40 years ago when one first fooled around with the idea that there was a web of interconnections between markets like the web between producers and consumers in biomes of nature, one concluded that there was always a web between markets, what I called the ecology of markets, i.e. when stocks went up it caused bonds to go down, et al–but the problem was that the web was always changing. In looking back at that hypothesis and observation, doing many recent rests, one concluded that problematically that the observation was correct, and the main problem as far as opportunity is that that the web is always changing. Perhaps this is because of ever changing cycles, but perhaps due to homeostatic activities by the central banks and flexions.

anonymous writes:

1. Most of the money today is managed by AI methods.
2. AI data input is biased toward current decade, to substantial degree.
3. Within current decade, most intraday moves had Bonds suppressed by Equities strength.
4. Bonds are still not far off their ultimate record high valuation; and Equities are on their records.

It would make a hard sell to modern asset allocators to point that 40 years ago Stock fortunes were in lockstep with Bond fortunes. Will ancient history make abrupt comeback? This would make for utter disruption.

anonymous writes: 

How many markets or asset categories make up the web? Just trying to keep it simple here is what I came up with:

1. Equities
2. Fixed Income (Bonds)
3. Commodities
4. Currencies
5. Real Estate
6. Arts & Collectibles

Did I leave anything out? 

Stef Estebiza writes: 

American markets steadily, slowly, go upwards…the markets are opportunistic pathogens…until a bad note of any nature happens, they continue to do what they were doing, in this case they are going up, using the most illicit systems to do so exp-multiple. Panic has been abolished by law…what is it that still has to happen to cause a change? A random nuclear explosion? When you have liquidity and infinite ability to handle any "indicator" as you like (even the debt) what can you expect? The only one would be a collapse of consumption…one of those non-controllable costers from central banks. For now the sun shines, navigates upwards…waiting for Trump…and in the meantime, all the MINCHIATE on artificial intelligence, bitcoin etc…can also stay. 

Russ Sears writes: 

"panic has been abolished by law". Please define "panic" and put some numbers to this. It would seem to me that "panic" implies some over-reaction During the election when it was clear that HC would not win..There was panic…S&P futures down 100… then a reversal by end of day. It would be hard for me to put a market impact number on a nuclear attack, because it would be huge, and probably would be some "panic" at some point. But lack of big down days implies that the market believes it essentially has got it (the future) right. Not conclude that it is being manipulated. It's much easier to get people to believe a malicious falsehood about someone/thing than it is to get people to believe in benevolent falsehoods. 




Andy Aiken writes: 

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

Alex Castaldo writes: 

Not very courageous either:

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

anonymous writes: 

Mine, it's better :-)

"JPMorgan patents Bitcoin-like payment system"  



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

Orson Terrill writes: 

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

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

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

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

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

To make the point about AI:

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

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

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

Stef Estebiza writes: 

Warren Buffett's favorite holding period is forever.

anonymous writes:

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



Aka how to get in the news:

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

Stef Estebiza says: 

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

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

Ralph Vince writes: 

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

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

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

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

Russ Sears writes: 

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



"Billionaire investor Paul Tudor Jones has a message for Janet Yellen and investors: Be very afraid"

Victor Niederhoffer adds:

I will wager the billionaire investor is not long.

Jeff Watson writes: 

Articles like this are why I ignore financial editorials. Fallacies like the Argumentum Verecundia (appeal to authority) should never sway a spec. One wonders why, since March 2009, the financial media never published articles that said stocks were too cheap, predicting the S&P to go up 250% from the bottom. One suspects that articles like that would never get printed as they would be good advice to the investor, but bad for the broker's bottom line. 



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

Ralph Vince writes: 

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

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

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

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

J.T Holley writes: 

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

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

Ralph Vince writes: 

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

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

Kim Zussman writes: 

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

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

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

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

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

Ralph Vince responds: 

Kim, my response to your points is below: 

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

This is already baked into the market.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



There are 2 basic reasons that "modern" portfolio theory is no longer "modern". While the basic idea is still golden, diversity lowers risk.

First, there has been an explosion of asset classes in which one can diversify into, which are traded. However, the data on these classes are not long enough to have stood the test of time. For example do high yield bonds diversify or are they simply a mix of bond risk and equity risk with liquidity risk thrown in?

Second there has been an explosion of ways to game the model to make the manager appear to have added Alpha, but really has loaded up on some other risk not measured in the model, like liquidity risk (real estate for example) or model risk (MBS for example) or simply taking other risk besides measurable volatility risk. When the MPT is taken as gospel it often is taken to extremes leaving one vulnerable to misinterpretation, like any other scripture, one should beware of those claiming to help one understand that scriptures fine points, especially when money is involved.

Ralph Vince writes: 

I think there's a bigger question here, and that is, why hasn't MPT been applied to other similar processes (as that of the equity curve of a trader in capital markets or gambler) in the natural world.

This is the question I find most baffling — why, 75 years later (at least with regards to the Markowitz subset or geodesic) are the models floundering solely in these equity curve style exercises. There are more exercises and more important exercises where this can and by now, ought be applied to, specifically exercises in the natural world with respect to many things — some of which I have mentioned here in the past such as deficit reduction sans tax hikes or budgetary cuts, chemotherapy or other pharmacological dosing, spread of pathogens, etc. etc. any growth-feedback function wherein we seek to diminish growth in the natural world.

Given that MPT resides in the Leverage Space Manifold, and that each axis along each dimension in that manifold (minus 1) varies in the domain 0..1 representing, in the exercises we are more familiar with, the percent of stake being risked on that component, MPT itself, at 75 years old could, conceivably, be applied to such growth-diminishing exercises. The axes which each range from 0..1 in value can be transposed to reflect the cosine of the variance to the mean growth of the data used for that axes. Thus, any growth-feedback function can be mapped to the Leverage Space Manifold, and in turn, mapped to Markowitz's Efficient Frontier (the geodesic) provided the variance can be altered by human intervention (such as dosings, national debt accumulation rates, etc. there are some functions, like Sir Ronald Fisher's fundamental theorem of natural selection, which states, "The rate of increase in fitness of any organism at any time is equal to its genetic variance in fitness at that time," maps to this model even though we are not seeking to tweak an organisms genetic fitness).

And yet, dosages are not considered under such a model (and contemporary medicine itself stands accused of dosing in manners opposite those which this model might often suggest) , deficits continue amidst a seemingly intractable tug-of-war between budgetary cuts vs. increased taxes, and all of these can be addressed, improved, through the implementation of some relatively simple mathematics. There are ample meals here and research ideas.

The tragedy of MPT, and more generally (and to me, personally), the hyaline manifold of leverage space, is not that it is not seeing full employment in financial markets, but that it is not being used for beneficial ends in other physical and social sciences.

I'll shut up about it now.

Orson Terrill writes: 

"The tragedy of MPT, and more generally (and to me, personally), the hyaline manifold of leverage space, is not that it is not seeing full employment in financial markets, but that it is not being used for beneficial ends in other physical and social sciences." Could you elaborate on this?

Ralph Vince writes: 

We have a manifold of N+1 dimensions where N is any seperate set of outcomes affecting what we are observing (these could be individual stocks in a portfolio, or anything else for that matter) and bound in each dimension between {0,1} (or whatever scale you care to provide, where we scale it to {0,1}).

The N+1th dimension is the growth (after Q trials, or Q elapsed periods, Q{0, infinity} at each value for each of the N dimensions, and thuse gives as an N+1 dimensional "surface" in this manifold.

You look inside this manifold and you see some very interesting contours on the surface across it's field bound by each axis, but also as these contours chage with respect to Q. Tht's a description of the thing but here is what it does. In the context of capital markets, any portfolio construction mechanism (e.g. MPT, CAPM, portfolio insurance and levered ETF constructions, etc.) or "staking system" (e.g. Kelly, antimartinglae, "never risk more than 2% on a trade," etc") map to this surface in ths clear manifold. And from that, given the "chronomorphic" character of the curve (i.e. that it changes as Q gets larger) we can see the effects of these different applications in a manner bigger than the aplication itself. For example, we can see the effect of implementing MPT upon the countour of ths surface, and the benefit of this is that the counters, these geometrically significant points, give us information about our actions and how we might amend them to vastly improve what we seek to acheive, our "criteria." (Absent criteria, we are looking inside of a glass box, mouth agape, like Piltdown man - it is of no use to us despite the fact that all models map to the surface in this manifold).

Here is where there are great insights to be had in my opinion. Each axis, which, in caital markets orgambling parlance represents a percentage of risk, can also be mapped to the cosine of the mean outcome and standard deviation of outcomes of the sample used to construct inputs along that axis. Thus, for any growth function, we can look at what occurs with it with respect to changes mean or standard deviation (see the previous post re: Fisher's Fundaental Theorem) but far more beneficially, if we can affect the mean or standard deviation (as, say, with a nation's period-on-period borrowings, or biological growth rates) we can affect these systems in manners not yet even attempted (or perhaps dreamed of). For example, along the countour of the surface, along every axis, as we move towards 1, there is a point where the grwoth rate drops below 1. Always. This means there is a point, along any axis, where the aggregate growth rate at those values, insures the entire system cannibalizes itself (multiplying an account by a number less than 1 with each passing period, each increase in Q, and the account value approaches 0).

To the notion of MPT, it means that regardless of how may components you have in your portfolio, it takes only one component whose allocation is too high, regardless of he allocations to all others, to insure ruin.

In the natural sciences or other matters where we wish to diminish growth, or affect it in manners opposite those which our criteria call for in capital markets applications, the principles hold again. Any growth rate that has variance in it's growth or where variance may be induced, maps to the surface of this hyaline manifold, and the implications of where we are on that surface and its counters apply. If we can affect the mean and/or variance, we can position ourselves wherever we want on that surface and achieve whatever criteria we seek. If you are near Kalamazoo, Michigan on Thursday, I have to go there and speak about this at Western Michigan University and it is open to anyone.

Stef Estebiza writes:

I'm not sure I understand, but it seems you need a main manifold, for controlling, managing, the overall view, but also serves an independent process for each component of the mainfold, to handle exceptions, those situations where, contrary to the "market efficiency", a market, apparently in "harmony" that responds in a way related, to rule connected, it disconnects (singles part of it) … and every process must be able to manage themselves, monitored, to not degrade the performance of the "mainfold". to understand each other, regardless of the relationship, if a process is disconnected from reality (manifold idea), degrading the overall performance, it must be disconnected (you must atoscollegare) or managed (inverse relationship), or avoided, until he "recovers". .. the main manifold must provide the general idea of what you would like … but if the process is irrational and responsive to subjective rules, then any subjective process must have its own mainfold, "object", which defines the rules of the single object, and may depend on the general idea (mainfold). the main mainfold can provide the basic idea, the limits, but in reality, each "object" must be able to log out( or reverse) to prevent damage to the main idea(mainfold). especially in situations like this, where economic policies and "latency" in fiscal policy can fully determine "new situations", unforeseen, not covered by our "manifold".  

Russ Sears writes: 

If I am following the logic of Stef and Ralph correctly, I would add that if there is a space where the overall market is not aware of or such as a "new market" and one inputs this new market's data into the fixed system one finds an arbitrage advantage. If however, this new market and arbitrage is discovered by all using a similar fixed system, the market will form a "bubble" and hence is headed for ruin. A lack of dynamic inputs into a dynamic system can be worse than no system at all. Such is what appears to have happened with sub-prime loans. One of the biggest problems with the current stress testing system in my opinion is that one must "disclose" any relevant changes to your stress testing model. The regulators look at these disclosure more as an admission of bad modeling or model "error" than as a necessary part of a modeling system. Hence the modelers are not going to do this unless forced to.

Orson Terrill writes: 

Ralph, thank you for the expansive explanation. So, you feel that your work with the Leverage Space Model offers optimization beyond what portfolio managers are currently using? What is the hold back, learning costs?

Is there a video of your talk?

Ralph Vince responds: 

Orson, I'm afraid there's no video. Widespread acceptance is at least a generation away, and I see many depts now teaching it, their professor's sold on it. People remember what their nsteuctora believe and tend to accept it.

Most of the work in this manifold and what is going on in there at this point has not been done by me but quite a few academic others. I try to keep a repository of what they VW written on my website under
*related papers." Zhu and Maier-Ppaape are working now on the most amazing capital market applications of it and will likely publish it in the next year or three. I can understand the concepts…The actual symbol legardemain far beyond me



 Since the epic crash of 2008, many key relationships have changed and some have gone outright haywire.

Traditional meaning of money for students of demand and supply has been that value of assets and value of money do not move together and rather move in opposite directions. The USD and the S&P500 have been moving up together through a sustained eight years now. In satisfying the mind, which is nothing but a self organising pattern seeking system as per Edward de Bono, one places in the model of the new world the Euro as the new money of this new world.

If this is a perceptive transformation that is acceptable for logical minds, one places on the table a few questions that might deserve indulgence of the specs:

a. What do quants see in the relationship of Eur with other key assets, the extent of the idea that Euro is behaving as the money of the new world?

b. Given impermanence is the only permanence, to prepare better than the rest, in what good ways should one be studying the configuration and the factors working into the significance and role of the Euro in today's world such as when this meme / regime will be about to be ending, the list may be one of the earliest lighthouses to note the changing tide?

c. Will JPY be the next to take over the role of the , howsoever ephemerally in the infinitude of ever changing cycles, to mimic appearing to be the money of the world? There is another question hidden within this simple looking one, that is, will the super bull of equities continue for years further even if the eight year persistence of EurUSD gives in with similar behaviour of a sustained decline coming in the value of the JPY?



 Merkel does not see a banking crisis in Italy. She is waiting for Italy to intervene and save the banks with BAIL-IN and only after be able to save Deutsche bank with bail out. It would serve an avalanche for Deutsche bank …

Stefan Jovanovich writes:

Does anyone think that the world's central banks can "control" the relative prices of their national currencies? I don't; but I have the luxury of being completely ignorant about what and how GZ and others do in the trading of IOUs. I just see it as analogous to what the national Treasuries tried and failed to do with bi-metallism; no matter how much they huffed and puffed, they could never bring their official ratios for the prices of gold and silver into balance with what people bet they were worth.

If central banks cannot, in fact, "control" the exchange ratios of their own legal tender, they certainly can "control" the price of their domestic debts. No one doubts that the Fed or the Bank of Japan or the Bank of China or the Bank of England can determine what their national Treasuries will pay as interest on the country's central government's new borrowings and outstanding debt.

Can the European central bank prevent the Bank of Italy from funding whatever additional borrowings the Italian central government wants to make? Even those of us who are completely ignorant know that the answer is not going to be determined by "the law" but by the same politics that always govern essentially closed systems of interest. To put it in 18th century parliamentary terms, will the interests of the owners of the sugar islands and the city merchants who did their finance win out once again or will there be another tax revolt in the commons? So many people everywhere in Europe now get their money direct from the EU just as so many people in England got theirs from the Navy; but that is of no benefit to the people who are on the local government and private payrolls. They want their own payouts.

I confess I do not understand the notion of "peak" debt. The direct liabilities of the central governments are "high" but they are insignificant compared to the off-balance sheet promises that have been made for future retirement, medical and welfare payments. Governments can keep rolling over their debts and adding to them as long as they want; they have a zero interest credit card from their central banks. The only risk is that the professional scolds will (1) demand a "strict accounting" that brings those never-never plan obligations onto the country's official balance sheets AND (2) decide that the poor will have to go first in terms of "belt-tightening" (after all, they are all fat and should go on a diet).

Rocky Humbert responds:

Stefan's post reminds of Ben Graham's quote: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

In the short run, the Bank of Italy, or any Central Bank or any Government or any enterprise for that matter, can do whatever they choose. In the long run, unsustainable policies are reflected in the exchange rate; or the cost of capital; or the access to capital; or in the wealth of a nation.

Right now, the ECB's policies have seemingly altered both the signals from markets and what defines "long run." I am not unique in making these observations of course.

My database shows that from May 1973 to September 1982, the Italian Lire declined from 800L/$ to about 2000L/$ — and it traded in a extremely wide band (+/- 50%) subsequently — until the conversion to the Euro. In the post-Gold Standard world, the Lire (and for that matter, most paper currency purchasing power) have always moved in one direction: down.

The current Euro regime is unprecedented in all of our lifetimes– it's creating all sorts of novel imbalances — both similar to and different from previous fixed exchange rate periods (which always resulted in violent or gentle devaluation). The biggest imbalance of all is being created by the ECB's QE buying of sovereign debt — which essentially allows the Bank of Italy to be immune from the discipline of the market. I don't know how this will resolve, but the Greek experience of the past years is one possibility.

The discussion about Scott's annuities are not unrelated. We have been in a protracted period of inflationary quiescence. When inflation and interest rates are low, people focus on "income income income." But when inflation is high, people focus on preserving their purchasing power. The most dangerous mistake any investor can make is taking for granted certain embedded truths — which turn out not to be a truth, but rather an assumption.



It is interesting to consider whether certain month's employment announcements tend to be consistently bullish or bearish. A former employee,  writes to me that the May employment numbers have been quite bearish for stocks.

Bill Rafter writes:

The NFP report is always murky to me. It always needs "interpretation" which is why it looks different several days after its release. The big interests (from the media, at least) are the unemployment rate and the number of new jobs. Both are the result of rather obtuse calculations. I prefer the growth of payroll tax receipts which require no interpretation. The source is the Daily Treasury Statement, effectively the bank account of the government. Attached is the data from last week; no change in appearance since. It may not agree with the early or late interpretation of the NFP report, but it speaks truth about the actual job situation.

Stef Estebiza writes: 

Employment data are smoke and mirrors, are more a political need to do to accept further cuts/taxes and justify these policies. The new jobs are precarious and at reduced wages.

anonymous writes: 

I suspect that I read about the Chair's views on the unemployment rate in years past, but is it safe to presume that the numerator smoke/mirror terms cancel out the denominator smoke/mirror terms?

Or does the science of people counting treat the employeds different than the idleds at the tabulation level?

I've generally treated the unemployment rate as a good bit more reliable than the overall jobs number.



It is useful to consider whether there is a formula like I = E/R for markets with appropriate random elements. Would a resistor for the stock market voltage be bonds or euro? Does the speed with which a market moves a given magnitude have a differential effect on the future?

Stef Estebiza writes: 

Check this out: "Charging and Discharging a Capacitor"

They know this stuff because right now they are experiencing a flow of money from China/asiatic markets and Macao. They are discharging the capacitor in China to upload that to Macao.

The product of Resistance R and Capacitance C is called the Time Constant τ= tau, the time constant which characterizes the rate of charging and discharging of a Capacitor. But if you use a fixed resistance and change the supply voltage (variable) you can change the time of charge of a capacitor anyway.

So, from 2009 the capacitor S&P 500 was loaded in ascending exasperated way, despite the high resistance (endless but constant). The monetary mass, (the applied voltage) was very high, steadily increasing, just to force the charge of the capacitor, despite strong resistance. The money supply, which, thanks to the tapering they said NOW to be reduced…so, if you reduce the voltage, the capacitor will start to discharge…it has a current when it has a potential difference, currently, the condenser is charged, it is in full charge, and equals the voltage applied to load it (monetary mass).

So, in real life you can't go over the capacitor features, if you rise the voltage to force a further charge on the capacitor, you risk to destroy it. But…it looks like someone (some kids well informed) short-circuit the capacitor for brief moments. (short-circuiting the poles of the capacitor).

If the resistance across the capacitor's pole is zero (short circuit) the current tends to infinity, as well as the transformation of value from the nominal value (on the markets) in cash. So, yes, like Macao teaches, the important thing, if you remove the tension, you open the circuit so that there is no discharge of the condenser. In reality the capacitor has its own internal resistance that sooner or later download the condenser…SO YES, EUR$ can go to 1.15 and over… (the higher the better to buy then$) (I was waiting) for 1.20/22.

"Does the speed with which a market moves a given magnitude have a differential effect on the future? "( Yes, we are managing a phenomenon of discharge or runoff ).

All that is to help Emerging (see the yuan) Europe and USA (strong $)…Alchemy of Finance if they can manage the crisis and then do the quantitative easing for the masses, everything can get going again, otherwise, they have not understood anything about the current situation.



 Common thoughts among the masses:

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

Ralph Vince writes: 


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

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

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



Warren Buffett's Berkshire Hathaway is on track for its worst year since 2008. Buffett can't find cheap stocks to buy. The last time that Berkshire had a down year and underperformed the S&P 500 was all the way back in 1999.

Gary Rogan writes: 

I also can't find cheap stocks to buy. I don't think this is a sustainable situation and is likely to be resolved either by a crash or years of under-performing stock market. On the other hand, if Trump is likely to win Trump is likely to win, who knows whether his anti-fee trade rhetoric will outweigh his anti-regulation rhetoric in terms of impact on stocks.

Victor Niederhoffer writes: 

One must balance the return on capital of companies versus the 10 or 30 year interest rate.our guests are good at compounding. And this adjusted for growth must go back to the cheapness of the p/e one thinks. 



Fact 1:

As Bill Rafter recently wrote, "what drives markets most of the time (i.e. 90+ pct.) are two things: momentum and sentiment. If you have a handle on those you can make money."

Fact 2:

Credit drives GDP. "For the period from January 1955 through June 2015, we found that nearly 88% of periods in which the trailing twelve month average of private debt acceleration declined or was negative occurred when the U.S.' real GDP was falling, and if we look just at the periods in which the trailing twelve month average of the real GDP growth rate declined, we find that nearly 84% of those periods are ones in which the acceleration of private debt was either falling or negative."

Fact 3:

We live in a world where cash and checking account balances have given way to credit as the medium for actual transactions.

Fact 4:

The people and businesses who actually have the discretion to spend more (or less) do not need the approval of banks or bond buyers to do so. They depend entirely on their existing credit limits and their cash flows.

But the current presumptions of nearly everyone–male and female–who wears a suit and tie to work are that these facts can be ignored. The watchers/believers in the oracles of the Federal Reserve Banks still believe in that old time religion: bank reserves and the interest rates on them drive the economy by changing consumption preferences. They may be right even if their theories of political economy no longer fit the known facts.

History makes it more than a bit clear that "the stock market" (really, the credit market) not only leads but controls "the economy". Collapses in production and employment follow collapses in credit, which are, in turn, dependent on sentiment and momentum, which are now largely dependent on what people believe about who is in control. We skeptics may be the greater fools. It may not matter that there are only semi-midgets spinning special effects wheels behind the curtain that the little dog has pulled away. As long as people believe in the magical powers of the flashing lights and sheet metal thunder, they will save their worries for important stuff –like Syria and the Chinese invasion of the Spratlys.



 Here's Old Man Cutten's short book "Story of a Speculator." Cutten was bigger than life and was arguably the biggest individual wheat speculator in history. There are so many market and life lessons contained within, and it gives a glimpse of what the grain trade was like a century ago. His market lessons contained in this short read became my lessons when I was first starting out. His comments on liberty, government, and choices are priceless. So much of this is relevant today, which is an added bonus.

Stef Estebiza adds:

"None can dictate prices who cannot control production" -Arthur Cutten

Not all of what you see is GOLD.

Read to the end of the first page and the start of the second in "The Parable of the Rich Fool"

Larry Williams writes:

That widely circulated epitaph of speculators misses some key points as it did with Cutten.

Henry A. Wallace, the then United States Secretary of Agriculture charged Cutten with improper trading activities and tried to have him barred from trading on all futures exchanges in the United States. This ultimately went to the US Supreme Court in the case of Wallace v. Cutten, 298 U.S. 229 (1936) (decided in Cuttens favor over the issue "was Cutten guilty for violating laws that were passed—after—the acts of commerce/speculation were commited).

The government then went after him for income tax evasion. The tax suit would only be settled by the executors of his estate, because Arthur Cutten, his fortune vastly depleted by the stock market crash and the cost of lawyers to defend him from the government lawsuits, died in Chicago of a heart attack a few weeks short of his sixty-sixth birthday. His body was brought back to his Canadian birthplace and interred in the family plot in Guelph's Woodlawn Cemetery.

So we have gummint guys going after evil speculator and breaking the poor fellow. I'm certain Soros learned from this which explains is ability to fund politicians.

Most folks live for today or in the past, speculators live for and wager on the future. They are the builders of the future.



 Obama is pressing for Congress to give Puerto Rico money to save USA SPEC investment.

anonymous writes: 

I don't know what the president's view is on this. But, I am fairly certain that discussions within branches of the government are entirely against any monetary support at the present for Puerto Rico. Consider the example it might set for other municipalities, states, etc.

But to be sure, Puerto Rico will be a growing topic going into the next election year. I believe I outlined here what I thought where some of the key macro issues in Puerto Rico several months ago. Specifically the key salient differences between Puerto Rico and say a Greece. I didn't see the whole piece but apparently Wilbur Ross was talking about this yesterday.

Since that time one particular meme has caught my attention. The general workout numbers developed by many on the degree to which Puerto Rico must right down the debt fall into the same trap the IMF and Europeans have. Here in lies one of the similarities with Europe as well. Both PR and Greece are in a currency union and cannot use the currency for stimulus and the fiscal tightening required to get the budge in order contracts growth for a very long time. Thus the future GDP assumptions several years out are inflated relative to what realistically can occur.

Further, despite the tax incentives, one might consider the population exodus at circa 3% of total population per year. Yet another key issue in the debt workout for the future as those leaving tend to make up a certain bracket of the population that has both financial and educational resources.



There are companies in which you invest, even at high prices, because they have a solid business, returns and steady gains, justifying the ups and downs of the markets. They're almost never cheap, except in times of crisis, for those who know how to catch the moment.

There are other companies for which you are willing to pay much more because of the frenzy of the moment, and the golden visions of analysts (it's their job sell) can catapult them to exceptional values even in a short time. But what happens, after the step of publicizing the "elixir of love", if a stock does not take off during an expansion phase, but rather it suffers periods of continued harmful reports (and bad data), like now?

Suddenly, the speculator starts to turn into a speculator at a loss, or worse, undergoes a Kafkaesque metamorphosis from a once confident investor. The initial price paid corresponds to the start-up costs of the future company (hoping takeoffs).

See references like Yahoo (and many others). Generally an eye ball estimate corresponds to a loss of value of the company by up to 90% of the most ever by a title.

I write this because looking at the chart of TWTR I can not help but notice that the maximum of April 2015 was only a mistake, prices quickly returned to the values of December 2014, to be broken in these days. Everyone would think of a support at $ 25, but the fact is that I can not think of any reason that could justify a return to higher prices (including interest rates rise) in the near term. However never say never. $25 must be a dam, but if broken I will start to consider $7.4 as (the worse case) target for a rebound.

anonymous writes: 

Twitter remains a fad, a digitalized counterpart to Donald Trump, a demonstration of socially acceptable narcissism combined with determined information overload. The lack of user growth (and little suggestion of the resumption of such growth) hobbles Twitter's efforts at monetization. That lack of growth also impacts on the underlying value of the assets—the value of a network increases with the addition of new users and the more users it has, the more that that value increases beyond a simply arithmetic increment. I've heard it suggested that a new video streaming capability is the future of Twitter. Twitter meets YouTube. News flash: YouTube doesn't make any money. It covers cost. I doubt that a service that just covers expenses could remain valued at $18 billion, never mind one losing $500 million. 

anonymous writes: 

As TWTR approaches its inevitable denouement [a reckoning with a seemingly binary outcome in which stockholders might either recover 100 - 150% of their marked to market investment via some external corporate action, or perhaps see shareholders equity trade zero], I have become increasingly interested in what goes on when a 'Tweet' occurs and if the underlying technology has any intrinsic proprietary value for a suitor or not.

This article "The Hidden Technology that Makes Twitter Huge", written before the float, had some surprises and an interesting bonne bouche.

None of this will be 'news' to the very tech savvy on this list but one posts nonetheless because even a modicum of understanding of what makes up the technology behind this stock is important in placing one's bets for the upcoming binate discontinuity.

* The 31 data fields within a tweet are publicly documented
* A tweet, at its deconstructed level, is - for all intents and purposes - indestructible. Giving substance to the lie of the 'throw away' nature of sending a tweet.
* ALL the following is known: ID of creator, If generated by Carbon based life-form or Silicon based entity, date & time of origination - amongst much else.
* The whole piece is public record and effectively 'open source'
* So so called 'GeoJSON' - allowing absolute and relative triangulation of a tweeter's (did I really just use that word!) location. In point of fact, the absolute and relative positioning of users likely uses structures more complex than triangulation.

Is there anything worth buying? I have no idea. A suitor has to really, really, really buy into the advertising revenue bit and look through the expenses issue mentioned by the Chair. One gathers that the security services are well past 'GeoJSON' for watching our every move and recording 'metadata'.

I wonder about market applications from using something like 'GeoJSON' [relative locations of different markets, how much they have moved and the time elapsed between different ranks]




 "Why the U.S. Is the Next Greece: Doug Casey on America's Economic Problems"

anonymous writes: 

Doug has been singing this same song since the 1970s.

Victor Niederhoffer writes: 

His most recent book is titled "The Education of a Speculator" . One could learn a lot from Doug about strategic self improving trades, as well as the bon vivant life in Uruguay. 

Anatoly Veltman writes: 

Title is oddly familiar. I wanted to thank Vic again for including me into Four Seasons dinner with Doug guest of honor in March 1993. Doug the world traveler hardly remembered me from Toronto roundtable of 1986.

Also comes to memory another member of that roundtable Ian McCavity who founded Central Fund (closed end gold fund), which caused me to invest in Gold and Silver there, for the first time, because it was offered at discount to book value. I notice the same to be the case with GTU currently: at a historically large discount to NAV! Hedged against GLD, one can be betting the discount will narrow once gold sentiment improves (hey, August is here how!). A free Call option on gold for the price of your cost of funds?

(GTU/GLD narrowed as an activist waged a proxy battle to liquidate the trust at NAV, but they lost and the spread widened.)

Rocky Humbert writes: 

Firstly, regarding Stef's previous post about inflation, it appears that he has confused credit with money.  The S-man has written extensively on this subject — but a contraction/expansion in the money supply (i.e. currency, specie or whatever) has complex interactions both with prices and with credit — especially in a fractional reserve banking system.  I share David's puzzlement about the lack of generalized price pressures with the growth of the central bank balance sheets and monetary aggregates, however, I would note that rent (and housing) prices, certain securities prices, certain taxes & fees, and other things have risen dramatically over the past 6 years. (Even gold!) So while there isn't a generalized inflation, there are (always) some pockets of inflation. Hence my definition of inflation is: "When prices for me rise, that's inflation. When prices for other people rise, that's deflation." My late great uncle, Milton Friedman, claimed that inflation is always and everywhere a monetary phenomenon — that is, too much money chasing too few goods.  However, in his later years, he and Aunt Rose mused that the connection between headline inflation and monetary aggregates had not worked for many years. So perhaps — at the end of the day — inflation is primary a psychological phenomenon that has excess money as a necessary, but not sufficient condition.

A happy jobs report day to all!


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