The hydraulic fracturing process which has lead to a big increases in recoverable fossil fuels is having an interest effect on other resources. Hydro is the Greek root for water and the process is extremely water intensive. In places where water is finite in supply like the western states, water rights are being sold by municipalities at prices 10x those just a few year ago. This is not a new story but an interesting twist. I'd rather own water rights than oil/mineral rights out west and I wonder how long before the h2o commodity becomes actively traded.



 Last week while in the DC area I took a visit to Mt. Vernon which I would highly recommend. It is an education into the life of GW the man, and not just the iconic figure that sits on the dollar bill. One interesting thing they have done is to construct images and statues of how he would have looked in his 20s and 30s since there are few portraits from this period. His early life was new to me and it is the story of a young ambitious man, whose father died early leaving most of the wealth to his old brother. GW, though guided by his older brother, was left to support himself and took up the trade of surveying. He learned the terrain of the expanding territories around Virginia and Maryland. He was an excellent horseman and outdoorsman. He began his land speculations at this time, eventually obtaining over 50,000 acres. He joined the British in fighting the French in disputed western and Ohio territories and was a colonel by the age of 23. He was involved with the first shots of that 7 Years War and showed many acts of leadership and bravery. After the war he married a widow of means to begin his life as a country planter in Virginia. This was cut short with the events of the Revolutionary War which occupied the next 8 years of his life, returning home just once.

What sets him apart from the other founding fathers is that he was first a military man, second a man of enterprise and afterward a man of government. He had immense power and was hugely popular, but he chose to leave government for his beloved Mt Vernon. He only had two years to do so before his death. This act of giving up power was his greatest achievement and is one of the cornerstones of our republic today. A visit to Mt. Vernon brings GW out of mythic stature to real life, where I learned about a very practical and able man, who had the courage to take big risks on his way to achieving greatness.



 I've been thinking about the importance of the actual day session. Pit close seems to be a moving target these days since most liquid markets trade almost 24/7. With futures there is a relationship to the cash market which must be respected. Also for margin purposes there is specific time/price which the "committee" uses which also must be respected. There is probably a range regarding importance depending on the contract. I would put FX at one extreme where the arbitrary close matters least. For stocks and equity futures, I believe the NYSE, Dax, Nikkei closes do still matter as a reference point. For the softs and metals they too seem more connected to the pits where the close is important.



Hydro, from Duncan Coker

September 24, 2014 | 1 Comment

The hydraulic fracturing process which has lead to a big increases in recoverable fossil fuels is having an interest effect on other resources. Hydro is the Greek root for water and the process is extremely water intensive. In places where water is finite in supply like the western states, water rights are being sold by municipalities at prices 10x those just a few year ago. This is not a new story but an interesting twist. I'd rather own water rights than oil/mineral rights out west and I wonder how long before the h2o commodity becomes actively traded.



In an article today about Pimco they disclosed that they prefer holding bond futures as opposed to cash bonds. The logic being that since futures only require a good faith margin they can deploy excess capital into higher yielding shorter term corporates for the interest payments. The futures positions are used primarily to capture any price movements on bonds. They hold a $63 billion position in 5, 10, 30 year futures which I calculate represents roughly 11% of the open interest and every quarter they would need to roll 630,000 contracts.

Jonathan Bower writes: 

One of the huge trades I remember them making many years ago on the floor was selling 30-50k out of the money puts on US and TY. They did this several expirations in a row. The rationale was they could capture the premium and if the market went down they'd take delivery at their line in the sand. Perhaps it is an efficient way to put on size at a target level.



One of the good parts of trading using statistics versus fundamentals is that you can be right for the wrong reason, or for no reason at all. Take the bond market this year. No one was bullish bonds a year ago other than Gary Shilling. His reasoning was deflation, new recession, no growth and general earnings disaster. None of the reasons happened, and yet he was still correct on the direction and made money on his long Treasury Bonds. Good for him. It is another version of the win ugly argument which is much better than losing gracefully.



I think knowing your counterparty in a trade falls under “to know thine enemy” and is always of value. These days, however, it is hard to verify or test. In floor trading there are locals and the ubiquitous “paper” when it come to fills. I would much rather trade against the latter then the former. With electronic trading I used to have a theory I was trading against the retailer traders who would not hold over night, or the trend followers who would tolerate losses in the short-term. But these were hard to verify even then, and now I would not propose those theories as valid. I have yet to develop an alternative theory.



 On August 5, 1949 the Mann Gulch fire claimed the lives of 13 of the Forest Services' best and bravest from the elite group of fire fighter/parachuters known then as the Smokejumpers. That day turned into a foot race against an apocalyptic fire. Two outran it and one survived by laying down in a smaller escape fire he set himself. The others did not survive. It is told by Norman Maclean, woodsmen, scholar and Montana native in his book Young Men and Fire. It is a fine book by an even finer man. I can do no justice as a reviewer other than to say it is a universal story of the tragedy of young men or woman, facing danger, and who do not return. It is also the story of the old men who are compelled to tell the story of the young, searching for answers to how it all occurred, and maybe even parts of the why it occurred. It is told with dignity and compassion.

 One part that has particular relevance to many on this list is the creation of three Forest Fire Laboratories in the early 60s that was a partial result of the Mann Gulch tragedy. Here scientists and engineers began to research and create models predicting how fires spread.

The research led to new approaches to fighting forest fires which up to then had simple been to "get there early". Using controlled wind tunnels they varied inputs and measured outputs. As inputs they had 12 fuel categories, terrain slope from 0 to 90 degrees (fires burn faster uphill), fuel water content from 0 to 50% (little burns beyond 24% moisture) and lastly wind conditions. This last point is complex as fires create their own wind as rising heat pulls in colder air from below. This wind is in addition to whatever prevailing winds are already in the area. Some of the outputs include fire Btu per foot per second, speed in feet per minute, height of flames, and most likely direction of spreading.

Maclean enlisted the researchers there to help tell the story of Mann Gulch attempting to recreate the past events of that day. Equally important scientists could make predictions to aid the Forest Service on big fires. It is a tragedy none of this was available at Mann Gulch, but a positive consequence that science now complements bravery for those firefighters facing nature in the field.



 I can make the case this year volatility has been low in the major markets, stocks and bonds. It has been a bit more firey in some of the other markets like energy (crude) and metals (gold). Yet there have been glimpses of movement like some of the European moves down 1% today and on occasion earlier this month.

I would make the comparison to stored potential energy waiting to be released. When I google it the first image is that of an archer pulling back a bow before it is released, or springs held in check. A damn of a river is holding a lot of potential energy. Potential energy could be generated in this way as an impediment to the natural flow state of constructural theory. A test would be to look at what impediments there might be in a system and when or how those could break down to release the potential energy, thereby sending the arrow to its target.



One of the greatest features of any market is they enable price discovery. The words are almost interchangeable. Markets equals prices. Once a price is established from hundreds, thousands or millions of transactions, then the laws of supply and demand, scarcity, comparative advantage, can kick in to allocate resource to create the greatest aggregate wealth. Also things can be measured when there are accurate prices to study baselines, make comparisons, and determine trends. The opposite would be true for industries where there is no price discovery. I can think of one big industry prices where discovery is notably absent and there is much waste as a result.

anonymous writes:

anonymous's comment deserves far more applause than it is going to get - given his understandable reluctance to have his words delivered to the public. Marx's "Capitalism" - that schoolteacher word of schoolteacher words from the postdoc of all postdocs - says almost nothing about prices except to ridicule the notion that they are anything but a fraud. It is not surprising that Leftist thinking almost always ends up saying something nasty about "the Jews". In different times and places, you can substitute "Hugeunots, Quakers, Italians (actually not but use it as a short-hand for Venetians, Genoese, Milanese, etc.), Greeks, Phoenecians, Lebanese, Masons…." - anyone guilty of being able to do the math.

Of course, prices are bent; someone in every trade has the advantage of having a better idea of what his present costs and future profits are. But, an unfair trade is a better start than a hope for mercy or "fairness". People learn from prices; they learn what Morgan said was most important - "the character" of their counter-party - and, where there are markets, they have the means of acting on what they learn.

FWIW, Eddy agrees with you, anonymous, about the waste that results from the failure of our medical-industrial system to allow any bid-ask pricing to intrude on its theological rationing of services. She told her Dad aka the History Beet (not Kerouac but the vegetable) last night at dinner that she now understands how so many of the monasteries collapsed even when they were not taken over by Henry VIII and other monarchists: "the abbots swallowed all the money with their building programs and then complained about the greed of their donors and the usury of their lenders".

anonymous adds:

With anonymous's support I am emboldened. As a thought experiment if there is a cogent argument against having accurate, transparent prices for a good or service, what are those benefits? It is not a left vs. right issue as they are not mutually exclusive. I can be in favor of giving away apples and still think it important to know what the price of that apple is.



Bonds and stocks are both near highs for the year and yet the traditional relationship of moving opposite on a daily basis seems to still hold. I looked at daily changes of stock and bond futures using a time of 1600. Here are the percent of times they move together in the same direction vs opposite along with number of observations. I exclude unchanged days.

2014    28%/72%   n= 35/89

2013    43%/57%   n=106/139

2012    26%/74%   n=63/179

2011    25%/75%   n=63/185

2010    36%/64%   n=87/155

2009    41%/59%   n=101/142



I had the pleasure of seeing a very entertaining production of The Merry Wives of Windsor the weekend. It was fictionally set during the 1960s at a summer resort in the Poconos. Think Dirty Dancing meets Downton Abbey. The play shows Falstaff in all his completeness. The sometimes modern theme of women outsmarting their dullard husbands began long ago in this play. But in this story somehow the mockery is not spiteful or malicious, but to use a pun is "playful" with a touch of ribaldry to keep it interesting. I highly recommend everyone get out to see open-air Shakespeare somewhere this summer.

Oh yeah, and the play contains a fantastic use of the word alacrity: "I have a kind of alacrity in sinking"

- Falstaff recounting being tossed into the bog, outsmarted by the Wives. 



 The Secret Diary of Arthur Burns provides a first hand account of the Federal Reserve Board Chairman for the period of 1968 to 1974. It was an interesting time frame for Fed policy. Among the issue they faced were; leaving the gold standard, floating the currency, renewing deficit spending, managing tariff/price controls, and dealing with an energy crisis to name just a few.

The context of the book takes the reader back to the highly regulated world of pre-Reagan America. Industry, trade and currencies were overseen by technocrats and this Republican administration had their hands seemingly everywhere. Bureaucracies like a wage and price boards set industrial pricing. Tariff boards controlled international trade, and currency pegs served to formalize handshake agreements between countries. The Nixon administration, however, marked the beginning of the end for at least some of these controls. Gold, famously, was the first to go. The metal increased from the longstanding $35/ounce peg. Eventually it floated freely.

The book portrays a cabinet completely preoccupied with politics, internal power struggles, and meddling in economic areas beyond their competence. On the monetary side, Milton Friedman's ideas were used but they were misapplied. The Fed boosted M1 as stimulative, but then developed a spider web of price controls to reduce the inflationary results. Hubris and indifference to basic economics were displayed by all the central players, Nixon, Burns at the Fed, Shutlz on Budget and Connally at Treasury.

For example, in dropping the gold standard Burns was the first to admit they had no idea what the consequences would be. It was purely a politically expedient decision. They needed more paper dollars to fund the ending of the Vietnam War. Also, they wanted to begin what would become many decades of federal deficit spending. In one such discussion he outlines the dynamics of a typical meeting:

page 66. "Here we were Kissinger, a brilliant political analyst but admittedly ignorant of economics; Connally, a thoroughly confused politician… Shultz, a no less confused amateur economist; I (Arthur Burns) the only one there with any knowledge of the subject, but even I not a real expert on some aspects of the intricate international problem"

Burns did argue for some growth policies including tax reductions and industry incentives. However, he was not persuasive enough. Time and time again the economically correct course was discarded for the politically easy one. Tariffs were arbitrarily thrown up to protect certain jobs prior to an election. The currency was expended to allow for politically targeting spending. Double digit Inflation was an acceptable consequence for fiscal expansion.

As an unintended benefit the book gives an interesting preview of recognizable characters in their youth like, Volcker, Shultz, and Kissinger. Burns though is often brutal in his character assessments. Burns made clear the book was not to be released until 30 years after his death. I can see the reason why.



It is happening again. Starting in mid June the realized volatility of stocks futures, calculated with a 20 day look back, is lower than the realized volatility of 30 year bonds futures. Over the last 10 years it happens about 15% of the time. The returns for stocks are slightly negative during these time compared to the normal positive drift for stocks. Bonds are flat. This makes intuitive sense as the now less risky stocks would underperform the more risky (yet still risk free) bonds.



 Even I am starting to take note of the moves in the grains, logabola and then some.

Like the taxi driver commenting on stocks he is buying unsolicited by passengers, this must be some sort of indicator and I offer it as a free fade to the pros on the site.

Jeff Watson writes:

When you think about it, Ceres is the most important market mistress, because everyone has to eat. Even the insiders tread lightly around her, the medieval devices of torture she still employs are very painful.



 First day of the quarter goes up about 65% of the time since 2000 versus 52% of the time on other days. As if the market likes to establish an early lead. So any fund managers, investment advisers or traders who were prudently on the sidelines are forced to play from behind for the rest of the quarter. When you're playing catch-up in any sport or game, like tennis, eventually you have to take riskier shots. While your opponent, in this case the market, can just keep hitting them high and deep to the backhand, waiting for you to make an error.



 Here is a list of golf aphorisms written by a friend of mine. He is a competing low handicap golfer of just 20.

You can't win a tournament on Thursday, but you can definitely lose it.

There is no picture on the scorecard.

It is good to compete. It brings out the best of your abilities.

There will always be new swing ideas and people in your ear about mechanics. Stick to the swing that is natural and successful for you.

Approach the toughest hole with the same strategy as the easiest hole.

Golf is a test of your will versus the course, the natural elements and the tournament.

You can't walk off the course and go back to the range.

Play with what you're hitting that day be it hook, slice, or draw.

Have just one or two "swing thoughts" for the day.

If a putt lips out but you hit it the way you wanted, that's all that can be asked.

Learn how to play in different conditions and environments. It won't always be 75 degrees and sunny.

Sometimes hitting the driver 300 yards isn't the best play. Figure out when to be aggressive and when to be tactical.

Always forget your bad shots or good shots for that matter. Focus only on the shot at hand.

Sunday on the back nine you may have to change tactics completely.

Often times a bogey is a great score.

Never get angry with the course set up, the greens, or pin placements. Everyone plays the same course.

Approach practice like a tournament. Make each practice shot live and relevant.

-Austin Williams USC 2014



This is a technical observation but in doing some housekeeping and looking at S&P 500 futures data going back to 2000, we are almost at the point where a roll adjusted continuous time series is the same as the non-roll adjusted time series. In other word since 2000 there have now been almost as many positive carry months as negative carry months for SP futures. The changing of the guard if memory serves was some time in 2008 when short term rates (cost to borrow) became lower than the dividend yield of the cash SP 500. At that time the term structure of futures went into backwardation and there it has remained.

Charles Pennington writes:

We should thank 'anonymous' who told us back then that backwardation would be good for stock investing.

anonymous clarifies: 

My supposition [was] based on comments by Philip Carret in his 1931 book The Art of Speculation.
Mr. Carret talked about periods when stocks "carried themselves"
because their dividends were sufficient to cover the cost of borrowing.
As of today, stocks are still carrying themselves, as Mr. Coker notes.



 Heller wrote in Catch 22:

Seven-cent Maltese eggs cost the sellers in Malta four and one-quarter cents each to procure. Milo is actually buying the eggs from himself in Malta, which means that as a seller there he is making two and three-quarter cents each egg. After he resells the seven-cent eggs to the mess halls for five cents each, he is still making a three-quarter cent profit per egg.

However, it turns out that Milo's Maltese eggs are actually one-cent Sicilian eggs which he has secretly shipped to Malta to drive up their value, yielding him another three and one-quarter cents profit per egg.

In short: in all these dealings, where Milo is the producer, consumer, and middleman (twice), he can afford a two cent per-egg loss, because overall the syndicate is making six cents revenue per egg. And everyone has a share.

I'm involved in a cash grain deal that is turning into something like this.

Duncan Coker writes: 

I can only fictionalize (a la Heller Catch 22) what arbitrage Jeff has in place and the exotic transport involved. Buying Ukraine wheat shipped via ex-Russian military transport vehicle to the Black Sea, to load into barges to go down the Bosphorus to Istanbul. Then by freight via the Suez to Singapore for delivery against the Hong Kong futures sold for August. Just one possibility.



One of the bigger surprises this year for me has been the rally in the bond market up some 7% on the long end. It appears as if the vigilantes will never ride again. Rather than the Fed as the cause, I would look to the Treasury. Related surprises are the federal deficit which has decreased sizeably from the peak several years, and spending, as bad as it is, has remained relatively flat. Massive new discoveries of energy reserves have helped to push down prices in commodities and boosted tax receipts. As the Fed unwinds its buying program apparently there are many others willing to step up.



 Averages are interesting and ubiquitous. I use averages every day and they are a part of my trading research. However, they are often misapplied in a social context. Find the average man, for example, and he does not exist, except in films like Idiocracy (highly recommended for a laugh). Thomas Sowell has written about this when statistics refer to average wealth, income, etc. In the sense that these are real flesh and blood people, the statistics deceive. For example, if there were just two earners, one making $50,000 and one making $1,000,000, the average is $525,000, surely not reflective of the underlying population.

The market on average has an equity of premium of 6% per year and a nominal increase of around 9%, but very few years actually are near this. Just look at the last 10 years starting in 2004 for the SPY etf. (10.7, 4.83, 15.85, 5.14, -36.81, 26.37, 15.06, 1.89, 15.99, 32. 31) avg=9.1. Certainly there's nothing "average" about this decade.

This is not news to anyone reading this site, but it is interesting to think about. In practice, in life, and as traders we live in the variation. If I can be philosophical, we live in the journey not the destination. The journey being the many deviations from what we expect might occur. The variation around the expectation, in more interesting, positive and negative extremes, and how we will deal with them when they occur. This is what defines us as individuals.



 In preparation for my first fishing trip of the year next weekend, I watched the film Low and Clear. It starts with the usual boring fishing-zen dialogues, but then it presents an interesting parallel between mentor and student reunited for a steel-head fishing trip in BC. The mentor is a fishing master that has done little else with his life and has a relentless approach to catching fish. The student now has a life outside fishing, but he is not as good fisherman anymore and he focuses more on the experience of fishing and other superfluous things like a "spade cast".

This contrast reminded me of the time when I discovered that trading didn't need to be a beautiful process, it only needs to get the job done. And somehow I don't see around the guys who were obsessed about catching the big swing with fancy methods. I do see the disciplined hybrids (specs/grinders) consistently making money every year.

A quote from the Palindrome seems appropriate:

"A lot of people of average intelligence make a good living. Really smart people can accumulate a fortune if they are truly committed. The problem with you is that you like to do interesting work. Someone who wants to be rich doesn't care what he does. He only focuses on the bottom line. All day long he thinks how can he make more money. If that means setting up more shoe shine stands, that's what he does."

Happy Fishing, and trading!

Duncan Coker writes:

It is good to hear from another angler on the list. Hernan brings up the "winning ugly" concept as it relates to fishing and trading. It is definitely better to win ugly, then lose gracefully in trading, in sports and many other things. In fact all my trades are ugly. It is a scrappy dog fight.

Fishing, though, is a respite and pastime in nature, not a vocation. If I was a guide maybe I would feel differently. But as an amateur and outdoorsman, I like all the aspects, walking to the river, scouting for fish, setting up, casting. On style, I much prefer spending the day taking long casts with a dry fly versus "hucking-lead", the equivalent of bait fishing on a river. My fishing buddy and I fit the two different profiles well. It ain't pretty, but he catches more fish. I am slow and deliberate. He races from one spot to the next and probably works a bit harder on the river. I suppose it is how you define success. In trading it is clear, P&L is all that matters. In fishing a day on the river is always a winning trade and I don't define fishing success relative to anything. Like an aspiring Zen master on the river, fishing simply is.



Here is an economics anecdote on trade that I can explain to my six year old. Yesterday at an outdoor plaza there is a soup vendor I normally go to and a taco guy next door. I notice my soup guy is eating tacos, and I look over to taco stand and he is having soup. I ask the soup vendor about it and he quips that he is checking out the competition and hopes he is not poisoned. But I see a nice illustration of comparative advantage, value creation and utility curve optimization.



 It is time honored policy for governments to run up huge debt, then via inflation to pay back that debt in pennies to the dollar or not at all. The most extreme example would be Wiemar republic in the 20s, but there are devaluations all the time, witness Argentina. It is an easy and quiet destruction of wealth of the citizenry by their government. Keynes wrote about it. Though eventually it will work in the US, there must be frustration it is taking so long here. There must be other forces at work holding up the dollar I would call these the positive affects, like the production, innovation, demand for US currency for trade, a slowing of credit growth (second order affect). Amazingly for the time being these forces counter-act a destructive currency policy and there is a stand-off.

Stefan Jovanovich writes:

I think anonymous' point needs further support. Governments have not, in fact, "paid back" debt using inflated currencies. That is one of Keynes' historical fantasies. The debt was simply defaulted. After the new currency was refloated, some of the former debtholders (but never all or even a majority) are lucky/influential enough to be "repaid" by having their old debt instruments swapped for new IOUs using the new "sound" currency; but actual payments that extinguish the debt are never made for the simple reason that the government had no reserves in the old currency and no political ability to make one grand final payment in full. This may seem like a distinction without a difference, but it is not. Default allows the governments to wipe out all the other promises made that were not secured by indentures (pensions, social service payments, subsidies) in the name of "reform". If those obligations had, in fact, been "paid back" in the inflated legal tender, the claimants would at least have gotten old "dollars" that were worth new pennies; what, in fact, happens is that they get nothing.

The rise of the National Socialists can be directly tied to the fact that the currency reform after the hyperinflation left all the old Bismarck safety net promises in default. Hitler's most successful campaign promise was that he would restore those vanished pensions at full value (one can find parallels with the American Progressives' promise throughout the last third of the 19th century and all the times thereafter to assure farmers that they would receive "par" for their crop payments. The just-passed farm bill is a legacy of that toxic doctrine of equalism.)



 In the short term trading world is it better to diversify and trade many things or specialize and trade just a few. I am in the later camp, as it takes all my usable mind capacity to manage just one or two positions concurrently.

Others prefer to trade many instruments saying it increases opportunity and reduces risk by diversifying. However in futures trading, and short-term in particular, there is no Markowitz "free lunch" that comes from diversification which applies only to stocks. By trading more instruments it does perhaps give you something to do when other markets are slow. This however could also be viewed as a negative, and maybe it is better to not be in the markets at times. It makes sense to me to trade based on opportunity. Yet, in practical trading-life these opportunities are so difficult to find, it takes being a specialist to uncover them.

In angling, I am a bit of a hybrid. I specialize in flyfishing, but I will go after anything with gills and scales and recently added the beloved carp to my list. In economics, comparative value tell us to specialize and has been the source behind much advancement. Ben Green traded just horses and the occasional mule. Bacon just bet on the ponies. Specializing served them both well.

Anatoly Veltman writes: 

The main advantage of algo trading is the ability of your portfolio to simultaneously participate in all futures you've pre-programmed. Certainly that's an impossible task for a manual trader

Kim Zussman comments: 

Duncan isn't trading index futures lunching with Markowitz? (Albeit less so than before the period of widespread indexification).



 Keynes is famous for writing "in the long-term we are all dead". Focusing on the long term may be important but ultimately is meaningless to the individual. He also wrote that for businesses planning the short-term is predictable, while the longer-term from year to year becomes random. For governments multiply this by many factors. Anything in a government budget beyond year t+3 is complete fiction. Wall street convictions say the opposite, that stocks are unpredictable in the short-term. In the long-term, however, stocks will enjoy an upward drift. Fischer Black wrote about this issue in his business cycle theory saying that firms attempt in the short-term to produce for future long-term demand. When they plan and execute well there is economic growth. When they plan and execute poorly there are recessions. The 2008 mismatch being a tremendous oversupply of housing and credit, for example.

In life and business, it is sounds more wise and mature to have long-term thinking, childish to think only of tomorrow. The Sage holds investments forever, yet the insurance premiums collected I am sure are tallied ever day. A Zen philosophers would say we should live in the moment, the extremely short-term. I agree with Fischer Black's thinking. It is good to embrace that the future is highly unpredictable and every decision we make involves time and uncertainty. I still work hard in the short-term towards long-term goals, but expect some variation along the way. The Yangtze has many twists and turns before reaching the sea; Fortes fortuna adiuuat.



 This may be already be obvious, but there is an amazing similarity between statistical analysis and writing country music songs. In song writing, you have two or three verses and a chorus to try to convey one idea and maybe a supporting storyline. The chorus has to be convincing, and if you accompany this with a nice melody the song will have an emotional impact on the audience.

The same is true in statistics. The best graphs, tables and charts are the simple ones that can easily convey one big idea. Statistics when presented well have an emotional impact, just like a song, that wow affect. True it is hard to hum confidence intervals or t-scores, but otherwise they are not to far removed.



 Avalanche prediction requires the study of the snowpack both historically and how the snow structure has metamorphosed over time. One of the prime causes of avalanches are weak layers and slab formation. Weak layers in the snow pack are layers in the snow that cause the snow on top of it to slide off it and down the hill causing an avalanche. Weak layers can be low density snow or an ice layer or hoar frost flakes. Slab avalanches are created when higher density snow bonds together then slides on a weak on steep hill. Avalanches can kill.

Avalanches remind me of markets. You can study market structure historically by looking at the number of trades at a price. Over time the density may change. Market order depth structure is not available in full but could be inferred to some degree. Some parties have access to full book.

The theory is there are weak layers in the market structure that might cause a market avalanche or rapid rise. There may also be dense layers in the market structure. An example is a long bar with big price change but low number if trades. Time may change the number of trades at the prices or depth of orders might affect the reactivity of the bar. And a gap is also an example of a weak layer.

Duncan Coker adds: 

Jim's post on avalanches' relationship to the market can be summed up in one word. Respect. Respect that at any point in time the market is in equilibrium. It is priced correctly given forward required return, the price of risk. If one disagrees and expresses this in a position, the null hypothesis is the market is right and I will be wrong. The mountains always prevail in the same way, and if I am venturing out in the back country, I will show due respect.



Collateral plays a big role in the system at large. If the banks can survive only through overnight funding at either the repo, MRO/LTRO, or Fed discount window, acceptable collateral is as important as rates. To ease the Fed can ignore rates and just say one day they will except IBM or Apple debt or commercial paper as collateral in exchange for loans. Conversely they could slip in some language about raising "haircuts" on notes or bills to have a tightening effect. While all are focused on the level of bond buying, there are many other tricks they can pull from the sleeves.

Richard Owen writes: 

They say the securitisation markets died.

Not so. It is just the banks began wrapping to repo rather than sell.

The ECB gave it a pill by agreeing to accept any AAA collateral. Standard practice is to wrap your doo doo, top slice it, and fund the AAA at ECB.



 We have all experience or witnessed the thing called beginner's luck in sports, games or other competitions. I will make a hypothesis that this is not luck at all, but a non-random effect. It may be like the home field advantage, which was never fully explained until recently. In beginner's luck what the player lacks in experience he more than makes up for in other attributes allowing him to compete better. It could be a higher performance mental state. Lacking experience the player also lacks other things like fear, disappointment and loss. Free of these, he is willing to take on more risk. He is not anchored to one belief system or set of rule. Rather he is quite flexible and adaptable to new conditions as they present themselves. Beginners see the world as children again, albeit all too briefly, and may find simple opportunities that a more experienced player would overlook. In a competition, an opponent could underestimate a beginner giving him an advantage and allowing him to play with less pressure to win. It would do well for a more experience players to understand what is behind beginner's luck and to find ways to either adopt or counter it.

Anatoly Veltman writes:

I experienced it first hand in spring of 1987. I've decided to make my first major trade by that time, because I spent several months eyeballing all available charts and was struck by an unmistakable basing pattern in Silver. I surveyed dozens of veteran Silver traders around COMEX - and none of them would get excited at that particular junction. They all got burned, some less and some totally, in the course of the preceding 6 years worth of price action in Silver - and that seemed to convince them that Silver can never again master a sustainable rally.

Well, as my beginner's luck would have it: I started accumulating as much as I could over 30 consecutive trading days from 50k of initial margin money, and by April 27 I already owned hundreds of lots, worth over a million! But on that one day - easy come easy go - Silver rolled back from $11.25 to $7.50, leaving me with barely positive equity and a single lot for memory keep-sake! So, admittedly, the old wolves did end up skinning me: during that one unprecedented futures session, which flipped all futures months from limit-up to limit-down lock - only they knew how to execute in the Spot month of un-traditional April futures and front run (via switches) all outside would-be sellers, none of whom got to sell anything that day! And by next day the April contract was not just spot delivery - it didn't even exist!! That one trading session proved too arcane for any amateur futures trader, and the Exchange insiders fully capitalized. Just like in their good ole times of the famed January 1980! 



There is a second derivative of deception on tomorrow's employment data. Not only don't we know the number, we don't know when they plan to release the unknown number. And since all is closed, we don't know when they will even announce when they will announce the unknown numbers. The markets, the great discounters of all information, will have to work extra hard.



 I heard an interesting economist speak recently regarding currency and in particular what is required to be a Reserve Currency. There are three important requirements. First, the currency must float freely. The world won't hold a currency that is incorrectly priced. Second, there must be an active and legitimate bond market to set rates of interest. Third, and most interesting to me, a strong navy. In global trade there is an implied guarantee that goods held in a Reserve Currency will reach their destination unharmed. That is not to say a global Reserve cannot change, it just requires some doing. British Sterling met those standards in the 19th century, when she ruled the seas. Not so now. At present the Chinese Yuan is deficient in all three, the Euro is lacking in one. 



I am reading a book on equity risk premiums and it provided a nice frame work to view bonds and stocks. The equity risk premium P is fairly stable over time, meaning the excess required return to hold the riskier* asset of stocks over bonds. So when bonds go down, for example, as they are now, riskless rates are going up. This means the required return for stocks = riskless rates plus P, in now also higher. So either the future prospects for stock earnings must be better, or stocks must go down now to make up the difference. That seems to be the battle we will be in for the post Bernanke world. One eye on earnings, the other on bonds.

*Note the last few years has proved there really is no such thing as a riskless rate, real rates can stay negative for a long time, and sometimes in bond risk is higher than equity risk. But all that hurts my brain too much to contemplate.



 I was speaking with a sailor friend recently about the new boat designs for the Americas Cup race. They are now completely foil keel, which means very little of the boat is actually in the water, and more like hovercraft. The sail coverage and mast size to boat size ratios are at an extreme, with the mast now double the length of the boat. They are incredibly fast and incredibly unstable. To move the boom requires a mechanical device rather than sailor sweat and strength. Sadly, there was a fatality in this year race and more than one lost boat. All this means a captain must react well ahead of the wind and conditions to stave off disaster. This reminds me of another activity many are involved with on the site.



 Gershwin's Summertime is written in a minor key which gives it a dark, listless feeling like floating down a river on a hot, humid day. The generally optimistic lyrics are incongruent with the minor key of the melody. If it was written in a major key it would be completely different, but he chose minor. The song gives the listener a sense that things are not really so wonderful and the "living is– not really that– easy".

As the optimistic stocks market drifts ever higher and higher in the summer heat, the bond market is playing a minor key melody. Bond volatility is higher than stocks, and their role as substitutes for one another has changed, giving the listener a sense that the living is not that easy. Then again, maybe it is just summertime trading.



I found myself on a mountain lake one morning recently, watching the sun rise over a distant peak. For the first half hour I try some standard streamer patterns, casting more or less blindly into the crystal smooth waters and looking to attract some attention. Though it is relaxing to cast and practice the timing, it is really a prelude to catching fish. In fact it is probably counter-productive. The lake being so calm at this time of day the splash and vibration from the line will scare any fish in the vicinity.

As the sun starts to rise and warm up the lake small duns hatch and hop along the surface. I decide on another approach, and do nothing for a while, wait and observe. There are splashes far out in the middle of the lake as fish being to feed on the duns. The light is getting better, particularly looking south along the bank. I’m able to scan far ahead and deep into the water looking in this direction, while to the north I see only the black surface of the lake. I wait some more and notice a small fingerling trout feeding in a corner bank where the sun is just started to reach. The duns are getting heavier now. Finally I see a nice sized brown trout near the smaller fish, circling , stopping, and feeding in the shallow water. Here, is a fish a might have a chance to catch.

I change flies to one slight larger than the duns, but same color and a close match. The trout has not seen me I think, but perhaps out of instinct he moves away into the shadows, before I can cast. So I wait some more. Out of the shadow he emerges and I can see him circle back in my direction. It is so calm, a direct cast will scare him. So I make guess where he might go and cast there. The fly lands and he is unaware, meandering in that direction. Now I am acutely interested, focusing on the fly and the trout just below surfaces, as he heads to the dun fly. He sees it, moves, and takes it! I have him on the line and keep it tight as I steer him to the shallow water by the shore. The hook is well set in his upper jaw but easy to remove. For a brief moment I can appreciate his beautiful coloring and wildness before sending him back to his breakfast routine.

Then sun is rising more overhead and I see more splashing to my right. But after this encounter I decide wait some more, to let the water get back to its natural state. Then I head south along the bank I scouted earlier. I see a nice cruising fish headed my way far ahead. I raise the rod to cast, but my shadow alone sends him off to the middle of the lake. I wait some more. Now I am walking along the bank holding the fly and line in the opposite hand from the rod. This is the way the bonefish guides teach you in Andros to prepare, and no false casting allowed. “Wait, wait, wait”, then say. “Until you Seeeee the fish”. Then and only then you do cast with conviction, accuracy and intention. You make the first one count because by the second or third cast he is gone. I am able to land a few more this way before the tranquility of the lake starts to wane as the other anglers join in. The heart of the morning begins and I head back to join my family for breakfast and start the rest of the day.



Bonds are traditionally considered safe, but they have become a bit dicey last month. I calculated the 20 day historical volatility using adjusted 30 year bond futures and sp500 futures from July-2003 to June 2013. Roughly 75% of the time stocks are more volatile, and 25% of the time bond volatility is higher.  The most recent occurrence when bond vol was greater was in late May to mid June.  Looking just at the period from June 2010 to present, S&P returns were normal, while bond returns were negative during these episodes.

Alex Castaldo adds:

Probably not a coincidence that at this time 'A Big Risk Parity fund is under the weather ' according to a Reuters story from late June.



 Today as the market looks to get even for the month, Lacker is part of the rescue. He is one of the most hawkish on the Fed, but is also a realist commenting on how there is no meaningful reduction in bond purchases anywhere on the horizon. Tapering, he points out, is a derivative, changes in the rate of purchases, but still purchases.

As an aside, in swimming, tapering is the last phase of a rigorous training schedule in preparation for a race. Tapering implies some sort of disciplined or difficult action preceding it. It will be nice when the word retires from the financial lexion as "the cliff" did.

At present, Lacker is a non-voting member so has nothing to lose by telling the truth. With B retirement talk, Lacker would be the best candidate, but the odds can't get long enough and better to wager a summer claiming race at Saratoga.



 Everyone loves a good story and I try to read to my children every night. The current market narrative is that the last 6 month rally is entirely Fed driven and without Fed support equity markets are doomed. I'd argue stocks have gained on an improving economy and corporate profits. Real rates have gone up for the same reason as seen in TIPS ( though still negative). But as long as this narrative is floating around there will disparate opinions which is what makes a market.

I think this will be the summer theme. Then one day, rates and stocks will have gone up enough for this narrative to be dismissed entirely and we will be on to a new story. And, with any luck we will all live happily ever after.



Some back of the envelope numbers on S&P500  futures daily changes last 10years for your perusal:

Year       %up       Max       Min        SDev

2003      55%       28           -29         10

2004      57%       18           -21         8

2005      54%       21           -21         8

2006      53%       26           -25         8

2007      52%       44           -57         14

2008      50%       127         -100         27

2009      56%       54           -42         14

2010      58%       48           -41         12

2011      51%       59           -85         18

2012      51%       42           -35         12

2013      65%       25           -38         11

Alex Castaldo ponders:

The standard deviation for a binomial is the famous sqrt(N p q) and the standard deviation for a proportion is sqrt(p q / N).  Assume p=0.54 q=0.46 and N=252 days per year. Then sd= 3.1%. The proportions for 2003 through 2012 are within usual confidence intervals.

But for the year 2013 we have only N=95 trading days so far. In that case sd= 5.1%.  So the observed 65% is about 2.16 standard deviations above the expected.  Yes, it is statistically significant but not hugely so.





 I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.

My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.

Probably another sleepless tonight tormented by that devil.

Gary Rogan asks: 

What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?

Tim Melvin writes: 

I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.

Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.

Gibbons Burke writes: 

 Here is something I posted here before on this distinction…

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.

The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

Kim Zussman writes:

One gambles that Ralph and/or Rocky will comment.

Leo Jia adds: 

From the perspective of entering trades, I wonder if one should think in this way:

speculators are willing losers who often win; gamblers are willing winners who often lose.

David Hillman adds: 

It is rare to find a successful drug lord who is also a junkie. 

Craig Mee writes: 

One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."

Bill Rafter comments: 

Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 

 Anton Johnson writes: 

A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.

Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.

Jeff Watson writes: 

I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 

anonymous writes: 

Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."

That's how a compulsive gambler responds.

Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.

Anton Johnson writes: 

It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.

Gibbons Burke writes: 

That's the essence of my distinction:

"gamblers are willing losers who occasionally win"

That is, gamblers risk their capital on propositions where the odds are either:

- unknown to them
- cannot be known

- which actual experience has shown to have negative expectation
- or which they know with mathematical precision to be negative

They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.

"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:

- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience

They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.

If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.

There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.

Duncan Coker writes: 

I found Trading & Exchanges by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."

He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.



 New and old technology can coexist well together. For example, I had a ground water monitor installed recently which has a wireless feature that seamlessly deactivates a related irrigation system. Sounds complex, but the key element in the system is cork. When the cork in the device expands due to rain it triggers the cutoff. Cork is very useful in other areas too. The modern fishing reels use exotic metals and arbor designs to get the best performance. But cork is still used for the drags. This sets the tension on the line when fighting a fish which is the main purpose of a reel. In wine cork is preferred sealer especially for the purpose of aging. In trading the older methods of going against the panics and the crowds can coexist and profit in the post HFT world.



I used drift adjusted time series data, but I realize when one is trading against the drift (never a good idea) drift adjusted data will inflate the trade expectation. For example, using the difference method of subtracting the average move over the time series, X expectation will become X-drift. In a rising market, X-drift will be more negative than X, given a higher expectation to go against the drift. X are real points one might have made or lost; X-drift, I suppose, is for statistical significance test reasons. In a rising market if you are trading with the drift, using drift adjusted data gives you more conservative results, which is probably a good thing. But what about trading against the drift? Any comments appreciated to help me get the drift.



 In reading Scorecasting, well reviewed and recommended by the chair, I came across a point that hits home when looking for statistical causal relationships. When x variable appears to be related to y variable, it is very possible that an undiscovered variable z has a much larger effect, perhaps on both variables. There are examples of this in the book, mostly thoroughly explained in the home field advantage. This is empirically shown to be true across, time, cultures and sports, running at an advantage of 55% to 70% in favor of the home team. Controlling for other things, crowd size does correlate very highly with the home team advantage. But changes is crowd size are shown to have no effect on players performance. Rather crowd size influences officials, but it is secondary affect. The primary affect is officials themselves who have a in bias (most likely unknown to themselves prior to this book) to favor home teams regardless of the fans. Crowd size amplifies or dims this already existing bias. Had the authors not researched deeper this point would have been lost.

Pitt T. Maner III writes: 

It is interesting that there are sites that keep statistics on the refs now too.

The held ball call near the end of the Louisville-Wichita St. Final 4 game by Karl Hess appeared particularly bad but you wonder what the factors and influences are that might have led to it. The game finish would have been much more enjoyable if the Shockers had had at least one last attempt at a 3-pointer to tie the game.

Was it the nearby presence of the Louisville coach Rick Pitino? An ego issue where the ref felt the need to decide the contest? Crowd influence? TV audience thoughts? Subconscious need to end the game and prevent possibility of overtime (desire to get off the court,)? Something a player said (need to payback for perceived questioning of previous call)? A whistle blown by mistake in a hurry with no means to take back (I never make a bad call in an important contest). Lots of possibilities.

Russ Sears writes: 

When watching a game, I have often thought that the bias in the ref could be spotted by whether or not they avenge a bad or close call on one side by giving the next close call to the opposing team. After a moment of reflection, the ref probably realizes he blew the whistle too soon or did not blow the whistle when he should have. However, it appears to me that the avenged even handed blown calls are often one sided. Yet when watching a game, my own biases would prevent me from "counting" this fair.

Perhaps the broadcasters in a national game could be counted on, but it appears to me they have a vested interest to give the losing team something to complain about. If I recall correctly, the tie-up was initially called a great defensive play by Louisville, but then changed to blown call.



Back in the pre crisis era (before negative real rates) hardly a day went by when the carry trade wasn't mentioned in some form or another. If the carry boys are still around they must be enjoying the BOJ policy. For example, AUD up 17% versus yen plus a 3% rate kicker, without leverage. It is roughly the same for NZD. I was told they never hedge the currency risk and put on at maximum leverage so returns could be many multiples higher, but I may be misinformed on that part.

Anatoly Veltman writes: 

Of course, a funny BOJ announcement comes out right after your query– which may pretty soon invert the carry trade! Yen may soon become the highest yielding G-7 currency.



 I played guitar for many years, but recently I've been taking to practicing scales which in my younger days I rejected as too boring. Now, far from tedious, I find it relaxing, challenging, helpful to develop dexterity skills and better timing. Musical theorists will know that every major scale has a relative minor scale (I just learned this, so never too late). The notes are exactly the same, the scale simply starts from a different root note. But that root note makes all the difference since the tonality of the scales are like day and night. The concept of a relative minor should have a place in the markets, the darker side of the optimistic (major) equity markets with the same notes, just played in a different order.



Despite what I have read I am not convinced the HFT in aggregate are profitable. Buying High, Selling low, and making it up on volume just does not seem like a good business model to me. The research on HFT seems unadjusted for survival bias. They study the biggest and most profitable firms to see how big and profitable they are. I personally know an HFT firm that made money 3 years in a row, then after 4 months of bad performance they realized their edge was gone and they closed shop. I am sure they were never included in HFT research. I use limit order so I suppose HFT is taking the other side and the jury is still out.

Jim Lackey writes: 

Of course, Dunc, it should be like all things sports MX. Top 10 sleep in the Hilton and ride in the Factory rig and the next 10 best in the world sleep in their trailer in the pits 20-99 are part timers and lose money racing. 



No doubt that any cuts next month will be targeted to inconvenience the public most directly like travel, preferably during school breaks. After all if no one noticed what's to stop them from making, horrors, additional cuts.



 It is remarkable they found remains

Of Richard Three, the King that none could tame.

The discovery of the body of Richard III this week could be a hoax. However, I think not given the carbon dating, the matching historical features of the body, and the evidence of DNA linked to known descendants. It is history and legend transported to the present. Richard is made famous by Shakespeare who depicted him as one of history's greatest tyrants. True or not, I believe the Bard was most concerned with universal truths ahead of historical accuracy.

Along those lines, I am reading an interesting book on the forms of poetry. All the Fun's in How You Say a Thing, by Timothy Steele. Poetry of 14th and 15th century England was evolving from Old English to a newer form. Word accent, syllable-count, and rhyming pattern were the essential features. Most popular was an alternating accent (iambic), with 5 segments or feet per line (pentameter). The works of Chaucer, Shakespeare, Milton, Johnson and Pope were written in iambic pentameter. Modern poets like Robert Frost use it as well. Close to me, I can recall my Grandfather teaching me poems. He kept his favorite works by Samuel Johnson and Walt Whitman near at all times. It is relevant still, and learning the forms of verse makes poetry more meaningful.

I think of rhythm when generalizing about prosody, as I do in sports, music and even markets. The early markets in England were developing along with the Great Poets and perhaps there were mutual influences. The patterns in verse are made interesting by exceptions and variation, not unlike markets. On this stormy Northeast weekend, dust off the books of poems from university days.

It's true that time's well spent with poetry.

For snowy days and children full with glee.



I was skiing in Vermont recently and as is usual for skiing in the northeast, the slopes weren't as deeply covered with snow as one would wish. When one attacks a steep run in these conditions, it is guaranteed that the center of the trail will be bereft of snow — thin cover is the term we use euphemistically to indicate ice and rocks — mostly ice though. When this happens, there can usually be found some snow piled on the edges of the trail, it having been pushed there by previous skiers who made all their turns in the center, their scraping edges clearing it away off of the underlying hardpack and pushing it to the sidelines.

Skiing in such conditions can be done, but not without incurring greater than normal risk. And it is usually not as satisfying as skiing using the entire available path whose deeper, more sweeping turns are somehow more satisfying and which provide greater control. But under these conditions, staying in the center is deadly so advanced skiers will stick to the edges of the trail, making all of their turns in rapid succession on what is in effect a trail only two or three feet wide. This means that turns must be small in degree and therefore must happen very quickly so as not to allow the tips to remain pointed straight down the hill and therefore incurring excessive speed. This kind of skiing requires conditioning, linking extremely rapid turns is exhausting and one must not attempt this when fatigued as the resulting inability to really push hard and dig can be catastrophic. It also requires some nerve, for one, keeping near the edge puts one in dangerous proximity to the treeline (or the edge of the abyss -as the case may be) and one slip at high speed and it's all over. And it means high speed, even while carving one edge after another in succession, the lack of available surface on which to gain traction means keeping the tips pointed perilously close to straight down the fall line. Mistakes at these speeds tend to have greater than normal undesirable consequences.

As I enjoy the speed, I will make one or two runs in these conditions just for the thrill of it, but this kind of tight skiing in a narrow and steep path requires tremendous concentration and loses it's appeal rather quickly. I will spend the majority of my time on tamer runs with more snow, even though they may be more crowded, so I can make the more gratifying, longer, carving turns that I prefer.

Jeff Watons writes:

That's just like surfing big waves vs small waves.I am not comfortable in the brutal conditions Mr Sogi San surfs on an every day basis. In those conditions, I will look for the rip current to get outside, paddle and make a bottom turn, and ride it in. Like typical Sunset. I don't stay out very long as I did when I was younger when it is big. But if the waves are 2-3' overhead, I'm good all day long. I'll still find the rip to make paddling out easier, but I'll attack the wave harder. But some of the very best days are those waist-chest high waves where you cruise on a long board, and catch the glide. However, during calm conditions I have suffered the greatest traumas while surfing. Broken vertebra, herniated discs, tendon and ligament damage, broken nose, etc. Somehow, being relaxed while it's calm is more dangerous then when it's big. Or maybe I'm more careless when the waves are small, and a bit reckless thrown in for good measure. Carelessness happens in the markets also. You start taking your profits for granted. It's humming along nicely with all your positions in the green, then wham, the Mistress gets a little PMS(no sexism intended) and throws the whole system off balance or upsets the cart, and your account suddenly needs a tourniquet. The lesson here is to keep your guard up at all times.

Jim Sogi writes:

 Just back from backcountry skiing in the Eastern Sierras. The conditions were snow that was about a week old, with very cold temperatures, and no wind. The sun made a crust where solar energy hit, so the powder stashes were hidden on north facing aspects where there were old growth trees. The cold had dried out the snow making it sparkle and soft and creamy sugar which was excellent for skiing.. Though it had not snowed for over a week, in the shade, on the north facing slopes shaded by old growth pine where the sun did not affect the snow there was beautiful sugary soft powder. It took some doing finding these niches and some hiking to get there and fighting some pesky brush at lower elevations. No one else seems to have discovered these hidden stashes of nice powder. This reminds me so much of the markets, when even in less than optimal conditions, there are hidden stashes of unridden goods. It takes understanding of the underlying processes that create and destroy snow, the equipment and will to get there, and the ability to ride those conditions. Its surprising in such a huge mountain range that only in such limited conditions would there exist such fine skiing. The last day, new wet snow came and turned everything into the famous Sierra cement.

Laurel Kenner writes:

I took Aubrey to our favorite ski place, Telluride, a couple of weeks ago. A drought was on and the mountain was brown, but the resort's snow-making machines had been at work since November and most runs were open. A few patches of grass were visible in some popular places — enough to send a skier head over heels in the old days. The new equipment was somehow able to ride it out, although caution was still warranted. That strikes me as like the market; if you're well-equipped enough with margin and numbers to ride out the rough patches, you can still do well in adverse conditions.

Steve Ellison writes: 

I ski 10-15 times per year and encounter a wide variety of conditions. Light is an important factor. An overcast sky causes what skiers call "flat light". I slow down in flat light because the lack of shadows makes it hard to spot irregularities on the surface until one is nearly upon them. Dense fog is even worse. I have been in fogs in which I could not see the trees on either side and momentarily lost track of which way was down.

I like fresh snow, but there can be too much of a good thing. One day right after a 2-foot snowstorm, I started down my first run and fell on the very first turn when my outer ski caught some snow. I pushed off my hand to get up, but my arm sank into the snow all the way to my shoulder. It took a few minutes of wiggling and maneuvering to get back on my feet.

Wind is another factor. The Sierras sometimes have very high winds, which blow loose snow off exposed areas. The result is alternating ice and soft powder (in the spots in which blown snow settles). Going too fast at the transition point can result in a fall. On one traverse I often ski, I use moderate wind to my advantage by letting the wind slow me down as I ski into it with no effort on my part.

Duncan Coker writes: 

When backcountry skiing which Mr. Sogi describes another key element is the approach. There are no lifts, so you hike uphill for every turn you will make downhill. It can be exhausting, but also very rewarding and you get to know the terrain including snow pack, the location of rocks, couloirs, tree wells, cliffs and the grade. After enjoying the view at the top you can descend focusing mainly on execution, making some nice turns. Skiing the steeper, untouched terrain has more dangers but is more rewarding.

I love the surfing analogy of "never taking the first wave" alluding to the dangers of being tempted by the first big wave in a set, after a lull. In skiing there are times when it is better to take pass on a run as well. Condition may appear good, but dangers are still there. Ultimately though we all have to "drop in" at some point for whatever activity we are pursuing, and taking some risk is certainly worth it.



There are many headline numbers on the horizon. SP500 cash crossed 1500 yesterday, Dow is a just a couple of good days from 14000 and all time high of 14165, same is true for the DAX 8000 and all time high shortly after. Nikkei admittedly has a little way to go to get back to 38916 ( in 1989), but some impressive moves of late.

Headline numbers usually are a contrary indicator. But one of the worst feelings I found in trading is having to read constantly news that goes against ones position, making shorting stocks now all the more perilous. Also a good reason not to read what is touted as financial news.



If there is an annual pinnacle of flexionic activity, Davos is it. It is good however to have such a meeting in a mountain location and in winter. The bracing air and ruggedness of the mountains does bring out the better qualities of human nature. So perhaps those forces will balance out the other less admirable features of the conference. I am taking the kids skiing today to a local hill in as a pre-commencement.



Japan, from Duncan Coker

January 14, 2013 | 1 Comment

Even a forex novice like me could not help but notice a 25% increase in the value of the Euro vs the Yen, over the last 6 months. At the same time a record $155 million yen paid for a single Bluefin tuna at auction in Tokyo. Nikkea 225 up 27% last year, most I believe of any developed economy. Not to be dismissed also, the 150 inch snow base at Niseko ski resort, more than any in lower 48 states or the Chamonix valley. Japan seems more relevant than ever recently.



Here's something for the guaranteed to happen file. When asking a futures brokers for rates on treasury bills for margin collateral, I am informed the 9 basis points of interest will no longer cover the new monthly carrying charges and execution fee for their trouble. So I can look forward to excess cash getting a negative nominal return along with negative real return. I decided on an alternative plan.



 One of the more encouraging statistics I have heard recently is that the rate of movement within the US by county is now back above 2007 levels of 4%. For a variety of reasons roughly 11m people per year are moving again for opportunities. The constraints to moving, be it housing, jobs or some other factor, are less. Tyler Cowen has sited lack of movement as one of the frictions slowing economic growth.

Movement is essential to health on a macro-economic level, and in other areas. On a river, I cannot fly-fish without movement in the water. It provides oxygen for fish to breath and transports food for them to eat. Without wave movement, Sogi and Watson cannot surf. Einstein is quoted, "Life is like riding a bicycle. To keep your balance you must keep moving." In his realm everything is always moving, though we may not be aware of it. In trading, there must be movement to find more favorable prices. Studies show physical movement beneficial in avoiding chronic disease (D. Agus, End of Illness). Sitting too much during the day is harmful. The frontier men of the West were at their best when on the move. When at rest in the saloon, brothel or poker table trouble always ensued. Gretsky said and demonstrated: "I skate to where the puck will be, not where it is now". Fred McDowell sums it up well in the second verse of his song You Gotta Move, covered by the Rolling Stones

"You may be high
You may be low
You may be rich, child
You may be poor
But when the lord gets ready
You gotta move"



 A lesson I learned from Einstein is the benefit of being able and willing to changes one's mind. At times a pacifist, he changed after witnessing the rearmament in Europe. In physics and science in general when presented with new evidence it is quite normal to revise theories and mathematical proofs, or even to reverse a position entirely. Putting ego aside, he did this many times, most famously dropping his famous Constant variable regarding a static universe when through experiment it was proved no longer necessary. This is skill which comes more naturally at a younger age, but is quite possible for the post 40 crowd as he demonstrated in his long career.

Russ Sears writes: 

It seems to be increasingly clear that part of Einstein's long term productivity was due to his long walks often with Godel. It makes me think of this article: "Exercise Grows Brain Cells".

Dr. Brett S. maybe able to clarify, but it is my understanding that some of the latest ground breaking research shows that "changing your mind" is more than just a figure of speech. It appears that meditation can reroute the neuron wiring especially between the regions of the brain. This may also produce new brain cells. Or perhaps it uses the new cells produced to strengthen the bridges between regions.

Brett Steenbarger adds: 

There's also interesting research on brain changes following successful behavior therapies, such as treatments for phobias. And, yes, a good amount of research on brain changes related to meditation practice. What's most interesting is that the brain changes following effective medication are nearly identical to those following effective talk therapy:




50/50, from Duncan Coker

December 10, 2012 | 2 Comments

 Jeff's coin proposition bet illustrates a nice lesson for me when applied to trading. That is, even if probability is favorable, there can and will be streaks against. So, there needs sufficient N and staying power for probability to work in trading. So all the seasonal or studies that trade once or twice a year probably don't have a statistical edge.

The inverse lesson is that sometimes it is good not to trade when the probability is not in favorable, as in never take a proposition bet against a Florida surfer with a low handicap, (humor intended).

Jim Sogi writes: 

I read that in a sample of 10^10 binomial chances, there can be a run of a 1 million 1's.

The idea that in an infinite random time series every possibility will occur, such as the history of the earth, kind of worries me. There seem to be laws of nature, but are they? Will they change? Do they?

Ralph Vince writes:


Yes, and it is man's innate ability to asses such probabilities (and hence, the fallacy of Huygens and Pascal — that risks should be assessed based on mathematical expectation) that is the most fascinating thing about the entire story of evolution (again, to me).

Why do you get on an airplane when it can crash? Why do you get in your car and go out to buy a quart of milk? We have evolved over eons to pursue often time-critical rewards on a risk-laden planet — it IS how we operate or we would be still cowering agoraphobically in the shadows of a primeval world. This notion fascinated me (and the reason I wrote a book on it in 2011), and the more I dove into it, the more I saw that the answer to it — i.e . the fundamental equations we posses innately for assessing risk, pertains to all other mathematical decision (game theory is rife with concepts that are tuned to the Huygens/Pascal model, not our innate model) and ought to be reassessed under the lens of our superior, realistic model (and yes, it is superior, or we would all be looking for termites to eat up in a tree some place.

Leo Jia writes: 


Your notion about man's innate ability to assess probabilities is fascinating to me. I hope to read your new book soon (I presume it is Risk-Opportunity Analysis.)

It is clearly phenomenal that the human species was able to advance over other species. It is not as clear though whether it was man's special innate ability that made man evolve or it was the evolution process that gave man the innate abilities. Regardless of whatever came first, I think many of man's innate abilities that exist today were largely fostered by the evolution process. While this was wonderful, it is perhaps also very discomforting to learn that many of our innate abilities were more meant for the environment of the wild, not really for the modern times as the modern couple hundred years is far too short in evolution terms. It begs the question of what of the very innate abilities are really useful and what are not. Whether we realize what abilities we have or not perhaps is not a big issue as we naturally use them in life. It does become more important for us to know what of our innate abilities are actually harmful to ourselves today.

Leo Jia adds: 

I did a test. It went like this:

1) toss a coin 10 times,
2) if there is 5 heads then add 1 to a record do the above 2 steps 1 million times.

The chance that in ten tosses one gets exactly 5 heads and 5 tails is 24.5539%. 

To be more comprehensive with the test results:

4 heads and 6 tails: 20.4194%

6 heads and 4 tails: 20.5125%

3 heads and 7 tails: 11.7019%

7 heads and 3 tails: 11.7010%

2 heads and 8 tails: 4.4018%

8 heads and 2 tails: 4.4145%

1 heads and 9 tails: 0.9783%

9 heads and 1 tails: 0.9830%

0 heads and 10 tails: 0.1004%

10 heads and 0 tails: 0.0968%

Easan Katir writes:

Thank you, gentlemen. This is good info to ponder and apply to trading. For my part, I found a shiny Lincoln-cent and spun it 10 times. Result: 7 heads.

Jeff Watson writes: 

But there is also another trick of spinning a coin very fast, get down to coin level on the table and observe carefully, and if you get a blurring image of tails, call tails…same thing if you see heads, call heads. Since the coin spins at a slight angle, the side that you can see the image will be what lands.

Ralph Vince adds: 


As far as coin tosses and trading — and this may be redundant information to many of you — to me, personally (in my sciatica and failing vision nowadays) I find the largest implication pertains to the nature of the equity curve and expectations, and the deceiving nature of randomness.

We know if we plot out the equity curve of consecutive coin tosses (with heads +1, and tails, -1, say) and we plot this out, we can then draw bands around the mean expected value (0 in this case) of standard deviations. Thus, we can draw a one standard deviation band above and below.

Such a band will be parabolic, like a parabola resting on its side, rightward-facing, opeining up as time or trades or plays go by. That is, the upper band will always be ever increasing albeit at an ever decreasing rate. Thus. to be ahead of the expectation by play number X to the tune of 1 standard deviation, is below being ahead of the expectation by play X+1 or X + N where N is any positive number.

Couple this now with the Second Arc Sine Law*, which pertains to such randomly-generated equity streams and tells us (the essence of The Second Arc Sine Law) that we would expect both the peak and nadir of equity stream to occur least likely towards the center (time-wise) and most likely near the start or finish of such a stream.

These two principles, take together, warn us that in a stream of randomly-generated outcomes (coin tosses, or trading if/when the outcomes occur with randomness) we should expect the rightmost endpoint to be at or near the very top (or bottom) of the entire equity run, deluding us into conclusions, "This works!" or "This fails," that have no basis in a causal existence, but are merely the artefacts of randomness.

*The First Arc Sine Law buttresses this further, this law being that we should expect the ratio of the cumulative equity line (comprised of X number of plays) least likely to be above the expectation X/2 number of times, and most likely to be above or below X or ) number of times — the same Arc Sine distribution as the Second Law. Thus, say, if I toss a coin ten times, it has an expectation of 0 (given the caveats mentioned in this thread!) and I would expect with highest probability that ten of those tosses see the cumulative equity line above (or below) the expectation line of 0 and with the least probability, see 50% of them above and below the expectation (0) line.



Light, from Duncan Coker

November 18, 2012 | 1 Comment

 I am reading Isaacson's biography of Einstein and I promise a review in another 400 pages. But in the meantime, there a few ideas I found interesting from one of his early papers on light. He presented light as a mixture of physical particles and waves. Up to that point, no one thought light had physical quanta. Light, he theorized, has discontinuous particles as well as continuous wave properties. He was also very interested in the field through light moves, the "ether" from classical physics. He did not take for granted that space was made up of unspecified ether, but rather the space had very important properties of its own. It is similar to the study of water in understanding the waves which move through it. I tend to view markets as discontinuous quanta. Each day represents a discrete event. Others see markets as continuous moving waves. The field for markets was once a physical floor. Now it is much different. The field itself must have properties which affect movements.



 "Professional Fisherman? I didn't even know there WAS such a thing!"

There are many niches in the fishing world for a man to make a living.

There are:

Professional angers who compete in international fishing tournaments where the prize money can be $100k, plus side bets

Professional fishing captains who run the boats to fish for big game fish

Commercial fishermen who fish to sell to stores and restaurants

Professional guides who guide clients on rivers and streams to fish

People who own fishing stores, sell lures and info

Subsistence fishermen

Crabbers, lobstermen, oyster farmers

Farm fish in aquaculture.

Duncan Coker writes: 

I have a friend who has carved a nice life for himself as professional fishing river guide. His home water is the S. Platt in Colorado where he guides and teaches. Fishing and writing complement each other well. He has written several books on fly-fishing and is an editor at large for Field and Stream. They send him all over the world for stories which he dreams up, salmon in Scotland, rooster fish in Baha, tiger sharks off San Diego. Fishing and writing by fisherman have a long history. Some of the favorites on my bookshelf are by Hemmingway, Norman Maclean, MacQuarrie of the Old Duck Hunters, James Duncan's The River Why. It is good to have a backup plan. So if the fish aren't biting perhaps you can craft a good story about the day your fly box floated away on the first cast, or secretly borrowing your friends waders for two years, or instinctively yelling "save the rod" just as your wife slips into the rapids holding a brand new 6 weight.



 Should you find yourself in need of a kite for kite flying this weekend, I highly recommend a foil kite over traditional framed kites. A foil kite has a stitched honey comb design which inflates expanding the canvass to catch wind. They require no cross bars or frame. They are lighter, pack much smaller, require less wind to fly and can be stored in a backpack to be near when the kiting urge takes over. Premier is a good brand. Find a field, some wind, a small child, or child-like mood and enjoy the day.

Jeff Watson writes: 

I fly a lot of kites and use this purveyor Into the Wind. They have my good seal of housekeeping. 

Craig Mee adds:

The Tao of Kiteflying: the dynamics of the tethered flight by Harm van Veenmuch is quite a good little book with a great foreword: "dedicated to all those who have not yet unlearned their sense of wonder about reality in general and the phenomena of kites in particular". 

Easy enjoyment and also market lessons for all.



With all the sampling being done in at least two areas of recent hot debate, employment data and election polls, it brings to my mind the issue of sampling bias.

How many samples is optimal? I believe too many samples and the risk of Type 1 errors (accepting a false prediction or causation) goes up.

I use this approach towards the markets, so this is relevant to me. Is there an optimal number to avoid "water boarding" the data? 10 seems about right based on practice but statistical justification would be appreciated.



 My first job out of college was working for the World Bank in DC, the sister organization of the IMF so much in the news these days. I was a temp living with my parents who were in DC at the time. I was basically just doing Word documents, organizing supply rooms and running errands at an hourly rate for about three months. I remember though the offices being very subdued, beige, and heavily carpeted. The main activity would be the occasional meetings when dignitaries would arrive in which case things would temporarily spring to life. Without summits meetings there would be very little to do there.

One anecdote: I was helping an official who had a very thick accent. He handed my some papers and said what I thought was "..two coffees please". I brought this right up but what he actually he wanted was "two copies". I slinked out of the office, but my level of performance in this case was not at all unusual there.

My second job was working as a scheduler for a manufacturing plant that ran three productions lines 24/7. My office was the nerve center, phones never stopped, people coming and going constantly. JIT was new then and the theme of the day. I started getting line production updates calls at 6am from my apartment and it never stopped all day. Quite a contrast.



We might need a newer new normal or perhaps just the old normal given year-to-date returns: equity 13%, commodity (1.4%) , dollar (1.6%), and bonds 3.1%, impressive equity premium like the old days.



 I think Lacker is the most important Fed member next to Big B, not for his support, but rather for his dissent. (Aside: Can anyone name another member without checking?).

They need Lacker to the help maintain the appearance of objectivity. So the opposition can be duly noted then duly rejected. I heard Lacker interviewed recently and he is very smart, articulate and I am glad he is there for whatever reason.



We watched the 1993 Kenneth Branagh produced version of Much Ado About Nothing on Netflix this weekend and give it high praise. It is worthy of a view and a feast for the eye and ears. It is all the set in sunny epicurean Tuscany, with a young Kate Beckensale as fair Hero, a brilliant Kenneth Branagh as Benedick and a spicy Emma Thompson as Beatrice. More than a few lascivious moments to keep the audience interested then (circa Shakespeare) , just as now. There are skillful word plays and delicious ironies. Ultimately the women educate their seemingly honorable soldiers who, save Benedick, commit one gaff after another. As in other plays there is artful deception and false identity, clever vicars, a faked death, and much lamenting and obsessing over that inescapable condition which is young love. Fine end of summer viewing. And may all life's deceptions end so comically.



The effects of the mountains are sanguine. The vast open spaces and the scale that the West provides will give our policy makers the temper to make grandiose and bold statements. Freed from the confines of offices and committee rooms, let the liquidity flow like the big Snake river itself. Why would they want to spoil the mood in such an inspired setting. It must be the one of the reason these meetings take place in the mountains rather than seaside resorts.



 Very European that Draghi would make some vague heroic comments to save the Euro sending the market up 20 points, mid-day on Thursday. Most on the continent take off Friday and the August vacation soon approaches so the timing in retrospect seems obvious.

Paolo Pezzutti writes:

Quite impressive how markets are reacting to Draghi's remarks. Assuming that it is hard to believe that effective actions will follow his statements. I wonder if this another opportunity to short the Euro. Unless actually they are counting more on the US printing presses getting ready…..

Anatoly Veltman writes: 

One absolutely should have a long-term EUR shorting program. The European experiment was flawed at its core. The result will be eventual technical breach of the currently defended 6-7 year low. It happens to coincide with the same price area, from where the just-introduced EUR slid non-stop in 1999-2000, until it landed near 83.00. This time, the matching of the initial 1.6->1.2 leg will again target 1.2->.8 straight slide. Being involved in the world's most liquid trade is a must for every spec!



I did a quick look at real GDP vs. SP500 quarterly changes to see if there is any relationship. Regarding GPD there are numerous revisions and this study uses the final revision. Using the first estimate for GDP would have been better, but I don't have that data. So there is a retrospective bias. Here are the correlations with lags of up to 5 quarters since 2004:

GDP to predict SP500

0   .55

1   .16

2  -.17

3  -.21

4  -.11

5  -.09

Even given all the shortcomings of the study I would not have expected correlations to go negative after 1 quarter lag 

SP500 to predict GDP

0  .55

1  .51

2  .35

3  .37

4  .15

5  -.04

 Correlation is stronger in this direction and fits with the adage that the market it looking ahead 3-9 months.

Here is the same using the change of change for real GDP(1st derivative) vs SP500:

Rate of GDP Change to predict SP500

0  .47

1  .39

2  .06

3  .-15

4  -.01

5  -.01

This is somewhat interest with lag1, but not actionable since all the revisions for GDP usually take a full quarter.

SP500 to predict Rate of change of GDP

0  .47

1  -.05

2  -.20

3  -.02

4  -.26

5  -.23

Some relationship a year away, but seem suspect as not stationary.




 I am at a loss why seemingly great athletes — those you would expect to have the keenest kinesthetic awareness — seemingly struggle on the dancefloor (I am not referring to ballroom-type dancing here…..not just shaking around on some club floor). I used to think that they were merely overly-self conscious, and this was causing their seeming stiffness. Yet, these very athletes excel precisely because they do NOT stiffen up and understand perfectly well the necessity of avoiding that, as well as preventing adrenalin surge, or coping with it in beneficial ways.

Peculiarly, the only atheletes-turned-dancers I have seen who can perform the dancing aspect gracefully are those who are boxers or very good standup fighters.

And the more I have watch this, the more evident it has become to me why (this is my hypothesis, which I am seeking feedback on here). A great ballroom dancer, like a great boxer or stand up fighter, has to have his feet under him such that if he were wearing a belt buckle, it would be slightly pointed upwards. In all other sports, be it playing shortstop, returning a tennis serve, a hockey player…..there is a certain, crouched position where the belt buckle is pointed downwards.

Yes, the best boxers, the best standup fighters almost invariably have tremendous footwork, where even their punches come from the balls of their feet (watch a slow right cross from Ali, how the ball of his right foot pivots, the heel up and turning outward, allowing that complete extension through his target). Many of these guys are often even built much like Fred Astaire, light not just in bodyweight, but seemingly light on their feet as well (though, not to the extent of Astaire, who must have been filled half with helium, the man was truly superhuman). Yet, footwork aside, it seems the angle of the belt buckle, in a range of, say, ten degrees, is a hugely discriminating factor in what permits an athlete to go from his game to the dance floor.

Russ Sears adds: 

In my opinion, there are at least 2 reasons "great athletes" are not dancers both stemming from your definiton of "great". Most of the highest paid athletes need 2 things extra-ordinary size and extremely high levels of fast twitch mucles.

The size comes at a considerable price to "grace". Extra ordinary increase in growth during teen years happen with increase muscular strength often very awkward years for even more normal sized men. It takes much more to control a large body to make delicate movements. Those needing the speed spend considerable time training for raw speed, to go with that size, not necessarily intricate steps and bends. Those needing delicate touch, likewise spend considerable time to get the hand/arms to move just so.
But perhaps more important is the fast twitch need in most of the highest paying sports leaving the "great" athlete with little endurance. Endurance comes with a more balanced slow twitch combination. A cardio taxing dance last several minutes long.

Dancers have considerable cardiovascular fitness, as do boxers. The middle distance runners I have known often are great dancers and often make great boxers and vice a versa. In the olympics note the events that last 2-5 minutes at a hard pace with no rest and you probably have some great dancers. The longer events suffer the opposite, slow twitchers can't jump but have great endurance but lack the explosive movements ability.

Anecdotally, didn't Apolo Ohno win "Dancing With The Stars" one season? 

Duncan Coker writes: 

I used to take lessons and compete in some pro/ams back in the 90s in New York, and also got to know a lot of the professionals at that time, mostly British and Russian. Ralph is right about the position of the man's belt buckle as it is quite important. The center helps create a floating style important in ballroom. Also interesting, the term swing as it applies to ballroom dance is not really about 1940s swing dancing. Rather it means to mimic the swing of a pendulum in fox trot and waltz. As the dancers are moving laterally across the floor they are also gliding up and down. Another position technique that was taught was contra body movement (CBM). It means to move the feet and legs in one direction while maintaining contact with a partner in another direction. Most professional couples start dancing in childhood, so the steps and physical attributes are ingrained early. I can see how many of these techniques would be hard to learn by even accomplished athletes in other sports later in life.

Ballroom is a strange and wonderful world. It still amazes me the tv shows are so popular, but I think it is great.

Ralph Vince writes: 


Once, in working with a biochemist-turned-programmer, and talking about my pathetically slow running, the Chinaman, the biochemist (who was no runner, not the slightest athletic propensity whatsoever) told me that age, weight, and cellular mitochondria were the limiting factors. The only one I could really change was my weight, in order to get faster.

Now, I don't believe that entirely, because that would mean that whatever training I did only benefited by whatever weight I took off, and clearly there are 02 factors that you can train for, etc. But he did point out that I am not going to cut my average mile time in half — a valid point. He then mentioned that in all creatures, speed is a function of how much mitochondria is in one's cells, with, say, a cheetah having a great deal of it, human beings, in differing degrees, of course, possessing far less.

Now, this has nothing to do with Fred Astaire's ability to beat the living daylight's out of most thugs (I am convinced a man with his feet and coordination could have done that handily, and I say that based on the little thugs I knew in my youth who were physically disposed in similar though far less amazing ways) but I would like to know your take on that given your background in the world of running.

Russ Sears replies: 

Despite the popular assertion to the contrary you can not "be anything you want to be." relative to others. No amount of training will get a sprinter to turn into a distance runner and vice versa. I believe it was Flo Jo that after retiring from sprinting tried to become a distance runner. She was very dedicated, hired smart coaches and believed she was going to be great… but never ran a 5k faster than about 21 minutes. Now this is a decent time for the general population. Competitively this would only get her onto most high school girls cross country teams. In most teams even small schools this time would not be the best on the team. In evaluating kids to guide them into the right event to try out for in track in field I have tested for the following.

Sprinters- Fast twitch explosiveness- standing and running vertical jump relative to size. Muscle size relative to strength is important, lean muscles verses bigger more explosive. Bone size is also important.

Stalky - bigger muscles large bones, built for sprinting and short middle distance.

Lanky - Small bones, lean muscles for distance and longer middle distance. Middle distance - repeat 200 meter and 400's times. Distance VO2, max heart rate, and recovery time - Push-up and pull-up counts coordination for most field events - timed box steps up and down in patterns. Weight /Size and arm and leg strength with fairly good fast twitch relative to size for throwing. Small bones but explosive for high jumpers. Pole vaulters - coordination, explosive, stalky, fearlessness- look for trampoline and diving craziness.

You can be good at an event simply by loving it, training for it, have some core athlete talent and being in shape, but to be great you have to have several genetic factors in your favor.

Some of these factors can be changed by type of training, eating and lifestyle while young etc. But you can not completely reverse them by nurture. Most people that run regularly will see their times drop for many years. It takes about 10 years of hard cardio training to fully develop your cardio system. But your body will break down due to training before it could develop someone without the core body type and muscle types into a distance runner.

Peter Saint-Andre writes: 

Lessons for traders and investors here? Probably some folks are built for short term trading, others for long-term investing, others for building companies directly, etc…



 Entitlement in a good sense is not talked about much but is the effect of consumer surplus. Loosely defined, most of the gains from productivity over the last decade, generation, century, accrue to the consumer in the form of much lower prices, higher quality and often products and services that were not even available before.

The split is about 70-30%. The 30% goes to the capitalist who took the risk and deployed resources. But the other 70% of the value goes to the consumers.

For example, laptops cost a fraction of the cost 10 or 20 years ago. Sure, Dell deservedly gets rich. But with the surplus, millions of consumers can buy iPhones, something not even available a decade ago at any prices. Food cost as a percentage of income has declined steadily for decades. With that surplus consumers buy other things to better their lives.

It's a pretty good deal all thanks to competition, which drives down their returns on capital for suppliers. In growing open societies consumers take this entitlement almost without acknowledging it is there.



 It is often the case that I prefer position fishing to position trading, though the two are not mutually exclusive. Regarding the prior, I enjoy fly fishing on rivers and streams. Current relates closely to positioning on a river. The ideal is directly across from the trout, but not too close. From there I cast upstream at a 45 degree angle allowing the fly to sweep with the current to the fish. If the line is tight, drag free and natural a nice trout might take the fly. When the current is slow I add even greater stealth.

When the fish are rising, there is a huge advantage for the angler. A trout has chosen to reveal his position for what must be a considerably appealing meal. This is very useful information. If I can match this insect and cast well, while concealing my own position, I may catch fish. I have heard of anglers who crawl on hands and knees to the river to avoid detection, but I have never been this disciplined. Once at Henry's Fork I worked as part of a team with a friend. One of us would act as lookout on the cliffs above yelling to the other positions of the otherwise undetectable trout.

That aside, it is never good to fish with a noisy friend. And though I love an amiable labrador, they do not make good fishing companions and always give away your position. As a rule, the largest fish will always be in the places that require the most effort to get in position. They will be in the deep pools on the wrong side of the river, in slow water just next to fast water, under limbs and fallen trees or in eddies that are impossible to row or wade to. The more effort you put in climbing over boulders, fording deep streams or running to get ahead of your fishing buddy, the better your chances.



 There has been much guitar news in the financial world of late, one good, one bad. Fender is planning an IPO in the near future and Gibson was recently raided by feds under the Lacey act for breaking imports rules. Though never charged with anything, this will still hurt Gibson production. I've owned at least one Fender since I was 16 years old, but not a Gibson, though I have always wanted a Les Paul. With respective production issues Fender guitars will pro ably go down in value and Gibson up. Given I am long one 1970 Fender Stratocaster and short one unbought Gibson Les Paul, the spread will widen against me. The only sensible trade is to cover the short side and buy a Les Paul at the next opportunity. This way I can play my Texas blues along with my Texas hedge.



 In an effort to prove or disprove Keynesian notions I looked at two data series since 1971 for predictive relationships, federal spending and GDP annual changes adjusted to 2005 dollars from CBO data. With lags of 1 to 5 years I found nothing of significance for federal spending affecting GDP 1 to 5 years ahead. For GDP predicting spending, I did find a slight positive relationship between GDP changes now and spending changes two years from now, rsq=.04. I think it fair to say marginal federal spending increases or decreases do not affect GDP much, now or 5 years from now, but the debate will rage on.

Gary Rogan writes: 

While I of course believe that Keynesianism is pure unadulterated nonsense and any attempts to create net wealth by the government are doomed to fail, the statement that 'if there had been an opportunity for profit, some clever merchant would have been making the stuff even without a government "investment". ' isn't easily provable.

Clearly two points need to be addressed. One is scale, and it's very relevant these days as the weird topic of "colonies on the moon" has become a hot issue in the Florida primary. Could it be that things so giant in scope that no real-world merchant, even a billionaire, would voluntarily attempt to do for the fear of a devastating loss may make a profit? Much as this topic has been discussed here, I encounter it all the time in my discussions elsewhere, as just yesterday I was reacting to a list of space program spinoffs.

Second is the strangely modern behavioral economics aspect of Keynesianism. Is it possible that when "fear grips the nation" merchants, along with everyone else, start behaving irrationally and their fear of loss overcomes their normally healthy interest of making a profit even when such profit-making opportunities are otherwise self-evident?

Stefan Jovanovich comments:

Er, no, Gary. The scale of current investment in the petroleum industry alone dwarfs the capital construction programs of the every government in the world. Nimitz class aircraft carriers cost roughly $4.5B each. The Ford class carriers that the Pentagon hopes to build will cost $8B each; right now they are building 2. The projected investment in oil sands in Canada alone for 2013 will exceed the entire budget for the Navy's 2 new carriers.

If there is an opportunity for profit, people with money will find it. Of course, that includes government contracting, as Adam Smith so ably reminded all of us. Keynes' theory of "animal spirits" was useful because it suggested that entrepreneurs themselves needed Keynesian economics, that - without the assurance of a government customer - no one would take the risk. That premise seems far less easily provable than mine. The many people on this List and throughout the world and throughout history who have literally made something from nothing seem to have a superabundance of energy and determination and guts and the necessary lunacy required to "make it new".

If there is a profit to be found in sending air breathing tailless monkeys into the void of space, Mr. Branson and his competitors will find it. What Speaker Gingrich is proposing is precisely what Keynes proposed, paying people in Florida to dig holes and fill them up again. Yet, somehow, he and not Governor Romney is the "true conservative". La Di Da.



 I thought it my civic duty to do some counting this eve of the annual presidential address to congress. Who in fact is the best speaker of the century ( or at least 1930), not in terms of rhetoric, but in terms of moving the market up. I am using Dow industrial index since 1928 understanding there are substitution and other biases involved. Looking a week after the speech, here are the average percentage moves ranked by president.

Bush Sr  1.5%  n=4
Clinton 1.3%  n=8
FDR  1.2%  n=9
Reagan .7%  n=7
Truman .6%  n=7
Johnson .6%  n=6
Ford .6%  n=3
Bush Jr .2%  n=8
Kennedy (0.9%)  n=3
Eike (.6%)  n=8
Carter (1%)  n=4
Hoover(2%)  n=4
Nixon(2.3%)  n=4
Obama(2.5%)  n=3

all Reps (.20%)  n=38
all Dems .35%  n=40

There were a total of 78 speeches in the period. Here is an interesting link.

The Democrats appear to be more beguiling speakers at least to the markets' ear.

I would be glad to add Grant in honor of Stefan if someone will forward any market data from 1869 to 1876. I am sure U.S.G would bring up the Rep. average.



 Does anyone recall the regulations back in the 70s on banks that forced them to offer things like toasters, blenders and coffee makers in order to attract new depositors? I believe deposit interest rates then were set by the government [Regulation Q] and the banks could only compete for deposits to lend by offering other incentives to savings depositors, like kitchen appliances. Today the situation is playing out on the lending side. The banks are awash with funds, but the Fed has forced the lending rates so low they will not cover the credit risk on mortgages or small business loans. Now the banks offer free (metaphoric) toasters to be left alone so they can just buy Treasuries.

keep looking »


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