Who Knew?


Figure 1


Who knew last November that the market would crash in February? That was the beginning of the Trump rally which just collapsed (Figure 1). In June of last year Kal Salama and I posted an article on Linkedin discussing the merits of the Upside Potential ratio as a predictive performance ratio and offering a link to download the software (Forsey-Sortino Model).

In September we called attention to the work of one of my former research assistants, Bernardo Kuan (deceased) who tested the efficacy of the PRI methodology and noted the methodology was “now warning investors to seek liquidity”(see “The Cost of Assuming Liquidity”) on this website.

I also called attention to a book by Joshua Cooper Ramo, Co-CEO of The Kissenger Institute. In 2016 Ramo wrote: The Seventh Sense: Power, Fortune, and Survival in the Age of Networks.  In it, he warned that we are living in the age of “collapse and construction.” He forecasted the rise of “Gatelands” controlled by a few companies with big data and massive computer power, “each, essential in some way, to national or economic security. Trade, finance, education, cybersafety, artificial intelligence, and military affairs will move from unconnected to connected.”  And, if you are not connected you are Ausgespielt (English translation SOL).  This theme was echoed by Professor Yuval Harari at the recent Davos opening ceremony.  True, they are not trained in economics or finance. If you want mathematical rigor, read “Scale, The Universal Laws of Growth, Innovation, Sustainability” by Geoffrey West, physicist and president of the Santa Fe Institute and read about “Finite Time Singularity” leading to “Entropy”.

Figure 2

Yes, the blue chart in both graphics above is the S&P 500. West also posited a new theory disputing the old economic theory of diminishing returns to size.  West explains why firms like Google and Amazon have increasing returns to size, which supports Ramo’s view of the future.

Why look outside the disciplines of economics and finance? We don’t have all the answers, and perhaps, “You won’t find a forecast of the future by sifting through the ashes of the past” (author unknown). The future may belong to big data driven by AI.

About Frank Sortino

Frank Sortino is finance professor emeritus from San Francisco State University and Director of the Pension Research Institute which he founded in 1981. For 10 years he wrote a quarterly analysis of mutual funds for Pensions and Investments Magazine and he has written two books on the subject of Post Modern Portfolio Theory. He has been a featured speaker at many conferences in the U.S., Europe, South Africa, and the Pacific Basin. Dr. Sortino received his Ph.D in Finance from the University of Oregon and has carried out research projects with many institutions like Shell Oil, Netherlands and The City and County of San Francisco Retirement System.
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