Capitalogix

The Benner Cycle: Making Market Predictions

When I first got interested in trading, I used to look at many traditional sources and old-school market wisdom.  I particularly liked the Stock Trader's Almanac. 

While there is real wisdom in some of those sources, most might as well be horoscopes or Nostradamus-level predictions.  Throw enough darts, and one of them might hit the bullseye. 

Traders love patterns, from the simple head-and-shoulders, to Fibonacci sequences, and the Elliot Wave Theory.

Here's an example from Samuel Benner, an Ohio farmer, in 1875.  That year he released a book titled "Benners Prophecies: Future Ups and Down in Prices," and in it, he shared a now relatively famous chart called the Benner Cycle.  Some claim that it's been accurately predicting the ups and downs of the market for over 100 years.  Let's check it out. 

 

 

Here's what it does get right ... markets go up, and then they go down ... and that cycle continues.  Consequently, if you want to make money, you should buy low and sell high ... It's hard to call that a competitive advantage.

Mostly, you're looking at vague predictions with +/- 2-year error bars on a 10-year cycle. 

However, it was close to the dotcom bust and the 2008 crash ... so even if you sold a little early, you'd have been reasonably happy with your decision to follow the cycle.

The truth is that we use cycle analysis in our live trading models.  However, it is a lot more rigorous and scientific than the Benner Cycle.  The trick is figuring out what to focus on – and what to ignore. 

Just as humans are good at seeing patterns where there are none ... they tend to see cycles that aren't anything but coincidences. 

This is a reminder that just because an AI chat service recommends something, doesn't make it a good recommendation.  Those models do some things well.  Making scientific or mathematically rigorous market predictions probably aren't the areas to trust ChatGPT or one of its rivals.

Be careful out there.

Tech Over The Long Run

Humans are wired to think locally and linearly ... because that's what it took to survive in a pre-industrial age. However, that leaves most of us very bad at predicting technology and its impact on our future. 

To put the future of technology in perspective, it's helpful to look at the history of technology to help understand what an amazing era we live in. 

Our World In Data put together a great chart that shows the entire history of humanity in relation to innovation. 

Max Roser via ourworldindata

3.4 million years ago, our ancestors supposedly started using tools. 2.4 million years later they harnessed fire. 43,000 years ago (almost a million years later) we developed the first instrument, a flute. 

That's an insane amount of time. Compare that to this:

In 1903, the Wright Brothers first took flight ... 66 years later, we were on the moon. 

That's less than a blink in the history of humankind, and yet we're still increasing speed. 

Technology is a snowball rolling down a mountain, picking up steam, and now it's an avalanche being driven by AI. 

But innovation isn't only driven by scientists. It's driven by people like you or me having a vision and making it into a reality. 

Even though I'm the CEO of an AI company, I don't build artificial intelligence myself ... but I can envision a bigger future and communicate that to people who can. I also can use tools that help me automate and innovate things that help free me to focus on more important ways to create value. 

The point is that you can't let the perfect get in the way of the good.  AI's impact is inevitable.  You don't have to wait to see where the train's going ... you should be boarding. 

Onwards! 

Can We Predict The Future?!

New technologies fascinate me ... As we approach the Singularity, I guess that is becoming human nature. 

Second Thought has put together a video that looks at various predictions from the early 1900s. It is a fun watch – Check it out. 

via Second Thought

It's interesting to look at what they strategically got right compared to what was tactically different. 

In a 1966 interview, Marshall McLuhan discussed the future of information with ideas that now resonate with AI technologies. He envisioned personalized information, where people request specific knowledge and receive tailored content. This concept has become a reality through AI-powered chatbots like ChatGPT, which can provide customized information based on user inputs.

Although McLuhan was against innovation, he recognized the need to understand emerging trends to maintain control and know when to "turn off the button." 

In 1966, media futurist Marshall McLuhan envisioned a form of digital research eerily similar to the customized queries now answered by AI. Then he makes a surprising admission about why he studies technological change—with a lesson I think many need to hear. pic.twitter.com/yEBJv95GvP

— Benjamin Carlson (@bfcarlson) March 22, 2023

While not all predictions are made equal, we seem to have a better idea of what we want than how to accomplish it. 

The farther the horizon, the more guesswork is involved. Compared to the prior video on predictions from the mid-1900s, this video on the internet from 1995 seems downright prophetic. 

via YouTube

There's a lesson there. It's hard to predict the future, but that doesn't mean you can't skate to where the puck is moving. Even if the path ahead is unsure, it's relatively easy to pick your next step, and then the step in front of that. As long as you are moving in the right direction and keep taking steps without stopping, the result is inevitable. 

Here Are Some Links For Your Weekly Reading - February 19th, 2023

Here are some of the posts that caught my eye recently. Hope you find something interesting.

 

Lighter Links:

• Listen to Understand, Not to Respond. (FlowResearchCollective)
• 9 Habits of Creative Genius. (WayneDyer)
• OverHyped and Never Delivered: A Brief History of Innovations that Weren't. (BigThink)
• Introducing the AI Mirror Test, Which Very Smart People Keep Failing. (TheVerge)
• OpenAI CEO Sam Altman Frets Over 'Potentially Scary A.I. Tools and How People of the Future Will View Us.' (Fortune)

 

Trading Links:

• Warren Buffett Just Sent a Subtle But Terrifying Signal to Investors. (MotleyFool)
• The Fed Minutes May Reveal a Steep Rise in Rates on the Horizon. (SeekingAlpha)
• The Stock Market Has Been Flipped Upside Down. (Markets)
• IMF: World Economic Outlook is Starting to Recover. (WEForum)
• The Metric that Shows Why the World's Three Biggest Economies Could Be in Serious Trouble. (MarketWatch)

 

The Big Mac Index: Worth Paying Attention To?

Last week, I wrote about various “indicators” for markets that just don’t make sense — like the Superbowl Indicator.  The lesson from those indicators is that we crave order and look for signs that make markets seem a little bit more predictable, even where there are none.  This is especially true in complex systems like the stock market, where so many variables and factors are at play that it can be difficult to predict or explain why things happen.

Now, it doesn't mean there aren't patterns - and benefits to watching them. Warren Buffet has proven that. In order to improve your understanding of "markets" you can focus on the fundamentals of individual companies and industries rather than broader market trends. By conducting thorough research and analysis of financials, management, and competitive landscapes of companies, you can make informed decisions about which stocks to buy or sell. Another way to improve your understanding of the market is to focus on long-term trends and avoid getting caught up in short-term fluctuations.  It's about focusing on what doesn't change - instead of what does. But, ultimately, you should realize that if you don't know what your edge is ... you don't have one. And, market movements are getting faster, more automated, and harder to predict over time, not less. 

With that said, Wall Street is still inundated with theories that attempt to predict the performance of the stock market and the economy.  More people than you would hope, or guess, attempt to forecast the market based on gut instinct, ancient wisdom, and prayers.

While hope and prayer are good things ... they aren’t good trading strategies.

It’s true that there are many indices and economic indicators that can provide valuable insights into the workings of economies and markets.  While some of these indices may seem “out there,” or even frivolous, they can often shed light on underlying economic trends and realities.

One example of this is the Big Mac Index, which is published annually by The Economist.  This index is based on the idea of purchasing power parity, which suggests that exchange rates should adjust to ensure that the price of a basket of goods is the same in different countries.  The Big Mac Index uses the price of a McDonald’s Big Mac burger as a proxy for this basket of goods.  It compares the price of a Big Mac in different countries to determine whether currencies are overvalued or undervalued.

While the Big Mac Index is not a perfect measure of purchasing power parity, it can provide valuable insights into the relative value of different currencies and the economic factors that influence exchange rates.  By looking beyond the headline numbers, and digging into the underlying data and trends, investors and economists can gain a deeper understanding of the forces shaping the global economy.

Ultimately, the key to using economic indicators like the Big Mac Index is to approach them with a critical eye and a willingness to dig deeper.  By looking beyond the surface level and using data-driven analysis to understand the underlying trends and drivers of economic performance, we can gain a more accurate picture of the economic realities shaping the world around us.

In 2020, when I last talked about the Big Mac Index, the Swiss Franc was 20.9% overvalued based on the PPP rate.  That math was based on the idea that, in Switzerland, a Big Mac costs 6.50 francs.  In the U.S., it costs $5.71.  The implied exchange rate was 1.14, and the actual exchange rate was 0.94 - thus, 20.9 was overvalued.  At the time, the most undervalued was South Africa. 

As of the end of 2022, The Swiss Franc is still the most overvalued but has now increased to a whopping 35.4%.  Meanwhile, the South African rand has “increased” to only 45.9% undervalued, making the Egyptian Pound the most undervalued currency at 65.6%.

Click the image below to see the interactive graphic.

via The Economist

One of the main limitations of the index is that the price of a Big Mac reflects non-tradable elements such as rent and labor, which can vary widely across different countries and can distort the accuracy of the index.  This means that the index is most useful when comparing countries that are at roughly the same stage of development and have similar economic structures and cost of living. Consequently, while it can provide some useful insights into exchange rates and currency values, it is important to recognize that it is only a rough guide and has some limitations when comparing countries.

Another limitation of the index is that it does not consider factors such as taxes, trade barriers, and transportation costs, which can also affect the relative value of currencies.  These factors can be especially important in countries highly dependent on imports or exports. They can lead to significant disparities in currency values that are not reflected in the Big Mac Index.

Despite these limitations, the Big Mac Index can still be useful for gaining insights into global economic trends and currency values.  By using the index in conjunction with other economic indicators and data sources, investors and economists can achieve a more comprehensive understanding of the forces shaping the global economy and make more informed decisions about how to invest their money.

Obviously, there are more factors at play if something can be significantly overvalued or undervalued for multiple years without significant consequences. 

It is not meant to be the most precise gauge, but it works as a global standard because Big Macs are global and have consistent ingredients and production methods.  It’s lighthearted enough to be a good introduction for college students learning more about economics. 

You can read more about the Big Mac index here or read the methodology behind the index here.

The Importance of the Super Bowl

Thirty years ago, the Cowboys played the Bills in the Super Bowl.  As a Cowboys fan, I wanted to watch the game, but my second son was scheduled to be born that day. 

Luckily, our doctor said, “if you want me to be the one to deliver your baby, you need to induce early.” 

So, I got to watch the Cowboys win with my youngest in hand ... while his mother shot me angry looks as I woke him up with my screaming. 

That anchors the Super Bowl as a special day for me ... but some believe it’s also a "special day" for markets. 

The theory is a Super Bowl win for a team from the AFC foretells a decline in the stock market – while a win for the NFC means the stock market will rise in the coming year.  There is one big caveat ... the history of that "indicator" counts the Pittsburgh Steelers as NFC because that’s where they got their start.  If you accept that caveat, it has been on the money 33 years out of 41 - an 80% success rate.  Sounds good, right?

Come on ... you know better!

There is no substantial evidence to suggest that the outcome of the Super Bowl has any significant impact on stock market returns. 

The stock market is driven by many factors, including economic data, company earnings, and overall market sentiment, rather than the outcome of a single sporting event.

Ultimately, it’s important to recognize that the stock market is a complex system – and that no single event, such as the Super Bowl, can predict its performance.  While the Super Bowl may be a fun event and a source of excitement for many people, it’s not a reliable indicator of stock market returns.

Here are some other “fun” stock market fallacies:

• January Indicator
• Aspirin Count Theory
• Hemline Indicator
• Sports Illustrated Swimsuit Indicator
• Men’s Underwear Index
• Big Mac Index

Back to Reality

Rationally, we understand that football and the stock market have nothing in common.  And we probably intuitively understand that correlation ≠ causation.  Yet, we crave order and look for signs that make markets seem more predictable.

The problem with randomness is that it can appear meaningful. 

Wall Street is, unfortunately, inundated with theories that attempt to predict the performance of the stock market and the economy.  The only difference between this and other theories is that we openly recognize the ridiculousness of this indicator.

More people than you would hope, or guess, attempt to forecast the market based on gut, ancient wisdom, and prayers.

While hope and prayer are good things ... They aren’t good trading strategies.

As goofy as it sounds, some of these “far-fetched” theories perform better than professional money managers with immense capital, research teams, and decades of experience.

Here is something to ponder...

What percentage of active managers beat the S&P 500 in any given year?

... Now, what percentage beat the S&P 500 over 15 years?

The percentage of active managers who beat the S&P 500 in any given year can vary, but it is typically low. According to research by S&P Dow Jones Indices, the majority of active managers underperform the S&P 500 over the long term.

For example, in 2020, only 24.5% of large-cap fund managers outperformed the S&P 500. In 2019, the figure was slightly higher at 28.2%, but in 2018 it was just 17.2%. These figures are representative of a broader trend in which a relatively small percentage of active managers outperform the benchmark index in any given year.

Over 15 years, the answer is about 5% of active managers are able to beat the performance of the S&P 500 Index (and that’s in a predominantly bull market). That’s significantly worse than chance.  It means that, in general, what they’re doing is hurting, not helping. 

It's worth noting that these figures represent the average performance of active managers across all market segments and time periods. The percentage of managers who outperform the S&P 500 in any given year can be influenced by a number of factors, including the overall performance of the stock market, the specific market segment being analyzed, and the time period being considered.

In conclusion, while there are some active managers who outperform the S&P 500 in any given year, the majority of them underperform the benchmark index over the long term.

via Gaping Void

There’s simply too much information out there for us to digest, process, rank, and use appropriately.

In 2009, I wrote an article about how things aren’t always what they appear to be.  In it, I mentioned the human predisposition to find patterns in data.  At the time, I was still analyzing and marking up charts looking for patterns ... but I was also using early AI and computers to find better patterns and remove my fear, greed, and discretionary mistakes. 

I suspect that the desire to find patterns is the same element of human nature that leads people to become superstitious, read their horoscope, or go to a fortuneteller.  It is also the reason so many authors and speakers sell access to their chart patterns that supposedly work. The successes are much more startling than the failures.  So the successes stand out.
    -"Things Aren't Always What They Appear To Be"

Today, my stance is even more extreme.  Every second you spend looking at a market is a second wasted.

There are people beating the markets — not by using the Super Bowl Indicator ... they’re doing it with more algorithms and better technology. 

There will never be less data or slower markets.

Onwards.

AI Tools For Your Business

Last week, I talked about the time value of time - and the benefit of quality peer groups. 

On Friday, one of those peer groups spent hours talking about the promise and peril of generative AI. While some people remained skeptical or in fear of what tools like ChatGPT made possible. 

One of the members shared an AI tool directory that I thought was worth sharing as well. It's called Futurepedia.io 

via futurepedia.io

My contribution to the discussion was brief, but it amounts to this ... Nothing you're hearing about AI should scare you. It should scream opportunity.  You don't have to rush.  AI is at the beginning of a long upwards sloping cycle of impact and capability. However, AI isn't duct tape, and for most, it's not a business ... it's a tool to help you create a bigger future that wasn't possible before.  Much like "internet" companies came and went in the late 1990s ... yet almost every company uses the internet in ways that were unimaginable at the beginning of the cycle.

People often get stuck searching for 'something' (often a singular goal or result). But, in their myopia, they miss the possibility of 'or something better.' 

In my business, I'm rarely happy to settle for less than I'm aiming for ... but I am willing to happily take the 'or something better'. Nonetheless, it is hard to see (let alone be open to) other targets or possibilities when you myopically focus on achieving the lesser (but specific) goal or target you initially chose to focus upon.

So, here is a thought to ponder ...

What is opportunity, and when does it knock? It never knocks. You can wait a whole lifetime, listening, hoping, and you will hear no knocking. None at all. You are opportunity, and you must knock on the door leading to your destiny. You prepare yourself to recognize opportunity, to pursue and seize opportunity as you develop the strength of your personality, and build a self-image with which you are able to live -- with your self-respect alive and growing. ~ Maxwell Maltz

Imagine what you believe this tipping point indicates is possible personally and professionally.

Hope that helps. 

On The Time Value Of Time

I have always believed that you can predict a lot about your future based on the quality of the people you spend the present with.

That is why I think participation in quality peer groups is critical. 

Over the years, I joined several business-leader peer groups like Strategic Coach,  Abundance 360, and Genius Network.  These groups are a great way to meet people and learn things ... and they also provide you with access to the benefits of feedback from a group of trusted advisors, perspectives you might otherwise get from a counselor, and a flow of ideas and opportunities that wouldn't have crossed your mind or your desk.  They allow participants to see, hear, and discuss things they don't usually think about, talk about, or even notice.

Peer groups are also great at bringing blind spots to your attention and connecting you to trends transforming industries and the world.

In these meetings, you often find a "nugget" in the discussion.  Sometimes it stems from what is happening in the world.  Sometimes it alerts you to potentially valuable relationships, opportunities, or gadgets.  And sometimes, the nugget comes from discussing a common problem or constraint (like the pandemic) with your peers. 

This week, several of these groups prompted me to think about time (e.g., not wanting to sell time for money, wanting to live past 100, the "strangeness" of time during the past year, etc.). 

Time is funny.  Sometimes it seems to fly by ... other times, it seems to stand still.  Dan Sullivan uses the example of 10 minutes with a dying loved one compared to holding your hand on a stove for 10 minutes.  One seems excruciatingly short, and the other seems excruciatingly long. 

zefrank via YouTube

The average life expectancy for men in the U.S. is 76.

How many amazing vacations do you have left?  How many jaw-dropping moments?  How many fantastic meals?  How many Super Bowls?

What about time with your parents or older relatives?  It's easy to forget to call or miss an important event because "life happens" – but if you realize you may have already used 95% of your in-person time with that person ... doesn't it become more special?

For contrast:

• Would you rather spend that time dwelling on a mistake?
• What about being angry at something out of your control?
• What about doing work that drains you mentally and emotionally?

In my TEDx talk, I mentioned "living like you only have a year left" and how much more "life" we got out of the last part of my dad's life. 

That is just an example, but clearly, it is worth taking the concept further. 

To start, think of some of the activities you do, places you go, experiences you have that are special and make you feel like your best self. 

• Hitting Flow-state and creating something new and exciting;
• Taking an amazing vacation and experiencing something completely new;
• Having a moment with someone you love that makes you stop and say - "Wow!"
• Making a difference in someone's day or giving back to your community;
• Experiencing peace and relaxation;
• Feeling pure joy.

It's easy to get lost and take these moments for granted when they happen, but when you think about how much time you have left ... they take a whole new meaning. 

How can you maximize the time you have left?  Fill it with the best experiences, activities, and people you can.

To start, think about different time frames:

• What activities could you commit to doing at least once a year?
• What activities could you commit to doing at least once a month?
• What activities could you commit to doing at least once a week?
• What activities could you commit to doing at least once a day?

 Make those lists ... it is a simple way to get a better return on the time value of your life.

Seriously, try it.  

Let me know how it worked for you – and what you chose! 

 

 

How'd These 2022 Predictions Fair?

As we brought in 2022, I asked the question:

What's going to happen as a result of the continuing pandemic, inflation, interest rates, the ongoing supply chain issues, and the growing anxiety and unrest brewing underneath the surface of the new normal? In January, we'll get to see VC's predictions. Before that, what do you expect to happen in 2022? - How'd These 2021 Predictions Fair?

I proceeded to share visualcapitalist's 2022 predictions: 

via visualcapitalist

Well, there was undoubtedly increased volatility. 

While the whole board isn't correct, there's a surprising amount of prediction accuracy. On some level, predictions benefit from being generally vague. Also, many of the predictions that may not seem as accurate "today" seemed more accurate at some point this year. For example, we heard a lot about NFTs in the first half of the year, and while Big Tech is currently laying off employees, there was massive growth this year. 

What are you surprised they got right? In what areas were the predictions most off-base? Why?

And, of course, what are your mega-trend predictions for 2023?

Interesting stuff! 

What Year Is It?

It is officially 2023 ...  new year – and a new set of opportunities. 

But that's only based on the Gregorian calendar. Those of you that have followed me for a while know I often go to Asia for Chinese New Year (Gong Xi Fa Cai!) ... but that's also only one of many New Years. 

While the following chart is a day late (and thus, a year out-of-date from a Gregorian perspective), it is a handy little guide for knowing what year it is. Check it out. 

Like most things, time is relative. It can seem to go fast, it can seem to go slow ... sometimes it seems like it stands still. It's a matter of perspective. As we just saw, so is the calculation of what year it is. But, so too is the perspective of what you pay attention to, what you make it mean, and what you choose to do. There's no absolute "right" – only a seemingly endless stream of choices and opportunities.

I hope you had a productive and happy 2022 – and an even better 2023. 

Onwards!