AI Insights

Lessons From History

by Plotinus Plotinus No Comments

Who would have predicted a year ago, from the trough of the pandemic crash, that the S&P 500 would cross the milestone of 4000 on April 1, 2021? Its symbolic importance increases considerably when it is considered in the context of what a highly unusual 12 months it has been.

The broader question of course, pertains to the future not to the past. It is one of sustainability, how long can this growth continue?

The chart illustrates how the conditions of negligible interest rates, as a response to the market trauma in 2008 and last year, are intrinsically related to the stock market recovery in both cases. Their characteristics though are somewhat different.

Taking negligible rates conditions to be from when the Federal Fund rate first dropped below 0.10% at the end of December 2008, interest rates averaged 0.13% for the next six and a half years, ranging from 0.04% to 0.25%. The S&P 500 rose to a peak of 214% from its low during this period. The rate of the recovery was most rapid in the first year, it rose 68%.

In the past year, the Federal Fund rate first dropped below 0.10% at the end of March 2020. It has averaged 0.08% since, ranging from 0.04% to 0.10%. From the low during this period of negligible interest rates (this occurred on April 1, as distinct from the absolute low of March 23, which occurred before the negligible interest rate period had begun), the S&P 500 has grown 63% in 12 months, less rapidly than the first 12 months post the low of 2009.

A feature of the post 2009 period is the stabilization in the change in the rate of growth once the market had fully recovered and was adding new growth. Ultimately this steady growth continued (with minor aberrations) for another five years until the pandemic recession.

A similar pattern can be observed taking shape in the last year. Since recovery was achieved in August, the change in the rate of growth is showing signs of stabilizing.

From the long-term viewpoint, it is early days in this post recovery phase and too soon to prognosticate on what this may mean for future growth. That said, however, it should be kept in mind that whilst it may not be the best idea for the speculative investor to look for historical repetition, policymakers do look toward history with somewhat of a different eye. The book on the crisis and post-crisis management of the Global Financial Crisis was authored by the Fed. They have the scope to take the broader view on how the long-term pandemic post-crisis should be managed. Thus far the indications are that this approach will be watchful and calm.

In 2021 we have already seen investors jitters when it comes to inflationary worries and there is a certain inevitability that fears of over pricing, the potential for a correction or sector rotation will be the source of further market turmoil. This is where investors are perhaps best served by looking for those opportunities that allow volatility to be managed while keeping faith with US equities.

© 2021 Plotinus Asset Management. All rights reserved.
Unauthorized use and/or duplication of any material on this site without written permission is prohibited.

Image Credit: Pixelbliss at Adobe Stock.

The Limits of Knowledge

by Plotinus Plotinus No Comments

The recent stock market turmoil took the shine off February’s early glow and set the NASDAQ on course for its worst losing streak for twelve months. Much of this disturbance appears as a spill over of bond nerviness and the specter of inflation raising its ugly head. It is interesting, though, to see how much it is the ghost of a former era. The dip-buyers generation knows not inflation. Up until a year ago said same generation had not known a bear market. Now however, they have experienced a bear market, all be it the shortest in history and one that surely has cemented unwavering faith in dip-buying forever.

This raises a curious question: is ignorance bliss, or a profound vulnerability?

Did for instance the blind faith that the pandemic fall had a bungee cord attached, and that all dips should be bought, assist the rapid ascent of recovery, and consequently actually effectuate a new reality?

It is part of human make-up to rapidly identify and compound confirmatory biases. This tendency has its problems in that we tend not to see that we are involved in a self-fulfilling prophecy until it has blown up in our faces. On the other hand, without the optimism to see the positive signs of opportunity, there would be no growth only a fearful stagnation.

When building an AI trade decision-making process, we must be cognizant of how it receives its data. Trading is not a game with a set of clear, defined rules, it is elastic, plastic, smart and stupid, crowd and individual all at once.

Opinions as to whether the increase in long term treasury yields is a sign of a pandemic aberrated, economic overheat or as Janet Yellen recently suggested a sign of a stronger-than-anticipated recovery, will vary according to one’s personal perspective and with it the preparations (or lack of) for higher inflationary conditions.

What interests us however, as AI practitioners, is what this means in terms of the limits of knowledge and the degree to which knowledge or the absence of knowledge influences a decision-making process. Subtle inferential bias can emerge in that process depending on the amount of knowledge at hand. So, we are left with questions as to how much we should seek to know to assist, rather than detract from this process. The Big Data temptation is to accumulate all that there is to know or at least all there is to know up to some processing limitation. Know is the operative word here, does know mean knowledge of i.e. awareness of, or does it mean the accumulation of factual knowledge? This question itself, requires a further question, what do we mean by factual? As that the author considers that facts are always context dependent.

Thus, we are faced with having to analyze what we think we know, or in the case of an AI system what it is aware it is aware of. This changes concrete facts into floating opinions and the analysis brings one to recognize the manner in which we weight or rank those opinions (a structure that is often predetermined by the perspective that has been adopted from the start) hence the danger of falling into the trap of introducing latent self-confirmatory bias. In simple terms, if you see disquieting signs of inflation ahead you will find more, whereas if looking at the same signs you see a stronger-than-expected recovery then those are the signs you will find more of.

When building an AI trade decision-making process, we must be cognizant of how it receives its data. Trading is not a game with a set of clear, defined rules, it is elastic, plastic, smart and stupid, crowd and individual all at once. So, these varied and in many cases contradictory perspectives are both imbedded in the data but also imbeddable into the data. To avoid leaving itself in a position of static indecision the AI system must be able to discern the implicit meaning of that data. Engaging in this process though is not value free. By doing so it is therefore adopting an opinion. In designing a more robust system this can of course be accompanied by a skeptical alter-ego which can query the legitimacy of the system’s decisions (fortunately AI systems unlike their human equivalents don’t take criticism personally).

The key to obtaining useful actionable AI trade decisions is ultimately simplicity. Having the ability to cut through complexity and arrive at a clear decision, requires a recognition of the limits of knowledge, not only what it can know but what it is useful to know and more importantly its own ignorance.

© 2021 Plotinus Asset Management. All rights reserved.
Unauthorized use and/or duplication of any material on this site without written permission is prohibited.

Image Credit: Feelartphoto at Can Stock Photo.

Once Upon a Time

by Plotinus Plotinus No Comments

The power of narrative should never be underestimated. Humans it would appear have been story tellers and story listeners since time in memoriam. Myths have a deep role in our societies with a function in maintaining the structures of the society from which they emanate. It is important not to erroneously assume, when we look at the technological advancement that surrounds us, that our current era is too sophisticated for, or susceptible to contemporary myth.

Read more

Is Karl Chuckling?

by Plotinus Plotinus No Comments

The new US administration is making its foreign relations preparations to assume power in January under the banner “America is Back.” The phrase contains what some non-Americans might call American Solipsism. This is fed in part by the mistaken notion that the whole world has been moving in an Americentric or more specifically a Trump-centric orbit for the last four years, simply because all US political/media debate thought it to be so. What has been most striking for the outside observer from abroad, one step removed, was the totality of it, ½ + ½ = 1, regardless of which side of the US political divide, which could be parodied as total hate or total love of the 45th president.

Read more

AI Strategies Are New Bedrock for Portfolio Management

by Plotinus Plotinus No Comments

Artificial intelligence can be deployed to help investors navigate the post-coronavirus backdrop. Whereas popular yield-enhancing strategies, such as venture capital, often require redemption lockups and may lead to valuation surprises, advanced technology empowers portfolio managers to exploit otherwise established trading patterns in public securities, argues a new white paper by Plotinus Asset Management.

Read more

Long Washington, Short London

by Plotinus Plotinus No Comments

With the US presidential election now appearing to be over we are seeing much of the world’s excess media attention that the election had been vacuuming up in recent weeks, return to the theme that has dominated 2020, Covid-19. From an investor’s perspective this return to the pandemic focus means trying to continue to assess its economic/investment consequences and its various governmental mis/handlings globally.

Read more

Side-Stepping the Maelstrom

by Plotinus Plotinus No Comments

As the US election makes its last twists and contortions toward its finale, there are clichés a plenty to describe its unique ‘never before, in a time like no other’ status. Partisans and pundits feast on every breath, tweet, or throat clearing from the White House.

Read more

What’s In a Name?

by Plotinus Plotinus No Comments

We are often asked about the origins of our firm’s name. What connection could a philosopher of antiquity have with artificial intelligence decision-based trading?

Read more