July - 2017
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
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3
 S&P +4.10
 USB -0.20
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 S&P +3.00
 USB +0.09
6
 S&P -19.60
 USB -1.02
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 S&P +14.30
 USB -0.20
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 S&P +2.00
 USB +0.11
11
 S&P +0.10
 USB +0.02
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 S&P +15.60
 USB +0.23
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 S&P +5.50
 USB -0.19
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 S&P +10.50
 USB +0.14
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 S&P +2.50
 USB +0.08
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 S&P -0.25
 USB +1.01
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 S&P +13.50
 USB +0.02
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 S&P -0.50
 USB +0.05
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 S&P -2.00
 USB +0.17
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 S&P -1.00
 USB -0.14
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Jul

24

 The Asylum by Leah McGrath Goodman tells the sordid story of the history of the NY Merc from the time it traded potatoes in the early 20th century to its purchase by the Chicago Merc in 2008 as oil barrels went up from $50 to $150 a barrel and back to $25 in just a few months. The NY Merc was called an asylum and its members inmates because it resembled an unruly insane asylum where drugs, fights, vulgarity, drunkenness, sex, bribery, gambling, police raids, infighting, revolving doors with bureaucrats, corruption, and most of all illegal cheating of the public was rampant.

As such it provides a good baedecker of what the markets have been like while pit trading was rampant prior to the electronic screen trading of the current era. Some anecdotes give the flavor. A Hasidic trader was told to take off his yarmulke as it would give too honest an impression of the floor. One trader after another knocked the other out if they dared to stand in the way of a short term profit at the expense of the public on the floor.

The book provides interesting coverage of the chairmen of the exchange. Each one like an Atlantic City Mayor was kicked out and fined by the Feds for illegal activity of one kind or another. A particular favorite who the author seems to admire is Zoltan Louis Guttman, a Hasidic trader, who chaired the exchange for 6 years but was convicted of fake option trading and banned from executive and trading activities. Compared to the other chairmen she writes about Guttman was a saint as his activities were not at the expense of the public or the members but merely for self preservation.

The author is particularly sensitive to sex on the floor. She quotes with umbrage: "Whether you were the chairman of the exchange or the lowest of the low, blow jobs were the one thing everybody could agree on." She follows the traders to a sex bar adjacent to the exchange and is appalled at the sex acts she sees there. When in Washington, she is appalled at the lack of understanding of the politicians to the nitty gritty of the exchange and can tell from a distance that the politicians are more interested in the tight miniskirts of their assistants than the testimony of the exchange officials. Like Miss Clavel in Madeline she decries the women on the floor who wore high heels and tube tops and quotes approvingly a trader: "they took jobs on the floor to catch a rich husband. They'd marry a trader, they'd break up a year later, and she'd walk off the baby and half his net worth."

 There are interesting stories about some of the traders habits. One likes to play practical jokes on his assistants. Another is known as a great scholar because he schools his traders in technical analysis before they go on the floor. Another is very handsome and rich and smart and a martial arts expert who dines at Raos.

The book reaches a climax as the traders fight like mad dogs over their sale to private equity firms and the Chicago Merc. They see the end of their ability to cheat the public in the usual way when screen trading is imminent. They sue each other and fight with each other even after death as they decry the rise in the value of their seats from 50,000 in the 1970's to $15 million when they finally sell to the Chicago Merc and the price of their stock reaches 150. None of them seem to realize how lucky they were as the sale took place right before the crash of 2008 and the descent of oil from $150 to $25.

The energy market is important in many way for the commerce of the world. While there are competitive exchanges in Europe and Dubai the Ny Merc continues to be the premier market in terms of volume of trade. The exchange charges a fee for each trade by non-members, and this is the source of the valuation of seats on the exchange. Many interlocking webs with the regulators, politicians, and competitors maintain the oligoplistic nature of the market. I found the book fascinating, couldn't put it down, and would recommend it to all as both a warning and a education in what it was like, what they were up against in their own trading through the pits, and what the trajectory is likely to be in the future.

Jul

24

 The average monthly income is $600 US in St. Petersburg. The average apartment rents for $400 US so they share a 2br.

Food is relatively inexpensive and fresh. Caviar is $40 an ounce.

A cop stopped our limo driver. A long negotiation ensued resulting in a $100 payoff to avoid a one year license suspension. This is apparently common. Doctors also require payoffs for "free" healthcare.

Submarines and warships lined the river ahead of Putins visit to his summer house. The summer house was an imperial palace.

It hailed grape sized hail. The weather was sunny and 60s with occasional rain and thunderstorms.

The port is huge. It makes Oakland look small. It must serve the entire Russian economy.

Jul

24

 In a jam-packed life, with 24/7 markets and all other things to do, how do the voracious readers of this site, including the Chair, do so much reading?

Do you read word by word, line by line, or there are other reading techniques you use.

Overwhelmed eager minds to get back into good old days of lot of reading will benefit if you share your reading methods.

Larry Williams writes: 

I read 2-3 books a week. I used to speed read but now I skim a book to get the gist and if it looks good I plunge in. I read very few market books. Mostly history. I look to learn or be royally entertained—a few books do both. 2 I recently enjoyed were:

Today We Die a Little!: The Inimitable Emil Zátopek, the Greatest Olympic Runner of All Time

The Plains of the Great West and Their Inhabitants

Jul

21

 1. There are lots of signs in Grand Teton and Yellowstone National Park that read "Be Bear Aware."

Lesson for Investors: Even when things look great, bear markets come with the territory.

2. Every local has bear stories to share.

Lesson for investors: If you invest long enough, you will see more than one bear.

3. Hikers are reminded to carry bear spray – which is proven to be "90% effective"- but 100% effective in producing sales.

Lesson for Investors: Hold some cash, buy some insurance, and realize there is always someone selling protection from bears, but nothing is 100% effective. Per my river guide, statistically you are more likely to be killed by avalanche and Moose than bear. l still bought the bear spray and I am glad I did. It was a small price to pay.

4. Bears prefer higher elevations and are lazy. As a result, they prefer to run downhill.

Lesson for Investors: High valuations and high multiples make bear markets more likely.

5. Bear attacks are most common in the months of July, August, and September.

Lesson for Investors: During these months, bears come out of the winter hibernation looking for food and the number of outdoor recreationalist increases making encounters more likely. These months seem to line up reasonably well with stock market seasonality.

6. Bears are largely solitary animals. Lesson for Investors: Listen to the independent, solitary bear.

7. Hiking in groups and making noise reduce the chances of being attacked.

Lesson for Investors: When there are many people making noise about bears, there is a lower likelihood of being attacked. Worry when it is too quiet.

8. Older bears tend to be heavily scared.

Lesson for Investors: It is hard living as bear, but those that survive are some of the most dominant creatures of the forest.

9. Bears are curious and have a keen sense of smell.

Lesson for Investors: Bears and short sellers are naturally curious and are easily attracted by unprotected food.

10. Bears are fast and charges and attacks happen quickly.

Lesson for Investors: Mentally rehearse what you are going to do before you go hiking or invest because chances are you will not have much time to react when bears attack.

11. If attacked. DON'T RUN! Bears instinctively chase running prey and run 35 miles per hour.

Lesson for Investors: Stay invested despite your fear. It's not easy. I admit to being intimidated by the grizzly I saw 20 yards away given his size, despite being in my rented Toyota Prius. I had the bear spray ready, having seen Youtube videos of them climbing on cars.

12. If your bear spray fails. Get face down on the ground, protect your neck, and wait as most bear attacks are short.

Lesson for Investors: You are statistically better off submitting than fighting, though in rare circumstances you may have to fight. The key is to protect your most vital parts like you neck, ideally with your backpack, and wait before moving to insure the bear has left the area. For investors, this means you may need to sell down a few positions to protect your best positions and don't rush into a bear raid and wait until the bear has left the area.

13. Finally, most people do the wrong things when they encounter a bear.

Lesson for Investors: When I saw the grizzly bear, others were stopping, getting out of their cars and approaching for better pictures, which is exactly what the ranger information said not to do. Instead, Be a Bear Aware Investor. What I learned about Bulls and Bears while vacationing in Jackson Hole, WY: Lessons for stock market investors.

And now some insights about bulls from the Jackson, WY Rodeo.

1. Bulls can be tough to ride for 8 seconds, even for experienced cowboys.

Lesson for Investors: Bulls markets will try and buck you off. Hold on tightly.

2. Bulls are larger than bears.

Lesson for Investors: Bulls markets will typically last longer than bear markets.

3. Bulls and cows can be tough to corral once a stampede starts.

Lesson for Investors: It can be dangerous once a stampede starts. The running of the bulls causes more harm than bears (see part 1, #11).

4. Young bulls come out of the chute fast making them hard to lasso.

Lesson for Investors: Be ready to throw your rope and hold on as new bull markets start fast.

5. Bulls and cows are pack animals.

Lesson for Investors: Sometimes you may feel late arriving to the party, but that is how the herd rolls. Look for the crowd – what products and services are they buying.

6. Wyoming was the first state to grant women the right to vote and politically participate.

Lesson for Investors: Women live longer, so they should be active investors too.

7. There was a sheep chase for the kids.

Lesson for Investors: Consider 529 plans so your children or grandchildren can chase the sheepskin.

8. There were lots of twists and turns in the barrel races.

Lesson for Investors: There were lots of twists and turns in the barrel races, but the youngest rider was about 8 years old. There are long term advantages to starting early because the older riders were really moving fast.

9. The clowns play an important role.

Lesson for Investors: You may find your financial advisor is a stupid clown at times, but he is trained and there to protect you.

10. Faith, country, risk and return. It's the American Way.

Lesson for Investors: The rodeo started with prayer, the national anthem, and an announcement that rodeo is a dangerous sport, but that the cowboys are excited for the opportunity to go win some prize money. Sounds about right for the stock market.

Jul

20

There's a very good story by Jack Schaefer about a hunting lodge with Peyton, an excellent naturalist, who is as sporting as Scott when it comes to culling a sick or weak deer, finally a rancher calls him a predator like the wolf and tells Peyton that he's been searching for a word that appropriate for the predatory hunter. The word is "humility". It's good to have it in the market especially when shorting the stocks.

Jordan Low writes: 

The NYT wrote an article about short sellers, but is unable to find one willing to go on the record, except a retired short seller from 2008.

Jul

20

 Indian equities have been smoothly chugging along. Flagship indices at PE of 18 and some pink papers writing its already the most expensive market in the world. Another headline that caught my eye today was that Market Cap of Indian stocks has reached 2 Trillion USD, whiskers lower than that of Germany & Canada.

No, I am not describing the current moment as a bubble, AT ALL. Yes this market seems valued and while it is flirting very very close to the first 5 digit round number, the magical 10000, there is a much deeper bubble building up and the current market is nowhere close even its onset.

Before I lay my two line thesis, at the end of this note, let me share an image that was circulating much through market-mens' whatsapp here today.

In the local market-colloquilism, the market operators are typically alleged to make the public wear stock at the tops. So when a wearable cloth image was going around on Whatsapps today, one could not miss recalling old posts on the list regarding the struggle ahead of a big round and its eventual release. Well thats a digression into the short term.

The real big bubble factors could be:

a) The world needs its next, bubble. This is a key surmise for one to guesstimate where the next bubble will rise. [More on this on a separate thread, why the world needs the next bubble]

b) Sobriquet of fastest growing economy already bestowed.

c) Political risk computes on India are at all time low with a uber-dynamic CEOesque Prime Minister. Valuations are a function of confidence and quality of management in any security. India was ranked as having the highest confidence in its Government amongst all countries recently, with 76% of the sample stating so, highest of all countries.

d) Cutting the long list of so many other potential factors that may appear to be mere bones, when I put this piece of meat on the table: The Government may very likely drop the Income Tax Rates from the current 32% to almost 12% or 10% before the General Elections in first half of 2019. It might do so by way of a policy to bring the Income Tax rate down in 5 years from 32% to 12%. Many reasons for the Government to do this:

i) Very low rate of compliance right now. The Laffer Curve may be put to play or expected to put to play. ii) Black Money, or unaccounted wealth of Indians, stashed in the banks around the Alps has been a key element of all political rhetoric. Destroy the device that motivates c reating black money, a.k.a. high Income Tax Rates so there will be huge jump in disclosure of incomes. There may be a huge flight of capital inwards into India too.

e) For now, the thing that may be important is, whether or not this much of a tax regime tectonic shift comes or not by 2019, these expectations will be taken very very seriously in the next eighteen months.

So while through the school of mumbo & jumbo, with this indicator or that indicator or this study or that study will keep pointing to a 5% dip for traders to keep playing, the huge huge short gamma, short delta risk on India will be out in the open pretty soon.

In the long run, before we all are dead, the expectable income is truly only gains in taxes and reduction in the cost of capital.

Alston Mabry writes: 

Thanks for the analysis, Sushil. I notice too that most estimates of currency valuations show the rupee as one of the most, or the most undervalued.

Peter Ringel writes: 

This sound like wonderful news for India!

I am quite a Modi fan boy myself. I am happy to read, that his administration has not lost it's drive yet.

I think there was a lot of FDI into India because of Modi – like a Trump-like catalyst and these tax reforms sound very healthy to me.

I am very surprised that Modi is able to do this.

After decades of socialism, related red-tape/corruption and state-sanctioned monopolies I had pretty much given up on India.

I was wrong and now I think the potential in India is huge.

Thank you for the update, Sushil.

Charles Pennington writes: 

As of January 2015, the Big Mac Index had the rupee 60% undervalued. The only two currencies that were more undervalued were the Russian and Ukrainian currencies, 72% and 75% undervalued, respectively.

By a long shot, the Swiss franc was the most over-valued based on the index, 57% over-valued. Second place — Norwegian krone at 31%.

Only 5 of the 57 currencies listed were over-valued against the dollar.

I was a little surprised to see Hong Kong at 49% under-valued. Supposedly a Big Mac costs $2.43 in Hong Kong and $4.79 in the U.S. The U.S. number seems high — does that include fries?

Jul

19

It looks to me as though the high is about in here. Maybe a drop of 5-10% over a period of at least a few weeks. All of this in the context of a very powerful bull market that will carry for at least the next 4 or 5 years (with fits and starts, decades) driven by lower rates, lower unemployment and low inflation in a world fast transforming on the energy and transportation arenas.

Anatoly Veltman writes: 

I only glance at the charts, and I see no difference between the 2007 topping action and the current chart juncture. So to me it looks more like agreeing with Ralph about no charting reason to hold Long here, but also not anticipating reasons to look for Long any time soon. What was that about "lower rates"??

Paolo Pezzutti writes:

Charts are useless. Your perception can be biased by what could look like specific formation. I think we should discuss the possibility of a top based on a more scientific and measurable approach. It's been years since we've heard about analogs with past topping formations and distribution patterns. Sooner or later stocks will move to the downside anyway.

anonymous writes: 

If we are in an analogous market to 2007:

Have we had any "warning shots" similar to Feb. 27, 2007 in which the underlying weakness of credit markets began to be evident? Is there reason to suspect that commodities are at bubble levels, or that a commodity bubble may form as in 1H2008, in divergence from the trajectory of earnings growth and equity prices? Are quant funds blowing up, indicating a sudden change in historical relationships between markets?

Ralph Vince writes: 

Giant bull market in bonds for the past 35 years.

I KNOW I'm not smart enough to call the top in that one. There's no great insight on my part, I'm just sticking with the bass line here, and that brings us to a 1 big-handle on the thirty constant mat.

Larry Williams writes:

The bearish Cassandra's on bonds miss the point. The Fed can't raise rates much here in a struggling economy. 2% GDP growth looks like about it based on velocity of money and credit. The Fed has to stop using Phillips Curve model.

Jul

19

What a contrast with the current Wimbledon champion. Becker's rough and tumble play has led to many skinned knees. An anti-role model to ponder:

"How tennis legend Boris Becker blew $167 million"

"Mr Briggs also said Becker was 'not a sophisticated individual when it comes to finances,' and that bankruptcy was likely to have an adverse effect on Becker's image."

Jul

19

"George Soros lost nearly $1 billion in weeks following Trump's win"

I don't know how reliable the sources are, but I wonder who the other side has been on the not quiet flash crashes but quick down and recoveries on many negative Trump news…

Jul

19

 On the topic of comparisons, there are many being made between 2017 and 1999, because of the run-up in tech stocks.

In early 2000, I looked at the top stocks in the Nazz 100 and found that they were selling for 83x earnings and 14.7x revs.

Here is a quick take on the top stocks in the QQQ now, using ati instead of earnings.

Jul

19

 Developing nation no longer refers to a country where the average income is lower than in industrial nations. Rather, I pick the rarer developing countries to travel to where there are no Smartphone thumbs. Mayo Clinic researchers and CBS News report a condition that doctors used to only see in factory workers and athletes is becoming globally widespread due to the penetration of Smartphones, even in the poorer countries. The repetitive movement of texting has led doctors to dub it the Smartphone thumb. It's actually tendinitis, when the tendon that bends and flexes our thumb becomes inflamed. When my airplane lands in a new country, I keep heading out into the more remote regions until the crooked, painful thumbs disappear and I can catch a glimpse of a disappearing pristine life where people can still give me the Ugly American finger.

Jul

14

 Mr. Wheat asks for a few Wiswell quotes great for trading:

"We suffer defeat gladly, as we know that is the only way to learn, and improve, and ultimately to win"

"The world can't guarantee you wins. You must depend only our own good moves for success"

"Look twice before you move once, and do it every game"

"The board supplies no easy answers. Therefore it is necessary to take a calculated risk: that is not the same as gambling"

"If you want to knock a player out, you have to go for the solar plexus"

"How can a genius make all the right moves in a board game, and then make all the wrong moves in the game of life".

"Occupy, or attack the center. The sides and corners are lifeless. The center radiates warmth and energy"

Jul

14

 One of the themes on DailySpec is the triumph of the optimist and human adaptability and ingenuity.
I found this article on social media: "The Uninhabitable Earth: Famine, economic collapse, a sun that cooks us: What climate change could wreak — sooner than you think."

I post this, not to debate climate science and what may or may not happen in the future. Rather I was struck by the overall tone, defeatism, and agenda pushing (rightly or wrongly) that talked about all things wrong with the world and none of the things that are right. That there was allowance that there may be a way to solve any of these possibilities.

Fortunately I read very few of these things or else I would likely be mired in perpetual depression. But it is probably healthy to be exposed occasionally to this as a reminder that defeatists are all around us.

(There is probably a joke about defeatists, realists, and optimists in here too)

Jul

14

 It's been ten years since the iPhone came out. Walking around NYC I see they have 100% penetration. What I have noticed is that the most vulnerable seem the most entranced and glued to the screen: children and people who appear uneducated. While the benefits are clear and the social connections good what I wonder about are the more sinister aspects of controlling visual and audio input using well proven methods of subtle influence. Much of the content is powered by ads and commerce. I wonder if there is a unifying effect? I wonder how many are killed by walking in front of buses or hitting something while driving. Definitely a major world changing trend in in progress.

Jul

14

 In Animal Husbandry class for vet school we went to the Michigan State rodeo ring every Saturday at 7am to palpate and judge the various large animals: goats, pigs, cows, and horses. i learned to say such things as, ‘There’s a lot of daylight between that hoss’s legs’ indicating he was many hands high to impress the professor. Then at 9am we walked over to the slaughter house to judge other animals after they had been killed and skinned, but not yet butchered for eating. In the slaughter house I learned never to trust a mouthful of chicken, because chicken cancer is arbitrarily determined by counting the # of enlarged lymph nodes. One node under the allotted # meant a trip to Colonel Sanders, but one node over and the carcass was cancerous and put in the incinerator. Another judging lesson at slaughter was the fat marbling of pigs. A professor made us experts in quantifying the amount of intramuscular fat located inside the skeletal muscle that we had palpated and judged externally earlier in the morning. Fat marbling up to a tasteful point especially in pigs is associated with high quality meat in the butcher’s shop or supermarket. On Saturday nights I began palpating females on dates, and learned that in humans excess accumulation of intramuscular fat is associated with conditions such as insulin resistance and Type 2 diabetes. It’s odd to look back and see how our food and health habits form.

Jul

14

 I continue to be amazed that anyone takes Warren Buffett's public comments seriously. What the man does in his tax management of ongoing businesses deserves absolute attention; what he says is the kind of stuff that used to be dispensed by every barker at a medicine show.

The only people who make money buying and selling shares are the rocket scientists. Sometimes their experiments blow up, but they are the only people who have ever made a killing on Wall Street, since the Morgan family was blessed with not one but two genius partners (Peabody and Drexel).

Buffett pretends that his great fortune has come from buying socks and stocks when they are on sale; but his actual stock portfolio's performance has been mediocre ever since the quants and index funds joined the party. Buffett's actual success has come from copying what the best merchant bankers did in the 19th century: buying whole companies and eliminating internal their bureaucracies and combining their income statements and balance sheets to turn the government into a minor partner in the future gains. (The merchant bankers in the 19th century did this as well, with tariffs and what they called "money shaving".)

The world Buffett describes is gone. There are no times now "when no one else is (interested)" and patent medicines are readily available everywhere.

Jul

14

 In Georgia (the country), the most amazing thing about it is the drinks the country offers. It's said wine originated in the region thousands years ago. Now one can buy many very good wines and beers at low prices. And craft beers are sold in supermarkets where they fill a plastic bottle from the tap directly. So we tried to take good advantage of it by tasting as much as we could. But the effect is that we got more sleepy than normal.

In Vietnam, the most prominent drink is the coffee the country produces, mostly robusta. In every corner of any town there are coffee bars where local people drink and chat with friends. One can also easily buy freshly ground coffee in many shops, and a unique handy coffee maker that is very convenient for travel. So we also tried to take good advantage of it by tasting as much as we can. The effect is that we stayed high-spirited most of the time.

Does the drink in a country affect its productivity? My experience says yes.

anonymous writes: 

Except that you could add a control and look at the success of Vietnamese immigrants in the US, academically and financially. Perhaps the booze is less cause than effect.

Jul

14

 Pakistani equities are down 20%.

It could very likely be a case of spurious correlation, yet worth taking a glance at.

Down 20% from the highs of the year, so far.

Interestingly, in the last 15 odd years that it's allowed foreign participation, it moves like the highest beta stocks would. Races up and comes down ahead of most other markets.

Jul

12

 What is this thing called vig?  See old man vig from Mr. Grain.

"Bored Traders on Tinder Are a Symptom of Wall Street Revenue"

By Laura J. Keller (Bloomberg)

One bond trader says he's been slipping out early to watch his kids play sports. A fund manager says his office just staged a golf retreat. A trading supervisor at another bank confides he's swiping through a lot of profiles on Tinder, the dating app. Welcome back, Wall Street, to the doldrums. After four straight quarters of rising income from trading, the biggest U.S. investment banks spent the past few months in a renewed slump. Shareholders will soon see how dull it's been. Analysts estimate the five largest firms will say their combined revenue from trading dropped 11 percent from a year earlier to $18.4 billion — the smallest haul for a second quarter since 2012. The banks start posting results July 14. Behind the scenes, traders grouse about a lack of market- moving news. Congressional gridlock is eroding optimism that President Donald Trump can enact a sweeping, pro-business agenda. Other geopolitical frictions have yet to jolt markets. The Federal Reserve is sticking to its interest-rate path. Among the hardest hit are fixed-income traders. Combined, the five firms are likely to say revenue from that business fell 16 percent to $11.2 billion, according to estimates gathered from nine analysts. At Goldman Sachs Group Inc., it probably tumbled 23 percent to about $1.5 billion, the estimates show. At JP Morgan Chase & Co., it likely fell 17 percent to $3.3 billion. In equities trading, analysts estimate total revenue slipped 2 percent to $7.2 billion. Stock-trading leader Morgan Stanley may post the sharpest decline, about 6 percent. Spokesmen for the five banks declined to comment.

Jeff Hirsch writes:

It's seasonal….

Victor Niederhoffer writes:

The market needs vig regardless of the season. 

Jeff Hirsch writes: 

Of course. But vig has seasonality too and that may be part of what drives market seasonality. It is clearing repetitive collective human behavior at work.

Jul

12

Here is a copy of Richard Proctor's 1887 book, "Chance and Luck". Proctor thoroughly describes luck and chance in a very thorough but antiquated way. He also gives a very complete treatment of lotteries, horse racing, gambling on the stock market, and notes on poker. He delves into gambler's fallacies, coincidences, and Martingale systems. His stock market gambling chapter is basically covering the types of wagers at bucket shops and is full of holes….A caveat, he does make some mistakes, minor math stuff and wrong sentiments taken as fact. Proctor tends to moralize, a paraphrase of his, "If one has more information regarding a wager than another, then any wager between the two parties is immoral." There are plenty more examples of this type of moralization. However, Proctor's book, like Bacon's, contains a hundred practical useful nuggets and several meals of a lifetime for the speculator. Coming in ~ 150 pages, it's an easy read and very interesting. Frankly, I just like how he thinks and heartily recommend this book as a good addition to any spec's library.

Jul

12

I noticed an article today a la E that some sort of weed killer is accidentally killing crops and another that marijuana crops may displace food. Unintended consequences dept. RJA finally trying to stop going down?

Jul

12

 The humorous one didn't inflict any joke hurting anyone, it seems.

Commodities Up, Bonds Up, Equities Up & even the USD Index Up.

Everyone is Happy. Capital Markets are trading like it's communism everywhere!

Or there can be a sustained move in the same direction everywhere?

So is there really no joke today? Or when is the joke going to be understood? Which of the four is the deception?

How does one try to figure out the answer to such questions?

Jul

12

In our shop we consider ourselves "data monkeys" rather than quants, hoping that the disrespect of the moniker will limit wannabees. But if it looks like a duck and walks like a duck…

The problem of ever changing cycles/ figuring out the current regime/ the Church of What's Working Now is solved by most in a brutal fashion rather than a subtle one. Suppose you drive an old car from sea level to say 12,000 feet and it struggles. You could lift up the hood and tear the engine apart. You could also make an air-intake adjustment. Both methods work.

We data monkeys believe that the only things that count with regard to markets are sentiment and momentum. That is, it's all behavioral, and it's reasonably efficient. Sure we like to comment on fundamentals, but the fundamentals to us are only important because they influence the behavioral. When a market has been moving in a certain regime, sooner or later a market Watcher gets the inkling that a change is afoot. His action or inaction will disseminate exponentially to others, and then the regime really will change. The key to keeping up with this is to watch what the Watchers are watching.

To us this means that if you are monitoring data with human input (e.g. price) you had best be making your inputs adapt to what they are watching (i.e. usually the length of past data) and it should have an exponential component to it, rather than linear because human knowledge moves exponentially. If the in-crowd has switched to watching the last week and you are watching the last two months, a change will occur before you become aware. Non-human influenced data (e.g. most fundamentals) can be fixed and linear.

Rocky Humbert writes: 

Roy Niederhoffer wrote a prescient piece 3 years ago. It's worth re-reading this as I think he makes some excellent observations: "CTAs Could Face Historic Challenges From Rising Rates"

anonymous writes: 

Roy Niederhofffer's piece points out that the structure of futures markets for interest rate futures has favored those that didn't expect rates to rise. A large portion of the earnings of investors around these markets would make money because futures had a bias to be priced with an expectation of higher rates than eventually occurred. Those who took the bet that rates would rise lost, and the reverse. We've had a long run of this bias back to the rate peak in 1980/82. Certain types of investors made better than market returns because of this.

The source of this has been Fed led by their providing excess liquidity, and making pronouncements that they would continue the low rates so carry trades would transmit low Fed funds rates to other instruments. THese low rates provide under pinnings for other business investment, and for increasing stock multiples as the only game in town.

What's next?
 

Jul

12

It is funny to see some of the European performances year to date, like Russia and the Americas always moving in opposite directions, and Turkey up 28% or so, the best [Chart of Istanbul 100 below]. As Haaretz says, the markets don't care much about authoritarian rule, or democracy, or individualism or religion, as long as there is a rule of law so that the investors can get their money back. But rule of law not even upheld there.

http://www.azlyrics.com/lyrics/samcooke/wonderfulworld.html

 

 

 

Jul

10

In the book Presuasion recommended to me by The Chair the act of reciting or singing together or marching instep creates subconscious feeling of group unity leading to greater willingness to help other group members. A similar technique is used by churches and armies.

Jul

10

I find it to be a much different game involved when managing a big winning position than dealing with any size losing position. Sometimes the market moves render even the best trading plans moot, either side, win or lose. The Mistress broadly encourages one to abandon reason and science, imploring one to trade in an emotional, "seat of the pants" mode. The mistress tends to endow a winner with self doubt and adds a double dose of hindsight just for kicks. She messes with confidence levels, tries to decrease humility, increase hubris, and whispers in your ear some small suggestions, that if followed will cause personal ruin. It is important to note that the mistress is fastidiously equal opportunity, sowing discord among winners and losers alike, and all at the same time.

Losers are easy to deal with…..get rid of them quickly, learn whatever lesson is presented, and move on. It's the very rare big winners that are most perplexing….there's not much material out there on how to deal with them.

Thoughts?

anonymous writes: 

Jeff writes: "I find it to be a much different game involved when managing a big winning position than dealing with any size losing position."

I agree with this statement.

And why might that be? Is it because we have trouble keeping positions open — that is, "cut your losses and let your winners run" is much easier said than done. Or might it be that we suffer from a personal guilt/insecurity that subconsciously believes we don't "deserve" to have an big winning position? (See: Prospect theory). Or perhaps it's more mundane: a lack of strategic tactics and discipline.

Whatever the reason, it's what I call a "quality problem" — so long as one doesn't believe that "no one ever went bankrupt taking a profit." Taking small losses and small profits is a surefire way to bankruptcy.

Julian Rowberry writes: 

How many times a year do you have to cut losses? How many times a year do you have to manage a big winner?

anonymous responds: 

The Pareto Principle states that, for many events, roughly 80% of the effects come for 20% of the causes. But in fact, if one is trying to beat the S&P500, it's much more concentrated than that. According to Cliff Asness, each year for the past 20 years, the top 10 stocks have accounted for about 45% of the total gains. (There are different ways to calculate this — but the gist is the same: if you are long-only and own a concentrated portfolio, then owning those few winners is absolutely essential. It's left as an exercise for the reader whether this is one and the same with the so-called Momentum Effect.)

Similar phenomena occur in commodities…

This underscores the difficulty — perhaps even futility — of calling "tops" and "bottoms." This isn't a recent phenomenon either. I've seen some studies that show the most outsized gains occur in the final stages (so-called "blowoffs") of markets. So if you are trying to beat a benchmark (which is the most intellectually honest way to invest), then the only way to explain away those missed gains is to (a) pick a different timeframe for the benchmark and/or (b) couch things in terms of "risk-adjusted" returns or (c) pick a modest, absolute return benchmark. 

Raph Vince writes: 

Je me regarder.

There is absolutely nothing to consider here on this question but to further muddy the answer, and the only way to arrive at the answer is to first solve the fundamental, personal reason as to why you are here.

What are you seeking to do? This is true whether you are looking to trade Cook Co GOs, Natural gas futures or at the cheapie blackjack tables in Biloxi.

What are you trying to do? what is your criteria? And if the answer is simply "To make money," or "To make more money than ybidyblibidyblamgozoo," then you are among the deluded masses who will part with what you've brought in this in only a matter of time.

The single clearest denominator between those who loose what they have and those who do not is that the latter know, very clearly, and with respect to risk and timeframe, what they are doing here. Whether you're playing cards at the caddy shack or venues higher up the food chain. Once a person goes through the rough the honest and realistic self-evaluation, given their abilities, of what they can do and seek to do given their personal limitations, can they then attempt to answer such questions as posed on this thread.

Galen Cawley writes: 

I have found that piecemeal exits work best based on three different mechanisms: first, your personal utility curve (this can and should be programmed), second, a bayesian updating of the premise of your original entry, and finally, pure market action (some sort of trailing stop). The first type of exit is based on your psychology but has the beauty of not being made in the heat of the moment. The second type is logically based on your methodology, and the last one lets the position run as long as the market dictates (which can certainly escape the logic of your particular system). Occasionally, I'll give in to discretion by throwing a virgin into the volcano, e.g. selling a one lot during a runaway market, or liquidating a small portion after persistent daydreams of fantastically extrapolated returns, knowing and hoping that I'm usually wrong.

anonymous writes: 

The problem with getting out of trade too early, is "you don't know what you had until it's gone". In other words, you fail to realize the true value of the trade, until you're out. In essence then, it comes down to a problem of "recognition". One must be able to identify and acknowledge if a trade is simply a random move, or if the market has crossed some threshold; and one has been presented with the opportunity to take full advantage of "the move". At times, the argument is logical, intuitive, and almost compelling. But, at other times, the process can defy logic, be counter-intuitive, and render one doubtful. Of course, with the exception of a post trade analysis, one never knows for certain if their assessment was correct; so one attempts to eliminate bias and doubt, and reduces everything to past experience and probability.

Jim Davis writes: 

Are big winners really that rare? What’s
rare is holding long enough to capture the ‘big’. Of course, it’s
easy to hold everything you own as long as you don’t mind the many
backsliders from highs.

How many sold their beloved Bitcoin or Etherium at prices that today look like zero.

Jul

10

First the technology changed. This improved the cost. The improved cost changed changed the mix.

Better materials of construction permitted the maximum allowable inlet temperature for gas turbines to increase from about 1500F to 2300F. This resulted in efficiency improving from about 25% to about 40%. Even with the higher efficiency, the exhaust temperature of the gas turbine increased by several hundred degrees. This higher temperature resulted in higher efficiency for the steam portion of the combined cycle and lower relative capital cost. Now total efficiencies are in the range of 60%.

Horizontal drilling and fracking resulted in falling gas prices in the face of rising demand.

Steve Jobs (and maybe Rick Perry) was right–sometimes supply creates its own demand.

Via technology.

Jul

10

I thought this was an interesting paper on Autophagy and Lifespan.

Is there a market connection? Nutrient starvation and caloric restriction sound like a market with low energy/volatility. During those phases autophagy starts working replacing dysfunctional hormoneles and proteins from the cells making them stronger. Similarly a market that has low volatility like the last year's market is getting stronger internally as strong hands are buying from weak hands who are dysfunctional.

Jul

8

@vicniederhoffer the definitive explanation I believe for flash crashes. It's margin calls triggered by the notorious broker and fellow travelers. As Bacon says: "The public has no right to lose as much as they do". But it's perfectly legal and unmentionable; but in fairness you have 2 minutes to meet a margin call by wiring money at 2 am to an unreachable counterpart before they take the opposite side to you. You can often see seemingly unnatural huge bids and offers away from the price just waiting to devour you in this context. As mentioned to add risk to injury in the event that one out of a thousand customers isn't exited in time for the broker to take all their chips, they add a risk fee to you next time around to take account of what might happen to them if the market moves 10%or 20% or so in a minute and they can't avalanche you out.

Jul

6

 The Match King by Frank Partnoy covers the Swedish Match company and Ivar Kruegar who committed suicide after developing many derivatives, forging Italian bonds, and developing new methods of manufacturing buildings and matches. He did real trading unlike Madoff but used many of the same techniques. He tried to follow the example of the south sea bubble and Mississippi bubble to get us lenders to funnel money through him to loan to foreign governments in exchange for monopolies.

Author is a respected attorney with Wall street experience. Very resonant. Also A History of the United States in Five Crashes by Scott Nations. Cover the 1907, 1929, 1987, 2008, and flash crash of 2010. Insightful, interesting and anecdotal with some analysis.

Jul

1

After a week of low volume two weeks ago, last week was highly volatile and erratic. It coincided with the advent of a new intern in the office. During the day, we don't talk much but as the market gyrates we try to quantify many different regularities. In the last 5 minutes of trading the market swung back to the lows before a holiday and a shortened day of trading before the first day of the month with gold, bonds at low, and the S&P who knows where. The moves raised a number of queries. And I realized that to a new intern and a outside observer it sounded very much like we were inmates in an insane asylum. It reminded me so much in retrospect of the idiot savant that the collab and I met at the baseball hall of fame who came up to us, and recited the batting averages of every player on every team from 50 years ago.

Anatoly Veltman writes:

I realize that one thing hasn't changed: institutions need to be invested. But other than that one thing, every other market make-up and mechanism has changed due to globalization, algos (especially HFT) and the incredible successful CBs experiment of 2010's with long-lasting zero-cost of all major currencies.

So that would mean to me that pre-2010s patterns are unreliable. And if one follows only a few years of pattern, then the problem lies with different placement within economic and election cycles, as well as most recent hacking waves. Which leads me to believe that the only constant is a CHANGE, and patterns that still CAN be relied on need constant adjusting of sorts…

In conclusion, I venture say that institutional investing has grabbed an oversize share (of course at the price of individual investing). Thus, given my introductory sentence, I have recently expected a Bull phase to last as long as it is - and then switch over to a lasting bear phase to wipe out 50-80% of the preceding gain. Now in that sense, not much change from 2007/2008 grand pattern - except for the exchange execution mechanics (with politicians dominating haphazard rule changes). So yes, lots of fun ahead for the intern.

Ralph Vince writes: 

The relentless move continues throughout the Summer, the majority waiting on the sidelines, assessing the virtues of each thumb, and the litany of those who should know better who all were looking for a top at various points up.

Yes, things are overvalued by most metrics. It's a bull market. That's how they go, have people forgotten this?

We've gone from a market of fear and disbelief, to merely one of fear now - a dangerous environment for weak stomachs as we have seen the past six weeks. The kind of market that wants to shake out those who are and have been aboard, and tempt those who aren't with a certain legerdemain only Mr. Market could do so as to get those who want to get aboard, unable to by crossing their feet and getting their weight going the wrong way.

Voir venir as mom would say.

anonymous writes: 

"Wait and see."

Anything to make us think it's no longer a bull market. Quick, volatile drops in speed and magnitude like we saw this past week, or long, slow, drawn-out affairs where new highs haven't been seen for months, yet still within the context of this bigger, overarching, fear-driven bull market.

Jun

29

 Rarely do I read a book that I must write a review to honor the author. One of the best autobiographies I ever read is Robert Burns' I Am a Fugitive from a Georgia Chain Gang! I could not stop turning the pages.

A WWI soldier and medic, Burns returns to the USA shell-shocked and penniless after the conflict. Living hand to mouth while hoboing freights, he lands in the South and is coerced at gunpoint into robbing a gentleman's store of $5.00. He is collared by the police and sentenced in 1921 to six years on the notorious Georgia Chain Gang.

There was a saying in the chain gang, and it ran as follows: 'Work out' – meaning make your time, 'Pay out' – by purchasing a pardon or parole, 'Die out' – meaning to die, or 'Run out' – meaning to escape. Few lived to serve their terms, he had no money, he preferred to die, bit Burns was struck by the idea that he could run out and likely die out trying.

The problem was the chain that never left his legs for years. One day while working on a railroad, he sledge hammered the steel ring around his ankle into an elliptical shape, and yelled to the shotgun wielding, illiterate guard, 'Stepping into the bush', to which the guard replied, 'Step into the bush', indicating he had one minute to relieve himself. When he slipped his heel and sprang up running one minute later, a shotgun blast in the ass hurried his pace, and the three bloodhounds were cut loose.

He tamed the hounds with kind words as he ran, until they thought it was a game. Racing through the swamps and back woods to Atlanta, he befriended a prostitute who helped him because he refused to bed her to conserve his strength. She paid his fare aboard a Chicago bound passenger train, where he arrived and climbed on a soap box daily for a month trading advice like a psychologist for coins, until he had earned enough to rent a large apartment. He refurbished and sub-divided it into nine smaller apartments until there was a stake to launch Greater Chicago Magazine. He became a prosperous, honest Chicago businessman and publisher, until a jealous divorcee turned him into the police. Burns did the impossible and escaped a second time, this time to New Jersey. He was still a hunted man living in hiding when this book was first published in 1932.

What a story of an individualist and entrepreneur who with grit, creativity, and intellect fought to success.

Jun

28

 My father (RIP) joked back in the 1980s that when our local northeast Ohio mall died that it would make a great prison. At the time we laughed because we never thought the mall would ever lose its appeal–I mean it had an Orange Julius store in it–what could be better than that? Well that mall did die and it still is just one huge boarded up bereft eyesore. The mall up the road 3 miles in the next town just lost its Sears anchor –recent December announcement. And this mall will be the next to die. Another 5 miles up the road in a better neighborhood is a mall that had to restrict unchaperoned teens on weekends due to a mass teen flash mob that went wilding–terrorizing the people actually shopping. It will be the next to go–people do not want to be harassed in a captive space when they go out to shop. The trend seems to be more of these outside based shopping plazas where you walk outside and stroll from store to store and enjoy open air and green space, etc. The "everything under one roof" concept seems to be going away.

What will eventually develop out of these dinosaur chunks of dead mall space in prime locations in less that prime towns? These towns lost middle america–maybe prisons, or halfway houses, or a la Trump–new job training centers, or low rent housing for displaced illegal aliens, or detention centers for questionable illegals, or new factory centers for returning blue collar jobs. I do not know the answer.

anonymous writes: 

The dead mall long standing empty property and another one about 20 miles away were bought by Amazon to be turned into warehousing distribution centers . Both will be high tech built for drone delivery. Not many flesh and blood workers to be getting jobs in these places. However, the building trades will be quite busy and there will be contractor dislocations and shortages of cement and rebar, etc to be anticipated.

Rocky Humbert writes:

It is arguable that this country has way too much retail space. It is arguable that Class A malls will survive, but Class C malls (that still look like the 1950's) will fail. It is arguable that population movements will render some malls unprofitable. It is arguable that the valuations of REITS are too high relative to their growth prospects and trend in interest rates. But the "Anchor Tenant" is a legacy of a bygone era….

Lastly, I will speculate that people who live in large urban centers (especially New York City) have little understanding of the social phenomenon of malls– and how they are the climate-controlled "main street" in many places. 

Jun

28

I have a friend who set up a bitcoin mining operation in Texas. After a pilot operation with 20 servers he just added another 50. Some interesting points on the business; At BC $2300 he makes back all of his capital in around 6 months, after which his break even on variable costs is around $1200 BC, everything above is profit. He converts bitcoin to $$$ regularly. Power accounts for about 25% of his marginal costs, though he worked an arbitrage on the power and is getting below market rates. All the servers must be ordered from China and there is waiting list.

He says Iceland is becoming a big spot for miners because of the cool climate and subsidized green energy. Cooling is important as overheated servers run slow or stop. The business model is closer to a lease than anything overly technical; renting servers to pools of bitcoin users. The calculating programs to verifying transactions are all pre-loaded in the servers and require just some basic set up. After which, he runs it all on his smartphone.

The biggest risk is something happening in the first 6 months, as well as having reliable cheap electricity. After 6 months, if BC prices get to low he will just shut off the servers, but if prices stay the same or rise he participates fully in the upside.

Jun

28

There are almost as many negative headlines about crude coming across my feeds as there are about the prez.

Alston Mabry writes:

I was just looking at some of the oil service companies and how their total equity+debt is less than the property, plant & equipment line on their balance sheets. That could well be a realistic assessment if oil is dead. But it's awfully tempting.

Jun

27

 Batteries will become increasingly important actors in the future. This opinion is shared by many managers in the utility industry. As evidence, there are massive R&D public/private partnerships already underway, involving government laboratories, universities, and corporate participants. There are at least five separate centers of innovation in the United States, Europe, and China. Already, there have been interesting breakthrough technologies announced, including lithium ion II batteries.

For our conversations, I believe it might be important to have a common understanding of the term "battery." For me, a battery is an energy storage mechanism. In most cases, it's a chemical.

In my opinion, a fuel cell is not a battery any more than a car engine is a battery. A fuel cell does not store energy; it converts energy. The fuel tank stores energy.

If you chose to combine the fuel tank with the fuel cell and call the combination a battery, that's fine. Personally, given where we are today, I don't believe there are many opportunities for fuel cells in the transportation sector.

A problem with fuel cell economics is how proponents set up the question. They usually begin the argument with, "given I have hydrogen," fuels cells are amazing. I might agree; fuel cells can be amazing little power plants if sourcing hydrogen were not a substantial challenge.

Unfortunately, that's not reality. If fuel were free, oil-burning power plants could also be amazing.

Fuel Cell Electric Vehicle (FCEV) serves to make a point. What is an FCEV? It's an electric car with a fuel cell, and a hydrogen tank bolted on. Like a Tesla, an FCEV needs a motor and a bank of batteries. However, FCEV's battery capacity has to be reduced to accommodate added weight and space needed for the fuel tank, fuel management system, and the [hot] fuel cell. To make concerns more challenging, the fuel tank in an FCEV has to be larger than normal because compressed hydrogen is a relatively low-density fuel and it can be hazardous.

The first macro question that should surface is basic. Specifically, what is accomplished by toting around hydrogen?

I will save time. If there's something to be gained, it's not substantial. Compared to a combustion engine, a fuel cell is more energy efficient. It's more energy efficient.

However, hydrogen is not economically efficient. If the objective is to compete with electricity, I doubt hydrogen could ever be a cost competitor anytime soon.

In many ways, hydrogen and electricity are similar. One is about protons, and the other is about electrons. Both are secondary fuels. Both are manufactured from primary fuels. Most important, both require vast investments in infrastructure to be useful.

They differ economically. The electric infrastructure is already built. Electricity already has a comprehensive infrastructure in place. It was developed incrementally over several decades. It cost hundreds of billions of dollars to build and more to maintain.

The hydrogen infrastructure does not exist. As a redundant fuel, to compete with electricity economically, any hydrogen infrastructure would be scaled, vast and costly.

As Western utilities move towards natural gas as their primary source of fuel, electric cars store natural gas' energy in their batteries. FCEVs store the same energy in hydrogen tanks. Why not deploy natural gas vehicles (NGVs)? You'd save several energy conversions.

TL;DR:

Approximate energy densities MJ/L:

Coal:        34-43
Diesel:        36
Gasoline     34
Fat:             34
LNG:           22
Wood:         13
H2 (comp):    9

Jun

27

 The scenic Georgian mountain town Kazbegi is less than 10km to the Russian border. One afternoon we decided to bicycles there. After about 3km there was a tunnel of about 2km long. It's dark inside and we could see barely the light at the other end. As we entered, there were some cars with lights so we could see the way. But when the last car of the group passed us nearly 300m inside, it became pitch dark looking forward.

I tried to ride forward but felt something very strange. I had a hard time controlling the bike. For less than 20 seconds, I brake but then felt my hands and one knee on the ground and the bike lying down. I don't know why and how i fell but instinct told me to stand up quickly because vehicles can arrive very soon. So I did that and pulled the bike up and started walking back toward the light. My wife was ok as she stopped very early trying to call me. I was not much hurt except some scratch on the knee. I think i was very lucky.

But anyhow, the point I want to make is that I couldn't control the bike in the dark. It started fishtailing, if that is the right word, or swinging from side to side much like the front tire was flat. Now thinking about it, without sight my mind had to rely on other senses that are much slower than vision, so the control was out of sync.

Perhaps there is a lesson here for trading. The reason market swings up and down is that the market participants trade in the dark. They rely on senses that are much lagged behind. So even when the market fell, traders don't know why and how it fell.

So a better vision is indispensable.

Jun

27

According to the CDC, the U.S. population's growth rate is undergoing a dramatic decline.

The teenage birth rate - which, in the past, has been the leading indicator for overall population change - has fallen in half.

In 2007 births per 1000 females aged 15-19 in 2007 were 41.5; for 2015 the number was 22.3.

Jun

27

 You will be discriminated against in Slab City or any other outlaw town if you are:

•    Educated

•    Don't drink alcohol or do drugs

•    Display no broken teeth or knife wounds

•    Have no tattoos

•    Never been in jail

•    Have no one to vouch for you

•    Lack anecdotal evidence in story telling

•    Are not on food stamps or SSI

•    Do not wolf your food from past hunger

•    Are not an anarchist

•    Use your true name

If you are uneducated, have a drug habit, show tattoos and knife wounds, like to party, steal and tell stories of the road, have a prison record, know someone who will vouch for you, use an alias and dislike authority, you are welcomed in Slab City.

Jun

22

 One failing of modern medicine is that tests, which control future diagnoses and treatments across the board, are generally conducted on a small sampling from cities of people who are victims of 'diseases of civilization' from smog, bad water, & processed foods. healthy people are rarely tested, so our medical system is full of holes. Responses vary from group to group and individual to individual. Lewis Thomas, famous for Lives of a Cell, provides a more professional explanation in Dr. Thomas's ass-kicking autobiography The Youngest Science: Notes of a Medicine Watcher.

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Jun

22

 Back in September 2015, GS introduced their first active beta ETF to much fanfare, including the fact that the management fee significantly undercut competing products.  Time enough for a reality check. Total Return Since Inception:

GSLC: 25.93%

SPY: 30.02%

Annualized equivalents:

GSLC: 14.82%

SPY 17.04%

[Note: results from 9/30/2015 to 05/31/2017]

Hernan Avella writes: 

It looks like the same can't be said abut Blair Hull ETF (HTUS). It seems to be accomplishing it's goal, beating SPY since inception and with less volatility. I haven't looked under the hood of fees, distributions, taxes. But superficially looks good.

Rishi Singh writes: 

The return/sharpe are meaningless for a sample size of a year, espeically as the fund (according to prospectus) is balanced quarterly. I would want to see tracking error of live results vs their backtest. Also - I don't think people would buy this ETF expecting a return > than SPY every year, but for the correlation benefit. Again, what's the backtested corr, vs live and tracking error?

Russ Sears writes: 

I would respectfully disagree that "return/Sharpe are meaningless for a sample size of a year" because if they have had 4 quarters, it should give someone watching an idea of how stable each part is compared to S&P, and idea of its volatility. The returns/Sharpe may not tell one much but the individual data points of 4 quarter returns and volatility/correlation the picture has become clearer. While I would agree that it may not be enough to make a statistically significant conclusion, I would not even use a fund for diversification/correlation if the volatility/correlations to standard benchmarks are not somewhat stable. And the poor start does not bode well for the fund's strategy's alpha's consistentcy.

Further, if you had invested say $100 million of some institutions funds in the fund with a benchmark of S&P arguing a $2.6 million under-performance would not be something I would want to defend too rigorously or try to initiate the fund.

Jun

22

 A few thoughts:

The spread of software into just about everything (combined with miniaturization of the hardware on which that software runs) is a major change in how the built world works, and how we interact with that world.

Quantum computing, if it comes to pass, will have a big impact (e.g., everything that's currently secret via cryptography would come out into the open).

Semi-related is blockchain: it's essentially an immutable, fully transparent version of double-entry bookkeeping (another major change from the 1300s), but applying to all data, not just finance. This will upend practices like auditing.

Retail stores have existed for centuries, but they might be going away for most goods - that seems significant.

The relentless advance of automation will change the nature of many jobs, or eliminate them entirely.

As video games and the like become ever more realistic, some people seem to be giving up on work entirely.

Jun

22

 A few years back, it seemed like Carnival couldn't get out of its own way, and one person opined that maybe there was some form of employee espionage at work.

It seems that the disease has spread to United. It's having a true annus horribilus:

"United passengers left terrified and injured after turbulence on US flight"

Jun

22

 Does anyone shop at Staples anymore? Doesn't Staples own Office Depot and Office Max? Is this another reason to buy AMZN because of the fact that Custer's band of soldiers over at Staples(and most other retail) is circling the wagons before the inevitable?

I was the only customer in my local Staples today. The store was empty and this was at 2:30 after the grain close, normally a busy time when I go there. They were staffed very light with a girl running the front end and register, the general manager on the floor, and one guy on the floor stocking and waiting on customers. And this was after their lunch break according to the guy on the floor when queried as to why the light staff. Looks like they have a pretty tight payroll with no hours to spare and the guy said that he was full time and cut back to 32 hours. Yet they have help wanted in the window. The store was badly in the weeds, and the shelves showed the empty spaces of out of stocks. In fact, they were out of what I stopped in there for and said it would take a couple of days. I was tempted to order it off of AMZN for tomorrow's delivery in front of the manager who tried to find what I needed. He knows retailers like Staples are dinosaurs and times are a changing. Why make him feel worse by rubbing it in? The poor guy looked beleaguered, like everyone in retail is. Working in retail has to be the shittiest existence in the world. It is top down management, everyone is responsible for making their numbers, yet nobody is making their numbers. There seems to be money everywhere, but none in their shop. The despair shows in many of the faces in every retail place you go….hours are being cut with the same work, quotas, and numbers as before, in fact more from less. It's gotta be hell for the workers getting ripped by their bosses, those bosses in turn are getting ripped up by their bosses, and on and on all the way to the top banana.

Face it, we're all getting spoiled online, and discovering that driving to places to buy something, go shopping is a waste of time. How much more enjoyable is life if one can substitute a round of golf, tennis, surfing, museums, music, rather than the drudge of shopping and dealing with surly staff? How uplifting to be liberated from shopping which is equivalent to the period 90 years ago when the average middle class housewife got a washing machine and was liberated from the hours and hours a day doing laundry by hand.

Jun

22

Changes in prevailing direction in market with respect to time period H, such that H > t, often occur as period t has elements with increasing number of lows and increasing number of highs; often ranges decline, as the median price trajectory tilts over, volume decreases (very related to range decreases). The market is in a thixotropic state, where the market making viscous forces are the dominant presence. Sudden change in trading volume (and log changes in trading volume have a negative serial correlation, so such a thing is more likely than usual) perturb the system to a more inertially dominated market than before. Or: volatility contracts and expectations are harder to hit, and traders sideline, while the few voters left who think they have worthwhile wager battle it out.

Jun

22

 Can you mount a factual argument in support of the Paris agreement? Can you explain the fossil fuel industry's support of it?

All I have heard is (a) empty platitudes: "USA leaving is bad for the world", usually from people that fly private jets– and (b) extreme coercion in support of a deal whose stated outcome is to spend a lot of money and accomplish very little.

Fossil fuel industry support is likely explained by promotion of methane hydrates - an opportunity that Japan is pursuing with vigor. I personally am less enthusiastic about an undersea landslide enveloping us in a gigaton methane plume, however.

Consider too that the net impact of increasing EPA emissions standards has been to increase global emissions as industry is forced offshore to China with a grid that is several multiples dirtier than the US, and with 8,000 miles of round trip shipping added on. A disaster for the environment. Emissions targets in the Paris agreement perform a similar function.

The UN's green climate fund does not preclude investment in coal-fired plants, and green group's have already condemned their plans.In general I am skeptical that shipping boatloads of cash to unaccountable bureaucrats will fix anything. A feeling that is not assisted by knowledge that the UN's WHO spends more on travel (including first class flights) than it spends on Aids and Malaria.

Climate change is a problem that can only be solved by the invention and industrialisation of technology. I'm putting my money where my mouth is - I'm substantially overweight Tesla and am privately invested in promising battery and solar tech R&D. Deregulation of the energy grid, as voted for in Nevada, will provide room for these technologies to be adopted. Dismantling the petrodollar would help too.

Jun

22

 We owe our modern misconception of optimism/pessimism to Voltaire, who in the interest of satire, oversimplified the schools of thought greatly.

It's possible to be an optimist in the sense of being a judicious risk-seeker, of seeing opportunity everywhere, while being an anthropological pessimist.

The judicious risk-seeker assesses the probabilities and is unreserved and aggressive, not assuming the worst.

The anthropological pessimist is a philosophical conservative, not in the modern political sense, but in the sense of Oakeshott:

"To be conservative, then, is to prefer the familiar to the unknown, to prefer the tried to the untried, fact to mystery, the actual to the possible, the limited to the unbounded, the near to the distant, the sufficient to the superabundant, the convenient to the perfect, present laughter to utopian bliss."

People too often think that schools of thought are in contention, instead of being potentially syncretic. The post-Marxist Leszek Kolakowski articulated one type of syncretism brilliantly: "As for the great and powerful International which I mentioned at the outset–it will never exist, because it cannot promise people that they will be happy."

Jun

22

A visit to a nyc public park just opened in a West Side neighborhood brings bak many resonances. This is the Gertrude Ederle park . She was first to swim the English channel in 1926 and was cal coolidge's best American girl. The park was 10 years in construction and once held a 1920's type swimming pool which has been remodeled. As I was passing by doing my dailyjob, I heard 100 kids playing . As I passed one shouted in the midst of pushing 3 other kids " Its already settled. Its already settled. Your own man said we were rite ". The park is quite decrepit and I doubt whether they still have a Greek solarium in it so typical of the one patronized by former Chicago community organizers before they reached the Beltway.

Jun

22

“In the next 30 years, the world’s pain will be much greater than its happiness,” Ma said at an entrepreneurial conference in Zhengzhou, China. “Social conflicts over the next 30 years will hugely impact every industry.”

“Machines should only do what humans cannot,” Ma said, adding “only in this way can we have the opportunities to keep machines as working partners with humans, rather than as replacements.”

“Fifteen years ago I gave speeches 200 or 300 times reminding everyone the internet will impact all industries, but people didn’t listen because I was nobody," he said.

"people should prepare for decades of social upheaval and pain as the internet disrupts the global economy."

Jun

22

 An old high school friend (who reads and has commented on DS) recently told me that he is burned out in his career and wants to trade FX for a living. Apparently he knows 2 people that make a living trading through one of those shops. I gave him more than several reasons why he should consider taking a pass on this new career, but he's going to a 4 hour seminar to learn why FX trading is the way to go. He is willing to invest $10K in this venture. My immediate comment when hearing about his limited bank roll was that he would need to generate an extraordinary return on his money just to make a living and that would be near impossible. I ask the list for some guidance….questions he should ask the FX broker, questions he should ask himself. I've tried to talk him out of this, but he is still considering taking the plunge. What are your thoughts about someone 60 years old, quitting his job and trading FX on a $10K bankroll. I know my thoughts, but ask the list to add some of their own.

Generally speaking, when casual acquaintances ask me this question, I tell them that they will do better going to Vegas….at least when one blows through the $10K bankroll, they might get a few comps….the mistress of the market will just take one's money without even a thank you kiss in return.

Stefan Jovanovich writes: 

Cue Marcel Proust: We remember the stories of our lives but there is very little of the past that our nervous systems actually keeps in the present.

One of the lucky and tough survivors of the torpedoing of a merchant ship sinking in WW II described the part of the whole thing that stayed longest in his active memory.

It was the voices of the barely 20 year old seamen in their Mae West's calling for their mothers.

Jeff's friend seems to be another believer in the age-old faith that Mommy is still out there somewhere and will magically save us from the hardships of shipwreck. 

Bud Conrad writes: 

Read the opening personal story of Education of a Speculator for an example of how hard the high leverage can become. You could quote me as saying: "I wouldn't trade forex without a $300,000 portfolio." This kind of desperation often accompanies market reversals. For forex I don't know what the change will be, but I would warn your friend in the strongest terms.

anonymous writes: 

I think risk of ruin is too high if you're under 100k bankroll. With 10k there is leverage needed to make a living, but with a 100k you can survive a couple bad streaks. 

Jim Lackey writes: 

Good afternoon, Chair, Brothers, ladies and gentlemen. Interesting post, I just caught a young man screen watching. It's the stare of hope. If one would focus enough the prices would go our way. I was asking him if he wanted to buy the truck or not. He cursed and I knew it was about something online. I said what is going on dude? He said "look at this. " He motioned me to look at his screen. It was forex quotes, I said, what is your position?. "Long the Euro and they said it is going up because….". I asked who are they and why would they tell you and what is their position? He looked up and………., huh? First off one must start with individual stocks 2-1 only. Secondly they always know and I was always the last to know. Huh? Do you want the truck or not? He looked back at the screen and said "but the Euro….." If he bought the truck I would have given him a few good books. I'm sticking with trading cars and trucks. It is not a very profitable business margin wise. It is a lot of physical work. I am in excellent physical shape. I can sleep at night. I'm not sure if it is a permanent disability, but I have lost my ability to take risk in the financial markets. However, I would never discourage anyone from speculating for a living. Buy them a cup of coffee and after an hour see if they would read the good books. Specs are honorable and benefit society in ways that I did not comprehend until years after I hung up the racing helmets.

Larry Williams writes: 

While I've already agreed with the majority comment on the subject let me add this…

A few years back I got a letter at Christmas time from a guy who wrote basically saying, "Larry I bought your trading course I actually went to the blood bank and saw blood to buy it. I raise some capital while I was learning started trading now here I am in Vail Colorado. I'm a single father my kids are with me I'm living in a house beyond my wildest expectation, all because of learning to trade etc., etc."

Of course I replied that it had nothing to do with me was his success and good fortune but nonetheless this was a wake-up call in lesson for me it's hard to tell people know don't do this because this letter was not an exception have had others, not as extreme, but in a similar vein. Clearly there been other people who have lost money, some probably even shirts or shorts.

This is a hard-core to stop somebody so what I personally do is let them see the doors open but also all the dragons and monstrous just beyond the door. Full disclosure, brutal disclosure then if they want to pick up the craft they can.

I know you don't build good athletes by telling them they can't do something you have to encourage them so this trader, want to be trader need some encouragement.

Jim Lackey adds: 

This is what happens in forex too: Cascading margin calls for so many and who was holding the other side after everyone was forced out of their positions? GDAX affiliates? GDAX?

A side point: a few million worth and the price is crushed. Small market. Any medium sized player can own the price action in that arena…

https://www.cnbc.com/amp/2017/06/22/ethereum-price-crash-10-cents-gdax-exchange-after-multimillion-dollar-trade.html 

Jun

19

 The Liddell Hart theory–i.e. a war of movement can avoid the costs of frontal assault–has been almost entirely discounted by modern studies of what actually happened in WW II. If the Great War was so much bloodier than WW II for the British and Americans (but not for the Russians and Germans), it was not because of any change in tactics or strategy but because the Anglo-American forces spent so much less time at the sharp end. When you compare killed, wounded and missing per day of direct combat, the WW II battles (the Bulge, to take one, which is still and is likely to always be the bloodiest battle in American history) are no less "massive showdowns" than Western front struggles in the Great War and just as awful. The casualty rates are the same.

Hart's hope that tanks could produce battles of movement was not proven true; as soon as the opposing forces learned to use them, the anti-tank guns created their own stalemate. Kursk became a mechanized meatgrinder equal to Verdun.

The military analogy that comes to mind for the Bezinator's successful campaign is Curtis LeMay's firebombing of Japan. With its massive capacities for warehousing and delivery and the logistic coordination that allows customer orders to be processed without interruption, Amazon has done an incendiary bombing of its competitor's profit margins.

Andrew Goodwin writes: 

I have read Liddell Hart and Clausewitz. The losses on a frontal assault were too high in land campaigns.

Napoleon did the indirect attack in a formulaic way by a mock frontal assault covered by a horse screen on one wing ending in a back side cutoff of the supply line of the enemy. The maps of his campaigns are well seen through the book called "The Campaigns of Napoleon" written by David G. Chandler.

This approach appears to create a panic in the enemy lines. The method to defend against this has developed considerably since then. You have to think about how they worked a way to defend against the elephant charge.

If you leave corridors open, the elephants will look for less resistance and charge through the gaps you create. Then you can cut them off from behind.

The one who figured out how to use this in more modern warfare was Von Manstein. He created passes and then encircled from the rear. How this is done today with air and sea and land combat is not of my reading yet.

Stefan Jovanovich replies: 

Er, not quite. Neither von Manstein nor Napoleon ever doubted his own genius, but we can't take them at their face value. Von Manstein managed to be consistently blind to any possibilities that the Soviets might also use their brains. His great triumph - Kharkov - came between two disasters that were far more consequential - Stalingrad and Kursk.

Napoleon's genius came almost entirely from his ability to move his cannon quickly to the point of attack. In the set piece battles for which he is justly famous, that allowed him to bring massive firepower to bear and then follow it up with attacks in column by infantry that were classically "frontal" - most of the time the infantry did not even discharge their muskets but marched forward in a phalanx of bayonets. In the wars that he lost, his cannons were useless; in Russia because of the mud (the same factor that lost him his chances at Waterloo), in Spain and Portugal because of impossible terrain.

Nelson followed largely the same tactics, with the same success. His ships attacked in column, not line, and in direct frontal assaults.

The actual record of the use of elephants is that they look impressive but are - like the massive artillery guns the Germans loved - not worth the trouble. Alexander refused to use them; and Hannibal discarded them (they probably ate them) long before Cannae.

Jun

19

 A great video to watch: Hitchens on Orwell.

Christopher Hitchens talks with EconTalk host Russ Roberts about George Orwell. Drawing on his book Why Orwell Matters, Hitchens talks about Orwell's opposition to imperialism, fascism, and Stalinism, his moral courage, and his devotion to language. Along the way, Hitchens makes the case for why Orwell matters.

Jun

19

 Memory preservation is an area apparently in need of further research, but the recent statement highlighted below by one in the field is surprising to read.

1. "Working memory and distractions were the subjects of the second speaker, Fiona McNab, a Wellcome Trust Research Career Development Fellow at the University of York (UK). McNab explained that working memory is important for decision making, reasoning, language, and mathematical processing. She said there was no scientific evidence to show current brain training games could improve working memory; while games might improve the performance of a specific task intrinsic to the game, they do not have a transfer effect to other tasks. Instead, McNab highlighted the use of functional magnetic resonance imaging and behavioural studies to explore working memory and distraction. She also referred to the Great Brain Experiment, an app that allows users to play games to test their memories and provide data for neuroscience research."

2. There is certainly an interesting history to the idea of memory improvement though. Pelaminism was a popular subject in Victorian England.

Jun

19

I was talking to a gentleman who is a classic pessimist and here is what I wrote to him:

You are such a pessimist. I'm glad I don't suffer from your disease. I'm an unbridled optimist for the earth, and for the uplifting progression of mankind. Do you realize that mankind is headed for a bull market in "mankind." It will be a multi-century bull market. This is evidenced by things like reduced total worldwide extreme poverty by 90% since 1950. We're getting more peaceful too, with many less getting killed in any conflict than at any other time. Hunger is down significantly, life expectancy overall is way up. Childhood deaths are a fraction of what they were in 1950, and real per capita income of the planet is up 85% since 1950. Worldwide literacy rates have never been higher. Our technology will increase by a million percent in the next 300 years. There's so much to be optimistic for and mankind will most certainly benefit from this new golden age. Incidentally, everything good for humanity, like reducing poverty, disease, early deaths, wars, famines etc has been done by optimistic people. The exponential increase of science and technology is solely because of optimists. The optimists of the world are responsible for every great achievement of mankind, from the Magna Carta to penicillin to landing on the moon. Nothing has of note has ever been done by pessimists. Pessimists add no value to anything as they are too busy waiting for the sky to fall, the market to crash, and the bankers to take the lint out of your pocket. How can one positively add to the human condition when one is huddled up in a defensive mode crying about how whatever cabal, what boogeyman is trying to bankrupt you and eat your children in some blood ritual.

I really feel sorry for those who's emotions are not on solid ground. One suspects that it's all the bad news one is inundated with 24/7(if it bleeds it leads), and the large segment of the population that cannot think for themselves. Most people can't, hence the popularity of the different outlets like Fox and MSNBC that tell their disciples how and what to think. If one can think for one's self none of this bad "news" is going to be a make any difference, certainly not in one's day to day life. Anyways, what poses as news these days is mostly editorial. It goes without saying that I prefer facts and figures to news/editorial. The facts are strongly indicating that we're in the initial stages of a grand movement, a total upward trajectory for the human race. A market equivalent is that right now we're the S&P 500 and we're priced at 72 points and getting ready to rally. And a reality of the present stock market is that some of this optimism is priced in, as it should be.

Jun

18

 How much bad news was there last week with the market refusing to go down?

If 1 millionth as much good news came and the market didn't go up, every commentator would be saying the market is in the worst shape ever because no good news will budge it. But not the reverse.

There must be consternation and frowns at the marbled corridors of the Governors. They tried so hard to knock it down.

Reminds me of the Union Club on fifth avenue in the 1950s where the members sat at the windows looking down at fifth avenue and frowned at the women wearing mini skirts et al.

Ralph Vince writes: 

It reminds me of when I was an adolescent, and work was at Cleveland's food terminal, and the old kraut I worked for set starting time at 5 am sharp.

The endless ghetto lay between the job and my bed and the only way there was with my thumb. The jungle would always be hopping at that hour, kids out riding their bikes, etc. I would go through there like a ghost, and disregard any danger, trying only to be ready for it.

This market is identical, and calls for absolutely the same, exact, unflinching mindset. The same exact thing.

Jun

18

There's something lethal in this exchange between the NY Times and the humorous chair.  "We've certainly noticed that the stock market is up over the last year. That usually shows up in financial conditions indexes." The hate, the umbrage, the distress from both the questioner and the answerer is almost palpable.

Jun

18

This is a great SI article on a 45 year old's quest to hit a home run. Lots of practice required.

Jun

15

As I've mentioned before, I am not a very good peer-to-peer lender.

Lending Club says that my account (adjusted for loans that are in default, late, etc.) is now worth 3.9% more than it was when I opened it in early 2016 and that my annualized return has been 2.87%, much lower than what they claim to be typical, which is >5%.

Stats on my loans are given below. I give the number of loans for each rating category from A to E, along with the number of "bad" loans in each category.

I define "bad" to be either "in grace period", "late 16-30 days", "late 31-120 days", or "charged off".

Occasionally you'll hear someone claim that you should just lend to the highest interest rate borrowers because the bad loans are relatively independent of rating. That was totally false in my case. I had literally zero bad loans in the "A" category, and only a reasonable 5% of my B loans were "bad". Meanwhile about 13% of my C and loans went bad, and 27% of my E and F loans went bad. "E and F" borrowers probably overlap a lot with "Ebay merchants" in my opinion!!!

Of course, when a loan goes bad, it's typically not a 100% loss, but believe me, it's pretty bad.

In retrospect I would have done much better by sticking to A and B loans, or even just A loans.

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Stefanie Harvey writes: 

I have been playing on Lending Club for 5 years. I now choose all the loans I fund rather than "index"

- I only choose "A" loans
- Borrowers must have 2 years of employment and a credit score higher than 730
- I exclude any loan for "medical" or "relocation"
- My return is around 5%

Great discussion; Jeff thanks for posting that article (and agree - poorly edited book excerpts!)

I have done over 1000 loans and the A loans default at just under 2%. I lost more the first year I invested when I tried mixing risk. 

anonymous writes: 

Very interesting, thank you.

Maybe the whole idea of the D, E, and F loans with interest rates >20% is just a broken model. It's hard to see how those can have a good outcome for several reasons:

–If you're really strapped for cash, are you even going to be *able* to pay off the 20% loan, when the interest itself is so staggering?

–If you're really strapped for cash, are you even going to be *willing* to pay off the 20% loan, given that there's no collateral? Surely you'll pay on anything else first–mortgage, student loan, whatever. And your credit rating can't go much lower than it already is.

Seems like maybe the whole model — charge a higher rate to compensate for the higher risk of default–might be broken because of a Heisenberg effect–the rate itself affects the default rate.

Regarding loan selection, I read elsewhere some stats purporting to show that, counter-intuitively, one of the best credit risks is people who borrow to pay for a wedding.

Conversely, borrowing to "start a business" turned out to be a bad credit risk. The easy explanation was that such people would soon be quitting their steady-paying jobs.

anonymous writes: 

It brings to mind the payday loan business and makes one think that productive research could be done in that area, with the usual caveats.

Jun

15

Finally something useful and not hateful from the fraternity paper.

"In the Hunt for New Antibiotics, Scientists Hit Pay Dirt" by Jenna Gallegos

Bill Ray writes:

Until fairly recently, the direct was a great place to find antibiotics. Streptomycin, which was the first treatment for TB (and which showed that randomized trials had a place in clinical research) was discovered in direct, as was erythromycin, I think. There have been many others, as well.

Soil can be fertile in lots of ways.

Andy Aiken writes: 

I heard someone recently mention colloidal silver as a natural antibiotic with zero side effects. Zero collateral effects, except turning blue. Also, probably zero effect on melanoma and other conditions that colloidial silver is supposedly used to treat.

Vancomycin, Erythromycin, Penicillin, etc are all the purified form of natural antibiotics produced by fungi. Why consume silver, which has no nutritional function, when the best antibiotics use the ancient wisdom that playing in the dirt provides excellent immune protection?

Jun

15

Aside from an effort to sink the President, how does a hoped for increase in inflation above 2% help the economy and overwhelm the "data driven" of the past? Wow, all of old time economics where employment was related to the real rate is going out the window. I must throw all my 19th century economics books out.

Jun

15

The humorous chair and agrarian wild man both hoping for end of prosperity. One sees an albatross; the other notes with trepidation that the stock market is up

More a frenzied man of TV says "prez has become an albatross to the stock market": let us hope there are more albatross like him out there

The more prosperity we have, the better it is for everyman and the Prez, and the worse for cattle and prospects for camp kinsella policies

Here's the humorous chair on stock market…it's almost like she hates to see it up. and why not? the move prosperity.

@VicNiederhoffer on twitter

Jun

15

It was only after business men and women sent their children off to be thoroughly schooled in administration in the late 19th century that there were economics textbooks. Poor Jack Morgan never fully regained his father's respect after he came home from Harvard and told Dad what he had learned about banking from Charles Franklin Dunbar.

The beauty of the late 19th century in the United States was that its massive failures were awful but never frightening. For people who had endured the Civil War, the financial collapse of a third of the railroads in the U.S. was something to be gotten over; but not the end of the world. Sensible people bought and owned the bonds that the Morgans put their names on and understood that the money market was a fascinating place to go gambling but hardly the appropriate investment for themselves and the other people who were not speculators.

Morgan made only one public prediction about "the market" in his entire life; when asked what it would do, he laughed and said, "It will fluctuate." He knew that his customers would accept fluctuations precisely because they were owners, not traders. That is why his bonds could be paying 4.5% when offers of 15% were failing to draw sufficient call money to carry a position through from Saturday afternoon to Monday's open.

The present portents of an inverted yield curve are supposedly warnings about recession and inflation. What they might be instead is a signal from the Chairwoman of the Federal Reserve that the central bank is no longer willing to be the Treasury's bitch - i.e. the customer of first resort - now that the ECB really needs a friend. Ms. Yellen can either help the ECB pretend that European sovereign debt is never ever going to be a problem or allow Secretary Mnuchin to roll over his inherited overdraft at bargain rates. For those who believe in the global future of globalism, that is hardly a choice; the Euro must be saved by being discounted freely just as Bagehot commanded. (Oh, wait, he was talking about domestic borrowers, wasn't he - since FX did not allow for any discounting until the Austrians decided that they wanted a Balkan War of their own.)

anonymous writes: 

I show that the curve is still in up trend-bullish. Am I missing something (as I usually am)? 

Jun

14

 Amazon hits 1000 and FANG pulls back. Already commentators at Barron's, CNBC and TheStreet.com are talking about a topping out of growth stocks and a shift to value stocks…

Anatoly Veltman writes: 

Talking strictly random digits: both AMZN and GOOGL exceeded 1000 right before reversing; AAPL and FB both reversed from 156 area.

Andy Aiken writes: 

I didn't call it a reversal. I called it a pullback.

The morons in the media are quick to call every pullback in a bull run a reversal or a popped bubble.

Anatoly Veltman writes: 

Yet other morons may be paying 1000, like there is nothing else to do with 1000.

anonymous writes: 

Without resorting to invective by calling people morons, didn't Ableson have a similar denigrating mindset to yours when he wrote that people thinking the S&P was cheap at 400 were "intellectually challenged?" I think the word he used back then was idiot, but he still was a name caller. Wasn't the late Abelson the name he used on others that didn't share his wrong beliefs?

Jun

13

 Ken Burns' Vietnam series starts in September.

I wonder if Gen. Vang Pao's story will be part of it:

"Gen. Vang Pao, Laotian Who Aided U.S., Dies at 81"

Even before President Dwight D. Eisenhower's vow in 1960 that Laos must not fall to the Communists, the country was immersed in bloody conflict. Its importance grew immensely during the Vietnam War, when most of the Ho Chi Minh Trail, the serpentine route that North Vietnam used to funnel supplies southward, ran through Laotian territory.

The United States wanted to interdict the supply route, rescue American pilots shot down over Laos and aid anti-Communist forces in a continuing civil war, but was hampered in doing so publicly because Laos was officially neutral, so the C.I.A. recruited General Vang Pao for the job. At the time, he held the highest rank ever achieved by a Hmong in the Royal Laotian Army, major general.

The Hmong are a tribe in the fog-shrouded mountains separating Laos from southern China, and they were natural allies for the C.I.A. because of their enmity toward Laotian lowlanders to the south, who dominated the Communist leadership.

General Vang Pao quickly organized 7,000 guerrillas, then steadily increased the force to 39,000, leading them in many successful battles, often against daunting odds. William Colby, C.I.A. director in the mid-1970s, called him "the biggest hero of the Vietnam War."

Lionel Rosenblatt, president emeritus of Refugees International, in an interview with The New York Times Magazine in 2008, put it more bluntly, saying General Vang Pao's Hmong were put "into this meat grinder, mostly to save U.S. soldiers from fighting and dying there."

When the C.I.A. approached him in 1960, he was already fighting Laotian Communists. The next year, he would also fight Communists from Vietnam after they had crossed the Laotian border. The Times in 1971 said that the C.I.A. did not command the general's army at any level, because his pride and temper would have never permitted it.

The general led troops into combat personally, suffered serious wounds and was known to declare: "If we die, we die together. Nobody will be left behind." About 35,000 Hmong died in battle.

General Vang Pao was also skilled at uniting the 18 clans of Hmong. One technique was to marry women from different tribes, as multiple marriages were permitted in Laos. He had to divorce all but one of his five wives when he went to the United States in 1975, settling on a ranch in Montana.

General Vang Pao lived more recently in Southern California and Minnesota, where many of the 200,000 Hmong that followed him to the United States or were born here live. His picture hangs in thousands of homes.

Stefan Jovanovich writes: 

The beauty of the New York Times is that they always get it wrong. Eisenhower's "vow" came in 1954, not 1960. There is even video.

I can guarantee that Burns et. cie. will get wrong the other unspoken part of Eisenhower's "domino" theory - the one that was communicated privately to the Soviets now that Stalin was dead: Indochina would be the last acceptance by the U.S. of territorial war by the Comintern. Spying, subversion - everything that Stalin had initiated as part of communism's "cold" war - would be accepted as part of the normal woofing between major power; but this would be the last "war of liberation". If the Soviets persisted in that policy, they risked bringing on their own nuclear destruction.

The Soviets knew Eisenhower was serious because Admiral Radford as Chairman of the Joint Chiefs had asked for permission to use atomic bombs to rescue the French from Dien Bien Phu. Ike knew that the Soviets knew what his reply had been; the U.S. would not "defend" British, Dutch or French imperial possessions in Asia. As the British later learned over Suez, Eisenhower meant what he had said. The U.S. had not fought WW 2 to defend European empire.

But it had fought WW 2 and Korea to defend Europeans' and East Asians' rights to "self-determination". That is the part of the story that the Democrats never ever seem to understand even though the policy itself goes back to Woodrow Wilson - the one thing the man got right.
 

Jun

11

Happy father's day to all the fathers who read our site. The fathers who are on this list are very benevolent and competent as far as I know. If I had one thing to impart as the father of 7, I would say teach the kids at an early age about the idea that has the world in its grip, and put all their assets in spiders or a comparable zero rake equity fund. And let them know that their own situation and the world will get better.

Jun

11

He sees a case against Prez but the 30,000 emails deleted, smashed computers, emoluments to foundation contributors were not enough for a reasonable prosecutor to consider a case against cattle.

"Bharara 'Absolutely' Sees Enough Evidence for Case Against Trump"

Stefan Jovanovich writes: 

The monopoly on prosecution is another part of the American legal structure that has no support in either canon or common law. It is based on sovereign presumption and preemption; to a horrible extent, allowing a district or U.S. attorney the discretion to decide whether or not someone should do the time for their crime is a product of the desires of the early New England emigrants to North America. They wanted to establish a Congregationalist theocracy. They succeeded. Now, of course, we have the high priests throw the Federal Criminal Code instead of scripture at the apostates; but the outcomes are entirely the same. None of us is without sin, and we are all guilty of something; our actual freedom is almost entirely a matter of having not yet pissed off someone in authority who thinks we are a ham sandwich in human form.

19th century Americans understood this in their bones. That is why The Scarlet Letter was the first blockbuster novel in U.S. publishing history. I know we are all supposed to prefer Melville's tract; but I think the public got it right. It remains the best single work of fiction ever written by an American.

Jun

11

Whenever the conversation turns to the health care system, and the question becomes, "Well, what would you do?", I always say that whenever prices are rising rapidly and you think they shouldn't be, then look for 1. constraints on supply, and 2. subsidized demand. Root out those two problems first, and then allow economic liberty some time to sort the situation out, and then look to see if there are externalities that need to be addressed or common goals that aren't being met.

Jun

10

Interesting hypotheses from Mr. Kedia reminiscent of the self serving tautological contrived promiscuous hypotheses of the behavioral science Nobelists. That's why we test such things. My tests indicate business as usual. The test from the 12 observations, 11 in 2000 and 1, three Wednesdays ago show continuations of previous marching order will be apt.

Jun

10

 Does a single day large drop past 4 sigma imply:

a. short term horizon bulls are mostly all stopped out and supply curve at higher levels is all gone into the stops?

b. short term horizon bears have become fatter and at further dips, if they come, there will be a stronger demand curve nibbling in?

c. effects of one market over another, a.k.a. the pulley effect, should be ignored or such large drop in one segment of the market, Nasdaq in this case on Friday, has its Pascal's law effects on the bigger wider board N days later?

d. Such large massive one day drops in one specific market are an isolated event only or a yellow canary inside the coal mine?

Jun

7

 The Chair and Collab wrote in Practical Speculation that the frequency of home runs in baseball goes up and down with public sentiment on the economy. Contrary to the upside-down man's persistent gloom, baseballs are flying out of parks at the highest rate ever.

In 2017 to date, 14.2% of all hits in major league baseball have been home runs, a larger percentage than last year's record 13.3%.

Exhaustive statistical analysis has led to a change in technique. The following paragraphs are quoted from The Washington Post, "The statistical revelation that has MLB hitters bombing more home runs than the steroid era", June 1, 2017:

In 2015 the league introduced Statcast, a "state-of-the-art tracking technology capable of measuring previously unquantifiable aspects of the game," giving teams, scouts and players access to detailed data which is used to make the physics of hitting a lot clearer.

The biggest change brought about by the Statcast data is illustrating the importance of an uppercut swing that results more often in fly balls and line drives rather than groundballs. According to MLB's Statcast data, the average launch angle in 2015, the first year data is available, was 10 degrees. That has jumped to 10.8 degrees in 2016 and 10.9 degrees in 2017, causing the frequency of extra-base hits, also known as isolation percentage (ISO), to spike to .165 in 2017, which is closing in on the record mark set in 2000 (.167).

Jun

6

 The standard academic introductions to economics spend no time discussing the invention of credit. They usually have the conventional summaries about the uses of money - store of value, et. al. - but there is literally nothing about the invention of promises to do and to pay. In one way, that is completely understandable. People live their economic lives in a world of futures; they measure even their savings by what the hoards will earn; evn in Rousseau's world of pure nature, financial promises would be made. Given those facts, it makes sense that economic textbooks do not spend any time discussing the invention of credit; IOUs have always been part of human interaction itself.

But, if credit's origins do not need to be part of the history of economics, surely the invention of legal tender deserves at least some small attention. Coinage is usually given at least a few paragraphs, but there are rarely any discussions of how the law came to be the method that defined what would be the financial unit of account. Hayek, at the very end of his life, complained that money had been literally hijacked by the state, that people should be free to use whatever money they choose. Even his theoretical opponents agree; current "mainstream" economic theory begins with the assumption that there is no need to give state money any special legal status; in the natural world of credit people can buy and sell using whatever coinage they want, as the success of BitCoin has proven. And yet, the IRS insists on being paid only in dollars, by check or credit card or wire transfer. (One of the wonderful ironies of the current age is that actual money - currency printed by the Treasury for the Federal Reserve Bank - is NOT an acceptable means of tax payment.)

Legal tender - officially enforced money - only exists because some exchanges are not and never have been voluntary. Hayek's assumption that money developed as a means of payment to clear private debts is bad history. The archaeological record shows that the earliest money coinages survive from the Greek city states that traded with one another in the Aegean Sea in the 7th century B.C.E. The first known coin, the Lydian Lion, (formed from electrum - a naturally occurring alloy of gold and silver) can be dated to 610-600 B.C.E. It was minted by the tyrant Alyattes in Sardis. Every money hoard discovered by archaeologists in that region has been found in sites that were government treasuries, not private merchants. The German historical school's standard story (the one used by all the textbooks) is that people invented money as a "store of value". No. Tyrants, monarchs, emperors and - eventually - democracies all created money as a means of collecting taxes.

Why? Well, for one thing, the governments could do what the people who control governments always want them to do - keep crooked books and fiddle with the tax rates and preferences . The taxpayers would have to use drachmas, and the state would define what a drachma was. The standard historical theory for "inflation" is that when people with the power of the state stretched their credit beyond its limit, the state would increase its "money supply" by changing what a drachma was. The more realistic assumption is that coinage as legal tender was manipulated from the moment of its invention. Tyrants did not have to wait around to discover that they could "manage" their economies by "tightening" and "loosening" public credit. Even the U.S. Constitution takes it for granted that the Federal government will charge a fee for making its own money. Needless to say, this "money" thing caught on. Within two centuries every part of the Mediterranean world had its official money.

As Hayek so beautifully points out, free human exchange creates its own systems that work even though they defy logic. When confronted with the demand for tax payments in "money", people did what they always do - they started trading. The money market was born. As every black market in the world confirms, there is the official price for currency and then there is the market price. If you owed tax to Necho II, you could save some of its cost through arbitrage among the coins minted by Aegina, Samos and Miletus. (The Egyptian Pharaohs used all 3 as their official money.)

The academics have it backwards. "Money" was never a store of value and never the primary mechanism through which human exchange developed. It was how the state paid for and exercised its own power through war.

Jun

6

 The J.P. Morgan test applies for both customers and employees: you should only deal with people whose character you trust. Every successful business I have owned (including the one I still own) applied those rules; in every failed one I thought that exceptions should continue to be made.

I have never been shrewd enough to be able to judge the character of people until I have dealt with them. So, for me, until experience has proven otherwise, I deal on the assumption that others will be honest. (There is also a good deal of evidence from applications of game theory that this Tit for Tat approach has actual rewards, provided that the game is one of repeated encounters, each with limited risk.)

But, once you have seen someone cheat, there is no excuse for continuing to deal with them. Every significant business failure I have had started with my telling myself that a lie did not matter. That meant, of course, that the dishonest had already begun to compound itself; I had lied to myself and others by letting the dishonest person skate.

Jun

6

 August is the hottest month in my home state of Montana so I went to Intellicast to see how the temperature has risen since Global Warming began.

The hottest August temp recorded was in 1934 at a smoking 107.

Looking at each day of the month none of the hottest days ever recorded were in this century. One has to go back to 1988 to get a record setting day.

So I thought maybe GW is not heating up the summer months but at least the cold months should be showing a warming effect so I looked at January. What I found was the coldest January was 1930 with -39 below.

Highest temp ever seen in a January was 1897. The average hi has been 37, average low 13.

Again I looked at each day of the month to see when the coldest and warmest ones were to be found expecting to see warming in this century. There it was! 2 days out of the 31 were record setters, 1/24 and 25 with 64 and 59. I had to go back to 1992 to find the next record setting days.

From this limited data it I hard pressed to see any warming trend. Suggest other try it on their home towns etc. We did the same thing for US Virgin Islands and again you have to go way back to get the hottest days.

David Lillienfeld writes:

The discussions on this site about global warming remind me of the discussions about cigarette smoking and lung cancer. One of the early arguments from the Tobacco Institute, that domicile of wise, impartial men, was that cigarette smokers didn't die only of lung cancer—there were other diseases that they died from, and at higher rates. All true, but not particularly relevant.

Then there was the TI's argument that most cigarette smokers didn't even die of cancer. Also true. Also irrelevant.

Then there was the argument that there were other reasons, like psychological factors, that led those with a predilection to lung cancer to smoke. Well, there actually is, but it's too small to explain the relationship.

Then there was the argument the TI made that lung cancer among cigarette smokers was the result of occupational exposures to carcinogens. Also true. But cigarette smoking has a stronger, some might opine much stronger, relationship to lung cancer than the occupationally-related cases. And in some cases, like asbestos, there is an interaction between smoking and occupational carcinogens.

The TI was successful, to a point, in constantly changing the focus of the discussion.

I could go on.

While any scientific hypothesis should account for observed phenomena, one must be careful in how one phrases the hypothesis. Let's be clear about what we are talking about, since I sense in these discussions (and I think this is round ninety-one or so) are often about more than one hypothesis.

Just an observation.

anonymous writes:

Increased CO2 is measurable, and more a function of our numbers than our behavior.

What is enigmatic is the expected temperature increase is not manifest in recent decades.

Why? Not an ideological answer to "Why?" But actual, scientific (repeatable by experiment) why. If the stakes really ARE so high then why be ignorant about this? The answer may buttress the AGW debate (in which case, we must periodically cull our numbers so that aggregate CO2 output is sustainable, for those who have he stomach for such) or it may not.

But blindly arguing either side from a standpoint of ignorance is only done to support one's interest.

Jun

6

 I just wrote this two minute primer on Bitcoin and Blockchain.

We are at $2,500 but potentially a long way to go still. The must read that explains the fundamentals of a blockchain and bitcoin is still the original white paper.

The breakthrough is the ability to transfer ownership of a digital good without a trusted third party - this was not possible before bitcoin. The implication is that cash can for the first time become digital without an intermediary like a bank, visa, paypal etc. Much of the nomenclature is borrowed from mining. The miners in a competitive process keep the network secure and is rewarded by transaction fees as well as a block reward, currently 12.5 bitcoins per block - on average every 10 minutes. The block reward is cut in half in about every 4 years. There will never be more than 21 million bitcoins. Bitcoin can be seen as digital gold - limited supply, hard coded the protocol, no cost of storage and transferable as easy as an email, Gold 2.0. The bull case of bitcoin is that it is arguably 'better' than gold, and gold's 'market cap' is around 10 trillion, which would equal around $500,000 vs. the current price of around 2,500 per bitcoin.

Each block in bitcoin is capped in size to 1MB, this has meant that transaction fees recently gone up dramatically as the blocks are getting full and is now averaging some $3. There has been a big scaling debate in the space for a couple of years now that hasn't been resolved yet. Barry Silbert of Digital Currency Group is right now building consensus around a promising scaling solution. It if becomes a reality, one could expect the price of bitcoin to experience a relief rally.

As for investing, most trading are done on dedicated exchanges such as GDAX, Bitstamp, OKCoin etc. The Winklevoss ETF was rejected by the SEC earlier this year, currently that is being reviewed for a final decision but there are not big hopes. Interestingly, CME Group launched an index last year and rumor has it they might look into launching futures on Bitcoin. The most liquid listed asset is currently two ETNs listed on the Stockholm Stock Exchange by xbtprovider. Their combined assets are around $80M. They have seen some institutional buying as well.

The price currently seems to be driven by Japan, Korea, maybe India. Seen quite high premiums in those markets recently.

Other blockchains:

Every major bank is currently researching blockchains as it has the potential for instant and secure settlements in combination with the fear of being disrupted by nimble fintech startups. I think they are slowly realizing that if you create a private blockchain without a token which is required for the consensus mechanism in an open blockchain such as bitcoin, you are essentially just creating a shared, inefficient database; nothing revolutionary. The point with blockchain is precisely that you're able to do away with the trusted 'third party'. The biggest bank project is called R3: and is run by more than 70 financial institutions. They announced earlier this year that they in fact is not building a blockchain. I think this blockchain hype much driven by consultants preying on banks scared of being disrupted will slowly die down.

The open blockchain currently with the most promise besides Bitcoin is Ethereum. The transactions in Ethereum is much more flexible than Bitcoin, which gives rise to the possibility of trustless 'smart contracts' - programmable money. These contracts will execute according to the code, ie code becomes law. I can imagine asset management type of apps, financial derivatives, decentralized autonomous organizations (the most famous was called the DAO, and had a funding of $150M, see ) all built on top of Ethereum. If the "killer app' for Bitcoin is digital gold, the current killer app for Ethereum is tokens and so called ICOs, this is a really good introduction by a partner at Andreessen Horowitz, Balaji S. Srinivasan.

This is another take on the token space by Chris Dixon also Andreessen Horowitz. As an example the BAT, an Ethereum based token earlier this week raised $37M in 30 seconds.Even though Ethereum is attracting some real money it is still experimental in nature, still very much evolving, buggs are still found, their consensus algorithm is untested at this stage, the native token ether might not be a store of value as the inflation is not capped as Bitcoin's is. The project is much more centralized vs Bitcoin.

There are many other blockchains, one example is Zcash that uses zero knowledge cryptography to protect the privacy of transactions. This discussion with Nick Szabo and Naval Ravikant is really good– two of the absolute brightest minds in the space.

Resources:

Bitcoin stats

Crypto market caps

Bitcoin price

General info

Ethereum

Industry research

Jun

6

How I got out of Florida condos at the top:

1) The tennis pro at the building became a realtor.
2) The fellow who installed my window treatments became a realtor.
3) Hurricane season was approaching.
4) A "ballerina" I knew quite well told me to delay selling my condo until she could take the newly instituted 5 day cram course to get a realtor license for which there was a several month waiting list.

This week I heard from a fashion model eagerly desirous of entering the coin market who had opened up accounts at several shops and was mad because they had a waiting period for her buying of various coins.

The conventions on coin presentations were oversold and standing room only.

Sad I can't hand out a statistical answer to document the froth, but there are many.

1) Control of more than 50% of the coins potentially weakens the security.
2) The leaked ability of the hackers to enter any computer in multiple ways retrospectively.
3) The advent of access to quantum cloud computers by corporations in beta (which means govts have had access longer)
4) The untested nature of the post-quantum algos.
5) The need for the governments to track and tax money flows.
6) The investigation powers newly needed to stop ransom attacks requiring payment of coins to "anonymous" wallets.

Andy Aiken writes: 

Possibly some lessons are:

Techies, anarchocapitalist utopians, Chinese elites, even ordinary people desire a currency not controlled by the state, that offers privacy and security without requiring armed guards for a big gold stash.

The financial technology and payment processing systems for USD, Euro, etc are antiquated and slow, decades behind what is feasible and in reach, struggling under a mountain of regulation.

A currency is what people use to pay for things. When the European banking system was in shambles after WW II, people paid for food with cigarettes. Scrip has been used many times throughout history.

Getting financing for a company by working with bankers is an expensive, frustrating experience.  Business founders will find a way to cut the middlemen out of the game if they don’t add value.
 
The cryptocurrency mkt is definitely frothy. As with the dot com bubble, most of the coins & firms will fail.  Some will go on to be the future Amazons. These human needs are in search of a solution even if all of cryptocurrency goes to zero tomorrow.

Orson Terrill writes: 

Same here, starting about 2 weeks ago, yet again, people are asking me about bitcoin. This has usually coincided with near term top, and has been true since 2012. Same for stocks.

anonymous writes: 

I do some consulting in this area, and last week I had a few calls (one from a PE firm) come in asking me for a general overview of the competitive crypto landscape, including who mines, what the pecking order of coins is (in terms of best, most used, etc.) and so on; stuff that could pretty easily be found on the web, by haunting Reddit, etc.

Froth indeed.

Stefan Jovanovich writes: 

Thanks to Andy Aiken, I have been able to get some sense of how Bitcoin actually trades. Also thanks to him, I learned - yet again - the most important lesson about trading: you can't claim to understand a market if you don't actually trade it.

I don't trade Bitcoin and have absolutely no idea what will happen to the markets for it. But, it does seem to me that the participants in the markets for cryptocurrencies - whether long or short - are making one assumption that is simply not proven by the evidence.

Bitcoin is not a currency. Neither, for that matter, are ounces of gold. These days a currency is an IOU that

(1) is accepted as a credit for deposit by the banks that are willing to use that currency as a unit of account; (2) is accepted as final payment for taxes and legal judgments; and (3) is the face denomination for the government debts that are accepted as officially-sanctioned reserves for financial institutions

That Bitcoin is not a legal tender has not mattered in the slightest as far as the traders in Bitcoin are concerned.

In the days when money was coin, there was a long history of unofficial credits being actively traded and readily exchanged and even accepted for deposit. The Virginia lawyers who most closely followed Washington as President (Jefferson, Madison) were infuriated by the speculation they saw in New York over the debts that were to be redeemable in the country's new money. They were themselves active speculators, as Washington had been; but their gambles and savings were in warrants and other paper claims on the Western lands. When the people who support and believe in Bitcoin argue that the digital claims they have bought or mined are as "real" than as the digits that represent the vast bulk of people's dollar/pound/Euro/yen/renminbi "money" (sic), they are absolutely right. Bitcoins and dollars are both simply collective promises that what is represented has the value of scarcity and is not counterfeit, and they both have to be taken on faith.

There is only one problem. Governments, as Hamilton demonstrated, have a serious interest in having their official fictions take precedence. The risk of any Bitcoin "bubble" is that, in the name of the protection of official legal tender, unofficial digits may find themselves being investigated for their risks of "fraud". Government can always be relied on to investigate others for having committed the very sins that the government wants to preserve for its own spiritual authority. 

Anatoly Veltman writes: 

Centrals may investigate and outlaw whatever they wish - but since they've encouraged the vastness of the internet, it's impossible for them to replace the cork. Eventually, they'll be adapters of a protocol.

anonymous writes: 

And that is exactly the point.

With crypto there are no groups of individuals painstakingly crafting bills in basements OR shadowy dictators buying eight figure currency printing machines from manufacturing facilities in Bavaria or Switzerland. Even if governments manage to cripple or persecute the Bitcoiners - (who? miners? users? developers? writers? consultants?) - there are as I type this 735 existing crypto issues, over 100 crypto assets, and thousands of tokens trading in nearly 4000 markets of varying mechanisms and liquidity around the world. Far more important than that, each day tens of thousands of new minds are brought into the crypto sphere, some of whom are brilliant programmers both (a) eager to outdo the best of what is currently available, and (b) eager to get rich. There is no, absolutely no, putting the proverbial genie back in the equally-proverbial bottle.


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