Forecaster, theorist and author Bob Prechter is still riding the waves.
Cause And Effect: Bob Prechter based his theories of market behavior on the work of Ralph Nelson Elliott, opposite, shown here in 1926
Bob Prechter wants to change the way you think. He wants to alter your most basic assumptions about cause and effect, the market, the economy, human social history and Shakespeare.
To some, especially the 80 or so people who work under the umbrella of his company, Elliott Wave International (EWI), which does market forecasting, publishes books and newsletters and conducts conferences and seminars, Prechter is an oracle, an absolute genius with his finger on the pulse of human social history and the economy.
“I used to tell people 26 years ago when I joined this company, I’m like a guy interested in physics going to work for Einstein,” says Dave Allman, chief of research at EWI’s headquarters in Gainesville.
To others, Prechter is just another counterintuitive guy with a system – sometimes it works, sometimes it doesn’t.
“I’d say there’s no doubt that the jury is still out,” says Roger Tutterow, professor of economics at Mercer University.
To Prechter it doesn’t really matter, one way or the other – he’s got it all figured out. He knows he’s right, and you can either keep up or get sunk in the depression that Prechter says is most certainly coming. And this one won’t be like the 1930s. He says it’ll be worse.
“History doesn’t repeat itself, but it rhymes. I think Mark Twain might have said that,” Prechter says. “This will be a way higher degree of depression. The last time we saw anything of this magnitude was 1720, the peak of the South Sea Bubble. After that, the British stock market went into a 64-year bear.
“I think this whole century is going to be chewed up going sideways to down. But it’s not the end of the world. We lived through the 1700s. We did fine.”
And the thing of it is, Prechter saw this coming – or something like it – more than 30 years ago. He wrote about it, with co-author A.J. Frost, in the book Elliott Wave Principle: Key to Market Behavior.
“In 1978 we said there was going to be a big, huge, bull market,” Prechter says. “But we also forecast the aftermath.”
Prechter and Frost weren’t reading tea leaves or throwing chicken bones – they used the Elliott wave principle. Developed in the 1930s by Ralph Nelson Elliott, the wave principle is a technical analysis tool that attempts to forecast trends in financial markets and other societal trends.
Elliott detected recurring patterns of movement – waves – that recur in stock market price data, reflecting the psyche of the human herd, or social mood.
He illustrated the patterns: five waves in one direction (imagine a three rungs up, two rungs down scenario, for example) followed by a three-wave correction (one up and two down). In a bull market the dominant trend would be five up, three down, and the opposite for a bear market.
Elliott identified the patterns as fractals, identical shapes linking together to form identical shapes of increasing size, or degree. So, a centuries-long “grand supercycle” is subdivided by smaller, identical waves called “supercycles” (multiple decades), which may be subdivided by smaller, similarly shaped “cycles” (several years) and so on.
Using Elliott’s wave principle, Prechter suggested 30 years ago that social mood drives cultural trends and influences financial, economic and political behavior.
“The standard view, permeating everybody’s thoughts, every academic paper I’ve ever seen, every news article I’ve read is that outside events impact social mood,” Prechter says. “Wars happen, speeches happen, economic reports come out and the markets react. That’s what they all believe, that events cause social mood. That’s the widely accepted notion.”
And Prechter’s been pushing the exact opposite notion for decades.
From Gigs To Guru
Prechter had to pick a major at the start of his junior year at Yale, but nothing jumped out at him. He settled on psychology. When he came to the last question on a senior year exam – “Why do you want to be a psychologist?” – he wrote down, “I really don’t.”
He didn’t know what he wanted to do when he graduated in 1971, but he’d been having a great time playing drums in a band, so he kept doing that professionally for several years.
“But I was always interested in the markets, and my dad would send me copies of Richard Russell’s Dow Theory Letters,” says Prechter, athletic-looking at 60. There are hundreds of CDs on shelves along one wall in his office, wave patterns and articles pinned to a bulletin board, a large wave pattern hanging on one wall.
“I sort of taught myself about technical analysis,” he says. “We’d be going around to different venues, playing different gigs, and I always had my charts with me.”
Prechter eventually talked his way into a job with Merrill Lynch’s market analysis department in New York. He’d gotten interested in Elliott’s wave principle through reading Russell, and A.J. Frost.
“But hardly anybody had read Elliott’s stuff since the 1940s,” Prechter says. “I checked the Library of Congress and they didn’t have his books. But I dug around at the New York Public Library and saw them listed. They were on microfilm. They wouldn’t let me check anything out, but I could buy copies by the page – a big investment at the time.”
Prechter eventually started his own publishing company and brought Elliott’s work back into the public consciousness, and he wrote his book with Frost, peddling copies out of bags he carried to New York City bookstores.
Not long after seeing a copy of his book in the front window of one of the city’s major bookstores, Prechter struck out on his own to start writing his newsletter in 1979, The Elliott Wave Theorist, still the flagship in his company’s long list of periodicals.
In 1981 Prechter talked his Connecticut Yankee bride, Robin, into moving down to Gainesville. He’d grown up in Georgia, and was tired of the New York distractions. He didn’t want to get caught up in everyone else’s thinking.
“There were too many people with opinions, and I believed you do better work when you’re isolated,” Prechter says. “See, my whole point is that markets are crowd psychology. It’s herding, and if you’re in the middle of the herd, like in New York, you’re getting cues left and right. It’s hard to separate yourself.
“I found it was much better to watch what the herd is doing from a vantage point.”
Turned out to be a pretty good vantage point. He predicted a decline in the gold market, called for a long-term bull market, characterizing it as a “coming mania,” forecasting high stock prices when nobody else was. And he was right so much of the time that his following and subscriber list grew.
He won the U.S. Trading Championship in 1984 with a then-record 444 percent return, and became a media star in business publications. In 1989 he was named “Guru of the Decade” for the 1980s by the Financial News Network (now CNBC).
He’d kept both eyes on the herd from afar, and developed some revolutionary insights on social behavior.
“Everything started falling together and I realized, ‘I’m in psychology,’” Prechter says, his voice reaching an excited pitch. “This is all about psychology!”
In the 1970s, Prechter become entranced by what he saw as an endogenous organization to Elliott’s wave patterns – there was no external cause for social mood, that the movement of the market was social mood made manifest. He conceived that social mood was the root, the cause, and everything else was the effect. And he coined the term “socionomics.”
“There’s a structure to the market, it’s a fractal, a specifically patterned fractal, and that means outside news can’t possibly be buffeting it around,” Prechter says. “It’s an internal thing. I began to realize there are waves of optimism and pessimism in social mood, and they prompt people to make rather swift decisions regarding the buying and selling of stocks.”
He entertained the idea that there might be a feedback loop – a chicken and egg cycle, “that events happen and create mood, and mood makes people act, and that creates events. And I finally realized that’s completely wrong. It’s a simple A to B causality.
“There’s no feedback to the endogenously regulated, fractal system of mood fluctuation. That’s just how human beings behave, it’s a natural component of our social behavior.”
He’d been writing about social mood as the driver of cultural trend in his newsletter for years, but he brought his theory to a national audience in 1985 with a cover article in Barron’s entitled “Elvis, Frankenstein and Andy Warhol.”
Pete Kendall was working as a financial reporter in Denver at the time. He discovered Prechter after asking colleagues whom he should call as a reliable source for a story about the market.
“They mentioned Prechter and a few other guys, because they were considered good sources and that was the word on the street,” says Kendall, who joined EWI in 1992 and is co-editor of The Elliott Wave Financial Forecast and director of EWI’s Center for Cultural Studies.
“I became pretty much enamored of that report Bob did in Barron’s. He’d covered some of it before in his letters, the impact on pop culture, but that report was like a full blown tree that grew into the science of socionomics.”
In 1999 Prechter created the Socionomics Institute, an independent think-tank where analysts, researchers and writers are working to promote socionomics with the hopes of bringing it into the academic mainstream. The Socionomics Foundation, a 501(c)3 nonprofit was created to fund scholarly investigation into the theory.
“You have to take baby steps. The next baby step is going to be taking the work that Bob has already done, formalizing it and getting it published in academic journals,” says Matt Lampert, associate director of the Socionomics Institute.
“The goal is to disseminate the ideas in a way that will hopefully encourage other people to say, ‘Hey, this is cool stuff, we should be researching this.’ And once there are many researchers doing socionomics work then eventually, yes, we hope to one day have socionomics departments in universities throughout the world.”
Lampert will certainly do his part toward that end – this month he begins pursuit of a master’s degree in sociology at the University of Cambridge, thanks to a scholarship from the Socionomics Foundation. He’ll stay in England to earn his PhD, and plans to study macroeconomics from a socionomic perspective.
The Socionomics Institute, like pretty much everything else in the EWI universe, is based in downtown Gainesville, where Prechter’s firm occupies two and a half floors in the so-called Hunt Tower, a six-story building, formerly a hotel, from the 19th century.
Prechter has assembled a dedicated team of researchers who have applied wave principle and socionomics theory to a diverse array of topics in the numerous newsletters EWI produces on a regular basis. Prechter estimates his subscriber list to be in the 15,000 to 20,000 range.
Most of the guys who work in the Socionomics Institute are a little bit like Lampert – young and smart. And Prechter definitely made an impression in their lives. They grew up as friends to his son – Elliott – who now works for Microsoft in the Seattle area.
There’s Euan Wilson, who recently wrote a piece in the monthly newsletter The Socionomist entitled “The Coming Collapse of Modern Prohibition” – a rising social mood produces prohibition of recreational substances, a falling mood produces tolerance and relaxed regulation. Guess which way we’re headed.
There’s Ben Hall, who played soccer with Elliott and says he always figured that this was where he wanted to work. And then there’s Ben’s father, Alan Hall, the de facto senior writer for The Socionomist. He got to know Prechter on the soccer sidelines, read some of his books and says, “They seemed to explain things better than anything else I’d read about the ways we behave as a group, collectively.”
A self-described generalist, Hall is a multi-talented man, a musician, potter, bread-maker and carpenter, for many years a professional builder.
“I saw the top coming in the building business,” Hall says. “Part of it is what I’d read, and part of it was observation. Most of the work I was doing was an exercise in vanity. These were second homes, people who wanted two complete kitchens in the same room so the kids would have a separate kitchen for Thanksgiving.
“People had more money than they knew what to do with and they didn’t have enough places to put it and they thought real estate was safe. Well, I was ready to do something else. But I had no clue I’d have this opportunity, especially at age 50, to totally change careers and exercise an entirely different skill set, essentially to get paid and go back to school.”
Hall has succeeded marvelously in his new career as a writer, using his socionomic insight and love for research to produce some interesting studies and in some cases prescient forecasts.
For example, in November 2007 he wrote about Russia’s peaking social mood nearing its inevitable decline – humanity’s endogenous and alternating waves of optimism and pessimism. Hall identified the likely results, pointing out that plummeting social mood often leads to aggression and war. Essentially, he predicted the violent Russia-Georgia border conflict nine months before it happened.
EWI claims on its website (www.elliottwave.com) to be the world’s largest market forecasting firm, doing around-the-clock forecasts of the world’s major markets. At its heart, EWI is a publishing firm, producing about a dozen newsletters in addition to books and videos and providing other education services in the form of conferences, workshops and webinars.
Anyone who frequents the website would be fully of aware of what Prechter sees coming – a depression unlike any since the one following the South Sea Bubble, something he sees as inevitable following more than two centuries of upward trending.
In his book Conquer the Crash (2002) Prechter accurately forecast the current credit crisis, the real estate and stock market bubbles. Don’t be fooled by short-term bullish rallies, he says now, it’s all part of the waning days of the fifth wave up. In the book he offers advice on how to survive the coming deflationary depression – basically, don’t own stocks, do own precious metals and have cash on hand.
The man has his followers, and there are plenty of other wave principle disciples out there. There also are plenty of critics who say Prechter’s record hasn’t been all that good, or they question whether or not markets unfold in decipherable patterns – an idea that contradicts the efficient market hypothesis, the dominant paradigm in academia.
“I’m not sure we can pick out patterns that are so predictable we can base policies and forecasts upon them,” Mercer professor Tutterow says.
“One of the things I like about Prechter is that he is an interdisciplinary thinker. He may be a pioneer in applying different methodologies and ideas toward economic phenomena.
“But his work tends to be more long-term focused, more so than other technical analysts, who talk more about the short term. It takes a long time to see if a theory holds up.”
Prechter figures he’s a year or two away from completing a massive study of Elizabethan poetry, a project he started 11 years ago. He wants to identify who wrote what under whose name. Working weekends, he’s written about 1,500 pages so far.
For 30 years Prechter has been promoting his theories, delighting some investors and behavioral economists along the way, infuriating the fundamentalists. He has even applied the wave principle to forecast his own company’s fate.
“I’m in the fifth wave of my own career,” he says. “After that? Well, either retirement or a big reversal where I’ll do something that makes the business contract severely. Nobody ever plans to do that, but if you realize it’s coming and if you’re smart, you can plan to do the best possible thing.”
He hasn’t applied the wave principle specifically to his personal legacy, nor does he put a lot of deep thought into how people will remember him. But he’s betting on one of two options.
“Oh gosh,” he says, “people either seem to love what we’re doing or they think I’m a complete idiot. So that’ll probably continue.”