Wednesday, July 11, 2007

"Slightly" off topic to investments...

...readers here will recall that I am highly interested in science, and more specifically with feedback systems. I wrote the below recently to some friends explaining one of my favorite examples of feedback phenomenae.

We all know the importance of time intervals and sample periods when
looking at the markets, and it is somewhat unfortunate we lack
millions of years of data to strengthen our inferences or provide
additional hypothesis generation.

The market is rife with feedback mechanisms, both on granular (individual stocks)
and global (indexes) scales.

Fortunately, the planet earth has a wonderful temperature regulation
feedback system that serves to illuminate why global warming is a
problem of scale – humans will have to actively engineer, on a massive
scale (like blowing up the Rocky Mountains) carbon introduction into
the atmosphere in the future if we wish to live here.

The system can be characterized thusly: Plate tectonics produces
carbon dioxide through volcanic emission, carbon dioxide warms the
planet. Warming increasing weathering (surface water is a function of
temperature, as temperature rises, water evaporates leading to clouds
and subsequent erosion). Carbon dioxide then attaches chemically to
silicate rocks experiencing weathering. This process removes the C02
from the atmosphere and cools the planet. Carbon Dioxide is
introduced again by volcanic emission (and water is needed here as
well for subduction), and on and on.

This process that has kept the Planet at a relatively constant
temperature (never below freezing and never above boiling) for around
4.5 Billion years. Planets need land, water, and plate tectonics to
achieve this system that is very good for carrying life. An oceanic
planet would not be a very nice place to live, and likely would not
remain that way for long as the lack of temperature regulation would
likely boil the planet. (in the spirit of good taste, I will withhold
jokes regarding a certain movie starring Kevin Costner, as said movie
has already experiences too much suffering)

This feedback loop is interesting to me because of its massive time
scale. In the long run (geologic scale), we should be more worried
about making more CO2. But on relatively short scales (hundreds of
years), we may have a problem with increased temperatures due to our
own actions.

Looking at the markets, it is very clear what the "geologic" drift is,
caused by an extremely complex feedback system of its own…but when you
zoom in closer, it becomes apparent that too much on one side of the
differential equation can kill 90% of "oxygen-dependent species".
Life does go on, but it takes a different scale of time for that to

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