Zbigniew Piekarski Foreseeing the future

"Economics is extremely useful as a form of employment for economists." - John Kenneth Galbraith Life is rarely predictable. Because of all of its ambiguities and enigmas we have always sought reassurance and guidance, and have flocked to those who purport to predict the outcome of our daily efforts. Before the age of the great religions, oracles, soothsayers and fortune tellers provided this guidance. In the Greco-Roman era, the more common types of divination included the casting of lots, the flight pattern and behaviour of birds and the examination of the entrails of sacrificial animals. Human nature has not changed since the days of the Greeks and Romans. We still face uncertainties on a day-to-day basis and seek reassurance from the modern world's version of oracles, soothsayers and fortune tellers - journalists, analysts and economists. If the measure of any science is its ability to predict the future, then the accepted wisdom of orthodox economics and its disciples is woefully lacking in credibility. It's not that these failed mathematicians lack intelligence. Far from it. They must be intelligent as most have managed to attain security of employment and positions of authority. And even though some of the most fundamental premises upon which this pseudo-science is based are fundamentally flawed, the concepts are of sufficient simplicity that even failed sports journalists (who become financial journalists) can understand and repeat them ad nauseam. Let us start with the view of the nature of man, the punter. The punter's decisions in the realm of economics are supposed to be rational and are supposed to occur once all the information about the product has been solicited and understood. He, she or it then decides to purchase the said article in full knowledge of the facts and will be prepared to pay a 'fair' price, this price being determined by a balance between supply and demand. If reason prevails, then why is it that in the craft of shop-fitting and shop design great care and attention is given to a section designated for the 'impulse buy.' If reason prevails, then why is the art of salesmanship based on 'selling the sizzle and not the steak.' If reason prevails, then why are asset 'bubbles' formed and why, in the latest bear market rally, have companies and countries that are the least profitable and the most likely to default on their debt obligations experienced the greatest price escalation of their assets? The rational answer to the latter is that they have the greatest 'future potential,' and that is why many pension funds are increasing their asset allocation, investing into 'emerging markets' such as Poland. However, I seriously doubt that they do so after a thorough and detailed investigation of the local conditions and the companies best suited to benefit from positive changes to the local economy. They do so because other fund managers are doing so, and as we all know 'a group of lemmings may have a rotten image, but no individual lemming has ever received a bad press.' Another questionable premise is that of the relationship between supply, demand and price. The explanation is as follows. As demand for a said article increases, so more producers appear, producing the said article, and the price falls until a balance between demand and supply is established and everyone is happy. What the above does not explain is the common and repeated pattern in financial markets where the participation of investors increases as prices rise and is at its maximum at market peaks and at its minimum at market troughs. In addition, the supply of investment products also increases as prices rise. Thus you have maximum production and maximum demand at maximum price, and minimum production and minimum demand at minimum price. Both of the above can only be explained if one accepts that man, the punter, is motivated by emotion and not reason and feels far happier acting in concert with others. In other words by 'following the herd.' If we accept the premise that emotions are the motive force governing our actions and that crowd behaviour rules, then we are left with the question as to what can alter that behaviour. The conventional explanation is that external events affect financial markets, just like one billiard ball hitting another, to produce a given result. This common belief is sometimes called linear thinking, a mechanistic approach to forecasting social trends and events, and it is deeply entrenched within society. The mechanistic approach extrapolates the past into the future, which is seen as 'being more of the same, only slightly different' and has resulted in repeated and colossal blunders, as it has not allowed for the probability of change in crowd behaviour resulting from predictable alterations in 'social mood.' In other words, the decline in financial markets is now once again explained as being due to 'geopolitical uncertainty' and not to changes in the social mood of the herd, which in turn influences cognition and the resulting action. If you are interested in what we are about to experience and our probable future, you should read the two-volumes of Socionomics - The Science of History and Social Prediction by R.R. Prechter, the founder and president of Elliott Wave International. You can access them at www.gpmanagement.com in the News section. Then you will understand that social mood is a natural product of human interaction and is patterned according to the Wave Principle. It revalues the financial markets, continuously and emotionally, and waxes and wanes in predictable outcomes. The significance of the statement by Britain's Chancellor Gordon Brown in the House of Commons on Wednesday, March 17 will become clear. It was: "I can now report that Britain is enjoying its longest period of sustained economic growth for more than 200 years - the longest period of sustained growth since the beginning of the industrial revolution." The two hundred years of growth were preceded by eighty years of depression, which resulted from a massive experiment in fiat currencies and produced the South Sea and Mississippi stock market bubbles. Cycles repeat.