Another rally in the markets today.  The US dollar is down again and the Canadian dollar is up by another four cents, following on oil’s rise above $66 (it’s now at more than $68 after hours as I write).  Quite amazing how quickly the cash flows back in once those on the sidelines sense there’s a rally to be had.

Many reporters in the last few days have been discussing how volatile the markets have been over the last month.  I’ve been paying attention especially to the daily “records” being made: highest one-day rise since the 20’s; largest one-day drop in the history of the DOW; etc.  Up or down, it doesn’t matter - the fluctuations drive larger and larger swings.

The Edge of Chaos

If you study complexity theory, especially with regard to weather systems, you’ll know about how weather patterns are predicted to violently fluctuate with increased global temperatures.  It’s the same process at work in the boiling of water.

That’s why I think the global markets are basically a complex dynamic system fluctuating around that “period 3″ region, the region of chaos.  It’s here where new structures and changes are supposed to emerge.  But what will or can emerge at the edge of chaos in financial markets?  What does a new financial structure look like?  Is it a new relationship or system for managing relationships between currencies?

Here are some guesses for the sorts of “emerging structures” we might see:
-stronger “emerging” markets;
-changes in fundamental economic relations between countries
-new currencies or the death of previous ones
-cancellations of debt obligations
-major mergers or acquisitions
-other unexpected upheavals (for a smaller example, take the fact that Volkswagen is now the world’s largest company by market capitalization)

I’m sure you can think of others.  How dramatic the emergent structures are will depend on how volatile and bad the markets become.  Today’s interest rate cut by the Fed may have been the immediate cause for the rally, so we still don’t know how long the rally will stick.

Chances are it’s going to remain volatile for a while as many investors use this as an opportunity for purchases or sales that didn’t look attractive at lower or higher levels.  If the volatility remains but we don’t see more downward motion over the next week, I’d expect that to be an indication of the bottom.

When you consider all that’s been happening and put it on a short timeline, it’s amazing that we’re still seeing so much coordinated effort internationally.  This is great.  No one anywhere wants global markets in chaos.  It’s a good sign, in a way, that there is so much financial cooperation (at least that public knowledge is privy to).

But this last week has seen a couple of new developments: namely, the fact that the crisis is showing signs of having hit both China and the Gulf region.  Will this make a difference?  You bet it will.  But I’m not sure exactly what difference yet.

It has me wondering whether the financial crisis could lead to greater political crises.  Sure, in theory, it could.  The food price problems of the summer started on that route.  What could it be this time?  I’ve seen one article in a local newspaper raise the question as to why the bankers responsible for this mess aren’t being charged as criminals.

It’s a fact that the US banks basically created their own private “market” for the exchange of off-balance-sheet entities in order to gain more profits.*  Was this illegal?  I am sure it is in someone’s books.  It’s certainly devious, non-transparent, and basically, sort of, like lying.

As the crisis unfolds and hopefully cools down, we will see more and more of this kind of analysis, I imagine.  Expect books rehashing the past two years on the shelves of Borders and Chapters in droves.

What do you think?  How bad can this get?  Do you agree with Nouriel Roubini?  He certainly has no personal motive for screaming that the sky is falling.

*You can read more about this in David Smick’s The World Is Curved (2008).

Here’s a webcast you might want to watch about how to fix the world’s current financial crisis.  It took place last Monday at Columbia University’s Earth Institute, featuring:

George Soros, global financier and philanthropist, founder and chairman of the Open Society Institute and the Soros foundations network, and chairman of Soros Fund Management LLC.

Nouriel Roubini, professor of economics and international business at the Stern School of Business, New York University.

Jeffrey Sachs, director of the Earth Institute at Columbia University and special advisor to United Nations Secretary-General Ban Ki-moon.

Click here to watch. (It’s 1 hour, 44 minutes long).