|
|
Musings Report #35 8-30-14 Is the Market/Economy a System or Not?
You are receiving this email because you are one of the 500+ subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Is the Market/Economy a System or Not?
Are the stock market and our economy systems, or are they tightly controlled monocultures? This may sound obscure, irrelevant or boring, but bear with me.
The question arises because many smart observers are persuaded that the stock market and the economy are tightly controlled by the central banks, such that the market and the economy are puppets on strings held by the central banks and their government partners.
In this view, the stock market will not be allowed to fall by more than a few percentage points, because a deep decline would wreak too much damage on pension funds and the wealth of Power Elites. These same Elites will print and funnel enough money into the economy to keep it stumbling forward at low rates of growth, maintaining the status quo with however much freshly created money is needed.
We can summarize this view as: the market and the economy are not systems, they are carefully controlled monocultures. There are no inputs that can't be blunted or controlled, and the status quo is completely controllable.
An alternative view is: regardless of how much money central banks print and distribute and how much they intervene in the market and the economy, these remain complex systems that are ontologically prone to the semi-random instability that characterizes all complex systems.
This is a key distinction, because it relates not to the power of central banks but to the intrinsic nature of systems.
One of the primary motivators of my work is the idea that systems analysis can tell us a great deal about the systemic dysfunctions in our market and economy. It also enables us to discern certain pathways of instability that repeat over and over in all complex systems--for example, the S-Curve of rapid growth, maturation and diminishing returns/decline and the 80/20 (64/4) Pareto Distribution.
Another feature of complex systems is that they are not entirely predictable. An agricultural monoculture is a good example: we can control all the visible inputs--fertilizer, seeds, water, pesticides, etc.--and conclude that we can control the output, but evolution throws a monkey wrench into our carefully controlled system at semi-random times: an insect pest develops immunity to pesticides, an earthquake disrupts the irrigation system, etc.
The irony of assuming controlling all the visible inputs gives us ultimate control over all outputs is the more we centralize control of each input, the more vulnerability we introduce to the system.
Those arguing that central banks can control the system have the past six years as evidence. Those of us who see this heavy-handed control as increasing the risk of unpredictable instability have no model that can pinpoint the dissolution of central bank controlled stability. We seem to be waiting for something that will never happen.
Despite its inability to predict a date for the collapse of stability, I still see systems analysis as providing the most accurate and comprehensive model of how complex systems function in the real world. If the economy and the market are indeed systems, then we can predict that any level of control will fail no matter how extreme, and it will fail in an unpredictable fashion that is unrelated to the strength or power of the control mechanism.
What I Learned/Gained from Readers
Longtime blogger/correspondent Nina gave me one of her original artworks--lucky me!
Summary of the Blog This Past Week
Is There Capitalism After Cronyism? 8/30/14
Can a National Quasi-Religion (Pro Sports) Go Broke? 8/29/14
The Housing Echo-Bubble Is Popping 8/28/14
Why Artifice Rules the World: We Have No Choice 8/27/14
It's Not Just Politics That's Broken--The Status Quo's Model of "How the World Works" Is Broken 8/26/14
The New Misery Index 8/25/14
Best Thing That Happened To Me This Week
My book review "Is There Capitalism After Cronyism?" was finally published in "The American Conservative" magazine. (Sorry, it's behind the paywall.) Please don't judge TAC by its title; it is an independent journal that publishes a wide range of commentary: for example, it published an article by Ralph Nader last issue. I am pleased to be published in any national journal of analysis/commentary that is not corporate/ideologically bound.
Market Musings: New Highs, new Risks?
There are multiple reasons to be skeptical of the consensus that the stock market's continued advance is bulletproof.
Now that we got the new high in the S&P 500 (SPX) out of the way, let's look at four charts: corporate and Treasury bonds (HYG and TLT), the chart of the SPX in 2011 I posted 3 weeks ago, the put-call ratio (CPC) and the McClellan Oscillator (NYMO).
The chart of HYG and the SPX is tracing out a pattern that presaged a major decline in stocks. Different this time? If so, why?
The chart of the SPX in 2011 I posted 3 weeks ago is still an interesting potential analogy: the market rallied for 3 weeks rather than the 2 I'd suggested, but the result is remarkably similar to 2011 just before a waterfall decline.
The put-call ratio is flashing a peculiar warning: normally the demand for puts spikes in a panic decline, as participants rush to protect their portfolios with hedges against a further drop. Yet here is the put-call ratio at an extreme high of the sort that usualy indicates a panic bottom. Why are participants loading up on hedges against a decline? This is highly unusual in a market of complacent faith in continued advances.
The McClellan Oscillator (NYMO) has spiked, and this is a generally reliable sign of a market top.
If I were betting on further upside here (and I'm not), the put-call ratio would give me pause: why are so many people hedging a decline at the top of the market? The only explanation is that they're afraid of a drop, or insiders are engineering a drop and they've positioned themselves to profit from the decline. Neither is reassuring to Bulls.
Yet the consensus remains very complacent and confident in market upside and stability. This raises the question, what is the least expected move? Is it up, sideways or down? I would say a down move that exceeded 3% would be the least expected action. In the contrarian view, that increases the odds of such a decline, as the market endeavors to take the fewest possible participants along for the ride.
Could the market rise, taking the majority with it? The market is rarely so obliging.
From Left Field
Twitter Hate Speech Map Pinpoints Racist, Homophobic Hotspots Across U.S. -- not sure if this means anything, but striking nonetheless....
Three-quarters of whites don’t have any non-white friends (and 2/3 of African-Americans share similar limitations...) -- mixed-race marriages introduce ethnic variety into circles of friends, and mixed-race marriages are the norm in Hawaii and many parts of California....
In Delhi, 'Monkey Wallahs' Ape Scary Simians to Spook Pesky Primates -- not your average cubicle job, to be sure....
The Energetic Basis of Wealth -- an interesting (and brief) analysis of plant-based energy
Mystery of Death Valley's Sliding Rocks Solved -- surprising answer
How Social Media Silences Debate -- de-friend anyone who doesn't share your opinions?
College Football Is Ruining Education -- not news, but it's good to check in to see how boiled this particular frog is...
Patriotic Heresy vs. the New Cold War -- Power Elites don't bother with what the masses think....
Chinese Gadgets Signal New Era of Innovation -- or not.... any good idea is quickly pirated, destroying the incentive to innovate and improve the product by iteration....
Don't Send Your Kid to the Ivy League -- the factory produces a particular kind of obnoxious, self-preening incompetence...
40% of U.S. on Welfare; Obamacare Expands Welfare by 23 Million; More on Welfare Than Full-Time-Employed -- how do we say "unsustainable"?
Measuring Real Wages: "Lies, Damn Lies, and Statistics"
When creative destruction becomes creative devastation:
The idea is that society’s standard of living is improving more than we appreciate due to an abundance of tech-advanced services and products, which can’t be monetized easily and therefore can’t be captured in national measures.
Working Undercover in a Slaughterhouse: an interview with Timothy Pachirat
"The lesson here, of course, is not that slaughterhouses and genocides are morally or functionally equivalent, but rather that large-scale, routinized, and systematic violence is entirely consistent with the kinds of bureaucratic structures and mechanisms we typically associate with modern civilization. The French sociologist Norbert Elias argues—convincingly, in my view—that it is the “concealment” and “displacement” of violence, rather than its elimination or reduction, that is the hallmark of civilization. In my view, the contemporary industrialized slaughterhouse provides an exemplary case that highlights some of the most salient features of this phenomenon.
I am now more inclined to think that it is the preoccupation with moral responsibility itself that serves as a deflection."
"If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes." John Wooden
Thanks for reading--
charles |
|
|
|
|
|
