[PDoyle]

Wow, really interesting read. Thanks for the link.

Only trouble is that once people find patterns like this, they have a habit of disappearing. Hopefully this one is based on solid enough fundamental market forces that it persists after its publication. It was published in 2013 so we won't know for sure until after 2023.

[babaganoosh89]

I actually made an automatically updating chart for this using FRED data: http://financial-charts.effingapp.com

TLDR: The correlation did go down a bit since publishing but still seems alright.

[yrral]

This is awesome. Would it be possible for you to extend the spx 10 year return line with a greyed out or dotted line from 2007 onwards that shows the running annualized return so far? So for example for 2012 it would show the spx annualized return from 2012 to 2017.

[cloudkj]

Thanks for this. Can you also add a way to change the window for S&P returns from 10 years to other time windows? It'd be interesting to see how the plot changes with adjustments to the window.

[babaganoosh89]

I remember looking at other time windows, anything 5 years or below wasn't great.

[luckydata]

this is great! you should add shaded areas for official recession periods, it's pretty easy to find:

https://fred.stlouisfed.org/series/JHDUSRGDPBR

[mzh0]

I saw lot's of suggestions above, how about making it on github so anyone can hack it?

[wsxiaoys]

Just found its repository here: https://github.com/effinggames/financial-charts

[seanmcdirmid]

> Only trouble is that once people find patterns like this, they have a habit of disappearing.

It took me a few seconds to figure out that you meant the patterns and not the people as the targets for disappearing.

[wyager]

> Hopefully this one is based on solid enough fundamental market forces that it persists after its publication.

If you can find any way to predict the future price of things, you can make money by performing arbitrage across time (instead of space, which is how people usually think of arbitrage). This (nominally) describes all types of model-informed time-based investment.

The thing with arbitrage is that there's a finite amount of money you can make. If there's a price difference on some cross-listed stock between HKEx and SZSE, you can make money by buying on the cheap one and selling on the pricier one. But, as a side effect of doing so, the price goes up on the cheap one and goes down on the pricier one. There is only a finite amount of stock you can exchange before the price difference approaches zero and you can't make money. The price information has been communicated, and the market has served its function.

The same is true for arbitrage across time. There's only so much money you can spend before the "prices" (more complicated than spacial price differences, because you have to worry about some more complex utility theory to find the expectation value of something in the future) equilibrate and market information has been propagated "through time".

This is why these things "have a habit of disappearing"; every single way of making money via models corresponds to a market inefficiency. Model-based traders are eliminating market inefficiencies and making a cut off the benefit, just like any other good business. The inefficiencies are just more abstract than usual.

So if a model is good, there's no way for it to persist. If it actually predicts something we didn't expect, that corresponds to some inneficiency in the market that some trader can eliminate in exchange for a nice fee.

[kbenson]

Which is all just another way of saying (albeit more interestingly and in more detail), that when new information becomes available, the market adjusts to better reflect the true value of things.

[StanislavPetrov]

This is true in a theoretical free market where there is price discovery. In the "markets" that actually exist, though, we don't have true price discovery. We have a market with centrally controlled interest rates, central bank purchasing (in a variety of ways) and other institution-based interference that create inefficiencies that are not organic, and are therefore not self-correcting.

[lugg]

I don't think that changes the previous statement. It just changes the value of truth. Maybe not self correcting, but certainly self regulating towards the new normal as set out by regulatory constraints.

[wyager]

None of the stuff you mentioned invalidates any of the mechanisms I described, although regulations may decrease their effectiveness (as with any other price-discovery mechanism) by introducing friction or breaking efficient instruments.

[specialist]

aka "policy". Also self correcting, but with a longer time scale.

[Retric]

Depends on what your modeling. A risk vs inflation vs ROI curve should be maintained by the market rather than destroyed by it.

[wyager]

This should be baked into your calculation of future expectation values. This factors in risk, uncertainty, time preference, inflation, etc.

[hendzen]

You should read the author's next post where he pokes a bit of fun at his metric:

http://www.philosophicaleconomics.com/2013/12/valuation-and-...

[anotheryou]

self destructing prophecy :)

[pishpash]

The 10-year window is kind of arbitrary, and knowledge of this pricing model won't erase the pattern, but may change the window over which it is effective to something much shorter as timescale compresses.

[chrisweekly]

> "... once people find patterns like this, they have a habit of disappearing."

Hah! Grammatically, "they" refers to the people (not the pattern).

IMHO, sometimes these details matter, as in:

"Let's eat grandma!" vs "Let's eat, grandma!"

or

"know your shit" vs "know you're shit"

:)

[jxramos]

what makes his sentence not an amphiboly? What's the grammatical rule that fixes the "they" to apply to the people not the pattern?

[chrisweekly]

Thanks jxramos, good questions. FTR I had to look up "amphiboly":

  > "Linguistically, an amphiboly is an ambiguity which results from ambiguous grammar, as opposed to one that results from the ambiguity of words or phrases—that is, Equivocation."

Your reply - and a handful of rare / unexpected downvotes led me to re-read my comment, and in retrospect I realize I did a poor job communicating. I intended simply to convey my amusement at the ambiguity. I think for all intents and purposes his sentence was an amphiboly.

"Fixing" it would probably involve rephrasing to reverse the order of "people" and "pattern" in the sentence or just put all the emphasis on the pattern:

"... these patterns, when discovered, have a habit of disappearing"

Strict correctness regarding subject:verb agreement can, like other grammatical constructs, lead to non-idiomatic, awkward phrasing. Formal "rules" about prepositions are the first related example I can think of. ("... of which I can think" is awful, right?). My point was just to laugh at the ambiguity. (shrug)

[chrisweekly]

PS The sinister "people are disappearing" interpretation was the 1st way I read it.