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.

Review of Moods and Markets: A New Way to Invest in Good Times and in Bad by Peter Atwater

We talk fairly often about social mood, which is a concept that comes from Prechter and his idea (he thinks it's a new science) of "socionomics".

The simplest explanation of social mood is that rather than social events determining the tenor of mood, social mood determines the tenor of events.

I think that social mood is a very, very valuable concept, and that if you pair social mood with Falkenstein's Batesian mimicry hypothesis of the business cycle you have an extremely powerful mental model of the economy that is going to outperform over full market cycles.

The problem is that if you read about social mood through Prechter, it comes packaged with kooky Elliott Wave Theory. Whether or not you think EWT is wrong, it sounds nuts to most people. (I am a skeptic of EWT and I don't use it in investing.)

Peter Atwater wrote a book in 2013 that's about social mood and doesn't use Elliott Wave at all: Moods and Markets: A New Way to Invest in Good Times and in Bad.

Observations:

• Atwater has come up with a spectrum he calls "Horizon Preference" that goes from "me, here, now" (negative social mood that is focused on present, personal, local concerns) to "us, everywhere, forever" (positive social mood that is generous, trusting, inclusive, globalist, and permanent). The "us, everywhere, forever" behavior that he describes sounds just like Silicon Valley today. In fact, it reminds me of Gavin Belson's line in the new season of Silicon Valley: "I don't want to live in a world where someone else makes the world a better place better than we do!"
• Both Prechter and Atwater think that there is "an entirely different pricing dynamic for assets purchased for their fundamental utility value versus assets purchased for their investment potential." That is, for a product like gasoline for your car, the lower the price the more you buy. But that microeconomic supply/demand logic is inverted in investments.
• Something that I had never heard before: in August 1932 for the first time in U.S. history emigration exceeded immigration. Great bottom indicator.
• His discussion of mood-driven accounting principles is very important. "Rather than predestined laws, financial accounting standards are nothing more than regulations that were established, like all other regulations, in response to changes in mood. The result is that we deregulate accounting all the way up in a bull market and we re-regulate all the way down. The consequence is that it is much easier for a corporation to generate $1 of earnings at the top of the market than at the bottom of the market."
• Related: "Never underestimate the inverse correlation between scrutiny and social mood."
• He does group talks where he asks the crowd "when were things better than they are today?" and "when were times far worse?" The good and bad times are remarkably consistent and coincide with economic peaks and troughs (and hypothesized peaks and troughs in social mood).
• The Bloomberg Consumer Comfort index peaked in 2000. The stock market peaked then too - except it went on to hit even higher highs in 2007 and now today - unless you look at real stock market, i.e. deflated by gold. Then they track each other much better.

There was a paper presented at Prechter's socionomics conference that really supports social mood theory, where the authors found "a strong correlation between a 'literary misery index' derived from English language books and a moving average of the previous decade of the annual U.S. economic misery index", meaning that "[Fiction] Books Average [the] Previous Decade of Economic Misery".

I can give Atwater's book to give to people to get them up to speed on social mood without all the EWT baggage that would come from a Prechter publication.

5/5.

Excellent Post By Lux Capital: "Of Bubbles, Synapses & Slime Molds"

This post is really interesting:

Around this time last year, while sitting with Yahoo founder (and a co-investor in some of Lux Capital’s investments) Jerry Yang, he told me he thought the market had jumped the shark with the huge head-scratching headlines of Snapchat, Oculus and WhatsApp. But he said the most important thing I heard: he capitulated. Now, he said, he thought it could go on for two more years or maybe more. And at that moment, I started tracking what percentage of people I polled and spoke with on a given week said “two years”. Around that time, from a pretty diverse sample set ranging from cynical short sellers and deep value equity investors to CEOs, VCs and bullish entrepreneurs, 10% of people imperfectly (and not very empirically) polled, said “2 years”. About six months ago, the number crept up to 25%.

Today, in April 2015, it stands at 1 in 2, 50%. My speculation is that when 80% of my imperfect sample size measure answers “two years”, then that day, it’s over.

This seems like a very good metric. Look what faithful bear Tim Knight said on Thursday:

"it’s looking like the S&P might be poised for another 80 points higher in the near future. The relentless bull market is so long-lived at this point, I’ve noticed a severe change in tone over at ZH. The comment section has morphed from a cabal of tin-foil hat wearing lunatics into basically a bunch of people pissed off at ZH for being solidly bearish since its founding in early 2009. I have seriously never seen behavior like that over at ZH, so I guess the last wispy threads of bearish spirit have finally been snuffed out for good."

Poll in the comments section. Be honest - how much longer do you think the bull market can last? My over/under is one year.

Paper: "Books Average Previous Decade of Economic Misery"

Abstract:

"For the 20th century since the Depression, we find a strong correlation between a 'literary misery index' derived from English language books and a moving average of the previous decade of the annual U.S. economic misery index, which is the sum of inflation and unemployment rates. We find a peak in the goodness of fit at 11 years for the moving average. The fit between the two misery indices holds when using different techniques to measure the literary misery index, and this fit is significantly better than other possible correlations with different emotion indices. To check the robustness of the results, we also analyzed books written in German language and obtained very similar correlations with the German economic misery index. The results suggest that millions of books published every year average the authors' shared economic experiences over the past decade."

That's interesting - think of the period from 2005 until present. That is probably what people have integrated into their minds as "normal" economic conditions. That period includes only two crash years, 2008-2009 (20%), and quite a few mania years.

Keep Calm There's No Bubble!

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! 

Cycles Have Been Vanquished, Buy The Dips

Saw a link to this value investor's blog on twitter:

"a lot of value investors get too caught up in the macro picture, trying to outsmart the market by holding large cash positions, tweeting links to examples of excess in the market, and attempting to call a market top"

As Prechter puts it,

"most of the time, ill-timed optimism is harmless because most of the time, recessions are indeed mild and brief. [...] Small, mild retrenchments occur more frequently than large ones so forecasting errors are only mildly damaging. (p66, CtC)"

I agree with y0ungmoney's recent post - that "value investors" are conditioned to ignore market cycles (something I've mentioned before) and that they are buying some very low quality businesses.

But what if there are cycles? And what if we are near the top of one?

Contemporary art is one of the signs that civilization is decaying, not improving, and therefore a new "all time high" (not really in 2000's purchasing power) is a divergence from fundamentals that needs to be resolved.

See, for example, "Tracey Emin stands by My Bed as it goes on sale for £1.2m". It's being sold by the dealer Charles Saatchi who bought it for £150,000 in 2000.

"Theory: The Four Phases of Extreme Bull Market Complacency"

Must read:

• Theory: The Four Phases of Extreme Bull Market Complacency
• Bull Market Complacency After the Great Depression

This is very compelling.

There are so many indicators signalling that it's time for a comeuppance.

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.

Latest Howard Marks Letter

The January 2014 memo ("Getting Lucky") is very interesting - along the lines of what we've even seeing from Bill Gross the past couple years.

I believe he's coming to terms with the fact that the market performance experienced during his career was sheer luck that isn't going to be repeated.

Marks is unusually thoughtful for an asset manager. Thus, he is the leading edge of this realization.

Art Basel Miami

According to the WSJ, at this year's show, the "mood evoked the feverish feel of 2007, the market's last peak".

Does Social Mood Limit the Fed's Ability to Inflate?

That is basically Prechter's theory. So, even though the Fed "could" completely devalue the currency, that's not the direction that mood is going.

Here is an outline of Philadelphia Fed president Charles Plosser's talk last week at the Cato Institute’s 31st Annual Monetary Conference, "WAS THE FED A GOOD IDEA?" [!]:

"President Charles Plosser discusses what he believes is the Federal Reserve’s essential role and proposes how this institution might be improved to better fulfill that role.
President Plosser proposes four limits on the central bank that would limit discretion and improve outcomes and accountability.

• First, limit the Fed’s monetary policy goals to a narrow mandate in which price stability is the sole, or at least the primary, objective;
• Second, limit the types of assets that the Fed can hold on its balance sheet to Treasury securities;
• Third, limit the Fed’s discretion in monetary policymaking by requiring a systematic, rule-like approach;
• And fourth, limit the boundaries of its lender-of-last-resort credit extension.

These steps would yield a more limited central bank. In doing so, they would help preserve the central bank’s independence, thereby improving the effectiveness of monetary policy, and they would make it easier for the public to hold the Fed accountable for its policy decisions."

Invert that last point: a less limited central bank threatens its own independence! Plosser says that "monetary policy has very limited ability to influence real variables, such as employment," which is something that we know but central bank flaks have long disputed.

He also says that price stability is the only goal that the central bank can ever truly hope to achieve!

Wow! That's deflationary medicine! The timing of Hugh Hendry's capitulation couldn't be any worse, it looks like.

New Turchin Article

A must read from Turchin:

"[L]ife was good for the upper-crust English around 1300. They drank more wine and spent their spare cash building or refurbishing castles, cathedrals, and monasteries. They didn’t just enjoy a better living standard; they also grew in number. For example, the number of knights and esquires tripled between 1200 and 1300. But disaster struck in 1348, when the Black Death removed the population surplus (and then some). By the 15th century, while the common people were enjoying their own Golden Age, the aristocracy had fallen on hard times. We can infer the severity of their financial straits from the amount of claret imported from France. Only the gentry drank wine, and around 1300, England imported 20,000 tuns or casks of it from France per year. By 1460, this declined to only 5,000. In the mid-15th century, there were simply fewer aristocrats and they were much poorer."

Turchin is the author of Secular Cycles.

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."]

"The Decline of the Strike"

Number of strikes involving 1,000 or more workers since 1947.

Look at that chart. You have to hand it to Prechter. Strikes have been declining along an exponential decay curve since the end of the Great Depression, and the decline was especially steep during the most recent three decades of mania.