Sunday, November 2, 2008

More on Chaos Theory

The financial and economic landscape today is so complex, so massively complex, that it is impossible to deduce what exactly is coming next. There are billions and billions of individual influences all working in concert to shape our future from one day to the next.

We have a shifting political landscape, moving in different directions at different speeds in every corner of the globe. We have unknown and unseen moves being made by Central Bankers around the world, some in concert and some in secret. We have unseen flows of capital from dark pools of liquidity into short positions and then back again. We have individual households making their spending plans for this year's Christmas gifts. We have oil barons and gold titans discussing their world-control options. We have a multitude of opinions moving at the speed of light over the internet, changing and shaping the thoughts of millions of people in every country of the world.

So if someone tells you they know for sure exactly what is coming next and when, you can know one thing for sure... that person doesn't know!

The inflation/deflation debate is almost comical at this point. Most of the disagreements I read these days boil down to misunderstood definitions. Many people I see arguing are actually in perfect agreement if they would only properly define the terms.

The point I am getting at is that the only way to view such a complex landscape is from very far away. That is, if you really want to see what is happening. And one way to view it in this way is through Chaos Theory, which was mentioned in this post.

For those of you who don't know much about Chaos Theory, the name can be somewhat misleading. It is a theory that deals with complex systems that, on first glance, appear completely chaotic or random. But the reality is that these complex systems are actually deterministic. That is to say that seemingly chaotic gyrations in the future are actually amplifications of the initial condition of the system, and do not require the interference of random elements to explain.

Through the observation of chaotic behavior, patterns start to appear. As the billions of individual influences on our economic landscape act, and then react, then react again (called "iterations"), a pattern will emerge which is "self-similar". What this means is that the pattern at the smallest scale, the individual, will start to resemble the combined pattern of larger and larger groups. This will continue to develop until the fullness of the pattern has revealed itself, and that will be our future. This pattern, called a "fractal", appears everywhere in nature. It can be seen in clouds, snow flakes, crystals, mountain ranges, lightning, river networks, fern leaves, heat burns, coastlines, and the list goes on and on.

The closer you look, or the farther away you get, the pattern is still apparent. Look at the pattern of a spiral galaxy. Almost looks like a hurricane, yeah? This pattern repeats at each scale as you move in closer. It is seen in the individual solar systems, in the weather patterns on the planets, in a river eddy, even down to an atom with spinning electrons. In nature, fractal patterns abound.

Here are some other common fractal patterns:

The Fibonacci Ratio is an observation that came out of this natural phenomenon, and it is used in the Elliot Wave Principle which most of you are probably familiar with. I only mention this to show that everything is connected. But Fibonacci and Elliot are outside of the scope of this post.

Back to the economy...

At the individual level, a pattern can be seen when it comes to a person's wealth. All over the world individuals are coming to terms with the fact that they have lost some wealth. Their response is the pattern. And the pattern is that the remaining wealth is moved. It's movement may seem chaotic in any individual case, but it is generally following the pattern of moving away from paper promises (perceived danger) to real things (perceived safety).

Often, the first move is not ideal. Value moves from one paper promise to a different one until new danger is perceived, then it is moved again. This "migration" continues, and WILL continue until perceived safety becomes real safety.

As this pattern develops in the individual, it also appears slowly in larger groups, like funds. Pension funds, hedge funds, etc... will all begin to migrate value to safety.

Then, soon the pattern will emerge at the national level, then the international level, and finally the galactic level.

It is my belief that Another recognized this fractal pattern as long ago as 1997, and perhaps sooner. Our path in getting from there to here has been circuitous, to say the least. Many "chaotic" detours have muddled the pattern; 9/11, the housing bubble, etc... But the fractal pattern remains intact. Therefore, I believe that we are still on the path that Another laid before us, and I believe we are closer than ever to the end that he predicted.

You see, it doesn't matter so much what happens along the way. It will make perfect sense to us once we are well beyond the end and can look back. Hindsight is always 20/20. And what happens along the way will most definitely appear chaotic to the close observer. But the pattern will ultimately emerge from the chaos and, in the end, the whole system will be shown to have been deterministic from the beginning.

In this case, the beginning is the mid-90's (or perhaps much earlier), and the end is FreeGold, because that is our focus.

So look for the pattern to appear in the larger scales. I have already seen it appear in my own home. And I can already see the signs that it is coming.

Inflation/Deflation? It doesn't really concern me. I have my opinion, and that is massive hyperinflation at some point in the not-so-distant future. But as I have said before, FreeGold DOES NOT REQUIRE hyperinflation.

As Another said...
The winds blow well on this cloudless night. All are asleep with the dreams of what tomorrow may bring. Yes, this is a fine evening to consider gold!



FOFOA said...

"Bill is partially correct, imo. If you note the 120 year chart of gold (if memory serves) v. DOW, the ratio has come to to better than 2:1 I believe at least 3 times, with 1980’s being 1:1. As I recall the ratio has favored gold more each time. As the fiat fiasco has worsened and had 36 plus years to perfect itself (NOT!) or get worse, which ever you prefer, the ratio this time will likely, imo, go to fractions of Gold ounces to one DOW. I can see it being .1:1 or better. This may be because we must at some point pay off US debt with one-half of our reserves so we still have one-half of the gold reserve remaining. I don’t see the DOW going to 156,000, but I do see gold going to better than 6,000. For a little illustration, the US has 256,000,000 ounces of gold give or take a few. The US has obligations of dollars in excess of $50 Trillion give or take 10 or 20 trillion here or there. Half of the US gold supply is 128,000,000. $50 trillion divided by 128 000 000 = three hundred ninety thousand six hundred twenty-five or $390,625/oz. just to wipe the slate clean. That Gold:DOW ratio would be 11 000 DOW divided by 356 000 = 0.0308988764 or .031:1 (.031 ounces of gold to one DOW at 11,000). I suppose the DOW could go to 2.325 and gold stay at 750 or so. Anyway you slice it, this time around the ratio is going to beat 1:1, imo.

Keep up the good posts all (noble1 included!).

Our Trade of the Decade was meant to capture the early stages of this — but only a bit of it: the relationship between gold and stock prices. In 1982, briefly, you could have bought every one of the stocks in the Dow index for a single ounce of gold. But by the time the stock market finished its epic rise, in January 2000, (while gold was doing an epic fall!) you would have needed 44 ounces of gold to buy the Dow. Now, that ratio has come down considerably. You only need about 13 ounces of gold to buy the Dow. And as stocks come down, the ratio is likely to fall below 5…and eventually back to 1 to 1 (at which time, remember, it will be time to sell gold and buy shares).

-Bill Bonner at the Daily Reckoning
his archive



Anonymous said...

Great post !

There seems always order in the Chaos.
It comes stongly to the perception of the individual as how this order is behaving.
To understand at the base on building perception. An interesting article what comes to mind here is "Money and the three Minds" to be found here;

It becomes clear here there is muche more than the eye can see and gives some more clearness on the chaos. I admit it is a bit long but absolutly interesting to this subject !


FOFOA said...

Venezuela takes a gold mine

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