Pete Kendall's Socio Times: A Socionomic Commentary

What's really behind that mask?
In a knowledge-based world, the traditional measures don’t tell the story.

The economy you thought you knew – the one all those government statistics purport to measure and make rational and understandable – actually may be a on a stronger footing than you think. Everyone knows the U.S. is well down the road to become a knowledge economy, one driven by ideas and innovation. What you may not realize is that the government’s decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas.
Business Week, February 13, 2006


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Why the Economy Is a Lot STRONGER Than You Think
By: Pete Kendall, February 7, 2006
“This fifth wave will be built more on unfounded hopes than on soundly improving fundamentals such as the U.S. experienced in the 1950s and early 1960s. And since this fifth wave, wave V, is a fifth within a larger fifth, wave (V) from 1789, the phenomenon should be magnified by the time the peak is reached.”
The Elliott Wave Theorist, a special report on the “SUPERBULL MARKET”,  August 1983

This is another deja-vu moment that takes us back to the very same psychological condition at the all-time high in early 2000. At that time, the New Economy was all the rage and Business Week and the rest of the financial media was overflowing with arguments about the unaccounted for strength in the form of innovation and technology. This time Business Week declares that GDP is underreported by $2 trillion due to research and development and software and another $224 billion in household education expenses. These are said to contribute mightily to the country's productive capacity. It's may be true, but there's nothing new about R&D and education. They've been part of the economy for many years. What's different now is the impulse to factor them in in one lump sum. The reason is that social mood at that place in the wave pattern where the desire "paper over cracks in the fundamentals" becomes overwhelming. By tracking "the creation and flow of knowledge" rather than just the goods and services that educationa and R&D create, the exhorbitant prices investors must pay for financial assets are justified. 

This appears to be nature's way of creating divergences between the strength of the fundamentals third waves and weaker performance in fifth waves.  As the chapter on "Predicting Economic and Monetary Trends" in Pioneering Studies in Socionomics explains this is what investors do at the end of a fifth-wave rise  --  make up for fundamental shortcomings with a psychology of optimism that actually invents reasons to celebrate weakening growth rates. At the end of the largest advances, innovation and a belief in soft "squishy" concepts like "knowledge" and the "future-oriented investment" runs high.

If you've been a subscriber for more than three months, we don't even have to mention the contrary implications of BusinessWeek's cover placement of this story. It has the same meaning EWFF identified in connection with similar stories about oil in September, the dollar in late 2004 and dot.coms in early 2000.

Additional References

September 2005, The Elliott Wave Theorist
The Eonomy Is About To Resume Its Trend Toward Depression
The economy started a depression in 2001, and it’s not over. The recovery of 2002-2005 is akin to those in the Japanese economy since it topped out in 1989. It is not a new trend of expansion but simply a respite.

February 2000, EWFF
At the Crest of the Tidal Wave first identified the connection between the gathering deflationary storm and the belief in a New Economy. “The true threat today is not inflation, but deflation” At the Crest said. “There is no hint of any such crisis on the horizon because economists are unanimous in their identification of slowing money supply expansion and moderated price gains as the best imaginable news for long-term economic growth.” Since then, the New Economy has grown into an elaborate myth. It reflects the positive psychology of the extensive bull market in social mood, which serves as cover for the dangerous transition from inflation to deflation. R.N. Elliott said, “It is a well known fact that prosperity and depression follow each other in cycles.” It is a reality that most people admit only at market bottoms. That is why a search of 27 major newspapers finds no references to a “new economy” in 1980. As late as 1985, when the bull market entered Intermediate (3) of Primary 3, there were still no such references. Even in the middle of the 1990s, many of the references were qualified and others rightfully warned that the very idea of it was a sign of an overly enthusiastic social psychology. The dramatic quickening in the new era drumbeat recalls the drunken revelry in Troy as the Greeks’ famous wooden horse was accepted inside the gates of the citadel. The more exaggerated and insistent the reports of the triumph of the New Economy and the death of the business cycle become, the more emphatically they reveal the hidden fact that the economy is back where it was in the fall of 1929, at the cusp of a great deflationary downturn.

This prelude in which objections were gradually and then joyously overcome is also consistent with the Greek legend. Homer says that many Trojans wanted to run the hollow cavern of the wooden horse through with their swords and some wanted to “drag it to the peak and throw it off the rocks.” According to Bulfinch’s Mythology, Troy was fully apprised of the danger inherent in accepting the horse by a high priest who said, “What madness is this? For my part, I fear the Greeks even when they offer gifts.” In time, however, “the tide of the people’s feelings” turned against the priest, and they “no longer hesitated to regard the wooden horse as a sacred object, and prepared to introduce it with due solemnity into the city. This was done with songs and triumphal acclamations, and the day closed with festivity. In the night the armed men who were enclosed in the body of the horse opened the gates of the city to their friends, who had returned under the cover of night. The city was set on fire; the people, overcome with feasting and sleep, put to the sword, and Troy completely subdued.”

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