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Can Predictive Data Revolutionize Capital Markets?

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Can Predictive Data Revolutionize Capital Markets?

Can Predictive Data Revolutionize Capital Markets?

For investors around the world, the information age presents a double-edged sword.

On one hand, all this data can be harnessed to make intelligent and timely investment decisions. However, with data growing at exponential rates, this also means that there is a lot of noise – and finding the right signal can be like looking for a needle in a haystack.

Today’s infographic from Mergalim shows how the power of predictive data analytics is growing, and using tools like AI and Bayesian inference to anticipate the outcome of events before they happen is more feasible and applicable than ever.

The Big Data Landscape

Before we get into predictive analytics, let’s look at what investors are up against in the first place.

Volume: The rate of data creation is accelerating so fast, that in 2017 there will be more data created than the previous 5,000 years combined. To put this in perspective: in the U.S. alone, approximately 2,657,000 GB of data is created every minute.

Variety: Data is not uniform, and there are many types of data. With data coming from many sources simultaneously, useful analysis can be very difficult.

Velocity: Especially in the markets, data needs to be monitored in real-time to be useful. Getting information too late could mean zero liquidity for a portfolio in some sort of crisis.

In other words, one missed data signal can cause irreparable harm to a portfolio in a situation where things go awry. Therefore, along with having a smart allocation of assets, it can be advantageous to also be one step ahead of the game to know what’s coming.

The Power of Predictive Data

Predictive analytics is defined as:

“The branch of advanced analytics used to make predictions about unknown future events. It uses techniques from data mining, statistics, modelling, machine learning, and artificial intelligence to make predictions about the future.”

This kind of predictive power is already widely used by companies like Amazon, which uses algorithms to sort through billions of data points, your buying history, and current trends to recommend to you the items that you are most likely to buy. In fact, experts estimate that 35% of Amazon’s revenue comes from this practice of anticipating exactly what you want.

Not surprisingly, Wall Street has jumped on this bandwagon too.

  • Goldman Sachs famously employs more engineers than Facebook, Twitter, or LinkedIn.
  • Citadel, a secretive hedge fund, calculates the outcomes of more than 500 “doomsday scenarios” per day to assess potential risk for the firm from geopolitical and other potential crises
  • Quantitative traders use streams of data and complex algorithms to create models of the market to find predictable patterns, and create machine-derived forecasts

But there is one possible limitation with these approaches. Markets are complex systems and need to be analyzed as such. After all, human decision makers can be irrational, events can be “triggered” by seemingly random factors, and traditional mathematical models can fall apart when markets get volatile.

A Multi-Disciplinary Approach?

One solution to this limitation may be to borrow ideas from the intelligence industry, which must anticipate irrational or “random” human actions before they happen.

As an example of this, intelligence agencies like the CIA have already been working to apply other disciplines to the techniques already widely used in predictive data:

Bayesian Inference: A formula in which the probability for the hypothesis is updated based on new data.

Behavioral Psychology: The science behind how responses to environmental stimuli shape people’s actions.

Complexity Theory: Born in the 1960s, the science around how complex systems work is now well established.

Fuzzy Cognitive Maps: A way of representing social scientific knowledge and modelling decision making in systems.

Historical Perspective: Applying knowledge of past events and subject matter experts to these other disciplinary fields.

Artificial Intelligence: Today’s deep learning now allows AI to instantly recognize and process all types of previously impenetrable data.

If predictive data analytics becomes the norm and its potential is fully realized, having data only in real-time may not be enough for many active market participants. In turn, this could set up a very different landscape than exists today.

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Bitcoin

How Decentralized Finance Could Make Investing More Accessible

Under the current global financial system, billions of people do not have access to quality assets. Here’s how decentralized finance is changing that.

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Infographic: How Decentralized Finance Could Make Investing More Accessible

Did you know that a majority of the global population doesn’t have access to quality financial assets?

In advanced economies, we are lucky to have simple options to grow and protect our wealth. Banks are all over the place, markets are robust, and we can invest our money into assets like stocks or bonds at the drop of a hat.

In the United States, roughly 52% of people are invested in the stock market – but in a place like India, for example, this portion drops to a paltry 2%. How can we make it possible for people on the “outside” of the financial system to gain access?

Breaking Down Barriers

Today’s infographic comes to us from Abra, and it shows how decentralized finance could make investing a more universal phenomenon, especially for those that don’t have access to the modern financial system.

It lays out four key obstacles that prevent people in developing markets from investing in quality financial assets in the first place:

  1. The Geographic Lottery
    Where you live plays a massive role in determining your ability to build wealth. In advanced Western economies, the average person is much more likely to be invested in financial markets that can help compound wealth.
  2. Financial Literacy and Complexity
    Roughly 3.5 billion adults globally lack an understanding of basic financial concepts, which creates an impenetrable barrier to investing.
  3. Local Market Turmoil
    Even if a person is mentally prepared to invest, local market turmoil (hyperinflation, political crises, closed borders, etc.) can make it difficult to get access to stable assets.
  4. The Cost of Investing in Foreign Markets
    Foreign assets can be pricey. One share of Amazon is $1,800, which is realistically more money than many people around the world can afford.

In other words, there are billions of people globally that can’t take advantage of some of the most effective wealth-building tactics.

This is just one flaw in the current financial system, a paradigm that has created massive amounts of wealth but only for a specific and well-connected group of people.

Enter Decentralized Finance

Could decentralized finance be the alternative to open up access to financial markets?

By combining apps with blockchain technology – specifically through public blockchains such as Bitcoin or Ethereum – decentralized finance makes it possible to get around some of the barriers that are created by more traditional systems.

Here are some of the innovations that are making this possible:

Smart contracts could automate transactions and remove intermediaries, making investing cheaper, faster, and more accessible.

Fractional investing could allow partial or shared ownership of financial assets by using tokenization. This would make expensive stocks like Amazon ($1,800 per share) available to a much wider segment of the population.

Location independent investing is possible through smartphones. This would make it possible for people in remote parts of the developing world to invest, even without access to nearby financial institutions or local markets.

Like the internet with knowledge, decentralized finance could reshape the world by making financial access universal. Who’s ready?

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Economy

How Macro Trends Shape the Market’s Future

From climate change to aging populations, macro trends are changing the future. Here’s how to use them to your advantage.

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It’s hard to say for certain what the future holds.

Without the luxury of a crystal ball, investors must find opportunities by analyzing the market. There’s just one problem: the 24/7 news cycle is enough to make anyone’s head spin.

Where should an investor focus their attention, when almost every new venture is forecast to be the next big thing?

The Powerful Influence of Macro Trends

Today’s infographic comes to us from U.S. Global Investors, and it highlights how analyzing macro trends can serve as a key investment tool.

U.S. Global Macro Trends

Two Main Investment Approaches

When selecting stocks, many investors fall into one of two camps:

1. Top-down Investing

  1. Analyze macroeconomic trends.
  2. Identify specific sectors and regions.
  3. Choose individual stocks based on company fundamentals.

Considering the aging Chinese population, a top-down investor may choose to invest in Chinese healthcare stocks.

2. Bottom-up Investing

  1. Complete in-depth company analyses.
  2. Select a stock that is outperforming others in its sector.

A bottom-up investor could analyze Home Depot and choose to invest if it had strong performance relative to Lowe’s.

These approaches can be used separately, or even combined together. Zooming out allows investors to identify the big picture opportunities. Then, a bottom-up approach can find the companies that best capitalize on each trend.

What is a Macro Trend?

A macro trend is a long-term directional shift that affects a large population, often on a global scale. For example, climate change is affecting industries in both positive and negative ways. While “green” industries have seen increased support, ski resorts are projected to have 50% shorter winter seasons by 2050.

There are a couple of main ways to identify macro trends:

  1. Government policy
    Government policies are a precursor to change, shaping macro trends and creating opportunities. For instance, Obama’s Recovery Act fueled growth in renewable energy with a $90 billion investment.
  2. Economic cycles
    The cyclical nature of the economy means that investors can also use history to identify macro trends. Consider fiscal and monetary policy, which is implemented in response to economic data:

    • Expanding economy
      The central bank raises rates and the government reduces fiscal stimulus. As a result, inflation is moderated.
      • Contracting economy
        The central bank lowers rates and the government increases fiscal stimulus. As a result, growth is stimulated.

Discovering Long-Term Value

Macro trends are a key tool for discovering long-term market opportunities. They are beneficial because they are:

  • Unbiased and data-driven
  • Not swayed by daily headlines
  • Tend to avoid riskier, niche industries
  • Can be diversified by sectors and regions

There are currently many macro trends at play. For example, Trump’s sweeping tax reform and deregulation boosted the U.S. economy, lifting GDP growth to a 13-year high of over 3% in 2018 Q3.

However, not everyone’s a winner. America’s reduced taxes have made Canada less competitive. It’s estimated that 4.9% of Canada’s GDP is at risk due to ripple effects from U.S. tax reform. What’s more, regulators worry that the bank deregulations might put the financial system at risk.

The proposals under consideration… weaken the buffers that are core to the resilience of our system.

— Lael Brainard, Member of the Board of Governors of the Federal Reserve

So, how do investors distill this wealth of information into a future of wealth?

Spotting the Next Wave

In today’s hyper-connected world, it’s easy to get lost in data overload. Thinking big picture allows investors to focus on trends that:

  • Have a long-term outlook
  • Affect a large population
  • Create a clearer vision of the future

Then, an investor can target the most promising regions and sectors. When used effectively, this approach enables investors to ride the next big wave that will shape markets.

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