope addict cooks name is...Great show!  Anyway, I trust him!

Clock Crasher's picture

All markets going parabolic at all degrees of trend during hyperinflation.

Machines and algos are not social creatures. Hence social mood theory can not be applied.

fremannx's picture

Good theory :-)  But hyperinflation is no where in sight. The next major trend, socially, economically and politically, will be deflationary. As Prechter warns, it will be greater than the deflation of the 20s and 30s.

it aint paranoia if they really are out too harm you's picture

Machines and algos are created/ written/ maintained by people, hence I'm not ready to throw out this social mood theory.

jmcwala's picture

You can lump Central bankers in with that lot.

Troy Ounce's picture

 

Not a word about gold or silver, just stay in the system.

Silver Savior's picture

The system can take a rather long walk off a short pier.

fremannx's picture

Gold is in a Primary wave B advance, that is to say a countertrend move, which will take it higher over the next few months. However, once that advance is over (1500-1600 range) it will fall into Primary wave C, and collapse into the 400-600 dollar range... according to Prechter.

MagicHandPuppet's picture

Interesting.  Prachter seems to be consistently wrong about gold... so, there's that.

jmcwala's picture

Not consistently. I believe he called the top.