11th October 2004
Friday, July 30th, 2010
Predictable Chaos
It has been said that, for the individual, there are only two certainties in life. Death and Taxes.
"Satisfaction = Performance - Expectation"
Lord Saatchi, Conservative Party Conference, October 7, 2004
It has been said that, for the individual, there are only two certainties in life. Death and Taxes. But I subscribe to the view that there are a few more predictable patterns that must be taken into consideration by you and I, as we will all experience their effects in our lifetimes, provided that we live for a full four score years and ten. They are the five and the three as outlined by the Elliott Wave Theory and the science of Socionomics and given support by the mathematics of nature as discovered by Fibonacci.
Once you get familiar with the five and the three and Fibonacci numbers and ratios then the mysteries of Life, the Universe and Everything become less haphazard. It is then, and only then, that you can plan for the exigencies of life. It is then that the daily news noise becomes little more than the snap, crackle and pop of your daily cereals or the interference on radio channels as you travel through the length and breadth of Poland in your Ferrari (provided you can find suitable roads).
The five and three describe the progress and regress of cultures and civilizations on a scale of history, the mood swings of the herd on an intermediate time scale encompassing a few generations, and may even apply to the pattern of successes and disappointments in our individual lives.
The five is an impulse wave. It moves in the direction of the predominant trend. The three is a corrective wave. It moves against the predominant trend and redresses the imbalances created by the impulse wave.
Fractal knowledge
The pattern is a fractal, a simple pattern that repeats itself at varying levels of scale and amplitude. Its existence in the behavior of stock markets and individual shares was first outlined by Ralph Nelson Elliott in two books, twelve magazine articles and several dozen essays published from 1938 to 1946.
Half a century later, Benoit B Mandelbrot (the founder of fractal geometry who was born in Warsaw in 1926) claimed to have discovered the application of this phenomenon in the movement of markets in his article in the February 1999 issue of Scientific American entitled "A Fractal Walk Down Wall Street."
In that article he defined a fractal as "a geometric shape that can be separated into parts, each of which is a reduced-scale version of the whole," and clearly stated: "I claim that variations in financial prices can be accounted for by a model derived from my work in fractal geometry. Fractals-or their later elaboration, called multifractals-do not purport to predict the future with certainty. But they do create a more realistic picture of market risks." Needless to say, his claim to have discovered the fractal nature of financial markets caused a great deal of controversy, especially as he had disparaged Elliott in an earlier publication, but one cannot expect less from a person born in Poland, educated in France and who attained academic stature in the USA.
Once you are able to accept that fractals exist and that nature is full of them, as is the ebb and flow of man's activities and social organizations, then you come to realize that there are definite turning points in man's apparent infinite progress towards perfection and you are able to prepare for a future apart from the herd.
The fall of the bull
It is our contention that, from the historical perspective, we have experienced a bull market for over 200 years. This was the impulse wave from 2 to 3 which, because it was impulsive, moved in line with a 5 wave progression on a lower scale. This smaller wave was interrupted by two notable corrections. The retrenchment from 1 to 2 occurred in the 1850's with the collapse of the mania for railways and cotton and the Bank of America. The correction from 3 to 4 became known as The Great Depression after the mania of the Roaring '20s. Since then we have moved onward and upward in another impulse wave on even a lower level and, from the 1980's, have created a mania of historical proportions as the 5th waves on several levels joined together.
When the present Fed Chairman, Mr. Alan Greenspan, warned the markets of "irrational exuberance" on December 5, 1996, the NASDAQ stood at 1,300. It peaked 30 months later on March 10, 2000 at 5,048.62 after increasing by 394.76% and formed the end of wave 5, or 5 of 5.
Since then the market has corrected. It bottomed out at 1,114.11 on October 9, 2002 and, at the time of writing it stands at 1,971.03.
Yet all measures of the mood of the market point to the fact that the prevailing optimism is at levels never before recorded. In other words, the herd expects that the markets will race higher, that they will attain new highs, that they will discount debt, the pension crisis and demographic certainty, that they will ignore the lies and deceits fuelling geo-political uncertainty and shady accounting practices, pass off the Boeing and Airbus trade wars, ignore the destruction of civilization as defined by the achievements of our Victorian forefathers and herald in the New World in which facts are ignored but the implied motivation of future possible actions form the basis upon which man is judged and convicted.
But what would happen should the performance not match the expectations? Cycles repeat.
From Warsaw Business Journal by Zbigniew Piekarski
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