December 30, 2011

By Elliott Wave International

The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.

Here is Part IV of the series. Click these links to read Part I, Part II, and Part III. Or you can download your free copy of the Independent Investor eBook here.

Another Example of Rationalization, Ripped from the Headlines

Almost every day brings another example of rationalization in defense of the idea that news moves markets. The stock market rallied for half an hour on the morning of April 20, peaked at 10:00 a.m., and sold off for the rest of the day. Almost every newspaper and wire service claims that the market sold off because "Greenspan told Congress that the nation’s banking system is well prepared to deal with rising rates, which the market interpreted as a new signal the Fed will tighten its policy sooner rather than later."³ Is this explanation plausible?

Point #1: Greenspan began speaking around 2:30, but the market had already peaked at 10:00.

Point #2: Greenspan said something favorable about the banking system, not unfavorable about rates. A caption in The Wall Street Journal reads, "Greenspan smiles, markets don’t."⁴ The real story here is that the market went down despite his upbeat comments, not because of them.

Point #3: Greenspan’s speech was not the only news available. Most of the other news that day was good as well. As the AP reported, profits of corporations were good and "most economists don’t expect the Fed to raise rates at its next meeting." So if news were causal, then on balance the market should have risen.

Point #4: The Fed’s interest rate changes lag the market’s interest rate changes. Interest rates had moved higher for months. Even if Greenspan had stated (which he didn’t) that the Fed would raise its Federal Funds rate immediately, it would have been no surprise.

Point #5: Greenspan said nothing that people didn’t already know, so while the fact of the speech was news, there was no news in thecontent of the speech.

Point #6: The simultaneously reported fact that "most economists don’t expect the Fed to raise rates at its next meeting" contradicts the argument for why investors sold stocks. If economists don’t believe it, why should we think that anyone else does?

Point #7: Greenspan did not say that rates would go up.

Point #8: We have no data on the history of stock market movement following mere hints of a possible rates rise, which means no data on which commentators could justifiably base an explanation of the market’s apparent reaction to such a hint, if in fact there was one.

Point #9: There is no evidence that a rise in interest rates makes the stock market go down. In 1992, the Federal Funds rate was 3 percent. In December 1999, it was 5.5 percent. The Dow didn’t go down during that time; it tripled. Rates also rose from the late 1940s to the late 1960s, during almost all of which time there was a huge bull market. Ned Davis Research has done the research and found that in the 22 instances of a single rate hike since 1917, "the Dow was always higher…whether three months, six months, one year or two years later."⁵ In other words, if interest rates truly cause market movements, then a rate rise would be bullish. According to Davis, it takes a series of four to six rate increases to hurt the market, and that’s if you allow the supposed negative causality to appear up to twelve months later! So even accepting the bogus claim of causality would mean that investors would have had to read into Greenspan’s optimistic comment on the banking system a whole series of four to six rate rises, after which maybe the market would go down within a year after the final one! (The truth is that rising central-bank rates are usually a function of a strong economy, so many rate increases in a row simply mean that an economic expansion is aging, from which point a contraction eventually emerges naturally. Interest rates, like all other financial prices, are determined by the same society that determines stock prices. It’s all part of the flux within the same system. Changes in interest rates are not an external cause of stock price movements, just as stock price movements are not an external cause of changes in interest rates.)

So why did so many people conclude that Greenspan’s speech made the market go down? They didn’t conclude it from any applicable data; they just made it up. The range of errors required for people to concoct such "analysis" is immense, from an inapplicable chronology to contradictory facts to an utter lack of confirming data to a false underlying theory. Yet it happened; in fact, it happens every day.

Quiz: What does this sentence from the AP article mean? "Worries that interest rates will rise sooner rather than later have distracted investors from profit reports this earnings season." Answer: It simply means, "The market went down today." There is no other meaning in all those words.

Had the market instead gone up on April 20, commentators would simply have cited as causes the numerous optimistic statements in Greenspan’s address, i.e., "deflation is no longer an issue," "pricing power is gradually being restored," inflation is "reasonably contained," labor productivity is "still impressive," etc. There were, in fact, no — zero, none — negative statements about markets, the economy or the monetary climate in his address, which is why commentators — in order to maintain their belief in news causality — had to resort to such an elaborate rationalization to "explain" the day’s price action.

But wait. The market went up the next day, April 21. Let’s see what the explanation was then: Appearing this time before the Joint Economic Committee of Congress, Greenspan reiterated that interest rates "must rise at some point" to prevent an outbreak of inflation. But he added that "as yet," the Fed’s policy of keeping interest rates low "has not fostered an environment in which broadbased inflation pressures appear to be building." Analysts took that to mean the Fed might not be in such a hurry to raise short-term rates, the opposite of their reaction to his testimony to the Senate Banking Committee on Tuesday.

– The Atlanta Journal-Constitution, April 22, 2004⁶

We read that Greenspan "reiterated" his comments; in other words, he said essentially the same thing as the day before, yet investors "reacted" to the statements differently and did "the opposite" of what they had done the day before.

We know that this argument is false. How do we know? We know because once again we take the time to look at the data. Here is a 10-minute bar graph of the S&P 500 index for April 20 and 21. On it is shown the time that Greenspan was speaking. Observe that the market fell throughout his speech on April 21. It rallied after he was done. So his speech did not make the market close up on the day. It’s no good saying that there was a "delayed positive reaction," because that’s not what happened the day before, when stocks were falling throughout the speech and for the rest of the day thereafter. Such ex-post-facto rationalization is common but never consistent. The conventional presumption of causality demanded an external force that made the market close up on the day, and, as usual, it manufactured one. An article that put the two days’ events side by side reveals how silly the causal arguments are:

NEW YORK — Stocks ended higher Wednesday despite Federal Reserve Chairman Alan Greenspan’s acknowledgment that short-term interest rates will have to be raised at some point. The gains came a day after stocks had sold off sharply when Greenspan said pricing power was improving for U.S. companies, sparking inflation fears.

– USA Today, April 22, 2004⁷

One interviewee stated the (false) conventional premise: "Wall Street was in a less hysterical mood than yesterday with Fed Chairman Alan Greenspan being more expansive in his view of the economy," i.e., the news changed investors’ mood. The socionomic view is different: People’s mood came first. Greenspan’s words did not make people calm or hysterical; people’s calm or hysterical moods induce them to buy or sell stocks, and then they rationalize why they did. Since there is no difference in the news items on these two days, our explanation makes more sense. It is also a consistent explanation, whereas news excuses are typically contradictory to past excuses and the data.

Those offering external-causality arguments, by the way, include economists and market strategists, people who supposedly spend their professional lives studying the stock market, interest rates and the economy. Yet even they barrel ahead on nothing but limbic impulses, sans data and sans correlation, because it seems to make sense. It does so because most people’s thinking simply defaults to physics when analyzing financial events. But when we take the time to examine the results of applying that model, we find that it is not useful either for predicting or explaining market behavior.

Another interesting aspect of financial rationalization is that in fact there is virtually never any evidence that people actually bought or sold stocks for the reasons cited. The fact that people actually sold stocks on April 20 or bought them on April 21 because of these long chains of causal reasoning is dubious at best. Had you asked investors during the rout why they were buying or selling, would they actually have cited either of these convoluted interest-rate arguments? I doubt it. Most people buy and sell because the social moods in which they participate impel them to buy and sell. A news event, any news event, merely provides a referent to occupy the naive neocortex while pre-rational herding impulses have their way.

This is what’s happening: When news seems to coincide sensibly with market movements, it’s just coincidence, yet people naturally presume a causal relationship. When news doesn’t fit the market, people devise an inventive cause-and-effect structure to make it fit the day’s market action. They do so because they naturally default to the physics model of external cause and effect and are therefore certain that some external action must be causing a market reaction. Their job, as they see it, is simply to identify which external cause is operating at the moment. When commentators cannot find a way to twist news causality to justify market action, the market’s move is often chalked up to "psychology," which means that, despite the plethora of news and ways to interpret it, no external causality could even be postulated without exposing an overly transparent rationalization. Few proponents of the physics paradigm in finance seem to care that these glaring anomalies exist.

Read again carefully the newspaper excerpt quoted above. If you at some point begin laughing, you’re halfway to becoming a socionomist.

A Model That Cannot Predict Financial Events

Let’s ask another question of our believers in the cause-and-effect physics model of finance. What was the cause in August 1982 of the start of the strongest one-year rally in stocks since 1942-1943? (Was it the bad news of the recession? No, that doesn’t make sense.) What was the cause in early October 1987 of the biggest stock market crash since 1929? (Don’t spend too much time trying to figure this one out. An article from 1999, twelve years later, says, "Scholars still debate the reason why" the stock market crashed that year.⁸)

Can you imagine physicists endlessly debating the cause of an avalanche and feeling mystified that it happened? Physicists know why avalanches happen because they are using the right model for physics, i.e., physics, incorporating the laws and properties of matter and physical forces. The crash of 1987 mystifies economists because they are using the wrong model for finance, i.e., physics. They are sure that the crash was a reaction, so there must have been an external action to cause it. They can’t find one. Why? Because they are using the wrong model of financial causality.

No External Causality

The model is wrong because it assumes that each element of the social scene is as discrete as billiard balls. But they are not. Here is a pertinent passage from The Wave Principle of Human Social Behavior: When dealing with social events, what is an "external shock"? What is an "outside cause"? Other than the proverbial asteroid striking the earth, which presumably might disrupt the NYSE for a couple of days, or the massive earthquake or destructive hurricane that we repeatedly observe does not affect financial market behavior in any noticeable way, there is in fact, in the social context, no such thing as an outside force or cause. Every "external shock" ever referenced in finance is in fact an internal event. Trends in the stock market, interest rates, the trade balance, government spending, the money supply and economic performance are all ultimately products of collective human mentation. Human minds create these trends and change both them and their apparent interrelationships as well. It is men who change interest rates, trade goods, create earnings and all the rest. All social events, whether a rise in interest rates, a drop in the stock market, or even a war, are the result of collective human mentation. To suggest that such things are outside the social phenomenon under study is to presume that people do not communicate (consciously or otherwise) with each other from one aspect of their social lives to another. This is not only an unproven assumption but an absurd one. All financial events, indeed all social movements, are part and parcel of the interactive flux of human cooperation. All such forces are intimately commingled all the time. Yet to the conventional analyst, each is as detached a cause as a cue stick striking a billiard ball. It is this error that so profoundly undermines the conventional approach.⁹

The more useful model of social (including financial) causality is socionomics, the theory that aggregated unconscious impulses to herd conform to the Wave Principle, a patterned robust fractal. In this model, social actions are not causes but rather effects of endogenous, formologically determined changes in social mood. To learn more about this new model of finance, see the April and May issues of The Elliott Wave Theorist and the two-volume set, Socionomics.

Many people, by the way, dismiss the Wave Principle as impossible because they think that news and events move the market. We have shown that this notion is highly suspect. I hope that the demonstrations offered in this and the previous issue remove a primary impediment to a serious exploration of the Wave Principle model of financial markets.

A Stone’s Throw

This discussion about the natural tendency of people to apply physics to finance explains why successful traders are so rare and why they are so immensely rewarded for their skills. There is no such thing as a "born trader" because people are born — or learn very early — to respect the laws of physics. This respect is so strong that they apply these laws even in inappropriate situations. Most people who follow the market closely act as if the market is a physical force aimed at their heads. Buying during rallies and selling during declines is akin to ducking when a rock is hurtling toward you. Successful traders learn to do something that almost no one else can do. They sell near the emotional extreme of a rally and buy near the emotional extreme of a decline. The mental discipline that a successful trader shows in buying low and selling high is akin to that of a person who sees a rock thrown at his head and refuses to duck. He thinks, I’m betting that the rock will veer away at the last moment, of its own accord. In this endeavor, he must ignore the laws of physics to which his mind naturally defaults. In the physical world, this would be insane behavior; in finance, it makes him rich. Unfortunately, sometimes the rock does not veer. It hits the trader in the head. All he has to rely upon is percentages. He knows from long study that most of the time, the rock coming at him will veer away, but he also must take the consequences when it doesn’t. The emotional fortitude required to stand in the way of a hurtling stone when you might get hurt is immense, and few people possess it. It is, of course, a great paradox that people who can’t perform this feat get hurt over and over in financial markets and endure a serious stoning, sometimes to death. Many great truths about life are paradoxical, and so is this one.

NOTES:

³ Associated Press, "Possible rate increase sends stocks reeling," The Atlanta Journal-Constitution, p. C5. May 21, 2004.

⁴ The real story here is that the market went down despite his upbeat comments, not because of anything he said.

⁵ Walker, Tom, "Stocks plunge on Greenspan’s rate-boost hint," The Atlanta Journal-Constitution, April 21, 2004.

⁶ Walker, Tom, "Greenspan soft-pedals on rates; market rebounds," The Atlanta Journal-Constitution, p. F4. April 22, 2004.

⁷ Shell, Adam, "Greenspan calms jittery investors," USA Today, April 22, 2004.

⁸ Walker, Tom, "Identifying sell-off trigger difficult." The Atlanta Journal-Constitution, p. F3. August 6, 1998.

⁹ See page 325 in The Wave Principle of Human Social Behavior.

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This article was syndicated by Elliott Wave International and was originally published under the headline Stock Market Is Not Physics: Part IV. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Looking ahead to a new year and planning for the future

December 29, 2011

By Elliott Wave International

It’s hard to believe that 2011 has passed so quickly and that 2012 will soon be here. Now is a good time to look back over the past year and assess your finances. Did your choices this year put you in better or worse circumstances? Do you have the information needed to make wise decisions in the next year? Are you prepared to protect your financial future?

The following excerpt from Conquer the Crash explains the importance of preparing and taking action now so that you’ll be ready for what’s ahead. You can read 8 more chapters from Conquer the Crash — 42 pages of critical information, including a list of imperative "dos and don’ts" — Free. Find out how below.

Chapter 14: Making Preparations and Taking Action

The ultimate effect of deflation is to reduce the supply of money and credit. Your goal is to make sure that it doesn’t reduce the supply ofyour money and credit. The ultimate effect of depression is financial ruin. Your goal is to make sure that it doesn’t ruin you.

Many investment advisors speak as if making money by investing is easy. It’s not. What’s easy is losing money, which is exactly what most investors do. They might make money for a while, but they lose eventually. Just keeping what you have over a lifetime of investing can be an achievement. That’s what this book is designed to help you do, in perhaps the single most difficult financial environment that exists.

Protecting your liquid wealth against a deflationary crash and depression is pretty easy once you know what to do. Protecting your other assets and ensuring your livelihood can be serious challenges. Knowing how to proceed used to be the most difficult part of your task because almost no one writes about the issue.

Preparing to Take the Right Actions

In a crash and depression, we will see stocks going down 90 percent and more, mutual funds collapsing, massive layoffs, high unemployment, corporate and municipal bankruptcies, bank and insurance company failures and ultimately financial and political crises. The average person, who has no inkling of the risks in the financial system, will be shocked that such things could happen, despite the fact that they have happened repeatedly throughout history.

Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. For now, you should focus on making sure that you do not become a zombie-eyed victim of the depression.

The best news of all is that this depression should be relatively brief, though it will seem like an eternity while it is in force. The longest depression on record in the U.S. lasted three years and five months, from September 1929 to February 1933. The longest sustained stock market decline in U.S. history lasted seven years, from 1835 to 1842, and featured two depressions in close proximity. As the expected trend change is of one larger degree than those, it should be a commensurately large setback, but it should still be brief relative to the duration of the preceding advance.

Taking the Right Actions

Countless advisors have touted "stocks only," "gold only," "diversification," a "balanced portfolio" and other end-all solutions to the problem of attending to your investments. These approaches are usually delusions. As I try to make clear in the following pages, no investment strategy will provide stability forever. You will have to be nimble enough to see major trends coming and make changes accordingly. What follows is a good guide, I think, but it is only a guide.

The main goal of investing in a crash environment is safety. When deflation looms, almost every investment category becomes associated with immense risks. Most investors have no idea of these risks and will think you are a fool for taking precautions.

Many readers will object to taking certain prudent actions because of the presumed cost. For example: "I can’t take a profit; I’ll have to pay taxes!" My reply is, if you don’t want to pay taxes, well, you’ll get your wish; your profit will turn into a loss, and you won’t have to pay any taxes. Or they say, "I can’t sell my stocks for cash; interest rates are only 2 percent!" My reply is, if you can’t abide a 2 percent annual gain, well, you’ll get your wish there, too; you’ll have a 30 percent annual loss instead. Others say, "I can’t cash out my retirement plan; there’s a penalty!" I reply, take your money out before there is none to get. Then there is the venerable, "I can’t sell now; I’d be taking a loss!" I say no, you are recovering some capital that you can put to better use. My advice always is, make the right move, and the costs will take care of themselves.

If you are preoccupied with pedestrian concerns or blithely going along with mainstream opinions, you need to wake up now, while there is still time, and actively take charge of your personal finances. First you must make your capital, your person and your family safe. Then you can explore options for making money during the crash and especially after it’s over.

As the subtitle implies, this book is designed as a guide for arranging your finances prior to any future deflationary depression, whether one occurs now, as I expect, or not. Although I want this book to have value beyond the present situation, some of the specifics of my suggestions are time-sensitive by nature. If you need to know today where you can find the few exceptionally sound banks, insurers and other essential service providers, if you want to locate the safest structures in the world for storing your wealth, whether in paper monetary instruments or physical assets such as precious metals, you will find the answers in these chapters. Yet over time, the best institutions and services today might be long gone, and others may have taken their place. For a few years at least, we will post free updates to this information at www.conquerthecrash.com/readerspage. But if you read this book 50 years from now, you may have to do your own research to fit the investment options and service providers available at the time. Nevertheless, the general nature of your goals should be much as outlined herein.

Most people do not have the foggiest idea how to prepare their investments for a deflationary crash and depression, so the techniques are almost like secrets today. The following chapters show you a few steps that will make your finances secure despite almost anything that such an environment can throw at them.

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This article was syndicated by Elliott Wave International and was originally published under the headline Preparing Your Finances for 2012. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The Market Myths Exposed eBook sets the record straight

December 28, 2011

By Elliott Wave International

Not knowing the truth can be hazardous in just about any type of situation, but especially when it comes to your financial future.

To help you decipher market truth from myth, Elliott Wave International put together Market Myths Exposed, a free 33-page eBook that takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. Originally published in 2009, it’s still just as valuable as ever. Get your free eBook here.

Here are the first two myths from Market Myths Exposed:

Myth Number 1: Earnings Drive Stock Prices

"The bottom line is earning drive stock prices" — Investopeida.com. It’s simply not true. The flawed notion that profits drive stock prices is something that EWI has discussed numerous times over the years. For one thing, the quarterly earnings reports announce a company’s achievements from the previous quarter. Trying to predict future stock price movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. The trends in earnings and stock prices sometimes even move in opposite directions, such as the 1973-74 bear market when S&P earnings rose every quarter as the S&P declined 50%. More recently, earnings have been cycling with stocks, but that still leaves the problem of reporting delays, which leave investors eating the market’s dust when the trend changes. To try to get around this, pundits use analysts’ estimates of future earnings as a guide. In doing so, however, they are subject to the same herding impulses as investors. As Conquer the Crash puts it, "Earnings estimators are too pessimistic at bottoms and too optimistic at tops, just when you most need the indicator to tell the truth."

Myth Number 2: Small Stocks are the Place to Be

As one headline from earlier this year put it: "Small Firms See Silver Lining in Deflation Cloud." The common refrain is that small caps will score efficiency gains because "they are typically more nimble." But they are also less well capitalized and thus susceptible to price wars, spiraling asset devaluations and tighter credit conditions. "Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars," says analyst Meredith Whitney. She estimates that credit-line cuts to small business are about halfway through, but this estimate will prove overly optimistic. Small business loans are frequently backed by collateral such as homes, buildings, inventory and receivables. As these items decline in value, creditors will not make new loans or roll over old ones, forcing more sales and intensifying the small business person’s plight. As we noted in last month’s Bottom Line, small-cap shares are "providing downside leadership." They continue to do so, signaling a burgeoning decline for the larger stock market as well as intensifying deflationary pressures.

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Learn why you should think independently rather than relying on misleading investment commentary and advice that passes as common wisdom. Just like the myth that government intervention can stop a stock market crash, Market Myths Exposed uncovers other important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, inflation and deflation, and more!

Protect your financial future and change the way you view your investments forever! Learn more, and get your free eBook here.

This article was syndicated by Elliott Wave International and was originally published under the headline The Top 10 Market Myths Exposed. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

December 27, 2011

By Elliott Wave International

The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.

Here is Part III of the series. You can read Part I and Part II here. Check back in a few days to read Part IV, or you can download your free copy of the Independent Investor eBook here.

Cause and Effect

In the 1990s, a university professor sold many books that made a case for buying "stocks for the long run." In a recent issue of USA Today, he told a reporter, "Clearly, the risk of terror is the major reason why the markets have come down. We can’t quantify these risks; it’s not like flipping a coin and knowing your odds are 50-50 that an attack won’t occur."¹

In other words, he accepts the physics paradigm of external cause and effect with respect to the stock market but says he cannot predict the cause part of the equation and therefore cannot predict stock prices. The first question is, well, if one cannot predict causes, then how can one write a book predicting effects, i.e., arguing that stocks will go up? Or down or sideways? A second question is far more important. We have already seen that economic performance, earnings and inflation do not necessarily coincide with movements in apparently related financial markets. In fact, the two sets of data can utterly oppose each other. Is there any evidence that dramatic news events that make headlines, such as terrorist attacks, political events, wars, crises or any such events are causal to stock market movement?

Suppose the devil were to offer you historic news a day in advance. He doesn’t even ask for your soul in exchange. He explains, "What’s more, you can hold a position for as little as a single trading day after the event or as long as you like." It sounds foolproof, so you accept. His first offer: "The president will be assassinated tomorrow." You can’t believe it. You and only you know it’s going to happen. The devil transports you back to November 22, 1963. You short the market. Do you make money?

Figure 5 shows the DJIA around the time when President John Kennedy was shot. First of all, can you tell by looking at the graph exactly when that event occurred? Maybe before that big drop on the left? Maybe at some other peak, causing a selloff?

The first arrow in Figure 6 shows the timing of the assassination. The market initially fell, but by the close of the next trading day, it was above where it was at the moment of the event, as you can see by the second arrow. You can’t cover your short sales until the following day’s up opening because the devil said that you could hold as briefly as one trading day after the event, but not less. You lose money.

You aren’t really angry because after all, the devil delivered on his promise. Your only error was to believe that a presidential assassination would dictate the course of stock prices. So you vow not to bet on things that aren’t directly related to finance. The devil pops up again, and you explain what you want. "I’ve got just the thing," he says, and announces, "The biggest electrical blackout in the history of North America will occur tomorrow." Wow. Billions of dollars of lost production. People stranded in subways and elevators. The last time a blackout occurred, there was a riot in New York and hundreds of millions of dollars’ worth of damage done. How more directly related to finance could you get? "Sold!" you cry. The devil transports you back to August 2003.

Figure 7 shows the DJIA around the time of the blackout. Does the history of stock prices make it evident when that event occurred? After all, if markets are action and reaction, then this economic loss should show up unmistakably, shouldn’t it? There are two big drops on the graph. Maybe it’s one of them.

The arrow in Figure 8 shows the timing of that event. Not only did the market fail to collapse, it gapped up the next morning! You sit all day with your short sales and cover the following day with another loss.

"Third time’s the charm," says the devil. You reply, "Forget it. I don’t understand why the market isn’t reacting to these causes. Maybe these events you’re giving me just aren’t strong enough." The devil leans into your ear and whispers, "Two bombs will be detonated in London, leveling landmark buildings and killing 3000 people. Another bomb planted at Parliament will misfire, merely blowing the side off the building. The terrorist perpetrators will vow to continue their attacks until England is wiped out." He promises that you can sell short on the London Stock Exchange ten minutes before it happens and even offers to remove the one-day holding restriction. "Cover whenever you like," he says. You agree. The devil then transports you to a parallel universe where London is New York and Parliament is the Pentagon. It’s September 11, 2001.

Figure 9 shows the DJIA around that time. Study it carefully. Can you find an anomaly on the graph? Is there an obvious time when the shocking events of "9/11" show up? If markets reacted to "exogenous shocks," as billiard balls do, there would be something obviouslydifferent on the graph at that time, wouldn’t there? But there isn’t.

Figure 10 shows the timing of the 9/11 terrorist attacks. You may recall that authorities closed the stock market for four trading days plus a weekend. Question: Was it a certainty that the market would re-open on the downside? No! Some popular radio talk-show hosts and administration officials advocated buying stocks on the opening just to "show ‘em." You sit with your massive short position, and you are nervous. But you are also lucky. The market opens down, continuing a decline that had already been in force for 17 weeks. You cheer. You’re making money now! Well, you do for six days, anyway. Then the market leaps higher, and somewhere between one week and six months later you finally cover your shorts at a loss, disgusted and confused. If you are an everyday thoughtful person, you decide that events are irrelevant to markets and begin the long process of educating yourself on why markets move as they do. If you are a conventional economist, you don’t bother.

In case you still think that terrorism is a factor somewhere in the falling markets of 2000-2002, please read "Challenging the Conventional Assumption About the Presumed Sociological Effect of Terrorist News," which is reprinted in Pioneering Studies in Socionomics. It shows unequivocally that the terrorist events and related fears of that time encompassed a period when the market mostly went up and consumer sentiment improved. The graph that accompanies that study is reproduced here as Figure 11.

Now think about this: In real life, you don’t get to know about dramatic events in advance. Investors who sold stocks upon hearing of the various events cited above did so because they believed that events cause changes in stock values. They all sold the low. I chose bad news for these exercises because it tends to be more dramatic, but the same irrelevance attaches to good news.

Since knowing dramatic events in advance would produce no value for investing, guessing events is an utter waste of time. There are no "inefficiencies" related to external causality that one may exploit.

If news is irrelevant to markets, how can the media explain almost every day’s market action by the news? Answer: There is a lot of news every day. Commentators don’t write their cause-and-effect stories before the session starts but after it ends. It’s no trick to fit news to the market after it’s closed. I am writing this paragraph the day after stocks had a big down day. The news at 8:30 a.m. yesterday was good, a "stronger-than-expected 1.8 percent jump in March retail sales." How, then, did this morning’s newspaper, relying on cause and effect, explain yesterday’s big drop? (Remember, it’s easy to play games with cause and effect under the physics paradigm.) Here is the headline: "Rising-Rates Scenario Sends Stocks Reeling."² This and other articles present the following ex-post-facto consensus reasoning: Investors appear to have decided that the good news that the economy is "starting to accelerate" might mean higher interest rates, which would be bearish if it happened. This contrived conclusion is doubly bizarre given the century-long history of interest-rate data, which (as the next section will show) belies such a belief. How, moreover, does one explain the fact that the stock market openedhigher yesterday, in concert with the standard view of such news being "good"? There was no more big news that day. Had there been some "bad" news immediately after the opening, such inventive reasoning would not have been required. The "reason" for the rout would have been obvious, just as it was on the previous down day of this size, on which terrorists conveniently bombed trains in Spain. (Let me guess. You think that this example of news causality makes sense, don’t you? Sorry. Did I mention that the U.S. stock market — fully apprised of the news — rallied until noon that day before selling off?)

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"The Stock Market is Not Physics" is just one report in the more than 100 page, two-volume Independent Investor eBook. You’ll get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history; you’ll also get new analysis, forecasts and commentary to help you think independently in today’s tumultuous market.

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This article was syndicated by Elliott Wave International and was originally published under the headline Stock Market Is Not Physics Part III. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

December 22, 2011

By Elliott Wave International

The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.

Here is Part II of the series. You can read Part I here. Check back in a few days to read Part III, or you can download your free copy of the Independent Investor eBook here.

Action and Reaction

In the world of physics, action is followed by reaction. Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, "Because so-and-so has happened, such-and-such will follow." The news headlines in Figure 1, for example, reflect what economists tell reporters: Good economic news makes the stock market go up; bad economic news makes it go down. But is it true?

Figure 2 shows the Dow Jones Industrial Average and the quarter-by-quarter performance of the U.S. economy. Much of the time, the trends are allied, but if physics reigned in this realm, they would always be allied. They aren’t. The fourth quarter of 1987 saw the strongest GDP quarter in a 15-year span (from 1984 through 1999). That was also the biggest down quarter in stock prices for the entire period. Action in the economy did not produce reaction in stocks. The four-year period from March 1976 to March 1980 had not a single down quarter of GDP and included the biggest single positive quarter for 20 years on either side. Yet the DJIA lost 25 percent of its value during that period. Had you known the economic figures in advance and believed that financial laws are the same as physical laws, you would have bought stocks in both cases. You would have lost a lot of money.

Figure 3 shows the S&P against quarterly earnings in 1973-1974. Did action in earnings produce reaction in the stock market? Not unless you consider rising earnings bad news. While earning rose persistently in 1973-1974, the stock market had its biggest decline in over 40 years.

Suppose you knew for certain that inflation would triple the money supply over the next 20 years. What would you predict for the price of gold? Most analysts and investors are certain that inflation makes gold go up in price. They view financial pricing as simple action and reaction, as in physics. They reason that a rising money supply reduces the value of each purchasing unit, so the price of gold, which is an alternative to money, will reflect that change, increment for increment.

Figure 4 shows a time when the money supply tripled yet gold lost over half its value. In other words, gold not only failed to reflect the amount of inflation that occurred but also failed even to go in the same direction. It failed the prediction from physics by a whopping factor of six, thereby unequivocally invalidating it. (I was generous in ending the study now rather than in 2001, at which time gold had lost over two-thirds of its value.)

It does no good to say — as we sometimes hear from those attempting to rescue the physics paradigm in finance — that gold will follow the money supply "eventually." In physics, billiard balls on an endless plane do not eventually return to a straight path after wandering all over the place, including in the reverse direction from the way they are hit. (What physics-minded investor, moreover, can be sure that gold should follow the money supply rather than vice versa? Is he certain which element in the picture should be presumed to be the action and which the reaction? Maybe a higher gold price increases the value of central banks’ gold reserves, letting them support more lending. Cause and effect arguments are highly manipulable when using the physics paradigm.)

We do know one thing: Investors who feared inflation in January 1980 were right, yet they lost dollar value for two decades, lost even more buying power because the dollar itself was losing value against goods and services, and lost even more wealth in the form of missed opportunities in other markets. Gold’s bear market produced more than a 90 percent loss in terms of gold’s average purchasing power of goods, services, homes and corporate shares despite persistent inflation! How is such an outcome possible? Easy: Financial markets are not a matter of action and reaction. The physics model of financial markets is wrong.

Learn to Think Independently — Download Your Free Independent Investor eBook

"The Stock Market is Not Physics" is just one report in the more than 100 page, two-volume Independent Investor eBook. You’ll get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history; you’ll also get new analysis, forecasts and commentary to help you think independently in today’s tumultuous market.

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This article was syndicated by Elliott Wave International and was originally published under the headline The Stock Market Is Not Physics: Part II. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

A look at EWI president Robert Prechter’s requirements for successful trading

December 21, 2011

By Elliott Wave International

How often have you heard analysts refer to a down day on Wall Street as "traders taking profits"? Sounds great, but the sobering fact is that most traders — in futures, commodities, or forex — lose money.

Any book on trading will list for you the many reasons why most traders lose. Yet some traders do win; some even set records. In 1984, Elliott Wave International’s founder and president Robert Prechter won the U.S. Trading Championship, setting a new all-time profit record of 444.4% in a monitored real-money options account. Later in his monthly Elliott Wave Theorist, Prechter published a Special Report "What A Trader Really Needs To Be Successful" with 5 important insights for would-be market speculators (including the explanation of why "market manipulation" is not why most traders lose.)

Here’s a quick excerpt — and to read Prechter’s Special Report in full, free, look below.

"What A Trader Really Needs To Be Successful" (excerpt)

By Robert Prechter

Ever since winning the United States Trading Championship in 1984 (see footnotes, p.4), subscribers have asked for a list of "tips" on trading, or even a play-by-play of the approximately 200 short term trades I made while following hourly market data over a four month period. Neither of these would do anyone any good. What successful trading requires is both more and less than most people think.

In watching the reports of each new Championship over the past three years, it has been a joy to see what a large percentage of the top winners have been Elliott Wave Theorist subscribers and telephone consultation customers. (In fact, in the latest "standings" report from the USTC, of the top three producers in each of four categories, half are EWT subscribers!) However, while good traders may want the input from EWT, not all EWT subscribers are good traders. Obviously the winners know something the losers don’t. What is it? What are the guidelines you really need to meet in order to trade the markets successfully?

When I first began trading, I did what many others who start out in the markets do: I developed a list of trading rules. The list was created piecemeal, with each new rule added, usually, following the conclusion of an unsuccessful trade. I continually asked myself, what would I do differently next time to make sure that this mistake would not recur? The resulting list of "do’s" and "don’ts" ultimately comprised about 16 statements. Approximately six months following the completion of my carved-in-stone list of trading rules, I balled up the paper and threw it in the trash.

What was the problem with my list, a list typical of so many novices who think they are learning something? After several months of attempting to apply the "rules," it became clear that I made not merely a mistake here and there in the list, but a fundamental error in compiling the list in the first place. The error was in taking aim at the last trade each time, as if the next trading situation would present a similar problem. By the time 16 rules are created, all situations are covered and the trader is back to square one.

Let me give you an example of the ironies that result from the typical method of generating a list of trading rules. One of the most popular trading maxims is, "You can’t go broke taking a profit." (The brokers invented that one, of course, which is one reason that new traders always hear of it!) This trading maxim appears to make wonderful sense, but only when viewed in the context of a recent trade with a specific outcome. When you have entered a trade at a good price, watched it go your way for a while, then watched it go against you and turn into a loss, the maxim sounds like a pronouncement of divine wisdom. What you are really saying, however, is that in the context of the last trade "I should have sold when I had a small profit."

Now let’s see what happens on the next trade. You enter a trade, and after just a few days of watching it go your way, you sell out, only to stare in amazement as it continues to go in the direction you had expected, racking up paper gains of several hundred percent. You ask a more experienced trader what your error was, and he advises you sagely while peering over his glasses, "Remember this forever: Cut losses short; let profits run." So you reach for your list of trading rules and write this maxim, which means only, of course "I should NOT have sold when I had a small profit."

So trading rules #2 and #14 are in direct conflict. Is this an isolated incident? What about rule #3, which reads, "Stay cool; never let emotions rule your trading," and #8, which reads, "If a trade is obviously going against you, get out of the way before it turns into a disaster." Stripped of their fancy attire, #3 says, "Don’t panic during trading" and #8 says, "Go ahead and panic!" Such formulations are, in the final analysis, utterly useless.

What I finally desired to create was a description not of each of the trees, but of the forest. After several years of trading, I came up with — guess what — another list! But this is not a list of "trading rules"; it’s a list of requirements for successful trading. Most worthwhile truths are simple, and this list contains only five items. …

Read the rest of Prechter’s report now, free!

Here’s what you’ll learn:

• Why a trading method is a "must" for your success
• What part discipline plays in your trading success
• Why "market manipulation" is not why most traders lose
• How to gain trading experience
• More

Keep reading this free report now.

This article was syndicated by Elliott Wave International and was originally published under the headline "Market Manipulation" Is Not Why Most Traders Lose. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

December 19, 2011

By Elliott Wave International

The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.

Here is Part 1 of the series. Check back in a few days to read Part 2, or you can download your free copy of the Independent Investor eBook here.

See if you can answer these four questions:

1. In 1950, a good computer cost $1 million. In 1990, it cost $5000. Today it costs $1000.
   
   Question: What will a good computer cost 50 years from today?
2. Democracy as a form of government has been spreading for centuries. In the 1940s, Japan changed from an empire to a democracy. In the 1980s, the Russian Soviet system collapsed, and now the country holds multi-party elections. In the 1990s, China adopted free-market reforms. In March of this year, Iraq, a former dictatorship, celebrated a new democratic constitution.
   
   Question: Fifty years from today, will a larger or smaller percentage of the world’s population live under democracy?
3. In the decade from 1983 to 1993, there were ten months of recession in the U.S.; in the subsequent decade from 1993 to 2003, there were 8 months of recession. In the first period, expansion was underway 92 percent of the time; in the second period, it was 93 percent.
   
   Question: What percentage of the time will expansion take place during the decade from 2003 to 2013?
4. In 1970, Reserve Funds kicked off the hugely successful money market fund industry. In 1973, the CBOE introduced options on stocks. In 1977, Michael Milken invented junk bond financing, which became a major category of investment. In 1982, stock index futures and options on futures began to trade. In 1983, options on stock indexes became available. Keogh plans, IRAs and 401k’s have brought tax breaks to the investing public. The mutual fund industry, a small segment of the financial world in the late 1970s, has attracted the public’s invested wealth to the point that there are more mutual funds than there are NYSE stocks. Futures contracts on individual stocks have just begun trading.
   
   Question: Over the next 50 years, will the number and sophistication of financial services increase or decrease?

Observe that I asked you a microeconomic question, a political question, a macroeconomic question and a financial question.

Trend Extrapolation

If you are like most people, you extrapolated your answers from the trends of previous data. You expect cheaper computers, more democracy, an economic expansion rate in the 90-95 percent range, and an increase in financial sophistication.

It appears sensible to answer such questions by extrapolation because people default to physics when predicting social trends. They think, "Momentum will remain constant unless acted on by an outside force." This mode of thought is deeply embedded in our minds because it has tremendous evolutionary advantages. When Og threw a rock at Ugg back in the cave days, Ugg ducked. He ducked because his mind had inherited and/or learned the consequences of the Law of Conservation of Momentum. The rock would not veer off course because there was nothing between the two men to act upon it, and rocks do not have minds of their own. Earlier animals that incorporated responses to the laws of physics lived; those that didn’t died, and their genes were weeded out of the gene pool. The Law of Conservation of Momentum makes possible our modern technological world. People rely on it every day. Despite its use in so many areas, however, it is inapplicable to predicting social change. For most people in most circumstances, the proper answer to each of the above questions is, "I don�t know." (Socionomics can give you an edge in social prediction, but that’s another story.)

The most certain aspect of social history is dramatic change. To get a feel for how useless — even counterproductive — extrapolation can be in social forecasting, consider these questions:

1. It is 1886. Project the American railroad industry.
2. It is 1970. Project the future of China.
3. It is 1963. Project the cost of medical care in the U.S.
4. It is 1969. Project the U.S. space program.
5. It is 100 A.D. Project the future of Roman civilization.

In 1886, you would have envisioned a future landscape combed with rail lines connecting every city, town and neighborhood. Small trains would roll around to your home to pick you up, and a network of rail lines would help deliver you to your destination efficiently and cheaply. Super-fast trains would make cross-country runs. You could eat, read or sleep along the way.

Is that what happened? Would anyone have predicted, indeed did anyone predict, that trains in 2004 would often be going slower than they did in 1886, that they would routinely jump the tracks, that they would be inefficient, that they would have little food and few sleeper cars, that the equipment would be old and worn out?

In 1970, the Communist party was entrenched in China. Over 35 million people had been slaughtered, culminating in the Cultural Revolution in which Chinese youths helped exterminate people just because they were smart, successful or capitalist. Would anyone have imagined that China, in just over a single generation, would be out-producing the United States, which was then the world’s premier industrial giant?

In 1963, medical care was cheap and accessible. Doctors made house calls for $20. Hospitals were so accommodating that new mothers typically stayed for a week or more before being sent home, and it was affordable. Would anyone have guessed that forty years later, pills would sell for $2 apiece, a surgical procedure and a week in the hospital could cost one-third of the average annual wage, and people would have to take out expensive insurance policies just in case they got sick?

In the space of just 30 years, rockets had gone from the experimental stage to such sophistication that one of them brought men to the moon and back. In 1969, many people projected the U.S. space program over the next 30 years to include colonies on the moon and trips to Mars. After all, it was only sensible, wasn’t it? By the laws of physics, it was. But in the 35 years since 1969, the space program has relentlessly regressed.

In 100 A.D., would you have predicted that the most powerful culture in the world would be reduced to rubble in a bit over three centuries? If Rome had had a stock market, it would have gone essentially to zero.

Futurists nearly always extrapolate past trends, and they are nearly always wrong. You cannot use extrapolation under the physics paradigm to predict social trends, including macroeconomic, political and financial trends. The most certain aspect of social history is dramatic change. More interesting, social change is a self-induced change. Rocks cannot change trajectory on their own, but societies can and do change direction, all the time.

Learn to Think Independently — Download Your Free Independent Investor eBook

"The Stock Market is Not Physics" is just one report in the more than 100 page, two-volume Independent Investor eBook. You’ll get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history; you’ll also get new analysis, forecasts and commentary to help you think independently in today’s tumultuous market.

Download Your Free eBook Now.

This article was syndicated by Elliott Wave International and was originally published under the headline The Stock Market Is Not Physics: Part I. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Often, basics is all you need to know.

December 15, 2011

By Elliott Wave International

Understand the basics of the subject matter, break it down to its smallest parts — and you’ve laid a good foundation for proper application of… well, anything, really. That’s what we had in mind when we put together our free 10-lesson online Basic Elliott Wave Tutorial, based largely on Robert Prechter’s classic "Elliott Wave Principle — Key to Market Behavior." Here’s an excerpt:

Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it. …the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. In markets, progress ultimately takes the form of five waves of a specific structure.

The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure.

These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one’s present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations.

As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern.

The following discussions relate to an underlying bull market… These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

1) First waves — …about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other half of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced.

Read the rest of this 10-lesson Basic Elliott Wave Tutorial online now, free!

Here’s what you’ll learn:

• What the basic Elliott wave progression looks like
• Difference between impulsive and corrective waves
• How to estimate the length of waves
• How Fibonacci numbers fit into wave analysis
• Practical application tips for the method
• And More

Keep reading this free tutorial today.

This article was syndicated by Elliott Wave International and was originally published under the headline Learn Elliott Wave Analysis — Free. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

December 14, 2011

By Elliott Wave International

Did European Union leaders make the sovereign debt crisis "go away" last week?

Not even close. What they did agree on is tougher budget rules:

"…17 countries of the euro zone…agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don’t enforce such discipline properly…"

Wall Street Journal, (12/9)

Will the EU agreement prove bullish or bearish for world stock markets, including the Dow Industrials?

Let’s put it this way: The evidence suggests that government intervention in the economy does not alter the dominant trend of financial markets.

For example: Look at the DJIA chart and try to identify when the U.S. government bailed out Fannie Mae, Freddie Mac, and other financial institutions.

"[The chart below] shows that in fact these actions took place in the early portion of the biggest stock market decline in 76 years. These actions did not push stock prices back up. The market finally bottomed months later, at a time when nothing along these lines happened.

"It is no good to claim that these actions had results eventually. By that reasoning, any future turn in the stock market would prove the contention."

Elliott Wave Theorist, March 2010

If anything, the face value of this chart argues that economic government intervention makes stocks go down. 
There is simply no "cause and effect" relationship between government actions and stock market trends.

The stock market’s price pattern is governed by the Wave Principle:

"Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life.

"….The market’s progression unfolds in waves. Waves are patterns of directional movement."

Elliott Wave Principle, (p. 21)

If you found this insight into stock market behavior eye-opening, read the2011 Independent Investor eBook, an educational, powerful and FREE 50-page eBook to help you think independently about what really moves the markets.

Thousands of investors have downloaded the Independent Investor eBook, and it has changed the way they think forever. Now YOU can get this important eBook, packed with insightful analysis from 2010 and 2011 Elliott Wave Theorist and Elliott Wave Financial Forecast, free.

Download your free eBook now.

This article was syndicated by Elliott Wave International and was originally published under the headline European Union Agreement: Good or Bad for the Dow Industrials?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Government spending makes the average citizen poorer. What? That’s some nonsense from a right wing, Republican think-tank funded by greedy Wall Street, right?

Nope. And this is what makes this information so relevant and so important today when Americans and Europeans will be making critical decisions about the role of government in their lives. The study is from the European Central Bank: ECONOMIC PERFORMANCE AND GOVERNMENT SIZE. Working Paper No. 1399, November, 2011. http://www.ecb.int/pub/pdf/scpwps/ecbwp1399.pdf

Here is the summary conclusion:

1.) There is a significant negative effect of the size of government on economic growth;

2.) Government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).

Note that the negative effect of government spending beyond that necessary for law & order, critical infrastructure (roads, bridges, etc.) is a universal economic axiom. You get the same result in a social democracy, a tin-pot South American dictatorship or a Middle East monarchy.

The reason is actually pretty simple to understand. It’s Austrian Economics 101. Every dollar spent by government, whether by tax or debt, is a dollar taken out of the general economy. The aggregate effect of millions of individuals making consequential, real-time decisions about the price and value of goods and services will always produce better economic results than a few individuals making decisions about how to benefit the few, or even the many. The appeal of the Austrian Economics school is that it does not mandate how governments or large organizations should run things like Keynesians do. It just lays out in plain sight that economic decisions have real consequences and what is going to happen when you choose plan A over plan B.

The same result applies whether the government spending is for health care, green energy, or some Utopian social scheme. This simple, proven economic truth will be hard for many people to accept because we all have been taught differently since the first grade.

The conclusions of this ECB Study, that government spending makes you poorer, should be the headline in the New York Times, The Wall Street Journal and every major, metropolitan newspaper. The TV networks should lead with this vital story. The President of the United States should capture the airwaves and share this information with all the citizens.

Of course, that is not going to happen. Not in this lifetime or any other. The politicians who spend the public’s money, and the select few who receive it, have a greater interest in perpetuating the myth that government spending is good for the economy. There are plenty of people willing to help with that. Read a few Paul Krugman columns in the NYT to see how that works.

If every citizen in the USA digested the ECB report, or at least were aware of its conclusions, would the country be teetering on the brink of financial disaster as it is now? Not likely.

In a democracy the people can implement all the government spending programs they want, even to the point of commiting societal suicide, but shouldn’t The People at the very least be aware that they are hurting their standard of living by voting for them? How does something like this happen in a world born in Reason, guided by the logic of the Best and the Brightest people who are smarter than God (so they tell us)?