Lesson 26: LONG TERM WAVES

In September 1977, Forbes published an interesting article on the complexity theory of inflation entitled "The Great Hamburger Paradox," in which the writer, David Warsh, asks, "What really goes into the price of a hamburger? Why do prices explode for a century or more and then level off?" He quotes Professor E.H. Phelps Brown and Sheila V. Hopkins of Oxford University as saying,

For a century or more, it seems, prices will obey one all-powerful law; it changes and a new law prevails. A war that would have cast the trend up to new heights in one dispensation is powerless to deflect it in another. Do we yet know what are the factors that set this stamp on an age, and why, after they have held on so long through such shakings, they give way quickly and completely to others?

Brown and Hopkins state that prices seem to "obey one all-powerful law," which is exactly what R.N. Elliott said. This all-powerful law is the harmonious relationship found in the Golden Ratio, which is basic to nature's laws and forms part of the fabric of man's physical, mental and emotional structure as well. As Mr. Warsh additionally observes quite accurately, human progress seems to move in sudden jerks and jolts, not as in the smooth clockwork operation of Newtonian physics. We agree with Mr. Warsh's conclusion but further posit that these shocks are not of only one noticeable degree of metamorphosis or age, but occur at all degrees along the logarithmic spiral of man's progress and the progress of the universe, from Minuette degree and smaller to Grand Supercycle degree and greater. To introduce another expansion on the idea, we suggest that these shocks themselves are part of the clockwork. A watch may appear to run smoothly, but its progress is controlled by the spasmodic jerks of a timing mechanism, whether mechanical or quartz crystal. Quite likely the logarithmic spiral of man's progress is propelled in a similar manner, though with the jolts tied not to time periodicity, but to repetitive form.

If you say "nuts" to this thesis, please consider that we are probably not talking about an exogenous force, but an endogenous one. Any rejection of the Wave Principle on the grounds that it is deterministic leaves unanswered the how and why of the social patterns we demonstrate in this book. All we propose is that there is a natural psychodynamic in men that generates form in social behavior, as revealed by market behavior. Most important, understand that the form we describe is primarily social, not individual. Individuals have free will and indeed can learn to recognize these typical patterns of social behavior and use that knowledge to their advantage. It is not easy to act and think contrarily to the crowd and to your own natural tendencies, but with discipline and the aid of experience, you can certainly train yourself to do so once you establish that initial crucial insight into the true essence of market behavior. Needless to say, it is quite the opposite of what people have believed it to be, whether they have been influenced by the cavalier assumptions of event causality made by fundamentalists, the economic models posited by economists, the "random walk" offered by academics, or the vision of market manipulation by "Gnomes of Zurich" (sometimes identified only as "they") proposed by conspiracy theorists.

We suppose the average investor has little interest in what may happen to his investments when he is dead or what the investment environment of his great-great-great-great grandfather was. It is difficult enough to cope with current conditions in the daily battle for investment survival without concerning ourselves with the distant future or the long buried past. However, long term waves must be assessed, first because the developments of the past serve greatly to determine the future, and secondly because it can be illustrated that the same law that applies to the long term applies to the short term and produces the same patterns of stock market behavior.

In Lessons 26 and 27 we shall outline the current position of the progression of "jerks and jolts" from what we call the Millennium degree to today's Cycle degree bull market. Moreover, as we shall see, because of the position of the current Millen nium wave and the pyramiding of "fives" in our final composite wave picture, this decade could prove to be one of the most exciting times in world history to be writing about and studying the Elliott Wave Principle.

1. The Millennium Wave from the Dark Ages

Data for researching price trends over the last two hundred years is not especially difficult to attain, but we have to rely on less exact statistics for perspective on earlier trends and conditions. The long term price index compiled by Professor E. H. Phelps Brown and Sheila V. Hopkins and further enlarged by David Warsh is based on a simple "market basket of human needs" for the period from 950 A.D. to 1954.

By splicing the price curves of Brown and Hopkins onto industrial stock prices from 1789, we get a long-term picture of prices for the last one thousand years. Figure 5-1 shows approximate general price swings from the Dark Ages to 1789. For the fifth wave from 1789, we have overlaid a straight line to represent stock price swings in particular, which we will analyze further in the next section. Strangely enough, this diagram, while only a very rough indication of price trends, produces an unmistakable five-wave Elliott pattern.

Figure 5-1

Paralleling the broad price movements of history are the great periods of commercial and industrial expansion over the centuries. Rome, whose great culture at one time may have coincided with the peak of the previous Millennium wave, finally fell in 476 A.D. For five hundred years afterward, during the ensuing Millennium degree bear market, the search for knowledge became almost extinct. The Commercial Revolution (950-1350), eventually sparked the first new sub-Millennium wave of expansion that ushered in the Middle Ages. The leveling of prices from 1350 to 1520 forms wave two and represents a "correction" of the progress during the Commercial Revolution.

The next period of rising prices, the first Grand Supercycle wave of sub-Millennium wave Three, coincided with both the Capitalist Revolution (1520-1640) and with the greatest period in English history, the Elizabethan period. Elizabeth I (1533-1603) came to the throne of England just after an exhausting war with France. The country was poor and in despair, but before Elizabeth died, England had defied all the powers of Europe, expanded her empire, and become the most prosperous nation in the world. This was the age of Shakespeare, Martin Luther, Drake and Raleigh, truly a glorious epoch in world history. Business expanded and prices rose during this period of creative brilliance and luxury. By 1650, prices had reached a peak, leveling off to form Grand Supercycle wave two.

The third Grand Supercycle wave within this sub-Millennium wave appears to have begun for commodity prices around 1760 rather than our presumed time period for the stock market around 1770 to 1790, which we have labeled "1789" where the stock market data begins. However, as a study by Gertrude Shirk in the April/May 1977 issue of Cycles magazine points out, trends in commodity prices have tended to precede similar trends in stock prices generally by about a decade. Viewed in light of this knowledge, the two measurements actually fit together extremely well. This third Grand Supercycle upwave within the current sub-Millennium wave Three coincides with the burst in productivity generated by the Industrial Revolution (1750-1850) and parallels the rise of the United States of America as a world power.

Elliott logic suggests that the Grand Supercycle from 1789 to date must both follow and precede other waves in the ongoing Elliott pattern, with typical relationships in time and amplitude. If the 200-year Grand Supercycle wave has almost run its full course, it stands to be corrected by three Supercycle waves (two down and one up), which could extend over the next one or two centuries. It is difficult to think of a low-growth situation in world economies lasting for such a long period, but the possibility cannot be ruled out. This broad hint of long term trouble does not preclude that technology will mitigate the severity of what might be presumed to develop socially. The Elliott Wave Principle is a law of probability and relative degree, not a predictor of exact conditions. Nevertheless, the end of the current Supercycle (V) should usher in an era of economic and social stagnancy or setback in significant portions of the world.

Next Lesson: The Wave Pattern Up to 1978