At the end of next month there should be some confluence of news and seasonality. The orange clown is threatening government shutdown and gauging from the healthcare vote there will be political brinkmanship and a news fiasco. It also kicks off strong seasonalities. Though the government can limp on, Mr. Market hates uncertainty and there should be glorious vol for all. Put it on your calendars.



 My friend Joe Stock is the best alpine ski guide in Alaska and the only IFMGA Certified guide.

His article on "Managing Avalanche Uncertainty" has great lessons for traders as well.

One big difference is an accident in the field can mean death.

Rarely is that a problem in markets, which is good.



 On a trip I met a Swiss insurance guy and we had an interesting discussion. He said that the elites are shooting out way ahead of the masses and accumulating excess cash. They are not able to spend it, are are not really able to invest it productively leaving excess unused non productive capital. This seemed like a powerful idea to me. Negative rates, low interest are either causes or results of the glut. Some of the super rich are trying to use their excess wealth to change the world, such as Gates, or the FB guy in medical research. Chair likes to say capital goes to good use, but here is an anomaly resulting from too much cash. It's the idea that it just starts piling up….you just can't spend it fast enough. Like the scene in that movie about the drug dealers having all the cash sitting in basements and rotting away. It's like money in bank accounts, rotting away.

anonymous writes: 

Or finding its way to equities, despite rate-driven, developed pre-08 models. The ocean of money is coming down the canal, and ultimately must capitulate, having nowhere else to go but the certain, inexorable attrition of it.



 One is thinking of retiring and setting up a radio flyer wagon on Wall Street, and selling guidance on markets for 5 bucks a query. One has given up studying the factors that determine the bull or bear of individual stocks., especially since no studies are valid unless they use a compustat as is file and according to Andy Lo, even those are adjusted. One wonders if there is any systematic way of dividing stocks into good and bad that works these days? A related query is whether the Value Line rankings of stocks into group 1-5 have held up now that the great Sam Eisenstat has been eased out. Do you think I could be as good as Kramer?

Jim Sogi writes: 

Years and years ago I read Value Line regularly in the binders at the brokers office and generally followed it during the bull market. It did well. Later, I subscribed, but found that by the time I got my issue, first by mail, then electronically, that the chosen No 1 stocks already had made their move making it impossible for me to get in with any hope of profit. I always wondered how that worked.

Larry Williams writes:

We tested value line ranking is Q&A software (Thompson/Reuters) about 2006-2009 time frame and were not able to come up with much that rolled into/out of top ones or bought and held for 6 to 9 months. Maybe need a long hold time. 



 The market has been in range mode for quite a while, then one day it breaks out/down into a new range where, in this theory, it will stay for a while. Sub atomic particles have a probability that the particle will be in a certain energy sphere, but not its specific location. In the market, there would be a probability that the price will be in a certain range, but one might not know the exact price. At some point due to energy input of some sort, the particle or price jumps to a different level. The ranges seem to have some regularity as do the jumps.

Peter Grieve writes: 

Very nice– the quantum theory of markets. Particles can also "tunnel" out of boxes which they shouldn't be able to leave under classical theories, and get into other boxes. There may be a market analogy here also.

I took a class from Feynman in my undergradute days (about a million years ago) and he was a powerhouse. He had tremendous intellectual integrity, and was a strong advocate of intellectual discipline. He said something like "the person you least want to fool is yourself, and you are the easiest one for you to fool".



 It's been predicted that wave heights could be significantly above average due to Hurricane Matthew passing our region of the Atlantic Ocean around Thursday of this week. Some have said over 10 feet–perhaps with 30- 40 mph winds. An opportunity for very experienced surfers that does not come that often.

In Palm Beach the favorite spot is near the inlet and it is aligned with and called "Reef Road". Not a lot of public parking there but I imagine a ferry service will evolve to carry local surfers back and forth from this beautiful beach location. It's been said that due to a gap in the Bahamas chain of islands that our area enjoys increased wave amplitudes whenever a storm or hurricane tracks along the Bahamas. I imagine die hard surfers are beginning to monitor all of the technical information available online and start to look at potential treks along I-95 to maximize opportunities.

On another note a photographer in NE Florida near Jacksonville has photographed surfers with over 20 or so years of experience and they look to be a very happy lot. He calls them "Salty Dogs" which is also the name of an old college bar at UF.

Jeff Watson writes: 

Reef Road is very hard to access, as there is virtually no parking and the PB police love to ticket or tow cars parked illegally. I have a friend that lives on the north end of PB and he is very benevolent the few times a decade that we get over for huge swell. There is no place on the East Coast that can handle big waves (Hawaiian size) like Reef Road. It is the premier big wave break in all of Florida, and handles big waves even better than Montauk, NY. Thursday AM, the Surfline forecast is for 10'+ after Matthew has passed by and headed up north, which will be the best time to surf. One can expect that when the storm is parallel to the break that one might see 20'+ waves, but those big conditions will be like a washing machine, totally blown out, almost impossible to surf. I'm trying to put a bug in my wife's head to take the trip over, but the conditions are fluid as nobody has an accurate model of the path. Right now, I'm fixing a ding in my big gun, getting ready for what might be my last time surfing really big waves. To say that I'm stoked would be a very accurate assessment. 

Jim Sogi writes: 

Jeff, catch some good ones for me!

As even Market waves start increasing, it's good to be ready, in shape, and have good equipment. Have good timing by watching the wave sets for a while in advance, and let the daily pattern reveal itself. As Shane Dorian says: "trust your board and ride the wave". It's not good to bail prematurely as that is when you can get hurt. Ride it until the wave has spent its force. That's the safer time to bail or end the ride.



I remember seeing some videos of the rough and tumble pit traders from Brooklyn back in the day. They had no college degrees, no charts. They got in there and what they watched was price levels and order flow. They had a little pad with some price levels. That was their strategy for the day. The strategy seems good in the current range this last couple weeks.



 I saw Queen of Katwe this weekend and highly recommend it as one of the best movies of the year. Lupita Nyongo will get awards. The movie is about a young girl living in the slums of Kampala Uganda who becomes a chess master. It is a feel good movie. It's actually filmed in the slums of Kampala and captures the feeling of the city, with its hustle and crowded traffic and people hawking wares in the streets between cars.

I'm not sure if our resident Grandmaster is reading this and I hope he comments on the movie. In one scene her coach realizes that she can see 8 moves ahead. Chess is complex, but compared to life, it is simple. Life can be simplified by realizing that the most important thing is to love and be loved by others.

Even though she did not learn to read, she was able to master chess. I'm always fascinated by the pit traders, rough tumble, uneducated guys making good money trading. Trading basically is simple. When you learn it it becomes complex. When you get better at it, like many things one masters, it becomes simple again.



Computers are the key to modern trading. The Chair is famous for inventing modern algorithmic computer trading. I am trying to learn new computer skills including Python and Pro Tools audio recording interface. (Was it Spec-lister Jeff Sasmor that invented Pro Tools?) I am struggling to learn both programming and the new interface. I recommend to all young people starting out to study computer science. Computers run pretty much everything in the world now. The richest people I know are computer scientists who started businesses. They are in fact some of the richest people in the entire world. Trading is dependent on computers, programming, speed. Learning a trading interface and being able to operate it with speed accuracy under pressure is essential to trading.

Some years ago I learned R with the help of some erudite and benevolent Spec Listers. I fondly remember the Wiz, a true master, who from the top of head could with a single line of code, search relevant data, process it, and have it report a table of elegant results. Computer science does not replace judgment or vision, but realization requires the computer skills.

Some of the specialized programmers can get a bit nerdy. Thinkers of big thoughts can really benefit from being able to program and fine tune their thinking. Writing up the algo's really clears up thinking. The computers really help with the massive number crunching that would be impossible without them. I kind of understand the basic statistics and math in a general way, but the computers help me do the computations.



 In music, space is very important. The underlying beat can be implied. The space between notes and phrases is as important as the notes themselves. Modern hip hop has a lot of musical space. In the 80s the mixes tended to be thick with no space. It was a wall of sound.

I've been thinking about the spaces between vol events and their distributions. They can be as important as the moves the themselves because of timing, leverage issues.

Peter Pinkhaven writes: 

Somewhat unrelated, but I think the study of changing cycles and tastes is important.

Pre 2005, most hip hop music was sampled. The mix had an aesthetic and sonic ambiance that was very hard to emulate from scratch in modern digital studios– as most records that producers sampled from were originally cut to tape through dozens of vintage analog mixing desks and compressors, before being cut to vinyl. Producers would record open spaces of sound into these into 12-bit or 16-bit samplers and then loop them. They would go to find a drum break — some common ones are Skulls Snap's its a new day, California Soul, Led Zeppelin's When the Levee Breaks.

Creativity came from a lack of technological ability to manipulate the sound. These samplers could only hold 12-60 seconds of sampling time. In order to get bass lines, you had to cut a kick drum note into the first sine wave, loop it and what you would get is a long buzz. EQ filter the high end of this buzz and pitch it down 12 octaves, you had the authentic sound of golden era hip hop bass.

As computers started to enter the modern studio, these samplers were not seen as useful anymore. The limitations of them became a hindrance. Most sequencing starts and ends on the computer these days. Its not hard to replicate the vintage sonic sound anymore. These factors I think are what led to the open space Mr. Sogi was referencing to.



 Embracing discomfort can lead to good results. This excellent TED talk talks about going beyond the comfort zone to achieve results for adventure photographers.

Trading can be uncomfortable even though you can have a passion for it. Embracing the discomfort gets one through the difficult times of uncertainty. Having been there, having experience is key.

Some of the speclist exchanges can be uncomfortable, but help to weed out chaff and mumbo and improve thinking and reveal more about the writers than they might intend. The adversarial legal system is very uncomfortable, but can, and historically has, led to better results through honing in on the truth. Most cannot handle it and criticize it, but it is their weakness. Same with markets. There's no place for weakness.



 Over the next four weeks, there will be countless column inches spent debating what a Brexit really means and why it does/doesn't matter.

I will make a simple qualitative observation. You can poke fun at it. But in about six months, you will discover that I was right. And I'd rather be right than smart.

If the UK votes to leave the EU, then Donald Trump will be the next president of the US. If the UK votes to stay in the EU, then Donald Trump will not be the next president of the US.

Yes, it's that simple.

Because I believe that this is really a referendum about voters' trust/rejection of the "elites" — and the EU is the creation and embodiment of the elites. Nationalism, regulation, free trade — all of that is secondary to the populist support or rejection of the "elites". Vic likes the term "flexion" — but that has different meaning. The elites can be found on the left and on the right — they typically were educated at Harvard, Yale, Princeton, Stanford, Chicago. Some may be libertarian. Others may be socialist. But they all cling to the religion and arrogance of knowing what is best for the common man — and which often also involves rejecting common sense and facts in evidence.

The Trump phenomenon is precisely the same wave on a different continent. It's about a rejection of the political and academic elites. Forget about his politics and policies. He has stuck a fork in the elites.

Lastly, I further believe that politically, the UK and the US voter psyche/momentum moves together.

So if the Brits leave the EU, then Trump is in.

So you now know what Brexit means for the presidential odds in Vegas.

What that means for the markets is left as an exercise for the reader.

anonymous writes: 

Right now, over on Paddypower, the odds of remaining in the EU are 2/7 in favor and the odds of an exit are 11/4 against. Meanwhile, the odds for the US presidential race have tightened considerably over the past few days, with Clinton discounted as an 8/15 favorite, and Trump marked as a 13/8 dog, with Bernie coming in at 20/1 and Biden bring up the rear with 33/1. No overlays here. One wonders when they start including Gary Johnson in their line what his odds will be discovered to be. The betting lines for both the EU and US presidential race have been correlated, and are quite close.

Jim Sogi adds: 

I met some people from Scotland a few months ago whilst in Alaska. They were educated, business people. They said the Scottish proposed exit was extremely foolhardy and unrealistic. They said that had they exited, within several months they would have been bankrupt. GB would certainly last longer than Scotland. Its the unmoneyed, uneducated crowd, the Trump folks as RG calls them. The news will have a heyday, but realistically, its not going to happen, yet. The EU will fall apart for other reasons, but not now.



 I'm getting an electric bike. It's like this one, except with a belt drive and the Nuvinci N360 Harmony continuously variable transmission. It's an automatic shifter with infinite gears allowing a steady pace for different speeds and hills. The motor has a Lithium rechargeable battery with a 25 mile range. The main reason is to get up the mountain I live on which has prevented practical bike use before.

I'm learning a lot about batteries and will move to an electric car soon. The Chevy Volt looks good. In June I will be electric biking in Italy and Spain. Europe is way ahead in ebike use, as 15% of all bikes sold there are now ebikes. Bike use in Europe is much more prevalent than in the US. 99% of my daily transportation needs are under 20 miles.

I was surprised to hear that NYC outlawed electric bikes. I can understand the conflict with pedestrians and cars and know how aggressive NYC bike riders are. But it's a regressive plan.

I think Carder will agree with that Batteries are the wave of future for power and energy. Tesla and Musk will be changing the market for batteries soon. TSLA will be interesting to follow.



 Hinahina, also known as Spanish Moss, is an epiphyte and lives off the air and water. It does not have roots in the ground. Orchids can also live off air and water, and their roots do not have to be in the dirt to get their nutrients. Chair looks at trees and their root and leaf systems for ideas. It's a completely different system, but it works well.

I've been looking at electric bikes and there are some nice ones ready to go, but there are many designs that are vapor ware. They don't really exist except in concept. Some appeal to kickstarter crowd funding or vc to get capital needed to execute the ideas.

Looking back during the dot com bubble, many companies were vaporware, had no earnings, just air. But for a while they exploded. A few, such as Amazon, grew into big businesses with solid roots, bricks and support structures.

Epiphytes, such as orchids, are the some of the most prolific and widespread organism on the planet. In the business world, innovation, invention and new ideas spread on vapor. Some software ideas, things like texting, email, Twitter, Facebook are pure vapor, yet can become widespread, powerful business forces.



 Wheat and corn are up close to 3% today. Junk following up as well. Why would ag commodities and junk be correlated? Carry?

Jeff Watson writes: 

I haven't looked at that correlation, but am closely looking at the May CBOT/KCBOT wheat spread which is quite inverted and is widening. Somewhere along the line, a great trading opportunity will present itself. However, the caveat is that one only need to look at the 2007 Dec CBOT/KCBOT inversion that caused major mayhem with many of the specs. Market and personal memories of that time suggest that trading any spread of this nature to be similar to walking naked, blindfolded through a minefield. Caveat Emptor.



 There was a restaurant which had good service and good customer satisfaction 15 years ago. Over time, customer satisfaction went down, and average lunch duration crept up to 75 minutes, up from under 60. They hired a consultant to figure out why.

Now when people are seated, 15% ask to be relocated, up from zero before. When seated, waiter brings water and menus in same time, but people look at their phones for 6 minutes, and 12% ask waiter for assistance with wifi. When asked what their order is, most say, we haven't looked at menu yet. When food comes, in same time, a number take pictures with their phones, and ask waiter to take their picture for social media. An increasing number then complain about food being cold, or having gluten, meat, fats, sugars, cheese, nuts, or some food allergy thing. Net result: satisfaction down, time up. Whose fault?

I see a many people about who act and feel entitled. This seems more prevalent on the East Coast. These are the people who try to cut the line to just drop something off, or ask a "quick question". These are people to berate the waiters, the postal employees. We know the anecdote about the tragedy of the commons. But time is a communal resource in public situation. How much time is being wasted globally? I would be an interesting metric to quantify.



 My friend said to me the other night, "I don't seem many people carrying or using cash much any more, except in the gangsta videos. Coins certainly are a pain in the neck to carry and spend."

Even street level drug dealers use Square now a days since their users utilize 7-eleven bought money cards. Wholesale drug pushers can carry around 500k easily in money cards and the police wouldn't know the difference. Lot more deceptive than the gangsta rolls with rubber bands (Escobar spent 25k per mo.). You can hide money! So, even the lowest level of illegal activity is paperless these days.

Jim Sogi reflects:

In Roman times, leaders coined their own currency. In old England, when the mint failed to print small enough coins to pay small labourers, a private company came up with a copper penny to allow wages to be paid and business to go on.

Stefan Jovanovich writes: 

There is a fascinating (to me, at least) book on the question of private coinage that is freely available through Google books: Private gold coinage of California, 1849-55, its history and its issues, Edgar Holmes Adams.

Adams describes how the shortage of legal tender coins led to private minting in California after the gold rush began. What is fascinating is that the private coinage did its best to imitate the products of the U.S. Mint even as people were busy accepting ingots as payment. The private money-makers did so because that allowed them to do a minor bit of counterfeiting; the private coins were, on average, 3% less than the proper weight and fineness that the Coinage law specified.

This is not the story told by the Misean gospel; it directly contradicts what Murray Rothbard used the incident to try to prove - namely, that sovereignty was irrelevant to the question of money.

Sovereignty is the only question where money is concerned - what monopoly authority has decreed that their paper, coins and digits are legal tender as far as the sheriff, bailiff, court clerk, tax collector and other licensed strong-arm agents of the government are concerned.

Bitcoin is not yet money for the simply reason that you have to get someone to exchange it for legal tender if you want to use it to buy any legal tender currency. Neither are the phone cards, money cards and other forms of wealth verified by magnetic strips that the dealers are using. (I think J.T. is unfairly maligning N.C. cops; according to K.H. (a now-dead vice cop for one of the cities here in the Triangle and a truly wonderful person) the first thing cops do is run the plastic through the dealer's own Square to see what it is worth.)

Bit coin may become money; some forms of credit are now as officially sovereign as the Federal Reserve's own certificates of IOU. You can now pay your taxes and court fines (though not yet large judgments) using credit cards that Visa and Master Card (though not, in this jurisdiction, American Express) are willing to clear.

The authors of the Constitution gave Congress and Congress alone the authority to "Coin Money" because they had seen the ruin caused by the States abusing their sovereignties to issue money that was, in fact, nothing more than bad credit. That remains the central question of all discussions about "money" now - how good is the credit. J.T. and James are right; money, as legal tender, is no longer Coin. It is now only and everywhere an IOU that is a form of credit officially-approved by the sovereign.

The tricky part remains the one people dealt with in California in 1849. How good is the assay? For us retards Bitcoin's assay remains far more than 3% below par. 

Jeffrey Hirsch dissents: 

Cash is still king. US $20 bill is still the best global icebreaker.

Anonymous writes: 

In Argentina a $20 US bill buys $100 in value, and is readily accepted and preferred over the peso. 



Generally, market regime has been simply defined as up, down, and sideways. Clearly that is not enough for all kinds of trades. I believe that there is at least one way to define market regime based on any type of trade one conducts. So market regime is really a relative term and can be defined in countless ways.

Here is a list of 10 ways I define it.

1. based on past high-low vs multiples of ATR

2. based on the position of current close vs past high-low

3. based on change of price moving average

4. based on standard deviation of closing prices vs. percent of closing price

5. based on slope of linear regression

6. based on change of ATR

7. based on ATR vs percent of closing price

8. based on sign of average returns

9. based on average of abs(return) vs percent of closing price

10. based on standard deviation of returns vs percent of closing price

Jim Sogi adds:

11. Vol
12. Liquidity
13. Bar size
14. Speed



 When I go on a ski expedition or have a musical performance coming up, I spend countless hours preparing the gear, the techniques, the words, training the muscles, lungs, heart, and mind. It is the difference between success and trouble. Books and books have been written on the subject.

When preparing to trade, it's good to be prepared. Have your equipment, the connection, the data, the broker, a back up for everything, power in good order and readily available. Have a clear schedule, and a clear mind. Have the trade situation and prospects well in hand and an opinion and a plan.

Even after doing these things for many years practice is important because the muscles and mind cannot just pick up an activity without hours and hours of practice strengthening the muscles. The mind and inner sense pick up nuances that only come with regular and repeated practice. It's more about hard work and perseverance than talent. It took me a long time to learn this difficult and hard lesson.



 We're all quantitative traders, but we still have gut feelings. The body has a self awareness of its internal conditions. The stomach has more bacteria than human cells. The stomach has more seratonin receptors than the brain. When nervous you can feel the butterflies. You get gut feelings about things that govern conscious decisions. I have a theory that dreams are the sleeping brain receiving feelings from the body and stomach during the night. Gut feelings are distinct from the amygdalian flight impulses. I've never heard of any studies or information about gut feelings other than anecdotes. How often has a gut feeling saved you, or how often does it lead to wrong decisions?

Russ Sears writes: 

Dr. Janice Dorn a former list member, wrote a book, in which she and her co-author argue that your gut feeling is not programmed for market risk, but market risk will give your gut the opposite reaction than you should take. When I tried trading the stronger my gut was scared the more I knew I should trade and vice-a-versa the more passive I was about my position the more I knew I should be out. Rather than honing in on this "skill", I would suggest a more palatable method, nerves were my undoing as a day trader. I suspect Dr. Brett S. would say something similar.



I thought this was an interesting opinion piece from David Deutsch who has some creative ideas in physics theory:

"Probability is as useful to physics as flat-Earth theory"

Gibbons Burke writes:

String theory, or more particularly, M-theory, which represents a current SWAG (Scientific Wild-Assed Guess) at the grand-unifying-theory-of-everything, requires some eleven dimensions to make it all work out.

Our mortal finite deterministic mental capacities can wrap our space-time evolved brains around four or five, with instruments perhaps a few more.

Perhaps randomness is how we get a handle on behavior which defies rational explanation in our four-dimensional flatland of what seems to be the 'natural' material world; if there are eleven or more dimensions, then perhaps what seems random for us has rules beyond our ken which govern the dynamics of the other invisible, shall we say, 'super-natural', dimensions.

Ralph Vince writes: 

I think people are missing the point of the article Dylan puts here. The author of this simple piece is discussing things that are right in my ambit, what I call "Fallacies in the Limit." The fundamental notion of expectation (the probability-weighted mean outcome), foundational to so much in game theory, is sheer fallacy (what one "expects" is the median of the sorted, cumulative outcomes at the horizon, which is therefore a function of the horizon).

To see this, consider a not-so-fair coin that pays 1:-1 but falls in your favor with a probability of .51 The classical expectation is .02 per play, and after N plays, .5N is what you would expect to make or lose for player and house, as the math of this fallacious approach - and I say fallacious as it does not comport to real-life. That is, if I play it on million times, sequentially, I expect to make 20,000 and if a million guys play it against a house, simultaneously, (2% in the house's favor) the house expect to make 20,000

And I refer to the former as horizontal ergodicity (I go play it N times), the latter as vertical ergodicity (N guys come play it one time each). But in real-life, these are NOT equivalent, given the necessarily finite nature of all games, all participants, all opportunities.

To see this, let is return to our coin toss game, but inject a third possible outcome — the coin lands on its side with a probability of one-in-one-million and an outcome which costs us one million. Now the classical thinking person would never play such a game, the mathematical expectation (in classical terms) being:

.51 x 1 + .489999 x -1 + .000001 x - 1,000,000 = -.979999 per play.

A very negative game indeed. Yet, for the player whose horizon is 1 play, he expects to make 1 unit on that one play (if I rank all three possible outcomes at one play, and take the median, it i a gain of one unit. Similarly, if I rank all 9 possible outcomes after 2 plays, the player, by my calculations should expect to make a net gain of .0592146863 after 2 plays of this three-possible-outcome coin toss versus the classical expectation net loss of -2.939997 (A wager I would have gladly challenged Messrs. Pascal and Huygens with). To see this, consider the 9 possible outcomes of two plays of this game:


0.51                     0.51    1.02

0.51             -0.489999    0.020001

0.51             -1000000    -999999.49

-0.489999            0.51    0.020001

-0.489999    -0.489999    -0.979998

-0.489999    -1000000    -1000000.489999

-1000000            0.51    -999999.49

-1000000    -0.489999    -1000000.489999

-1000000    -1000000    -2000000

The outcomes are additive. Consider the corresponding probabilities for each branch:


0.51          0.51                 0.260100000000

0.51          0.489999          0.249899490000

0.51          0.000001          0.000000510000

0.489999   0.51                  0.249899490000

0.489999    0.489999          0.240099020001

0.489999    0.000001          0.000000489999

0.000001    0.51                 0.000000510000

0.000001   0.489999           0.000000489999

0.000001    0.000001          0.000000000001

The product at each branch is multiplicative. Combining the 9 outcomes, and their probabilities and sorting them, we have:

outcome             probability         cumulative prob
1.02              0.260100000000    1.000000000000
0.999999       0.249899490000    0.739900000000
0.020001       0.249899490000    0.490000510000
-0.979998      0.240099020001    0.240101020000
-999999.49    0.000000510000    0.000001999999
-999999.49    0.000000510000    0.000001489999
-1000000.489999    0.000000489999    0.000000979999
-1000000.489999    0.000000489999    0.000000490000
-2000000    0.000000000001    0.000000000001

And so we see the median, te cumulative probability of .5 (where half of the event space is above, half below — what we "expect") as (linearly interpolated between the outcomes of .999999 and .020001) of .0592146863 after two plays in this three-possible-outcome coin toss. This is the amount wherein half of the sample space is better, half is worse. This is what the individual, experiencing horizontal ergodicity to a (necessarily) finite horizon (2 plays in this example) expects to experience, the expectation of "the house" not withstanding.

And this is an example of "Fallacies of the Limit," regarding expectations, but capital market calculations are rife with these fallacies. Whether considering Mean-Variance, Markowitz-style portfolio allocations or Value at Risk, VAR calculations, both of which are single-event calculations extrapolated out for many, or infinite plays or periods (erroneously) and similarly in expected growth-optimal strategies which do not take the finite requirement of real-life into account.

Consider, say, the earlier mentioned, two-outcome case coin toss that pays 1:-1 with p = .51. Typical expected growth allocations would call for an expected growth-optimal wager of 2p-1, or 2 x .51 - 1 = .02, or to risk 2% of our capital on such an opportunity so as to be expected growth optimal. But this is never the correct amount — it is only correct in the limit as the number of plays, N - > infinity. In fact, at a horizon of one play our expected growth-optimal allocation in this instance is to risk 100%.

Finally, consider our three-outcome coin toss where it can land on it;s side. The Kelly Criterion for determining that fraction of our capital to allocate in expected growth-optimal maximization (which, according to Kelly, to risk that amount which maximizes the probability-weighted outcome) would be to risk 0% (since the probability-weighted outcome is negative in this opportunity).

However, we correctly us the outcomes and probabilities that occur along the path to the outcome illustrated in our example of a horizon of two plays of this three-outcome opportunity.

Russ Sears writes:

Ok after a closer look, the point the author is making is scientist assume probabilities are true/truth based on statistics. But statistics are not pure math, like probability, because they are not infinite. Therefore they can not detect the infinitely small or infinitely large.

But the author assumes that quantum scientist must have this fallacy and do not understand. Hence he proposes that thought experiments or philosophical assumptions of deterministic underpinnings of physics must hold and should carefully supercede statistical modeling. Hence denying the conscious mind any role is creating a physical world outside itself.

So basically the author accuses others of not understanding the difference between the superiority of probability over statistics. So he tries to use pure thought to get pure physics devoid of the necessity of consciousness to exist. Perhaps he does not confuse the terms himself. It would be better written however, if he used the terminology a 1st year probability and statistics student learns. 

Jim Sogi adds: 

I believe that the number and size of trades at a price, or the lack of density at that price lead to certain gravitational effects. The other somewhat unknown are the standing orders at those levels but the orders and trade density are related.



Negative rates are:

1. Tax on cash.
2. Service charge, like a bank.
3. Currency war weapon. Weaponize as Mr. E used to say.
4. Policy tool to encourage risk and capital movement.

Stefan Jovanovich writes: 

Negative rates are, as James writes, a tax on short-term IOUs from government-guaranteed issuers; but they are a subsidy for actual cash currency. The banks already charge for holding our "cash"; and anyone who has held significant balances already knows that their cash has been trashed in terms of any returns from interest.

Those of us sitting here in the back of the bleachers see the central banks as doing everything they can to force the banks to "go long" - i.e. push the maturity of their reserves much further out than they have been. Could it be that we have a new consensus among the countries that have dealings in size in each other's currencies? They will each do their best to enable their national Treasures, state-owned enterprises and retirement systems to continue to fund the transfer payments that are now at least 2/3rds of total government expenditures and no one will worry about exchange rates because capital flows between countries are now a trivial concern compared to the actual and potential losses of capital itself from a "crash".



 I go fishing with my best friend. We start at night about 2 or 3 am. He has a fish finder and can see the fish. We fish for Opelu which is a small silver fish about 6 or 8 inches long to use for bait for bigger fish. We use a hand line on a spool. We hang a bright light over the side to attract the shrimp that the Opelu like to eat. On the end is a leader rigged with five or six different color hooks with small colored plastic skirts that imitate small shrimp or squid. There is a weight on the bottom. We drop the line down and jiggle the line. Almost immediately there are several sharp tugs on the line and the line is pulled in with several wiggling silver fish. Its great fun. The fish go into a tank in the bottom of the boat where they swim around while we head out to sea to fish aggregation buoys. The small fish are rigged, alive, to a big hook. The Mahimahi are large aggressive fish who love the opelu. Whatever we don't use for bait we can eat fried up and are very delicious. Mahi, however, is my favorite fish. When they strike, they jump high in the air spinning. When they come into the boat, they glow in rainbow iridescent colors.

When the market is taking a dive, I figure its going to drop to around its maximum recent range, and that is a safe depth to drop my line of hooks at different depths to try land some silver spus. Hopefully I don't catch a huge marlin or shark that takes me and my lures down into the deep dark depths. The goal is to pull them right up. Its funny that the lines on the charts look almost exactly like the readings on the fish finder. Its important to find the right depth.



 Joe Stock is a IFGMA internationally certified alpine guide from Alaska and an all around great guy, full of energy and smiles. He has done some truly epic feats traveling though and across hundreds of miles of mountainous terrain on foot. He has a system to stay alive which addresses the human factors and the group dynamics.

He quotes Sarah Carpenter's system as an example.

1. Check the avalanche forecast every day.
2. Follow the weather.
3. Track avalanche activity.
4. Plan before you leave the house.
5. Be prepared.
6. Have an opinion.
7. Adjust your plan if conditions are different than you anticipated.
8. Report your observations.
9. Review your tour at the end of the day.

How appropriate such a list is for trading. Joe says: "test every slope before skiing". For traders, like Chair, it is advised to test your ideas before trading.

The main thing is to avoid the silly mistakes, which happen no matter how much you know or how careful you are. Probably one of the most important things I've ever learned since growing up is I can and will make mistakes. You need to mitigate that though, and give yourself the leeway to get out of a tight spot you'll eventually find your self in.



People are afraid. They watch too much TV. TV shows many bad things. They access net info aggregating and confirming their fears in confirmation bias. A friend of my wife appears unreasonably afraid of Dengue fever, but the chances of getting it are very very low. Seems there is a lot of fear in the market shaking out weak hands. People vote from unreasonable fears. People fear crime, but crime is lower. The fears are mostly unreasonable, and should create opportunities.

Alston Mabry writes: 

Check out this article.

Fear and Loathing in Las Vegas: Evidence from Blackjack Tables



Psychologists study regret primarily by measuring subjects' attitudes in laboratory experiments. This does not shed light on how expected regret affects economic actions in market settings. To address this, we use proprietary data from a blackjack table in Las Vegas to analyze how expected regret affects peoples''decisions during gambles. Even among a group of people who choose to participate in a risk-taking activity, we find strong evidence of an economically significant omission bias: players incur substantial losses by playing too conservatively. This behavior is prevalent even among large stakes gamblers, and becomes more severe following previous aggressive play, suggesting a rebound effect after aggressive play.

from the paper:

Panel A also illustrates the first-order result: approximately 80% of all deviations from the Basic Strategy involve passive mistakes; ones in which the player should have taken an extra card and did not, ones in which the player should have split or doubled down but did not. Only one mistake in five involves players behaving overly aggressively. In panel B we no longer restrict attention to single-hand deals, but also include deals in which the player (rightly or wrongly) split. In a handful of cases, the player splits more than twice, but in general the basic fact that passive errors are much more common than aggressive errors holds regardless of the number of hands played (or won).

[ … ]

This paper uses novel field data obtained from actual play at a Las Vegas Blackjack table to show that errors of omission are four times more likely than errors of commission. This profound omission bias occurs in spite of the fact that real economic agents are making real decisions with their own money, reaping the rewards of skill and good luck, suffering the costs of bad luck and mistakes. The bias we observe grows more common in the wake of past aggressive play, and is robust to controls for memory and skill. Perhaps few decisions of economic consequence are made at a Blackjack table. Nevertheless, the underlying mechanism here—choosing between acting or not acting in an economic environment with uncertain payoffs—is present in many economic problems, such as planning for retirement, searching for a job, or starting a business. Indeed, the findings from our field study are striking when one considers that Blackjack players are not a random sample of economic agents: they have self-selected into the game of Blackjack based on their willingness—indeed, desire—to bear risk. The conservatism that we identify at a Blackjack table is all the more severe when we consider this self-selection issue.



 Being Mortal by Atul Gawande thoughtfully looks at the process of aging and dying in America. Before modern science, normally people died suddenly at home. Now doctors propose more and more expensive and invasive and often uncomfortable treatments. Hospice provides palliative care to increase the quality of the last days of life, and ironically extends life compared to invasive procedures and aggressive treatment. Doctors, now unable to address this need, need to be able to have this discussion with their patients and receive training in end of life decisions regarding palliative care.

Aging and diminished capacity requires additional care, but the aged person wants his independence. Assisted care home are evolving to meet these needs.

I highly recommend this book for many who have aging relatives and are dealing with these issues.



 After some practice, a kid can throw a ball and compute the trajectory on the fly. It becomes internalized. Mathematically it is a complicated computation. Normally people don't think statistically unless say after 45 years of doing it it is internalized.

My question to Chair and others is whether after trading for many years using statistically based evidence you have internalized the data and math such that a trade is similar to throwing a ball. Computations of course help reject ideas, or deflate misconception, or identify newly arising cycles but what percent is intuition? Even system traders identify new systems by eyeballing data or plots or using analogies.

Stefan Jovanovich writes: 

If we are talking baseball, the throwing equations have their own internal derivatives. To throw a ball well enough to play the game at even a semi-professional level as a pitcher requires a great deal more than "some practice"; for the people who make it all the way to "the show" the internal computations get down to the questions of how much pressure you place on the joint of each toe. The calculations about how you hold the ball for each pitch are maddeningly complex; then there is what you do with your biceps, elbows, trunk, etc.

I suspect surfers have the same kind of subtlety in their thinking about what they do. But, I don't know: can't pitch, wouldn't dream of surfing. What I do know as a catcher is that pitcher's internalization process is never finished; they are flakes because they have to be.

anonymous writes: 

When surfing at the home break, most of the good locals have it pretty well wired. Knowledge of the bottom, how the surf breaks on different tides, swell direction, currents, winds, and where the wave will peak allows a local to successfully get waves. When traveling for waves, new breaks tend to present a host of different challenges. While I will never have another place wired like my local break, when visiting a different one, I'll catch a few waves, but the locals will catch many more. I find injuries are more common at other breaks, mainly because of the lack of knowledge of the wave and the lineup. An outsider never knows all of the quirks, inside rules, players, and forces at a beach.

Seems like a good time to present a market analogy. A competent local surfer generally gets more waves than a competent outsider, just like an insider or specialist in a single market generally has more opportunities than outsiders for good trades. The insider/specialist knows his market just like the surfer knows his home break.

Jeff Watson writes: 

Surfing is a good example of an intuitive process internalizing complex multiple variables. At my big wave spot I know the secret line up markers: a grass spot on the mountain, the tops of certain palm trees, a rock, some foam. It puts me in a 6 foot square in the ocean. I can see the waves in the distance, sit in a certain spot, and the wave come right to me. Someone 6 feet to the right is in the wrong spot. Newbies often get slaughtered. For example, there was a big crowd out two days ago with medium size waves when a HUGE set came thru and washed almost everyone out who were sitting on the inside.

On the rare occasion that I hit it right, I enter a trade at a good spot and ride it on most of the full move. You can feel the variables, the amount the market has fallen, its speed of trading and movement, the way its trading. The price location in relation to the last week, the last few days, the last few hours give info. When to go out and not watch. Seems like there is a lot of info being processed internally, somewhat unconsciously that has valuable input. Ideally one could quantify all these and have a computer do it with AI better than a human. The multiple variables make it hard to quantify though. I suppose some simple rules apply: after multiple 2% drops is a good time to buy or after a 50 point down move in a day on the third or fourth down day, after fake bad news, on on some stupid announcement like FOMC and the market dives 50 points for no reason. I'm sure there are more rules of thumb that one always keeps in the back of your mind, including all of Chair's caveats, and all Wiswell's proverbs. Maybe that's the point, over time one internalized all the rules, the basic setups, the data, even more complex set ups, without having to count on the fingers as its happening. 



 When they proposed the four day work week, a number of workers exclaimed, "Hey, we don't mind working the extra day!"

Jokes aside, I've noticed a number of recreational retail companies closing for Black Friday (REI), closing over the holidays (Oakley), even doctors offices. Is this a sign that the younger generations do not feel the need to show up early, and wait until the boss leaves, that they value their independent lives over work, that there is more to life than money?

Speaking of overwork, this year I've made fewer trades, with months off between some, yet made more than in years were I've overtraded. It can be debilitating and negatively affect judgement to stare at the screen all day. My best trade was when I entered a position and went camping, but forgot my security device and was unable to sell. I sold when I got home, whereupon the market continued up for several more days. The few times I looked just happened to be when the market was up, and I did not look to see the dips.

I think there is a lot to be said about not working to much, about working to make work to look busy. Americans are prone to this in the US. After all health is your best wealth in the end. How much money do you need? After a while it starts piling up unspent.

anonymous adds: 

There is a tremendous amount of wisdom is this post.

The only thing that I would add is that the ITOT (Ishares Core S&P Total US Market ETF) now charges an expense ratio of 0.03%. If you have a Fidelity Account, it can be purchased commission free. 3bp and no commission. This is not a typo.



What kind of moving average of the last x days is the best predictor of current and future happiness, and how does this relate to markets?

Anatoly Veltman writes: 

The widespread misuse of MAs concept is what gives it bad name. 90% of testers and users look at crossovers, and the remaining 10% look at break of MA from above or below. All wrong

The only proven way to apply MAs from trend-follower stand point is to look at nothing else but SLOPE. (Trading Days) Is 14-day MA sloping upward? If so, then is 30-day sloping upward? If so, then is 50-day sloping upward? If so: then Shorting is forbidden! Mirror test may save you from disastrous bottom-picking.

Bill Rafter writes: 

I beg to differ. There is no way the "average of the last x days is best predictor…" It by definition is at least a coincident indicator and more likely a lagging indicator. BTW the same can be said of the SLOPE of the last x days.

However, you can construct a leading indicator by comparison (difference or ratio) of the coincident to lagging indicators. For this newly created leading indicator, there tends to be a lot of false signals, due to random market action. To guard against that you need to have very smooth coincident and lagging inputs. Making them smooth also makes them more lagged, but that will not hurt you as you are not going to look at them outside of a difference or ratio, which will be quite forward-looking.

The real problem is that investors want to identify a static x. In doing so they are insisting that the market be modeled by x periods. Well, the market doesn't always feel like cooperating. At times the market may be properly modeled by x periods, and at other times by x+N, in which N can assume a wide range of positive and negative values. The solution is to first identify the exact period over which the market should be modeled for the coincident valuation. And then go on from there. Rinse, repeat.

Russ Sears writes: 

This would be a good question to ask the trading expert psychologist Dr. Brett.

It seems that with the same brain imagery he uses is being used in the study of the science of happiness.

While I am no expert I have read Rick Hanson, PhD book "Hardwiring Happiness"/ It has been awhile since I enjoyed this book, my summary of it is "focus on the life/good in the present. Placing things in context to how it has brought you to this moment, then enjoy the moment is enjoying life."

Presence seems to be the buzz-word in studies of contentment and psychology of success. Being aware of all your inputs, your feelings and recognizing them as part of life, then celebrate living. Presence gives you the fulfillment in your life needed to be loyal and disciplined enough for what is working well in your life. Thanksgiving is a day built on this idea, But presence also gives you the courage to turn things around, admit things are not as you want, and gives you Hope for the future. Happiness is more about living your life, being in control, then it is circumstances. Some of my happiest times have been after running hard for over 2 hours exhausted after 26.2 miles, cold and totally and dangerously spent but knowing I gave it my all.

So I would suggest that MA, trend following, momentum, acceleration, nor death spirals nor reversion to the mean, value investing should not ever be the "key to Rebecca", rather judge them in the context of everything else. Some days "the trend your friend" other days "the sun will come out tomorrow". 

Brett Steenbarger writes: 

It's a really interesting area of recent research. It turns out that happiness is only one component of overall well-being. What brings us positive feelings is not necessarily what leads to the greatest life satisfaction, fulfillment, and meaning. I suspect the market strategies that maximize short-term positive emotion have negative expected return, as in the case of those who jump aboard trends to reduce the fear of missing a market move.

Ralph Vince writes: 

Too many times in life I've found myself in darkened parking lots with a small gang of characters who intend me harm, and saw how the pieces would play out enough in advance enough to get out of it, or at least to realize there was only one, very unpalatable way out of it.

Shields up.

Too many times in life, I've had an angel whisper in my ear with only a few hours or seconds to spare to keep from being robbed blind by people I made the mistake of trusting.

Too many times in life I've paced in some anonymous hotel room, wondering "How the hell am I going to do this once the day comes?"

Too many margin calls have had to be met.

Far more times than I would care to, I've found myself confronted with the proposition of having to throw boxcars to survive, and I find myself, yet again, with that very proposition in a life and death context.

Only someone who really loves the rush of the markets, could enjoy wanting a given market to move in a specific direction. I've come to the conclusion it's far better for me to set up to profit from whatever direction things move in on a given day. Those that dont move in a manner so as to profit from this day, will tomorrow, or the next day, or the day after that… I need to just show up on time with my shoes on, collect on that which comes in today, sow the seeds today for taking profits on something at some future date. It's not difficult, and a lot more satisfying.

There's enough episodes in life we need boxcars to show up, and yeah, "Baby needs a new pair o'shoes."

Victor Niederhoffer writes: 

I like all these untested ideas about moving averages but my query was of a more general nature. What kind of moving average, perhaps its top onion skin an exponential average, is the best predictor of human happiness. I.e. if you are happy yesterday and unhappy the day before, are you happier or sadder. I mean vis a vis the pursuit of happiness, not markets, although the two are related I think.

Alexander Good writes: 

My answer would be a medium term moving average works best - about 6 months. We're naturally geared to notice acceleration not speed. After accelerating happiness, it's virtually certain to decelerate which we would have a heightened awareness of. Thus a 5 day moving average would have too much embedded acceleration and deceleration to yield a good outcome.

I would also say 6 months is a good number because there's a fear of 'topping out'. I.e. if you're at the peak happiness of the past 5 years you might get afraid of a larger mean reverting move. 6 months is short term enough not to be victim to noticeable accel/decel, but not too long to be subject to such existential thoughts that lead to unhappiness. 2 quarters is also a good timeframe for evaluation of back to back 3 month periods which seems like a relevant timeframe to most people professionally.

My meta question would be: does measuring one's happiness with a moving average make one more or less happy? 

Theo Brossard writes: 

I would pose that happiness would exhibit similar behavior with market volatility. Short-term clustering (which makes exponential average a good choice, if you are happy today chances are you will be happy tomorrow) and longer-term mean reversion (there must be some thresholds defined by values and time–you can't be very happy or unhappy for prolonged periods of time).

Jim Sogi writes: 

A good way to study this is to rate and record your happiness each day. Also record your acts: exercise, diet, work, family, vacation, tv, meditation, etc. Over time you can correlate the things you do that make you happy. You could correlate day to day swings as Chair queries in a univariate time series.



 I'm in Ushuaia Terra del Fuego Argentina en route to Antarctica. Argentina is experiencing severe inflation. Some years ago (say mid 2001) the Peso was on par with the dollar. In 2013 it was 8:1. Now it's 12 Peso to the dollar. A hamburger is 85, a beer is 50, a crab dinner is 170. Classic economics defines inflation as higher price goods. However I see 3 different causes of inflation that seem to be different mechanisms and have different results

First is classic. Inflation where demand grows or supply shrinks and price goes up. Second is the situation in Argentina where the Peso devalued due to government default on its international loans The third is the Fed increasing the money supply and causing the oversupply of dollars to (in theory) raise prices. But it doesn't work. The latter two do not seem to either increase demand or relate to supply change. To me they seem to be different mechanisms at work. The problem with increasing money supply is that it doesn't increase demand. Instead the money flows to a bubble. The classical definition of inflation does not accurately describe the latter two mechanisms. Isn't there a better way to describe them?

Stefan Jovanovich writes: 

There is no way to separate the causes of an increase in the nominal current selling price of a good or service - let's call it Item X. Is it the result of a decrease in the supply of Item X? Is that decrease the result of sellers actually running short of Item X or are the sellers holding back inventory from the market in anticipation of a future price rise? Or have the suppliers all gotten together somewhere and agreed to form a cartel that will restrict the supply of Item X? Or are the sellers all agreed that the unit of account that prices Item X is now in greater supply? And is the unit of account that prices Item X in greater supply because lenders are offering less restrictive terms for borrowers? Or is it because the government has issued more checks or made more electronic transfers from its central bank account exchangeable on demand for the currency that the Sellers and Buyers of Item X accept as the unit of account?

These are just some of the supply questions that affect pricing; there is an even larger list that can be written about the variability of demand.

The Peso's devaluation relative to the U.S. dollar can be explained quite simply; people holding dollars do not want or need as many pesos as they once did and their counter-parties, the people holding pesos, are now far more eager to swap Argentina's currency for ours. When one then asks why, we are back in the land of multiple explanations: Argentina is not seen as a profitable place for holders of dollars to buy businesses or property, the risks of regulation, currency controls, legislated devaluation and other forms of legal confiscation have increased, etc. etc.

"Inflation" only has a a theological definition; it is part of the modern economists' vocabulary for describing how many monetary angels should be standing on the tope of a GDP pinhead. And like those other now obsolete serious academic questions, it has a very useful purpose; for its presumed answer one must look to the diviners of expectation.

What Samuel Butler wrote as a satire in Erewhon is now how the world worships; we no longer spend much time in the Musical Banks because we all know that the important messages now come from those who sit on the thrones that are Reserved.



 I bought this little Washburn rovèr travel guitar for travel. It was really cheap and must be made in China, but the amazing thing is it plays well, is built with good precision, is in tune and sounds surprisingly good. It came with a nice case. The parts must be cut by computer. It's one of those deflationary things that are cheaper but better and better.



I would ask an important question. In the marketplace when are the best times to wait?

Jim Sogi writes: 

Rocky said mean reverters make a little money a lot of the time, like 99% of the time, but on 1% lose big. Its those big big 100 plus point days or weeks that can cause great harm. Those day you wished you waited to the end of the day, until the next day to buy. Those days you wished you stayed in bed. Is there a way to avoid the ax, the falling knife, the big vol trend down weeks? Is there a warning, a canary to tell you, wait? When 99% of the time it's the opposite?

Our friend Seattle Phil used to say, its all about leverage and max expected draw down. Chair says it's about broker margin games. They're all right of course.

On the days when it's 40 plus down, it seems a bit easier, because you know it can't go much further, normally. The other days that are difficult are the low vol creep upwards week after week.

anonymous1 writes:

The Skew Index provider thinks there is an answer in measuring the market implied probability of an extreme tail event in the stock market. It carries the assumption that the market can evaluate the risk in its assignments of implied volatility up or down.

If it can, then you scale risk exposure levels to match the skew risk measurements. High skew means cut back exposure.

That said, I'd rather know the margin call levels available only to the brokers as a composite readig on all their customers. That can work better than skew for capturing the cleanup prints at the end of the day when increasing margins knock out the risk takers.

CBOE SKEW Index Introduction to CBOE SKEW Index ("SKEW") The crash of October 1987 sensitized investors to the potential for stock market crashes and forever changed their view of S&P 500® returns. Investors now realize that S&P 500 tail risk - the risk of outlier returns two or more standard deviations below the mean - is significantly greater than under a lognormal distribution. The CBOE SKEW Index ("SKEW") is an index derived from the price of S&P 500 tail risk. Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant. One can estimate these probabilities from the value of SKEW. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the "skew".

anonymous2 writes: 

Back in 1994, during that memorable Fed tightening cycle, every time the Fed tightened, the market priced in a greater probability of more and faster tightening. Chairman Greenspan referred to the Eurodollar futures market as "A blind man looking into the mirror."

Similarly, I do not think looking at Skew index will help you systematically avoid risk and make money for similar reasons — namely, it is self-referential. At the risk of articulating an Epistemology, any market price that is set by market participants cannot correctly discount the probabilities of something that isn't correctly discounted. I know that sounds like a typo, but it isn't. It's the nature of arbitrage-free pricing.

To say that "high skew means cut back exposure" is way too simplistic and it is what gives rise to the high skew in the first place. It's similar to market participants who adjust exposure based solely on VaR — they take more risk when things "look" safe and reduce risk when things "look" dangerous — with the blessing of academics and statisticians and other wonks. In contrast, many successful investors do the exact opposite: they reduce exposure when things look safe and increase exposure when things look dangerous.

There are many paths to heaven.

Almost no one reading this post has invested a period of protracted 0% CPI or deflation in the USA. I'd suggest that one consider this possibility and its implications — as it is very easy to miss the forest from the trees. The Skew is the trees.

Larry Williams says:

On a different note, seasonality might offer a reason to wait.


Bill Rafter writes: 

If you compare SKEW and VIX you can get some good signals that predict the equities market. But those signals are not necessarily better than signals from other indicators. This coeval of signals is simply evidence that when a market is ready to go [fill in your choice, here], its intention to do so is writ wide across the landscape.

If you compare ratios or differences between SKEW and VIX you find that relative to VIX, SKEW is a pussycat. So essentially the comparisons are merely using SKEW as a benchmark with VIX doing the wild dancing. N.B. the series have different orders of magnitude, which means if you want to take their differences you should cumulatively normalize them.

We have always been suspicious of sausage and indices, as one frequently never knows exactly how they are put together. Those newbies studying VIX would benefit from a good understanding of its construction. Dave Aronson (we believe) had similar concerns, prompting his creation of a less theoretical measure of volatility ("True VIX"). The same can be done for SKEW by taking not prices, but ratios of volume and open interest of equity calls and puts and index calls and puts. We have done that and found profitable results, but again not enough to forsake our current algos. However, we have researched the data with the goal of improving equities trading. Someone with the resources to pursue a full blown options program (e.g. a large investment bank) probably would find further study of additional value.

This is our experience to date. We haven't checked everything as doing so is, to say the least, mildly distracting.

Ed Stewart writes:

Anxiety and waiting sucks. How much of winning is just being willing to wear the opponent down, exhaust them. Play the long game to when when no one else sees it. In markets but also business. It seems easy, but if you play that "long" game, everyone else thinks you are an idiot for along time, asking why, up to the moment you win. Then they get it, see you won, but don't see how. They say, "it was luck". That is why it's difficult. One needs to value results over accolades. 



 I've found over my career when involved with matters that garnered news coverage (15 minutes) is that you have to manage the press and use them as your tool to further your agenda. You cannot let them control the dialog or agenda. To that end, press releases and limited information leaks are one of the tools to manage the press. Having an inside shill in the news system is also very helpful to feed the pack and keep them away from ripping out your throat which is the tendency. They are basically lazy and if you provide them with an easy to regurgitate package, they will tend to run with it. Managing public opinion is another matter altogether and it's extremely difficult. Both the news and the public crave simplicity, easy answers, and they follow the first knee jerk.

Andrew Goodwin writes:

The tactic the good journalists used, the limited times I had something, was to call and tell me that they had a story deadline in an hour. The story was to be printed with or without my input and their editor would not relent. Did I wish to make a comment?

That guerilla tactic usually forces unscripted replies. It was taught as basic field craft at Columbia Journalism School when I took classes there.

Having given it some thought, the counter to this maneuver works if you are a repeated source of information. The source should offer to give a scoop at some point if the reporter holds off until he/she can issue a statement. (Then the source has time to carefully prepare statements)

You also want the press to hear indirectly that you keep a favored and hostile list of journalists depending on how their coverage goes.

Nixon figured out how to get the last word when he was under fire during the Watergate reportage. The secret was to hold late evening news conferences that ended just before most people would go to bed. That way the news consumers would shut off their TV's before the hostile commentary could begin. That's a strong tactic still in use today. 



Counting the number of trades at a certain price or price range over certain times or look backs should have information. It's the idea of consolidation vs thin long bars the TA guys use. Seems like there is some sort of blockage effect. It also ties in with rounds. If someone tests this, I'd appreciate results.



 My wife and I were kayaking in Glacier Bay National Park this June and saw 10 bears during the trip. One black bear came up to our parked kayak on the beach about 80 feet away from our tent early one morning and started banging it around. The bear strategy is to speak to it in a firm loud but calm tone, so I said in a cop like tone, "Please leave the area immediately. Do not touch the kayak." It looked up at me and walked on.

In an earlier bear encounter a big brown with two cubs was walking along a stream on a beach where the two of us were camped. The rangers orientation had recommended standing two people together and try to look big. So we stood together and raised the paddles over our head. I had my guitar and was singing songs to alert the bear to our presence. When it saw us, it stood up 10 feet tall and looked at us in what appeared to be horror and sent her two cubs scurrying in to the brush and up a hill. I turned once or twice as it ran away. Once during the encounter when I ended a song my wife says," hurry sing another one!". But I couldn't think of another one. I should have sang, The Bear Went Over the Mountain, to see what he could see.



Single time series statistical analysis or 2 variable correlations are easy to compute with limited data and standard formula and normal assumptions. However in real life situations there are obviously more than two variables. In practice everyone considers multiple variables. I've read and used Kendall's Rank Correlation methods, but am not sure how they work exactly. This seems like a way to weigh multiple factors or variables. Multiple things affect the price of a future contract. Real time data is available for a number of things that should affect price, other than just prior prices. Isn't there a way to factor more than one of these things in on a quantitative basis? Do them one at a time but simultaneously, and average it?

One way game theory way to make decisions is to have two columns, plus's and negatives. A factor can be added to each as to its weight or importance to the participants or its possibility or probability. Simply weighing the two sides can help with a decision and it can be quantified.

Steve Ellison writes: 

I sometimes use a machine learning technique called gradient descent to get an idea of which of many factors is more predictive. The (greatly oversimplified) general idea is to start with a default weighting parameter on each input, then make a prediction and compute a "cost function" (error) on the difference between the actual result and the prediction. As it sequentially processes each occurrence, the algorithm adjusts each weighting parameter up or down to try to reduce the cost function. The factors that end up with weights farther from zero (in either direction) appear to be more predictive. This technique helps me narrow down the possibilities, and I can then pick a few factors to evaluate using simple linear regression.

Mr. Isomorphisms writes: 

Linear algebra is the study of multiple variables interacting at once. However it's a difficult subject which requires multiple go's to really understand intuitively. is something I'm looking at these days. MIT OCW has a good first course.

Gram Zeppi made some interesting comments on Quora: the Jordan decomposition is the main result. (Or maybe it's factorisations.) Based on pure formalism and symbols, one can rearrange the interacting factors into smaller independent matrices which compose together as a sequence of simpler transforms rather than one big transform, but achieving the exact same result.

I still don't really understand how linear algebra is used in time series. One of the standard transformations is to swap dimensions. But this should be strictly disallowed in time series. (Differencing and then doing linear algebra would be a little better in this regard. Then, like with most choices of window, one implicitly assumes that the "pieces" all come from a statistical population.)



 This strange, ancient mariner guy shuffles over to us as we stand, 8:30 pm, in the short but growing queue outside Alice Tully Hall, where the movie will have its world premier at the 53rd Lincoln Center Film Festival. His hair flyaway, his body flapped in summer wear too light for the evening chill in the early autumn air; his skinny height curved in a cautious concave half-parenthesis.

"What movie?" He demands.

We tell him, "The Walk."

"Great special effects, average story…" he mumbles, wandering off uptown. We yell after him: "Have you already seen the film?!" He doesn't turn back. He's off to other adventures, the albatross having evidently flown from his back.

When we get to the auditorium, seated very close to the stage where a moderator introduces director Zemeckis and a dozen of the producers, photographers and lighting geniuses that created a 3D worth the time and effort it takes.

Behind us, Philippe Petit grins from a balcony in a floodlight illuminating his pixie genial face and those of stars Joseph Gordon-Levitt and the piquant female lead, delightfully named Charlotte Le Bon. From 'way up front, we can't see if co-star Ben Kingsley is also waving down at us all; the angle is wrong. The vast 2,000-person audience smiles and claps, delighted with our privilege at seeing the real deal, the actual tightrope walker, himself.

We weren't prepared for the gripping suspense of the story, as Petit/Gordon-Levitt goes through an amazing series of 'wire-walks' in his native France, sneaking into closed-for-the-night circuses, entertaining passers-by on the streets of Paris. Neither were we prepared for the spectacular and, frankly, eerie special effects of the film that spookily recreates the World Trade Center, up-close, constant, right there in front of you.

We know about blue-screen and all, but this work is altogether dizzying with verisimilitude.

The big shocker is that this meticulous planning of a caper plays like a heist, and we are along for the prep, the setups, the disappointments, the last minute reprieves, the heart-in-your-throat anxiety—will it work?

Hate to say it, but the Petit-gathered "accomplices" that Petit/Gordon-Levitt recruits to traverse the abyss of the 110-storey-tall towers gathers undeniable force, aided by the masterful stars and the outrageous effects that create both the height and the depth of the now-demolished Twin Towers. There is compelling movie-making here, as the plan to wire-walk between the buildings is, of course, illegal, daunting, unheard of. Crazy, sort of. You really can't figure out why anyone would do such a thing, even if their lifelong love is walking on wires without a safety belt—and without even the suggestion of pay.

Don't know if others felt as unnerved by seeing the towers in the glimmering distance and immediately in our faces, remembering that they are no more.

Of course there is no mention of the coming destruction of 9/11, as this was all done in the planks and wheelbarrow days of the WTC construction effort. Back in 1973 and '74, before the concept of al Qaeda was even a speck in the eye of Condoleezza Rice, Donald Rumsfeld or George W. Bush.

Not a swear word to be found, nor even a teeny sex scene. (Two chaste kisses, okay.) The focus is die-straight. And despite our misgivings about the tragic future of the vaulting towers, It elicited round after round of applause at the final shot. There are a few out of chronology fails we caught, but most people will miss them, or won't mind. Even the doubters, like us, were wowed by the effort, the acting, the filming, the suspense, the dizzying strength of the effective and powerful 3D, which really makes you jump, cynical as you think you are.

Even kids can appreciate this goal-focused tale—and how often can you say that about adult films nowadays?

And "average"? This is no average walk in the park.

Jim Sogi writes: 

In the 70s I was a delivery boy for my father's Wall street law firm. One of my deliveries was to the lower floor of the still under construction World Trade Center towers. I thought while I was there I'd punch the high buttons on the elevator. When I stepped out, there were no windows up a 100 floors and the wind was whistling through. On that bright summer day I could see to the ocean and the mid west, almost to California, or so it seemed.

Russ Sears writes: 

Mr. Sogi's story, the review of the movie the Walk and the conquest of Mount Everest by Mallory all remind me of the days I would go out on a early Sunday morning run going over a marathon distance at a pace that wins most amateur marathons. There were plenty of memorable sights a few wild adventures and plenty of solitude with nature outside and within me. But the reason I did it for as long as I could was a slight variation to Mallory's supposed quote, "because it's there"…. No it was "because I can". Despite what one might feel about a deity or nature, this time spent experiencing my world on the edge of what's humanly possible, assures me that conscience experience is at the heart of existence. Perhaps through quantum mechanics this connection can be quantified. 



I was discussing life expectancy vs. average age at death vs. life expectancy at birth and found the following article which was helpful: "Why 'life expectancy' is a misleading summary of survival". The discussion helps explain some problems with mean, median in skewed distributions.

The clustering in the skewed distribution of deaths was interesting. When I look at trades at certain prices, I see a clustering at certain prices. I think we notice this in the round number effect. Analysis of rounds is difficult due to adjusted prices at rolls. But in the same contract, or adjusted, there is clustering. Seems there might be some information there along the lines of my previous post on long thin bars and ranges.



 Today's market (9/29/2015) reminded me of the scene in Princess Bride where the Sicilian is choosing the vial with the poison with the hero. The Sicilian is trying to double, triple or quadruple reverse out think the other guy. I know, that you know, that I know, so I will triple reverse out maneuver you.

Today the market is trying to out maneuver the FED so when the Consumer Confidence is higher, it means the FED knows the economy is not as weak as it thought so it makes it more likely to raise, which will affect the market, so we'll sell the market… but no, if the confidence and economy is strong then that's good, so we'll buy. Hence the quadruple pump.

After declaring his invincibility the Sicilian drinks the vial and promptly dies. The other guy had previously built up an immunity to the poision, and both vials had poison.



 I like to go on adventures. I am a ski mountaineer, and I like to go out on the ocean. You make your plans. You are prepared and have contingency plans. You've picked good weather. You have the best equipment. You know what you are doing.

As you hike up into the unknown, where you've never gone before you don't know exactly what will happen or how it will go. That is part of the excitement. You hope everything will be okay, and it usually is. If things turn bad, you turn around. You always want to return home safe. If things are good, sometime you extend your trip, or go further or bigger.

A trade ventures into the unknown in the same way. You don't know exactly what is going to happen. You've entered at the right spot and the plan looks good, but you just don't know how it will unfold. Hopefully things go well and you succeed. Sometimes you have to turn around. The main thing is, you don't want to get killed.



September 21, 2015 | Leave a Comment

 Jack Reacher, my favorite mystery thriller novel character, was a military investigator. One of his methods was to look for evidence that was missing, not just at what was in front of him.

Some years ago, I spoke to a programmer from a big Euro bank who was helping me with a project. I was describing what I wanted. One big problem he used to have was the irregular nature of trades. They don't necessarily happen in neat regular packages as the charts make it appear. Complete time and sales data available from the exchange at premium prices has 52 or more columns of information describing events. Most of this tends to get ignored to make analysis of data more tractable in real time by small computers and slow data streams.

The missing evidence would be the space between the trades. This would be calculated or deduced. This would give you speed as one piece of information. Sizes combined with speed would also give more information. But as far as I know this is missing.

I imagine some of the super high tech firms use this data in high speed trading and require super computers and co located data feeds. That would give them an advantage. Sorting through the data to pick out some of the lost info might give a smaller firm an advantage and still be tractable in real time using regular business computers.

In addition to speed, the additional data would give you density which is important to mass calculation and thus momentum. Other data would be historical time and sales to give a reading or evidence on the medium through which the market is moving under the theory that prior sales gives information of what orders might be there, who owns what.

There is more evidence available that may not be immediately apparent, but which is being used by some to their advantage, and that requires a high level of computational power and speed in comm. It is a race in fact. There is evidence there and it should be able to be deciphered.

"How to Catch a Spoofer"



 Water is unstoppable. Given enough time, it will defeat all the mortal ingenuity of the best and the brightest.

Two atoms of Hydrogen bonded with one atom of oxygen.

How can something so powerful in one context also be so weak in another. Jump off a high diving board and hit the water abdomen first and tell me it doesn't hurt, but sit next to the pool and you can effortlessly push your finger into the water.

I think it is very helpful to think of relationships between financial markets in this way.

There are circumstances under which past conditionality allows one market to predict another for a given holding period with much greater accuracy than normal. In this context the weak bonds between molecules that allow you to push your finger into the water correspond to those occasions when leading correlative effects are absent and vice versa for those fleeting periods when regularities are plentiful.

It makes some measure of sense to look at what situations might make the molecules (predictive relations) hold closely together and those times when the mistress collects her dues from market protagonists.

Clearly having the predictive relations is enough. But some measure of 'meta-understanding' does not hurt, even if such classification is elusive or futile.

There really is nothing to lose by doing so.

Jim Sogi writes:

The speed of water or the object over the waters will determine the interaction. Anonymous's belly flop example is good. A slow moving stream is easy to cross, but a raging torrent will knock down huge trees. A small little wave tumbles gently, but larger waves move faster. In the surf, the lip of the wave as it pitches out and over on an 8 foot wave can be over a foot thick moving at 50 miles and hour and is enough to snap your board in half. In surfing, one of the worst things that can happen is getting "axed" by the lip as it crashes over on hits you directly. The tactic to avoid this is first, don't be there, or second, on smaller wave is to duck dive, with your board, under the the water, under and below where the lip hits. A big wave will penetrate deeper than you can dive, so that doesn't work big waves. The strategy is to wait for a lull to get in the water. We time the sets, their period, and the amplitude in order to time entry.

The analogy to the market is that a fast moving market carries some momentum. Big waves, like we are having now can wash through. Measuring amplitude, period seems helpful. Expecting wash through can save some wipeouts.

Jeff Watson writes: 

One must be very careful when describing the characteristics of water or any other molecular compound. While bonding is of utmost importance, temperature is the main determinant of the characteristic one will observe. Water temperature at -50 degrees C is ice which can be as hard as a rock. Water at the triple point can have the lowest co-efficient of friction which is close to zero somewhere around .02-.05. Water above 100 degrees C assumes a gaseous nature and contains a latent heat of vaporization of somewhere around 2600 Kj/Kg which means it feels hotter at 100C than liquid water at 100C. At around 11,750 degrees C water can turn into plasma….But when describing compounds, one must take into account the temperature and pressure.

Temperature and pressure are important in the markets also. One might think by the looks of things an easy splashdown of a trade will occur because it's a soft landing in water. It could just as well crash into solid ice, land into steam and cook you, or it might land into plasma where very interesting things will happen to your electrons.

Metaphorically speaking, one must find the sweet spot where it will be easy to get out of a trade with an minimum transfer of energy. Ideally using water as an example, that sweet spot would be at the triple point (0C depending on pressure) where the ice on ice has a co-efficient of friction of 0.02. The nice thing about this analogy is that there are more sweet spots than one depending on pressure differences. Always go for the gentle landing, it's easier on your account balance. It would be interesting to study other (triple points) and learn some market lessons.

Sushil Kedia writes: 

With so many interesting insights into markets relating to the molecular chemistry of water, here are my two cents on the table.

This derives from a Chemistry exam term test in the 9th year of my schooling. We had an awesome new teacher in Chemistry Mr. A Das come into teach us. The entire school was swept over its heels with his intellectual purity and his natural charms as being a fantastic teacher. The term exam paper he set had maximum 50 marks and Minimum 20 was necessary to earn a pass. None but yours truly got exactly 20, several ended at 19 and no one could cross the boundary of 20. His entire question paper was to tear everyone apart and push everyone to go to the library and read far beyond the textbooks.

That game changer question where I "managed" to earn that 1 mark was as follows:

If Sulphur is a heavier compound (Its in the row after where Oxygen is in the Periodic Table) then how come H2S is a gas and H2O is a Liquid at the same room temperature and same atmospheric pressure.

This question was poking a hole into an "anomaly" into an "irregularity" of the almost divine knowledge that we felt we received in learning the Periodic Table.

In battling with that very humbling question paper, I didnt want to leave any answer blank. This H2O is a liquid and H2S is a gas question I made a "Story-telling" answer:

The true molecular structure of water must be (H2O)n where n is a random unfixed number creating large coalescing molecular structures of variety giving a lighter compound as H2O the properties of a liquid while a heavier compound as H2S is only a gas and I believe this number n is an unfixed (I didn't know how beautiful the word random was at that age so used unfixed) varying number due to which there is no specific colour or odour water has since colour and odour of any compound is an intra-molecular property and not an inter-molecular property and because water has no odour or colour the varying value of n cancels out all intramolecular frequencies to produce a null colour and null odour.

This question had 2 marks. I got 1 from the 2 possible, because I was almost right, it so turned out when our answer papers were discussed by our teacher! My teacher penalized me in not giving the entire 2 because I wrote unnecessary additional mumbo jumbo about how n must be a varying quantity.

Morals of the story:

When faced with an irregularity, ingenuity in your response does work at least often enough and there is something called luck we knew back in school and today I love to call it as randomness.

When you are still able to make an effort to pull yourself out of a pile of horse-manure be brief and to the point. 

Jeff Watson writes:

We were never lucky enough to get essay questions on chemistry tests. It was either multiple choice, or solve a problem with showing your work and getting the correct answer. Our teachers were sadists. they never gave partial credit.

Sushil Kedia writes: 


Is the glass half empty or half full? Yes, it depends.

An Essay Type test has an undefinable probability of scoring on guess-work. A multiple choice test does have a definable probability of 1/n if n is the number of choices! If teachers never gave partial credits the also could not deduct 1 out of 2 marks possible for telling more than required! Glass is half full and half empty, always. 

anonymous writes:

A final note on this subject:

I accept that a multiple choice exam can test the ability of a student to possess and regurgitate basic and essential factual information. And a well-written multiple choice exam can do somewhat better than that. However, I have met and worked with endless numbers of people who score in the 99th percentile on standardized tests and have perfect grade point averages and despite these "successes," these people lack the ability to differentiate between facts and knowledge; they never learned or acquired critical reasoning and creative problem solving skills. I believe that these things cannot be probed on a multiple choice exam — they requires a free-form response. (Some might say that these things cannot be taught, but I believe otherwise.)

Just for amusement, let's imagine a multiple choice exam for the Presidency:

Question: If Russia invades another country while the President is on vacation what should you do?

(a) Instruct the Defense Secretary to move the 6th fleet to the region and have US fighter jets engage in skirmishes near the border

(b) Call an emergency session of the UN Security Council

(c) Recall the US Ambassador to Russia and boycott the Olympics

(d) Launch a pre-emptive nuclear strike on Moscow

(e) Continue with his golf schedule because the President must appear calm and in control.

And here's one for a hedge fund manager:

Question: If the stock market suddenly drops .8% on an unconfirmed headline of a terrorist attack in New York City, what should you do?

(a) Immediately reduce all open positions by 30%

(b) Immediately cancel all stops to avoid getting stopped out.

(c) Immediately increase all exposure by 30%

(d) Do nothing because you are a long term investor

(e) Check Twitter and if the subject is "trending", then (a). If the subject isn't "trending", then (c).

And here's another one for a hedge fund owner:

Question: If a new employee is producing P&L results that are remarkably good and vastly superior to expectations and everyone else in the firm, do you:

(a) Give the employee more capital to manage and a pat on the back?

(b) Call the employee in and ask him probing questions about what's going on in his portfolio?

(c) Have another employee study the new guy's trading records and positions to figure out what he's really doing?

(d) Reduce the employee's capital because you think he's just lucky and his hot streak will end?

(e) Retire and hand over the firm to the new guy.

Now imagine what a free-form essay response would be ….



 When I first started trading actively in the late 90s there were some pretty massive swings in many issues and markets. Some popular simple systems being touted involved following trend lines or MA's or MA crossovers. With big moves and high gross values in those days such ideas worked ok for a while, but then they stopped working. They haven't seemed to work much the last 15 years except on a long term scale. I think it was called trend following or momentum. It was pretty basic chart based stuff. It was often combined with a predefined stop loss and a trailing stop after a fixed amount of gain. All the charting programs had presets for drawing the lines. Anyone could do it.

The recent 30 point moves in a direction reminds me of those times. You also have to remember that back then we'd been in a twenty year bull market in which the mantra the trend is your friend was true and had been a very successful investment strategy. Everyone one was lucky.

With the drift the way it's been for the past 120 years, one could make a cogent case that the only unlucky ones were the counter-parties to the longs. 



 I was recently on a ski mountaineering trip in the high glaciers of New Zealand. New Zealand has large storms coming in from the Tasman sea which hit the mountains and deposit snow and the wind blows hard. This creates avalanche conditions which can be very dangerous. One of the methods, among many others, is to use what is called a Compression Test. It involves digging a pit in the snow on a steep hill and isolating a column of snow about 25 cm square for the depth of the snow. One smoothes the edges and feels the snow to see where the layers of snow and the different types of snow. There might be layers of ice buried if it rained. There might be loose sugar snow if it is old and cold. There might be hard layers of wind packed snow. One taps the top of the column with progressively harder taps, ten from the wrist, ten from the elbow and ten from the shoulder. If the column breaks away and slide from a certain layer, one knows, depending on the amount of taps, and the energy from the break how strong the snow is at that particular location. One uses that information to make forecasts of weaknesses in the snowpack and the likelihood of an avalanche.

As I performed these tests, I wondered why one could not use the time and sales data to examine the strength of the market at those particular times. Some markets execute thinly with few sales at a particular price, others are thick with sales, at a fast rate. One can also look at how the market executed. One could probably make some hypotheses as to the strength of the market at those prices and the possibility of collapse or avalanche. One presumably wants to avoid being in a market avalanche. In Reminiscences of a Stock Operator, a tipster goes to the big time trader with a tip to buy. The trader tells his broker to sell a few hundred, then to sell a few hundred more. The tipster asked, wait, I thought I told you to buy. Yes, says the Commodore, I just wanted to test the market and see how it would take my offers.



 I remember the 80s real estate boom. There were systems for buying no money down. Flipping real estate. There were 10% months. People leveraged investments. People bought with balloon payments. Then Volcker started tightening. Imagine having Treasuries at 14%. Lots and lots of people went bust, got caught. Lots of foreclosures. No more financing. No one could refinance at 17-24%. The long term average interest over the millennia is something like 4-6%. The cycles are very long. The Fed tightening cycles continue for quite while.

Paul Marino writes: 

This was from March but has stuck with me since and sort of guides my thoughts on rates. Basically, Bernanke doesn't expect the Fed Funds rate to rise back to its historical average of 4% in his lifetime. That is a long time at low rates and basically non-existent inflation for that to occur.

"At big-ticket dinners, a blunt Bernanke sounds theme of low rates"



 I was waxing nostalgic when I was reminded of one of Vic's favorite precepts…

Not that it was anyone's business, and not that anyone really cared, but after the trading day was over, one was often asked matter-of-factly, "so how'd you do today?" even back-in-the day (on the floor of all places) traders doled out socially accepted responses to this very probing question. These responses were realistically based on a hierarchical assessment of one's intra-day p&l.

Ranging from bad to worse, were the losing days…

- they got me
- got killed
- at least I got my health

Ranging from good to better, were the winning days

- not a bad day
- got 'em
- had a nice week today

A gentleman never kisses and tells; and a trader does not provide full disclosure about his performance; the trader should instead exhibit humility. For those on the right, humility may be seen as political correctness by a different name, while those on the left may see this as a way of stifling free expression. However, like a poker player without a tell, one should never be able to discern if a trader had a good day or a bad one. A trader shouldn't whine, or proffer excuses on bad days; and there should be neither bragging, nor hubris tendered on the good ones. Trading makes strange bedfellows. Individuals from disparate backgrounds with varying opinions, beliefs, and backgrounds are brought together by their passion for trading. But, what should also unite them is a shared belief that humility is not only there to protect them, but is a kind of moral compass that should always remain a virtue.

Anatoly Veltman writes: 

People would never guess so after the close, if I just made some easy six figures. I never-ever thought of the reality of that cash (for me, the winner). People would hear me going off at "that silly market", which just did so unprofessionally today.

Reminds me of one Robin Hood's trading idea to never cover if the market let his contrarian position recover back to break-even. His logic was that if "they" were covering themselves so aggressively as to even forget "to force me out first"–then my initial premise must have been reeeeally good, and is bound to go a long way!

Jim Sogi adds: 

My second cousin is a pitcher for the Dodgers. He and every other baseball player has daily, game by game, lifetime, yearly statistics kept and prominently displayed whenever his name appears. Why don't professional traders have this type of info if they are running a public fund or ETF? I think it would be good.

Sushil Kedia writes: 

In my earlier years, there was a dream job I wanted to get hired for. Interview processes lead me to the final round with the big man, who has been an idol nearly for me for close to two decades now.

At the deeper end of what most would consider to be a long interview by his standards, since he had already given me twenty minutes he asked me to tell him one exceptional quality I have in me which would be really difficult to find in most others and how it is relevant to the job of running his billion dollar book.

I told him humility is my most effective quality. He asked why. I told him that it is the most powerful currency that can ever be invented. He stared at me and asked why. I told him, without spending any cash of any type, it is very effective in seizing a put option from the world of your own short-comings, follies and errors. He said, this may not always work, as some will be so good that they will still encash your short-comings. I wasn't sure if he didn't like what I said. Then with a long pause he asked, what more ways can you justify saying that humility is the most powerful currency. I said it helps you see others' cards often better without revealing most of yours. He smiled. He asked, tell me a third way in which humility is a currency. Told him, the same way that deception minimizes struggle for the discovery of the deal zone, humility also reduces the required effort for closure. He said you are hired, subject to reference checks.



 Anything of relevance?: "Rogue Wave Theory to Save Ships"

Stef Estebiza writes: 

Better than "of relevance", it is fundamental. The wave is only the visible part of the situation: "Artificial Surfing Reefs".

Pitt T. Maner III adds: 

Have you seen this video of a rogue wave hitting a tanker? The video is not, by any stretch, a rogue wave though. Those are large enough that their weight simply breaks the ship's steel.

Here is a picture of the damage from a rogue wave to Hornet from WW 2.

Steve Ellison responds: 

Yes, in the markets too there are infrequent "rogue waves" that can be catastrophic. A recent example was the move in the Swiss franc after the Swiss central bank abandoned the peg to the euro. If one is using leverage, such a rogue wave can easily be fatal.

The study of earthquake recurrences might also be fruitful. There was recently some media attention to the possibility of a magnitude 9 earthquake in the US northwest that would have many characteristics of the Japan earthquake in 2011, including elevation changes that would put some areas below sea level and drop others to within range of a tsunami. Such an event could occur tomorrow or might not occur until a later century.

Jim Sogi writes: 

A rogue wave can be a "hole" in the ocean due to random overlapping of normal size waves. Sometimes a hole forms big enough for the ship to drop into the ocean, and get covered up. The waves are not always "high" waves.

In the market, random and other forces can cause big air drops, or a no bid situation. I think these are the ones most damaging to traders. It's not just the big climax peaks.



 When I'm on the road and am hungry at lunch, sometimes I stop at McD's and order a hamburger and nothing else. They always ask, just a hamburger??? It used to be .99. Now its .83. That's quite a big drop.

If the McD's index around the world is some measure of value, is this a measure of deflation also?



 There have been hundreds of fights over time and these are the most memorable:

1. 1988 Sir James in Huntington Beach‏

In 1988 I was living in Huntington Beach, CA doing demonstrations on the beach and under the pier in preparation for my attempt to break 100 inches of concrete at the Ed Parker National Karate Championship. I was in top shape, and had a buddy, Joe, who was small and got picked on. He came up to me one day to report that some guys at a beach party had disrespected him. I hopped on the back of his moped and we rode into the party. I got off and there were no words. They knew why I had come. Two guys came flying at me and I dropped them with a left and right to the chins using their own momentum to knock them out. Two more came and I forward jabbed them in the faces knocking them out. Two more came and I spinning back kicked one in the face and in the same motion back fisted the other, and both were knocked out. They started calling me, Sir James, and one of the six reported, 'Sir James is a dangerous man. He knocked six of us out in 13 seconds.' Actually there was a seventh who came on slowly, alone. He had some boxing skills and we fist fought. He had speed, but I was a little faster, so I slowed down and took a few blows to see what he had. Every good martial artist should to take strikes to know what his opponent is made of, and out of respect. I kept him in it for a long exchange, backed him up against a wall, and said, 'You are one touch youngster' and he hit me in the face drawing blood in the corner of my mouth. I liked that, and walked away from him, but the Sir James name stuck.

2. 1984 Graniteville, SC

In 1984 some local toughs called the Moss brothers catcalled my sister in the Graniteville, SC market parking lot and wouldn't leave her alone. When I came on the scene she was in near tears with two of the brothers on the lot and the oldest in their pickup. They were rough guys, but not gangsters and probably were picking on sis to test me. Sometimes I think people started fights with me just to watch the performance at the price of getting their asses whopped. One came up to me and said, Rambo (my nickname in the south), what are you going to do if I hit you with this bat?' I said, 'Hit me and find out'. He reared the bat over his head and I threw him the pitch. It was a spinning back kick to the chest with so much force he flipped head-over-heels and landed out cold. His brother was moving forwarded but hesitated, and I whirlwind swept him with a spinning squat with one leg out taking his legs out from under him. I helped him up and asked, 'Want to go again?'. He shook his head. I walked to the oldest brother in the pickup and asked, 'Do you think that was a fair fight?' He said, 'Rambo, there is never a fair fight with you,' and rolled up the window.' My sister swooned, 'Oh, James!', and I became friends with the Moss family after that. You have to defend family but can't embarrass someone in a small town and expect to ever relax. It's better to make friends of your enemies after you beat them up.

#3 1985 CCI in South Carolina‏

Central Correctional Institute (CCI) in Columbia, South Carolina was a dangerous place in 1985, especially for me. I had a rep as the toughest guy in this oldest Confederate prison in America. The main hall was called Death Tunnel with several cell blocks on both sides. I had just come out of Metal Shop into the Tunnel and two guys came at me. One was holding a 16" pipe and a 7" knife and the other had murder in his eye. For them to have those weapons here must have been a setup by a guard who either wanted to see a good fight or to have me killed. There was a guard standing next to me as the two advanced, and I asked, 'Well, are you going to do something?' He was frozen with fear, so I eyed the PR4 strapped to his hip which is what the correctional officers call a swivel baton that martial artists call a Japanese Tonfu. I was an expert with the Tonfu. The guard saw me eyeing the baton in his holster, and said, 'Rambo, don't do it', and as he spoke I grabbed it and faced the killers. The one with the pipe and knife muttered, 'Rambo, we're going to beat your ass and kill you.' As he swung the pipe I thrust the Tonfu out from under my shoulder in a fake strike and did a spinning back kick into his solar plexus that knocked him ten feet back and he lost both saddles and dropped the knife. I knocked the knife out of the way with a foot. He got back up with the pipe, and i said, 'You'd better do it quick 'cuz the cops will be swarming in thirty seconds.' He swung and missed, and I stepped in and hit him with the baton with a series of serious strikes. There was blood all over, so I wiped off the baton, slid it back across the floor to the guard (so I wouldn't be accused of attacking him), and the cops were all over us. We were surrounded by inmates chanting 'Rambo' who explained to the cops what had happened. They dragged the attacker away with a broken jaw, orbit, fractured skull and missing some teeth, and his partner had fled. The guard got fired, and I never got bothered again at the prison.

4. 1994 Corcoran Shoe Scopaletti

Corcoran State Prison in CA was called the 'most troubled state prison in America' by the *Los Angeles Times* when I was there in 1994. It was more trouble for me as a sexual offender because the Brand Aryan Brotherhood was murdering sexual offenders right and left. You cannot house convicts and sexual offenders in the same facility and have peace. Over a period of two months, of the Brand had eased into a relationship on the SHU (Special Housing Unit) yard where we would slap each other on the shoulder and do the prison routine of walk and talk around and around the yard. One day, I sensed something in their mannerisms that was suspicious; it had been a set up. They took a killers' stance around me like a pride of lions. One named Dennis 'The Mongoose' Scopaletti clapped me around the shoulder, and I felt a sting in the front of my neck. It spun my head and I continued into a spinning back kick that caught Scopaletti in the temple that crashed into a cement pillar. Blood and gray matter oozed out, and he sunk to the ground flopping like a fish, already dead. The other three ran away into the razor wife. Alarms sounded, red lights blinked and I started to get pelted from the wall by wood bullets. A Big Bertha block got me in the leg, and I knew the next shot would be live, so I lay still on the ground while the responders surrounded me. They dragged the Mongoose off and the guards got me up and asked me if I was alright. I said, 'Yeah', but was having trouble swallowing. A welding rod I hadn't noticed stuck in my neck, so they walked me like Frankenstein to medical where they pulled it out and sewed me up. The yard camera had caught it all, and the guards said I was safe now because the Brand had sent their best man the Mongoose to kill me and he had failed.

5. James Doc Holiday

Had I known that James 'Doc Holiday' was the General of the Black Guerilla Family (BGF) and leader of the Symbionese Liberation Army (SLA) when he patted my ass and said, 'Welcome home, boy', our fight might have lasted more than one second. When he started that in the shower room I finished it with a foot in his temple and he went down out cold. Three guards rushed up, asking. 'Do you know what you just did?' 'He started it, I finished it.' I said. 'Gather your clothes, one ordered. They slapped on a K-10 Red Bracelet on my wrist that is the most sensitive custody. I was crowned 'King of the LA County Jail' by the inmates, guards and staff. It was 1978 and I was only nineteen. Doc Holiday and I made up in High Power maximum security but in every facility I entered after that someone wanted to test the 'King'.

6. 1992 Rolling Pin at Ely, Nevada

‏When the California prisons (CDCR) couldn't hold or protect me any more in 1992, they transported me to Ely, Nevada State Prison. That warden wasn't happy with the responsibility because I was a marked man as a celebrity martial artist and sexual offender. Soon after the transfer, two Aryan Warriors came at me with a typewriter rolling pin and screwdriver. As the rolling pin crashed the back of my head I spun into high caps and hit the Warrior four times with my elbow in the face. In that instant, the other stuck the screwdriver in my forehead at the hairline. I backed him up against the wall as a wave of guards rushed us. Now they made we walk the gauntlet between the guards and the jeering convicts who might have it in for me. The screwdriver was jiggling up and down as I did a sidestep on my own blood through the hallway to the clinic. They unscrewed the driver, and then put me in solitaire. I was so mad I kicked the door until the walls started cracking and the hinges bent out. The guard screamed for backup, and they had to torch the door open. The warden called California and told them, 'You come get this guy. No cell here can hold him!'

7. Sixteen Officers Down‏

In 1978 at the LA County Jail third floor chow hall a guard smacked the back of my head for no good reason. Guards do that to get themselves in hot water so the rest of the guards can jump in and beat up an inmate. The guard smacked me and said to, 'Hurry up,' and I went off verbally. In seconds, my buddy Virgil Kim and I were surrounded by five shouting guards. They didn't count on the backbone of Virgil Kim, a Korean who was an expert in open hand Karate. Back to back, we fought the charging guards until the Goon Squad arrived with their nightsticks, shields and riot gear. That made it even until one dropped his nightstick. I grabbed it and hit them so fast Virgil's eyes were spinning. Then I tossed him the nightstick and he beat the ones nearest him. We used their shields and helmets, passing the baton and hitting them with everything in the chow hall including the coffee pots. Sixteen officers were down! Sergeant Bullis and Brother Gerald, the Catholic chaplain, came in quietly and approached us with palms raised. I had great respect for both of them, and when Bullis said, 'Calm down, and this won't happen again,' I believed him. We piled all of the riot gear next to the unconscious cops, and Virgil and I got our pictures taken wearing their black helmets, and the officer who slapped me got fired.

8. Mexican Standoff‏

Unit 3100 in LA County Jail is called the 'soft block' and I was there as a first time offender of any law of the land and had not yet been declared 'dangerous'. This was my first and last fight in a soft tank because, after it, I would go on to knock down James 'Doc' Holiday and the third floor chow hall 'Sixteen Officers Down' and from then on be housed in special units because either I was dangerous or someone dangerous was after me. But in 3100 in 1978 I was minding my own business in the day room when six burley Mexican's decided to test me. They walked up and said, 'We hear you're good. Let's see how good you are!' I always give people like them a chance to walk away, an out, so I replied, ' Are you sure?' The response was two advanced from the front and two from the back, while two stood at ready. I always take care of what's behind me first, so the ones in front can watch and have a chance to leave. I saw the ones in back in my peripheral vision and used Bruce Lee sounds like, 'Ooh! and Hah! to distract them. I took them out in one motion with a kick to the chest and leg swept the other. I spun, and did the same with the ones in front. The two others had just seen poetry in motion, and didn't want to be the next stanza. I helped them up, asked them if they wanted to play it again, and they said, 'No Mas!' The test was over and we became buddies. You never hit anyone in the face who's trying to test you or establish a pecking order because it's more of a handshake than a fight.

9. Brush at Wasco

In Wasco State Prison in 2009 an inmate came at me with a toothbrush with a razor blade fixed in the handle. He was out to brush my teeth, waving it in my face to intimidate me. I asked, 'Are you sure you want this? I don't want you crying about it later.' He raised the razor, and I right forward kicked his shin. I usually defend against prison weapons with a kick because it would have to hit an artery to do any damage. Then I follow up with punches. My kick broke his tibia that stuck out through the skin like a splintered stick, and then i closed with an elbow across the face that knocked him out. They call assassins like this 'Torpedoes', but he never touched me.

10. Chinatown Street Fight‏

In San Francisco's Chinatown in 1981 I was contacted to fight the ranking world street fighter, Jimmy Tenaca, a Japanese from Seattle, in what the Japanese sometimes call *Kumite*. The modern version of this is Ultimate Fighting where *Kumite *often takes place inside a ringed area similar to that of a boxing ring. In this case, they led me at dawn into Chinatown where the shops were closed on both side of a street that was blocked off, and no cops. It was illegal, high wage street brawling. Tenaca was ranked #3 on the street fighting circuit and this was my first fight. He was cocky and muscular, known for his hand and foot speed. I was a backwoods, self-trained and also known for hand and foot speed. We were surrounded by about 130 people including many Japanese Triad in their sleeved shirts and old Chinese gentlemen smoking. Dozens of kids perched on the shop roofs as Tenaca and I did the pre-fight bow and moon-sun hand-in-fist 'handshake'. He instantly moved in with punches and kicks, while I dodged his attack to observe. I saw he was a traditional fighter trained in a dojo, so I took a free style position. I began throwing punches and kicks using mainly Wing Chun for close combat. My blows landed hard on his arms and shoulders causing him to wince. The Chinese in the crowd murmured to acknowledge their impact and the kids on the roof clapped. After three minutes of exchanges, Tenaca waded into me with hands held high, and by a fluke he raised one to throw a punch just as I released a front snap kick that went under his arms into his advancing chin. Down he went, but not out. They stopped the fight as I walked away the winner out of Chinatown with $7000, I was invited into the USA street fighting circuit but it wasn't my style. I only fight for defense or to aid a victim. It will sound strange, but my best techniques are lethal and can't be used in street fighting. I didn't want people to know what I could do, and wished to remain a free spirit.

Victor Niederhoffer writes: 

What's your opinion on how the former 'world's greatest martial artist, escape artist, and psychic fared with fists.

Jim Sogi adds: 

I've been reading a lot of Lee Child's Jack Reacher series. It's pure pulp fiction, but surprising captivating book after book after page after page. Great mystery also.

Jack fights a lot, street fighting. He uses the head butt, which people don't expect, and the forehead is strong against the nose, and eyes.

He also does a lot of low kicks the the knee, and elbows to the face, and punches to the solar plexus. Punches to the face often result in broken hands so are not effective.

His motto is get your revenge in first, and don't fight fair. Of course he's 6'5' and 250 lbs which makes the punches more effective.

A great guy, I really like him.

I question some of the reverse and spinning kicks the guy talks about in Vic's post. Such kicks in reality are much too slow, and give the opponent way to much time to kick you in the balls while your legs are up in the air. Real fighter don't use high and spinning kicks. It's movies stuff.

Anton Johnson writes: 

Hi Jim,

Thought you might enjoy this video clip, even though it may be a set-up.

Jim Sogi replies: 

In a real street fight the idea is to incapacitate the attacker instantly and permanently, then walk away quickly and not gloat over the attacker.

People think "put up the dukes" and picture Bruce Lee high kick and don't expect the low fast kick to the knee. A big low kick to the thigh can prevent the attacker from chasing when you run right after also.

If you train and can do it size wise, broken finger by hitting attacker hands with a weapon is good. Some sort of weapon is also helpful and advised. Timing is important, don't wait those first beats, strike first.

Now I'm too old for that type of thing anyway.

Trading lessons abound. Strike first, strike hard. Don't necessarily wait for regular hours. Hit and run.

Chris Tucker writes: 

An old friend, Mike, was Marine Force Recon–astonishingly huge guy–arms bigger than my thighs, was hanging with some friends from Seal Team 2 in Honolulu, stepped out of the bar with one of them and headed down the street. A huge Samoan dude hails them from an alley "Hey Bra", "yeah??", "why don't you give me your wallet now?" Mike reaches back for his wallet, winds up and slams this guy in the chin with a roundhouse. The Samoan, a head taller and even larger than Mike, touches his chin and smiles down at him. The Seal, a medic and only 170 pounds wet, gently pushes Mike aside and says "Let me handle this". He steps in front of him and darts past the Samoan, slamming a wicked kick with his heel into the side of his knee, putting him down instantly, screaming in pain. "I told you to let me handle this stuff, you big dummy".

Ralph Vince writes: 

But the problem with a kick, a rear kick or a sidekick is they need to pretty much be standing still. It's very difficult to do if someone is moving around, at least for most mere mortals or fat guys like me.

I've given a lot of consideration to the idea of "getting out of there," after a confrontation, or during it, or if there are multiple attackers. I think you have to stick around, no matter what, and I think there are a number of reasons for this. (I had an episode, a possible entanglement, just last night, that I thought might be trouble, late night in Buenos Aires, with the wife, and the thought occurred to me).

Assuming you are NOT the aggressor (and old fat guys like me never ought to be), then you have to consider several factors, all of which suggest you need to stick around the scene after a problem.

For one, you're probably captured on video somewhere, so if you leave, there's video not only of you, but that you left, which is not something innocent people should do. Secondly, there is a good chance you will be with a female, and a good chance she is in footwear not conducive to getting out of there. Third, I'm too old to run away, and not much inclined to no matter what the younger aggressors might have in mind. Of course, this is why you always need to have multiple, non-redundant weapons with you (and an extra clip of ammo. Look, if you have to shoot someone, and stick around, and you better, they likely have friends, or family nearby, and they may be armed too).

But then there are situations like last night, where you cannot be carrying weapons, and you're at a tremendous disadvantage, especially against potentially multiple aggressors.

Hydrick had some interesting stuff in that post. I think he mentioned something about not being afraid of other boxers or grapplers or martial arts kinds of guys– and you never should be, at least in my opinion. Those are different sports altogether than a real fight. They need their footwear or their clothing or whatever to be comfortable, and they are used to certain rules, etc. If you look at someone you can get a pretty good idea of how they would fight, based on their build and physiognomy. Just because someone has a lot of boxing in their background doesn't mean they have an advantage in a real fight.

For example, it's not uncommon to see a lot of boxers move into a position down and to the outside of their opponent in a sort of "crouched" position, with, if the two opponents are right handed, has the crouchee with his left hand almost against his tummy, his right hand up, not unlike the very popular-of-late "shoulder roll" position, the latter being far away, the former where the aggressor wants to get inside.

But that position (and I contend there are only 8 positions your head / body can viably be in in any fight and have a chance, and most people quickly get out of position) will get you biffed in a real fight where kicking occurs. Instead, someone who wants to get "to the outside: of his opponent (again, assuming two right-handers) is to step in with hands high, left shoulder snapped down towards the right hip, and not waste time in their (whereas the crouchee does want to waste time, he really cannot be hit with any force down there, and he can skooch out if necessary, but this all falls apart in a world where kicks are coming and the fight is usually over in a few seconds).

So there's really not a lot to fear in any opponent, as long as you've decided you're going to hurt him and stick around, and if multiple people, you aren't going to have to encounter more than two or three of them, and most of them are without a clue and not looking for a fight really (which is why they are in numbers), even if you don't have a weapon on you.

So, I've kind of come to the conclusion that it's a bad idea to leave. Best to stick around and tell the cops how you were being attacked, and that "It's probably on video," and be able to live with myself.

John Floyd writes: 

This is pretty standard kick called "kansetsu geri" or "joint kick", it takes some practice for getting the right power and timing but is very viable, and in this case if the Seal really wanted to hurt him there were at least a dozen other things he could have done, one would be a "toho" to the carotid artery or "nukite" right through his eyes, there are also many techniques that allow death to occur slowly over several days to avoid immediate implication of the attacker, but the best advice though is just avoid these situations if you can.



 As some might recall, I follow coffee pretty closely. And while coffee trading may be a relatively closed shop, the price still responds to supply and demand. I recall from my econ class that even monopolies have to factor in the reduction in demand consequent to an increase in price unless the good is inelastic. That's four decades old, though, so maybe my recollection is off.

Here's the thing: oil's dropping as the supplies bulge and the dollar strengthens. Gold's weak as well. That fits a deflationary environment. Increasing interest rates fits an inflationary one. Coffee remains weak, trolling multi-year lows. What's intriguing to me about this is that evidence continues to grow that the el Nino taking place is getting stronger, and there's now discussion of whether this year's even might be stronger that the record one in 97-98. El Ninos generally mean the coffee crop is smaller than average. So while weather developments suggest a reduction in supply, pricing suggests a marked decline in demand, too. Either that or deflation with a stronger dollar.

Maybe I'm missing something here. (I probably am.) Anyone care to help me understand this better?

anonymous writes: 

Procter & Gamble, Starbucks, Sara Lee, Kraft, Tchibo and Nestlè control 60% of the market. Actually they are in overproduction, 120 million bags (sixty pounds) of coffee products, 105 consumed. The inventories accumulates from year to year.

They are trying to introduce into the market a GMO coffee variety whose seeds ripen all at the same time, greatly cutting production costs and collection costs, allowing automatation. They are destroying the lives of 125 million people, mostly small-scale farmers and their families for profit in exchange for a coffee built in the laboratory.

Andrew Goodwin writes:

Has anyone else made the same observation that nearly without fail, the same people who make the sternest warnings about climate change are the same ones who mostly firmly protest GMO food?

If the climate is changing then please explain why the crops that worked in the old climate will succeed in the new one. Sometimes it is enough to make me think these folks are going to succeed in starving us all.

In this case, respectfully, it seems that some parties would rather see higher coffee prices, which they think will help some number of people. They don't consider that the destruction of the Brazilian rainforest to make room for coffee plantations, profitable only with prices at higher levels, might have catastrophic impact on humanity in the longer term. 

Michael Ott writes: 

I've noticed that those that are vocal about climate change tend to make arguments based on the overwhelming scientific evidence. Yet when pressed with overwhelming evidence about the safety and benefits of GMOs they ignore it or claim it's a conspiracy. They make fun of those who ignore climate change science or claim it's a conspiracy. It's all hypocritical. This article was thought provoking: "Unhealthy Fixation: the war against genetically modified organisms is full of fearmongering, errors, and fraud. Labeling them will not make you safer."

Jim Sogi writes: 

The Kona Coffee specialty crop will be big this year. There are a lot of beans and just starting to ripen. We had some big rains right at the beginning of the season and there were rows of fragrant coffee flowers early on. The coffee borer was bad last year, but as with many natural cycles, it is not as bad this year. With the trees stronger from good rain, the pests can't get as big a foot hold. There is not enough Kona Coffee to make even a drop in the world wide market, but it's what I grow, harvest, process, dry, roast, grind and drink. There's not many coffee gourmets who can say that.

My son got me a nice Rancilio grinder. It's made a huge difference and now I enjoy real Italian style espresso and cappucinos. It's a game changer compared to the cheapo grinders and results in a very even fine fine grind which you can't get any other way.

Stef Estebiza writes: 

There is a ton of material about the problems with GMOs, and not only with the way in which they are then treated with pesticides. The list is long, but lobbyists' interests are mor profitable and important than your health. Here are two articles:

"Cancer Viruses Are Deliberately Inserted Into Your Food"

GMO: Study Shock, Toxic to Animals and Man

Michael Ott replies: 


Those articles are perfect examples of unfounded claims. This quote is just false: "because they are heavily contaminated with the toxic herbicide, Roundup". Literally dozens to hundreds of tests have been performed and prove the opposite.

False: "petunia plant which is a nightshade. That means folks with nightshade-induced arthritis can now get arthritis from soybean products." This has never been shown in a valid scientific study. Rather it's been repeated by pseudoscientists from a base false claim.

The second article showed results based on massive unrealistic doses and has been widely discredited. 



 The Hustler with Paul Newman and Jackie Gleason has many good lessons for traders.

George Scott tells Fast Eddie: "You're a born loser". He always has a ready excuse for losing. Despite his talent, he lacks character.

Winning is defined solely, in Scott's book, by the amount of money one takes home at the end of the day.

Winning can be hard for some to accept, as well as the price for success.

What is the price of success? Presumably, Fast Eddie gains character by the end of the movie, and wins…but does he, in the long run.



 I read Dark Pools recently, a great book about the development of the trading algorithms and computers that match buy and sell orders originally by Island, then ARCH then Nasdaq.

The author said that NYSE resisted them the whole way, and their computers and systems were patched together in a big mess, with patches upon patches.

Perhaps that is why today, when thing really counted, their systems crashed.

Not good at all.



 By the way, I believe it might be a subject of speculation whether  Mr. Simons and his colleagues have found anomalies that they can still exploit as they might be much too big, and there is much too much competition from other humble anomaly seekers.  Yes, as Mr. Harry Browne would say, as described by  the true believer below, their pantheon of geniuses soars on a much higher level of cognition than myself or any of my colleagues or hundreds of followers - but then again superior intelligence isn't everything. And aside from the profitability of market making, as first enumerated by MFM Osborne, it might be difficult to capture anomalies on a systematic basis that the competitors in St. Louis and other small venues might have missed, no matter their profundity.

Anatoly Veltman writes: 

Does this also answer the query as to WHY would Virtu decide to go public?

A true believer writes: 

If there is anything whatsoever to the legion of gambling analogies to markets, market ecology and human endeavor then most of the chips will end up in very few hands.

The Medallion Fund represents the very apogee of human brilliance so applied to financial markets.

What is more likely, that there is something rotten in Denmark? Or that the combined work of pure genius including:

James Simons

Elwyn Berlekamp

Robert Frey

Henry Laufer

Sean Pattison

James Ax

The whole 'European Contingent' - I will not list those names here.

Plus a host of mere 'worker ants' cleaning data, programming testing machines and keeping the lights on.

Might just have come up with the single best group of high capacity strategies ever known.

We should all celebrate this achievement. It represents everything this list is about, surely?

Trying to pick holes in something like this is the equivalent of the Barron's columnist bearing bearish for 30 years on U.S. stocks.

My belief and optimism is based on facts, not some idol worship groupie phenomenon.

anonymous writes:

Is one allowed to agree with both the True Believer and the Chair? What Simons and the others did was pure genius–they used mathematics to identify the consistent anomalies that occur when people buy and sell securities. Those of us who lack their pure brains and mathematical chops marvel at what they have accomplished and have done our best to create a glacially slow mimicry using employment data and their correlation to the business cycle. (They are playing Scarlatti the way Michelangeli did; I am playing chopsticks hitting one key a month.)

But, as Vic notes, the question is whether or not there remain any arbitrage opportunities left now that those anomalies have been examined in such detail for decades by the far greater number of smart people who have come after the folks at Medallion.

Bill Rafter adds: 

Like others, I agree with both the Chair and Shane. The question then is "how much juice is left in the fruit?" As Stefan says, he gets one a month.

I would posit that it is a question of time frame. Certainly the HFT opportunities are gone for us simple folk, and maybe much of the day trading. But there are still anomalies if we are willing to accept less certainty and leave our bets on the table a little longer. After all, realize the prop shops do not want their worker bees to have an overnight position. Which means those of us willing to have such a position will have an automatic edge. As an example, compare the Open to Close returns to the Close to Open returns of certain derivatives. There's an edge, less than it used to be, but still there, and the edge favors the overnight holders.

Also, we simple folk cannot expect to outperform by trading only SPY (or perhaps its overleveraged sisters), the most competitive and liquid of assets. The greatest returns have always been in the least liquid of assets. 

Shane James replies: 

I see no disagreement with the Chair on this thread. As with the Chair, myself, Medallion, DE Shaw, Citadel and all such people interested in trading from all walks of life - we shall continue to look at new angles, different ways of splicing the available information amongst much else. Medallion too will do this. The outcome? Only the shadow knows.

On this next point, the Chair, myself and anyone with half a clue will be in violent agreement - it is always best to be the bookie . The RenTech entity, at the last count when the info was still public, collected 8% management fee and 45% performance fee (I may be off by just a little here).

To use a collection of letters used by my children to describe this: OMG.

It's good the be the king. 

Jim Sogi writes: 

Much of what they have done is computer science not just math. It also has to do with understanding and moving or changing and understanding and exploiting regulations at the exchanges. In a competitive environment, there will always be an edge available somewhere. They change and move, but there is always opportunity in change, the change in others, the rate of change, the unforeseen effects of changes. I think there is opportunity for the slow and small as well. Computers are stuck with their algos. They leave tracks, patterns, singly and as a group. The markets are complex, and no person or computer knows exactly how it works, though they may find opportunities in complexity. There are always effects of effects of effects, unknown to the actor. Waves spread out from every action.



 It takes a combination of multiple factors all to come together at one point to make really great waves. Any one thing, like wind, tide, current, change in swell, can ruin that perfect combination. Good surfers know in advance, in general, what conditions are needed for each particular spot, and can anticipate and show up early and see if the conditions predicted manifest into great waves. Also the surfer must be on top of his game, conditioned and not out of shape, with the right equipment for the day.

I've seen pictures of really good waves in the New York area. I've caught some good ones up in Rhode Island.



 I like LinkedIn as a company – it's oriented about a useful business service (jobs and business references) rather than being purely social. They also recognize that once people get a job they have less reason to visit the site, so they're developing programing to draw people to the site other times. I bought the stock for these reasons – and because my high-performing granddaughter (Yale summa, Baker Scholar at Harvard B School) chose to accept a job there rather than return to McKinsey.

Jim Sogi writes: 

I like FB.  Did you read Dataclysm?  It's all about getting personal private data…big data. That's what Goog is about.  Very scary is the info they have and what they can do with it.

Quants take the data they give and package it for us but there is so so much more data available to some and at different times. That's Chair's flexion beef. Creativity should be directed more at data and sources than chewing over the same old data feed. Satellite live data, crowd cloud data, twitter data, goog data. Buy a data stream from them for market turns. There have been a few failed hedge funds trying this idea and it sounds interesting. 



Trend days are the exception rather than the rule. We are looking for are rules, but is it possible to find the exceptions also? Trend days are something to avoid for mean reverters who get caught in a trend day or multiday trends. However, if one stays long all the time, its been found that a large percentage of the overall increase in value comes on a few days. Just playing the long side probably helps the odds in the long run. On the other hand, the big jumps in volatility and big moves on occasion are to the downside. The only thing I can see that sets up a big trend day is when buyers or sellers are totally outnumbered exponentially right from the open. Big up trends days can set up after big declines but its a matter of being positioned and hold long enough to catch the big trend days that can make your year. One must also avoid being caught the wrong way that can end your career. The Learned Professor posits the opposite: that fat tails are the rule and that the exception eventually swallows the rule. Statistically one must hold the defined period at the defined leverage to realize the normal expectation. My common error has been to try to beat the expectation which apparently is not possible over time. In conclusion, it appears that one can only follow the rule, not the exception. The problem however is in reality the actual variance has and will exceed the expected variance.

Larry Williams writes: 

There are 2 things that help define trend days.

First, they are hard to know in advance, but trend days (large ranges) almost always close at the high (up trend) or low (down trend) so best working strategy is to hold to the close if it looks like you are in a trend day.

Secondly, trend days are usually proceeded by small ranges and small open to closes.

Stefan Martinek adds: 

Once we are in a high range day, usually more is coming in the same direction (vol. clustering with a drift). To overcome the cost of trading, it seems that 3-5 days (bars) holding or some combination is preferred. Regarding the point below "Just playing the long side probably helps the odds in the long run.", it is maybe correct in equities. When we trade on a basket of futures, not just ES, eliminating short trades usually damages risk adjusted returns.



 I'm reading an interesting book, Sapiens by Yuval Harari. In making rather blunt conclusions he theorizes that it was the new ability of Sapiens developed only about 70,000 to imagine non existent things that allowed the development of larger organizations of humans such as large tribes, countries, corporations and religions. It is through the larger organizations based on myth that man's accomplishments occurred only recently rather than in the 2.5 million prior years of homonid history. The conclusions are speculative because there is virtually no record and the very scant archeological evidence shows little of what and how ancient prehistory man thought, did, acted, believed. He discounts the importance of tools on the basis that man had tools for 2.5 million years and did not accomplish much and was no more distinguished an animal than the other apes.

In an interesting take on agriculture, he discusses how foraging man spent 4-5 hours a day working to survive, then hung out the rest of the day. Contrast modern man's long work week. He explains some of the stress comes from the fact that man is designed for 2.5 million years as a forager, and that his reactions built in haven't evolved to accommodate recent civilization only in the last 5000 years.

The timeline is interesting with 2.5 million years of not doing much. Then fire was discovered and has been used for 300,000 years; Agriculture for about 9000; Civilization less than 5000 years. Other species of humans existing until about 10,000 years ago. The recent genetic evidence seems to point to some interbreeding with humans having Neaderthal genes. Humans seem to have wiped out most of the large beasts wherever they went in short order.

I have not finished the book ,but I fear for his conclusions at the end.

Peter Grieve writes: 

Around 71,000 years ago, Mount Toba exploded in what is now Indonesia. This was the second-largest volcanic eruption in the last 450 million years, displacing 4,000 times as much earth and ash as the Mount St. Helens eruption. The result seems to have been six years of "volcanic winter", which not only triggered an Ice Age that lasted 1,000 years but also caused massive deforestation, famine for all animals, and a major die-off of human beings. According to genetic studies, the human population might have been reduced to about 2,000 people.

That certainly might have been just the kind of environmental stress to induce a major advance in human capabilities merely in order to survive.



 I've been eating do it yourself Soylent which I call "Superfood" for about 9 months now. It's changed my life. I eat it instead of lunch and as an energy drink. I make my own custom formula high in high energy elements such as maltodextrin, dextrose, spirulina, and whey isolate protein. I've added chia seeds and use masa harina for the carbs. I add electrolytes, calcium and vitamins as well. I've found it to be very very effective in providing good nutrition and energy while engaged in high energy activities such as surfing or skiing. It is easy to digest, easy to consume while on the go. It is much more economical than commercial energy bars or drinks, and much more nutritionally complete.

It is great to drink a little at a time through the day or the days activities without having to stop, sit and consume raw foods and it keeps your sugar and energy levels up consistently though the day without cycles of hunger. During driving or a work day it is great way to stay hydrated, and nourished and avoid low blood sugar, grumpiness. It helps me be productive by avoiding having to stop at a restaurant, wait to be served, eat, and pay, saving hours, and money. It only costs about $4 a day for the bulk ingredient which I can order from Amazon. It is great for traveling when access to food or a restaurant my not be possible. I vacuum pack it in convenient size bags and add to water, or to fruit smoothies.

We have a lot of mango, banana, pineapple and papaya in our yard now, so it makes a great smoothie in the morning. I find myself leaner, with good hair and nails, with more energy. I surely enjoy the good flavors of a nice meal after drinking what I call "Superfood" all day though. I prefer my homemade variety because I can custom mix the formula to match my individual taste, nutritional needs and preferences. Plus its all easily and readily available when I need on my shelf, or very quickly from Amazon. I mix the dry ingredients with a Kitchenaid, and mix the drink in the Vitamix.

The website has a diy section with a custom home recipes submitted by users and a nutrition and calorie calculator. I highly highly recommend it.



 We've had some big waves recently. The waves are measured by amplitude and period. We had 6 foot waves with 22 second period. This is very powerful compared to a 6 foot wave with a 9 second period as it stacks up on the reef when it breaks so there is much more water where you are in the wave. The surf prediction services use buoys to give the wave amplitude and period peak to peak, and with two parameters and a direction, we have very good information to determine when, where to go out, what board to use, and how to approach the wave, where to line up. Ocean waves in theory follow a sine wave, but in real conditions so much random influence results in a lot of chop most of the time. That's why we look for a nice clean big swell with a long period. We know the waves are going to be good.

At times, the stock charts have wave like structures and some descriptive method giving the height of the move and the length of time between maxima and minima would be very helpful descriptions if not having some predictive ability. X period maxima doesn't work because the periods tend to differ according to the day and doesn't describe the swings. The daily algebraic range doesn't really capture differences in conditions. There's been some work with sine waves, but that doesn't work either. It's easy enough to see looking back, but it's hard to describe in an algo to find them. Chair discussed percentage and algebraic ranges and it's odd there isn't a simple way of describing volatility. I don't understand implied volatility, but it just doesn't seem right to me with its directionality. Absolute volatility doesn't seem all that great in distinguishing various conditions, nor do daily ranges. I don't mean to Prechterize but the idea is that the waves often do not come as isolated events, but in a series of moves.

In the ocean, tides are generally, but not perfectly, predicted by tide charts which generally follow a sine function. Dr Phil has often mentioned arc sine functions in daily markets which tend to place highs and lows at the beginning and end of the session. This is often helpful.



 Here is an article from the world of transport engineering. It's not too much of a stretch to apply something similar to observations and timings of magnitudes in financial markets:

Extract: "Why Buses Bunch at Single Stops"

Maybe you've waited at a bus stop for longer than usual, and your bus finally shows up. And then, immediately after, a second bus on the same route pulls up right behind. What gives? Why can't they stay evenly spaced to improve everyone's waiting time? Lewis Lehe provides an explanation in a small interactive game.

Two buses travel along the same route, starting off in opposite positions. They make stops and pick up passengers right on schedule. But then add in your own small delays, and you see bunching relatively quickly. It really doesn't take much to throw off the equal spacing…..'

Jim Sogi writes:

Watch the ocean for a while, or the beach. Random waves cluster to form set waves, larger than the rest, or rogue waves, which can be magnitudes greater than the average. I believe this is a function of randomness or alternately pattern formation from simple binary functions a la Wolfram.

Here's some good information about Three Phase Traffic Theory.

Jim Sogi writes: 

When I go to the US Mainland and drive the big freeways for long distances, I try to drive about 2 or 3 miles per hour slower than traffic.  Most try to drive as fast as they can and bump up against slower traffic groups, and results in waves of clusters of cars.  It's more effort and emotional cost to try drive fast and requires more attention to try pass, notice and avoid slower cars, and cars next door.  Driving a bit slower requires less attention, less stress as you set you speed, and allow other drivers to pass, avoids coming up on slower traffic, and allows you to drive in the spaces between clusters, the "lulls" so to speak. I'm not in a rush and find it more relaxing and you can see the clusters in the distance, and adjust to drive between them. In large urban areas, the clusters tend to be time of day (rush hours) and location oriented, except for accidents.

In markets, vol clusters and it's good to be aware of the lulls and clusters, the timing of them, the length of the lulls.  It's like the lulls and sets in surfing. Trading also seems to cluster around the rounds, and time of day (arc sine).

In playing and composing music, it's important to leave "space" in the music, where there are fewer notes to allow emotional development. 

Jonathan Bower writes: 

 Mr. Sogi makes some very good observations. I drive 150 miles round trip every day for work. I see people in such a rush to "slow down" when they inevitably meet slower traffic (or jam). Maintaining a high average speed is much more important in determining length of drive (and better on gas). There is also a strong behavior bias to get in the left lane that frequently staying right, particularly in heavy stop and go, is frequently and consistently optimal.

Jim Wildman writes: 

And mathematically, except on long, open road drives, speeding won't save you signification time even assuming you succeed in increasing your average speed.

You can't save 5 minutes on the typical 20 minute commute by speeding. You can if you are willing (and able) to run stop signs and stoplights.

I used to drive from East Texas (Longview area) into Dallas every day (about 115 miles). It was my observation that most radical speeding (10 MPH over) occurred where it would do the least good. Very few drivers speed in the truly rural areas, but once you get into the more potentially congested areas, the number of speeders goes up.

David Lillienfeld adds:

I've found that the frequency of speeding is inversely proportional to the density of police cars on the side of the road. The result is that you have lots of speeding going on on the interstates, punctuated by islands of drivers going at the stated speed limit. I don't know that the state makes much off of speeding tickets in this setting; I do know that it presents a nice the opportunity for accidents as cars slow down and then speed up. Twice, I've seen cars flip in the course of trying to avoid an accident while slowing down—once was just out of range of a radar gun.

Stefan Martinek writes:

I found that a good solution is to reverse the time zone. I had one period when I was living in the US time zone while in Europe. It is always good to avoid crowds. Gyms are also nice and empty around midnight. No clustering.



 Amber Halliday, (Australian Olympic rower and recent stroke victim), recently said: "the mind-set that you need to become an Olympic athlete is pretty similar to the mind-set that you need to recover from serious injury or illness."

… or trading, applying and dedicating yourself more than the next guy.

Jim Sogi adds: 

As my skier guide friend says: "pain is just weakness leaving the body." 



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

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

Dan Grossman writes: 

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



 Our late friend Mr. E placed some significance on global natural phenomenon, because human hubris aside, they do affect mankind. There are a number of large volcanoes. I saw some pictures of big ones in Chile shooting up to the stratosphere, and some satellite pics of huge ones, and they all seem to be going off big time now. Even Kilauea Crater in Hawaii is overflowing for the first time since 1964. These shoot particulates in the air. When Krakatoa went off, the following summer was cold due to the ash blocking the sun. I suspect the volcanism will cause a similar effect in this following year and the temperatures may be somewhat cooler again. This may affect crops, productivity and GDP in various ways.



One very significant and predictive element of surf forecasting is the period of the swells.

NOAA Wavewatch [latest pacific waves forecast]

The period is the time between the peaks of the waves and can determine the eventual size of the breakers, the power, and the quality. Higher periods mean faster and better waves. A smaller wave with a long period is often better then a big wave with a short period which is choppy.

I wonder if market price periods might have some predictive value. Survivorship analysis is one way to look at it. Time between events, max and minima time periods seem productive looking forward. An idea is along the lines of the longer time between max/min the more the amplitude as in waves in water. Would shorter periods mean more "chop" with less favorable trading conditions. Would longer periods predict larger amplitudes or more vol and good trading?

Ed Stewart comments:

I think there is something to it. The tricky part is sometimes one can identify wave periodocity that they won't let you profit from - they let you in on the bad trades every time but not often enough on the good trades. Yet is can be very enticing if one does not consider that factor beforehand.

For example. A friend told me his firm "shut off" their computers due to going outside their risk parameters, and what do you know the periodicity during that period was highly profitable with the type of very fast reversals and squeezes from extremes many short term traders thrive on. Huge volume still but a low level of resting orders. Made me consider that when composition of the participants change the character of price formation changes substantially.

Stefan Martinek says:

High/low pressure areas drive weather patterns. Pressure can be quantified in markets as well. We can fix a time unit and measure the price pressure, or we can fix a price unit and measure the time pressure. Price and time are non-linear. To manage just one dimension seems enough.

A few years back we sailed to Corsica [island in the Mediterranean] when Mistral [strong northwesterly wind] arrived. All was very predictable: Short chopping waves, everyone threw up 10-20 times except captain, and it went for two days. I never sailed between Europe and the US, but some claim that it is the most predictable journey due to Passat winds.



 The Chair talks about trees often. I find them interesting as well. Tree roots emit an unknown chemical that attacks competitors roots, but supports their own species roots or symbiotic plants. Trees in Hawaii predate other trees and choke them out. I've seen that in the Amazon forest also.

Companies such as Microsoft and Google design their programs so that other companies apps and programs do not run well or at all on their systems, but allow their own apps and programs to run well, or those of cooperating companies.

Countries obviously help their own companies survive and create barriers for companies of other countries thru tax incentives, tariffs and regulations. Politicians look after their own state's, and their own supporters interests.

Various market exchanges make is harder for orders coming from other sources to execute and give preference to their own dark pools, and cooperating brokers. Brokers give preference in execution to their own proprietary traders, over their own clients or outside orders.

This idea of looking after your own and torpedoing the competition has far reaching implications at many levels. The flexions, and the military industrial complex are just two broad examples. Knowing how this works is important to succeed in in business and trading.

Steve Ellison writes:

Jim, I remember asking you about the roots of the banyan trees when I was in Hawaii. I had never seen anything like them. Some roots dropped from branches to the ground.

In northern California, there are mistletoe plants that are parasites on other trees. The mistletoe roots bore into the host branches. When deciduous hosts drop their leaves, it is easy to see the evergreen mistletoe.



 Who are the beneficiaries of lower crude prices (other than US drivers).

I own some global power generation utility funds and they seem to be benefiting from lower oil despite the global malaise meme.

Some of the downward pressure on futures would be coming from commercials who are hedging by selling at higher prices to insure the selling price of current production or stock.

After further research, the US Dollar, Thailand, Oil Tankers, Saudi's UAE are winners.

anonymous writes: 

Add India as well. 30% of their imports is oil. It has been a great profit generator with more upside potential. 



 I recently connected a turntable to my professional sound system with equalizers, subwoofers, and running two 1700 watt power amps. I have a collection of several hundred vintage vinyl records from the 60s on. I was amazed anew at how full and involving the analog sound is. You can hear the wood tones in the guitar of George Benson. It makes you feel like lying down and just listening to the music, or dancing. That just doesn't happen with CD's or digital content. The digital sound algorithms leave out some of the feeling and nuance of the sound. Boosting the bass does nothing but cover the lack of content in the other registers. Also, they vinyl has lasted for 50 years with excellent quality. The art on the covers is fascinating. Meanwhile, my cd's have dissolved, the cases broken, and been transferred to hard drive and lacks the same fidelity.



 If ever the appropriate thought were "physician, heal thyself" it would apply to Smith. He's the source of most of their problems. And when he gets back in, the Knicks will be totally hopeless. One tends to forget how bad he is when he's out.

Jim Wildman writes:

It would seem to be a case of someone who is sure of their talents being unaware of what talents they lack. He is unable to see himself as part of the problem because he does not see himself as having weaknesses.

Pitt T. Maner III writes:

Happy Holidays and New Year to all. A quote from a Knickerbocker caught my eye:

While he has been out, Smith has spent a lot of time watching film, trying to figure out why the Knicks have struggled so often late in games, losing 16 times by single-digits. "I think that's the million-dollar question," Smith said. "It looks like it's so many things, but at the same time it's got to be something real small to change because we're still in most games. It's hard to tell right now. If we knew our record would definitely show it."  



Why does the Fed have a mandate to insure 2% inflation. Perhaps the better question is who benefits from inflation. The average Joe 6pack has no savings, rents an apartment, leases his truck, owns no assets, no stocks. He gets his paycheck and spends it. He wants lower prices. When gas goes below $2 he's happy. When beer goes down he's even happier, and the more he drinks the happier he is and the more he saves. Who wants higher inflation? Big debtors. Who is the biggest debtor: US govt. Who has the most assets at the most leverage: Big banks.

Orson Terrill writes: 

I disagree with the Feds own explanation, and I think many economists would too.

The Fed doesn't have a mandate for any target rate, and the dual mandate puts employment at odds with inflation. Their stated concern about falling wages is disingenuous.

While they talk about falling prices, the fact is that the Fed is powerless if rates hit zero and deflation persists. The Fed wouldn't have control over the money supply or the economy. Though there are experimental tools that could be used.

The Fed will never say they are powerless. That creates a game theoretic situation where in deflationary panics The Fed could lose credibility in the markets, and deflation with rates at zero could become a Suboptimal Nash Equilibrium.

Why 2%: There's not really a good reason, and what the the Fed published is moronic….

Theoretically, you can have very stable 10% inflation target, and life would be no different than at 2% inflation target, because REAL prices would be same, so as long as inflation expectations were stable. Most monetary economists would probably agree with this….

Gordon Haave writes: 

There are two things going on here really:

The first is the idea that price stability is a good thing in that it aids in long term decision making. The most important point though is the fed view that deflation is a bad thing. The origin of that line of thinking is the Keyensian notion that the market for labor doesn't clear because wages are sticky.

To elaborate: Classical economics would dictate that you would never have ~25% unemployment because the price of labor would fall until it hit equilibrium. However Keynes said that during the great depression this did not happen because wages are "sticky". Due to contracts and other things the price of labor does not fall. Hence, to reach equilibrium the government needs to stimulate demand. There is at some level some amount of truth to the "Wages are sticky proposal" however the cure is much worse than the diseases. The primary policy of both the fed and the federal government is to prevent markets from clearing at all. Hence, when homes are overbuilt and a crash occurs the powers that be actually think that building more houses is a good idea.

The reason for this is the second reason why the fed targets 2% inflation: The idea that deflation is a bad thing. Main stream economists believe that if the economy enters a general deflation that it will enter a "deflationary spiral" where prices will keep going down. Under this theory nobody will ever buy anything because why would you buy something if you know the price will be less next year?

A funny thing is that the Keynesians like to scoff at "Austrians" and other free market theorists for having ideas that don't hold up under scrutiny yet the deflationary spiral nonsense is easy to examine.

First: We know that flat-screen TV prices have gone down every year for the past 15 years. Yet, is it the case that nobody bought them because everyone knew that they would be lower the next year? So, with that one example alone we already know that the entire theory is bogus.

2nd, the deflationary spiral theory poses that basically there is no way out of it. Yet, society still exists as a whole despite many bouts of deflation, so we know that the markets have a way of righting themselves.

This entire theory explains the seeming disconnect between GDP numbers and how the average person sees himself in the economy. In order to keep housing prices up, for example, millions of homes were being built due to false price signals by the Fed while millions of homes sit unoccupied. Everything is being done to keep markets from clearing.

When markets are not allowed to clear and prices not allowed to fall what you get is what currently exists in Japan - the death of civilization as young people, priced out of marriage, home ownership, children, etc. simply check out of society. It is coming here.



 The dollar is strengthening. I remember when I was young in the 50s and 60s and the dollar was worth 350 yen, and 7 Francs. Bank accounts paid 5%. The world was a great deal. I wonder if that world will return.

David Lillienfeld writes: 

That was the world in which Jews and blacks couldn't own homes in some neighborhoods and could be refused service at will by any business. It was a world in which someone could be denied a job because of his/her sexual orientation, ditto for renting an apartment/buying a house. It was an era in which when women worked, they were expected to earn a fraction of what their male counterparts did, particularly if they were married since they weren't (it was assumed) the primary source of income for the family. It was a world in which a physician might not inform a patient of a diagnosis of cancer or pressure a patient to participate in a research study after the patient had declined to do so—in some instances, declined repeatedly. It was a world in which a black man with syphilis in a government study would be denied treatment in the interest of learning about the disease's natural history, though without the man having given any consent to be so studied. Ditto for Guatemala men and women, who were infected with syphilis by the US government with the same aim of learning about the natural history of syphilis. That world included an American government which didn't hesitate to listen in phone calls as it pleased and spied on persons as it pleased.

I could go on. There were lots of aspects of that world that were good economically, it's true, but there were lots of downsides, too. Maybe the level of discrimination is the same as back then—just less visible, but I'd like to think that we've matured as a society, as a country, such that there's been a reduction, ideally a significant reduction.

Is today better? Worse? I don't know that I can given an answer other than to note that it's a different world. Would I like our economy to be such that we had the dollar at 350 yen and 7 francs. You bet. But as for the rest of that world, I'm not so sure.

Jeff Watson writes:

But we live in a world where the poorest of the poor can own a smartphone and have the access to information greater than the library at Alexandria, in fact they have all the information of the world available to them. I'm very optimistic for the human race. Our poor are better off than Louis XVI in almost every way.

anonymous writes: 

The central conceit of many well intentioned people is that the poor are dumb and can't find their way around anything. We think the poor need help, and they need our money transferred via politicians to be made whole. As the Chair drums the cadence in our heads, it's "the idea that has the world in it's grip." That conceit needs to go away as it is just wrong. The war on poverty has cost enough to give every poor person a couple hundred grand, but the money has gone to programs, not the recipients. Not all poor are dumb at all, they are victims of circumstance. However, the war on poverty will continue, as will the war on drugs, terrorism etc as there's really big money in it for the insiders. 



 There is kind of a nice but terrifying symmetry in the chart looking at the last two days, with a big red line in the middle.

In candlestick theory when the open and close are the same, it shows some sort of balance between buyers and sellers forming a doji pattern. These kind of things are testable. Also supposed to evidence change in direction when it occurs after a decline or rise.

I imagine in the old days in feudal Japan they would paint their charts for the rice warehouse receipts with a brush and ink while sitting in the tatami mat room in a kimono warmed by a charcoal brazier.

Jeff Watson writes: 

This is a good accompaniment to Sogi-San's mention of rice: Dojima Rice Exchange.

Jim Sogi replies: 

The Seventeenth Century Japanese rice traders relied on horse riders and runners to get the news of the crops and the buying and selling. To beat the time delay one enterprising trader rigged a series of flags on hilltops to relay the info to him in town so he would have the info he needed to place his orders ahead of the other traders. Definitely our kind of guy!

Jeff Watson writes: 

The Japanese taught old man Rothschild a thing or two 50 years before his coup in London. Hail to thee who can get and act on information quicker than the opposition.

Etali writes:

When living in Hong Kong, I learned of the story of an early British banker anxiously awaiting on Victoria Peak for signs of arriving ships from London. Apparently , the banker and shipping crews had worked out a flag signalling system. Certain flags signalled that the business news from Europe was good. Upon seeing the "good" flag, the banker rushed to the exchange to get his buy orders in before the ship from London docked. Other flags indicated the news was bad and of course, the baker dumped shares before anyone else had the news. This particular banker went on to found one of the beginnings of a highly successful British merchant bank.

Balzac: "Behind every great fortune, there is a crime!"



It's snowing in Hawaii!



Recalling fondly The Wiz's requirement that posts have numbers, a hand count reveals that the S&P crossed 1850 on 21 days this year since February.

Examining the standard deviation might suggest a trading system or indicator like Mr. Bollinger's to define a range where its not the average or median that is as important as the excursions.

Looks like a little more 1850 action.



After shooting up from below 60, went from 147 in 08 to 33 in 09. Quite a drop. Then back up to the 100 range area.



 Good morning Mr. Niederhoffer,

In your bestseller, The Education of a Speculator, you wrote:

I need to know what is happening in the markets…I hooked up a music synthesizer to the computer, linked it to the interface between the computer and quote screen, and generated a program that would give a musical summary of the markets. I used piano tones for stocks, strings for interest rates, the cello for short-term rates, and the violin for the 30-year bond. The Japanese yen was registered with the high flute, corresponding to the favorite instrument in Japan, the shakuhachi. The English horn, the French horn, and the Alpenhorn stood in for the other currencies.

A lot has changed since then, particularly in terms of software tools becoming available to achieve this. In that spirit, the "music" in this video has been created by turning market data (prices, returns, volatility, and other time series) into MIDI-format (via our software tool) which subsequently was imported into what is called a Digitial Audio Workstation (DAW). The latter allows users to assign instruments (from a single guitar to a whole orchestra) to those data-sets and turn them into sound.

I created this video as part of my PhD research. The fact that it does, indeed, sound like music with a certain rhythm and timbre (rather than random audio-signals) is exactly what distinguishes my approach from earlier attempts at sonification of market data. In the final step, the resulting "composition" is linked to software which allows the creation of visuals that dynamically respond to the sounds (e.g. the small coloured spectra you see appearing against a backdrop of coloured fog).

The video captures a specific period in finance history. Usually I then ask watchers how they would allocate percentage wise a hypothetical portfolio across stocks, bonds, and cash based purely on this video (i.e. "Don't analyse the video but focus on how it makes you feel; what did it convey?").

What's the purpose of all this? Please allow me to share another quote, this time from Jack Schwager's The New Market Wizards:

"Every market has a rhythm, and our job . . . is to get in sync with that rhythm . . . There's no sense of self at all. There's just an awareness of what will happen. The trick is to differentiate between what you want to happen and what you know will happen. The intuition knows what will happen."

Although some investors/traders have a natural ability to intuitively get a sense for market rhythms, others may need a little help. The investment research method I'm developing is aimed at that: offering a structured, disciplined approach (including advanced software) to train investors' intuitive abilities to sense the market mood in general and its rhythms (i.e. swings) in particular. Massive amounts of data can be efficiently transformed this way to benefit from the whole spectrum of the human-computer bandwidth. Perhaps you're familiar with the behavioural finance concept of System 1 and System 2 of the human mind (e.g. Kahneman, 2011)? Audiovisuals are particularly suited to appeal to System 1 abilities.

Why is this important? Because I believe we have gone way too far in quantifying markets, inspired by the flawed premise of the "market as machine". As a result, what we casually refer to as "the market's mind" has become imbalanced (at multiple levels). Apart from the obvious suspects like HFT, VAR, and flash crashes, monetary policy is also misinformed by this bias. Moreover, we try to understand market sentiment and moods purely analytically (e.g. put/call ratio, bulls/bears spread, etc.) while increasingly repressing our emotions by outsourcing decision-making to algorithms. By distorting the delicate process of discovery it is no wonder we're facing secular stagnation, for example.

Admittedly, this is just my opinion, but should you be interested in the background to all of this I would be happy to send you a short introduction (derived from my thesis + draft paper).

Happy to discuss and clarify.

Warm wishes,


Chris Cooper writes:

Here is some cool sonification of measurement data from the LHC in search of the Higgs boson.

And a good article about it: "Unlocking Big Data: Lessons Learned From the God Particle".

Jim Sogi writes:

I like the phrase in the article "ski the stock market" using virtual reality goggles. There are few good VR rigs coming out soon. One for the Samsung Note 4. In Dataclysm, Rudder plotted some big data on a scatter plot to get a handle, and in the case of language usage to determine ethnicity, focused on the rare outliers. It was the things people both said a lot and didn't say at all that allowed identification. Black people never say "my blue eyes" and asian women say "single parent family". Only white people say "my blue eyes" and "snowmobiling".

keep looking »


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