All right so I've had a re-think. Instead of leading out and trying to prove that the market is chaotic (which I've said is a- not a new concept and b- probably where we might get bogged down) I've decided to shift the order around. I am simply going to post some references for you to read or not read - your choice and then I want to demonstrate the principles of how we can take advantage of the Macro expression of chaotic principles on the economic cycle, and
then discuss the implications and the things that are important to assist understanding.
Below are some links (not an exhaustive list) of useful infomration. - This is academia guys and girls - some of this stuff is major headache inducing.
1) Probabilistic causation
http://en.wikipedia.org/wiki/Probabilistic_causation - I know it's just wiki - but this will give you a starting point. It's only us nerds that go read the cited reference materials.
2) Analysing Chaos Models -
http://www.newton.ac.uk/programmes/HOP/seminars/070310001.pdf - This one is bitchingly math heavy.
3)
http://necsi.edu/projects/baranger/cce.pdf
4)
http://iic.wiki.fgv.br/file/view/CH...+APPLICATION,+AND+MANAGERIALIMPLICATIONS.pdf
5)
http://sprott.physics.wisc.edu/chaostsa/
6)
http://gwydir.demon.co.uk/jo/numbers/interest/golden.htm - Irrational number sequences
Below I've reposted some info from my newbie thread - I'm going to expand on it a bit - but not today.
Economic Cycles and how to spot them
Our market is cyclical. CYCLICAL. As is
every market. Do not delude yourself that somehow
this current market is different. Do not listen to the crowing of a broker who spouts rubbish about supercycles and how the emergence of China will create a cycle that will last for twenty years. (I heard this at the tail end of the last cycle) Do not listen to those that say
"We are different". We are the same as everyone else because the things that drive us
are the same. Therefore the market goes through periods of boom and bust. NEVER THINK OTHERWISE.
Historically our market is rising roughly 80% of the time and during this time we are all gods. It's
easy to make money when the market is rising. It is however the 20% of time that tends to kill people. This is where the cowboys and those that have let the excitement and emotion of the bull run lead them into disaster as we approach the
inevitable correction. Every cycle there will be someone who thinks that the conditions that we see now are going to stay around, (or that the correction won't be bad). This is where the Storm financials, the Opus Primes, the Tricoms, lose money and destroy wealth for their clients. They do NOT understand the principle of the economic cycle and how to use this to their
advantage.
So the biggest question is How do you tell when everything is
about to go pear shaped? What are the signals? What do I look for to know when it's time to liquidate or protect my share market assets?
Economic Clock
View attachment 42839View attachment 42840
If you do a search for Economic Clock you'll get images like those I have attached above (hopefully). The Economic clock dates back to the 1930's where it was proposed as a forecasting methodology by English Economists and released in the London Evening Standard as a series of articles. The basic theory is that certain events which are:
a) Easily recognizable; and
b) highly correlated;
will allow you to ascertain at which point of the broader economic cycle we currently sit. Theoretically if you know where we are in the cycle, you know which asset class in a broad sense is the correct one to invest in for an optimal investment. Each event is related to the previous event. Each previous event
causes the following event to occur. It's Cause and Effect, but in a cycle of events that roll around and around in a never ending cycle.
You'll note some differences in the two diagrams I attached, even though the basic principals of one event following another event in a series remains intact. This is where the theory gets subjective and it's subjective because we are dealing with a mechanism that is attempting to take a complex aggregation of factors and deliver them to you in a simple easy to understand diagram. The clock does not tell good time. The clock is an imperfect and generic indicator - but is still a valuable tool, particularly for analysing the market over the longer term.
The clock is a simple representation of a complex aggregation and there are differences between the interpretation of the theory because each cycle is an aggregate of several different cycles, with each of these individual cycles having their own characteristics in terms of length, midpoint and amplitude (depth or height). Have a look at the wave below to see what I mean.
View attachment 42842
Imagine that the wave represents that of the interest rate cycle. This wave will be highly correlated
yet different to the wave representing the currency cycle. It's only when these two waves move in combination with each other that the effects will be felt. In terms of the broader economy there are
14 different cycles that are correlated to a greater or lesser extent. It's only when
all these cycles move in a negative aggregate direction that our economy as a whole moves into a corrective pattern. Where academics and economists differ is where this cycle of events starts and finishes. Where exactly on the circle do you point to an arbitrary position and say "this is the start of the cycle". It's a cycle...it never ends..hence the differences in the two diagrams and the differences between academics.
I like to conceptualise the 12 o'clock position as being the peak of the share market cycle, and the six o'clock position as the start of the new cycle. From 12 to 6 the market is falling, and other asset classes are more appropriate to invest in.
Note that because it is an aggregate of a bunch of individual cycles, each time the cycle rolls around, it looks different. Some cycles are 5 years in length, some cycles have been 14 years in length with the long-term average of the cycle 7.8 years.
The important thing to remember is that the
sequence of events around the outside of the clock is always consistent. Yes they look different each time but the major events (or the signposts if you will) stay the same every cycle. The sequence is consistent.
Now I'm going to add a layer to make the concept a little bit more complex for you. Global economies are correlated. They synchronise their clock's, but they aren't perfectly synchronised. Larger economies tend to lead and smaller economies tend to lag. Australia makes up 1.6% of world economic activity. So we are a very small player. This is GOOD FOR US. Other economies lead the way into and out of booms and busts, meaning that we have a higher level of predictability in our market that the larger economies do NOT. We get an indication of what is to come for us, by looking at larger economies. This is the reason why I frequently rant at Australian Managed Funds because of their behaviour during the GFC. They could
see what was about to happen in our economy and they did nothing to protect the assets in their control.
So the clock is a general tool and it is the events on the outside of the clock that determine where you are in terms of the clock. I'm going to focus on the events at the start (bottom) and end (peak) of the share market cycle, rather than go through a full cycle, because I think that will be the limit of the time I can give and then open it up to questions.