The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

The End is Near……Not

07/11/2010

Earlier this month, a market analyst named Robert Prechter predicted the Dow would fall about 90% over the next six years, from about 10,000 to only 1,000. He is better known as one of the few surviving apostles of the “Elliott Wave Theory”, first developed by Ralph Nelson Elliott in 1939 but popularized by Prechter in a 1978book titled The Elliott Wave Principle. He’s been writing a monthly newsletter (at $19/month) on this ever since.

Quoting now from the widely respected Dictionary of Finance and Investment Terms, the theory holds that all human activities, including stock market movements, can be predicted by identifying a repetitive pattern of building up and tearing down, represented graphically as eight waves, five in the direction of the main trend, followed by three corrective waves. A 5-3 moves completes a cycle, althought cycles and the underlying waves vary in duration. Some practitioners believe the most recent “supercycle” began in 1932 and ended with Black Monday in 1987, indicating a 55 supercyle.

OK, that’s a mouthful but hold on!

There are numerous other “long-wave theorists”, such as my favorite, Nicholai Kondratieff, a brilliant Russian economist who served as Deputy Minister of Food in the early 1920’s at the tender age of only 25. He also saw a “supercyle” of 48-54 years. He saw this as an advantage for capitalistic systems, since the purging and destruction that occurred during the down-cycle only insured the “surival of the fittest”. Because he believed this made capitalism better in the long run, he was stripped of his office and finally died in a Soviet prison.

And, there are other long-wave theories. But, a few observations are appropriate. First, Elliott Wave theory says “all human activities” are governed by these cycles, even love and marriage. (I struggle with that one.) Second, Prechter’s cycle is out of sync, since it has only been 33 years since the last bottom. Third, some people need to feel a sense of pre-determinism, that all things are foretold, and will find Prechter’s prediction comforting, despite over-whelming evidence of what physicists can “randomness”. Fourth, a University of Michigan study found that 54% of people were more likely to believe an extreme forecast than a moderate one, in the believe the prognosticator wouldn’t make such an outrageous prediction unless it was certain. Lastly, I’m sure Prechter will sell more newsletters (at $19/month) now!

My belief remains that we are in recovery, with predictable hiccups along the way but still in a recovery. It is not a V-shaped recovery, like the stock market made. It is not a W-shaped recovery, because things will not be as bad as last year, either in the economy or in the market. I expect a recovery in the economy to look more like the Nike Swoosh, with a rolling bottom and a long, slow climb back to full recovery. The good news is that, once the economy recovers as much as the market already has, we can expect a return of the bull, a return of positive returns. While nobody knows when that will be, I’m confident it will be.

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