In the talk, he hints at some of his most recent analysis: On May 17, 2013, he says, “we identified that the US stock market was on an unsustainable path, and we released on our website … that on the 21st of May, that there will be a change of course. And the next day, the market started to change course.”

We talked to him about this, and he was willing to go into more detail, starting with the graph below. On the left axis (in black) you can see the level of the S&P500’s exchange-traded fund, SPY, over the past three years. On the right (in red), you can see the level of the Crash Risk Index (CRI), his team’s forecast of the likelihood of a crash.

The past three years of S&P500’s growth compared to its Crash Risk Index.

There was, as he said, “a pretty strong signal on May 21st. Since then, however, the CRI dropped to zero.” He went on, “The US market saw its peak on 22nd May 2013, and since then, it has gone overall down and sideways, confirming clearly the change of course, breaking the trend that had developed since November 2012, which we expected.”

That new information begged a few more questions:

Are there any other forecasts for the coming year that you’d be willing to share?

We have recently diagnosed bubbles in the financial and insurance sectors, as well as in the construction and realty sectors, in the US. This is interesting, given that these very sectors were at the core of the crisis starting in 2007.

Is there a way to prevent market bubbles from forming in the first place?

The prediction of 21st May 2013 concerning the US market and subsequent developments illustrate that markets are largely driven by political events. For instance, the US market developed in lockstep with the Nikkei after the Governor of the Bank of Japan, Haruhiko Kuroda, announced the massive quantitative easing (QE) in Japan, in the beginning of April 2013.

[Note: QE is the process by which central banks buy assets from private banks and other firms to inject currency into the market by, theoretically, making it easier for those institutions to continue spending and lending. QE has been tried, repeatedly over the past few years and never without controversy, in the US, UK, Japan and EU.]

Indeed, equities are expensive, and prices have been propped up by central banks’ easing policies. But the big correction, when it comes, will be triggered by a major political or social event induced when bubbles, driven by the QE everywhere, reach maturity and global instability rises.

All this is to stress that market bubbles are formed in response to accommodating policies of central banks and governments. Now, it may actually be counterproductive to prevent bubbles from forming. There are many indications that central banks, and the Fed in particular, react dynamically to stock market developments in an effort to push them up. This has become the unwritten goal of the Fed — as growth and a booming stock market creates wealth and instills confidence for investors and consumers. But, having said that, I do believe that bubbles in the financial sphere, in the long run, drive the misallocation of resources and generate great instabilities.

What specific mechanisms can prevent boom-and-bust cycles and forge a sustainable path for growth?

There are several mechanisms to prevent booms-and-busts, but they come at the cost of stronger regulation and a stricter control of the banking and insurance industry, such as reenacting of the Glass-Steagall Act. In other words, in the present architecture, lower volatility and smaller booms-and-busts come at the cost of lower growth. More specifically, the simplest way to prevent bubbles is through monetary policy (by increasing the interest rates, as well as other instruments to reduce access to credit).

The social bubbles argument [Note: the argument that market bubbles can spur a concentrated spurt of innovation in the relevant sector] is interesting in this context: Over-optimism can be a powerful driving force for innovation, as it was in the cases of the Apollo and the Human Genome projects. [1-4] But, in those two examples, there was a clear vision driving public investment. That is very different from pumping money into the private financial institutions and hoping for the best, as central banks have been doing from 2008 on. The current QE-fueled bubble will probably not have any useful social consequences …

What scares you most about today’s global economy?

My worry is that the present QE policies may jeopardize long-term growth by not addressing the underlying structural problems and the exploding debt of nations.

What scares me most is the illusion of the perpetual money machine [5] that continues unabated, along with growing structural imbalances that are absolutely not being addressed at their roots (e.g., German vs. Greek productivity and many others; the exorbitant privilege of banks in the economy when they do not serve their real, useful role; the focus on short-term economic growth at the level of nations without addressing the paralyzing structures that have to be modified … and so on).

And central banks are flying blind, they have no clue and are doing an enormous real-life experiment with enormous consequences for the welfare of real people.

And what is frustrating is that the knowledge is there; it’s just that central banks are mostly guided by DSGE (dynamic stochastic general equilibrium) models that do not account for the possibility of out-of-equilibrium bubbles and crises. They are using sextants, while they should be using GPS.

Does anything about today’s global economy make you optimistic?

Young entrepreneurs, the creativity of people, and the conviction that, when things get much worse, great creativity and cooperation will be unleashed.

I do not believe we will see a smooth and soft ride, but rather rough and turbulent times ahead of us that will hurt different nations and groups of people differently. Mankind will have to adapt to the new normal, with accelerating changes. It won’t be without pain, but there will be great opportunities for those who are prepared with multiple skills.

I would also mention the immense startup ecosystem that has built up over the past two decades, both as a result of open-source software (OSS) and the first big internet bubble. The way I see it:

• Cheap money (due to both QE and past internet successes) + cheap capital (in the form of tools, due to the incremental nature of OSS) + cheap labor (due to high youth and structural unemployment) => optimism.

• OSS and collective learning, cooperation and problem-solving provide truly unique and novel opportunities.

Footnotes:

[1] D. Sornette, Nurturing Breakthroughs; Lessons from Complexity Theory, Journal of Economic Interaction and Coordination 3, 165-181 (2008), DOI: 10.1007/s11403-008-0040-8 (http://arxiv.org/abs/0706.1839)

[2] Monika Gisler and Didier Sornette, Exuberant Innovations: The Apollo Program, Society 46, 55-68 (2009), DOI: 10.1007/s12115-008-9163-8 (http://arxiv.org/abs/0806.0273 and http://ssrn.com/abstract=1139807)

[3] Monika Gisler, Didier Sornette and Ryan Woodard, Innovation as a Social Bubble: The Example of the Human Genome Project, Research Policy 40, 1412-1425 (2011) (http://arxiv.org/abs/1003.2882 and http://ssrn.com/abstract=1573682)

[4] Monika Gisler and Didier Sornette, Bubbles Everywhere in Human Affairs, chapter in book entitled “Modern RISC-Societies. Towards a New Framework for Societal Evolution”, L. Kajfez Bogataj, K.H. Mueller, I. Svetlik, N. Tos (eds.), Wien, edition echoraum: 137-153 (2010) (http://ssrn.com/abstract=1590816)

[5] D. Sornette and P. Cauwels, The Illusion of the Perpetual Money Machine, Notenstein Academy White Paper Series (Dec. 2012)(http://arxiv.org/abs/1212.2833 and http://ssrn.com/abstract=2191509)

Occupy Wall Street’s slogan “We are the 99%” had been echoing through the United States and the world for just over a month when James B. Glattfelder and his co-authors released the study “The Network of Global Corporate Control” in October 2011. The study was a scientific look at our global economy, revealing how control flows like water through pipes — some thin, some thick — between people and companies. The finding: that control of our economy is highly tightly concentrated into a small core of top players, leaving us all vulnerable to fast-spreading economic distress.

James B. Glattfelder: Who controls the world?

In today’s talk, filmed at TEDxZurich, Glattfelder reveals that the impetus of the study wasn’t at all to validate global protesters. Instead, the study was conducted out of a desire to understand the laws that govern our economy, in the same way that we understand the laws that govern the physical world around us. Glattfelder and his co-authors Stefania Vitali and Stefano Battiston are complex systems theorists, meaning that they study a whole — for example, an ant colony or the human brain — as more than just the sum of its part. Complexity theory examines interactions between parts, looking for the simple rules that emerge when viewed en masse.

“Ideas relating to finance, economics and politics are very often tainted by people’s personal ideologies. I hope that this complexity perspective allows for some common ground to be found, “ Glattfelder says in today’s talk. “It would be great if it has the power to help end the gridlock of conflicting ideas, which appear to be paralyzing our global world. Reality is so complex — we need to move away from dogma. But this is only my personal ideology.”

To hear more about how the study was conducted, watch this talk. And to learn more about the results, and how they were received, keep reading.

To answer the question, “Who controls the world?” the study looked at ownership networks, breaking it down to nodes (such as firms, people, governments, foundations), links (the percentage of ownership) and value. Overall, the study looked at:

• 13 million ownership relations
• 43,000 transnational corporations
• 600,000 nodes
• 1 million links

At the top of this post is a 3D rendering of all the connections in this study. The dots represent the transnational corporations, nodes and links. Any section of it looks something like this.

As Glattfelder explains, in this ecosystem of transnational corporations, there is a periphery and there is a center — a connected network that contains about 75% of all the players. Nestled in this center is what the study calls the core. This core contains 1,300 highly connected nodes. While only 36% of transnational corporations are in this core, they make up 95% of the value of the entire network. This image will help to illustrate the core.

The authors of this study also assigned each player in this system a degree of influence. And overall, they found that the 737 top shareholders have the potential to control 80% of all the transnational corporations’ value. These top shareholders are mostly financial institutions in the US and UK. The first 10 on the list:

1. Barclays plc
2. Capital Group Companies Inc.
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co.
7. Legal & General Group plc
8. Vanguard Group Inc.
9. UBS AG
10. Merrill Lynch & Co Inc.

Download the full list here »

But their findings get even more extreme. The 146 top players in the core — representing just .024% of all the nodes studied — have the ability to control about 40% of transnational corporations’ value. This high degree of interconnectivity means that not only are we all highly influenced by a few — but that their distress is able to spread like wildfire.

The study, published in PLOS ONE at just the right time, quickly went viral. Read the study in its entirety »

Or check out some of the stories that ran about it:

• The New Scientist: Revealed — the capitalist network that runs the world (Oct. 24, 2011)
• The Montreal Review: Decoding Complexity (April 2012)
• Public Intelligence: Network of 147 companies control nearly 40% of global economic value of transnational corporations (Oct. 21, 2011)
• Science News: Financial world dominated by a few deep pockets (Sept. 24, 2011)
• Huffington Post: ‘Super-Entity’ of 147 companies at center of world’s economy, study claims (Oct. 24, 2011)
• Media Freedom International: Small network of corporations run the global Economy (April 4, 2012)
• Global Research: Bankers rule the world (Dec. 16, 2011)

As the story spread, Glattfeld and his co-authors took on the issue of whether their study was a proof of a conspiracy.

“Our study does NOT claim that the actors in the core are colluding. NOR does it claim that this structure is the result of some intentional design. We actually think that it probably emerges ‘naturally,’ as a result of simple mechanisms that are at work in the market,” they write here. “What we claim is that further studies are needed to investigate the implications of such a structure, because it is very well possible that it is [endangers] market competition and financial stability.”