What a shame the great Benoit Mandelbrot died 2 weeks ago. He would have had plenty to tell us about the fractal nature of markets. Whether it is the way price charts show patterns regardless of time scale (ask any fib or Elliott supporter, they relish it) or even down to the fractal nature of "what if" analysis. With 7bn people, each with a few billion brain cells, it takes a while before you get down to the binary calls. And so it is with macro. Each piece of information we have is a small weight on either side of the balance of outcomes. The skill is in attributing the correct weight to each piece. Every news headline scrolling across a news screen affects YOUR market in some tiny way. We used to play a markets version of 6 degrees of separation with our new interns to get them thinking in relevant ways. Headline - Danube levels fall 8cm? Perhaps that's marginal enough to stop some bulk shipping or increase stream traffic due to lower flow and how would that affect Hungarian or Balkan trade data. Etc etc. We mention this because yesterday was a case in point. We decided that what for many was probably the Nth degree of nerdy micro, to us is one of those grains of sand that can tip the balance. And as such needed comment.
The complexity of this analogy is added to when you consider that behavior of each individual grain of sand has its own probability distribution. At which point we go all quantum. And you could quite easily say that markets only express one value or another once we look at them! Prof Schrödinger's Cat like.
Just as a coastline is the sum of the grains of sand along the shore, so macro is the sum of the micro. But of course we can't just simply keep track of so many micro elements at once and instead like to categorize them by ordering them into families we can easily deal with. We create implicit rules that we think identify these categories and detest it when those rules break down. Correlation is a wonderful concept when it works. A sort of glue for the Grand Unified Theory of Markets that allows us to create "fire-and- forget " trading models. But when the correlation glue breaks down, as we are now seeing, we are forced back to the micro to rebuild our macro models.
At any rate, please excuse our foray into matters philosophical. It's been a relatively quiet time in the mkts, as everyone collectively holds their breath in anticipation of the Big Bad Ben. So we leave you with this. Mandelbrot may be gone, but fractal markets have been and will be with us always. We are just glad that the great man died peacefully and wasn't a victim of foul play (which is, we suspect, the fate that befell Paul the Octopus, who just knew too damn much). Otherwise it would have taken the cops a very very long time to draw the chalk line around the body.
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