For those interested in pharma/biotech investing, or simply interested in innovation or public health, here is an interesting, easy-to-read study recently published by the FDA: "22 Case Studies Where Phase 2 and Phase 3 Trials Had Divergent Results".

To paraphrase the political scientist cum statistician Andrew Gelman, the problem with the Neyman-Pearson statistical decision framework (set a null hypothesis, perform a statistical test to accept or reject it) is that the difference between statistical significance and non-significance is itself non-significant. Computer models are often inaccurate, and even animal surrogates may not be predictive either. We often don't understand how a drug really works until it is put into clinical use.



 "I have noticed that 538 are quite incompetent (and aggressively so)– they don't grasp something basic about an election probability as an estimator of a future binary outcome. The more uncertainty, the closer the estimator to 50%. But let us 'price' it as an arbitrage-free option."

I think that Taleb is correct here. The point estimate of an election probability is far more unstable than the 538 model portrays. Also, on the betting markets, the uncertainty should be reflected in wide bid-ask spreads, which is not the case in these markets either.

Stefan Jovanovich comments: 

The poll numbers are not trades that must be cleared; they are, at best, applied social science research.  There is no penalty for getting the estimate wrong; no one ever gets fired for having missed the spread.  When you all lay on a single trade, there is actual money at stake - far more serious money than anything these D List celebrities on the tube ever put at risk. (Reminder: "Politics is show business for ugly people.")  The stuff fascinates me because it is the random walk of actual history, but why do any of you serious punters pay attention to it as anything other than a minor sports bet - like wagering on Columbia basketball in Casino (the movie)?

For all the supposed money at stake in politics and the outcomes of political elections, the actual net expenditures - the money spent that goes outside the bubble of the campaign organization itself - are trivial.  There is more money spent by GEIGO and its rivals on pitching auto liability coverage than all the net payments to television for Presidential campaign ads for both parties. 

The poll numbers being reported, even this morning, are for samples taken before Friday's revelation about the Danger Man's laptop.  They "changed" because the pollsters decided to use a sample that was a statistical probability rather than one that was completely bent in favor of Mrs. Clinton.  ABC News had a headline that says it all "Shift in the Electorate's Makeup Tightens the Presidential Contest".  Yeah, right.  The makeup of the electorate over an entire campaign season does not change.  If it did, the Democrats would not be so passionate about enacting same day registration and voting. 

A week ago ABC News had a poll that showed Mrs. Clinton up by 12 points and at the magic number of 50.  The poll with the headline had her at 47 and Trump at 45.  What "changed" was the weighting of the sample.  The earlier poll divided the electorate as 36% Democrat, 27% Republican and 31% Independent.  The more recent one splits it 37, 29, 29. 

So, Stefan, how does this prove your thesis?  Easy.  The folks at ABC decided that 81% of the registered Republicans are now going to vote, as opposed to only 75% a week ago.  They also decided that 5% fewer registered Democrats were actually going to vote.

Who is in the electorate does not change.  Who is going to be foolish enough to waste their time to actually vote is always the question.

The enduring paradox of representative government is the fact that there is no statistically valid reason for any individual to bother with voting.  Your individual vote NEVER counts.  It is a pure act of faith.  That is the reason that the countries that are actual democracies are wise enough to make voting have a real cost; it is only in autocracies that voting is free, easy and compulsory.

As for who will win next week, I still favor the Harold Macmillan prediction.  When asked by a journalist (who else?) what will determine the coming Parliamentary election, he replied: "Events, dear boy, events."



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

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

Stefan Martinek writes: 


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

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

A few observations on this thread.

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

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

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

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

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

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

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

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

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

Andy Aiken responds: 

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



 In every election since 1984 and in 19 of the 22 elections since the Composite Index was introduced in 1923, the S&P 500 Index has been the most reliable gauge of Presidential election results. If the Index on election day is higher than it was three months earlier, the incumbent party retains the White House. 2181 is the magic number; that was the close on August 8th. Back to life not lived through "the news"….

Andy Aiken writes: 

I am also low-news/high-information. I seek out primary sources, e.g. read the academic paper or CBO study instead of a journalism student's usually flawed interpretation of it. As Nietzsche said, "All things are subject to interpretation. Whichever interpretation prevails at a given time is a function of power and not truth." The major media in the US have been speaking power to truth for a long time.



 I tested the old Jewish trader axiom "Sell on Rosh Hashanah and buy back on Yom Kippur?".

Andy Aiken writes:

Historically, returns between the two holidays are negative, but not often enough so to be a reliable calendar trade. Average returns are distorted by 2008.

Year    SPX change (%)
2000    -2.40%
2001    -1.94%
2002    -0.32%
2003    3.76%
2004    -0.92%
2005    -4.06%
2006    1.26%
2007    3.68%
2008    -17.76%
2009    -0.50%
2010    2.43%
2011    0.38%
2012    -2.21%
2013    1.77%
2014    -2.03%
2015    0.31%

% negative      56.3%
average return  -1.16%
median return   -0.41%

A 2004 paper suggests that the negative returns during this period may be due to lower-than-usual volume.



Vigilanted and Palindrome cronies in S. Hampton trying to force world state by shorting stocks.

Stefan Martinek writes: 


Andy Aiken writes: 

The event guaranteed to elect President Trump is a break in the U.S. Stock market that hits the better people in the 401k. The hermit says the only reason I like his counting is because I share Queen Milo's hope that the Donald will beat the hag. He may be right, but I think the recession is what will make the hermit's numerology come true. If there is one thing Trump's election will kill, it is the one world currency order.



 I first learned about Thompson's On Growth and Form at a talk back in the late 80s by Benoit Mandelbrot, who referenced the book as an influence. I think Thompson's book has relevance to equity markets, philosophically as well as on more practical terms. Thompson simply observed nature and described relationships of form to function. He didn't attempt to infer an evolution process. In this sense the book is an early precursor of Bejan's Constructal Theory.

Examples: Thompson shows that the speed of a fish or ship is proportional to the square root of its length, and that the kinetic energy exerted by an organism is proportional to its mass to the fifth power. Thompson considered form as the product of the dynamic forces acting upon it. Logarithmic spirals reflect a constant proportional growth rate. The logarithmic spirals in pine cone scales or sunflower seeds result in a Fibonacci expansion in the number of scales or seeds. The Fibonacci sequence is just a discrete version of the continuous logarithmic curve.

It's not unrealistic to think that logarithmic spirals and Fib sequences crop up in equity prices. Daily returns are often assumed to be lognormally distributed. The relationships are probably not as simple as "stock x should drop to 38.1% Fib level and bounce".

One of the forces acting on the form in this case is human perception of emerging patterns. One of the more powerful conclusions drawn by Thompson is that many species share features that are invariant under simple linear transformations. So the shape of a gorillas skull and skeleton is the same as a human's through a "stretching" deformation.

If we make an analogy to stocks, this could imply self similarity in price patterns (fractal relationship) or the idea that we need to adjust for both price and time transformations when using historical analogs to predict future returns..


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