FYI | Apr 26 2006
The story about Tim Price and me hasn’t ended just yet (see last week).
One of the most beautiful stories ever written in Australian finance journalism (in my humble opinion) carries the title "Human Behaviour, The Greatest Barrier To Trading Success".
The scientific study that was used as the main source of inspiration for this story came from a reference in one of Tim’s emails.
I constantly collect references and reports and if I don’t lose them, one way or another, they serve as background at some stage for a story, a column, my editorial, or sometimes simply as the source for a single quote that can make all the difference.
Most of the time I have to rely on my memory though, as I don’t have a very sophisticated way for archiving my reports and other documents and once you get into the territory of "many" it is easy to get lost, or to lose too much time in finding something you know must be there, but it cannot be found when desperately needed.
The human behaviour story, by the way, hugely popular all over the internet and amongst the readers of our previous project, was written by Greg Peel.
Greg and I share one common regret –and we really only have a few- and that is that we used to publish our stories without a byline. As a result of this there are at least a dozen of absolute beauties of stories, swirling around the internet, anonymous, carrying only a reference to our previous project.
Ah well, you all will have noticed we’ve started to use bylines at FN Arena News this week. Now you all know that Chris is based in Tokyo, Japan and that has allowed him to be present at one of many investment conferences in Tokyo this week.
As a result of this, FN Arena News is quickly catching up with the archive we left behind at the end of March, publishing our first stories featuring Marc Faber and Jim Rogers on Tuesday and Wednesday. For those who have been reading our work over the past two years, these experts do not need further introduction.
There’s another reason why I started this week’s editorial with a reference to Tim Price again. In his farewell email earlier this month, Tim cited another scientific study which, because of its nature and its simplicity, and the strength of its message, probably already left an everlasting imprint in my memory.
Think market correction. I won’t go deeper into the matter just yet. If the universe remains on my side over the coming days I will definitely dig deeper in the matter and write it all down in another FN Arena News story. But for now I would like to explain to all of you why it is so difficult –for anyone- to predict when and how a market correction starts and unfolds.
What do forest fires, earthquakes, sand piles and the stock market have in common? Tim Price asked last week. He referred to Mark Buchanan’s ‘Ubiquity’ (Weidenfeld & Nicolson, 2000) wherein Buchanan states they are all connected by what physicists call ‘power laws’.
To illustrate how these ‘power laws’ operate, let’s have a look at an experiment by physicists Per Bak, Chao Tang and Kurt Weisenfeld in 1987 simulating the dropping of sand grains, one by one, onto a table top:
"As the pile grows, its sides become steeper, and it becomes more likely that the next falling grain will trigger an avalanche.. (but) what is the typical size of an avalanche ? ..there was no result, for there simply was no ‘typical’ avalanche. Some involved a single grain; others ten, a hundred, or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain tumbling down. At any time, literally anything, it seemed, might be just about to happen.."
And that, my fellow readers, is the essence of what we are experiencing in the markets today. The current commodity bull market, I read somewhere this week, is already the biggest in 45 years. Are there dangers around the corner? Yes there are. A wall of worries to climb? Probably a few..
But everybody who has dared to put his head on the block over the past four years, predicting it would all soon come to an end, is now walking around with his head under one of his armpits. And there are quite some roaring names I am thinking of: Old Joe Granville, Robert Prechter and earlier this year Aspect Huntley and Credit Suisse issued similar warnings.
Don’t forget that global equities are currently in a sweet spot with US interest rates about to go on hold, global inflation still largely contained and economic growth surprising on the upside still. Pull backs are part of life, especially in times of a sheer relentless bull market.
I currently tend to agree with the optimists that a correction (not to be confused with short term pull backs) still seems as far away as ever.
But then again, a good old crisis because of Iran’s nuclear ambitions might be all that is needed to push some air out of the markets. How much air? Well, we’re back to the sand grain experiments, aren’t we?
Till next week!
Your realistic-optimistic editor,
Rudi Filapek-Vandyck
(Supported by the Magnificent Three)