New column: Riding the waves

This is an old joke, but it’s still a fable for our times:

http://www.salon.com/comics/boll/2009/11/19/boll/index.html

Axel Leijonhufvud has a very interesting article on “The Stabilities and Instabilities in the Macroeconomy.” http://www.voxeu.org/index.php?q=node/4244
Leijonhufvud reminds us that Hyman Minsky showed that an extended period over which a crisis does not occur encourages increased risk taking and makes the economic system unstable. Such endogenous trends in the underlying economy, rather than the admittedly fascinating Fibonacci sequences, are probably at the bottom of market waves.

Wow the Elliott wave theory. Is it true? Of course its not; it does catch statistical anomalies in the market, but the market does have pockets of asymmetric information and that can and does lead to said anomalies (like the time when Barclays took over price fixing from NM Rothschild & Sons and then went into backwardization). The analogies are there and the fact the EWT does catch them is just an anomaly of coincidence. It would be like giving credence to a chartist even though I personally don’t support the random walk hypothesis.

Did not know that Mr. Proechter made the 87 call. Everybody seemed to think he was always a perma bear. Nice reporting. Balanced article.

Regarding anomalies. With all due respect, am weary of hearing that term. Whenever we do not understand something, or it does not fit into our generally accepted models, it is explained away contingently, or dismissed as an anomaly.

I submit that if you can only describe an event within a system than you do not fully understand it. If you can explain it other than attaching a label; you understand it. A favorite quote: “Just because you know the name of something doesn’t mean you know something.” – R. Feynman

That is why we end up with incomplete models, and scratch our heads when we cannot explain, “What just happened”? People, the event happened within the system. If your model does not include it, then it is not a full process model.

Think we should put an asterisk on the end of any theory that is not full process. i.e. EMH*

Bob Klapetzky
http://www.alphaadder.blogspot.com

I don’t think the market is quantum mechanical. As for anomalies they’re really IMO just inside knowledge that results from asymmetric information to the rest of the “on-lookers,” left starching their heads wondering what just happen; was that glitch, is it this is it that. Have you ever heard of the House stabilization hearings of 1928? That’s how Paul Warburg knew the market was going to crash. Helicopter Ben is not a expert on the “great depression.”

As an Economics Professor, I find it saddening that Time magazine chose to publish this piece by Justin Fox.

Mr. Prechter’s predictions have no more basis in sound science than a doctor who claims to be able to cure cancer through prescribing Vitamin B. Mr. Fox and Time Magazine should not be in the business of publishing an article that is the Economics and Finance equivalent of quackery.

For a market model, look up, look to the starling.