The Challenge

History doesn’t repeat but it rhymes. — attributed to Mark Twain.

October 19, 1987. So-called “Black Monday.” The U.S. stock market fell 22.3% in one day. Creating the largest daily percentage drop ever.

In prior history, atomic bombs exploded on Japan. Two world wars raged. The great depression crippled the nation. Periods of high inflation and deflation came and went. We endured famines, smallpox outbreaks, dust bowls, massive earthquakes, and deadly hurricanes. A major civil war ravaged the nation. We witnessed murdered presidents and world leaders. Bank runs, savings and loan crises, energy crises, and deadly terrorist attacks all impacted the stock market.

What transpired on this day? What left the market worth $1 trillion less than 24 hours before?

A quick scan of the news. Something worse than the previous must be crossing the wires. Perhaps nuclear war with Russia? A minor asteroid hit? Yellowstone volcano erupting? The magnetic poles shifted? A major solar flare knocked out the power grid? A UFO invasion? Well, let’s see, hmm… nothing! The only news of relevance, the market itself.

This turn of events was baffling, fascinating, and motivating. I resolved to discover what was happening here!

Fast forward over 3 decades of an incredible ride and here is my report on what the stock market has to convey.

The book contains four parts.

Part One lays out a prediction for the equity market for the next 30 years.

Part Two contains other thinkers who arrived at similar conclusions - or frameworks.

Part Three comprises my interpretation of the message beyond stock prices.

Part Four closes with some practical applications.

The market is communicating a missive beyond dollars and cents. It is encapsulating how evolution is unfolding and our place in it. I started by seeking to understand the crash of 1987 and determine if it was predictable. Not only was it predictable, the market provided the prediction.

Part One

The Journey.

The cave you fear to enter holds the treasure that you seek. - Joesph Campbell.

Market predictions are an ambitious game. John Templeton — an icon in the money management field for over 55 years — said this regarding stock market predictions. “The influence on stock prices are so numerous and so complex that no person has ever been able to predict the trend of stock prices with consistent success.” 

So, making a 30-year prediction about the stock market sounds ridiculous. Yet, that’s what I present here.

I contend this complexity contains an underlying simplicity, thus enabling success at producing forecasts. For the first time in history, we have enough data, computer power, and understanding of complex systems to unlock this simplicity. 

In part One, I go on record with this 30-year forecast, and assert the reason it’s relevant, valid, and timely, and present the genesis.

Chapter 1 

Down the Rabbit Hole.

Why waste my time listening to half-truths, shadowy statements, inaccurate projections, and just plain bold-faced lies? I could just look at the behavior of the stock. The story was clear in its action. The truth was in the tape for anyone and everyone to see. - Jesse Livermore.

The fabric of stock market culture weaves with venerable old sayings. Like, “the fastest way to have a million dollars in your investment account is to start with two million.”

Invest or trade and prepare for humility. We learn the genesis for so many sayings and books around the markets.

If we think we’re intelligent, attempt to match wits with the markets. If we think we understand who we are, have a dance with the psychology of the financial markets. One of the first messages we hear, is the markets are larger than us. They are also bigger than everyone.

The Federal Reserve might think they can control the markets, they can’t. Presidents might think their power holds dominion over the market, it doesn’t. We might surmise our elected officials are on top of things and in charge, they are not.

Anyone can come into the marketplace and influence its behavior for a brief period. Yet, “go where the markets want to go, not where you want them to go.” Sayings like this are popular around Wall Street for a reason. It’s what the participants discover.

It turns out chaos theory, and the modern science of complexity, assist in the explanation. Sometimes referred to as the field of CAS. This acronym stands for the study of Complex Adaptive Systems. Stay with me. This is not a textbook. But we need to cover some basics, enabling a language to proceed with.

What is a Complex Adaptive System? It is any interconnecting system with inputs adapting to those inputs. This includes power grids, our brain, social networks, ant colonies, cities, traffic flows, cells, and the stock market.

Books on chaos theory, complexity theory, and the markets, already exist. My aim points elsewhere. First, I want to create something practical and relatable. I want to leave the science on the surface and keep the math simple. I’m not seeking to get deep into how or why it works. It seems more valuable and enjoyable to present the findings, and help you, the reader, profit from what I have learned.

Complexity sounds like a big word doesn’t it? Yet at it’s core, it holds an ironic message of simplicity. It agrees with Thoreau’s musing from “Walden:” ‘Our life is frittered away by detail. Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand.’

We don’t need to appreciate why the meteorologist is predicting a Category 5 hurricane is about to make landfall. We need to understand its implications for us and our direct course of action. Is it best if we:

A) stay put with supplies on hand,

B) evacuate until the storm passes, or

C) evacuate and prepare to move because destruction awaits our home.

So let’s accept the stock market is a complex system, and distill it down to a few simple concepts we can all relate with. We merely need to understand a few basic points; attractors, bifurcation points and fractals.

Complex systems, like the stock market, have attractors. These attractors pull the market in a direction. They also have bifurcation points. These act as a shift towards a new attractor. And they perform these characteristics in a fractal or self-similar fashion.

Envision a coin drop spiral wishing well you see at a carnival or the mall. After you release a coin into the bowl, it swirls around and finds its way to the bottom. The basin is the attractor. Now imagine once it falls out of the hole in the bottom, rather than turning into a gumball, the coin falls into one of many other wishing wells moving about below it.

The fall from one bowl to the next is a bifurcation; a change in direction towards a different attractor.

Now imagine, every wishing well also acts as a coin inside of a larger well. Therefore, coins of various sizes are rolling around and falling into other larger wells. These larger wells do the same thing. The small wishing well mirrors a coin spinning inside a much bigger wishing well. And so on, and so on. Wishing wells, inside of wishing wells, inside of even bigger wishing wells.

All the wells spin towards their attractors as they bifurcate into different trajectories.

In the stock market, this transpires as players from all time frames, pocketbooks, and agendas, participate in an arena containing enormous rewards and considerable power. These players include market-makers, gamblers, speculators, day-traders, investors, entrepreneurs, corporate raiders, and crooks. Add to this, groups like pension funds, banks, dark pools, hedge funds, mutual funds, and governments. All operating in diverse time frames and optimizing their own best interests. Think of these as the various size bowls or wishing wells.

The specialist on the floor of the New York Stock Exchange sets the bid/offer price throughout the day. This works as a small bowl, moving the price, as orders come into the market.

The Federal Reserve fixes the cost of money by adjusting the amount of its supply in the banking system. This works like a large bowl.

Each bowl acts like the vortex of a wishing well. Pulling the market into its basin of attraction.

Once understood, these attractors kill any ideas we have about blaming the market or its participants for our results. No conspiracy controls the stock market. No Wizard of Oz hides behind the curtain. There may, or may not, be cabals acting as serious players, but they all live inside a bowl while moving some smaller bowls into their vortex of control. But, if they fight their higher vortex, they will lose.

If you want to make money in the market, I have some encouraging news. Pick a time scale matching your strengths and personality. Locate the boundaries of an attractor operating on this time scale. Set up some solid risk parameters for the scale, then get on board and you will win. Like the wishing well. Create a reliable algorithm repeating this, and you too will become a titan. Simple enough.

Be careful not to confuse simple with easy. Rather, it is constructive to simplify the process. 

You might think, “I don’t work on Wall Street nor do I know how to write algorithms. How can any of this CAS talk benefit me?” Let’s begin here: