Hurricanes and Fractal Geometry.

November 6, 2012

These next 24 hours will see Hurricane Sandy deliver massive stress and uncertainty to the nation's eastern seaboard. Schools, buses and transit systems, not to mention The New York Stock Exchange, are closed. Predictions of the financial damage range into the tens of billions.
Every media outlook in the world is sideways with anticipation. When? What? How much? How strong? The fact that we can answer no questions with any degree of certainty serves only to further titillate.
Human beings live with, love and loath uncertainty.
If we can predict anything with reasonable degrees of accuracy, we quickly lose interest. If we have difficulty forecasting an outcome, we obsess.
Such is the logic for our fascination with financial markets, weather patterns, sports, politics, and other complex systems which lead with and conclude in high degrees of uncertainty, suspense and excitement.
At this moment, we are contending with the evolution of three separate, uncertain and highly complex systems, each of which will conclude with enormously far-reaching consequences for constituencies across the nation. None of which we care capable of forecasting with any degree of accuracy, even though their conclusions are upon us.
The three systems? The presidential election, the economy, and Hurricane Sandy.
Two weeks from now, we may look back with finality on each of these dynamics. We will know who won the election. We will know the extent of Sandy's trauma. And we may know whether the U.S. economy is slipping into recession.
Yet, at this moment, we haven't a clue.
Each of these complex events is comprised of a multitude of discreet, tightly connected variables that will, in aggregate, manifest themselves into visible patterns leading to a discernible outcome. Each of these systemically unfolding evolutions is so complex as to defy the certain prognostications of even our most seasoned speculators.
An Uncertain Hurricane
With roughly six to eight hours till Hurricane Sandy reveals its full ferocity to the east coast, we've no idea what the actual post-landing scenario will look like. Even with such a short window remaining, there is too much uncertainty. Too much complexity. To many variables that can impact the outcome one way or the next.
Storms are measured by their central pressure, which can reveal the strength of the weather system. The effects show themselves via wind strength and size. Storms can bring a focused core of devastating gusts, or -- as appears to be the story with Sandy, a large dispersion of strong winds pushing enormous amounts of water toward the coast.
Measurements taken earlier indicate an alarming drop in the storm's central pressure, with measurements dropping from Sunday night's 950 millibars (milli-wha?!) to 942 millibars by this morning. Winds have strengthened from 75 to 85 miles per hour.
Bottom line? This thing continues to strengthen. The storm's likely aftermath will be somewhere between bad and catastrophic.
An Uncertain Election
The same holds for the final week of the presidential election. In fact, could this hurricane be the October surprise that ends up impacting the election outcome one way or another?
The president continues to hold a razor thin lead in the Electoral College. His challenger continues to hold a razor thin lead in the popular polls. In fact, it increasingly appears as if the whole ball of wax could be decided right here at Ground Zero, from which I currently write, Hamilton County, Ohio.
With a week left, this election is as unknowable as the direction of the wind across the Tibetan Plains.
An Uncertain Economy
Ditto, concerning the U.S. economy. A month ago, it appeared that the U.S. economy was clawing its way forward, defying the gravitational pull of the slowing global economy. Today? Maybe not. We may end up being the prisoners of our debt-driven heritage.
Debt once enabled us to borrow from the future, accelerating our spending, investment and economic growth. But, this led to a catch-22. Further growth required further borrowing. More incremental debt was required to create incremental growth.
Debt became a means of allowing all facets of society to access easy credit and then consume non-discretionary goods. The automobile industry. The housing industry. Furniture. Travel. Entertainment. Consumer electronics. All became the beneficiaries of the nation's bloated balance sheet (see my article, The Three Little Pigs Economy).
Today, consumers, government and banks are all attempting to deleverage simultaneously. The result? Low growth, high pain.
The curious thing? That each of these unpredictable events could actually affect the ultimate outcome of each other. Complexity, meet irony.
Benoit Mandelbrot was a French-American mathematician. He dedicated himself to one thing: attempting to better understand extremely complicated mathematical systems. The flow of water. The shape of turbulence. The evolution of weather patterns. And financial markets.
Mandelbrot recognized that there was a huge diversity of complex natural systems, and that man is equipped with a limited number of tools by which to analyze and attempt to understand them.
Fractals are one such tool. And Mandelbrot is widely seen as the father of fractal geometry. These computer-generated patterns provide a new and wholly random way of considering our world. They underscore the abject unpredictability of, well, everything.
Sailing too close to a storm. Skiing down a mountain. Investing capital in the markets. Each activity holds rewards and dangers yet unknown.
Man thinks he is an adept pattern identifier. We train meteorologists, political pollsters and stock market analysts to provide the outcome of highly unpredictable events.
I can tell my sons not to eat certain berries alongside the trail we're hiking. I can explain to them the dangers of sailing into a storm. I can explain the risks and rewards of money invested into volatile stock markets. Still, I cannot tell them how to avoid risk. To accurately prognosticate uncertainty. To outwit Mother Nature.
Some friends are fond of saying, "We live in uncertain times."
Others are fond of saying, "We live in interesting times."
Both are true. These statements are not mutually exclusive.
Last week I had the opportunity to teach an investment class to students at the University of Cincinnati. Roughly 60 students. Gazing down from the depths of the lecture hall. Some emanated that excited student's curiosity, while others radiated boredom. Whether I left them regaled or bored senseless, I could not help but wonder, as I walked from the building. How can a society can better prepare its youth to contend with the massive amounts of complexity and uncertainty that await them. Economically. Meteorologically. Politically.
Every sunrise brings my young sons one day closer to leaving the safe confines of their home. Of stepping from their mother's arms into the fractal geometry of decision making in the real world.
Whether one is voting for a president, living amidst the storm pattern, or investing capital, there can be no reward without a degree of risk. Accept that fact, and life becomes a bit less fractal.

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