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A FOGGY
DAY IN UNCHARTED WATERS
by Robert B. Gordon,
Sc. D.
November 18, 2002
I awoke this morning to find this headline on the front page of the paper: "Crisis of Confidence puts Market in a Dive". This news writer and nearly every other market commentator today have the story backwards. The truth, resulting from the pioneering work of Ralph Elliott, is that the market moves come FIRST and the social events FOLLOW. In this essay we will explain why nearly all investors and economists are still very much in an INTELLECTUAL fog on this issue. Serious readers will then be in a position to understand the need to critique every view of others and build their own clear understanding of the present situation.
REAL FOG CAN BE DANGEROUS
Every car driver should be quite aware of the dangers of driving into a sudden bank of fog in the road ahead. They have options to prevent an accident like pulling to the side of the road. But sailors in a small craft are confronted with a much scarier situation when an unexpected bank of fog surrounds them. I well remember two such experiences, which I carry in a vivid memory from earlier days.
One
summer in the late 1930's, two fellow graduate students and I chartered an
old 40-foot gaff-rigged sloop for a leisurely cruise along the coast of
New England. In the course of the month long round trip we had problems.
We ran aground in the Cape Ann canal at low tide. We were becalmed and had
to pull into harbor by hand rowing our small dinghy. We had countless
problems avoiding the floats from lobster traps that were very prevalent
in coastal waters. But our day in the fog was really scary because in
those days there were no tools like geodetic positioners. We were helpless
and suffered physically and mentally.
Twenty years late, while living and working in Southern California, my wife and I were vacationing in Santa Barbara. We chartered a small sailing craft and had barely cleared the harbor when an unexpected fog bank rolled in. In thick fog where the sun is not visible, it is not possible to determine directions. Somehow we managed to survive that experience which remains sharply in memory today.
INTELLECTUAL FOG CAN BE DEADLY TOO
Up
until Ralph Elliott's pioneering work in the 1930's and 1940's, there were
no fundamental explanations for the actions of stock markets. Since the
days of the Tulip Bulb mania in Holland in 1637, the western world had
been going through periodic boom and bust cycles every few generations.
With the publication of Elliott's pioneering work and that of his
successors, one might guess that our so-called experts in Macroeconomics
would be trying to devise ways to mitigate or to partly ameliorate the
effects of Manias on our society. But in 60 years of progress in many
areas, literally nothing has happened in Academia, Wall Street or
Washington DC. to advance our knowledge or ability to deal with market
cycles.
Elliott not only determined a set of rules which govern stock waves at every time interval from minutes to centuries, but correctly postulated that the stock waves were a natural phenomena caused by the unthinking action of crowds of investors acting in herds. Since then, independent investigators have confirmed that Elliott stock market waves are similar to, and behave like, other known elements in nature. Unfortunately, our national economy and investor's wealth will still have to suffer while the present, huge blanket of intellectual fog continues to exist.
THAT OLD LONELY FEELING
Since, my first encounter with the earth-shaking consequence of the Elliott Wave Principle in 1995, I have been a member of a small but enthusiastic band of believers. I was anxious to spread the new "gospel". I began to publish letters in our local community paper. I looked for ways to shake my readers from their intellectual lethargy. I wrote about the biblical story of Joseph's interpretation of Pharaoh's dream in "Seven Fat and Lean Years" as a way of picturing our modern boom/bust cycles. I sent that short piece to Bill Fleckenstein, a noted market commentator. He published it in full in his "Daily Rap". Since then I have published more than 30 essays and plan to write as long as I am able to do so.
I am unable to reach the professors in their ivory towers, the great minds in our think tanks or influential leaders in Wall Street and Washington DC, so I continue to direct my words to individual investors. And from my many e-mail responses from all 6 continents, I know that my words are being read.
UNDERSTANDING ELLIOTT WAVES
There are at least two ways to learn, understand and use the results of Elliott's pioneering efforts. One can get totally involved in the complex waves and rules that govern them. There are several dozens of them and the tutorial books provide typical chart forms as illustrations. To do this requires a certain amount of intelligence and patience. But the effort expended will make using the waves in your investing easier. That is because there is nothing superficial about Elliott. It involves profound natural laws that must be understood to use and appreciate.
I chose a second approach, which is to scan the tutorials and to study the real time action through the periodic subscriber reports. This was a very slow process but in the end resulted in my belief in and full time use of Elliott Waves.
Regardless of the method used, the hardest part of learning is the great problem of UNLEARNING old ideas that is essential for success. Some people cannot make the 100% switch from conventional to Elliott thinking. They continue to believe that political and social events in the outer world cause all stock market actions. They not only continue to believe this but attack the Elliott Wave concept for its imagined failure to predict the TIMING of market events. The whole truth about Elliott is that it does not involve time but is all about FORM. It predicts that, when the fifth of five waves either up or down, is complete, the market trend reverses. All stock waves follow predictable Elliott forms but their time to completion varies. This is because the unknowing joint actions of herds of investors are at work in the market so the ending time will remain quite variable.
Most if not all investors have grown up to believe that a market tool is supposed to tell WHEN to buy and sell. They fail to appreciate the greater value of knowing when a market changes from up to down. Elliott signals tell investors whether to BUY or SELL! When a great bull or bear market comes along, the most important decision is that of market direction. Following the Elliott waves in the late 1990's, I was bearish a little early but am very happy now that I knew what was coming well in advance so as to be prepared both mentally and financially.
As a final important note, since Elliott waves are a natural phenomenon caused by the unknown herding actions of people, they look and act alike in all major world stock markets. Right now the consolidated World market index is in a deep bear market and resembles our S & P 500 index. Of course Japan, whose economy was the wonder of the world in the 1980's, led the way with its huge crash in 1989, fully ten years ahead of the rest of the world. Whether it will ever lead the world out a deep depression remains to be seen.
A NATION IN CRISIS
It's not that there is no Captain on the bridge, but that neither our President nor his advisors, saw the "Iceberg" in advance and, even if they had seen it, knew how to avoid the Great Crash in all world markets now underway. It is of course, far too late to do anything about the current bear market. The time for action was in the 1940's when Ralph Elliott was publishing his revolutionary findings. Sadly, in that booming post-war era, our economists and politicians were smugly claiming that a Great Crash and Depression could never happen again. Its too bad that some of those "great" thinkers are not alive to day to see the tremendous damage their actions and inactions are causing for the current American generations.
It is very urgent for all to realize that, if our current experts in Macroeconomics do not quickly learn the truth about the causes of bull and bear market cycles, history is sure to repeat. Then, perhaps in another three generations, the world will have to endure the enormous consequences of unchecked human emotions in another New Era, possibly greater in all respects than the one now in the very painful process of correction.
WHAT LIES AHEAD
We are in the beginning stages of a very long bear market. Keep that well in your mind. Only a tiny fraction of 1% of investors understands that basic truth. Most investors will probably lose most of their assets in the stock market and, if they escape the direct effect, will lose assets in the bursting of the real estate and credit bubbles that will occur later.
The history of all past market manias is very clear in one important respect. In all completed cycles, the market fell to or below the starting price. In 1929 the Dow rose from 100 to just below 400 and them plummeted to 42. If history repeats, and there is no basis for questioning it now, the Dow will drop below 1000 or even possibly below 400.
All completed major manias were followed by severe economic conditions known as depressions, not recessions. It happened in 1929 in the U.S. and much more recently in Japan, whose economy is still declining 12 years after its 1989 stock market peak.
With just one or two exceptions, our nation's economists are optimistically expecting the economy to recover from a brief recession. But, some of their current words are nearly identical to the optimistic statements of the leading economists in the 1929 era. It is also sad to recount that, just a few days ago, George W. Bush voiced words nearly identical to those of President Hoover seventy years ago.
This past week, Alan Greenspan told Congress that he doesn't see a bubble in real estate. Of course he failed to deal with the stock bubble either. Unfortunately the records of manias over the last two centuries show that stock crashes lead real estate crashes by two or three years. So future economic losses from housing may rank right up with those now occurring in the stock market.
READING LIST
Readers interested in seriously studying Elliott Waves, should go to the list given in my Gold-Eagle.com essay: "The Great Duping of the American Investor" published in June of this year. This essay also briefly mentions a brilliant work, published earlier in year 2002 in Gold-Eagle.com: "Forecasting Crashes and Recessions" by Hernán Cortés Douglas, Ph.D. He is a Chilean economics professor who explains Elliott far better than I can. It is very much worth your time to look up and read his words.
A note to my readers: I try to respond to e-mails to the best of my ability, but cannot advise you what to buy and sell. The goal of all my essays is to teach you how to acquire the ability to do it yourself. The big job right now is (1) to pick the very few asset classes with a good prospect of rising prices in a bear market and (2) choose the right balance of assets or the means for periodically rebalancing them.
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© 2002 Robert B. Gordon, Sc.
D.
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Robert
B. Gordon, Sc. D.
Sun City West, Arizona
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