Feb

14

The current VIX is priced above both the first (F1) and second month Vix futures (F2). I looked at times  when Vix>F2 and the subsequent moves of SP500 holding until Vix<F2, since 2012, non-overlapping.


Nbr of trades             :  40
Total points              :   475.00
Avg points                :    11.88
Stdev                     :        26.92
Z                         :              2.79
Pct Win                   :        0.73
Max Trade P&L             :    81.00
Min Trade P&L             :   -81.25
Avg PL Win Trades         :    24.09
Avg PL Lose Trades        :   -20.32

The average length of the trade is 3 days.  The current trade was entered on 1/31, 9 days ago and down -160  points and not included above because it is still open.  After this long it is another 11 days on average before the term structure flips back to contango and this trade would be exited.

Feb

10

 “Inflation is About to Appear ‘With a Vengeance’ Paul Tudor Jones Says”

Larry Williams writes: 

I’d defer to Hoisington Capital over PTJ on inflation.

anonymous writes: 

Hoisington has an interesting comment about the low savings rate now vs the normal 8%. Ancedotally I’m seeing lots of consumer spending and travel due to the “bull market” euphoria.

Feb

3

 Markets can experience contagion. I remember from trading futures (nee commodities) that a crash in one market tended to bleed through to others. We would always remember it as though someone who had a great position in beans would sell it out to meet a margin call in silver that should have been dumped. That is, cutting your profits to let your losses run.

In that vein I wonder how much the recent hit in Bitcoin contributed to the equities decline.

Jim Lackey comments: 

Ben K Green Horse Trading.

Bitcoin the gypsy trade
Currency Rebel Commander 
Nazz Maniac Mule

Feb

1

"Are Longboat Key Cameras an Invasion of Privacy?"

A scary advance of the state surveillance apparatus. Don't let this fool you, these cameras are a printing press of revenue. Don't drive in this town if you ever even jaywalked, they will use anything as a pretext to detain you and search you and your car. There is a bright side, just think how safe you will be.

Jan

27

Not sure how to count it, but it sure seems that the remarkable magnitude of weekly gains in SPX are correlated with the number of slanderous articles about Trump in the gossip media (BBG, NYT, CNN).

One fears the day they cut him 1mm of slack, in their pink hats.

Jan

27

Dear Universe,

I have just posted my 2018 walking tour schedule on my website www.indepthwalkingtours.com.

Also, I am nearing completion of a memoir called BOND, SPOCK, GALT AND ME: GROWING UP NERD IN THE SIXTIES. Should be fun to read for those who remember those times.

See you on the streets!

Fred

Jan

19

For educational and history purposes 
Assuming DJIA closes where it is today on the coming tue
Here are the longest stretches of DJIA without 5% corrections from all time high closes  in terms of calendar days 

# rank by longest stretch since 1900 

Date first date of 5% correction 
DJIA value at the time of first 5% correction from all time high close 
Date , first date when DJIA came out from 5% correction zone ( i.e previous day DJIA close was below 5% from ATH close , while on this day its above (ATH close -5%)
# days , self explanatory 
returns self explanatory 

Jan

19

Peter Pinkhasov replies:

Mr. Partridge, I have just sold my Climax Motors”

Jan

13

 I sometimes wonder how big agrarian reformer traders like palindrome and drunk and upside down man and his twin can make money retrospectively outside of service loopholes and I think a large part of it is creating a buzz concerning their already held positions and another part of it is they made money in the past but haven't made as much as the market in the last x years? What do you think?

anonymous writes: 

Some time ago I corresponded with professor Malkiel about the WSJ dart-throwing contest. I pointed out that the pros had (slightly) beaten the darts. Dr Malkiel's response was that this was explained by the announcement effect: People reading the picks of experts (vs darts) bought the expert's picks at the next open - believing the experts were in fact experts. This publicity added to the the expert's returns. And controlling for this, there was no difference - like the thousand monkeys composition problem.

As far as upside down people and sages, in a world of lawyers surely it is malpractice not to advertise positively one's positions.

Peter Ringel writes: 

Two days ago the  center-most headline on drudge was:

"CHINA MAY HALT PURCHASES OF US TREASURIES –Markets Rattled" (It linked to articles on Bloomberg and cnbc.)

An emotional argument and IMHO not the real driver of the current leg down in bonds. Bonds made some sort of short-term low.

I thought: "Wyckoff Lives", because it seems to be Wyckoff-style news-manipulation.

Today, I read the first paper on Kora's list: Front Page News: The Effect of News Consumption on Financial Markets by A. Fedyk

and I think: "Wyckoff Lives!"

- The paper gives empiric to the fact, that front-page news on BBerg create higher volume and stronger drift in the minutes after the news-release – than non-front page news "of equal importance".

- The paper defines three categories of news PI("primary important"), SI_1("secondary important" on front page) and SI_2("secondary important" NOT on front page)

- The paper discusses the relation of SI_1 and SI_2

- The paper does not research the impact of PI-news - probably because we don't know what the control group (of news) would be .

I think it is an easy step to conclude that this behavior is gamed. E.g. if someone wants to exit a position, he will attempt to place news on BBerg's front-page, create a buzz and exit into that "artificial" volume.

The above describes a potential manipulation to exit a position and a resulting reversal (intraday).

Now I wonder if there are already papers that research news-buzz impact longer-term and for directional moves.

To research this I think a major problem is how to categorize and qualify the news and what would be the control group? E.g. for the "story stock Tesla" (the one with the buzz), what would be the "non-story Tesla"?

Stefan Jovanovich writes: 

The question about the last year's stock market rise is whether the gains are to be measured in dollars or Euros. In dollars it has been a big deal; in Euros it was an 8% net return, less than half what could have been earned without the stock market risk by simply being short the Almighty dollar and long the Euro. 

I agree FX impact & risk is often overlooked by the (global) public. We just had it in Poland, where a lot of private real estate debt was in USD. Then people were in trouble, because of the strong USD. The polish Gov ended up forcing the creditor to convert to zloties (the polish currency).

Jan

12

The UN provides a convenient table that ranks countries by you-know-what. Perhaps this was in the President's briefing book.

Jan

4

Many markets are in a parabolic upward move with new highs and current prices well above the 20 day average, i.e they're trending… is it bullish or bearish and what is the affect on other markets that have not gone up big?

anonymous writes: 

The move has been underway for several weeks, most recently with CL edging above 60 and GC breaking above 1308. In the midst of the NYC blizzard, the markets smell the long-forgotten florid boughs of the K-spring.

The rallies of the past decade were driven by geopolitical tensions, or fears of debt default in Europe. But the economic backdrop is qualitatively different now.

The question is whether the Fed can get ahead of it, or not, and it ends in a crack-up boom. Or, is it even a sustainable rally? It's difficult to get too confident with softs not joining in the fun.

Dec

30

 The lede: Bitcoin drops 11% as South Korea moves to regulate cryptocurrency trading

Instead of the more relevant (other crypto did not drop commensurately): "Bitcoin drops as Snapshot Block for the Segwit 2x Fork Passes"

Boris writes:

Still acting as directional magnet for all other cryptos, at least for the larger ones - Only Ripple not following.

Heck of a run for Ripple (XRP) in the last 24 hours - now the third largest (71B) crypto by market-cap. Was second largest for couple of hours. Going from 1.16 (yesterday noon) to currently 1.67 USD - Market chatter of becoming the winner of 2018. Great pattern behavior to capitalize on. Stay tuned.

anonymous writes:

I would note that XRP is not a cryptocurrency, and is the opposite of the vision of a trustless, decentralized peer-to-peer transaction network. The XRP token itself has little utility in the Ripple network, and is just a demo token for Ripple, Inc.'s Hyperledger tech. Even if banks choose to use XRP to defray costs of using the network, the amount of XRP required is trivial. Ripple leadership has said that it would amount to about USD 10 worth of XRP for an institution's entire year of network fees. The futile attempts to explain that to XRP "investors" could merit a scholarly article by the scholarly disciples of Leon Festinger. The Ripple tech does have value, and the best way to play it (i.e. lowest risk:reward ratio) is through equity investment in Ripple. Ripple, Inc. holds 65% of the outstanding Ripple tokens, and starting in January will unlock these tokens, distributing them on exchanges.

Of course, the pumps in XRP are astounding due to new dumb money that regards a USD 1.70 token as "cheap" (there are 100B XRP tokens total) compared to ETH at 750 (95M coins) or BTC at 14500 (16M coins). Because not driven by changes in fundamentals, the dumps are dramatic too.

Speculative profits are profits, and making money from the oblivious greed of others is just as good as any other profit; no question.

Andy Aiken writes: 

Life isn't like the golden days, when there was one phone company, the top marginal tax rate was 91%, stock brokerage commissions were hundreds of dollars per trade, and a heart attack or aneurysm had 95% mortality. Remember the placid days of yore, when people worked 6 days a week, 10 hours a day, and nonetheless spent 70% of disposable income on shelter and food? Those were good times, much better than letting people have money to fritter away on ringtones and vacation homes. When times were still good, people didn't die of fancy illnesses like Parkinsonism or Alzheimer's, they died of proper diseases like cholera and tuberculosis! Or they consumed a bit too much of the botulinum toxin that was omnipresent in the food supply. Sure, a few slipped through and died of things like ALS, but they were exceptions.

Dec

30

 Quick summary from Tyler Cowen: "The Rate of Return on Everything"

Here is what I learned from the paper itself:

1. Risky assets such as equities and residential real estate average about 7% gains per year in real terms. Housing outperformed equity before WWII, vice versa after WWII. In any case it is a puzzle that housing returns are less volatile but about at the same level as equity returns over a broader time span.

2. Equity and housing gains have a relatively low covariance. Buy both!

3. Equity returns across countries have become increasingly correlated, housing returns not.

4. The return on real safe assets is much more volatile than you might think.

5. The equity premium is volatile too.

6. The authors find support for Piketty's r > g, except near periods of war. Furthermore, the gap between r and g does not seem to be correlated with the growth rate of the economy.

I found this to be one of the best and most interesting papers of the year.

The NBER version says you can have it for free if you live in a "developing" country or are an establishment drone of various types, but in **big red letters** says that I can't have it, so here is the working paper version.

Federal Reserve Bank Of San Francisco Working Paper Series

The Rate of Return on Everything
, 1870–2015 "scar Jordà Federal Reserve Bank of San Francisco, University of California, Davis et al

December 2017 Working Paper 2017-25

This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century. What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long-run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive dataset for all major asset classes, including—for the first time—total returns to the largest, but oft ignored, component of household wealth, housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new insights and puzzles.

Dec

27

Bitcoin, from Anand

December 27, 2017 | 3 Comments

 The more I read about this market the more Bitcoin and its offshoots look like Railroad stocks in the late 1800s. Behind the shadows there are ‘whales’ who own large blocks with the credulous public chasing the market higher. Every time there is a mini panic these guys come in and support the market like a modern version of Jay Gould. For the time being they are seen as kind benefactors with some kind of wispy greater goals in mind (to save the market/solve global poverty/give humanity its freedom etc). I reckon they are pushing the market up together to liquidate their holdings on the gullible public. A couple of days ago LiteCoin founder said he’d liquidated his whole holdings as he didn’t want a conflict of interest. When it all crashes and the publics savings are wiped out there will be wailing and hand wringing but who are they going to complain to? After all, bitcoin buyers think the establishment is out to get them which is what drew them to go ‘off piste’ in the first place!

I don’t think many people are ‘trading’ bitcoin. We know the stress trading financial markets with a fraction of the volatility. Anyone who tries to trade these tokens is going to have a heart attack within a month. They are a mixture of ‘real money’ (money launderers/criminals gangs and rogue states like N Korea doing off the system transactions) and ‘long only investors’ most of whom are investment neophytes. The latter are the second coming of the silver brigade we saw a few years ago. In fact I think the Silver tin hat lunatics have migrated to Bitcoin and other tokens and picked up other followers along the way. Check the Silver price vs. Bitcoin movement (people have mentioned Gold but I think Silver is the one which is inversely correlated although I need to test it).

Andy Aiken writes:

The volatility is a profound boon to a trader, not inherently a nerve-wracking experience. It’s unclear what you think a trader actually does.

The concentration of ownership of BTC is not dissimilar to present-day ownership of US stocks or real estate.

As for the smear of an inherent criminality, this has been debunked here numerous times. It’s almost always the final argument of those who would prefer that humanity have no economic freedom at all.

Dec

15

 There has been much comparison between the BTC rally and the tulip bulb bubble back in the 1630's. Zero Edge has proclaimed the BTC "bubble" as the biggest bubble in history. Whether it is or not, none of that matters to me. What does matter is all the mention of tulips and the effect they had contributing to my family's considerable folklore.

Back in the late 1960's. my great aunt became rather batty, as most women on that side do. Since she was well off, people referred to her as an eccentric, rather than hanging the crazy moniker poor people would get. One day, my great uncle(by marriage) dug up a bunch of tulip bulbs and put them in their pantry's onion storage box. Apparently, he never told my aunt that he put them in the box. For the record, my aunt was arguably the worst cook in Illinois and it's lucky they never had kids as she would have probably poisoned them. My mom and dad jokingly called her refrigerator the ptomaine box and we were instructed as kids to always politely refuse her offers of food.

One day she was making him dinner and mistakenly used the tulip bulbs from the pantry instead of onions and shallots. That night, he ate the dish, got stomach cramps later in the evening, then dropped dead the next day. She said she didn't have any dinner because she wasn't feeling well. Because he was in his 80's, had chronic medical issues, and was an old man, no autopsy was ever performed, so we'll never know the exact truth of what killed him.

At any family gathering, we still like to joke that my great aunt got away with murder. It gets a lot of laughs, 50 years after the fact. Personally, I don't think she was a murderess or had any intent to murder him, as her brain was rather addled by that time. Furthermore, although tulip bulbs contain a few toxic glycosides, there are no recorded deaths from ingesting tulip bulbs. Still, it makes a great story.

Every time I hear about tulips, bubbles, onions, and shallots, I get a mental image of my great uncle eating that food and keeling over.

anonymous writes: 

My mother was a child in Holland during the Hunger Winter of 1944-5; tulip bulb soup was commonly served because eating that was better than starving.

Dec

15

 Printed 715 USD or 597 EUR–close to 50% in two days. Not a bad move in my investment book.

So whats next–Do we listen to naysayers? Do we look at the yield curve? Do we look at ECB buying bonds? Do we look at FED raising rates? Do we look at sales for the local pizza store, or how much 3-D printing there is out here?

By now, one has understood, that none of the above matters at this point in-time, and may never do. No, what works is the behaviour of price action as there are (clear) enough with clues of directional moves. Buyers&Sellers are watching price points, breakouts, momentum, retracement levels, sentiment chatter and possibly overbought/oversold territories.

Depending on your time-horizon, you could buy&hold, or take off some betting chips in the very short term. The crypto train will have retracements along the way, but the fundamental question is, whether this asset is a good way of adding diversification or some portion of spice in the portfolio for the long haul. Is this the beginning of a wide spread alternative investment vehicle that will outshine the internet boom era between 95-00?

Perhaps. For now we ride the trend until proven wrong and we don't resort to all kinds of mumbo jumbo, explanations of the past (even though good lessons can be learned) or general "I missed the move" and therefore this crypto thing is bogus. Spare the bullshit, eh. Everyone has their way/style of increasing the value of their investments, and that's the only thing that matters. You can talk, or you can act.

Dec

7

"Researchers find bacteria tied to esophageal cancer"

December 1, 2017

David Lillienfeld writes:

There was a Nobel award in the early part of last century for the discovery of the bacterial cause of cancer. The work was subsequently found to be deficient.

anonymous writes:

If they give Nobel Prizes for common sene then my Grandfather should receive one. As a nine year old boy I was heartbroken when my Granddad told me that our black Lab Duke was sick and not going to get better. I asked him what was wrong and he told me he had cancer, a sickness where the body turns against itself with healthy tissue being taken over by the disease. "Why? What causes this?" I asked. "Well it was probably from his food (diet) or on the instructions he got from his mom and dad since he was a puppy (ie. Genes)".

So why do humans get cancer? Same reason: our diet and our genes. Why do elephants not get cancer? Going out on a limb here… their diet and their genes.

The highest rates of cancer outside of humans in higher order species are the very ones in which we human control the diet: livestock and pets. Given that dog's frequently consume the scraps of their human family's meals one would EXPECT to see a significant correlation to diet induced disease. Veterinarians note that cancer has become much more prevalent in man's best friend in the last half century and again–Captain Obvious–it has also increased discernably in man.

Dec

4

"The power of Groups is that they're where people go to have conversations about specific topics. So, in the context of conspiracist or highly partisan communities, they can become incredibly powerful echo chambers; few people join a group to start challenging the prevailing opinion, and those who do typically get kicked out."

-"Fake News and Rabbit Holes: Radicalization via the Recommendation Engine"

Dec

4

"The Secrets of the Wave Pilots":

What seems clear is that our ability to navigate is inextricably tied not just to our ability to remember the past but also to learning, decision-making, imagining and planning for the future. And though our sense of direction often feels innate, it may develop — and perhaps be modified — in a region of the brain called the retrosplenial cortex, next to the hippocampus, which becomes active when we investigate and judge the permanence of landmarks. In 2012, Maguire and co-authors published their finding that an accurate understanding of whether a landmark is likely to stay put separates good navigators from poor ones, who are as apt to take cues from an idling delivery truck as a church steeple. The retrosplenial cortex passes our decisions about the stability of objects to the hippocampus, where their influence on way-finding intersects with other basic cognitive skills that, like memory, are as crucial to identity as to survival.

Recently, Maguire and colleagues proposed a new unified theory of the hippocampus, imagining it not as a repository for disparate memories and directions but as a constructor of scenes that incorporate both. (Try to recall a moment from your past or picture a future one without visualizing yourself in the physical space where that moment happens.) Edvard and May-Britt Moser have similarly hypothesized that our ability to time-travel mentally evolved directly from our ability to travel in the physical world, and that the mental processes that make navigation possible are also the ones that allow us to tell a story. ''In the same way that an infinite number of paths can connect the origin and endpoint of a journey,'' Edvard Moser and another co-author wrote in a 2013 paper, ''a recalled story can be told in many ways, connecting the beginning and the end through innumerable variations.''

Dec

4

Articles from Goldman paint a bearish picture and they are so flawed in their analysis. This is what the CFA stuff has led to. Gresham's Law.

anonymous writes: 

Does "the CFA stuff" mean the attempt to certify critical thinking and standardise which facts are important?
 

Dec

3

 Ever since the CFA exams I have noticed a tendency for Wall Street research to deteriorate. A Gresham's Law appears to be operating. The articles like the white shoe one I mentioned are chock full of seemingly sapient stuff that are scientifically flawed amid reference to Shiller p/e data with their 10 year averaging and data when no earnings were reported etc. They refuse to take account of interest rates and use technical analysis and charts for suggestive but random conclusions. It is sad to see this deterioration as literacy increases as predicted by Nock.

Alston Mabry writes: 

I find that if I'm really serious about an individual ticker, one of the few places where I can get at least trailheads to research is the earnings conference call, not for the company's answers but more for the analyst's questions, assuming there are analysts on the call who are at least somewhat skeptical. Not that I dig into individual tickers that much anymore.

anonymous writes: 

Vic's point of Gresham's Law happens everywhere, but especially in situations where there are credentials given that appear to have value. IMO the CFA society exists (as does the CMT) primarily to enhance the status of its anointed ones (for a price), and for the side benefit of providing income to the society heads.

Al is right: There is no original thinking and virtually no research. But there is a benefit to us thinking ones: If all of what passes for research is bot-written drivel, released over some time period, a case can be made for trends to exist based on the gradual release of the drivel. That would support the contention that what really drives certain markets is momentum and sentiment.

Never complain about the weaknesses of your opponents; exploit them.
 

Allen Gilespie adds:

In an effort to defend free thinking CFAs from the white shoe firms, I have attached and included a link to my most recent annual analysis on the Dow Jones Industrial Index built on Ben Graham's method's with an added modern twist and nod to Richard Russell in a world of QE. I have also include my white paper on Bitcoin, Banking, and Bernanke in a World of Monetary Chaos from 2013. Prior year reports available to those with a Bloomberg under DIA US equity. Given that the economy now includes industrial businesses and network/software type businesses like MSFT and V I think there is a delta between book value, average ratio and earnings methods due to network value theory and excessive monetary inflation. I am calling this new valuation framework my Gold, Bitcoin, Dow Theory whereby one bitcoin plus one gold coin = one Dow share. Obviously, figuring out the key ratios is key, but in short, the theory is that gold and tangible book on the Dow should trade on a ratio. There will then be the goodwill book value which gets measure by crytpo, so in combination they will equal the value of shares in fiat. In short, there is value but that value is dependent on the value of money, assets, earnings, and interest rates. We live in a world of fiat, hard, and crypto currencies. In short, I think QE is the same as John Law effort to demonitize gold but then cryptos broke out - you can inflate values but the market will find a way to make proper measurements. I have started making all price targets in dollars, gold and bitcoin equivalents - when money is mispriced it is hard to know the value of anything and all secular bear markets are the result of a breakdown in the monetary system (greenbacks - bi-metal system - gold standard - Bretton Woods - Quasi-Free float - Crypto) - bear just don't understand how they play (sometime values decline (deflation) (1929-1932), sometimes they inflate (1966-1982) so nominal prices hold but you loose purchasing power, and sometimes you hyperinflate your values go up but you gotta find a better currency (cyrpto).

The Dow Jones Industrial Average - Fintrust Investment Advisors

Bitcoin, Banking and Bernanke - Fintrust Investment Advisors

Rocky Humbert writes: 

Spurious correlation. The first CFA exam was administered on June 15, 1963 to 278 men and 6 women. In 2017, the pass rate for CFA-I was 43% out of 189,000 candidates. The average starting salary for most CFA's is under $100k.

See page 55 of From Practice to Profession: A History of The Financial Analysts Federation and the Investment Profession

"CFA Says Pass Rate for Level 2 Climbs to 47%, Highest Since 2006"

Russ Sears writes:

While I agree with much of what Rocky states, what appears to be missing from the thread is that the motive for much "rresearsh" is often CYB (cover. your. behind) Designatona helps but the real cause and effect of such proliferation is litigation and regulation.

Gordon Haave writes: 

I'm a CFA and I agree with Vic and Jeff. Almost anything written by a CFA is formulaic and uninteresting.

I get an email once a week from the CFA society linking to all the things on Seeking Alpha that were written by CFA's and they are almost universally worthless.

Rocky Humbert writes: 

Wait a second. The hypothesis proffered by Vic was that "ever since the CFA exams I have noticed a tendency for wall street research to deteriorate. A greshams law appears to be operating."

We are in agreement that virtually all of the research is unhelpful or rubbish. But it is incorrect to to attribute this to the CFA exam or to suggest that this is anew phenomenon. At the very least, it is due to the fact that customers of wall street firms do not pay for the "product." And the price of the product has finally converged to the value. Do you remember Henry Blodgett? Mary Meeker? That was 20 years ago. This isn't news.

Additionally, back in the early 1990's and long before the front-running scandals, David Silfen formed an internal prop group to invest based on GS analyst research. The results were abysmal and the group was disbanded. 

Russ Sears writes: 

While I agree with much of what Rocky states What appears to be missing from the thread is that the motive for much "rresearsh" is often CYB (cover. your. behind) Designatona help but the real cause and effect of such proliferation is litigation and regulation.

Paul Marino writes: 

I agree with you Russ, but in a world where you can pay to know if Fed Powell likes his morning egg hard boiled or over easy I'm a little over easy myself. Bernanke was an oatmeal man. This is Flexionic activity written by Gov's and the Operator's will take every advantage over the common man.

Allen Gillespie writes: 

In an effort to defend free thinking CFAs from the white shoe firms, I have attached and included a link to my most recent annual analysis on the Dow Jones Industrial Index built on Ben Graham's method's with an added modern twist and nod to Richard Russell in a world of QE. I have also include my white paper on Bitcoin, Banking, and Bernanke from 2013. Prior year reports available to those with a Bloomberg under DIA equity. Given that the economy now includes industrial businesses and network/software type businesses like MSFT and V I think there is a delta between book value, average ratio and earnings methods due to network value theory and excessive monetary inflation. I am calling this new valuation framework my Gold, Bitcoin, Dow Theory whereby one bitcoin plus one gold coin = one Dow share. Obviously, figuring out the key ratios is key, but in short, the theory is that gold and tangible book on the Dow will normalize and the delta goes to crytpo, so in combination they will equal the value of shares in fiat. In short, there is value but that value is dependent on the value of money, assets, earnings, and interest rates. We live in a world of fiat, hard, and crypto currencies. In short, I think QE is the same as John Law effort to demonitize gold but then cryptos broke out - you can inflate values but the market will find a way to make proper measurements. I have started making all price targets in dollars, gold and bitcoin equivalents - when money is mispriced it is hard to know the value of anything and all secular bear markets are the result of a breakdown in the monetary system (greenbacks - bi-metal system - gold standard - Bretton Woods - Quasi-Free float - Crypto) - bear just don't understand how they play (sometime values decline (deflation) (1929-1932), sometimes they inflate (1966-1982) so nominal prices hold but you loose purchasing power, and sometimes you hyperinflate your values go up but you gotta find a better currency (cyrpto).

anonymous writes: 

David Simon made a related point to all this with regard to journalism. (He worked for the Baltimore Sun before writing The Wire.) As seasoned journalists who knew their beat were replaced by cheaper fresh faces who can still write words, skepticism and quality deteriorated.

Dec

2

Infographic: Visualizing the Journey to $10,000 Bitcoin

How did Bitcoin jump 10X in value in the matter of just 11 months? This timeline visualizes the events in the journey to $10,000 Bitcoin. After dotcom popped, many companies lost 98% market cap - yet an operating concern remained (YHOO comes to mind). What's behind Bitcoin? I have removed 2000-3000 as an area of support following this weekend's madness. Clearly, she'll end below 1 Alas, as I always said, the hi print is likely prior to CME debut.

Andy Aiken writes: 

"Clearly" and yet Anatoly claims to have no position. Evidently his net worth is tied up in airline vouchers.

anonymous writes: 

Actually the "right" trade during the dotcom bubble was to be long and own low delta, far out of the money puts. The same was true during the silver bubble, the nat gas bubble and all exponential moves. What I find astounding is that some people never learn from their past mistakes. If you don't know who the sucker is at the poker table, look in the mirror…. Of more interest than calling the "top" or "bottom" in bitcoin (or anything else) for bragging rights and which are worthless, what do intelligent people expect the opening futures yield curve/implied interest rate for Bitcoin futures to look like? There is no real borrow market; so should futures be in backwardation? Or should it be upward sloping like a regular currency with a positive interest rate? My guess (based on learning from experience) is that speculative flows will swamp arbitrage flows and so it will be in backwardation so long at the market is rising strongly — and once the price has topped and it starts declining, the yield curve can/will go positive. My instinct is that the shape of the futures yield curve will provide a better clue about the status of the bear/bull debate than pulling numbers out of the air — and it's options on futures where the real fun will be had. Does anyone have a better perspective on this?

Andy Aiken writes: 

Finally an interesting question on this subject. There could be some good spread trade opportunities, since I expect the term structure to move wildly in the initial stage of market development.

I expect it to be mostly in contango at first, but move to a modest backwardation that reflects an implied yield.

Bill Rafter writes: 

From the cheap seats, bubbles tend to coexist with inversions (backwardation). Current uncertainty places a premium on the near month while the distant months play with the expectation of mean-reversion. Isn't that exactly what Bitcoin is all about? So you would expect Bitcoin futures to show backwardation. The only problem is that you cannot build an economically rational model for such a price structure. Thus it seems as though momentum and sentiment will rule the day. Appropriate quote from the Senator: "It is conjecture. When a researcher lacks hard evidence, conjecture is his greatest tool. Some conjecture better than others. Some conclusions are more conclusive than others."

Dec

1

I posted on a friend a while back that started out with 50 servers a year ago mining BTC. He recently found some investors and is scaling up to 2000 servers. Some metrics he follows; on his variable costs (electricity, rent, etc), he budgeted it would take 15 days of mining each month to cover, last month it took 5 days. Return of capital he budgeted 6 months, actually taking 3 months. Break even prices for BTC (marginal mining cost) is $1000 to $1200. Says scale is important, bigger processing capability of 2000 servers allows more profitable transactions. They will soon be #2 in their "pool". He has a good relationship with largest server producer in China and negotiated a power deal in the US with decreasing marginal cost based on usage. On ICO and cryptos in general he would not know a crypto-fork from a salad fork, but knows how to run a business and will ride this wave for as long as it goes, with a good cushion above BTC $1000.

Jim Lackey writes: 

Why isn't Google Amazon or the valley locking this biz? Good question or as usual I'm last to know.

Anatoly Veltman writes: 

I could never understand the ethics of crypto mining "biz". You certainly use up resources–to produce "what"??

J. Hales writes: 

Would your friends ROI be positive without the rally? Or more simply: would his investors have done better simply just buying Bitcoin outright?

Years ago when Bitcoin was trading around $50 I did a lot of research on mining operations almost every single one was essentially equivalent to: long bitcoin - expenses of maintaining servers and operations. None the less, they were extremely popular 'investments' as people liked the cachet of being a technologically sophisticated 'miner.' 

Nov

30

 WSJ featured a chart of BTC vs other bubbles. Usually there is a correlate–such as the desk top computer and tech stocks, gold and political uncertainty (sic), etc.

The only things I can think of that correlate with BTC's trajectory are the frequency of NK nuke tests and due-process free salacious executions of key members of the deep state.

Others?

Andy Aitken writes: 

A key characteristic of a bubble is that the people in it don't recognize that they are in it.

The bubble proclamations about bitcoin seem to come from those who have missed out (i.e., they're "too smart" to participate), as well as from those that stand to lose something. Despite Anatoly's misquoting of me, in response to Jamie Dimon calling bitcoin a fraud, I did not call Jamie Dimon a fraud. I wrote that bitcoin said that Dimon is a fraud. Bitcoin is still less than a $150B market cap, less than a third the size of one company (Cisco) at the height of the internet craze. Which turned out to have not been a "craze". The most chiliastic augurs of a connected humanity, portents of Teilhard de Chardin's noosphere reified, were too conservative. Just 15 years later, there are quite a few tech-oriented companies that have surpassed CSCO's peak valuation, and everyone is tied to the net 24/7 through pocket supercomputers.

In my view, the bubble that is barely acknowledged is the vast scope, size, and scale of the state (not just the government), and its rapacious intrusion into our private lives. This precarious bubble continues to inflate on the premise that there is no diminishing marginal utility of additional units of state power. The gap grows between the linear growth in expectations and the logarithmic returns. If this is a bubble, then bitcoin represents its antithesis.

Rocky Humbert writes: 

Andy, Bubble schmubble. There are sardines for trading and sardines for eating. I submit that the most important trait for successful investors/speculators is knowing the difference. And not becoming an idealogue, philosopher or believer. I suggest that you read the Harvard paper that I posted two days ago a bit more carefully. As the paper reports and I've learned from experience, these moves go much further and last much longer than reasonable people expect. Especially for bitcoin (and real estate markets) since the supply/new issuance is very limited. And since you mentioned Cisco, I believe its high tick war around 85; 17 years later the stock is trading at 38. During its final blowoff phase, the stock appreciated by about 800% and the only trade was to be long. Until it wasn't. And then the only trade was to be short — for about two decades (with most of the move occuring during the first 24 months). Same thing with the Nikkei in 1990. Gold in 1979. Etc. And I feel comfortable predicting that the same thing will be true for BTC but from a final blowoff top of who-knows-where. Lastly, here's a rocky challege: Name one major currency whose value routinely moves around by 20% intra-day? (Other than a government engineered revaluation, of course.) Anyone? Anyone? Of course, it's Bitcoin.

Andy Aitken replies: 

I've been emailed personally by several people on the List who asked what I guess they thought were questions I hadn't considered or couldn't answer.

I've responded with thorough emails with numerous academic and non-academic references, and never received a "thanks" or even an acknowledgement of my time spent. The fact is that I have pulled out many times my investment, and yet those with the strongest opinions have nothing at stake (at least in terms of money, the need to be right is very much in evidence), with no more relevance to the market price than a bucket shop price shouter. I have less certitude about the future price than they do. But what do I know?

I really don't care if people think I am ridiculous or stupid. I'll take my profits while they opinionate. Your benchmark of price stability (USD) has declined in purchasing power by 99.5% since the creation of the Fed just over 100 years ago. This was after a long period of purchasing power stability, or even of productivity-driven deflation. Ah, but those fluctuations in prices (e.g. 1907)! They drove a free people to put the management of their currency in the hands of technocrats. My grandfather retired as a bank vice president about 55 years ago, never having earned more than $10K a year. And yet he and his family lived an upper middle class life, with no mortgage on the brick house on a tree-lined street, cars bought with cash, and a child who went to an expensive private college.

What sort of price stability is this? I hold gold and trade it, and even expect a rally in it, but I think we all know that the CBs would kill any "bubble" in gold, though such a "bubble" might be very much justified. If the state and its extension, the CME, kill bitcoin as Anatoly hopes, then another cryptocurrency (or something like it) will replace it.

There are already several that could replace it. It is a mistake to equate bitcoin with cryptocurrency.

There is the beginning of something here that all lovers of freedom should welcome, even if its name is not bitcoin.

Jason Pilfer writes: 

Victor had a quote about Dimon I recall that sums up many of these bitcoin bubble threads.

"Sounds like one of the non-falsifiable predictions from the adventurous traveler or so many of his ilk that don't have the constraint of having to make a profit with trading.vic"

I admire Andy's instructive tenacity and hope to see more. There remains quite a chasm to bridge. I've argued in the past that cryptos are an ongoing disruption rather than simply a new currency coming into an old framework. Many of the predictions would be more relevant if bitcoin were simply a global fiat currency.

The chartism and top/bottom calling entirely misses the reason why cryptos came into being, are incredibly popular and accelerating in adoption and appeal.

The bubble discussion is weary and likely tied to the ongoing global FOMO effect, yesterday I ran across this Fortune link from two years ago about how to short the megabubble when bitcoin was 1/10th today's price

Not much has changed.

The higher level discussion about CME impact is insightful and appreciated.

Nov

28

"U.S Mint's Silver and Gold Coins Turn to Lead":

The government currently is selling the gold-coin proofs at a 25% markup over per-ounce gold prices, a premium that can run as high as $360 per coin. The silver coins carry a more than 200% premium over market silver prices. That might be well worth it for coin collectors and hoarders—or for stashing in a post-apocalypse bunker along with the guns and freeze-dried macaroni. But some unhappy investors have deposited them into retirement accounts, where the shiny gold and silver coins have performed like lead sinkers. Paul Rumage, a 64-year-old retired software engineer from Michigan, said he was looking for a haven from stocks for his individual retirement account in 2013. A private dealer persuaded him to buy 45 four-coin sets of American Eagle gold proofs, and 979 ounces of silver Eagle proofs, records show. The 1,135-coin treasure of gold and silver cost him $308,000, which included a 6% commission for the broker. Less than a month later, his IRA statement valued the coins at $212,000. "I knew something was wrong," Mr. Rumage said. After filing a lawsuit against the dealer and broker, he sold the coins back at a loss. He since has given up on gold and instead bought land in Arkansas.

Nov

26

From what I gather, the pretensions of moral philosophy to be "scientific" were laughed at when the term "social science" was coined.

Say what you will about the 21st century, one thing that is getting better is that social-science authors have the ability to, and feel some obligation to, post their code and data sources where readers can access them.

EqualityofOpportunity.org/data

^ This warms my heart.

Jeff Watson writes: 

Your post reminded me of an engaging article I read this morning. The article is about the increased bullshit that is being strewn across workplaces worldwide. It describes the origins and history of the bullshit, then examines and illustrates the many different kinds of bullshit being tossed about from the boardroom to the classroom. Well worth the read.

Nov

20

 Outlaws use game theory.

Game theory is the math connected with the analysis of strategies for dealing with competitive situations. The outcome of the participant's choice of action depends critically on the actions of the other participants,

Outlaws, being the majority in Slab City, make this town an apt place to study game theory.

The other anomaly of the population is the individualism. Being individuals, there is primarily non-cooperative game theory. Unlike other games, small town outlaws operate better alone, under the radar, and satisfied with continued repeated small profits toward an eventual fortune, without getting caught.

The way they don't get caught is what I call subconscious game theory. Almost zero of the participants have math skills beyond arithmetic, and yet their IQ's are much higher than the Americans norm. This provides an enormous subconscious space for lightning calculations of game theory.

Some of the finest criminal minds have lived or vacationed here in the past three years. There has been the kidnapper of Patty Hearst, road partner of the JFK shooter, girlfriend of 'El Chapo' Guzman, point man of the Jonestown massacre, principal in the World Trade Center bombing, and an early executioner for Hell's Angels.

Crime is like sport, business, politics, gunfights, or any other competitive setting where what I call the three elements of game theory interact: Game, Play, and Analysis. The Game is the well-defined mathematical setting, the Play is the recipe of action, and the Analysis is the best recipe.

Some examples of game theories that occur daily in Slab City are War of Attrition, Cake Cutting, Truel, Stag and Hare, Chariot Race, Pirate's Party, Peace-War, Dictator, Restaurants, Companies, Coordination, and Brinksmanship.

In War on Attrition the game theory is a dynamic timing contest involving a pause. Slab City Poker players meet at a central table where a timer is set, as each sets off about town in a stealing contest. The various strategies are to go by foot or bicycle, carrying a pack or pushing a cart, and so on. At the end of the timed 'hand' they return to the table to compare loot, trade strategies, and get high, before going out on the town for another hand. The conclusion drawn is there is no value in the pause in Slab City poker because they are all liars, and keep their higher value articles 'in the hole' somewhere so they're not stolen during the next hand.

Slab City is wild with adventure, and a hotbed of lawless game theory. It reminds me of the old west Dodge City where the citizens said, 'Leave me alone, and let me go my own route to hell.' A wicket little town, indeed, its character is so crystal clear that one might conclude is marked for special providence.

Nov

17

The price price of BTC is unlikely exceed 8,000 by much - a reader

Do you play poker? If so, have you ever made money from listening to the people watching the game?

The top call is interesting, but it would be a lot more interesting if you put money on it instead of making paper trade calls, as you have been since BTC was trading at 400.

I suggest 3-6 months of consolidation now that the 2x fork threat has passed (today) without drama.

The rest of the crypto market (i.e. alts such as ETH or app utility tokens such as REP) has been pounded indiscriminately in both BTC and USD terms since August. The attention has been entirely on BTC and its forks, with BTC dominance (market cap of BTC as a % of all crypto) climbing from 40% in June to briefly over 60% last week. The alt bear market has been relentless, taking 75% - 90% off the value of coins for solid, valuable projects with serious PE/VC backing.

Several of these apps will launch on the mainnet to great fanfare in the next few months, and will lift the price on many alts, including some that are undeserving. Coinbase/GDAX will begin allowing trading of some of these in January. Currently they only allow trading in BTC, Ether (ETH), and Litecoin (LTC). Coinbase is all that many new crypto investors know of the market (USD and crypto deposits are insured).

Also, now that Coinbase/GDAX has launched a custody program for digital assets, competitors will follow suit. Soon, institutions will have no compliance barriers to holding crypto and hedging with futures (launching this month on CME) or options (January on the CBOE).

But Wall Street and the CME are latecomers to this party, and with a few exceptions, haven't yet had the opportunity for many "liquidity events" such as what an equity IPO represents. I don't see a close analogy here. Most of the BTC that can exist has already been mined and is available to trade. Anecdotally, I know quite a few serious investors who are clueless about crypto who are champing at the bit to "short the bitcoin bubble" via futures. They haven't bothered to read any of the educational materials I have sent them, don't understand the market beyond what they read in the WSJ and Barron's, and have little but rock-ribbed certitude to justify their position. I expect them to get their education the hard way. IMO in the near term the debut of futures and options will create a tug-of-war. What someone treating it as just another financial asset does not understand is the degree to which network growth, miner hashpower, and difficulty adjustments have on the price. There are, in other words, fundamentals that are reflected in the long-term price trajectory, and complex stakeholder relationships.

I don't call tops (or bottoms), but I do expect a trendless consolidation period for BTC. Consider that following its 4000% run to 420 in June, ETH has traded in a range of 130-380, with trading action concentrated in the high end of that range. I expect ETH to rally while BTC stalls. Price growth has lagged network growth by a significant margin since June, and several of the closely watched use cases/apps are about to launch, which will increase network utilization significantly.

Nov

17

Today we had four people ask us about the likelihood of a current liquidity problem. Someone out there in Financial Journalist Land remembers the last line of the journalist in The Man Who Shot Liberty Valence: If the legend is more interesting than the truth, print the legend.

Here was our response (it's very short). As pictures and charts often do, these compel belief.

Mr. Theo writes: 

Thanks Bill. I would also add that historically the flattening of steep yield has been the best environment for equities.

Nov

14

"Low Volatility and Investor Complacency - the NY Fed Offers An Interesting Analysis":

As discussed in Robert Shiller's Nobel Prize lecture, the original puzzle in financial economics was why stock prices are so volatile relative to dividends. According to the Gordon growth formula, stock prices and dividends should have the same volatility. In the data, however, stock prices are significantly more volatile than dividends. Since the 1950s, stock prices have exhibited 16 percent annualized volatility. That is almost 10 percentage points higher than the "fundamental" volatility of dividends, which has been closer to 7 percent (for example, see Shiller's annual data).

Shiller interpreted these results as evidence that stock prices were inefficient, with investors potentially succumbing to animal spirits, or "waves of optimism and pessimism," to explain the large variation in stock prices (see John Cochrane's discussion of this view in a Grumpy Economist blog post) . Importantly, however, Shiller's analysis assumed a constant discount rate for computing net present values. Subsequent work provided evidence against this assumption. Time-varying discount rates are now a standard feature of asset pricing models that can explain the excess volatility of stock prices relative to dividends (see Discount Rates by Cochrane or Monika Piazzesi's summary of related asset pricing research).

As shown in the previous chart, today's realized volatility is about 6-7 percent. This level is what one would have originally predicted using the Gordon growth formula, suggesting that the low volatility puzzle is perhaps less puzzling than originally thought. Alternatively, if one subscribes to the more recent asset pricing theories, it appears that current volatility is either abnormally low or that discount rate variation has somehow been dampened, leading us back to concerns about investor complacency.

Larry Williams writes: 

The disparity is because investors are more influenced by price than dividends. Dividends are not a driver of emotions, prices are. The waves of optimism or animal spirits are in response to price changes which may feed upon itself.

Theo Dosis writes: 

Also worth mentioning that Schiller's data is garbage.

Ken Sadofsky writes: 

How so?

You needn't encumber your own studies, but perhaps a reference to anything, somethings - studies, that falsify.

I understand mu((c) or (s))h is too vague and convoluted to falsify; but then why false a void?

I ask, because you speak with authority.

Thanks,

a wannabe learner. 

Nov

13

Stocks looking pretty vulnerable in here.

Victor Niederhoffer writes: 

Yes. But remember the senator's golden apple and Vince's admonition that you have to be crazy if you're not long and refresh the dimsonian 40,000 a century and see how it works in Nov and Dec.

Nov

10

 I have always thought of "If" by Rudyard Kipling as a fully developed trading plan. It's on my wall above my trading desk and head.

Charles Pennington writes:

Even this?!

"If you can make one heap of all your winnings
And risk it all on one turn of pitch-and-toss,
And lose, and start again at your beginnings"

That doesn't sound like a good trading plan!
 

Nov

8

 While everyone is focused on the no brainer outcomes in VA and NJ, it's quite interesting to observe that Dems swept all of the low level row office positions in the Bucks County and Montgomery County courthouses near Philadelphia.

This is interesting for two reasons.

1. It has never been the case that incumbents got booted out like this, let alone all of them.

2. These two counties flipping to R over the past three decades are a big reason why Rs have been able to do well in Pa. since these are/were the swing counties.

Apparently no longer. They booted out all the incumbent Rs, something which has never happened.

Wow, people must really hate Trump for that to happen. Of course things can change between now and the midterm elections and the next presidential election.

But this is a huge indicator of where things are going, at least for now, and one you may have missed because who tracks row office elections in county courthouses.

Nov

6

 "We are facing a total reform to find a balance and to cover all the needs and investments of the country." -N. Maduro.

The reform is intended to restructure the debt. Down down like Charlie Brown.

anonymous writes: 

Venezuela is a lesson that things take longer to collapse than one expected. I am surprised that to date none of Maduro's bodyguards has plugged him. When will that happen? Probably when the residents fear the status quo more than change.

Parallels to North Korea? Not really. In the Hermit Kingdom the state has almost total control.

Nov

1

Announcement found here.

"The new contract will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin. Bitcoin futures will be listed on and subject to the rules of CME."

Doug Martin writes: 

What do you think the notional value will be per contract?

100 Coins X $6500 = $650,000/contract

5% move per day. Margin requirements would be quite large per contract.

John Netto writes: 

There will be a mini-BTC

Henrik Andersson writes: 

I'm also curious so I called CME and asked. Each contract will represent 1 Bitcoin and when the contract settles you will receive the cash amount of the Bitcoin Reference Rate. 

Oct

23

 An interesting aspect of baseball is that top competitive athletes fail 70% of the time and they are considered good and are paid millions. They play 160 games a year, and no team or player no matter how good can win them all. There are too many variables. They learn to think statistically, and go for percentages. Its a different way of thinking than normal. Specs also fail 40% of the time, at least statistically and that is considered good. Winning and losing tends to be overemphasized in conventional thinking. I wonder what kind of training for youth might change that.

Stefan Jovanovich comments: 

Baseball is about losing most of the/your time; for all the audience cheering and TV noise its natural pace is laconic. So is work. The game outlasts your skills if you are really good or great; it defeats most of us almost immediately. That is why its home has been the parts of "America" that have never had the pretense of being "winners" - the grain farms, the mill towns, the small city (NOT the Large) ghettoes and hoods. The people always knew that the real odds in life are never far from 50/50. 

Oct

23

I've been looking at the Internet of Things from the perspective of security. In medicine, this has become a concern—as it is everywhere else IoT is rearing its head, which is to say everywhere. The process of providing information from one node in a network to another is a transaction, and blockchains provide a means for securely effecting/tracking transactions. Why wouldn't one simply frame the transmissions from an IoT node, then, for an IoT system to assure a secure system (an oxymoron, I know)? I must be misunderstanding a bunch of concepts here, and thought someone might provide some insights that I'm lacking.

Oct

20

It's where we get the saying "All I need is a chip and a seat".

Jeff Watson writes:

Some degenerates have been known to say, "All she needed was another furlong and she would have won."

Oct

20

TRUMP, YELLEN MEETING LASTED FROM 2:00 TO 2:30 - WH OFFICIAL: FOX NEWS

Odds on her staying? I believe she is not long for the Chair.

Oct

15

 The process and speed of Weinstein's demise is an excellent example of the "critical angle of repose." Weinstein's angle of repose was very steep–any number of his widely-known misdeeds could have triggered an avalanche–but his personality, relationships and business acumen resulted in a morphology that had a very steep angle.

One can find numerous analogies in markets and individual companies–John Gutfreund is one example that comes to mind. An astute investor might claim to be able to exit a position/relationship before the angle of repose is reached, but it is nearly impossible to discern luck from brains in this regard.

Oct

12

 A call for preventative measures–less Lamotta, more De Niro?

"Raging Bull: First study to find link between testosterone and stock market instability":

"Based on our findings, professional traders, investment advisories, and hedge funds should limit the risk taken by young male traders," continued Nadler. "This is the first study to have shown that testosterone changes the way the brain calculates value and returns in the stock market and therefore- testosterone's neurologic influence will cause traders to make suboptimal decisions unless systems prevent them from occurring."

anonymous writes: 

That paper fits in well with the overall plan to feminize males in the West. I'm sure this latest generation won't have to worry much about high T levels between the estrogenic impact of leftist culture, environmental toxins, and hormone treatments in youth.

Oct

11

 Publisher's Clearing House directs it's advertising towards the elderly. The advertising format of Publisher's Clearing House (PCH) attracts con men who piggyback on their message and try to extract as much cash as they can from the elderly and unsuspecting by declaring them winners of the big prize.

This hit close to home this week. A few weeks ago, my mother in law called my wife to tell her that Publisher's called to inform her that she won the grand prize of 70 million dollars and a new Mercedes. My wife, ever the skeptic, told her mother that she didn't believe the whole thing, and please don't send any money. Mother in law assured my wife that she didn't send any money.

She mentioned a lawyer/representative of PCH she spoke to who was named Dave Sayer (an actual prize patrol spokesman of PCH). My wife googled this name and got a zillion hits of this Dave Sayer/PCH scam and how to know it's a con. My wife called back and told her mother it was a scam but my MIL didn't believe her. My wife then reported it to the state Attorney General's office, and had one of the officers call my MIL to inform her that this was a total con.

After speaking to my MIL, the officer then called my wife back and said that my MIL had indeed sent cash to this guy via Western Union. She sent $6,000 cash, at least that's what she admitted. The officer thinks it was probably much more as most victims won't ever admit the true damages. My wife confronted her mother to tell her to not send any more money. My MIL said that her money is her business, and to butt out. The problem is that she believes the guy and expects to have a brand new Mercedes delivered this afternoon (Oct 10) and her check for $70 million by the end of the week. Of course it won't show and she can kiss her 6K goodbye. She won't get her 70 million either.

Incidentally, the 6 grand was the tax and delivery charges for the Mercedes. Here's the deal, my MIL is in her early 80s and is quite aware of things. Her mental facilities are not diminished and she's quite bright. Her problem is that she does not believe that people would call on the phone and misrepresent themselves. She thinks she's streetwise enough to recognize a con. The MIL believes in the goodness of human nature and is also a old South Christian woman. She is quite naive and she's also $6K poorer.

My MIL does not think she has been the victim of a con at all, quite the opposite, she is ready to drive her new Mercedes and is ready to sell the Toyota I bought her last year. One thing she does have that all con victims share is an out sized sense of greed, of getting something for nothing. She was never a customer of Publisher's Clearing House. Needless to say, we are very heartbroken and also upset that despite being shown the truth, she is waiting at home for her new car and $70 million. Somehow, I feel that this is going to come out of my pocket.

anonymous writes: 

Anecdotally, I've noticed that the elderly seem very susceptible to being catfished also by Nigerians and others, even if they don't otherwise appear gullible. I guess hope and loneliness are very powerful emotions to be exploited.

Sorry to hear about the MIL and the fact you'll probably being paying for it.

anonymous writes:

Everyone should be aware of this Phishing scam. It almost snagged me and I'm not "elderly" (in actuarial terms at least).

I received a text on my cell phone that says: Alert from CHASE Bank : Your Debit-Card is temporary Locked. Please call us now at 201-754-1565. Thank you for your time

There are two clues that this is bogus. (1) The word temporary is a typo. They meant temporarily. (2) The call back number is in New Jersey. If the text had no typo and an 800 number and perhaps the last 4 digits of my debit card, then I would have called them and been phished. Instead I blocked caller ID and called the number and heard a legitimate sounding Chase autoanswer voice, which detected my caller ID blocking and hung up on me.

I've heard of scams like this during which they record you saying the word "Yes" and then use your recorded voice to purchase goods/services/transfer money. Or it could just have been an attempt at identity theft. Regardless, I forwarded the text to Abuse@Chase.Com and Chase shut down the scammer….for now at least.

It's a jungle out there. Robo callers/texting/emailing makes the marginal cost of solicitation close to zero.

Oct

11

 "A supplement that may block the toxic effects of alcohol"

My friends in the nutritional supplement community tell me that you can enhance the metabolism of blood alcohol to acetate, carbon dioxide, and water and minimize the acetaldehyde molecular logjam by taking oral supplements. L-cysteine, vitamin C, and vitamin B1, which are purported to help.

At supplement doses, they are cheap and harmless at worst. At best: Goodbye, acetaldehyde toxicity; hello, restful sleep. About 200 mg of L-cysteine per ounce of alcohol consumed is sufficient to block a major portion of the toxic effect of acetaldehyde. But because alcohol is absorbed and metabolized rapidly, it may be necessary to take L-cysteine before and concurrently with consumption to maintain protection.

Also, an excess of vitamin C (perhaps 600 mg) can help keep the L-cysteine in its reduced state and "on the job" against acetaldehyde. Experts recommend these doses (with or without extra B1): one round before drinking, one with each additional drink, and one when finished. Some say that this regimen works very well.

Oct

6

 Victor Niederhoffer writes to David Hand:

I am good friend of Steve Stigler and recently read and recommended your book. I came across an interesting coincidence in our mutual field. Every day I post a colored graph of 4 possible outcomes of directions of bond and stocks previous day. 11 of the last 16 occurrences have been yellow days with stocks up bonds down. The binomial prob of that is 1 in 10 million or so. I point out that events have to happen. And this is one of many billions of starting stopping pts and outcomes. Still it seems like an anomaly as I point out, the more important question is what does it portend for future. What's your view? Random or not?

David Hands replies:

Hi Vic,

Thanks for recommending my book!

Can I first check the basis for your calculations. (I may have misunderstood what you meant.) If we take a simple model in which the probability of each of the four types of up/down pairs is equal, and the days are independent, then the probability of getting 11 out of 16 having (stocks up; bonds down) is Choose(16,11)*(0.25^11)*(0.25^5) = about 1 in 4000?

But you presumably chose (to comment on) the pattern (stocks up; bonds down) after having seen the data. So if instead we say what about the probability of any one of the four patterns coming up 11 out of the 16 times, then we have four times the probability. So, now it's 1 in 1000.

That sort of calculation would be ok if we simply had a set of 16 days to look at. But, of course, we are scanning across time. The longer we go on, the more we should expect apparently anomalous sequences to crop up. For example, we should ask not 'what is the probability of getting 11 out of 16 the same?' but 'what's the probability of getting 11 out of 16 consecutive days the same over the past 1000 (or however many) days?'

I really liked your website, which I had not seen before.

All the best

David

Professor David J. Hand Imperial College, London

Pitt T. Maner III adds:

A 1 hour lecture by Prof. David Hand on this subject (2014) is available here.

I was watching Professor Hand's lecture and thought it amusing that he found himself in a situation where a man with his same name was staying at the same hotel at the same. This reminded me that at the University of Alabama about 39 years ago I had, if my memory is right, a Professor Hand for an advanced, introductory chemistry course who was a Harvard graduate. Ironically, the chemist Dr. Hand liked to grade on a curve and on his first test the grade for a "C" was 35% instead of the normal 70%! The first question on this first test involved multiplying/dividing two large numbers and determining the number of significant digits–this took about 15 minutes of the allotted 1 hour test time to do with a calculator but was only worth 5% out of the 100% perfect test score– such a tricky fellow. Now the professors get rated online by the students!

Oct

5

Market cap to annual unit sales

GM - $6,374

Ford - $7,384

VW - $8,276

Toyota - $11,864

Tesla - $1,158,741

At a market cap of $22,000 per unit sold, Tesla needs to sell 2.7 million units per year. Ain't gonna' happen!

Markets can remain irrational longer than you can remain solvent.

Oct

3

 Toria my 4th daughter's boyfriend is a dealer in the Bellagio. He was dealing there when the shooting started. As predicted, the poker did not stop, thereby replicating the situation on the titanic where the gentleman continued their backgammon game until they sunk and the band continued playing.

Stefan Jovanovich writes: 

The White Star Line invoiced the heirs and family members of the ship's band–for the cost of the unreturned company uniforms.

anonymous writes:

The sinking of the Titanic was a harbinger of change — for some things. (Below is an excerpt from the book And the Band Played On by Christopher Ward. Ward's grandfather was the Titanic's Violinist.)

But the Titanic revealed changing social attitudes, as well as atavistic ones. Andrew Hume, for instance, did not pay the bill for his son's uniform. He forwarded it to the Amalgamated Musicians Union, which published it without comment in its newsletter. Public opinion was beginning to assert itself. More than 30,000 people lined the streets of Colne in Lancashire for the funeral of the liner's bandmaster, Wallace Hartley, who, with the rest of the band, had heroically played until the end to maintain calm.

If White Star learned nothing from the consequences of its recklessness, its employees did. A week after the sinking, 54 stokers and firemen, most of whom had lost a father, a son or a brother, walked off the White Star liner Olympic when they discovered there were insufficient lifeboats to accommodate the passengers and crew. They were arrested for mutiny, but the magistrates discharged them. They returned to the Olympic, whose departure had been delayed by a fortnight, to find 16 additional lifeboats.

The captain and crew of the Mackay-Bennett also discovered that the old order was changing. Having risked their lives sailing more than a thousand miles into ice fields, they might have expected to return to Halifax as heroes. Instead, they were the subjects of a public storm, for they had come back with only 190 corpses, having buried 116 at sea. What made the difference between a body being tipped overboard and one being brought ashore? The purser's conscientious descriptions provided the explanation: tattoos or a foreign-sounding name.

Oct

3

 I am rewarding my son for getting an after school job as a server in a popular nearby restaurant. He is making great tips and a bi-weekly check and promises me that the job will not be an excuse for a reduction in grades at school. He is in that exciting phase of life—drivers license, first car, first regular job, cash in pocket, etc. I opened a roth ira custodial account and learned that I could have done it sooner for him since he was already working around the house via chores and some other odd jobs that were not as regular as what he is doing now. My understanding was that his direct deposit regular paycheck had to be established that proved that he was employed to be able to have the ira. I also thought that funding of the account had to come from the income source. But no. Only I can fund the account, access the account (till he 18y/o), make trades for the account till he is 21y/o. There are no proof of income papers to sign, etc. So I want to harness the engine of compounding and unleash the power of the natural upward drift of the market for his time horizon.

So with the market up since 2009 –one of the longest bulls in history; how does one invest these beginning funds for the next two to three years. Obviously I would love to buy no load index funds during panics if possible. I offered my son a matching contribution from me to him for the next two years–making him understand that money put into the ira cannot be taken out till retirement to help get the fund started and some wise investing habits instilled. All ideas on funding would be appreciated.

Sep

30

 I've been watching the news observing the enthusiastic reporters. The rain is hammering them, the wind is ripping, and they are about a couple hours away from a supposed 12-foot storm surge. One reporter for instance is standing in Key Largo, which seems to be about 90 miles away from the eye of Irma. Not sure he even knows where he will go once this thing hits.

I guess they have these guys sitting on the bench waiting to get called up and sent into action. We could be witnessing a form of hazing or simply a rite of passage.

This is also apparent in some of the resorts you venture to during holidays, an analogy is the omelet station attendee. That role seems to be the very earliest of many steps towards hotel management, akin to "Hurricane Duty."

It's one thing to step up to the omelet station with that tall white hat, but putting down your savings and competing against some of the shrewdest institutions is quite the challenge.

I have learned that there are no minor leagues to trading.

Sep

28

The NY Times and Bloomberg wrote about this new paper (August 2017) that purports to show that Tbills outperform almost all stocks over the long run–and that a tiny number of stocks account for all of the returns. I just read it. I recommend that you read it too–since it is counter intuitive.

I see several unrealistic/unspecified methodologies in this paper including (1) equal weight holdings from IPO to delisting of every stock; (2) no clear explanation for how the capital from mergers, acquisitions and spinoffs are handled; (3) where the new investor capital comes from to buy fresh IPO's and where the cash goes when a company is acquired for cash. I also didn't study his statistics carefully. Since most every company goes through a life cycle, it's intuitive that most will disappear or be acquired/acquire, so I need a better explanation for the investor's portfolio management/cash to really understand the practical. What other problems or unique insights do you see in this paper? Something just feels wrong here.

Do Stocks Outperform Treasury Bills?

Hendrik Bessembinder, Arizona State University. Revised August 2017.

Abstract:

Most common stocks do not. Slightly more than four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns, inclusive of reinvested dividends, less than those on one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed companies. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness of multiperiod returns arises both from positive skewness in monthly returns and because the compounding of random returns induces skewness. The results help to explain why active strategies, which tend to be poorly diversified, most often underperform market averages.

Victor Niederhoffer writes: 

This ridiculous paper from anti stock which I haven't read and goes counter to the carefully worked and accurate work of the triumphal trio duly reported in all their yearbooks is an absurdity. Of course most stocks will underperform. That's the nature of cross sectional returns. The distribution has quite a few good winners. It's probably true of a normal distribution also. Certainly for the kind reported in the NYSE year book. Certainly for the stocks in any variant of the pareto distributions. How far will they go to undermine the value of equities. It's so absurd I can't begin to say how it would apply to most any real life distribution in any field like IQ's.

Stefan Jovanovich writes: 

Index investing works because it allows people to avoid the risks of trading; and most of us are lousy traders.

Enterprise ownership beats public investment in terms of ROI (not "Radio on Internet"); but the public markets offer the only way for entrepreneurs to cash out. We still own one of our start-ups; its annual payout as ROI has been greater than 40% annually for the last 38 years. But, we cannot not "cash out" by selling it to someone else. The actual market for private businesses that makes hundreds of thousands, not millions, does not exist. We have been able to "retire" - i.e. extend the life of the business beyond the time we directly manage it - by doing a private variation on an ESOP; our former employee now runs it as a part owner.

As for the tug of war between "capital" and labor, we have been lucky enough to escape Marxism almost entirely. The cash flow from the business is distributed using the New England whaling ship model of "shares". Keith, the captain and part owner, sails out into the unknown every month and we get our cut on what the barrels that he lands in New Bedford. What we all share - Keith, Eddy and her Mom, your pontificating correspondent, and everyone else in the crew - is a 19th century American sense of equality. We are all equal members of the enterprise in dignity and responsibility and everyone understands that what people "make" is a function of talent and timing, not innate worth.

P.S. Every business failure in my life has been a situation where the people in charge (including me) thought that talk about the business as "family" and a mission statement on the web site would do the trick. It didn't; it can't. 

Rocky Humbert writes: 

I read his paper again and was able to tease one critically important fact out of it.

Page 15 and table 2A/Panel C: 70.5 % of the stocks that are in the largest decile by market cap outperformed the Tbill with a 1 decade horizon. And 81.3% of those stocks had a positive return. It's only for the smallest market cap groups that a substantial percentage substantially underperformed Tbills. Look at that table carefully and you can look at your own portfolio and it all makes sense.

In essence — if you own the biggest companies, you have beaten the Tbill (as we know from experience), but if you own the smallest market cap stocks, you have not. This makes intuitive sense since there are only two kinds of small cap stocks — those that start small and end up big. And those who were once big and are on their way to 0. It's a rare and bizarre company that starts small and always stays small!

The press reports and paper abstract are written in a bearish sensationalistic manner. For whatever reason, he chose not to include the key point mentioned above in his abstract. Now that I found this fact, I feel like everything else is noise — except for reinforcing one lesson that I've discovered anectodally: individual price momentum on the way down matters. If you have a stock that was once a $100 billion market cap and is unfortunately now a $10 Billion market cap, you should take your tax loss and reinvest whatever is left in another stock. And not wait for it to go to zero…and definitely not keep averaging down. In contrast, if you bought a $50 Billion market cap stock and it's now a $100 Billion market cap stock, don't sell it because it went up a lot. The skew and history suggest that it will continue to do well. (Until it doesn't).

Sep

26

[A Barron's article, published in 2016, was concerned with a Tail Risk Protection product].

I'm a neophyte simpleton, but it seems to me that risk and reward have a linear relationship. How do you take less risk and get more reward in anything speculative?

Andy Aiken replies: 

He's proposing that far OTM put prices embed assumptions of solvency and central bank competence that are revealed to be untrue in a crisis. This is probably true to some extent. It's similar to betting on #19 on a roulette table month after month, at a casino where the (unlikely) policy buried deep in the published casino rules is that if the lights go out mid-spin, the player is declared the winner.

The payoff for a straight number bet at roulette is 36:1. Of course the probability of a straight bet winning is 1:37, so the expected value of the bet is 36/37.

Tail risk strategies are a bet that the probability of the lights going out mid-spin are significantly greater than 1:37.

The problem is that if a crisis is really severe, then no payoff may be possible.

Did the lights go out because the casino couldn't pay its electric bill (because it is bankrupt)? Did a 3-mile-diameter meteorite hit the casino? Did the Fed declare put contracts null and void, requiring redemption at the original purchase price? This problem is analogous to David Bernoulli's famous St. Petersburg paradox:

The game could be profitable if there were no tail risks on collecting the winnings themselves. Also, although there may be near-term anomalies/market inefficiencies enabling a "value" investment, the question is whether the strategy is profitable in the long run accounting for spreads, transaction costs, and tail risks on collecting the winnings. 

Sep

14

 DIMON: BITCOIN IS A FRAUD
DIMON: BITCOIN IS WORSE THAN TULIP BULBS
DIMON: BITCOIN WILL EVENTUALLY BLOW UP
DIMON: BITCOIN WON'T END WELL
DIMON: WOULD FIRE ANY TRADER TRADING BITCOIN FOR BEING STUPID
 

Andy Aiken writes: 

And in response, bitcoin says that Dimon is a fraud…

Alex Castaldo writes: 

Not very courageous either:

JPM's Jamie Dimon on #Bitcoin: "Don't ask me to short it, it could be at $20,000 before this happens but it will eventually blow up."

anonymous writes: 

Mine, it's better :-)

"JPMorgan patents Bitcoin-like payment system"  

Sep

14

Harvest, from Kim Zussman

September 14, 2017 | 2 Comments

 Our vines this year produced a much larger crop than anticipated. Maybe 2 tons, including an earlier pick for Rose' fermentation.

This last weekend we did the pick for reds. I hire a crew of experienced Mexican workers to pick the grapes into plastic lugs, and haul them up the hill where I transport them to our shaded sorting area. I did some picking with these boys but they are amazing. 5 guys - each not much more than 5 feet tall. But strong like oxes, and coordinated enough to carry 36# lugs along slippery slopes like I can no longer do. Couldn't ever, for that matter.

I generously tipped each of them and worried a little that they thought I was greater than them.

14 friends and neighbors formed the sorting brigade. In the shade the brigade picked off bird-damaged berries, leaves, etc. This year the grapes were left to ripen more than prior years, and I learned something: Pretty fruit isn't great fruit. Our crop already had many raisins and bird damaged berries. Raisins are ok, and the flavor improvement by waiting for full ripening through incessant bird attacks and heat waves was amazing.

The harvest party and lunch afterwards - featuring our wines - was great. Except for the neighbor who was drunk by 11, and failed in his function of sorting grapes in lieu of chatting up the on site women.

I had anticipated a bigger crop this year, but not this much bigger. As I write this there is 1000L of grape must fermenting in four containers in the garage. Fortunately I was prepared with enough fermenters, but I'm still short an aging tank that is to be shipped from Florida.

Wine making reminds me of my emergency medicine rotations as a resident. You have to think on your feet. No texts to consult, no one to ask. Each and every crisis you have to address to the best of your ability. (The Mrs is not on board as to the amount of work involved in this. But I think it is good for one's 62 year old noodle, to the extent that it forces me to learn and adapt like I was a kid)

The fermenting must is like a beautiful version of the irresolvable mess of humanity. There are thousands of compounds and enzymes going off in every direction, and your job as wine maker is to not destroy beauty and enjoy the ride. This kind of thing attracts controlling people who serendipitously succeed by letting go.

Here's to what California might have been, had the socialist putsch of the past 40+ years not robbed of us our destiny.

Check out the blind taste testing scene in the movie Bottle Shock.

Stefan Jovanovich writes: 

Amen. I first saw California in 1967 on my way to VN and it took me 5 years to get back. Our daughter, who was born and raised there, and her parents now live in permanent exile from what was our near perfect homeland. None of us is ever going back, and we will always mourn for what was destroyed - the common belief that no one in private life had the right to tell anyone else what to think or do.

Kim Zussman writes: 

I have done two Tours of Duty of living in the beauty of California, and I can confirm that the 1960s were very different, especially from a technologists point of view. The joy of creativity has moved to the effects of huge financial emphasis rather than intellectual idealism.

Our natural setting is still very desirable, but the feeling of open spaces has changed into me feeling claustrophobic in freeway traffic, escalating housing and living costs, and government that makes things worse.

But I see even more problems in the world almost everywhere else: Crowded Asia, Corrupt Latin America, poor overpopulated Africa, cold Russia, and dyeing Europe. There are too many people in all the big cities, and not enough for all the people to do. I fear the world will go through bigger problems before society settles on a more peaceful and productive system.

Sep

13

I went to the book release party for "Blockchain Applications in Finance" this evening. The author spoke, as did a Chinese venture capitalist focused on fintech projects.

She likened the recent ICO ban to the government's ban of cryptocurrency trading in 2013. In that case, they slowly relaxed their restrictive stance, allowing exchanges and cryptocurrency ownership.

In 2017, the Chinese ICO market was crowded with scam projects, and in typical Chicom fashion, the government announced an outright ban on ICOs to allow them to inspect each exchange and project, and sort things out. She was fairly confident that the Chinese government would again relax its stance, but with far fewer ICOs going forward.

Sep

4

 Forget the unemployment numbers.

The question I've got is how much of a bump to the GDP is generated by the rebuilding of Houston and the rest of Texas hit by the recent inundation?

anonymous writes: 

This will help: "The Parable of the Broken Window"

George Devaux writes: 

I am not sure about the truth of the parable.

Consider that for years people transferred wealth to insurance companies. The insurance companies put liabilities on their balance sheets, and used the cash to generate net wealth.

With the event, the insurance companies transfer cash to the people (and reduce the liabilities on the insurance companies) to restore the destructed wealth. The insurance companies retain the net wealth.

In the longer term, people having seen the destruction build differently. The people are also more prone to secure insurance. The insurance companies use their collective wisdom to innovate solutions or at least improvements that reduce future destruction.

In summary, destruction forces improvements.

Russ Sears writes: 

Banks and insurance companies cause the multiplier effect. the higher the leverage, the higher the multiplier effect is. Holding more reserves and surplus slows the speed of money. Hence rather than just GDP, it should have an "inflationary" effect as the speed of money increases. Prices also increase because of demand and supply shocks. We've already seen the effect on gasoline. 

Rocky Humbert writes: 

This is actually a complex analysis with many feedback loops. It is possible, but not necessarily true that short-term US GDP will increase due to the hurricane rebuild. Nor is it necessarily true that this will be inflationary, however, certain prices (such as local lumber and wallboard) will likely increase. I believe that the primary determinant on short-term and longer-term US GDP is what activities and investments and jobs will be sacrificed/diverted to the hurricane rebuild; what income will be temporarily or permanently lost; and what the relative multiplier effects are between these alternative uses of capital and labor and the hurricane rebuild. Furthermore, if the economy were in a recession with a high unemployment rate, the effect on GDP would probably be greater than the effect in a modestly expanding economy with a low unemployment rate.

For illustration, if my house was destroyed by a hurricane, and even if I have flood insurance, I will surely still have uncovered losses. I will therefore likely immediately reduce other spending, such as a trip to Disney World and eating out at restaurants and buying new clothes. I might also delay the purchase of a new car and other big ticket items because I will need to buy replacement furniture. More generally, local businesses will likely be disrupted — and productive local service employees will be laid off for days/weeks/months — resulting in less economic activity in the region — offset by an increased need for carpenters, plumbers, and tradesmen.

There is a debate among economists about the real multiplier effect from infrastructure spending. But even that debate assumes that the infrastructure will be upgraded and improved — not simply hauled away and replaced. But the multiplier effect is beyond the question on the table. The bottom line is: it's complicated…..

Aug

27

If you plot daily range versus daily volume for the S&P over a long time interval you get the following graph. I have included straight lines illustrating that 2 distributions (relationships) are apparent.

anonymous writes: 

Bill: Excellent visualization! This double hump result is surprising. Vic's random walk explanation was elegant and intuitive.

How does one intuitively explain the two humps? The most intuitive way would be a regime change of some sort — and primarily affects the measured volume.

Regime changes might be changes in market structure (i.e. HFT, commission-rate changes, plus-tick shorting rule changes, growth of ETF's, the way exchanges calculate volume including dark pools, etc.) The commonality of these regime changes is that there is a before-and-after …. so the second hump may be more/less pronounced after a give date??? If one were to do this scatter plotter for each year and make a moving slide show from the result, the result might look very differently…and give some interesting avenues for further research. 

Aug

26

I'm a firm believer that being a bookie in high school prepared me far more for a career as a trader than anything I learned in a finance class.

This is an interesting article on how Vegas sports books are managing their risk for this fight. As an aside, there is usually 100 times the money bet outside of Vegas for an event like this than what is wagered in Vegas itself.

Aug

25

Eleven of fourteen Powerball ticket purchasers refused to sell their tickets to a reporter for at least twice the purchase price. Most feel so good about their numbers, their shot at the big one.

"@business insider: we tested an economic theory by trying to buy people's Powerball tickets for much more than they paid"

Aug

25

 "Memory believes before knowing remembers. Believes longer than recollects, longer than knowing even wonders."

This quote by Faulkner says much though you'll have to read it over again many times along with Light in August before it sinks in. Faulkner knew much about tragedies which befell the South and wrote about them as honestly as anyone. Understanding the South starts with reading Faulkner.

Most of his books concerned individuals saddled with crimes and mistakes inherited from the past, borne for lifetimes and passed on for many more. Eventually even their statues grew tired, and only the memory of memories remained; and they wondered if the past had finally offered up redemption. Faulkner believed no; history never once forgave nor was ever forgiven.

Stefan Jovanovich writes: 

Faulkner is the classic schoolie author. He is the Henry James of the South, and almost everything he writes about actual history is complete bunk. He lied about being in the Royal Flying Corp in WW I and seeing action. His only actual service was as a reserve cadet in the British Army in 1918 in Canada. The only "front" he saw was Toronto. "Pickett's charge was the end of the Civil War" because he and Shelby Foote say it was; the Confederates who were there - including the man in charge of the artillery, General Alexander - thought it was only a loss and no worse for the Army of Northern Virginia than Chancellorsville had been for the Army of the Potomac. The actual war - the period when there is not one bloodbath in a year but one each month that the weather permits - is won and lost in 1864; but that doesn't fit the story of how "they" drove Old Dixie down.

Faulkner's obsession with history is about all the lost Butler money of his mother Maud and her mother Lelia. He and his fiction mourned the good old days when Mississippi was the richest state in the Union, and his sentiment for the former slaves was the same bathetic crap that people indulge in when they talk about the old cars they once owned but were forced to sell.

If political blacks and their allies want to continue "the struggle" 150 years later, that is hardly shocking or surprising. The Irish in America were still marching and crying and complaining to the United Nations 250 years after the Battle of the Boyne; and the Irish Free State was still choosing to be neutral when presented with a choice between Hitler and Churchill.

Understanding "the South" starts with knowing that Faulkner never picked cotton, never missed a meal and never, ever had to eat shit from Yankees for talking funny; and that absolutely none of that matters, as history.
 

Aug

23

 Aaron Brown on 1820s Northwest USA and poker's role in the invention of futures markets

Aaron Brown laying out his ideas on currency (also available in chapter 10 of RBR or part 7 of The Physics of Wallstreet: "The Physics of Wall Street: The Most Arrogant Book in the World? Part 7")

The most notable part of his thesis is that the standard story of futures markets (farmers love them) is false for farmers, centered on the wrong parties (should be centered on processors: millers, cleaners, shippers of grain), and backwards.

Brown claims that, instead of borrowing the cash to run a business, running the business, and repaying the creditors in cash, futures markets allow businesses to borrow something much more like what they will produce (wheat, electricity, FCOJ), and then pay back in kind—thus hedging currency risk. (This was especially important in the days of wildcat banks and soft paper monies—the wild west had little coinage.) Someone who transports wheat from St Louis to Chicago could short a location spread, for example.

Crucial to his point is that July 23 #2 soft red winter wheat at Minneapolis is *not* what I produce—it's merely similar enough that by rolling a series of short calendar spreads, I can continually borrow in terms *similar* to what I will actually produce.

In AB's world, not only are bonds, bills, notes, and corporate equity alternative currencies/numeraires –so is, with thick enough markets, each short spread on a commodity market. What's more, he claims that futures markets were not invented by anyone; they arose bottom-up out of a poker-playing culture, which had developed "clearing-houses" between 1820-1850, so that hedging credit risk/ currency risk in this way felt obvious.

Stefan Jovanovich writes: 

As another Brown would say "AAAARRRRGGGGGHHHHH!!!!"

No one in 5th century Greece or 18th and 19th century Atlantic America thought that you "borrowed cash to run a business". If you could not deal in credit, you had no business to run.

The use of the term "money" seems to defeat almost everyone's understanding of these periods. There was no "paper" (or clay or parchment) money. Those were, like the Federal Reserve's small pieces of art, bills and notes - forms of IOUs. Coin - cash on the barrel head - was what you demanded from people when you no longer trusted their credit on any terms. Coin was valuable because the demand for gold and silver jewelry, plate and other forms of ornament was real and because, when there was a credit collapse, anyone holding coin could find great bargains by being willing to surrender their cash in exchange for - wait for it - bills and notes.

"Wildcat" banks were local credit merchants; people who lived within a day's ride or canal boat journey (also dependent on horses) had a pretty good sense of what the local wildcat's IOUs were worth. The conventional histories pretend that this produced a crisis because they were all written by people who found the anarchy of local credit dealing offensive. They wanted a nice, neat world run by proper people named Biddle.

anonymous writes: 

I have not read the book. But I just read Aaron Brown's review. If he submitted that essay to an accounting professor, he would get an F. It is obvious to any objective observer that the proximate cause of the Bear Stearns and Lehman blowups is the same thing that blew up all of the S&L's in the 80's, Mettelgeselschaft, and countless other operating companies: they held illiquid long-term assets that were financed with short-term funding. Period. End of story.

Aaron Brown evidently has a large brain that is similar to Nassim Taleb's but he lost my respect when he wrote: "But everyone with a brain agrees that (a) derivatives are at the heart of things and (b) the essential aspect of derivatives is not contracts that reduce risk by specifying prices in advance but the system of exchanges, clearinghouses, and standardization that replace credit risk with liquidity risk."

Absent a surprising development since his last medical exam, Rocky still has a brain. And with that brain, he has written several laws — laws that have served him profitably over the past decades. One of those laws is that when a market becomes dominated by arbitrageurs and second-order instruments (whether it's merger arb, convertibles, mortgage backeds in 1994 and again 2007, CMO's etc etc etc) — it will blow up. Always has. Always will. And there are many many reasons for that. Note to Aaron Brown: (1) DERIVATIVES ARE NOT THE HEART OF THINGS. THAT IS WHY THEY ARE CALLED DERIVATIVES. (2) There is nothing remotely interesting, novel or insightful about your (b) observation. Anyone who has taken an introductory course in Finance understands there is a difference between Solvency and Liquidity.

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

16

 I'm not unfamiliar with the VC world, and I'm baffled by the size of the filecoin raise. Can anyone provide insight?

Andy Aiken writes:

In effect, Protocal Labs, the company behind Filecoin, has eschewed VC funding and simultaneously made a gambit that selling the coin will stimulate quick adoption of their app.

1) In contrast to other ICOs, Filecoin deliberately designed the ICO to be SEC-compliant, and thus could allow US investors
2) the timing could not be better, with Bitcoin and platform coins such as IOTA near ATHs. It has been hyped in a well-orchestrated marketing campaign.
3) the project/app has immediate practical value, and similar offerings have already been implemented in such projects as Sia and Storj.
4) the coin is the transaction token, and does not represent a share of the company. Think of a Filecoin as a unit of revenue, not as an indication of valuation. Consider Walmart: annual revenues this yearwill be about $500B, while Walmart market cap is <$250B. The relationship between Walmart revenue and market cap depends on other variables, such as operating margin.

I did not participate. My view is that the project will succeed and be profitable, but that the valuation is rich given the established market presence of Sia and Storj, not to mention cloud storage offerings such as AWS. But with AWS or similar cloud storage, a user is not able to generate income from their own unused storage capacity. There is a financial incentive to use apps like Sia, Storj, and Filecoin.

The future value of the coin will depend on adoption. Sia and Storj are not very easy to use. If Filecoin can make their user client easier to use, then it could well deserve the valuation.
 

Aug

16

The hysterical reaction of media commentators and graveled foreign policy pomposities to Trump’s "fire and fury" reminds me of the reaction to Reagan’s hot-mic joke that "we begin bombing in five minutes".

Although now the left now discusses Reagan in hushed tones as an idyllic "good conservative", it was not so at the time.

Isomorphismes says:

I have never read a pro-Reagan leftist. Even centrist American liberals (eg Robert Reich) conveniently count (as noted by Mr Terrill) America's decline as starting with his presidency.

Andy Aiken adds:

That was then, this is now:

https://www.nytimes.com/interactive/projects/cp/opinion/election-night-2016/the-example-of-ronald-reagan
https://www.commentarymagazine.com/articles/the-liberal-misappropriation-of-a-conservative-president/
https://thinkprogress.org/10-things-conservatives-dont-want-you-to-know-about-ronald-reagan-7a87723a4f68/
http://www.politico.com/magazine/story/2017/06/26/how-the-right-gets-reagan-wrong-215306

Aug

10

We have seen Korea crises before. Panic abounds. Then markets bloom, again.

Well, one can never know when this phenomenon will fail and panic might be well founded. But based on logical imagination of how the supposedly irrational dictator also knows not to get pulverized on one hand and based on the history of how such panic has been induced from time to time and then dissipated…

Not sure, where to get the precise dates (week of heightened rhetoric N Korea style) and the price action through that week and next. So excusing myself out yet again from trying to count such things out. Perhaps a spec will have ways to extricate such dates and might run numbers.

This note leaves a hypothesis, the Dictator is either the smartest Put Writer in this world or is being deployed by the smartest Put Writers in the world to indulge in collection of wages of selling fear and panic, from time to time.

Peter Ringel replies:

I guess some Wyckoff-style manipulation goes on with North-Korea related news. Once the news is on Bloomberg it's old news. There is intelligence about NK every day - there are talks with NK every day ( someone, somewhere ) - there are new developments every day | yet only sometimes the news reach Bloomberg & co.

One explanation could be, that geopolitical risks are not well understood and managers go into cash once NK news hit Bloomberg.

This should make NK news a great tool if someone wants to shake out equity bulls.

(Sorry, I offer lots of opinion, but few facts)

Aug

8

 Back when I was an honest hustler with more brains than money in the sport that was replacing bowling as America's greatest pastime, I could not resist testing my best game by betting on it. Honest as a Michigan farm implement, with an indomitable backhand, it was the act and then the action of making the bet a win that counted. I refused to take any good person's money. If he was an evil cheater, I doubled the bet.

In the same year that I was the best shooter in the ugly sister sport of racquetball, 1973, Bobby Riggs smashed onto magazine covers and into world news by defeating Margaret Court in the Mother's Day Massacre. A few months later, slandered the 'fattest sexist pig in history', he stepped up to legendary charming Billie Jean King in the Battle of the Sexes.

You only need to know the hustler's mentality to know the outcome. You don't need to read about the mob riding Bobby for a debt, secret locker room conversations overheard by a janitor, or diagnose his supposed ailing 55 yea- old body. Just watch the video of the match and how he jumps blithely over the net after match point to congratulate the winner King.

I'm sure that he threw the match because these would have been my thoughts, and were them, when I battled the same year nearly every female racquetball champion informally or in exhibitions playing opposite handed.

Bobby said to himself, 'She doesn't stand a chance of beating me, the odds are long against King at 8:5, I'll bet a hundred thousand on myself, and tell my friends to do the same, throw the match, and still be able to get a date! Then with the first match publicity I'll make a million on the rematch.' So, assuredly 30,000 people in the Houston Astrodome and a global audience of a further 50 million watched him throw the match.

Riggs was the #1 world player for three years, won Wimbledon, and the U.S. Open. I also threw a few matches rather than take a good woman's money, and then had them treat me to a date after the match.

Andrew Hollan writes: 

During my 8+ years of investigating all aspects of Paul Haber's life I interviewed a high powered Chicago lawyer that saw Haber give 15+ points and the serve to a Mob family's son who was gifted with a power serve and a good kill shot repertoire. The Chicago mobster got hot and beat Haber in a 21 point game.

Haber did not have money to cover the $ bet and they were going to beat him to a pulp or kill him. The lawyer paid Haber's debt to save his life. The attorney said the Chicago mob had a group that just played 4-wall handball within their own group but Haber being Haber got himself in their group that day by placing bets with them and giving points and the serve to start the match.

I met Bobby Riggs at the Houston Racquet Club. My group was young wooden racquets Racquetball players. He stood out to a 16 year old Andy Hollan. I played the Juice's driver Al Cowlings at the HRC too. It was jaw dropping in later years to see the Bronco ride with them on a split screen with the Rocket championship game vs. Knicks on the other 1/2 of the screen.

Bo Keely writes: 

The way Haber sometimes worked that hustle was to throw the game and collect a percentage of the debt paid by the party to the mob. No mob family son was going to beat Haber with 15 points if they played all year, but Haber had to let the mob save face, while making his fee. 

Aug

7

The price of a lumen-hour in British pounds adjusted for monetary inflation

Aug

3

I did not use a single piece of paper money throughout the Baltic Scandinavian countries. Everything is cashless and wireless. Even in euroland I had trouble getting rid of my Euros. The cards have no foreign transaction fees and an attractive conversion rates.

Aug

2

Scientists have a lot of pressure to publish and often a null result won't publish. Some speculate that hypothesis creep may affect reproducibility. It's like curve fitting in finance.

Aug

2

 We just visited Copenhagen, Denmark. It's a beautiful city thronging with tourists. Very few Chinese tourists…they were all in Russia. Construction on old and new everywhere. Just below Stockholm on the beautiful woman index. Canals, open squares, spires. All the young people ride bikes and drove Uber out of business. Everyone speaks perfect English. Food and lodging is expensive. Cashless everywhere.

New Nordic cuisine was the rage in all the trendy restaurants.

Denmark used to be feudal society. My theory is there are trickle down effects from ancient history. People stopped at traffic Lights: bikes, pedestrians and cars. Every follows rules, no litter. There is an undercurrent of compliance and social conformity. Those in power positions act high and mighty and expect compliance. Anecdotally a waitress was afraid to bring food problems to a chef. An Airbnb host complained "I am not your servant!"

There was no attitude of self entitlement or the attitude so prevalent in the US that the rules do not apply to me. A similar effect operates in Japan where the nail that sticks up gets pounded down.

Jul

30

The Polish Zloty is .28 USD but at a recent big piroshkis lunch for six the entire tab was about $40 US. Real cheap. No political unrest in Gdansk. Streets were not as clean as Sweden or Finland.

Jul

24

 The average monthly income is $600 US in St. Petersburg. The average apartment rents for $400 US so they share a 2br.

Food is relatively inexpensive and fresh. Caviar is $40 an ounce.

A cop stopped our limo driver. A long negotiation ensued resulting in a $100 payoff to avoid a one year license suspension. This is apparently common. Doctors also require payoffs for "free" healthcare.

Submarines and warships lined the river ahead of Putins visit to his summer house. The summer house was an imperial palace.

It hailed grape sized hail. The weather was sunny and 60s with occasional rain and thunderstorms.

The port is huge. It makes Oakland look small. It must serve the entire Russian economy.

Jul

20

 Indian equities have been smoothly chugging along. Flagship indices at PE of 18 and some pink papers writing its already the most expensive market in the world. Another headline that caught my eye today was that Market Cap of Indian stocks has reached 2 Trillion USD, whiskers lower than that of Germany & Canada.

No, I am not describing the current moment as a bubble, AT ALL. Yes this market seems valued and while it is flirting very very close to the first 5 digit round number, the magical 10000, there is a much deeper bubble building up and the current market is nowhere close even its onset.

Before I lay my two line thesis, at the end of this note, let me share an image that was circulating much through market-mens' whatsapp here today.

In the local market-colloquilism, the market operators are typically alleged to make the public wear stock at the tops. So when a wearable cloth image was going around on Whatsapps today, one could not miss recalling old posts on the list regarding the struggle ahead of a big round and its eventual release. Well thats a digression into the short term.

The real big bubble factors could be:

a) The world needs its next, bubble. This is a key surmise for one to guesstimate where the next bubble will rise. [More on this on a separate thread, why the world needs the next bubble]

b) Sobriquet of fastest growing economy already bestowed.

c) Political risk computes on India are at all time low with a uber-dynamic CEOesque Prime Minister. Valuations are a function of confidence and quality of management in any security. India was ranked as having the highest confidence in its Government amongst all countries recently, with 76% of the sample stating so, highest of all countries.

d) Cutting the long list of so many other potential factors that may appear to be mere bones, when I put this piece of meat on the table: The Government may very likely drop the Income Tax Rates from the current 32% to almost 12% or 10% before the General Elections in first half of 2019. It might do so by way of a policy to bring the Income Tax rate down in 5 years from 32% to 12%. Many reasons for the Government to do this:

i) Very low rate of compliance right now. The Laffer Curve may be put to play or expected to put to play. ii) Black Money, or unaccounted wealth of Indians, stashed in the banks around the Alps has been a key element of all political rhetoric. Destroy the device that motivates c reating black money, a.k.a. high Income Tax Rates so there will be huge jump in disclosure of incomes. There may be a huge flight of capital inwards into India too.

e) For now, the thing that may be important is, whether or not this much of a tax regime tectonic shift comes or not by 2019, these expectations will be taken very very seriously in the next eighteen months.

So while through the school of mumbo & jumbo, with this indicator or that indicator or this study or that study will keep pointing to a 5% dip for traders to keep playing, the huge huge short gamma, short delta risk on India will be out in the open pretty soon.

In the long run, before we all are dead, the expectable income is truly only gains in taxes and reduction in the cost of capital.

Alston Mabry writes: 

Thanks for the analysis, Sushil. I notice too that most estimates of currency valuations show the rupee as one of the most, or the most undervalued.

Peter Ringel writes: 

This sound like wonderful news for India!

I am quite a Modi fan boy myself. I am happy to read, that his administration has not lost it's drive yet.

I think there was a lot of FDI into India because of Modi – like a Trump-like catalyst and these tax reforms sound very healthy to me.

I am very surprised that Modi is able to do this.

After decades of socialism, related red-tape/corruption and state-sanctioned monopolies I had pretty much given up on India.

I was wrong and now I think the potential in India is huge.

Thank you for the update, Sushil.

Charles Pennington writes: 

As of January 2015, the Big Mac Index had the rupee 60% undervalued. The only two currencies that were more undervalued were the Russian and Ukrainian currencies, 72% and 75% undervalued, respectively.

By a long shot, the Swiss franc was the most over-valued based on the index, 57% over-valued. Second place — Norwegian krone at 31%.

Only 5 of the 57 currencies listed were over-valued against the dollar.

I was a little surprised to see Hong Kong at 49% under-valued. Supposedly a Big Mac costs $2.43 in Hong Kong and $4.79 in the U.S. The U.S. number seems high — does that include fries?

Jul

14

 It's been ten years since the iPhone came out. Walking around NYC I see they have 100% penetration. What I have noticed is that the most vulnerable seem the most entranced and glued to the screen: children and people who appear uneducated. While the benefits are clear and the social connections good what I wonder about are the more sinister aspects of controlling visual and audio input using well proven methods of subtle influence. Much of the content is powered by ads and commerce. I wonder if there is a unifying effect? I wonder how many are killed by walking in front of buses or hitting something while driving. Definitely a major world changing trend in in progress.

Jul

14

 In Georgia (the country), the most amazing thing about it is the drinks the country offers. It's said wine originated in the region thousands years ago. Now one can buy many very good wines and beers at low prices. And craft beers are sold in supermarkets where they fill a plastic bottle from the tap directly. So we tried to take good advantage of it by tasting as much as we could. But the effect is that we got more sleepy than normal.

In Vietnam, the most prominent drink is the coffee the country produces, mostly robusta. In every corner of any town there are coffee bars where local people drink and chat with friends. One can also easily buy freshly ground coffee in many shops, and a unique handy coffee maker that is very convenient for travel. So we also tried to take good advantage of it by tasting as much as we can. The effect is that we stayed high-spirited most of the time.

Does the drink in a country affect its productivity? My experience says yes.

anonymous writes: 

Except that you could add a control and look at the success of Vietnamese immigrants in the US, academically and financially. Perhaps the booze is less cause than effect.

Jul

12

I noticed an article today a la E that some sort of weed killer is accidentally killing crops and another that marijuana crops may displace food. Unintended consequences dept. RJA finally trying to stop going down?

Jul

10

In the book Presuasion recommended to me by The Chair the act of reciting or singing together or marching instep creates subconscious feeling of group unity leading to greater willingness to help other group members. A similar technique is used by churches and armies.

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