Most economists, traders, bankers and quite to a large extent regular investors believe in Elliott wave theories. Hedge funds name their companies after Elliott, investors pour in billions. Here’s an example: http://www.businessinsider.com/r-paul-singers-elliott-management-raises-5-billion-in-24-hours-letter-2017-5
But I couldn’t find a single article on what causes them to happen. Not specific literature on why super cycles and Grand super cycles happen – What is the fundamental Basis of the larger waves as they are much beyond the greed and fear as experienced by an average investor in a lifetime.
From my previous article http://malhotra.ca/index.php/2017/05/27/us-stock-market-2017/, you would have observed the basics of Elliott waves. But, here it is in a nutshell :
Hypothesised degrees, which are:
- Grand supercycle: multi-century
- Supercycle: multi-decade (about 40–70 years)
- Cycle: one year to several years (or even several decades under an Elliott Extension)
- Primary: a few months to a couple of years
- Intermediate: weeks to months
- Minor: weeks
- Minute: days
- Minuette: hours
- Subminuette: minutes
Reasons behind wave 1, 2,3,4 and 5 of a cycle and lower degrees:
The reason there can be (and usually is cited to be) a mix of greed and fear. Trading or any form of asset management is always risk vs reward. In emotional terms, it becomes Greed vs Fear https://en.wikipedia.org/wiki/Greed_and_fear. At wall street, they use the terms “bull” or “bear”, and being “bullish” or “bearish”.
Warren Buffett once said that as an investor it is wise to be “Fearful when others are greedy and greedy when others are fearful.”
Read more: Warren Buffett: Be Fearful When Others are Greedy | Investopedia
In very simple terms:
- When fear is overdone and asset prices are below fair value, then wave 1 happens wherein some very smart and very large investors start accumulating assets below fair value. These really large investors are usually known as whales. Time for whales moves at a slower pace. Their time horizons are usually in years. What they buy now will be sold in 5 to 25 years.
- The market still is not very positive, so as their buying ends, the market gets in wave 2 which takes the market down again.
- Then it slowly becomes clear that worst is over and prices stabilize (start of wave 3) and as economic conditions improve, prices now reflect the improving fundamentals and start rising strong and broad in wave 3 usually for long period of time.
- Till asset prices grow to the top of their fundamental value based on new economic conditions. At this point, most investors realize that the best is behind them and they stop buying more. This leads to wave 4 which usually oscillates within 10 or so percentage points of fundamental value of asset prices.
- Until some economic/political conditions change which makes people believe that the market could be heading for another period of quantum leaps. This is usually wave 5. At this point, the market is pricey for fundamentals but now comes in the speculation. People have already made a lot of money in wave 3. Now there is more reason to be even more bullish. It seems like things are going to get even better and much-much faster. For some large investors though, that’s too good to be true. They sit back, let the speculators take it up beyond what they consider fair value. At this point, they start selling which leads to an eventual downturn.
I believe that lower degrees happen dues to exactly these reasons but with fish smaller than whales and for reasons much shorter in duration. Such we get down to swing traders, day traders and high-frequency traders managing profits and losses at a smaller and yet smaller timeframe causing waves of smaller and smaller degrees.
But, what causes super-cycles and grand super-cycles?
This is the question that’s been pestering me for a while now. The timeframes for these waves are much longer than the lifespan of most investors. How and why do these waves originate?
For example, I believe that we ended a super-cycle peak in the year 2000 and then we went into an ABC correction and then further started a new super-cycle after touching the bottom in 2009. As all Elliott wave degrees work, this super-cycle should first correct to anywhere between .5 to .786 levels and then be off to the races in a broad and sweeping wave 3.
What causes this super-cycle then? and what causes grand super-cycles?
These I believe are caused by a change and progression in the economic engine that drives the society. A Soviet economist Nikolai Kondratiev termed them as Kondratiev waves and gave a plausible explanation. More details on Wikipedia https://en.wikipedia.org/wiki/Kondratiev_wave
I believe these are caused by how a society organizes itself. The last grand super-cycle is believed to have started just as representative democratic societies started evolving around the world. First starting in Greece and China, and then spreading throughout the world. Initially, this was limited to merit-based appointments to a Ruler’s court, but the movement had started. At this point, most of the world was still ruled by Authoritarian dictators (aka Kings) but the seeds of democracy were starting to sprout, people now had an ability to be heard. This was a great transition for Humanity as we moved from being hunters and gathers organized in kingdoms under the autocratic and arbitrary wishes of a warring faction to being City and Town dwellers, in more established “Countries”, with some notion of rule of law – of just punishment, of reciprocity, of an ability to trade without being butchered. This brought in stability and peace, (not-absolute peace as world wars later demonstrated), but more peace than there was before. This pushed us forward into culture, civilization, creativity, and growth.
I believe the second Grand Super Cycle maybe created when we re-organize ourselves as a society and that may happen in following ways (and many other ways that I can’t see):
- A crypto driven direct democracy. This may eliminate the extraordinary waste that any and all governments do and allow a more efficient mechanism for us to organize ourselves. This is the best option to move us forward. If this does not happen, then these 2 are likely and possibly parallel options:-
- From Kingdoms to Countries to Corporations – this being the next likely scenario. If humans are not able to fill the constant void in efficiency and economic dilution left in their wake by Governments, then slowly corporation will step in to mitigate inefficiencies in governance either through direct ownership of Countries or and more active participation in shadow governance like having private cities etc.
- From Kingdoms to Countries to Planets – this is another possible option where space technology becomes common-place. Corporations take to rule the skies, of creating their own kingdoms on Moon, on Mars, and space stations in deep space.