07 April 2013

Future Markets in the Past

When one considers future markets, one is narrowly constrained in some sense, as the market is by its nature opaque to change as it happens. If the market has not evidently changed, what can we make of an approach and passing of the old highs of 2007. What can we consider as pointers to the durability of a rise.

One could say that precisely the valuation aggregation required to find these highs was approached and has been exceeded and note that some companies which were part of this in 2007 do not exist or have sharply reduced valuations. But can one say that the aggregation is more primary, than its parts (one way of saying the preceding sentence does not matter).

In those rushes to great highs, one can note that indeed the aggregation itself is primary, but one might note that in the long build up they may not be. For the market at some stage made a transition from bear to a bull market. That is, something happened that was not part of any kind of exuberance at all, in fact may be part of a great depression.

So what was value then. It seemed to me value lay in orderings, such and such companies fell this much, other this much, thus there was some kind of retention of real value, but in an aggregation still.

That is, even if what happened was a bounce, something real remained. One could characterize here a bounce as a series of valuations which are free floating, because they exist from reasons of market behavior. But one might say that if the crisis retracement was a revaluation, there may be real value to what happened next, including the actual bounce (clearly there was some kind of bounce at the end of the crisis fall).

It is those transition points which are of great interest. If one notes a trading market, one may see that great moves come from nowhere. One can say there is always something of a gamble in an entry. That is, even of one sees signs of some kind of a move, for it to go somewhere is something else.

However, one could note that one may indeed see signs of that move, but the question is in terms of time, whether it matters in those early moments of any such move. That is, is the move deterministically set at the beginning, or is it like a dice spinning until a certain point.

It may be like a dice spinning throughout the move, it is just that it continues to spin a certain way. However this is a useful view of bounces/not bounces, the spinning dice which enables a sharp reversal. One could note that at equity hours, that some forex pairs may have no spinning at all, it is simply that they are pulled along.

Why would this matter, because it becomes impossible to see those signs native to the pair. One might suggest that equities do not evidence those spinning dice, except that perhaps some companies may. It is this which one may mean by the idea of a new market, that initially is company driven, that is for a time there is an overriding of that aggregation value, but we assume it still survives.

One might note that the appearance of such spinning is a random event: that is it may or may not appear during that transition, when it is really needed (it is always needed though). This gives great possibility to companies at an early stage, in fact more, if one strips away the effect of accumulation of penumbras of valuation over time. This is a slightly stronger sense of the importance of start-ups to create value above and beyond.

But might something like this happen with aggregations of companies, the appearance of the spin, which may result in crashes, nothing or a bull market. That is again, the nature of phases of the market is set at this early random event. So what is it that Reagan did, did he unleash a bull market or help it emerge. By freeing it, in a very certain sense.

Is this what approaches of the past few years is doing to the market. One might say that that is the heart and soul of a free market, one which can unleash its *own* power, to bring great wealth, but unleash a potential for a random event to act, rather than burying it. Thus effectively removing some controls from the market may have had the effect indeed of shortening the interregnum since the great retracement valuation of 2008, by effectively reversing the effect of controls prior to this.

So in a trading market can one see effects consequent on releases on valuation as causal (that is things coming from nothing, coming from something). That is a reason for looking at effects after the closing of markets, which was an interest of mine during the crisis itself. But these seem dependent on larger grained effects, perhaps similar, effects to have any utility.

The effects of controls may be a structure breaking of some kind, suggesting another similar market driven route for such changes, with cascades of value releases. One may note that constrictions on market may produce such structure breaking. Thus constrictions -> structure breaking -> relaxation ->free markets -> until...

From this we can see some kind of determinism, but not quite the intended outcome, but an interesting one nonetheless. Thus we see free markets as necessary for the market to do what it does, find creative jumps to higher values, which as a secondary effect, brings assets higher (something from nothing, but more from the transition to freedom).

But with the caveat that reversals are always there, but maybe the reversals can be reduced by a different kind of approach to programming the markets, that is not programming them in a certain way (but maybe not).

However, given the success in programming since the crisis, there may indeed be a call for them, except they may not be programmable in a causal way, to do something (like how traders cannot force a free market up and up). But one can reduce it to this program/not program and get effects this way from the way the market deal with inputs, of a certain kind.

This raises the interesting question of whether the content of the program matters. Simply to input from a sufficient position of strength, one might assume may be sufficient. Simply to refrain may thus also be sufficient. However one may note that what one needs to refrain from, may be something that was strongly inputted over time (in terms of structure breaking).

The strength of this or the time may be related to the relaxation, which may or may not express itself as a sharp revaluation. That is structure breaking may precede relaxation, but with the caveat that it may occur in bursts which may not be random, but will appear random. The lack of randomness may be related to the way valuations clumped over time.

There may be long term survival, even if we view structure breaking as destructive to information. That may be expressed in the unlikely appearance of spinning dice, reflect perhaps in a sense certain companies, that wake up the now free market and make unlikely but enormous changes, that once in full flow, seem like they will never end, and could never start.

We might note that the transition to free markets may not happen, but that is the chance, which may or may not be dependent on the content of the input. So we may count our lucky stars that we have free functioning markets, and note what happens when they are not...malaise for so long.

But we want to consider that which did not happen as well, that is the sense of a core element of the market, that anything could have happened. We can see this as the spinning dice if we want. Or more properly perhaps, as the spin. It is anti-determinism, but the history of the Dow suggests that aggregations, at least do not follow this, except perhaps at a trading level.

But at our free-market market we are looking at less aggregation. But there is a determinism to companies, we can analyze them, and see that there is such and such a functionality that we can expect such and such changes in valuation in the future. But money flow itself may be important, and we are talking about markets bolstered at least by this. And that can go anywhere, but I would not see it as anything like that core element of the market.

That is there may be something more nonetheless, that sense of possibility is itself a reason for optimism, but what it does may be obscured to a lesser or greater extent. But whether seen or unseen, or obscured, even functionally obscured, it seems to do what it does.

One might ask if one can see a company as layered with the past expansion. That is, what might one make of a possible ordered transition from expansion -> retracement -> expansion such that: least affected, last up. That is instead of gainsaying a possible new expansion by noting that such and such a company is not rising yet, one might note that part of it exists in the past, but a good part and that may be part of the functionality of the future expansion, something that may not be affected by inputs.

But one could expect companies that emerge in the new expansion, or at its start to have a more conforming structure. The idea here is that it may be more optimal to have the new and the old as well, for a more durable expansion. It gives memory and possible extension over time. But we may note different behavior, if it is possible again, to see in that opaqueness.