From: John Conover <john@email.johncon.com>
Subject: Re: The Standard: Warning: Recession Ahead
Date: 6 May 2001 17:32:57 -0000
Interestingly, the lack of predictability in the US GDP is
exploitable.
As a mathematical expediency most corporate strategies are divided
into short term and long term, (short term being a few months, long
term being more.)
For long term strategies, the size of the window of predictability is
regarded as zero-meaning that the US GDP is treated as an entropic
system that behaves randomly. Strategies are developed that fit into a
framework determined by the average, (the potential gain,) and the
standard deviation, (the risk,) of the marginal increments of the US
GDP or industrial market-usually using monthly or quarterly data.
Short term predictability is an inefficiency, (at least in the sense
of the efficient market hypothesis,) and can be exploited by adjusting
operations to near term GDP/market anticipations faster than anyone
else, by using the like of JIT techniques to minimize WIP risk, etc.
The potential advantage is quite significant.
John
BTW, what would happen if every company that contributes to the US GDP
did that? Not much, except that it would grow faster. The US GDP would
become entirely entropic, (i.e., unpredictable,) and would be
efficient, and fair. It would be stable, (in the sense that it could
exist like that, forever.) Further, if the average of the marginal
increments equaled the variance, it would be maximally optimal.
Unfortunately, it is a politically inexpedient solution. Such concepts
as monetary/fiscal policy to affect consistency in full employment,
etc., (which has been the paradigm of the last seven decades in all
industrialized countries,) would have to be discarded. Perceived lack
of influence over economic issues is not an expedient political
platform.
(BTW, full employment is not necessarily optimal. It has, in general,
an unsustainable cost. Maximal sustainable employment is when the
GDP's average of its marginal increments equals the variance. However,
maximal employment does not, necessarily, mean full employment.)
John Conover writes:
>
> In case you are curious, the big US economic recessions since
> Independence happened in 1819, 1833, 1837, 1857, 1873, 1893,
> 1929, (using the GNP/GDP numbers, which are not necessarily
> coincident with the stock market numbers, as far as downturns
> go,) and, (possibly-we don't know yet,) 2000.
>
> Note that this is the first generation in US history that has not
> had to endure a famine/depression, (at least yet,) and our
> perspective does not include how ugly they really are.
>
> John
>
> BTW, the numbers are interesting. To make predictions-like in the
> attached-the US GDP must be a deterministic system. Finding a
> mechanism that gives zero-free paths representing those numbers is
> a formidable proposition. If that can't be done, then, predictions
> can not be made.
>
> In NLDS systems, (of which the US GDP is certainly one,) the
> influence of the past on the future deteriorates rapidly-meaning that
> a small window into the past can be used to predict a small window
> into the future, and that is the best that can be done. The size of
> the window for the US GDP, is, at best, a few months, to a 70%, or so,
> accuracy.
>
> Unfortunately, the prevailing wisdom is that fiscal/monetary policy
> can not be used to influence the fluctuations in the US GDP-which
> was the paradigm of the past seven decades, and has since been
> abandoned.
>
> http://www.thestandard.com/article/0,1902,24243,00.html
--
John Conover, john@email.johncon.com, http://www.johncon.com/