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.

Jul

10

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

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

Thoughts?

anonymous writes: 

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

I agree with this statement.

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

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

Julian Rowberry writes: 

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

anonymous responds: 

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

Similar phenomena occur in commodities…

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

Raph Vince writes: 

Je me regarder.

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

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

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

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

Galen Cawley writes: 

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

anonymous writes: 

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

Jim Davis writes: 

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

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

Jul

10

First the technology changed. This improved the cost. The improved cost changed changed the mix.

Better materials of construction permitted the maximum allowable inlet temperature for gas turbines to increase from about 1500F to 2300F. This resulted in efficiency improving from about 25% to about 40%. Even with the higher efficiency, the exhaust temperature of the gas turbine increased by several hundred degrees. This higher temperature resulted in higher efficiency for the steam portion of the combined cycle and lower relative capital cost. Now total efficiencies are in the range of 60%.

Horizontal drilling and fracking resulted in falling gas prices in the face of rising demand.

Steve Jobs (and maybe Rick Perry) was right–sometimes supply creates its own demand.

Via technology.

Jul

10

I thought this was an interesting paper on Autophagy and Lifespan.

Is there a market connection? Nutrient starvation and caloric restriction sound like a market with low energy/volatility. During those phases autophagy starts working replacing dysfunctional hormoneles and proteins from the cells making them stronger. Similarly a market that has low volatility like the last year's market is getting stronger internally as strong hands are buying from weak hands who are dysfunctional.

Jun

28

 My father (RIP) joked back in the 1980s that when our local northeast Ohio mall died that it would make a great prison. At the time we laughed because we never thought the mall would ever lose its appeal–I mean it had an Orange Julius store in it–what could be better than that? Well that mall did die and it still is just one huge boarded up bereft eyesore. The mall up the road 3 miles in the next town just lost its Sears anchor –recent December announcement. And this mall will be the next to die. Another 5 miles up the road in a better neighborhood is a mall that had to restrict unchaperoned teens on weekends due to a mass teen flash mob that went wilding–terrorizing the people actually shopping. It will be the next to go–people do not want to be harassed in a captive space when they go out to shop. The trend seems to be more of these outside based shopping plazas where you walk outside and stroll from store to store and enjoy open air and green space, etc. The "everything under one roof" concept seems to be going away.

What will eventually develop out of these dinosaur chunks of dead mall space in prime locations in less that prime towns? These towns lost middle america–maybe prisons, or halfway houses, or a la Trump–new job training centers, or low rent housing for displaced illegal aliens, or detention centers for questionable illegals, or new factory centers for returning blue collar jobs. I do not know the answer.

anonymous writes: 

The dead mall long standing empty property and another one about 20 miles away were bought by Amazon to be turned into warehousing distribution centers . Both will be high tech built for drone delivery. Not many flesh and blood workers to be getting jobs in these places. However, the building trades will be quite busy and there will be contractor dislocations and shortages of cement and rebar, etc to be anticipated.

Rocky Humbert writes:

It is arguable that this country has way too much retail space. It is arguable that Class A malls will survive, but Class C malls (that still look like the 1950's) will fail. It is arguable that population movements will render some malls unprofitable. It is arguable that the valuations of REITS are too high relative to their growth prospects and trend in interest rates. But the "Anchor Tenant" is a legacy of a bygone era….

Lastly, I will speculate that people who live in large urban centers (especially New York City) have little understanding of the social phenomenon of malls– and how they are the climate-controlled "main street" in many places. 

Jun

28

I have a friend who set up a bitcoin mining operation in Texas. After a pilot operation with 20 servers he just added another 50. Some interesting points on the business; At BC $2300 he makes back all of his capital in around 6 months, after which his break even on variable costs is around $1200 BC, everything above is profit. He converts bitcoin to $$$ regularly. Power accounts for about 25% of his marginal costs, though he worked an arbitrage on the power and is getting below market rates. All the servers must be ordered from China and there is waiting list.

He says Iceland is becoming a big spot for miners because of the cool climate and subsidized green energy. Cooling is important as overheated servers run slow or stop. The business model is closer to a lease than anything overly technical; renting servers to pools of bitcoin users. The calculating programs to verifying transactions are all pre-loaded in the servers and require just some basic set up. After which, he runs it all on his smartphone.

The biggest risk is something happening in the first 6 months, as well as having reliable cheap electricity. After 6 months, if BC prices get to low he will just shut off the servers, but if prices stay the same or rise he participates fully in the upside.

Jun

28

There are almost as many negative headlines about crude coming across my feeds as there are about the prez.

Alston Mabry writes:

I was just looking at some of the oil service companies and how their total equity+debt is less than the property, plant & equipment line on their balance sheets. That could well be a realistic assessment if oil is dead. But it's awfully tempting.

Jun

22

 Back in September 2015, GS introduced their first active beta ETF to much fanfare, including the fact that the management fee significantly undercut competing products.  Time enough for a reality check. Total Return Since Inception:

GSLC: 25.93%

SPY: 30.02%

Annualized equivalents:

GSLC: 14.82%

SPY 17.04%

[Note: results from 9/30/2015 to 05/31/2017]

Hernan Avella writes: 

It looks like the same can't be said abut Blair Hull ETF (HTUS). It seems to be accomplishing it's goal, beating SPY since inception and with less volatility. I haven't looked under the hood of fees, distributions, taxes. But superficially looks good.

Rishi Singh writes: 

The return/sharpe are meaningless for a sample size of a year, espeically as the fund (according to prospectus) is balanced quarterly. I would want to see tracking error of live results vs their backtest. Also - I don't think people would buy this ETF expecting a return > than SPY every year, but for the correlation benefit. Again, what's the backtested corr, vs live and tracking error?

Russ Sears writes: 

I would respectfully disagree that "return/Sharpe are meaningless for a sample size of a year" because if they have had 4 quarters, it should give someone watching an idea of how stable each part is compared to S&P, and idea of its volatility. The returns/Sharpe may not tell one much but the individual data points of 4 quarter returns and volatility/correlation the picture has become clearer. While I would agree that it may not be enough to make a statistically significant conclusion, I would not even use a fund for diversification/correlation if the volatility/correlations to standard benchmarks are not somewhat stable. And the poor start does not bode well for the fund's strategy's alpha's consistentcy.

Further, if you had invested say $100 million of some institutions funds in the fund with a benchmark of S&P arguing a $2.6 million under-performance would not be something I would want to defend too rigorously or try to initiate the fund.

Jun

22

 A few years back, it seemed like Carnival couldn't get out of its own way, and one person opined that maybe there was some form of employee espionage at work.

It seems that the disease has spread to United. It's having a true annus horribilus:

"United passengers left terrified and injured after turbulence on US flight"

Jun

22

“In the next 30 years, the world’s pain will be much greater than its happiness,” Ma said at an entrepreneurial conference in Zhengzhou, China. “Social conflicts over the next 30 years will hugely impact every industry.”

“Machines should only do what humans cannot,” Ma said, adding “only in this way can we have the opportunities to keep machines as working partners with humans, rather than as replacements.”

“Fifteen years ago I gave speeches 200 or 300 times reminding everyone the internet will impact all industries, but people didn’t listen because I was nobody," he said.

"people should prepare for decades of social upheaval and pain as the internet disrupts the global economy."

Jun

22

 An old high school friend (who reads and has commented on DS) recently told me that he is burned out in his career and wants to trade FX for a living. Apparently he knows 2 people that make a living trading through one of those shops. I gave him more than several reasons why he should consider taking a pass on this new career, but he's going to a 4 hour seminar to learn why FX trading is the way to go. He is willing to invest $10K in this venture. My immediate comment when hearing about his limited bank roll was that he would need to generate an extraordinary return on his money just to make a living and that would be near impossible. I ask the list for some guidance….questions he should ask the FX broker, questions he should ask himself. I've tried to talk him out of this, but he is still considering taking the plunge. What are your thoughts about someone 60 years old, quitting his job and trading FX on a $10K bankroll. I know my thoughts, but ask the list to add some of their own.

Generally speaking, when casual acquaintances ask me this question, I tell them that they will do better going to Vegas….at least when one blows through the $10K bankroll, they might get a few comps….the mistress of the market will just take one's money without even a thank you kiss in return.

Stefan Jovanovich writes: 

Cue Marcel Proust: We remember the stories of our lives but there is very little of the past that our nervous systems actually keeps in the present.

One of the lucky and tough survivors of the torpedoing of a merchant ship sinking in WW II described the part of the whole thing that stayed longest in his active memory.

It was the voices of the barely 20 year old seamen in their Mae West's calling for their mothers.

Jeff's friend seems to be another believer in the age-old faith that Mommy is still out there somewhere and will magically save us from the hardships of shipwreck. 

Bud Conrad writes: 

Read the opening personal story of Education of a Speculator for an example of how hard the high leverage can become. You could quote me as saying: "I wouldn't trade forex without a $300,000 portfolio." This kind of desperation often accompanies market reversals. For forex I don't know what the change will be, but I would warn your friend in the strongest terms.

anonymous writes: 

I think risk of ruin is too high if you're under 100k bankroll. With 10k there is leverage needed to make a living, but with a 100k you can survive a couple bad streaks. 

Jim Lackey writes: 

Good afternoon, Chair, Brothers, ladies and gentlemen. Interesting post, I just caught a young man screen watching. It's the stare of hope. If one would focus enough the prices would go our way. I was asking him if he wanted to buy the truck or not. He cursed and I knew it was about something online. I said what is going on dude? He said "look at this. " He motioned me to look at his screen. It was forex quotes, I said, what is your position?. "Long the Euro and they said it is going up because….". I asked who are they and why would they tell you and what is their position? He looked up and………., huh? First off one must start with individual stocks 2-1 only. Secondly they always know and I was always the last to know. Huh? Do you want the truck or not? He looked back at the screen and said "but the Euro….." If he bought the truck I would have given him a few good books. I'm sticking with trading cars and trucks. It is not a very profitable business margin wise. It is a lot of physical work. I am in excellent physical shape. I can sleep at night. I'm not sure if it is a permanent disability, but I have lost my ability to take risk in the financial markets. However, I would never discourage anyone from speculating for a living. Buy them a cup of coffee and after an hour see if they would read the good books. Specs are honorable and benefit society in ways that I did not comprehend until years after I hung up the racing helmets.

Larry Williams writes: 

While I've already agreed with the majority comment on the subject let me add this…

A few years back I got a letter at Christmas time from a guy who wrote basically saying, "Larry I bought your trading course I actually went to the blood bank and saw blood to buy it. I raise some capital while I was learning started trading now here I am in Vail Colorado. I'm a single father my kids are with me I'm living in a house beyond my wildest expectation, all because of learning to trade etc., etc."

Of course I replied that it had nothing to do with me was his success and good fortune but nonetheless this was a wake-up call in lesson for me it's hard to tell people know don't do this because this letter was not an exception have had others, not as extreme, but in a similar vein. Clearly there been other people who have lost money, some probably even shirts or shorts.

This is a hard-core to stop somebody so what I personally do is let them see the doors open but also all the dragons and monstrous just beyond the door. Full disclosure, brutal disclosure then if they want to pick up the craft they can.

I know you don't build good athletes by telling them they can't do something you have to encourage them so this trader, want to be trader need some encouragement.

Jim Lackey adds: 

This is what happens in forex too: Cascading margin calls for so many and who was holding the other side after everyone was forced out of their positions? GDAX affiliates? GDAX?

A side point: a few million worth and the price is crushed. Small market. Any medium sized player can own the price action in that arena…

https://www.cnbc.com/amp/2017/06/22/ethereum-price-crash-10-cents-gdax-exchange-after-multimillion-dollar-trade.html 

Jun

18

This is a great SI article on a 45 year old's quest to hit a home run. Lots of practice required.

Jun

15

As I've mentioned before, I am not a very good peer-to-peer lender.

Lending Club says that my account (adjusted for loans that are in default, late, etc.) is now worth 3.9% more than it was when I opened it in early 2016 and that my annualized return has been 2.87%, much lower than what they claim to be typical, which is >5%.

Stats on my loans are given below. I give the number of loans for each rating category from A to E, along with the number of "bad" loans in each category.

I define "bad" to be either "in grace period", "late 16-30 days", "late 31-120 days", or "charged off".

Occasionally you'll hear someone claim that you should just lend to the highest interest rate borrowers because the bad loans are relatively independent of rating. That was totally false in my case. I had literally zero bad loans in the "A" category, and only a reasonable 5% of my B loans were "bad". Meanwhile about 13% of my C and loans went bad, and 27% of my E and F loans went bad. "E and F" borrowers probably overlap a lot with "Ebay merchants" in my opinion!!!

Of course, when a loan goes bad, it's typically not a 100% loss, but believe me, it's pretty bad.

In retrospect I would have done much better by sticking to A and B loans, or even just A loans.

.

.

.

.

.

.

Stefanie Harvey writes: 

I have been playing on Lending Club for 5 years. I now choose all the loans I fund rather than "index"

- I only choose "A" loans
- Borrowers must have 2 years of employment and a credit score higher than 730
- I exclude any loan for "medical" or "relocation"
- My return is around 5%

Great discussion; Jeff thanks for posting that article (and agree - poorly edited book excerpts!)

I have done over 1000 loans and the A loans default at just under 2%. I lost more the first year I invested when I tried mixing risk. 

anonymous writes: 

Very interesting, thank you.

Maybe the whole idea of the D, E, and F loans with interest rates >20% is just a broken model. It's hard to see how those can have a good outcome for several reasons:

–If you're really strapped for cash, are you even going to be *able* to pay off the 20% loan, when the interest itself is so staggering?

–If you're really strapped for cash, are you even going to be *willing* to pay off the 20% loan, given that there's no collateral? Surely you'll pay on anything else first–mortgage, student loan, whatever. And your credit rating can't go much lower than it already is.

Seems like maybe the whole model — charge a higher rate to compensate for the higher risk of default–might be broken because of a Heisenberg effect–the rate itself affects the default rate.

Regarding loan selection, I read elsewhere some stats purporting to show that, counter-intuitively, one of the best credit risks is people who borrow to pay for a wedding.

Conversely, borrowing to "start a business" turned out to be a bad credit risk. The easy explanation was that such people would soon be quitting their steady-paying jobs.

anonymous writes: 

It brings to mind the payday loan business and makes one think that productive research could be done in that area, with the usual caveats.

Jun

11

Whenever the conversation turns to the health care system, and the question becomes, "Well, what would you do?", I always say that whenever prices are rising rapidly and you think they shouldn't be, then look for 1. constraints on supply, and 2. subsidized demand. Root out those two problems first, and then allow economic liberty some time to sort the situation out, and then look to see if there are externalities that need to be addressed or common goals that aren't being met.

Jun

6

 August is the hottest month in my home state of Montana so I went to Intellicast to see how the temperature has risen since Global Warming began.

The hottest August temp recorded was in 1934 at a smoking 107.

Looking at each day of the month none of the hottest days ever recorded were in this century. One has to go back to 1988 to get a record setting day.

So I thought maybe GW is not heating up the summer months but at least the cold months should be showing a warming effect so I looked at January. What I found was the coldest January was 1930 with -39 below.

Highest temp ever seen in a January was 1897. The average hi has been 37, average low 13.

Again I looked at each day of the month to see when the coldest and warmest ones were to be found expecting to see warming in this century. There it was! 2 days out of the 31 were record setters, 1/24 and 25 with 64 and 59. I had to go back to 1992 to find the next record setting days.

From this limited data it I hard pressed to see any warming trend. Suggest other try it on their home towns etc. We did the same thing for US Virgin Islands and again you have to go way back to get the hottest days.

David Lillienfeld writes:

The discussions on this site about global warming remind me of the discussions about cigarette smoking and lung cancer. One of the early arguments from the Tobacco Institute, that domicile of wise, impartial men, was that cigarette smokers didn't die only of lung cancer—there were other diseases that they died from, and at higher rates. All true, but not particularly relevant.

Then there was the TI's argument that most cigarette smokers didn't even die of cancer. Also true. Also irrelevant.

Then there was the argument that there were other reasons, like psychological factors, that led those with a predilection to lung cancer to smoke. Well, there actually is, but it's too small to explain the relationship.

Then there was the argument the TI made that lung cancer among cigarette smokers was the result of occupational exposures to carcinogens. Also true. But cigarette smoking has a stronger, some might opine much stronger, relationship to lung cancer than the occupationally-related cases. And in some cases, like asbestos, there is an interaction between smoking and occupational carcinogens.

The TI was successful, to a point, in constantly changing the focus of the discussion.

I could go on.

While any scientific hypothesis should account for observed phenomena, one must be careful in how one phrases the hypothesis. Let's be clear about what we are talking about, since I sense in these discussions (and I think this is round ninety-one or so) are often about more than one hypothesis.

Just an observation.

anonymous writes:

Increased CO2 is measurable, and more a function of our numbers than our behavior.

What is enigmatic is the expected temperature increase is not manifest in recent decades.

Why? Not an ideological answer to "Why?" But actual, scientific (repeatable by experiment) why. If the stakes really ARE so high then why be ignorant about this? The answer may buttress the AGW debate (in which case, we must periodically cull our numbers so that aggregate CO2 output is sustainable, for those who have he stomach for such) or it may not.

But blindly arguing either side from a standpoint of ignorance is only done to support one's interest.

Jun

6

How I got out of Florida condos at the top:

1) The tennis pro at the building became a realtor.
2) The fellow who installed my window treatments became a realtor.
3) Hurricane season was approaching.
4) A "ballerina" I knew quite well told me to delay selling my condo until she could take the newly instituted 5 day cram course to get a realtor license for which there was a several month waiting list.

This week I heard from a fashion model eagerly desirous of entering the coin market who had opened up accounts at several shops and was mad because they had a waiting period for her buying of various coins.

The conventions on coin presentations were oversold and standing room only.

Sad I can't hand out a statistical answer to document the froth, but there are many.

1) Control of more than 50% of the coins potentially weakens the security.
2) The leaked ability of the hackers to enter any computer in multiple ways retrospectively.
3) The advent of access to quantum cloud computers by corporations in beta (which means govts have had access longer)
4) The untested nature of the post-quantum algos.
5) The need for the governments to track and tax money flows.
6) The investigation powers newly needed to stop ransom attacks requiring payment of coins to "anonymous" wallets.

Andy Aiken writes: 

Possibly some lessons are:

Techies, anarchocapitalist utopians, Chinese elites, even ordinary people desire a currency not controlled by the state, that offers privacy and security without requiring armed guards for a big gold stash.

The financial technology and payment processing systems for USD, Euro, etc are antiquated and slow, decades behind what is feasible and in reach, struggling under a mountain of regulation.

A currency is what people use to pay for things. When the European banking system was in shambles after WW II, people paid for food with cigarettes. Scrip has been used many times throughout history.

Getting financing for a company by working with bankers is an expensive, frustrating experience.  Business founders will find a way to cut the middlemen out of the game if they don’t add value.
 
The cryptocurrency mkt is definitely frothy. As with the dot com bubble, most of the coins & firms will fail.  Some will go on to be the future Amazons. These human needs are in search of a solution even if all of cryptocurrency goes to zero tomorrow.

Orson Terrill writes: 

Same here, starting about 2 weeks ago, yet again, people are asking me about bitcoin. This has usually coincided with near term top, and has been true since 2012. Same for stocks.

anonymous writes: 

I do some consulting in this area, and last week I had a few calls (one from a PE firm) come in asking me for a general overview of the competitive crypto landscape, including who mines, what the pecking order of coins is (in terms of best, most used, etc.) and so on; stuff that could pretty easily be found on the web, by haunting Reddit, etc.

Froth indeed.

Stefan Jovanovich writes: 

Thanks to Andy Aiken, I have been able to get some sense of how Bitcoin actually trades. Also thanks to him, I learned - yet again - the most important lesson about trading: you can't claim to understand a market if you don't actually trade it.

I don't trade Bitcoin and have absolutely no idea what will happen to the markets for it. But, it does seem to me that the participants in the markets for cryptocurrencies - whether long or short - are making one assumption that is simply not proven by the evidence.

Bitcoin is not a currency. Neither, for that matter, are ounces of gold. These days a currency is an IOU that

(1) is accepted as a credit for deposit by the banks that are willing to use that currency as a unit of account; (2) is accepted as final payment for taxes and legal judgments; and (3) is the face denomination for the government debts that are accepted as officially-sanctioned reserves for financial institutions

That Bitcoin is not a legal tender has not mattered in the slightest as far as the traders in Bitcoin are concerned.

In the days when money was coin, there was a long history of unofficial credits being actively traded and readily exchanged and even accepted for deposit. The Virginia lawyers who most closely followed Washington as President (Jefferson, Madison) were infuriated by the speculation they saw in New York over the debts that were to be redeemable in the country's new money. They were themselves active speculators, as Washington had been; but their gambles and savings were in warrants and other paper claims on the Western lands. When the people who support and believe in Bitcoin argue that the digital claims they have bought or mined are as "real" than as the digits that represent the vast bulk of people's dollar/pound/Euro/yen/renminbi "money" (sic), they are absolutely right. Bitcoins and dollars are both simply collective promises that what is represented has the value of scarcity and is not counterfeit, and they both have to be taken on faith.

There is only one problem. Governments, as Hamilton demonstrated, have a serious interest in having their official fictions take precedence. The risk of any Bitcoin "bubble" is that, in the name of the protection of official legal tender, unofficial digits may find themselves being investigated for their risks of "fraud". Government can always be relied on to investigate others for having committed the very sins that the government wants to preserve for its own spiritual authority. 

Anatoly Veltman writes: 

Centrals may investigate and outlaw whatever they wish - but since they've encouraged the vastness of the internet, it's impossible for them to replace the cork. Eventually, they'll be adapters of a protocol.

anonymous writes: 

And that is exactly the point.

With crypto there are no groups of individuals painstakingly crafting bills in basements OR shadowy dictators buying eight figure currency printing machines from manufacturing facilities in Bavaria or Switzerland. Even if governments manage to cripple or persecute the Bitcoiners - (who? miners? users? developers? writers? consultants?) - there are as I type this 735 existing crypto issues, over 100 crypto assets, and thousands of tokens trading in nearly 4000 markets of varying mechanisms and liquidity around the world. Far more important than that, each day tens of thousands of new minds are brought into the crypto sphere, some of whom are brilliant programmers both (a) eager to outdo the best of what is currently available, and (b) eager to get rich. There is no, absolutely no, putting the proverbial genie back in the equally-proverbial bottle.

Jun

2

Moderate Drinking Does Not Appear to Prevent Heart Attacks

An analysis of 45 studies of relationships between heart attacks and alcohol consumption reports that the studies that associated moderate drinking with reduced heart attack rates are flawed (Journal of Studies on Alcohol and Drugs, May 2017;78(3):375-386). To show that moderate drinking is associated with heart attack prevention, researchers must show that non-drinkers have more heart attacks than moderate drinkers. The problem is that in most of the studies, the non-drinking group includes a high number of people who have been told that they need to stop drinking because they:

* have liver, heart, lung or kidney disease

* are diabetic

* are alcoholic

* have had heart attacks

* have any of the many other reasons that alcohol can harm them.

Once the researchers remove people who have stopped drinking alcohol for critical health reasons from their non-drinking groups, the drinkers show no advantage over the non-drinkers. Long-term studies that have followed people into their later years have shown no advantage from moderate drinking.

Journal of Studies on Alcohol and Drugs, May 2017;78(3):394-403

May

31

Here is a copy of Wallace Lee's excellent, out of print, booklet, "Math Miracles". As a youngster, this book provided the basis for many proposition bets to add to my repertoire. It's an entertaining read and mere words cannot do it justice.

May

31

Check out this video. Paul Haber: Against the Wall

Paul Haber did the impossible beating the world racquetball champion in a winner take all Hands versus Racquet match in Memphis. Sports Illustrated called it the greatest mixed sport match in the history of athletic competition. In the world of handball, Paul Haber was Arnold Palmer, Jack Nicklaus, Bobby Hull, Joe DiMaggio, Joe Namath, and a dash of Frank Sinatra. A Sports Illustrated writer called him "the most colorful champion in sports since Namath - and with better knees."

Howie Eisenberg writes: 

Ironically in the match with Muehleson, it looked as if Paul was playing clean and the dentist, pullar of society was intentionally blocking. It didn't seem as if Muehleson was using the power advantage that a racquet has. Yes Paul Haber was a a scumbag but except for the screaming at the refs was not bad on the court. Nobody had any greater will to win than him. He was actually fun to be with if you weren't playing against him or lending him money or he wasn't sleeping with your wife as he did with some guy who was dumb enough to invite him to stay at his house for a tournament. He and his father also named each other as corespondents in a paternity suit. Other than that he was a paragon of virtue.

May

27

 From pro poker player Sam Farha:

"The one who bets the most wins. Cards just break ties."

Doug Martin writes: 

I sat next to him on the way back from Aruba about 8 years ago. I had no clue who he was until someone on the plane told me. I rarely win at the casino.

That trip in Aruba was odd. I was playing Roulette for about an hour. Red, Black, Odd, Even, etc, just passing the time over some drinks. It got awkward. The dealer started to randomly pay out on some of my losing hands. After about 3 losers where the dealer gave me free money I wandered off with my girlfriend. Very strange but I remember it vividly.

I would imagine about 5 more of those "winning" hands I would have been followed out and asked to hand the money over to some kid in on the scam.

It was a small hotel casino, probably 40 people there total. 

Jeff Watson writes: 

Last time I saw Sammy play was at a 5/10 NL game at the Bellagio. He did not look happy in his reduced state/bank roll. He had the same hang dog expression and demeanor the same as some of the hundreds of busted out traders I have known over the years. This brings to mind the story about Nick "The Greek" Dandlos. Having played for millions, winning and losing 20 fortunes over the years, in his dotage Dandlos was reduced to playing $5 draw poker at the Normandie Club. At the table, the Greek was asked by another player how he could be playing for such reduced stakes and he replied, "Hey, it's action, isn't it?"

May

27

As long as there are useful idiots in the world like those that I often enumerate from Cal, and the twin former Harvard fund manager, there is no need to worry about A.I in our field.

Orson Terrill writes: 

The idea out there that there is no discoverable alpha, or soon there will be no discoverable alpha, because of so many quant funds, hft, AI algos, have absorbed it all…. is ridiculous!

People should be excited that no one can get to it all.

The factorial reality when trying to get the faintest idea of the market as a closed system was already beyond the grasp of current human ability. Attempts to increase precision with AI doesn't remove anomalies from the market at an increasing rate, it will slow the rate of removal. Deep learning adds a huge amount of variables (random weights, nodes, whatever you want to call it) to the computational load.

Say you want every basket of 10 stocks you could make with the SP500, for 10 years of data, OHLC, volume, ranges of various frequency, day of week, day of month, month of year, 1st 2nd 3rd (and on) differences of everything, some various filters such as averages, then you want covariances, the changes in those.

THEN! (Maybe!) You take those 200 octillion data points (seriously) and get to work with some AI? Seriously? Every computer in the world probably couldn't do this, and of course you'd still have over fit models in the end.

To make the point about AI:

Formulating a model, or an hypothesis about a condition, with all the data wrangling and basic transformations involved, that are then used to make orders of magnitude more data by fitting something as basic as a neural network auto-regression model, essentially means the potential combination of inputs, and computational demand, has left the universe. It's way beyond the scale of any computational feat happening even the most bleeding edge. So. Far. Beyond.

In other words, think, dig, have ideas, test them, and don't worry that you might be the only one trading on something. If what you're trading on has just a minutia of complexity, it probably wasn't found via brute force search by some high performance computing juggernaut. Bet on that. They have trillions and trillions of the most simplistic price change anomalies that they are still chasing/racing each other for all over the world.

The stuff that the Chair was doing in the 70s (before I was even born!) is still being chased today…and everything else (which is almost everything) is left on the table. The structural reality of: What computers are good at, returns to speed, large funds needing to focus on the most liquid assets for risk control, and because large funds need larger sources of liquidity to match against, guarantees most money is crowding in the same large liquid spaces. 

Stef Estebiza writes: 

Warren Buffett's favorite holding period is forever.

anonymous writes:

That is his favorite holding period for everyone else, particularly those holding his, as it reduces the directional liquidity to the upside and therefore reduces the the power of the viscous forces to resist change and increase slippage to the upside.

May

23

 I am not familiar with Kurt Godel, but I think his ideas are similar to the ideas of cosmologist Max Tegmark. Here is an excerpt from the BBC documentary Horizon interviewing Max Tegmark.

He states that our Universe/Reality is math. So math is not only a language to understand the world, but it is the world itself.

My knowledge of the topic ends here-– it is fascinating though.

Quoting T. Mcclellan:

Plato was probably the last person to at least be on a level with the then leading thinkers of functionally all branches of human thought (Aristotle conventionally thought to be even more so).

There is an interesting refutation of the ideas in the Republic in the Parmenides. In this second dialogue Parmenides delivers a devastating criticism of Plato's skepticism about empirical reality. Plato has him argue strictly on Platonic lines that in fact if we grant that the Forms (for example numbers) truly exist, even then we could not know them–and worse, if we exist then pure beings such as the gods could not know us! Thus not only are ideas as unreliable as appearances they are no surer a foundation for knowledge. Obviously not a great conclusion for a Platonist!

Believe it or not, the real existence of forms–or the Pythagorean equivalent that all the universe is number (perhaps numbers) is still hotly contested today. Supposedly Kurt Godel could not understand people who did not believe in the literal existence of numbers outside the human brain. Although of what substance he thought them to be composed, I know not.

Russ Sears writes: 

The following is what I wrote to the spec-list in 2010, concerning Godel and Singularity. Kurt Godel was a close friend of Einstein, they often walked to and from the University together. He is most known for his "Incompleteness Theorem".

It has been suggested before that Godel's proof gives us insights into human intelligence. John Lucas was one of the first to suggest it. "Godel's Theorem seems to me to prove…that minds cannot be explained as a machine".

Roger Pemrose has 2 books, "The Emperors New Mind" and "Shadows of the Mind" that supposedly show Godel disproving "mechanism" and "artificial intelligence".

Pemrose suggests that while we're not a machine, we are a physical system and should consider quantum mechanics.

Godel was much too timid about conjecturing on the record. He was very fearful about confrontation. As suggested, the Third Reich probably never did give him or his kind a second thought. To his paranoid mind the world would conspire against him to keep all mankind stupid. So what we have from him on this subject is from his private conversation with Hao Wang and a lecture.

Wang on Godel: "Either the human mind surpasses all machines (to be more precise it can decide more number theoretical question than any machine) or else there exist number theoretical questions undecidable for the human mind." or as Ms Goldstein suggests: "The incompleteness theorem, by showing the limits of formalization, both suggest that our minds transcend machines and makes it impossible to prove that our minds transcend machines. Again, an almost paradox."

Or in my words we could simply be deluding ourselves that we have access to "truth" through intuition. This is of course is tragic and ironic in that while we can't know the pure case, Godel himself succumbed to some major delusions and was paranoid later in life.

And we as speculators certainly can't cast the first stone. While I would suggest that we may "transcend machines" through quantum mechanics, our minds may also transcend time through quantum mechanics, leaving a rendering of our "physical system" difficult if not impossible to interpret and to reproduce. 

May

23

This paper argues that most anomalies go away when microcaps are removed from the bucket:

Replicating Anomalies

Kewei Hou, Chen Xue, Lu Zhang
NBER Working Paper No. 23394
Issued in May 2017
NBER Program(s):   AP   CF   EFG   IFM   ME

The anomalies literature is infested with widespread p-hacking. We replicate the entire anomalies literature in finance and accounting by compiling a largest-to-date data library that contains 447 anomaly variables. With microcaps alleviated via New York Stock Exchange breakpoints and value-weighted returns, 286 anomalies (64%) including 95 out of 102 liquidity variables (93%) are insignificant at the conventional 5% level. Imposing the cutoff t-value of three raises the number of insignificance to 380 (85%). Even for the 161 significant anomalies, their magnitudes are often much lower than originally reported. Out of the 161, the q-factor model leaves 115 alphas insignificant (150 with t < 3). In all, capital markets are more efficient than previously recognized.

May

18

 Bitcoin is currently stalling out on transaction speed and will force the hand of the core development team to make adjustments.

At present, the miners are clearing (very roughly) 2000 transactions every 10 minutes, this is primarily due to the limit of the block size of 1 megabyte and the amount of transactional information they can place into that size.

There is a lot of hand-waving about the slowing rate of growth of bitcoin versus other cryptos and the glacial adoption of newer protocols is certainly a part of it. For my part, I am content that the developers are overly cautious as any bug in the implementation can crash the economy. Ethereum learned this firsthand last year after they lost millions due to a bug. That said, Ethereum is also a model about how resilient the cryptos can be in the face of lost confidence.

At some point, bitcoin will increase the size of the block above 1MB and punt the transaction problem down the road for a while, but it exposes one of the problems with it's design which is transactional throughput. Most of the cryptos out there have the same tree-based transactional design that at greater scale will eventually cause the system to come to a crawl under normal load, not to mention making them vulnerable to spam attacks.

There is some promise in a new way of guaranteeing transactional integrity without a tree in DAG (directed acyclic graphs). The concept is more of a mesh of (very) lightweight transactions, each of which is forced to validate two other previous transactions. This obviates the need for miners and makes every initiator of a transaction do the proof of work. This concept would scale far better than (what has become) the centralized miner model of the major cryptos.

I am aware of two cryptocurrencies being developed that use this model, Byteball and Iota, with Iota having a better marketing department. They are completely unproven, flawed, hoarded and still in development, but already have a solid following and are trading at what I'd consider high premiums. If they somehow reach critical mass without implosion there may be a big future in actual microtransactions, fulfilling the promise of cryptocurrencies years ago.

Andy Aiken writes:

Ethereum is on track to convert to a Proof of Stake transaction model sometime in 2018. Like bitcoin, ethereum is currently a Proof of Work cryptocurrency, in which transactions must be included in each new block being "mined".

As Jayson indicates, mining is highly computationally intensive. BTC and ETH mining requires special hardware, and consumes hundreds of gigawatts of power globally.

In a Proof of Stake (PoS) system, the network consists of nodes that reach network consensus on transactions without the computational intensity. The owners of the nodes (stakeholders) get a share of the transaction fees. A node could be run on an ordinary PC. There are currently PoS coins, but they are much less popular than bitcoin and ethereum.

On May 22, there is an Initial Coin Offering (ICO) for Tezos, which will be Proof of Stake right out of the gate. Tezos claims to be a direct competitor to Ethereum for the mantle of next-generation bitcoin. I'm skeptical of this ICO since the issuance is uncapped. This means that interested individuals and institutions will be able to get a piece, unlike other recent ICOs (e.g. Blockchain Capital, a venture fund that issued its own coin) that closed within 5-10 minutes of opening. On the other hand, Tezos could raise billions of dollars while being years from developing anything close to what Ethereum has already developed.

Byteball and Iota are using an entirely different model and a unique distribution system. E.g., if you hold BTC, you can get an allotment of Byteball by providing some personal information.

Cryptocurrency is much like the auto industry of the early 1920s. The failure rate of new coins/businesses will be high. Regulatory agencies are barely present, there are many scams, and a gambling mentality at the cryptocurrency exchanges. But the opportunities appear to be commensurate with the risk.

Stefan Jovanovich writes: 

AA may want to adjust his historical analogy slightly. The failure rate for automobile manufacturers peaked not in the 1920s but in the preceding decade. By the "early 1920s" the "Big 3" were already established.

The historical analogy that works best for me is the growth in the collectibles market pioneered by Joseph Segel. No one can question the Marxist measure of value for the objects that the Franklin Mint and others produced just as no one can quarrel with the enormous amounts of human labor, energy and computation that have gone into producing these current digital collectibles. One wonders what network of Quality Value Convenience will evolve out of all this buying and selling of precious man-made objects.
 

May

17

Dr. Janice Dorn was a well respected member of the Spec List for many years. She became a dear friend via e-mail and phone, though we never met. When she did not respond to my e-mail and her message box on her phone was full, I became concerned and checked the web. Her husband and two sisters had all passed away in the past couple of years. So I had no one else to contact to find out what might have happened. So I was greatly saddened this morning to find that she passed away on April 25th at the age of 78 from cancer. She will be greatly missed by me as she was a wonderful person.

Her obituary can be found here:

In Memory of Janice Bebe Dorn

October 13, 1938 - April 25, 2017 Obituary

Dr. Janice Dorn, M.D., Ph.D., 78, of Phoenix, Arizona, passed away April 25, 2017 peacefully after a courageous battle with cancer. Born October 13, 1939 in Canton, Ohio, she graduated from the Albert Einstein College of Medicine with a Ph.D. in Neuroanatomy and did her postdoctoral work in Neurophysiology at the New York Medical College. She went on to receive her M.D. from La Universidad Autonoma de Ciudad Juarez, then onto a year of clinical clerkships in Phoenix, Arizona as well as a Neurology Internship at The University of New Mexico in Albuquerque.

Dr. Dorn subsequently trained in Anesthesiology at UCLA and also completed a Fellowship in Cancer Pain Management. After the conclusion of a Psychiatric Residency at the Maricopa Medical Center in Phoenix, she accepted the position of Associate Professor at the University of Texas Southwestern Medical Center in Dallas, The University of Missouri Medical Center at Columbia and The Chicago Medical School. She won numerous awards for teaching and eventually held the position of Director of International Clinical Research for a major pharmaceutical company that sent her around the world for nearly a decade searching for methods of life extension and optimal aging. After living in Scotland, Germany and South Africa, in 1987, she began her private boutique practice of Biological Psychiatry, Addiction Psychiatry and Psychoneuroendocrinology in Phoenix, Arizona.

Dr. Dorn held the following Board Certifications:

• Diplomate, General Psychiatry, American Board of Psychiatry and Neurology

• Diplomate, American Society of Addiction Medicine

As a Coach University graduate, in 1994, Dr. Dorn had focused her attention on trading, mentoring and commentary in the financial markets with emphasis on Behavioral Neurofinance, Mass Psychology, Trading Neuropsychology, Futurism and Life Extension. She is believed to have been the only M.D. Psychiatrist and Ph.D. Brain Anatomist in the world who traded actively and coached traders while writing commentary about the financial markets. She authored over 1000 publications relating to Trading and Investing Neuropsychology, Market Mass Neuro-psychology, Behavioral Neurofinance as well as Holistic Wellness and Longevity as she provided coaching/mentoring to more than 600 traders around the world. She also published two books, her first in 2008 entitled "personal Responsibility: The Power of You". She served in the position of Global Risk Strategist for Ingenieux Wealth Systems in Sydney, Australia. She became a sought after media personality, lecturer and trading coach.

Dr. Dorn most recently honored as a faculty member at The University of Arizona College of Medicine as a Clinical Assistant Professor in the Department of Medicine. Her greatest joy was helping others grow & prosper. She was a lover of music, an accomplished pianist and dancer. As a long time advocate of health and wellness, she was also a multiple medalist in the Senior Olympics. She was predeceased by her longtime husband, Thomas McNaughton D.O., M.D. and will be missed by her family, friends, students and colleagues. Donations may be made in Janice's memory to a charity of your choice.

J.T Holley writes: 

She was a kind soul. She reached out to me during my divorce to ease my mind. The world lost an incredible mind and warm heart.

anonymous writes: 

One of the most perceptive people I've ever met.

Jeff Watson writes: 

I've been trying to contact her for months. She was a friend and helped me through a period of great difficulty. Requiescat in Pace.

Jeff Rollert writes:

She was one great lady, and a particularly impressive addition by Vic to our group. I will miss her a lot. There have been too many who have gone silent in my life over the last year. I'd like to ask the List how we replace them in our lives. There must be a practical way.

Russ Sears writes: 

Like Jeff, she helped me through a hard time, all the while she was suffering from impending death of her husband. She also helped me with some writing. She was always eager to help me with any idea I thought was clever. And loved to share her plans. But last contact I could not get any response to what projects she was working on. I had been trying to contact her but was getting no answer. Like Scott, I have a pit in my stomach from the loss. She will be missed. 

May

17

 I have no doubt that Elon Musk will be able to raise billions of dollars for his tunnel projects. However I would provide a polite reminder and cautionary tale that the Channel Tunnel (that connects England and Europe) cost 9.5billion BPS to build–double the original estimate of 4.7 billion.

The tunnel officially opened on May 6, 1994 to much fanfare.

The company filed for bankruptcy reorganization about 12 years after it opened for traffic.

After writing off a ton of debt and wiping out the equity, the company finally achieved profitability, and ironically bought out a bunch of competing ferry companies. Nonetheless, the company stock has produced a negative total return for shareholders since it was relisted post-bankruptcy. See: Groupe Eurotunnel SE.

Similar lousy returns were had by the public investors in most American railroads, subways, canals, and other massive capital expenditure/infrastructure projects.

I know. This time is different.

May

17

 What a mess.

Will Ralph's bicycle helmets be enough to protect our brokerage accounts or do we need more?

Please post any historical studies on how markets normally react to presidential impeachments through the various phases.

anonymous writes: 

At worst, if it goes forward, it will be like the impeachment of WJC, and ultimately go nowhere.
But more likely is that impeachment talk fizzles out after a few weeks like everything else the WaPo wrings its collective hands over.
 
It’s difficult to assess post hoc the effect of the WJC impeachment on the markets, since Russian debt default and LTCM failure were concurrent.
I remember that at the time, traders and CNBC talking heads were imputing the daily news of stained dresses and perfumed cigars as the reason for the sharp selloff.
The news of LTCM breakdown came late in the selloff, but now journalists and media figures talk about 1998 as if LTCM was on everyone’s lips from the beginning.
 
So maybe something else is afoot behind the scenes.  I regard this inordinate market reaction as a warning sign, similar to Feb. 27, 2007.

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