Trending Toward Randomness

The Dow lost another 139 points on Friday. Now the stock market is in a downtrend. Is it THE downtrend? Or just another random move, of no particular importance?

Hard to say.

We began questioning our faith last week. Why do we think there’s a bear market in stocks? Why do we think stocks will go below 5,000 on the Dow? For a minute, we couldn’t remember.

We weren’t questioning our reasoning; we were asking much deeper questions. Of course, we don’t want to buy stocks – they’re expensive. And the economy is worse than people think.

But what we were wondering about is the idea that stocks move in long trends that take them from epic highs to epic lows. Of course, it is obviously true. Stocks go up and down. They’re bound to hit extreme highs and extreme lows from time to time. Then, when you look at the pattern, it’s going to look like the stock market knew where it was headed. That is, the motion of the stock market could be purely random, just like the finance professors say. Even so, it would still move from a very high point to a very low point.

So what’s the difference between random movements and the patterns that the random movements make? To put it another way, what is it about reality that makes it possible for it to appear completely random and completely organized at the same time?

Or, what if God made it appear that he didn’t exist? What if everything happened in an apparently random way, but according to a plan that was too subtle for us to understand?

Whoa…this is, like, getting heavy…and deep. We’re already in over our heads.

So, let’s back up. Let’s say you knew that the stock market is theoretically random. But let’s say you also knew that this random motion had been headed down for the last 10 years…and that stocks were still not even half as cheap as they were the last two times random motion took it to an epic low? What would you say?

Well, “watch out!” That’s what we’d say.

Our position is that the market is almost random – but not quite. It is so random that almost everything it does can be explained by randomness. It is so random that it is almost impossible to beat with any ‘intelligent’ system. It is so random that it will drive a thinking man mad if he spends too much time thinking about it.

And yet, for all its randomness, it looks to us as though there is a pattern.

29 – 66 – 99

Those numbers were the years in which the Dow hit major highs during the 20th century. Note that they are separated by periods of 33 to 37 years – roughly the period of a human generation.

Bonds do more or less the same thing. From a low in ’49, bond yields rose until ’81 – 32 years. Then, they began an epic decline, which continued until 2008 – 27 years. (This trend may not be over).

The big trends tend to last about as long as a generation. Why? Because one generation learns; the next forgets. After the Crash and Great Depression there was no way investors were going to bid up stocks to ’29 levels. The old timers had to retire…and a new generation of investors had to take over.

Of course, this is just a hypothesis. All we know is that when we look back at the stock and bond markets, we see long trends, punctuated by extreme highs and extreme lows. So, when an extreme high is reached, an investor is well advised to sell. The next extreme will be an extreme low. It can take 10 or 15 years to arrive. But it is a miserable time to be in the stock market.

On the other hand, after an extreme low, an investor has little fear and a lot to gain. All he has to do is buy, sit tight…and hope he lives long enough to take advantage of it.

Where are we now?

It looks to us as though we are 10 years into a bear market. The extreme was reached in ’99 – when tech stocks were trading at extraordinary prices. In the years following, the Dow actually went considerably higher. But adjusted for inflation, the Dow never actually set a new record. The period 2000-2007 was a bit like the period following the ’66 top. High levels of inflation made it hard to see what was happening. The Dow rose to the ’66 level two years later…and never registered deep losses. But year after year, inflation cut the real value of the index…wiping out about 75% of investors’ money over the next 15 years.

Even before inflation is taken into account, stock market investors made nothing during the last 10 years – not in the US. They ended the decade about where they started it.

But this leaves the trend incomplete. Stocks have still not gotten down to super-cheap levels. Look back. The last extreme was on the upside. That means the next one should be on the downside. And it must be extreme – say, Dow below 5,000. Otherwise, the long-cycle prophecy won’t be realized.

For every extreme high there is an extreme low. Otherwise, nature would be out of balance and Heaven would be unfulfilled. So, until we finally reach an epic low…an epic low still lies ahead. And until that time, the souls of dead value investors and grumpy perma-bears are doomed to walk the earth… They can never relax. They can never sit down and have a beer. They will never be satisfied. Only when the Dow finally sells for 5-8 times earnings will they get to say ‘I told you so.’ Then, they can take up their eternal rest.

It is coming, dear reader; it is coming…

And more thoughts…

We knew it!

Yes, we could tell by the cut of the chin…and by the eyes. You know, that dim look of someone who thinks he knows what he is talking about but who really has no idea.

We’ve been saying for a long time that Ben Bernanke is a Neanderthal. Now, at last, we have proof.

Is this not the ancestor of Ben Bernanke? (Below…)

And now that we know more about Ben Bernanke’s lineage, it is tempting to draw other conclusions as well. Yes, dear reader, why did Neanderthals go extinct? Was it because of climate changes? Competition from other humans? Or, did one of Ben Bernanke’s ancestors doom the whole race with his inept Neanderthal central banking?

Yes, we now have the genome deciphered. Now we’re ready for the rest of the story!

Bernanke's Lineage

Wired Magazine:

After years of anticipation, the Neanderthal genome has been sequenced. It’s not quite complete, but there’s enough for scientists to start comparing it with our own.

According to these first comparisons, humans and Neanderthals are practically identical at the protein level. Whatever our differences, they’re not in the composition of our building blocks.

However, even if the Neanderthal genome won’t show scientists what makes humans so special, there’s a consolation prize for the rest of us. Most people can likely trace some of their DNA to Neanderthals.

“The Neanderthals are not totally extinct. In some of us they live on a little bit,” said Max Planck Institute evolutionary geneticist Svante Pääbo.

It took four years for Pääbo’s team to assemble a working sequence from DNA in the bones of three 38,000-year-old Neanderthal women, found in Croatia’s Vindija Cave. The sequence, published May 6 in Science, covers about 60 percent of the entire genome.

Though much remains unfinished, researchers were able to compare the Neanderthal genome to the human at 14,000 protein-coding gene segments that differ between humans and chimpanzees. Researchers link these proteins to changes in humans’ cognitive development, physiology and metabolism.

At all but 88 of those hot spots, Neanderthals were no different than us. The differences are so slight that the researchers suspect them to be functionally irrelevant. If more genomes could be compared, there might be no differences at all.

Bernanke's Bones

Changes in the biology of humans and our close caveman ancestors may be a result not of simple genetic changes, but of evolution in how humans use our genes, turning them on and off at different times and places.

That type of evolution won’t be easy to study by looking at a few ancient fossils.

“There are a lot of aspects of differences between species that can’t be solely obtained from DNA sequence,” said University of Michigan genetic anthropologist Noah Rosenberg, who wasn’t involved in the study. “But at the same time, the DNA sequence is a good place to start.”

Such studies will occupy scientists for years to come. In the meantime, the researchers produced a more immediately stirring result. They compared the Neanderthal genome to genomes of five people from China, France, Papua New Guinea, southern Africa and western Africa. Among non-Africans, between one and four percent of all DNA came from Neanderthals.

On a functional level, the DNA was no different from our own, but bore telltale molecular marks of Neanderthal heritage.

Many studies have posited a Neanderthal-human inbreeding. In 1999, researchers discovered a 25,000-year-old girl with mixed features. Population geneticists have found historical patterns of genetic influx so sudden that breeding with Neanderthals seems the most plausible explanation. But studies like those have not proved conclusive.

For people of African descent disappointed that they lack Neanderthal ancestry, Pääbo gave solace.

“It’s totally possible that inside Africa, there was a contribution from other archaic humans that we don’t know about,” he said. “We shouldn’t take these results as saying that only people outside Africa have caveman biology.”

[Images: 1. Neanderthal sculpture by John Gurche./ Photographed by Chip Clark, Smithsonian. 2) Neanderthal bone fragments./Max Planck Institute.]


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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3 Comments on "Trending Toward Randomness"

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HFT used by Goldman Sachs to manipulate markets ?

If you think the massive sudden drop happened because one lowly trader hit one wrong button, if you actually believe that the entire stock market can plunge because of one mistaken key stroke by a low level trader, you are stunningly naïve. I hate to burst your bubble, but this was a direct attack. In a market where 70% of all trades are executed by computer algorithms via High Frequency Trading (HFT), Goldman Sachs has the power to make the market crash or rise at will. In fact, Goldman has a major Weapon of Mass Destruction in its Program Trading… Read more »

…You neglected to mention the .com bubble as well.

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