Market Manifesto

On ear­ly warn­ings.

We speak here of pre­science, prog­nos­ti­ca­tions, and ear­ly warn­ing sys­tems.
We speak of intu­ition and mag­i­cal think­ing. And we look at meth­ods of fore­telling change in crit­i­cal times of peace and war, and in nature.

We would all like to be pre­scient traders.

If we could fore­tell the future we would be wealthy with­out risk, be seen as wise and suc­cess­ful, and move in the most ele­vat­ed cir­cles.

But future-telling is false prog­nos­ti­ca­tion. It is a fan­ta­sy, and those who hold out to the pub­lic the abil­i­ty to see into the future are frauds. (By the way, this encom­pass­es about nine­ty per­cent of all finan­cial mar­ket com­men­ta­tors.)

So we give up the fan­ta­sy of see­ing into the future and replace it with an aware and alert life lived right here in the present.

But what about those signs and sig­nals that seem to fore­tell change, that warn of the future before the future has arrived, that let us know that change is about to occur?

Cer­tain­ly such signs exist. But if these signs were per­fect, that is, if they always occurred in the same way, then they would not be a sign of change but the change itself.

No, we are inter­est­ed in those sit­u­a­tions where every­thing hangs on get­ting the fresh­est pos­si­ble infor­ma­tion, to tell us what is hap­pen­ing or about to hap­pen at the ear­li­est pos­si­ble moment, to the best and high­est degree of cer­tain­ty.

Let’s think about sit­u­a­tions where life and death are at stake. And not just a sin­gle life, though that is sure­ly a grave issue. How about see­ing if there are ways to pre­dict the future when mil­lions of lives are at stake? Cer­tain­ly every effort would be made to find such signs and sig­nals and the best pos­si­ble think­ing would be applied to the prob­lem.

How about glob­al ther­monu­clear war? Is that an impor­tant enough issue?

The dynam­ics of the cold war are well known. If one side were to launch a mis­sile attack, the oth­er side would have to know about it soon enough to retal­i­ate. This mutu­al assured destruc­tion would pre­vent either side from act­ing, or so it seemed with­in the crazy log­ic of the war-gam­ing gen­er­als.

Thus the whole scheme, the whole des­tiny of mankind hung on the abil­i­ty of one side or the oth­er to deter­mine if an attack were actu­al­ly occur­ring. If there were a way to actu­al­ly fore­tell the future sure­ly this is the place where that infor­ma­tion would be brought into play.

The ear­ly years of the Cold War saw the devel­op­ment of the DEW line, the “Distant Ear­ly Warn­ing” line of radar instal­la­tions across the arc­tic tun­dra and polar ice­cap. Because of the earth’s cur­va­ture, these pow­er­ful radar trans­mit­ters and receivers could not see deep into the Sovi­et Union. But by putting the radar as close as pos­si­ble to the bor­der they could detect launched mis­siles short­ly after lift-off and we would gain ten min­utes warn­ing of the Armaged­don.

As space tech­nol­o­gy pro­gressed, mon­i­tor­ing tasks were tak­en over by satel­lites that could watch and trans­mit data in real time. Pro­vid­ing that the land oper­a­tors could inter­pret the sig­nals cor­rect­ly, we would know the instant that the dead­ly ICBMs were fired. Bil­lions were invest­ed in “star wars” tech­nol­o­gy that would then attempt to shoot these mis­sile-launched mul­ti­ple war­head weapons out of the sky before nuclear bombs were trig­gered.

Here we have all of human­i­ty at stake and the best that could be done was to main­tain an alert state and mon­i­tor close­ly, and watch for signs that the antic­i­pat­ed event was actu­al­ly occur­ring. Noth­ing else was deemed reli­able enough to gam­ble the future of mankind upon. We could not rely upon spies in the Krem­lin, on inter­cept­ed mes­sages between gen­er­als, on the stealthy watch­ing of parts sup­pli­ers, or on the chat­ter of polit­i­cal prog­nos­ti­ca­tors, no mat­ter how well informed. The risk of a false sig­nal would be too high.

When push came to shove (not to reduce glob­al ther­monu­clear war to a school-yard shov­ing match, even if it did seem that way dur­ing the cold war years), the only thing that could be relied upon was hard evi­dence of an actu­al launch.

No for­tune-telling here, only alert, aware mon­i­tor­ing in real time.

Do we stretch things to draw a com­par­i­son between nuclear war and trad­ing? Maybe so. But to us, the tech­ni­cal analy­sis side of our method­ol­o­gy is like the satel­lite ear­ly warn­ing defense sys­tem. It detects move­ment at the ear­li­est pos­si­ble moment, and it shows us what actu­al­ly hap­pen­ing as it actu­al­ly occurs, and not before.

Let us remem­ber that a sign that can­not be seen or under­stood does not exist for you. Sup­pose you are a tech­ni­cal ana­lyst look­ing at satel­lite pho­tographs. If you see a shad­ow but don’t know what it means, then that infor­ma­tion is locked away from you. It is as if the infor­ma­tion does not exist. Now if a col­league who has greater knowl­edge than you looks at the shad­ow and can inter­pret it, the cur­tain of knowl­edge is lift­ed. His advanced knowl­edge may let him see and under­stand things that to you seem like mag­ic. He may seem to be a gen­uine prog­nos­ti­ca­tor. But he is not – he just knows more.

When the huge empire that was the Sovi­et Union col­lapsed, it came as a great sur­prise to the U.S. gov­ern­ment. Yet the col­lapse was so rapid and com­plete that it was clear with hind­sight that the Sovi­et econ­o­my was rid­dled through and through with inef­fi­cien­cies and dis­con­nects. In attempt­ing to keep up with the arms race prompt­ed by Reagan’s Star Wars ini­tia­tive, the Sovi­ets had spent them­selves into bank­rupt­cy. With every­thing depen­dent upon cen­tral plan­ning, with resources exhaust­ed, and with no mar­ket incen­tives in place, there was no way to cor­rect the sit­u­a­tion. The entire econ­o­my col­lapsed upon itself like a hol­low paint­ed East­er egg crushed under­foot.

For fifty years the U.S. CIA had both the mon­ey and a man­date to study the Sovi­et Union and give the Amer­i­can polit­i­cal and mil­i­tary lead­er­ship an accu­rate assess­ment of impend­ing changes. Sure­ly there were many signs of change on many fronts. How could a coun­try the size of the Sovi­et Union col­lapse with­out a pletho­ra of creaks and groans and con­crete warn­ing signs? But the CIA utter­ly failed to alert our polit­i­cal lead­er­ship to the impend­ing cat­a­stro­phe. How could this be?

For all prac­ti­cal pur­pos­es the inter­nal changes of the Sovi­et Union did not exist for Amer­i­cans because the CIA and oth­er des­ig­nat­ed watch agen­cies were not look­ing for the right things. In short, they were unaware, rigid in out­look, and prob­a­bly a bit stu­pid as well.

But are not these peo­ple in the CIA and oth­er gov­ern­ment agen­cies well edu­cat­ed, well mean­ing, hard work­ing indi­vid­u­als? (The atmos­phere among the Amer­i­can intel­li­gence com­mu­ni­ty in Wash­ing­ton is very civ­i­lized, we’re told, much like the atmos­phere of a high qual­i­ty Amer­i­can uni­ver­si­ty.) Lest you start to feel supe­ri­or to these peo­ple you should know that their error is the most com­mon error that traders encounter.

Which errors are these? Those that come from a rigid­i­ty of out­look. Those that come from not see­ing signs that exist right under your nose. Those that come from the belief that we can fore­tell change based on opin­ion and not observ­able fact.

So the les­son is, if you have an ear­ly warn­ing sys­tem in place, you had bet­ter be sure you are watch­ing for the right mark­ers of change. If you’re not, change will be upon you before you know it.

Indi­vid­u­als whose phys­i­cal or pro­fes­sion­al life depends upon the ear­ly iden­ti­fi­ca­tion of change are usu­al­ly more reli­able mon­i­tors than bureau­crat­ic func­tionar­ies, or advice-givers. Those who give advice have noth­ing at stake except the accep­tance of their glib pre­sen­ta­tions and face-time with their supe­ri­ors.

Take the politi­cian run­ning for office who wish­es to insti­tute a new pol­i­cy but who does not know how the media will react. Here is a sit­u­a­tion where polling is not very help­ful because the opin­ion of the media – some say the most pow­er­ful con­stituen­cy in the coun­try – can­not be fore­told by polls. There are many instances of the media express­ing opin­ions that are at odds with the gen­er­al pop­u­la­tion. The politi­cian usu­al­ly will not launch a huge make-or-break ini­tia­tive with­out first float­ing “trial bal­loon­s” to see what reac­tion the new pro­gram draws from what­ev­er quar­ter. This is a sam­pling tech­nique, and a respect­ed and use­ful method of test­ing for change. (We will see an inter­est­ing use of sam­pling in the mar­kets when we speak about “flow” in Les­son 27.)

We all remem­ber the sto­ries about the min­ers in Eng­land who would car­ry with them a canary in a cage. They did this because the small bird was far more sen­si­tive to changes in air qual­i­ty than were the min­ers. If the bird col­lapsed and died, then the min­ers knew that the air was going bad and that they had to get out. This was their ear­ly-warn­ing sys­tem and they bet their lives on it. This is an ear­ly-warn­ing sys­tem that depend­ed on the use of a more sen­si­tive indi­ca­tor (the canary) to fore­shad­ow the change in the less-sen­si­tive, but more impor­tant, organ­ism (the min­er).

As the world changes, the nature of our ear­ly warn­ing sys­tems must change as well. In the 50s the DEWS radar line was deemed suf­fi­cient to let us know there was a mis­sile threat under­way. When sub­marines came to dom­i­nate the Russ­ian-US arms race, then some­thing bet­ter had to be found, and for a decade there was no Sovi­et sub­ma­rine that moved in the Atlantic or Pacif­ic with­out being shad­owed by a US sub. When the Russ­ian subs became qui­et enough to hear their pur­suers, the U.S. found that yet more tech­ni­cal inno­va­tions were required, and spe­cial shad­ow­ing tech­niques were devel­oped that per­mit­ted the dance to con­tin­ue. Change in the envi­ron­ment required change in the mon­i­tor­ing tech­nique.

Ear­ly warn­ing sys­tems depend on alert­ness, and aware­ness, and a will­ing­ness to look beyond the imme­di­ate con­text to the next lev­el. Things change. Life is not the same from one day to the next year after year. While human nature has con­stant themes and these con­stants may reap­pear in each new gen­er­a­tion, the indices of change may alter. We must be alert to catch them.