Hoop, great post and - as usual - to very high standard. As well - you clearly know more about market theories than I do, but I still have some questions.
Correct me if I am wrong, but all the market theories are based on observations collected during the most recent say 100 to 150 years. People make observations about correlations and than form a theory about how the market is supposed to behave in future.
Actually - this is similar to climate theories (and I hope that this does not open up another battle field over climate change ... anybody keen to discuss climate change - here is your thread:
http://www.sharetrader.co.nz/showthr...climate+change). Scientists took measures over the last 100 to 150 years and are drawing conclusions from them how the climate is supposed to behave in future. And yes, they discovered a lot of correlations - be it with sunspot activity, (de-)forestation or the CO2 concentration in our atmosphere (and many other factors, some we know and others we don't). Now - obviously we don't know, which factors will be the most important to influence the climate in the future (because we are not there yet), but we do know with the climate that there have been in the past huge changes in the climate caused by other things than the factors we are assessing to predict tomorrows climate. Example: Vulcanic eruptions, huge storms (bringing dust into the atmosphere), meteorites crashing into Earth, increase and or decrease of other atmospheric components (like water). Some of the changes enforced as well some positive feedback like e.g. ice ages: more snow coverage caused lower temperatures due to higher sun light reflection.
My question (now back to market theories) is - why do we think that we fully understand the markets based on a quite short period of observations? Maybe the current low interest period is something like a global ice age - basically freezing the market mechanisms for a long time? Looking at the data for the Japanese market over the past 20 years or so might support this idea. Obviously - all sort of equivalents of meteorite crashes or volcanic eruptions can happen in the markets as well, and I don't think that we have a method to predict what might happen and how markets will react medium term to them.
I think we can isolate the cycles somewhat....Geological cycles are huge oscillations spread over millions of years..and yes my doubt about present day climate change is.. have the Boffins factored in these natural interglacial cycles and are there any of those factors having a differing and a more dominant effect over the shorter cycles..Unfortunately. us the majority are Media taught and the media is fixated on the very short term factors within short term cycles with nearly any form of cyclic events...OK geological short term cycles can be hundreds of years,,but relate that to sharemarket short term market cycles and the influencing factors can just be "noise" (tertiary drivers)..
Back to the Share Market...A personally would be happy to see a 1000 years of data for a secular analysis....Secular cycles last nearly a generation so having 50 Bull and Bear cycles within a 1000 years should be enough to acquire reliable data..So far however the primary driver (inflation) has been identified..Going back to climate (Geological time) 50 glacial cycles would need about 4.5 million years equivalent..There seems to be enough evidence to identify atmospheric CO2 concentrations as a primary driver..
https://upload.wikimedia.org/wikiped...ycles_800k.png
Eyeballing and applying the KISS method to the above Glacial warming cycle/CO2 composite chart it seems the present warming event is just another cycle going through the motions...nothing out of the ordinary..(yet!)
One other question ... markets are obviously influenced by fundamentals, but at least as much by normal human behaviour. Now - it is not always easy to believe for people monitoring the political scene, but humans are capable of learning and of changing their behaviour. If they would not, we still would all swing ourselves from branch to branch through some central African forests.
Which begs the question ... why would we think that things are not different this time? It is different people running the markets - and they do have the knowledge of the last 150 years ... actually, it would be highly unlikely that they don't use this knowledge and with that change the market physics.
What I want to say is - I don't think it is possible to predict the market behaviour based on the last odd 100 years. And sure - given that the market seems to move in waves, it will go down at some stage. Always up is no wave. However - I think we better prepare if we accept that anything can happen - and that there are just certain likelihoods for each scenario.
I think evolution dictates instinctive behaviours and for Humans to evolve towards a different instinctive behaviour would probably take hundreds of thousands of years..or longer...Humans are "herd" animals and we are all "hot-wired" before (at) birth with a set of survival instincts. In effect all humans are "hot-wired" the same...Fibonacci tried to convert the instincts to math. He amongst others observed that all lifeforms and the universe itself have cycles..TA is able to show these group instinctive behaviours..and as these instinctive behaviours reoccur so do the behavioural events..Mark Twain nails it with his famous quote "history does not repeat itself but it does rhyme"..Humans being a "herd animal" is capable of irrational behaviour such as stampedes, from bear market capulations to hundreds being killed during mass crowd hysteria
I think education and higher IQ will not override instincts...Market behaviour is just an extension of herd (group) behaviour and can be predictable..It would take an evolutionary effect to alter that behaviour such as an alien lifeform..Market Bots are programmed with human factors so they exihibit human behavioural traits but maybe in the future an alien lifeform could be an AI created by other AI without human input
Personally - I think that a crash a la 1929 is possible over say the next decade, though it would need in my view a massive trigger which I don't see at current. On the other hand ... if we look into the dynamics of dumb mobs supporting in more and more countries populists over moderate politicians - Yes this might bring us at the brink of another large war, and this might upset markets at some stage. Interesting though, that the 1929 crash was not caused by WWII, but actually just triggered it.
Always the scenario..booms causes busts...Humans seem to get bored/disenchanted with the status Quo (the fashion of today) so if the status quo is great economic times then attempting to become better by changing the systems ends up becoming worse, bizaare or just stupid..Good god I can remember wearing bell bottoms and a flowery cotton shirt and I thought I was cool!! I also wore speedos down at the beach..and later I voted for Rob Muldoon (Rob's Mob)looking back from now to then it was wasn't cool but bizzarre (bell bottoms) and creepy (speedos) and stupid (Muldoon):scared:..The opposite is also true...hence the cyclical behaviour.
I think however that we need to prepare as well for some other scenarios.
One of them would be a financial ice age with low interest rates for decades and very high PE's.
(See my post below) Why is this an option? Well, given all the QE's we have ways too much money in the system (meaning no need to pay high interest rates to borrow it), and given that the world population is likely to peak soon - and afterwards likely to shrink is there as well no growth to reduce the money supply (per capita). Another reason for long low interest periods is obviously that no fed wants to bankrupt their own country, which they would do in most of the industrialised countries given their huge debt loads if they rise interest rates more than a couple of base points. I am sure that they all work towards a common goal (keep the interest rates very low).
Last not least do I think that we still need to be prepared (as one possible option) for some years (or decades) of healthy growth to come. Despite the quote "never underestimate human stupidity" (falsely attributed to Einstein) did humans so far always manage to improve lives and living conditions (at least in the long run).
I am sure that this time it is different (it always is), but I don't know in which way
(I disagree.. it is a cyclical thing) High PE and low inflation has been seen many times in History...The standard of living has been trending upwards at an expontental rate over the Centuries ,..Actually all things are trending exponentially from life expectancy technological advances..communication (decreasing cost of data)..efficiency in producing goods and services..advances in medicine and medical techniques..Biotech..sharemarket indices..Increasing IQ and knowledge, etc... In a hundred years our great grandkids will look back at us as cavemen living in a state of squalor having only basic needs..
The unknown will be the Technological Singularity event due around 2045..We (humans) all hope that AI will be friendly and look after us well i.e. I try to be prepared. Sometimes it pays off to adhere to the old boy scout motto.