Deutsche Bank/US Financials Ratio versus EUR/USD Exchange Rate - EURO/$ much further to fall, first 0.99 then 0.82

Gold/Silver Ratio (Inverted) versus S&P 500 - Divergence In Part Driven By Side-Effect Of Quantitative Easing

Complex Adaptive Global Macro (Executive Summary) - An Evolving Approach To Trading Global Markets by Gurraj S. Sangha

Traditional economic and market analysis attempts to reduce all events to a single cause and effect.  I am of the mindset that the global economy is much more like a rain forest, where millions if not billions of distinct animal and plant life interact with one another in a complex and adaptive system.  That is everything is connected.  Furthermore, I am of the belief that this interconnectedness manifests itself in nonperiodic, nonlinear, cyclical behavior throughout financial markets.  Business cycles have been present throughout all of time, as noted by former Fed Chairman, Arthur E. Burns “For well over a century business cycles have run an unceasing round. They have persisted through vast economic and social changes; they have withstood countless experiments in industry, agriculture, banking, industrial relations, and public policy; they have confounded forecasters without number, belied repeated prophecies of a ‘new era of prosperity’ and outlived repeated forebodings of ‘chronic depression”.  Furthermore, another Fed Chairman, Paul Volcker, in his 1978 essay (Rediscovery of the business cycle) wrote “The Rediscovery of the Business Cycle – is a sign of the times. Not much more than a decade ago, in what now seems a more innocent age, the ‘New Economics’ had become orthodoxy. Its basic tenet, repeated in similar words in speech after speech, in article after article, was described by one of its leaders as ‘the conviction that business cycles were not inevitable, that government policy could and should keep the economy close to a path of steady real growth at a constant target rate of unemployment.”  Additionally, the cyclical behavior which may be apparent in a single market is affected by the complexity of this interconnectedness, thus altering the cycle, giving the appearance of random or chaotic behavior.

By applying non-linear theories used effectively in other scientific disciplines one can seek to identify the major turning points in markets that occur based on the actions of individual market participants and individual markets that ultimately set in motion a domino effect of often much larger changes in other markets or [almost] all markets simultaneously. It is through the appreciation of the minimizing entropy behavior of market participants, in an arena governed by power laws and dynamic nonperiodic cyclical behavior, that one can utilize sophisticated fundamental, quantitative, and systematic analysis, to build a portfolio that protects investors from extreme events and allows one to opportunistically position for major market shifts.  This approach, a complex adaptive global macro strategy, builds upon traditional global macro approaches by integrating quantitative and systematic analysis, in light of continuing scientific studies supporting the view of the financial markets being a complex, dynamic, and continually evolving system.

S&P 500 Geometry of Time

S&P 500 Geometry of Time - Next Up 3/10/16 and 3/14/16

The Great Currency Realignment – Does Bitcoin Have a Role ?

The Great Currency Realignment – Does Bitcoin Have a Role ?

The global monetary system has experienced substantial upheaval 3 times since 1900.  These currency realignments took place in 1914, 1934-1939, and 1971.  Each period was accompanied by geopolitical unrest, economic instability, and financial market tension.  As part of our ongoing multi-market, multi-asset class analysis of complex adaptive systems, it is our contention that 2008 marked the opening salvo in the current chapter for a currency realignment which is expected to reach fruition by 2024, if not earlier.  The fundamental issue involves the constitution of “money”, a measure which has evolved from the gift and barter system, to barley, to receipts, and then to a fixed reference point, measured in ounces of gold, and most recently to a fiat system, impacted by the proliferation of credit-based “money”, and asset-backed securities, and the mountain of worldwide derivatives.  The size of this total liquidity pyramid far outstretches total GDP and as such is increasingly contributing to the volatility experienced in currency markets, and via a complex transmission mechanism, the volatility in all asset markets.

Bitcoin is among the first digital currencies introduced in the peer-to-peer framework and in part has disrupted the traditional definition of “money”.  In fact, Bitcoin accounts for approximately 0.00004% of the world’s total M3 (broad money) supply.  As the public has seen quite clearly over the past few years, Bitcoin is a digital store of value, highly volatile, in part due to its emerging status, and can act as an electronic cash-like currency with very low cost of use. Bitcoin’s “block chain” characteristics which allow no single point of failure, and its decentralized status, are highly prized in a world in which traditional centers of money creation are effectively unlimited in their capacity to run the printing presses.  It is, in part, this unbridled proliferation of monetary aggregates, and the leverage upon leverage piled on by derivatives, that is contributing to the widespread rumbling in the global financial system.  The financial system, due to its widespread interconnectedness, has become increasingly unstable as the inherent nature of complex adaptive systems which are susceptible to dramatic changes from somewhat innocuous actions.  As such, we are likely to witness increasing bouts of volatility, across asset classes, as the global financial systems seeks a new, higher level, of order, and in that path, Bitcoin may yet make headlines, not so much as to achieve widespread use, but to influence the evolution of the currency monetary system to a new regime as we head into 2024.

Deflation Risk Continues to Rise

Outlook for 2014

Is Deflation A Risk ?

Thus far, the Fed's massive monetary base expansion with a balance sheet exceeding $4 trillion

Federal Reserve Balance Sheet

and largely sits as excess reserves at the Fed, and as such monetary velocity continues to make 50-year lows.  Thus, there has been very little real goods inflation, traditionally driven by a demand-pull dynamic.

Excess Reserves

Monetary Velocity