How Keynes Gained Self-Mastery To Influence Global Leaders

The global financial crisis has refocused commentators on the life of intellectual/vipra John Maynard Keynes. Hedge fund manager Barton Biggs devotes the closing chapter of a recent book to Keynes’ aesthetics, investment style and economic influence. Ex-World Bank investment manager Liaquat Ahamed zeroes in on how Keynes became so influential in the first chapter of his new book Lords of Finance: The Bankers Who Broke The World (Penguin Press, New York, 2009):

As I began writing of these four central bankers and the role each
played in setting the world on the path toward the Great Depression,
another figure kept appearing, almost intruding into the scene: John
Maynard Keynes, the greatest economist of his generation, though only
thirty-six when he first appears in 1919. During every act of the drama
so painfully being played out, he refused to keep quiet, insisting on
at least one monologue even if it was from offstage. Unlike the others,
he was not a decision maker. In those years, he was simply an
independent observer, a commentator. But at every twist and turn of the
plot, there he was holding forth from the wings, with his irreverent
and playful wit, his luminous and constantly questioning intellect, and
above all his remarkable ability to be right.

Keynes proved to be a useful counterpoint to the other four in
the story that follows. They were all great lords of finance,
standard-bearers of an orthodoxy that seemed to imprison them. By
contrast, Keynes was a gadfly, a Cambridge don, a self-made
millionaire, a publisher, journalist, and best-selling author who was
breaking free from the paralyzing consensus that would lead to such
disaster. Though only a decade younger than the four grandees, he might
have been born into an entirely different generation.

Ahamed offers several lessons here on self-mastery strategies for intellectuals/vipra who desire to influence the objective universe. Keynes mastered a repertoire of roles which developed his intellectual strengths through a boostrap process. Although an establishment outsider, Keynes influenced the frames and contexts of economic decision-makers and political leaders, and in doing so, created the Keynesian school of economics.

Keynes used luck, timing and dramatic situational contexts such as the Treaty of Versailles negotiations in 1919 and the Great Depression in 1929-33 to protest against the establishment, create a reputation for asking difficult questions, and to envision solutions. Through each of these exogenous shocks he used his repertoire to gain influence and public notoriety, despite financial and health setbacks. From his initial antinomian commentary, Keynes’ scale and scope of his solution design expanded to its zenith: the co-design of the Bretton Woods system for international fixed exchange rate and monetary policy management, which lasted from 1944 to the Nixon Shock in 1971.

For consultants and foresight practitioners who wish to cast their influence into the world, Keynes’ career path and strategies illustrates one model of how to achieve this.

Picking Up The Phone To Hear White Noise

Social-democrat economist John Quiggin fires an interesting salvo in the journalist-blogger debate: ethics and journalistic practices are perhaps the key distinction between the two.

Watching the hostility between ‘old media’ journalists and some Web 2.0 bloggers is often like watching Muzafer Sherif‘s Robbers Cave experiment. For bloggers, traditional journalists are constrained by objectivity, news values and institutional power, and traffic in biased op-ed columns and lightly rewritten corporate press releases. For journalists, bloggers don’t understand the norms and practices of the craft, don’t navigate the institutional shadow network, and vary greatly in the quality of their analytical insights. The two clashing stereotypes fuel a circular debate, which like Sherif’s experiment, may only change when a frame-changing exogenous threat is introduced.

For me, Quiggin makes three key points: (1) journalists have a socially recognised role to “pick up the phone” and talk to strangers; (2) journalists may select material from their interviews into a story and do not have to report everything; and (3) journalists have “a formal code of ethics and a set of informal conventions” to do this whilst bloggers do not. In doing so, I believe Quiggin adopts a middleground position similar to Terry Flew, Barry Saunders, Jason Wilson (from their YouDecide2007 project) and my own thoughts on citizen journalism, with some new insights.

My personal experience of Quiggin’s first point is that their role can empower journalists with Freedom to talk with anyone, and to view a situation through different, iterative stances. As I discovered during a 1994 student journalism stint and 1995 coverage of Noam Chomsky‘s Australian lecture tour, this is a great shock: in the right situation, people can tell you anything, and you can also become a a participant-observer who is now inside the unfolding events. It’s a little like Jim Carrey‘s character in the romantic comedy film Yes Man (2008): you ‘forget’ the self-limitations of yourself and act beyond normal social conventions.  As Quiggin observes, few people can ask questions of strangers and expect to get revelatory answers.

This approach reaches its zenith in New Journalism as a methodology and repertoire of practices in three ways. First, the journalist may create the “story” through a catalytic, influential effect on the external environment. Second, the journalist can become part of the “story” through capturing their subjective consciousness, and trying to capture a similar stance from the other participants through internal dialogue, scene reconstructions and other techniques. Third, the journalist has more freedom in convention, methodology and practice, such as using fiction techniques in a non-fiction profile. At its core, New Journalism fuses autoethnography, anthropology and acting, which are facets that a blog publishing system might not capture.

Quiggin’s second observation is a major flashpoint in the debate: how journalists hone a story and select the facts to report. Bloggers turn to critical media studies for many of their arguments: objective news values, op-ed columnists and other biased sources, institutional forces, and a conservative implementation of web publishing capabilities. In turn, journalists point to the chatter/noise factor in blogs: they may be alternatives to op-ed columnists and newswire press releases yet do not yet replace areas that are resource-heavy and have mature practices, notably investigative journalism. Bloggers counterargue they have more freedom to use nonlinear narrative styles and to publish the raw sources. Perhaps one of the lessons from YouDecide2007 and AssignmentZero was that the editorial decision process to hone and select material is more nuanced in practice than Twitter‘s role as a first responder in disasters and emergencies.

How do journalists navigate such decision processes? Journalists have discipline-based norms, practices and ethics as barometers. This acts as a check and balance within newsroom culture and its role only becomes clear in a go/no-go decision where the editor has to weigh up the competing interests of different stakeholders and the potential outcomes of publication. In contrast, many bloggers appear to be driven by normative-based anchors (Web 2.0 compared with institutional journalism) and commons-based advocacy (education, sustainability, future generations). But belief alone in noosphere politics and networks may not be enough to surmount the different manifestations of power. If bloggers want to influence the objective universe they can learn much from journalist ethics and strategic nonviolence.

Wikinvest

Parker Conrad and Michael Sha launched Wikinvest in 2006 to gather user-generated security analysis. The project collates wiki profiles on investment concepts, fundamental analysis of companies and technical analysis of market price movements. It also appeals to MBA students with sections on personal investing, investment concepts and funds management. Conrad and Sha have graduated from Harvard dorm day traders to Web 2.0 knowledge entrepreneurs.

Claire Cain Miller’s New York Times profile makes the obligatory link with Wikipedia, the online encyclopedia. Conrad and Sha go into some detail of their verification process for data and public sources. Actually, the wiki has some specific applications for the pooling or crowdsourcing of investor insights. Sell-side analysts in the research departments of investment banks can have dual allegiances if the underwriting departments incentivise their research products to drive sales revenues. The best will gravitate to portfolio managers, dynamic asset allocation and hedge funds that use event/risk arbitrage and short-sell strategies. An investor wiki could provide a counterbalance to these influences through a broader snapshot of investor sentiment, and strategies to delimit analyst biases and groupthink. A side-effect however is that investor views are more likely to converge to a mean, and the market efficiencies may thwart value investing strategies that require information asymmetries.

In fact, the Wikipedia analogy has some limitations because analysts, traders and portfolio managers all structure and use market information in different ways to online encyclopedias. This was one of wiki creator Ward Cunningham‘s insights when he devised the Portland Patterns Repository in 1995: the value of a repository to capture domain knowledge and processes, and to codify them from tacit to explicit form using a methodology such as design patterns or object oriented programming structures. If it stays within Wikimedia’s online encyclopedia model then Wikinvest will be suited to fundamental analysis and introductory investing topics. However, it could evolve into a different form if it adopts insights from behavioural finance and tactical asset allocation into the wiki process. These areas augment Cunningham’s original schema with strategies to deal explicitly with how information quality and source selection can affect investor decisions, judgment and verification. Even these vary depending on the end-user, their self-awareness, the intended contexts of use, and what potential outcomes may occur (a normative stance on the superiority of user-generated content over ‘traditional’ media is not sufficient alone to address the concerns that these processes are meant to anticipate and solve). The pressure to change and evolve may come from sell-side brokerages which now use Wikinvest as a cost-efficient data source for market commentaries. Alternatively, it may come from Wikinvest’s end-users as the wiki gains more public prominence, and attracts a range of investor styles with knowledge of asset classes, inter-market volatilities and global dynamics. If this occurs then Wikinvest and other wikis could have a pivotal role in the democratisation of finance beyond London, New York and Chicago.

Just don’t be surprised if Icahn Reports maven Carl Icahn (video) launches a wiki raid.

DreamWorks’ Debt Finance Battle

Hollywood recently honoured Steven Spielberg with a two-hour retrospective on his 40-year career as a film director and producer. FT‘s Matthew Garrahan reports however that the celebrations may be shortlived: Spielberg cannot raise debt capital for his independent film company DreamWorks after talks failed with HBO and NBC Universal.

DreamWorks has endured a difficult 14-year history. Spielberg co-founded the film studio as DreamWorks SKG in 1994 with music mogul David Geffen and Jeffrey Katzenberg who had just left Disney after a high-profile battle with Michael Eisner. Spielberg envisioned DreamWorks SKG as a 21st century successor to United Artists whilst Geffen and Katzenberg wanted their independence from the Hollywood establishment. However since 2004 the trio have rolled back their original vision and relied instead on the divestiture of the DreamWorks Animation division and distribution deals. They sold the studio to Viacom in 2005 partly because Geffen wanted an exit strategy from a daily operations role. Spielberg announced a $US1.5bn deal for independent films in September 2008 with India’s Reliance ADA Group which specialised in Bollywood films. The announcement was a world is flat moment worthy of Thomas Friedman: would India invade Hollywood as Japan’s Sony had done with its acquisitions of CBS Records (1987) and Columbia Pictures Entertainment (1989)? But as Garrahan notes, Reliance ADA Group’s funding of Spielberg’s independent vision was contingent on debt finance and distribution deals from other funding sources, which have now ended the negotiations.

There are several reasons for this outcome apart from the global financial crisis. Just before he announced the Reliance ADA Group deal industry analysts suggested that Spielberg had priced himself out of the United States market. Jeffrey Katzenberg’s attention is elsewhere: a charm offensive to raise the investor profile of DreamWorks Animation and its 3D releases. NBC Universal, HBO and other funding sources have their own reasons to be wary of DreamWorks: the fledgling studio was too early on digital television in the dotcom era, Geffen and Katzenberg adopted hardball negotiation tactics on earlier distribution deals which make a repeat game difficult. The ancillary and complementary markets in cable television, DVD and Blu-Ray sales face a volatile near-term future. Collectively, these factors may weaken Spielberg’s negotiation stance as the global financial crisis closes off other funding sources.

To have different negotiation options Spielberg may need to alter his game plan and overcome two barriers.

First, DreamWorks never developed the economies of scale and leverage to achieve Spielberg’s strategic vision as an independent studio. It overestimated demand for its Shrek and Transformers franchises and made money instead on mid-level romantic comedies and animation films. DreamWorks faced firm-specific risks from distribution partners which it hedged using ancillary and complementary markets to control revenue forecasts. Instead of the prohibitive cost structures of a studio Spielberg could model an independent DreamWorks on a smaller vision: Francis Ford Coppola‘s Zoetrope and Harvey Weinstein‘s Weinstein Company.

Second, Spielberg could look at other options to raise capital. He could follow David Bowie‘s example of asset-based Bowie Bonds and underwrite the films through commercial bonds on the future revenues of individual films or a production slate portfolio. Commercial paper may be an option as the global finance crisis recedes. A far more disruptive strategy would be if Spielberg adopted a microfinance model that would enable a broader range of investors to participate than the traditional debt and equity markets. DreamWorks’ legacy would then surpass the Hollywood studio system to encompass the bottom billion‘s dreams of financial independence.

J6M Returns

At the nadir of the 2000-01 dotcom crash I worked for an Internet news portal that a high-profile US interactive consulting firm had acquired. As the stock price dramatically plummeted the firm’s employees apparently left irate messages on the CEO’s mobile phone and debated the merits of an (in)famous investor conference call. After a deathwatch period the ex-CEO formed a holding company, hit the university lecture circuit, launched a new company, and is now an inhouse entrepreneur at a venture capital fund. The company was Razorfish, the CEO/entrepreneur is Jeff Dachis, who now works with Austin Ventures.

Jo Johnson’s Financial Times interview with Jean-Marie Messier (aka J6M) the fallen ex-CEO of French entertainment conglomerate Vivendi SA (Google Finance stock price) prompted me to follow Dachis’s Twitter page. Dachis and J6M offer many lessons on how smart executives can make mistakes, survive the deathwatch period, and fire back. Both faced learning/experience curves as young, ambitious CEOs and grew their global footprint through acquisitions of smaller firms. Both gambled on bold Web 1.0 visions of digital ecosystems in which the acquisitions promised deal synergies. When the gambles failed they became media targets for value destruction which made the deal synergies a mirage: Johnson and Le Monde journalist Martine Orange pilloried J6M in their book The Man Who Tried to Buy the World (Portfolio, New York, 2003).  Just over five years later, J6M is frank with his former nemesis on his survival instinct: “The real motivation is to be alive, to restart, to kick yourself and stand up again.”

Johnson believes many of J6M’s decisions are gambits to resurrect his reputation on his own terms. He’s reached out to financial media journalists who took him to task for Vivendi’s hypergrowth. He’s a longtime confidante and advisor to French president Niolas Sarkozy. He’s joined George Soros, Paul Krugman, Robert Shiller and many others in writing a book on the global financial crisis. But perhaps J6M’s smartest move like Dachis was to leverage his core skillset to create value, in a more favourable setting without the pressure of being a public company CEO. J6M founded Messier Partners in 2002 as a 20-person investment advisory boutique with offices in New York, Paris and London that provides cross-border M&A, divestitures and capital raising services (Forbes & International Herald Tribune coverage). Like many boutiques it leverages Messier’s name, personal network and a cadre of young analysts whilst keeping a low profile: when I checked, the firm doesn’t have a current public website for its Internet domain name and its Internet Archive cache returns errors. You’ll have to settle for the boutique’s LinkedIn page, BusinessWeek profile and Jobs-Salary.com data.

NIN’s HD Lights In The Sky Tour Footage

Trent Reznor has released 404gb of raw, unedited HD tour footage from three shows on Nine Inch Nails‘ 2008 Lights In The Sky tour.  The footage is available as a peer-to-peer BitTorrent file.

An interesting pattern emerges about the reasons for Reznor’s BitTorrent tactics and Christmas gifts to fans.  Several weeks ago Reznor indicated to fans that an official DVD project for the tour had fallen through after a negotiation breakdown with a production company.  Whilst researching this 2008 conference paper and presentation I found out that Reznor knew in December 2006 about the Pirate Bay leak of NIN’s unreleased Closure DVD (Halo 12), a project still held up by licensing negotiations.

As I suggested in the paper, Reznor is using BitTorrent hyperdistribution to side-step negotiation breakdowns.  You can visualise the backward induction of decision tree payoffs or the real options analysis.  It’s a win-win situation for Reznor and NIN’s fans: Reznor breaks the deadlock and releases ‘unreleasable’ projects which probably have significant, unrecoverable sunk costs.  Fans get the raw, unedited material for user-generated content.  Behind this strategic rationale is a positive feedback loop that keeps NIN and Reznor relevant, generates buzz marketing and media coverage, and enhances Reznor’s bargaining power in negotiations.  The losers in this reshaped value net are the traditional record companies, their retail distributors and music industry lawyers.

Panetta’s CIA Director Nomination

The debate about the Obama administration’s nomination of Leon Panetta as the Central Intelligence Agency‘s next director highlights the greater visibility of the United States intelligence community.

Media pundits diverge in their opinions about Panetta’s suitability for the role.  In doing so, they reveal how each makes assumptions about the CIA’s institutional function, the CIA’s relationship to the Director of National Intelligence (DNI), the budget process, and the experience of political outsiders in assessing the quality of analytical product.

In the sample I looked at The Nation‘s Robert Dreyfuss reflects the consensus view that Panetta is a “doomed” appointee as a political outsider.  Dreyfuss makes four key arguments:

(1) Dreyfuss is a political appointee to a non-political organisation.

(2) As a “consumer of intelligence” Panetta is passive and unable to spearhead the operational transformation that the CIA needs.

(3) Panetta opposed the Bush administration’s interrogation techniques yet a CIA insider would have been a better choice.

(4) As “a relentless centrist and a conciliator” Panetta will be outwitted by the Pentagon, the DNI and private military contractors, even though Dreyfuss opines, “the very office of the DNI is a useless post, and the entire office ought to be abolished by Obama on day one. Who needs it?”

Dreyfuss writes great, sarcastic op-ed commentary but the limitations of his arguments becomes clear when you compare his analysis with two columnists who actually know about the intelligence bureaucracy and its function: Slate‘s Fred Kaplan and The New Yorker‘s Steve Coll.  Each show for different reasons why Dreyfuss’s arguments are interwoven.

Political appointees to the CIA have a poor track record, Kaplan and Coll agree.  Coll finds Panetta’s nomination “unconvincing”.  Kaplan suggests that Obama’s priority was to distance his incoming administration from Bush’s perceived politicisation, and in the absence of other candidates, Panetta was the best choice.

This priority also discounts Dreyfuss’s third argument on why a CIA insider would be inappropriate.  “He seems to have been selected as a kind of political auditor and consensus builder,” Coll suggests, in agreement with one premise of Dreyfuss’s fourth argument.  Coll however does not write-off DNI and suggests Panetta’s limitations: his lack of foreign policy experience, and his lack of direct experience in managing the CIA’s operations and relationships “with other spy chiefs, friendly and unfriendly.”

Dreyfuss believes that Panetta would therefore be under the control of Admiral Dennis Blair, who is Obama’s DNI appointee, and thus undermine the CIA’s civilian status.  Kaplan has a more nuanced view of the DNI-CIA relationship and Panetta’s leadership style.  He suggests Panetta could retain the CIA’s deputy director Steven Kappes, a move that would please insiders and consolidate his position.

Kaplan also reveals that Panchetta knew more about the CIA’s intelligence programs than Dreyfuss’s write-off suggests.  As the Clinton administration’s Office of Budget and Management “director and White House chief of staff, he was not just passively exposed to intelligence issue,” Kaplan counters.  He then quotes an email from former counterterrorism chief Richard A. Clarke which reveals that Panchetta “knew about all of the covert and special-access programs.”  This experience gives Panchetta the budget skills, special knowledge, and high-level overview of CIA activities that few insiders would have, and that is a close fit with operational transformation methodologies.

If Panchetta’s nomination doesn’t work out I have a Team B that could probably do the job of cleaning up the CIA’s black budget programs, or at least make an Open Source Intelligence attempt.  It would include award-winning journalist James Bamford whose book The Puzzle Palace (1982) features revelations about the National Security Agency; anthropologist Carolyn Nordstrom whose book Shadows of War (2005) revealed the new contours of global conflicts; and Economic Gangsters (2008) authors Raymond Fisman and Edward Miguel, who use publicly available information such as diplomats’ parking tickets to uncover potential corruption.  Add Kaplan, Coll and their New Yorker colleague Lawrence Wright, and that’s a pretty substantial investigative team with foreign policy and intelligence community experience.

Kuznets’ Remakes

Why does Hollywood’s upcoming production slate have so many remakes of classic science fiction, horror and fantasy films?  Depending on your viewpoint, several reasons.

The Writer’s Guild of America‘s 2008 strike affected the ‘deal flow’ of new scripts that Hollywood’s studios may have purchased and fast-tracked out of development hell and into pre-production.  In the language of managerial economics the studios lacked the willingness to pay (WTP) the willingness to sell (WTS) price demanded by WGA members for their services.  Faced with months of industrial action the studios pursued a fallback option: remakes of existing properties.

WGA’s delay tactics have given the studios a potential financial windfall in the near-term future.  The studios often already own the intellectual property rights for the remakes.  Demographics such as inter-generational shifts creates two consumer segments: people who remember the original films, and Gen X and Gen-Y viewers who are new.  Ancillary markets can be tapped, from cable television re-runs of the original films to DVD repackages/re-releases, ‘versioned’ editions for collectors, and ‘bundled’ packs of both films.  The studios’ windfall is a short-term boost in cashflow which can be used for working capital management or debt-equity leverage.  New Zealand’s Weta Digital also benefits as the films require its expertise in digital special effects; the studios can minimise their production costs through currency hedging and business process outsourcing.

The global financial crisis also benefits the studios through a market timing strategy for film portfolio management.  The production slate announced so far for 2009-2010 is heavily weighted towards dystopian science fiction films from the turbulent late 1960s and the energy crisis/stagflation early 1970s.  There’s also a few 1930s Depression era monster films and 1950s Cold War science fiction.  American journalist Annalee Newitz, amongst others, has observed that Hollywood studios turn to genre films during times of social dislocation; this thesis is central to 1950s film noir and its neo-noir remanifestation in the early 1990s recession, and may also fit the micro-trend of counterterrorism films in the wake of the September 11 terrorist attacks.  Cinema Studies scholar Geoff Mayer has also explored this thesis in Pre-Code Hollywood cinema and the Western genre.

However, there’s another potential pattern here that might be worth further research, even though correlation is not causation.  The 1930s Depression era films appear to fit the 54-to-70 year long macroeconomic cycle (aka the KWave) that Soviet mathematician Nikolai Kondratieff proposed, particularly the Fall and Winter periods of stagnation and recession/depression.  The time period between the 1930s, 1950s and 1970s films also roughly fits the 18-year Kuznets Wave identified by Simon Kuznets, and which might explain the deeper/unconscious interest in 1970s film properties.  Add a mid-1990s wave of films (perhaps neo-noir or the heroin chic of My Own Private Idaho and Trainspotting), and you have a series of macreconomic cycles that span film genres, subcultural imagery, inter-generational audiences and new cohorts of film actors, directors, scriptwriters and producers.

It may be a neat backtesting/retrospective explanation of how Hollywood studios can revitalise their institutional power.  Or, it just may be the theoretical framework for the Entourage crew to shed their up-and-coming careers and achieve some real deal-making longevity.

Trading Chaos

Williams, Bill & Justine Gregory-Williams.  Trading Chaos: Maximise Profits With Proven Technical Techniques (2nd ed.), John Wiley & Sons, New York, 2004.

The father-daughter authors summarise a personal methodology based primarily on: (1) the technical analysis of oscillations in market securities; and (2) the opportunities for day traders and swing traders to appropriate value from institutional funds through ‘countertrend’ signals which occur in commodities futures and currency/foreign exchange (forex) markets.  The first (1995) and second (2004) editions coincided with the IT and subprime bubbles which created day trading subcultures and market volatility, so it would be interesting to see how the authors have fared during the 2007-08 global financial crisis.

The book’s first half synthesises various ideas on formulating a trading plan and the psychology of market trading.  The ideas include a social constructionist view of money as a holder of value (John Searle); crowd psychology and rational herds in markets (Gustave Le Bon, Charles Mackay); the new paradigm of chaos theory in markets and how fractals and self-similarity create new trading perceptions about pricing and signals (Benoit Mandelbrot), and the popularity of Eastern belief systems amongst traders as models for skills acquisition and stress management (notably Western popularisations of Zen and Taoism).  Thus an awareness of broader intellectual trends can be useful to unpack the building blocks of a system and for comparative analysis with other theorists and models.

Ben Williams’ original contribution is to explain how his background as a psychologist informs his trading approach.  Chapter 7 outlines a generic model of skills acquisition — novice, advance beginner, competent, proficient and expert — that was explored in the book’s first edition, and can be integrated with Agile, CMMI and other frameworks for integrating operations and strategy.  Williams summarises exercises from autogenic training for stress control in the face of market volatility, symbolic interactionist approaches to align the trader’s individual psyche with the market, and cognitive psychology techniques such as cognitive chaining for surfacing deeply held beliefs which lead to self-sabotage and trying to trade out of a losing position without stop losses.  The cognitive psychology approach reminds me of physician John Lilly‘s mid-career work on meta-beliefs and it also parallels recent work in behavioural finance.  However, some descriptions — such as a section on Taoism, Zen and visualising the market as a river which follows the path of least resistance — seem to be closer to New Age beliefs about zero point fields which integrate consciousness and matter than the original metaphysical systems.  I agree these systems can be applied to training however they need far more grounding than detailed here.

From the earlier material on trading approaches, the book’s second half develops a trading system to anticipate the price movements in market securities through fractals and self-similarity which occur in volatility.  It’s always interesting to see how traders justify their approaches and the example trades given.  I’m closer to the adaptive markets, event arbitrage and behavioural finance schools of investing and remain to be convinced about the validity of technical analysis that the Williams propose, beyond the obvious role of pattern recognition.  Actually perceiving nonlinear dynamics and turbulence can be very different to the language and paradigmatic thought that makes chaos theory a popular explanation.

I did experience some perception changes after reading Trading Chaos: (1) charts might be interpreted in a different psychological frame using fractal, self-similarity and volatility metaphors; (2) viewing charts at different timescales (e.g. 1 hour, 1 day, 1 week) might develop the cognition skills to quickly scan signals in a real-time environment; and (3) the juxtaposition of lead and lag signals for trading decisions and triggers has potential, particularly if combined with game theoretic modelling of the market and volatility effects from institutional investors, monetary policy and rational herds.  It remains to be seen if these perceptions are sustainable and verifiable in trading conditions, and not just subjective reactions based on past research about chaos theory models.

That said, the trading system may also have several criticisms and weaknesses. Finding signals in oscillations and nonlinear dynamics may be difficult in a volatile market.  Analysts can be subjective particularly if de-leveraging and other actions by institutional investors are not factored in.  Swing traders may be exposed to market sensitivities (aka the Greeks): Gamma (the rate of change in the underlying security’s price), Vega (sensitivity to volatility), Theta (time-decay) and Rho (time-decay of interest rates).  Finally, modelling turbulence and uncertainty in a grey or white box system remains a major challenge for financial engineers in new market environments.

Threaded throughout Trading Chaos are the mix of useful insights and shibboleths in day trading subcultures.  CNBC, investment experts, and the plethora of courses and newsletters thrive on investor insecurity yet create noise (pp. 34, 42, 56).  Trading decisions, trading volume, and speed and type of momentum may be lead indicators of price volatility (p. 126).  Broad market knowledge purports to trump expert/specialist understanding (p. 135).  Market facts must be distinguished from opinions and beliefs (pp. 8-11).  Trader personalities shape risk tolerance, time horizon, the asset allocation process and types of controls (pp. 92, 155), a factor relevant to human resources consultants and the ‘transition in’ process for trading desks in investment banks.  Analysis risk involves emotions and perceptions of a signal (pp. 52-53).  The interest in Fibonacci numbers and Golden ratios are partly because they are iterative, geometric structures applicable to price movement forecasting (pp. 22-23).  Grey and white box systems with transparent, programmable rules are preferable to expensive, high-end black box systems which use artificial intelligence and neural net algorithms (pp. 53, 56).  A useful bibliography highlights the Santa Fe Institute‘s influence on chaos theory applications in finance and macroeconomics.  It suggests this area needs far more research to verify the claims and provisional findings in this book, to separate the gold from the dross.

Perhaps the most pivotal insight of Trading Chaos is buried in the text.  “We all trade our belief systems.  When some of you think about this, it produces a crisis,” the authors assert.
  Now that could be the basis for a ‘contrarian’ trading system — probably the one that hedge funds with a short/event arbitrage approach use to scalp day traders in currency/forex and commodities futures markets.

Calling All Nations

Several weeks ago I noticed new graffiti on street signs in the Melbourne suburb Northcote from an unknown group: the Saracen Soldiers.  A block away from the most prominent graffiti two houses displayed nationalist flags in their front windows.  It could have been coincidence or maybe a signalling game to establish psychological turf.

At the time I thought of the ominous graffiti in Philip K. Dick‘s posthumously published novel Radio Free Albemuth (1985).  The grafiti also reminded me of the wanna-be teenage mercenaries in Leo Berkeley‘s film Holidays on the River Yarra (1990), who are recruited by a racialist organisation to engage in graffiti, brawls and other low-level politically motivated violence.

Two nights ago police fatally shot 15-year-old Tyler Cassidy during a confrontation in Northcote’s All Nations park.  Earlier that evening, Cassidy left home after a family argument then stole two knives from Northcote’s Kmart store.  Four police were called to arrest Cassidy and Victoria Police will now investigate what happened next.  As Rosie X observes, several media outlets speculated about Cassidys membership in the nationalist group Southern Cross Soldiers (SCS) and posed a ‘suicide by cop’ explanation for Cassidy’s death.

There are a couple of interesting things to note about blogosphere and media coverage.

Journalists described Cassidy’s online life as “subterreanean” – a mix of Sherry Turkle‘s theories about online identity fused with cyberterrorist fears – yet did not link to Cassidy’s MySpace page or mention the SCS sites above.  In contrast, Richard Metzger observed to me in 1998 that Disinformation had a different strategy: it would link to white supremacist groups such as Aryan Nations so that readers would understand their ideological worldview.  This got Metzger into trouble with several anti-racialist organisations who confused him with Tom Metzger of White Aryan Resistance.

Anarchist and anti-racialist bloggers knew SCS for months before Cassidy’s death as a white supremacist gang or youth network. The SCS band has copied Rahowa‘s white separatist music as a recruitment strategy.  The social network Bebo has pages for SCS recruitment and the SCS bandJacques Ellul would be proud: SCS (and perhaps Cassidy unwittingly) use a blend of Australian historical imagery for in-group identity and integration propaganda (“Aussie pride”, the Southern Cross flag, conflation of national identity with ethnicity) with agitation propaganda that is aimed at specific out-group enemies (Italians, Lebanese, anyone who does not meet SCS’s criteria for being Australian).

Several questions: How many other pages are there?  Who has been monitoring them?  What if any threat assessments were made?  Will anyone get an opportunity to conduct a sociometry analysis of SCS’s online social network before the pages are pulled (Marc Sageman established a benchmark with his study of Salafist cells that may have had weak ties to Al Qaeda).

Bloggers and journalists alike noted that police might have de-escalated the incident if they were armed with a Taser electroshock weapon.  The incident captures why there is a tactical role under specific circumstances for law enforcement personnel to use non-lethal or less-lethal weapons that could have saved Cassidy’s life.  The four police will likely receive critical incident debriefs and stress counselling.

A few days after Cassidy’s death Northcote remains largely subdued apart from occasional police sirens in the distance.  In contrast. Greece has faced a week of riots after the shooting of 15-year-old Alexandros Grigoropoulos which may spread to Europe.  As a ‘paired study’ – SCS’s street gang violence, the shootings of Grigoropoulos and Cassidy, and the divergent reactions – illustrate the late sociologist Charles Tilly‘s distinction between individual aggression (Cassidy), brawls (SCS) and scattered attacks (Greece) as different types of collective violence.

Tilly’s urban sociology in the 1960s foresaw how today’s social network sites may be used to coordinate street violence.  Perhaps police intelligence analysts would benefit from a few hours with Tilly’s masterful study The Politics of Collective Violence (Cambridge University Press, Cambridge, 2003) to pre-empt any SCS revenge attacks for Cassidy’s death.  SCS might then remain the purveyers of bad hip-hop/rock/metal hybrids (not exactly Australian), poorly designed web sites and street graffiti: the opportunist yet ineffectual extremists that Dick and Berkeley tried to warn us of . . . and that Greece and Europe may face again.