I received another delightful comment on my two-part column regarding inflation, deflation, or stagflation, and it brings up an economic theory and trading approach I know little about – Elliot Wave Theory.
On further thought… Earlier today I wrote to thank Trader Ed for his excellent reply here, equally useful for its lesson in US economics as for its demonstration of critical thinking for investing. After reading several additional articles today on macroeconomics, I’m thinking there is a fundamental economic variable that Trader Ed’s reply does not mention – that of social and investor sentiment. In their February 2010 publication of Animal Spirits, Akerlof and Schiller are credited by many to have begun a major revision of economic theory by acknowledging the overarching importance/causative contribution of social sentiment in economic cycles. And in 2001, Frost and Prechter described seven year cyclic fluctuations in social mood that presage and correspond to historic market cycles (Elliott Wave Principle currently in 10th printing). A recent extensive interview with Robert Prechter gives his Elliott Wave Theory perspective on current and coming economic conditions at
Nonetheless, Trader Ed’s reply is invaluable and very much appreciated; and I’d enjoy hearing your assessment of the principles described in Animal Spirits and Elliott Wave Principle.
I did go to the link referenced, and I did listen to the hour-log interview with Robert Prechter. I suggest you do the same, as I found him articulate, intelligent, and an excellent spokesman for the Elliot Wave Theory. I also learned a bit about the theory, which prompted me to research more about it. Tomorrow, I will lay out some of what I learned, but today, I want to respond specifically to the reader’s suggestion that “social and investor sentiment” is a variable for analyzing the future economic picture as it relates to inflation, deflation, or stagflation
Prechter and the other thinkers the reader mentions suggest sentiment plays a strong role in economic cycles. It is hard to disagree. For example, just look at consumer sentiment and the housing market today. The correlation is clear. The lowest mortgage rates in 60 years should be spurring real estate buying, but buying is not happening. In this way, at this moment, sentiment is contributing to a somewhat deflationary environment. The issue is this – is sentiment the reason for, or is it the result of the current real estate issues? One could argue either side of this. It is the classic “which came first, the chicken or the egg” debate. Because of this causality dilemma, my question is: how does one reasonably project that sentiment 1-2 years into the future as it relates to deflation, inflation, or stagflation without first projecting the future state of the real estate market? And I can only project that based on a projection of the future overall economy, which is dependent on the facts as I understand them.
My tendency is to think simply. Elliot Wave Theory is complex, and it connects the dots with sophisticated and nuanced associations. This does not work for me, generally, as I think we humans, as a rule, tend to over complicate just about everything, which obscures our vision. As one of history’s more complex thinkers, Dr. Freud said, “Sometimes, a cigar is just a cigar.” Tune in tomorrow for a look at Elliot Wave Theory …
Trade in the day; invest in your life …
Trader Ed
