A helpful guide to accumulate references to understand the cyclic nature of markets and where we stand at the moment.

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This PKM page is part of the open-asset-allocator project! If you want an application to help you manage an investment portfolio using asset allocation techniques and this knowledge, check it out!

https://github.com/benizzio/open-asset-allocator

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To properly define my asset allocation through time, I need to read multiple dimensions of the complex system that is the Global Economy and Financial Network. As I cannot understand and follow it completely, I need to smartly select indicators that will show me the most important aspects. I need to read them in conjunction, like an orchestra, and understand what part of the cycles I am.

What are the premises that I need to accept to continue?

• Trends in economy and finance tend to be cyclic;
  • cycles can be identified in multiple time periods (long, medium and short term);
  • multiple cycles of different nature and time periods happen at the same time;
  • cycles mean a composition of phases that can be generically characterized;
• Markets, economies, societies, biological ecosystems and multiple other examples are Complex Systems (https://en.wikipedia.org/wiki/Complex_system) that belong to domains that follow fat-tailed distributions;
  • cycles within those systems are chaotic, and do not follow linear and deterministic constraints. They can be extended or shortened, phase changes can be hidden within the noise, and extreme disruptions can cause accumulated fragilities or strengths to show all at once;
  • evaluation of those cycles suffer from retrospective distortion;
  • they cannot be predicted, but share common characteristics that can be used to identify at what phase we are currently living and prepare, non-predictively, for changes of its stages;
• One of the tools that can be used to identify the cycle phases are indicators, serving as conceptual proxies to discern signals in the chaos of the day-to-day noise;

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No indicator can assess an entire market and economy alone. All non-predictive analysis should verify fragilities in the system by accumulating multiple readings of indicators at all time periods (long, medium and short terms).

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💵 World reserve currency, currency dominance and the “Dollar Smile”

What are we trying to answer?

• What is the current currency that is considered the “world’s reserve currency”?
• How strong is it in its position?
• How does it behave during the business cycles (mainly the business cycle of the country that issues it)?

1. The global economy and markets are dominated by two main tools:
   1. Secondarily, global trade, where most powerful economies impose their currencies in trade deals;
   2. Primarily, debt. As countries and private entities use credit and bonds to finance its activities and economies, debt accumulates, and defaulting (not paying) debt obligations means scaring the entities that could finance further need of resources.
2. The currency that controls the bigger part of those tools and dominates the markets is the reserve currency.
   1. Transitions to lose the status from reserve, dominant currencies are slow and unclear, as opposing countries and entities need to impose trade and make sure that others accumulate debt in their currencies. Those happen in the long term, spanning multiple decades;
   2. The behavior of the current reserve currency value, relative to other strong currencies, happens in the short, medium and long term trends, mainly of the economy that issues it;

How to read reality and obtain the answers?