Daily Speculations
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James Sogi
Philosopher, Juris Doctor, surfer,
trader, investor, musician, black belt, sailor,
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(address is not clickable)1/09/2006
Intelligence Analysis
Intelligence Analysis: A Target Centric Approach, by Robert Clark, looks at the intelligence analysis process and offers a different approach to market analysis. Intelligence is defined as reducing uncertainty during conflict. Openly available sources can reveal information an opponent wishes to conceal. Intelligence can be the process of obtaining meaning from available information by forming models, hypothesis and conclusions and predictions for use in strategic decision making. "Future conflicts will be fought more by networks than by hierarchies and whoever masters the network form will gain major advantages. "
In one sense, market analysis is simple: It focuses on which way and how far the market will go. The sole goal is to make money. This is simpler than deciphering the course of governments, war, society and the world. On the other hand, the market is a complex network itself. It adapts, evolves and changes, sometimes quickly. Chair's network intelligence approach works. Intelligence input from all levels benefits mutually. A network of hedge funds alone, or dealers alone, or small traders alone, (or all experts only) would not work as well as a broad network with views that contrast, differ and are from different perspectives. As such analysis is a social process. By looking at the market as a network analysis of the components of the network can lead to information in addition to viewing merely the end result. Sometimes it is easier to target a weak link in a network to get information better guarded elsewhere. Successful analysts have an inherent inquisitiveness and lifelong interest in learning that may seem to have no relevance to the current subject area. long term historical perspective is essential in making predictions. Intelligence requires teamwork, and the process is social where there are many stakeholders. One of Machiavelli's strengths was to evaluate conduct rather than values. Objectivity and broad perspective are crucial.
Models are essential to analysis, to simplify, and to capture the range of thinking and creativity. Looking at the market using different models from other disciplines has helped creative ideas of profitable speculation. Models are built, analyzed and synthesized into better models in an integrative process. Ethnocentric bias, wishful thinking, parochial interests and premature closure should be avoided. The conceptual model should look at systems. For example the energy system includes not only oil supply, but transportation, infrastructure, distribution and alternate sources of energy. Rayner and Best talked about creating models in Contingency Tables. The next task is figuring out how to fit the data into the model template. Use Occam's Razor: explain observations with the fewest possible hypotheses, the simplest explanation that fits the facts. This is the parsimony principle.
Data collection can be broad. Rather than sit in the office and wait for info to come in, one thing we did when in the government in my youth was to go to the target and look around, talk to people, look at the wheat, feel the dirt. Look at the weather. It's amazing what you can learn by just observing, as Yogi Berra said. Nothing covert, just ask. What might a speculator learn by going to Detroit and talking with a few GM guys and taking the free tour, going to the farm and looking at the corn, to Brazil, China, Iowa, Dubai; walk around.
In weighing analysis by others weigh the testimony as in a court of law. Is the purveyor competent to express an opinion by education or ability. Did the person nave a bias or vested interest? Was the person able to perceive directly or was the information third hand hearsay? Common errors re caused by over weighing vivid experience, overweighing based on the source (name dropping, testimonial), errors of recency, disfavoring the unknown, hearsay, experts. Weighing evidence may utilize Bayesian analysis or Dempster-Shafer approach using ratios which can be manipulated arithmetically. There is of course a fascinating section on deception and counter espionage.
Analysis entails breaking down a large problem into smaller pieces. Nobel Laureate Enrico Fermi posed the question, how many piano tuners are there in Chicago? The answer was to determine the number of families, the number with pianos, and then how many pianos can a piano tuner tune? The problem of the US interest rates and the analysis of the wrong data recently in the Daily Spec is a good example of the need to properly deconstruct a problem. A bigger view of collateral models may be needed to get a better grasp on the domestic interest rate problems, and a wider global view including commodities may hold the key to the 'conundrum'. This the 'gap' analysis that needs to be done to understand the issue. Clark calls the conundrum an 'enigma'.
Strategic vs. Tactical Analysis. Tactical analysis answers which way the tanks are going, and when. Strategic is long term and looks at SWOT (strengths, weaknesses, opportunities, threats). Collection of I&W (indicators and warnings) were used by analysis to predict the Iraq attack against Kuwait a week before the invasion. True analysis is predictive. The problem is convergent and divergent evidence. One is cause and effect, the other is more difficult along the lines of chaos theory where a meme grows rapidly from small beginnings. An example is the aborted meeting Gates set up with IBM of CP/M Gary Kildall who went flying his plane instead of meeting IBM. IBM, miffed, told Gates to write his own system. Scenarios are constructed and as situations develop the analyst determines which scenario is unfolding and understand which driving force or which branch was central in the development. One of the triumphal trio's main contributions has been the idea of drift. The analyst always must understand that the predictions will always be wrong, in detail. The value lies in the assessment of forces shaping events and markets. Old predictions can be entertaining so far off base and so wrong. In the markets, the bright future scenario shaped by the upward drift, the resourcefulness of man and the market makes the prediction easier. The question becomes solely the path to riches without going bust on the way, i.e., how much leverage to use. The gloom and doom scenario is much more complicated and problematical from a trading perspective.
Of the forces, Newton first named inertia. Things tend to continue. Institutions resist change. All forces meet resistance. No country can expand unopposed, as we are now seeing with Russia opposing US action in the Mideast. We are defined by who opposes us. In Dante's Inferno, Etheriel asks G-d if the adversary is his servant. The reply: "For what is Good but the eternal fight against Evil?"
Jim Sogi, May 2005
(address is not clickable)