Wednesday, January 10, 2007

The Cycle Of Volatility Will Return To Equities

First off this is an unusual post for me. You'll understand as you read further. Secondly, the spell checker is on the fritz and so is my brain so this hasn't been edited. One of my recent posts highlighted the volatility in Russian equities. I've also talked repeatedly about the lack of perceived risk and complacency in the system. This is a good time to introduce the next chart. But before I do so, let's talk a little about esoteric or unexplainable phenomenon.

Within a short period of time western culture and science has attempted to erase any form of mysticism or intuition humans have developed over the millennia. Not only do I find this unfortunate but I believe it has left us incomplete. Now, I'm not going to turn this into a philosophical diatribe but how can anyone believe man's knowledge somehow represents some form of truth? I can't recall where I was reading about man's limited intellect but the author posed a question. "Suppose there were a fourth primary color. Can you describe what it would it look like?" Or here's one I enjoy based on some of Einstein's work. What about the possibility of bending time? Can you imagine it? I mean truly imagine it. That the future is accessible as it the past or another plane of time. Or the possibility that time has no beginning and no end. Why would our cycle of birth and death and renewal be any different than what we see around us? What does that mean? Man's imagination is very limited and our cumulative knowledge is infinitesimally small. Yet our arrogance is infinitely large. Here's the true reality. Man has discovered nothing. Truth was here before us and will be here after us. Our theories and sciences are simply attempts at organizing what we can imagine, be it true or false, in a way that allows our very limited intellect to comprehend it and use it for our perceived benefit.

Now, don't get me wrong. You won't find a bigger proponent of science and research than me. My point is that it is tremendously arrogant for man to take our perceptions of what is true, ie science, as fact and discount anything which cannot be explained.

So, where am I going with this? I've posted some general commentary about cycles on here. Things you might be able to figure out on your own. But, the my cycles work, which I haven't posted, came to me in rather unusual circumstances: theories I had never thought of were presented to me in a dream. Now, as I type this, I have to laugh. Why? Because it sounds like I am crazy. Especially since I don't typically remember any dreams nor do I practice any type of mysticism. In other words, my hobbies are football, picking my nose and pizza like every other American guy. (not in that order) But, as much as I wrestled with issues time and again, explanations never came to me. One night I awoke from a dream and it was as clear as could be. I was actually drawing out the theory on a chalk board in my dream. I awoke, grabbed a piece of paper and started writing and drawing as the ideas filled in. In fifteen minutes the entire outline was complete. It was a very unusual experience.

One should never discount ideas or phenomenon they don't understand. One should never assume they have the answers to anything. This is why as we grow older, we lose our creativity of youth. Our learned experiences destroy our ability to think with a clean mind. Our creativity of a child's mind that knows no bounds is lost. It is also one of the significant causes of failed relationships should it be said. (The wrong blog for this one) Many of the world's oldest cultures have a saying that truth is never found in the obvious. How often have you found that to be the case? For me? Almost always. In a society where innovation and creativity play a significant role in economic success, you would be well served to forget nearly everything you know to be true. I might post more on this later in the year as it pertains to innovative cultures both from a business entity and a society.

This line of thought is very applicable to the graphic below. It is a fifteen or so year chart of the VIX. Does anyone believe equity returns can be predicted based on symmetry? That the future is of an investment cycle may have absolutely nothing to do with economics or the Federal Reserve? I'm not saying this is so but why not? Because you were told otherwise? Because you cannot measure it? Symmetry is found all around is in nature. We as humans are a work of symmetry. Left brain and right brain. Symmetrical physiology. On the chart there are four symmetrical major tops identified in the VIX separated by symmetrical lower lows. The 2006 peak in the VIX equidistant from a symmetrical peak in 1994. A recent outside day low in the VIX reaching the lowest level since an outside day low in 1993. The one in 1993 was preceded by higher volatility and therefore one might expect volatility will only increase from here should the past pattern be used to forecast the future. And, what is the axis of symmetry for this entire pattern? That's right. It's the 2000 bubble peak in equities, to the month. Is this explainable? Is it simply a coincidence? Maybe. Yet, I am confident we have seen the low in volatility and the future will be heightened volatility. If so, buckle up because the ride is about to get more intense.




You may click on the graphic for a larger view.
posted by TimingLogic at 3:26 PM