On Correlation

As a follow on to my previous modeling rant, I found a great example of correlation nonsense, reading an article from Caijing (which is actually a magazine I find very useful for keeping up on China).

Shares on the Shanghai Stock Exchange plunged 5.21 percent Monday, the most significant slump since April 8 when the Shanghai index plunged 5.5 percent.

“Today’s market turned out rather surprising,” said Glenn Maguire, Chief Economist of Asia Pacific at Societe Generale. ...
Meanwhile, the National Bureau of Statistics has announced that the domestic production price index for July was 10 percent. The July PPI registered a sharp increase year-on-year ...
Maguire noted that, “the rising PPI should be expected to squeeze corporate margins.”
The international oil price reached a new low today. Crude oil for September delivery dropped 4 percent to ＄115.20 a barrel in New York last Friday, the lowest since May 2.

Yet, according to Maguire, there is no strong correlation between the oil price and the Chinese A share market. ...

Now Mr. Maguire could easily have been sort of misquoted, sometimes the juxtaposition of quotes in the media can kind of distort what you said in a conversation. Nevertheless, my main point is the concept of correlation. When one says that oil is not correlated to a stock market, I'm sure there is some time period up until now when it hasn't been, and likely that is what Mr. Maguire is speaking about. But I take great issue with people essentially misusing verb tense when talking about correlation. The proper thing to say is that there has not been a strong correlation between oil price and the chinese market. When you say there "is" no strong correlation you imply that there will not be any correlation in the future, especially if you use this as a response to oil price worries. I think i can easily imagine that a stock market could get hammered if energy prices went up substantially and sunk corporate profits. At what point this correlation kicks in, who knows for sure, but the simple fact is that oil could very well at some point "correlate". 
I recommend that people take a bunch of data series and calculate correlations for different time periods... shorter, longer, in the distant past, and recently. Correlation might end up happening until it doesn't, and not existing... until it does. Markets and economies are dynamical systems, whose properties change with the passage of time. Thus depending on correlation is like using a ruler to measure windspeed in a hurricane. So why is correlation talk considered professional, and intelligent even? Given the fact that its usually a useless statement, I find it actually just nonsense. Nevertheless I guess it provides a nice easy answer, better than "well at some point oil could hurt profits substantially enough to wreck the market, but there will be a lot of other factors as well" Again this is not mean to single out the article above alone, I just used the article since it was my latest read.

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