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".



 The book Illumination in the Flatwoods by Joe Hutto, the best book on nature I have read, is a 1 1/2 year chronicle about the connection of a naturalist and artist who lived as a turkey, the most human of birds. It teaches you about the life of humans, the relation between romance and affection, the beauty and artistry of nature, the connections between all things including animals and humans, and how to be part of and leader of a group. One comes away from it with a reverence for the turkeys and Joe Hutto, and many ideas for how to trade the markets better, and live a better life.

Hutto imprinted himself on two dozen wild turkey eggs when they hatched, a thing he has done with foxes, deer, monkeys, waterfowls and many others. He lived and foraged, dreamed about, and protected the turkeys each day, until they grew into independent adults. There's mutual love between them memorialized in such passages as "I have never kept better company or known more fulfilling companionship. Our communications although somewhat abstract is completely satisfying and out interests are identical: plants, insects, reptiles, birds, mammals. We are driven by the same engine, and in spite of our divergent morphology, and intellectual approach, I find that our similarities are greater than our differences." Hutto mixes scientific knowledge and studies about animal behavior with the documentary so that one gets an education about ethology, ecology, psychology, and geology seamlessly and painlessly from a reading.

The Turkeys, spend most of their time on the ground walking on two feet, communicating and sensing like humans, and grow to be close in size to our size. They contain within them the instincts developed from 20 million years of evolution, and all it takes is a trigger from their daily life for them to know exactly the right thing to do. They are totally exuberant and enthusiastic and teach us to enjoy the present moments with gusto. As Hutto says: "They are more alert, sensitive and aware, they are vastly more conscious than I. In many ways, they are more intelligent… Every day I see that the most important activity of the turkey is the acquisition and assimilation of knowledge. They are curious to a fault, they want a working knowledge of every aspect of their surroundings, and their memory is impeccable."

 Hutto himself is an admirable person. He is a can do person who loves nothing more than building things, eating a grasshopper along with the turkeys, painting a scene about nature, and picking up a dozen rattle snakes with a garden hoe and transporting them to a new home. I particularly admire his ability to withstand the thousands of insect bites from gnats and Florida black bugs, the constant wetness from perspiration that cause him all sorts of pain and soreness that arise in the day and fray with the turkeys. Yes, this life was difficult, but he notes it was easy compared to his previous imprinting study of water fowl where he lived with them for 6 months, submerged half way in tide pools, with alligators stalking him and his charges 8 hours a day. Without further ado, but recommending the book and accompanying PBS documentary wholeheartedly, I turn to the 15 or 20 things I took away from it that should help us with our trading.

1. Seriousness

The turkeys are the favorite prey of many animals, and parasites, and have to be very careful from birth that they don't die. As a consequence, they are very serious about learning at all times, and never allow anything out of the ordinary to escape them. While they are exuberant and enthusiastic, they don't have time for frivolity. Like the turkeys, the market person is always prey to disaster, and must not be distracted during the fray.

 2. Sense of Place

The turkeys like certain places and will speed up to get to them, and once they get there just relax and admire the beauty and majesty of it. They especially enjoy ponds and edges. The market person has certain landscapes that they should look forward to, and should expedite their passage to them, and take full advantage of their beauty and profits potential.

3. Interconnections

The turkeys often join flocks of other species, including jays, chickadees, woodpeckers, cardinals, wrens, gnat-catchers. The birds are attracted to the movements of other birds. On occasion, the market person must know that all markets move together. The normal negative correlations don't work. The bid moves in one market carry over to the others. Try to find the mechanism that creates this, but also be alert that one big move can presage another.

4. Curiosity

Nothing escapes the turkey's attention. Nothing new can happen without them investigating it and assimilating it into their daily life. They won't move on until they understand it. They never forget once they have uncovered it. The market person must be alert to all new things, all unusual moves, all crazy events that cause big moves. For example, on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was a preamble to one of the biggest drops the next day in market history.

 5. Edge areas

The turkeys loves to forage in areas that are between forests and farmlands, wetlands and drylands, pastures and creeks, pines and oaks. The edge lands are more interesting, provide a better variety of food, and provide more areas of escape. The edge of markets are great opportunities for us. The time between one market open and another open, the moves that occur during and after the fixings, and reopenings, the times that pit markets close and electronic markets open, the times between work and lunch, are all grist for an opportune study and alacritous attempt to profit.

6. Acquisition of Knowledge

The turkey's main business during the day is gaining knowledge. Any object that they haven't met must be assimilated. All new things must be examined by each turkey. The market person should have a wide canvass. He should study science, economic, psychology, politics, and turkeys. Whenever a new relation occurs, whenever a new crazy reason for a market move is on the cusp, the market person must pause to understand it.

7. Fossil Ancestry

The turkeys have 20 million years of evolution to teach them about all things that have ever been life threatening to them. They instinctively know which reptiles are dangerous, which insects are edible, which places they are safe. They rely on instincts leavened by knowledge of the current environment. The humans have fossil ancestries and instincts also. When you feel your color changing, your hair raising, your sense of fear arising, know that your tens of thousands of ancestors are sending you a warning, and pay attention to your instincts.

 8. Color

The turkeys will try to remove any clothing on Hutto that they don't like. Blues are their favorite color, and reds their most hated. Market persons should wear colors that are not distracting to their colleagues, and don't interfere with their quiet contemplation.

9. Skirmish Lines

The turkeys move in a line so that when one turkey harasses an insect but doesn't catch it, and the insect flies away, the turkeys behind it are able to catch it. They maintain that order all the time so that they are optimally formed for the flock to capture the maximum of prey. The humans who trade markets maintain a line of trades so that if the first one doesn't lead to the desired move, the trades right behind it perhaps on a scale down or scale up will do the trick. Similarly, the big market operators can't move the markets by themselves. They form a skirmish line with their colleagues by having meetings where they agree that the market should be down or up, and then go to the old stream media now the new social media to broadcast their views, and make sure that the personages in the line next to them can move the food in the desired direction.

 10. Sensory abilities. The birds can detect movement and smells and color to a discrimination level that is almost supernatural. They can spot a hawk at 2,000 feet above. They are always alert and never rest without the protection of cover and their leader. They can smell all their predators and prey and investigate all new things with their beaks. The market person must always keep his eyes and ears open and should never wear headphones or any other distraction.

11. Herding versus Following

The turkeys like to be together at all times. They have numerous calls to assemble. And when they can't see their brothers and sisters they are unhappy and nervous. They never wish to be alone. And yet, they know that Hutto is their mother and leader. They wish and know they should follow him, but he must never do anything that disperses or confuses them. Hutto's relation with the turkeys is similar to many trading mangers, and leaders on a trading floor that I have seen. He stands at the front and reports various ideas and opportunities, and trades that he is doing, and the herd of traders and salesmen follow him in a flock of related activity. Never forget that humans have the herd like tendency of birds in a flock, and as Galton points out the mentality of oxen who will never lead but follow a leader with blind ambition. Okay, that's a start.

Steve Ellison comments: 

In point 4 you write: "For example on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was preamble to one of the biggest drops the next day in market history."

This is a very interesting example. I suspect the 10-point decline in the S&P 500 after the unemployment report on July 8, 2011 was in the same category. The S&P 500 fell another 130 points in the next month and did not regain its pre-July 8 level until late October. I generally think most news is discounted before it happens, so any market reaction to news is likely to be reversed. However, there may also be cases in which a reaction to news exposes an underlying supply/demand imbalance. Finnegan moves, such as the 2010 "flash crash" and quick recovery (only to have the S&P 500 drop back to the flash crash low 3 weeks later and continue down), may be in the same category.

Jim Sogi writes: 

Viciousness. I've heard turkeys can be vicious. I believe trading takes a bit of viciousness. The reality is you are taking money from someone. You may be ruining someone. It takes a certain attitude to do this. It's abstract as you are screened from the other side in anonymity behind the screen. But I've seen the reality of it. A trader needn't have a vicious or a terrifying mien. Take the Chair, for example: he seems mild mannered in person, but underneath there is a drive that makes him a good trader. Please don't take this wrong, I don't mean he's vicious. He's the most magnanimous man I've ever met.

Andrew Moe writes: 

I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff

The only reason they are able to do this is that they provide a necessary function for the market at the lowest possible cost. Perhaps one should take heed of the original brilliant post in this thread and examine the why and the where of how HFT fits into the market ecology. What do they eat? How do they hunt? What do their tracks look like (nanex will show you some pretty pictures)? Do they herd? What are their defenses? When are they weak? The turkeys undoubtedly know all this and more about anything that might be stalking them. Once you understand the predator, it is much easier to avoid being the prey.

Anatoly Veltman writes: 

"You are taking money from someone" And do you say the same about someone who is perpetually long stocks?

It's interesting to hear your opinions on the subject. I'll tell you one thing for sure: I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff.

anonymous writes: 

My 2 cents

The investor's wealth ultimately comes from flows that derive from the real economy such as eventual dividends, buybacks, etc. I would include the return of leveraging equity which is financed by "real" economic activity. This is particularly true when the finance rate is in some way subsidized by state intervention, which is frequently the case.

Trading and speculating -if successful- takes advantage of the money flows of other traders and market participants. Many of these strategies (at least what I am familiar with) are based on the concept of "urgency." My finding is that ideas with persistence are in effect "giving the market what it wants" even if what it wants is mistaken if viewed from an X period(s) of time later perspective, which is where the profit is made.

In the real world there is much overlap, however I see these as two distinct sources of potential return.

If one believes (as I do) that the primary purpose of financial markets to price things (equity, debt, commodities, currencies), it makes sense that there is a competition to set prices and achieve equilibrium (which is never reached). If one does not want to participate in this contest they can hold for very long periods and seek to get the investor's return that derives from the "real" economy and leveraging equity.

My way of seeing HFT is that it occupies the space the floor used to have. They are consistent (the good ones) because they get massive scale and turnover beyond what an individual could achieve trading manually. This is why (once again, the good ones) are so consistent, it is a law of large numbers type effect.

I had the opportunity to invest in such a firm when it was just getting started and the principles were looking for backing. Upon reviewing their business model I felt I could not get a handle on the extreme blow-up risk do to potential operational error. It was outside of my competence level to assess accurately or prudently. I passed and still feel I made a good decision, even though with hindsight the guys were very successful and I would have made a large return. My point in mentioning it is that the great HFT return stream can hide things that are not obvious - particularly operational risk that often appears to be huge (…or at least I tell myself that rather than kick myself for passing). 

Andrew Moe writes: 

I'm glad the thread lives, and it will hopefully develop in a few directions. But one point I raised was very pointed: I was not implying HFT as a sector. I was questioning the moral aspect of a handful, who managed to place themselves into a no-risk pocket within the ecology. Their only risk is CAPEX committed and personal freedom, should lawmaker flip on them one day. But their conscious choice is to operate daily as nothing more than a tax on all participants.

When Mr. Sogi said "taking money from other human", he merely implied competing (and prevailing) within the risk-taking endeavor–not within 1:1000 day risk of loss.



 Argentinian malbec has been showing up at great prices under ten, and its a good wine. The Argentinian pesos is dropping through the floor. Official rate is 8. Last year I got 10 peso exchange down there at any restaurant or store by paying US cash. Probably could get close to 20 now. That's a nickel to the dollar! There would be good travel deals there. Its a beautiful country.

"Argentinian Devaluation Seen in Offshore Peso Gap: Currencies"

I think its making their wines super cheap. I like them better than the Cali cabs which I'm pretty sick of due to their artificial flavoring.



Pure random sequences are difficult to artificially generate using computers or algorithms. Some random number generators use natural phenomenon, such as a flame to generate a random sequence. Looking at the ocean waves, or sand dunes it is fair to think of the patterns a being random in the sense one cannot predict where a particular peak or valley will be at a particular time and place. Sailors know this all too well. However, there is an underlying process with its own set of internal rules that generates the the so called random pattern. For waves it is the dynamic between wind, the water surface and the water surface tension and viscosity, the length of the fetch and speed of the wind. Even with such a seemingly random pattern it is possible to predict certain aspects of wave generation such as size, direction with information of the wind speed and direction and duration. Applying the idea to markets, if one could identify the underlying functions would it not be possible to have some predictive ability on the wave size, or in markets volatility as to size time and place as is possible in wave prediction. The navy and NOAA has spent considerable sums on creating models for waves as it is used to time war attacks, landings, how it affect shipping, oil rigs and other industrial needs. Weather prediction is one of the main forefronts of computer science and modeling due to the large number of people affected, and the risks of life and property. Surfers happen to benefit being able to quite accurately predict waves, timing, arrival and size.

What are the winds that drive the markets? Fed stimulus, currency moves, economic forces, upward drift, regulation, bank policies.

Jeff Watson writes:

It is much more difficult than one would think, to generate truly random numbers.

Gary Rogan writes:

While there is no mathematical proof, as far as we know the digits of pi while of course truly deterministic also form a truly normal distribution.

Orson Terrill writes:

How would that be? It seems to me that the 10 digits (0 to 9) would merely have an irregular distribution for any stopping point, but would approach the same number of observations as the number of digits observed approaches infinity. Therefore, the digits would form a uniform distribution, no?…


Min.   1st Qu.  Median   Mean   3rd Qu.    Max.

0.000   2.000   4.000   4.443   7.000   9.000

691 decimal points.

Mr. Isomorphism writes: 

Getting arbitrarily long π is pretty easy with the Berkeley Calculator.

$ echo "scale=2222; a(1)*4" | bc -l > pi.2222

(    a(1) == arctan(1) == quarter-circle     )

then in R:
pi.2222 <- scan('pi.2222', 'character')
slice.pi <- strsplit(pi.2222, "")

  .   0   1   2   3   4   5   6   7   8   9
  1 199 229 230 204 219 230 223 217 227 245

One is then limited only by patience….

It's unclear what a 'normal distribution' of digits would mean, since the normal is defined on [−∞,+∞] and most of its mass is between [−3,+3] … it's not defined on {0,1,2,3,4,5,6,7,8,9}…. I think that Ï€ is actually a normal number, which means the digits are distributed uniformly.

Another nice artefact of using bc -l is that with obase=2, obase=16, etc one can play with the question a bit more, as 10 digits is not sacrosanct. The binary expansion of pi


should have a 50/50 distribution of 0's and 1's if the decimal digits are evenly distributed, and higher bases (imagine base 12837687622234) would count what appear as "longer patterns" in base 10. I believe it's this way of thinking that leads people to say eg the works of Shakespeare are encoded in pi.



 I listened to an interesting NPR piece about Florida crime novels. One of the authors, John D Macdonald, is one of the best crime writers I've read and The Deep Blue Good-bye is a great book, filled with bad people, easy women, and a glib philosophical detective set in a dark background. You can burn through it in a day or two.

Tim Melvin writes: 

The John Deal books by Les Standiford are also great. Lawrence Shames' key west crime novels are hysterical. Tom Corocoran also has a nice series set in keys. All Travis McGee books are right there with Louis L'Amour. Must reads, good stories, many lessons.



 The Hawaii housing market is starting to warm up after years of lethargy. It lags behind the mainland markets and a good sign of a market cycle maturation. Inventory is low. There have been cyclic bubbles in the local market for vacation condo's and home from mainland, Canadian and Japanese investors over prior market cycles. Excess money from various world markets makes it way to the luxury market as 2nd homes or vacation homes here. There are many new home building projects, busy contractors in sharp contrast to the last several years.



The S&P crossed or touched 1950 22 days since February.



 There has been a 20 year drought here in Hawaii which is now ending officially. Severe drought is ending in many places. We've had 4 weeks of steady rain, which is unusual for recent times, but the old timers say this is the norm.

Weather cycles also extend in large waves across the globe, for example, the Pineapple Express, where Hawaiian storms surge east to the West Coast.

In any case, heads up. There's a weather cycle change afoot.



 To what extent can Pascal's principle where a change in pressure is transmitted undiminished to all parts of an enclosed liquid or gas system, whereby a small change in force on a narrow area can move a much larger force on a larger area as used in car lifts or construction machinery, be applied to markets in certain situations? Is this a useful question?

Stefan Jovanovich writes: 

The Chair has asked a question that I cannot answer so I will add to my stack of irrelevant comments. What is called the Industrial Revolution was neither. Metal working and large scale enterprise were not new things. The Arsenal at Venice and the Royal Navy's yards with Brunel Sr.'s block carving automatic lathe did not need the "invention" of the steam engine. It was the discovery and application of the paradoxes of fluid dynamics that created our modern world — first steam, then gases and liquids generally.

Gary Phillips writes: 

Mauboussin likes to talk about the market as a complex adaptive system and critical points where large scale reactions are the result of small scale perturbations, the implication being that causality can be difficult to identify because it is often very subtle.

Traders tend to focus on multiple and ubiquitous agents that may not drive price, but do support their directional bias, while ignoring potential outcomes with low probability that may be driven by hidden or obscure agents. Same with systems with too many degrees of freedom and over fitting.

Gary Rogan writes: 

I often think of the market as a Pascal system or a school of fish. How do all the stocks know to move the similar direction?

Ralph Vince writes:

In the context of fluid dynamics, Gary's question leads to the (near inescapable) conclusion that the movement of stocks prices, in this context (with an isomorphism to 3D space of the varioius stocks) is characteristic of the flow WITHIN the de/compressing cylinder itself, under varying states of compression at varying times.

A study of hydraulic flows would show that fluid flow within the cylinder itself is not uniform, and is also a function of various degrees of pressure.

From this we could create such a model.

Gary Rogan responds: 

It is kind of like that, but it's almost like there are local agitators within the cylinder. This morning provides a perfect example that I can see in my own stocks. Some joint venture news in MDLZ, one of the Kraft spinoffs has provided positive agitation to the food stocks, and more so to the specifically beverage stocks, and less so to the consumer non-durable stocks. This agitation is somewhat sticky in that when the market first rose for whatever reasons and then fell likely on Yellen's remarks, these stocks seemingly have experience a smaller sensitivity to the market had the important news not occurred. It's like a decompressing cylinder with small local explosions/collapses.

Ralph Vince adds: 

 Matter in the expanding (i.e. decompressing) universe may be a better model?

But it still boils down to a feed back loop where the output of one becomes the input for the next ( in one case amplifying and in the other dampening).

Gary Rogan writes: 

That's an excellent analogy and something I've been reading a lot about! It's not perfect but likely productive.

Immediately after the Big Bang the small world was pretty uniform. But then quantum uncertainty fluctuations have added a small pattern to the Universe that was the progenitor of what we all see today. In addition sound-like wave resonated within the Universe leading to the spectrum we still see in the microwave radiation today. Gravity has dramatically amplified the initial quantum fluctuation leading to the truly observable local pattern of galaxies, stars, and planets. And of course all the following star formations, collapses, and explosions created all the heavy elements as well reshaped the local structure of galaxies. Plus there is all the dark matter and dark energy (dark pools?) that exert gravitational and expansionary forces that can only be guessed at by their effect.

Craig Mee writes:

From the back benches, I think the problem may lie in measuring the change in volatility, since under no news conditions, the environment may be ideal, for example, after news releases in Europe mid morning before the states come in. After that though, it may be difficult to separate cause from effect. 

Jim Sogi writes: 

Might a small amount of money pouring into something like gold or oil or wheat move the entire market? The canary principle might be at work rather than Pascal's causal function, and there may be a lag, complicating the relationship.

anonymous writes: 

 The use of finite-volume methods in sell-side modelling suggests it is a useful question. Market cap is a "squishy" concept of volume, as it can change when prices rise and fall. Book value is less squishy but still far from rigid.

Imagine a directed graph of trade flows among several companies, forming a trade network. Suppose there is a bottleneck somewhere. Destroying this link might be more disruptive than destroying other links.

My father used to talk about one of his coworkers who whirled about his organisation with fingers in every pot. This individual did much more than his job description suggested. When he left the organisation many projects across departments floundered.

The Allies' North African campaign of WW2 was meant to attack a "pressure point": Rommel's petrol supplies. Paraphrasing ER: "The bravest man can do nothing without guns, the guns can do nothing without ammunition, and neither guns nor ammunition are mobile without petrol."

I would also use the metaphor of joint-locks in jiu jitsu. Consider the manifold of configurations of your opponent's feet, knees, hips, shoulders, elbows, wrists, fingers. Applying pressure (vector) to the wrist and fingers in most of these configurations will not move the opponent's feet or hips. Joint locks find the configurations where a small force in precisely the right direction will cause the opponent's feet and hips to move a lot.

Saving the geekiest example for last: in George Lucas' fantasy world, certain Jedi Consulars are able to, with sufficient meditation and magic, see "shatter points" in a situation–precisely the kinds of vulnerabilities that will spread and multiply force to a wider area.



 I read a National Geographic article about a women who set the record for hiking the Appalachian Trail. The consensus thinking was that it had to be approached as an ultramarathon. The male record winners all ran 9-10 hours a day to beat the 57 mile a day average. This lady was a hiker and everyone pooh-poohed her strategy to hike it. Well she hiked it, 14 hours a day, and beat the record.

It's the tortoise and hare strategy. Maybe we could call it the Rocky/HFT strategy. Discretionary daily trading can be strenuous, like ultra marathoning. Recently, I've been holding longer and doing better. Let the market do the walking. As Lack would say, "get the joke".



 The documentary for rent on itunes about Muscle Shoals recording studio is absolutely amazing and a requirement for any music buff. It rivals the 20 feet from Stardom, and the Funk Brother's stories. The movie documents a small recording studio in Alabama, it owner and producer, Rick Hall, and their amazing studio musicians They produced well known recordings such as Wilson Pickett's Mustang Sally, Aretha Franklin's RESPECT, Rolling Stones, Bob Dylan, Paul Simon, Dire Straights, Lynard Sknrd, Steve Winwood, Joe Cocker, and the list goes on and on.



 I was sent this video about a honey badger taking on 6 lions. I noted a similarity between the way the honey badger reacts to attack. He retreats bitten, backing up with face towards adversary, then counterattacks, retreats for a little, then attacks again and retreat attack again.  Is it general or random?

Ken Drees shares from wikipedia: 

Honey badgers are very intelligent and are known to be capable of using tools. In the 1997 documentary series Land of the Tiger, a honey badger in India was filmed making use of a tool; the animal rolled a log and stood on it to reach a kingfisher fledgling stuck up in the roots coming from the ceiling in an underground cave.

As with other mustelids of relatively large size, such as wolverines and badgers, honey badgers are notorious for their strength, ferocity and toughness. They have been known to savagely and fearlessly attack almost any kind of animal when escape is impossible, reportedly even repelling much larger predators such as lions. Bee stings, porcupine quills, and animal bites rarely penetrate their skin. If horses, cattle, or Cape buffalos intrude upon a ratel's burrow, it will attack them. They are virtually tireless in combat and can wear out much larger animals in physical confrontations. The aversion of most predators toward hunting honey badgers has led to the theory that the countershaded coats of cheetah kittens evolved in imitation of the honey badger's colouration to ward off predators.

Pitt T. Maner III writes: 

 Honey badgers have a very interesting collaborative endeavor with the honey guide bird. It's an amazing partnership. Here is a vid about it: The honey guide bird leads the honey badger.

UPDATE: It's evidently a myth started by an early Swedish naturalist who heard of the behavior from a 2nd-hand source! Similar to the cliff-diving Norwegian lemming movie meme in some respects.

But at least the birds appear to interact at some level with humans on the honey trail and probably are not far behind a marauding honey badger to pick up the crumbs:

"Lies, Damned Lies, and Honey Badgers"

'Claire Spottiswoode, author of the recent honeyguide paper, set me straight. Even though the bird certainly teams up with humans, Spottiswoode said, "There is no persuasive evidence that honeyguides ever guide honey badgers". Cue baffled noises from me, and the faint whimper of broken childhood memories. Spottiswoode continued: "You might have seen the YouTube clip of a honeyguide seemingly guiding a honey badger - I'm afraid that was a set-up with a stuffed honeyguide and tame badger!"'


'The myth of the badger-guiding honeyguide began in 1785 with a man called Anders Sparrman, who had heard the story from local people. He never saw the actual behaviour first-hand. Neither had anyone else. In 1990, three ornithologists – Dean, Siegfried and Macdonald – wrote a paper debunking the honeyguide/honey badger story. In it, they wrote, "Naturalists and biologists have been active in Africa for more than 200 years. During this period, to the best of our knowledge, no biologist or naturalist, amateur or professional, has observed a Greater Honeyguide leading a Honey Badger to a beehive." '

Ken Drees writes:

My sister was in a party hiking in Sumatra, Indonesia some time back that was ambushed by the honey badger. He lay in wait and as soon as the local guide of the group appeared from under a fallen tree at the bottom of a ravine on an established path he swooped. Luckily the guide was quick enough to swing his machete, which had a chunk out of the blade after he caught mr. honey badger's shoulder. My sister was number two behind the guide, ducking under the log at the time of the attack and felt his furry coat on his retreat. The guide was very quick to start hacking a new path through the jungle and organizing the troops to flea since he was certain the honey bear would be back. After a few skipped heartbeats all worked out ok on that day. But it appears from this he's a thinker and from the guide's reaction and concern, the attack retreat attack is possibly not random. 

Jim Sogi writes: 

In The Book of Five Rings one of Musashi Miyamoto's three main strategies is to retreat …attack …retreat…. attack…retreat. It throws the pursuers off balance and separates multiple attackers and allows you the choice of your terrain and setting.



 The fun spec party trip to the Meadowlands racetrack highlighted many Dailyspec themes. Bacon talked about changing cycles. A system tends to draw down as cycles change. In The Logic of Failure Dorner discusses identifying the dependency of variables in a complex system Some variables regularities may be conditional. A fixed system could be filtered by a variable such as a rising TED spread to avoid degradation in a changing cycle.

The second theme of the trip to the races was that you don't really know about your theories until you have some skin in the game. Also it may not matter so much what your system or theory is as long as you have a theory you can stick with that isn't a sure loser.

The fascinating spec party easter bonnet parade down 5th Ave on a beautiful spring New York day is best recapped by the Heisenberg Uncertainty Principal.
 Just the act of observation changes the outcome. No one is just an observer. By your presence you create and are part of the event and change its reality. Some folks had outrageous bonnets, some watched. All were part of the event.

Wandering around New York on a random fashion highlighted the benefits of randomness, chance and observation. Strolling back from the parade we chanced into the broadway play of Of Mice and Men by Steinbeck starring James Franco and Chris Dowd who gave a great performance.

As Yogi Berra once said it's amazing what you can learn by observing. Many thanks to the Chair and Susan for a wonderful weekend and for the generous hospitality.



 On a recent ski trip to Hokkaido Japan, we had 10 days of heavy snow on top of 3-4 meters on the ground. Deep fluffy light blower powder.

Food, lodging, recreation were very cheap. Nice airline Airport hotel for $65. Spaghetti dinner $9, wine $2. French Chateau bottled 2011 vintage $12, French regionals Medoc, Bordeau $9. Full room and board at rural onsen $60/day per person. Ski lift tix $40, $33 for senior, $10/single. Noodles $6. Big Mac, fries, coke…$7. Part of it is the recent 30% devaluation of the yen, but it still does not explain the values.

The Japanese were very polite and many more had some English than 25 years ago. Very noticeable demographic age bracket bulge in 60s and 20s.

Yishen Kuik writes:

Japan is cheap these days.

Hokkaido is a major tourist destination, famed for hot springs, sapporo beer, nikka whisky, the countryside, fruit from yubari, champagne powder skiing and a spectacular snow festival among other things. It is an island north of the mainland but chitose airport is beautiful and large and the shinkansen links it to Tokyo.

Pretty much the entire skiing population of Australia, New Zealand, Singapore, Hong Kong and South East Asia skis in Japan and Hirafu, Niseko in particular has emerged as the international ski capital of Australiasia with 1000 usd a night for a fashionable 2br apartment as the going rate in peak season. Malaysian, Australian and Hong Kong developers have filled the town with modern eateries and apartments.

But elsewhere, 100 usd a room with breakfast buffett and onsen is the norm at the many good bubble era hotels built all around the country. Cheaper alternatives go all the way down to 40 usd a night at ski pensions. Many Australian seasonaires are to be found in Niseko working the bar, cafe, ski hire and hotel.

In major cities outside Tokyo, food is excellent, crime non-existent, public infrastructure superb and the level of service is exemplary. In downtown Kyoto iirc you can get prime real estate for 400 usd psf and non-prime at 200 usd psf. You can lunch at a touristy place for 20 usd or pay 10 usd for an excellent bento box lunch. Kyoto is the cultural tourist destination for the Japanese and japanophiles with festivals throughout the year. A wonderful town where Steve Job's favourite hotel, the Tawaraya, is located.



 "Japan Snowstorm Kills 12, Strands Thousands of Motorists"

This follows on my comment about people wanting to stop global warming, but not stopping to think what the alternative is. Probably a good time to head over there to ski though.

A severe snowstorm sweeping across Japan has killed 12 people and left more than 1,650 injured, Japanese media reported, as the extreme weather sparked widespread transport chaos.

At least a dozen people have died in snow-related incidents in seven prefectures after the storm broke records, with Tokyo blanketed in 27 centimetres of snow, according to the Kyodo news agency.

A further 2,150 people have been evacuated from their homes over fears the weight of the snow would cause their houses to collapse, public broadcaster NHK said.



 Slater won the Pipe yesterday. Check out this minute and a half video of a perfect 10 on a wave he rode. Even a non-surfer would regard this as a perfectly ridden wave. What other moments in sports are comparable? What trades are comparable?

Jim Sogi writes: 

Perfection. It's rare, but when it happens, it's the best. Yesterday the surf here was perfect. Same size as the pipe pictures, west swell, perfect form, no wind, perfect size. It was like the cover of a Beach Boys album.

There were only about 8 people out, all of whom I knew. I caught many waves and didn't fall. Caught them right on the peak, in the pit, dropped in, the wave walled up and then kickout on the inside. Just a perfect day. Everyone was hooting and hollering and smiling. A pretty girl in a bikini paddles by and says the waves are so good she feels like she's on drugs. Just perfect.

The other great thing is the perfect day of powder snow, sun, no wind, new snow, no people, untracked lines.

Another great thing is the perfect trade. Great volatility, good entry in size, and good mental condition to ride the trade to a good exit with no pain.

All very rare, but just the greatest thing. You have to watch and wait and then be on it when it happens.



 Weather must play a factor in ag commodities. The weather has been pretty weird lately with weeks of rain in Alaska in January, snow in Hawaii (skiied 2 days last week), bad East Coast weather, drought in California. I am guessing this will affect the volatility of the ags and energy in the coming years. On a larger scale, weather can affect the economy of the entire world.

Jeff Watson writes: 

The big drought played havoc with the grains and we had a monumental rally. Weather also affects shipping of grains by barge, and sometimes the Mississippi River is unnavigable due to a variety of weather conditions. The basis for corn and beans can easily double in a matter of days at the Port of New Orleans when that happens. Since the system is all interconnected, other ports will see an increase in the basis.



 Hypothesis: inflation is rampant but hidden by federal subsidies. Prove me wrong or prove me right. If I am right I will go into politics.

Jim Sogi writes:

This seems to be what Gross at Pimco is saying as well. Credit growth fuels asset price. Credit deflation may result in asset deflation. Seems to be what is affecting stocks.

The alternative theory is to follow the Fed's explicit explanation that the Fed is preventing deflation, and that removal of the stimulus will allow prices to deflate. This as they say is the greater risk.

Ed Stewart writes:

That makes sense to me. Credit growth or fed asset purchases have created asset price inflation relative to the rest of the economy, which is known as "the rich getting richer".

Deflation of assets is harmful as it impacts the money supply that leverages off of asset prices via credit. Kind of a different dynamic than what most people think of when discussing inflation based in consumer prices. One thing Mises said that I like is that money creation is never neutral across the price structure. It enters in specific ways and impacts specific prices relative to others. I used to think someone must understand how these things work, I now wonder if it is that things change enough such that understanding is not possible.

Gary Rogan writes:

Presumably asset inflation is related not just to the growth of the money supply (a large portion of which sits as excess reserves right back at it's point of origination and isn't contributing to anything other than bank earnings) but also to the intent of the Fed. Otherwise why would relatively tame tapering result in some deflation even while a huge amount of money is still being printed?



 The dollar is strong. I have been traveling internationally this past year on ski mountaineering expeditions ( and found the dollar is strong and there are good travel deals now.

Canada and New Zealand are both below the dollar 10-15%. With the modest life style in those countries hotels and meals and car rentals were low, and cheaper than the US. Argentina, where the pesos dropped from par to 8 or 10:1 is cheap. Nice Malbec wine is $10. A dinner for 3 in a nice restaurant in downtown Usuaia is $40. Japan is the surprise. I'm heading there next week and hotels are under $100. Ski lifts are $30. The yen has fallen over 30% recently. Surprising last year also was the Euro. In France a modest prix fixe lunch with 3 courses, wine was $12. Can't find that in US. I am surprised the Euro has not dropped reading the news. The prices there have self adjusted notwithstanding the exchange rate.

You may think Hawaii is not such a good place to live for a ski fanatic, but its less than a day to NZ, Japan, Alaska, Canada, Sierras, Rockies, for year round skiing. There is even snow on Mauna Kea where I've been skiing.



 As diligent dailyspecs know, I recommended a long in natural gas a few weeks ago. The front contract has now risen about 40% and is currently making a new high (up about 15% over the past two days).

As a veteran of this market, I can say with wizened knowledge that Natural Gas is a market that V-tops. So if you followed my recommendation and bought some UNG or whatever, don't expect a graceful exit. I am NOT calling a top. There is some probability of further upside. Possibly massive. Rather, I am saying that you shouldn't expect me to announce my exit in the way that I did in gold.

Note to Dr. Z and the counters: There is always a bull market somewhere.

Ed Stewart writes: 

Amazing string of winning ideas. It seems that with the benefit of Rocky's calls doing one's own research is counterproductive.

Jim Sogi writes: 

In '05 and '08 natgas went over 15 and 10. What caused those run ups?



After a long down turn the ag commodities seem to be turning around or bottoming. Just looking at the charts.



 I've recently started to enjoy hip hop music. I'm talking Juicy J, Andre Nikatina, real gangsta rap. I never could listen to it before, but now enjoy it very much. Some observations:

1. It appears to be a new form of music, and despite its roots in African rhythms, is a clear break from current pop music forms. It appears to be a form of tone rhythm poems. The structure does not have standard ballad form. It appears to have a refrain.

2. You need specialized equipment to hear the elements of the mix. A regular radio or car radio does not pick up the bass part which predominates the mix. A typical subwoofer set up has a 1k watt amp with special bass speakers. You've heard them in cars 200 feet away driving down the road.

3. The rhythms are polyphonic and multi-layered, varied within songs and changing. It seems to defy normal time signatures. Perhaps more technically trained musicians can correct me here. The various voices of the musicians pick up different rhythms over the sub rhythm.

4. The mixes sound lush, full, but a relatively sparse with only about 5 or six elements. There is typically a piccolo snare drum, a piccolo note pattern defining the chordal feeling, and a big bass part filling most of the mix. On top are varied vocal improvisations with different vocal tonal structures.

 5. The lyrics focus on a narrow range of drugs, sex, money and cars. The word "Nigga" is the most used lyric. For example, a typical lyric will read, "We dem niggas, We don't give a f%$k". I can't tell if they are serious or its posing, but if a white person accused an African American of any of it, the PC police would be knocking down their door. I don't understand what is going on here at all. A friend points out that all pop music deals with sex, money, but normal pop music is much more whitewashed.

Since this is a market forum, it occurs to me that a market position should be like a good music hip hop mix in that it will have a harmonious clean mix of a few good holdings all designed to promote not only a good profit, but a good statistical expectation and variance and express a simple but cohesive theme. For example, recently gold, bonds, yen all went down and have had a nice bounce. These seem like varied and diverse elements but have moved in concert. ES seems to have lagged in its movement. For the last year, ES has not been much of a trader so its good to add other things into the mix.

anonymous writes: 



F**k the losers.



Canada, from Jim Sogi

January 29, 2014 | 1 Comment

 I am just back from a ski mountaineering trip in the back country deep in the Canadian Rockies. Canada is a huge country, rich in natural resources, with only 30 million people. The people are relaxed and with a lot less anxiety and tension than Americans. They lack the expertise and manufacturing base to extract much value from the raw resources.

It is a beautiful country. Things are inexpensive, especially since the recent devaluation of the loonie to US .90. There are many new immigrants to Canada from China, India and other commonwealth countries. They have a liberal immigration policy that allows commonwealth members to work there when they are young. I sense great potential in the North.

Anatoly Veltman writes: 

Jim, isn't the potential resting squarely on natural resource prices?

The problem I always had with Canada's potential was economies of scale. This population one-tenth of the US's but spread out over huge territories still needs to be managed efficiently. I'm afraid the government's burden per capita just crowds out too much.

Peter St. Andre writes: 

Here is a visualization of population density.

Shane James writes:

There is a 4 day train trip you can take from Winnipeg to Churchill (which may still be the Northern most point you can live). You can go dog sledding there, meet the remarkable Innuit people and pretend for a short time that you are Ranulph Fiennes or Amundsen.

But it's cold. Ha!



Here's an introductory article on Local Motors at its inception with the idea that I think would be worth developing here. One wonders if we could apply it here.

Jim Sogi writes: 

I've been looking at making a 4×4 E350 camper van for various adventures. You can buy a new one set up for $150K, or you can buy a empty van and build it up your self to your own design. It seems like a fun and exciting project. There is a North Carolina 4×4 conversion kit.



 It was in July 13, 2012, more than a few months ago, when Specs were voicing concerns about Facebook, including that it was valued at an "astronomical" amount, and daughters were reporting their friends were getting bored with it. FB was at $31 then; it's at $55 now. It must be very bullish for a stock if kids are getting bored with it.

Jim Sogi writes: 

I'd agree with the Professor. Just because it's not in style with kids doesn't matter. When Boomers and Grandmas use it, it's become very successful and more likely to last than a fad. I use FB to stay in touch with kids and friends in a nice way. It's a better tool than email in many ways as a killer app. There are flaws, and they are making it worse, but the idea is the same.



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

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

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

Duncan Coker adds: 

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



 I recently came across this humorous story for lawyers.

A Law teacher came across a student who was willing to learn but was unable to pay the fees.The student struck a deal saying, "I will pay your fee the day I win my first case in the court."

Teacher agreed and proceeded with the law course. When the course was finished and teacher started pestering the student to pay up the fee, the student reminded him of the deal and pushed days.

Fed up with this, the teacher decided to sue the student in the court of law and both of them decided to argue for themselves.

The teacher put forward his argument saying, "If I win this case, as per the court of law, the student has to pay me as the case is about his non-payment of dues. And if I lose the case, student will still pay me because he would have won his first case. So either way I will have to get the money."

Equally brilliant, the student argued back saying, "If I win the case, as per the court of law, I don't have to pay anything to the teacher as the case is about my non-payment of dues. I f I lose the case, I don't have to pay him because I haven't won my first case yet, so either way, I am not going to pay the teacher anything.


1. If you are the judge before whom this case comes up, what is the best course for you to dispense justice?

2. What market situations, if any, are similar in construct?

Stefan Jovanovich writes: 

1. Disbar them both - "the case" is about their contract, not about the teacher's remedies

2. Any that involve transactions that manage to exclude themselves from the jurisdiction of the Uniform Stock Transfer Act of 1909 and its successors - i.e. just about everything where the rules have been sufficiently obfuscated to avoid the clarity that our predecessors brought to questions of money and credit.



Passing through Spokane after backcountry skiing in British Columbia, I noted that last week had unusual extended below zero F temps. There was a short local news query on whether the winter wheat crop may be affected by the cold snap.



 This afternoon I was thinking of the events of my honeymoon back in 2009 and while in Hawaii we visited the Sogi residence which featured some good ol' jam band rock-n-roll action by Sogi and his team.

The decay in current music quality versus yesteryear production came long before the decay we have recently seen in the financial services industry. About 30 years or so is my estimate. What is interesting is that classic rock and roll will always have its place — like an old shoe or old pair of jeans. Financial services should be so lucky. What is scary while also quite ironic is that technology is largely the culprit for the decline in both fields.

Jeff Watson writes: 

 Rock and roll is not in decline at all, far from it. Revenues might be down, but not the musical quality. People of a certain age just get stuck in the 60s and 70s and won't let go. But one tends to only taste the cream and forgets that the 60s and 70s brought some absolutely horrible music to the table, stuff (I won't even call it music) performed by Boyce and Hart, Cyrcle, King Harvest, C.W.Mcall, and The Cuff Links. This is the worst song ever written.

My parents thought music died in 1955. My grandparents thought music died in 1920, and on and on. Every generation experiences the same nostalgia for the past, for the music of their youth and feels the new music of the day is declining in quality. Nostalgia is big business because people miss their youth. Bands like the Mowglis, Black Keys, Of Monsters and Men, Daft Punk, Outkast, et al are producing some amazing music which is just as good, or better, than the rock of 40+ years ago. Troubadours like Jack Johnson write and perform music which is just as relevant today as what Bob Dylan wrote two generations ago. An entire new group of people, our kids, are listening to the new rock, and a few old people like myself enjoy it immensely. Stop listening to Clear Channel and find some music……it's out there just waiting to be discovered.

Jim Sogi comments: 

 One day someone asked while I was playing, "Do you know any songs less than 10 years old?" I was kind of stumped, so I've tried to find new songs. It's harder to learn things when you are old and have to beat the new neural pathways harder.

A childhood friend of my son is Ryan Fontana, of Sex Panther. He has achieved big success as a DJ playing electronic dance music. There is some good music there and it's good for dancing. The girls really like it. EDM keeps people dancing and drinking. Some clubs according to WSJ can sell a million dollars of drinks in a night. Some of the music can feel repetitive but when they're dancing, they're not really listening to the music, but feeling it. With the big sound systems, the ground literally shakes. It's an experience and it's good business. I've got an open mind and even like some hip hop stuff, though it's taken a while.



 I wish I hadn't written the chapter on poker in edspec. I hadn't played for 30 years when I wrote it, and all I did was read some books from the gamblers book club, and then write about it as a layman, poseur, armchair geezer. I wasted 5 pages of everyone's time on it. And anyone who knows the game would have seen I was out of my league. I try not to be as ignorant of my ignorance as I once was.

The current issue of Outside is all about the secrets of survival. What it takes to stay alive. I am ignorant on this subject. The only thing I know about it, is from books, that when you're the captain, you're supposed to be the last man out, until you say "every man for himself" as Aubrey did. Also, what I read in L'Amour about always being aggressive at the beginning when threatened with a life saving situation. But people on this site are infinitely more knowledgeable than I on this subject as are all my kids and partner, who all had to spend a few days alone in the Vermont wilderness as part of the Mountain School they went to.

So please, give us your survival things, and comment on what Outside said, so that we can survive better in speculation, a consummation devoutly to be wished, and which the all seeing eye would like to do so many things in this life over again related thereto.

Jim Sogi writes: 

 Many cases of death in the wilderness are as a result of a series of small stupid mistakes that compound and make what is not a deadly situation, into a deadly one. First is lack of preparation. The classic case is the two hour hike without proper basics such as jackets, maps, water, shoes, compass and the weather gets bad. The party hurries, mistake 2. One in the party gets injured: mistake 3. The parties separate to get help: mistake
4. Both parties become disoriented and lost and panic, running about. mistake 5. Their bodies are found days later a few feet off the path. All stupid mistakes, compounding a nice situation and tipping into irretrievable disaster. It is the same as Chair talks about: a good base of operation. Basic needs of the operation in the wild are adequate shoes, protection from weather, warmth and hydration, and basic navigation.

The second main survival issues are the basic needs of human survival: water and warmth. One can go for days, and almost weeks without food, but without water, hours can bring on death. If the body goes just a few degrees below or above its normal temperature, body and mental functions shut down and the person goes into a stupor. It can happen in 70-80 temperatures surprisingly.

Often, the simple cure to avoiding the above is just to stop. People have a real need to be doing something, and often it is not helpful and leads to disaster. How many parallels there are to trading!

I have a simple survival first aid package. Loss of blood is one of main causes of battlefield death. Unless bleeding is stopped, death will quickly follow often in minutes. Cetox granules go in the wound and staunch the bleeding by forming clots. Pressure and bandaging or sealing with stitches or tape will stabilize until further help. Also in the kit are pain killers. Sprains and breaks are common, and pain killer will allow the party to limp or carry to further help. The commercial first aid kits are often a waste. Water treatment is top of the survival bag list to kill giardia and cryptosporidium that will cause runs and dehydration. A small tarp or space blanket and jacket will provide enough shelter to avoid hypothermia by blocking wind and rain. Tape such as dermoplast or even duct tape can be used to staunch bleeding, make splints and stabilize breaks and sprains. A good flint and steel and tinder and water proof matches will help build a fire to keep warm. That's about all in my kit. All the crap in the commercial kits tend to be useless weight. Most survival situations only last 3 days. By then 95 percent are rescued or dead. Just stay warm, drink water, and keep your blood inside you.


98.6 The Art of Keeping Your Ass Alive
Cody Lundin
Backcountry Skiing Skills Wheeler, Margaret
First Aid: A Pocket Guide Van Tilburg
Glacier Travel and Crevasse Rescue ,
Selters, Andrew

Deep Survival, Gonzales, Lawrence

Phil McDonnell writes: 

About the only thing I can add to Mr. Sogi's excellent summary of survival techniques is to recommend the choice of tinder for the flint and steel technique. I have considerable experience from Boy Scout days with flint and steel. The best tinder by far is steel wool. I believe the reason is that hitting the steel against the flint throws off molten steel sparks which somehow are attracted to the steel wool fibers. In competitions I used to be able to boil a #10 tin can of water in 3-4 minutes.

Pitt T. Maner III writes: 

 I occasionally watch the Les Stroud Survivorman show and he has some good ideas on the subject. Similar to Mr. Sogi.

For urban disaster he emphasizes having a basic kit stored in a plastic container.

In Stroud's view it is ideal to keep:
1) a week's supply of water and 2) a nice first aid kit (probably doesn't hurt for everyone in the family to take the Red Cross First Aid/CPR course or from another qualified provider. He advises having a 3) crank-up radio to keep in touch with outside world and 4) a shake, non-battery flashlight. 5) Water proof matches, 6) Rope, 7) a Multi-Tool.

During the hurricane season a trip to Costco to prepare for a possible storm is important. Easy to pick up canned goods, water and other items needed. A little wine to share with your fellow condo survivors doesn't hurt either when the power and water go off for a week and you are sweltering without the A/C. I like a big lantern-type flashlight with fresh batteries so you can read a bit at night.

At any rate, Stroud emphasizes staying dry to avoid hypothermia in the wilderness. Exposure is a big risk in the wilds.

Ed Stewart writes: 

 James has an excellent summary of important points.  I will add (or expand on) a few.

First, be very cautious when venturing into new territory.  If one is experienced at hiking a certain path or mountain or area, Don't assume "it is all the same" when you go to a new place.   Don't assume, "I know how to find my way".   I grew up in rural New England and spent a great deal of time in the woods (back country type skiing, hiking, fishing, etc) from a young age.   My families home was near a govt owned wilderness area, and over time I got to know the terrain extremely well in terms of having a mental map and orientation, but also things like natural formations that could be useful as shelter, etc. Knowing a wilderness territory is like knowing where the "utilities" are that you can access from any position.

It is very dangerous to generalize such specific knowledge into thinking "I am good at finding my way", a mistake I experienced and learned from.

Wear the right clothes initially, not just in a backup capacity. What is comfortable in ideal conditions (light cotton long sleeve T-shirt, etc) can be a disaster when conditions change. Material that is waterproof and/or maintains insulating ability when wet is always good.

Extreme danger emerges out of "usual" situations and seemingly small challenges. It is hard to see danger without experience. For example a recreational hiker thinks, "that small rock formation would be fun to climb".   The problem is, how it looks at the bottom (easy!) is a distortion relative to what one sees close up (unstable rocks, dirt, etc) from a now dangerous height. "From a distance" assessments are not an accurate judge of things for most people.

Focus on external factors that reveal themselves through the five senses. Take the time to observe. Stop and listen. Look at shadows, type of earth you are on, gradient, sounds, smells. Getting into that observation mode, not talking, not focusing on your own thoughts but on what is "out there." Bringing the senses alive to the slightest changes in the environment is a significant survival skill.

Experience coping with blood and guts, both literally and metaphorically, prepares one for survival. Many people are very deceived about survival situations because most of modern life is very safe, sanitized, and compartmentalized. Meat comes in a plastic package. "Someone else" does the dirty work. "Someone else" fixes an injured person. "Someone else" makes things safe and secure. People are squeamish about crossing boundaries, and when confronted with them can panic or become ill. An easy way to develop a natural survival mentality in any circumstance is to look for ways to cross boundaries before one is forced to do so.

The sound of a heavy metal bell can carry a great distance.  As I said, I grew up in a very rural area and our home was on a large number of acres. When I was out late fishing, etc, my mom had a very heavy metal bell that she would ring– a sound which would carry for miles and alert me to come home — and immediately, automatically set my orientation.   There are plenty of ways that a low cost item like this can be used.

Vince Fulco writes: 

 Besides some of the other great pubs listed here, the US Special Forces Medical Handbook (a bit dated) can be found on amazon and similar for $10. There is plenty of food for thought for the non-medical professional for when the stuff hits the fan in a bigger way.

Vincent Andres writes: 

I remember well one of Reinhold Messner's simple tips.

When in danger, you are yourself the very first level of protection (and also one of the best, since your reaction can be very immediate). So work well on this very first level, and don't count on somebody else doing the job for you.

This is also a very libertarian and Randian tip.


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