The entire investment market is estimated to be in the order of USD 27,000 billion. On the one hand, there are massive market challenges, insufficient market practice and unsatisfied investment demand, as the global financial crisis (GFC) led us into entirely unchartered waters. On the other hand, all this implies vastly growing opportunities for smart investors.
A widespread problem with financial market analyses is that they are often based on equilibrium models, which are not accurate representations of how the real world works. Rather than studying the structure of the market, they focus on the effects of marginal impacts.
To emphasise this point, financial expert James Rickards (The New Case For Gold, 2016, p58) came up with the following metaphor. Imagine a mountain with a steeply pitched section near the top, where it has been snowing for weeks, and the snow has piled up. True experts would be able to see the windswept snow leaning in an unstable way and recognise the apparent avalanche danger. Though the snowpack can persist for a while, at some point the snowpack will clearly collapse. The experts would come to this conclusion by assessing the entire situation, rather than concentrating on individual snowflakes.
One day a single snowflake is sufficient to disturb a few other snowflakes, create a disturbance and then a small movement that turns into a bigger slide. Suddenly the whole mountainside is destabilised and comes crashing down. Of course, it’s not the ‘marginal impact’ or single snowflake, but the unstable condition that created the avalanche.
The message is that one needs to address the entire structure of financial markets to come up with reasonable forecasts, and this, at Qantares, is our underpinning philosophy. Although QanSystem usually cannot predict a major market move, it does estimate the probability of such a move and determine its likely size.