May - 2015
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 S&P +22.70
 USB -1.31
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May

23

 1. Germany is a semiconductor that expands energy in other markets in the East and West.

2. The Upside Down Man and the 100 Million Man, formerly his partner before and after Harvard, talk a much better game than they play. The more bearish they are for stocks, the more bullish it is.

3. The more the media feature startling bearish forecasts, the more bullish it is.

4. The cobweb theorem holds for all markets.

5. the low vol in the stock market during recent days can't continue because the public would not lose enough if it continues.

6. Sales growth is much less important for stocks than profit growth.

7. The agrarian reformers at the Central Banks will not allow cattle trading operatives to recede.

8. The leaks in Brussels to hedge funds were rampant and premontory. They will arabesque to other forms now that early release to the media of the transcripts has been curtailed. The good one knows how it plays out in other countries.

May

23

 This coming Monday is Memorial Day. That means different things to different people. For me, it will be my mother's yahrzeit, as well as remembering those whose efforts provided the cover under which the USA lives. But it also means the running of the Indy 500. And switching to the summer comforters. For one of my neighbors, it's setting up the outside grill for the summer—which he does after visiting his brother's grave (he died in Vietnam) at the national cemetery up the road. I'm sure there are lots of similar activities at one another's homes. Some many no longer give much thought to those whose deeds provide that cover, to those who sacrifice assured that we may live under it. But they should.

A couple of years back, Tim Melvin penned a piece that encapsulates the meaning—for at least some of us—of the day. (It will be reposted below)

It is one of the more eloquent expositions of the holiday.

Stefan Jovanovich comments: 

 First of all, it was not Memorial Day. It was Decoration Day; the particular day on which the public would officially do what people regularly did on their own–go to the cemetery and put flowers on the graves of the departed. And it was a Sunday, not a Monday.

Second of all, how does anyone presume to speak for the dead in war? That is the sickest of all sick jokes. If you are lucky/skillful enough to survive one, the one thing you know is that medals for the living are pure vanity; and Grant was–as with so many things– right: parades are only tolerable if they are parties where you throw ticker tape out the windows (ticker tape, windows?) and can make noise in praise of the living. For the dead there should only be flowers, no speeches.

FWIW, the first decoration day was on May 1, 1865 in Charleston, SC. It was held in honor of the Union soldiers who had been held and died as prisoners of war and buried in a common grave. After the Federals occupied Charleston, one of the first things they did was give each of the soldiers' remains its own individual burial and marker. In gratitude for their liberation the Negroes in Charleston built a fence around the new burial ground and an arch over the carriage entrance. The "Union" cemetery was opened that May Day; according to the newspaper reports ten thousand people came to walk among the graves and put flowers on them. (This is what David Blight of the Rocky Ghostly Academy concludes from his research into the subject.)

For "Memorial Day" and this bathetic dishonesty, we have to wait for World War I and segregated mourning.

At least baseball still does it right; people simply stand in silence for a moment, as they did when they remembered Christy Mathewson, a casualty of that truly awful war.

May

23

 David Lillienfeld writes:

Last year, Tim Melvin posted a classic piece about Memorial Day. It brought me to tears then, and it did so this morning when I went through it again. It is some of the most eloquent writing I have seen about Memorial Day, and it's a shame that it hasn't received more notice outside of this site than it has to date—it certainly merits it.

Tim Melvin writes:

They call to you this weekend. From Flanders Field, from Normandy, Khe San, Gettysburg, Concord and Lexington, the Chosin Reservoir, from the hull of the Arizona, and from all the hundreds of thousands of resting places marked and unmarked they call to you. The call to you from the depths of the Pacific and the jungle of Asia, from the deserts of the American Southwest, from the fields and cities of Europe, from Cuba, from around the world they call you with a request this weekend. Remember me.

Remember who I was and the hopes and dreams I willingly laid upon the altar of the great American experiment. Remember that like you I was once flesh and blood and I gave that up to secure a portion of the American Dream and secure essential liberties at home and even for people around the world. You may not have agreed with the rational for some of the conflicts we have ensnared ourselves in over the centuries and I am not even sure I fully understood it. But our nation called and I answered. Liberty carries a price tag and I paid it for you. Remember me.

War is an idiotic human endeavor and I wish we never had to go engage in such a wasteful exercise. But at times throughout history it has been necessary for good men to take up arms to secure our freedom from tyranny and defends ourselves against expressions of pure evil and hatred. When such times have arisen I have taken arms and defended the freedom and liberty in which I believed and for which all humanity years. Remember me.

Do not remember me with tears and sadness. Pray solemnly and shed tears if you must but that it is not my preference. Remember me in a violent celebration of all that is America. Take your families to the seashore and frolic as man has done since we merged from the sea. Go out on your boats and go as fast as you can over the waves with the winds of a free land and a free people blowing back your hair. Fire up your grill and invite the neighbors up for food, drink and laughter. This is why I laid down my life. Not so you would cry for me but so you could enjoy your life and your family, your loved ones and friends. Remember me in the laughter and joy of being alive.

Hear me in the sound of loud music coming from a dock bar. Hear me in the growling of a stock car engine taking a green flag or the whine of Indy car hitting 200 mph on the backstretch. Hear me in the laughter of a child skipping in the surf or running through the sprinkler in the back yard. Hear me in the chatter of friends around a BBQ pit. Hear me in the swell of an orchestral pop concert on a wide meadow as the sun settle over the land. In all the joyous raucous noises of being alive, hear me and remember me.

 See me in the flag unwinding in the breeze. See me on the baseball diamond, the soccer pitch the basketball court. See me at the bar with my friends raining a glass to good times gone by and still to come. See me in the smile of your wife, your girlfriend or male equivalent thereof. See me in the hammock beneath the tree taking a slow summer nap. See me in all the moments and times of that make life special. See me and remember me.

Remember me best in living well. Think of me when you are passing around the steaks and steamed crabs. Remember me as you sip the cold gin and tonic in a sweaty solo cup under a shade tree. Think of me in the fisszt of a beer bottle opening, the fizzing of soda pop in a glass, the shaking of a martini, the pop of a cork, and the tinkle of ice. Remember me in the sounds of the party of life.

I do not want you to remember me in solemn sweaty ceremonies and pompous parades of politicians. You do not need to go to the cemetery to remember me for I am not there. I am at the beach, the ballgame and in the backyard. I am at the lake, on the boat and fishing on the riverbank. Do not remember me simply because I died. Forgetting to duck or being ordered to charge impregnable positions is a crappy legacy if you ask me. Remember me because I lived and I died protecting your right and ability to live and experience all the joys and madness that is life.

I am not merely a dead soldier who died in the service of his country. I am all the things that were made possible by freedom gained and protected. I am Mark Twain, William Faulkner and Hunter Thompson and all the words written by the geniuses spawned in the America. I am the music spawned among a free and talented people. I am Robert Johnson, Miles Davis Liberace and Ted Nugent. I'm all the great scientists and inventors that have graced this land. I am Edison, I am Feynman and I am Ford. I am all the great athletes born in the towns and cities of this nation. I am Mantle. I am Unitas. I am Jesse Owens and Jim Thorpe. I am every greatness achieved by this nation born in a sea of blood and protected by rivers of it over centuries. Do not mourn me for the time has past for that, but remember me.

Remember me for I am also the future of this great nation I died to build. Remember me as you live, as you build as you work and as your create. Remember me as youprotect my legacy from the charlatans, thieves and idiots who make up our political class. Remember me when you refuse to cede personal liberties I died for to those who have good intentions and bad ideas. Remember me when you take chances and reach for your dreams and ideal. Remember me when you refuse to participate in limiting freedom or opportunity based on skin color, sexual preference or genital make up. Remember me when you dream, when you achieve and when you celebrate. These are things for which I died and for which I would be remembered.

My voice calls to you today. Life, love, laugh dream, build achieve. Do this in remembrance of me.

Happy Memorial Day. Remember me.

Stefan Jovanovich writes: 

 Memorial Day used to be Decoration Day — the day when the graves of soldiers were draped in flags — and there was no official Federal date. In Gettysburg it was held on November 19, the day the cemetery was dedicated. In the South it was on various dates in the Spring. It was never, ever a day for speeches until the official South decided that the soldiers graves should be part of a general uprising to justify the Rebellion — the same political movement that gave us official segregation; at that same time - the late 1880s — the states began legislating official holidays for Decoration Day, they also made Jefferson Davis' birthday a state holiday. What we now observe dates only from WW II, and the date itself was fixed in the 1960s. It is strictly a Cold War ritual that has been revived for the war against unspecified terrors.

I hope Tim finds an equilibrium somewhere between thinking that everyone who ever died in uniform as a hero and believing war is everywhere and always to be considered the worst of all things. I hope everyone enjoys the ceremonies today. If I don't, it is not out of disrespect for what people have done. I don't like official remembrances for the same reason Grant hated parades; they tend, by their very nature, to be organized lies.

They allow the people in the reviewing stands to preen and they present a picture of order that is the very last thing that wars ever are.

The truth is that some wars are worth their awfulness and some are completely stupid. The people best qualified to judge are the ones who have done the fighting; as with so many other things in life, those who know the most are the very ones who don't say much. There are exceptions, like Professor Sledge:

"War is brutish, inglorious, and a terrible waste… The only redeeming factors were my comrades' incredible bravery and their devotion to each other. Marine Corps training taught us to kill efficiently and to try to survive. But it also taught us loyalty to each other - and love. That espirit de corps sustained us."

"Until the millennium arrives and countries cease trying to enslave others, it will be necessary to accept one's responsibilities and be willing to make sacrifices for one's country - as my comrades did."

anonymous comments: 

I differ…greatly.

I preface by saying I have not served in the services nor in a war.

Yet I've known many…young, naive or foolish men who have answered the call. Many didn't believe in the cause and thought their superiors to be idiots. Yet they stayed and fought. I respect and remember that loyalty, and buy dinner or drinks for them and their family when I come into contact with them. I do it out if loyalty and not guilt. They upheld their end of the bargain. The least I can do is acknowledge them.

These are not the she-men that appear to surround me, those who talk about shat should be done yet are never there to do it. They have loyalty to no one.

There are pieces meant to rouse the animal spirits and conscripted ranks. I felt Tim's piece wasn't a call to enlist as other pieces.

The generation of Vietnam castigated those who were drafted and required to fight. That double bind or catch-22 has always bothered me. There's a similar thinking in DC now, where you are encouraged to break laws and obey them simultaneously.

One if the primary social contracts is to take care of your own. Tim's piece echoed that sentiment. The Chair demonstrates it too, as do many on the list.

In the Catholic Church, there are many celebrations of saints. I have learned, not having been raised Catholic, that many saints were far from perfect. There was a similar idea in his piece. Monday isn't a celebration of personal perfection or success in war. As Tim writes, it is recalling the guy who once sat in the empty chair at our table.

Semper Fi et Ductus Exemplo. 

Ralph Vince writes: 

There is nothing more inadvertently dangerous than a young man.

There is nothing more potentially vicious than a woman on her own.

One must tread carefully around these. 

May

23

 It is common in athletic events for the sagametricians to say at certain points, things like "the home team has won 87% of their games when ahead by 2 or more run in the seventh inning." Or "the bigs have gone on to win 92% of their 7 game series when they win the first two".

Most of these utterances are completely consistent with randomness. But the question emerges: is there a time in the market when the scales are taken out and Zeus decides whether Achilles or Hector will win the battle based on the calculations from his sexy partners or even his own volition. I would hypothesize that 1:30 pm Eastern Standard is the key hour where the scale is tipped and the market decides whether to head further up or down.

David Hillman comments: 

Exactly the hour when our dear departed Ed's 'big boys' return from lunch sated by filet or dover sole and are deciding if they will dine with their sexy partners that evening at Daniel or take them to Nathan's for a full dress dog. No more testing of the hypothesis seems required.

May

23

This is a meta analysis of twin studies. 14,558,903 twin pairs! This should settle degree of heritability (at least for those who believe in science).

May

22

 Vanderbilt used to cross at slack tide. There appears to be no slack tide in Europe:

"Schaeuble Said to Raise Possibility of Greek Parallel Currency"

Stefan Jovanovich writes: 

Vanderbilt sold the last of his steamships in 1864; like the Greek shipowners (Onassis et. al.) whose fortunes got going after WW II using the money paid by the British government in war damage compensation, most of the sales proceeds for Vanderbilt came from the public purse. That was the money he used to buy and build what later became known as the New York Central. The Commodore would have agreed with John about the tides in Europe; for him there was only one currency - gold coin. The arbitrage between greenbacks, Treasury bonds - redeemable and non-redeemable, and coin were the Commodore's first serious speculations in the market (as opposed to the largely private battles for control of the feeder Boston railroads to the Long Island sound that were the source of his steamboat passenger traffic). Then, as now, FX was THE GAME.

May

22

 When the Bank of England "suspended" during the Napoleonic Wars, it had not run out of gold; and it did not stop paying out gold and silver coin based on their relationship to the unit of account known as "the pound". Neither did the U.S. Treasury during the Civil War, when thanks to the currency acts that created National Bank Notes, the Treasury had become America's first central bank to control the country's legal tender. There were still outstanding debts that continued to be paid off in coin. What was suspended was the redemption of the bank/Treasury's own near money;in both cases what Cantillon called "the state bank" would no longer redeem its paper notes in coin on demand.

The present American central bank has no redemption obligations for its reserve notes; neither does the U.S. Treasury have any outstanding debt obligations that require interest and principal to be paid in coin. So, there is literally nothing against which dollar paper notes can be discounted as money within the boundary of the U.S. of A. At home the dollar will always be at par; and there will be no "gold cases".

As the bond pros and even us idiot amateurs know, the Fed has gone on an acquisition spree. Its assets have grown from $900 billion at year-end 2007 to over $4.5 trillion, which serious money. To support those holdings, the Fed's has also raised its own capital - from $37 billion in 2007 to $58 billion now.

The question that this raises for us idiots in the bleachers is this: what happens politically when the Fed starts to lose money?. At some point the market value of the Fed's assets is going to fluctuate in the wrong direction enough that the losses are more than the Fed's capital.

Under the Fed's rules adopted in 2011 that will require the Fed to suspend making payments to the Treasury of its "net" profits. The pros who long ago flagged this are not worried.

http://www.cumber.com/commentary.aspx?file=012711.asp

We amateurs who insist that dealings in money raise questions of "political economy" think the headline: "Fed Goes Broke" may have somewhat larger market implications.

May

22

I found this business model interesting. It involves storing wine in the ocean. Hype or real?

Stefan Martinek writes: 

Anything having to do with wine must be a good business model. In case of some redemptions, managers can drink the inventory.

May

22

The Dax is like a snake digesting its food, after some time of reasonable volatility. When it awakens it will be of interest. Which direction will it dart. It has been unusually tired this recent week.

May

21

 The fish are getting smarter. The fishermen may need new methods or find a new "fishin hole". Perhaps there is something to be said for direct counting in light of behavioral change.

Reports on the dramatic decline of fish populations in the ocean which were only based on fishery-dependent data, for example data from the long-line fishery of tuna, cod or swordfish, could also have their cause in enhanced gear-avoidance behaviour of those fishes. We have to rethink our monitoring of fish stocks and take the behavioural changes into account. Maybe some areas with high fishing intensity host more fish than we believe," concludes study leader Robert Arlinghaus.

May

21

 Profit. It's one one of the most hated concepts in modern society, but why? Sure, profit is selfish in the sense that individuals follow their rational self-interest to reap the fruits of their labor. However, the prosperity that profit brings in turn benefits society as a whole. This subtle but important concept is fundamental to a free society, yet many students — much less adults — still don't understand it. That's why African Students For Liberty teamed up with the Free Market Foundation to produce a short video explaining the benefits of profit in the form of a parable called "The 100th Man". 

"The 100th Man" tells the story of an African village that is burdened by a two-hour uphill walk to fetch water from the nearest river each day. That is, until one entrepreneurial tribesman has the idea to divert part of the river into a small stream flowing downhill to the village. An economy quickly emerges, but it is not without its challenges. I don't want to spoil the ending for you, so I'll stop there. Click here to watch the video on YouTube, and pass it along to your liberty-curious friends. The time has come for the world to relearn the miracle of prosperity that the pursuit of profit have bestowed upon humanity.

Sincerely & For Liberty,
  

Olumayowa Okediran
  
African Programs Manager
  
Students For Liberty
 

P.S. Although "The 100th Man" is an African parable, Students For Liberty is a global organization that you can get involved with no matter where you are on the planet. Select your region on our website to find out more about our student activities near you. Or, if your college days are behind you, join our global alumni network. Connect with us on linkedin facebook and twitter.

  

May

21

 This winter in order to stave off the polar vortex II, I joined the USBGF and tuned up a forgotten game, played online and re-read some books. My goal was to play in my first over the board USBGF tourney in the spring here in Cleveland. It was a very difficult yet rewarding. I wound up playing in the intermediate flight, and lost in the semi finals (money match) to a Ben Franklin looking naturalist from the woods of Pennsylvania. He went on to beat the next man and win the section. I hedged with him and as the loser –still won my entry fee back and then some, so I exceeded my expectations as a first timer. I played with professionals and held my own.

Backgammon sharpens the mind, dampens the swinging emotions surrounding wins (highs) and lows (losses). It makes you perform quickly and decisively. The sport seems to be having a slow rebirth. Many backgammon experts went over to the poker tables over the last 15 years. Maybe this is a patch for me to exploit. Everyone there were very friendly. Not many people under 30 at all. Probably 25% women at the tourney. There is a lot of wager money in this game. I played on a $3000 custom board with a dice rolling tower during one game. There is quite a "gambler" mentality there that I felt could be expolited–I avoided a lot of side bets, skipped the drinking and just ground it out. I was exhausted afterward and also satisfied.

In honor of the 36 possible backgammon dice combinations:

Backgammon and Trading Markets

1. Match play is a grind. Every game, like a trade needs to be executed, and evaluated and reexamined roll after roll due to the changing landscape conditions. In an 11 point match, you could wind up playing 21 games.

2. Expect to lose. As in trading, you must minimize drawdown. Losing a game is no big deal during a match, but getting gammoned sometimes or backgammoned will cause you most likely a match.

3. You need to be physically fit. Playing 20 hours of tournament backgammon over the board in two days takes a physical toll. Food and diet usually fall off, sitting and not being in routine makes your body fall out of rhythm. Trading foreign markets comes to mind here. Tourneys usually begin the day's play around 11:00am and end late into the evening. If you are a morning person, you need to change your habits.

4. Fatigue can make one loose with the cube, or willing to take risks with hits or leaving blots. It can also be exploited of your opponent. Your opponent due to fatigue, may just take a risky double. Or you may decide to play a grinding, long slow back-game with complexity in order to really move him into deep water when he is tired.

 5. As in trading, don't let a brilliant win go to your head, or an unexpected loss go to one's soul.

6. Backgammon opponents are like different markets. Some are binary, robotic, calculated. Some can be cagey, erratic. Watch your next opponent before you play him or her. Study your intended market before you trade it. Watch out for the delicate little old lady, and pray you don't get paired against the hot looking woman.

7. Be ready for everything to go foul and stay foul. Cut your losses quick, play safe, concede one point games. The dice are not to be blamed–but when your opponent blames the dice agree with him or her that indeed the dice are not good for them today. Kindly reinforce their beliefs. Don't make excuses for your losses.

8. Blitz! Hit loose, blitz in, keep hitting, slot your points and keep it up till it runs out, then double if its correct–especially early if the chance arises. So take that quick hit winning trade, just bank it and move to the next trade.

9. Be ready to be put on a camera under bright lights or in a featured table for live feed against a big star opponent. In trading this may be like a sudden streak of wins when spouse says nice things or maybe when you are called by a friend for your "expert" opinion.

10. Remember, that everyone else may be tired too, or hungry or in discomfort of sorts. You are not the only one

 11. Match equity rises and falls for each opponent on each roll of the dice and subsequent move. Each trade has a heartbeat, an ebb and flow, prices change. BG is a pricing game to a degree. You need to know if you are over valued, even, or under all the time.

12. What is the trading plan; what is the game plan? Are you running, priming/blockading or are you playing an intentional back game. You need to review your plan prior to making your move –does your roll help or hinder what you are doing. Did your trade look suddenly different from its planned start?

13. Sometimes too much success leads to failures, multiple doubles in a row tend to get you off to a great start that actually pushes you way past your optimal timing leading to a forced stacked up game. You now find yourself out of position. Don't overtrade, do not double up because you feel bulletproof.

14. In a short length match, seize upon a good starting position and double. Your opponent may shrink and pass since he will judge the risk as too great at this early stage to gamble. You must have a good start and his must be neutral or lagging.

15.Every play is a potential cube turn. Ask yourself if you should be doubling before you roll. In trading, once again–review your plan at each logical turn.

16. Be ready for the quick re-double right back in your face. Now the stakes are way up if you take, funny how your position shrinks up on a redouble? Akin to a whipsaw or a flash crash, the market has just gone 180 degrees from where you were. Where you ready for that?

17. What will my opponent do if I double? What will the market do if I take that offer?

18. I have just been doubled, is it a take, a pass, a redouble or is it quite impossible to judge? Use Woolsey's law then and take the double. As in trading, sometimes its better to take the trade on with insufficient knowledge and then do some analysis rather than pass it up.

19. At Crawford game during match play the doubling cube is not used. It gives the players one game where they must play through without upping the stakes. A trading holiday, a risk off breather is always a good thing once in a while. The Crawford game happens when either opponent is one game away from winning a match. It stops an automatic cube double from the lagging player.

20. If you make it into the money matches in a tournament, it is usually wise to hedge with your opponent so if you lose you don't leave empty handed. Do not be greedy and demand whole hog. Many market examples can be found regarding hubris.

21. What is the pip count? You must be able to size up the score mentally and quickly. Backgammon play is expected to be brisk and in matches slow play is frowned upon. In trading, being aware of the current (daily, hourly) conditions is essential. You can't call a time out in BG, likewise you can't stop the market while you think things through.

22. Leave a blot, but leave it properly, either far away or very close. Leave it so that if it's hit you may be able to recapture. Close out your trades properly.

23. Make points that hinder your opponent's big winners. Block his potentiality. Beware of and block if possible the "miracle" opponent's role, the double threes that get him out of danger and puts you in irons. Set your blots on points that he needs for getting back in. What miracle market move lies in wait to swamp your trade?

24. Again, don't get locked into one type of game, be flexible and take what the dice give you. Take what the market gives, don't hold out for a round number sale.

25. When it's time to run–then Run. Sometimes one gets focused too myopic on trapping and blocking and thus fails to prep for a freeing attempt. In trading, maybe

this is an example of just going with a major momentum swing and forgetting the chop trades.

26. Double hit if possible. Putting two men on the opponent's bar is a powerful move. Keeps him out of the game, for the time being. This gives you leverage. Possible cross over to using derivatives in a trade to maximize an expectation.

27. Hitting a blot takes half your opponent's role away. It is usually wise to hit versus not, yet not always. Automatic action can be seen in some players who always hit no matter what. I like to play against these types. Some markets behave on "autoplay" –use this tendency for planning a trade.

28. The safe move is usually not the best. You need to slot points, fight for the 5 point and be aggressive. Playing safe in the markets may be akin to being long the "favored sectors", last year's winners.

29. Lay out decoy blots. This tactic lures your opponent off his strong point and hopefully gives you compensating re-hit chances, and recycles a man to aid in your timing. Decoy methods and markets are well discussed.

30. Hitting loose is a decision that must be made with a goal in mind–needs to be justified. Taking a market risk that is usually cavalier needs to be justified and quantified. Hitting loose describes hitting a blot when your risk of re-hit is great. Its making the best of bad choices.

31. Know your basics inside and out. 6 x 6 dice table, %chance of rolling any single number, %chance of making a high number versus a low one. Know the percentages faced when getting back in from the bar. Holding a losing trade is not playing the percentages.

32. Aggression is awarded in backgammon in that you need to hit blots, fight for points, and resolve oneself to being hit and thrown back. Its a regenerative cycle and one needs to be able to define the worth/price of the position roll to roll. In trading you need similar levels of mental engagement–how to go for a small victory every venture, yet be ready to turn that into a major winner if the right odds come to the fore.

33. Opening, middle and late game positions, cube decisions during those stages, the match score or cash game level at the time of the stake double. Balance is key –maintain your forces as best as possible under the given dice. Know the landscape when the double arrives. Anticipate your opponent's moves. What is the market telling me at this moment?

34. What is my best move? Why is it that the best moves sometimes are the hardest to do? The best move usually looks risky/naked. Buying when all is lost, when the cane is in your hand is when you are right.

35. Why do I usually win the Crawford game–the game where no doubling is allowed? Why do I win the small trades and lose the bigger ones? Maybe I should be looking over my past trades with a critical eye—do some more work.

36. If I win game one of an odd numbered match, I tend to relax and just grind higher. All I need to do (as in baseball) is win a series. Am I in gammon save mode or gammon-go. Sometimes you need to protect against the double up or go for the double up as your goal when starting a new game. Is the trade a limited one to begin with or an attack strike? Do you realize that each roll can help or hinder that goal and adjustments sometimes need to be made. Or simply waiting is the right answer-
-a move that keeps the position static. 

Victor Niederhoffer writes: 

To Mr. Drees's excellent post an observation. I have known several dissipate drunk squash players who often asked me to set up a game of backgammon with my wealthy friends including Jim Lorie who paid his way through Cornell with backgammon. The dissipate players were all National Champions at backgammon and hustled for a living. To play against them was ruinous and fortuitously I prevented Jim from playing against my player opponent Claude Beers. One should never play markets against men named doc or those who pretend to be dissipate. 

Andrew Goodwin adds: 

When I held a seat on the NYFE, there was a trader whose badge number was mine with only the order of two digits varying. We shared an execution broker. The trader's name was doc, and I had to check in with the clearing firm each day because only his losing trades would end up in my account. Not once did I get one of his winners. One can lose to doc in ways other than merely playing against him.

May

20

I was excited to hear on Bloomberg radio about the launch today of a new VIX product — that allows investors to own/short the VIX without the negative carry of the futures and VXX. Sadly, upon reading the prospectus, I am very disappointed to see that this isn't actually how the product works. Savvy arbitrageurs, however, may see opportunities.

The VXUP is supposed to track the VIX positively, and the VXDN is supposed to track the VIX negatively. They are paired — so the profits from the VXUP offset gains/losses from the VXDN. Specs with a long memory may recall a similar structure in a crude oil ETF several years ago. However, that ETF blew up when crude went from 40 to 100+ — which wiped out the short crude ETF and so the long crude ETF stopped rising. The crude ETF pair was unceremoniously liquidated.

The creators of VXUP/VXDN think that they solved the 200% price rise crude oil problem — by having reset/distribution dates — where money flows between and out. And they imposed a 90% price rise cap in place — just in case the VIX quickly pops from 13 to 26+ . That indeed "fixes" the liquidity problem however it creates a much bigger problem. The VXUP/VXDN will not perform in line with the VIX if the stock market crashes — because the VIX will quickly go from 13 to 70ish.

But there's more.

The far more serious problem is that they embedded a "penalty" charge for the VXUP. (See page 3 of the prospectus). Here's the text: "During any Measuring Period and in order to create a balanced market for the Up Shares and Down Shares of the Fund, the Class Value per Share of each Up Share of the Fund will be reduced and the Class Value per share of each Down Share of the Fund will be increased by [a] fixed amount ["Daily Amount"]. In each Measuring Period where the VIX Index has a level of 30 or lower on the prior Distribution Date, the Daily Amount will be 0.15% per day of the Class Value per Share on the prior Distribution Date. If the level of the VIX is greater than 30, the Daily Amount will be zero."

WHAT THIS MEANS IS THAT THEY WILL BE CHARGING VIX LONGS AN ANNUALIZED PENALTY OF ABOUT 38% PER YEAR AND THEY WILL BE PAYING VIX SHORTS AN ANNUALIZED BONUS OF ABOUT 38% PER YEAR WHEN THE VIX IS UNDER 30. REGARDLESS OF THE VIX FUTURES TERM STRUCTURE. BUT IT APPEARS THAT THEY WON'T BE DOING THE REVERSE EVEN IF THE VIX MARKET GOES INTO BACKWARDATION.

I stopped reading the prospectus after this paragraph because it completely destroys my interest in the product — it has all of the VXX problems of roll-negative carry when the VIX is under 30, but it doesn't have the VXX positive carry when the VIX futures get backwardated. In essence, they have created a product that won't perform if the market crashes, but has all of the problems of the VIX futures and VXX (for volatility bulls).

So what's the arbitrage for Specs who like these things? I see an obvious one. They've arbitrarily picked and locked in a roll cost. And a cap when they think the market will backwardate. They will surely be wrong on both of those arbitrary decisions. For example: Right now the May15/Jun15 Vix future contango spread is 13%. So the 38% annualized penalty for the VXUP is vastly less than the negative carry for the futures roll. The May15/Dec15 futures roll is about 38%. So again, the VXUP penalty charge is less than the market roll. Hence, the obvious arbitrage is that the VXUP/VXDN has priced in a contango of 38% annualized — but the futures market has a different contango. They have also implicitly priced in the VIX level when the VXX goes from negative carry to positive carry (30%). The reality is that the VIX futures market will backwardate at VIX levels much lower than 30.

The way to exploit this arbitrage is left as an exercise for the readers.

May

20

I found these benchmark tests interesting: "Tactical Asset Allocation: Beware of Geeks Bearing Formulas".

May

19

 One hypothesizes that prices act to maximize their chances of survival and their volume of activity.

The moves and the announcement during the day and fray are controlled by the prices to create the most successful survival mechanisms.

The Selfish Gene

In bonds did not believe it could reproduce at 15300 at a 3.1 % 30 year rate, and thus demanded that a robot from Euorope would say that they would create liquidity this summer by expanding qe. 

Anatoly Veltman writes: 

Also, a huge market trace of insider announcement distribution "on need to know basis". Both Stocks and USD ended strongly the day before (a pairing that would be hard to explain, otherwise).

Victor Niederhoffer writes: 

In bonds did not believe it could reproduce at 15300 at a 3.1 % 30 year rate, and thus demanded that a robot from Europe would say that they would create liquidity this summer by expanding qe.

May

19

 Far from the Madding Crowd by Thomas Hardy gives a realistic view of sheep farming in the 1860s in England. Nice market scene where the heroine who has the ability to make 3 men fall in love with her, bargains to get a fair price for her seed. A forerunner of Edna Ferber's novels of strong woman who run a business and a portrait of 2 good men, a wealthy farmer and a competent shepherd. Many lush scenes of sheep and meadows. A forerunner of square romantic novels of the 20th century where 3 men compete for the love of a deserving woman.

May

19

 I wonder if the instinct to show off or "peacock" one's wealth is part of a larger social level mean-reversion process. Wealth display might aid in securing mates and other forms of social prominence, yet it also triggers envy which causes others to find ways to drag the individual back lower into the pack or target with new tax findings. In a fictional case, the gangster was identified and targeted because for once we went "flashy" with a vulgar fur coat, and was immediately picked out in the crowd, which triggering his ultimate downfall (also, listening to a woman when he shouldn't have)

Then you have the lists compiled by media of "top earners" that some of the members might prefer not to be on. Every time you see these, you also see the left proposing solutions to level things– "they make more than all the kindergarten teachers in the world", for example. So it seems the list compilers are also playing a part to pull things down–generating the fanfare that triggers envy.

Do markets that "peacock" in an unusual way also undergo this same process. Perhaps the markets that create more "flashy" signals are dragged down sooner vs. those that quietly advance without fanfare. Don't know if any of that is true so I am making assumptions that would need to be defined and tested.

anonymous writes: 

Do you think it an accident that Lifestyles of the Rich and Famous followed a decade thoroughly forgettable from an economic perspective?
 

May

19

 Roughly 47% of "Debt Held by the Public" ($13.1 trillion as of March 30, 2015) is now owed to people (individuals and institutions) who do not use the dollar as their own unit of account. The rest is owed to holders who do their accounting in greenbacks.

I can remember Galbraith making one of his royal appearances at the one undergraduate class he still taught and entertaining the assembled worshippers with a quip about the national debt not mattering because "we owed it to ourselves".

"We" are about to become the minority creditors. Clearly, the solution is abolish the use of cash itself so that even the vague historical memory of currency as the yardstick for measuring debt can go bye-bye.

May

19

A friend writes me and asks, "when will bonds start to act based on inflation expectations?" about this Bloomberg article "Euro-Area Bonds Climb as Coeure Says ECB to Frontload Purchases".

I don't know if it was a rhetorical question or not. The answer has to be bundled in with the seeming utter absence of labor market take-up occurring, and so fueling a general pricing competition for that (most vocal) factor of production.

The other three factors of production ebb and flow as to demand, but usually have a less general, and more of a localized 'spot market' effect, and so do not trigger off inflation expectation reactions.

May

18

 The first business book I read was Napoleon Hill's Think and Grow Rich in which I learned to establish a master mind group to learn from. I always hired people who were smarter than me, and tried to keep control of the business. The second business book that shook me up was Ross Perot's In His Own Words during a 7.2 Richter earthquake in San Felipe, Baja Mexico that flung me off the earth as rocks tumbled down the arroyo walls and the nearby tide on Cortez receded 12 feet in three seconds. The third book I just finished is Perot's autobiography My Life: The Principles for Success.

In my life, as well as my life, the principles involved are really principles of life. Businesses need not be big to practice these standards. Small businesses are the backbone of the American economy that began fossilizing about twenty years ago with stricter government regulations. I urge you to beat the odds and establish your own business to get you to the heart of yourself.

My first capitalistic venture was a nickel-a-glass Kool Aid stand on the summer streets of Idaho Falls. I learned that a seasonal business is better than none at all. The second major business was Service Press Inc. out of a Michigan garage that came about when I published two books in one day. The lesson from that was don't overextend your budget based on your dreams. The third business in swap meets went surprisingly well. I had returned bone broke from two years of travel and, on walking into my old racquetball sponsor's warehouse, noticed a hill of racquets gathering dust. They were seconds, blems, demos and returns that the company boss let me have for a song to sell at the flea markets. The first weekend I took ten racquets to the San Diego Sports Arena swap meet and sold out in an hour to pay my hotel bill. The next week I took 100 racquetball, tennis and squash racquets that sold out the first day enabling me to buy a motorcycle with a sidecar to carry more. The third weekend in the first five minutes my competitor bought me out, and I had enough money to travel again. The fourth business was a slum landlord, which is a misnomer. My partner and I bought fixer-upper houses in well-groomed sections of Lansing, MI and fixed them up in learning the golden rule of real estate is location. I earned enough to buy more books, and travel. A few years ago, I established an executive hobo service that combined riding the rails with show business. Semi-annually I get a call from out of the blue from someone or the media wanting to ride the rails to gain perspective a la the prince and the pauper. When the kings of the offices meet the kings of the road, warm sparks fly and a good time is had.

Here are some of the principles of what I've learned in business and life:

· Save your money, and when you can afford what you want, buy it.
· Don't disappoint the scruples of your parents or peers, or you will break their hearts.
· It may seem unthinkable that a six-year old can work, but you cannot start too early.
· Grow your business as you probably grew, a little at a time without overextending it.
· Conduct your business in the center field of ethical behavior.
· The incentive of working for yourself is the more seeds you sow the more crops you reap.
· Don't give up. In the past six months I've been attacked dozens of times by dogs and thugs in the Amazon, lost everything in a Miami office robbery, was defaulted on a large loan to a friend, lost my family, and lost most of what I owned in a desert home robbery. But I've written ten books in that time, and that paints a rosy picture.

With a lot of hard work, a master mind group, the good sense of persistence, and maybe a little luck, your potential for success is practically unlimited. Please don't limit my success by not letting me work harder than the next guy. Some people don't think they have much chance because they weren't born with a silver spoon in their mouth, but using these principles you may succeed in small business and your life.

May

18

A nifty web counting and computation tool is Wolfram Alpha.

I'm sure most or even all know about this site, but it is worth playing around with if you have not done so in a while. It is better than it used to be. It can often help one to count "stuff" that would otherwise be arduous to look up given time limitations. The cool part is that you can use regular English in conjunction with mathematical notation to do some neat analysis very quickly. For example, it is a great way to double check reporters statistics or assumptions, including a quick computation of a relevant base rate.

May

16

 Last  week           This week

mon       -1.0                 -3.10

tue         -0.9                 +0.6
wed        -1.7                 -1.4
thu        +1.8                 +1.2
fri          +0.3                 +2.2
                         

A syncopathy.

May

15

 I highly recommend the book Natural Born Heroes. It's an incredible WWII story and infinite wisdom for our finite minds. The book also documents what is reported as the only time in history a standing general was effectively removed from the battlefield (the crete kidnapped him, hid him and finally, after a month, removed him… on and from an island). This is a great outside magazine article about the story: 

"No, Heroes Aren't Born. They're Built. And This Is How You Become One.": One of the most
surprising heroes of World War II was a pint-sized shepherd nicknamed
The Clown—and his fitness wisdom can change your life.

May

15

This is probably old news to our serious counters: "Gridded Population of the World (GPW), v3"

May

15

 Last night I had a drink of plum wine. I subsequently made about 10 errors in trading overnight. Similar things have happened to me before on the rare occasions I drink alcohol going back 50 years when I misread a card in poker and ended up losing my then minimal but very important fortune. I wonder to what extent it is a good rule not to drink alcohol on the days before, during, and after trading.

Rocky Humbert comments:

I think that needs to be tested with a controlled study. I volunteer to be the counterfactual.

Scott Brooks writes: 

As a non-drinker, I can confidently say that a fall down drunk Vic or Rocky would handily beat a sober me at trading.

Although I haven't played in over 20 years, I'm pretty confident I could take them both at poker.

But I'm 100% certain that I could take them both at the archery range, even if they were sober.

A drunk Vic would easily take me at squash, racquetball or table tennis.

There are three lessons here:

1. If you are playing "for real", only play the game you can win.

2. If you are playing "for real", only play against people that you are confident you can beat.

3. If you are playing "for real", make sure you are at your peak potential to do. Do nothing to impair your physical and cognitive abilities. 

Craig Mee writes: 

When dealing with leverage and perceived opportunity one unfortunately can stray due to the slightest of distractions.

May

14

The USCI Commodity ETF recently showed up on one of my screening runs. I looked at the chart and noticed that on 5/6/15, USCI traded down from the previous day's close of 47 to a low of 23.875 and then rebounded– closing unchanged.

Upon closer examination, there was a single tiny trade at the open (down 50% in price) that was later canceled by the exchange. Given that this is a commodity ETF, the price move defies logic and was obviously a bad data point.

Yet both the stock exchange and Bloomberg consider this a valid trade.

And so the chart of USCI looks just like the humans who refuse to correct this error: idiotic.

May

14

 Nothing but free time, as I sit here long (from an average of 1999.00) watching the spoos take their shot at ath's.

I recently had the opportunity to don my cargo pants and tool belt and accompany my gc wife and her 15 worker crew on a project where we deconstructed the display merchandise at a dozen decommissioned u.s. branches of a large European bank. For one day I gave up the comfort of my home office and $1500 ergonomic office chair, for a box truck and impact drill — and thoroughly enjoyed the experience. While I was certainly, a fish-out-of water, I felt right-at-home taking orders from my wife. She is an unapologetic task-oriented leader, whose sole focus is getting the job done in a timely and productive manner, yet can always be found working along side her workers, showing them how-it's-done.

Luckily she had previously detailed the step-by-step procedures necessary to complete my arduous tasks, so I was able to immerse myself in the work-at-hand. Inevitably, second order analogies to trading came to mind, and it wasn't long before I began to compare my current blue-collar labor to the commonly perceived, white-collar vocation of trading. It really isn't much of a stretch as one would think, especially for an ex-cbot floor trader. Most of us had empathy, if not an outright disdain for the *suits,* whose shoulders we rubbed as we walked defiantly past them on la salle street. Those of us who traded in the pits, did not consider ourselves white collar guys. After all, there was nothing sexy, nor glamorous about standing next to a bunch of sweaty guys, with alcohol on their breath, risking your own money, in order to make a living. In reality, making markets was quite the workman-like activity and not much different than the task-like work I was currently performing for my wife.

To this day, I consider trading to be a blue-collar work. After all, the activity that is trading, is not that much different in it's simplicity from manual labor. One only needs to look at the worker, and not the work; to find where the blame lies for any added complexity. The laborer understands the workplace procedures required to get the job done within the team environment. If he does his work, he collects a paycheck. Yet as traders, we fall prey to our natural instincts which often make our analysis unnecessarily complex and our work burdensome.

Because we are self-professed critical thinkers, I believe we sometimes forget that we are at heart, traders and speculators. We often fail to just trade-the-market, or as Jeff wrote, "we over-think the market and miss out on-the-move." Which is why I often go back-to-basics and go *caveman* on the market. I study the markets price action, and if I think the market is going higher, I buy it. If I'm wrong I get out. If I'm right, and I think the market is going to continue to higher, I buy more. And when I don't think it can go any higher, I get out. and then, I do it all over again. There are no excuses; I just do my work and collect a paycheck. Maybe I'll start wearing a hard-hat when trading…

May

14

 Excitement levels are rising in my household as the Monaco Formula 1 Grand Prix approaches. I try to attend every year.

This year, one has the rare pleasure to be watching the event from a yacht in the harbour owned by a world class scientist who has recently retired from markets.

I shared a wonderful (all too brief) lunch with him yesterday in a wonderful eatery on St.James' in London called CafeMurano… But I digress…..

We spoke of the great things he has done in markets and what I was doing, amongst much else.

I share the following, absolutely invaluable quotes with those on this list - they are now on my office wall alongside something that Jeff Watson send me some time ago of equal import:

"…..- we made so much money with so little risk because we were applying techniques that were, a/ roundly rejected by academia b/ conceptually very different from what is taught in higher education establishments …" and, most compellingly of all - this gem '…. There exist phenomena in the market that completely and utterly defy physical and traditional mathematical 'laws'…we focused on what we could not see…." (his emphasis upon the word laws).

Let us redouble our efforts. I know I am.

May

14

 April is the time of the Master's and jackets (usually iill-fitting of green), and of Opening Day. The grass is freshly mowed. The paint on the dugout top is bright. The peanuts are crisp, and the seats still creak from the stills of winter. The call of "Play ball!" is usually a welcome one, but particularly in April, probably more so in the Northeast and Midwest, where the snows may still be melting, but generally around the country regardless of the specifics. April is the month Passover, of Easter, of renewal. The baseball season awaits, pregnant with potential to confound the statisticians whose analyses figure into most, if not all, of the moves a field or general manager may make in the course of a game, a series, a week, a month, a season. Now is the next season we spoke about last season.

By May, the season is in full bloom. The first assignments to AAA have been made, the first players have been placed on the 15-day DL. The true depth of a team's bench, of its pitching staff, of its bullpen, of its farm system are becoming clear. The Derby is done as the run for the roses completes and the golf world disengages from Amen Corner to contemplate the upcoming US Open. As the month progresses, teams find their grooves and the season begins to take shape.

So one might be pardoned for wondering if the same Orioles team that prostrated itself 10-2 before Toronto last night could possible be the one that skewered the same opponent 5-0 this evening. Looking at the program, they are indeed the same teams. But the games played couldn't be more different.

That's the thing about baseball. It's a 162 game season. Sure, some games are a bit strange, like when the Os played Chisox in an empty ballpark. And there are the glimmers of genius that surface in those who previously performed as if they has no clue, as in Sandy Koufax's show in 1961 (does anyone realize how close he came to just hanging up his cleats after the 1960 season?). Maybe this year, that will be the case with Ubaldo Jimenez. Certainly, there is the potential.

The season's still young, though it is May. Preakness is coming up, and the Stakes isn't too far behind. The wheat fields will be coming to life around then, the cornfields too. And somewhere across the US, there's an 8 year old boy or girl heading off to the ballpark, A, AA, AAA, or the show, makes no difference, glove in hand, convinced that he or she will catch a foul in the stands and, if someone will sign it, a great thing for "show and tell" that week. And at least a ball for a game of catch if not.

Baseball in May. Breathe it in. Smell the freshness of the cool grass in the outfield. Hear the clap of the ball off the bat.

It's restorative of the soul. And watching a team metamorphose as the Orioles did from last night to tonight, restorative of hope and of dreams. In May, in baseball, all things still remain possible.

Play ball!

May

14

Always better to see the writing on the wall sooner than later.

"Faces of the Queensland drought":

Cattle grazier Duncan Emmott, who runs stock at Whitehill Station, just south-west of Longreach, (QLD Australia) said he saw the writing on the wall last year. He made the decision to cart off much of his stock and, as of next month, will only have about 120 head of cattle left on his property – less than 20 per cent of what he would normally have on the land. "I think it's a lot easier to make the decision in times like this and to sell and get your stock off while they're still alright to sell, rather than hanging on," he said. "I think that emotionally, psychologically, it plays on your mind a lot more watching your stock get poor, dying, getting bogged, seeing them get pulled out of the bog every day– that's a tough thing to do, to see that happen."

May

14

Brendan Simms likes to refer to Germany and the Holy Roman Empire as a force multiplier and their 10 year bund has had a range of 200 points in a day compared to ours of just 50 points in a day recently.

anonymous writes: 

A very sagacious Dailyspec contributor recently stated that when we look back in a few years from now, the Bund will be remembered as the JGB was in the 1990's– as a graveyard of bond bears.

I have no idea beyond the next 36 hours but I do remember the JGB debacle….

Arguably, if my oft stated view that the European (and soon US) banking systems are to be 'Japanified' proved to be correct, then the above will certainly be true as the banks go further and further out the curve to pick up a basis point or two.

May

13

 1. One wonders to what extent ind stocks that go up when market is way down are bullish in the next relevant periods. Does something comparable for markets exist.

2. Gold and spu both break through round number on same day. Is it non-random.

3. How low do grains have to go before they turn bullish.

4. One reads The Life of a Leaf by Steven Vogel which shows leaves reacting as much to their environment as our markets do to theirs.

4. The absurd moves up in bonds whenever the economy is weak because of expected liquidity from the fed, and more importantly the absurd moves down in them when the announcements are strong, provides opportunity.

5. I own a reasonable quantity of twitter on the sprained ankle theory . Will it suffer the same fate as the blackberry I rode down from 60 to 10.

6. To what extent now do companies that are hit hard in the stock market by revenue shortfalls provide opportunity.

7. One of Wiswell's favorite proverbs was that "checkers is a game of architecture". I believe the same is true of markets, but I am not a good enough architecht to apply all the proper principles.

8. There are more things in heaven and earth. The great great grand nephew of Robert Boyle comes in and tells me the reason that one can't make money trading in stocks is that all the high frequency people use some sort of lock the price then front run to get ahead of you and not violate the rule that the customer has to get the best price. 

Larry Williams writes: 

Please tell the great, great, grand nephew there are still people making money buying value/momentum stocks and holding for more than a nano-second.

Whenever I hear people decry the market place as to one person, group, etc running the table so we mere mortals "can't" succeed I think it is just a losers lament.

People, lots of them, still win in this game.

Gary Phillips writes: 

Everybody needs a "scapegoat" especially the the disenfranchised traders who thinks the market owes them a living.

anonymous writes: 

It is particularly fruitless on that small time scale because any countermeasure you develop that works will be viewed as a criminal act. You either actively lose or you are found guilty of winning–take your pick. Larry's idea is the sensible one.

Victor Niederhoffer replies: 

As the EC says about all their countries, "they're one of us. We'll protect them", the grand nephew is one of mine. He worked for me and did a fine job, and is well aware of the drift. His only weakness is that he knows that the other side is a bunch of highway robbers, and like the man who complained about the Australian moves even though he doesn't change it, he's a real trader and knows you can never get an honest deal from the markets.

May

13

 When Harcourt, Brace & Company bought World publishing, the wags said that my father Bill Jovanovich had taken over the world. (The better joke came later when the firm changed its name again to Harcourt Brace Jovanovich and someone said that Dad had replaced the world because he knew better.)

The second joke was funnier to me because in the world of testing (which is what World Publishing did) Bill Jovanovich always did know better. He understood something that was so simple and radical that it will be another century, if at all, before the world catches up.

The only sensible use of testing is to allow people to find the full range of their failures; then they can decide what are their best chances for success.

Dad wanted "school" to be nothing but tests– of reading, hopscotch, sewing, everything possible. He wanted them to be voluntary, and he wanted them to be subject to the competition of choice. His idea of open enrollment was literally that– people could send their children to any courses they chose.

That was the only way for "society" to allow people to figure out what they "should" and "could" learn. He thought standardized education was an abomination, precisely because it allowed the helpers to always know best and gave the students and parents no escape from "the permanent record".

May

13

I view the market as having many dimensions. I believe you can define market regimes based on its status along any one dimension. For instance, one dimension could be trendiness. You can define three basic regimes along this dimension: up trend, down trend, and sideways. Another dimension could be volatility. So regimes along this dimension can be high volatility and low volatility.

How else would one separate the market into different regimes? Which ways of separation in your experience benefit trading more?

May

13

 The charity industry is America's oldest profession (the whores came only after the British took over New Amsterdam and brought in the young men in uniforms).

"Helping" in the name of God/Progress/Equality was established as the primary career for the properly educated even as the Indians were coming close to driving the colonists back into the Atlantic.

Without "helping" there is no justification for compulsory primary and secondary education, college attendance and all the soft subjects that are now the bulk of graduate school education in the United States.

It is– and always will be– the real "jobs" program because it is the only way the commercially-inept can maintain their social status and pass on their sinecures. As the First Lady reminded us the other day, she is "an Ivy-League educated lawyer". So there.

Russ Herrold writes: 

The thought that I had when I saw the initial post was this meditation:

"I am for doing good to the poor, but … I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed … that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer."

― Benjamin Franklin

May

11

 Russ Roberts did an interesting EconTalk with David Zetland recently on water. A comment by Zetland:

I did a crazy, back-of-the-envelope calculation for replacing California's water with desalination, which a lot of people think of as the holy grail. And putting aside the massive energy costs and costs of running desalination, you'd need 500-plus desal plants for California. And they just spent 20 years fighting to get one, near San Diego. So, that's not going to happen.

A summary of the talk:

David Zetland of Leiden University College in the Netherlands and author of Living with Water Scarcity talks with EconTalk host Russ Roberts about the challenges of water management. Issues covered include the sustainability of water supplies, the affordability of water for the poor, the incentives water companies face, and the management of water systems in the poorest countries. Also discussed are the diamond and water paradox, campaigns to reduce water usage, and the role of prices in managing a water system.

anonymous writes: 

It will be tough to convince the majority of Californians to build nuclear plants for desal after their getting the Wave from Japan. On the other side of the ring of fire, those in the CA cities are too green to approve. CA had lax groundwater restrictions but the bottled water companies and private labels are relocating now. This indicates the value of the land is falling because a round of groundwater extraction restrictions is on the way. Water channels from north of CA and use of the rails more likely. Longshot and long-term bet on towing icebergs through the Straits of Drake interesting. 

May

11

"SEC Approves Pilot to Assess Tick Size Impact for Smaller Companies"

I found it of interest that they set up a scientific type test with a control group.

May

11

Over at Business Insider, they carried this graph. It looks pretty scary. I don't think it's possible to sustain current prices in the face of declining inflows, but maybe I'm misinterpreting it.

Larry Williams writes: 

Look at the chart! This has happened many times before where the blue line guys got out and the rodeo went on higher. It's not the first rodeo they missed. Who're you going to believe, the chart or a cub reporter?

Steve Ellison adds:

I don't have the data to test this rigorously, but my hypothesis is that "net inflows to mutual funds" is a contrary indicator if it is an indicator at all.

anonymous writes: 

All the studies such as the ones carried out by DALBAR suggest that returns weighted by investor money flows are always worse than time-weighted returns.

There is a movement of people who think that this "behavior gap" can be closed with education or sound advice for all. I find it more likely that it is a necessary feature of markets for the reasons described by Bacon. Some can do better but nothing can work for everyone at once.

Victor Niederhoffer writes: 

One would have thought that this post came from Mr. Conrad rather than you, who has been exposed to the drift.

Bud Conrad responds: 

Mr. Niederhoffer mentions my name as suggesting I might be bringing negative opinions about the future for the stock market, but I have been relatively quite on this list in that nature in recent years. My base for stock market valuation comes from the view of comparing the potential return from the stock market earnings to that of long term government bonds. For several years and continuing to today, the returns from stocks as measured by dividing earnings by the price (E/P ratio) have far exceeded the returns from fixed income, so I have been a bull on stocks, despite the many worrisome commentaries about the general economy. The Chair and others will recognize this general approach as sometimes called the "Fed Model" for stocks. My summary comment is that "The stock market is the best game in town", sort of like the comment on the dollar compared to other currencies as "The best horse in the glue factory".

I have been bullish stocks for the first half of 2015, but with caution that there are other forces like the Fed raising rates, a slowing GDP for the general economy, a disastrous collapse in the oil and gas fracking that will cost lenders huge sums, and continuing trade and government deficits that make me be more concerned that the outlook for 2016 is possible for a down turn. I'm interested in extending that watch for a turn in stock market optimism as others find quality analysis.

As to the specifics of the flows in the chart from BofA ML, I notice that the 2013 down turn in flows didn't hurt this bull market, so the indicator may not be capturing some of the drivers, like possibly foreigners that are even less enamored with their domestic prospects, who may be finding dollar denominated assets much safer than say those in the declining Euro. As a related note in my local area: Palo Alto is supposedly 20% owned by foreigners, mostly from China. Real estate prices are booming in Silicon Valley, and there is plenty of inflation in asset prices here.

Anatoly Veltman writes: 

This was an interesting point, reminding me of a disaster of a trade I had in 2005. Copper, for the first time in history, eclipsed its decades-long resistance of Fibonacci $1.6180 level at the COMEX. It was clearly driven by developing China demand, and I wouldn't stay in its way. I had good luck picking up Longs at the other Fibonacci end around 61.8 cents just six years prior…

But as the 2005 rally progressed beyond the $1.6180 breakout and all the way to the un-phathomable $2.000/lb round - I could hold myself off no longer. My Shorting reason was that throughout the 2005 rally, COMEX Open Interest figures have declined(!) dramatically. Classical technical analysis states that a commodity's prolonged upside run, when accompanied by progressively declining Open Interest - must be Shorted!! The reasoning is very compelling: in zero-sum game, such event can only mean one thing - that the pricing is extremely over-bought, while progressively more-and-more Shorts have already covered!! Thus, as a new Short, you're getting the greatest downside potential in history, while the risk of potential blow-off to the upside is now severely constrained. Well, I'm still a huge believer in this indicator, except…

…2005 happened to be the first year of an unprecedented GEOGRAPHIC shift in Copper inventory. Away from the COMEX in US, and in favor of the LME in London as well as a brand new physical and derivative market born in China and vicinity. While the COMEX Open Interest was going through temporary decline, the pick-up overseas was enough to feed the demand and put further increasing stress on supply. Thank goodness for my catastrophic COMEX stop-loss above $2.0025 - that trend roared unabated straight to the next Fibonacci extension of $3.62!

anonymous writes: 

Some people are going to believe what they want to believe, hear what they want to hear, and avoid information that contradicts what they already think or believe. These are the people who find comfort with a group-think mentality. On the other hand, there are those who love to fade the market, for the sake of being contrarian. These people cannot resist doing the opposite of popular opinion and possess a mindset toward reactive devaluation. This forum strives to operate on a level where useful information is transferred from one reader to another; often times from the extremely knowledgeable (victor, rocky et al) to the less-so (myself included). We all strive to reach independent conclusions based on a reasoned process. We ignore popular opinion, and do not take anything at face value. We keep open minds, organize and filter our ideas to determine what is relevant, yet allow conflicting ideas to generate new conclusions.

In an effort to promote and perpetuate this practice, I still find myself sanguine about the prospects for the market. Real short-term rates are still negative. The fed maybe tightening, but the yield curve is steepening. GDP has averaged 2.25% per year since 2009, and yes, real GDP growth in q1 was weaker than expected; but that may only serve to be a down-tick and not the beginning of a nascent trend, as as was the case last year. Growth is there, but it has been stultified by the Obama administration's policies. If we were to see tax rates and regulatory burdens rolled back with a new administration, we could see a renewal of corporate investment and risk-taking and an acceleration in productivity and growth, and a much higher market yet.

Jeff Watson writes: 

Many are overthinking this stock market and are missing out on the move. Trying to fit events into one's belief system can be very costly in the long run. Sometimes, like in surfing, you just gotta catch the wave because it's a groundswell, and the waves are stacked up like corduroy all the way to the horizon. Plenty of opportunities here.

May

11

 Some good books one is reading after a hurried visit to the Seminary Book Store in Chicago.

The Best of Ed Zern by Ed Zern, a hilarious and deep book by a writer with part Ring Larnder, part Mark Twain, with all the stories relevant to trading.

Somewhere For Me, a bio of Richard Rodgers by Meryle Secrest, a lugubrious account of a great musical composer, great businessman, son of a gun.

Why Capitalism by Allan Meltzer, an excellent update of Free to Choose and Capitalism and Freedom by a monetary economist with many deep thoughts appropriate for introductions to free markets for kids.

Karl Pearson: The Scientific Life in a Statistical Age by Theodore Porter, a bio that shows how philosophy and morality led to the foundation of frequency statistics, a disciple of Galton.

The Roman Market Economy by Peter Temin, some nice charts and diagrams showing the importance of economic variables, prices, labor, land in the history of Rome up to 300 AD.

Modeling Binary Data by D. Collett, everything you'd want to know about how to explain binary data using logistic models and maximum likelihood. The simple dependent variable makes the book a good intro to variables whose magnitudes go all over the map.

Europe by Brendan Simms, a 700 page intro to European history from 1500 to the present emphasizing the importance of Germany with many pithy and seemingly deep summaries.

 Magnificent Trees of the the New York Botanical Garden, a beautiful pictorial and descriptive journey through the Bronx Garden we will be visiting September 4 with Adrian Bejan, who says it's replete with constructal trees.

Crony Capitalism by Hunter Lewis, a surprisingly informative view of bribery, double dealing and insider activity in the financial crisis written surprisingly by an agrarian reformer.

Top Dog by Po Bronson and Ashley Merryman, shows how competition, incentives, and motivation effect winning in many psych experiments and sports outcomes.

The Improbability Principle by David Hand, a deep book explaining the reasonable probability of coincidences and extreme events by a profound and erudite scientist, good for the layman and the expert.

Chemistry: Science Double Award by B. Earl and L wilford. A secondary school intro to chemistry about my speed in developing a foundation for this fascinating and useful subject.

Gordon Haave adds: 

 I wrestle with reading non-fiction and fiction. I have been reading so much non-fiction for work that I have been trying to read fiction when I can to unwind.

Recently I have finished, for the 2nd, time, three of my favorite books:

Growth of the Soil, by Kunt Hamsun.

Independent People
, by Halldor Laxness

And Chronicles In Stone, by Ismail Kadare

All three are great. After I read Chronicles in Stone I had to go and visit Girokaster, Albania, where it is set.

Here are the pictures I took. The WW2 items are inside the castle which is the focus of the book (the book takes place under Italian occupation in early WW2).

The above is a public link that everyone should be able to see. There is also a picture of Enver Hoxha's house in there.

David Lillienfeld writes: 

I've been reading Supreme City by Donald L. Miller. The book discusses the development of Manhattan during the 1920s. It includes the development of radio networks (Paley vs Sarnoff), the rise of organized crime in the wake of Prohibition, the building of such icons as the Chrysler Building and other buildings, the creation of the Park Avenue residential district (43rd to 96th Streets), and so on. A fun read.

anonymous writes: 

It's been quite a while since I last recommended a book. However, "The Boys in the Boat" by Daniel James Brown deserves consideration. It traces the course of a group of young men attending the University of Washington through their (Depression) years of crewing (eight man) and their quest to represent the U.S. in the 1936 Olympics. We don't produce guys like this anymore– unless you can name a recent college team (any sport) that achieved athletic greatness while all acquired degrees in engineering, science, or law.

anonymous recommends: 

I'm really enjoying Conn Iggulden's 5 book series on Genghis Kahn, starting with Ghengis: Birth of an Empire.

May

11

 A commodity trader is never happy. "Do you know what happened in Australia over night? What a gyp. It opens up 20 big points, ran the stops and then backpedaled and went as much down the other way running those stops. Margin calls abounded and they had just increased intraday by 100% without notice so everyone was hosed. To add insult, commissions are 50 a contract a 5000 item both ways".

"Did you get caught?" I asked.

"No, I don't trade Australia at all".

There goes a true commodity trader, I said as he caught his train. The market is either too fast, too slow, too opaque, too illiquid, too crowded, too controlled by insiders, too far away from value, too random, too heavily arbitraged.

May

11

 The only reasons why Europe is recovering (euphemism) are the collapse of the euro (ie almost a return to the old currencies (peseta, lira, franc and drachma, etc ..) and the collapse of oil.

Steve Ellison writes:

Stef, this is an excellent point, and there is a meal for a lifetime if one can understand and anticipate how markets move to correct imbalances. As one who trades only S&P 500 futures, I have noticed that every time that market sold off in the past 5 years ostensibly over Greek worries, the euro went down at the same time, which directly alleviated the root cause of Greek non-competitiveness. Soon enough, there was no longer any reason for the S&P 500 to decline further.

anonymous writes:

I threw challenge a few weeks back: could anyone test "5 year expected earnings" vs ES.

I'll re-post these links as a trailhead at least for how one might go about such a study:

"Expectations and the Valuation of Shares
", Burton Malkiel, John G. Cragg

And the book.

May

11

 Preeminent statistician and election prognosticator Nate Silver, recently lamented on the problems pollsters are experiencing; and the recent election results in the UK may be a glaring example of their waning accuracy. Most pre-election polls called for a deadlock between the conservatives and the labor party and not the one-sided victory that actually transpired.silver listed the inability to reach voters over the telephone, and a growing distrust with probability sampling as two of the factors contributing to the pollsters' problem. To make matters worse, there have been instances where some pollsters withheld results when they differed from other surveys. Instead of acting independently from the other pollsters, some pollsters have herded with the popular consensus.

"Why Did A Rasmussen Reports Poll Disappear"

Jeff Sasmor writes: 

The Observer Effect , i.e. polls are generally less effective because people are bombarded with polls, surveys, etc. The act of observation is tainting the process.

Purchase a car lately? The salesman will explain to you how someone will call from the OEM and they'd like you to give them all "excellent" on all questions.

Use opentable and you're asked to post a review. Go to a website or use a company's interactive phone system and you'll be prompted to please take a short survey. Marketers and pollsters call on the phone several times a week to ask your opinion.

There's so much of that going on that many people won't participate. What does that do to the validity of the statistical methods used to process responses from people who refuse to play?

May

11

I recall when I first started trading, I did not do execution myself and in fact wrote down the orders on trade sheets, blue for buy, yellow for sell. Then took the written order, walking across the whole trading floor, all taking notice, and handed it to the execution trader. I had better have had a good reason for whatever I was doing. This was a very good process and instilled discipline, discouraged over trading and resulted in reaching full holding period more often than not.

May

8

 Victor writes to Adrian Bejan, author of Design in Nature: How the Constructal Law Governs Evolution in Biology, Physics, Technology, and Social Organization:

A reader asks if this is related to your work: "Wind Power Without the Mills"

Adrian Bejan responds: 

Hi Victor,

The answer is yes, in the two ways that this flow system behaves and improves itself:

–The natural: the vortices that shed downstream of the pole are constructal designs, the best way to mix the fluid downstream. They are predicted from the constructal law, man cannot change them

–The artificial: the wobbling pole can be designed (fine tuned) to capture and deliver most power to its magnet-power-generation unit at its base. Yet the "efficiency" will be low … this is why the company talk about other attractive features, low cost, easy maintenance, no moving parts, no noise, etc

Good night,

Adrian

Adrian Bejan ( MIT ' 71, ' 72, ' 75 )
J.A. Jones Distinguished Professor
Duke University
Academy of Europe

<http://www.amazon.com/Design-Nature-Constructal-Technology-Organization/dp/0385534612/ref=sr_1_1?ie=UTF8&qid=1327888221&sr=8-1>

On Thu, May 7, 2015 at 6:26 PM, Victor Niederhoffer (MANCHESTER TRADING L) < vniederhoffe@bloomberg.net> wrote:

May

8

Many of the major markets had made quite respectable gains and losses YTD up until recently.

These same markets have, on the whole, traded back to where they were at the start of the year and, in the case of bonds in Europe, gone well beyond.

In the closed system of major financial markets there is more than gristle to be had by looking at relative magnitudes and times elapsed from the beginning of periods to extremes and back again of different markets in ones trading 'universe '.

It is also worth asking if the, for lack of a better term, 'reversionary laggards'–in this case EURUSD and the DAX–both of which still some way from 1-1-15 levels–if this is predictive. Must these errant sheep rejoin the pack and trade back to initial levels seen the start of the year?

Is this a constructural phenomena? I believe it is. And a strong one at that.

May

8

A survey from CRT capital on the causes of the bond sell-off had 40% saying Bunds were to blame. Next was positions with 25%, followed by inflation fears (ECI, oil, the dollar and TIPS) with 15%. Domestic data only got 13% and other carried 8%. Liquidity and corporate issuance were mentioned as stressors.

May

8

I have some reading to do in the form of this paper by Burton Malkiel, John G. Cragg: "Expectations and the Valuation of Shares".

May

7

 Guaranteed paydays in boxing implies there is no inherent risk premium, so taking larger risks in prizefights does not provide larger returns. Accordingly, Floyd "Money" Mayweather took very little risk last Saturday evening, and fought "not-to-lose".

Both traders and fighters are susceptible to being emotionally enticed into behavioral patterns that adversely affect their performance, so while Floyd's approach may have appeared to be "uninspired", his strategy was based on reason rather than emotion.

Throughout the night Mayweather displayed superb technique, pacing, discipline, patience, and emotional symmetry.

In the end, the punch count was close to even, but Mayweather landed more "big" blows. It may not have been an exciting fight to watch, but asymmetric punches were the difference.

Mayweather exploited Pacquiao's weaknesses while staying away from his opponent's strengths. Even though Manny was the aggressor, Mayweather took the fight to Pac-Man and pressed at the right times. When the openings weren't there, he covered up and rested.

The chair exposed naive analysis of the markets for the pseudoscience it is; with technical mumbo-jumbo, spurious correlations, and causal urban myth making it a negative-sum proposition for most to try to predict the market.

Even for non-pugilist tacticians who can make a variant perception of the market look like anything but rocket science; without proper execution, an ever-changing and idiosyncratic market will quickly render any prescient analysis less than effective.

A trader sits down in front of his screens, and faces what is arguably a much tougher and more formidable opponent. At times his opponent is very predictable and easy to hit, but the majority of the time, his opponent is extremely unpredictable and elusive.

The trader will know his opponent's tendencies and have a plan, but just like the fighter, the trader will ultimately rely on a dynamic assessment of price action and adjust his strategy accordingly.

In either game, no matter how well you have sized up your opponent and tested your strategy, you still have to go out there and fight-your-fight.

Jeff Watson writes: 

Gary, great post by the way.

I might add, the "not to lose" habit is the most important characteristic of any successful speculator. When winning, one presses their bets, and when losing, one takes the losses with alacrity. Managing the losses with strict discipline will allow the wins to take care of themselves, provided one knows how to take a win. Winning is not as easy as it sounds or looks.

Gary Rogan writes: 

Once again diversification is an alternative to taking losses "with alacrity", at least in some markets. If what you are buying or selling has no known intrinsic value than perhaps there is no choice but to let the market be your guide. But as the well-known metaphor of "Mr. Market" indicates, in some areas "he" is not rational and should be taken advantage of instead of being used as a guide. I know that's not how you operate Jeff (and what's the intrinsic value of onions when not in a burlap bag?), but there are alternatives.

May

7

Chart of the Day- 30 Year Mortgage Rate

I, for one, do not share publisher's spin that this implies something down-trending at this junction. I view this chart better representing the fact that rates are way below historical norm. This is not to say how imminent the reversal is; but to say that once reversed, the rates have way more room to the upside than any remaining downside.

Jeff Sasmor writes: 

Two things:

1. that chart doesn't go back far enough for me. This one goes back to 1900

Assuming that that chart is roughly correct, one can see that for most of the last century mortgage rates were generally between 5 & 6 percent. Once out of that range it didn't return for about 30 years (except for a short blip).

2. Rates returning >= 5% will induce great hue and cry from many directions. I am not asserting that such a thing is armageddon-ish, but many will. It will be interesting to see if the Fed has the will to hold back from trying to influence the economy some more at that point.

Rocky's Ghost writes: 

Firstly, I would point out that the bond market (as it drops like a stone) is behaving like a bull market right now. Huh? How can that be? Yes, kids — bull markets are characterized by persistent grinding price gains and vicious pukoramas declines. Think about that statement very carefully before you disagree. Bear markets, in contrast, are characterized by grinding and persistent price declines and vicious price rallies. Again, think about that statement very carefully before you disagree.

But let us assume that Anatoly is correct as a thought exercise. Let us then note that the current bull market has lasted for 35 years. If you want to start setting secular (as opposed to cyclical and trading shorts), what's the hurry? I submit that one needs at least a few months to validate the secular bear market thesis. That thesis requires a lasting change in inflation expectations that break out of the 2-ish% range or a change in the perception of growth/capacity or a change in labor union/gov't policies or a change in the perception of sovereign risk/real rates or a war that changes the balance of investment/spending or deficit financing that exhausts savings or any other number of things that don't happen in a fortnight. Can they happen? Sure. Have they happened? Not yet. Heck, the Fed hasn't even tightened yet. A knock-down drag out cyclical bear market will the fed to be behind the curve on growth and inflation. Growth is still anemic. PCE inflation is still below the desired target.

All that has happened so far is that a bunch of people were on the same side of a multi month trend (bonds, dollar, crude oil, european QE) and those people are all exiting at the same time and moving prices to an equilibrium. This move is about positions. It's not about fundamentals. Yet. 35 years is 12,775 days. The high tick in the TLT was on 1/30/15. So we are about 125 days off the all time high.

Bottom line 1: DON'T SUFFER FROM THE RECENCY BIAS. Bottom line 2: TRADE IN THE TIME FRAME THAT MATTERS TO YOU.

P.S. Look at what has happened over the past few years when the 10-15 day moving average crosses below the 100ish day moving average in the TLT. People pay 2&20 for that nugget of advice. Hah.

anonymous writes: 

or perhaps the bear began in july 2012, when the 10-yr yield fell to 1.4% and cpi hit a low of -2.1%.

anonymous writes: 

You say this move is about positions.

From the cheap seats, this seems like the null hypothesis, for sure. Certainly, everybody didn't suddenly decide there's going to be a huge ramp-up in inflation. Or a default in bonds. More likely that many players are leveraged in the same direction(s), and recently enough have decided to "take profits", that others have decided to follow.

May

7

Bulls and bears take a back seat. Check out this video of Cow vs Goat. A cow picks a fight with a goat and loses…big time.

Market lesson: No matter how big or strong you are, don't mess with someone in their area of expertise.

May

7

 As one gasps for breath the following thought springs forth, motivated by:

A: the recent co-movement in Bonds , the dollar and stocks

B: the LoBagola completed (just about) in Bund futures a little while back this AM.

When related but different markets are experiencing a relatively high/unusual degree of co-movement, might the relative duration taken to 'LoBagola'/ reverse in each market be predictive?

As usual, I am trying to write words while there are only numbers, functions and classes in my head. So, put another way, might not the relative speed of reversal back to an initial market price be predictive for some future time period during periods of extended and robust co-movement?

Good day ahead all.

Anatoly Veltman writes: 

well, on what happened last couple of weeks.

As Bunds neared 0.05%, a handful of prominent entities took a position. They telegraphed the fallen king, who joined in. The risk was not nearly as high as it usually runs in the markets, and thus the speculation could be inordinately large of size…

The contrary trade gained speed as it continued to be helped both verbally and pyramidicly. In the process, the EUR began to look more and more attractive correspondingly.

Eventually, the high velocity moves in both rates and currency disrupted the equities peaceful drift. So you got the moment of all three moving in the same painful direction.

Vince Fulco writes: 

Sounds poetic looking in the rearview mirror.

May

7

 At age 3 in Tallahassee I learned the hard way that you can not to play in fire ant mounds. A very adaptable insect– millions of dollars have been spent to eradicate them.


"Fire ants roll 'snowballs' to dig a tunnel":

"The ants' ability to build their home in different types of soil could help explain their global expansion. In the past century, they have spread from their native South America to many other countries including the US, Australia and China. And they're not only comfortable on land: the insects can withstand water as well, by banding together to form unsinkable rafts the size of dinner plates that can handle waves and unforeseen forces."

May

7

16-Year-Old Man Warns of Next Financial Crisis: "Crisis will happen again, but not like 2008: Geithner"

May

7

 From Strategy Page:

There has not been a war between the Great Powers in Europe since the surrender of Nazi Germany on May 8, 1945, a peace that has lasted 70 years so far. This is the longest period of major-power peace in Europe since before the fall of Rome 1500 years ago. The second-longest such period of peace among the European Great Powers was the 43 years between the end of the Franco-Prussian War (January 31, 1871) and the Austro-Hungarian declaration of war on Serbia (July 28, 1914), which signaled the outbreak of the First World War two days later. In effect, since November 5, 1988, every day that the European Great Powers have not been at war with each other has set a new European regional –and pretty much a world– record for the duration of a peace.

May

7

One notes that the 30 year bond has gone down 11 big points in the last 13 days, and this is the largest decline in history. Rational expectations would not have predicted that the long term rate of inflation expected has changed that much.

anonymous comments: 

Wages, energy, and housing are all rising faster than the current rate of core inflation, but perhaps not at a rate that would justify such a precipitous bond move. Bonds may simply be getting back in-line with their German counterparts. US and German rates diverged significantly over the past year or so due to fears of Greek default, deflationary concerns, and divergent monetary policy. Last month ust10y rates traded at ~24X det10y rates with the rate spread hitting an all-time high of 190 bps. The recent 55 bps bounce in 10 year bunds from the 0.05% low on rational expectations for grexit and the stabilization of oil prices, has seen the bond/bund relationship begin to revert to the mean with the spread narrowing to ~162 bps and the ratio trading < 4.00. 

May

7

 I am not a conspiracy theorist, but the official explanation behind Dave Goldberg's (Sheryl Sandberg's husband) cause of death seems improbable:

"He reportedly left his room in the resort near Nuevo Vallarta at 16:00 local time to exercise, and family members went to look for him when he failed to return.

He was found at about 18:30 in the gym, lying by a treadmill, with a blow to the lower back of his head. It was apparent he had slipped on the treadmill and hit the machine, a spokesman for the Nayarit state prosecutor said."

Can someone explain the physics of how you (a) lose your balance; (b) whack the back of your head; (c) end up "lying by a treadmill". Anyone care to bet whether there is a video camera in the gym? Access control? An autopsy report from a board-certified pathologist? Are there any other examples of severe injuries to the "lower back of the head" from a treadmill?

Until I see the data, I'm canceling my trip to Nuevo Vallarta and betting that this was a botched kidnapping (Sandberg is a facebook billionaire) and is being covered up by the hotel and local authorities to prevent a tourist exodus.

Russ Sears writes: 

Treadmills are dangerous if operated at the higher speeds. What is a high speed depends on the individual working out. There are several ways to fall. In order of frequency for me:

1. Step half way off the tread.

2. Power outage due to either over heating motor, or simply power failure.

3. Pulled muscle or cramp.

4. Sudden distraction

But at hotels it's often due to improper maintenance, such as a loose tread or over heated motor. 

May

7

 At times like this one is reminded of Horatio Nelson's admonition to Aubrey: " Forget the maneuvers and go right at them".

Stefan Jovanovich comments: 

But if your men cannot go right at them, your only choices are to avoid engagement either by using the ocean's wide spaces or by staying in port. Pierre-Charles Villeneuve was shrewd enough to know that the only role for the French and Spanish fleets was to be a potential threat but never to actually come out and fight, except in those brief moments when they had overwhelming local superiority. That threat of a "fleet in being" would compel the Admiralty for political reasons to devote most of its energies to patrol duties in the Channel to guard against invasion and to blockading the Atlantic and Mediterranean ports of the enemy. It would maintain a stalemate which would, in fact, be a victory for Napoleon's continental system. But Villeneuve had the bad luck to work for a man who could never sustain a strategy that was working if it contradicted his latest impulse. So, Villeneuve was doomed to be ordered repeatedly to use absolutely the worst of all possible tactics. To this day, the French continue to blame him for the defeat at Trafalgar. They even join the English is questioning the Admiral's character for finally obeying Napoleon's stupid orders when faced with the choice of obedience or execution.

P.S. Nelson's contemporaries had the grace to acknowledge that Villeneuve was a better sailor than Nelson; when he attended the funeral ceremony, his presence was not considered shameful but a further endorsement of Nelson's military greatness.

May

7

 Those amongst you who receive bucketloads of bank Research (even with spam filters turned on high) will note the extraordinary versatility of sales people to be 'experts' in everything. In just the past twelve months, my counterparties have been offering risk taking 'advice' based on their expertise in:

Geopolitical events (Ukraine)

The Euro

Oil prices

Volatility

The DAX

And now… BUNDS.

They are all so clever! In all fairness 'cross product sales' and associated financial incentives for same (sales credit anyone?) is likely a driving force.

The fever pitch in the spam often occurs fairly coincidentally with slowing rates of change or reversal in the relevant sector….like Bunds now perhaps.

It is a good demonstration of misdirection, obtaining alms from customers, encouraging the wrong actions at the wrong time and bare faced hypocrisy.

One has to stand up and applaud futures broker this AM for making special phone call recommending the purchase of very short dated 15 delta BUND puts at a volatility so high that no amount of movement could give anything other than a loss.

The seeds of the next move of substance are likely in markets not in focus… Perhaps yield curve in NZD, Rice, South African Rand, or the on going Japanification of the US banking system and its ramifications for the still positive integer on the left hand side of long dated US treasury yields.

May

7

 One of my martial art instructors emphasized when facing an adversary a practice of never fixing your eyes, focus, or thoughts on any one specific attack. The thesis is that attention to a particular area leaves you vulnerable to secondary attacks. For example, when you are solely fixated on a potential blow to your right rib cage the real threat might be a spin kick to your head. The attention to one area delays both your reaction time and distracts your mind from other threats. Rather, the objective is to deal with the opponent in a more general sense, using peripheral vision and react spontaneously. Years of practice hone these skills to a point where they are intuitive. A chess master will recognize patterns on the board in similar fashion.

In fact, the saccadic movements of our eyes compress time subjectively. Saccadic eye movements as described by Neuroscience magazine are "rapid, ballistic movements of the eyes that abruptly change the point of fixation…..Saccadic eye movements are said to be ballistic because the saccade-generating system cannot respond to subsequent changes in the position of the target during the course of the eye movement. If the target moves again during this time (which is on the order of 15–100 ms), the saccade will miss the target, and a second saccade must be made to correct the error." . Scientific work by Concetta Morrone, John Ross and David Burr and others have shown that subjective time and space are compressed prior to saccadic eye movements. The remapping process of the brain is the likely cause of the distortions in time and space.

The lessons can be carried to the markets. In terms of multiple attacks and space compression a few things come to mind. The combination of factors such as the FOMC meeting in March, market positioning, sentiment, and economic data in Europe, Greece, and the United States that may have contributed to the recent selloff in the US dollar The rise in interest rates over the past fortnight and the feedback mechanisms and knock on impact to other markets. In terms of space compression others come to mind. The similarities between bond market reactions and timing to quantitative easing's actual implementation in both the US and Europe. In terms of the future how might similarities between the old Argentine Peso peg to the dollar at 1.0 and the current Euro currency regime play out?

May

7

 One notes the almost 5 year decline in the prices of Maize, Wheat, Soybeans and notably/most importantly, in the price of Rice.

I am often told to pull my head out of my ^%$#% and look at the real world. Well, I look directly at it now and say this: Why are the international food agencies not involved in these markets now (maybe they are?) buying whatever amounts necessary to begin alleviation programs.

They seem more interested in blaming evil speculators when prices are high.

Perhaps Stefan and Jeff could both rightly put me back in my myopic little box and correct my interpretation of the current situation?

Stefan Jovanovich writes: 

I can't, Shane. Your comments are literally a meal for the billion and more who still live have not to mouth. The central banks and national treasuries and the electorates have avoided the follies of the 1930s; they have not assumed that only preparations for war can justify income subsidies. But those people who have "learned the lesson" of the Great Depression have also done their best to ignore what the people who survived WW 2 did to get back on their feet again. They hoarded.

The rise of grain prices that had Britain remain on food rationing longer than West Germany came not from crop failures but from the producers' decision to build up inventories rather than release them.

The Marshall Plan was about bribing the American farmers to trust the government for once to pay them a log-dated premium over the market large enough to justify current sales from the inventory and a commitment to "overproduction". Without such a Marshall Plan output could remain flat while prices rose because farmers were still reminding themselves of the lesson of the past half-decade.

After restrictions of the the risks that come with a world in which commentators on current events no one can remember.

Scott Brooks adds:

Because there's no power to be gained by actually helping people get ahead. A downtrodden, hungry, oppressed man will reach out to grant power over his life to anyone who tells him the lies he wants to hear.

Stefan Jovanovich adds:

I thought Shane was pointing out that the non-profitistas were not buying low after complaining about the speculators selling high in the past. That seemed to me a shrewd observation not only for its comment on the nature of the helping professions but also for its implicit reference to how international food relief got started in the first place. In any case, I appreciated taking what he wrote as an invitation to discuss the political origins of the Marshall Plan and an amateur exploration of how grain producers might be shifting to hoarding. (Jeff has been silent because he is busy actually trading; I suspect he is also being kind enough to refrain from publicly reminding me that current production is controlled by entirely different government rules than those around in 1948.)

Where, in this meander, does Scott's comment fit? Are we supposed to say "Oh, dear, the poor are being stupid - again?" In my own direct experience of being poor (not just broke but also cut off from the safety nets of family and professional connections), I don't remember having any "power". If I had, I would have been happy to trade it for lies, if there had also been some cash to go with it. The poor don't mind being used as the excuse for the ministering to their needs; why should they? They may get only one piece out of eight from the money being spent but it is still better than nothing.

Neo-socialism does not exist in America because "the poor" demanded it but because the markets are as cruel to the well-educated as they are to the rest of us. The Congregationalist claque in Massachusetts and the Quaker gang in Pennsylvania learned that straight off; and they did not like it. Their solution was no different from the 19th century Progressives, Kennedy's Peace Corps or the current LDS - tithes and non-profit jobs for respectable children and their elders and, of course, price supports paid for by government paper money.

The lie that will always sell is the notion that people can be helped "to get ahead" through anything but commerce.
 

May

6

"Credit Supply on the Housing Boom":

"An expansion in credit supply was the fundamental driver of the surge in household debt and that borrowing against the increased value of real estate accounts for a significant fraction of this build-up in debt."

anonymous writes:

And it was prefaced by a fed rate hiking cycle in 2004 where financial market conditions did not tighten, but in fact, loosened significantly. Yellen's comments this morning seem to support the idea of a "yellen collar" on equities, while the recent sell-off in bond prices seems to also fit nicely with her master plan.

May

6

I am reading Life on the Mississippi by Mark Twain about his years as a steamboat pilot. It was a treacherous business and shares much in common with trading bonds.

May

5

It looks like a new currency awaits.

There's lots of assertions about what happens to Greece in case of a Grexit given that the resulting drachma would probably quickly lose value. What if Greece were to tie itself to bitcoins or some other cryptocurrency?

anonymous writes: 

The first step will be capital controls. The second step will likely be some form of domestic IOU's and or default. Those IOU's may or not morph into a New Drachma, etc. depending on both domestic and international factors. Very good chance they default and remain in the Euro as well. The Greek populace has made it clear they don't want to leave the Euro and want some sort of compromise. The bridge to cross between the two sides, however, has proven to be too far to cross. Further, the Greek economy is collapsing and all targets are moving faster than "shoot the freak" on Coney Island.

-primary budget now at best deficit of 1.5% of GDP, target was 1.5% surplus

-so need 3% of fiscal tightening in middle of this recession

-Greek constitutional court now talking of reversing some pension reform

-watch the bank deposit and financial market flows for keys to whether capital controls will be implemented

May

5

BAD NEWS

Wall street leading analyst calls for major crash of 35% decline to start now.

GOOD NEWS

The son of a gun has never been correct.

May

5

One notes the chart on page 65 of the May 2-8th edition of The Economist magazine detailing selected MXN bond yields over almost the past 200 years. (required a log scale clearly)

The recently over subscribed 100 year issue puts into perspective just how desperate the market is for yield, come what may and history be dammed.

May

5

 I thought some might find this clip interesting "Remarkable HD Footage of Berlin from July 1945".

The video quality is astonishing. Fascinating HD color video shows the situation of the city in summer 1945, just after the Second World War and the capitulation of Germany.

Daily life after years of war. Pictures from the destroyed city, the Reichstag, Brandenburger Tor, Adlon, Führerbunker, Unter den Linden, rubble women working in the streets, the tram is running again.

May

5

 Seventy Years Later, I Still Remember….

The scene of the liberation, as an inmate in the concentration camp of Mauthausen, Germany on May 5th, 1945

"It was early afternoon, and lying on the topmost bunk, I saw through a tiny window, on the top of the hill, grim buildings of the camp administration surrounding the Appellplatz, the square where prisoners were counted before going to work. For days now there was only deep silence there: no more labor troops. The Appellplatz seemed totally deserted.

"Suddenly, on the winding road a jeep appeared, followed by an armored car with a soldier at the machine gun mounted on it. They moved very, very slowly, cautiously uphill. The buildings on top were separated by a steel barrier from the rest of the camp. Today it was not the usual SS guard; the soldiers wore a different uniform. The two strange-looking vehicles reached the barrier. They stopped, and for a while the two sides eyed each other. Then the German guard raised the barrier without any resistance. Just as slowly as they came, the vanguard moved forward and stopped again in the middle of the square. Two giant-looking American soldiers got out.

"A minute later, the eerie silence was shattered by an earthquakelike rumble. Humanlike shapes, clad in striped prison pajamas, crawled forth from nowhere, moving grotesquely, seemingly senseless, stumbling, falling, and getting up again, trying to approach the Americans. All the while, they were shouting and screaming inarticulately; the sounds emitted were hardly human. They threw themselves at the Americans, who stood there in shock and disbelief, taking in the apocalyptic scene. Tripping over each other, they kissed their hands, their feet, their uniforms, wherever they could touch them. Many crawled around the vehicles convulsively, in hysterics.

"If man ever cried out from the depths, here was the nadir. These were the victims of the great German empire. All the enslaved, humiliated, down-trodden people of Europe.

"This moment remains indelibly set in your memory. Very few lived through such a scene and survived to bear witness. This is an experience during which you know, right when it happens, that the rest of your life can produce nothing like it. And perhaps time ought to come to a stop here.

For a brief moment it seemed that justice prevailed after all: the innocent is set free, and the evil is punished.

"Lying on the bunk, all that crossed my mind. But I didn't cry. I had run out of tears long ago."

May

5

One has ascertained two regularities highly applicable today for bonds. As of 1030. One has 10 observations 100% up to 1300, the other has 10 observations 100% down to 1300. Magnitudes very similar also. Right out of Gilbert and Sullivan.

May

4

Topic #1 at investor conferences is always: "When will the Fed raise interest rates?".

Here are some expert views on when it will happen and what it will mean for investors.

May

4

This is a big deal: US Supreme Court agrees to hear case about FERC's Order 745.

FERC Order 745 is about regional grids' ability to offer market-based incentives to reduce demand. In a word, it's about demand-response.

Generating utilities hate demand-response. It represents new competition. It dramatically alters supply-side economics. It reduces generating revenues and margins.

To fight expansion of demand-response programs, generating utilities argue that the federal government (FERC) lacks authority to regulate demand. They argue that demand represents retail consumers, which are traditionally within the domain of individual states.

It's a rich question. It touches many other issues, including new authorities granted to NERC. It affects the future value of batteries (TSLA) and transmission lines (ITC, AEP)

It's also an academic argument. If the Supreme Court knocks down FERC's presumed authority, many states will implement demand-response programs on their own. In fact, some already have.

May

4

 Any man who plays tennis knows how great a good, men's doubles match can be, with pace and at the net — a fight involving of four where you don't feel the punches.

In November 1996, I had a regular game with three others in a club I belonged to every week, at about 530 a.m. It was worth getting up for. One of those days, I would have a flight later that day to Newark, and from there a taxi or car into the city to do a class at New York Institute of Finance late afternoon, back out to Newark for a red eye flight to Amsterdam, where I was to speak at an IFTA conference the following morning.

One of the staff came out, midway during our game, to tell me I had a phone call.

I took the call, and they were telling me that my 96 year-old grandad had passed away that night. Realizing I couldn't bail on the commitments I made, I got on the plane, did what I committed to do so no one got stood up, managed to get a ticket off the street in Amsterdam (since the airline wouldn't change my ticket) for a flight, out of Brussels the following night to JFK. I got into JFK late, rented a car, drove the 11 or so hours, and showed up at the old man's funeral.

We were quite close, though our horns were always locked. He was a gritty guy who spoke with a Southern Ohio/ Kentucky accent ("I see you on the fourth of Joo-Lie") not unlike the old cartoon rooster Foghorn Leghorn. He played and coached in the early days of pro football ("The worst was that day in Detroit, the wind was cold, the field was cinders, not grass, and every time you went down you gotcha self scuffed"). I used to describe him as "Tougher than catshit."

He was.

But he was gregarious, and fun, and we used to go down to Lou-vull for the Derby quite frequently. It was a big deal every year– it was the culture he was from.

Every year on Derby day, I can;t help but think about him, and how now, now that I am older and slower don't care about a lot of things I once did, I realize how right he was about so many things.

The following May, I had to go without him, and it was more of habit than anything else (and it is not a glamorous place, contrary to the depiction on television, quite the contrary, there is a pervasive seediness to the whole area).

Hemingway describe The Derby as "the most exciting two minutes in sports, an explosion, an emotion."

That Derby
, that one, with my Silver Charm - Captain Bodgett Box, I got it, I got Hemingway. Absent the old man, it wasn't the best Derby I could remember — but it was certainly the most exciting for me.

May

4

 Courage to write freely comes in many forms and only some are proper.

This article contains the latest list of those writers who require that any First Amendment bravery be "fastidiously exercised for the good of humanity."

"204 PEN WRITERS (THUS FAR) HAVE OBJECTED TO THE CHARLIE HEBDO AWARD – NOT JUST 6"

May

4

 Perfectionists have trouble doing things because they want everything to be perfect. It never is. They often focus in on small inconsequential details and lose sight of the bigger picture. They have trouble prioritizing and seek detail. Certain things benefit from this, but trading is not one of them.

In focusing on small details, larger macro cycles can be ignored. It's important even when studying small time frames to look at the larger cycles at work. I saw a trading idea once called "Framesync" where the trader looked for bullish signals on three different time frames to pull the trigger. I always thought that was a good idea and generally follow that thinking.

Dan Grossman writes: 

I know Jim is right that one should avoid perfectionist tendencies when buying and selling. But I must say I get great pleasure when it turns out that I have sold a stock at the highest price of the day (ie, to the exact penny), or have bought a stock at the lowest price of the day. And I admit that this psychological pleasure sometimes outweighs that of the actual dollar gain. I am curious how many other Specs experience the same.

May

4

 Give me the place to stand, and I shall move the earth."

This is the translation from the Greek of what Archimedes is quoted as saying about the power of the lever. (Pappus of Alexandria, Synagoge, Book VIII, c. AD 340; Chiliades (12th century) by John Tzetzes, II.130.)

Since 2008 the predictions of doom by the goldistas have all been wrong. There has been no hyperinflation among any of the countries whose currencies can be cleared in large amounts through the central banks of the world. Gold has proven to be no more reliable a "store of value" than any other investment, even if you go all the way back to Nixon's cutting the last feeble fetter in 1971. (Yes, over that 4+decades gold ownership has been wonderfully rewarding for those early investors but no more so than ownership of the shares of Philip Morris, for example. As in the past tobacco has proven to be a more than adequate pseudo-money.)

The best explanation for why fiat money has not utterly failed is the simplest: currency itself no longer counts towards leverage. In a U.S. banking system with nearly 3 Trillion $ in "excess" reserves, vault cash on hand has become a footnote to any reserve accounting. Even the amount of money in circulation in the country becomes an inert variable compared to the volume of credit card transactions. (One suspects that even the traditional #1 users of dollar bills - those in the U.S. illegal drug trade - have moved on the debit cards.) So, we are in a new world where John Law's experiment has succeeded, where credit is the means for all transactions and the form of all savings. Law's system failed because gold was still the ultimate unit of account, and foreign exchange dealings remained in private hands. The livre could be traded for coin, and the governments, for all of their monarchical tyrannies, lacked the mechanisms to prevent people from taking their specie and running over the border. But, in the new world of central bank mercantilism, that is not a problem; the players at the table cannot cash in their chips. They can only exchange them for a differently colored legal tender IOU.

"Monetary policy" has been based on the assumptions that (1) banks wanted to lend to consumers for transactions and real estate asset purchases, (2) consumers wanted to borrow to buy now and would pay for the privilege, and (3) interest rates would control how much lending took place. But what if the consumers decide that they, too, want to hold "excess" reserves in the credit system? In a world of debit cards both consumers and banks may have discovered that they have less need or use for hassle of short-term leverage. The Fed has already hinted that it will be frowning on the uses of credit that are not "investments" - i.e. loans to existing members of the Fed club. "(W)e will use the rate of interest paid on excess reserves (IOER) as our primary tool to move the federal funds rate into the target range. This action should encourage banks not to lend to any private counterparty at a rate lower than the rate they can earn on balances maintained at the Fed, which should put upward pressure on a range of short-term interest rates."

If the Fed is going to keep its promise to draw down the assets on its balance sheet while tugging upward on the IOER, won't its interest rate policies necessarily be drawing private credit balances from consumption to savings? How else can they help create the necessary customers for the issuances of fresh Treasury paper; there has to be someone out there to do the buying so that the Treasury can actually send principal back to its best old customer. There are only two alternatives to that dreadful scenario of higher interest rates and lower consumer spending: (1) the Fed continues to be the Treasury's best new customer, or (2) the U.S. Treasury issues further regulations under the Trading with the Enemy Act outlawing "private counterparty" (sic) interest-bearing bank accounts.

But who can imagine the Fed breaking its word or the U.S. Treasury outlawing the private holding of money - er, credit?

May

4

 I have been thinking about the ability of snakes to see in the dark. What players in the market have abilities beyond the norm to see their prey no matter the chaos?

"The ability to sense infrared thermal radiation evolved independently in several different families of snakes. Essentially, it allows these animals to "see" radiant heat at wavelengths between 5 and 30 μm to a degree of accuracy such that a blind rattlesnake can target vulnerable body parts of the prey at which it strikes.

It was previously thought that the organs evolved primarily as prey detectors, but recent evidence suggests that it may also be used in thermoregulation and predator detection, making it a more general-purpose sensory organ than was supposed.


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