Fractal market movements predict deep economic depression just ahead

Paul Raven @ 08-07-2010

It’s a great time to be a prophet of economic doom, because everyone’s still smarting badly enough from the last suckerpunch to take the threat of a groin-kick very seriously. And if you want a really bleak prediction, Robert Prechter’s ananlysis of fractal patterns in the market movements of the 1930s and 40s implies that the groin-kick will be delivered by an elephant wearing concrete boots [via TechnOccult]:

Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or “fractals,” in the stock market of the 1930s and ’40s, the theory suggests that an epic downswing is under way, Mr. Prechter said. But he argued that even skeptical investors should take his advice seriously.

“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

[…]

For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grandkids many years from now, ‘Don’t touch stocks.’ ”

The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”

Prechter’s analysis isn’t very popular, naturally.

The “mathematics don’t work,” Mr. Acampora said, because such a big decline would imply that individual stocks would need to trade at unrealistically low levels. Furthermore, he said, “I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.”

Still, on a “near-term” basis, he said, “We’re probably saying the same thing.”

There’s a deep emotional component to Acampora’s response, there – the same one that keeps most of us from considering the real worst case scenarios. Caesar hears only what is pleasing unto Caesar, perhaps… but note that Acampora has shifted his own personal holdings to cash in the short term, so grim times are likely to be on the cards one way or the other.

But Doug Rushkoff, typically enough, sees an opportunity to build a better system on the ruins of the old:

Yes, this is really it. The beginning of a true end-of-cycle economically.

If you own “stocks,” use these bounces to get out completely. If you have to park your money somewhere, consider yourself lucky you have money to park.

The object of the game for those who actually have capital is not how to grow it, but how to keep it. Capital has driven our economy since 1300, and the recent bull market was the end of a cycle that began in the mid-1700′s.

The fact that it is ending is not the end of the world at all. It just means that there’s a whole lot of money out there with no place to go. People can’t find a place to park their money because there’s more money looking for investment than there is stuff to invest in.

And that’s because we’re finally in a technological era where great innovations are more about reducing the need to spend time, resources, and energy than they are about increasing it. iPads aside, of course.

Given the choice, I’ll take Rushkoff’s vision of the future, please. Will we make that choice for ourselves, and carry it through? I guess that’s down to us.

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7 Responses to “Fractal market movements predict deep economic depression just ahead”

  1. Kirby Gehman says:

    Okay, but now what? What do I do with my stocks and investment vehicles that are based in stocks?

    If this happens will that banks collapse so that even if I have my money with the bank but not in stocks, it’s gone?

    Get physical cash and put it under my pillow? Stick to bonds? Leave it in a checking account?

  2. Rick York says:

    Has anyone ever done a simple numerical/chronological count of the multitude of world collapse scenarios which have been espoused in the last two centuries? And, I am restricting myself to just the last two centuries.

    I am willing to bet that a significant number of them are based on deep analysis of long term trends which consistently point to utter complete collapse. The world “as we know it” has been predicted to end almost every year. Some of those predictions were based on sound statistical trends, including – I’m sure – fractal/chaotic trends.

    These predictions are like ideologies: they fail when confronted with humanity. We humans tend to be both perverse and flexible in our reactions to crisis. Total civilizational collapse can probably only occur in one of two ways: Major environmental collapse, such as a large asteroid strike or a complete collapse of all human virtue, common sense and stability. While I would never bet against the latter, I think the first is far more possible.

    And, really don’t think of myself as a cockeyed optimist.

  3. fs says:

    I thought this bit of the first article was interesting: “He has far less day-to-day influence now, after years spent developing a theory he calls “socionomics,” which holds “social moods” as the cause not only of market cycles but also of economic and political events. A grand cycle is ending, he says, and the time for reckoning is near.”

    In some ways, “social” seems like a new buzzword to me, overused to the point of meaninglessness. Haven’t we always been social? Social apes, that’s us.

    In this usage, though, it makes sense to me. We’ve always known things like “consumer confidence” (whatever that means) affect the market, that “voter confidence” affects politicians. How we _feel_ about a company or a politician has a huge impact. Like the IPO of “don’t be evil” Google or the election of “yes we can” Obama. They make us feel good, and we reward them for that.

    Is that getting off topic? If so, I’m sorry.

  4. Wintermute says:

    I’ve heard a lot of suggesting of another crisis looming on the horizon from people who predicted the 2008 meltdown, so I think there is definitely something coming up.

    I mean, we are still, in the US and globally, at systemically unsustainable levels of debt. Debt-to-GDP still needs to come down by almost a third, and there are no more serial bubbles to blow after the last one. We’re trying to blow another one by shifting the debt over to governments, but it’s not big enough to sustain the illusion of prosperity. The mid-2009-20010 rally has always been a fluke bull run pumped by the political-financial complexes’ attempts to stave off the economic truth by stuffing money into the system and allowing “mark to fantasy” to continue.

    The day of reckoning when we take our collective economic medicine is coming, soon. The Dow might not trade under 1000 but I think the writing on the wall is another severe drop perhaps as steep as the 2008-2009 crisis. Hopefully if we can get through that detox in something resembling civilization we’ll be woken up enough to get rid of the whole “get rich by moving money around” fantasy/working class wealth-stripping, and start reqarding only those who actually contribute to the wealth of the society as a whole (individuals and corporations who actually *make* things or provide *valuable services)

    *Pushing paper around is not a valuable service

  5. Denni says:

    Maybe the time for micro investments and grassroots venture capitalism has come. If I had any money ‘to park’, I’d invest it in a small business venture or a friend’s start-up. Risk is easier to accept if it is something you can believe in.

  6. Chad says:

    This reminds me of the book DOW 36,000. The crazy theories always get more play after a long period of craziness. DOW 36,000 was published right before the internet bubble burst and now this is gaining traction as we enter year 3 of the Great Recession.

    I’m not saying we can’t experience more pain, just that a world ending crash is highly unlikely. Mr. York, above, has it correct, extinction level events are rare, and that is what DOW 1,000 would be. In human history the only events of this magnitude were the Justinian Plague and the Black Death. Both are credited with killing roughly 30-60% (most think the true number is in the higher part of the range) of the European population. At this point in time the bad loans and wild spending have not caused anywhere near this kind of damage.

    Also, the idea that the South Sea Bubble of the 1720’s is in anyway comparable to our current situation is laughable. There are massive differences in culture and economic structure preventing this comparison. It’s like comparing the first canoe to a modern aircraft carrier. Sure they both float, but after that the similarities end.

  7. Jeff Tandom says:

    I don’t think his mention or use of fractal terms probably has any validity in this analysis. Robert Prechter may be O.K. at arithmetic but probably isn’t a fractal mathematician. I suspect the so called ‘fractal’ analysis is more just analogy.