I grew up in the 70s and when I hear OPEC it always brings back vague, distant memories of waiting in the gas car line in our Pontiac LeMans, Nixon and the Bee Gees, sometimes all at once. What I did not know then which I know now, is that in some countries when a group of competitors gets together to set production and price levels it is considered an illegal activity, called collusion. Proving again when the crime is big enough it can go unfettered.
Fortunately, the arrangement is along the lines of a Puzo novel where enforcement and compliance are very difficult and the family business might not make it to the next generation. There are larger forces at work including cheaper alternatives, better efficiency, new reserves, and the technology to get at them. I predict in the years and decades ahead that OPEC will be looked back on with a wistful relevance somewhere between ABBA and frozen fish sticks.
In a second installment on Washington let me echo Mr. Jov's comments. Washington's story is not what he was in 1775, but what he became over the course of the next eight years. The Revolution started as grievances by the elite over restrictions on western land expansion, credit expansion and taxes. But these were primarily "rich peoples" problems. The taxes affected luxury goods for the wealthy or mercantile traders. It was initially a revolution for practical reasons not ideals.
The Revolution became great when Washington and others turned the fight into an ideological war described early on by Thomas Paine in Common Sense. The war turned on the higher ideals of Freedom, Liberty and a fight against the foreign tyranny.
What is most astounding about Washington is how he was able to keep a standing army in the field for those eight years of incredible suffering. The infrequent battles were difficult enough, but the real hardship came during the winters and years of deprivation. He lead an army with no clothes, shoes, weapons, pay, food, or shelter. The men, for good reason, enlisted for only very short periods, and Washington was constantly losing half his army to disease, desertion or end-of-enlistment . He somehow managed to keep them together and perhaps those higher ideals and his example of leadership were the glue. The average Continental had little to gain personally and truly was fighting for the greater cause of Liberty.
It was also a time where chivalry and honor still ruled the day. In an amazing gesture, after the bloody siege of Yorktown and the British surrender, Cornwallis and British officers were invited to a celebratory ball by Washington. The Revolutionary elite still respected the European elite. The 8000 British regulars however, were resigned as prisoners.
The larger point being the country has always grappled with leadership's elite status and the blood, toil and tears of the rest of us. Washington was able to convince the country by words and deeds he was of the people. A farmer, statesman, warrior, but not a ruling elite. He put his life on the line countless time to prove that. In my mind he did prove that. Very few of our leaders since who call themselves public servants have served anyone other than themselves. That is why Washington remains great.
Let's hope a woman of such infinite jest brings some levity to the markets today (2016/08/26), lest we end up like poor Yorick.
In media res is a writing technique in which a story begins in the middle, then flashes back to the past to fill in the narrative, concluding back at the beginning. Hamlet and the Odyssey are examples. Markets often follow this narrative and like to revisit certain narratives from the past before concluding the day's story. Today I think qualifies.
I am reading Life on the Mississippi by Mark Twain about his years as a steamboat pilot. It was a treacherous business and shares much in common with trading bonds.
April 10, 2015 | 6 Comments
One of the most frustrating things in trading is when you research a (qualitative, not a systematic) trade, stay up late figuring out how you want to express the idea to maximize gain and minimize loss, and then the next day when you want to put on the trade that stock is up near 3%.
Considering it has done nothing for months you figure, "I will wait till to buy on a decline a bit lower". Then the next day you see it is up 8% and the options you had looked at were would be up 60% in a few days had you conceived of the idea just 1 day sooner.
I think at such times (similar things have happened to me 3 times so far this year) one is very prone to going on tilt, such as finding some other market to chase, or otherwise do something out of frustration that is not logical and end up losing what you would have made had you been one day sooner.
I am wondering if there is any way this sequence of events can be generalized beyond specific circumstances of one trader, to general market phenomenon, maybe even events that lead to predictable circumstances.
Jeff Watson writes:
Whenever I go surfing, I miss a lot of good waves. I either am in a wrong position, miss it completely, or just blow it off thinking a better one will be behind. I never feel bad about missing a wave because there will always be another wave sooner or later. I look at trading exactly the same way I look at surfing.
John Floyd writes:
Agreed, put another way as someone once said to me “there is a bus every 5 minutes”. Also importantly in terms of the limits of time and energy don’t spend it worrying about missed moves, focus on what is ahead.
I read a poignant quote recently in The Joyful Athlete: ”Second tier athletes tended to beat themselves up for mistakes, while the champions simply noted their errors and moved on, wasting no energy on self-recrimination.”
Stefan Jovanovich writes:
I have the same problem. Sometimes I wait on a trade too. I think it is greed, the desire to seize the least/highest perfect. So I remember: "Luke, trust your instincts!"
I strenuously disagree with the philosophy that "there is a bus every five minutes." (My late great father used to say, "there's always another street car.")
This is a rationally flawed analysis. Because it treats an opportunity cost as economically different from a realized cost. The reality is that the P&L from an opportunity cost is real, and it compounds over time. And this is true so long as one is consistent regarding timeframe, methodology and performance benchmarking. The most pernicious thing about this street car delusion is that it can be hidden, rationalized and forgotten.
By way of example, our fellow Spec Lister and Bitcoin Booster, Henrik Andersson declared on March 12: "Crashing commodity prices, currency war, crashing yields (with a big chunk of European debt trading at negative yield), surely this can't be because everything is so rosy in the world, this cant possibly be 'good' news. Couple this valuations close to ATH and I have for the first time in 25 years sold everything (I started investing when I was 12). Everything."
Since this declaration, the SPX, Dax and Nikkei have all risen between 3 and 6% — and the DAX is at an all time high. If Henrik measures his performance on a daily or weekly basis, this is a bona fide opportunity loss of substantial note. But if Henrik measures his performance on a long term, multi-year basis, it is way too early to render a verdict and this opportunity cost may well morph into an opportunity gain.
John Floyd comments:
Point well taken and a good one. I was afraid my quick comment might garner the need for elaboration. The point I was trying to make is if you “miss” a trade you should learn from the experience and move on, while trying not to repeat the same error in the future. Juxtaposed against expending energy lamenting the perceived lost opportunity, which also has a cost. Assuming this is done with some degree of improvement I think it is both rational and sound. In this way the opportunity cost is treated as real and minimized over time. If there is improvement made then returns are compounded in a positive fashion as opposed to a pernicious one. In anonymous’ example that might even mean Henrik recognizes what may or may not have been an incorrect thesis and “buys” everything the minute he read anonymous’ post.
Sushil Kedia writes:
My two cents on the table:
Opportunity costs as well as realized costs are both known and quantifiable only after the market has moved. At the instant of a decision as to whether to decide to take a trade or not, both are unknown.
Since a real P&L is a progression of a series of unknown infinitesimally sized but infinite number of moments, it is likely a flawed debate to undertake whether or not opportunity costs compound, since if those said opportunity costs actually turned out to be realized losses they too would compound.
Transliterating approximately what the Senator has said often in the past, the purpose of a trader is not to be in the market, but to come out of the market, one would like to tune one's mind to focusing on how much could one gain without losing beyond a point. For each this is a unique set of numbers despite the market being same for all. This uniqueness comes not only from different skills, but different restrictions on the types of trade one is allowed to take, the different marketing pitch each has to use for garnering risk capital (oh we keep transaction costs low), the different risk tolerances each must remain within etc. etc.
So each needs to focus on how one will travel from an infinite series of infinitesimally small pockets of time in deciding when to not decide.
Paolo Pezzutti writes:
With regards to missed opportunities, I have two observations.
Firstly, I think our mind is biased in focusing on the good trades that one could have made. We tend to forget the bad calls. It is true, however, that if your trading methodology is systematically not "efficient" then your performance will eventually be sub par.
Secondly, if you continue to miss opportunities, you may have an issue in pulling the trigger when it is the right time to do it. I have a long way to go to improve my trading and I think I have to work on both these areas. My trades are inefficient, because I can spot good entry points but my exits too often get only crumbles that the market mistress is willing to leave on the floor after a lavish dinner. Moreover, one tends to be afraid of taking the trade right when the risk/reward is more convenient, that is when fear is the prevalent sentiment in the market, the moment when you should "embrace you fears" as Larry Williams would say.
As a final comment, I have to commend the market mistress for her naughtiness and deceitfulness. The employment report on Good Friday released with markets closed saw prices of stocks plunge seriously (20 pts in 1 hour) to get 30 pts back on Monday. Many opportunities during the Easter weekend in stocks, bonds, currencies, commodities because of ephemeral end deceptive moves. Who knows if they were orchestrated or simply "random".
I went short gold on Thursday at the close (1715) at 1202.6. The first price printed on Monday was 1212.7. I eventually took a loss later that day of about 14 points. After 2 days gold was down at 1994. Focused on my potential loss, I did not exploit the huge opportunities offered. Afraid of even bigger losses, I liquidated my position instead of trying to close the big gap printed at the open. Moreover, I did not buy stocks or bonds to trade the obvious lobagola move. Double damage.
It is a matter of mindset. There are coincidences, situations; there is the ability of a trader to translate into action tests, statistics related to these conditions created by the market mistress. The more extreme the conditions, the more compressed is the coil, stronger and more powerful it will be the reaction in the opposite direction. Much to learn.
Duncan Coker writes:
I have always had a hard time reconciling opportunity costs/gains with realized costs/gains, though I know in economics they are comparable. For example, a casual friend offered me a private investment opportunity which didn't smell quite right and I declined and I left the money in cash earning -1% real rates. Shortly thereafter the enterprise went bankrupt and all would have been lost. I suppose on an opportunity basis it was a huge success for me, 100% gainer, and yet my cash account is the same earning -1%. Every day trading is a missed opportunity to be fishing on a nearby river which is easier for me to grasp and adds to the overall cost of the trading endeavor. Being able to forget and move on is a useful thing in trading. A swim or run at the end of the day does it for me.
I do believe one can go broke from taking profits. Maybe if one has very few positions at a time this could take a while to notice (the benefit to marketing a long term strategy of any sort– few observations) but everyone will fail.
Think of football, a defense might determine that if they can hold the other team to 17 points that they have won their part. What if the offense deploys their secondary after 14 points? May your successes be larger than your defeats.
We are playing an unbounded game, we have no idea the amplitude of future gains or losses, let alone their frequency. Taking profit when unwarranted may not give us a chance at tomorrow.
As for opportunity, we all balance the fear of missed opportunity with the fear of loss. The more successful traders I've known are slightly more fearful of leaving money on the table than losing money. Slightly.
But that depends on the difference between the value and utility of the opportunity. Duncan, you bring up the ultimate question about the purpose of life. Way to make this a deep conversation.
I am reading a math book now and came across a section regarding permutations. I thought it relevant in looking at various markets and the possible combinations like a ranking. If you had 10 markets for example, I was curious how many possibilities there are of those 10 when the order is noted. Turns out there are 3.6 million combinations for just those 10 markets. The formula is P(n,r) = n! / (n - r)! where N is a set of items and R a sub set of selected items. In my example both N and R are 10. Intuitively I would have guessed much lower and shows how my brain at least is not very good estimated very large numbers. Math experts please educate me if I have erred.
On the currency moves versus the dollar the headlines get it sort of correct. A currency change seems to effects the non-US country much more that the US. For example since 2003 when the Euro/$ gown down 3 points over 10 days on average,n35 the Dax goes up 50 over next 10 days. When the Euro/$ goes up 3 points over 10 days, the Dax goes down -32 over the next 10 days on average, n05. In both cases the SP is relatively flat during those period. Admittedly the R square is very low. Todays outperformance of the DAX so far is unprecedented since 2003 with the Dax up over 200 and SP up a fraction or possibly down.
Meanwhile, the US consumer is the envy of the world. Energy cost halved, currency at 12 year highs. Rate at historic lows. What's not to like, except US equity markets which lag every other Western nation, except of course Greece.
John Floyd writes:
"I skate to where the puck is going to be, not where it has been." -Wayne Gretzky
I for one would consider the IMF assumption that a 20% rise in the US dollar has a 1% impact on both GDP and inflation. What if the Fed tightens in June to September and the US dollar is still appreciating and markets approach more Greek issues, a UK election, and upcoming Portuguese and Spanish elections?
Chris Cooper writes:
I've been short non-US currencies for some time. But this appears to have been successful mostly because it is a "risk off" trade. In other words, one theme. My question is similar to Mr. Floyd's. Even if we assume that "risk off" will continue, at what point does USD cease to be a good vehicle for this theme? Is there, or will there be, a better vehicle, such as corporate bonds?
I recently purchased a convertible desk that allows you to sit or stand. I highly recommend them. In this first week I have been gaining stamina each day and now stand about half of the work day. It is great for the back, but more than that allows you to get a different perspective. Going from sitting to standing I think stimulates some energy or intensity and gives you an extra focus in your work. When you stand you mean business. For trading, I think the act of standing simulates the energy of the pits and whether real or imaginary is beneficial. I find I am getting more work done particularly in the afternoons when fatigue sets in. I have one from Varidesk. Ergotron looks like another good manufacture.
Tom Printon writes:
There was many issues for me to contend with when transitioning from 25 years in the pits to an office, one of which was sitting. Purchased a sit/stand desk a few years ago (Geekdesk) and felt much better for all the reasons Mr Coker stated.
We're talking about watch sales around here. Rolex apparently sells 650 million in watches each year. Susan says that wearing a watch these days is like jewelry for men, and that it's useless since everyone has a smart phone. We're thinking about Apple's watches. They'll have to compete with all the other watches. Supposedly they forecast it to use up 1/2 of all the gold production in the world. I wonder when Apple will stumble and launch a product that doesn't set the world on fire. Samsung wearable watches apparently didn't do that great. What do you think, and how will it affect the price of Apple. We just bought some on the news that they had to pay 600 million out of 150 billion in cash on a patent suit, which will probably be reduced to 10 or 30 million.
Stefan Martinek writes:
I agree with the view that watches = jewelry, but then it is more about IWC Portuguese watches in platinum having an unassuming steel look and simple elegant design. Apple is not a competition here. Apple watch will need a phone for core applications + daily charging. Some people probably like to carry two devices when one is enough. Some people probably disagree with Diogenes "who wanted to be free of all earthly attachments — on seeing a boy drinking with his hands from a stream he threw away his drinking bowl, his last remaining possession".
Pitt T. Maner III writes:
Given the popularity of the "Quantified Self" and Fitbit, why not a watch that monitors all your physiological parameters (via implanted sensors) and provides feedback on the optimal things to do next.
An early example might look something like this: "a new digital wellness and telemedicine platform which helps patients live a healthier lifestyle and connects healthcare providers to patients using telemedicine and wearable mobile technologies, today announced that its platform will be fully integrated with Apple Watch products. Or this: "Apple Watch wearers with diabetes will be able to use an app to monitor their glucose levels."
Carder Dimitroff writes:
I believe the iWatch will be an ongoing success. Like they've done with the iPhone, Apple will convert the old watch into amazing and useful technologies. As such, the iWatch will likely become less of a watch and more of something else.
In my family, we seldom call each other. It's either an email, text or FaceTime. Phone calls are the last option. Our iPhones are not used much for phoning home.
Like the iPhone, each iWatch upgrade will pack in more technologies on less real estate. We will likely learn new tricks, become mindful of health issues and live a better life.
You can sign me,
My son asked me why he has to go to school? "Why can't all this learning simply be uploaded into my brain?", he asks.
The question becomes:
1. Will it ever have a cam?
2. Will it ever be independent of an iPhone?
3. What body sensors can be built into it?
4. Perhaps it will be the base for iHome?
Just some questions.
Duncan Coker writes:
A watch is a perfect accoutrement for a man as it is rooted in a practical function. The form and design however vary greatly. They can be showy and expensive or simple, like the Timex my father had. Men like things that have a purpose. Watches are handed down from fathers to sons or daughters for generations. The Tank watch is one of my favorites though I don't own one. Fountain pens are in the same category as would be certain sporting gear like classic hunting rifles, bamboo fly rods, Hardy reels, or Swiss pocket knives that every man used to carry. For Apple I know design is very important along with function which is a good start for continuing this tradition.
Jim Sogi writes:
A Swiss army pocket knife with can opener, screw driver, wine bottle opener and blade, a simple model, is the most handy camping tool. I love mine. I also have a pocket tool with pliers, knife, screwdriver with multiple tips. It's very handy for many things like sports, camping, and skiing.
I got a very nice waterproof sport watch used at the Salvation Army for $6. The guy at the jewelry store laughed when he saw the price tag and the battery was $15. You can get a real nice casio waterproof sport watch for $20 with alarms, date, stopwatch. I just don't understand some guys desire for expensive watches or computer watches. If the watch were small, had a phone and music and alarm, and GPS and the battery lasted… maybe.
I am finishing The Deluge by Adam Tooze, an ambitious undertaking of a book which covers the post-WW1 rebalancing of power on a global scale. WW1 was largely a war of feuding imperialist nations with entangled alliances. But after the war the world became a different place. One particular issue that has relevance today is that of debt. Europe was very familiar with debt with from 1917 to 1925, particularly Germany. All the powers, Germany, England, France and Britain had borrowed heavily from their populace and international bankers (JP Morgan and friends) to finance the war and reconstructions. The populace could be easily taxed or the currency devalued to eliminate a portion of the debt. The foreign debt holders, however, demanded payment in hard currency or gold and were ruthless in collection. Their was no debt forgiveness by friends or foes. The Entente (Britain, France, Russia) had their ongoing currency and gold wars amongst themselves and with the US over debt. Germany was crushed by debt during that period. Perhaps Germany's intransigence today is due to their history. No one showed them much mercy at that time.
All told today in Greece the total debt at par is roughly 400b euro. A reasonable haircut could easily be absorbed by the central banks and official institutions who own most of the debt. I think the battle is one of ideas. The German notion of aggressive self reliance and go-it-alone attitude, versus the dream of a family of nations which Wilson wanted ( at least for everyone outside the US). I predict in Europe the latter path will prevail. No one wants another war, metaphoric or otherwise. The cost of a write off is negligible when the ECB is prepared to spend 1.6 trillion euro on various paper. The 5 and 10 year Greek bonds appear to agree as they started to rally in October well in advance of the current debate and are up roughly 40% since that time.
Stefan Jovanovich writes:
Adam Tooze has written a very good book on the Nazi economy. Now he has written a very bad one. There was only one foreign debt holder for Britain and France after WW I - the U.S. The only justification for describing the Americans as "ruthless" is the Keynesian one: the U.S. Should not have insisted on being paid back in the same money that it had lent - gold priced at the U.S. Exchange rate. The U.S. Did not, in fact, collect any war debts beyond the amounts lent to Germany under the Dawes and Young plans which were paid to the European Allies as reparations and then sent back to the U.S. Finland is the one country that actually paid back what it borrowed. Germany was not crushed by debt; the hyperinflation literally wiped out all the creditors. The reparations demanded by the Allies were large, but they were less than a third the size of the ones demanded from France after their defeat in 1870. The French actually paid, in gold; the Germans never did pay up. The British thought they could ignore their default by adopting a gold exchange standard - i.e one that only applied to account reconciliation between central banks but not to money held privately. The French and the Japanese, to their credit, actually tried to restore fully so that their money would once again be automatically exchangeable to specie. The Japanese were defeated by the Tokyo earthquake and fire of 1925; the French by the U.S. Reversion to mercantilism under Hoover and Roosevelt's planned economies and the devaluation of the dollar. The great sin of the U.S. Was not to have tried to collect the war debts; it was to have violated the Constitution by failing to value foreign coin. Without the U.S. Treasury and Federal Reserve's connivance, the New York banks would not have been able to discount francs and pounds at pre-war par; and the war in Europe would have ended by summer 1915.
All the testing I have done on stops indicates they work exactly as you would expect. They reduce risk and they also reduce expected return. Sometime they reduce the return to breakeven or negative in which case its better off just not to trade. In other cases they eliminate bankruptcy risk and allow for some return, but not the expected return you get without stops. It seems to fit right in with EMT, CAPM and practical ideas on markets regarding risk and return. If you are selling disaster risk, you expect to be paid for it.
Ralph Vince writes:
Or, expressed in terms of their effect:
Total Return = (A^2 - V)^(Q/2) - 1
Where A = Average return per trade (expressed as a multiple, i.e. 1.0 + return)
V = Variance in the A's
Q = total number of A's
When stops reduce V more than they increase A^2, it pays to use them.. I suggest conducting tests on this, it is far more revealing (in terms of the distribution of the A's) then meets the (rolling) eye(s) when looking at the simple equation.
Speaking of round numbers, the euro/swiss must want to end up close to parity of 1. It will make it so much easier to do all the conversion at Davos.
The part from Ecclesiastes that Runyon missed, "but time and chance happeneth to them all," was covered in another of Runyon's gems that I have shared before, the one mentioning that all life is 6:5 against. I think the Bard deserves to be included with this list and one of my favorites that is related is from Hamlet:
"Not a whit. We defy augury. There's a special providence in the fall of a sparrow. If it be now, 'tis not to come. If it be not to come, it will be now. If it be not now, yet it will come–the readiness is all."
I can still hear my college professor repeating this line with all his British vigor. The readiness is all!
Speaking with a friend in Latvia (Skype is amazing), he told me things are very quiet for this time of year. Normally it is full of Russian students. Now, their student debt has increased by a factor and they are staying home. I am sympathetic to anyone whose nest egg evaporates from being caught holding the wrong government paper. Politically a group of wildcatters in North Dakota have achieved far more than the UN sponsored sanction entities could do. Two rhetorical questions: who could ever have connected the dots in advance, and should I take the rouble vs dollar off my quote screen yet.
December 2, 2014 | Leave a Comment
An all seeing eye could write a novel about what happened today. Some lessons seem to cry out. Buy on the announcement of the bad news. Gold lost the vote in the mountains, and oil lost the OPEC meeting amid talk of 40 buck oil. They both sent up 10% or so from low. The first day of the month is the most bullish day. Great. Too many people know it. Great time to sell when it don't open the right way. Bonds, nas, and dax finally went down after 12 or 13 of the last 15 up. Nothing goes up forever even stocks and bonds. Gold's price up 50 bucks from its overnight low has nothing to do with deflation. It's beautiful, useful, and a hedge against evil. When the battleship is leaking, that's the time to buy. Commodities all around at 5 year low. They're up 3 or 5% today.
What other things do you see that the all seeing eye should note?
The sneak attack has to come at night, on a holiday, when the Americans, and only the Americans, are eating turkey and on holiday, stuck in airports.
Ken Drees comments:
The grains at the end of the summer–indeed.
Gary Rogan writes:
Something needs to be done to avoid the supposed "government shutdown" by Dec. 11. Talking about it could provide some mild market-related entertainment.
Steve Ellison writes:
Silver made both a 20-day low and a 20-day high on Monday. Going back to 2006, I find no previous occurrences of such an event.
Craig Mee comments:
It would appear the commodity turn around was a function of a Friday Monday suicide run created by combined single factors and then astute cover, not by a function of any meaningful low being in and a return to global meaningful growth.
Duncan Coker writes:
March Chicago wheat had a robust move to the upside almost at limit on Monday, which in this case was not mimicked by the other grains, in other words grain spreads got a lot wider.
Jeff Watson comments:
Yesterday, the spread between beans and wheat narrowed, and is still narrowing, while the spread widened with corn. Spreads in wheat stayed pretty much in line. Due to arcane exchange rules for the delivery in grains, there is much gamesmanship in the front month that's ready to expire. The gamesmanship comes from the cash side of the business.
There are offsetting affects to the decrease in $ priced crude. The decline in the rouble is in fact a windfall to those in power. The oligarchs in Russia have access to hard currency via exports, crude, natty gas, etc. The hard currency is converted to roubles to buy national real assets at 40% discount, like land, hard assets. As long as they can keep ahead of inflation it is a great deal for those in power. Or they borrow form the populous, sell paper bonds and pay back in worthless currency and pocket the difference.
I am not an expert in Russian affairs, but this scenario has played out in history before.
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.
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'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".
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.
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.
May 14, 2013 | Leave a Comment
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.
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.
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:
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.
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.— keep looking »
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