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RE: Re: Re:[RT] A note on Forecasting / Mandelbrot

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** Governments can stimulate growth in production by increasing money supply and directing it toward production.**

Sounds very central planning.  I’d agree but only to the extent that the stock of money is held constant.  If, overnight, the Mint doubled the amount of money but production did not double, it’s a ‘stock split.’ 

With the hyper inflation scenario out, governments can only stimulate monetary expansion IF AND ONLY IF someone is willing to borrow.  IF the world has reached that tipping point of consuming vs borrowing (as did Japan in the late ‘80s to this day and the US in the ‘30s) it’s the “liquidity trap.”  People will not borrow at any level of interest rate (said as a generalization) or credit availability.  Drop the real interest rate to zero (which equates to a negative economic interest rate) as did Japan and the consumer still wouldn’t borrow.  So, monetary policy is dead in the liquidity trap; governments cannot create credit money. 

How about fiscal stimulus like the Obama ‘New Deal’.  Those Bush stimulus checks did little.  And infrastructure building didn’t work in Japan.  Tons of bridges to nowhere.  And finally Obama’s New Deal isn’t even a true New Deal (from what I expect to be proposed).  Most of what he really wants to do IMO, is redistribute wealth or spend on wind power (ala Carter in the ‘70s).  Not married to that opinion but it’s my take at the moment.

Wow, grad school was so many years ago I don’t remember what I wrote!!!  But let’s just say it was painstakingly typed on a modern marvel; an electric typewriter.

Jim

 

From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Jim White
Sent: Thursday, December 11, 2008 1:06 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: Re: Re:[RT] A note on Forecasting / Mandelbrot

 

Money is a surrogate for the production of labor. In a barter economy, without money, goods are exchanged between parties at an agreed ratio. As economies progressed and grew more complex, money was created to replace barter and facilitate markets. The fact remains that money is only a surrogate for the production of man's labor. Money can only be created by an increase of production over consumption. Governments can stimulate growth in production by increasing money supply and directing it toward production.

We are now a global economy and perhaps we need to look at world wide measures of production and consumption. One can be encouraged by the millions of potential consumers in third world countries that could fuel a world wide boom.

Incidentally, years ago , while in grad school, I wrote a paper relating the increase in money supply compared to GNP growth to changes in interest rates and price of gold. The model worked quite well back then.

 

Jim

----- Original Message -----

From: Jim Ross

Sent: Thursday, December 11, 2008 5:28 AM

Subject: RE: Re: Re:[RT] A note on Forecasting / Mandelbrot

 

I thought his explanation of money creation was very consistent with Prechter’s (not that it makes either correct).  I expect you take exception to “Under a floating exchange rate, money is created by the private sector and no central bank can prevent it….money supply cannot be controlled by the central bank in any absolute sense…” (pg 4).  I think the last two year’s experience greatly supports this thought.  We HEAR daily, talking heads saying the Fed is PRINTING historic amounts of money.  That is entirely false.  The Mint’s printing presses are not printing bills.  The stock of currency is and has been relatively constant.  The Fed has provided tons of borrowing power to banks but that does not translate to actual currency stock.  If M3 were still computed, it would be through the floor I expect.  In their (Prechter and Armstrong) perception, it’s the economic monetary multiplier in reverse.  Regardless of the Fed’s “pumping”, there are fewer real dollars chasing more goods; deflation.  And the central banks can’t do anything about it via monetary policy.  It’s the classic ‘liquidity trap’ which occurred in Japan over the last 20 years and the subject of several Fed Res Staff Working Papers back in 2001-03 (suspiciously one in particular I read back then was removed from the Fed’s site and I had to find it in Univ or Illinois, Urbana online library archives).    When that great tipping point of human psychology is tipped, people simply stop borrowing and buying and start saving.  Two years ago, the mass psychology was ‘no money down, buy all you can get’, today it is keep your job and stash money in the mattress.  Liquidity trap.

I received a different impression of Armstrong’s cycle extremes.  I haven’t gone back to look, but I believe he described his theory as applying to the world economy rather than any particular index of economic activity.  At the greatest cycle levels (309.6 year, 224 year, 51.6 year, 37.33…..) there will be greater crescendos of indices; not just stock market indices but more largely many ‘indexes’ of economic activity that reach extreme levels.  At smaller cycle subdivisions (8.6 year, 8.6 month…) there will be fewer indices of activity supporting a cycle extreme at the same time.  I believe there was a chart of which indices reached tops on certain given dates which implies that ALL indices do not peak at the same date.   At the greatest levels of cycle, a greater consensus of indices should hit extremes at once like the rogue wave.

I did find Feb 27, 2007 as an interesting date to have claimed a top did occur and, likewise, I didn’t see the support for his claim.  Maybe somewhere we’ll find mortgage aps peaked or delinquencies ticked up.  It was an 8.6 year cycle top, a minor top as opposed to a grand cycle top, so I expect a clearly visible grand consensus of indices would have been expected to have occurred.  Maybe he is relying on his prior cited historic validations of the 8.6 and its relative proximity to the 10/11/07 high.  Just don’t know. 

Jim

From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Jim White
Sent: Wednesday, December 10, 2008 10:25 AM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: Re: Re:[RT] A note on Forecasting / Mandelbrot

I have finished reading the essay and find many concepts that agree with my methodology. However, I find his concept of money creation to be flawed.

Also on page 18 he says "the economic high came precisely to the day on February 27th, 2007." In the past he had correlated his turning dates with the stock market indices. However this statement is clearly referring to some other measure of the economy since the highs in the market indexes did not occur until 10/11/07.  I found no explanation in the document of what he was referring to. Do you know what his measure of economy is?

Jim

----- Original Message -----

From: Jim Ross

Sent: Wednesday, December 10, 2008 5:00 AM

Subject: RE: Re: Re:[RT] A note on Forecasting / Mandelbrot

http://www.contrahour.com/ItsJustTimeMartinArmstrong.pdf

“It’s Just Time” goes far beyond his 8.6 cycle.  It appears to be TYPED on the original typewriter used for his other texts implying he wanted to be possible to authenticate the text (I can’t do that).  But from my reading of this and previous texts, the thought processes, depth and style indicate it is bona fide.  The first chapters are the most important and the latter chapters devolve into his personal situation.  Most importantly, he is looking for a high the first week or two of March before a greater collapse into the ultimate bottom in the first half of 2011. 

Jim

From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Jim White
Sent: Tuesday, December 09, 2008 10:29 AM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: Re: Re:[RT] A note on Forecasting / Mandelbrot

Jim,

I am a big fan of Armstrong. Can you provide a reference to the essay you noted?

Jim

----- Original Message -----

From: Jim Ross

Sent: Tuesday, December 09, 2008 7:23 AM

Subject: RE: Re: Re:[RT] A note on Forecasting / Mandelbrot

I’m not a statistician, but what my little accounting mind derived from reading Mandelbrot was not so much that he envisioned a ‘solution’ as he saw chaos that could only be interpreted in fractal generation.  What was so interesting and has been profitable to me in degrees I never thought possible, was his assault on Black Sholes.  His proof via the frequency of ‘long tailed events’ in the market entirely laid waste to the idea that a normal distribution could be applied to the market.  And further, that distantly out of the money options were dangerously UNDERPRICED.  Well, those 9000 contracts $.14-.21 October 38 QQQQ puts that I purchased in exactly the first 90 minutes of trading on September 19, 2008 became $8+ intrinsic before they expired in October.  How many bags is that?  No, I didn’t hold out for $8 intrinsic, but it was a big number.  Mandelbrot, obviously, rules in my book.

Conversely, when VIX spikes, it’s not time to buy premium.  The majority still rely on Black Sholes.  Who needs “the solution” when you can see the fallacies on which others are writing options contracts?

Martin Armstrong has a very similar view of the non linearity of the market.  He sees multiple cycles converging to provide the ‘perfect storm’ or ‘deadly wave’ with chaos ordered by ‘self generating’ fractals or ‘schema’.  His latest essay (“It’s Just Time” 10/8/08), which I believe is authentic, is amazing.  I’m into my tenth reading, at least, of it (err, the early chapters).

Very, very interesting people.  Wish I had a tenth of their insights.

From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Bob Pardo at Mindspring
Sent: Tuesday, December 09, 2008 9:50 AM
To: realtraders@xxxxxxxxxxxxxxx
Subject: RE: Re: Re:[RT] A note on Forecasting / Mandelbrot

I don’t think “Mandelbrot conclusion has many conditions attached to it” is an accurate conclusion.

The fractal distribution has qualities that make it almost totally unlike the distributions used in classical statistics.

However, since it is rather obvious that billions of dollars have been earned using these “flawed statistics” and variants thereof (see D. E. Shaw and Renaissance Technologies) it is also obvious that the entire matter is amazingly complex.

Since all of these firms are secretive almost to a paranoid degree, a determination of the actual technologies they employ will require a major piece of detective work.

As Sergey indicates, the devil is in the details.

Regards,

Bob Pardo

From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Stan Rubenstein
Sent: Monday, December 08, 2008 9:33 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: Re: Re:[RT] A note on Forecasting

Is it possible that Mandelbrot conclusion has many conditions attached to it not spelled

out in your comment that has a bearing on it?

Also isn't it the "log normal" distribution that's applicable to financial stock returns

and not the normal dist? 

Curious

----- Original Message -----

From: SergeyTS

Sent: Monday, December 08, 2008 10:03 PM

Subject: Re: Re: Re:[RT] A note on Forecasting

Jim

These are too general statements about too general subject. The most important is in details. Here I agree with you.

And I use the models with a lot of added conditions. The complexity of some model is not a problem for the kind of research that I do.

As to Prediction Company and their technologies, I have some questions for you as a professional.

What exactly did you use from Chaos Theory:

1) Non parametric statistics? If so, how did you use it?

Information for those who are not familiar with it:

Mandelbrot found that the normal distribution is not working for financial data. It means that we cannot apply classical statistics for financial data.

For example, traditional calculation of profit of some trading system, or Black-Scholes option pricing model, are not applicable for the real stock market.  

2) R/S analysis? If so, how did you use it?

Information for those who are not familiar with it:

E.Peters uses R/S analysis a lot. And there are a lot of nuances there. I did article about this issue here:  http://www.timingsolution.com/TS/Articles/Chaos/chaos_ts.htm

Best regards,

Sergey.

  

----- Original Message -----

From: Jim White

Sent: Monday, December 08, 2008 8:15 PM

Subject: [Bulk] Re: Re:[RT] A note on Forecasting

Sergey,

All trading systems are based on some assumption about market behavior. In simple form a trading system says "If A occurs then B follows."An another example If an oscillator reverses in oversold territory, buy next bar at x price.We all know that such a system may have remarkable results over a given time period however in the long run it will fail because it does not accurately describe the way markets work. Markets can trend for long periods, yielding many false signals and failed trades. However, suppose we add another condition to the model that describes when the extended trend will end. Now we have a model that more accurately describes how markets work and should prove more reliable over longer periods. If we add enough conditions to accurately describe market behavior under a number of market scenarios, then we have a model that will have consistent returns over time and markets. And the statistics will be a realistic expectation of performance. This , of course, is the dream of all system builders.

You may make the case that markets are so dynamic that one can never detail conditions enough to create a model that will yield reliable performance over all time frames but I beg to differ. Both Mandelbrot and Peters agree that markets may be predictable in the short run. I, in fact use the work of both in my market model. And the Prediction Company certainly succeeded, did it not?

Jim

----- Original Message -----

From: SergeyTS

Sent: Monday, December 08, 2008 2:23 PM

Subject: Re:[RT] A note on Forecasting

Jim,

Static cycles are not my favorite or special.

The real question is a fundamental one: how to verify any trading strategy, based on anything.

10 years ago I have participated in a big research project. Its purpose was to test and verify different trading systems based on methods of technical analysis. Our group has found that the application of methods of classical statistics to the stock market analysis is an extremely dangerous thing.

Let me explain it better on this example.

Let say we have found a system that provides 70 winning signals from 100. The university's course of statistics says that this fact is not occasional with the probability of 99.5% (Chi Square=20x20/50=400/50=8 => P=99.5%) It means that we can assume that there is a high possibility that this system will work well in the future as it does in the present. And somebody may decide that the Holy Grail is found finally. But - it is not true. Statistics of the real stock market and the market's logic are different from this one. If the system works good enough for 100 current examples, it does not mean that it will work the same for other samples.

Jim, I want to emphasize that I do not name here the models that we used for the research. My group tried different things: TA indicators, risk/money management, arbitrage systems, then different math models (like Spectrum, autoregression), astro cycles as well. This problem still presents for all of them.

I believe that this problem is described well in these books:

1) "The (Mis)behavior of Markets"  of Benoit Mandelbrot; 

and 2) "Chaos and Order in the Capital Markets: A New View of Cycles, Prices, and Market Volatility" of Edgar E. Peters.

In financial analysis, we have to work with big data samples.

 Best regards,

Sergey

PS. Jim, it seems to me that you are mixing two different things: fixed (or static) cycles and dominant cycles. As an example, I would not believe if somebody states that the 20-days cycle is found that has worked for 20 years. From another side, if somebody states that withing the last 100 days the 20-days cycle has been found, it is quite possible.

Next 100 days there might be some other cycle (27-days, for example). It is closer to MESA and wavelet analysis, not to normal fixed cycles analysis.

----- Original Message -----

From: Jim White

Sent: Monday, December 08, 2008 4:27 PM

Subject: [Bulk] Re: [Bulk] [RT] A note on Forecasting

Sergey,

The inability of a methodology to return reliable and consistent performance is an indication that the underlying hypothesis is flawed. For example, methods based on static cycles or projections based on static cycles will have inconsistent performance over different stretches of time because static cycles are not fundamentally correct model of market activity.

There are characteristics of market movement and trader psychology that do not change over time and methods based on these will exhibit consistent performance. be it 100 or 700 samples.

Jim

----- Original Message -----

From: SergeyTS

Sent: Monday, December 08, 2008 11:52 AM

Subject: Re: [Bulk] [RT] A note on Forecasting

Hello, Jim

Actually, the question about financial statistics is a tricky one. The important things there are not only win/loss ratios, the intervals where these ratios are calculated should be considered as well. I have had many cases when a trading strategy worked very well for a half a year. And then it died forever.

As an example, see this intermediate backtesting result for huge intraday data:

cid:image001.gif@xxxxxxxxxxxxxxxxx

The system provided 65% good signals (469 win./ 247 los.) during some perios (several months).

After that 53% only, and then 59%.

100 trades is not enough to get the reliable statistics (we use at least 500 trades, in this example 700 trades).

One of this forum's participants is Robert Pardo, he can comment this better than me.

Best regards,

Sergey

----- Original Message -----

From: Jim White

Sent: Monday, December 08, 2008 12:31 PM

Subject: [Bulk] [RT] A note on Forecasting

My pivot trading methodology depends on anticipating and trading as close to the pivot points as possible. My argument is that trades near the pivot points are the lowest risk and highest reward points to trade. I operate my trading as a business - I buy inventory  and sell to capture a minimum profit margin. I have spent most of my trading career studying the characteristics of markets at turning points (pivots) and constructing trading tools to anticipate and trade near those points. These tools deliver consistent reliability of profitable trades between 70% and 80%.

I document my trading concepts by forward testing, not computer generated back testing. In other words I trade the tools in real time and record the results. For example, my latest application to the ESZ08 has generated about 78% profitable trades on a five minute chart over the past 6 weeks.

One of the issues I have with the people that post forecast on this list is that they do not provide reliability measures of their techniques. Failed forecasts are rarely addressed and specific application details are not provided. Consequently I usually delete them without consideration - after all - a stopped clock is right twice a day.

So I recommend that anyone who posts a forecast provide the statistics documenting the same performance of technique over at least 100 applications. For example my techniques are good within one bar of the forecast 70% to 80% of the time depending on market. With that information, readers can better judge the value of the post.

Jim White
Pivot Research & Trading Co.
PivotTrader.com


 

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