As diversified systematic trend followers, we like to observe. Simply lie and wait and watch with our traps open. Waiting for the cocky all knowing trader to confidently lurch into our domain of uncertainty. We observe all complex systems as we can find strong analogies to help our cause and ensure we are firmly footed in our strange and exotic realm.
You see, when it comes to complex systems, most avoid interrogating them, due to their infinite ways of shaking the belief systems of those seeking certainty….however there is so much that is similar between all complex systems that most fail to grasp. The feedback loops, the memory, the self regulation, the one to many relationships, non-linearity, power laws, emergent features, adaptability, dynamism, the relationships between things as opposed to the things themselves…..and I could go on and on and on.
So when you observe any complex system with a broad understanding of the principles at play that actually make them complex, you start appreciating the flow of it all and can see what is going to assist or suppress the coordinated and dynamic interplay of processes at work. You can see complex systems all about us. In the medical world, in the financial world, in the urban world, in the biological world etc etc etc. ad infinitum.
We certainly can tell when a complex system is ailing or sick and whose nature is changing towards one that is more hostile to those that participate in it, however the method of treatment is frequently found wanting as ‘cure all drugs’ that suppress a complex system tend to create more problems than they are worth. Those without a grasp on this complexity choose ‘good enough’ treatments or approximates rather than ‘magic bullet’ treatments in our attempts to suppress hostile symptoms as opposed to using accurate and effective pinpoint measures to eliminate the perceived cancer ailing the system. As a result, given the one to many relationships that exist in a complex system, we should not be surprised in the Machiavellian way that a complex system responds to this broad brush intervention.
Now for some of us that recognise the mules kick of an angry market, we would have preferred a more selective precise ‘Magic Bullet’ treatment of the sub-prime mortgage debacle that led to the GFC as opposed to a mass suppression of market volatility itself….but don’t blame us if market processes down the track get a bit more exotic than what have been used to since 2010.
Of course, as trend followers, we don’t take a ‘what is right or what is wrong stance’ and all we do is lick our lips with the prospects of a banquet arriving at their table from the ‘clever intervention’ of a controlling hand. We have been hungry lately since the GFC as Central Banks have been dousing the complex financial system with mass suppressants, with the less well versed in what we do stating boldly….”that our predictions lately have not been much good or haven’t adapted fast enough”….I think they have missed the point however. They simply fail to grasp that we haven’t been predicting at all. All we have been doing is just following the state of things. We have not needed to adapt our systems as the system has been stable and very predictable since the GFC and we avoid the predictable market at all costs. Those of us who have been caught in the noise of this predictability have not been doing their job as well as others in this game of risk management and capital preservation.
It is not surprising that the ineffective or mass suppression of the financial markets via injection of mass volumes of fiat money into the system by buying the dips and selling the tips to suppress volatility has created a very predictable managed environment…..But it appears that the time of certainty may be drawing close to it’s end. Let’s see how the markets respond now that the suppressants are lifting.
“Wakey wakey Mr Market”…..it’s time to return from your slumber. Us trend followers are hungry and need to be fed. The intrinsic risk that we know lies lurking now is harder to trace to it’s origin but we have confidence that it lies lurking somewhere….perhaps throughout all asset classes that since 2010 have become more correlated.
Enjoy an excellent thought provoking podcast from Jacob Stegenga who with a critical and sceptical mind challenges the modern methods deployed to treat complex systems. In this instance, the science of diagnosis, treatment and prevention of disease in the human system. See if you can connect the dots to these financial markets.
Trade well and prosper