Friday, October 24, 2008

Fractals, Chaos Theory and Black Swans

In Jurassic Park (the book), Michael Crichton introduced us to fractals and Chaos Theory through the character of Dr. Ian Malcolm, a mathematician and self-professed "chaotician," a title which he used to describe his work in applying Chaos Theory to practical real-life scenarios. Malcolm was played by Jeff Goldblum in the movies. His character explained, through fractals and Chaos Theory, how the "meddling" created such disastrous results.

In the video link at the bottom, you will meet a real life "Dr. Malcolm" in Benoit Mandelbrot. His Jurassic Park is today's economic crisis...

Start with this post today from Michael Kosares, the owner of USAGold, CPM (Centennial Precious Metals) and host of Another/FOA from 1998 until 2001:

MK ( 24October2008; 10:06)
Why gold ownership is so important. . .

“The next Fourth Turning is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation, and empire.” — William Strauss and Neil Howe, The Fourth Turning, 1997

“We are in the midst of a once in a century credit tsunami. . .Those of who have looked to the self interest of lending institutions to protect share holders’ equity, myself especially, are in a state of shocked disbelief.” — Alan Greenspan, 10/23/08, Congressional testimony

“I don’t know… if we’re entering the most difficult period since, not since the Great Depression — since the American Revolution. . .Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding its properties. Now you understand why I’m worried. I hope I’m wrong. I wake up every morning - actually I don’t wake every morning now, I start to wake up at night the past couple weeks hoping I’m wrong. Begging to be wrong. I think that we may be experiencing something that is vastly worse than we think it is.” — Nicholas Taleb, author, The Black Swan, PBS interview, 10/21/08


Taken together, these three quotes summarize the current situation, not just as an assessment, but as a call to action. Those of you who have read my writings over the years know that I put stock in the idea of fractals and chaos theory, though I think “chaos theory” a misnomer. There is a great deal of structure to the chaos Mandelbrot and Taleb describe. Thus, I was very interested in the interview linked here by gLod (Thanks, sir!).

In this context, an event like the Iceland breakdown, for example, is important not so much in that it will cause further, knock-on problems in the financial system. It is important because it is the result of circumstances which exist everywhere, i.e., provocative circumstances in place system-wide. Iceland becomes a template, by this this way of thinking, for what might occur elsewhere, and thus, not an isolated event. In essence, Iceland might be seen as a fractal. It follows then that Icelands may exist everywhere because of the global spread of fiat money systems — economies prone to stagflationary breakdown.

As I have said before, the first stagflationary breakdown of this type was the United States in the 1970s. The same sort of breakdown occurred in Asia in the 1990s, as well as in Mexico, Argentina and a host of others thereafter — same symptoms, same disease. And now — some 35 years later — we have come full circle back to the United States. In this wave, the number of state participants has risen, i.e., the nature of the crisis as Mandelbrot and Taleb point out has become global with global consequences.

I can see why Taleb is having trouble sleeping nights. He is not the only one. Individual investors/citizens should take note. In the same way, what is happening in the gold market is not an isolated event. Gold could be a fractal in its own right signaling what might happen in other commodities, most notably, oil, natural gas and foodstuffs if collapsing prices cause shortages. Be aware. This is not a time to beg off as a casual observer.

Here is glOd's post referenced by MK which contains audio and transcript links:

gl0d ( 23October2008; 19:21)
Black Swans & Mandelbrots

A short interview with Nicholas Taleb and Benoit Mandelbrot on NPR [mp3] [some transcripts]

Taleb: “I don’t know… if we’re entering the most difficult period since, not since the Great Depression — since the American Revolution”.



alek said...

Good links, thanks.

I wonder what is brewing under the hood of the central bankers all over the world. Not a word from the BIS or any concrete action from the euro side. Russia has been rambling on and on but the others... Silence.

After Greenspan publicly announced that his FAITH was misplaced, I think it should be getting clear to those in high positions in finance that his faith has been (mis)placed further than just the bankers of Wall St.

Anyway, there are some signals that I pick up about a possible bottom in POG and bottoms in stocks after some possibly dramatic sessions next week. The rally may last until Obama ascends on the throne and may even be reinforced by that act.

FOFOA said...


The silence is deafening. As our PPT takes dramatic steps to rescue a plunging stock market, simultaneously driving down oil, gold and foreign currencies, I can only imagine the world is pissed off right now.

For those countries that are not the USA, foreign debt denominated in US dollars is becoming very expensive to service right now. Their resources, gold or oil, are failing to balance their budgets right now.

And it is becoming clear that Paulson and Bernanke are not helping things much. At least not for those who don't reside on Wall Street.

So I imagine that plans are being hatched in backroom deals the world over. I imagine that we should see some surprises soon. From the BIS? From Russia? From OPEC? From "Arabia"? Who knows. I imagine the first one to act has the best chance of success. But then again, who holds what the world needs? And who has the most gold?

I don't know the answer. But it seems to me like something more than just splitting the difference between a 1 million bbl decrease and a 2 million bbl decrease probably was discussed in Vienna today.

Do you really think the markets want Obama? Just curious. I tend to think the final bottom in the markets is probably a year away. I expect to see rallies followed by new lows followed by more rallies. Unless, of course, some outside force changes the whole paradigm. And I'm not talking about Obama's "Change".

As for gold, I wouldn't be surprised if the bottom dives to near zero. It just seems like there is a lack of takers right now. The big money is finding it's gold elsewhere, where delivery is assured.

Thanks for the comment.


jerry said...

Hey folks,

Oh, how we would love a time machine right about now!!! Paulie and Bada Bing Bernanke are wearing Depends these days because their stomachs are totally inflamed! These educated airheads are credit frozen themselves. They have run themselves into a corner and cannot get turned around because they committed themselves to take the wrong way out.

They are hoping that this upcoming economic summit will knock them into a more necessary direction. Bush and the bankstas won't allow it unless the new posse puts a gun to their heads.

We will see.

But one thing is for sure, unless there is a $1T plus "stimulus" package delivered before Xmas, the
"de-cession" will not be seeing any upswings for a long time in the future.

It is 12:33 AM in Pittsburgh, and the DOW futures are -513. Not a good sign! It still is a long way til Monday morning.

FOFOA said...


Arabs clearly lust to control and manage a global gold trading center. It will be in Dubai in the United Arab Emirates. The new Gulf dinar currency will pave the road to that center. The Gulf Coop Council is biding time, cutting time delay deals, warding off pressure by the USGovt, appeasing with weapons contracts from the USMilitary, and is working behind the scenes to create a new dinar currency. The new Gulf dinar is likely to be primarily gold in its backing. So, foreign nations will soon be forced to purchase the dinar for all or most of crude oil payments. This forces the purchase of gold in order to purchase crude oil. The demand for gold will thus fortify the global banking system, by means of commodity settlements. Many details are unknown, but the basic structure has been slowly come to light. A new motive flashes red in front of Arabs to institute some changes FAST. The crude oil price is down, cut in half from July. Their revenues are sharply reduced. Russia figures into the complex deal to launch the dinar. The Saudis and small sheikdoms need security protection. The next chapter will involve protection amidst a gold-backed currency, not a military-backed currency, in Saudi eyes.
-Jim Willie

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