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Todd Harrison Interviews Robert Prechter: 'When Social Mood Turns, the Fundamentals Will Follow'

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Ahead of the Social Mood conference in Atlanta, the market analyst who invented socionomics explains how his theories are playing out in today's "long top" market.

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TH: And I think the best way that I can talk about it is I've always believed that the Great Depression caused the stock market to crash as opposed to the crash causing the Great Depression. And I think that's one of the-a very subtle, but an extremely valid point in helping to explain the difference between socionomics and socioeconomics. I've believed that for a very long time. And it wasn't until I came across your work -- and I thank Kevin Depew, I thank Peter Atwater and others within the Minyanville community or have been a part of the Minyanville community -- for bringing that to the forefront of a lot of things we talk about and write about in Minyanville in helping to educate people on that train of thought.

So, getting to a few questions. We're seeing the Dow Jones at an all-time high here. At the same time we're seeing events that we'd normally associate with negative mood. We could talk about Nazism in Europe. We could talk about what we've been talking about for a long time in Minyanville, the Tricky Trifecta of societal acrimony, social unrest, geopolitical conflict, whether it's Occupy Wall Street, whether it's the Tea Party. How do you explain that chasm between perception and reality where the market's at all-time highs, but for most people they're not really feeling like we're at all-time highs?

BP: Well, in the United States we've got some indexes at new all-time highs. Now, if you inflation adjust them they're pretty much not at new all-time highs. But still we've had a four-year recovery in social mood toward the more positive. You could see results in that in the fairly easy reelection of President Obama. Now, you brought up the idea of the growing taste for Nazism in some countries in Europe. Well, it's interesting if you look at those countries where the concentrations are.

We just saw an article that said people in Austria are saying if Nazism where legal they think they would have a good chance of electing a lot of Nazis in Austria. Well, take a look at the Vienna Stock Index for Austria and you'll find it's down 50% from the 2007 high. That would be in the United States as if the S&P were not at 1,500, but were at 750. That'd make a huge difference in the way that people feel, or at least would reflect a huge difference. And the other big area where they're actually making headway, of course, is Greece. And Greece is the singular stock market in Europe that's down 90% from its high.

So, those reflections of social mood-and I use the stock market as the best gauge for social mood. There are others. But we don't have as much data on the others. So, you take a look at a Greek stock market. I think that explains what's going on politically. It has nothing to do with any of the antecedents that people usually link to it. It's an expression of mood, and their mood is very negative.

TH: But getting back to the question, now, I get that question a lot because I talk about how when the U.S. government decided to embark on this grand experiment, which there'll be victory laps; we're at all-time high. AIG is making money. Cats and dogs singing in the rain. We have Nazis-and Chicago Nazis, notwithstanding because there's nothing worse than Nazis than Chicago Nazis. But I've tried to piece together what I think is this chasm between perception and reality, which is different than how I trade just so it's said. I trade two-sided. You trade the market that you have, not the market that you want, but stepping outside of the nuts and guts of everyday, trading and making money in this mechanism. I think there's a much more-I don't want to say pernicious, but there is a much more-a deeper chasm, a deeper-rooted disconnect between what we're seeing and what we're feeling. So, if the Dow's at all-time highs, but there are a lot of people who are not feeling that way, is it a lame answer to say, well, the government just pumped 15 trillion reasons why the market's at an all-time highs and that's helping to explain the chasm in social mood. That's my first question. The second question is-

BP: Wait a minute. I'm not that sharp-I've got to do one question at a time.

TH: Okay. So, that's the first one. Is that a cop-out? I mean, I'm not-

BP: No, it isn't. No, no. I think the very clear explanation, but you have to bring in the Elliott Wave model to understand it. You might remember the market was very hot in 1967, 1968. Under the Wave model that was a bear market rally. In fact, the Dow came up and nearly matched its high of 1966, but the Value Line Composite Index was flying to new highs. There was a whole lot of speculation. But under the Wave model that was what we called Wave B. In other words it was a counter-trend rally within a bear market. And you had things like the riots at the Democratic Convention. Bear market rallies are fundamentally different from a social mood point of view than the actual impulse, what we call impulses or true bull markets. And in my view the true bull market just as it ended in 1966 after rising from 1942, in this go-around it ended in 2000.

So, on the left side of 2000 you had all sort of positive mood events, including amazing euphoria where the Dow got down to yielding 1.4%, the lowest ever in history. And since then you've had periods of extreme upset, such as we had in 2007 to 2009. And you've had these periods recovery, such as we've had into '07 and now are having again in 2013. But I think both of them are bear market rallies just like we had big bear market rallies in the 1968, 1973. And that's why you're getting this sort of mix of social mood that's negative and positive. The long-term trend is still down. The intermediate trend for the last four years has been up. Now, when the trend turns back down again, that's when you're going to see everything line up on the negative side.

TH: And that fits. I mean, listen, I could argue and I'm of the view that this is a cyclical bull market within a secular bear market, but I feel silly saying that out loud when we're at all-time highs on the Dow. And I think a lot of it is that it's a multi-linear dynamic. And I will say this just to put it out there: you had mentioned earlier that being held your feet to the fire. There are people out there who are saying, well, this is not-this has been proved wrong, whereas I as a believer in this process will argue that this is a context for risk, not a catalyst per se. and things are ever changing from an input standpoint. But it does fit what you just said with the idea-and we just this chart on Minyanville-where we're now on the S&P approaching 1,580. And if you look back over the last 15 years, we've had this process that continues to rinse and repeat where investors are getting punished at the top and the savers are getting punished or screwed at the bottom. Does this fit with what your Elliott Wave analysis is projecting? I mean, do you see-what is it telling you right here on March 12, 2013?

BP: Well, first of all as you know the average investor always does the wrong thing. And at the low-on March 9, 2009 on that exact day was the lowest reading ever in the percentage of bulls in the DSI, the Daily Sentiment Index. Only 2% bulls; Ninety-eight percent of traders thought the S&P was going to go lower on the exact bottom day. So, now we've had this very long recovery. It's much further than I thought it would be, but it's one thing to have an indicator. Socionomics says that the stock market is an indicator and it predicts the kind of society, the kind of social actions you will see. I think that is pretty much carved in stone and that is the reflection of the power of socionomic theory. But it's quite another to predict your own indicator. It'd be like saying a Gallup article will tell us when the poll is going to change. Well, that's a whole other discipline. I think using the Wave model to try to assess the extent of these trends. And in the past 12 years, 13 years, the extent on the upside has surprised me every time.

In fact, once we fell in 2002 I'd imagine that we would have the peak of the real estate occur in the middle of this topping process. People were going absolutely berserk. But look what happened when it finally folded. The biggest drop in real estate since the Great Depression, the weakest recovery in housing ever on record, even though we had a four-year recovery in the stock market. And now, okay, some people are saying-and, of course, they ran a whole page on this in the theories that I just published. People are saying, "Oh, it's just begun. It's just started. We're at the starting gate of a great bull market;" some people are saying in an issue I published 16 different charts of sentiment indicators that are either matching or exceeding all-time extremes of optimism. So, I think that's a classic B-wave indication, I don't think it's going much higher. And you have to take things in context. In other words, would you want to buy any stock today? I would say don't touch it with a 10-foot pole. There's going to be a great low, probably even better than the '09 low sometime in the next year. Wait for that.
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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