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Investigating the Event Cascade
Want crystal clear hindsight? Start with a valid premise.
Aircraft disasters are examined in minute detail. When a cause is found, investigators seek causes of the cause as they work back through the "event cascade" that initiated the crash. We do this same after-the-fact investigation of financial crashes and social events like wars, ostensibly in an effort to learn from our mistakes. Generally speaking, we humans do better at understanding the airplane crashes.
That may be because we try to understand war and finance with the same cause-and-effect model as physics. We think: "If we could only find the cause, we could prevent the calamity." But the physics model doesn't work in the social realm, and though pinning the blame for war or financial problems on a series of events is good business for media, it's a compulsive waste of effort.
For example, let's try to backtrack through the subprime crisis as if it were an accident investigation. Crash debris is now scattered from Europe to China to the Australian Outback. Investigators (the media) are at work producing reports. Here are just a few of today's Wall Street Journal headlines, overshadowed by Murdoch's coup:
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Fears Intensify on Economy
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Fannie, Freddie May Suffer in Subprime Mess
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Stocks Decline on Housing Concerns
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Hints of Broader Problems Arise in Real-Estate Loans
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Bear Seizes Most of Fund's Collateral
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American Home Confirms Liquidity Crunch; Shares Plunge
The subprime mortgage world was once a paradise of cheap money in a social environment where credit could do no wrong. Now it lies nearly in ruins. If we name subprime as the cause, then what caused subprime? Lax lending standards. Fine, then what caused those? A flood of easy credit. OK, and what caused that? The Fed. Ah yes, the institution that was founded to prevent this kind of calamity. Well, what caused the Fed? Uh, the Great Depression?
This circular reasoning heads nowhere. The physics model of analysis doesn't work for socially generated phenomena. The media proves this every time they attempt to use events to justify market moves, and then ignore the same events when the market reverses.
Occam's Razor is a principle that states that the explanation of any phenomenon should make as few assumptions as possible. In other words, the simplest and most elegant answer is usually the correct one. The Wave Principle provides a simple, elegant framework that describes these cyclical waves of optimism and pessimism far better than chicken-and-egg deliberations.
Human social behavior is not event-driven. Our collective interaction causes events. The ebbs and flows that manifest as boom and bust, and peace and war, are part of the same growth pattern that makes Elliott waves in stock charts, and real estate price charts.