Prechter on Dividends

"[T]he greater investors' pessimism, the more dividend payout matters to them, and the greater their optimism, the less relevant or necessary it is deemed. In today's market environment, dividends are actually considered a detriment to stock ownership, the theory being that it is better for management to put the money back into the company to make it grow faster. As far as I can determine, this attitude is unprecedented."

- The Wave Principle of Human Social Behavior and the New Science of Socionomics

Review of Prechter's Perspective: Conversations with Bob Prechter, Legendary Market Theorist by Peter Kendall

We at Credit Bubble Stocks have an ambivalent opinion of Bob Prechter. As I mentioned four years ago in my review, his book Conquer the Crash led to a theoretical breakthrough for me about investor genotypes in an investing ecosystem.

Prechter's Elliott Wave Theory is probably trivially true. As David Aronson writes in Evidence-Based Technical Analysis, its ability to "fit any segment of market history down to its most minute fluctuations" is because of its "loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude," like epicycles in Ptolemaic astronomy.

However, many of Prechter's ideas stand on their own whether or not Elliot Wave Theory is true, and so today I was reading Prechter's Perspective, a book which is an extended interview of Prechter.

• [T]he bond market is bigger than the Fed. The Fed cannot do whatever it wants anymore. If it acts, the market will make a judgment, and depending on the psychology of bond investors, they can support, neutralize, [or] reverse whatever the Fed attempts to do to affect the money supply. The market is in charge and the Fed knows it. Why do you think the Chairman keeps going on TV to explain what he's doing? 
• Q: OK, maybe rising rates aren't always bearish. But we know [that] falling rates are bullish long term.
  A: If you had lived in the 1930s, you might conclude, as the consensus did, that falling interest rates are bearish for stock prices. [T]he biggest crash in our history, 1929-1932, was accompanied by falling short term interest rates. The recovery was accompanied by rising interest rates. At the time, the theory was that stocks and bonds compete for investment capital. 
• Most published forecasts are at best descriptions of what already has happened.
• They weren't saying ["buy stocks for the long term"] twenty years ago. Now they tell us. What's really going on is they are predicting the past. 
• The only way to guarantee that politicians will never again inflate is to introduce private money and ban legal tender laws. [...] The market place will choose the soundest forms of money, and competition will insure that the science of money is advanced. Compare the old telephone monopoly to cell phones and the Internet, and you'll get an idea of what would happen.
• Q: Aren't there things that could be done to soften the downside of the cycle?
  A: Perhaps there are things that could be done but the real question is will they be done? [...] Society undergoes a pendulum-like swing, back and forth between prosperity and recession.

All great points. The idea of "predicting the past" is something we were just talking about this week to describe that ridiculous "housing eating the world" essay. As our correspondent wrote,

What Conor Sen did essentially was describe the current state of reality in such a way that it appeared like a prediction or forecast of the future. The familiar and undeniable fact of present reality seduced people into thinking this pseudo-prediction is implicitly accurate and inevitable.

In reality, reversion to the mean suggests a better bet is that something which is wildly expensive in relation to incomes and expectations actually gets cheaper over time, not more wildly expensive. You're going further and further out into outlier land, especially with regards to the time of origination of the trend versus the additional timeline granted in the forecast. If the "prediction" turns out to be true, its success can be explained as LUCK, not PRESCIENCE.

Advice to buy and hold stocks (or bonds) is the same. The returns on a 60/40 portfolio aren't going to be duplicated unless the 10 year bond yield becomes seriously negative and stocks become even more expensive relative to earnings and cash flows.

3/5.

Latest Prechter on Financial Herding

Prechter points out that even corporate insiders herd, because "their misperceptions are the same as everyone else's. When the market goes up for a long time, corporate health factors strengthen, and when it goes down, they weaken. Insiders misinterpret these indications of their own company's present health as being the same as its prospects. Whenever their stock gets expensive, they think it's cheap, because they feel optimistic about the company's future."

Hussman Reads Prechter Too

From this week's Hussman,

Don’t make the mistake of getting the relationship between monetary interventions and the risk-preferences of investors backwards. Monetary easing and other interventions can be very effective when they occur against a backdrop of risk-seeking investor preferences, but history shows that they regularly fail when they occur against a backdrop of risk-aversion among investors. The best measure of investor risk preferences is the uniformity or divergence of market internals across a broad range of risk-sensitive securities. Prechter describes the prevailing psychology of investors with the term “socioeconomic orientation,” and his observations on this, I think, are exactly correct:

“People keep asking, ‘What effect will the next central-bank plan have on the stock market’s behavior?’ This is the wrong question. The socioeconomic orientation turns the question around: ‘What effect will the next stock market move have on the central bank’s behavior?’ Just study [the chart above] and you can see that the authorities are not pushing the stock market around; the stock market is pushing the authorities around. Sadly, when markets push authorities around, authorities push people around. All it does is make things worse.”

Prechter on Grand Supercycle Peak Belief in Bailouts

"It is a sign of a Grand Supercycle-degree peak that governments even care what happens in the stock market. This orientation is a death trap for politicians. If people think their government is to be credited for a rising market, they will blame it for a falling one." [...]

People keep asking, “What effect will the next central-bank plan have on the stock market’s behavior?” This is the wrong question. The socionomic orientation turns the question around: “What effect will the next stock market move have on the central bank’s behavior?” [T]he authorities are not pushing the stock market around; the stock market is pushing the authorities around.

No Longer Bullish On Bonds, But Was July 2012 the Top?

Prechter's latest Elliott Wave Theorist issue (February 2015) repeats his call that the July 2012 low in the 10-year bond yield (1.46%) is a major, multi-decade low.

Although recently we have thought of bonds as the flight to safety asset (moving inversely with stocks), he correctly points out that bonds and stocks have been going in the same direction since the mid-1960s. Both have been in a huge bull market.

I had thought that bond yields cannot rise until after the stock market has crashed, because the government could just refuse to bail out the stock market and thereby "chase" people back into bonds. But I had not considered that people need to view bonds as perfectly safe in order for that to work. And treasuries clearly are not perfectly safe.

That makes them vulnerable to going down with stocks when social mood becomes more pessimistic. The only thing that would rise would be the dollar - which of course has had a massive breakout.

And you see that there have been a series of higher lows in the ten year yield after the July 2012 low of 1.46%. First, April 2013 was 1.66% and then January 2015 was 1.68%.

I am officially open to the possibility that bonds have topped.

Prechter Capitulates?

Yesterday, Prechter published a wave count indicating that the current rally could conceivably last another 8 years, until 2022 (although, "with sentiment recently so optimistic, that goal seems unlikely").

Still, to even entertain it as a possibility is surprising.

A correspondent says, "Any self-respecting Grand Supercycle would simply have to crush Prechter into capitulation before it could be over!"

Comment on "Cycles Have Been Vanquished, Buy The Dips"

A commenter on yesterday's post, "Cycles Have Been Vanquished, Buy The Dips" writes,

So if I make a mess of my room and I scream loud enough that the mess is "art" that makes me an artist?

I have trouble telling if the corrections of 2001-03 and 2007-09 are merely a downwave of supercycle degree (80 year cycle, with our economy being at the end of a 15 - 20 year down wave), or if we are near the start of a 40 to 50 year down wave terminating the grand supercycle of roughly 280 years that began with the 97% crash of 1720 - 1723 followed by 40 more years of downwave, with the 240 year up wave ending in the year 2000.

Yet with the decline, decay and collapse of so many of our cities, Detroit, Buffalo, Cleveland, etc. this looks like something more than just a supercycle. We are in a Grand Supercycle down wave. but unlike the 97% crash of 1723, fiat currency money printing will make this follow R. N. Elliot's "principle of alternation" producing an extended flat with 50 years of corrections like the 2001 and 2007 episodes we have just been through.

It is only on the cultural front, with the appearance of "art" like "My Bed" by Tracey Imin that I strongly suspect that this is the beginning of a millennial wave down cycle (Decline of the Roman Empire 275 AD to 475 AD, the crusades and plague 1050 to 1250 AD.) in which all of the delusions of the enlightenment (1720 to the present), human equality, tolerance and individualism, are washed away as a mono ethnic tribe of over a billion Han Chinese are on the ascendant with a quiet eugenics program that would make Hitler blush. While here in America the dream of multiculturalism evaporates as competing tribes and races refuse to support each other and all (including unemployed whites) stop working and apply for welfare following James Baldwin's "the slowdown" as described in his seminal work "The fire next time."

The demise of "Multiculturalism" and "Inclusiveness" happens when competing tribes and races which essentially separate from each other suddenly must contend with a shrinking economic pie.

It is what grand supercycle and millenial wave contractions are all about, and what better symbol of the process than a soiled, unkempt bed along with used condoms, empty vodka bottles and burned cigarets parading as art and commanding a $2,000,000.00 price tag! 

Textbook Example of Social Mood

Somebody tell Prechter about this social mood example. In the Reddit thread about the Bitcoin collapse, someone asked why people left huge amounts of BTC in their MtGox wallets. Answer:

"You have to take yourself back two months ago. Cryptocurrency was a big deal, everyone was (generally) riding high, and it seemed impossible that a disaster of this magnitude would strike."

Textbook.

Petróleo Brasileiro S.A.

If Prechter is right, 2009-present was just a bear market rally and the market will eventually take out the 2009 low.

Notice that Petrobras has already traced that out perfectly.

The beauty of PBR is that it is a Brazilian company not run for the benefit of its shareholders and so it has no fundamentals. The value is solely psychological.

Left In the Comments Section

Left in the comments section of an earlier post,

Many investors failed to invest in QE’s riskless trade, and having seen equity investments, such as Dividend Growth, VIG, and World Stocks, VT, grow in value, as well as credit investments, such as Junk Bonds, JNK, and Distressed Investments, FAGIX, increase in value, are expressing a desire for “return on investment”. Investors should consider that even “return of capital” is at risk, in what has been safe investments, such as Short Term Corporate Bonds, FLOT, and US Short Term Government Notes, SHY, as the bond vigilantes call the Benchmark Rate, ^TNX, higher from 2.86%.

During the week ending December 13, 2013, Global Financials, IXG, led Nation Investment, EFA, and World Stocks, VT, lower, as the Bond Vigilantes continued calling the Benchmark Interest Rate, ^TNX, higher from 2.8%, and steepening the 10 30 US Sovereign Debt Yield Curve. The volatility ETFs, TVIX,VIXY,VIXM, rose strongly higher as volatility, ^VIX, burst out.

The bond vigilantes in calling the Benchmark Rate, ^TNX, higher from 2.8%, and in steepening the 10 30 US sovereign debt Yield Curve, $TNX:$TYX, are effecting eight pivotal economic changes: 1) destroying Banks, IXG, worldwide, 2) destroying the sovereignty and seigniorage of nation states, EFA, such as debt impaired Italy, EWI, global trade South Korea, EWY, global industrial mining Australia, EWA, the current account deficit BRICS, EEB, 3 and 4) destroying global industrial production and global growth, 5) and are destroying yield investment in Real Estate, IYR, Global Real Estate, DRW, and Global Utilities, DBU, Utilities, XLU, Global Telecom, IST, Global Health Care, IXJ, and Health Care Provider, IHF, and Medical Devices IHI, as is seen in the ongoing Yahoo Finance chart of DRW, IST, PSP, DBU, IXJ, and IHI, 6) investment in consumer spending, 7) investment in infrastructure development, as is seen in the ongoing Yahoo Finance Chart of PKB, CHXX, INXX, BRXX, 8) energy production, XOP

And, the currency traders in selling currency carry trades reinforces the destructionism of bond vigilantes. For example, the currency traders have followed on the heels of the bond vigilantes by selling the Swedish Krona Japanese Yen cross, SEK/JPY, FXS:FXY, destroying nation investment in Sweden, EWD, and its consumer goods producer and automobile parts manufacturer, ALV.

In short the bond vigilantes, by calling the Interest Rate on the US Ten Year Note, ^TNX, higher from 2.80%, and the currency traders by selling currency carry trades, have have introduced financial market risk, into what was under QE a riskless trade, and have pivoted the world out of the paradigm and age of liberalism and into that of authoritarianism. Their combined actions are unleashing waves of recession, and societal strife, commencing Kondratieff Winter.

The Elliott Wave 3 of 3 Up that commenced with the bond vigilantes calling the Benchmark Interest Rate, $TNX, higher from 2.48%, on October 23, 2013, seen in the Risk Off ETN, OFF, trading higher, has unleashed destructionism replacing inflationism, and has pivoted the world out of the paradigm and age of liberalism and into that of authoritarianism. The Elliott Wave 3 of 3 Waves are the most sweeping of all waves, they create the bulk of wealth on the way up, and destroy most of the wealth on the way down. This wave will make the bankers holding Interest Rate Swaps, that came as part of liberalism’s POMO, awesomely wealthy.

On Manias

"A very human aspect of manias is that no prudent professional is perceived to add value... Indeed, the professional with a knowledge of history and value is eventually judged an impediment to success. The reason is that the investments that are the focus of the mania are widely accepted as the benchmark of normalcy. Therefore, only a professional who 'beats' that benchmark is considered successful. As the focus of the mania narrows, that task becomes impossible. This is another difference between a bull market and a mania. In a bull market, professionals can add value relative to the benchmark, which is usually conservative. In a mania no one can add value."

More Troublesome Sentiment Indicators

"The wide array of optimistic extremes in sentiment measures includes several readings that exceed the extremes of 2007, when the Dow made its previous high. With a finishing structure that Elliott Wave Principle describes as occurring at 'the termination points of larger patterns,' the market is ripe for a decline of historic magnitude."

Prechter: "Market sectors are no longer competing with each other but with cash."

In today's letter, he asks,

"What does it mean when stocks, bonds, gold, silver, and commodities are all weak? According to rotation theory, it's not supposed to happen. It is indeed a rare event, but it does reliably occur in times of severe debt deflation. That's the condition at which markets are just beginning to hint. It is very early in the new trend, but these few weeks of selling across supposedly competing market sectors is highly suggestive that something new is afoot. Eventually investors will realize that these market sectors are no longer competing with each other but with cash."

Something strange happened in May. Both junk and the safety/yield-substitude trades rallied hugely and then tanked.

I'm talking EM debt, fallen angel corporate bonds (there's an ETF!), Swiss equities, preferred stocks, lumber, biotech, consumer staples, WalMart, convertible bonds, DJ transports, SolarCity, Beazer Homes (the most levered public HB), Indonesian equities, Suntech, US momentum equities, the Canadian financial sector, REITs, the Nikkei, floating rate paper, 2 year treasuries.

Those things don't normally trade in lockstep. Since when do treasuries and both blue chips and junk equities dive at the same time?

And there has long been some troublesome thorns in the side of the inflationists and money printers: copper peaked 850 days ago. The junior gold miners, the industrial metals, silver, oil, emerging market equities, and commodities all peaked in April or the first few days of May, 2011.

Why isn't Abenomics working for the Nikkei? Japanese stocks are down 20% off the highs on... May 22. Look at that broken bubble chart.

"Decline of the West"

"The last man on the moon left in 1972. The tallest building in the united states was finished in 1974. [...] US electricity production was growing exponentially until 1972. After 1972 it grew more slowly. Per capita electricity consumption seems likely to have peaked around 2007 or so."

This is a Prechterish viewpoint, consistent with his idea that economic improvement in the great bull market since 1982 (i.e. a "wave five formation") has not been commensurate with the stock market increase during that time.

Speaking of decline, see this WSJ opinion piece "The Ugly Brutishness of Modern Britain" by Theodore Dalrymple, who is also the author of Life at the Bottom: The Worldview That Makes the Underclass. He has written a number of books about the decline of the West. He points out,

"Incivility in Britain thus has a militant or ideological edge to it. The uncivil British are not uncivilized by default—they actively hate and repudiate civilization."

Why are we talking about this on an investing blog? All of this has profound investing implications, although subtle ones that you can't just act on right away. More than anything, these trends imply investments that you should avoid buying. In many cases they can't be shorted either due to market constraints (real estate) or because of high cost of carry and forced buyers (think single asset-class investors).

But you can come out ahead, in relative terms (which is all that matters), by not buying most types of real estate which will have steadily falling NOI as far as the eye can see. Unless you are bullish on the rents that landlords can extract from the growing share of the chav population in Britain? Or, if you think local government employee pensions will be paid somehow besides higher property taxes? Note that some states are poised to dramatically increase taxes already. That could start exciting positive feedback loops.

Prechter Paper: "Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results"

Their paper, "Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results", just came out.

"We analyze all U.S. presidential re-election bids and find a positive, significant relationship between the incumbent’s vote margin and the prior net percentage change in the stock market. This relationship does not extend to the incumbent’s party when the incumbent does not run for re-election. We find no significant relationships between the incumbent’s vote margin and inflation or unemployment. GDP is a significant predictor of incumbents’ popular vote margin in simple regression but is rendered insignificant when combined with the stock market in multiple regression. Egotropic and sociotropic voting hypotheses fail to account for the findings. The results are consistent with socionomic voting theory, which includes the hypotheses that (1) social mood as reflected by the stock market is a more powerful regulator of re-election outcomes than economic variables such as GDP, inflation and unemployment and (2) voters unconsciously credit or blame the leader for their mood."

Their methods were pretty thorough. Evidence in support of social mood theory.

I write about Prechter fairly often and my review of his most famous book, Conquer the Crash, led to a theoretical breakthrough for me about investor genotypes in an investing ecosystem. Lots of Prechter's ideas stand on their own whether or not Elliot Wave Theory is true.

[I think that EWT is probably trivially true, or, as David Aronson writes in Evidence-Based Technical Analysis, its ability to "fit any segment of market history down to its most minute fluctuations" is because of its "loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude."]