Friday, 12 July 2013

How Resilient Are US Markets As A System?

In the past months attention, as well as speculatory attacks, have been focused on the EU. But how resilient are US markets? We have analysed the S&P, DJIA and the NASDAQ markets separately and as a single system. Here are our findings.

S&P Complexity and Robustness:

NASDAQ Complexity and Robustness:

DJIA Complexity and Robustness:

It is evident that considered as isolated systems, the three indices appear as healthy, with robustness ranging from 70 to 85%. However, this is a false perception. The point is that these markets are not isolated. They may embrace different types of corporations but, in reality, all companies interact, directly or indirectly, forming a single system of systems. In fact, as an integrated analysis shows, the robustness of the combined system is this:

Robustness falls to 68% and the Resilience Rating to a mere two stars. Highly fragile. One must always be careful. Numbers don't always tell the full story.

The corresponding Business Structure Map, which reflects the interaction between the markets (blue is NASDAQ), is illustrated below:

It is interesting to note that while the complexities of the single markets are approximately 7, that of the combined markets is over 27 instead of an expected value of approximately 21. This is because the complexity of each component cannot simply be added to that of the others to produce the overall measure of complexity. In other words, the difficulty in understanding the dynamics of the system of markets is more than that of the sum of complexities of the single markets. What is also non-intuitive (intuition fails quite often, doesn't it?) is that two robust four-star systems, when combined with a three-star system, lead to a two-star not-so-robust system. So much for linear thinking.