April - 2017
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
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3
 S&P -3.10
 USB +1.15
4
 S&P +0.50
 USB -0.03
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 S&P -10.00
 USB +0.12
6
 S&P +7.10
 USB +0.07
7
 S&P -1.50
 USB -0.07
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9
10
 S&P +0.30
 USB +0.09
11
 S&P -1.40
 USB +1.06
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 S&P -10.30
 USB +0.01
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 S&P -13.40
 USB +1.00
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17
 S&P +17.60
 USB -0.17
18
 S&P -7.70
 USB +1.22
19
 S&P -3.60
 USB -0.13
20
 S&P +18.40
 USB -0.19
21
 S&P -4.70
 USB +0.01
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Apr

22

"Billionaire investor Paul Tudor Jones has a message for Janet Yellen and investors: Be very afraid"

Victor Niederhoffer adds:

I will wager the billionaire investor is not long.

Jeff Watson writes: 

Articles like this are why I ignore financial editorials. Fallacies like the Argumentum Verecundia (appeal to authority) should never sway a spec. One wonders why, since March 2009, the financial media never published articles that said stocks were too cheap, predicting the S&P to go up 250% from the bottom. One suspects that articles like that would never get printed as they would be good advice to the investor, but bad for the broker's bottom line. 

Apr

22

 To say nothing about in my specific field the absurd and damaging impact of wearing protective eye wear and other stuff in racket sports, but how soon will it be that the jock strap manufactures pay a royalty to all the sports associations and the Olympic committee like the eye glasses do to insure that we all wear jock straps as a requirement before engaging in sports.

Apr

22

 Just got to Esfahan today. A lot of tourists, mostly Europeans. Hotels are very full here. I read somewhere that Americans can not come into Iran individually, they must join some kind of a group.

In general, hotels in Iran are quite expensive: $70 and above for a 3-star hotel. Condition is not too bad but for the money there are much better hotels in other parts of the world. And no popular booking sites serve for Iran hotels due to sanctions. One almost has to call individual hotels to book. Or one may work with an agency which then works with another agency etc to book hotels. Difficult.

Surprisingly, women in Iran are very lively.

People aren't poor. There are many cars on the streets. Most cars are of old or unknown models. But there are newer Japanese or European cars.

Roads and sidewalks are in very good conditions.

Commerce, particularly in the form of bazaars, are quite extensive. Artworks are wonderful.

Larry Williams writes: 

I've spent a lot of time there. It is a repressed society, and two faced. Most want to get out. I brought out an entire family that are now good hard working thankful Americans. Sure, it's a nice place to visit (we were tailed by secret police (not so secret) most places we went. Arrested a few times and detained…long story. Too bad it is not Persia any more. Unliberated. The Gummint hates Americans. The people, I found, loved us.

Apr

22

The safest way to get good-quality extra virgin olive oil is to pay up for California oil. Second is to get Spanish oil from TJ's or another trustworthy source. A good way to balance the omega-6 in olive oil is to get walnut oil, rich in omega-3's, and make a vinaigrette or similar with the two, in something like a 3 or 4 to 1 ratio, olive to walnut.

Apr

20

 Take a look at the late, great Dell computer. I started shorting it in the late 1990s using a statistical/valuation methodology that was predicated on volatility and the near certainty of a substantial correction. I was correct in that I eventually made money, but the mark-to-markets (and "risk adjusted return") were dismal. I don't use that strategy anymore…

Remember also that nearly every company (GE being one of the exceptions but for the grace of the Fed) eventually disappears either through acquisition, merger, or bankruptcy. So if you only look once every decade or two, and leave a GTC order to buy everything down 50%, you are very likely to get filled. But you are also likely to own a portfolio of losers.

Apr

20

Wondering if anyone can recommend an index that tracks the performance (or lack thereof) of short-biased or dedicated-short hedge funds.

It looks like there were some indices from Credit Suisse in this category that were discontinued in early 2017, presumably due to bad performance. (The performance might have been even worse than it looks — I don't know how they treat funds that "stop reporting".)

Apr

20

 GDP figures are "man-made" and therefore unreliable, Li said. When evaluating Liaoning's economy, he focuses on three figures: 1) electricity consumption, which was up 10 percent in Liaoning last year; 2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and 3) amount of loans disbursed, which also tends to be accurate given the interest fees charged. By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are "for reference only," he said smiling.

"Fifth Generation Star Li Keqiang Discusses Domestic Challenges, Trade Relations With Ambassador"

Li's metric—since dubbed the "Li Keqiang index"—has declined for four of the past six years, recording an especially precipitous drop in 2015.

But, argue the authors, there are other indicators.

"Is Chinese Growth Overstated?":

Our results are consistent with work by Rosen and Bao, who argue that Chinese statistical services have chronically underestimated the size of the service sector. Rosen and Bao's hypothesis is consistent with our finding that rail freight growth should receive less weight than the other indicators in the Li Keqiang index. Hence, as the Chinese economy becomes increasingly service-oriented, the (conventional) Li Keqiang index will likely send increasingly faulty signals about the state of China's economy. In fact, our estimate for Chinese growth shows an appreciable acceleration in 2016, even as the official growth rate remained virtually unchanged.

John Floyd comments: 

The breadth of Stefan's ken continues to amaze. These are interesting sources of information to put in one's quiver for looking at China and the linkages with related markets. I would add a few points in terms of the data, timeline, and broader market implications:

- Veracity of the data
- Chinese economy is likely to hold up into the Communist Party meeting later in the year
- Important question is beyond that. For example will China follow a Japan style pattern of secular stagnation?
- Various paths China can take will have significant global market implications.
- GDP numbers have merged, but the US is still the largest elephant in the room, and there has been recent cooling. 

Apr

20

 QE is over, it's back to the same old money creation we've had for centuries — an idea which has actually levered the resourceful potential of man.

Your going to see a car drive in front of you as you stand on the curb, and it will be sans driver.

Your going to see a man in a drone, in a park, lift off the ground.

These things are here, and united airlines isn't in the game. Or any of the others for that matter.

And faster than you can gobble un croque monsieur, they will collide in a 3d, computer controlled "roadway," obsoleting cars and every minor roadway, parking lot and driveway,and traffic jams will be viewed as lice infestations of the past.

But it will take some forward-thinking and planning here. Wasting a trillion-dollar is rebuilding these roads, airports, etc. on an infrastructure plan, is not the equivalent social investment as building the interstate system in the 19 fifties was. This would be a trillion dollar simply to maintain that which we currently have, when the future is about to take an Abrupt turn. That's where we are to be funding things with public monies, as that's where the enormous multiplier in terms of social benefit derived from money spent will be seen much as it was when we built the interstate system originally. To spend that money an existing infrastructure which will soon become obsolete, is equivalent to porkulus, on a diluted scale.

Victor Niederhoffer writes:

Mr. Vince makes a subtle point that I think he means. The most valuable thing in the world is a person. They can make tremendous contributions that all can benefit from. Julian Simon is very good on providing statistics for this. And it is no accident that standards of living are so highly correlated coterminously with population like during the industrial revolution. As to which causes the the other, it's mute.

Ralph Vince adds: 

It is a bad bet to bet against the likes of Jonas Salk. But for every Jonas Salk, how many others of equal insight go untapped throughout their lives?

The population of the earth in 1960, five years after his vaccine was announced, was about 3 billion. It is now 250% of that. For every Jonas Salk of 1960, we would expect 2 1/2 of them….and for every untapped Jonas Salk….2 1/2 of those as well.

And virtually every varlet and their harlot(s) who are not the equivalent of Salk posses some sort of potential to add to the cumulative progress.

Why would you bet against the resourcefulness of man? All bear markets, since the invention of the hand axe, have been short-lived compared to their bullish counterparts, and every single market top over those millennia have been exceeded (save for 3/1/2017…..yet).

To bet against the resourcefulness of man is silly, ultimately futile, and it requires one to time things perfectly. It is a far easier proposition to load up long as when things are selling off, and manage your powder to see it through to the next new highs.

David Lillienfeld writes: 

Two thoughts:

1. There's lots of infrastructure spending to be done to support some of the newer technologies to which you refer. And it's beyond broadband. Just air traffic control alone could use a shot in the arm (well, more actually). There's also the reality that people like to physically move. And the way the society is configured, tire's no doubt that will figure out ways to do so as efficiently as they can within whatever infrastructure exists. Until motivations like sex or control disappear (which seems unlikely in the life span most of us associate with being on the face of the good earth), keeping the existing infrastructure going will also have its benefits. The interest in sex, for instance, isn't disappearing anytime soon, especially among those in their teens, who will do just about anything to get away from the clutches, eyes and ears, of their parents. That takes infrastructure.

2. I recall at the 1964 World's Fair, there was the ATT building in which there were picture phones with an assurance that certainly within 20 years, they would be omnipresent. Didn't seem to work that way. Ditto GM and the future of transportation. I've heard about the new technologies coming into use for more than 5 decades. Yes, the technologies do make it into use. But it takes a lot longer than anyone at first thought likely. Remember commercial supersonic aviation? I don't think it was ever fiscally viable. The story of how RCA came to dominate wireless communications is a case in point. Eventually, the new technology did triumph, but it took longer than anyone had considered likely.

Plank's law comes into play and is part of the explanation, inertia and lack of understanding of the potential of the new technology is another. Remember Amazon in the 1990s when it was starting to hit at sales at Books a Million and the other retail outlets? It still took 15 years for Amazon to practice its hegemony—which represented the triumph of the net over physical bricks and mortar. And even now, Amazon is putting up bricks and mortar. Isn't the internet supposed to displace such things?

anonymous writes: 

Sure trucks and jumbos full-o-junk and folks crossing oceans will still be needed.

But technology gets here in less than half the time anyone ever thinks it will.

And if we're going to spend 1-2 trillion on infrastructure, rebuilding existing assets will not pay off the way they paid off when they were first built; that's only a little better than giving it away to teacher's unions and far-lefty organizations. The electronic infrastructure for tomorrow's transportation would be a much wiser investment than rebuilding existing infrastructure.

J.T. Holley writes: 

Bruce's "Glory Days" lyrics give a beginning of explaining why throwing money at fixing all the decrepit bridges in Pittsburgh is a bad idea.

Now I think I'm going down to the well tonight
I'm going to drink to I get my fill
And when I get old I hope I don't sit around thinking about it
But I probably will
Yeah, just sitting back trying to recapture
A little of the glory of, well time slips away
And leaves you with nothing mister but
Boring stories of glory days

That is all that throwing 1 trillion is going to produce. Eventually just "boring stories". It's just to pacify the unions, steel, and cement industries. The Rust Belt vote will be needed in the future. Hats the only forward looking that is taking place.

Apr

20

 A nice story that appeared on CBS news last night. "Living Stronger: Centenarian a fixture in NYC neighborhood by caring about others":

'If it's Saturday night at Pasquale's Rigoletto, it's Joe Binder with the mic. "That is what keeps me going, when I make people laugh," Joe said. He's been entertaining people most of his time on this Earth, but on this day, it's everyone else's turn to sing. Joe just turned 107.'

Here is an article about his secrets to a long life: "no grudges", glass of wine, singing/music, exercise/activity and socializing at the fore.

Apr

20

 All journalists will know The Elements of Style by Strunk and White. William Strunk was a professor at Cornell and my grandfather had the good fortune to study under him as did E. B. White. White later went on to compile Strunk's notes into this gem of a book, as well as write many of his own books like Charlotte's Web. My grandfather, an admirer of both gentlemen, always kept a copy close by and recommended I do the same. Recently, I found a used copy at a bookstore and purchased it for one dollar, though I felt guilty the price was so low. Though not quite 100 years-old, it nonetheless qualifies as time-tested wisdom.

Heuristics add to the style of trading just as they do writing. In that spirit here are some of Strunk's and White's rules along with ideas on how they apply to trading. The whole book can be read in a few hours and is well worth the effort.

Apr

19

It is a bad bet to bet against the likes of Jonas Salk. But for every Jonas Salk, how many others of equal insight go untapped throughout their lives?

The population of the earth in 1960, five years after his vaccine was announced, was about 3 billion. It is now 250% of that. For every Jonas Salk of 1960, we would expect 2 1/2 of them….and for every untapped Jonas Salk….2 1/2 of those as well.

And virtually every varlet and their harlot(s) who are not the equivalent of Salk posses some sort of potential to add to the cumulative progress.

Why would you bet against the resourcefulness of man? All bear markets, since the invention of the hand axe, have been short-lived compared to their bullish counterparts, and every single market top over those millennia have been exceeded (save for 3/1/2017…..yet).

To bet against the resourcefulness of man is silly, ultimately futile, and it requires one to time things perfectly. It is a far easier proposition to load up long as when things are selling off, and manage your powder to see it through to the next new highs.

Apr

17

 Pre-Suasion by Cialdini is a book that resonates with all who wish to influence. The shocking part is that it's all about what you can do before you create the message to gain influence. There are chapters on (a) the critical moment to establish influence, what he calls the privilege moments (a good time is after you've done a favor for someone) (b) how to gain attention for your message by opening with a situation that puts the listener in a framework where he's ready to assent especially with favorable or unfavorable fragments (c) how to focus attention with sex, threats, mysteries, changes in environment (d) how causality comes from focusing attention (e) the proper way to seat yourself vis a vis others in the room and when to talk (f) how to compliment the listener, (g) how to shift attention to a field where your listener is likely to give a yes, (h) how to elicit content with the universal principle of influence-reciprocity, liking, authority, social proof, scarcity, and consistency (i) a new category of influence for Cialdini not covered in his previous book Influence, the important of unity with the crowd, especially if you can get the listener to join in on the bandwagon, (j) how to make your influence last by creating actions that set them on the road.

Each chapter is self contained, starting with an anecdote from Cialdini's undercover work at high pressure sales meetings, then discussions of how to use the ideas consistently to gain influence, academic studies that support the method of influence, and then a lead into the next chapter as to how to gain even further influence read the next chapter. At the end of the book are detailed notes on the academic papers and further examples to hit the point home.

Cialdini does not place much emphasis on the economic value of the methods of influence he suggests nor its costs. Nor does he reference the studies of direct marketers like Caples who have tested numerous forms of influence, or the craft and lessons that advertisers have learned in their efforts to influence.

He is mainly concerned with how to influence listeners before the message in day to day activity, in business meetings, in politics, and somewhat in advertising. These are all good and the anecdotes he tells especially about hostages, and the Holocaust will rivet you and stay with you forever.

Needless to say, I find that all the techniques of influence are used in the market. We could start with the moments when key announcements are made for their greatest desired effect on the listener, the importance of focusing attention at the open or the close, the role of gurus and experts talking their book, the part of messages left unsaid, which Cialdini says is one of the greatest influences. There are many others.

I can heartily recommend the book on all fronts to anyone who wishes to know how the world works, who wishes to influence his family, business associates, voters, threateners, and or improve his market performance.

Apr

16

 For the Chinese Communists North Korea is now what Cuba became for the Soviets after Reagan's election. Their mangy dog on a chain in the yard has barked and snarled on cue but the new neighbor's response has been rather different than President Carter's. Since the dog has never economically earned what it eats, its only value has been as a "threat" to the Americans' sense of being "in control". It had worked, in the 1970s to Central America and Southwest Africa, in the 2010s to Japan and South Korea.

But now? China already owns North Korea as the Soviets owned Cuba. Taking it over would be as risky and useless as the Soviets taking direct control of Cuba in 1981. The U.S. simply would not tolerate it. The Cubans in 1980 had no direct means of threatening the United States; the Soviets clearly did. The North Koreans do not yet have the military capacity to threaten even South Korea with a nuclear bomb; they clearly have the missiles and bombers to reach Seoul, but their "bomb" is still far too large and heavy a payload.

The Chinese have just been told that the neighborhood is going to be dog-free, either with or without their help. There is no reason to believe that the North Korean hierarchy has any semblance of rationality; they live in a world of their own information and, in their view, they are now winning the war. The country has survived the terrible famine of the 1990s (itself a product of the Americans' treachery), and it now has nuclear weapons and missiles. (Just as the Iraqi scientists believed in their "progress", the North Koreans' technical people believe in theirs; you do not survive in a dictatorship by thinking that the truth is something that can exists independent of ideology.)

The Chinese have a choice.

(1) They can risk an economic war with the United States similar to the British open blockade of Germany after 1914. The U.S. Navy can effectively seal off all maritime trade with China while staying well out of the range of any land-based anti-ship missiles. The U.S. carriers can do that job just as the British surface ships did and be safe from any submarine threat. The U.S. can immediately confiscate all Chinese holdings of American securities just as we "froze" and then (after 1917) confiscated all German holdings.

(2) They can agree to the Americans' removing the North Korean hierarchy and even offer to help, with their price being the "demilitarization" of the peninsula. (The South Koreans are likely to be willing to accept that at least in nominal terms.)

(3) They can invite Trump to visit.

Apr

16

 If data matters, coal miners should worry. It appears another round of layoffs is in the making. Reducing regulations won't help. While regulations are an issue, they are not the industry's greatest challenge.

Here's some data to consider:

National power production increased year over year since 1949. It wasn't until 1982 before the first decline was recorded. Growth resumed in the subsequent years until production reached its peak in 2006. Since 2006, production ceased growing.

For 60 years, coal enjoyed between 44 percent and 57 percent of the power industry's market share. From a percentage point of view, the worst years were between 1971 and 1978 when market share hit their low near 44 percent. The best years were 1955, 1985, 1987, and 1988. The peak year occurred in 1988 when coal hit 56.97 percent

Since 1988, coal's market share has been in decline. In 2011, the percentage punched through 44 percent. In 2016, it sank below 30 percent. The trend is lower.

Percentages are one consideration. Raw production is another. Since 1949, the amount of power produced from coal (coal power) increased year over year. While there were minor declines, the general trend was upward from 1949 until 2005. Since 2007, the year-over-year trend has been in a steep decline. From 2005 to 2016, 20 years of growth had been erased leaving the industry at 1980 levels.

Politicians have it wrong. Most coal industry jobs were lost in the 1950s. Peak employment occurred in the 1920s. By 1970, 80 percent of the industry's jobs were lost. In 2003, employment numbers fell below 100,000. By 2011, 40,000 new jobs had been added; the industry was restored to 1992 levels. Today, it's returned to 2003 levels.

It wasn't regulation that killed employment. It was economics and efficiency. In 1950, the industry required 3.2 employees for each gigawatt-hour (GWh) of coal power produced. By 1955, that number dropped to less than 1 employee per GWh. By 1978, the number sank to 0.25. By 2003, it had bottomed out at 0.05 employees per GWh.

Here's a surprise. Since 2003, employee counts have been increasing. Today, counts are almost 50 percent higher than 2003 lows (.073 employees per GWh). As such, it appears the cost may be too high.
It appears the coal industry is gambling on the power industry. Specifically, employers may be gambling that wholesale power prices will increase. With higher power prices, utilities might be willing to buy more coal or pay more for coal. Either way, miners might earn more.

If the industry's gamble is wrong, there could be a problem. Either mining companies will cut fat or the power industry will do it for them. If higher labor costs percolate into a constrained power market, more power plants will be idled or retired. More plant retirements mean less coal consumed. Less coal consumed means fewer jobs.

Finally, it's important to appreciate that most members of the energy industry want government interference and regulations. The coal industry wants the government to force consumers to pay more. The power industry wants the same. The only stakeholder not wanting regulatory interference is the consumer, unless it's about regulating power plant emissions.

Notes:

Energy Information Administration (EIA), Mine Safety and Health Administration (MSHA) were the source of most data and analysis used in this discussion.  Their data appears to have an error rate near five percent.

Reliable power production data for 1948 or earlier was neither available nor relevant. Production for 1949 was approximately 290 GWh. Today, it's almost 4,100 GWh. Pre-1949 data had to be insignificant.

In earlier years, coal was used for heating. Heating coal was not considered in this discussion. That omission represents a flaw that could represent an error that's greater than five percent, particularly in pre-1960 discussions.

Apr

15

 According to Fortune, PepsiCo is moving into the premium water business with LIFEWTR, a purified water that is pH balanced with electrolytes. I stumbled across it in the local college cooler, and later on YouTube as the ‘Lifewater Super Bowl Commercial 2017′. So, I asked the stocker how the beautiful designer bottles are selling, and he said, ‘Life crazy!’

PepsiCo already owns the ‘billion dollar water’ Aquafina, which a U.S. Marine helicopter delivered to me on the open desert recently thinking I was thirsty, so why would they compete with themselves?

The answer is that they are not competing with themselves. According to the PepsiCo CEO, LIFEWTR’S greatest equity is in the bottle. I translate that as the water costs pennies per the bottle that costs a ton, if the marketing of it is thrown in. The LIFEWTR labels feature a rotating series of creative, exclusive designs done by emerging visual artists. They are quite attractive, like Southwest art.

I finally broke down and bought a $2.00 bottle to seek why it’s called ‘Inspiration Drops’, per the YouTube of the Super Bowl commercial of it raining colored droplets over Manhattan (that cost the company $5.5 million for the 30 second spot).

What is in it? The bottle label offers no ingredients other than purified water. The first page of online searches insisted it is just electrolyte water with no additives. However, I had bought and tasted the top neck of the bottle before discarding the rest in the college bird bath, and knew it wasn’t true. The sensation of drinking the water is surreal: it sent me into a tranquil altered state like a designer drug, or like getting hit with a tranquilizer gun that we used on obstreperous apes in vet school. I felt relaxed.

The online information still insisted it was just plain old water, until I searched deeper down and finally found two added ingredients: Magnesium Sulfate and Potassium Bicarbonate. Magnesium Sulfate, commonly known as Epsom Salt, is used to control eclampsia in pregnant women, children seizures, and encephalopathy (severe brain function problems) in adults. It is an anti-seizure medication, as well as a laxative. Potassium Bicarbonate is a standard treatment for acidic stomach and high blood pressure.

The large print in life makes you happy, and the small print makes you sweat it.

Apr

14

Uncle Howie lost in the finals of 49 separate handball finals. Some of the ways he lost are detailed I Education of a Speculator.

Sweden's Museum of Failure is opening this June in Helsingborg, Sweden. The museum seeks to de-stigmatize personal and professional failure.

Apr

12

If I am not mistaken, yesterday's S&P 20 point decline was precipitated by some smoke near the airport where Secretary of State Tillerson was landing in Russia, later attributed to, I believe, a local burning some garbage.

Apr

11

 Our members who are professional traders often write about the feel of the pits and how that information is now missing from any calculations about particular markets. As politics tries to become more and more a matter of computer calculation, there is a similar information loss. The data from what your precinct workers were being told by individual voters is now being discarded in favor of census-based projections.

Here is a war story from the election that suggests that the professional politicians may regret the loss.

"They [Democrats] just didn't have the data or the intelligence. They were using predictive modeling without that human component of knocking doors. They missed it because they assumed they had it. The night of the election, the Democrat chair and I—we spent a lot of time together, so after we finished interviews we said 'you tell me what your polling is saying and I'll tell you what my polling is saying.' Because my polling was saying that Trump was going to win by 8,000 votes, and that's the RNC. It was right. His said 'we're going to win by 5 points.' So when you think you're going to win a state by 5 points, of course you don't invest. You just don't. It changes your compass."

- Republican National Committee (RNC) chairwoman Ronna Romney McDaniel discussing the vote in Michigan

Apr

10

 A few times in every generation a person comes along that makes a significant impact on the world. Rare or lucky are those that can do this. And then there are those that can impact the world in more than one field as if it was just another day at the office. Ed Thorp is one of those very special minds, and he has done this with ease, grace and a calm and confident demeanor for the better part of 60 years. For those that don’t know, Professor Thorp was one of the original Wall Street Quants that got his start in a very atypical fashion–casino gambling.  In his new book A Man For All Markets, released Jan 24, 2017, Thorp chronicles his whirlwind life and gives a full and complete answer to the question “How did you do it?”.

Thorp's first book was published in 1962 and was titled Beat the Dealer. It was the first widely distributed publication that gave a purely mathematical derivation on how a player could beat the casino at the game of 21. This book started the revolution of Advantage Play–the practice where people reverse engineer games of chance for profit.  As professor Thorp stated: “I dropped a pebble into the ocean, and it started a tidal wave.”

Thorp's original thesis on beating blackjack paved the way for inquisitive minds to think of new and clever ways to attack casino games for profit. Every year professional gambling’s most successful players converge on Las Vegas to attend Max Rubin’s Blackjack Ball. The gala is hosted by long time organizer and advantage gaming legend Max Rubin. Every attendee has beaten the casinos at their own games, in most instances for several millions of dollars.

Every advantage player owes their start in one way or another to Professor Thorp.  As long time player and gaming author Henry Tamburin puts it: “For me to say that I owe my successful blackjack playing career to Dr. Thorp would be an understatement. I’m not alone in forever being grateful to him for his intellect, research, and dedication to discover a mathematically-accurate way to beat the casinos at their own game.”  Henry is author of the Ultimate Blackjack Strategy Guide that he published at the 888casino website.

Blackjack lobbies all over the internet use the conclusions derived from Beat the Dealer to help players improve on their own gaming strategies. At the 888casino, a highly reputable online casino website, the aspiring player can view Thorp’s original analysis in a modern framework using Tamburin’s Ultimate Blackjack Strategy Guide, and see if they too can beat the casino. One of the most vital aspects of Thorps analysis is that it can only be applied to live dealt versions of 21. This is true for both online and land based casino games. Some land-based and online casinos have blackjack video gaming machines with programs that use random number generators to determine the outcome. Thorp's work only applies to games that are dealt in the live section of casinos (online and land based) where played cards have been placed into a discard tray.

This accomplishment would be the crowning achievement of any person’s career.  Yet, Ed Thorp had no intention of turning off his analytical mind after one achievement. Thorp and Noble Prize winner Claude Shannon developed what internet users have deemed the world’s first wearable computer, which was used to beat the game of roulette. Thorp and Shannon developed the device while both were on faculty at the prestigious Massachusetts Institute of Technology (MIT). Thorp's early achievements in probability and predictive analytics provided the foundation for his equally earth shaking work in the stock market.

In the late 1960s Thorp took his understanding of probability and statistics to the biggest casino in the world, Wall Street. His main focus was identifying pricing anomalies in the securities market. Using his original research in the world of high finance, Thorp helped launched the first market neutral hedge fund in 1969. His concepts were also central to the creation of the derivatives market.

In his new book, Thorp puts forth a comparative analysis between casinos and Wall Street, where he concludes that gambling is a simplified version of investing, and explains how it’s possible to apply the same logic to both. Perhaps the biggest difference is that when you excel at making money in the stock market the “house” can’t ban you.

Thorp provides a thorough discussion of the risk involved in both endeavors. (He amazingly predicted the dangers of Long Term Capital Management, even foreseeing the Madoff debacle almost two decades before it happened. Where others saw opportunity for financial windfalls in the LTCM game, Thorp saw extreme risk, and the potential for fraud.)  

Thorp’s clients have been very happy over the years with his analytical approach to investing. In 1998 Thorp released a public statement stating that his personal investments have yielded in annualized 20% rate of return averaged over 28.5 years.  A number which one can safely assume is in the neighborhood of his assets under management portfolio.

Ed Thorp was honored at the 2017 Blackjack Ball. There he gave a speech where he discussed his truly remarkable life, and how it started with a trip to Las Vegas in the 1950s.  In a conversation with me, he elaborated on how remarkable his journey has been, and how supportive his wife Vivian was in all of his endeavors until her death in 2011. 

His life has come full circle. It all started on an off chance visit to Las Vegas decades ago, and now his story, and the lessons that he has learned is available for all to enjoy, admire and perhaps to be used as a guide for those that are on their own path to induce change.

At its core, A Man For All Markets is a personal look at the predictability of chance and how to walk the tightrope between risk and return. It’s a must read for anyone who wants a look into the mind of an out of the box thinker who has made a significant impact on the world in so many areas.  

Apr

10

 Milton Friedman - The Negative Income Tax - Firing Line with William F. Buckley Jr.

In this 1968 interview, Milton Friedman explained the negative income tax, a proposal that at minimum would save taxpayers the 72 percent of our current welfare budget spent on administration.

Stefan Jovanovich writes:

My Dad helped Friedman embark on the way to making serious cash in his later life. Dad published "Free to Choose" and helped Friedman find the TV producer (who deserves much of the credit for the success of that series by damping down Professor Milton's inclination to be obnoxiously pedantic). The book royalties were excellent, but what really helped Friedman become semi-rich was the fact that the series made him a "name" for the trade show lecture circuit. The fees he earned were nothing like those the Clintons and General Powell and others later earned; but they were, for the time, major coin.

Since no good deed by a publisher goes unpunished, it will not surprise the List to learn that Friedman continuted to think he knew more about elementary and secondary education than Dad did. I remember listening to several conversations they had where Dad tried to persuade Friedman that his voucher system was both bad politics and worse pedagogy. "Milton, the urban schools were failing (they still are) precisely because the actual students had no incentives. The middle and upper class kids are paid to do well in school - by their parents; my son the bum knew that he would be rewarded for swotting away. But the kids in the ghetto have no such encouragements. They lose money by going to class. Their truant friends could be out on the streets hustling or, at the very least, enjoying the rewards of freedom. This is what has changed with "modern" education. They system worked in the past because poor kids had the greatest personal incentives. Being allowed to skip farm work and go to school only if you got good grades was a real incentive. For you and me, as the children of immigrants, there were huge personal rewards. We were the prize boys in the family. Our parents wanted us to go to school so that someone in the house could speak "proper" English; hell, my older siblings had to sacrifice some of their prospects so that I, the youngest child, could afford to keep going to school."

Dad's solution was simple: pay children for achievement test results. Pay every child for taking the test and then pay them more for getting better and better results. Once people understood that the system was here to stay, parents would be making certain that their kids went to school - if only, Dad said, so they could drink up the money the children earned. (This may sound cynical but it was, in fact, wonderfully charitable; there was nothing "society" could actually do about preventing children from being exploited by bad parents but at least the children would be learning the skills that would allow them to escape as adults.)

Friedman seems to me to have had a similar blind spot regarding "poverty". He was right, of course, about the poverty industry; it is appallingly wasteful and corrupting. But the solution was not to allow the poor to believe that they were somehow entitled to the money, which is precisely what a negative income tax would do. You could eliminate the "helping" bureaucracies and offer the poor incentives to do better by following Dad's scheme, by paying the poor for good conduct. But, if you simply handed over the money and used the income tax as the mechanism, you would be undermining the tax system itself. The experience with the Earned Income Tax Credit is proof of that fact; if you are going to have an income tax at all, you have to treat all income equally and apply the lowest possible rates, even to the helping and disability payments. If the poor pay nothing, they have a permanent incentive to remain officially poor.

Apr

10

 The Airbnb Anti Asian prejudice story has much to do with the rise of Wall Street. The Dutch settlers like the commercial interests of today were only interested in greasing the wheels of commerce. They time and time again ordered the authoritarian governor Peter Styvesant to allow freedom of speech and freedom of religion so it would enhance the number of settlers and increase commerce so that the Dutch East India's revenues would rise. This is always the case. Commerce enhances freedom in all its forms.

A good enumeration of all the dutch did to make Wall Street the center of World Finance in the 17th century is contained in the excellent book Greater Gotham: A History of New York City from 1898 to 1919.

Apr

10

 The most erudite thinking on how the Delphi was able to maintain their forecasting site for 800 years aside from the convention aspects of it was that their forecasts were always non-infirmable. The fixed income twins have continued in this tradition. Especially the Upside Down Man who says such things as "as long as the the 10 year yields does not breach 2.5 for two weeks the bear market in bonds has not yet begun in full." Can't infirm it, and if it ever is above for 2 weeks it will be way above so it starts out way in the money. "A decisive victory will be won" is how Delphi liked to say it to the supplicants.

Apr

10

Aubrey likes to sing. He's at the park today with The Bronx and all of sudden he starts whistling "standing on the corner watching all the girls go by". The Bronx asks him "which one is it". He says, "the one with braids".

Apr

9

Some historical context is necessary. Let us remember that much of the current Syria situation can be attributed to Obama's "red line" and his naive agreement to have the Russians remove all chemical weapons. Does anyone remember that? Let us also remember that the flood of Syrian refugees is a direct result of the former too. Wouldn't it be nice if everyone could just "get along" and sing Kumbaya? Perhaps in our next life. But not in this one.

The missile strike is a calculated political signal; not a military one. It's how one sets the table for negotiations — not so much in Syria, which is now a lost cause — but much more importantly in North Korea and other places. And on that subject, Gordon and the others will surely change their views if and when Kim tests a Nuclear-tipped ICBM capable of hitting of San Francisco….

Stefan Jovanovich writes: 

Kim and I may be hopelessly biased; we think the United States' only sensible policy in the Middle East is to insure the survival and prosperity of Israel. To do that, the U.S. and the Israelis have to choose which side of the ongoing civil war among Muslims is the better bet.

It is not a difficult choice; the Sunni majority countries are the only ones that are not absolutely focused on the destruction of the Great and Little Satans.

What the missile strike - by its size and focus - has done is show the Sunni countries (many of whom just happened to be visiting the White House recently) that President Trump is not someone who believes in military gestures. He is actually willing to break things permanently. That air base is gone.

The fact that the missiles were in the air as the President sat down to dinner with the one country in the world - other than the U.S. - that can destroy North Korea's nuclear threat is, of course, a mere coincidence.

anonymous writes: 

Just like everyone else, you're entitled to your opinion, but please excuse us for questioning another unilateral action in the Middle East that does little to serve US interests. If anything, I would expect it to accelerate nuclear programs in both North Korea AND Iran.

You should be asking yourself who gains from this action, and why Little Marco and McCain are ecstatic about the news. I understand that anything that helps Israel is probably fine in your book, but I find it curious that noone seems to be questioning why a rational actor like Assad would be gassing people on the verge of a peace process.

A civil war has been going on in the WH between the populist platform that Trump ran on, and the globalist policies of the existing state apparatus via the proxy of Kushner. Based on these recent events in Syria, Bannon being stripped from the NSC, and the latest news that he and others may be out completely, things are not headed in the right direction for anyone who actually voted for change last election.

And so it goes…

anonymous responds: 

Your conclusions about how North Korea and Iran will view this are interesting — but are diametrically opposite to how I and many others may view this.

One must ask the question, why would Assad use chemical weapons right now? This is very odd timing, don't you think?

The only plausible explanation was as a test of Trump. And Trump's response was a calculated signal to the world.

You can argue what the signal meant. And you can reasonably argue that it's a bad message.

But for me, it meant several (good) things:
1) International standards (Geneva Convention) matter and we are not going to rely entirely on the "international community" or the UN or useless financial sanctions.
2) Violating deals and treaties have real consequences. This is a signal to Iran regarding their Nuclear accord with Obama.
3) We are not afraid to use force and we will not be intimidated by the playground bully.

Ultimately, you have to decide whether there is good and evil in the world and if there is, who are the "good guys" and who are the "bad guys" in the world. I will readily admit (and here I am being an idealogue) that I am one of the good guys. And I want the good guys to prevail in the least bloody way. And that means carrying a big stick.
 

Apr

9

 Back in the old days, if the market opened at 9:30, and there was no news…but traders showed up 45 minutes before the open and the pit started filling up 25 minutes early instead of the regular 5, one knew with 95% confidence that the market was going to rally. There were also many changing noise levels and tone levels that offered predictive value at that time. Nowadays, such visual clues are gone and in the absence of the moods of the floor, what modern indicators are useful to predict rallies in this electronic age? And can those indicators be tested?

Apr

6

 He was a fine gentleman who was a master of tactics. He started out by playing checkers and was very good at it. He taught all my daughters every Saturday for many years. He, Tom Wiswell, Steve Wisdom, and I would play combo chess and checkers each week for 10 or 15 years. He always had a smile and was a master at fixing his car which he drove from the Catskills through rain or snow. He did not oppose admiring the opposite sex and loved to socialize during matches. I arranged for him to give lessons to the Soros's at my expense and he enjoyed teaching that whole family in their homes. When Nigel was visiting the two of them liked to play and Nigel usually was the winner.

When we watched him in matches, we begged him not to talk to all his opponents. But he liked to watch everyone else play and generally took about 30 seconds for each of his moves. His autobiography contains some of his greatest games.

He was always a gentleman and one time in the US Open in the finals Bobby Fisher fell asleep and would have lost in time pressure as he was hustling for 50 cents a game the night before. But Art woke him up, and thereby Fisher represented the US rather than Bisguier. He worked as a consultant for IBM and was always interested in the latest in programming. When he came to the office, he liked to make a few trades. And for some reason his trades were always winners. We will miss him dearly and all who meet him in the next world can look forward to a good board game with him.

Here is the obit of a fine game player and gentleman. His favorite player was Bronstein who he said was the best player ever. 

Apr

6

 My Papa used to walk to town (8 miles round trip) just to get a RC Cola and a hot dog whenever the weather permitted.

I stayed with him during the Summer months as a kid and would join him for the walks.

He used to exclaim looking over at the streams while walking "The cows are up and walking. Good day to fish" or "The cows are down and laying. No fishing today."

I generally followed his sage advice in my adult life. It really did net more fish. Still does when I go to smaller streams and rivers when there are stretches with cows on the other side of the bank.

I asked him later in his life if it was just an ole wise tale or if there it had any truth. He exclaimed that it was sound. He let me know that when then cows were up and walking they stirred up all the insects. Swatting more flies as well as making grasshoppers make last second jumps. The fish know this and get excited.

It might not be sound science but I bought it. More observations like this were things that shaped my mind. Trial and error. Looking at outcomes from different attempts. Keeping things simple to get positive results.

Duncan Coker writes: 

Great post on many levels, about spending time with your father, fishing, nature, observing and prediction. I was trying to guess the connection before reading and thought it might have something to do with sunlight causing the cows to move seeking shade. Sunlight means the fish might be looking up feeding and easier for an angler to see them.

Statistically brings up good example, A (walking cows) are good predictor for B (catching fish). On the surface this seems an odd correlation, not causation, and tempting to disregard. But there is actual another factor C (insects) that is the explanation. Statistically, the cows are easy to see, small insects not so much. Question is even if we don't know about C or can't measure, should we still use the A as a predictor even if it does not seem to make sense. For fishing the answer is defiantly, yes

Charles Pennington writes: 

My fishing experience was mostly gained in Georgia, fishing for largemouth bass. That maxim seems right to me. On very hot summer days, for example, both the fish and the cows are listless from the heat.

Another bass fishing rule of thumb is that bass are total suckers for spring lizards as bait. The problem is that it's easier to catch a bass than to catch a spring lizard.

Apr

6

 Statistician, blogger, and author Andrew Gelman of Columbia University talks with EconTalk host Russ Roberts about the challenges facing psychologists and economists when using small samples. On the surface, finding statistically significant results in a small sample would seem to be extremely impressive and would make one even more confident that a larger sample would find even stronger evidence. Yet, larger samples often fail to lead to replication. Gelman discusses how this phenomenon is rooted in the incentives built into human nature and the publication process. The conversation closes with a general discussion of the nature of empirical work in the social sciences.

Apr

6

 Egged on by arguments raised by the recent change in Administrations, and the white-hot debates generated by the "climate change" brouhaha, a glance at the field of geomorphism, the science of how the Earth changes over time, its forces and contributors, seems a plausible and worthwhile effort.

The average citizen pays little attention to the less sexy but commanding aspects of erosion, relying unfortunately on the headline tropism that provides little in the way of actual explanations or in-depth nuance. Icecaps melting! Shout the tabloid media. Island sinking by 2015, foretold a former Vice President, now proven comically overbloated in his prognostications, highly remunerated speeches and fizzled films.

But let us consider more than headlines in regard to geomorphism, which might reclaim some measure of moderation in thinking about the hubbub over change over the planet.

The geomorphologist has to consider multiple factors in trying to interpret how hills and valleys came to be. This includes the timing of these erosive elements, and what these geologic features look like over the march of years. Erosion as an umbrella overall is a key tab, but occurs at differing rates within a delicatessen of timescales based on rainfall, climate,, vegetation, , composition and homogeneity of rocks, fractures, fissures, landslides,

avalanches, riverine sedimentation and carrying capacity and, often overlooked but supremely important, slope. Nor can the geomorphologist ignore sunrises, sunsets, and even persistent shadows cast by crags and crests, blanking out sunlight for large swathes of day.

Remembering, too, the silent gnomes: Moon and tides, vestigial but vestal.

Instances of data are mobile, note, where the rate of erosion at the surface is offset by the never-ending fores of uplift/gradual upheaval ongoing as constantly, if incrementally, in many latitudes. For word lovers, this is denudational isostatic rebound. (For analogy and lingerie lovers, this can be likened to cunning covered underwires, for bosom support architecture.)

There are some 'easier' rules of gauge—with higher ascents and steeper mountain ridges eroding relatively swiftly: the East Himalayas erode at a whopping 2 to 3 mm per annum, for example. Such erosional rates, themselves, will evolve over time, as well, to meet new equilibrial homeostasis–depending on weather and wear forces noted above. (Such erosional rates hold steady for all earthly features except, one can posit, stubborn body fat, which defies discernible erosion for decades, seemingly.)

"Don't think we'll ever find the single smoking gun of erosion," according to pooh-bah Eric W. Portenga, bishop of Earth & Environmental Sciences at the University of Michigan. "The natural world is so complex, and there are so many factors that contribute to how landscapes change over time." As his measurement paradigm manages to gain foothold in the field of geomorphology, we will glean a better sense of what variables are vital, and which are not, in the erosion saga.

For decades, it has been a geology truism that rainfall is erosion's master driver. Semi-arid landscapes with sparse vegetation, yet the occasional major storm were thought to manifest the greatest grids of wear. But an important study challenges that 'bedrock' idea.

"It turns out the greatest control of erosion is not mean annual precipitation," notes theorist Paul R. Bierman, of the University of Vermont.

Instead, regardez slope.

"People always thought angle was a big deal," says Bierman. "But the data show slope is really important." Who would have thought?

(As with phalli, the angle is critical, for impregnation, as well, of course, as pleasuring.) So the land's angle, the naked scree and tree-root tangle, all fall to the mean—entropy flattening at the smallest suggestion, evolution's Zamboni edge.

Some of course prefer more direct and more calculable methodologies, ways of measuring the vales and hollows and their duration or extinction. Practitioners in this still-emerging field draw from the arenas of physics, biology, chemistry and math to arrive at a more graphic understanding of terrestrial surface processes and the evolution of topography over short-term and longer-term timescales.

We are clearly not yet at the certitude we seek. Needed is a Dionysian, geologic Dian Fossey, the recent Sam Pepys of primatology. Geologists and statisticians need rules of less-than-dumb thumb for figuring the whys, hows and whats of Earth's dynamic surface, translatable to our Earthly rocky past. And hopeful learned future.

Scant evidence, we propose (tongue in left cheek), of a gneiss Deity?

Apr

6

Very good methods of hiding your evil intents in one of best books ever: The Art of Travel by Galton. A method often used by Governors and their inspector generals and other flexions.

Apr

6

Will it be the Golden Scale, Christy Mathewson, Ralph Vince or Rocky that determines market moves for rest of year?

Apr

6

At least Another quasi humorous utterance from the humorous chair lights a shuck down the self exonerating highway. But the more important question— the checker player, often an adversary of Tom Wiswell and Branch Rickey, points out "a man should always hold something in reserve a surprise to spring when things get tight". When will that crucial point in the market come when everyone hoping for the political situation to implode reacts to that crucial pitch, and which way will it go?

"Thorn: Re-reviewing 'Pitching in a Pinch' by Christy Mathewson"

Apr

4

 A good show without an anti business bias because it is about two women entrepreneurs rather than two men entrepreneurs is Warpaint. It provides a good review of consumer behavior during each decade of the 20th century. The music is all minor, but is good, and the two singers Patti Lu and Christine Ebersole play the parts of Helena Rubenstein and Elizabeth Arden well.

Apr

4

Like many aspects of biological systems, too much of a good thing may not work out so well. Although this is preliminary research, this is perhaps a cautionary tale as it looks like telomere length may follow a U shaped curve in terms of adverse health effects:

"Telomere Length Predicts Cancer Risk, According to Large Epidemiological Study"

Larry Williams writes: 

My telomere expert wades in on this:

There have been a number of studies that have shown the opposite of this result, but these other studies have not been focused on the really long telomeres so more studies are needed. This study on the surface seems like a lot of people but if you get down to how many had "unexpectedly long telomeres" it probably was not very many people. And another issue is how did these people get these "unexpectedly long telomeres"? Could there be some force at work there that also led to increase cancer?

The thing about having long telomeres is that no one taking cycloastragenol or doing anything else is getting anywhere near the telomere length we have in childhood. We are born with 15,000 basepairs. And yet cancer in youth is rare.

The cause of cancer seems to be DNA damage. But what often sets it off is running out of telomeres which leads to a cascade of events that allows the cell to go full cancerous. So keeping the telomeres from getting critically short is a very important way to prevent cancer.

One thing about the telomerase enzyme in a healthy cell is that there is a control mechanism that is much more likely to use it to create more telomeres if the telomere length is short and not if the telomere length is long. That is why people who are tested using the length distribution method, which indicates the percentage of telomeres under 4,000 base pairs, will see their short telomeres get long first (within a few months) and then only years later see their average move up.

So the increase of the telomerase enzyme in a healthy cell is used in a well regulated manner to make short telomeres longer but does not have that effect on longer telomeres.
 

Apr

4

 Europe and emerging markets are the favorite topic of all in the coming months. Osmotic pressure?

Ralph Vince writes: 

But Stef, why screw around with those markets when the US is in a monster bull market — bigger than anything seen in over 50 years, or maybe in modern times? The US and the earth may have de-linked, and the US is, at least, a sure thing. We are in SUCH a raging bull market it's silly. This may be MORE than 1982, and the reason I am certain of it is because EVERYONE is SO RISK AVERSE. A planet of absolute weenies now.

I had some stooge tell me the other night, as I went to our myself a glass of tap water from the faucet of a friends condo here, "I only drink distilled water." Are you f***ing kidding me?

A bike helmet society. Since 9/11 and the crash, everyone is insanely risk averse. "The Presidents first priority is to keep Americans safe!" has been a common theme. That appears NOWHERE in the US Constitution btw, and I'm certain its framers - who were individually certified badasses, would laugh at such a statement. If you step outside of the day, if you transcend the era we are in and look at the bigger picture, it;s clear that never have so many people, been so motivated by fear in my lifetime. Maybe in 1938/9 people in Europe were, maybe in the Spring of 387 they were, Do you think this is not manifesting in the markets? Does anyone think that fear has dispersed yet?

Youth is steeped in it, and now, must be conditioned, only trough painful, firsthand experience to NOT be so risk-averse. The markets have never accommodated everyone, why would it be different this time around? Yes, there will be fits and starts and sputters, but the next 20 years are up and up and up and it doesn't matter what happens politically–this is bigger than politics, but is the market's reaction to one-sided human emotion.

J.T Holley writes: 

I completely agree with you Ralph. Having been a Father of three, Athletic Coach, and Boy Scout Leader I can tell you that there are two generations of folks that would rather be risk averse and maintain a lower standard deviation with their lives than take even the surest of bet!

The only other generation that might have had more fear would be that of the 1950's after WWII. That generation or slice of generation were the ones who did bombshelter drills, got under desks at school, and were spoon fed propaganda. They feared total nuclear annihilation. That eventually faded.

Ralph Vince writes: 

We're finally seeing what we "feared" for a long time, that all this inflating would result in a giant asset-bubble. This is now manifesting, but nowhere near to the degree it would to be commensurate with the size of the inflating that occurred.

If people are risk averse, the late-boomers, people my age, mid 50s to early 60s. simply want to be able to hobble into "retirement." They are not taking any risks. The younger set has been programmed NOT to seek risks. People of wealth are and have been hunkered down for a long time. Bank prop desks are dissolved…so very few are taking serious risks in the equity of assets–an endeavor the vast majority of people think is about finished for a variety of weak, small minded reasons.

Kim Zussman writes: 

Ralph I admire your optimistic enthusiasm. So much, in fact, I would like to adopt you as my brother (along with a select group of spec listers)!

I somewhat get the point about pervasive fear. But as a devil's advocate (and I'm not particularly bearish):

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum
2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order
3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode
4. Protectionism and withdrawal from international trade might not be good for many company's earnings
5. To the extent one cares about valuation, stocks aren't particularly cheap here
6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"
7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them?

You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

Would you suggest all-in, or scale-in on dips?

Ralph Vince responds: 

Kim, my response to your points is below: 

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum

This is already baked into the market.

2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order

Very likely they will do all they can to obturate things. But as I said, this saturnine, fearful sentiment is what drives markets, and it;s the same mechanism we saw, for the same reasons as in 09. Except the fear - at a deep and cultural level, has remained as an ocean of cash has been pumped into the system — still out there. The ascent of Trump merely gasoline on this deep, prolonged, over-arching cultural shpilkes.

3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode

At the short end. Mr market is telling us a differetn story at hte long end, where the free market for credit occurs. I'm looking for a 1 big handle on the thirty within a year.

4. Protectionism and withdrawal from international trade might not be good for many company's earnings

You're talking a zero sum game by definition. It may not be good for some, but people will still buy light bulbs.

5. To the extent one cares about valuation, stocks aren't particularly cheap here.

They aren't expensive either, the relationship being (earnings ^2 ) / ln(long rates). By this (linear) measure they ARE quite failry priced indeed, and at the 1 big handle on the denominator, well….

6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"

And where SHOULD Vix be? Is the pre-November historical level……..is that same level where it should be? Everyone for months has been looking for Vix to spike. It will, of course, at SOME point,as stocks too will correct beyond a few percentage points, at SOME point.

As an aside — perhaps looking at outright vix levels is deceiving us, just as looking at absolute interest rate levels deceives us. Perhaps vix, like interest rates, should be looked at for the character of its term structure, rather than absolute levels? (and further, vix exhibits the character, ie.e the manner in which it moves, which is very similar to monthly unemployment — not that they move together, they do not, but they move with similar personality)

7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them? We haven't seen Dr. Greed enter the picture yet. How many guys do you know well past retirement who love to take a spec on things? Boomers aren't going to leave this game en masse — where will they get a return?


You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

We have similar fear today, and, just like 08-9, it is deep and culturally ingrained, far beyond the mere fear of capital market corrections. The difference is we've been further steeped in it, and the markets have continued higher, stoking hte fear further. By every metric, gun sales, political banter (on all sides, favoring "safety!") etc., we are a culture in a sort of tenebrous, deep fear, which has persisted well beyond a decade and a half now — I contend it is so deep and so ingrained that we aren;t even aware of it.

Would you suggest all-in, or scale-in on dips?

Timing dips is for dips who think they can. Why piddle when things are just going to keep making new all-time highs? Just buy and buy and keep buying. Come up with more money and buy some more. Add and add and ultimately cause yourself to have a bigger stake in it which has naturally averaged in. If you want you can protect it very cheaply for about 1-2% /year.

Apr

1

The last major change in Federal tax law (excluding 1986, which was not, IMNHO "major") the Economic Recovery Tax Act of 1981. It was also adopted into law in August by a newly-elected President.

There were a few differences. The ERTA had no serious opposition. It was introduced by the Democrats; Dan Rostenkowski, the newly-elected Chairman of Ways and Means, was the initial sponsor. The bill passed the House on July 29, 1981 (323–107), the Senate on July 31, 1981 (by voice vote), was reported by the joint conference committee on August 1, 1981; agreed to by the Senate on August 3, 1981 (67–8) and by the House on August 4, 1981 (282–95) and signed by President Reagan on August 13, 1981.

I have no doubt that the current bill will be introduced by Congressman Brady, the current Chair of Ways and Means, and that it will make it from committee to the House floor. The odds are also better than even that the Republicans will give it a majority vote; but there is absolutely no chance that the bill will pass the Senate on a voice vote.

So, the matter will come down to a guess on the likelihood that the Senate will adopt new rules or a precedent that will effectively nullify the ability of the minority to hold up legislation by talking it to death.

PredictIt makes Gorsuch's confirmation a near certainty.

It is difficult to see how the odds against "tax reform" will be significantly worse.

As to what will be the final compromise that produces the actual bill…. ERTA ended up being named Kemp-Roth, even though neither of its Republican sponsors thought it went nearly far enough towards gutting the absurdity that is U.S. income tax law.

Mar

30

 Here's a copy of a book by Jim Patten: In the Wheat Pit. Patten was one of those early, larger than life, wheat speculators in the vein of Cutten, Leiter, Armour, et al. For awhile, he was the big dog of the pit and could carry 30 million bushels. He was known as one of the most honorable gentlemen to ever trade, part of that old school grain crowd. This book has so many meals of a lifetime that it would take a long time to even scratch the surface.. The stories, anecdotes, and lessons contained in this "autobiography," are priceless.

Mar

30

One sees that everything is topsy turvy with the service reform that repubs are now pointing to. Apparently the agrarian reformers have put a framework in place where a new plan must be revenue neutral or else it has to subject to whatever non-reconciliation is. To the layman that means it's a lot easier to get a revenue neutral plan in. Washington loves that because gov spending won't be decreased. But the fly in the ointment is that any proposal to reduce service rates will generate enormous increased revenues through growth and compliance and proper business activities rather than those designed to reduce payments to the service. Supposedly the "non partisan" budget office made the congress agree that there can't be dynamic scoring. So the Lafferian correlation between reductions in service rates and growth can't be taken into consideration. Thus, the whole thing has an improper foundation, a twisted acorn that must grow into a twisted oak. I've found that all things built on improper foundations eventually crumble.

Rocky Humbert writes: 

Since taking office, I count that to-date, Trump has eliminated over 90 government regulations; some of which are very significant and positive from an economic growth perspective (if one is inclined to view the cost/benefit ratio of such regulations as high).

Rocky wonders whether Vic has any hot water in his Connecticut manse. Why? Because he always seems to have a bucket of cold water at the ready.

Ralph Vince adds: 

And further to Rocky's point comma it is estimated that these regulations costing economy about to trillion dollars a year. That's one eighth of our economy. Cut that in half reduce half of these regulations and you see an immediate 6% bump in GDP. In my case I have spent over 150 hours in the last month simply wrestling with the regulations caused by Dodd-Frank. Those who oppose the president on the political scale to sew an ideological grounds but in the nuts and bolts world of trying to get anything done and America the regulations are stultifying.

That 6% bump in GDP is before any kind of multiplier is put on it. Can again go back and look at any of the great social programs have been started and worked successfully in America from Social Security to Medicare to Medicaid they all coincide with double-digit GDP growth, something I personally and looking for between now and January of 2019. Taking a machete to the Jungle of regulations anyone trying to start or run a business or even so much as take out a mortgage has to contend with, as the numbers illustrate goes a long way towards getting his towards that double-digit growth, and possibly then some type of healthcare plan in America. People have been flying to this putting the cart before the horse.

Kim Zussman shares the article: 

"How to Engineer a Trump Boom"

Cut taxes, deregulate, build roads, bridges and airports—and don't start a 1930-style trade war.

By ROBERT J. BARRO

Stefan Jovanovich writes: 

Mr. Barro is looking through the large end of the historical telescope. Trade wars only occur when countries are already having shooting wars; they begin and end when one country loses all its money. The 20th century's "trade war" began in 1914 and only ended in 1945.

What "explains" the 1920s is that the one country in the world that had any money - the United States - decided that it could afford to accept other countries' central banks' valuations of their domestic currencies. What explains the 1930s is that Herbert Hoover and Franklin Roosevelt both agreed that the way to solve the collapse of the Wall Street credit bubble was for the U.S. to join the rest of the civilized world and undertake its own default on its domestic currency.

When economists now say that countries can inflate their way out of their debts, they are referring to the magic of the defaults of nearly all the international loans issued after the Great War. No one got paid back because the valuations accepted for the initial loans (mostly from the U.S.) were as fictional as the current Venezuelan exchange rate; and the Americans decided that having the U.S. Treasury own all its citizens' money was the ideal way to revive American credit exchanges.

Academically trained economists insist on treating political economy as a science, yet they believe, without evidence, that international trade was "free" after World War I. They see a world without quotas, currency controls and imperial preferences after 1918 as a kind of mystic vision that is true regardless of any actual facts. They believe this version of history with even more fervor than LDS believe in the story of Joseph Smith and the golden plates. The Mormons, God Bless Them, consider their gospel a matter of faith; Professor Barro and his colleagues must pretend that it is all somehow Reed Smoot's fault.

Mar

28

Nice tabulation of all the hot tip stocks promoted to get subscribers: Teaser Tracking

Mar

28

 Bad stories are always the ones that get told. They have the virtue of pretending that events have "lessons" and that history is a sequence of binary choices, each of which determines what happens next.

To this day almost every book about WW II in the Pacific will identify the Battle of Midway as "the turning point" in the struggle between the United States and Japan. The literature about the Civil War does the same thing about Gettysburg. In both cases the reason is simple: you can pick out a single dramatic moment in each battle - Pickett's Charge, the U.S. dive bombers attack - and make it the hinge for all subsequent events.

The Confederacy still had a chance to win the Civil War a year after Gettysburg; but for events that were not under the control of Lee and his Army of Northern Virginia, Lee and Davis' goal of a secession settlement through the political defeat of Abraham Lincoln and his Union Party would probably have been achieved. Lee saw Gettysburg as a defeat but hardly as a fatal catastrophe. It had reduced the Union Army in the East to literal impotence; for the rest of 1863 and much of the spring of 1864 the Army of the Potomac literally sat in its field tents and waited.

The Japanese setback at Midway was hardly, in their eyes, the beginning of the end. If the plan to capture Hawaii was now deferred, it was not abandoned. It took the naval Battle of Guadalcanal, which came over 5 months later, for the Japanese Navy to give up its belief that its ships and sailors controlled the Pacific Ocean.

The only reason to study events in detail is to realize, yet again, that the "what happens" is best understood through the data. The numbers in the supply chain are the story that comes closest to the truth; and their fluctuations, like those in the market, are determined by present actions, not past "forces".

Mar

28

 The bounty hunter returned to Slab City on a tip by a paid snitch who directed him to a busy camp where the road kid was roasting hot dogs with others. The bounty hunter brought three others, a total of four in three cars, and drove into the weenie roast yelling 'Surrender'. Instead, the kid jumped on his bicycle and led them on a merry chase through the camps of Slab City and exited into a lemon grove, where he climbed a tree and hid in the fruit until it got dark. Then he jumped down and returned to Slab City.

I was approached by the Hula Hoop girl of the Music Range who quoted 'How to Infiltrate an Outlaw Town' saying: "'You use the Slab City men to get to the their women, and now I'm using Niederhoffer to get to you.' She wrapped her hoop around me and away we went.

Mar

27

Statistical Modeling with Quantile Functions by Warren Gilchrist tells you how to look at models from the standpoint of the probability that the value x will be <= to a value Y such that the probability is a quantile like 95%. i.e. the when will the cumulative distribution be equal to a quantile. It explains all the uses for quantiles in modeling including bivariate modeling in a very simple way. An excellent non-parametric way of looking at things. Accessible to anyone with a love of statistics, an intro class, and a pencil and paper.

Mar

24

Today's market was a perfect example of deception in all its forms. One could write a book about all the forms it took today.

Mar

23

 Bridgewater just published Dalio’s 61 page treatise on Populism.

In summary, populism is…

• Power to the common man

• Through the tactic of attacking the establishment, the elites, and the powerful

• Brought about by wealth and opportunity gaps, xenophobia, and people being fed up with government not working effectively, which leads to:

• The emergence of the strong leader to serve the common man and make the system run more efficiently

• Protectionism

• Nationalism

• Militarism

• Greater conflict, and

• Greater attempts to influence or control the media

Stefan Jovanovich writes: 

“In the period between the two great wars (1920s-1930s) most countries were swept away by populism” has to be one of the great howlers of all time.

The political parties and leaders which held and gained power in Britain, France, Italy, Germany, Austria, Hungary, Romania, Greece, Spain, Portugal, Belgium, the Netherlands, Finland, and Poland were all dominated by imperialists whose policies assumed that the nation took priority and that acquiring greater territory was the ultimate goal of warfare itself. There were exceptions among leaders and nations - Leon Blum, the Czechs, the Norwegians, the Swiss and Swedes; but these people had no control over events.

Mr. Dalio should stick to counting his and other people’s money and leave history to us paupers.
 

Mar

22

 As AG correctly notes, most military "news" is very, very old information. But it sometimes seems to take its own sweet time about arriving where the world of money is concerned.

"Beautiful Day For A BONE Flight"

"B-1B Deployments"

Chris Tucker writes: 

So these aren't Bones, but BUF's. (Big Ugly F**ckers), other wise known as B52's. But it's a cute story. And I made up the call sign.

Around about twenty four maybe twenty five years ago. I'm a fresh, new radar controller at ZNY. I'm getting "seasoning" time, working the radar on my own, in full command of the sector, but with a highly experienced old hand sitting next to me in the radar hand-off position (sort of like an assistant) to keep me out of trouble. Happily, the old hand on this particular day was one of the best, most naturally gifted air traffic controllers I've ever had the pleasure of knowing. And I've known a few. His name is Dominic.

We are working the Yardley Sector, Sector 55, a busy and complex departure sector that blends southwest bound NY Metro departure traffic from EWR and LGA area airports with west bound and northwest bound JFK departures from the south east. At the same time, we descend BWI and DCA arrivals from the northeast through the departures and sequence the bunch. It's a fun sector to work, some people don't like it because, and I'm serious here, the angles are funny. You have to understand aircraft types and decide, long before they cross, who is going to be on top in any merging situation. We love Boeings - they climb fast. We hate Airbus - they don't.

So I'm working my tail off and I have this great big gaggle of traffic in the southwest corner of the sector, everybody is crossing and I've used almost every single altitude available to me between Flight Level One Eight Zero and Flight Level Two Eight Zero (essentially eighteen to twenty eight thousand feet). I'm waiting for a few pairs of planes to deconflict so I can climb every body and ship them over to the next controller, so my attention is focused (too much so) on this area. A departure checks on the frequency off of LGA, up in the northeast corner of the sector, level at one seven thousand, itching for higher. Standard stuff. So as I'm dragging my eyes up towards him I've already begun speaking: "U.S. Air Seven Forty One, New York Center Roger. Cliiiimb aaaand (eyes not yet there) maiiintaaaaiiiin." And Dominic explodes with a resounding "NO!!!" Aah. Yes. Now, very nonchalantly, I say "U.S. Air Seven Forty One, disregard. Maintain One Seven Thousand. Traffic, twelve o'clock, four miles, opposite direction, a flight of nine B52's in the block, Flight Level One Eight Zero through Flight Level Two Zero Zero". "US Air Seven Forty One roger - we weren't going anywhere - we heard him!"

Mar

21

Certain readers have suggested that your correspondent's comparison of post Civil-War U.S. and post millenium China is, to put it kindly, all wet. They agree that the countries had similar explosions of industrial growth in these two periods; countries that were important but not major economies became, in a decade and a half, the leaders in annual accumulations of wealth throughout the world. But, to think there is not even the remotest comparison between what happened in the last third of the 19th century and what is happening now regarding international money and credit is nonsense.

I can't disagree with the readers' description of what happened 150 years ago. We all think that the broad adoption of the gold standard after 1875 was the response of both Europe and the Americas to the collapse of the gigantic (mostly real estate) credit bubble that developed in the 1860s and early 1870s on both sides of the Atlantic . The cascade of bank failures that is wrongly described as the Panic of 1873 brought the world's banks and national Treasuries to agree that they would all use gold coin specie as units of account and that all their exchanges of credit would be cleared using a single gold standard for all borrowers' and lenders' currencies.

That is, my kind readers point out, precisely the opposite of what is now happening. International exchanges of credit are now cleared using the foreign exchange markets' valuations of the respective monies. While central banks and national Treasuries continue to hold gold bullion as assets, there is no legal obligation of any country to convert their legal tender to specie. So, there is no reason for China or any other country to adopt a physical gold standard as the exchange price for their currency. That would not fix the price of the yuan for the rest of the world; it would only substitute fluctuations of the price of bullion for the managed variations in the official exchange rate of the currency.

But, say the readers, if the United States were to adopt the gold standard, it would be a different matter. The dollar is already a reference currency in open markets for commodities, and U.S. Treasury debts are held as official banking reserves by central banks, even China's. Guaranteeing an exchange rate for gold coin would produce the very golden fetters that Keynes found intolerable; whenever buyers of Treasuries found the rates unattractive or the Treasury's borrowing excessive, they could use the gold exchange guarantee to push back. That was, say the readers, precisely what happened after the end of the Franco-Prussian War. The U.K., France and the U.S. all ended any hint of bi-metallism; and, to its great surprise, Germany had to abandon silver and accept gold as the measure of its domestic currency. No individual Treasury could stand out against the international market's independent assessment of the soundness of its credit.

This was not at all what the believers in unlimited sovereign authority had wanted, and they did their best to find a way around the limitations on state spending that had resulted. The Germans adopted social insurance as a way to stretch the Empire's budget - money for guns and cavalry horses and ship building now, promises to pay pensions later. The British embraced imperial bimetallism - gold for foreign trade, silver for India and China and East Africa. But, in trade among themselves and with America, the books actually had to be cleared; and any country that defaulted lost its credit overnight (Argentina).

My readers are right. For China to establish the yuan as an open currency, it would have to join an already established international gold standard. Fat chance.
 

Mar

21

The recursive paradox of self-determination or: If you lack the skills to trade, then trade to acquire the skills you lack

I ask for strength,

trading presents obstacles to make me strong;

I ask for wisdom,

trading provokes my critical thoughts;

I ask for courage,

trading challenges me with it’s risk and uncertainty;

I ask for patience,

trading puts me in situations where I am forced to wait;

I ask for discipline,

trading tests my resolve and determination;

I ask for prosperity,

trading gives me the opportunity to profit;

I may not get everything I ask for,

yet, trading gives me everything I need.

Mar

20

One interesting thing occurs when a team tends to lose close games to an inordinate degree. Some sabermetricians cancel these games out saying it shouldn't count against. Others suggest that it means that the team is bad, like the Knicks who have lost more close games than any other team. It calls for a test. I used 3 out of the last 10 games, a win by less than a 1/5 of %, and 3 out of last 10 that were won by less than 1/5%. The results show that losing by a squeaker to an inordinate degree is bullish.

Michael Chuprin writes: 

I first noticed this happening in chess and have since been able to recognize it in other sports. I think this happens when the players are not playing their best but rather playing to keep up with their opponents. For example, sometimes a strong chess player will see that their opponent isn't strong, so he will not really engage in the game and then draw. Other times the chess player sees that his opponent is very strong, so he will "turn on his brain" to match his opponent and then draw. In both cases he is just playing to match his opponent and in both cases he isn't playing his best. He says to himself things like "I see my opponent is up a pawn over me, so I must get a pawn too." If he were to ignore the level of his opponent and play his best all the time, he would win more frequently. I think it is this mentality that plagues many skilled players in many different sports. 

Allen Gillespie writes: 

That's ironic. My favorite college sports team, Clemson University, which my father attended when it was a military school, was split on this question this year. In my opinion, it is unquestionably bad to loose too many close games. It precedes a collapse. Many close wins leads to Championships. Clemson won the national championship in football after struggling through but winning many close games (as detailed below). Meanwhile, the basketball team finished near the bottom of the league after loosing multiple close games and ended the season blowing a 20 point 2nd half lead at home.

From my observations, here is the difference between the two teams and coaches.

Football:

Auburn - won by 6 stopping Auburn Hail Mary at end, beat Troy by 6, recovering onside kick late. Louisville won by 6 after 5 turnovers stopping late, Louisville drive inside 20 Beat NC State in OT after NC State missed chip shot field goal, lost to Pitt on last second field goal. Beat FSU by field goal. Beat Alabama 1 second 1 Close loss where they were outplayed and outcoached. Pitt came in with a great game plan, lots of motion to neutralize Clemson's pass rush and won. Won several games in row and won 3 of 4 games before final in blow-outs.

Basketball:

UNC missed free throws to win, lost in OT by 3 Notre Dame/UVA by 5 and 4 after being tied with less than 2 to go, Virginia Tech (2x), Syracuse - lost 2x on last second three point shots by opponent, FSU/DUKE - lost by 2 missing last second shots. Finally, lost in NIT after loosing 20 point second half lead at home. Lost several in blow-outs in-between.

Dabo is constantly speaking about resilience. They make plenty of mistakes. In fact, the last two Clemson football teams have had the worst turnover margin of any national championship teams. Alabama was known for a scoring defense - at the start of the second half, Clemson turned the ball over and Hunter Renford (a small walk-on receiver) ran down the Alabama player and stopped the defining defensive score. It was something they had discussed in practice. In short, Clemson's offensive said the Alabama's defense–you will not beat us. Then the great players made plays. Clemson won with 1 second remaining. I am convinced Dabo read Daring Greatly by Brene Brown.

Basketball - team of transfers, one already thinking he could make the NBA, in short all the Knicks issues with players in the bright lights. No defensive intensity. Missed shots. Lost three games by allowing the other team to run the length of the floor to get good three point looks. Went for ties instead of wins. Finally, just folded up tent on the season in the last game. Having watch a lot of sports, I am completely convinced good teams can be defined by 1. Beating bad teams early and by 2. Winning late as these are signs of mental focus and fitness. Just ask Andy Roddick about Wimbledon 2009.

Mar

20

 The Democrats' success in establishing the first national party in American history was hardly the product of inspired military leadership. Jefferson and Madison's careers as CIC were, to be kind, complete failures; and, by the time the Democrats' genuine war hero (Monroe) became President, the party dominated American politics as thoroughly as Roosevelt's New Deal Democrats did in 1934. But, with opponents like Hamilton, how could the Democrats have failed? No one with even half an ear could fail to hear the absolute contempt that the Federalists had for the Republican notion of popular sovereignty. What is even more striking is how determined they were to ignore what Washington himself had said and done.

When, after the Revolution's success, Henry Knox proposed the establishment of the Society of the Cincinnati, the charter provided that membership would be hereditary, by rule of primogeniture. Washington was invited to become a member and was elected its first President; but, when he learned of the hereditary membership clause, he insisted on resigning. There would be no nobility in the United States of America. To keep Washington as President, the Society revised its charter to eliminate all clauses providing for hereditary membership. After Washington resigned to take on the slightly more important duties of President of the United States, the members reinstated the clauses providing for hereditary membership.

Mar

16

"I never bet on a horse in my life unless I trained the horse. I have to laugh when the boys look over the doe sheets, and say "This one looks right to win".

"I spent a good portion of my days when I was training horses, trying to get a horse to look as if he wasn't right to win, so that I could win some money on him myself. The trick is to get a horse right, but not to have him look right. You can get big odds on what looks like an also ran" -Frank Tarbeaux

Mar

16

 Very dramatic map: "The Global Extremes of Population Density"

Which made me think to look at this map, and remind myself that the Indus, Ganges, Brahmaputra, Irrawaddy, Mekong, Yangtze and Yellow rivers all originate on the Tibetan Plateau where the glaciers may or may not be retreating.

Mar

16

 It appears that outdoor recreation in Palm Beach area is trending up with a proposed wave pool now making the news. Kelly Slater's wave pool would be located near a large aerospace manufacturing facility that was once the largest employer in Palm Beach County. The wave-making business also appears to be doing well internationally:

"Nowadays, there are seven different wave generating systems in the market: American Wave Machines, CityWave, Kelly Slater Wave Company, Murphy's Waves, Wavegarden, WaveLoch, and Webber Wave Pools."

Mar

16

I found the article in the link quite thought provoking in relation to the rise and decline of tradeable regularities in markets.

"Evolution Runs Faster on Short Timescales"

anonymous writes: 

Here is another new paper that has similarly provocative ideas regarding evolution of science/technology and which was recently highlighted by Greg Mankiw as an explanation for the decline in productivity in developed economies.

The Stanford paper is not as gloomy (nor politically charged) as Robert Gordon's work.

All of these papers share a common theme: The low hanging fruit of technology and human progress has been picked. If you subscribe to this viewpoint, then you are probably not long the QQQ … or anything else that is bullish on humanity.

Regardless, the notion of diminishing marginal returns seemingly extends throughout the natural world…

Mar

15

 Why does Scholes say that option pricing is like crowd sourcing as opposed to the market itself? Also are option prices calling for a decline or rise? And are option prices generally right? If it were worth studying what Dr. Scholes wrote in detail, I would have many more questions but since he was well known I think as the weakest link in our program, I will not delve into it, possibly at my cost.

Alex Castaldo writes: 

The article in question is

"Return to 'Old Normal' Hasn't Begun Yet: Scholes and Alankar After Trump's election, option prices signaled greater inflation risk. That no longer seems to be true."
By Myron Scholes and Ash Alankar

I don't quite grasp what option markets are telling us, and how it relates to real and nominal rates.

Mar

15

 Frank Tarbeaux says that speed with the gun in the west like speed with a trade in the markets is a matter of success or failure. He was pretty high frequency with a gun and killed his first man at 14. Here's how he did it. "The cowboys filed down their triggers until they hung on a hair or until they wouldn't stay cocked at all, just being discharged by pulling back the hammer and letting go." Their adversaries are as easy prey as such as we who are not colocated and don't have innovations faster than then speed of light. "The soldiers guns were hard to pull, a necessary army procedure to prevent the greenhorns from shooting each other by mistake. Lots of soldiers were killed." I would add that many a time I place an order and a high frequency trader, (indeed all the time), a high frequency trader is there ahead of me, and if the market would have gone in my favor, I end up with dead in the water with no fill, but if the market is going against me, I am the first to enter a disastrous spiral.

J.T Holley writes: 

Makes me think of the John Wayne movie The Shootist!

Gillom Rogers: But how could you get into so many fights and always come out on top? I nearly tied you shooting.

John Books: Friend there is nobody up there shooting back at you. It isn't always being fast or accurate that counts. It's being willing. I found out early that most men, regardless of the cause or need, aren't willing. They blink an eye or draw a breath before they pull the trigger, I won't.

Mar

15

 A voice from past asks "what can we learn about markets from birds". Do you have any insights? I'll donate $50 payable at the spec party for each of the first 20 insights.

Alan Millhone writes:

Dear Chair,

Birds of a feather flock together…

I wonder to what degree that adage is driving the Market Mistress to rise?

Do stock traders like birds have a pecking order?

Sincerely,

Alan

Art Cooper writes: 

I've long been impressed by the extraordinary efficiency in flight obtained by many birds (the albatross is a great example), which they achieve by taking advantage of their environment, through such techniques as "dynamic soaring":

and taking advantage of "ridge lift":

For a speculator, dynamic soaring is analogous to easily changing trading style between different types of markets (e.g., shifting from trend-following to reversionary as the market changes), and ridge lift can be seen as holding leveraged long positions during a parabolic blow-off move, or long puts during a crash.

anonymous shares a link:

"why a crow will never forget your face"

Pitt T. Maner III writes:

A recently-released book by Jennifer Ackerman called The Genius of Birds contains many examples of
bird intelligence and looks to be a good read on the subject. 

For example, pigeons use all available information: "They have to process multiple, different types of information: the sun and the stars, magnetic fields, landscape features, wind, weather, even smells." 

I've also read an interesting article about optimal flight pathway calculations. Life and death decisions made by migratory birds with respect to energy output/budget–when to seek and glide with tailwinds, when to change directions to avoid headwinds, when to take advantage of thermals to gain altitude, etc. Yet to be completely figured out by the ornithologists. Perhaps bearing some resemblance to long-term drift and innate sense of beneficial flow patterns and efficient trajectory:

"These results lead to the inescapable conclusion that honey buzzards make large-scale detours in anticipation of favourable future wind conditions. It is clearly implausible that animals can forecast distant wind patterns, so how could these routes arise? The wind systems that the honey buzzards exploit are highly consistent across years, and so if flying further to take advantage of wind assistance does increase energetic efficiency and/or survival, then natural selection would tend to produce these more complex migration pathways."

Laurel Kenner writes: 

The single file affords birds the same benefit bicyclists get from drafting. The followers don't have to work as hard. Very similar to market groups.

One could also explore the ancestry of birds. They are living dinosaurs. Why do they survive after T Rex and the giant plant eaters died out? Innovation is one answer. Adaptability. Behaving outside norms.

Chris Tucker writes: 

For me, it seems that birds have a unique perspective on the world, their ability to fly above the fray gives them an ability to survey the entire landscape, giving them access to a "big picture" that land based critters will never have. It also gives them access to an exit from catastrophe that is unavailable to the rest of the crowd.

Greg Devaux writes: 

we can learn from the Murmuration also seen in fish. Use the herd to let most of the individuals survive.

Victor Niederhoffer writes: 

They learn to keep out of danger or else they get killed. The survivors have it in their DNA.

Whenever you take a break from watching a beautiful bird to take a drink of coffee, they fly away. Birds migrate like the market. Lobogola lives. 

Orson Terrill shares his thoughts on birds:

Apropos to the benefits of analogous studies in birds, and the question of whether or not the existence of a "Collaborative" cannibalizes the benefits:

Birds that eat fruit and seeds often forage for food in flocks, whereas birds foraging for insects tend to not forage in flocks. The nature of fruit and seed payoffs are spatially and temporally ephemeral, so the information costs are reduced while the negative costs of competition from your flock are also reduced (because the payoff of the targets are "patchy", there is no lasting benefit to those who now know of the location).

So, sharing a specific statistical anomaly, that you expect to use again and again is self defeating. However, collaboration over the discovery of a potential theme in the economy, sector, or specific stock; that is for a time, is specific to that area of exploration -this is exactly the situation where voluntary collaboration should have a higher payoff relative to the costs of increased competition for the discovered returns.

For instance, if we all decided a special situation that was worth our time was to investigate whether or not retail real estate was hitting a tipping point, and would generally implode in certain areas. Gathering intelligence that is required in person, knowing what financial instruments available to enrich ourselves from such plight, how those would work, and who/what will be affected; that is exactly the type of foraging activity that the foraging activities of birds implies is likely to have a higher payoff, a payoff greater than the increase in competition costs.

anonymous writes: 

We kill ducks by deception. That is site (decoy) and sound (call). Speculators everyday have their money separated by site (charts) and sound (tip).

anonymous writes: 

Briefly reading over the migration of Canadian Geese on google links that popped up there seemed to be similarities to speculating the markets.

- Fly on average 40 mph but can get up to 70 with tailwinds (volatility)

- migration is for food (profit and/or incentive)

- pattern is up and down coast (lobogalessque)

- V shaped pattern is to fight wind resistance. Each bird takes turns and rotates when tired (speculators together meeting bids and asks breaking through stops)

Victor Niederhoffer writes: 

Thank you all for your ideas about birds. Brings back the many pleasant days I spent listening to the Macquarie President of the old duck hunters society. I am happy to say that for spec party we have in NY Adrian Bejan talking on may 5th, Kino Ayaka singing on may 6  and a party in Conn at my estab May 7 all invited with partners and kids.

Mar

15

 The Sonora desert around Slab City has received the most rain in anyone's memory, as much accumulative this spring as in the last twenty years I've lived here. The result is a carpet of green clover where normally parched sand lies, and a zoo of animals on it – insect, reptiles, birds and mammals.

One of the most beautiful, while hiking this morning, I followed through the grass, flowers, and clover to a party. The Velvet Ant (Dasymutilla magnifica) looks exactly like a large 1" ant with a red velvet stole, but is actually a wingless wasp. It is ranked in the top three (among tarantulas, millipedes, scorpions, bees, etc.) for giving the most painful sting. I once watched adventurer Coyote Peterson subject his forearm to a Velvet Ant sting, and jump around on a video that went viral, and that was enough to make me want to want to verify it.

This morning I put my hand in front of a Velvet Ant again and again, but she scurried around it, intent on something else. I could guess by the aroma over the flowers and clover that she was going out for a drink, like the giant 3" Pepsis wasps that have flown into my chest, after sipping flower nectar, and fallen rolling to the ground in a drunken stupor.

My date the Velvet Ant climbed over my hand, and I followed her on hands and knees for a few minutes. First, she climbed up a stalk of clover, inserted her mouth parts, sipped, and fell over backwards on the ground, kicking her six legs in the air. Had I a microscope, there would have been a smile on her face. She recovered in a few seconds, turned over, and scurried to the next bar of clover for a drink of nectar, and repeated the act. Then three more times.

Nectar and honey from certain flowers and clover is psychoactive to insects and humans, and overindulging is called Mad Honey Disease. Even when honey is not produced from the nectar of these toxic plants, it can still ferment to produce ethanol, on which the birds and bees can become incapable of flight or other normal movement. The word for drunk in classical Greek is even translated as 'honey-intoxicated', and two Celtic goddesses have arisen from it.

The red Velvet Ant, after staggering from one clover to the next, climbed a tuft of grass and ate merrily until her abdomen bulged, stopped moving, and fell asleep under my nose.

These insects remind me of Thoreau's aphorism 'Most men lead lives of quiet desperation, and die with their songs still inside them.' But not me. I walked over to the Coachella Canal, jumped in, and kicked my toes at the sun.

Mar

15

Ralph, you and I were dropping the word "manifold" on this site a year or so ago. It got me wondering if it is either necessary or helpful.

For example, what cases are we cutting out? What kind of situations are not manifolds?

- manifolds with singularities (this is what we really meant, I think, since aberrant days are remembered by all)

- algebraic spaces (recommended on MathOverflow as a precursor to understanding stacks = 2-sheaves)

-verdier duality (a condition which fails for non-manifolds)

In the 19th century, manifolds were always subsets of R^n (quoting bill fulton, representation theory). They might have holes or handles and they might have curvature. The curvature I think is what interests us in finance. Most term structures are curved, and order books are irregular as well.

All in all, I am still up in the air about whether this is a useful word to use in finance.

Mar

15

Here is my review of a genuinely useful book that documents what actually works.

Mar

13

 "Reflections on the revolution in Middlebury"

by Charles Murray

A few months ago, AEI's student group at Middlebury College invited me to speak on the themes in Coming Apart and how they relate to the recent presidential election. Professor Allison Stanger of the Political Science Department agreed to serve as moderator of the Q&A and to ask the first three questions herself.

About a week before the event, plans for protests began to emerge, encouraged by several faculty members. Their logic was that since I am a racist, a white supremacist, a white nationalist, a pseudoscientist whose work has been discredited, a sexist, a eugenicist, and (this is a new one) anti-gay, I did not deserve a platform for my hate speech, and hence it was appropriate to keep me from speaking.

Middlebury College. Last Wednesday, the day before the lecture was to occur, I got an email from Bill Burger, Vice President for Communications at Middlebury. The size and potential ferocity of the planned protests had escalated. We agreed to meet at the Middlebury Inn an hour before the lecture so that we could go over a contingency plan: In the event that the protesters in the lecture hall did not cease and desist after a reasonable period, Professor Stanger and I would repair to a room near the lecture hall where a video studio had been set up that would enable us to live-stream the lecture and take questions via Twitter.

Here's how it played out.

Mar

13

After reading by courts leave the investment outlook of the Upside Down Man:

Kids, you should know one thing more. There's a concept in economics called opportunity cost. It's how much you lost by not doing something rather than the thing you chose. It's the return on the alternate lucrative investment– the return on what you chose.

To be fair, I can't remember very far back possibly because of all the troubles I'm having with Mommy, the courts, my former partners, and lawyers I've been having lately. But I've been saying stay out of equities pretty continuously since at least 1988 I think. The dow was 2000 then. Certainly since 2009 when I said "death of equities" when the Dow was 6000. As you know, the Dow is 21,000 now. So the opportunity cost of following what I've just told you and what I've been saying is $10,000 to $3,500 for each $1000 that you have in your accounts.

There is a group from Chicago and a group from London that has been calculating what a 1000 invested in 1900 and held to the present would have yielded. They find that 1000 indexed about that time would have grown to about $40 million today. It's been about that much for most countries including the Scandinavian one where it would have been more, England about the same, Japan, a lot more. Except for China and Russia (taking these into account would lower the return to about 30 million.)

Ask yourself. Are conditions so much worse today than what they were in England 100 years ago. They were decimated by two world wars, lost their entire empire, and lost their position as king of the financial world among other things. What would these returns have been like if all countries were to have engaged in a pro business, low taxed, low regulation, reduced income transfer society like the current thing in the US today versus the opposite type of thinking that took over much of the world during the past 100 years.

There's a creepy guy in Connecticut that calls me the Upside Down Man, because I like to hang upside down during my 1 hour Yoga sessions. He invests his children's money in index funds like Spiders and Vanguard Mutual funds. And they've duplicated the returns of the Chicago and London guys. So far, following my advice would have been disastrous to you, and it probably cost trillions to those who followed my advice in the past because I am somewhat revered as a legend, and appear on TV often, and was known to be King of the bond market. So take my advice with a grain of salt.

Mar

13

The article "Seeking the Latest Fear Trade" on p. B2 of the weekend WSJ describes the efforts of volatility pioneer NYU Stern School Prof. Menachem Brenner to derive an actionable gauge of ambiguity, to complement VIX.

Ralph Vince writes: 

Fascinating stuff. I am searching for a cached copy. Think of the rich complexity of a listed product, the spreads and just mere sentiment expressions something like a listed product on such a creature would afford.

Mar

13

 Why can't people like Noah on the Knicks shoot more than 30% free throws, while making 15 big a year. He reminds me of Lenny from Of Mice and Men. Don't they pay free throw coaches in the NBA for their players making a minimum of 10 big a year? I know they practice free throws each day. My friend was manager at Coach K's teams at Duke. And he said Coach K used to make all the players shoot 10 free throws in a row or else they couldn't go home.

Jim Schatz, founder of the National Basketball Shooters Association, responds: 

Gosh, that's a long story but I'll try to be brief.

I forgot to mention the NBSA web site and membership has been inactive now since 2012 and I have been keeping it up in the hopes that some day I would be able to complete my mission. I direct two NBSA Championship format events, head to head competition, getting most of the top known shooters in October in Las Vegas and St. George Utah, every year since 2011.

I was able to form the NBSA with Chuck Leve's help. He was our original executive director. I wanted to improve shooting in game time and so did all the experts I was able to bring in as founders. My only mistake was not bring in enough money. Chuck left for a better offer three months later and he was the only one of the founders who understood what I was trying to do.

I was trying to set up basketball shooting events as a national sport and give expert instruction from the top NBSA ranked shooters who were also great teachers and coaches at all our events. Our core belief as a group was how can you teach free throw mastery if you can't demonstrate it.

Now to answer your question. The NBA is not really familiar with the mastery of shooting. Head coaches don't really know what to do because it's not their expertise and they do a lot of the hiring. There are many shooting coaches in the NBA that don't really know how to help. It's mostly friendships and seniority. The NBSA uses Noah Technology, www. noahbasketball.com among others technologies in our mastery of shooting instruction and the high school, college and pro teams that use this technology show the most improvement in shooting.

The real problem is the early instruction given to the kids. In basketball, the best players will have been coached by as many as 50 different coaches. It gets difficult to learn for some and eventually a player can adopt a negative picture of himself and that will unconsciously effect them.. It's also a mental shot so being able to relax at the line is paramount. Making shots is all based on confidence and that is developed in practice. There is a method to practice that works. It is not easy to come off the bench after sitting also. There is a term called "the drop off rate". That is the difference between your practice percentage and game time percentage. Players can drop off as much as 40-50% due to their inability to shoot with good fundamentals, a proven practice system and their inability to quiet the mind.

There is more but this is a good start.

Mar

13

My friend Jim Schatz, a raquetball player, started a free throw organization: "Dr. Tom Ambery shot 2750 free throws in a row at a gim, ending in a make, taking 12 hours to accomplish, stopping only because the gym was closing for the night". I repeat Joaquin Noah reminds one of Lenny from Of Mice and Men .

Mar

10

 I've taken many executive hobos on the rails around the country with all kinds of electronic gadgets, but this is the first journey that has been guided by mobile astrological devices.

Two Slab City women approached me with a wish to ride the fast freight…

'Anywhere!' they said.

The first hoboette is Breeze, a college grad from Massachusetts who ran cross-country and recently hiked the 2200-mile Appalachian trail. She boasts tattooed Popeye forearms from welding, and speaks poetry when she (rarely) talks. The second hoboette is a sister of the road from Michigan named Starr who is patching together a tapestry of alternative travel called, 'Hobo Culturenomics' in a series that has won Sundance and New York Film Festival awards . She was a five-sport champion in school, and resembles a Nile queen, regal and ebony at almost 6', with a photographic memory that law enforcement has offered to hire as a license plate reader (LPR).

Each tired of the American traditional treadmill in their hometowns, stuck out their thumbs on opposite sides of the country, and arrived independently a month ago at the mecca of meeting places in Slab City. Each was the fastest sprinter on her boys' track teams, and is still pretty enough to get away with it.

We drove in my Spark rental for two hours to the Colton RR Yard in San Bernardino, CA, which is a crew change yard and the portal for nearly all freights into and out of the greater Los Angeles.

We parked conveniently at the Arrowhead Hospital kitty-corner from the RR yard, and walked across the street to the Chevron station for liquids and snacks for a short trip. I got salted peanuts and V8 juice, while they, as vegans, shared lettuce and tomatoes. We stuffed ourselves and the 30-pound packs, as they chatted about fashion and astrology. They rolled their eyes when I said my sign was 'Feces'. With that, we slung our packs and walked out and up and over the Pepper Street Bridge, gazing like gods and goddesses over the Colton yard spreading toward the Pacific Ocean.

Like other classification yards around the country that build and break apart freight trains, this one is about five miles long, and shaped like a double ended funnel, with a breadth of about 40 tracks at its center, that dwindle to two main lines in and out each end. The west end is our hoboettes gateway into the grimy, greasy, noisy, exciting virgin territory under the Pepper Street Bridge. We crawled down the embankment and under the bridge at Colton Crossing.

We stood on the site of, in 1883, the most intense Frog War in railroad history. The crossing is the intersection for ATSF (now BNSF) and Southern Pacific (now Union Pacific) railroads. A frog is a switch at a junction to allow trains to pass one way or the other. At the 'Battle of the Crossing' citizens from Colton and San Bernadino gathered on each side of the tracks - San Bernadino residents on the north side and the citizens from Colton on the south – with the Southern Pacific locomotive between them.

Men on both sides carried, picks, shovels, sledgehammers, shotguns and revolvers. Virgil Earp stood in the gangway between the engine cab and tender facing the two mobs, his revolver in hand. California governor Robert Waterman posed on the cowcatcher between Earp and the mob, ordering the group to clear for the passage of the locomotive, and instructing Earp that if he made any move with his six-shooter, that his San Bernadino Sheriff and deputies were authorized to shoot. Tensions rose, and one of the bloodiest battles since Earp's Tombstone Shootout was sidetracked when Earp realized that further resistance was hopeless and would cause bloodshed. He holstered his weapon, and ordered the engineer to move the locomotive forward.

A hundred trains now use the crossing daily, where the two Hoboettes and I huddled near the frog for pre-game instructions.

I told them to keep their lights handy, dreadlocks bunned up under caps, double lace shoes, and secure every valuable. The blonde whispered to the other.

'I don't wear underwear.'

'Then pull out the bra.'

The blonde shrugged, and yanked a bra from her pack, raised her shirt, and strapped it on. Then she slipped her wallet and cell phone into the spare spaces.

Two huffing locomotives stood at ready, coupled to mile-long strings of cars, at 100 yards to the west, and shook the earth. We looped through the brush around the locomotives for 20 minutes to the midpoint of one of the freights. It whistled cannonball! and departed as we approached, and so we boarded the train on the adjacent track. Suddenly those engines 'dynamited' or separated from the string of cars, and left likely to fetch more.

So we crawled over five more sets of parked parallel iron strings, up and down ladders on each, until coming to another made-up- train ready for departure. Its engines rumbled a half-mile at the front end, diesel smoke drifted over us on an eastbound zephyr, and an electrical ticking from car-to-car along the entire line checking for connections cued an imminent departure. We climbed and hunkered in a box car … waiting … for 30 minutes. Unexpectedly, two yard workers screeched to a stop on the ballast on either side of the track, and the one on the right boomed, 'We seen your legs (under the cars)!'

'But they disappeared while you was walkin!' chimed his partner.

'We found you!' they tweeted like Tweedledum and Tweedledee. The girls cringed in horror at the twin bearded apparitions. However, one of the workers offered a 12-pack of Danone mineral water, and the other some dry advice that would change our astrological journey, 'Go to the main rail, and get on that BNSF fixin' to pull out.'

'What's your sign?' asked the blonde.

'Virgo,' they replied in unison.

'I knew it,' joined Starr. 'I attract Virgos.'

Eager in their beliefs, they leapt like superwomen over four strings on parallel tracks to the main line, so that I next saw aboard a curved-side hopper on the BNSF train. The curves indicate 8'x12' steel verandas at either end with a portal to a hobo hotel room the size of a pup tent, that is equipped with a bathroom hole in the car infrastructure over the ties.

A quarter-mile ahead, four red-and-black BNSF engines grumbled, wheels pawing the ties, for two minutes. The brakes released a whoosh, and the train lurched toward our destination.

A hobo never knows where he's rolling. The hoboettes seem satisfied with this. We slid under the Pepper Street Bridge, bent north at the Colton Crossing, and rode into the night. The girls bucked a chilly March wind, for a while naming the constellations, and then curled up in their sleeping bags, as I watched moonlight disappear under the 4' steel wheels.

No one could figure out if it was the sunrise or the stop of the wheels that awoke us the next morning. The locomotives abruptly dynamited off the freight, and since I had allowed the hobo faux pas of suggesting that everyone remove his shoes, we couldn't chase the locomotives to catch the continuing train. We were 'put out to the farm', as hobos say.

'First things first,' yawned the black-haired girl, pulling her Smartphone from her underwear. 'We're in Santa Fe Springs of north Los Angeles,' she said, keying the pad. 'And my online astrologer says that it's reasonable and permissible to exploit the past. We know what to do and how to do it.'

With that, the blonde offered, I hear freeway traffic.'

We had been set off on a spur track in an industrial park, and so any direction would be progress. 'Let's go!.' I agreed.

'We jetted toward the highway noise, and in minutes were also listening to the patter of rain on the brims of our hats like the sound of 'A Hobo Don't Mind a Little Rain', until it started to pour. We asked a Good Samaritan for directions to the Metro-link that floats light trains on the same tracks that the big locomotives travel. Soon a light rail whisked us to Union Station in downtown LA where a Chinese Lantern Festival was underway under sunnier skies. We caught another light rail out to San Bernadino, and then a local bus back to square one at the Colton RR Yard.

The athletic hoboettes were effervescent, and spun pirouettes, skipped and strutted across the hospital parking lot to the car. They were baptized hoboettes, and would ride the rail again.

Mar

10

Landlords and hotel chains hate Airbnb; taxi and limousine services hate Uber and Lyft, and today we saw that the SEC is hostile to Bitcoin.

Thank goodness they're there to protect us from the ravages of these fiendish innovations, wholly unrelated to their constituencies.

Mar

10

"Sneaky beetles evolved disguise to look like ants, then eat them"

Mar

10

 Benjamin Peters (Old Hutch) Hutchinson was a legendary wheat speculator at the Board of Trade. At one time he was worth 10 million dollars. A few bad trades later, failed corners etc, he was forced to sell his seat for $900. A year before his debacle, he wrote a very compelling article describing the virtues and benefits of speculation.

Old Hutch's piece reminds me of the Chair's elegant "Speculator as a Hero" written for the WSJ back in the 80s. While the old man's article is a bit dated(1891), it's still a good appetizer for the elusive meal of a lifetime. Much more detail on the life of Hutchinson here. Beyond his personal biograph, some of this details the lot of old, broken down speculators. All in all, there is some excellent material here……One agrees with the Chair that most of the good works on markets and speculation were written over 100 years ago.

Old Hutch's 7 page article showed that he had a very clear grasp of the market. One wonders if hubris is what took him down. One can only speculate.

Mar

10

 I sent this to my politically opposite progeny:

Who can guess why the creekbeds on the upper right don't continue toward the lower left, and some appear displaced?

One answered "Obama" and the other "Moonbeam".

I wrote back:

OK X came closest and Y gets 2nd place.

The diagonal line going from lower right to upper left is the San Andreas fault, a hundred miles from here in San Luis Obispo county. As you can see, the dry creekbeds end abruptly at the fault - and some even jog up and left after meeting the fault. This is because the left (West) side is the Pacific plate, and the right (East) side is the North American plate, and the Pacific plate is moving northward past the NA plate. Over thousands of years, the creek beds to the West of the fault shift North. Water run-off runs down the creek beds until intersecting the fault, and there either follows the fault or goes underground - because the bedrock is pulverized along the fault. You can see how some of the older beds (more eroded) used to line up but are now displaced.

There is evidence that much of the movement occurs during large earthquakes. Recently there was a study indicating there are very large earthquakes along the San Andreas about every 100 years (very large = 10-100X Northridge energy). The last big one along the southern portion of the fault was the Ft Tejon earthquake of 1857…160 years ago. ie, we're overdue (with the caveat that it could be decades or even another 100 years, though the longest interval they found was 200y):

Why are your politically correct answers correct? Because politicians are attracted to self-aggrandizing emblematic issues, while neglecting critical infrastructure needs. There should be many structural upgrades to roads, buildings, power, etc to better prepare for the big one. And of course the recent California drought will continue - despite record rainfall in parts of the state - because 92% of the runoff is lost as there aren't enough good reservoirs. It is more important to protect the delta smelt than farmers (so we can buy produce from Mexico where they only protect drug kingpins), build a bullet train from Fresno to Modesto, save the planet from global warming (even though man's contribution is uncertain), and squander taxpayer dollars to fight the feds for the right to hoard illegal immigrants.

Mar

10

In less than a year and a half we will be into another political campaign. The odds do not favor the Democrats. They will have 25 Senate seats on state ballots; the Republicans will have only 9. Only 1 Republican is running for re-election in a state that Mrs. Clinton won (Heller in Nevada); 10 Democrats are on the ballot in states that Trump won (Nelson-FL, Donnelly-IN, McCaskill-MO, Brown-OH, Stabenow-MI, Tester-MT, Heitkamp-ND,Casey-PA, Manchin-WV, Baldwin-WI).

Mar

10

 After 20 years, my trusty Ford Explorer bit the dust. The Mrs had been on my case for years to get rid of this beater, but I loved it. It was very reliable, and great for hauling stuff as well as scaring patients at the office.

At first I was going to replace it with a used SUV because of the 20% loss you incur driving a new car off the lot. But searching the web I actually found better deals for new SUVs than low mile used.

I wound up with a new 2017 Chevy Tahoe LS. It is about 15% bigger than my departed Explorer, and much more. It is a computer wrapped in a vehicle. Even though it is the low-option model, the Tahoe is loaded with technology. Better safety features include backup video with virtual car position, too close sensor, and braking assist when a too-slow vehicle is detected ahead. The stereo fidelity is excellent, and there are many communication features. Fuel economy is not much worse than the Explorer (the V8 goes V4 with lower load demand, and the big lug gets 23 mpg highway).

The Tahoe has OnStar, with satellite internet and a WiFi hub. This links to your smart phone to allow voice-recognition hands-free calling, navigation, and emergency services. In lieu of OnStar (free period ends in 3mo), I use the "Android Auto" app. The phone links to the console via USB or Bluetooth, and Google maps (with traffic, directions, etc) are projected to the video console. (With both systems you converse with a female robot. Mrs OnStar sounds older and kinder than Ms Google, who seems a bit shrill and abrupt. Right away I could tell spot the liberal)

In 1997 I paid $32,664 including tax and license fees for the Explorer. I plugged this into BLS CPI calculator, and with inflation this becomes $49,420 in 2017.

Remarkably the bigger/better/more advanced Tahoe was $48,088 out the door.

Besides being a beater, the other advantage of the Explorer was that the government (CIA, NSA, KGB, Google, etc) never knew where I was. Initially I took comfort knowing I never do anything that should upset the government, until recalling this was the same though Jews in Zimbabwe had before Mugabe.

Mar

9

There are 2 basic reasons that "modern" portfolio theory is no longer "modern". While the basic idea is still golden, diversity lowers risk.

First, there has been an explosion of asset classes in which one can diversify into, which are traded. However, the data on these classes are not long enough to have stood the test of time. For example do high yield bonds diversify or are they simply a mix of bond risk and equity risk with liquidity risk thrown in?

Second there has been an explosion of ways to game the model to make the manager appear to have added Alpha, but really has loaded up on some other risk not measured in the model, like liquidity risk (real estate for example) or model risk (MBS for example) or simply taking other risk besides measurable volatility risk. When the MPT is taken as gospel it often is taken to extremes leaving one vulnerable to misinterpretation, like any other scripture, one should beware of those claiming to help one understand that scriptures fine points, especially when money is involved.

Ralph Vince writes: 

I think there's a bigger question here, and that is, why hasn't MPT been applied to other similar processes (as that of the equity curve of a trader in capital markets or gambler) in the natural world.

This is the question I find most baffling — why, 75 years later (at least with regards to the Markowitz subset or geodesic) are the models floundering solely in these equity curve style exercises. There are more exercises and more important exercises where this can and by now, ought be applied to, specifically exercises in the natural world with respect to many things — some of which I have mentioned here in the past such as deficit reduction sans tax hikes or budgetary cuts, chemotherapy or other pharmacological dosing, spread of pathogens, etc. etc. any growth-feedback function wherein we seek to diminish growth in the natural world.

Given that MPT resides in the Leverage Space Manifold, and that each axis along each dimension in that manifold (minus 1) varies in the domain 0..1 representing, in the exercises we are more familiar with, the percent of stake being risked on that component, MPT itself, at 75 years old could, conceivably, be applied to such growth-diminishing exercises. The axes which each range from 0..1 in value can be transposed to reflect the cosine of the variance to the mean growth of the data used for that axes. Thus, any growth-feedback function can be mapped to the Leverage Space Manifold, and in turn, mapped to Markowitz's Efficient Frontier (the geodesic) provided the variance can be altered by human intervention (such as dosings, national debt accumulation rates, etc. there are some functions, like Sir Ronald Fisher's fundamental theorem of natural selection, which states, "The rate of increase in fitness of any organism at any time is equal to its genetic variance in fitness at that time," maps to this model even though we are not seeking to tweak an organisms genetic fitness).

And yet, dosages are not considered under such a model (and contemporary medicine itself stands accused of dosing in manners opposite those which this model might often suggest) , deficits continue amidst a seemingly intractable tug-of-war between budgetary cuts vs. increased taxes, and all of these can be addressed, improved, through the implementation of some relatively simple mathematics. There are ample meals here and research ideas.

The tragedy of MPT, and more generally (and to me, personally), the hyaline manifold of leverage space, is not that it is not seeing full employment in financial markets, but that it is not being used for beneficial ends in other physical and social sciences.

I'll shut up about it now.

Orson Terrill writes: 

"The tragedy of MPT, and more generally (and to me, personally), the hyaline manifold of leverage space, is not that it is not seeing full employment in financial markets, but that it is not being used for beneficial ends in other physical and social sciences." Could you elaborate on this?

Ralph Vince writes: 

We have a manifold of N+1 dimensions where N is any seperate set of outcomes affecting what we are observing (these could be individual stocks in a portfolio, or anything else for that matter) and bound in each dimension between {0,1} (or whatever scale you care to provide, where we scale it to {0,1}).

The N+1th dimension is the growth (after Q trials, or Q elapsed periods, Q{0, infinity} at each value for each of the N dimensions, and thuse gives as an N+1 dimensional "surface" in this manifold.

You look inside this manifold and you see some very interesting contours on the surface across it's field bound by each axis, but also as these contours chage with respect to Q. Tht's a description of the thing but here is what it does. In the context of capital markets, any portfolio construction mechanism (e.g. MPT, CAPM, portfolio insurance and levered ETF constructions, etc.) or "staking system" (e.g. Kelly, antimartinglae, "never risk more than 2% on a trade," etc") map to this surface in ths clear manifold. And from that, given the "chronomorphic" character of the curve (i.e. that it changes as Q gets larger) we can see the effects of these different applications in a manner bigger than the aplication itself. For example, we can see the effect of implementing MPT upon the countour of ths surface, and the benefit of this is that the counters, these geometrically significant points, give us information about our actions and how we might amend them to vastly improve what we seek to acheive, our "criteria." (Absent criteria, we are looking inside of a glass box, mouth agape, like Piltdown man - it is of no use to us despite the fact that all models map to the surface in this manifold).

Here is where there are great insights to be had in my opinion. Each axis, which, in caital markets orgambling parlance represents a percentage of risk, can also be mapped to the cosine of the mean outcome and standard deviation of outcomes of the sample used to construct inputs along that axis. Thus, for any growth function, we can look at what occurs with it with respect to changes mean or standard deviation (see the previous post re: Fisher's Fundaental Theorem) but far more beneficially, if we can affect the mean or standard deviation (as, say, with a nation's period-on-period borrowings, or biological growth rates) we can affect these systems in manners not yet even attempted (or perhaps dreamed of). For example, along the countour of the surface, along every axis, as we move towards 1, there is a point where the grwoth rate drops below 1. Always. This means there is a point, along any axis, where the aggregate growth rate at those values, insures the entire system cannibalizes itself (multiplying an account by a number less than 1 with each passing period, each increase in Q, and the account value approaches 0).

To the notion of MPT, it means that regardless of how may components you have in your portfolio, it takes only one component whose allocation is too high, regardless of he allocations to all others, to insure ruin.

In the natural sciences or other matters where we wish to diminish growth, or affect it in manners opposite those which our criteria call for in capital markets applications, the principles hold again. Any growth rate that has variance in it's growth or where variance may be induced, maps to the surface of this hyaline manifold, and the implications of where we are on that surface and its counters apply. If we can affect the mean and/or variance, we can position ourselves wherever we want on that surface and achieve whatever criteria we seek. If you are near Kalamazoo, Michigan on Thursday, I have to go there and speak about this at Western Michigan University and it is open to anyone.

Stef Estebiza writes:

I'm not sure I understand, but it seems you need a main manifold, for controlling, managing, the overall view, but also serves an independent process for each component of the mainfold, to handle exceptions, those situations where, contrary to the "market efficiency", a market, apparently in "harmony" that responds in a way related, to rule connected, it disconnects (singles part of it) … and every process must be able to manage themselves, monitored, to not degrade the performance of the "mainfold". to understand each other, regardless of the relationship, if a process is disconnected from reality (manifold idea), degrading the overall performance, it must be disconnected (you must atoscollegare) or managed (inverse relationship), or avoided, until he "recovers". .. the main manifold must provide the general idea of what you would like … but if the process is irrational and responsive to subjective rules, then any subjective process must have its own mainfold, "object", which defines the rules of the single object, and may depend on the general idea (mainfold). the main mainfold can provide the basic idea, the limits, but in reality, each "object" must be able to log out( or reverse) to prevent damage to the main idea(mainfold). especially in situations like this, where economic policies and "latency" in fiscal policy can fully determine "new situations", unforeseen, not covered by our "manifold".  

Russ Sears writes: 

If I am following the logic of Stef and Ralph correctly, I would add that if there is a space where the overall market is not aware of or such as a "new market" and one inputs this new market's data into the fixed system one finds an arbitrage advantage. If however, this new market and arbitrage is discovered by all using a similar fixed system, the market will form a "bubble" and hence is headed for ruin. A lack of dynamic inputs into a dynamic system can be worse than no system at all. Such is what appears to have happened with sub-prime loans. One of the biggest problems with the current stress testing system in my opinion is that one must "disclose" any relevant changes to your stress testing model. The regulators look at these disclosure more as an admission of bad modeling or model "error" than as a necessary part of a modeling system. Hence the modelers are not going to do this unless forced to.

Orson Terrill writes: 

Ralph, thank you for the expansive explanation. So, you feel that your work with the Leverage Space Model offers optimization beyond what portfolio managers are currently using? What is the hold back, learning costs?

Is there a video of your talk?

Ralph Vince responds: 

Orson, I'm afraid there's no video. Widespread acceptance is at least a generation away, and I see many depts now teaching it, their professor's sold on it. People remember what their nsteuctora believe and tend to accept it.

Most of the work in this manifold and what is going on in there at this point has not been done by me but quite a few academic others. I try to keep a repository of what they VW written on my website under
*related papers." Zhu and Maier-Ppaape are working now on the most amazing capital market applications of it and will likely publish it in the next year or three. I can understand the concepts…The actual symbol legardemain far beyond me

Mar

6

 Here's an alternate view of the Monte Walsh movie which I consider a loathsome comedy whereas the story is really a tragedy and the best business novel of all time.

Stefan Jovanovich writes: 

In the preface to the 1980 edition of the novel, Schaefer wrote: "among our nearest New Mexican neighbours was a young man named Archie West who to my mind was (and still is) in many respects, certainly in appearance and temperament and cattle-country capability and simple human decency, precisely my Monte Walsh."

An interviewer claims that the author's favorite was The Canyon (1953), "in which the protagonist is a lone Cheyenne warrior, Little Bear, who opposes war and must take his stand between the customs of his tribe, nature, and the necessity of community."

Mar

6

 1. There is more wisdom in the Ticker Magazine of 1907 and 1908 than in all the investment books and magazine in the last 110 years combined. Why?

2. The new guard of bond traders at Pimco is a credit to our profession and their attention to detail in the prospectuses and their emphasis on contrary trading has a pleasant resonance to our own inestimable and dearly departed Mr. E.

3. Every day the market swoons on some contrived piece of news to make the president look bad and create fear and churning and then closes the day at a new high. 64 of the last 293 days since year end 2015 the spu closed at a 20 day hi. Since year end 2008, its 489 out of last 2097 that closed at a 20 day high. It is a testimony to the wisdom of the triumphal trio and our own Williams and Vince.

3b. A 6' 11 inch giant who played for the Knicks and whose father could have a better + - record than the son, is not content to stay disabled and wishes to come back reminiscent in my opinion of Lenny in Of Mice and Men.

4. The three best books on investment are Bacon, Green and Tarbeaux but they are all only 90 years old rather than the usual hundred that the Markman edition of Reminiscences is also highly recommended.

5. A simulation of seasonalities in markets shows that there is a non-random seasonality in the bond market but not in stocks or gold I think.

6. When one has a very good hand in poker there is a very much elevated chance that another player has an excellent hand also. This of course is not random but a result of sampling without replacement. However in markets, runs of unusual moves in one market are often followed by runs of unusual moves in another market and this is a non-random regularity. For example, there were 5 red days in a row in Feb, 2017 and they were followed by 5 yellow days in a row.

7. The moves in the German Bunds often foretells the moves in the US bonds. The precious metals takes big positive moves to an inordinate degree around holidays and big announcement days.

8. The bonds like like it when the dollar is up, and the stocks like it when the dollar is down.

9. The ratio of the dax to the S&P stays remarkably close to 5 over time.

10. The stocks to bond ratio at 16 is at an all time high.

11. All news that is favorable to the current administration will be suppressed and all news that is unfavorable will be emphasized.

12. I challenge anyone to read the chapter in Monte Walsh on accounting for cattle profits and the race between the horse riders and the train without crying.

13. Any movie that wins a major academy award will of necessity treat business in a highly unfavorable way and lionize people of color, and will contain indirect negative references to Bush and Reagan to show that they are fellow travelers. 

14. The dominatrix beginning and end of the first episode of billions is very dramatic and realistic, but the fight between the agency in Washington and the NY state federal attorney seems contrived as is Axelrod's ability to spot block trades and take short positions based therein. Anyone who shorts stocks that are inside acquisition targets is likely to have a negative return much greater in absolute value than the triumphal trio's results.

Julian Rowberry writes:

A comment on point number 6 about poker: Interestingly this can work both ways as we break down a problem.

If we take a hand of poker, the decisions made during a hand over the flop, turn and river will reduce ranges (possibilities of different hands people can have) players have, i.e. folding bad ranges, continuing with strong ones. Resulting in stronger ranges as we approach the end.

But sampling without replacement will decrease the odds of another player having an excellent hand. If I have 2 hearts in my hand on a board that has made a flush, that is 2 hearts that no one else can have. Which by the end of the hand, where ranges are significantly reduced, there is a very much elevated chance an opponent won't have a flush. When bluffing, in this situation it's good to have one heart, thereby reducing the possible flush combinations opponents can have.

Maybe there's an opportunity with similar behaviour in bonds & stocks? I don't know.

Where a more detailed look involves some behaviour that opposes the stronger over riding behaviour. The stronger overriding behaviour is often more well known and understood. Making hard to remove the ideas out of the boxes we have put them in and think of them differently. Group think markets seem ripe for this type of oversight.

Victor Niederhoffer writes: 

Thanks for your erudite answer. Presumably when you have 4 of a kind, the chances that the opponent will have 4 of a kind are improved. There is also the chance that your opponent has stacked the deck. Much too often it seems one has a full house and the opponent has 4 of a kind?

Julian Rowberry responds:

Tricky question, like a lot of things, it depends. Ignoring stacked decks and rake, there is no one size fits all answer. I can give a general answer of why strong hands clashing appears to happen often. ANd much more often than optimal.

The nature of most poker games, we have pros versus 'recreational' or 'fun' players' (that's the modern PC term for fish, sucker, donkey or mark!).

In general, Pros when playing recreational players are are going to fold vastly more than optimally with their weaker holdings early on in the hand. Recreational players are going to continue on in hands vastly more than optimally with their weaker holdings.

This continuation increases the combinations of hands the weaker player can have towards the end. Which increases the combinations of 2nd, 3rd, 4th best hands for the weaker player against a increased combinations of 1st best hands for the pro. So the result is we see more strong holdings versus strong holdings showdowns. Where inevitably the pro wins what's left, if anything, after rake in the long run.

If two pros played each other, it is much rarer to have very strong showdowns from each player.

Orson Terrill comments: 

It seems that if you sample without replacement from a disordered arrangement of a well ordered system, and you draw a well ordered hand, then you leave a more ordered system on deck as a result.

The complement of order is not disorder.

I've played poker less than 5 times, but if the combined hands of the prior game were well ordered cards of lower value, and I received a well ordered high value hand, the assumption would be that the same situation for my opponents is even more likely.
 

Mar

5

 Like all movies that win an Oscar, Manchester by the Sea was very anti business. The funeral director was a fraud and tried to exploit them. They showed Joe's boss exploiting him by keeping all the money his plumbers should have shared in and working him beyond the law. Middle class women of non-color behaved depraved with the lower class janitor. There was so much funeral stuff in the movie and a wishy washy conclusion.

Gregory Van Kipnis writes: 

The anti-business elements are just incidental trite caricatures. This story is about the consequences of guilt in the tradition of Dickens and Dostoevsky. The bigger point than the slice of life details of people gaming each other (trite caricatures), is that he wanted to be exploited and he didn't care to be liked anymore. His willingness was born out of unshakable guilt. Drugs and alcohol caused him to let go of his normal commonsense precautions. He screwed up and he realized it. Despite being mush-headed from the excesses earlier that night he chose to not go back and double check the replacement of the fireplace screen. That overwhelming guilt destroyed his life and his desire to have relationships. At one moment he wanted to kill himself then he shifted and chose to live out life time of self imposed punishment.


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