On the other hand

GUEST COLUMN

Fractals are better than fundamental ratios which have little forecasting value.

Ever heard of fractal? It is a form that appears all around us, both at macro and micro levels. Trees, clouds, DNAs and atomic structures -- are all fractals. Physics, chemistry, biology and astronomy are full of fractal patterns. Mass psychology is also a fractal. Not very many books and articles are written about this universal truth.

A fractal means a mathematically definable structure which replicates itself across time and size scales. It's like a building block of creation. A fractal is at the heart of every natural creation.

Break a Pine tree branch and you see the tree itself. Kenneth G Libbrecht of Caltech came up with Snowflake physics identifying 35 classification of snowflake fractals. Natural patterns appearing again and again.

Curiously, the first time a fractal was observed in markets was in the 1880s, when Charles Dow constructed the DOW 30 and wrote his theory about the first economic fractal. We have to credit the man and his business acumen valued at nearly $5 billion today and creating an industry worth trillions of dollars.

He said markets move in a wave like fractal, a tide, a wave and a ripple. There is an accumulation stage, followed by a speculation stage, and finally public participation led by greed, after which the form ends and market corrects. And then, the structure starts again. Dow was the first to see the mass psychology form in financial markets.

DOW 30 survived the centuries but somewhere we lost his fractal. It never got the well deserved attention, unlike modern accountancy, which started to take shape somewhere around the same time.

Dow identified the fractal and called it an economic theory. Elliott redefined Dow's work and made an applied forecasting tool called the wave theory. The scale dramatically changed as fractals got seen not only on a multi year business cycle scale, but on every time frame. And on every broad asset and virtually any statistic which has a socio economic implication. Be it labour market metrics, macro economic parameters or simply global car sales, just anything.

The reasons which could explain everything about market and economics couldn't explain why metals, energy, agro commodities, industrial commodities and forex, for instance, behaved similarly. And where reasons failed, fractals stood firm, inexplicably.

The wave theory is one tool that works across markets, across subjects on both economic and socio-economic levels to forecast. This fractal can predict prices of say brent crude for a tick, a minute, a day till multi-years and decades in future without knowing about the oil crisis, hurricanes, supply gaps and all those causes that may arise in the future. The tool predicts the future without the breaking news, that may come years later.

So why did such a great tool took a back seat and never emerged? 1800s was too early to understand mass psychology. Stock markets were fancy things. The mass psychology lacked critical mass, the speculator knew little about leverage. Leverage reached world scale a century later. And something more was hot, information and its causal implications.

There was an information and explanation for what markets were doing. And the great depression was long forgotten as the new generation took over. Econohistory was never considered interesting reading.

Who wants to know how many banks failed in an era where a banker is celebrated? 125 years and we are still giving reasons, building businesses and technology systems defining the fractal that defines us. The fractal that is larger than life and continues to move relentlessly with cyclical precision.

We have reached some conclusions, why we forgot the fractal. Human mind is the least understood part of the human body. Recent attempts to map the brains throw interesting light on the subject. Emotion is a key driver for the brain. We are brain dead without emotions.

Further work has proved that the lizard brain (Reptilian Complex) rules our impulses, our herd tendencies, how we behave in the society and our stock market games. The lizard also explains why humans remain penny wise and pound foolish.

Why we make things complex rather than simplifying them? Why we can't stop or pause consuming as a society? Why panics happen? Why fear is a bigger motivator than greed? And why complacent society means low volatility? Reptiles also explain why fractals don't interest us?

Fractals are not stories we love to hear. The patterns are contrarion by nature looking at exits on greed tops and entry in busts. Fractals by very nature stand alone. They are unconventional. And above this they are a lot visual. People are different and so are their ways to learn.

Drucker classified them as group which learns by reading, or writing. All this leaves us with a small bunch of fractal lovers, only a few who can question the status quo standing alone uncomfortably. Fractal needs courage to stand against 200 years of economics and say there is no economics without psychology, and psychology is itself fractaled, patterned.

Everything has its limitations. Even fractals are not fool proof. But there are definitely better than fundamental ratios like price-earning ratios which fail the back test miserably with no forecasting value what-so-ever. Understanding fractals may take a few hours but integrating them in and above economics may take years and then like Eels said, "one day the world will be ready to see and wonder how they didn't see it"

CEO Orpheus Capitals, The Global Alternative Research Company