Oct

30

Very prescient call on the stock market.

Ralph Vince writes: 

Once again, luck trumps everything. Thanks Jeff.

Jeff Hirsch writes: 

Great call Ralph! Amazing the harder you work the luckier you get
 

Oct

23

The sentiment of earlier in the month carries a momentum for the next two months at least. Volume yesterday and today, both big board and SVXY tell us we must be buying weakness tomorrow. It might be on or two more down days, but weakness must be bought tomorrow based on this.

Oct

16

The biggest regrets people usually have are from the fights they sought, the fights they took that they didn't have to, not from not having engaged the fights they didn't take.

Stefan Jovanovich writes: 

RV's thoughts are a wonderful catalyst, as always. "Regret" is THE question. Grant deeply regretted the Mexican War to the end of his life but he never once regretted the Civil War. He thought the arguments for secession were utterly mad and the United States could not continue to maintain its laws and government while accepting legal inequality and outright servitude based on the phantasm of "race"; but no one was in control of the follies that led to that War Between the States. People were entirely in control of whether of not the United States had a war with Mexico; and their choice was a product of pure greed and stupidity.

I don't think Grant, were he alive today, would have any regrets for the United States finally ending its confused attempts to station garrisons around the World the way the British once established coaling stations.

(Note: that is how how Hong Kong began, as a refueling stop for ships headed for Shanghai. For Admiral Dewey to defeat the Spanish Navy at Manila Bay, he first had to stop at Mirs Bay to take on coal and then wait for the U.S.S. Baltimore to bring the needed ordnance. For Teddy the Roosevelt, the true believer in American Empire, this was a humiliation to be overcome as soon as possible.) 

Oct

16

The Dow rose from the lows in December well over 20.8% in less than two months.

Such a move from the low of this month puts the Dow at 31,112 by year's end.

I prefer the more conservative count of 30,800 by the end of January.

Sep

13

If today closes up for DJI [Thursday, September 12th], it will mark 16 of the last 20 DJI closes to the upside. The last time this happened was March, 2017, and before that, Dec, 2016.

Examining the daily Dow back to 1896, this is often indicative of the early stages of a runaway bull market.

Aug

8

I've learned a lot from the DailySpec. Larry's advice that the market rewards patience is good. Ralph's formula for leverage is good. I realize they go hand in hand (their advice). It's hard to have patience when over levered.

Larry Williams writes: 

Leverage is pressure. There is enough of that in this business as is. Why compound it?

Ralph Vince writes: 

This is life and death, and I have NO interest in comfort.

Steve Ellison writes: 

When the game is to shake out the weak, a game plan of being strong, which would preclude excessive leverage, just might work.

I thought the Chair summarized it perfectly in a tweet on Monday:

A typical fri-mon almost identical to the feb 2018 decline with down another 1.5% on Mon nite 1100 pm est and then ready to resume its inevitable bullish climb on tues. anything to force the weak to give their chips to the strong.

Peter Ringel writes:

This is a wonderful tendency. Worked like a charm.

Jun

13

The markets take money from the impatient and give to the patient.

Ralph Vince writes: 

There are plenty of mega-institutions whose horizon is longer than the human life expectancy.

They are plenty patient.

They're just slow, and adding into market drops must be done by committee. An individual, with adequate grit and nerve, can take advantage of that.

We live in an era of incredible fear. The multiples on stocks are further evidence of that - the world staggering around as though recovering from a good bonk in the head, the periods, roughly, 2001Q3 - 2016Q3, by many metrics worse than the Great Depression.

There's SO MUCH FUEL out there.

Russ Sears adds: 

While I will agree that there are many institutions that should have an infinite time horizon they are run by humans that have a finite political power over them. And generally the more politically charged the leaders must be, the shorter the patience shown.

Ralph Vince writes:

Russ, yes, in the West.

But some Middle Eastern SWFs have no such pressure–one's "position" determined at birth, the possibility of screwing up diminished via indexing.

Stefan Jovanovich writes: 

NASRA says their members collect 2,850 billion dollars annually in state employer and employee contributions. That averages out to 7.8 billion daily, not 750.

May

16

If one googles "is volatility dead?" there are ample articles, multiple pages, etc. However, if you restrict the search to the past year the question seems to not have been asked.

May

15

If we imported goods from, say, the Gaza, would that be a good thing?

Peter Ringel responds:

Please allow the kraut to interject:

Hamas bombed Israel with >1200 missiles (and counting) during the last 3 weeks.

Hamas tries to trick Israel into a broad attack because Hamas is losing support in Gaza fast.

Israel showed tremendous restraint so far. Something politically extremely costly during an election year.

It is on the shoulders of the Palestinians to get rid of Hamas. Economic sanctions help with that IMHO.

Then we will see.

May

13

 I'm still astounded by the actions of China last weekend. It seems we can count on them to make the stupid move, nearly every time.

I'm astounded by how amateur and clumsy that tactic was, the "11:59, sorry man this is all I have in my pocket," move in turning around after 15 months and saying they can;t live up to anything that has been tentatively agreed to as it violates their sovereignty.

To they really think President Bigmouth hasn't seen this move before, hasn't heard this tune before or did have contingency plans in pace for such a stunt? It looks like they do things by committee, this is typical non-US, by committee amateurism to "see how they respond to this."

To Bigmouth's credit, in a move of negotiation jiu-jitsu, the biggest leverage in any negotiation– time–he flipped from being against him to working now in the favor of the US.

No further talks are scheduled. Why would Bigmouth be in ANY hurry to talk to them until 2021, 22 or beyond or if ever?

So what do they do? They antagonize with pipsqueak threats on 25% on 60 bln–the full amount of which Trump is prepared to absorb having announced the grain buyback program in recent days.

My hope is that Bigmouth really is as sharp at negotiating as he is reputed to be, ad says nothing further. Nothing on the additional 300 bln in tariffs today (the anticipation of which is what the markets are reacting to this morning, not the pisqueak retaliation).

Yes, if he escalates, markets will temporarily tank further. OTOH, if he says he's going to leave things alone for now, keep that powder dry, we could have one of these 9/21/87, "Oh sh**, Oh Sh**, OH SH***," -type runaway rallies today.

Mar

24

"If the best horse always won, this stuff would be so easy," the Old Frenchman used to tell me.

But it sure helps when the best horse is running against a field of nags. Similarly, I don't recall, in forty years, what appears to be a easier setup than right now in equities.

Not even close. Ever.

Let's start with the backdrop, which is decidedly negative at least in terms of recent news - global slowing, yield curve inverting, earnings trailing off etc.

Great.

Now, let's just look at the reality. In terms of what's going on with rates–a contrived situation on the short end, entirely inconsistent with quality spreads which have narrowed in the past couple of months, considerably, even with respect to junk.

Whatever global slowing was going on in 2018 has decidedly and abruptly turned. Since the first of the year, Shanghai is up 24%, Oil is up 27%. Global Slowdown?

To think we're still in a slowdown period is to miss what's already going on.

Employment in the US is very strong, evidenced again by this past week's jobless claims, and should be evermore evident after the next monthly jobs number where it should become clear the February number was a shutdown-induced aberration.

In fact, the basic indicator I keep (and many others do, of essentially the same thing, in various forms) of commodities prices relative to employment has again turned up–and at already high levels. This is very strong.

Earnings, here we are, end of Q1 and month-on-month S&P earnings are still growing. That;s right, despite the 21 1/2% growth in earnings on the S&P 500 last year, and the fact that they were to be contracting by now, are STILL growing, month-on-month.

The sentiment is still quite negative, and there are actually people out there who, for whatever natural-glass-half-empty they harbor, think the December lows will be challenged here. In December, we saw sentiment readings in surveys, in the press, in put/call ratios and in VIX futures that were negative along the lines of what we saw in late 2008! Such readings occur, typically, before protracted gains, bull runs that last many months. The following chart shows the 13 week rate-of-change of the S&P, as percentage, as of this Friday's close.

We haven't seen a move this vigorous, up and outta here, since 2009 Q2. Does this look like a market about to roll over? All of this backdrop, historically, set the stage for a prolonged bull run–which we are again in the early throes of it would appear.

"Roy's Red" –the six week coefficient of variance (I call it that after my late friend and fellow trader, Roy Klopper, who cooked it up with me years ago trading value line futures on hourly data) has again dipped below .10, indicating an imminent move (i.e. we're coming up and out of this congestion we've been in the past month or so–a congestion which has had an upward bias, indicative of strength coming when we break up out of it). The last time we had a reading this low in Roy's Red, this imminent of a move, of an impending and imminent trending move, was in early October last year.

The volume bars of Friday (tight, profitable-quarter-ending-stops being played) indicate one should be a buyer on weakness Monday - even if things collapse Monday, you gotta be a buyer. ESPECIALLY if you can be a buyer below Friday's close (I don't know if we'll get this chance, or if Monday is a further collapse, on heavier volume–I doubt it, the setup is such that Friday should be made up and then some in the coming week). Even if things work a little lower, the bigger picture is so strong right now, that backdrop story so counter to what's actually going on in the numbers, and the forecast so strong here, and the daily so set up for a buy I just don't recall things ever being easier than right now.

Could I be more unequivocal?

Alex Forshaw replies:

Ralph,

A few devil's advocate arguments:

1. Shanghai composite was trading at 10x forward earnings 3-4 months ago with aggressive supply side government stimulus. that has historically always been a good time for a trading bounce. There hasn't been a material shift in on the ground economic fundamentals in China.

2. By my math the SPX is trading at 17x 12m forward EPS. The range has been 15-18x in the past 3 years. The SPX traded over 18x forward earnings 4 times in the last 100 years — 1929, 1936, 1999, and january 2018. In each of those occasions, the SPX's sharpe ratio for the following 12-36 months ranged from quite bad to historically atrocious. so unless there's a massive expansion in earnings in the near term, the SPX is not valued attractively right now.

3. Earnings season just ended. There won't be material movement in the "E" for another month.

4. While the yield curve doesn't historically correlate with fwd 12m equity returns, how do forward 12-month returns look when we are at least 6 years into an economic expansion and the yield curve has flattened? It's one thing for the yield curve to flatten 2 or 3 years into a bull market. but 10 years? Seems like the context is materially different from a lot of the past contexts around this statistic, although I haven't studied it closely.

5. Employment is a coincident to very slightly leading economic indicator, but hasn't it decelerated very markedly recently?

6. Europe is clearly slowing down dramatically again. China has had a valuation bounce but economic activity there is still quite weak judging from company earnings reports and anecdotal. The US has managed 3.1% GDP growth with a 5% deficit/GDP that dwarfs the OECD average.

7. Why would you pay 17x ftm eps for 3-5% estimated earnings growth? 17x for 20% eps growth (12% organic), a la 1h18, is one thing…

8. Given the volume of corp borrowing and debt issuance, and the peaking of the current rate cycle, why wouldn't the next downturn be much worse than the 2008 one? I think the "next downturn" risk is maybe 20% in next 6-9 months, but even if it's 20%, why would you pay 17x for that?

Ralph Vince writes: 

Alex,

All good points.

I'm considering valuations with respect to competing assets more so than historically, the notion being the investment dollars move someplace. Is the the "right" way to asses these? I don't know, it's how I usually try to look at it, but time will tell.)

Consider the long bond which is selling at a "multiple" of about 35 here vs the S&P 500 (whose earnings, as I say, are STILL rising; actual earnings, not future prognostications of events which have not transpired) of 21.48 (S&P500 PEs were riding above the long bond "multiple," dipped down and touched it around 88 and again in 95, by mid '05 the S&P500 PE dipped below the bond multiple, and has remained there ever since save for a period in 08-9 where the PE for stocks went haywire for several months. So one cannot say that the bond multiple naturally belongs above stock PEs, but they have for nearly a decade and half).

That's with the VERY rich US yields, relative to the rest of the world. The Bund, of course….a different animal here. Investment dollars flow someplace, the US, with earnings still gaining (despite the incredible gains of the past 14 months or so) look very attractive by comparison.

Employment is extremely healthy, so much so that wage pressure is finally returning. By my measures, last month was an aberration caused by the shutdown. A more accurate assessment, a proprietary one with respect to equities prices reveals: We're not even close to a sell by my employment measures.

On the more near-term, the next few weeks should see an end to this congestion we've been in for a month or a little longer in equities prices, per Roy's Red. Whereas it COULD be to the downside, I don't see it, the technicals (and sentiment) are acting far more lie 2009 Q2 here. Further, the pattern of volume (which is no different than how one might have read the tape 35, 40 years ago or before– only now we have the benefit of seeing bigger swaths of time, e.g. I look at yearly, monthly, weekly volumes as well) are ALL bullish here, all buy any weakness here. If I had to rely on jut one indicator, this would be it.

Alex Forshaw writes: 

To me, the S&P 500 is trading at almost the same valuation as it was in January 2018, except

1) S&P estimated earnings growth is 3-5%, instead of 20%
2) the 1yr/10yr spread (the most predictive of all the yield curve spreads) is slightly negative today, vs +80bps a year ago
3) all macro fundamentals have decelerated everywhere, and the rate of negative surprise has dramatically accelerated
4) SPX earnings yield minus 10 year yield (attached) is inline with its average over the past 10ish years, although if you go back further, it looks more favorable
5) there is no prospect of further policy stimulus until after the 2020 election, which remains a complete wild card, and seems like a "lose/no-win" coin toss for investors (the possible outcomes being untethered socialist idiocy or the dysfunctionally mediocre status quo)

In my experience, stocks-vs-bonds valuation logic is not very useful when stock valuations are rich by their own historical standards. It would have said to be aggressively buying through 2017/1h18 (if you were looking at the past 20 years of data) and the sharpe ratio would have been quite poor. It only takes 1 bad stretch to seriously derail one's financial career…

Ralph Vince writes: 

Re: "there is no prospect of further policy stimulus"

The transportation bill, likely to be proposed very soon, and highly stimulative. Think QE5. Giant barrel of uncooked pork.

China, among other things, agreeing to buy 500bln/yr ag and etc over next 6 years(my cheap seats guess), highly, HIGHLY stimulative (2 1/2% yr on a 20 trln economy, before any kind of a multiplier, which is at least 2, as that is just export, but goes into either consumption or investment 1x over 12 months, and that accumulates going forward).

Effects of "New Nafta" not yet felt online. We could go on and on hereon these various recent changes all of which are stimulative.

If you take away energy, and go back to our being a net importer of oil, and take away the repatriation effect of the recent tax bill (and AAPL agreeing to invest 350 bln, and Foxcon, and etc) , we would likely be at a GDP deficit here. Things haven't really gotten going yet is my point, but these are real numbers coming online. I don't for the life of me understand Atlanta Fed GDP projection.

Steve Ellison writes: 

Since 2010, the S&P 500 has not strayed too far in either direction from the level implied by a 2% dividend yield (see attached chart). From this perspective, the S&P got a little ahead of itself in 2017, and the 2018 correction overshot. In fourth quarter 2018, there was a plausible argument that the required dividend yield ought to adjust higher (implying the trend line should be pushed down lower), but the recent move in 10-year yields to multi-month lows seems to have taken that possibility off the table for now.

Dividends have been growing at roughly 8% per year recently.

Feb

14

This slowdown (actually, a reduction in the upward rate-of-chage of most measures) looks like it is more of a "touch-n-go" variety like we saw in 94-95. (And also comports to the extremes in negative sentiment seen in Dec).

Nothing would fuel a great equities run like higher commodity prices and energy costs, if it can muster. Even a hawkish Fed in 2019 has bullish implications if the long end rises as well.

Feb

4

I struggle to find an instance of equities being overvalued. This link shows not only my model for real-return adjusted earnings' linear relationship to the S&P ("model") but of particular interest the P/E of the S&P with respect to the P/E of the 30 year constant.

Gibbons Burke writes: 

What caused the quantum jump and return excursion of the SP_PE line (red) ~2010?

Earth Link writes: 

Earnings fell precipitously, particularly in the financial, energy, and materials sectors, during the 2007-8 financial crisis, and rebounded beginning in mid-late 2009. S&P GAAP earnings were negative in Q4 2008, and were also significantly lower than previous levels in Q3-2008 and Q1-2009, but by Q1-2011 had recovered to pre-crisis levels.

Feb

4

The AFC team wins the Super Bowl, and given the initial lopsided correlation of this nonsensical indicator, it is, if anything, bullish for stocks for 2019. This is not based on a ground hog's shadow, but on Borel's Law of Large Numbers.

I learned in 2013 to not fade this law in markets as well as to not trust any technical divergences in the face of good fundamentals.

Dec

25

 If there were ever a contrarian indicator of a down market in 2019, this may be it. The number of analysts predicting a down market in 2019: zero. (From Twitter)

Ralph Vince writes: 

My numbers call for at LEAST a 40% move from here (closer to 50% really, but even that sounds crazy to me), and no prospect of a recession until at least 2021 more likely at least 2022 at this point.

David Lillienfeld writes: 

With a tightening Fed (not the discount rate, the inventory)?

Stefan Jovanovich writes: 

Yes.

Sentiment, by any measure I keep, is as bad if not more so than it was in 08 — but the backdrop, not just in the credit markets but in terms of energy, corporate profits, etc., profoundly different than 08, and the drop is minor by comparison. Further, unlike '08, earnings continue to grow, even over this past week.

Capital must find a home, must seek a return. Cash is a temporary placeholder, cover for the rainstorm, and for liability-driven fiduciaries, a very temporary one when you have >4% annual liabilities. How would you manage a pension in Germany or Japan? The US capital markets, with our rich return on treasuries across the maturity spectrum and equities markets that have increasing earnings are the most viable place on the planet.

And all this has come about as QE has ended, ZIRP has snuck out of it's hole to viable, st rates, and a divided congress, who needs to spend and screech like a middle-aged woman who is about to cough up her gizzard, will only find common ground on a pending transportation bill (think QE4), so "yes," to your question.

Dec

18

"Investors Have Nowhere to Hide as Stocks, Bonds and Commodities All Tumble"

Certainly not our Mr Brush…bonds, grains and meats have rallied.

Ralph Vince writes: 

Several months ago, the major news organizations, in a fit of grotesque hubris, announced their joint commitment to intensifying their efforts to malign the current administration.

We have watched this play out in the realm of financial news as well (which has been further diminished in recent years by the loss of some greats, e.g. Abelson, etc., to be replaced with vaccuous amateurs). Specifically, the notion of "The longest expansion in US history," (the definition of which has never been provided despite my prodding, directly and personally and off-the-record), the recent yield curve "inversion" fallacy, etc.

Has anyone seen a comparative study of the years 1929-1940 and 2005-2016?

This makes it all-the-more imperative now to do one's own homework, maintain one's own statistics, disregard the shrill sirens and observe, distinguish and conclude.

anonymous writes: 

It's been slight loss of wealth YTD across all assets with real estate markets softening up. It's been an up market for 9 years straight and that failed inverse head and voodoo failure in the SPX after China gap fade in a time where most asset managers are down only fueled the frustration aggression theory which I think makes this year end tough but ultimately will manifest into a great opportunity. My two cents with no quantification.

Dec

9

From a NYT article:

In the past 60 years, every recession has been preceded by an inverted yield curve, according to research from the San Francisco Fed. Curve inversions have "correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession," the bank's researchers wrote in March.

anonymous writes: 

Cleveland Fed has a dedicated website on the YC. Lately the probability of recession in the next year has increased to 20%+ some good literature on the subject by the NY Fed.

While historically it has been a solid predictor, the timing is tricky and not stable (can you afford to be short the market at least a year before a recession) and its predictive power has decreased over the years. The evidence in foreign markets is also mixed (look at the UK in 2000s where a decent portion of the time the YC was flat/inverted). It is what someone will call a weak predictor. One would think that you might find a better forecast in specific industries/sectors (eg financials) than the market as a whole.

It's worth mentioning that inverted yield curves were the norm before 1900. Most academics attribute that to wars; if a country survived in the short-term (wars), it had less risk over the long term. Similar to the VIX term structure during sell-offs. 

Peter Ringel writes: 

We had so many bogymen on the news-wire today.
Everyone is free to choose the fear he or she desires:
- yield curve 
- Russia military aggression (old news- but displayed as new)
- Italy risk (old news)
- Brexit fail
- Trump-China back paddling ("China is puzzled" <- this one is real IMO )
- FED talk
- IRAN war (old news)

Probably all a campaign.

Ralph Vince writes: 

Alright, since the media is yield curve obsessed, I'm copying what I posted to another list, expletives deleted.

This talk of an inverted curve by taking segments out is the most ignorant discussion in the media on the topic i have ever seen. When there are inflection points in the curve, which are COMMON, historically, there are portions of inversion, of course.Throughout the late 90s, when the 20 was above the 30 year, was anyone calling it an INVERTED YEILD CURVE!!!!! (and screaming about it, as they do now?)

In late 1998, there were at least FIVE inflection points using the main maturities on the constant curve, and three segments that were inverted. Things were pretty strong in the economy until hints of slowness in 2001Q2.

This is more bull***it financial writing, along the lines of "longest expansion in history," etc.

Who knows, maybe a slowdown is upon us (not evident in any numbers I keep - yet) but the yield curve is NOT inverted.

Russ Sears writes: 

Perhaps they have learned after Trump's election that making the first move instills confidence in the dip buyers Trump optimism. But selling after a big up Trump day the opposite.

anonymous writes:

It would seem that those that believe Trump knows what he is doing now move regularly before those who doubt him.  

Kora Reddy writes: 

1. When T10Y2Y goes below zero for the first time in 250 days (one year) and forward $SPX index returns:

 .

.

.

2. When t10y3m goes below zero for the first in a yr:

  

.

.

3. When T10YFF goes below zero for the first time in a year:

  

.

.

.

.

.

Dec

6

I recommend to the group the TV show on Netflix Turn: Washington's Spies. It's based on the book Washington's Spies: the Story of America's First Spy Ring I believe. I enjoyed the series very much!

Ralph Vince writes: 

Turn is excellent. I second Scott's motion.

Nov

30

 This article predicts the impeachment odds near 50% for next 2 years

What are the obvious stocks/commodities/currencies that would directly benefit from an impeachment, if any? Which would decline?

The private prison stocks used to trade somewhat as an impeachment proxy but with the ousting of sessions and change in tone re: reform, no longer intuitive.

My thought would be putting on an appealing spread trade to hedge the odds market which feels very aggressive

Ralph Vince writes:

First things first.

I don't see Trump and Xi bypassing an opportunity to goose their markets. Expect a statement from both of them, jointly, to the effect of "we're working on a deal, we're getting close, it's complicated, there are lots of issues, but it's coming."

Nov

28

Ralph or anyone else. I need help with Ralph Vince's optimal f.

Take any one of Kora's excellent sample trade systems in SP with for example N0 Classical expectation is 60% winners, T=2.2, max historical drawdown 50pts, avg gain 4 pts avg loss 4 pts, with a million dollar stake; max acceptable drawdown 2%, a one year horizon rather than normal asymptotal assumption. R=risk free rate. Time horizon is close to close one day.

Traditionally one would use 8 contracts to limit loss to 2% on the max loss, or a fraction of .4 of stake.

What is the Optimum f use to achieve max TWR? Also what is appropriate n to compute optimal f: the 3 expected trades in the year, or the 30 over the history of the trade? Assume the current historical volatility in SP of 18. How does f change if vol is 9? Also how does the Vince bounded expectation differs from the classical unbounded expectation over a one year with 3 one day event horizon?

The solution in Vince, Risk Opportunity Analysis, p 171 is a 3 dimensional copula. (Escaping Flatland!). Is there a simple R routine or spreadsheet to compute this? The late Seattle Phil uses max drawdown as the main factor In his allocation formula. I think risk management is the most important aspect of investing.

Ralph Vince replies: 

Zubin,

So your criteria, from what you describe, is to maximize your gain over this period of time, all else be damned, withing a given (but unidentified) risk constraint. So you are talking about being at the peak of the curve (there are other points, or paths through the space, for different criteria), and you;re talking about a portfolio of one item.

But you do not know what this one-year future time window has in store for you, and I've found the best approximation for where the peak is to divide the percent of profitable compounding periods (in this case, since you have only one component, a compounding period we can say is the same as a trade) by 2. I won;t go into the math for why this is hte best guess aside from saying it will minimize the price you pay, worst-case, between this best-guess point and where, after the year, the actual point turns out to be. So in this example, it starts out at 60% winners, so

.6 / 2 = .3 ad therefore, the best guess point to use as the peak is .3, asymptotically. But you;re talking about only 3 trades over the course of the year, and since the expectation, if you make one play, is to be positive, then if you were to quit at 1 trade, your f would be 1.0, at two trades, the best guess is (f one play less-the asymptotic f) / 2 + the asymptotic or (1-.3)/2 + .3= .7/2+.3=.35+.3 = .65 and for three trades (.65 - .3 ) /2 + .3 = .175 + .3 = .475

So that;s an approximation, that .475, and that;s how I would arrive at it, absent knowledge of the future. It is a good, robust approximation and mathematically sound. I prefer robust approximations as opposed to the exact mathematical answers based solely on past data

Software for this can be found at Josh Ulrich's R implementation for it. I do not have the link offhand. The paper you cit gives the exact formula for determining the landscape and optimal fractions therein, but that is on past data. In the foxhole looking at tomorrow, or next year, I prefer robust approximations that will mimic what the actual formula might provide.

Next, you need to determine a worst-case loss situation. Perhaps you are going long, and you could use the value of 0 for your worst case. or maybe you have a stop in there, and you can use that plus some ridiculous amount of slippage for worst case or perhaps you are using options, etc. But you really need a worst case situation. Dividing the worst-case dollar amount by .475 will tell you how many units (the same quantity you determined the worst case dollar amount on, say, 1 contract 100 shares, whatever) to have on.

Understand, however, that when this worst-case is hit, you will be hit for 47.5% of your stake! So my point is, I think you need to rethink your criteria as it is unlikely what I paraphrase it to be in my first paragraph here. Perhaps you want to allocate a smaller percentage of your capital to this endeavor such that 47.5% is akin to 2% or your total capital. Maybe your criteria actually has you traversing a path in the landscape this curve in 2D space.

Orson Terrill writes:

Is Ulrich, or anyone, still maintaining quantmod? I still have some code that runs on parts of it, that I'll refactor to save time, but hadn't seen much activity around it.

Ralph Vince writes: 

I'm certain there is a robust community around it.

Oct

26

And at this very minute, the ten day correlation between VIX and he S&P 500 is -.97. VIX is running a positive carry both to cash and futures months more distant for any given futures month.

It is a condition which, if persists, allows a portfolio manager to in effect get a completely free lunch via Markowitz. Either stocks go up in the not-too-distant future, or the carry on VIX goes negative again (which occurs….when stocks go up).

Oct

19

They say the market is upset about the jump in bond yields but maybe she's anticipating a premature return to socialism

Stefan Jovanovich writes: 

If I thought there was any reliable direct connection between elections and speculations, I would be tempted to join LW and you other clever traders and bet my "system" - which does better than average at guessing political horse races. I don't because, if there were any such link, I would not be able to pretend to be an expert in such company. You guys would already know the odds down to the precinct levels if that mattered.

I think, in fact, you all do know what matters regarding politics and money. Now that I am 60% of the way through the House "swing" districts, I are learning what the markets have already predicted: Jim Jordan is going to be the new Speaker of the House of Representatives. When that happens, the Federal budget and the Treasury's operations are going to be subject to the approval of the 21st century successor to John Sherman; and the shock is going to be that the national debt will be brought home. The taxpayers are going to become the Federal bond holders just as they did during and after the Civil War; and they are going to want tariffs and "sound" money to protect their investments, even as Confederate paper (aka Chicago municipal bonds) is allowed to evaporate.

Larry Williams writes: 

If the new speaker shrinks debt stocks will get hit hard. Deficits are very bullish for equities.

Alex Forshaw asks: 

Larry, why do you say that/how do you strip out correlation vs causation in this? The blowoff 1998-2000 top occurred among budget surplus and deficits are inherently counter cyclical i.e. generally low in late cycle/high in early cycle (deficit as % of GDP biggest in 1981-83, during/after 2 recessions or 1 severe recession; 1991-93 after a fairly deep recession; 2002-03 after a recession; 2009-10 after a severe recession.) To the extent that the deficit is high adjusted for its place in the economic cycle (2012, 2018 ytd) it doesn't seem bullish. To the extent that deficits are unusually low cyclically adjusted (late 90s, 2007 arguably, 2015 arguably) it definitely does not seem bearish. 

Larry Williams replies: 

I don't think it is correlation but causation. Large deficits means lots of money floating around the hood. That translates to expansion, building–which translates to jobs, and that to consumer spending, and that to corporate profits. I'm traveling so lack data. The "one and only" Mr Vince may wade into this with data.

Ralph Vince responds: 

25+ years ago I bought the Commerce Dept Database of 900 data items, and set u p a program (that would take two months to run, with a math coprocessor no less!) to examine each pairwise data set, and for each pairwise data set, to skew them +12/9/6/3/0…/-12 months, and record only those dataskew pairs with absolute value of correlation > some value (I forget which, but it was quite high).

One of the (many) dataskew pairs that filtered through very highly was that of federal deficits and economic growth (and broadly, we can stipulate that ROC of economic growth correlates to equity returns). The greater the deficits, the greater the market gains.

There were periods that did not fit this pattern, of course, it was not absolute (one out-of-sample period being the Robt Rubin era which was yet to transpire).

My guess is like the Senator's here; greater money floating around menas greater economic activity. I think it;s even a deeper causation than that. I would define it by saying that debt needs be repayed only once (if ever, it can also be perpetually rolled — the "problematic" nature of this is solely a function of rates. If manageable due to rates, it is virtually nothing. Further, even if rates become problematic, the yield curve itself provides an avenue of release — cue Rubin again), whereas the borrowed dollar can circulate multiple times.

So there is the multiplier effect of borrowed money vs the borrower's asset which is a one-time shot

If it weren't for borrowing, in particular the fractional banking system, we'd be in the year 1,000.

Oct

17

 The hardest part is resting on your oars, but 58pts is a good time to ease off leverage. I think Ralph is right and there is more to go. Unlike RG I can't wait to learn patience.

Peter Pinkhasov writes:

Most of the close to close stats I'm seeing for such a decline are coming with the narrative that "but it has a potential to go lower" which I think takes away from being data and analytically driven to make decisions. I think with the large move in short term rates, it's better to use that as an independent variable for forecasting future returns given we have seen a new interplay in the last two weeks between stocks and bonds. 

Ralph Vince writes:

The upmove in st rates is and has been exceedingly bullish here.

Oct

12

 I'm very bullish. I can take the pain of that (and in truth this "pain" is something of a joke compared to what we went through in the 80s and 90s). I won't even attempt to trade the short side and such a strong bullish Market this move notwithstanding. That makes the current situation all the more juicy for getting or building long position–even if Kora's research manifests here and it goes on to seeing lower prices. Higher highs in the coming weeks and months are inevitable. This thing is nowhere near a high in price, in valuation or sentiment.

Russ Sears writes:

Perhaps I am too conspiracy and paranoid minded, but I see a parallel to Kavanaugh seated and Trumps election where market participants on the left saw a tragedy, and quickly exited only to miss out on a nice bull market. Not that I think Kavanaugh seat matter much to the economy or markets direction. But when people work themselves up into turmoil the markets reflect more volatility as it's made up of people's emotions
 

Oct

9

If I was a gambling man, I'd be getting very long here.

6-week weekly coefficient of variation in SPX calling for a major move.

Volume Thurs and Fri say to be a buyer on weakness.

A certain alliteration in the way prive & volume work on the short term is occurring here. OooOooOO this is hard!

Thurs SPY volumes on and Friday SVXY volumes - indicating to be a buyer on weakness in the coming day or two, followed by a little weakness this morning, and I'll double down on the gambling man proposition. (I have other signals too confirming this, but not going into the long-winded diatribe here at this time).

It;s hard because that 6 week weekly coefficient of variance, calling for a good, prolonged market run in one direction or the other, could be signalling a drop much further from here. But the odds favor the upside, so does the nose.

Aug

26

Those bonds last week should have had a little dip and that quiet strength is a sign of another wave of money about to flood equities again. All measures I keep, the valuation regression, which is only 14% over–nothing for a bull run, that relationship of short rates and earnings, the yield curve itself, breadth and confirmations, and the broader economic measures, the duration-balanced treasury rate continuing to drop (how about that 30 year?) all point to nothing but strength everywhere.

Looking at Drudge the past 24 hours, any market-related news is very negative. As hard as it may feel to pile in, it doesn't get much easier than this, folks.

Only 2 measures (really, super-measures for a market run-up) aren't going off here (and oh, if only they would!). One, proprietary that I only speak of with a select group, the other, that 20 year constant to linear between the 10 and 30, which is flirting at 5 bps over, and could invert pretty quickly here perhaps.

Just close your eyes…do what's hard here now, and get long. Ask yourself, "Do I want to go through my entire life as a weenie?"

Aug

20

In 2015, there was a very pronounced seasonality around the 3rd Friday of the month, where the market would ramp higher going into both quad-witch options expiration, and non-quarterly expiration, and then mean revert lower post expiration. J.P. Morgan had a couple of strategies that provided exposure to such options expiry momentum and it's subsequent mean reversion. Of course, this Friday's August expiration saw the market sell off the day before opex, and close unchanged on Friday. This is very similar to what happened during May opex of this year, when the ES sold off ~3% two days before expiration. While I'm not quite certain what the market will do next week, ES rebounded strongly the week following options expiration back in May.

As Kolanovic explained, the reason a broader selloff did not ensue is that none of the triggers for systematic selling were breached. Momentum stayed positive, bonds rallied and almost totally offset the equity selloff, and vol targeting strategies had already reached leverage caps at higher levels of volatility than those reached on that day. Options positioning going into May 17 was benign and long gamma, and as is often the case, moves are reverted when there is positive gamma exposure.

Bonds are once again negatively correlated to spooz, offsetting falling equity prices, and today's vol levels have only increased commensurate with May 17th's levels, however current VVIX:VIX is substantially higher than back in May, and momentum has turned negative. September options open interest is skewed toward puts in the current trading range with large pins at the 2400 and 2350 levels.

The stuffed cabbage appears to be falling apart, and there is no shortage of potential explanations as to why: trumpeachment, tax reform delay, balance sheet reduction, fed tightening, and if there were to be a selloff this Monday–renewed bellicose dialogue between the Kim and the Donald over war games.

P/C ratios continue to be bearish, and don't show signs of being overbought. A post-expiration move below 2425-20 on Monday would take dealers further short gamma as expired hedges are rolled forward boosting volatility. A test of 2400 in the ES then seems likely where a break below, might not be bought. The 'world' is leaning against that level, and recent statements imply the Fed may not be as inclined to be a buyer, as they have been in the past.

The powers that be seem determined not to allow gold to build value above 1300, however the $/yen is on the precipice, and further domestic conflict would pare it's price and support rallies in gold and treasuries. In any case triple bottoms (usd/jpy) and triple tops (gc) never hold.

Jim Sogi writes: 

Last weekend they paid a nice premium for taking the risk of holding their goods over the weekend. Always risk, and that's what they pay for.

Ralph Vince writes: 

Don't know if we'll see that tomorrow, but volatility is certainly telling us (very strongly) this is not the correction it seems most are looking for yet.

I still think we challenge the all-time highs first, and, very possibly, go into another strong up leg this Autumn on the inevitable tax cut legislation. The big bull–from wherever you begin looking at it from, March 09, Nov 2012, or, as I see it from January 2016, is far from over. And that means higher highs before it is.

I can be long and wrong but not short and wrong on the timing of all of this. But I'm quite certain we're going right back up to those all time highs here, just not so sure about tomorrow.

The bull market in bonds takes a breather this week.

Aug

19

 A great read:

"Turmoil in Quant Land: A hedge fund's candid view why strategies that were once working regularly mysteriously stopped working"

J.T Holley writes: 

The Law of the ever changing. The rudder is still the objective standard. Just try a little bit harder.

Use the objective but become more subjective while using the objective as a ruler.

Count. Then count again. Count some more. Die counting.

Adam Grimes writes:

A broad question on this topic.

Thinking about volatility, I understand how selling vol can depress implieds. This is obvious and if there's an ever-present offer on volatility (e.g., from banks selling for "yield") this would have an impact on pricing of those derivatives… but am I correct in thinking that there's no mechanism whereby this can actually effect realized volatility? And if realized volatility were higher (it obviously has not been) then the mispricing of those derivatives would be clear and the sellers would be crushed. We also could not have a situation where pricing of implieds comes dramatically apart from realized vol for an extended period of time because there is a day of reckoning on most of those instruments.

I can easily understand how buying and selling might, for instance, erode cycles or seasonality in the underlying and would quickly erase arbs, but I don't see how buying and selling pressure in a derivative can affect realized volatility. (Again… just to belabor the point… impact on implieds is obvious.)

I could imagine being a very deep-pocketed seller of vol and then operating in the underlying to dampen swings there, but it would seem that I would quickly magnify my risks to unacceptable levels without any assurance that I'd be able to accomplish what I was trying to do.

Am I missing something here, or is there a missing piece to this low vol puzzle in general? 

Ralph Vince replies: 

Adam, YOU'RE not missing ANYTHING. The notion that too many sellers of options dampen implied vol., if it were true, would create a wonderful opportunity to buy options, which, ultimately, reflect outcomes consistent with the historical vol over the period the options have been held. That is to say, the actual outcome of price distributions between the day I buy the options and the day the expire is, datum est, a function of the historical vol over that time window.

Ultimately, like a psychotic mistress you cannot shake, implied and historical can never be too far away for too long.

anonymous writes: 

Yes, this piece seems to be catered towards those whom are subscribers or clients of the author. I like to think that longevity in systematic/quantitative strategies relies on creativity and flexibility more than a fundamental understanding of statistics or arithmetic.

As Chair said "don't try to make money the same way twice".

If too many people are only focused on selling vol because that has been the main source of alpha over the last 3 years, then it would seem reasonable to expect those same actors to see heavier drawdowns and volatility being pushed like a hydraulic press into over leveraged players. A more prudent observer would find a way to take advantage or quantity some of these "irregularities".

Zubin Al Genubi writes: 

A couple of questions remain unanswered: Why has volatility been so low?

Other questions: why is inflation so low with such low rates?

Won't some of the old strategies start to work again once this low vol regime ends?

Personally I don't even bother to trade the low vol. Better to travel. 

Paolo Pezzutti writes: 

The concept of ever changing cycles is always valid. Competition on a set of inefficiencies exploited by more and more actors reduces gradually the edge. It has always been like this. The issue is that no edge is given and working forever. Innovation and research can never stop. One has to continue counting, find new regularities , dismiss those who do not work any more. An area of research in this regard and discussed in the paper is how to exploit the growing sector of passive investing and etfs. What are the new regularities that these growing actors are creating for the speculators to exploit and profit from? 

anonymous writes: 

They didn't take on enough risk, it's THAT simple.

What a pile of yadda yadda, "We don't really know why things didn't work as well as they had in the past, but we've fixed it because we have a lot of smart people working for us."

A failure-justifying amphigory, and fails at that too.

anonymous adds: 

Managers have to have a story to tell, especially when they under-perform the benchmark. The negative effects of index funds and ETFs is a pretty common part of the story these days. I am very skeptical because, from the cheap seats, it seems that if you took all the passive money and gave it active managers, they would wind up in aggregate holding the same positions as the passive funds held, only minus bigger fees. Following that logic, one consequence of passive investments would be higher markets because more of the customers' investable funds actually reach the market rather than being siphoned off by intermediaries. Which means that intermediaries will need to find new ways to siphon off funds.

Aug

17

If not today, then tomorrow…don't be shut out.

Gary Phillips writes: 

2475.00 appears impenetrable, at least until after opex Friday. If $/yen was to further take it on the chin due to Trump backlash, which looks likely, then gold should break higher and take out the round at 1300.00 while bonds tag along for the ride. Thinking 2440 in es before 2480.00.

Ralph Vince writes: 

Maybe so, Gary. BUT…there's no danger until the big indexes hit new all tie highs first, which is inevitable in the next couple of days.

anonymous writes: 

This is good, selling off into the open. Prime chance to add for another charge at new all time highs here. We are hitting a cycle low in this Thurs/Fri area, maybe even at it right now, and some intermediate stuff that is deeply oversold.

Aug

16

Volume gave nothing yesterday. It’s a good sign Monday will continue through today, and the 20 constant mat convexity is only 3 1/2 over linear.

It should be a stronger day in the end than the open might indicate.

Kim Zussman writes: 

So how will we know when the 8 year old “buy the dip” (slightest, shortest, before you blink) trading strategy will stop printing exponential bitcoin?

Ralph Vince writes: 

Everyone is waiting on “the dip”, and more than that in numbers are the grumblers who are and have been short or not aboard at all.

It’s the 1980s, but on steroids this time. Giant transformations - far bigger than reactionary politics - were in place a year ago and are just beginning to manifest.

Like the man on the loudspeaker at the trotter track says, “Do NOT get shut out.”

Jul

19

It looks to me as though the high is about in here. Maybe a drop of 5-10% over a period of at least a few weeks. All of this in the context of a very powerful bull market that will carry for at least the next 4 or 5 years (with fits and starts, decades) driven by lower rates, lower unemployment and low inflation in a world fast transforming on the energy and transportation arenas.

Anatoly Veltman writes: 

I only glance at the charts, and I see no difference between the 2007 topping action and the current chart juncture. So to me it looks more like agreeing with Ralph about no charting reason to hold Long here, but also not anticipating reasons to look for Long any time soon. What was that about "lower rates"??

Paolo Pezzutti writes:

Charts are useless. Your perception can be biased by what could look like specific formation. I think we should discuss the possibility of a top based on a more scientific and measurable approach. It's been years since we've heard about analogs with past topping formations and distribution patterns. Sooner or later stocks will move to the downside anyway.

anonymous writes: 

If we are in an analogous market to 2007:

Have we had any "warning shots" similar to Feb. 27, 2007 in which the underlying weakness of credit markets began to be evident? Is there reason to suspect that commodities are at bubble levels, or that a commodity bubble may form as in 1H2008, in divergence from the trajectory of earnings growth and equity prices? Are quant funds blowing up, indicating a sudden change in historical relationships between markets?

Ralph Vince writes: 

Giant bull market in bonds for the past 35 years.

I KNOW I'm not smart enough to call the top in that one. There's no great insight on my part, I'm just sticking with the bass line here, and that brings us to a 1 big-handle on the thirty constant mat.

Larry Williams writes:

The bearish Cassandra's on bonds miss the point. The Fed can't raise rates much here in a struggling economy. 2% GDP growth looks like about it based on velocity of money and credit. The Fed has to stop using Phillips Curve model.

Jul

10

I find it to be a much different game involved when managing a big winning position than dealing with any size losing position. Sometimes the market moves render even the best trading plans moot, either side, win or lose. The Mistress broadly encourages one to abandon reason and science, imploring one to trade in an emotional, "seat of the pants" mode. The mistress tends to endow a winner with self doubt and adds a double dose of hindsight just for kicks. She messes with confidence levels, tries to decrease humility, increase hubris, and whispers in your ear some small suggestions, that if followed will cause personal ruin. It is important to note that the mistress is fastidiously equal opportunity, sowing discord among winners and losers alike, and all at the same time.

Losers are easy to deal with…..get rid of them quickly, learn whatever lesson is presented, and move on. It's the very rare big winners that are most perplexing….there's not much material out there on how to deal with them.

Thoughts?

anonymous writes: 

Jeff writes: "I find it to be a much different game involved when managing a big winning position than dealing with any size losing position."

I agree with this statement.

And why might that be? Is it because we have trouble keeping positions open — that is, "cut your losses and let your winners run" is much easier said than done. Or might it be that we suffer from a personal guilt/insecurity that subconsciously believes we don't "deserve" to have an big winning position? (See: Prospect theory). Or perhaps it's more mundane: a lack of strategic tactics and discipline.

Whatever the reason, it's what I call a "quality problem" — so long as one doesn't believe that "no one ever went bankrupt taking a profit." Taking small losses and small profits is a surefire way to bankruptcy.

Julian Rowberry writes: 

How many times a year do you have to cut losses? How many times a year do you have to manage a big winner?

anonymous responds: 

The Pareto Principle states that, for many events, roughly 80% of the effects come for 20% of the causes. But in fact, if one is trying to beat the S&P500, it's much more concentrated than that. According to Cliff Asness, each year for the past 20 years, the top 10 stocks have accounted for about 45% of the total gains. (There are different ways to calculate this — but the gist is the same: if you are long-only and own a concentrated portfolio, then owning those few winners is absolutely essential. It's left as an exercise for the reader whether this is one and the same with the so-called Momentum Effect.)

Similar phenomena occur in commodities…

This underscores the difficulty — perhaps even futility — of calling "tops" and "bottoms." This isn't a recent phenomenon either. I've seen some studies that show the most outsized gains occur in the final stages (so-called "blowoffs") of markets. So if you are trying to beat a benchmark (which is the most intellectually honest way to invest), then the only way to explain away those missed gains is to (a) pick a different timeframe for the benchmark and/or (b) couch things in terms of "risk-adjusted" returns or (c) pick a modest, absolute return benchmark. 

Raph Vince writes: 

Je me regarder.

There is absolutely nothing to consider here on this question but to further muddy the answer, and the only way to arrive at the answer is to first solve the fundamental, personal reason as to why you are here.

What are you seeking to do? This is true whether you are looking to trade Cook Co GOs, Natural gas futures or at the cheapie blackjack tables in Biloxi.

What are you trying to do? what is your criteria? And if the answer is simply "To make money," or "To make more money than ybidyblibidyblamgozoo," then you are among the deluded masses who will part with what you've brought in this in only a matter of time.

The single clearest denominator between those who loose what they have and those who do not is that the latter know, very clearly, and with respect to risk and timeframe, what they are doing here. Whether you're playing cards at the caddy shack or venues higher up the food chain. Once a person goes through the rough the honest and realistic self-evaluation, given their abilities, of what they can do and seek to do given their personal limitations, can they then attempt to answer such questions as posed on this thread.

Galen Cawley writes: 

I have found that piecemeal exits work best based on three different mechanisms: first, your personal utility curve (this can and should be programmed), second, a bayesian updating of the premise of your original entry, and finally, pure market action (some sort of trailing stop). The first type of exit is based on your psychology but has the beauty of not being made in the heat of the moment. The second type is logically based on your methodology, and the last one lets the position run as long as the market dictates (which can certainly escape the logic of your particular system). Occasionally, I'll give in to discretion by throwing a virgin into the volcano, e.g. selling a one lot during a runaway market, or liquidating a small portion after persistent daydreams of fantastically extrapolated returns, knowing and hoping that I'm usually wrong.

anonymous writes: 

The problem with getting out of trade too early, is "you don't know what you had until it's gone". In other words, you fail to realize the true value of the trade, until you're out. In essence then, it comes down to a problem of "recognition". One must be able to identify and acknowledge if a trade is simply a random move, or if the market has crossed some threshold; and one has been presented with the opportunity to take full advantage of "the move". At times, the argument is logical, intuitive, and almost compelling. But, at other times, the process can defy logic, be counter-intuitive, and render one doubtful. Of course, with the exception of a post trade analysis, one never knows for certain if their assessment was correct; so one attempts to eliminate bias and doubt, and reduces everything to past experience and probability.

Jim Davis writes: 

Are big winners really that rare? What’s
rare is holding long enough to capture the ‘big’. Of course, it’s
easy to hold everything you own as long as you don’t mind the many
backsliders from highs.

How many sold their beloved Bitcoin or Etherium at prices that today look like zero.

Jul

1

After a week of low volume two weeks ago, last week was highly volatile and erratic. It coincided with the advent of a new intern in the office. During the day, we don't talk much but as the market gyrates we try to quantify many different regularities. In the last 5 minutes of trading the market swung back to the lows before a holiday and a shortened day of trading before the first day of the month with gold, bonds at low, and the S&P who knows where. The moves raised a number of queries. And I realized that to a new intern and a outside observer it sounded very much like we were inmates in an insane asylum. It reminded me so much in retrospect of the idiot savant that the collab and I met at the baseball hall of fame who came up to us, and recited the batting averages of every player on every team from 50 years ago.

Anatoly Veltman writes:

I realize that one thing hasn't changed: institutions need to be invested. But other than that one thing, every other market make-up and mechanism has changed due to globalization, algos (especially HFT) and the incredible successful CBs experiment of 2010's with long-lasting zero-cost of all major currencies.

So that would mean to me that pre-2010s patterns are unreliable. And if one follows only a few years of pattern, then the problem lies with different placement within economic and election cycles, as well as most recent hacking waves. Which leads me to believe that the only constant is a CHANGE, and patterns that still CAN be relied on need constant adjusting of sorts…

In conclusion, I venture say that institutional investing has grabbed an oversize share (of course at the price of individual investing). Thus, given my introductory sentence, I have recently expected a Bull phase to last as long as it is - and then switch over to a lasting bear phase to wipe out 50-80% of the preceding gain. Now in that sense, not much change from 2007/2008 grand pattern - except for the exchange execution mechanics (with politicians dominating haphazard rule changes). So yes, lots of fun ahead for the intern.

Ralph Vince writes: 

The relentless move continues throughout the Summer, the majority waiting on the sidelines, assessing the virtues of each thumb, and the litany of those who should know better who all were looking for a top at various points up.

Yes, things are overvalued by most metrics. It's a bull market. That's how they go, have people forgotten this?

We've gone from a market of fear and disbelief, to merely one of fear now - a dangerous environment for weak stomachs as we have seen the past six weeks. The kind of market that wants to shake out those who are and have been aboard, and tempt those who aren't with a certain legerdemain only Mr. Market could do so as to get those who want to get aboard, unable to by crossing their feet and getting their weight going the wrong way.

Voir venir as mom would say.

anonymous writes: 

"Wait and see."

Anything to make us think it's no longer a bull market. Quick, volatile drops in speed and magnitude like we saw this past week, or long, slow, drawn-out affairs where new highs haven't been seen for months, yet still within the context of this bigger, overarching, fear-driven bull market.

Jun

18

 How much bad news was there last week with the market refusing to go down?

If 1 millionth as much good news came and the market didn't go up, every commentator would be saying the market is in the worst shape ever because no good news will budge it. But not the reverse.

There must be consternation and frowns at the marbled corridors of the Governors. They tried so hard to knock it down.

Reminds me of the Union Club on fifth avenue in the 1950s where the members sat at the windows looking down at fifth avenue and frowned at the women wearing mini skirts et al.

Ralph Vince writes: 

It reminds me of when I was an adolescent, and work was at Cleveland's food terminal, and the old kraut I worked for set starting time at 5 am sharp.

The endless ghetto lay between the job and my bed and the only way there was with my thumb. The jungle would always be hopping at that hour, kids out riding their bikes, etc. I would go through there like a ghost, and disregard any danger, trying only to be ready for it.

This market is identical, and calls for absolutely the same, exact, unflinching mindset. The same exact thing.

May

29

 I am asked by a son for tips on how to be a good trader. Here's a good start. Ask yourself be4 you trade:

1. Have you tested it?

2. Is it already in market?

3. Are you getting in over your head?

4. Are you trying to make money the same way many did yesterday?

5. Are you shorting stocks and going against the drift?

6. Are big things happening in related markets that could domino over?

7. Is there much fear in the market before the next announcement thereby giving you an opportunity to come in before it?

8. Are you paying too much implicitly in vig, rake in terms of how big a profit you are going for relative to your vig, rake bid asked spread?

9. Are you playing someone else's game, like trying to make a 1/10 of 1% profit on your trade in the next hour while high frequency taking 100 mill a day?

10. Is something bad e.g. sickness happening in your family that will prevent you from proper decision making?

11. Can you afford to lose?

12. Did you stop to test, consider all these things before you traded or did you just make a reflex kind of trade?

13. Is liquidity going to be reduced shortly so you're playing mah jong against a group of experts with little chance of beating them?

14. Do you have a backup position with most of your assets long stocks?

15. Have you had sex recently good or bad and is it influencing your decision the wrong way?

What would you add or subtract from this?

Ralph Vince comments:

Along the lines of 11, can you handle the worst thing that can happen (and along the lines of 13, this event should include the notion that there will be no liquidity, which will haunt you in the quietest moment of the night.)

I would also add: "What's your time horizon on all of this–on this trade and how many of these?" Ad infinitum is an answer here, but there should be a reason for that answer, not as a default.

Once both of these two questions are answered, unequivocally and clearly, a trader can address the most important question, in my opinion, which answers the "how much," but is approached by answering the pinnacle of questions all traders must answer, which is "what are you trying to accomplish within this given time frame?".

Jeff Watson writes: 

Do you really know and understand the game being played that you are trying to join? Are you aware that there are always games within games that might have a totally different, secret, set of rules?

Are you under the delusion that grains are "easier" because they seem to move slower and with less violence than the metals, oil, spus, etc?

Are you in good shape financially and physically?

Have you developed an aversion to losing money?

anonymous writes: 

Focus on process over outcome. It's not whether you make the shot, but whether it was a good decision to take the shot.

May

6

 2 posts for plenty of thought:

"Did you know? The world population growth rate peaked in 1962/63 and has been falling to about half of what it was since then"

Children per woman, total fertility rate, 1955-2015

Ralph Vince writes: 

Who knows how quickly we will populate Mars, and how soon this will begin (these things come on much faster than anyone anticipates).

I posit tht population growth is a function of bounds, both economically, culturally, and geographically. When the hottest thing for a young person to do is move to Mars and start life, given the seemingly boundless opportunity out there, the picture will change dramatically, and these ancestors of ours will look back at such articles with amazement and a touch of humor.

Apr

25

Aka how to get in the news:

"Elliott Wave investor Robert Prechter says a Depression-like shock is coming"

Stef Estebiza says: 

"As I've explained here, Elliott Wave theory says public sentiment and mass psychology move in five waves within a primary trend, and three waves in a counter-trend."

Maybe the book is interesting, but Robert Prechter was very wrong in the past with his elliot theory. After the recent change that has seen rivers of money only for some, rates to zero and the central banks traders on the markets, I doubt that we can talk about investors, psychology and the public. The only mover of the market is the orchestrated national deficit > QE whatever it takes… 

Ralph Vince writes: 

Prechter himself is but a symptom of what is going on– this all-over asive,"low frequency," fear, as I have been talking about, and that is it biggest driver of prices here. This is not the "breath-stuck-in-your throat, 2008 kind of fear." Rather, a constant low frequency, ubiquitous background fear pervading everything.

Fear not only sells but it is both contagious, and it is relative. It has become so pandemic that we don't recognize how fear-motivated our actions are (and I contend it certainly IS manifest in the markets). Look at the rise on gun sales, the blue glove swarms, bike helmets, bottled water, political reactions (much of the "green movement" itself is fear-motivated), fear of losing people's jobs, credibility, etc.

Finally, fear, like volatility itself, though it can come on very quickly, dissipates slowly. This is WHY bull markets persist, and why the majority are never aboard early on succumbing to the contagion of fear.

This is the bass line guys, the bass line to what's goin' on in the world and hence capital markets as well, and if you listen to just the base you'll move just fine.

Russ Sears writes: 

It is with trepidation that I will disagree with both Larry and Ralph, but I must in principal. The "opposite" of optimism from belief in the individuals working together is not technical analysis, nor is it fear…those are but symptoms of the opposite of the force of human progress and wealth creation. No, the opposite is betrayal of the individual. It is when the markets thought were working for the good of their "team", turn out to be for example taking huge loans and buying lumber land in Canada, or helping individuals fill out mortgage loans pretending that these are same standards as the past, or perhaps at a higher level some branch of government that is to be "by the people for the people" is scamming the people or outright demanding more from the people. Yes there are the dot com bubbles and the East India Tea bubbles but these are not caused by over optimism of the human spirit, rather it is from a clear understanding the enormous progress in wealth creation is about to be made… which do occur… but just not how when or where the market was expecting.  

Apr

20

 QE is over, it's back to the same old money creation we've had for centuries — an idea which has actually levered the resourceful potential of man.

Your going to see a car drive in front of you as you stand on the curb, and it will be sans driver.

Your going to see a man in a drone, in a park, lift off the ground.

These things are here, and united airlines isn't in the game. Or any of the others for that matter.

And faster than you can gobble un croque monsieur, they will collide in a 3d, computer controlled "roadway," obsoleting cars and every minor roadway, parking lot and driveway,and traffic jams will be viewed as lice infestations of the past.

But it will take some forward-thinking and planning here. Wasting a trillion-dollar is rebuilding these roads, airports, etc. on an infrastructure plan, is not the equivalent social investment as building the interstate system in the 19 fifties was. This would be a trillion dollar simply to maintain that which we currently have, when the future is about to take an Abrupt turn. That's where we are to be funding things with public monies, as that's where the enormous multiplier in terms of social benefit derived from money spent will be seen much as it was when we built the interstate system originally. To spend that money an existing infrastructure which will soon become obsolete, is equivalent to porkulus, on a diluted scale.

Victor Niederhoffer writes:

Mr. Vince makes a subtle point that I think he means. The most valuable thing in the world is a person. They can make tremendous contributions that all can benefit from. Julian Simon is very good on providing statistics for this. And it is no accident that standards of living are so highly correlated coterminously with population like during the industrial revolution. As to which causes the the other, it's mute.

Ralph Vince adds: 

It is a bad bet to bet against the likes of Jonas Salk. But for every Jonas Salk, how many others of equal insight go untapped throughout their lives?

The population of the earth in 1960, five years after his vaccine was announced, was about 3 billion. It is now 250% of that. For every Jonas Salk of 1960, we would expect 2 1/2 of them….and for every untapped Jonas Salk….2 1/2 of those as well.

And virtually every varlet and their harlot(s) who are not the equivalent of Salk posses some sort of potential to add to the cumulative progress.

Why would you bet against the resourcefulness of man? All bear markets, since the invention of the hand axe, have been short-lived compared to their bullish counterparts, and every single market top over those millennia have been exceeded (save for 3/1/2017…..yet).

To bet against the resourcefulness of man is silly, ultimately futile, and it requires one to time things perfectly. It is a far easier proposition to load up long as when things are selling off, and manage your powder to see it through to the next new highs.

David Lillienfeld writes: 

Two thoughts:

1. There's lots of infrastructure spending to be done to support some of the newer technologies to which you refer. And it's beyond broadband. Just air traffic control alone could use a shot in the arm (well, more actually). There's also the reality that people like to physically move. And the way the society is configured, tire's no doubt that will figure out ways to do so as efficiently as they can within whatever infrastructure exists. Until motivations like sex or control disappear (which seems unlikely in the life span most of us associate with being on the face of the good earth), keeping the existing infrastructure going will also have its benefits. The interest in sex, for instance, isn't disappearing anytime soon, especially among those in their teens, who will do just about anything to get away from the clutches, eyes and ears, of their parents. That takes infrastructure.

2. I recall at the 1964 World's Fair, there was the ATT building in which there were picture phones with an assurance that certainly within 20 years, they would be omnipresent. Didn't seem to work that way. Ditto GM and the future of transportation. I've heard about the new technologies coming into use for more than 5 decades. Yes, the technologies do make it into use. But it takes a lot longer than anyone at first thought likely. Remember commercial supersonic aviation? I don't think it was ever fiscally viable. The story of how RCA came to dominate wireless communications is a case in point. Eventually, the new technology did triumph, but it took longer than anyone had considered likely.

Plank's law comes into play and is part of the explanation, inertia and lack of understanding of the potential of the new technology is another. Remember Amazon in the 1990s when it was starting to hit at sales at Books a Million and the other retail outlets? It still took 15 years for Amazon to practice its hegemony—which represented the triumph of the net over physical bricks and mortar. And even now, Amazon is putting up bricks and mortar. Isn't the internet supposed to displace such things?

anonymous writes: 

Sure trucks and jumbos full-o-junk and folks crossing oceans will still be needed.

But technology gets here in less than half the time anyone ever thinks it will.

And if we're going to spend 1-2 trillion on infrastructure, rebuilding existing assets will not pay off the way they paid off when they were first built; that's only a little better than giving it away to teacher's unions and far-lefty organizations. The electronic infrastructure for tomorrow's transportation would be a much wiser investment than rebuilding existing infrastructure.

J.T. Holley writes: 

Bruce's "Glory Days" lyrics give a beginning of explaining why throwing money at fixing all the decrepit bridges in Pittsburgh is a bad idea.

Now I think I'm going down to the well tonight
I'm going to drink to I get my fill
And when I get old I hope I don't sit around thinking about it
But I probably will
Yeah, just sitting back trying to recapture
A little of the glory of, well time slips away
And leaves you with nothing mister but
Boring stories of glory days

That is all that throwing 1 trillion is going to produce. Eventually just "boring stories". It's just to pacify the unions, steel, and cement industries. The Rust Belt vote will be needed in the future. Hats the only forward looking that is taking place.

Apr

19

It is a bad bet to bet against the likes of Jonas Salk. But for every Jonas Salk, how many others of equal insight go untapped throughout their lives?

The population of the earth in 1960, five years after his vaccine was announced, was about 3 billion. It is now 250% of that. For every Jonas Salk of 1960, we would expect 2 1/2 of them….and for every untapped Jonas Salk….2 1/2 of those as well.

And virtually every varlet and their harlot(s) who are not the equivalent of Salk posses some sort of potential to add to the cumulative progress.

Why would you bet against the resourcefulness of man? All bear markets, since the invention of the hand axe, have been short-lived compared to their bullish counterparts, and every single market top over those millennia have been exceeded (save for 3/1/2017…..yet).

To bet against the resourcefulness of man is silly, ultimately futile, and it requires one to time things perfectly. It is a far easier proposition to load up long as when things are selling off, and manage your powder to see it through to the next new highs.

Apr

4

 Europe and emerging markets are the favorite topic of all in the coming months. Osmotic pressure?

Ralph Vince writes: 

But Stef, why screw around with those markets when the US is in a monster bull market — bigger than anything seen in over 50 years, or maybe in modern times? The US and the earth may have de-linked, and the US is, at least, a sure thing. We are in SUCH a raging bull market it's silly. This may be MORE than 1982, and the reason I am certain of it is because EVERYONE is SO RISK AVERSE. A planet of absolute weenies now.

I had some stooge tell me the other night, as I went to our myself a glass of tap water from the faucet of a friends condo here, "I only drink distilled water." Are you f***ing kidding me?

A bike helmet society. Since 9/11 and the crash, everyone is insanely risk averse. "The Presidents first priority is to keep Americans safe!" has been a common theme. That appears NOWHERE in the US Constitution btw, and I'm certain its framers - who were individually certified badasses, would laugh at such a statement. If you step outside of the day, if you transcend the era we are in and look at the bigger picture, it;s clear that never have so many people, been so motivated by fear in my lifetime. Maybe in 1938/9 people in Europe were, maybe in the Spring of 387 they were, Do you think this is not manifesting in the markets? Does anyone think that fear has dispersed yet?

Youth is steeped in it, and now, must be conditioned, only trough painful, firsthand experience to NOT be so risk-averse. The markets have never accommodated everyone, why would it be different this time around? Yes, there will be fits and starts and sputters, but the next 20 years are up and up and up and it doesn't matter what happens politically–this is bigger than politics, but is the market's reaction to one-sided human emotion.

J.T Holley writes: 

I completely agree with you Ralph. Having been a Father of three, Athletic Coach, and Boy Scout Leader I can tell you that there are two generations of folks that would rather be risk averse and maintain a lower standard deviation with their lives than take even the surest of bet!

The only other generation that might have had more fear would be that of the 1950's after WWII. That generation or slice of generation were the ones who did bombshelter drills, got under desks at school, and were spoon fed propaganda. They feared total nuclear annihilation. That eventually faded.

Ralph Vince writes: 

We're finally seeing what we "feared" for a long time, that all this inflating would result in a giant asset-bubble. This is now manifesting, but nowhere near to the degree it would to be commensurate with the size of the inflating that occurred.

If people are risk averse, the late-boomers, people my age, mid 50s to early 60s. simply want to be able to hobble into "retirement." They are not taking any risks. The younger set has been programmed NOT to seek risks. People of wealth are and have been hunkered down for a long time. Bank prop desks are dissolved…so very few are taking serious risks in the equity of assets–an endeavor the vast majority of people think is about finished for a variety of weak, small minded reasons.

Kim Zussman writes: 

Ralph I admire your optimistic enthusiasm. So much, in fact, I would like to adopt you as my brother (along with a select group of spec listers)!

I somewhat get the point about pervasive fear. But as a devil's advocate (and I'm not particularly bearish):

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum
2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order
3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode
4. Protectionism and withdrawal from international trade might not be good for many company's earnings
5. To the extent one cares about valuation, stocks aren't particularly cheap here
6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"
7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them?

You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

Would you suggest all-in, or scale-in on dips?

Ralph Vince responds: 

Kim, my response to your points is below: 

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum

This is already baked into the market.

2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order

Very likely they will do all they can to obturate things. But as I said, this saturnine, fearful sentiment is what drives markets, and it;s the same mechanism we saw, for the same reasons as in 09. Except the fear - at a deep and cultural level, has remained as an ocean of cash has been pumped into the system — still out there. The ascent of Trump merely gasoline on this deep, prolonged, over-arching cultural shpilkes.

3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode

At the short end. Mr market is telling us a differetn story at hte long end, where the free market for credit occurs. I'm looking for a 1 big handle on the thirty within a year.

4. Protectionism and withdrawal from international trade might not be good for many company's earnings

You're talking a zero sum game by definition. It may not be good for some, but people will still buy light bulbs.

5. To the extent one cares about valuation, stocks aren't particularly cheap here.

They aren't expensive either, the relationship being (earnings ^2 ) / ln(long rates). By this (linear) measure they ARE quite failry priced indeed, and at the 1 big handle on the denominator, well….

6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"

And where SHOULD Vix be? Is the pre-November historical level……..is that same level where it should be? Everyone for months has been looking for Vix to spike. It will, of course, at SOME point,as stocks too will correct beyond a few percentage points, at SOME point.

As an aside — perhaps looking at outright vix levels is deceiving us, just as looking at absolute interest rate levels deceives us. Perhaps vix, like interest rates, should be looked at for the character of its term structure, rather than absolute levels? (and further, vix exhibits the character, ie.e the manner in which it moves, which is very similar to monthly unemployment — not that they move together, they do not, but they move with similar personality)

7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them? We haven't seen Dr. Greed enter the picture yet. How many guys do you know well past retirement who love to take a spec on things? Boomers aren't going to leave this game en masse — where will they get a return?


You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

We have similar fear today, and, just like 08-9, it is deep and culturally ingrained, far beyond the mere fear of capital market corrections. The difference is we've been further steeped in it, and the markets have continued higher, stoking hte fear further. By every metric, gun sales, political banter (on all sides, favoring "safety!") etc., we are a culture in a sort of tenebrous, deep fear, which has persisted well beyond a decade and a half now — I contend it is so deep and so ingrained that we aren;t even aware of it.

Would you suggest all-in, or scale-in on dips?

Timing dips is for dips who think they can. Why piddle when things are just going to keep making new all-time highs? Just buy and buy and keep buying. Come up with more money and buy some more. Add and add and ultimately cause yourself to have a bigger stake in it which has naturally averaged in. If you want you can protect it very cheaply for about 1-2% /year.

Mar

30

One sees that everything is topsy turvy with the service reform that repubs are now pointing to. Apparently the agrarian reformers have put a framework in place where a new plan must be revenue neutral or else it has to subject to whatever non-reconciliation is. To the layman that means it's a lot easier to get a revenue neutral plan in. Washington loves that because gov spending won't be decreased. But the fly in the ointment is that any proposal to reduce service rates will generate enormous increased revenues through growth and compliance and proper business activities rather than those designed to reduce payments to the service. Supposedly the "non partisan" budget office made the congress agree that there can't be dynamic scoring. So the Lafferian correlation between reductions in service rates and growth can't be taken into consideration. Thus, the whole thing has an improper foundation, a twisted acorn that must grow into a twisted oak. I've found that all things built on improper foundations eventually crumble.

Rocky Humbert writes: 

Since taking office, I count that to-date, Trump has eliminated over 90 government regulations; some of which are very significant and positive from an economic growth perspective (if one is inclined to view the cost/benefit ratio of such regulations as high).

Rocky wonders whether Vic has any hot water in his Connecticut manse. Why? Because he always seems to have a bucket of cold water at the ready.

Ralph Vince adds: 

And further to Rocky's point comma it is estimated that these regulations costing economy about to trillion dollars a year. That's one eighth of our economy. Cut that in half reduce half of these regulations and you see an immediate 6% bump in GDP. In my case I have spent over 150 hours in the last month simply wrestling with the regulations caused by Dodd-Frank. Those who oppose the president on the political scale to sew an ideological grounds but in the nuts and bolts world of trying to get anything done and America the regulations are stultifying.

That 6% bump in GDP is before any kind of multiplier is put on it. Can again go back and look at any of the great social programs have been started and worked successfully in America from Social Security to Medicare to Medicaid they all coincide with double-digit GDP growth, something I personally and looking for between now and January of 2019. Taking a machete to the Jungle of regulations anyone trying to start or run a business or even so much as take out a mortgage has to contend with, as the numbers illustrate goes a long way towards getting his towards that double-digit growth, and possibly then some type of healthcare plan in America. People have been flying to this putting the cart before the horse.

Kim Zussman shares the article: 

"How to Engineer a Trump Boom"

Cut taxes, deregulate, build roads, bridges and airports—and don't start a 1930-style trade war.

By ROBERT J. BARRO

Stefan Jovanovich writes: 

Mr. Barro is looking through the large end of the historical telescope. Trade wars only occur when countries are already having shooting wars; they begin and end when one country loses all its money. The 20th century's "trade war" began in 1914 and only ended in 1945.

What "explains" the 1920s is that the one country in the world that had any money - the United States - decided that it could afford to accept other countries' central banks' valuations of their domestic currencies. What explains the 1930s is that Herbert Hoover and Franklin Roosevelt both agreed that the way to solve the collapse of the Wall Street credit bubble was for the U.S. to join the rest of the civilized world and undertake its own default on its domestic currency.

When economists now say that countries can inflate their way out of their debts, they are referring to the magic of the defaults of nearly all the international loans issued after the Great War. No one got paid back because the valuations accepted for the initial loans (mostly from the U.S.) were as fictional as the current Venezuelan exchange rate; and the Americans decided that having the U.S. Treasury own all its citizens' money was the ideal way to revive American credit exchanges.

Academically trained economists insist on treating political economy as a science, yet they believe, without evidence, that international trade was "free" after World War I. They see a world without quotas, currency controls and imperial preferences after 1918 as a kind of mystic vision that is true regardless of any actual facts. They believe this version of history with even more fervor than LDS believe in the story of Joseph Smith and the golden plates. The Mormons, God Bless Them, consider their gospel a matter of faith; Professor Barro and his colleagues must pretend that it is all somehow Reed Smoot's fault.

Mar

13

The article "Seeking the Latest Fear Trade" on p. B2 of the weekend WSJ describes the efforts of volatility pioneer NYU Stern School Prof. Menachem Brenner to derive an actionable gauge of ambiguity, to complement VIX.

Ralph Vince writes: 

Fascinating stuff. I am searching for a cached copy. Think of the rich complexity of a listed product, the spreads and just mere sentiment expressions something like a listed product on such a creature would afford.

Mar

4

 Qiji Jim Zhu [bibliography ] has very pronounced, chiseled facial features as is often the case with men of Northern Chinese genetics, features that further seem to augment the aggressive way he assails the blackboard. He is physically fit for a man 20 years his junior as he attacks the chalkboard in his office to his audience of another gifted mathematician and myself, who has no business in their company, only the good sense to know it.

It is an explosion, a seemingly violent yet joyous expression, and with both men, this seems to be the case even though I think it is lost on them. I witness in awe, trying to absorb and understand the math as it is "carved" into the board, trying desperately to keep up.

Zhu attacks the board, aggressively, pausing not even to take a breath, his voice losing the race with the symbols he agressively carves into the blackboard with harsh, audible slashes and bangs. He begins to run out of blackboard space, and without skipping a beat in the slashing and banging of his chalked hand and accompanying voice, begins to erase ahead of where the chalk is going with his bare other hand. The expression visually, audibly, is as aggressive as any entirely serious Chinese gambler visiting Vegas, and he finishes abruptly, throwing his shoulders and head back as his hands come forward as he turns to us now smiling, the rapture of his expression only now evident to us.

Stani Maier-Paape [bibliography ] stands, walks toward the board, chalk in hand, rolling his head about his neck as he approaches, exactly as a very relaxed boxer approaches his opponent at the start of a new round, tapping his gloves as he rolls his head, the way such a boxer might do before coming into range of his opponent. He is in no hurry whatsoever, as though time no longer exists - he is lost in the moment, in his mathematical expression, and I notice his near-accent-less English now returns to a very German-sounding accent, which the man caught up entirely in what he is focused on is seemingly oblivious to.

He stops between each line, each phrasing, turns to his small audience and makes certain they are with him (me, in particular), in stark contrast to his Chinese counterpart, both men recognized from childhood in their respective countries as prodigies of mathematics, their contrast very evident and enigmatic to me.

I had the pleasure of being invited to meet with these two at Western Michigan University late this past week, and it was difficult for me to focus on the mathematics — as it is meeting any great man, where you are lost absorbing their persona, inadvertently, at the expense of trying to understand their expression of their mastery of their field.

As with most things in life, I found myself wondering what I was doing there, and "Hey, I gotta find a way to stay here," overwhelmed by the joy in their work, and how just being in the vicinity of that joy, is a drug in its own right. I felt like I was at "Baseball camp," where those of pedestrian existence get to spend a few days on the field with the big leaguers.

Feb

28

 Just as "The Big Short," debuted one month before the low last January, (the moral lost on almost all who saw it was that the story wasn't about anyone who caught the short side of the '08 crash, a drop of about 7,700 dow points, or about 56%, but the big long that followed– the dow rising 14,370 + points since then, or a gain of about 222% of what the drop was) I saw an ad on television featuring a commedienne I find highly offensive touting pastel-colored jeans.

It's very interesting to begin seeing these cultural reflections of bull market.

It will be very interesting to see if a musical wins best picture further buttressing this. And that's something I plan to learn in the morning.

Musicals are more of a bull market phenomena, and certainly La La Land is the antithesis of the pervasive, dark-themed movies of the recent past.

Feb

13

Amazing consonance of about 150 stock markets on my Bloomberg screen, all but Kenya is up with the median being about 5%. With the wealth of so many tied to stock markets in one way or another, many people must be feeling much happier and secure than in previous times.

Ralph Vince writes: 

The backdrop, at least for US equities, is 1982 - on steroids. A runaway market in its nascent stages (I see no end in sight from my indicators–in fact, my main intermediate term indicator, for the foreseeable several weeks, is still overSOLD).

99% of everyone I speak to or hear is looking for a top, a pullback, increased volatility–yet for those fully invested, it's been ripe for establishing defense–inexpensive hedges, etc…

The backdrop is certainly not one that could be characterized as "frothy." Yes, the decennial pattern of years ending in 7 would call for some type of serious selloff along the road here this year. If so, I don't see it on my radar screen yet. Frankly, if someone is in this business, and not very seriously long and have been throughout the past 12 months, they have no business in this business.

Feb

13

A friend asked me, "What in your opinion is the thing or things that makes markets rise upwards the most?"

I think it's a pretty straightforward answer, and all three factors have shown high correlations, at least for the last 5,000 years, to the price of ownership of any private property:

Population
x Change in man's upward progress
x Available stores of wealth (the aggregate amount of money)

The value of equities expressed as a line with respect to time, ever increasing as the factors comprising it ever-increase, about which the value at the moment fluctuates relatively mildly about.

Jan

30

While everyone is in a lathered-up blather about executive orders and screeching, we gotta keep our eyes on the ball. I for one can't get sucked up into political noise when there's money to be made.

Nearly everyone I speak to is looking for three things:

1. A pullback in equities.
2. Interest rates have bottomed and will now approach more historically normal levels.
3. Volatility is bound to increase in the coming months and perhaps years.

And the degree of which I am hearing this makes me quite certain none of these are in the cards. Tomorrow may be a great day to sell equities, shorter term, on any strength. The month of February should be, by my reasoning, a gentle, sane chop with an upward bias, in a bigger, grander, continued bull market. As far as rates go–I don't know, but I am surprised at the lopsidedness of sentiment regarding #2, above. But as the late kid from another (classier, as it were!) suburb of Cleveland used to say, "Don't fight the Fed."

Jan

9

VIX opens Monday at new lows; but chart seems VERY BULLISH. What say you?

Ralph Vince responds: 

I'm looking at the yield curve in constant maturity treasuries, the 10 year duration on out, which tells the tale of the market's health — it's currently very bullish shape. When the 20 yr yield > 30 yr yield or a big concave point at about the 20 year duration, I'll get worried.

Volume hasn't given us a short term sell here yet….

Three week plurality of NYSE Most actives has still not gotten oversold………..since way before the election.

Quality spreads in the credit markets starting to give it up, very bullish for equities, and the shape the big indexes on the charts is verrrrrrrrrrry.

Vix may see little spikes here and there, but I think this [stock market]  is a runaway train, and I think it's going to blow everyone apart who gets in it's way for a while. This is the perfect backdrop, everyone trying to call a top, everyone THINKING sentiment is too bullish, people's thinking all occluded from politics and the dyspepsia therefrom.

This is a runaway train.

Dec

21

 I thought this was a good article:

"Ray Dalio says read Ayn Rand to understand Trump's economics. Here's what that means"

Jeff Watson writes: 

Ayn Rand's "Virtue of Selfishness," contains many nuggets of wisdom IMO. It has roughly influenced the blueprint and road map of my life. A big lesson it taught me, among many other things, was that it is good to put myself first. Here's a copy of it.

Ralph Vince writes: 

I find her books (and I have not read "Virtue of Selfishness") hollow. It speaks of the effects and actions, I find, without the driving force, the motivation (save, except for vague notions of "profit," or "doing something worthwhile," or good, or improving things). It could be that I've missed those things in what of hers I have read. I think, however, it may be because it is an interpretation done by a woman, Rand herself.

By this I mean the following. It is vital that a man find his over-arching purpose in life, and find it before he is thirty, the single, solitary purpose that is the reason he lives his life, his telos.

Yes, taking care of family and other "obligations," and "responsibilities," one must live up to in life must be addressed, but aside from that he must find what he is here to do. His number one priority as a man is to find his purpose in life, his destiny, and pursue it with all he has outside of his responsibilities and obligations. (And it is on this point that modern education fails males, and it is on this point that inner city youths are left, abandoned to life).

Until a man has found this out, he should not commit to something, a job, a marriage, a city, etc. A man's purpose must be something he is crazy passionate about. Yes, a man can know success and/or monetary gain without ever figuring this out, yet it is the discovery of his telos that is where he draws his energy, and his joie de vivre, absent which, he is merely existing, merely a slave. It provides something he can do for the rest of his life, and make a living at. It provides something he would do if he were "retired." This is the ultimate form of success – getting paid to do what he loves to do and never having it feel like work. (This is why people so envy pro athletes, because they have found this at a young age). A man needs this to be happy.

Finding what he is meant to do with his life makes him powerful.

It is my belief women follow an entirely different existential path than this. I do not claim to know what that is, I am merely an outside observer, but it is a fallacy perpetuated by an ideology devoid of terrestrial and important motivations to assume genders are the same or even mirror images of each other - there is an inexplicable mystery involved that an outsider can never know. Rand was such an outsider, and as deeply as her writings resonate on the topics she wrote of, I say they are hollow as they seem to perceive what I have pointed to here as an outsider, which, to the world of males she necessarily was (and, in fairness, her works could never have been written by a man, else they would have, and that provides a unique perspective and beauty to hers).

Dec

8

 We must ascribe to President Trump that which is his contribution and that which is not. Employment has been accelerating the past two months, the yield curve has steepened, and warnings (on the s&p500) are up 1.6% since late Aug.

Is that Trump or Obama who deserves credit. Nevertheless, 50 bln is 30 bps bump in God, before accounting for the fact that is is 100 bln effect (it is akin to an export towards GDP, while 50 bln in goods need not be shipped), 50,000 jobs, and the multiplier effect on the above. So let's call it a solid 30 bps to GDP, not a bad day's work for any President.

I measure employment from eight different, what I believe to be non-redundant sources, so as to flesh out a fuller, clearer picture than if I relied on only the monthly number, or weekly jobless, though I do incorporate those 2 as part of the 8. 

I DO show employment not only picking up, but accelerating to the upside now, since late August (along with earnings, steepening 90day-30yr Fed curve) and the other "perfect storm," conditions I saw in pace for the beginning of the bull run of the century, which I have every reason to believe, barring human craziness, we are now in the very early throes of (and as I said on another list, a simple amex floor p&f chart gives a dow minimum count on the current run to 20,500). But I think this is the beginning of a multi-decade bull run that will go far beyond what anyone imagines - in equities in gdp, in employment, and in lower rates (yes, rates continuing the relentless, long-term decline amid skyrocketing asset prices).

None of this can be attributed to Trump, the conditions existed before Trump, regardless of who was elected (and I don't really care who is elected, I care about making money). However, if we dissect the numbers of what is happening, as I pointed out, something like the Softbank announcement yesterday is worth 30-60 bps bump in GDP — that would be attributable to Trump. A 15% corp tax rate, and the 300-600 billion that would bring in (read about 1.75-3.5 % bump in GDP) not to mention the multiplier effect, jobs created, etc.

I think political ideology can cloud our thinking and obfuscate opportunity oftentimes. I didn't care for Reagan (1986 amnesty, creating the atrocity we now contend with today, doing away with privacy in banking, bearer bonds, etc, war on drugs, violating checks and balances with Nicaragua, and worst of all, in my book, not putting the total kibosh on the Chrysler bailout, which I said then was a very bad precedent, proven in 08-09) and there are things about Trump I don't like, but all politics aside, this is 1982 on steroids now.

Nov

28

 Readers of the Dailyspec who follow the trend should note the French presidential primary result:

From the WSJ:

Francois Fillion, a former prime minister who compares himself to Ronald Reagan and Margaret Thatcher, resoundingly defeated Bordeaux Mayor Alain Juppe in the runoff [election] primary Sunday, garnering 66.5% of votes.

Just two weeks ago, polls had shown Juppe, a centrist with bipartisan appeal with a comfortable lead.

Fool me once. Shame on you. Fool me twice. Shame on me.  Fool me three times, shame on the pollsters and media.

Scott Brooks writes: 

The pendulum is swinging hard away from the leftists.

Soon the non-leftists will screw things up and it will swing the other way.

The left (including the MSM) are like cockroaches…..not even the nuclear bomb of Trump can wipe them out.

Ralph Vince writes: 

I think we're witnessing something bigger than a pendulum swinging — I think we're watching a major, glacial, cultural shift going on now, around the planet large than politics, where the last vestiges of the last century are being slowly self-lulled into extinction, and many other things going on.

I think the "ZIRP minus minus" world, the survival of the ending of easing, and other "perfect storm" factors are colliding to make for an explosive rise in asset values sans a corresponding rise in rates, that may persist for decades.

The greatest free-market transference of wealth in human history is already upon is for those willing to assume risk, to be followed by legions of those who must assume ever-greater risk. Never has there been such powerful feedback and driving mechanisms that have fallen into place.

And as I've said here, I think most people are on the wrong side of this, which further buttresses the case. As I mentioned yesterday, the "Snowflake" generation (who I regard as the new "greatest generation") are modern-day Spartans of productivity, trained in it from birth. I have infiltrated their camps, I have gone in and worked with them for months at a time, wanting to learn this-or-that (and getting paid to o it) telling myself that when I leave, I leave knowing what they know (oh, yes indeed this coerced humility from me!) and I walked out the doors with heir brains in mason jars, amazed at their work ethic, embarrassed by my own in comparison. Every preceding generation had "no such thing as dumb questions," but theirs.

What an engine, what a perfect storm, what a cultural cusp we are upon.

Nov

28

 The so-called "snowflake" generation works much harder than we boomers did, is more educated, lives in their parent's basements and doesn't know what 4% growth looks like. They are extremely efficient, and put the rest of us to shame. When this gets going, for real, it's really going to cook.

A little kindling from someone who knows how to do it now, a 15 corp tax rate and the great repatriation, among many other factors, many of which were going to occur regardless of who was elected (the ultra-strong market, having not clinched with the termination of QE, the sideways, bear-market-in-time since 2014, the ocean of money which must seek risk to meet liabilities, etc.) but Trump would be fastest on the (inevitable, ultimately) repatriation (which, even at current spending and receipts levels, puts us at a balanced budget for the year of the repatriation, the first time since 2000), and trade (which is directly accounted for in GDP. 170 billion less in annual balance of trade outflows is 1% added to GDP, before the multiplier effect, which is X-fold in addition to this!) and we are at the start of what will ultimately be the bull of our lifetime, and likely outlive many of us. So whereas the markets and economy were bound to perk up, I thought Trump could get it going posthaste. (Plus, I like what he said about women.)

The snowflakes deserve a rocking economy, and will be fueling it.

Oct

31

 This is a paper by Victor Haghani of LTCM fame on bet sizing observing and analysing how people place bets on a coin flip that is biased to come up heads 60% of the time.

Ralph Vince writes:

It's a very interesting paper, and to many might be surprising. A couple of comments:
1. It assumes someone's criterion in wagering on this is to maximize what someone makes. This is certainly not the case in capital markets, where (the rather nebulous) risk-adjusted return is king, specfically: "Optimal F: Calculating the Expected Growth-Optimal Fraction for Discretely-Distributed Outcomes"

2. Even what the authors and Thorp himself claim are the amounts to wager so as to maximize expected gain, their answer is not quite aggressive enough! The amounts the refer to are asymptotic, as the number of trials ever-increases. The author himself points to a horizon of 300 plays in half an hour, and the actual optimal wager (which would, int hat time period, yield a greater return than the authors or Thorp point to) is slightly more aggressive, and can be determined from the above paper.

Not trying to toot my own horn (it needs no tooting, and besides, my horn will do a lot, but tooting it won't do) but the paper is inaccurate on these two points.

Jim Sogi writes:

Thank you for the interesting article. The other night at our band practice, the bass player's wife, who works at a public school, asked me if I was taking my money out of the market. She had heard a number of people were worried about the election and a market drop if either candidate was elected. I told her the market would probably go up, though it might jump around a bit. I thought that was interesting. Its an example of the public doing the wrong thing, for the wrong reasons. It reflects peoples fear about uncertainty about the election. It helps explain some of the market action recently. 

Rocky Humbert writes: 

Mr. Sogi's anecdote and conclusion is a textbook example of Confirmation Bias — which is the tendency to search for, interpret, favor and recall information in a way that confirms one's preexisting beliefs or hypotheses.

To wit: On what basis does Mr. Sogi conclude that the bass player's wife represents the "public" — as distinct from Mr. Sogi himself being the "public" ??!!

How the stock market will perform over the next 30 or 60 days has very little to do with the study of a coin that is heavily loaded to land on heads. At best, the stock market's performance over the next 30 days is only slightly better than 50:50. 

Alston Mabry writes: 

Just had to do a quick sim of their betting game.

Oct

24

 I am quite certain stocks lift off here, immediately, and the beneficiaries are those who are long before the election should she win. It's going to be very hard to step into it once it goes for most who aren't in beforehand. We're on the long road to 1% long rates and similar numbers for unemployment according to my calculations.

As for the election, Trump lived to fight another day when everyone reacted in seeming horror to what he said about accepting the election results. He was so pathetic at the last debate, and the spotlight shifted, to his fortune, as a result of his "horrifying(?)" statement. As Pat Buchanan, who bears the furrowed brow I recognize and expect of all those who have tortured by Jesuits, puts so poignantly in his most recent column:

"The establishment is horrified at the Donald's defiance because, deep within its soul, it fears that the people for whom Trump speaks no longer accept its political legitimacy or moral authority."

I don't think this election is a foregone conclusion or can be measured anymore than we can know what a jury's verdict will be at this point. As difficult to predict as the market may be, it is a much simpler calculus than this election.

Oct

24

Rate Hike?

The trend has been for lower rates since the early 80s. It is precisely the "zirp minus" world that is one of the factors (the biggest factor) that will drive things farther and longer than anyone dreams. This condition has persisted far longer than anyone ever expected, and as I;ve said before, all money must now seek risk - and that exists in equities, private and public, real estate and "wild things" (art, sports teams, etc).

The world has been soaked in cash, so much so that there is seemingly no demand for it, and the pensions hunger grows evermore desperate each year.

What is too high a PE when the alternative is a certain loss? The world has changed, profoundly, as a result of this, and I would speculate it may get even stranger. For example, to be long equities is to be short volatility, and vice versa, and that relationship too, is not as cast as the sun rising in the East. That relationship too could flip.

Adaptation is the first rule of survival. Look at the hedge fund industry.

Oct

17

 Regardless of who wins this election, this market is going to rip to the upside — and I can be quite certain of that without even looking at the numbers, just the very tentative nature of nearly everyone around it. I've smelled this dish cooking before, and so have a lot of folks on this site. I don't know who is going to win this, but I do know that a 500 bln stop (not even flip) in the hemorrhage of balance of payments translates into an instant 3% GDP growth, and the multiplier effect on that puts us at 1965 growth, or even Truman-era growth. I was fortunate, in the 1980s and latter half of the 90s, anyone who showed up on time with their shoes on did pretty well. I had some lucky breaks too, which didn't hurt (and, as I have said repeatedly, and bears repetition for no one's sake other than my own perspective — "Anything that I may have has been given to me.").

But nothing has gone anywhere since the Spring of 2001. It would be wonderful to see growth in double digits, or just robust, 80s-90s style for the morass of all these millennials. People teasingly refer to them as "Snowflakes," but I have proactively and of my own volition gone out of my way in the past since 2007 to get into their heads, to work alongside them — not your typical snowflakes but snowflakes of all varieties. For all the negatives said about these kids (which I do not disagree with!), they are a much harder working, industrious, adaptable and far more pleasant gang than we boomers were. And for exactly them, I hope they get a break here and get the the change they deserve, and the economic growth they can use.

Stefan Martinek writes: 

Ralph,

The whole 2014, maybe the first part of 2015, you mentioned multiple times the issue of liquidity, the risk of a huge crash, structural liquidity problems, ETFs, etc. Do you consider all that is over? I always thought that the trend in equities (from 2009) will take some time to reverse, that there will be some chopping on the top before the next up move. I never tested this, but the chopping for another 1-2 years would look proportional, beautiful, expected… Of course growth will resume at some point. I thought that maybe market needs to take back some easy money generated in the last decade before going forward.

Jack Tierney, the President of the Old Speculator's Club writes in: 

A few observations on this thread.

First, perhaps because of its nature, Dailyspec tends to look for the cause of many social phenomena in financial terms. In our discussions, Mr. Haave suggested "that while the Southern states get more benefits those benefits go predominantly to the minority that votes democratic." Mr. Aiken's thoughts illustrate exactly why: "NY and IL are 'red states' outside of NYC and Chicago, respectively…" I can't speak for NY, but "ethnic demographics" are the key driver Big D majorities in IL…I have no idea how to quantify, or define, the effect of "cultural indices."

Mr. Hauser added a vital insight in suggesting that "many elderly move South in their retirement years" and, by extension, while their benefits add to the states' totals, it does not necessarily translate into democrat votes. I am one of those "expats" and can say with some certainty that we have had a marginal impact.

But several very important issues are either overlooked or avoided to explain why these states remain in the red column. First, and most important, many in the current (and, more than likely, continual regime) have quite boldly and heavy handedly attacked the religious foundations of many individuals in these states…certainly enough to swing the vote.

Second, gun control is no minor issue. Its rare to find a resident in my part of the state who doesn't own both a shotgun and a deer rifle…their purposes, though, are concentrated on bringing down consumable game and/or eliminating non-human varmints. Though many own pistols, their numbers are dwarfed by the many in our larger cities who use them for quite different purposes.

Third is education or, more specifically, the make-up of the curriculum and the content of the mandated text books. Many of today's parents and grandparents are now, after a significant amount of published and broadcast news, aware that they have received a less than adequate education. When school prayer was outlawed they were upset, but, over time, grudgingly came to accept it. However, when the study of Islam was made part of required courses, things became (and remain) a point of relentless debate.

Other points of contention which aren't appreciated outside the immediate area, but which lead many to the red side of the spectrum are the "elite" dictates discouraging, eliminating, or outlawing the Confederate flag, tobacco farming, soft drinks, fried food, salt, and "dipping."

Individually, these may seem to be trivial matters and, in many cases, "settled issues." Big mistake. Taken together, these represent stark examples of big government going well beyond its mandate. It took the Tea Party to underscore this and galvanize the voters…not just here but in other states as well. The current Democrat platform offers them nothing of substance and can do nothing to alter this situation.

Will things change? Sure they will. Despite a growing number of home schoolers and charters, an overwhelming majority of young students remain classroom captives in a system that has essentially replaced much that shaped western civ with new age agitprop.

But there will always be a remnant and as surely as all grand socialist experiments fail, this, too, shall pass.

Andy Aiken responds: 

It's tricky to quantify in toto, but consider a simple variable: married vs. unmarried. There is a stark difference in party ID and voting behavior between the two subgroups, all else being equal.

Aug

29

 "Why can’t we see that we’re living in a golden age?: If you look at all the data, it’s clear there’s never been a better time to be alive" by Johan Norberg

Jeff Watson writes: 

There's huge money in doom and gloom.

Ralph Vince muses: 

A person should live each day of his life with the same mindset, the very same attitude of savor and gratitude for every minor thing, as if he got out of jail that morning.

Or, as the Old Frenchman himself would say, "If you have the same address as a thousand other guys, you don't have a lot going on."

Alston Mabry writes: 

Pessimism is a strategy. People who have learned, usually from childhood, that they cannot act on their most important impulses use pessimism as a way to devalue what they deeply believe they are not allowed to want.

Bill Rafter adds: 

Just a minute…

As we all know from trading, if you want to increase your profitability over time the most effective strategy is to limit losses. Possibly related to this is the result of several studies attesting that fear is a greater motivator than greed, buy a factor of 3 to 1. Furthermore, we all look at prices and know both instinctively and historically that those prices will not be constant over time. They may be higher or lower, but not the same. Thus, pessimism is historically justified, profit-saving and possibly life-saving.

But to want to trade these markets for profit, one also has to be optimistic, often excessively so in light of bad experiences. You need both.

Jim Sogi writes: 

Jeff is right. Television causes pessimism. Don't watch TV. I haven't had TV for 47 years. It's not only the content. It does something to the brain. It's harmful. 

Stefanie Harvey writes:

Exactly. Television, especially US news television, is the poster child for confirmation bias. 

anonymous writes: 

Many good reasons for worry exist. If you're not worried, you're not paying attention. All of the worries stem from something completely nobody talks about in polite company: population explosion. In 1804, the world's population was 1 billion. In 2012, it topped 7 billion. It's projected to reach 9 billion in 2042 — within my son's lifetime.

True, Paul Erlich got it wrong when he said we'd all starve by the end of the 1970s– but go back read his book. Then reflect on how much different life is.

All those people are unsettling policymakers, with these results (and they are what's secretly worrying us):

Unspoken Fear #1: War. Today's empire builders are intent on grabbing resources; nuclear weapons are in too many hands.

– China: rich and populous; thanks to the free-trade break we gave them in the 1970s, they've created a war machine and ready to go for our jugular.

– Islam: implacable and populous; we have spent trillions trying to establish a decent government, and the area keeps morphing into an empire that despises us and all we stand for; they want their old empire back, be it from Baghdad or Istanbul.

– North Korea: Our strategy is, "Let's all ignore that man in the corner, and maybe he'll quiet down."

– Russia: ruthless, and intent on restoring the empire of Rus.

Unspoken Fear #2: Dystopia.

– When people don't have honest work, nothing good can come of it. In America alone, 94 million people are out of the work force. We're not being honest about the impact of robots and artificial intelligence. It's this fear that gave Trump the nomination, not that he knows what to do with it.

Unspoken Fear #3: Central government that keeps growing.

– Confronted by the population explosion, the elites have decided that the masses must be controlled and pacified. This political philosophy shows up in the fear of liability for anything fun, in subsidies, in central banking. We see sledgehammer policy-making, from FDR to Obamacare.

– And the educated love it! Calls for authoritarianism are the norm among socialist youth, aging hipsters, authors and "educators" at all levels.

These memes and unspoken but rational fears show up in pop music, with its ugly pounding overamplified brutalist mindlessness; in contemporary academic music, with its screams and jaggedness; in art, with its sneering cynicism; in architecture, with its boxy Stalinist aesthetics.

It shows up in the piggishness of the powerful, with Hillary Clinton the prime example. The rich expect multiple homes in idyllic spots, bodyguards, private jets; the poor suffer in overbuilt, crowded, noisy, polluted cities.

I happen to be an optimist, and always see the glass as half-full. Please note I am not prescribing anything; for one thing, it's gone too far. Nor do I think that going to Mars will help.

Russ Sears writes: 

First, human super-cooperation is built on trust. To evolve as a group, a high percentage of that group must be trustworthy for the compounding effect of the prisoners dilemma to work. As the group grows too big, it becomes too easy for a individual to feign cooperation. Hence the need for creative destruction and for power being placed in the smallest sized group necessary. It has always been easy to look at the big groups and see the corruption and assume that they are in control of the long term future. But the truth is they are dinosaurs and will lose out to the small but wise group/ businesses that still operates at the human individual trust one another level and are quite hidden from the spotlight, because of size. But these time and time again raise the tide for all.

Second, personally, it is too easy to dwell on the jerks that simply can ruin it for everyone but that fall into everyone's life. They can ruin many nights even if as a rule I try to avoid them. A single jerk can derail my perspective and keep me up at nights and easily crush my spirits if I let them. I found the best antidote for me is to turn the tables if I start thinking of the jerks and think instead of those in everyone's life that have blessed them with love, grace and patience. I think of my Dad's second wife, caring for a dementia patient at home for 13 years and weeping tears of love on his passing, the coach that helped me, the friend that's always there, etc. I try not to let the jerks own my mind rather than those loving, lovely (my spouse), good and virtuous people in my life. This also goes with those news makers, politicians and on the dole.

Aug

17

 Based on the timing indicated, he must be significantly underwater at this time. That assumes he has not thrown in the towel by now: "Soros Doubles His Bet Against S&P 500 Index"

John Bollinger writes: 

The interesting question for me is: Why is he advertising this now?

Peter Tep writes: 

Good point, John.

Sounds like he is releasing the hounds, so to speak.

Did the same for his short Aussie dollar trade some years back and also his long gold position–get long, get loud.

Jeff Watson writes: 

The more important thing is, who cares what the Palindrome says he does. Whenever anyone who's purportedly a big player discloses his supposed position, I look at his motives with a big grain of salt.. People bluff in the markets as much as they bluff at final table of the WSOP. It's all a mind game, and while one should take in what the opponent says, keep in mind that their disclosure is not for your benefit and it could be a bluff. A good lesson is to look at announcements like this and try to find tells….they exist. Nobody ever discloses their position(real or fake) to the media to be altruistic and benevolent. The sad thing is that many people(retail investors, CNBC watchers etc) believe in the good will of the Palindrome and the Oracle to the small investor. Those same unknowing investors are the pilchards that are eaten by the sharks.

anonymous writes: 

"keep in mind that their disclosure is not for your benefit"

That is a key. Even if it is true it is still not for our benefit. For example "they" cover while "we are riding a growing loss waiting for the idea to play out. Our entry was their exit. The flexions/greats/insiders see angles we can't, if we listen regularly our account balances will be eaten. 

Petr Pinkasov writes: 

I struggle to see how in 2016 it's even intellectually sound to present Q as another 'dagger on the steering wheel'. It's hard to quantify the intellectual capital that investors are willing to pay 50x earnings. 

Alex Castaldo writes: 

Exactly. What is the Q ratio for AAPL, how many factories do they own and how much are those factories worth in the marketplace? (Rhetorical question). The Q Ratio is a statistic from another era, when John D. Rockefeller built oil refineries bigger than anybody else's or when Mr. Ford bragged about his new River Rouge plant. It has limited value in many businesses today.

Another smaller point: the proposed tail hedging strategy is designed to break even if the S&P declines by 20% in a calendar month. In the last 30+ years (367 months) this has happened on only one occasion (October 1987). It is quite a rare event. Would you do this tail hedging all the time? I am not convinced that the numbers work when you consider that every month you are paying for put options.

 Alston Mabry writes: 

Doing some searching, I ran across this on FRED:

Nonfinancial Corporate Business; Corporate Equities; Liability, Level/Gross Domestic Product

Cheap-seat question: I know what GDP is, but I'm not sure about "Nonfinancial Corporate Business; Corporate Equities; Liability". Is that simply adding up the liabilities side of the ledger for public companies? Actually, it peaks Q1 2000, so it must involve market capitalization.

But it does peak Q1 2000 and Q3 2007. Of course, ex ante how do you know it has "peaked"?

Ralph Vince writes: 

All measures from an era when there was an ALTERNATIVE to assuming risk — that alternative now is to assume a certain loss, or, at best, a large rate markets exposure for the (slightly) positive rates at the longer durations.

This is an ocean of money that is coming through the breaking dam. It likely will go much farther and for much longer than anyone ever dreamed. Imagine the unwinding of the government-required-soviet-style Ponzi schemes like Social Security, which, at some point must start affording for self-direction to provide an orderly unwinding. Not only from the natural bookends of life expectancy, and pushing out the book ends to where too few could expect to ever collect from it, but the pressure from below in a runaway market for self-direction. This too will fuel the hell out of this run and make it last much longer than anyone dreams of.

Every equity that yields a dime has greater value than the certain loss; every wigwam that provides shelter too, from investing in the ingredients of pizza in Pulaski to Poontang in Pyongyang, all the wealth of the world must come out of the shadows and find a risk — and this creates a self-perpetuating feedback that is something we've never seen.

This is the move that comes along once in a century at best, and we're already starting into it. The measures of the world of positive rates (which may not be seen for a long time) I do not believe are germane to the world today.

Jul

25

Will someone tell Shiller and his followers that p/e's must be considered relative to interested rates. The value of an annuity growing at g is 1 + g /(1 +i) times a factor or two.

Ralph Vince writes: 

Thank you. Anyone who doesn't accept this isn't in the present moment, which is the most inflective moment in finance in my lifetime so far, and few moments in history with more opportunity and peril.

Interest rates are where they are on the planet because there is cash in such ample supply no one is willing to pay a damn thing for it.

Sitting on it, not exposing it to risk, is to expose it certain loss.

Anyone getting their mailboxes stuffed with all kinds of institutions begging them to borrow money?

This money must find propositions of some degree of risk, or it loses with certainty, every equity, every damn wigwam out there, everything is starting to shake and we've never been in a situation where a FACTOR of cash, a FACTOR that is measured in significant digits, is coming downstream.

Alex Castaldo interjects:

Excuse me but… If we receive one dollar a year from now, (1+g) dollars 2 years from now, (1+g)^2 the next year and so forth… and we discount at the rate i, then the present value of this growing annuity is  (1+i)/(i-g)

Jun

6

 "The economic consequences of a Donald Trump win would be severe"

by Lawrence Summers

On June 23, the UK will vote on whether to remain in the EU. On November 8, the US will vote on whether to elect Donald Trump as president. These elections have much in common. Both could lead to outcomes that would have seemed inconceivable not long ago. Both pit angry populists against the political establishment. And in both cases, polling suggests that the outcome is in doubt, with prediction markets suggesting a probability of between one in four and one in three of the radical outcome occurring. It is interesting to contrast the way that financial markets are reacting to these uncertainties. The markets are highly sensitive to Brexit news: the pound and the British stock market move with every new opinion poll. Analysis of option pricing suggests that if Britain votes to leave the EU, sterling could easily fall by more than 10 per cent and the British stock market by almost as much. It is widely believed that the uncertainties associated with Brexit are consequential enough to affect the policies of the US Federal Reserve and other major central banks.

It would in all likelihood be economically very costly for Britain to leave the EU and would raise questions about the future cohesion of the UK. It would also threaten London's role as a financial centre and curtail British exports to Europe.

What I find surprising is that US and global markets and financial policymakers seem much less sensitive to "Trump risk" than they are to "Brexit risk". Options markets suggest only modestly elevated volatility in the period leading up to the presidential election. While every Fed watcher comments on the implications of Brexit for the central bank, few, if any, comment on the possible consequences of a victory for Mr Trump in November.

Yet, as great as the risks of Brexit are to the British economy, I believe the risks to the US and global economies of Mr Trump's election as president are far greater. If he is elected, I would expect a protracted recession to begin within 18 months. The damage would be felt far beyond the United States. First, there is a substantial risk of highly erratic policy. Mr Trump has raised the possibility of more than $10tn in tax cuts, which would threaten US fiscal stability. He has also raised the possibility of the US restructuring its debt in the manner of a failed real estate developer. Perhaps this is just campaign rhetoric. But historical research suggests that presidents tend to carry out their major campaign promises. The shadow boxing over raising the debt limit in 2011 (where all participants recognised the danger of default) was central to the stock market falling by 17 per cent.

Ralph Vince writes:

What is not addressed is the question of what would be the economic consequences (and contrary to Dr. Summers musings, let;s keep it something measurable, like GDP growth) of another negative 100-500bln/yr in further deteriorated balance of trade over the next several years?

Are we willing to suffer another 2.5-3% drag on YoY GDP growth?

John Floyd writes: 

Yes, as with another winner of the John Bates Clark award in the year prior the reasoning leaves much out and is ingrained in a certain hue. Nonetheless I find the tack interesting as we approach UK referendum, FOMC, US elections, Italian referendum, etc. in the coming months and the potential impact and opportunities in markets. Not quite up to Patton's statement to Rommel, but along the same battle lines.

Ralph Vince replies:

Agreed.

This is a period that is a serious test of traders and nerves now, more so than the usual, more than the past four or five hours at the bridge table. With this hand, it gets particularly interesting now, for those who haven;t dozed off and know what the t the contract is now.

anonymous writes: 

As an extension to this line consider that one of the key tools in forecasting Bernanke’s reaction post 2008 was knowing his previous writings and statements as well as direct words including something very close to “a Japan type situation will never happen on my watch”.  To that line of reasoning consider and read Yellen’s work at SF Fed on the US economy and the influence of housing, etc. and I think that is a good roadmap to her speech today and actions coming in the future.

Mar

28

What is the difference between the "smart-beta" index built around "momentum factor" (offered by Russell or some other index provider) and a trend-following CTA? It seems to me like a lot of smart repackaging (trend-following is now called momentum since more academic research is about momentum, trading is now asset allocation, etc.)….

Aside of fees, of course :-)

Ralph Vince writes: 

All trading systems can be represented as indexes. (even your simplest, go long here, flat there, short here, has aggregatge weightings of 1, 0,1 on the various positions — cash always 1-position weight).

All portfolio models, can be represented as indexes.

So

Trading Systems ~ Portfolio Models ~ Indexes (~ representing "equivalent to")

It's a matter of packaging.

And further building on this edifice scratched in the walls of my darkened cave….

And all long positions ~ short put + long call of same series.

And all of this occurs within the hyaline manifold of leverage space, which readily explains things that are often not so evident on the surface (such as why a short etf will have a long-term downward drift, as well as all leveraged ones, just as with any form of portfolio insurance) and on and on and on and on.)

Rocky Humbert writes: 

Ralph articulates this well.

I would add one point:

We know as a logical syllogism that the overall return from an entire market (to all participants) is the overall return from an entire market. Putting aside the mark to market paradox, if I were the sole market participant and I owned the entire market, then my return would be the intrinsic market return (i.e. cash flow, profits, dividends, etc). And if there were two market participants, then the intrinsic return is shared between those two participants. Again, mark to market paradox notwithstanding, just as it is impossible to squeeze blood from a stone, one cannot produce a total return that exceeds the intrinsic market return. The only question therefore is how to allocate the return — which, beyond the intrinsic return, resembles a zero sum game. (Some people here call the intrinsic return, "drift", but it is really dividends, retained profits, etc.)

An academically pure index must capture the entire market's intrinsic return. And it would do that by owning the entire market capitalization of that market. The S&P500 doesn't do this exactly — the index owners exercise nuance and discretion — and that process might give some opportunities to the smart-beta crowd. That the S&P is market cap weighted further gives rise to the mark to market paradox (i.e. the starting point when one purchases the entire market cap).

But if one could actually purchase a piece of the entire market on the day of the market's creation — and own it until the end of the world — that investment will produce a return that will, after taxes and expenses — beat holding any given smart beta strategy for the same duration. This is a purely theoretical point — because during any given holding period, some particular smart beta strategy will surely outperform. Again, it's a mark to market issue. So the goal is to figure out which one will and which one won't. (Assuming that this is possible!)

So yes Virginia — there is a pure index. But it is theoretical ideal.

anonymous writes: 

I used to trade and develop "smart beta" strategies back at the fund.

I don't think there is an established "this is smart beta and this is not," but I can tell you as to what people expect. The momentum strategies are a bit different than typical CTA trending strategies (not using crossovers for example). Instead momentum is tracked by other measures such as relative performance across sectors and going long/short the best/worst performing ones.

The implied idea of smart beta, which is not exclusive to CTAs, are the other benefits of using these strategies amongst others in a way that utilizes portfolio construction or a dynamic weighting strategy (like monthly rebalancing on vol).

The goal with smart beta is to not produce alpha outright, but to accept that the majority of alpha has been "sapped" and you are now using diversified strategies that have a known cyclical alpha. This is where you get into gray area but I differ the two by saying:

alpha means the sharpe significantly deteriorates as others discover the method smart beta means the sharpe has already significantly deteroriated, but because it has, you can more easily predict the regimes in which they work/don't work. For example, AQR's paper: value and momentum everywhere discusses the idea that momentum (continuation) and value strategies (mean-reversion), tend to have negative correlations, albeit both strategies have lower sharpes (0.4 to 0.7).

anonymous writes: 

Assume, all flows as dividends etc produce an intrinsic market return of zero over some point. Trader A loses 10. Trader B gains 9 (dont forget the vig). Ok till this syllogism its a zero sum game

Next,
A sold at 100, B bought at 100.
A stopped out at 105.
B stopped out at 95.
There must be a C or a CDE.. and so on and so forth.
Still sounds like zero sum. 

But if over a length of time some stay in the game, majority keep dropping out. Then it becomes a series of zero sum games.

Next, If A,B,C,D,E…. et al become very large numbers then its a zero sum game between those who stayed in the game up to the point the non participants came in. This also explains the Lobogolas.

Market therefore is a variable sum game. People vary their exposures, they vary even their presence for prolonged periods of time. No one rides an investment bus permanently the way sage does. Normal people buy stocks with an "intention" to sell at some point.

The drift in equities is explicable by a fact that it is the only asset class where reinvestment in growth occurs. For Indian equities I have had calculated in the past it mimicks the curve of (1+GDP growth)*(1+inflation). Perhaps true for other markets too. Given in the long run supernormal profits dont exist, its the ability of businesses to pass on inflation to their customers that produces the drift in their cashflows and thus stock prices. 

Mar

24

 As Mr. Vince knows better than anyone, the variance of a sum is equal to the sum of the variances. I believe the market ecosystem works its magic each day of the week to do its damage and make the public lose more than they have any right to lose every day of the week without regard to levels or rest.

Ralph Vince replies: 

Which, by extension, we would expect the one-trading-day-variance from Friday to Mon to be the tamest of the five, consistent with your results, but not proof that weekends don’t matter.

If you could trade on Sat or Sunday it would be expected to get out of line compared to what we see from Friday come Monday, yes?

Victor Niederhoffer comments: 

The NYSE and many of the Asians I believe used to trade on Saturdays, and the changes on Sat were very small relative to the other days. I believe it’s because there is not as much damage that the collectivists do over the weekend.

Ralph Vince comments: 

When NYSE was open on Saturday, wasn’t that only half-day sessions? Us millennials know nothing of those bygone days.

Victor Niederhoffer writes: 

In the good old days, trading continued well into the evening at the fifth avenue hotel and the curb.

Anatoly Veltman writes:

Just got back from Seafire grill and I see this about the good ol’ days. Among other things, in my 1980’s better days, gold was only offered during Shabbat by HK dealers, and only a couple of hours. One memorable curb occurred after the Friday Oct.13th, 1989 Comex close. Late that Friday, following the UAL deal collapse, stock futures closed basically limit down. Gold futures that were closing full 1.45h earlier, didn’t discount any of that. I stared down a dozen screens, so I was anticipating SP technical troubles way ahead of the field. I kept soaking up gold offers all day - yet the darn contract barely edged up. My partner on the floor, who among others had no concept of what might have been transpiring with the stock market, kept a better tally: “we’re about 1,000 lots over the initial margin requirement!”

So going into COMEX closing sequence, I tell him: “We have no choice. Announce the offer of 1,000 lots, but please - no locals. Just keep yelling out “1,000 or nothing!” Don’t hit any partials.

No one took’em… An hour after COMEX close a good bank friend calls: “I heard you had some. Any market?” I give him .5% above Comex settle, he says buy’em, I say “1 bar mate”, he says “appreciate”. Half hour later he says “Aron is looking, help me out” (that’s Goldman). I give him 1% above settle, he says buy’em, I say 1 bar mate, he says “Wise. Appreciate”…And then HK quotes 1% higher and .5% wide - and no trade till Sunday…So Sunday night Sydney opens to a 1% higher bid, which I hit for my remaining 920 extra lots - and they’re thanking me! My broker calls Monday morning: “Any wire coming in?” I say you’ll hate me, but no wire; here is my 1,000 offsetting EFP shorts, I’m no longer your problem, made a quick million in the closed market, sorry mate, HOW ARE YOU DOING! He says “appreciate your concern; lots of accounts really fxxxup” I say sorry, not a freaking soul wanted them during COMEX, I be damned. He says don’t do it too often, and you owe me dinner… Guess what: I never got to buy him that dinner. Despite SP opening limit-down Monday, COMEX traded back down around Fri settle. My 920-lot Sunday opening sale was apparently passed around in Asia and thru Europe like a hot potato, with no one caring about the stock market again, like on Friday. I be damned… 

Mar

1

The edge in part related to the vig would be reduced to 0 if there were just 1 or 2 trades a day in  markets. Which time would be best for a non-flexion, non-top-feeder, i.e., the public, to trade if they wished to maximize their wealth?

Andrew Goodwin replies:

Mutual funds have had one price per day in most cases. It has proven difficult to keep various sharpies out of securities markets whether these markets price continuously or just once per day. The names and tactics change.

Ralph Vince comments:

You're referring to the most illiquid of times - which correspond to violent selloffs, not so much sleepy, pastoral markets. The most recent in memory was the open of 8/24/15.

Feb

17

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

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

Gibbons Burke writes:

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

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

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

Ralph Vince writes: 

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

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

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

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

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

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

outcome

0.51                     0.51    1.02

0.51             -0.489999    0.020001

0.51             -1000000    -999999.49

-0.489999            0.51    0.020001

-0.489999    -0.489999    -0.979998

-0.489999    -1000000    -1000000.489999

-1000000            0.51    -999999.49

-1000000    -0.489999    -1000000.489999

-1000000    -1000000    -2000000

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

product

0.51          0.51                 0.260100000000

0.51          0.489999          0.249899490000

0.51          0.000001          0.000000510000

0.489999   0.51                  0.249899490000

0.489999    0.489999          0.240099020001

0.489999    0.000001          0.000000489999

0.000001    0.51                 0.000000510000

0.000001   0.489999           0.000000489999

0.000001    0.000001          0.000000000001

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

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

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

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

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

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

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

Russ Sears writes:

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

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

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

Jim Sogi adds: 

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

Jan

11

 Common thoughts among the masses:

Invest in bricks and mortar, you will never lose your money. Invest in banks, whenever a bank has collapsed? Buy oil. It can only continue to rise in price, considering the peak oil, etc…

Ralph Vince writes: 

Banks?

Yes I did, starting in the summer of 08…buying and buying and buying and hotel room trauma in zero degree NR US city pacing at 4 am to meet margin call by 10…

My last position, Corus Bancshares, I saw print a 56 cents from a hot dog stand TV in Sarasota in the Winter of 09, and I knew my 55 cent limit was filled, my last position, exited with a profit — about enough to pay for my lunch that day after all of that!

I learned the hard way — banks aren't brick and mortar– they are bags of air, just as industrial companies are a web page with a picture of their parking lot on it, and some CNC drawings that are being used to make the product in Indonesian machine shops.

Nov

30

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

Anatoly Veltman writes: 

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

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

Bill Rafter writes: 

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

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

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

Russ Sears writes: 

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

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

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

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

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

Brett Steenbarger writes: 

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

Ralph Vince writes: 

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

Shields up.

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

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

Too many margin calls have had to be met.

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

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

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

Victor Niederhoffer writes: 

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

Alexander Good writes: 

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

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

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

Theo Brossard writes: 

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

Jim Sogi writes: 

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

Oct

14

 When I meet with prospective clients and talk to them about their portfolio, I ask multiple questions to determine their tolerance for risk.

Three questions I ask are:

"How much money did you lose in 2008?"

"How long did it take for your portfolio to recoup those losses?"

"Was that loss a lot of money to you?"

I've pretty always asked a version of those questions (i.e. prior to 2008 I asked about the same questions about the tech bubble).

As we all know, the market took a massive hit in those years and loses were rampant and widespread.

When I asked those questions in 2009 - 2013 people would regale me with tales of how much they lost (40%, 50%, 60%+). Even people that held a lot of bonds "for safety" spoke of the losses they experienced.

Almost everyone spoke of how many YEARS it took for them just to recover their losses (most took 5 years just to get back to even).

And almost everyone would talk about how the loss they experienced was a LOT of money to them and they'd rather never experience that kind of loss again.

Now, let's flash forward to 2015……And it's a completely different story.

When I ask them how much they lost in 2008, the majority of people say, "I really don't lose much". Some will say "I lost maybe 10% - 15%".

I am hard pressed to find a single person who lost any money worth mentioning.

Further, when I ask them how long it took them to gain back their losses, I hear things like, "Oh, maybe a few months, I really didn't lose much to begin with" or, "I think it took me maybe a year or a year and half".

When I ask them if the loss was a lot of money to them, I hear things like, "Oh, I really don't know, it was no big deal."

What's my point of mentioning all this to the group?

I know for a fact that the rank and file people of the world (the people that I deal with) lost a lot of money in the 4Q07 - 1Q09 housing debacle. I know this because they told me so and they told me they were scared and and that it took them 4 - 6 years just to get back to even and that they lost a LOT of money….more than they were comfortable with.

And now……..they've all forgotten.

Out of sight, out of mind.

All they see (again) is the magnificent rise in the stock market and they all just know that it's not likely to ever correct again in any appreciable way, and if it does, it doesn't matter….it will come back in a very short period of time.

Yes, I know this is anecdotal, but I can tell you that this is based on hundreds of interviews with prospects over many years.

And yes, the story I've written above applies exactly to the experience I had when I interviewed prospects from 2003 - 2007

They all experienced great losses in 2000, 2001 and 2002 that were beyond their comfort zone that caused sleepless nights…..and as time went on, the losses became smaller and smaller and the time it took for the losses to recover became shorter and shorter and the pain they experienced became less and less.

I think a line of lyrics from Paul Simon's "The Boxer" are appropriate here: "A man sees what he wants to see, And disregards the rest."

Ralph Vince writes: 

Great post Scott, thank you.

I'm astounded by this same thing. If you took everyone in early '09 who were upset that they didn't liquidate their 401k plans, etc., the percentage of those who have now is very, very small. Especially in a ZIRP world.

Sep

15

 From the 1960s-1982 the Dow stayed in a range between 600 and 1000, with several 40% swings. Then came the great bull market.

Is there any reason why we might not return to such a range for 20 years or more? We are off all time highs, but with quite the penumbra around 1950s. Also, it's been a bull market for 7 years.

anonymous writes: 

In real terms (adjusted for inflation) from the peak in 1966 to the bottom in 1982, that was a 75% decline in the value of the Dow, and a 29-year trough before a new high was made. The decline from 1929 to 1932 by comparison was 85%, also with a 29 year valley before the 1929 peak was surmounted.

Ralph Vince writes: 

Yes, but in August of 1982, you KNEW the lid was coming off.

On Friday the thirteenth, after a languishing bear market, things jumped. It had a different feel to it. By the next Tuesday, the 17th, it was off to the races.

I remember it well. It was a complete change in market character from what had been going on for several years before it (at least since the Summer of 1980, and August of 82 was profoundly different than that even).

My point is, you didn't have to be a contrarian to know something big was just getting going. It came in with bang,

We live in an era where damn few remember — if anyone ever knew — how to read a tape, the pace of whats coming across the Electro-Lux. I've tried to catalog this in terms of patterns of volume bars. If you go back and look at the Friday, August 13, 1982, it occurred on a low volume bar turnaround — v. bullish (assuming a descent into it).

But the real tell came later — the 18th, a high volume bar day, the end of the short term runnup, On the 18th, the DJIA dropped a small amount, on very heavy volume, marking the high that day as an interim high that should hold for a few days. Not only did the market blow through that, showing extreme strength, but the coup de grace was the following week when the market continued higher on very high volume. Often, a single bar making a high on high volume markets an interim high (there are fine points I am not mentioning here), or, even stronger still, if there is a few bars in between and another high on high volume. But a series of 3 or more bars, on very high volume, where the market continues to grind or grind higher, is very, very bullish.

There was a confluence of factors leading up to that — negative sentiment, bank failures, bankruptcies, etc. amid an environment of declining energy prices, falling rates, technological breakthroughs (as evidenced by Ipos in the 18 months leading up to it — Apple, Genentech, etc.) the pc was in its infancy , Apple was talking about "Lisa," the mother of Mac, there was by many people's accounts, a political climate favorable to business.

There are perhaps many similarities to today, and many differences. I suppose it could happen, could happen in the coming months (look at the advances in cancer treatment, and I don't think we've even begun to feel the effects of the technological advances afforded by a true, coast-to-coast high speed network drones and mass transport, or even the productivity created asa result of the handheld devices most of us use today). But if it's anything like the last, great bull market, it come in with a roar, and I would expect it to be evidenced by inexplicably high trading volume that generally persists.

anonymous writes: 

I miss the noise those Trans-Lux jets made, with those funky fluorescent black lights and those little colored pegs. They were crude, but effective. The bars around the exchanges all had jets so you could have a drink and still see the prices, real time. Nobody minded in those days if a broker went down to the bar for a quick one or three as long as they were good earners. The Germans, Irish and Italians were the ones who went to the bars for a quick one during market hours……..the Jews at the CME always wanted to maintain decorum and control, and never show public intoxication…..the drug of choice for the Jews was cocaine and naturally they didn't drink like the Germans/Irish, and the lack of good drinking establishments around the CME was evidence enough. The bars around the Merc were never legendary like the ones at the CBOT like Broker's Inn, Sign of the Trader, Trade Inn, and Alcotts around the corner. Those bars were in a league of their own and the back stories of what went on in those establishments would be worthy of Runyon or Hemingway. I have sources that have the 1970's Russian Grain Deal being worked out at a back table of the Broker's Inn. Whether or not this event occurred and is verifiable, I wouldn't say it would surprise me. I've seen 20mm tonne cash grain deals done on the back of a napkin and with a handshake.

Steve Ellison writes: 

It took the S&P 500 7 years to regain is 2000 high, but it could not hold that level for long. It was not until 2013 that the S&P 500 again reached its 2000 high, so we already had a retrospectively-defined trading range for 13 years. I have a hunch that the next "great bull market" is already here. The so-called millennial generation in the US is larger than the baby boom generation. I keep noticing things about this decade that remind me of the 1980s, including a commodities bust and concurrent strength in the US dollar and US stocks.

Stefan Jovanovich writes: 

Steve gets my vote. Part of what happened in the 80s was the destruction of previously secure franchises. Mr. Walton's stores destroyed thousands of local "downtown" merchants who had enjoyed distribution monopolies in the villages and towns of what became known as flyover country. Even as AT&T decides that satellite streaming of NFL football games is worth $3200 a customer, the kids are growing up wondering why anyone would be so stupid as to subscribe to a service whose ability to provide programming on demand is as ancient as a Betamax recorder.

anonymous writes:

But where can rates go, Steve? Or perhaps it isn't the direction of rates, so much as their absolute values?

The other big element that concerns me is not the systemic liquidity problem (which we had a taste of on 8/24) but that volume has been tapering off throughout this run up from the 09 bottom.

Sep

14

 On my last haircut before moving, I gave my regular lady a $100 tip on a $17 haircut (applause line here?). That small gesture brought her to tears. She is a very interesting older woman. I've enjoyed talking with the past few years. She knew I worked in investments/trading and asked if I had any ideas for her. I asked about credit card debts and she told me she just cashed in 25K of an IRA to pay down 25K of credit card debt, yet already had accumulated 2K since then and was getting in the hole again. I might invite her down to do some murals in my kids room, and perhaps do some studies on trees (She is an artist who made a living cutting hair for the last 40 years).

The point is (perhaps? At least the relevant one?) is the deadly financial problem of never having working capital that provides the flexibility that keeps one off the spike of usurious interest.

This lady had been sold on long term investments (by her branch XYZ big box bank) in high fee mutual funds with perhaps at best a 5% yr expected value over the long term, while paying off 25% interest rates on credit cards. The scams run on the lower middle class or working class are obscene.

And it is not income. Clearly if these folks can pay these obscene high interest rates, they can afford much more than they have. The problem is that they never understood the idea of having "working capital". I told my friend that her best investment is at least 6 months of living expenses in the bank. As basic as it is, and at such a low margin for error that standard that is, for many it is an alien concept. Her recent issue was a car repair that blew up her budget and started the credit card problem again. With no working capital plus compound interest against, it is like a giant pit metaphorically with wood spikes and lions at the bottom to gobble one up.

So in trading and investing, how can we use this idea? Victor has taught "never get in over ones head" as one of the key tenants of speculation. So how do we manage our cash in our speculations, investments, life's "issues" to have the flexibility to seize opportunities and avoid pit of being bent over a barrel–while still getting a solid return.

Scott Brooks writes: 

The problem is deeper than that.

The people that Ed is referring to don't have the mentality to accumulate wealth and get rich. They are sold on the "here and now" mindset. They go into debt to satisfy the here and now. Something will always come up that will prevent them from succeeding. The only thing they are really good at is coming up with PLE's (Perfectly Legitimate Excuses) to justify their failures.

They are defined by their failures.

anonymous writes: 

Especially with respect to this site, I would wonder the data and testing behind those assertions. Otherwise, one might consider them to be presumptive, elitist, and uncharitable, with mean-spirited implication. But for the grace of god….

Ed Stewart writes: 

"presumptive, elitist, and uncharitable, mean-spirited"

Yes but who cares. I'm guilty of most those things at most times. Is time preference the essence of trading? That might be a more interesting question vs. my original one. Can it be quantified? I think so, as a hypothesis generator. Does it work better than other thought models?

Russ Sears writes: 

Sorry, I disagree Scott. Ed is correct, it's a matter of education and coaching. Have a plan, believe in the plan, stick to the plan.

The average working poor Josie is not a loser. It's the average bank has learned they are more valuable dumb and paying fees than smart with small accounts. The stats say that the fees are several hundred dollars per person in the USA. So some are paying several times that. The banks have the average poor working single parent or mom in a snap trap that they can't figure how to unsnap and lift the door.

The first thing I tell kids is that you need a minimum of $1,000 in emergency cash preferably $2,000. Have a garage sale, stop buying lottery tickets, no gambling, stop buying new clothes, stop cable, and stop smart phones, etc until you have that emergency fund. Also budget, if you can't fix the budget to the pay, downsize housing, get roommates, no car, bus, pay for car pool, whatever it takes to have a workable budget. Then save for the 3 to 6 months expenses in a cash account ready for a big expense. Only then should you invest.

Most people in this problem don't have anyone they can trust to give them the advice and perhaps the tough love they need to stop living in denial. The truth is the banks want the poor.

What does this mean for "investors". Frankly I think most investors have it wrong. It's not so much managing your risk as it is managing your cash flow first, then manage your risk. You can take a lot of equity risk if your investment horizons 20 years out.

Also the lesson to investors is just because someone is in the best position to give you advice and would make some money off you if they gave you that advice, it doesn't mean they will give you the advice that's in your best interest when it conflicts with their best interest. Their best interest is CMA (cover my …) by silence or sin of omission. Then it's to make more money by selling what gives them the most profit to "cover" you like payday loans.

anonymous writes: 

The thing I practice (and I don't know if it adds any edge that can be computed) is to always take some off after a good run. No mater what, be it trading, investing, bonus, etc. Never spend it all–or even most of it. Put it away for when SHTF, because as day follows night, it will…

Andrew Goodwin writes:

A major part of the problem is the thinking that makes the credit limit on credit cards equivalent to ones own money.

For my part, I will never willingly stop at a gas station that has two prices for gasoline with one higher for the credit card user than for one paying cash.

In a world where there are card rebates on gasoline, what is the point of acting responsibly with credit when those who did not act responsibly get subsidized by those who did. The dual pricing also serves to support a cash economy against the public interest.

Peter Grieve writes: 

I feel that I am unique on this site as having been in this hairdresser's situation for most of my life (Hello, Peter). Obviously this is not due to a lack of economic education or upbringing. I feel that the factors include a lack of skepticism regarding my own appetites, a lack of faith in the future, a certain immediacy in response to the world. These are traits associated with immaturity, to which I confess. Of course this leads to tremendous inefficiencies, even when viewed from a purely hedonistic perspective, but it does have its compensations.

I do not regard Scott's comments as elitist, presumptive, uncharitable, or any of that baloney. On the contrary, I find the the use of the word "uncharitable" to be condescending. I do not feel that people in my position are a fit object of charity.

Everyone has their irrationalities, and they are often incomprehensible to those who do not share them. Scott's words are simple, honest truths, which many people (including me) would benefit by internalizing to a greater degree.

Stefan Martinek writes:

It is good to have an emergency cash for at least a decade; locked, untouchable for trading or similar. The rest can be at risk. And after MF Global steal from client accounts (is Corzine still free?), I think it is prudent to keep as little as necessary with FCM. In case of a brokerage failure, the jurisdiction matters (Switzerland is preferred, the UK is too slow but ok, then Canada, and the last option is the US broker).

Ralph Vince writes: 

Stefan,

I entirely disagree; emergency cash has a shelf life which is very short, and our perspective warped as we are speaking in terms of USD. Being the historian you are, you know full well how quickly that cash can be worth nothing. (And again, a many of our personal experiences here would bear out, money is lost far quicker than it can be made).

A bag of air on hand is good for one breath.

People are taught that "saving" is virtuous, borrowing a vice. I would contend that we have crossed to Rubicon in terms of the notion of stored value — no more able to contain that vapor than we can a bottle of lightning. The circulation brought upon by a zirp world, turning all those with savings into the participants at a craps table, the currency being used the product of a confidence game, among the virtues to be taught to tomorrow's youth is that of creating streams of income — things that provide an economic benefit their neighbor is willing to pay for, as opposed to a squirrel's vermiculated nuts.

"Stored value," is a synthetic notion we have accepted and teach as a virtue. It has no place in nature, it is a synthetic construct, one that is not scoffed at in the violent, life-and-death world of fire and ice. Young people need to be taught the fine distinction between the confabulation of "storing value," and that of using today's fruit to generate tomorrow's.

Stefan Jovanovich adds: 

From the other Stefan: I agree Ralph. "Stored Value" is another part of the economist dream that platonic ideals can be found. Money is and always has been one thing: the stuff you could voluntarily give to the tax man that would make the King find another excuse for throwing you into the dungeon. The gold standard did not change that; it simply gave the citizen a chance to make the same kind of unilateral demand on the government. It is hardly surprising that the fans of authority and "government" hate the Constitutional idea of money as Coin. How can you have a permanently elastic official debt if the citizens can ask for payment in something other than a different form of IOU?

However, Stef does have a point. Having a hefty cash balance is a wonderful gift; it gives you the time to figure out your next move. The sacrifice is the absence of leverage; the gain is having literally free time.

Scott Brooks comments: 

There are a lot of companies out there that take advantage of them and the bad advice they were given from their parents. Banks certainly do. Then you've got insurance companies and brokerage firms selling them crap products as well.

But that doesn't hold water in today's society with Suzie Orman and others like her being nearly ubiquitous on the airwaves and net.

These people live beyond their means. Plain and simple.

Yes, they lack education, but even with education available, they don't take advantage of it. They are just doing what they were taught as kids. For far to0 many of these people, as long as they've got enough money for their 1-2 packs of cigarettes/day and their quart of Jack/week, they go and live lives of quiet desperation, hoping that they don't lose their jobs and are lucky enough (i.e. like not spending money on stupid stuff is "luck") to pay off their debts by the time they are in their early/mid-70s so they can live out their remaining few years (if they even make it that long) on social security.

I know. I grew up with these people. I know how they think. But for grace of God (as was mentioned earlier), I might have been one of them. But for some reason, I was blessed with gray matter that works, and I saw the error of those ways, and I was able to get out.

Ken Drees writes: 

I knew a guy–lost touch with him over the years–who exclusively dealt with hairdressers and salonists. He sold variable annuities to them since these people had no retirement plans given to them from the salon owners. I believe in his mind that he was doing them a service–and I really do not know the quality of his products–but at a glance I saw them as mutual fund annuity hybrids that came from heavy fee fund families. He was a tall, dark and handsome gent and he would actually get entire staffs of salon ladies to invite him in after hours for a group meeting/financial planning discussion presentation.

He always said that business was brisk! 

Jim Sogi writes: 

When young friends ask me, how should I invest, I give them a simple asset allocation model based on ETFs or Vanguard and an averaging model. Invest x% of your paycheck off the top each time. Doesn't matter how much really.

Russ Sears writes: 

 Scott, since this is the DailySpec let us bring a little science into the discussion, even if it is social science.

Where we differ is not what is causing the hairdresser's problem. It is in what can be done about it that I differ. I believe you can coach people to delay gratification. I coached kids that never did homework before and got "D's" and "F's" during a summer and by fall the kid was an "A" or "B" student. You probably owe a hardy thanks to the coaches in your life.

Perhaps the greatest social science finding has been the "marshmallow experiment" done at Stanford. They did test on 600 4 year olds telling them if the child did not eat a marshmallow for 15 minutes after they left, they would get a second marshmallow. 1/3rd of them made the whole 15 minutes, a small percentage ate it immediately after the others had waited various amounts of time. They followed up on these kids several time in the last 40 years. Just about every way you can think of to define success was highly correlated with the time the 4 year old delayed gratification: SAT score, college/HS graduation rate, credit scores, long term committed relationships, contentment etc. And almost any way you can define failure was inversely correlated: jail time, high school.

The correlation was stronger than IQ, social economic status at 4 years old. In other words even the dumb poor kid that delayed gratification was happy/content/successful 40 years out. He may not be making much but he is happy with it.

For a humorous view of this experiment reproduced: Joachim de Posada: Don't eat the marshmallow! 

Sep

2

In the past six years, we have basically seen two phenomena in stocks: 1. etf growing use, and 2. share buybacks. My theory is that these two forces combine to totally drain liquidity from the stock market. The general downward trend in volume is the proof, also probably explains persistent small upward march of stocks, and the tendency for "corrections" to be much more like "flash crashes."

With one, we have something like robotic superfunds who accumulate mass quantities of stock and hold, rebalancing based on volume in the etf. With two we have drastic reductions in float.

A bear market in that environment will bring a certain violence and toxicity never seen before. Down days are almost forced to be large. So when we talk about a bear and months of down days, it will probably be something truly awful. Etfs will dump stocks on a reduced float market that is largely composed of funds anyways.

The size of the exit is determined by volume and float. Door is getting small…

Ken Drees writes: 

This article explains ETF mechanics well.

Almost as important for the ETF are the authorised participants, or APs, which act as marketmakers. The APs, most of which are banks, help to keep the share price of the ETF close to the value of the underlying assets. Imagine that one big investor in an ETF with, say, a 10% stake, wanted to sell its holding in a single day. There might not be ready buyers for such a large holding, causing the ETF to fall to a price below the value of the assets it owns.

To avoid this, the APs act to balance supply and demand. If the ETF is expanding (more people want to buy shares than to sell), then the AP puts in an order to the fund manager for a block of new shares, dubbed creation units, in the ETF. In return, it transfers a bundle of securities, based on the index the fund is tracking, to the manager (this bundle is known as the creation basket). If the ETF is shrinking (more people want to sell than to buy), then the AP sells creation units to the fund manager and receives in return a bundle of securities known as the "redemption basket".

The AP can also keep the price of the fund in line with its assets through arbitrage. The asset value of the ETF is published on a regular basis during the day; if the price of the ETF is higher than its underlying assets, then the AP (or any big investor) can sell ETF shares and buy the underlying assets. If the price is lower, they can buy ETF shares and sell the assets.

The AP can also keep the price of the fund in line with its assets through arbitrage. The asset value of the ETF is published on a regular basis during the day; if the price of the ETF is higher than its underlying assets, then the AP (or any big investor) can sell ETF shares and buy the underlying assets. If the price is lower, they can buy ETF shares and sell the assets.

So how might this process go wrong? One obvious danger might be the role of the APs. If they fail to make a market in the security, then the price could get out of kilter with the asset value of the fund. Alternatively, they might go bust in the middle of the creation or redemption process, which takes three days to complete. That might leave the ETF short of the shares needed to top up the fund (and match its benchmark) or the cash to pay its investors.

anonymous writes: 

Larry, your analysis seems reasonable. I'm curious if you or other folks here think the lack of liquidity applies more generally than just the stock market (e.g., in the banking and currency markets). See for instance:

"Into The ‘Dollar’ Run Now More Than Illiquidity?"

"Volatility As ‘Money’; Or Really Rising Vol As Anti-Money
"

Ralph Vince writes: 

And the fact that leveraged and short ETFs must move stock exponentially with a drop in prices. That is to say, the more the underlying securities in the ETF drop in price, the more shares must be sold and this is not — a a drop of 2d takes more than twice as many shares to be sold as a drop in 1d. This would seem not such a big problem except that it is likely to occur during times of vacuous liquidity. 

Aug

10

 Since the situation may well be worse than this data suggests, my question is how can China maintain 5% growth this year, never mind 7%. Or will the economy hit a wall?

Ralph Vince writes: 

It is not like our economy at all. Whereas we panic over QE this or that, there the government owns everything. It can go on forever.

Jul

31

 1. How many times have you taken a position in a market and had it moved against you, and then got out pursued by a debacle only to find that the market moved in your favor 9 or the next 10 days? Please quantify the situations and see if you can take the other side. Monday, July 24 spu????!!!!!

2. The Senator loves to find a market hitting a new x day low I believe at near the open and then going above some level (I believe the previous close or some such) as a great opportunity to buy. His Japanese acolytes took furious notes and wished to make him a national icon for this. How can it be quantified for individual stocks and markets?

Ralph Vince writes: 

#1 occurs ONLY when one has stops in the market of interest. Otherwise, it just doesn't happen that way– I am Cain (the market sees me, yes, me, there, in the shadows and trying to hide anonymously in the crowds).

I have to turn away, walk away in these situations, and look back at some as-yet unknown future point. "I'll be at the Coyote Motel, with it's missing light bulbs and wax bars of little soaps and the maids that never show. I will be eating cheese and day-old Reubens and watching the markets (now pointing with my index finger) and I will return when you can act like a lady."

May

23

 David Lillienfeld writes:

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

Tim Melvin writes:

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

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

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

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

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

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

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

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

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

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

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

Happy Memorial Day. Remember me.

Stefan Jovanovich writes: 

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

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

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

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

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

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

anonymous comments: 

I differ…greatly.

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

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

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

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

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

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

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

Semper Fi et Ductus Exemplo. 

Ralph Vince writes: 

There is nothing more inadvertently dangerous than a young man.

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

One must tread carefully around these. 

Apr

15

 I'll just throw this out.

Intuitively, I suspect that if a fraction X gets better on a placebo, and if a fraction Y (which could overlap with X) gets real physiological benefit (as determined the by the deities), then the fraction that will REPORT being better would be something like sqrt(X^2 + Y^2). (The "reasoning" is that the real effect and the placebo effect are probably uncorrelated and therefore "add" in an orthogonal way, like the Pythagorean theorem.)

So if X is 0.6 and Y is 0.4 then 72% of people in the study would say they were better.

Of course this won't be valid if X^2+Y^2 gets close to or exceeds one.

Anyway, if that formula is right, and if 40% of people really do benefit as determined by the deities, then we'd see 72% reporting that they're better, which is not much more than the percent that "respond" to the placebo, 60%. So it's probably hard to smoke out an effect, even if it's kind of big.

anonymous writes: 

Before any marathon or ultra, you hang around in the corral of runners waiting to go, (towards the back. towards the WaaaaaAAAaay back, with the jockeys, fat ladies, kids dribbling basketballs) and ask practically ANY old guy if they take it, they will tell you affirmatively. I've done that at least dozens of times. Then look around at who has had a knee replacement and is in that category. No one.

Now that does not mean that the prevalence of old guys running marathons now (whereas two or three decades ago you didn't see that, may be a function of fad, but I remember old guys who ran two or three decades ago stopped running– almost all of them because "their knees couldn't take it anymore," or they "wore out their knees.") is a result of G&C consumption, or the fact that there are so many more older people running now, the fad effect.

There is a tendency to mock anecdotal evidence such as this– but our entire lives are spent accumulating anecdotal evidence and attempting to draw conclusions, from what we consume, what the "best" route to get to a certain destination is, what time we ought to wake up, to how we trade, etc. Everything we do in life is an attempt to solve an optimization problem based most often on a statistically insignificant number of data points.

David Lillienfeld writes: 

First, I'm a physician and among my areas of expertise is the evaluation of drugs (pharm, not abuse). If you want to use anecdote, then you must have little use for regression to the mean. Anecdotes are subject to publication bias, small numbers, inadequate control of bias, among others. It is human nature to work off of anecdotes. It is also misleading.

Based on anecdote, radical mastectomy would still be the standard of care for breast cancer. Based on anecdote, rehab after a heart attack would consist of sitting on one's butt for six months "for healing." Based on anecdote, there are any number of medications one might use for treating pulmonary fibrosis. They actually don't do much. None of them. Based on anecdote, laetrile would be the nectar for cancer. Guess what—it isn't. So if you want to run on anecdote, go right ahead. But don't be surprised if your results are random, because that's what's happened in medicine based on anecdote. It's the reason why evidence-based medicine has emerged from the shadows. And don't forget that regression to the mean. Relying on anecdote goes right up there with physician self-treatment of disease. BTW, my uncle treated himself for a heart attack. Wrote the orders for morphine (it was 1960). Managed to kill himself with an overdose. In the hospital.

Second, vitamin C has been looked at for any number of diseases. For the common cold, there's lots of hedging by the Cochrane Collaboration, but I'd hardly call it something where they see compelling evidence—at least for the common cold. Linus Pauling may have thought he was onto something. He was brilliant, some would say he was a genius. That doesn't give him a pass on evidence. Ronald A. Fisher believed cigarette smoking wasn't—couldn't be—a cause of lung cancer, and he was mystified by the increasing mortality rates from it. The same was true for Jacob Yerushalmy. There's a fellow in San Francisco, generally acknowledged as brilliant (he may even have a Nobel) who maintained that HIV wasn't the cause of AIDS. Genius isn't immunity from being wrong. Conjectures in science, even from geniuses, need evidence to be considered worthy of incorporation into the corpus of scientific knowledge.

I had two good friends, Bill Cochran (he of Cochran's Theorem and Abel Wolman talking at a symposium on the history of epidemiology. Cochran observed that "Evidence is a bitch." Wolman replied, "At least evidence is visible. It's the non-visible things that will get you every time." Wolman made his reputation in sanitary engineering (as it was then known) on figuring out how to get sufficient chlorine into tap water as to kill the cell present in it while maintaining that water's potability. Threats that weren't visible was his stock in trade, so to speak. But these were philosophies of science, not specific research questions.

Third, the pharmacokinetics of vit C do not suggest that more is better, ie, always gives a higher serum concentration.

Sorry about the length of this message, but it's worth noting that saying, "Guessing is a capital crime, and if you engage in it, you will lose your capital and become a criminal." I wish I could remember who said it. Can't though.

Ralph Vince writes: 

I don't disagree with you (more specifically, I'm not qualified to disagree with you on this even if I were inclined to), however, as infants we learn to speak, and before that even, in our earliest life hours, we learn to learn by optimization based solely on the sparse data set of anecdotal evidence.

It's a platform that has certainly served us well, should not be disparaged, but rather ought to be acknowledged as perhaps not always best when other determination making platforms are available.

Jim Wildman comments:

Properly done full squats are excellent for strengthening knees (assuming no preexisting damage, only weakness). One of the surprising things I've found since starting powerlifting 4 years ago, is that a lot of 'knee pain' can be corrected through better mobility (ie, stretching). New power lifters of all ages typically have to work on hip and ankle mobility before they can successfully squat. Once you have the mobility issues corrected, building strength is a matter of patience and diligence.

Russ Sears adds: 

My wife, a RPh, thinks it MAY help, because it does seem to increase the lubricant on the joints.

However, firstly, this effect takes 2-3 months of use to develop this effect, The placebo effect is much more immediate. And most users think it works much quicker than the measurable effect to the body.

Secondly, it may simply be self selection, since as Jim and others suggest. Those willing to stick to taking 3-5 large pills a day are usually the ones willing to exercise. Diet also effect it.

Thirdly, many drugs help cause the desired response to the body, but create other problems to produce that effect. For example lowering cholesterol, but also side effect of lower calcium/electrolyte for the heart. (this is why I avoid supplements in general)

Fourth, it is not a "cure" but a MAY prevention future flare-ups, it MAY mask the symptoms. And people with arthritis have various rate of deterioration. Hence, needing a large group to determine if it helps.

With this said, many doctors and pharmacists do recommend using it. 

Feb

13

 This article "14 Ways An Economist Might Say 'I Love You" seems appropriate for the day. Personally, I'll go with an orchid. No lines, no trumped up cost. (The line on 86th used to go from 2nd Avenue over to Lex before turning south for 1+ blocks back when I was living in Manhattan. And a dozen red long stems was $44. Ouch.)

Gordon Haave writes: 

The best move to make on Valentine's Day is the single red rose, presented elegantly. That way it looks like you put some thought into it to make it special when really you are just trying to save money.

Ralph Vince writes: 

But you don't just give it to her. Now, is where the REAL thought has to happen and the magic transpires. But most men can't figure that out.

anonymous writes: 

The technique I have had great success with is to engineer events so that it looks like I was not thoughtful, had no plan, forgot, etc. This causes a growing sense of letdown and frustration, which of course seems a counter-intuitive intent. The key is in the swing to euphoria that can occur from this low level. When it is discovered that rather than "forgetting", you had instead been very thoughtful and utilized foresight well in advance (the opposite of what had previously lead to her sinking feeling), the elation can be intense on the lady's part, which leads to a very solid return from the male perspective. I think in the markets, you often get this same euphoric reaction after a test lower has cleaned out the stops– nowhere to go but up.

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