12,000 Years Of Elliott Waves

A SECOND STARTING POINT

We are going to use as our second starting point a historical period that most historians can agree upon, both in timing and in its impact on human endeavor - the Renaissance. From this vantage point we are going to work backward in time and then go forward in our effort to place ourselves at the proper spot in the current Elliott Wave sequence.

The term Renaissance, which describes the period of European history from about 1400AD to 1720AD, is derived from the French word for rebirth, and originally referred to the revival of the values and artistic styles of classical antiquity. Voltaire in the 18th century classified the Renaissance in Italy as one of the great ages of human cultural achievement. In the 19th century, Jules Michelet and Jakob Burckhardt popularized the idea of the Renaissance as a distinct historical period heralding the modern age, characterized by the rise of the individual, the birth of scientific inquiry, geographical exploration, and the growth of secular values.

This historical evidence allows us to theorize that the estimated 320-year period of the Renaissance can be categorized as a Grand Super Cycle in the Elliott Wave scheme of things. Historical facts of the following type bolster this belief. The Black Death (bubonic and pneumonic plague), which devastated Europe in the mid-14th century and reduced its population by as much as one-third, created chaotic economic conditions. Labor became scarce, industries contracted, and the economy stagnated. It is logical to theorize that this downward adjustment in economic progress with a duration of about 50 years can be designated as a Grand Super Cycle Wave correction – either a wave 2 or a wave 4.

To find out which it is, we have to go further back in history. The long period of human expansion from the end of the Dark Ages in about 1000AD until it was ended by the plague in about 1350AD, also has a duration of about 350 years. It is thus logical to believe that this period can be designated as another Grand Super Cycle impulse wave.

By comparison with what appears to be a normal Grand Super Cycle Wave correction of about 50-60 years, the extended period of 663 years of the Dark Ages appears far too long to be a mere Grand Super Cycle correction. Therefore, we can conclude it is a correction of at least the next higher degree, which we have termed the X-wave. We therefore concluded that the period of expansion following the Dark Ages has to be Grand Super Cycle Wave 1 of a new X-wave at least, with the decline in economic activity as a result of the plague as Grand Super Cycle Wave 2 – the first corrective wave of the current X-wave.

This analysis then allows us to logically designate the Renaissance as Grand Super Cycle Wave 3 in the forgoing sequence. Additional evidence that the Renaissance was Grand Super Cycle Wave 3 is the way it ended in about 1720, when a speculative blow off of gigantic proportions occurred, events that are typical of either a wave 3 or wave 5.

The end of the final bull phase of the Renaissance Grand Super Cycle 3 is so important for us to understand, and of such important historical significance, we are going to discuss it in detail. The story involves a man named John Law. He was born in April 1671, and died Mar. 21, 1729. He was a Scottish financier whose brilliant but overly speculative banking and stock market projects in France during LOUIS XV's minority created a spectacular but short-lived economic boom.

Law persuaded the near-bankrupt French government to test his theory that state credit schemes based on public confidence could greatly increase national wealth. In 1716 his government-chartered General Bank began to issue paper currency and provide low-interest loans to businesses. At the same time Law's Company of the West, organized in 1717, sold 100 million livres of stock based on the potential wealth of its monopoly over France's Louisiana Territory (the MISSISSIPPI SCHEME, which later became the INFAMOUS MISSISSIPPI BUBBLE).

By 1720, Law was controller general of finance in France. In that year he merged his bank and company into a vast financial organization that assumed control of state debts, coinage, and taxation. During the final stages of the speculative bubble that developed from his policies and actions, prices rose in a spectacular fashion. It all ended in panic public selling later in the year of 1720, which destroyed the entire scheme. The idea of state banking was discredited for nearly a century, and Law became a disgraced and bankrupt exile. For his efforts, he won the title of The Father of Paper Money.

Concurrently in England, a similar scenario was being played out. The South Sea Bubble is the name given to a speculative boom in England that also collapsed in 1720. The South Sea Company founded for trade in 1711 caused this financial disaster. Stock in the company sold well, and by 1718 investors were receiving 100 percent interest. In 1720 the company proposed and Parliament accepted that it take over much of the national debt. This move created a wave of speculation in the company's stock, which rose from 128.5 pounds in January to 1,000 pounds in August. In September the bubble burst. Stocks plummeted, banks failed, and investors were ruined. A reader who wishes to learn more about this fascinating era can do so by obtaining a book titledExtraordinary Popular Delusions and the Madness of Crowds by Charles Mackay.

These twin disasters on each side of the English Channel marked the end of the bull phase of Grand Super Cycle Wave 3 and ushered in Grand Super Cycle Wave 4, a downward correction wave. Our knowledge of these waves must be entirely based on historical evidence, since there are no readily available records of equity prices for the period of the Renaissance. It is instructive to note this final (bull) phase of the Grand Super Cycle 3 ended in the Mississippi Bubble in France and the South Sea Bubble in England. Both have been described since then as notorious periods of excessive speculative activity.

The aftermath of these bubbles left finance in extreme disrepute during the corrective phase following the Renaissance Grand Super Cycle, which lasted from 1720 until approximately 1775-1785 (GSC Wave 4). At this point we should especially take note of the length of time required to overcome the excesses brought about at the end of this Grand Super Cycle. It required about 60 years, at least one full generation (perhaps more like two generations based on life expectancy at that time) before the correction ended and a new GSC impulse wave could begin (GSC Wave 5).

Since we are again at the end of a GSC wave, this is the least duration we could reasonably expect for the correction that is soon to be on us. What we can expect at the end of a GSC5 wave, must await further analysis.

THE X-WAVE AND BEYOND

We have seen that the period of the Dark Ages was followed by three periods of about 350 years duration that correspond to three Grand Super Cycle impulse waves, separated by relatively brief corrections of about 60 years duration – one correction at the time of the Plague and the second correction as a result of the major speculative bubbles in France and in England in the 18th century.

The duration of the Dark Ages was very much longer than these GSC corrections – so much longer in fact that it has to be at least the next higher order X-wave correction, or even of higher order. We can therefore assume that the start of the first GSC wave in about 1000 AD was also the beginning of the next higher order X-wave.

This enables us to put together the schedule of the current X-wave, as follows:

GSC 1:   1000 – 1350
GSC 2:   1350 – 1400
GSC3:   1400 – 1720
GSC4:   1720 – 1780
GSC5:   1780 - 1999

Observe that this X-wave has a duration of exactly 1000 years, substantially longer than the 350 years or so of Elliott's longest wave, the Grand Super Cycle.

The major components of the X-wave are shown in Figure 5 below.

FIGURE 5

One of the keys to the further analysis of human history in terms of Elliott waves lies in the duration of the Dark Ages. At more than 650 years, this period is far too long to be merely an X-wave correction. It has to be at least a correction at the end of a Y-wave, which then implies that the current X-wave that started in 1000 AD is X1 of a new Y-wave. This also implies that the coming correction is not simply going to be a GSC correction wave, such as at the time of the Plague or after the Mississippi and South Sea bubbles; it will be more substantial and of longer duration.

This means that the current state of the markets deserve closer examination before we continue the examination of the whole 12000 year history of settled human civilization.

A MORE IN DEPTH ANALYSIS

Let's get some much-needed perspective of where we are and where we have been in stock market prices. In July of 1998 the DJIA soared over the 9000 level and has since gone over 11000. Many stock market pundits remark that the future looks rosy with few problems lurking on the horizon. They predict continuing higher prices. Some expect the DJIA to climb to 15000 or even 20000. We have seen this index surge over 11,000 since July 1998, while other broader indices have not been able to top their 1998 highs.

Looking back to as recently as early 1995, the DJIA had not breached the 4000 level, which is obviously more than 50% lower than the peak in 1998. Needless to say, for various reasons the DJIA advanced over 100% in a little over three years. A spectacular achievement (evidence of an Elliott Extension in the market and extreme speculation and overvaluation). In late 1996 while the DJIA was still under 7000, Alan Greenspan issued his famous warning that the United States stock market was displaying "Irrational Exuberance". The market swooned a little, and then continued to race upward for another two years, gaining another roughly 50% in the process.

What allowed this to happen? Let's remember we have been in a Grand Super Cycle bullish mode since about 1776, when the United States was born. The country grew ever stronger and richer during the 220 odd years since that time. By the 1940's the US had grown to the point where it was able to become the dominant power in the world during and after WW II. Our riches and power continued to build during the Cold War until by the last two decades of the Twentieth Century the United States was the colossus of the world. A famous Wall Street personality, Abbey Cohen, in the late 1990's described the economy of the United States as being similar to a loaded crude oil supertanker cruising through the ocean. Which implies the United States has so much bullish momentum built up that it would be as hard to stop or to change its upward course as a supertanker (which is indeed very difficult).

The growth of the United States and attitudes like those of Abbey Cohen were the causes for the explosive move up in the DJIA. This view is simplistic, and does not account for other important factors which aided and abetted the rise such as the computer revolution. Space will not allow a full discussion of all aspects of the matters touched on in this article. The important point we need to make is that the final upward surge in the last two decades of the 20th Century is the culmination of 220 odd years of economic growth and business activity. It constitutes an unsustainable euphoria and enthusiasm for stocks, and deserves the description of a "Bubble Economy"

This situation is comparable to the speculative frenzy described in the period leading up to 1720 in the South Sea and Mississippi Bubbles, or the speculative frenzy of 1927-1929. The implication of this is that we can logically expect these speculative excesses to be corrected by a major bear market move. This is all the more true since we are not only completing a Grand Super Cycle of over 200 years, but are completing the final Grand Super Cycle of an X-Wave which has very serious implications. Namely a bear market correction which will be very deep and probably over 100 years in length.

We must now ask ourselves what conditions have changed to stop this bull market, if in fact it has changed from bull to bear. Our judgment based on Elliott analysis, Dow Theory analysis, and other evidence, tells us that 1998 was the culmination of the Grand Super Cycle which started over 200 years ago. Others disagree. Time will tell.

Looking back to 1994-95, some analysts felt the market had already reached the top at that time. There was evidence which suggested that was the case. What was missed was the supertanker analogy, and the fact that you don't turn a supertanker or a 200 plus year bull market around quickly. It takes time and work (quite often, as in this case, such time and work takes on the aspects of a BUBBLE Market). There are times when no specific trigger is needed to stop a bull market. The bull market just continues upward until it loses momentum and starts to slide back down.

In the period of 1997-9, however, there were and still are many conditions in the US and around the world, which have contributed to a market top. We will not try to enumerate all of these items, because we feel certain anyone interested enough to read this article is already aware of these items of concern. One item that needs mentioning (But by no means the only one) is the Year 2000 Computer Date Problem, and how that can perhaps initiate or exacerbate the bear market to come. This impact of the Y2K problem may overshadow all of the other preceding problems in order of magnitude.

At or near the end of a cycle, psychology plays a critical role. Let's look at something Greenspan has said: "the fate of the markets is in the hand(s) of psychology". The psychology at the end of a Grand Super Cycle bull market is without question, insanely bullish and positive. Logic would say this is even more the situation at the end of a higher level X-Wave. That bullish psychology may well be starting to weaken. As a bear market progresses along its inevitable path, the bearish psychology will build until a point down the road is reached when no one in their right mind wants to own stocks. It is that attitude which held sway between 1720 and 1776 and that extended the correction to over a generation of humans. Is there any reason why something similar or worse won't happen again? Based on Elliott analysis we think it will. The all-important question is how long will the bear market last and how low will it go. In Part 5 we discuss some factors that could be implicated in the coming long term bear market.

There is a quote we want to share with you that comes from Richard Russell, who writes an authoritative stock market letter based on Dow Theory. Russell's warning: "In a bear market, whatever can go wrong will go wrong. This adage explains why bear markets often end up lower (more costly) than anyone thinks possible at their inception."

Let's revisit Abbey Cohen and her supertanker analogy. It appears the supertanker US stock market spent the spring and summer of 1998 slowing down, stopping, and reversing direction. The rally from the lows made in the last half of 1998 was aided by Federal Reserve policy when they were forced to bail out Long Term Capital Management. Despite reaching new highs during 1999, in what we believe to be an Elliott irregular top, that rally shows signs of weakening, and we may be on the verge of another major downward move in stock prices.

Will the supertanker stock market and economy go down as persistently as it went up? The question is, why not? We believe psychology will be just as bearish an influence on the way down as it was bullish on the way up. That will be especially true when psychology turns from bullish to bearish which is something that always happens at turning points of this type. We feel certain there will be disagreement on this, so, only time will tell. We do feel there is some very persuasive additional evidence for the pessimism expressed above. It is code named Y2K.

Our supertanker economy stalled in mid 1998 for many reasons, some we have mentioned. However, we have only slightly begun to feel the negative impact of Y2K as this article is being written. We are not going to discuss Y2K in great detail because the scope of the subject is too large to add to this narrative. If the reader is unfamiliar with the problem we suggest you immediately get current information and bring yourself up to date quickly.

In our considered opinion, Y2K will most likely turn out to be one of the biggest problems civilization has faced since the beginning of recorded history on a global scale. It will likely be the trigger, if another is needed, that could propel the world into a chaotic and violent bear market worthy of the previous Grand Super Cycle (1776-1998) and X-Wave (1000-2000) bull market it will correct. If the problems and disruptions Y2K can inflict on humankind turn out to be anywhere near as bad as the pessimists predict, and this trouble is piled on top of a world economy and world stock markets already in trouble and headed lower, we can see the negative ramifications. It will pay prudent individuals to monitor both Y2K and the current stock market developments closely. People who live through the next few years without taking reasonable precautions will fare much worse than those that do.

There is ample evidence that this market is way too high and should have a large correction. As to how low the DJIA will go, we turn to the Elliott Principle. It says a decline from this Grand Super Cycle Wave and X-Wave can and should ultimately drop to 1000 points or below. The reader, who questions this, can go to the Elliott writings for confirmation. This prediction is based on 1999 nominal dollars. If the value of the dollar changes either up or down, that will alter the value of the DJIA in nominal dollars at the time of the low. This is not an effort to hedge the prediction. On the contrary, it is meant to clarify the situation.

What are prudent precautions people can take, you may ask? There are several. First to preserve wealth one should exit most stock market investments. This will be hard for many to do. In the last twenty years at the very least, the investing public has been bombarded with the notion that the way to financial Valhalla is to buy stocks and keep them for the long pull. It is easy to see why such an investment philosophy would take hold during the fifth wave of a Super Cycle, which also is ending the fifth wave of a Grand Super Cycle.

The problem here is that the wisdom of the "Buy and Hold" philosophy is based on historical performance. If the bull market standpoint itself is history (evidence suggests it is), then this "Buy and Hold" philosophy is all wrong. This suggests a prudent individual will unlearn "Buy and Hold" and replace it with "Get Out and Stay Out" until the start of the next bull market which history says will be a long time in coming.

Where do you put the money you take from stocks? The answer to this question is always very difficult. In the looming bear market it is further complicated by the Y2K problem, which may change everything. The authors are not going to discuss in detail the merits of various alternative investments to the stock market. It is again not within the scope of this article. We will simply mention some possible alternative investments and leave it to the reader to do his or her own research on what to do. Some possibilities are bonds, cash, gold and other hard money assets, food and other emergency supplies, and real estate, to name a few obvious choices. (A comment from Richard Russell on the value of cash in a bear market: "In a bear market cash acts almost like a short position since cash will buy more and more stocks as the bear market progresses and equities decline").

There are undoubtedly other possibilities we do not know about. In all of your considerations about alternative investments, one very important consideration to keep firmly in mind is the vulnerability of fiat paper currencies. Recent history has witnessed the extreme depreciation of various fiat paper currencies around the world. All fiat paper currencies are vulnerable to one degree or another. This includes the US dollar, which is a fiat paper currency whether we want to believe it or not. The investment world during the next few years is going to be extremely dangerous to your wealth, as well as your mental and physical health. Keep in mind that one way governments could try to ameliorate the effects of the soon to come long term bear market would be by printing money – a course of action that could result in serious inflation and loss of purchasing power.

A GSC correction lasts about 50-60 years. We are looking now at not just a GSC bear correction, but a correction commensurate with an X-Wave.

A review of Table 2 in the next part shows that history tells us a normal correction for an X-Wave is 100 years or more. The implication we see from this information is that we can expect a very deep and extended drop in stock prices from the apparent top being completed in 1998-2000. More on that later. In addition, the correction should severely depress the global economy for a period of many years (100 or more). From the evidence of the Elliott count it is unreasonable to believe this correction will be over in a few months, years or even a decade or two. We are correcting too long and too large a cycle for it to be over in a hurry, or without inflicting major pain. Not happy implications. However unhappy the implications may be, the evidence presented in this article make them realistic.

SUMMARY

As we approach the end of the 20th Century, we find the world's economies, currencies, stock markets, and politics in disarray. Leadership in world affairs is sadly lacking. Both the IMF and the World Bank have fallen on hard times and dropped into disfavor. When we evaluate the United States Stock Market with these facts in the background, it should not come as a surprise to anyone that there is credible evidence of a looming turn downward in stock market direction and psychology.

We have in fact tried very diligently to show in this article that there is good evidence to suggest such a market turnaround from bull to bear is upon us. In addition we have gone to great lengths to demonstrate the bear market we are facing is going to be much more severe than 1987, 1974, or even 1929. We have stated our reasons to suggest the bear market will resemble the bear market period between 1720 and 1776, a period of a generation in length and of great severity in degree of market and business decline. We have discussed why this bear market can be even worse that just previously described, since we are ending an X-Wave. These are sobering thoughts to contemplate in our current bullish and positive environment.

These are dire possibilities. This places us at a point where we must ask ourselves this question: How much validity does the Elliott Wave Principle have and how seriously should people take these horrible prospects? Based on our study of the Elliott Principle over several decades, we can say the Principle has great enough validity to convince us to watch its signals carefully and pay attention to them. Each reader will have to decide how much weight to give the Elliott Principle, after examining the evidence presented in this article, as well as other sources. We should all keep in mind that Elliott Wave interpretations can change over time as more data is amassed and evaluated. We feel fairly certain that any practitioner of this Principle has had to change an analysis at sometime in his or her career.

The last item to cover in this summary is to remind ourselves that in a serious bear market, which can last for many years, a "Buy and Hold" policy is not prudent (contrary to popular belief as fostered by the Wall Street Community). A more prudent approach is to exit most stock market investments and replace them with alternative investments. Each investor must decide for himself or herself the best course of action to take after careful consideration of the facts.

Let us reiterate one last time. The investment world during the next few years is going to be extremely dangerous to your wealth, as well as your health.

BEYOND THE COMING BAD TIMES

It is terribly important at this phase of our analysis to go back to a thought that may have gotten misplaced in all of the bearish gloom of the recent paragraphs. Each correction wave, of any degree, does not go as low as the low of the previous cycle. The correction only approaches the previous low. A most important and positive thought to remember is that after the correction, the upward progress of humankind resumes and new highs will ultimately be made.

If we remember that at the end of this century we are ending the first X-Wave of the new Y-Wave of Z3-Wave, then we can look forward to the beginning of the third X-Wave of this Y-Wave after a correction wave (X2) has been completed. This suggests we are on one side of a valley of human achievement, and that once we have negotiated the difficult valley, we can look forward to better times and new highs of advancement on the other side. The end of civilization is not upon us, just a rather lengthy pause in the upward march of civilization. Unfortunately, most people in 1999 can only see the beautiful highlands on the other side of the valley, and do not realize there is a deep abyss to negotiate between where they now stand and the beautiful future that is painted for humankind in the 21ST Century and beyond.

(C) 1999 By The Authors
All rights reserved