Jan

26

The CME and the CFTC are doing a great job at destroying the market ecology by exterminating the 'spoofers' out of the futures markets. This clever species helps maintain the equilibrium of order flow by gaming liquidity asymmetries and thus keeping the population of naive momentum front-running strategies in check. It reminds me of the extinction and later reintroduction of the wolves in Yellowstone.

Ed Stewart writes: 

I can't see how spoofers are bad for anyone but the momentum front runners, as you suggest. There must be a "god given" right to jump in front of slower moving participants that we are not aware of. I'd love to know how the spoofing practice developed. My guess is it started as a counter-strategy to neutralize front-running before it became a source of profit?

Vinh Tu writes: 

And "they" destroyed limit orders when they busted the trades during the flash crash. I guess front-running is the only virtuous and god-favoured strategy?

Hernan Avella writes: 

Vinh, I think the case with the limit orders is simply adaptation forced by the hft boys techniques. They have raised everybody's game. What do ppl gain by advertising their intention in the order book?. What it's remarkable, is how long it took for other participants to start randomizing, splitting and using hidden orders in a more widespread fashion.

But to your point, yes, speed is expensive and 'they' try to recover those costs.

anonymous writes: 

Famous energy trader John Arnold says:

"Front-running is profitable against traditional orders entered by humans. But with spoofers in the mix, the picture looks quite different: When the front-running HFT algorithm jumps ahead of a spoof order, the front-runner gets fooled and loses money. The HFT's front-running algorithm can't easily distinguish between legitimate orders and spoofs. Suddenly the front-runner faces real market risk and makes the rational choice to do less front-running. In short, spoofing poses the risk of making front-running unprofitable. Because spoofing is only profitable if front-running exists, allowing both would ensure that neither is widespread."

The basic ideas are very similar to Hernan's market ecology post.

Jan

26

Here are my results. Stay safe everyone!

Jan

26

 It's during bizzards moreso than other storms that people suffer severe injuries. Orthopedic surgeons are usually quite busy after historic storms. Whether this one will meet the forecast remains to be seen.

When I was on call at Shock-Trauma during the 1983 blizzard, we a sustained of blizzard condition—whiteout and wind. Some fellow in Frederick County (I was in Baltimore City) decided it would be a great time to take his snowmobile out for a romp through the storm. He missed seeing the tree that his snowmobile took on and lost—and he suffered multiple system injuries—lacerated liver (it was half off the vena cava, and the surgeons were amazed he survived the helicopter trip), broken pelvis, broken femur, collapsed lung, brain hemorrhage, skull fracture, broken cheek and eye socket, 4 or 5 broken ribs, a broken knee cap, a broken wrist, a bunch of broken toes. and bilateral dislocated shoulders, not to mention extensive bruising. he received something like 25 or 30 units of blood. It was pretty bad. He walked out of the hospital 6 weeks later.

Blizzards are dangerous. They're not just big storms.

Jan

24

 Something today reminded me of a mentor (English teacher, older guy retired a few years later) that I had in high school. One of the key things he told me was, "Never get serious with a girl whose mother you would not want to have relations with, if given the chance". I think more than a few times that thought flashed before my eyes and it saved me from serious error, partly because it was memorable. I'm trying to think of any similar rules of thumb that might help us to avoid those trades or strategies that can severely set back profits, create anguish, and otherwise make things worse than they should be. Any ideas?

Leo Jia writes: 

Hi Ed,

"Never get serious with a girl whose mother you would not want to have relations with, if given the chance"– I thought that was only my words!

There can be many similar things for trading. Here are some for critique.

1. If you don't like someone's way of life, don't trade like him.

2. If you don't like the dominant players of a market, don't trade that market.

3. If you don't like the rule makers of a market, don't trade that market.

4. (I learned this one from Scott Brooks) If there is already a professional at the table, go somewhere else.

5. If you don't like a country's tax code, don't trade in that country.

6. If a market hasn't shown a lot of opportunities in the past, don't trade that market.

Jan

24

 I always thought dogs were angels too, and trained hard many years in veterinary school to heal them.

However, certain dogs in certain countries, depending on the people that influence them, in one month turn from angels to snarling demons. I learned a lot in the past seven months fighting about eight dog packs of 5-10 animals each by being surrounded by them all snapping within four feet – front, back, and either side.

The best thing to do is to back into a corner. Otherwise the fastest alpha will sprint around and try to hamstring you by biting in the rear. It's impossible to watch 360 degrees, so if one is encircled without any plan or mental rehearsal, blood is sure to flow. Yours.

It's exactly the same technique I watched on a National Geographic film of packs of 6-10 wolves each taking down caribou, deer, elk or even bison in Alaska. Unless the prey can outrun the predators (not me any more), or back into a corner so there is no real side or rear attack, or grab a weapon, then one is at the mercy of the canines.

This never happened to me, though I was bitten biweekly by the Peru Amazon street dogs in various haunts where I walk. The two primary fighting techniques were to pick out the alpha (usually the biggest male), and charge it ignoring the attempted nips from the rest. Once you kick the alpha in the teeth and he whines, the rest retreat. In the common case of the fastest dog running around end to get behind you, I always turn and immediately chase it trying to kick it. You need to get to it fast because as you turn to face it the rest of the pack rushes your heels. That dog is the fastest, usually the bravest, and once it zips off the rest will follow its lead away from your body.

Once I got these strategies down, I actually looked forward to the afternoon or night workouts of fighting off the packs after a long stint at the 'office', and it was restful before going to bed.

Sad to say for a veterinarian, I resorted to psychological warfare to turn the tide to keep from going psychologically rabid myself. I knew the dog alpha of each of the eight packs in a blink at a block's distance; it was usually the biggest male, but nearly as often the stupidest which is to say most fearless, like pit bulls and bulldogs. My psych warfare was to stalk them during their sleep, especially during a night rainstorm, and kick them directly in the cranium. If you kick in the eye, ear, nose or teeth it can cause permanent damage, but I only wanted to establish myself as their dominant. My foot made hard contact about twenty times over the months with the various sleeping alphas, as hard as football punts, but their heads are so hard that it was like kicking a 8" diameter rock. I alternated feet over the weeks waiting for the soreness to go away. I have no toenails left on either of my big toes from this.

Then the psychological part comes into play – a hard head kicked sleeping dog awakes instantly and instinctively turns and bites at the foot. There's a split second to kick a second time with the same, or better, the opposite foot, and about one second after your first kick the animal registers pain, the eyes dull, and it withers off yelping in pain with a tucked tail. Now is the time to follow it through the rain for blocks, not letting it lie down, rest or sleep for about thirty minutes. It's easier than you think because every alpha returns to the same spot after a few minutes, so I just lay in wait, as they have done with me, and keep them awake and moving. It's a combination of pain and sleep deprivation, and after a few nights of this, without fail, the alpha will no longer lead the pack in attack. Instead, when it sees me coming, it lowers the head in a cowering gesture and sulks off, followed by the rest.

That's the time to be on the alert for attacks from street people, who live like them, and empathize in bands. I know this from hundreds of encounters with the same packs in the past few months in the Amazon where the dogs have turned nasty with a sudden rise in consciousness of the people who now treat the dogs like second, instead of equal, citizens.

These are the techniques to beat fallen canine angels. And they worked on people too.

Pitt T. Maner III suggests: 

These high frequency deterrents called zappers work fairly well and could be easily shipped to Peru.  At least it would make an interesting study.

Marion Dreyfus writes: 

When I rented a house on a hilltop at End of The World, Zimbabwe, baboons made increasingly aggressive encroachments toward me and the house. I remember saying to the park ranger, who came and shot the baboons dead: "Once they are no longer afraid of people, they will rip your face off. We must kill them to keep that from happening."

Andy writes: 

A recent study on Montana and Wyoming data indicates that killing wolves leads to increased depredation of farm livestock.

One theory proposed is that shooting the alpha breaks the discipline of the pack and leads to more independent wolf breeding pairs. These rogue lone attackers are more likely to predate livestock than an alpha led pack.

The researchers did not find a drop in the depredation until >25% of them were destroyed, which corresponds to their population's rate of increase.

The idea for a rancher is to avoid killing the alpha unless he can and will take out more than 25% of the population of the wolves.
 

Jan

22

 Thank you for passing along the Constructal Law of Design paper by Adrian Bejan.

Bejan's basic premise is that everything in nature is a flow. There are the obvious flows of things like water (rivers, blood) or air (lungs, air distributions systems), etc. In addition, he discusses flows of stress, for example, in the arrangement of the limbs on a tree, or the flow of animate mass, e.g., when a herd of animals runs or school of fish swims. His premise is that living systems are continuously changing and adapting their configuration to maximize the "currents that flow through" them. Even the building of the Egyptian pyramids, he argues, represents the flow of stones from a broad area to a single point (the pyramid). Here "living" systems (both animate and inanimate, such as rivers or pyramids being built) are constantly evolving and changing their configuration. When a system stops reconfiguring its flows, it dies: a dried-out river bead, dead animal, or completed pyramid receives no further maintenance, i.e., there is no more reconfiguration when something is dead.

Here is a Q & A on the concept of Constructal Design by a Forbes reporter and Bejan that has things described in less technical terms than his paper.

In terms of applying these concepts to trading, it seems to me that the obvious entity that flows is money.

One concern that I have, however, in adapting Bejan's ideas to a trading model is that, in the flows that he is describing, there is always a driving force from high to low: gravity pulls water down a landscape, a pressure differential drives air in and out of the lungs, a disturbance or threat forces animals to run in the opposite direction. As a result, all of the flows that he is describing are one-way, or unidirectional. This central to his entire theory, as the opposite behavior is prohibited from the Second Law of Thermodynamics: heat does not move from cold objects to hot on its own, rivers do not flow uphill, air does not come out of the lungs when the diaphragm expands to reduce the pressure in the lungs to draw air in, dropping the broken pieces of a coffee cup on the floor will never result in re-assembled cup, etc.

Thus it would seem that a critical element in adapting Bejan's ideas for trading will revolve around describing a driving force for the flow of money. This is really your expertise far more than mine, but let me start the dialog by suggesting that the driving force for money is the perceived potential for money growth (PPMG). 'Perceived Potential' here implies that there is an opportunity to make a profit from an investment, but that the outcome is not necessarily guaranteed (think of Enron and Bernie Madoff). Reconfiguration, also a key tenant to Bejan's ideas, happens with the flow of money from one instrument to the next. If we now draw the analog of a river basin, and that high PPMG is analogous to a low point in the flow of water over a landscape, then it can be seen that money will flow from regions of low potential (elevated areas, mountainsides) to regions of high potential (low areas, valleys). The lower the elevation, the more rapidly money will flow into it.

What complicates the analysis is that PPMG is a dynamic quantity. A company can be very profitable at one point in time (Kodak, General Motors, Blackberry), and thus have considerable growth potential, but over time, its growth potential can change. This is analogous to the river basin landscape changing constantly in elevation, and having the flow adjust accordingly. This does happen in nature as well, of course, both slowly (Colorado River/Grand Canyon) or quickly (earthquake/volcano). Such a time-varying landscape would be important to include in a trading model.

I think that the above would be a bare minimum to implement the ideas that Bejan is putting forth. I did do a quick search to see if people were using these ideas for trading (in particular) or finance/economics, but I did not find much. This is not a surprise: Bejan's ideas are new and different and thus will take some time to permeate to other areas. This, in itself, is an opportunity to seize the advantage. The risk, is, of course, that the ideas may not have significant utility in trading to upset the state-of-the-art now in place, and thus will not pay off after time spent trying to integrate them. This is the risk of adopting any new technology/idea, I suppose.

Anyway, there you have it: my rather disjointed ideas on the matter. I would be interested to see if Bejan's ideas could prove to be of utility for trading.

Jon Longtin, Ph.D., P.E. Professor Department of Mechanical Engineering 159 Light Engineering Bldg. State University of New York at Stony Brook Stony Brook, NY 11794-2300

Jan

22

"How Do You Quantify Panic":

In a paper recently published in the journal Interface, researchers from the Massachusetts Institute of Technology, the Draper Laboratory, and the disease-forecasting company Ascel Bio say they've found a way to predict overreaction to outbreaks.

Jan

22

Lumber is worth a close study and possible long position here…

Jan

22

 QEe (QE euro) seems to be moving forward. So why did gold, which has had some strength over the past month, not budge at the news the way currencies did?

anonymous writes: 

The theory I am working on in my head and was hoping to have time to write about tonight is as follows:

QE depends upon a central bank "cartel" all agreeing to do it in unison and or in staggered phases. The cartel allows them to get away with this absurd policy without immediately wrecking the currency as compared to other currencies they don't seem to be devaluing.

Switzerland broke the cartel.

This means that the future of QE is in fact in jeopardy and will be more limited than otherwise.

anonymous writes: 

Isn't that the path off all cartels of > 1 players (Debeers),

Look at OPEC post 1974.

Like the prisoner's dilemma, the "cartel participant," game would call for a certain, upside price where the first member jumps ship, with a phony justification for their greed trumping the purpose of the cartel.

anonymous replies: 

Yes of course. Only in this case instead of restricting the supply, the deal was to expand the supply.

In the old days when Kuwait broke from the cartel and cheated it brought oil down more than just by the amount of Kuwait's extra production because once one member of the cartel cheats everyone else is going to.

It's the same thing here. Once SNB broke, others will be tempted to as well.

This isn't talked about in the press because of the insane and incorrect notion that your currency going up is somehow a bad thing, so the mainstream all think that the Swiss are somehow hurting themselves.

Alston Mabry writes: 

But the alt version is that they weren't playing along because their EUR purchases were putting upward pressure on EUR, counter to ECB's strategy.

anonymous replies: 

What ECB, US, and Japan would have wanted is for the SNB to devalue along with them. SNB wasn't going to do that.

Now, all of QE depends on the big lie that you are not really printing money and not really devaluing the currency.

Any time someone says "you're printing money" the response is met with "you just don't understand" followed by a description of the complicated process of QE and how it's not really printing money.

But the fallback position for the QE'ers is "look, there's no inflation (no consumer inflation.. it's in assets) and "the currency isn't being devalued".

The SNB's peg kept the ECB being able to claim they weren't destroying the currency. The SNB undoing of the peg reveals that the emperor has no clothes and they are, in fact, going to destroy the currency.

Alston Mabry responds: 

It may be true that claims were made about the EUR on the basis of the CHF cross. But I find compelling the narrative that Mario called up Thomas Jordan and said "look, unless you're willing to print tens of B of extra SFrs a month, you're not gonna be able to keep up." And Jordan, knowing that technically the SNB could do it but politically internally couldn't, said "you're right" and they dropped the cap. 

Jan

20

 Cold and flu season seems to be taking an unusually severe toll in California this year. Though it's still early in flu season, there are state-wide shortages of cough syrup, and state health officials are beginning to wonder what the consequences may be for the public's health.

While the notion of flu season is likely already incorporated into many of the models that we usually discuss, and while for the day-to-day modeling it might not much matter, I wonder if any of the other models of price movements have incorporated any indices of health status such as might be represented by flu cases? At some point, those case levels may impact us economically, leading to some increased gravitational pull bringing prices "closer to the earth."

Even if people who are infected go to work, their productivity will be less than usual. Or is the impact sufficiently muted as to be inconsequential?

Jan

18

Good morning. I've been wondering what the calendar means at the top
of the page… I'm sure there's a post I missed. Can you point me in
the right direction. Thanks.

Reply:

The numbers in each box are the daily changes in S&P futures and Tbond futures

The color coding is as follows:

Green: Bonds up and Stocks up

Red: Bonds down and Stocks down

Blue: Bonds up and Stocks down

Yellow: Bonds down and Stocks up

Jan

16

My recollection of the marketing pitches for retail focused FX platforms was that they had some parallels to the bucket shops described by LeFevre, particularly one of them who advertised that one of your account features could be "no margin calls." If a position went against you by a particular threshold, the broker would automatically close it out, so you would have no "surprises."

anonymous writes: 

FXCM stock (a listed US company) is indicated down 75% this morning. They issued a statement that the CHF move "generated negative equity balances owed to FXCM of approximately $225 million."

As of 9/30/14, their stated equity book value was $262.7 million (source: Bloomberg) — so if their book value is real — then this particular problem can be contained.

Interactive Brokers stock is indicated down 10% this morning. They have made no public statements so far. But as we've seen time and again, broker-dealers rely on customer confidence and should a large number of customers start withdrawing collateral, this could spiral. Hence silence isn't golden.

Ed Stewart writes: 

A few things about IBKR.

First, is is a much more highly capitalized than financial statements at first suggest, as only 15% of the company trades on the exchange, the rest is owned by managers and (mostly, if i recall 75%) by CEO Peterffy. As of the last quarterly report, excess regulatory capital stood at 3.25B. S&P credit rating A- Stable, zero long term debt.

Anyone who has traded there is aware that relative to other brokers they are very conservative on margining issues, etc. Also, they don't have the business model of bucketing all of the trades on their FX platform like most retail platforms do. The IB FX ecn mostly allows IB customers to trade with other IB customers and other banks, though they are also a market maker there. In other words it is a much, much stronger business than the crappy retail FX companies.

The other issue that is hitting the company recently (hurt their results last quarter and almost certainly this quarter) Is that they keep their equity in a basket of 16 currencies that they call the GLOBAL, so they are getting hit by the strong dollar.

I could be wrong I think a currency peg blowing up is the kind of thing their risk department and peterffy would identify as a risk and substantially mitigate, especially if they had retail traders trading in masse against the peg the way the other forex platforms had. This is based on my reading most of Peterffy's writing and conference calls over the last few years, I could be dead wrong.

If there is a bad quarter out of this but the damage is not too bad I think it might end up a solid buying opportunity. It was my largest stock holding in tax deferred accounts till yesterday when I dumped most of it.

Garrett Baldwin adds: 

Global Brokers NZ has failed and Alpari U.K. is insolvent.

anonymous writes: 

What am I missing? Why should a retail broker go under because a currency moved? Were they trading against their customers as opposed to just executing orders?

Anatoly Veltman writes: 

If they don't call for margin, they end up owning position. How could they do anything with a position thru the entire initial bidless 20% gap? They obviously did rush to liquidate on the small bounce; and that's how the new low was made (look up intraday chart)
 

Jan

16

 Here's a very interesting scholarly paper from some wheat counters ~83 years ago. It's a very good read, and appropriate for the time, but government interactions in the grain markets, wars, and international trade have rendered much of this obsolete. Still, it's a good picture of the level of scholarship that was applied to the wheat markets 83 years ago. Much has changed from then to now, but one thing never changes. The best and brightest of any generation will always drill down, and try to find a way to beat a single market.

Jan

15

Thoughts, from anonymous

January 15, 2015 | 1 Comment

1. The Swiss franc is up about 17% this morning. This is unprecedented in recent history. That is a BLACK SWAN. A BLACK SWAN is an event that you have not read to be predicted on Zero Hedge or anywhere else. This cannot happen without reverberations — and could be destabilizing — and volatility inducing in unexpected places.

2. This could be the ultimate no-confidence vote in the Euro currency.

3. It makes Bitcoin's move of 23% yesterday look quaint.

anonymous writes:

The most obvious conclusions to draw:

1) Further downward pressure on the Euro currency
2) Further downward pressure on global yield curves
3) Further loss of confidence in central banks

More derivative thoughts to consider:

a. Impact of forced liquidation of short CHF trades and potential subsequent reduction in risk and positions b. Impact on CHF funding trades in places like Hungary and Poland c. Impact on Swiss economy given where the currency and rates settle d. Impact on SNB flows e. Impact on ECB meeting next week in terms of QE

Jan

15

I notice that the Dow is down already and I note that gas is 1.86 this morning overnight from 1.92 here in Southern Ohio. Many empty rentals around my area. Many people, due to oil production in my area, have been been priced out of renting. I have several empty units but have found over the years people don't move over the holidays nor the cold winter months unless evicted or just moving into the area.

A complete background check will sort through any of those issues.

Gary Rogan writes:

There is enormous destruction going on of all kinds of daring, innovative oil drillers, the best of the best, which will produce damage that may last many years, as well as many traditional oil, infrastructure, transportation, etc, etc, companies but all people care about is the price of gas. Isn't that selfish?

Pitt T. Maner III writes: 

It will be interesting to see the impacts to natural gas supplies as the number of drill rigs in operation decreases.

"In fact, the current natural gas rig count remains 80% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 372 active natural gas rigs." 

This paper gives an idea of the relationship between drilling new wells and production.

Jan

9

Dear Dailyspec,

Do you think there is a need and market for alleviating the pain when being different hurts?

On any given day we have many people on the site that feel differently and are proud and pumped up about it with all the wonderful possibilities it offers. On a good day, feeling different means feeling free and unconstrained and the world is your oyster and playground.

I know however that there is a dark side to feeling different and on a bad day it can get really dark. On such a day you can go from feeling on top of the world to wondering if you know anything about anything especially after an, "I can't believe I just did it again. How can such a smart guy as me do such a f-in stupid thing AGAIN!"

Having spoken to a number of site members over the years and I know that this is not an uncommon feeling, it's just not part of the spoken culture here.

One of the top things I like about the site is that it is a group of people who appear to give a damn and are making a difference on so many levels. I'm thinking that our giving a damn should extend to caring about each other especially during those bad times when some people go "radio silent" and hear from them for a while (and it wasn't to go and kick butt out in the world).

Here's my question: How prevalent are the dark thoughts of feeling different when you're in the negative end of it, how dark do you think they get and if so, what do you think the need and market is for alleviating some of those thoughts and feelings? I don't know about you, but if and when I were to hear about a member of our site blowing their brains out, it would get to me (especially me being a former shrink and specialist in suicide) and I would think that I, and we,  missed something important.

The site is a special group and I'm honored to be a member.

Wishing you all the best,

Mark

Jan

7

I first met Ed sometime in 1997 or 1998. I was in graduate school and trying to earn a few bucks by working as a data cleaner and spreadsheet builder at a hedge fund not far from the university. I and the rest of the staff worked in cubicles in the  middle of a big trading room, while the important people had glass enclosed offices around the perimeter. One of these people, a well dressed, tall and large gentleman soon introduced himself as Ed Dunne. In the following few days he would often stop by and chat about what was going on in markets all over the world. Most often I could see him in the office of the head of the firm, the billionaire Mr. Why, talking and gesturing while Mr. Why nodded politely from time to time. I never talked to Mr. Why, but I felt I had a indirect link to him via my conversations with Ed. And he knew or spoke with so many other important people in the investment world.

Ed was to me was the quintessential expert on international financial markets. He would explain how hedge funds and re-insurance companies work together, how oil can be stored in idle ships for later delivery, what factors affect the prices of grains, and a hundred other things. All things that I was very curious to learn about. To become as savvy and as wealthy as Ed seemed within easy reach if I could have a few more discussions with him. One time he invited me to attend one of his meetings at Princeton University with several economics and statistics professors (though I did not see Ben Bernanke there), and afterwards to a sumptuous lunch in a nearby restaurant. That was just one example of his generosity.

Later on Ed claimed that he introduced me to Victor and got me the dream job that I now have. I think it was more complicated than that and that there were several people involved but I don't remember the details. But certainly Ed played a role and I am grateful to him for that.

Jan

5

 Media advice is of little worth, except for a fade perhaps. After all, the primary purpose of the typical financial reporter is to make his/her quota in inches. Quantity over quality. The purpose of the financial media is to sell ads, make money, and hook you like a fly fisherman casting a fly at a trout. The TV financial media has been taken over by guest experts(touts). I avoid reading or listening to them like the plague as I prefer to make my decisions looking through my own lens, not the lens of others(who are observers, not players), second hand.

This broken down old grain trader looks at the financial media with a very flinty eye, much like one looks at the guys at the track who sell tout sheets when you walk past the turnstyle. Make your own decisions, keep your own counsel, and play your own hand. If you need advice, there are private subscription services, for a high price, that might, sometimes be worth listening to, but unless they have skin in the game avoid them like the plague.

Craig Mee writes: 

Everyone is now a salesman trying to justify themselves…listener beware. Funny how the country boys seem to do less talking and more listening and see things more clearly. I suppose that happens when you're not selling your soul on every deal as a means to pay the rent.

Jan

5

 For a number of years I've been counting the number of private jets at the airport. A surprising number of the world's wealthiest people have homes here and fly here in their jets. Movie stars also like to vacation there. The theory is that the captains of industry or flexions as Chair likes to call them have the inside track on the prospects for the coming year, so a lot of jets is a bullish sign. In recent past years there have been so many jets, over 70 that they have had to turn them away and park them in Maui. This year I only counted 35. Though there were much fewer, they were the larger G4's and 16 plus seater, many brand new and shiny. Not many of the little Lear's where the poor multimillionaires have to bend over to get in cramped little cabins. The billionaires travel back and forth at will and can sleep and dine comfortably with bedrooms and baths in the jets. So the private jet indicator might indicate lowering expectations, except for the multi billionaires. Unfortunately I have not kept track or quantified this but my recency heuristics tell me there may be some correlation.

Jan

2

 The CME and the CFTC are doing a great job at destroying the market ecology by exterminating the 'spoofers' out of the futures markets. This clever species helps maintain the equilibrium of order flow by gaming liquidity asymmetries and thus keeping the population of naive momentum front-running strategies in check. It reminds me of the extinction and later reintroduction of the wolves in Yellowstone.

Ed Stewart writes: 

I can't see how spoofers are bad for anyone but the momentum front runners, as you suggest. There must be a "god given" right to jump in front of slower moving participants that we are not aware of. I'd love to know how the spoofing practice developed. My guess is it started as a counter-strategy to neutralize front-running before it became a source of profit?

anonymous writes: 

And "they" destroyed limit orders when they busted the trades during the flash crash. I guess front-running is the only virtuous and god-favoured strategy?

Dec

30

 Shake Shack has an upcoming IPO. Revenues are now about $150 million and have been growing about 60% / per year. Profit was about $20 million. They're talking about a proposed IPO valuation of $1 billion, or 50 times earnings. I'll buy some if I can get it at that valuation.

The reasoning: it's another Chipotle! Just to check for headroom, Chipotle's market cap is $21 billion. 

"We believe Shake Shack has become a compelling lifestyle brand. We helped pioneer the creation of a new fine casual category in restaurants. Fine Casual couples the ease, value and convenience of fast casual concepts with the high standards of excellence in thoughtful ingredient sourcing, preparation, hospitality and quality grounded in fine dining."

Darien Taylor: "I'd like to produce a line of high quality antiques at a low price."

Bud Fox: "Sounds great. I'll take you public."

Rocky's financial analysis shall follow in due course. In the meantime, he recommends that one noodle at the IPO and subsequent stock performance of NDLS.

anonymous writes: 

First of all, it's fairly likely that this will jump on the IPO day if the overall market stays roughly similar to the current conditions. Why? Because restaurant IPOs have been jumping no matter what, including NDLS and given its NYC roots, a lot of people who buy stocks will find it comfortably familiar. So if you want to flip it, your odds are pretty good. Will it also go up for some time? Probably, since they all have, but hard to tell based on how quickly the new buyers will figure out the financials.

What struck me about this thing yesterday was it's curious road to IPO-dom. It was started by a diversified restaurant operator with multiple brands but curiously only this part is going public. Why? Who knows, but most likely because you can build the restaurants cheaply as they are self-described "shacks", and the other ones are more substantial in nature. Now imagine yourself as a large, slow-growing company that wants to make a billion dollars. You start building "shacks" after your first one is genuinely successful, so you have a GUARANTEED way substantially growing sales every year if you just grow the number of "shacks" every year. Obviously as all students of binary progressions know this can't go on forever, but it certainly can until the IPO (except in this case just lately they kinda let their guard down). So you've got a 50% growth story and now it's worth a billion bucks or so they say. Voila, it's magic!

The profits: for the first 9 months of their respective years, they went down from $4.4 million to $3.5 million. You equity should you chose to invest went down from $37 million to $36 million as your sales grew by 40%, not quite the 50% as in the prior years so nicely pointed out in the bar chart. Oh yes, and the same-store growth has slowed down to next-to-nothing from pretty damn good in years past. So go ahead, buy this 5 million in profit for a billion for the long haul because your manhood depends on it and because burgers are what America is all about.

Dec

27

 The film version of Guys & Dolls is often repeated during the holiday period. It contains some sage advice on gambling, handicapping and, if you so desire, how to run a floating craps game without getting caught. It features a thirty-year-old Marlon Brando at the height of his acting powers as big time gambler Sky Masterson. Brando was born in Omaha, Nebraska and so the financial advice should be reliable.

Here are some apposite quotes:

I know it's Valentine, the morning works look fine

You know, the jockey's brother's a friend of mine

And just a minute, boys I got the feedbox noise

It says the great-grandfather was Equipoise

I tell you Paul Revere, now this is no bum steer

It's from a handicapper that's real sincere

I'm pickin' Valentine cos on the mornin' line

The guy has got him figured at five to nine

So make it Epitaph, he wins it by a half

According to this here in the Telegraph

Nathan: Not Sky. He doesn't lend money. He bets money! So why don't I bet with him? Why don't I bet a thousand with him on something?

Nicely: You would bet with Sky Masterson?

Nathan: I am not scared. I am perfectly willing to take the risk, providing I can figure out a bet on which there is no chance of losing.

 Nathan: Offhand, would you say that Mindy sells more cheesecake or more strudel?

Sky: Going strictly by my personal preference, I'd say more cheesecake than strudel.

Nathan: For how much?

Sky: What?

Nathan: For how much?

Sky: Why, Nathan! I never knew you to lay money on the line. You always take your bite off the top.

Sky: Nathan, let me tell you a story. On the day I left home to make my way in the world, my daddy took me to one side. "Son," my daddy says to me, "I am sorry I am not able to bankroll you to a large start, but not having the necessary lettuce to get you rolling, instead, I'm going to stake you to some very valuable advice. One of these days, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, you do not accept this bet because, as sure as you stand there, you're going to wind up with an ear full of cider. Now, Nathan, I do not suggest that you have been clocking Mindy's cheesecake.

Sky: But if I wish to take a doll, the supply is more than Woolworths has got beads.

Nathan: Not high-class dolls.

Sky: There's only one class: interchangeable.

Nathan: A doll is a doll?

Sky: All dolls, any doll. You name her.

Nathan: Any doll? Will you bet on that? Will you bet $1,00 bucks that if I name a doll, you can take the same doll to Havana with you tomorrow?

Sky: You've got yourself a bet.

Nathan: I name her.

Sky: Her?

Nathan: Sergeant Sarah Brown [head of the Christian mission].

Sky: Daddy! I got cider in my ear.

 Arvide: What are you unhappy about, son?

Sky: Gambling.

Sarah: Apparently you're a successful gambler.

Sky: Is it wrong to gamble, or only to lose? I'll come back for help when I'm broke.

Sarah: Don't misunderstand. It's just so unusual for a successful sinner to be unhappy about sin.

Sky: Besides, my unhappiness came up very suddenly. Maybe it'll go away again.

Arvide: We can keep you unhappy, son. Give us a chance. You don't look like a gambler at heart. What made you take it up?

Sky: Evil companions. Evil companions who are always offering me sucker bets.

Sarah: Just what is a sucker bet?

Sky: A bet that is reserved for suckers. For a gambler to get sucked in on such a bet is most humiliating. But to lose it means that you are marked for a very long time as a chump. You must go all out to win it.

Sarah: Is that so terrible, to be marked as a chump?

Sky: Among my people, being a chump is like losing your citizenship. A chump is an outsider, a yokel who will buy anything with varnish on it.

Sarah: Like a solid gold watch for a dollar?

Sky: This is a real chump.

Sky: Only one thing has been in as many hotel rooms as I have - the Gideon Bible. Never tangle with me on the Good Book. I must have read it a dozen times.

Sarah: If all that was no help to you…

Sky: Who says it wasn't? In one of my blackest moments I came up with a three-horse parlay: Shadrach, Meshach and Abednego.

 Big Julie: And since I've been cleaned out of cash, I announce that I will now play on credit.

Nathan: Big Jule, you cannot imagine how exhausted they are. Especially on a non-cash basis. Me, personally, I'm fresh as a daisy.

Big Julie: Then I'll play with you.

Nathan: But I am not a player. I am merely the operator.

Big Julie: You been raking down out of every pot. You must have quite a bundle.

Nathan: Being I assume the risk, is it not fair I should assume some dough?

Big Julie: Detroit, I'm gonna roll ya, willy or nilly. If I lose… I'll give you my marker.

Nathan: And if I lose?

Gangster: You will give him cash.

Nathan: Let me hear from Big Jule.

Big Julie: You'll give me cash.

Nathan: I heard.

Big Julie: Here's my marker. Put up your dough. Anything wrong?

Nathan: "IOU one thousand. Signed X." How can you write "one thousand" but not your signature?

Big Julie: I was good in arithmetic but I stunk in English.

Nathan: Here. This'll put you through Harvard. Big Julie: I'm rollin' the whole thousand. And to change my luck, I'm going to use my own dice.

Nathan: Your own dice?

Big Julie: I had 'em made especially in Chicago.

Nathan: I do not wish to seem petty, but may I have a look at those dice? But these dice ain't got no spots on 'em. They're blank.

Big Julie: I had the spots removed for luck. But I remember where the spots formerly were.

Nathan: You are going to roll blank dice and remember where the spots were?

Big Julie: Detroit… do you doubt my memory?

Nathan: Big Julie, I have great trust in you.

 A lady wouldn't flirt with strangers

She'd have a heart, she'd have a soul

A lady wouldn't make little snake eyes at me

When I've bet my life on this roll

So let's keep the party polite

Never get out of my sight

Stick with me, baby, I'm the fella you came in with

Be a lady Luck, be a lady, Luck, be a lady Tonight

Jeff Watson writes:

Those are such great quotes. Runyon once said that all life is 6:5 against. You can make a hundred billion dollars like the Walton family has done, but Runyon's 6:5 grind ensures you will ultimately lose.

Dec

24

 This is one of my favorite stories. I hope you enjoy it, and I wish you a Merry Christmas. — Victor Niederhoffer

High on the mountainside by the little line cabin in the crisp clean dusk of evening Stubby Pringle swings into saddle. He has shape of bear in the dimness, bundled thick against cold. Double stocks crowd scarred boots. Leather chaps with hair out cover patched corduroy pants. Fleece-lined jacket with wear of winters on it bulges body and heavy gloves blunt fingers. Two gay red bandannas folded together fatten throat under chin. Battered hat is pulled down to sit on ears and in side pocket of jacket are rabbit-skin earmuffs he can put to use if he needs them.

Stubby Pringle swings up into saddle. He looks out and down over worlds of snow and ice and tree and rock. He spreads arms wide and they embrace whole ranges of hills. He stretches tall and hat brushes stars in sky. He is Stubby Pringle, cowhand of the Triple X, and this is his night to howl. He is Stubby Pringle, son of the wild jackass, and he is heading for the Christmas dance at the schoolhouse in the valley.

[For the entire text of the story, please follow this link].

Dec

22

I know I have lot of biases about trading– that day trading is a losing proposition, that I get sucked into the bear camp… Early on my bias was to think the markets were totally rigged and also fully predictable.

It all leads me to the notion that our biases are what prevent us from prospering to our peak potentials.

Anyone else have thoughts about this?

Jeff Watson writes: 

I see biases from many of my friends that are permabears who make Abelson look like a bull. They just don't understand that as long as the conditions that allow stocks to carry themselves don't change, the stock market shouldn't suffer greatly. I would assume that the permabears are losing money but according to most of them they are making money. The Chair indicated that on Tuesday, to put words in his mouth, the market told us that seppuku was an option, then the stocks rallied and are 4% higher than Tuesday. It's amazing what can happen in 3 days. My bias is that being bearish in a bull market is just as fruitless as rowing the Bay of Fundy when the tide is coming in. Never fight the tides, the headwinds, the hidden powerful forces that control things.

Paolo Pezzutti writes: 

The bias is not in understanding the market's rhythm and extensions. The bias is fighting one's fear in order to balance risk and reward. The bias is the ability to trade bigger sizes when the opportunity is there and keep the trade open much longer to get a full profit. As one tends to scalp markets for small wins…. the bias is recognizing that you cannot win if you are not ready to lose.

Hernan Avella writes: 

The biases people have mentioned the most are: daytrading/scalping and not letting winners ride. I have two observations:

1. The real bias of daytrading/scalping is overestimating one's ability to compete in the most difficult arena of trading. It's is the most difficult because is the most profitable if you are a winner, the shorter your timeframe the more deterministic your process is, hence it attracts the most capable people in the world.

2. 'Not letting winners ride' - People have a bias to remember what they missed. They don't remember the 900 point draw-down they saved by puking when they did. After watching the market go from 665 to 2075, most peoples definitions of biases are towards holding their buys. After the market went from 1586 to 665, most peoples definitions of biases were about flexibility and cutting losers.

In sum we are biased about our biases.

Gary Rogan writes: 

"the shorter your time frame, the more deterministic your process is"

Came across a quote yesterday with a different perspective. Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein:

"He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner."

Stefan Martinek writes: 

Maybe our biases can be traced back to our good/bad memorable trades (long vs. short price, long vs. short tail, futures vs. stocks, slow vs. fast, systematic vs. discretionary, science vs. some market religion, etc.). Non-trading related education can create massive distortions about what is good and bad as well.

Henry Saad writes:

Overspecialization in the tape. Watching every single tick has been detrimental to my personal trading. Removing myself ever so slightly improved my results. Been watching the dog on the leash for so long haven't even noticed the owner.

Dec

22

 "Ralph Baer: the man you never heard of who changed technology forever":

Having fled Nazi Germany with his family in 1938 and been recruited into the US Army in 1943, Baer used his training as a technician for the benefit of military intelligence. As a 23-year-old, he returned from Europe at the dawn of the television age and - when only a few thousand TV sets existed in the US - began a career as a TV engineer.

At the time of this death, Baer had amassed about 150 patents for products including talking books, greeting cards and door mats. He had created famous board games such as SIMON for Milton Bradley, and Laser Command.

Baer said in a US TV interview in 2013 that inventing was what kept him going into old age. "All of my friends have died. What am I going to do? I need a challenge," he said. "I'm basically an artist. I'm no different than a painter who sits there and loves what he does."

"His desire and his genius was always 'What's the next thing?'" his son Mark Baer told The Los Angeles Times.

Baer was working on an electronic doll two weeks before his death, his son said.

Dec

19

I would like to draw your attention to this post from MoslerEconomics (the web site of Warren Mosler), this guy seems to know what he is talking about:

Crude pricing

The Saudis are the ‘supplier of last resort’/swing producer. Every day the world buys all the crude the other producers sell to the highest bidder and then go to the Saudis for the last 9-10 million barrels that are getting consumed. They either pay the Saudis price or shut the lights off, rendering the Saudis price setter/swing producer.

Specifically, the Saudis don’t sell at spot price in the market place, but instead simply post prices for their customers/refiners and let them buy all they want at those prices.

And most recently the prices they have posted have been fixed spreads from various benchmarks, like Brent.

Saudi spread pricing works like this: Assume, for purposes of illustration, Saudi crude would sell at a discount of $1 vs Brent (due to higher refining costs etc.) if they let ‘the market’ decide the spread by selling a specific quantity at ‘market prices’/to the highest bidder. Instead, however, they announce they will sell at a $2 discount to Brent and let the refiners buy all they want.

So what happens? The answer first- this sets a downward price spiral in motion. Refiners see the lower price available from the Saudis and lower the price they are willing to pay everyone else. And everyone else is a ‘price taker’ selling to the highest bidder, which is now $1 lower than ‘indifference levels’. When the other suppliers sell $1 lower than before the Saudi price cut/larger discount of $1, the Brent price drops by $1. Saudi crude is then available for $1 less than before, as the $2 discount remains in place. Etc. etc. with no end until either:
1) The Saudis change the discount/raise their price
2) Physical demand goes up beyond the Saudis capacity to increase production

And setting the spread north of ‘neutral’ causes prices to rise, etc.

Bottom line is the Saudis set price, and have engineered the latest decline. There was no shift in net global supply/demand as evidenced by Saudi output remaining relatively stable throughout.

Dec

17

I didn't catch this in 2009–Luby's 3 stages of psychological development of traders:

1. search for the Holy Grail (the quick big win)
2. managing wins and losses, trying to stay in the game
3. maturity

Dec

15

 We had a brief thread on favorite podcasts, in which I mentioned EconTalk as a favorite — Russ Roberts sets the bar pretty high. And I also mentioned Barry Ritholz's Masters In Business podcast on Bloomberg. Here are a few more, varied in subject matter, all available on iTunes:

For some great intellectual fun (and if you're a Yank, to get a stretch trying understand the UK cultural references), I recommend The Infinite Monkey Cage very highly.

For an interesting take on general news, On The Media is however far left you consider National Kommunist Radio to be, as well as being a good listen.

If you like to actually cook, America's Test Kitchen has an excellent podcast.

If you enjoy understanding current legal issues, the Bloomberg Law podcast is very listenable and informative.

For amateur or aspiring-pro photogs, the Improve Photography podcast is excellent.

For stories, I have enjoyed the New Yorker Fiction podcast (which has no separate page other than the NYer podcast page, but is distinct in iTunes).

The Planet Money
podcast surprises me often with interesting short pieces with a surprisingly (if you think NKR is too left) free-market slant.

Just recently, I've started listening to the TED Radio Hour podcast and have been enjoying it quite a bit. Sometimes it seems like TED talks can become overly-smart people enamored of their own ideas which simply don't have much punch out in the real world; but often it lives up to the hype.

Philosophy Bites covers lots of interesting topics, the most recent being probability.

I get a lot out of Consuelo Mack's WealthTrack and never miss the podcast.

For general human-interest stories, This American Life is the standard by which other shows are measured. The spinoff, Serial, is also good. And RadioLab is sometimes a little precious but does a good job in the end.

Clive Burlin comments: 

BIG thanks for all these links. They all seem worthy of a listen. By the way, between the dogs, photography, markets, the lists, podcasts, ûTůb, etc, etc, when do you find time to sleep? : ) I for one have always admired your breadth of interest and knowledge. Thanks for being so generous in your sharing.

Dec

15

 Will the increasing popularity of securities-based lending create the next opportunity for "strong hands"? Lots of "potential energy" if certain pain points are breached, I would think.

On a related note, I've read that the super high short-term rates encouraged people to invest short-term in the early 80s, when with hindsight they should have been invested long term and locked in those 10% rates. Are super low short rates (opposite condition of early 80s) creating a mirror distortion reflected in things like securities-based lending - causing the public to lean the wrong way at the wrong time?

"The rise of rich man’s subprime"

Dec

12

 Monkeys trained to use a fiat currency make the same mistakes as humans: they are loss-averse.

There are few ways how traders manage loss-aversion: (a) Deleveraging. In other words, everyone has a breaking point and can operate below this "gambling" threshold; (b) Diversification. By spreading a total exposure over wider group of instruments our anchor to individual outcomes is weakened [focusing illusion]; (c) Operational controls to enforce trade exits in case that all the other things fail [Paul Willman's research of traders in the City of London].

But how to design a trading strategy which is built to directly profit from loss-aversion of others?

Leo Jia comments: 

If this means one decides to totally abandon the nature of loss-aversion, then one can go do against all he recognizes as loss-aversion behaviors. This brings a question about its true benefit. If on the other hand, one only wants to take advantage of others' loss-aversion behaviors but maintain his own loss-aversion nature, then what he can do perhaps is limited.

The question is what really counts as loss-aversion.

If what we mean by loss-aversion is losing 1% of assets, then clearly it makes great sense to abandon it. But as one is willing to lose no more than 50% of assets, is he still considered loss-averse? If yes, then how much benefit would he gain by relinquishing this 50% limit?

So if God enforced us a loss limit within which we humans operate, perhaps he gave us a limit that is too small. Is it truly limitless in His mind? Perhaps there is also a limit with Him which just happens to be somewhat larger than ours. This latter may seem reasonable.

anonymous comments:

For those who believe loss aversion is an evolved behavior, it makes sense in the world of extreme scarcity: if you are on the edge of starvation and have a little bit of food, losing all the food could be significantly more detrimental than doubling it is beneficial. This does have some parallels in today's world, as for an average person near retirement age losing all of their savings is significantly more detrimental than doubling them is beneficial.

In terms of the markets, taking advantage of this asymmetry would be something like this, I imagine: let's say the average market participant hates to have their holdings go down by 1% (or any other number) twice as much as they would like them to go up by the same percentage. Let's also say that on the average everybody's holdings have an equal probability to go up and down. If you can figure out how to bet a small enough amount of your capital not to go bust multiple times in such a way as to counteract that tendency than on the average you'll make good winnings. The big question is of course how to bet against this tendency. Should you always bet when others are fearful against their fear regardless of any other evaluations of the situation?

Ed Stewart writes: 

"But how to design a trading strategy which is built to directly profit from loss-aversion of others?"

I think you can open up the concept far more broadly. I see it as the fundamental concept for a near unlimited number of strategies — an idea close to the core of the trading game, regardless of the market.

I told a spec-lister I met with a few weeks ago that the concept (described differently) is 80% of my short-term trading focus — meaning if I don't see it at work I don't trust the idea much at all — to such an extent I've mostly given up on other things. It is very similar to the Bacon cycle idea, but on a specific duration or circumstance (which itself is subject to the larger bacon-cycle effect). Loss-aversion creates urgency, price-insensitivity, and enough order flow to at times scare market makers — all things which open the door to speculative profits.

Consider:

-Times of day that loss aversion is most impactful or loss averse traders are prone to being active
-Price movements that signify loss aversion - quantitative definition
-Events that will trigger loss aversion
-If you know the basic "plays" or trades used by speculators on different time horizons, u look to anticipate who is about to be squeezed. If u define the setup condition (basic play) and a trigger event (of loss aversion) and combine them, you can find interesting ideas both on a discretionary and systematic basis that are highly counter-intuitive to most traders.
 

Dec

11

 Hi Vic!

I gave a shout out to Junto in a recent podcast I did! It's called "economic rockstars" and I'm entirely unqualified to be on a rock called that, but I did the interview anyway : )

Dec

5

 Another golden age myth bites the dust, or, in this case, drowns. The notion that the days of the Roman Republic before the Empire were a period of virtuous yeomanry has been an historical fiction beloved by everyone from Thomas Jefferson to Patrick Buchanan. It just doesn't seem to fit the facts of who had the money and land in the good old days.

"Massive Water Basin Unearthed in Rome"

Pitt T. Maner III comments: 

Here is another bit of fiction, but maybe not so far off with respect to the ravages of time– the modern world and subway systems unearthing ancient ruins. Amazing how much is left to be found.

Dec

5

 There's been lots going on in the baseball world, and I thought I'd start with (surprise!) the Orioles. The Joe Piscopo report would be something like this: "Cruz—gone. Markakis—gone. Miller—who knows. Davis—more drugs? who knows. Justin Upton—meh. Jimenez—oh, please.Orioles in 2015—not a chance so far. Yanks—always." I think Piscopo would have blown, just like the sportwriters who insisted the Os would troll for 4th place in the AL east in 2014, and would be lucky to even see 3rd place for part of the season. Then again, Baltimore's never gotten much respect from the sports journalism club. I still remember the predictions that the Big Red Machine would dominate the 1970 World Series—until Orange Crush took the machine apart. Check that, Brooks Robinson took the machine apart, while it seemed at times like the rest of the team came along for the ride and gave him great support. That series was Brooks Robinson vs the Big Red Machine. Go ask Sparky Anderson. (And if you succeed in doing so, please let me know how; there lots of money to be made there.)

The Os didn't do much last winter to shore things up for the 2014 season, other than sign Jimenez (which rivals the Glenn Davis-Curt Shilling and Frank Robinson-Milt Pappas as the worst off-season actions in baseball history). This year, well, it kinda depends on three player who didn't play last year who the Birds need to get solid seasons from to deal with some of the free agent departures. For instance Nelly Cruz signed with the Mariners. Ouch. He was a major piece of the success the Os enjoyed in 2014. Maybe it was money, maybe something else. It sure wasn't Buck; he loved playing under Buck (and that's a common refrain, not unlike players talking about Davey Johnson as a manager). Still, a big loss, particularly for a team that scored half its runs on Big Daddy Long Ball.

Then there's Nick Markakis going to Atlanta. Not such a big loss. He had been a solid player for the Os Great arm in right field. Just spot-on. Not much of a hitter anymore though. So while he may be missed (and maybe not depending on who the Os have to replace him), it's not nearly the loss that Cruz was. Signing Cruz in 2014 was a masterstroke for the Os.

So, one big loss, one so-so loss (good player, hopefully replaced in kind or better). And then there's Andy Miller, the wild card, and it's unclear what clubhouse he will inhabit come the spring. But one needs to remember that during 2014, the Os did not have Matt Weiters or Manny Machado for much of 2014 (Weiters was the whole season) and Chris Davis was out for long segments of it. If Davis gets his groove back (and learns not to swing at every first pitch so he doesn't strike out so much), the Os should be able to compensate for Cruz's departure. Weiters too. And Steve Pearce, with another solid season, would help to fill the hole.

Machado's offensive production and defense were hard not to miss in 2014. He's the first third baseman in Os history since 1977 (when Brooks retired) to be spoken of as harkening back to that era when the hot corner in Memorial Stadium (where the Os played back then) was manned by one cool cucumber. Weiters's offense was missed, but on defense, Caleb Joseph displayed defense talent not unlike that of Rick Dempsey. So at least one half of the battery is solid. It's the other part (until you get to the closer) where the Os need to do a lot of work. A lot. Having to wait through the first two months of the season for your pitching to warm up means you're digging an awfully big hole, and violated that first rule. Badly.

So that's some of where things stand with the Birds at the moment. I'll try and update soon. And provide something about some of the other teams (though Scott, I can't possibly know the Cards nearly as well as you do).

As Walt Whitman put it, baseball: America's game. And no, baseball hasn't been bery, bery good to me, but it's been fun.

Best of all, only 75 days until Orioles pitchers and catchers report (revised reporting schedule).

Play ball!

Nov

26

Happy Thanksgiving to all our readers.  Here is our 2006 article about Thanksgiving, economics and freedom.

Nov

19

 We thought this obituary was worth republishing, Ed.

Waving farewell - A surfing tribute to Doc Paskowitz

By Renee Ghert-Zand November 19, 2014, 1:42 am

Some 200 Israeli surfers paddled out together in to the Mediterranean to honor the memory of the late Jewish surfing legend Dorian “Doc” Paskowitz.

Paskowitz, who died on November 10 in California at the age of 93, is believed to have introduced the sport of surfing to Israel in 1956 when he visited the country for a year, bringing a bunch of long boards decorated with the Star of David with him.

On Tel Aviv’s Frishman Beach, Paskowitz found a kindred spirit in Shamai “Topsi” Kanzapolski, a lifeguard who was willing to take on the challenge of growing the sport in Israel.

It was on that same beach that the large group of Israeli surfers gathered on November 14 to pay their final respects to Paskowitz. Summoned by a Facebook event invitation posted by Orian Kancepolsky, Topsi’s son and founder of the Topsea Surfing Center, they arrived with their boards ready to ride the waves.

They paddled out on masse and formed a large circle formation in the water. Once in position, they splashed and threw flowers on to the sea’s surface.

“We enjoyed the Aloha spirit in his memory,” said Kancepolsky, referencing the “Aloha Doc” nickname by which Paskowitz, who spent part of his life in Hawaii, had been known.

According to Kancepolsky, not everyone who came out to honor Paskowitz had met him.

“Some just knew his story and wanted to be part of it,” he said.

Kancepolsky, on the other hand, had gotten to know Paskowitz and his large family (he and his wife Juliette had nine children) well when they stayed at the Kancepolsky home on their visits to Israel.

“It was amazing when he came here a few years ago to bring surfboards to Gaza. Here he was, this very old man with no money and who could hardly walk,” said Kancepolsky.

“I really liked his spirit. He believed that everything is possible, that nothing is impossible. He lived in the moment and had confidence that all would fall in to place at the right time,” he said.

Based on the turnout at Frishman Beach, it appears the Jewish surfing legend will be greatly missed by the Israeli surfing community.

“He was really a unique person. You don’t see a lot of people like him,” said Kancepolsky

Nov

19

 On Friday the world's greatest mathematician, Alexander Grothendieck, died, in Saint-Girons, Ariege.

More in Le Monde and the NYT, but I liked this quotation from Recoltes et Semailles:

New tasks forever call him to new scaffoldings, driven as he is by a need that he is perhaps alone to fully respond to. He belongs out in the open. He is the companion of the winds and isn't afraid of being entirely alone in his task, for months or even years or, if it should be necessary, his whole life, if no-one arrives to relieve him of his burden. He, like the rest of the world, hasn't more than two hands — yet two hands which, at every moment, know what they're doing, which do not shrink from the most arduous tasks, nor despise the most delicate, and are never resistant to learning to perform the innumerable list of things they may be called upon to do. Two hands, it isn't much, considering how the world is infinite. Yet, all the same, two hands, they are a lot…

McLarty's lecture is the best philosophical (rather than mathematical) take I know of on Grothendieck's work on the Weil conjectures. In summary, with his topos-theoretic approach he built a space tailor made to his problem, from the simplest of bits–and then let the space itself do the work.

Richard Owen writes: 

One presumes he has reincarnated as an interior designer? It's a shame he went off his loop a touch in the last decades. Or maybe he achieved a type of sanity we're not smart enough to understand:

The windows and blinds are all closed in most of the rooms of this mansion, no doubt from fear of being engulfed by winds blowing from no-one knows where. And, when the beautiful new furnishings, one after another with no regard for their provenance, begin to encumber and crowd out the space of their rooms even to the extent of pouring into the corridors, not one of these heirs wish to consider the possibility that their cozy, comforting universe may be cracking at the seams. Rather than facing the matter squarely, each in his own way tries to find some way of accommodating himself, one squeezing himself in between a Louis XV chest of drawers and a rattan rocking chair, another between a moldy grotesque statue and an Egyptian sarcophagus, yet another who, driven to desperation climbs, as best he can, a huge heterogeneous collapsing pile of chairs and benches!

Makes me think of: "One of my old supervisors told me that Wilhelm Reich went through three developmental phases as a theorist. In the first, he was not crazy and was not very creative, in the second he was a little bit crazy and very creative, and in the third, he was very crazy and not very creative."

Nov

8

November 8, 2014 | Leave a Comment

 Playing it My Way is the newly released Sachin Tendulkar's (a.k.a God of Cricket, next to Sir Don) autobiography, and I glanced and then read it as fast as I could.

For comparison's sake, it is more like a "Reminiscences of a Stock Operator" type book, where the modern reader, knows everything that the author wants to say. I'm seriously and eagerly waiting for the autobiography of Rahul Dravid, with everyone out there I bet, and if and when it comes, it could be an "edspec" type (I am serious, and no sycophancy here to either chair or Rahul Dravid who lives on the next road to me for the past 25 years).

Though I enjoyed the book, it is just a mere autobiography and doesn't really offer any tips on how to play the game. I think autobiographies need to be written by offering few minute technical tips to the future generation.

Nov

7

 On the last two announcements, whatever they were, the market did a big whipsaw which could be defined by big motion up, then down and vice verse in a short time equivalent to the range of the day around the central starting point. It didn't seem to matter what the announcement said. Crude has had some similar moves but were not related to the announcements mentioned above. The timing on crude was different also.

It might be analogous to the seismograph motion on an earthquake when the tectonic plates slip, or a heart attack type event on the heart scope.

Nov

6

 I note that gold miners bullish percent is at zero. Maybe some bankruptcies are forthcoming–IAG? Just recently Dr Greenspan opined that gold was a good investment…then the Fed announcement and the slaughtering of gold shares commenced. Hm.

Pitt T. Maner III writes:

All In Sustaining Costs (AISC) become important. IAG sold a niobium mine so maybe they will be able to weather a year or so with this cash. Perhaps the mining companies with cash, relatively low debt and available credit will be able to buy others and their better prospects on the cheap. 

"IAMGOLD Probability of Bankruptcy":

This will be added to Iamgold's assets to allow the company to boast of $800 million in liquid assets, with an additional $500 million of unused credit facilities to give the company a total of $1.2 billion in available short-term cash.

An area for more research?

Nov

6

Ten straight days with a 141 settlement handle. Ten day Vic (cumulative changes) at less than 2 points. How is Draghi going to upset this quiet?

Editor's Note: The Vic (first defined on this website in 2002) is a measure of volatility that uses absolute point changes rather than standard deviation.  For example the "10 day S&P Vic" is found by adding together the absolute daily point changes in S&P for the last 10 trading days.

anonymous writes:

It is important to understand what the currency markets are for and how they are used in the modern context.

Arguably the whole game is about keeping the stock markets (or more generally the 'risk' markets) going higher.

The USA started the game late in 2008 with QE. After a time the Europeans took over. Now increasingly the Japanese will supply the liquidity.

The Euro currency lower story is fading into the background in terms of 'rate of change'.

For the avoidance of doubt, the only two countries that are serious about lowering their currencies are Japan and Switzerland (Switzerland is a case study in defeating the markets - read about their actions in 2011).

The current QE in Japan is huge– make no mistake — an order of magnitude greater than the USA's actions.

The Europeans, at heart, are stable/ strong currency types and do not have the stomach to get genuinely serious about weakening the currency.

A multi-billionaire of my acquaintance in discussing Japan, put it to me this way– it is not often that a country pre-announces it's own bankruptcy.

Inflation is an interesting phenomena in this era, it is hard to create but when it arrives, it destroys. It is pathetic that policy makers believe that they can keep such a thing in control when it gets going.

There exist genuine reasons for low probability scenarios to play out in coming months.

Nov

5

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

David Lillienfeld writes: 

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

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

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

Jeff Watson writes:

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

anonymous writes: 

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

Nov

3

 Nice comment from Nick Walenda after this weekend's walk in Chicago:

"I believe what I do is a calculated risk"

To which I would add just like the insurance companies that wrote a $20,000,000 policy on his life for this event.

I need to be more calculating.

Oct

31

Stumbled on this amazing video this morning: "amazing resonance experiment". Being able to visualize the patterns associated with sound is a great way to think about the markets from a different perspective.

Oct

30

 "Running out Red Tape is a Growing Industry":

What industry sector employs more Australians than construction, education or manufacturing, and three times as many as mining? What function costs private industry and government a combined $250 billion a year? Few would have guessed compliance – the red tape industry. And it's booming."However, a frightening report released this week by Deloitte Access Economics fingers the real red tape culprits – the private sector business community whose compliance costs leave the government looking like rank amateurs when it comes to creating and paying for what, in many cases, are unnecessary and unproductive self-imposed rules.The total private sector workforce grew by 10.4 per cent over that same five-year period; its compliance workers grew by 17.4 per cent.Ironically, the group that represents our very large companies, the Business Council of Australia, has been a flag-waver for the government's attempts to tackle red tape. The embarrassing reality is that it should be focusing on its own backyard.

Ed Stewart writes: 

The missing factor is that "private" compliance rules are motivated by government mandate. They are required in order to avoid fines, bad pr, or lawuits. For example in the USA we have EEOC and OSHA, which both create enormous private bureaucracies and consulting practices. The "private" workplace rules are most often attempts to fulfill the requirements of these mandates.

Consider the headache a company must go through to fire an employee, particularly if they are "of color". It is a long drawn out process of documenting "evidence" that is fraught with risk if done wrong. Then you have the seminars on avoiding offending others, how not to think with the little head and accidentally cost the company 10m, the lengthy questionnaires with many imbedded "tricks" to weed out those not "with the program". It all works to create an environment that actively stifles common sense and rewards bureaucracy-enforced sensitivity.

Mandated dead-weight employees who can't be fired have a compounding effect of non-productive complexity. Everyone is a "stake-holder" and all ideas must be treated equally - or else. This leads to three hour meetings with no defined objective, the purpose of which is to provide ample room for people with no task related to the corporations primary purpose to feel important.

In my opinion we would see allot less "offshoring" of jobs if large US corporations were allowed to operate, hire, and fire efficiently.

Oct

30

George Mason University economics professor Bryan Caplan will speak at the Junto next Thursday on his forthcoming book "The Case Against Education".

Junto will take place Thursday, November 6th at 20 West 44th street at 7:30 pm-10:00 pm.

All are welcome. 

Oct

30

 One notes that Lloyds bank is 25% owned by the English as is Royal Bank of Scotland. And one wonders if government owned companies in general including AIG and GM and so many of the US banks, perform better than counterparts considering they have unlimited funding, they have the government put not to go bankrupt, and presumably would be the source of flexionic emoluments. One believes its worth a study.

Mr. Isomorphisms writes:

It was seen in 2008 that banks need not be state-owned to benefit from the government put.

Victor Niederhoffer writes: 

It would be seen that whatever anti says would be very sententious as he manages 1.5 trillion or so in Norwegian. His book is a good compendium of research by others. We can't figure out here if he says that bond futures have a drift or not because of liquidity preference. But its impossible to dispute the Dimson stuff that stocks return about 6 percentage per year higher than bonds. That can add up over 100 years.

Richard Owen writes: 

Did someone at the Norges Bank fund publish a Dimson-type book (favouring bonds)? The Norweigian surplus seems to be invested in a fairly Dimsonian manner.

anonymous writes: 

While it may appear that they have an unfair advantage, one must consider that Government subsidy cannot outpace the real economy forever without a collapse of the Government or the subsidized. It does not matter if the subsidy is direct or indirect off the backs of profitable real producers by changing the channels of money flow from real producers to the TBTF banks. Otherwise government TBTF banks would own everything. As the flexions get this status by already being big enough to crush the economy by their collapse. One wonders how many years such unfair advantage can continue.

While I would agree a study on those with NEW quasi government guarantees are in order.

I would argue that in the Dimson long run one must consider the following end scenarios:

1. Banks become so regulated that they are like utilities. That is they cannot fail, but they are only allowed to grew based on the "demand" for money. like Utilities grow with the demand for them.

2. Banks truly do rule the government, and they growth continues unabated and out paces the economy until there is revolution.

3. The Government tires of extortion and decides to break them up or kicks in their going out of business plan by charging them with crimes the banks deserved or railroaded.

I would not bet on the bread and circus acts for the TBTF banks to continue forever, as this is a bet against the USA.

Oct

23

 Mumford & Desolneux's book Pattern Theory: The Stochastic Analysis of Real-World Signals (Applying Mathematics) is the most promising work in foundations of statistical modelling I think I've ever read. The main idea is that whatever you're trying to model is some infinite-dimensional parameter space. The shape of the neighbourhoods and distances between them then gives structure to the randomness.

(My go-to example of infinite-dimensional space is handwriting: those who have tried to classify it, for example Douglas Hofstadter and Donald Knuth, have not been able to generate all possible ways to write eg "lowercase a" with any number of knobs. This is consistent with surfaces having a greater cardinality than reals. Demo of handwriting variation in a finite basis.

This is the rare book that doesn't get overwhelmed by the grandiosity of its own mathematical techniques. Lie theory and wavelets are just foundations, not the "Reverse Kolmogorov Smirnov Filter" of Nuclear Phynance.

P.S (Colour and music are also infinite-dimensional, in theory, as waveforms at least. Humans cannot resolve infinitesimal frequencies by eye or ear, of course. And ħ probably means that space can't resolve infinitesimal frequencies either. But theoretical waveforms are simpler; as long as a super high pitch was super soft, or conversely a very low pitch was very loud, the energy could be finite and constant.)

Here are some more great articles on loud low pitches:

"Strange but true: black holes sing"

"Have You Heard About B-Flat?"

"Big Long Cycle = Trend"

Oct

22

There are some very interesting points in this article about deception.

"Snake in the grass: Animals and viruses practise deception, fast and slow, in ways that help us understand human predators and scammers"

For example: "By constantly exposing individuals to harmless and weakened versions of deception, we might be able to build up the social antibodies necessary for individuals to recognise predatory deception when they encounter it."

Oct

21

 I just read Alletzhauser's House of Nomura (1990, out of print) after an old Japan hand recommended it to me. Highly recommend for anyone who wants to understand the history of Japanese business/markets from the Meiji through Showa eras from the perspective of an outsider turned insider. My summary/review/editorializing of the pre-WW2 era (skip to Four Big Bets section for the more market relevant tidbits).

Since the book released in 1990, the author portrays Nomura as omnipotent and triumphant (it was Japan's most profitable corporation in 1987) in a reverential tone that would seem absurd today. Of course with the benefit of hindsight, we know that Nomura was both partly lucky and partly a beneficiary of circumstances not just in the 1980's bubble but also at its very founding.

Perhaps more interesting is the glimpse into the business world of Meiji, Taisho, and Showa before WWII. What's clear is that Japan had Prussian institutions but an Anglo approach to corporate governance. State capitalism produced large conglomerated oligarchies (zaibatsus) that were run for the interest of shareholders. Behavior typically thought of today as "Anglo-styled capitalism": hostile takeovers, confrontation, shareholder preeminence, creative destruction, cutthroat competition, mobility etc. was a feature of Japanese corporate life. A few elite families dominated pre-WW2 and financial disparities wholly reflected this reality.

After the War, this entirely shifted to an egalitarian culture with corporations operated for the benefit of managers and labor rather than shareholders. Nomura was slightly exceptional for its more entrepreneurial spirit and aggressive culture, but not to the extent most corporations were before the War. The mandarin class gained even more power in this new system so political connections mattered even more after the War.

Mercantile Osaka

In the late Tokugawa (1603 – 1868) and early Meiji (1868 – 1912) eras, Osaka was the center of commerce in Japan whereas Edo (Tokyo), the seat of political power, was the much resented "kanemushi" (money-eating bug). Osaka was host to the world's first futures exchange, Dojima, which traded rice. Money exchanging became the most important, far dwarfing the stock exchange, as Osaka ran on a silver standard and Tokyo on the gold standard. The author points out that Osakans still greet each other with the phrase mokari makka, which loosely translates to "how's business" (though my Osaka friends inform me that this phrase is quite antiquated and fallen into disuse).

Money Changers

In this environment Nomura Tokushichi I (1850 - ?), the illegitimate son of a samurai and a domestic worker, inherited a prosperous money changing shop from his adoptive father. The Japanese, then as even today, regarded money changing as an occupation with low social status , the lowest rung of a class one notch above the untouchables (hierarchy: nobles > samurai > farmers > artisans > merchants > outcasts). However, by the end of the Tokugawa Era, many impoverished noble families had resorted to mercantile activities while the wealthy merchant class exerted tremendous power over the indebted nobles. Tokushichi I became comfortably wealthy and played the part of J.S. Morgan (1813-1890) to his more adventurous son J.P. Morgan (1837-1913)…though with much lower social standing and dominance.

Meiji Restoration

With a new national bimetallic currency and the abolition of feudalism, the Meiji Restoration gradually made money changing obsolete. The Meiji government legalized individual private land ownership and privatized large state-owned businesses. Adopting the centralized Prussian economic model, Japan largely relied on direct finance via banks to allocate capital. However, the formation of companies still required equity issuance, which gave birth to a burgeoning but largely backwater equity market. In Osaka, the stock exchange in Kitahama (in close proximity to the Dojima rice exchange) was open for two short periods a month. The massive bull market of the Meiji era led to the formation of 155 stock exchanges by 1897 of which the Osaka Securities Exchange was one of the largest.

Tokushichi II

Tokushichi I bestowed to Tokushichi II (1878-1945) the benefit of a modest fortune and excellent timing. Like the so-called American robber barons (mostly born in the 1830s), Tokushichi's lifespan happened to align perfectly with crucial events of the Meiji and Taisho eras in relation to equity investing. Unlike his conservative father, the young Nomura Tokushichi II was an inveterate gambler and spendthrift. Tokushichi II's father had to bail him out twice: first when as an apprentice Tokushichi II stole from his employer to speculate in the stock market (and lost) and second when he had a social obligation to indemnify a client who had lost money on his recommendation.

Four Big Bets

Bet 1: Having witnessed the bullish effect of the First Sino-Japanese War (1894-1895) on the stock market, Tokushichi II convinced his father to let him plow half of the family's net worth into a massive expansion of the stock brokerage operation once the Russo-Japanese War broke in 1904. As the stock market rallied as predicted, the gamble paid off and Nomura fully transitioned from a money changer to a stock brokerage.

Bet 2: In 1905, Tokushichi II bet big again when negative rumors circled his brother-in-law's textile business. After investigating the business and finding that the order books were full with wartime orders for uniforms, Tokushichi II accumulated shares at ¥20. Tokushichi II cornered the market, forced a short squeeze, and sent the price to ¥100. The paper profit (¥20,000, then the wages in the lifetime of an average Osakan) equaled the entire original capital invested a year ago to expand the brokerage. After this coup, Tokushichi hired a journalist and moles in trading companies to gather order flow and shipping volume information.

Bet 3: Tokushichi II's bullish bets paid off massively in the 1906 bubble. Seeing a parallel between the Russo-Japanese War and the Sino-Japanese War (which preceded a large bear market), Tokushichi II waited for other major dealers to become net sellers before selling most of his stocks. The determined risk-taker, Tokushichi II went short, but the market kept rising. By January 1907, Tokushichi II, teetering on bankruptcy, sought and received an emergency loan to cover margin calls from a leading Osaka bank by bribing the local branch manager with a senior position at Nomura. The market turned in mid-January 1907 and lost 88% of its value by the end of the year (though the author doesn't make a clear connection to the Panic of 1907, which likely bailed out Tokushichi II). At 28, Nomura Tokushichi II was worth ¥5 million and became a celebrity in the financial community.

Bet 4: With the arrival of WWI, the Bank of England raised the discount rate from 3 to 10%, which precipitated a financial crisis in Japan. Japanese banks called in loans to speculators and brokerages, which in turn sent the equity market into a nosedive and bankrupted a large swath of the financial service sector. Nomura survived this episode in part because at that time it was mostly in the business of earning commissions rather than trading for the house. 

Though by now most Japanese speculators understood that war was profitable for the listed corporations, most didn't think that a European war would mean anything for Japan. Tokushichi II speculated that WWI would be bullish for Japanese exporters based on the reports of shortages in Europe. His younger brother, studying in England, sent wireless reports that beat the Japanese newspapers and contained far more objective and accurate information. He also had access to intelligence in the Mitsui House trading empire, which gave Tokushichi II an edge over other speculators. While local Japanese papers gave the impression that the War would end in the winter of 1916, better information directly from his brother in Britain persuaded Tokushichi II to buy the dip that accompanied expectations of peace. The bet paid off as the war dragged on, which augmented Nomura Tokushichi II's already considerable fortune and cemented Nomura's standing as the top/surviving broker in Osaka.

Jesse Livermore

Tokushichi II's story bears remarkable similarity to Jesse Livermore's (subject of Reminiscences of a Stock Operator, 1923). Tokushichi II (1878-1945) was born a year after Livermore and died naturally five years after the latter's suicide. Both had a natural attraction to bucket shops in their youth, possessed high tolerance for risk that resulted in multiple failures, learned early that the stock market was prone to manipulations, and profited from their understanding of war's influence on economic cycles. Both made and almost lost their early fortunes in the Panic of 1907 and made their second fortune during WWI.

Perhaps the key difference between the two men was that Tokushichi II became a big fish in a small pond as a first mover in a nascent market while Livermore was always a minnow relative to the whales who had created their fortunes decades earlier. Tokushichi II used his early winnings to buy social status (eventually elevated to House of Peers in 1928 and repeatedly asked to become Minister of Finance in the 1930's) and ingratiate himself with the business and political elites. He built a network that produced valuable inside and early information. Conversely, Livermore seemed to hurt himself when trading on his "inside information" since he was never truly a member of the business elite himself. While Nomura Tokushichi II earned his fortune from imputing information and later rent seeking, Livermore had to rely more on his technical trading skills. 

Nomura Zaibatsu

Once Nomura Tokushichi II exhausted the easy opportunities from stock speculation, he parlayed his fortune into the more stable business of brokering, which became the basis of a fledging pre-WWII zaibatsu with more socially respectable business interests: primarily a bank and a rubber plantation in Borneo. This required him to concentrate more on political protection and opportunism.

The Nomura group never truly achieved the same status accorded to the great zaibatsu merchant houses of Mitsui, Mitsubishi, Sumitomo, or Yasuda. Within Japan, Nomura never earned the same cache or respectability that leading investment houses enjoyed in the US. This may be in part because of its roots in the rough and tumble world of retail brokering (rather than genteel corporate brokering), the strong cultural distaste for seemingly parasitic businesses that deal with secondary markets, and the subordinated role of equities and bonds to bank lending.

anonymous writes: 

I have not read Alletzhauser's book so this comment is based solely on what I have learned in my investigations into the WW I gold standard in Japan. The company that made Nomura Tokushichi II's fortune was Koriyama Kenshi Boseki Co.,Ltd. which still exists in a different corporate incarnation.

NT II was a friend of the company's owner, Yutaro Yasuhiro, who showed him the actual books. The company had been rumored to be bankrupt; but, because of the effects of WW I in Europe, there was an effective embargo on textile exports to East Asia, and the company's order book was as full as it had ever been. NT II bought.
 

Oct

17

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

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

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

Jeff Watson writes: 

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

Jim Sogi replies: 

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

Jeff Watson writes: 

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

Etali writes:

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

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

Oct

10

 Good morning Mr. Niederhoffer,

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

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

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

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

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

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

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

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

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

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

Happy to discuss and clarify.

Warm wishes,

Patrick

Chris Cooper writes:

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

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

Jim Sogi writes:

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

Oct

6

 Google has always given me the creeps. They have an awful amount of information and power and its growing. They are not the only ones.

In the Dataclysm, by Christian Rudder, who owns Okcupid an electronic dating service, he discusses the issues involved in big data. We all give up information in every transaction, when we go on Facebook, do a Google search, buy with a credit card, redeem a coupon. We get value in return, but the big data can be mined in creative ways to find out some very personal information. Facebook data can be used to determine if one is homosexual with an 80% accuracy. Target can determine if a customer is pregnant. Target doesn't want the customer to know that they know she is pregnant, so they put in lawnmower coupons together with the cribs and diapers so the customer will think she is getting the same booklet as the neighbor. Not. Big brother is watching.

In Okcupid data, they can tell a persons race by the language they use. Curiously men view women as being half above average in looks, and half below average, a bell curve. However, when women view men, they only think one in six men is above average in looks! My wife says, well that's obvious…women look at other things in men, not just looks. I guess that's how the ugly old guy gets the megababe.

On the dating site, people filter all the women or men by multiple criteria, however in experiments, they found that people were more satisfied by the experience in a blind date, (without pictures) even when one party was below average and the other above average in looks. Take away: people do not want really what they say and think they want.

Funny factoids aside, there are some big issues in privacy, use of the data. NSA has access to even more data, and recruits top math students to decipher it. What do they do with this info? They are not under the motto, "Do good".

We are basically at the beginning of history. Data is just starting to be collected. Kids now have their whole lives frozen and preserved forever in digital form. That drunken polaroid does not disappear when cleaning out the attic.

The book is annotated with explanations. I'd be interested to hear from the statisticians how this big data is mined. The word counts and graphs a la Tufte (who Rudder mentions) helps to tease out info.

Oct

6

 So it's Friday afternoon about 3:30 and I'm wrapping up the day when I get a call from my stepmom Patti.

Apparently, my cousin Veleda who lives in KC has a friend that was coming to St. Louis to see Pearl Jam in concert that evening, but his fiancee' had injured her back and was unable to make the journey.

So he had a couple of tickets that he didn't want to see go to waste.

So I called Veleda and she gave me her friend Justin's phone number and 10 minutes later the tickets had been changed into my name for pick up at the "will-call" window at Scottrade Center in downtown St. Louis.

So, now thanks to the courtesy of Justin (Thank you, Justin), I am in possession of two tickets to Pearl Jam. So now I have to decide who to take.

My wife was sitting with me when all this happened, so the first offer has to go to her. Gwen declined……she is not a real fan of heavier rock….but she did suggest that I take my son, Hunter who is fan of classic rock. Hunter (aka "Boosh") had already seen the Def Leppard/KISS concert earlier that summer and loved it. So Gwen thought he should go.

I called Boosh who was out for a walk in our neighborhood and he was in!

Unfortunately, Boosh really didn't know very many Pearl Jam songs, and there really wasn't time to get him up to speed, so I had him YouTube a couple of songs……..Jeremy, Even Flow, Yellow Ledbetter (incidentally, YL is my favorite PJ song)…….which got him pretty psyched.

We left early since I wasn't sure where the will-call window was. Since we got there early, we found a good parking space just across the street from the Scottrade Center and walked right in. We found the will-call window and got our tickets.

So now, we had to wait to even get into the venue. We waited almost an hour before the gates even opened. But it was an interesting hour.

We people watched.

We saw an odd array of people ranging from middle aged professionals like myself down teenage burnouts dressed in goth gear to emo's, to families with their children.

I was able to sneak a few pictures of the some of the more "interesting" people/groups in attendance.

There was the obese women in a wheel chair sporting a mullet.

There was a guy dressed in green military gear that looked just like Fidel Castro including the beard.

There was the professional guy who looked like he came right from work wearing coat and tie.

There was the mother and son with each with multiple piercings (ears, mouth, tongue, nose, cheeks, eye brows) and their bodies were adorned with tattoos.

However, everyone was very respectful and courteous.

It was not at all like it was in the old days. No one was looking for a fight, no one was yelling or getting obnoxious or getting upset when someone jostled them.

A VERY large heavily tattooed man accidentally elbowed me pretty hard when the line started moving. When he turned to see who had he had bumped, he had a look of concern on his face and words of apology and kindness flowed forth. When I smiled at him and said, "Meh, accidents happen", he smiled back and patted me on the shoulder.

When we finally got to our seats, the Scotttrade Center was largely empty. Far more empty seats than full ones. It was now ~ 6:30 and the concert was scheduled to start at 7:30.

So Boosh and I waited patiently. As people started filling in the seats, we made conversation with the people the around us. Of course, most of the conversation revolved around music and concerts.

Although most of the people around us were in the 30's and 40's (a few in their 20's and a few kids), I was probably the oldest in our immediate area (although there were people nearby that were clearly older than I…..I think I even saw some people that may have been in their 70's). I was asked a lot of questions and told stories of concerts "back in the day".

I told the story about how I had 3rd row center seats for Led Zeppelin back in the 70's and how on the day of the concert my report card came and my parents saw that I got an "F" in math (my one and only F of my entire school career) and grounded me from the concert.

People around us were partying and having a good time.

But there were things that were conspicuously absent.

For one, there were no beach balls bouncing around the concert hall.

Secondly, the room was not filled with the "haze of sweet smelling smoke" that I remember from the old days.

Also absent was the guy next to me saying " 'ere" (I spelled that phoenetically……some of you will clearly understand what that means) as he passed something to me.

We did catch the occasional whiff of marijuana, but only a little bit.

Also, the biggest difference was the Jumbotrons. They were showing the Cardinals first playoff game on the big screens.

Of course, between 7:30 and 8 pm, the Cardinals were not doing to well as the Dodgers dominated them.

Then, at about 8 pm, the concert hall was full and (as we were told by the band), the band was ready to come out and start playing…….but there was a problem…….

At about 8 pm, the Cardinals started a rally. They were down 6 -2 when the 7th inning started…….and were up to 10 - 6 after the inning was over.

The crowd was going crazy watching the Cardinals on the Jumbotron…..and Pearl Jam was just standing by waiting for the inning to end, knowing that they couldn't go out on stage while the Cardinals were staging this major comeback. So they waited and waited and waited. The inning lasted almost 1/2 hour.

When the inning was over ~ 8:25 Pearl Jam came out and started the show.

The first thing I'd like to point out is that, although I am a PJ fan, I did not know as much about their music as the people sitting around me did.

They played 3 songs before I even heard one that I knew. Now, don't get me wrong, the songs I didn't know were still fantastic and I enjoyed them very much.

They hit on almost all of their standby classics. Even Flow, Daughter, Better Man, etc.

The band absolutely rocked the house for 90 minutes and then left the stage. I figured the concert was over except for the encores. I was wrong. They were just taking a short bathroom break (as guess even famous musicians are subjects to the foibles of age and need more bathroom breaks than they did when they were younger).

When the band came back out, it was just the lead singer Eddie Vedder (one heck of showman, BTW) who came out with his acoustic guitar and began the second half of the show.

He played a few songs, including the old John Lennon song, "Imagine". It was very very good!

When the band joined him, they played a few acoustic numbers and then got back to the business of damaging my already diminished hearing capacity with more their hard rock numbers.

They played for another hour and ended the show with a bang.

Then came the encores…….a full 30 minutes of encores.

Of course, they saved a few of their classics for encores. The best song of the night was "Alive". They rocked the house with that one.

And then finally, for the last encore, with the house lights fully up and the entire concert hall fully lighted, they played "Teenage Wasteland" by the Who. Here is my iPhone recording of the final song.

A few other notes about the concert:

The band was incredibly gracious. They took time to read off emails and stories of fans that were going through hard times and dedicated songs to them.

The read off a list of birthdays being celebrated and even pointed out a few people in the audience who were either celebrating something or had just gotten out of the hospital to be at the concert.

One lady held up a sign that said "My 100th Pearl Jam Concert" that made it on the Jumbotron. A few songs later, the Vedder said that he was told that someone in the audience was seeing their 100th PJ concert and wanted to know where she was.

Once she was located, he took about 60 seconds and personally thanked her for her support of the band. Vedder had a bottle of something that he was drinking on stage (wine maybe) and said that he wanted to give this her as a personal gift from him and the band for her support of them……but the women was really far away from the stage.

So Vedder asked the audience to pass the bottle to her. He handed it someone and later we got to see that bottle had made it's way to her.

The band made a point at several times during the show to express thanks to their fans for their loyal support.

And they demonstrated their gratitude by putting on one heck of a show. I can't imagine how redundant it gets playing the same songs over and over again each night. But the band clearly took a lot of pride in their show and overall performance.

At no time did I feel like they were just going thru the motions. Vedder did the job you would expect from a lead singer and showman. Mike McCready did everything and more that you would expect from a talented lead guitarist and the rhythm section didn't miss a beat.

There were only two negatives that I could see. One was expected, and the other was a bit of a surprise.

First, the expected: When a band has a playlist as long as Pearl Jam has, there are going to be a few popular songs omitted.

They didn't play "Black" which really surprised me as that is one of their most popular songs  and they didn't play Yellow Ledbetter.

As we were leaving the Scottrade Center the one recurring theme I heard from concert goers was the absence of the song Yellow Ledbetter. Apparently, I'm not the only one that loves that song.

The unexpected negative was the lighting. I've been a bunch of concerts in my life, but this one had a twist to it.

I recall that the lighting used to be "on the performers", but at the concert last night lighting was "behind the performers".

What this resulted in was the audience being blinded for much of the show. I would say for about 50% - 75% of the show I couldn't really see the stage or the performers. All I could see was blinding lights in my eyes. It was like driving down the highway with all oncoming traffic having their high beams on.

I spent most of the night watching one of the two jumbotrons off the side of the stage just to see what was happening.

Although I'm not sure why they did it that way, I have a feeling it was to discourage people from taking pictures and videos of the show…..but I could be wrong about that.

Regardless, it was a great concert from great showmen. I highly recommend to everyone that if you have a chance to see Pearl Jam in concert you should take it!

Boosh and I had a great time!

And thanks again to Justin Trent for gift of the tickets!

Sep

21

 This is a short video about quantum computing. I was drawn to the simple explanation of a complex idea and there seemed to be many potential market lessons or at least gaining a new vantage point.

1. There is more than one complimentary way to view something.

2. If you participate you can't know what would have happened if you didn't and vice versa, particularly relevant for size.

3. Intrinsic randomness of superposition allows observations without a probability distribution. Still wrapping my brain around this. An example of ever changing cycles? Or something else entirely? If there is no probability distribution how do you define outcomes of events?

4. Quantum correlations are richer in describing interactions. This idea seems ripe for trying to understand the complexity of market interactions.

5. Attaining perfection is hard, maintaining it is impossible.

6. Viewing quantum computing affects the results, perhaps in the same way talking a position does.

7. How did you get that result? I don't know is the right answer in quantum computing. Do it yourself so you can understand. Don't trade what you don't understand. don't blindly follow someone else's "system" perhaps there are others…

anonymous writes: 

I agree that the quantum-collapse idea has broader applications to life in general. Danilov & Mogiliansky, many years ago now, used the collapse concept to talk about Tversky's famous quotation, "Preferences are not read off of a master list, but are constructed in the elicitation process." QM discussions have a tendency to go off the rails very quickly, and to attract sophists & cranks. But superposition and measurement-disturbances are, in my opinion, relevant and common to quotidian life.

1 = duality

2 = contravariance (the math.DG kind, not the math.CT kind), on trees

3 = I don't understand what this means either, but we can clearly reason about the unknown without attaching PRECISE probability numbers to it.

4 = I would guess no. Quantum correlations can have negative intersections. But someone here could find out: just allow your covariance matrices to take on complex values.

5 = set of measure zero

6 = talking or taking a position?

P.S. If someone finds complex numbers arcane or silly, I'm happy to share a few bits of perspective.

Mr. Isomorphisms writes:

Just checked the video and revised on Wikipedia and a little googling. I don't think 3 is an accurate statement. Quantum states are expressed as waves which can be added together. Lots of things in the normal world can also be expressed as finite-energy functional spaces. But I don't see where the video said there is no probability distribution. Nor is superposition "intrinsically random". Superposition is just adding things together.

If you check the Wikipedia page for quantum probability it says that outcomes of events are basically defined in the normal way, except since it's a complex space the i=-i equivalence shows up and screws with things.

OK, someone asked for my ideas on clarifying complex numbers. Here's my attempt for those interested:

- First the physical intuition. Electricity travels along power lines. If the transmission efficiency is 1 then the consumer gets 100% of the power produced at the generating station. If the transmission efficiency is sqrt(-1) then all of the energy from the station goes to heating the power line and does no useful work.

Now the maths.

- The usual numbers are annoying because signs "jump" from + to - with nothing in between. google.com/search?q=klein+j+invariant+whirling+upon the top video shows something else with only very specific points matching up, but instead of showing us only the actually equivalent points it shows us the whole movement, as it were — which is only posible in a smooth space. Complex numbers let us watch what's happening "in between" negative and positive.

- That's why e^i pi = -1. Nothing more special than that pi is halfway around a circle that goes from positive to negative, circling back to positive.

- View the complex line as a line and an angle ⟳. The angle replaces the usual concept of sign. All of the arithmetic on complex numbers works basically the same as regular arithmetic, except that you also take the "angle" (the "amount negative or positive") into account. If you multiply two numbers you need to add their "angles". (In finance, "angle" means "correlation".)

- So I generally think of the complex multiplication happening just on the unit disc, i.e. everything is equal magnitude but has different signs (and fractions of signs). Then I do regular multiplication second.

- However it's impossible to tell -i from +i. (-i)^3 == (—)i == -i So that has to be taken into account.

- Complex numbers don't require any changes to your metaphysical worldview, because they can be represented with real numbers. The matrix representation is on Wikipedia and it looks just as "half-negative" as (num)*(num)=-1 does.

- You can derive trigonometry from complex numbers. In other words the arithmetic induced by adding sqrt(-1) to a number system, matches what people figured out from plane triangles.

- For those who can use R (or don't mind logging into cloud.sagemath.org, opening a cloud terminal and typing R), run the functions in https://gist.github.com/5a30e61fb305ee52cff . That instantiates a "plat" function, basically like python mpmath's cplot except Cielab colours are psychologically superior to RGB.

You can "plat" polynomials like this: plat( Z, function(x) (x^2+1) * (x-2.3) )

Then red is positive, green is negative, and other colours are somewhere in between. Size is indicated with brightness, but there's nothing special going on here that you can't see in a regular plot.

I believe playing around with simple (and not-simple, if you can think of any) functions in these "plats" will give anyone (a) a better understanding of those functions, and (b) the feeling that the complex numbers are not scary or weird.

tl;dr. The complex numbers just let us look in-between positive and negative. More advanced: if you want to envisage a complex variety, then an idea I had recently is to animate the plat with a parameter that traces around the unit circle (all possible "signs" fed into the function).

The "worse" version of a parabola moving from +1 to -1 to +1 would be it "flaps its wings" with in-between being a flatline at 0–not very parabola-like.

Jonathan Bowers writes: 

I'll agree that I may not have articulated my understanding of superposition very well. In the video they show a coin flip since it also has two outcomes, but emphasized that while the coin flip has a probability distribution quantum computing does not. Perhaps that means that the distribution is always changing or unstable or when or how you measure it changes it.

Mr. Isomorphisms writes: 

I think it's just a superposition (convex combination) of 0 and 1. Same concept as a screwdriver if it could be any mixture of orange juice and vodka. You probably have a small range that you consider "screwdriver" but what if there was a word that meant "anything that's 100% orange juice, 100% vodka, or anything in between". That's a convex combination of oj and v.

Sep

17

The Betfair Sportsbook is paying out a substantial six figure sum on the NO vote three days before the market closes, fully confident that the Exchange will once again be the most accurate barometer of a political vote…

The moves comes as the £8.6m Exchange market remains vehemently in favour of a NO vote at 1.27 (1/4 and a 79% likelihood), despite opinion polls predicting a much closer result after the votes have been counted on Friday. Over 85% of the total volume traded is in favour of a NO vote.

Several big individual trades continue to come on NO, with one customer staking £55,000 and another backing it for £27,000 on Sunday alone.

There has been little sign of the YES vote gaining any traction with political bettors, trading at 4.5 (7/2), and the average size of bet placed on this outcome under £80, in comparison to the £465 average bet for the NO vote.

Betfair's Naomi Totten said: "Political bettors have often favoured the Exchange as their choice of betting platform and it has historically provided an accurate prediction of political outcomes. Paying out early on our Sportsbook is testament to the esteem in which we hold the illustrious track record of our Exchange.

Sep

15

 Shades of Galton….

Excerpt:

In his fourth-floor lab at Harvard University, Michael Desai has created hundreds of identical worlds in order to watch evolution at work. Each of his meticulously controlled environments is home to a separate strain of baker's yeast. Every 12 hours, Desai's robot assistants pluck out the fastest-growing yeast in each world, selecting the fittest to live on, and discard the rest. Desai then monitors the strains as they evolve over the course of 500 generations. His experiment, which other scientists say is unprecedented in scale, seeks to gain insight into a question that has long bedeviled biologists: If we could start the world over again, would life evolve the same way?

Stefan Jovanovich writes: 

The absence of time's arrow is fascinating. The "fittest" compete in a world where the rules are constant and invariable - "meticulously controlled" - while everything we know says that the rules are always changing in ways that even we brilliant humans fail to predict. Still worse for the purposes of experiment, the rules sometimes instantly and violently, even as they obey all of our entirely predictable laws of physics.

Ralph Vince comments: 

This has nothing to do with "fitness," and everything to do with randomness.

Take X scenarios. At each discrete point in time, they branch into one of these X scenarios, such that after Q discrete periods, you have X^Q branches.

Your "expectation," (not in the classic sense) is the sorted median outcome (whereas the classic sense expectation is the probability weighted mean outcome, and I contend that in the limit, i.e. as Q->infinity, they converge *).

About this sorted mean outcome (at QP0, in the paper this thread pertains to) there is a vast region of similar-outcome branches. It sounds to me as though this experiment has lass to do with evolutionary "fitness" and more to do with artifacts of expectation in finite time.

I am working on a proof of *, but working on it with respect to continuously-distributed outcomes (as opposed to discrete "scenarios") as well as continuous(though fininte) time, rather an discrete increments of time to Q.

It is a struggle.

Mr. Isomorphisms adds: 

This may not be what you're looking for in proving *. But the other day I worked out that you can exploit the "soft max" identity (seen in tropical geometry and elsewhere) to get analytic formulae for the median, third-from-top, etc. (only with log base ∞) which might get you where you need to go.

max = log_t ( t^a + t^b + t^c ), t going to infinity

min = log_t 1/( t^-a + t^-b + t^-c ), t going to infinity

second_max = max( {a,b,c} - max({a,b,c}) )

With recursion you can get all the way to the middle. (Now since we've turned the median into a continuous function we can take derivatives, which I haven't simplified or played around with since I realized one can do this. But I don't think that relates to your * — just hoping the method would.)

Steve Ellison comments: 

Regarding Shane's original question, yes, there is a phenomenon known as evolutionary convergence. Isolated areas with similar conditions often have similar life forms that developed independently. For example, cacti originated in the Western Hemisphere, but there are plants that originated in Eastern Hemisphere deserts that also store water and have spiky exteriors.

Gary Rogan writes: 

Clearly there are niches in the environment, just like there are in the economy, the market, the arts, sports, etc. It seems self-evident that a species that thrives on a Pacific island is likely to be different from a species being able to survive in the Arctic or at the bottom of the ocean. Not having "a single, cannibalizing species inhabiting the planet" only speaks to the niches in the environment not some complicated problem with evolution.

Ralph Vince adds: 

Perhaps we DO, in effect, have one, cannibalizing species, depending on how broad the field of view of our lens of examination.. How many animal life forms on the planet have but one eye? "Evolution" having eliminated that not-so-robust construction in all earthly environments. Is our notion of "species," which we believe to exhibit a vast array of life forms, only show us carbon-bases life forms with, at most, five senses. In that sense, is a penguin so much different from a scorpion from a human being? The notion itself of "food chain," with such biochemically similar life forms, is, in effect, an exercise in cannibalism. 

Gary Rogan writes: 

Since the evidence points to life arising or being successfully introduced to Earth just once, it's not surprising that we only have carbon-based life forms. And just because a scorpion shares a lot of genes and proteins with penguins doesn't mean they are of the same species, simply based on the definition of the word: to be so classified they'd have to be able to interbreed. I'm now no longer sure what the point is, but hopefully "descent with modifications" is not in question.

Ralph Vince clarifies: 

My point simply put, is that I don't find "evolution," or "Survival of the Fittest," an adequate model, i.e. a panacea for how life arose and differentiated (to the restricted sense that it has) on earth. I find it too simplistic of a solution, believe there are likely many other explanations (all of which are, in a limited sense, true, similar to the wave/particle properties of light) and am interested in any other explanations (there is not a debate here, aside from one which I don't believe you ascribe to of "Fitness" being an explanation for all life on earth).

For example, (to the best of my knowledge) every living thing seems to fit somewhere into the food chain. Perhaps there is an overriding-yet-undiscovered mechanism requiring this as a license for life on earth? (And if not, why not? A stupid question, unanswered, is still an unanswered question. I believe evolution seems to explain so much that we use it to explain where a different mechanism may be the driving one, yet, occluded by the seemingly-obvious-to-us explanation of "fitness"). Evolution is a powerful explanation, but it does not explain everything.Not that I have a problem with "fitness" as a driver here — clearly it is, so I am not at odds with you there (though I am not so sure life was introduced on earth only once, again, viral and fungal life is a difficult leap from living cells). So I simply wonder of what other driving mechanisms are at work here that we are unaware of.

Gary Rogan writes: 

Ralph, as it's generally hard to prove a negative, especially in open-ended complicated situation, I can't argue that there are other forces at work. As for fitting somewhere on the food chain, all carbon-based life forms eventually get weak and if not eaten at that point die. Weak or dead concentrated proteins and other valuable chemicals present too rich and too easy a food source not to be consumed by something, so this particular point doesn't instill a sense of wonder in me, but perhaps there is more to it than meets my eye.

We should keep in mind that on the average over any appreciable number of generations every existing species or otherwise categorized collection of biological creatures has almost exactly one descendent per individual, otherwise within a short span of time the group's mass would exceed that of the planet or conversely disappear. Therefore available resources present arguably the highest hurdle on the success of species, but as Hamlet said, "There are more things in heaven and earth, Horatio, than are dreamt of in you philosophy."

Ed Stewart writes: 

Speaking of the food chain, I think the concept of the tropic level has some serious application to the markets, as I the chair documented in his first book. Might be particularly good model to analyze the impact of various stimulus measures - what level the stimulus directly stimulates, then who feeds on that level directly and indirectly for investments opportunity.

anonymous writes: 

There are no marsupials above the Wallace Line above Australia. Below there are the myriad odd and strange life forms in Australia. It was a function of geology creating distinct eco zones and separate paths of development of life forms.

Sep

15

 From Borrow: The American Way of Debt:

While Ford may have pushed cars, he never pushed debt. Ford so loathed the sapping of freedom that debt represented for him that for most of the 1920s he refused to sell his cars on financing plans, and in the process nearly bankrupted Ford Motor Company. His hostility to finance, coupling an anti-Semitic hostility to Jewish bankers and a mechanic's hostility to anyone who didn't make anything, hobbled the company. That Dick could get a job at General Motors, which believed in debt wholeheartedly, is largely a testament to Ford's hostility to consumer credit.

In the 1920s, Americans, both borrowers and lenders, discovered new ways to finance consumer credit, and, of course, it was only the beginning. Debt was everywhere, and its ubiquity was made possible by changes in finance, manufacturing, and law that had occurred after the First World War. High interest on consumer loans had long been illegal in the U.S., but around World War I, progressive reformers, seeking to drive out loan sharks, pushed states across the country to raise the legal interest rate. Now able to lend money legally, at rates which could be profitable, new consumer finance industries sprung up overnight. The legal changes coincided with a new generation of cars and electrical appliances that were both expensive and mass produced. The installment credit allowed manufacturers to sell these new wonders at a volume, and consumers could afford them because of the easy monthly payments. What ultimately made all this lending possible was that lenders could now, for the first time, resell their debt.

Stefan Jovanovich writes:

This is very bad history. Henry Ford disapproved of debt, but he had no problem with his dealers offering it. Where Ford's stinginess really hurt was his failure to offer financing to his dealers to allow them to finance their inventory. That is what GMAC did. Sloan had the wit to insist that GMAC be truly separate so that the brand managers could not channel stuff. The explosion in debt in the 1920s was not in consumer debt at all. It was in producer and public finance.
 

Sep

15

I wrote this article and thought you might all be interested: "Authors Must Be Marketers".

Sep

11

Do any of the sports bettors on the site (Jeff?) have a sense of the following:

Scottish Independence is a binary event, thus the simplest to balance your book. You should therefore be able to make a dutch book?

Further, if the odds don't reflect the real probabilities, in theory, speculative money (or the bookmakers proprietary money) should balance them back up.

But, for uncommon events which involve a high percentage of public money, for which prediction is relatively difficult and unproven, do the odds generally manage to find equilibrium at the true percentages perceived by educated bettors? Or are they sometimes set to balance the money flows?

So for Scotland: if English will "emotionally" bet No, and Scots bet "Yes", and there is a 10:1 population imbalance, will the odds overstate a No?

More generally, say, could Manchester United odds (who have a huge number of world fans versus other football teams) generally be tight relative to the real odds, as "smart money" is insufficient to balance the emotional money? Or is this a sufficiently deep market for proprietary accounts?

Chris Cooper writes: 

Relating it to the practice among American sports books, the overriding concern is to balance the money flow. Thus it is possible to make a dutch book, considering the variations due to location and randomness. I'm not sure how true it is today, but in the past the Las Vegas lines for games involving Los Angeles teams could easily vary from the same lines elsewhere, especially as it gets close to game time, due to the proximity of the cities and thus the money flow.

The lines also vary depending on emotional factors or being public favorites. For example, as "America's Team", the Dallas Cowboys used to command an unjustified perception leading to perhaps a point difference in the spread. Again, the book is just trying to manage the money flow…if it gets too out-of-whack, they will normally try to lay off some of the action.

Sep

9

 Satyam Shivam Sundaram.

These 3 Sanskrit words together, have formed one of the most quoted and misunderstood treatises of ancient Hindu wisdom. Taken one at a time the three words mean Truth, Basic & Beautiful respectively. The root words for each of these words is Satya, Shiva & Sundar meaning Truth, Basic/Basis, Beautiful respectively. In this statement however each word ends with the suffix "am" (prounced as "um" as in gum) that basically is the conversion of any noun into the active entity. This phrase/sentence thus has only nouns and each is the active entity!

Since Sanskrit is one unique language that does not require any rules of syntax, we can translate the original in six different combinations, as follows:

1. Truth is Basic hence Beautiful.
2. Truth is Beautiful & hence Basic.
3. Basics are Beautiful & hence True.
4. Basics are Truth & hence Beautiful.
5. Beauty is the Basis & hence True.
6. Beauty is Truth and hence the basis!

Is there any contradiction? Well, if there are any felt by any, we can recline on Ayn Rand who surmised, "….check your premises". One of the several ways in which the premises can be checked and contradictions removed, that one may take all the six meanings together.

This list is a place where scientific approach to seeking truth prevails. I would be keen to hear from any who notice any contradictions in these six translations and of course from those who can wrinkle out and eliminate any contradictions to help establish a basic beautiful truth about truth, beauty and the basics.

Sep

8

 This book is an enjoyable compilation of studies that are so dense with fruitful analogous studies it is hard to share them all. The book is Behavioral Mechanisms in Evolutionary Ecology Published by University Of Chicago Press.

There is an interesting study in the book involving benefit optimization in birds' foraging behaviors relative to varying probabilities of success in various patches that are foraged in. Which is evolutionarily optimal: the benefit maximizers, the imitators, or the do nothings?

Also there is an interesting one about how to respond to signals when there is a varying probabilities of correct interpretation and/or response (studying frogs). I'm skeptical of the field studies, but the models and reasoning for them is nevertheless insightful and speaks to any one who has a love of economic thinking.

Dylan Distasio writes: 

Here is an interesting article about pigeon behavior:

And here is the abstract of the study

Whereas humans are risk averse for monetary gains, other animals can be risk seeking for food rewards, especially when faced with variable delays or under significant deprivation. A key difference between these findings is that humans are often explicitly told about the risky options, whereas non-human animals must learn about them from their own experience. We tested pigeons (Columba livia) and humans in formally identical choice tasks where all outcomes were learned from experience. Both species were more risk seeking for larger rewards than for smaller ones. The data suggest that the largest and smallest rewards experienced are overweighted in risky choice. This observed bias towards extreme outcomes represents a key step towards a consilience of these two disparate literatures, identifying common features that drive risky choice across phyla.

Orson Terrill comments: 

"Pigeons and humans showed remarkably similar patterns of risky choice, with both species showing risk aversion for low-value rewards and a tendency towards risk seeking for high-value rewards."

Is what underlies the strategy of acquiring deep in the money long dated calls in speculative stocks (SolarCity, Tesla…) and selling nearest dated calls in those same stocks essentially dealing to self selecting risk seekers paying the highest premium? Often it looks reasonable to get back your principle within the first year, and then another 6 -12 months of risk premium as income. The reserve requirements and added costs of frequent options exercises to see how much the return is reduced by those could be a deal killer…

Carder Dimitroff asks: 

How do you do this profitably for SCTY? How deep and how long?

anonymous comments: 

There are experts here that can answer this better; I don't have the real answer. This is in the context of the thread…. trying to deal to the most risk seeking individuals. The idea is to make it as much as like a covered call portfolio as much as possible, but reduce the cost of owning the shares by owning a deep in the money long dated call, with the minimum volatility premium, and subject to the belief that the income from selling near dated volatility can repay you over the duration of the longer dated call. This would suggest the longest dated possible, and probably a strike around half of the share price.

As an example: last week the cost of the 40 strike Jan 16 calls relative to the cost of the 70 Sept 12 calls. Would have put you at ~4% gross for the first week. It's not hard to imagine that after slippage, spreads, and transaction costs that it is possible to recover the cost of the long dated call in ~70 more weeks of selling nearest dated calls. However adding how much, and what, are the portfolio opportunity costs from needing to deliver on those short dated calls sold, and tax issues, make it look iffy at first blush…but it seems like there could be something there.

Even now there might be a $170 credit on selling 12 days (weekends are real) of upside risk from the Sept 20 calls against the the $3500 cost of the 40 strike in Jan 2016. Then you have to repeat the near dated selling; if you brought in $170 on ~21 of the 41 12-day periods leading up to Jan 2016 there would be a break even (gross). That seems like that is a large enough cushion to consider what may be left after taking the total portfolio approach to mitigate taxation, spreads, commission costs, and what return that is against the all the assets involved to implement…

Sep

8

This story [about the first demonstration of anesthesia at Harvard] has many of my favorite things in it, including Harvard's ability to pull the wool over the eyes of its alumni and pay its fund managers 100 times as much as the average professor, not taking into account that there is no sales cost, no symmetry of risk, and no taking into account the normal random variations in performance which would always lead to some doing better and some doing worse. But more importantly it causes one too reflect on how he should change his views over time, be open to new things, and be humble, and appreciative of the young and unaccredited. What revisions of your thinking have been helpful, and what should we do so as not to decry things of value.

Sep

4

George Meegan, who walked around the Americas for 12 years and holds the record for the longest walk, will be speaking at the Junto this Thursday at 7:00 pm.

The meeting will be held at the Mechanics Institute at 20
West 44th St between 5th and 6th avenues in Manhattan.

All are welcome. 

Sep

3

 Friends in Japan tell me there are going to inflate big time and expect stocks there to rip to the upside.

Charles Pennington writes: 

I'm going to bet with Larry. Japanese stocks (as sampled by etfs like EWJ [large caps] and SCJ [small caps]) are trading at around 1 times book value, 4 times cash flow, and 14 times earnings, and that's going to look attractive when free money gets thrown around. Rocky made this point in early 2013 right before a big rally, but what he said then is still true.

anonymous writes:

One of the largest economic myths is that Japan has been in economic cellar.

John Floyd writes: 

DXJ is a good way to play as it takes out the exposure of being long the Yen, should the Nikkei and USDJPY indeed go up. On a timing issue I think there are 2 key points to take in:

1. Structurally, unlike previous announcements and moves since the late 1980's the current move to end the economic malaise is much more entrenched and has wider breadth both from political and social support and the actual measures being using (the 3 arrows). Remember it was the stated intent of the BOJ in the late 1980's to deflate the stock market, they succeeded all too well.

2. Cyclically, Japan's economic growth is likely going to be lower than the BOJ is forecasting while inflation is also going to be lower than they think. However, it seems that the BOJ will not be revising its economic forecast until October and it will be sticking to its policies till then, but is likely to have increase QE prior to year end.

Gary Rogan writes: 

I don't understand how it's possible to to predict the effect on the Japanese stocks of this one factor. Earlier this year Japan raised its consumption tax from 5% to 8%. Last time anything like this happened was in '97 when it was raised from 3% to 5% and caused the economy to slip back into a recession. I don't think Larry believes that recessions matter for stock prices, but that's an arguable point. Also, Japan as an export economy cannot afford to inflate the cost of its exports, so you gotta believe that the price of Japanese stocks in dollars can't rise too much assuming there is anything like a recession or just economic doldrums. Someone mentioned hedging the yen exposure, and that may be the way to go. I'm also concerned that China is getting out of hand with the US walking around with a "Peace Now" sign. I any case, a single-factor analysis seems like something too simple for this situation.
 

Edward Talisse writes: 

I lived in Japan for a long time. It is very tough for non yen based investors to make money in Japanese stocks. The Nikkei tends to rise only when the yen depreciates, so any rise in stock gets offset with currency losses. Japanese stocks are all about corporate governance issues rather than financial metrics. Shareholder activism is rare and companies are usually loathe to reward shareholders with dividends or buybacks.

Obviously anything can happen. Last year N225 was up 57% and Yen was down about 30% and I am sure many are happy to have banked net 27% …but it was still below the S&P which returned 32%. Personally, I am routing for a big win in Japan and I hope the people there succeed. It just tough to make money. If you believe in the reflation story, it may be easier to just short the Yen and forget about stocks. Shorting JGBs should be avoided. All the bonds are domestically held and the BOJ buys whatever the MOF issues.

Lastly the story put forth here that Japan did not or has not suffered a lost couple of decades is at odds with my experience. There are people sleeping on the streets in Tokyo just like in NYC and senior citizens are in a deep pinch due to a lack of income on their savings.

Charles Pennington adds: 

Everybody hates the yen!

I was surprised to learn that the yen (as of July) is 24% undervalued based on the Big Mac Index.

anonymous writes: 

That makes sense, range has been -30 to 0 for past decade or so, and from semi recent travels on comparative basis the cost of hotels, coffee, noodles, etc. has not really changed much in 25 years, real interest rates have been comparatively high.

Alston Mabry writes: 

And at the same time, the surprising thing is that New Zealand is more expensive than Japan.

Peter Tep writes:

Wait until you see prices here in Australia. You will easily spend $20 a meal for a basic lunch, whatever cuisine have you and a drink. Dinner runs double that sans vino.

Public transport costs here are stupid as well as the parking costs. If you were out of town and were Parking in underground park for corporate lunches etc, you are looking at $30/hour.

Personally for me I travel some 15kms to work on the bus which costs me about $12/day. Mind you wages here are running higher I suppose with baristas (coffee makers) earning some $20+/hour. Friends of mine in the 20-30 age group pay $150-300/week in rent for a room in trendy inner city suburbs.

Just perspective for those interested in on ground prices!

anonymous writes: 

Peter, Thanks for the rundown on Australian prices, but they don't sound expensive compared to Silicon Valley.

Sep

2

 How many of the rich were in the lower quintiles like What's App which recently sold for 18 billion to Facebook and the owners were on food stamps the previous year. Is that bad for a society to provide such opportunity and for the mobility between classes to increase or should we be like England where once you're in one class you can never move to another.

Richard Owen writes: 

I am unsure if its really true that class barriers exist to any greater degree in the UK than the USA, other than perhaps in the mind or money of the classes themselves. A bit like Mr. Cosby's riffs to African Americans: don't perceive barriers for yourself. As my friend staying at the Knickerbocker club and being variously harassed for his attire, decorum and guests the other week reported "a certain strain of New Yorker could surely teach the British a thing or two about snobbery." Sure, we have a Conservative government with a disproportionate number of Etonians in it, but when one becomes Prime Minister, one tends to reach for trusted friends and fellow travelers. And being an Etonian is not a vote enhancer. Annunziata Rees-Mogg was asked to reframe herself Nancy Mogg for the purposes of election PR. The USA does not seem short of its own political dynasties and classes.

Ralph Vince writes: 

The chair's example of WhatsApp I believe is the exception more so than the rule.

The churn at the higher stratas sees parties leaving unexpectedly. Those arriving, arrive slowly, believing they will be there forever.

Vast sums of money are lost in a day, a minute or the blink of an eye. You see this principle play out at the baccarat tables and the markets. The new arrivals, the beneficiaries of money-begetting-money for protracted periods, often generations. 

Mr. Isomorphisms writes: 

Regarding the very long timetables, I admired both the diligence/ingenuity of Gregory Clark and The Economist for publishing that the surname "Micklethwait" has enjoyed a run of good luck, when its chief editor is John Micklethwait (graduate of Ampleforth College, and later Oxford). Miles Corak also earns a mention in that Economist piece. A short list of Americans from expensive high schools includes Dan Ellsberg, Charles Coker, Thruston Moore, Glenn Close, Adlai Stevenson, Cosma Shalizi, but not Dan Einhorn. 

Stefan Jovanovich adds: 

If you do any serious searching of genealogical records, you discover 2 things:

1. Longitudinal searches of census data by county locations, including the immediately adjacent ones, show limited "social mobility" because the people who stay where they are born and whose children stay there are largely content with their lots in life. This is one reason America scores better than Britain in the 19th century; the people who stayed in Britain were ok with their lives where as, in America, nearly everyone was moving around, even if many of them eventually came back to "home".

2. The people who leave are the ones who become very rich, by local standards, or flat broke or need to get away from the law. The very rich tend to move to the places where they can be with their financial equals (so the Rockefellers abandon Euclid Avenue Baptist Church and become Episcopalians in New York) and the flat broke know they have better chances getting help from distant relatives than from local ones (a great deal of the Northern migration of freed slaves and, even more so, their children follows that pattern). The need for people to get away from the local sheriff hardly needs explanation.

The Harvard study deliberately ignores #1 and #2. "We assign children to commuting zones based on where they lived at age 16 – i.e., where they grew up – irrespective of whether they left that CZ afterward." The study also makes no adjustments for relative costs of living as a discount factor in gauging incomes. A child who migrated from Charlotte to San Jose gained 50% in gross income during the study period; but he or she gained no wealth with the added income compared to a child of lesser social mobility who stayed back home.

There is one other fact of human nature that you learn from reading the ancestry searches people have done: Everyone with any pretensions finds a way to trace their ancestry back to European royalty, even if the parish records stop 300 years or more before the connection is made.

Aug

30

I just stumbled across this and simply could not help myself:

"Not everything that can be counted counts, and not everything that counts can be counted." — Albert Einstein

anonymous writes: 

You can replace the word "count" with "value", and it still works. Or one can replace it with "say" or "mean". As you try to fit in other words, the sentence starts to tell us that whatever we think we know can be so strange to us. Perhaps this can ultimately be rephrased by Lao Tzu's words: "The Tao that can be spoken is not the eternal Tao". 

Aug

28

 What can be learned from the ice bucket challenge–the challenge task itself, how it has spread, why people enjoy watching it, and how when you search for "ice bucket challenge" on YouTube the next suggestion is "ice bucket challenge fail". The ice bucket challenge fail video reminded me of a stop-stop order that has skidded out of control and exits much worse than expected.

Jeff Watson writes: 

Patrick Stewart has a most elegant way of handling the ice bucket challenge. This meme is transferred similar to a way the Chair described years ago.

Aug

28

Hi, perhaps you could put on the spec list that I have a entry level job opening for a quantitatively orientated trader to (eventually) work our evening shift.

Contact is: R. G. Niederhoffer Capital Management, Inc., 1700 Broadway, 39th Floor, New York, NY 10019. Email: info at niederhoffer.com

Aug

25

 One key finding is that some foreign car companies demand the local manufacturing facilities and dealerships to only source parts through the brand company. Through this scheme, the investigation said, those companies managed to achieve abnormally high profits.

Well, cars have been very expensive in China, many with 2-3 times the prices in the US. For many years, I have been puzzled by why this is the case and who actually take the money. Undeniably, various taxes in China are very high, but those do not suffice for the huge price differences.

Now this finding seems reasonable to explain the mystery.

The question is how they could be doing this from the beginning?

The absence of a useful legal system is cleanly an answer. But there are more hidden issues people often choose to ignore.

1. The state regulations provide foreign car companies with basically two choices: a) sell imported cars and pay substantial tariff; or b) set up local manufacturing and sell locally produced cars and pay less tariff. Choice b) obviously is more preferable to foreign car companies for their high-volume models. But the condition for b) is that they have to form local joint ventures with Chinese companies. To any successful foreign car company which is fully capable of designing, providing manufacturing facilities, manufacturing and marketing their own cars, this provision clearly means a brutal cut into their profit. Why would they joint-venture with local idiots who surely have strong political liaisons but know literally nothing about cars? So then limiting parts sourcing became a genius business strategy for them. The argument is very sound: to ensure the best quality of their cars! The local JV partners have little problem accepting it because with however high cost they know they could use their political ties to force higher prices onto the consumers.

2. Cross-border trades have always been extremely restricted in China. In the case of importing cars, only the extremely few with strong liaisons can obtain licenses. And again, the imports carry very high tariff. The rationale for this restriction that has long been planted into people's mind is that it protects national enterprises (implying the meaning that it is good for everyone in the country).

Now lowering prices should be a good thing for consumers. But it comes not without a concern.

If parts selections are not strictly enforced, qualities are certain to suffer. Would elite Chinese consumers trust Chinese products? No chance!

Aug

25

 "He was a degenerate gambler. That is, a man who gambled simply to gamble and must lose. As a hero who goes to war must die. Show me a gambler and I'll show you a loser, show me a hero and I'll show you a corpse." -Mario Puzo

Rishi Singh writes: 

This reminds me of Ed Seykota's remark to Jack Schwager in the beginning of Market Wizards 2 that the reason Jack blew up is because he wanted the market to tell him when to stop trading.

I spent some time with Ed at his place in Austin a few months ago. Remarkable soul who is on a crusade to change the way we feel about feelings.

Stefan Jovanovich writes: 

Puzo knew something about gambling from experience; he was one, to the point of degeneracy. His knowledge of war was a bit more limited; by the time he got to Germany the war was over. He served as a public relations officer for the air corps. Those who haven't, give tours.

Aug

25

 A while back in "the good ol' days", a list commentator (way back pre-crash) quoted an article "Mistakes of Investors" appearing in Ticker Magazine back in 1908. It seems a good time to reprise it:
Avoid inside information.

Never make an investment on enthusiasm or excitement.

Use your own judgment.

Pay for info rather than getting it for free.

Consider earning value and market value. The man who buys real estate looks to the enhancement of value more than to earnings.

Don't lose confidence. The investor hears rumors of impending disaster, which, if he would reflect upon, he would see would have no effect on his security. This applies to bank runs.

Stay away from names. (Even then there were touts and promoters.) No high sounding titles can make it a success if it lacks the true qualities of success itself.

Don't put too much reliance on advertisements, especially red paints.

The losses through mining investments (not tech) are greatest. Beware of promoters who have no reputation to lose.

The greatest mistake is one of pessimism and doubt. Never let your mind fall into that chasm. Do not think because you have lost money in one investment that all are unsafe." The posting continued with an observation about among article in that first issue, by Roger Babson:

"The most interesting article to me in the first issue was by our old friend Roger Babson, written in 1908 about bank loans. He says that when the proportion of loans to investments gets too high it's bearish and when it's too low, it's bullish, but on a time series basis for all banks, and cross-sectionally between banks within a year. He gives yearly figures from 1860 to 1906 to verify his point and then shows how the panics of 1873, 1894, 1890, 1893, 1898, and 1903, were accurately forecast by the ratio.The key ratio he uses is 50% loans to assets, which was 'In 1873, the ratio of loans to resources first exceeded 50%. Consequently a panic occurred by the spring. Another panic occurred in 1903. Again the western farmer came to the rescue and owing to bountiful crops, the recovery continued until 1897 when interest rates exceeded 2200% a year.'Thus, Babson preceded Boltan Tremblay, Colonel Ayres, the bank credit analyst, the fake doctor, and many other greats in relying upon these credit ratios more than 100 years ago. It's overdue for a test again today."

Jeff Watson writes: 

Here's the kind of statistics the old grain traders used back in the day. When you think about it, not much has really changed. This period covers the 1904-1914 cash wheat CBOT receipts for 1904-1914.
 

Aug

22

 One had a loss today and found it appropriate to go back to Wiswell to see if I can improve in the future.

We have losing days, drawing days, and winning days, and not every day is a losing day, and not every day is a drawing day, and although we may not like it, not every day is a winning day.

The real trouble with making our moves is that we don't know if they are good or bad… untill we have made them.

The good player loses without an alibi, wins with grace, and draws with a smile.

Don't strive to be brilliant, do not scorn simplicity. There is simplicity in the highest flights of all art.

To study the strong players is to learn how to play, to study the weak players is to learn how not to play: to study ourselves is to learn how to play the game of life.

I suggest you study your great victories a long time, and study your great defeats twice as long. You may well learn a great deal more from the latter.

Never let the fear of striking out get in your way.

Many games are won by the art of judicious leaving alone of pieces and men. This negative habit often develops into a win.

Good players do not complain about their lack of opportunities. They are good, in most cases, because they go out and make their opportunities.

Many a draw is lost for the simple reason that you did not ask for it– at the right time.

I seldom use the word impossible regarding chess and checkers. You will see just about everything happen on the board.

The art of playing is not only to make the right move at the right time, but to leave unmade the wrong move at the moment of truth.

Success in the opening can lead to a weak middle game, and finally defeat in the ending.

Playing much, suffering much, and studying much… these are the three pillars of learning.

Common sense wins many games, but there are positions where it would actually lose, and it will take uncommon sense to win or draw. You must decide when uncommon sense must come to the rescue.

The search for the right move while you are playing is helped by the research you have done before playing.

The good moves are all there— waiting to be made: all you have to do is sort them out and put your hand on the right pieces and move them to the right squares. Yet some of the greatest master have made serious mistakes in carrying out this "simple" transaction.

Andrea Ravano writes: 

Great ideas Vic. I've often been confronted with poor performance, and the most difficult part of it is looking straight at yourself in the mirror and saying to that innocent looking person "you are wrong". Admitting ones own errors is the beginning of rebirth, just as realizing that your win at the backgammon board was more then the consequence of unusual dice statistics over your calculating power. 

Aug

20

 The erudite and esteemed historian of ours raises the question what can we learn from ancient Rome. Richard Epstein [cv ], believes that almost all that is good in our own law comes from Rome. Nock believed that only classics should be taught in college because everything good and bad happened in Rome and Greece and all we have to do is learn from the mistakes. I have always believed with Nock that the stock market will do whatever it has to do to increase agrarian reform, i.e. whatever will create a easier flow for reduction of social power and increase in the palindrome type of state. I often follow that line in my own trading. Do you believe Rome, Caesar, the two wolf men et al the Greeks, have things to help up with our investing?

Stefan Jovanovich writes:

Eddy aka our daughter Nora had the great good fortune to study Art History at Cal Berkeley while doing the requisite training in molecular and cell biology that would enable her to go to the wikipedia school of medicine at UCLA. She had the even greater good fortune to discover Andrew Stewart and make certain that she took every one of his classes. This left Eddy with the handicap of having the closest thing to an Oxbridge education one could get in America; Stewart was a kind, clever and relentless tutor; he even forgave her at graduation for abandoning a career in art history for the dubious privilege of wearing progressively longer white coats.

My apologies for the long-winded preamble; I am attempting to explain where I got my answer to the Chair's question. The "Greeks" of the Hellenistic period, not the classical one, are the people from whom we should take our lessons about finance; for they are the people who established the patterns of trade - grain from Egypt, Crimea and Sicily, manufactures from the Eastern Mediterranean, spices and clothes from West Asia, etc. - that endured in spite of the Roman's preference for military-industrial pillage. 

Dylan Distasio writes: 

 Today marks the 2000th anniversary of the death of the emperor, Augustus.

If our esteemed historian would be so kind, I was hoping he might provide one of his favorite books on either Augustus or ancient Rome in general.

Stefan Jovanovich replies: 

Karl Galinsky's "Augustus: Introduction to the Life of an Emperor"

His discussion of Augustus as a politician is the best description of how "Rome" actually worked politically that I have ever read.

Pete Earle adds: 

Ironically, this was published today as a 'Think Piece' by the Adam Smith Institute: "Currency Reform in Ancient Rome". In it I look at four obscure emperors and their efforts (as well as their fates) with respect to shoring up the denarius as Rome entered its "Age of Inflation".
 

Aug

20

 Is coffee good for you? A recent study seems to imply it is good for the liver:

Coffee is one of the most commonly consumed beverages in the world. Its health benefits including improved overall survival have been demonstrated in a variety of disease states. To examine the association of coffee consumption with liver disease, a systematic review of studies on the effects of coffee on liver associated laboratory tests, viral hepatitis, nonalcoholic fatty liver disease (NAFLD), cirrhosis and hepatocellular carcinoma (HCC) was performed. Coffee consumption was associated with improved serum gamma glutamyltransferase, aspartate aminotransferase and alanine aminotransferase values in a dose dependent manner in individuals at risk for liver disease. In chronic liver disease patients who consume coffee, a decreased risk of progression to cirrhosis, a lowered mortality rate in cirrhosis patients, and a lowered rate of HCC development were observed. In chronic hepatitis C patients, coffee was associated with improved virologic responses to antiviral therapy. Moreover, coffee consumption was inversely related to the severity of steatohepatitis in patients with non-alcoholic fatty liver disease. Therefore, in patients with chronic liver disease, daily coffee consumption should be encouraged.

Aug

12

 There's lots of PE money going to Europe. Given the continent wide slowdown, I have to ask: why?

Tim Melvin writes:

There is a ton of PE and distressed money moving into Europe to buy bank assets and southern Europe. RE, KKR, Apollo, Baupost WL Ross and others have moved in a big way this year. The fund manager survey does not track this more patient (and probably smarter) money at all. Basically the PE and distressed guys are buying what the classic asset managers ares selling. Guess whose side I'm on?

anonymous writes:

On the macro level the fact that Germany is slowing is a major source of concern for the European economy, and the experiment in the single currency. Considering the Asian export market slowdown, persistence uncertainty in the Ukraine and ME it is unlikely German will have a meaningful pick up in 2014. German was supposed to be the main source of growth of Europe as the rest of Europe tightens budgets and deals with domestic crunch. The growing debt levels in the periphery, persistent weak growth, disinflationary forces, social and political discontent cannot portend well for the future.

The Italian government bond market is the 3rd largest in the world and they can borrow at roughly the same level as the US. Since 2010 public debt has gone from 120% of GDP to 135% and over the past 10 years GDP has been barely above .3%.

There is value in many of these assets being liquidated by banks and asset managers but expect the ECB to remain easy and the currency to make much of the adjustment necessary balance the macro picture.

Milton Friedman said:

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it's hard to believe that it's going to be a stable system for a long time. … If we look back at recent history, they've tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn't in on the euro. It's only a year old. Give it time to develop its troubles.

Boris Simonder writes: 

Interesting quote by MF. That must be a very old one judging by his comment. Fourteen and half years later the Euro is alive and kicking, in fact, well beyond of what any skeptic would believe given recent years.

John Floyd adds: 

The quote was from 2000, alive and kicking is relative, the euro straight jacket has done no favors to other macro indicators such as GDP, productivity, debt levels, etc….I am not making a prediction on Euro survival or failure, in the end that will be a largely political event, as was the inception, one cannot ignore the fact now that a negative political and economic vortex is forming and become self-reinforcing, where the braking mechanism is in asset prices I am not sure, and full disclosure I have been bearish the Euro concept since inception, luckily I have learned from mistakes and been able to squeeze out some profits and both sides and from other asset markets playing the same thematic tones, such as long the front end curves, I merely ask the question now is the timing and confluence of catalysts pushing us closer to seeing the Euro move lower? And yes alive and kicking for some time it has been, but so did the Argentine Peso pegged at 1 for about 10 years.

Boris Simonder writes:

The macro indicators you are referring to has more to do with national and cultural structures of each individual EU country, than the currency itself - As for betting against the Euro since inception, I'm sure no one envisioned an almost 100% rise between 2002-2008. Euro moving lower? Speculators net positioning in the futures market would think so, and perhaps the macro crowd betting on widening EU/U.S rate-spreads would support as well. If you consider Euro to be a risk-on currency, then the climate isn't perhaps the best to support that. Or how about the bag of technical breakdowns since May.

As for the comparison to Argentine Peso, can you really compare a pegged currency against a free-floating one? Or yet a single country against a bloc of countries with far more political and monetary power?
 

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