The Sage of Toronto

Dr. Bill Hyde writes:

There's a whole discipline (though scare quotes should be used there) on predicting the coming shape of the market indexes or of a single stock. It is called "technical analysis" and as you can imagine I'm not a big fan of it. Academic studies have shown it to have predictive skill not different from random chance (cf Burton Malkiel's "A random walk down wall street" which gives the results of such studies, among much else - highly recommended reading).

Though the TA types are not doing what you are doing, it might be useful to be familiar with their various techniques (they tend, among other things, to focus on moving averages. When the 50 day moving average crosses the 200 day good or bad things are supposed to happen, depending on the direction. Also, I think, Macbeth gets dethroned).

Brokers mostly don't believe in TA either, but it generates many buy and sell signals, so they're happy when a client believes, and most full service brokerages keep technical types on staff.

Another good book is "Bull" by Maggie Mahar. It's a fun read, and it talks a bit about "Dow theory", which is distillation of what market crashes look like. It seems a bit mystical - the claim is that a bear market will need three down "legs" before it is over. How a leg is defined I don't know. But mainly the book talks about the follies of the 90s, with more than a hint of the follies to come. There's an afterword written about 2004 to which I should have paid more
attention. Much more.

Dr. Thomas Crowley Responds:

Bill, thank you. as usual, your comes are insiteful and succinct. normally I would never engage in this activity on a continuing basis, but our ideas of abrupt transitions made us wonder whether there is any skill at all when it comes to the most extreme events, esp. since we noticed this striking similarity between the present situation and 1929. as you well know, this could be entirely coincidental, although at least we can say we made a semi-quantitative prediction in mid-November that has so far been born out - perhaps the recent actions of the Obama Administration will herald a comeback - I suspect not, not based on technical knowledge but on the suspicion that a depression is an indication of something fundamentally wrong in the wiring diagram of an economy and the only way to fix it is to break it apart and start anew - thus my analogy to the biological concept of punctuated equilibrium, which has some striking parallels in human societal history (eg, revolutions). this could all be blog blather - pet thoughts that have no more merit than that - something nice to stroke. nevertheless, using the climatologist "experimental forecast" terminology, I think one cannot fix something that may be fundamentally broken - although I guess here the real question is whether this is fundamental or truly correctable within the present set of boundary conditions?

Dr. Bill Hyde Responds:

I have a guess, not even at the hypothesis level, based on reading Galbraith's book on economic bubbles (also recommended, and it's very short).

What happens, it seems to me, after a bubble has burst, is that the money is in the wrong hands. In the hands of successful speculators, not investors. And therefore it is not put to productive use.

As an example, after the tulip bulb craze a speculator might find that he now owned, say, a brewery. He has no idea how to run a brewery, and really no desire to learn. His employees will keep it ticking over, but without the kind of attention the former owner gave it, productivity and quality will slide. Any profits from the brewery he will use to finance further speculation, not to improve the business.

It takes years for productive assets to be transferred back to people with the skill and desire to run them. Thus the long depressions that followed the tulip bubble, the south sea bubble, and so on.

How much this matters in big corporations is another question, as they are not run by their owners. Probably less or not at all. But there's a lot of small to medium sized business out there.

Of course this isn't the only structural problem. But I think it matters. The socialist historian AJP Taylor commented on the need for trust in capitalism. The system only works because, within limits, capitalists can trust one another. That trust is broken or at least severely damaged now. Until it is restored, business will be hard to do.


Forecast update to follow...