Jul

29

An "indeterminate, unpolitical, but highly sensitive miscellany of men" mutinying "against the vast, oppressive, ever-extending apparatus of parasitic bureaucracy."

"Fighting parasitic bureaucracies and crony capitalism"

"The Crisis of the 17th Century"

Jul

15

 In the age before central bank IOUs had become money, even the opponents of the gold standard understood what the words "gold standard" meant. Could you go to a bank or Treasury office in a country and present a bank or Treasury note and ask for and receive a gold coin in exchange? If you could, then that country was on the gold standard; if the bank or Treasury refused, then the country was NOT on the gold standard.

It is important to understand this definition because almost all of the scholarship written in the past 75 years has tried to use Keynes' definition of the gold standard. In Keynes' view, because of the barbarous beliefs of people who did not understand modern economics, a gold standard was still necessary for settlement of claims between nations' central banks. It was regrettable but unavoidable. There would have to be a gold price for each national currency so that central banks could have a way to clear accounts - i.e. know how much a French franc and a British pound were each worth in gold. Eventually, when people came to see reason, there would be no need for such an official gold price; central banks could settle accounts using a made-up international currency. (Keynes thought it should be something called a "Bancor".)

But, even under foreign exchange gold standard, Keynes thought there was absolutely no reason for people to be able to demand gold coin for money. He criticized Churchill for choosing the wrong gold price for the pound when Britain agreed to settle its foreign accounts in gold, but he applauded the fact that Britain had not actually "returned" to the pre-war gold standard. No one would ever again be legally allowed to demand gold sovereign coins in exchange for pound notes, even at the official price.

Jul

13

America falls out of the skyscraper race.

Also, more on the edifice indicator.

Jul

7

A Market Top in Round Numbers

Jul

7

 The people writing and thinking about political economy in the United States in the age before central banks had enormous advantages.

1. They were never, as we are, confused about what money was. It was, quite simply, the stuff that would keep you out of the hands of the people with badges and guns. Money was whatever the revenue agents, excise men, internal revenue collectors, and court, bureau and treasury clerks would accept as payment - either as a bribe or as an actual payment of a tax. If the stuff you handed over was considered legal tender, then it was money; if the officers of the Crown would not take it in payment, then it was not money but something else.

2. They were - for the most part - untroubled by the question of the "value" of money. The money you used to pay the government or pay off the people with official authorities might have a great deal of value or very little. That did not change the fact that it was the stuff that kept you out of debtors' prison.

3. If the people writing and thinking believe that liberty, not authority was the greatest of all values, they wanted money to be what the Constitution said it should be - gold (and silver for small denominations) coin. They did not "believe" in gold; if they were devout, they believed in Almighty Providence and the natural right to be free. If they wanted gold to be money, it was not because they thought that would offer "price stability" or a "strong dollar" or "full employment" or any of the other fraudulent promises that are made every day by politicians and academic economists promoting the latest magical system of "economic order". Gold's price would fluctuate, rise and fall, bubble and crash just like all other prices that are set by actual buying and selling by free people and not fixed by "the law".

4.
The people who believed in Almighty Providence had only one reason to want gold to be money. It would prevent the government from swallowing the people. Governments - the people who could claim the power of "the law" - and "ordinary" citizens were alike in their desire to spend more than they had. Yes, there were some people were naturally thrifty; but they were never more than a minority. What kept most of us gamblers, borrowers and spenders from defaulting on our debts was the fact that we wanted to keep our credit. We paid back our debts so that we could borrow again and even borrow more. The people who could claim the power of "the law" - i.e. the government - were no different about spending. But, they had an advantage the rest of us never had; "the law" would never, ever make them pay off their debts in anything but the stuff that the government itself defined as money. The doctrine of "sovereign immunity" meant that the people who got to wrap themselves in the protections of the flag could never, ever be held personally responsible for the government's debts. But, even worse, they government itself - that collective entity without a face or name - could always write itself a check to pay off its creditors. "Regulation" was no help; the regulators would always be people who also worked for the government. The only effective restraint was to require everyone - whether inside or outside government - to use the same money; and require that money to be something that no one - inside or outside government - could make for free.

Peter Grieve writes: 

A very timely post for me. I've just been reading how a guy bought a large interest in the Bank of England with a notched stick - a stick which the government would accept in payment of taxes.

Of course, they eventually decided that the stick money was silly, so they burned them all. Unfortunately they burned Parliament down in the process. This is an early example of the dangers of misjudged monetary policy.

Jul

3

An earlier post in Dailyspeculations.Com had the title "closes never seen again". The use of the word "never" is an example of the Hubris that is currently being displayed in certain quarters. It would be better to say "numbers not recently seen".

The early 50s, the mid 70s and the most recent Panic all began with the U.S. Treasury Department worrying much more than usual about what its customers, the bidders at the bond auctions, would do next week and with both the Treasury and the Fed hoping they would "never" be asked about next month.

Jun

24

 A hundred years ago Milutin Milankovich, a Serbian scientist/engineer, didn't have much to do as he was a POW held by the Austrians. So he calculated the pre-historical temperatures of the Earth, based entirely on planetary distances to the sun. Several other scientists persuaded him to go back quite far in time and eventually he calculated the temperatures back a million years. Of course at that time there was no way to prove his work, until in the 1970s data from Antarctic ice cores became available. It turns out his calculations were very accurate, as were similar calculations for Mars and Venus.

If someone a century ago could calculate Earth's temperature a million years ago, the global warming claims of one camp seem to lack significant credibility.

Stefan Jovanovich writes: 

Milankovic's theory is this: "variations in eccentricity, axial tilt, and precession of the Earth's orbit determine climatic patterns on Earth"

The theory of the warmist researchers is that "the addition of combustion gases - most importantly, CO2 - from man-made uses of energy to the earth's atmosphere determine climatic patterns on Earth".

The reason for the falsifications of data by warmist researchers– I assume here that no one denies that these have occurred– is that the theory of man-made global warming requires a dramatic increase both in temperature and CO2 levels during the period when people have been burning stuff. If that cannot be found, then the theory has to contend with the very data that Al Gore found so persuasive– the Vostok ice core samples– and explain why CO2 level increases seem to be a result rather than a cause of the rise in the earth's surface temperature. That non-modeled data (i.e. the ice cores were actually dug out of the earth, not created in a computer model) is inconvenient and true. The Vostok data shows that changes in temperature always precede the changes in atmospheric CO2 by about 500-1500 years.

The usual rebuttal to this evidence and the fact that its data is entirely consistent with the Milankovic theory is something like this: "yes, it's true there is a delayed correlation; but that ignores the more important fact. Once the rise in CO2 levels start, they take over as the most important climate force."

But here, too, the actual non-modeled data presents a problem; the declines in earth surface temperatures that begin the "ice ages" occur precisely when CO2 levels are at their highest. If the Hansen theory's forces are so strong and can overwhelm the mere changes in the Earth's orbit, then how can the 'weak' signal can start an Ice Age when the strong Hansen signal says the opposite should be occurring?

The answer to that, of course, is the usual ad hominems that are the ever available rhetoric of the progressive mind: (1) you don't understand, (2) you haven't read our secret data and (3) you are too stupid to understand these things.

I think we have another definitional problem here, HA. "Complete(ly) unbiased description(s) of meteorology-climatology science practices" do not get written by people who write: "as a historical science, the study of climate change will always involve revisiting old data, correcting, modeling, and revising our picture of the climatic past. This does not mean we don't know anything. (We do.) And it also does not mean that climate data or climate models might turn out to be wildly wrong. (They won't.)"

Jun

18

 I thought this was a fun read. Some excerpts below.

"The Biology of Risk" :

In one of my studies, conducted with 17 traders on a trading floor in London, we found that their cortisol levels rose 68 percent over an eight-day period as volatility increased. Subsequent, as yet unpublished, studies suggest to us that this cortisol response to volatility is common in the financial community.

A question then arose: Does this cortisol response affect a person's risk taking? In a follow-up study, my colleagues from the department of medicine pharmacologically raised the cortisol levels of a group of 36 volunteers by a similar 69 percent over eight days. We gauged their risk appetite by means of a computerized gambling task. The results, published recently in the Proceedings of the National Academy of Sciences, showed that the volunteers' appetite for risk fell 44 percent.

Most models in economics and finance assume that risk preferences are a stable trait, much like your height. But this assumption, as our studies suggest, is misleading. Humans are designed with shifting risk preferences. They are an integral part of our response to stress, or challenge. When opportunities abound, a potent cocktail of dopamine — a neurotransmitter operating along the pleasure pathways of the brain — and testosterone encourages us to expand our risk taking, a physical transformation I refer to as "the hour between dog and wolf."

One such opportunity is a brief spike in market volatility, for this presents a chance to make money. But if volatility rises for a long period, the prolonged uncertainty leads us to subconsciously conclude that we no longer understand what is happening and then cortisol scales back our risk taking.

In this way our risk taking calibrates to the amount of uncertainty and threat in the environment. Under conditions of extreme volatility, such as a crisis, traders, investors and indeed whole companies can freeze up in risk aversion, and this helps push a bear market into a crash.

Unfortunately, this risk aversion occurs at just the wrong time, for these crises are precisely when markets offer the most attractive opportunities, and when the economy most needs people to take risks. The real challenge for Wall Street, I now believe, is not so much fear and greed as it is these silent and large shifts in risk appetite.

I consult regularly with risk managers who must grapple with unstable risk taking throughout their organizations. Most of them are not aware that the source of the problem lurks deep in our bodies. Their attempts to manage risk are therefore comparable to firefighters' spraying water at the tips of flames.

Stefan Jovanovich writes:

One of the luxuries of sitting in the bleachers here in Spec Park is that you have all this time between innings to ask yourself questions about what the players are doing on the field.

Gary's referral to the latest wisdom from the New York Times raises a new query: Isn't "risk" simple the word that is used in financial theology instead of "sin"? Everyone is against it, but no one can define it until after someone has lost a large amount of money.

P.S. The suggestion that "firefighters' spraying water at the tips of flames" is foolish is dead wrong. That is precisely where the water is supposed to go so it can disperse the gases that are the actual fire. One of the first things shipboard firefighters learn is precisely any water sprayed anywhere else is not only stupid but dangerous. When the Forrestal had its fire, the greatest danger to the ship came from too much water being used; it almost sank the ship.

Jun

18

 Christopher Matthew is a professor whom I have no trouble endorsing. Based on his work so far, he offers as much promise as Gary Gallagher did when he was starting out as a teacher. Mathew has worked up his PhD thesis into a great book I recommend you buy, A Storm of Spears - Understanding the Greek Hoplite at War. (Less than $7 on Kindle).

P.S. He is editing a volume on the Battle of Thermopylae. We will soon have an opportunity to spend/waste more money on "something with Greeks".

Jun

4

 It may help to remove some of the heat from further discussions if we can all agree that individual liberty was never any American's birthright. The idea that people should be left alone and not harassed by officialdom was as radical an idea as the notion that God does not need appointed intermediaries to translate the message of faith.

Exhibit 1: The Oath of a Freeman

And June 1st was the anniversary of Mary Dyer's execution on the Boston Common.

David Lillienfeld writes: 

Since your citations are more than a century before the Declaration, I'm not sure I'm ready to accept your proposition. What are your distinctions between a 1776 definition of individual liberty and what you would characterize as what was viewed as the birthright?

Stefan Jovanovich replies: 

Franklin, who opposed actual slavery of other human beings, was wise enough to edit out of the Declaration of Independence Jefferson's indictment of King George for making white Americans "slaves". Jefferson, who never saw anything wrong with the enslavement of black and copper-skinned people, had thought it was a telling indictment and a politically appealing one to be added to the 1776 "definition of individual liberty". Franklin knew better. Neither Jefferson not anyone else i 1776 had a good answer offered to Samuel Johnson's question: "How is it that we hear the loudest yelps for liberty among the drivers of negroes?"

You really must sit down and actually read the Declaration of Independence, David. There is no definition of individual liberty in the document; if you want to find even a hint of that radical idea, you have to fast-forward nearly a dozen years. First, you have to watch the country go through a ruinous civil war and catastrophic financial default. Then you get to watch the genius and wisdom from experience of Washington, Franklin, Morris and (to a lesser extent, although the academics like you give him the greatest credit) Madison produce the first official confirmation of the rights of individual citizens in American history - the U.S. Constitution.

Here are a few things for you to consider as you follow the lesson plan:

1. The Declaration of Independence has no legal authority as far as the United States of America is concerned; it was the unanimous Declaration of the thirteen united States of America. That is why it is the favorite document of people who want to believe in absolute "states rights" and, like Justice Sotamayor, in a legal authority that is not required to be confirmed by the votes of the actual citizens of the country, as the U.S. Constitution has been.

2. If you read the document carefully, you will find that it has absolutely nothing to say about individual liberty; it is very detailed in its descriptions of the abuses by the King and his ministers and agents against individuals but those violations are mentioned as justifications for the rebellion that had already occurred in and around Boston, not as wrongs to be corrected in the laws of England and America.

3. War messages never, ever contain assertions about individual liberty; they only speak of "the people" and "the state". Note the entire absence of any statements about individual liberty in Jefferson's Wow finish: "That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor." The colonists are telling King George what the new boss is going to do; they are not spending any time telling him what the distinctions will be between their sovereign authority and the one held by the old boss.

I offered "my citations" as a reminder that Americans have not yet been gifted with individual freedom from birth. The arrival at Plymouth did not change that; neither did 1776. Thanks to the war veterans who were the majority in Philadelphia in 1787 and those who were a majority in the Congress in 1868 we have, as a country, made a more than decent start at establishing, once and for all, that people's natural rights come before everything else at law. But, we are still very far removed from Jeff Watson's ideas of freedom; and it is the worst kind of schoolie propaganda to assert that this is a nation founded "in liberty". We Americans (and the foreigners unfortunate enough to be snagged in our courts) have a few specific individual rights that can, with money and luck and honest judges, be successfully asserted. But, as too many of our List members know from painful experience, "the law" spends most of its time telling the citizens that the sovereign is right even when it is clearly wrong and then charges "the people" extra for the privilege of reminding them who is boss.

Jun

4

 On the stack of current books here at Chaos Manor is Geoffrey Wawro's book on the Outbreak of WW I and the Collapse of the Habsburg Empire; its title is A Mad Catastrophe.

Professor Harrison should stick to economics; he really has not idea what he is talking about when he discusses WW I. His biggest folly is his belief that "at the critical moment the advocates of war, civilian as well as military, were able to dominate". The advocates of war had been dominating the discussion for the last three decades (some people would disagree with me and say that it was more like four). When Eisenhower, who had studied the Great War, warned about the rise of the "military-industrial complex" he was telling Americans that they were in danger of following what the Europeans had done in the years leading up to
1914. "The war" had been actively planned in France ever since the fall of the Second French Empire; the entire country was encouraged to raise its population growth so that the nation would not be outnumbered by the Bosch. The politics in Germany and Britain favored military spending as a way to keep the factories going; heavy industry in both countries found itself under ever increasing pressure from the rise of the "new" economies of the United States and Russia. All the countries except Britain had developed mobilization plans to put millions of soldiers on trains and move them to the borders.

Wawro's books is far too detailed to summarize, and I can't recommend it for reading because he presumes that you already know a great deal about the subject before you read the first page. But, I do recommend his scholarship; and I do endorse his conclusion. The Habsburgs thought that a war in the Balkans would end the half century of declining authority. They had surrendered North Italy, been soundly whipped by their supposed allies, the Germans, given up political control to the Hungarians, seen the Serbs and Greeks go from being vassals of the Turks to independent sovereign nations and watch the Russians become the rising superpower in the East. From the palaces in Vienna this looked like insult piled on top of humiliation. What remains amazing is the Germans' willingness to go along with the Habsburgs' notion that their armies were worth something. The Germans were so credulous that they counted on the Habsburg armies to defeat the Serbs and defend both Germany and Austria-Hungary from the threats of Russian mobilization. The taxis at the Marne did not save the French in 1914; it was the defeat of the Austrian armies by both the Russians and the Serbs that forced the Germans to shift men and artillery to the east to prevent the threat of having Prussia itself overrun.

What Eisenhower did not say but could have is that Americans also have to be careful about making the mistake the Germans made in two world wars. As countries we are both better off at going it alone than in signing up allies, especially before a war starts. The record of joining a fight as a latecomer ally is an excellent one (the U.S. in WW I and II; Prussia in the final campaign against Napoleon); but neither we Americans nor the Germans should ever plan a war that depends on other people doing any serious part of the fighting.

Jun

4

 Disney seems to have the "princess" market captured. But it has difficulty getting boys to be ardent fans.

Do they hate men? It would seem so with their last two blockbuster movies, Frozen and Maleficent.

(Spoiler alert: skip this paragraph if you've seen it or want to experience whether it is man-hater fantasy for yourself): Maleficent turns the old "sleeping beauty" on its head and castigates men in doing so. As a young fairy, Maleficent meets the future king, then an orphan, and has a budding romance. They must soon part ways, sealed with the future king's words, "True Love's kiss" on departure. When the bounty of the whole kingdom is put on Maleficent's head as she grows, the boyfriend betrays his love and cuts her wings off to become king. Maleficent in turn puts a curse on his new born daughter, Aurora. The daughter is put under the care of incompetent fairies to hide her from Maleficent, (apparently any lady that follows a man is a fool) but all knowing Maleficent ends up taking care of the girl. Maleficent soon regrets putting the curse on such a innocent loving girl. Therefore a prince is brought in to kiss a comatose Aurora to no avail. Maleficent proclaims there is no cure for the curse because there is no such thing as "True Love's kiss". That is until Maleficent kisses her (apparently women alone can have true love), then Aurora reawakens. Aurora returns Maleficent wings and the kingdom is soon inherited by Aurora.

Movies in general, but especially Disney movies, have made their fortune on feeding the fantasy of changing how the world is into how it should be. Maleficent is no different, except how it is is a world run by ruthless men incapable of love. Only women are capable of love. Are the progressive so sure they are right that the world only needs empowered women in the future that they are willing to show boys they are only capable of hate and crimes against humanity?

When over 60% of the college Bachelors degrees are granted to women and an even higher percentage of Master degrees are women, one begins to question how much "empowerment" society can take. Young girls are cutting into the "math and science gap". But the boys' "reading and language" gap is remaining and growing. Will we miss educated men in the workforce? Do we really need diversity, or just certain diversity?

The old Disney has taken some heat for racism. Yet Walt had enough business sense to keep blatant hate out of his world and theme parks. But will the new Disney survive when the ever changing cycle changes once again and we see discrimination for what it is: stereotypical hate.

Stefan Jovanovich writes:

 Anonymous is right, but I think he omits a part of what Walt called "the wonderful world of entertainment" - games. I have not seen any data on the gender gap for players of video games; but Eddy assures me that it remains a world that is almost wholly male.

While waiting in the lobby of UNC's ambulatory care hospital yesterday for my number to be called, I watched a young boy and his older sister and their mother (the kids were, I would guess, 4 and 6) deal with the problem of a piece of trash. The waiting area had receptacles for both recycling and garbage. The trash was, in the view of the mother and sister, recyclable so the boy was instructed to put it in the green waste. He put it in the garbage. He did not do it out of contrariness or confusion. He saw both receptacles and even hesitated before making his choice. He chose the garbage because the recycling container just had an opening; the garbage had a lid with a handle that had to be lifted. The genetic impulse to do something was too hard to resist. To their credit the women did not complain or lecture; I think they understood what was going on as the boy returned to where they were sitting and resumed standing in front of his chair and playing with his miniature trucks on the seat. After watching all this, I could not resist saying "You go, guy", knowing it would elicit the appropriate response from my wife - a fairly gentle punch to side of my upper left arm.

P.S. I take the statistics about the gender of Master's degrees as confirmation of what my wife told me when we met in law school at Berkeley 41 years ago and enrollment was going from being 97% male to a more equal ratio. "Now that they have 'let the women in' law, as a profession, will go from being an elite profession to being what people do when they can't figure out how else to preserve/achieve higher social status after finishing college."

May

29

 I started working my way through law school at Berkeley by serving process and writing complaints for a personal injury lawyer who had his offices in the old Alaska Commercial Building in S.F. By 2nd year I was able to move up to part-time civil service as a way to pay the bills; I moonlighted 20 hours a week as a clerk/analyst/go-fer for the California Coastal Commission. They were just getting started and the "smart money" among the bureaucrats was that they might not last so, for a brief period in the early 70s, the place was actually under-staffed.

In addition to its other idiocies, Harvard in the 1960s required its architecture students to learn what was then called "city planning" but soon became "urban". Being able to claim that I had "studied" urban planning was what got me the job with the Coastal Commission. It was colorably true; I had taken the courses, but it would not be completely honest to say I had studied. The subject did not require it. If only for amusement and to profit from the profession's cult rituals (restricting urban land use does NOT, we repeat, NOT drive up the prices for homes and apartments), I have kept up with the "profession's" latest efforts to make us all broke and miserable in the name of public transit. Here is my latest discovery:

Houston has $587 million for its new light-rail system. It has cost - so far - $3,000 an inch ($587 million/3.3 miles).

The first light-rail system built in the U.S. since the 1890s was the San Diego Blue Line aka the Tijuana Trolley; it was completed in 1981 and cost slightly less than $10 million a mile ($157 an inch).

The two systems have the same carrying capacity.

May

28

 To what extent can Pascal's principle where a change in pressure is transmitted undiminished to all parts of an enclosed liquid or gas system, whereby a small change in force on a narrow area can move a much larger force on a larger area as used in car lifts or construction machinery, be applied to markets in certain situations? Is this a useful question?

Stefan Jovanovich writes: 

The Chair has asked a question that I cannot answer so I will add to my stack of irrelevant comments. What is called the Industrial Revolution was neither. Metal working and large scale enterprise were not new things. The Arsenal at Venice and the Royal Navy's yards with Brunel Sr.'s block carving automatic lathe did not need the "invention" of the steam engine. It was the discovery and application of the paradoxes of fluid dynamics that created our modern world — first steam, then gases and liquids generally.

Gary Phillips writes: 

Mauboussin likes to talk about the market as a complex adaptive system and critical points where large scale reactions are the result of small scale perturbations, the implication being that causality can be difficult to identify because it is often very subtle.

Traders tend to focus on multiple and ubiquitous agents that may not drive price, but do support their directional bias, while ignoring potential outcomes with low probability that may be driven by hidden or obscure agents. Same with systems with too many degrees of freedom and over fitting.

Gary Rogan writes: 

I often think of the market as a Pascal system or a school of fish. How do all the stocks know to move the similar direction?

Ralph Vince writes:

In the context of fluid dynamics, Gary's question leads to the (near inescapable) conclusion that the movement of stocks prices, in this context (with an isomorphism to 3D space of the varioius stocks) is characteristic of the flow WITHIN the de/compressing cylinder itself, under varying states of compression at varying times.

A study of hydraulic flows would show that fluid flow within the cylinder itself is not uniform, and is also a function of various degrees of pressure.

From this we could create such a model.

Gary Rogan responds: 

It is kind of like that, but it's almost like there are local agitators within the cylinder. This morning provides a perfect example that I can see in my own stocks. Some joint venture news in MDLZ, one of the Kraft spinoffs has provided positive agitation to the food stocks, and more so to the specifically beverage stocks, and less so to the consumer non-durable stocks. This agitation is somewhat sticky in that when the market first rose for whatever reasons and then fell likely on Yellen's remarks, these stocks seemingly have experience a smaller sensitivity to the market had the important news not occurred. It's like a decompressing cylinder with small local explosions/collapses.

Ralph Vince adds: 

 Matter in the expanding (i.e. decompressing) universe may be a better model?

But it still boils down to a feed back loop where the output of one becomes the input for the next ( in one case amplifying and in the other dampening).

Gary Rogan writes: 

That's an excellent analogy and something I've been reading a lot about! It's not perfect but likely productive.

Immediately after the Big Bang the small world was pretty uniform. But then quantum uncertainty fluctuations have added a small pattern to the Universe that was the progenitor of what we all see today. In addition sound-like wave resonated within the Universe leading to the spectrum we still see in the microwave radiation today. Gravity has dramatically amplified the initial quantum fluctuation leading to the truly observable local pattern of galaxies, stars, and planets. And of course all the following star formations, collapses, and explosions created all the heavy elements as well reshaped the local structure of galaxies. Plus there is all the dark matter and dark energy (dark pools?) that exert gravitational and expansionary forces that can only be guessed at by their effect.

Craig Mee writes:

From the back benches, I think the problem may lie in measuring the change in volatility, since under no news conditions, the environment may be ideal, for example, after news releases in Europe mid morning before the states come in. After that though, it may be difficult to separate cause from effect. 

Jim Sogi writes: 

Might a small amount of money pouring into something like gold or oil or wheat move the entire market? The canary principle might be at work rather than Pascal's causal function, and there may be a lag, complicating the relationship.

anonymous writes: 

 The use of finite-volume methods in sell-side modelling suggests it is a useful question. Market cap is a "squishy" concept of volume, as it can change when prices rise and fall. Book value is less squishy but still far from rigid.

Imagine a directed graph of trade flows among several companies, forming a trade network. Suppose there is a bottleneck somewhere. Destroying this link might be more disruptive than destroying other links.

My father used to talk about one of his coworkers who whirled about his organisation with fingers in every pot. This individual did much more than his job description suggested. When he left the organisation many projects across departments floundered.

The Allies' North African campaign of WW2 was meant to attack a "pressure point": Rommel's petrol supplies. Paraphrasing ER: "The bravest man can do nothing without guns, the guns can do nothing without ammunition, and neither guns nor ammunition are mobile without petrol."

I would also use the metaphor of joint-locks in jiu jitsu. Consider the manifold of configurations of your opponent's feet, knees, hips, shoulders, elbows, wrists, fingers. Applying pressure (vector) to the wrist and fingers in most of these configurations will not move the opponent's feet or hips. Joint locks find the configurations where a small force in precisely the right direction will cause the opponent's feet and hips to move a lot.

Saving the geekiest example for last: in George Lucas' fantasy world, certain Jedi Consulars are able to, with sufficient meditation and magic, see "shatter points" in a situation–precisely the kinds of vulnerabilities that will spread and multiply force to a wider area.

May

26

 David Lillienfeld writes:

Last year, Tim Melvin posted a classic piece about Memorial Day. It brought me to tears then, and it did so this morning when I went through it again. It is some of the most eloquent writing I have seen about Memorial Day, and it's a shame that it hasn't received more notice outside of this site than it has to date—it certainly merits it.

Tim Melvin writes:

They call to you this weekend. From Flanders Field, from Normandy, Khe San, Gettysburg, Concord and Lexington, the Chosin Reservoir, from the hull of the Arizona, and from all the hundreds of thousands of resting places marked and unmarked they call to you. The call to you from the depths of the Pacific and the jungle of Asia, from the deserts of the American Southwest, from the fields and cities of Europe, from Cuba, from around the world they call you with a request this weekend. Remember me.

Remember who I was and the hopes and dreams I willingly laid upon the altar of the great American experiment. Remember that like you I was once flesh and blood and I gave that up to secure a portion of the American Dream and secure essential liberties at home and even for people around the world. You may not have agreed with the rational for some of the conflicts we have ensnared ourselves in over the centuries and I am not even sure I fully understood it. But our nation called and I answered. Liberty carries a price tag and I paid it for you. Remember me.

War is an idiotic human endeavor and I wish we never had to go engage in such a wasteful exercise. But at times throughout history it has been necessary for good men to take up arms to secure our freedom from tyranny and defends ourselves against expressions of pure evil and hatred. When such times have arisen I have taken arms and defended the freedom and liberty in which I believed and for which all humanity years. Remember me.

Do not remember me with tears and sadness. Pray solemnly and shed tears if you must but that it is not my preference. Remember me in a violent celebration of all that is America. Take your families to the seashore and frolic as man has done since we merged from the sea. Go out on your boats and go as fast as you can over the waves with the winds of a free land and a free people blowing back your hair. Fire up your grill and invite the neighbors up for food, drink and laughter. This is why I laid down my life. Not so you would cry for me but so you could enjoy your life and your family, your loved ones and friends. Remember me in the laughter and joy of being alive.

Hear me in the sound of loud music coming from a dock bar. Hear me in the growling of a stock car engine taking a green flag or the whine of Indy car hitting 200 mph on the backstretch. Hear me in the laughter of a child skipping in the surf or running through the sprinkler in the back yard. Hear me in the chatter of friends around a BBQ pit. Hear me in the swell of an orchestral pop concert on a wide meadow as the sun settle over the land. In all the joyous raucous noises of being alive, hear me and remember me.

 See me in the flag unwinding in the breeze. See me on the baseball diamond, the soccer pitch the basketball court. See me at the bar with my friends raining a glass to good times gone by and still to come. See me in the smile of your wife, your girlfriend or male equivalent thereof. See me in the hammock beneath the tree taking a slow summer nap. See me in all the moments and times of that make life special. See me and remember me.

Remember me best in living well. Think of me when you are passing around the steaks and steamed crabs. Remember me as you sip the cold gin and tonic in a sweaty solo cup under a shade tree. Think of me in the fisszt of a beer bottle opening, the fizzing of soda pop in a glass, the shaking of a martini, the pop of a cork, and the tinkle of ice. Remember me in the sounds of the party of life.

I do not want you to remember me in solemn sweaty ceremonies and pompous parades of politicians. You do not need to go to the cemetery to remember me for I am not there. I am at the beach, the ballgame and in the backyard. I am at the lake, on the boat and fishing on the riverbank. Do not remember me simply because I died. Forgetting to duck or being ordered to charge impregnable positions is a crappy legacy if you ask me. Remember me because I lived and I died protecting your right and ability to live and experience all the joys and madness that is life.

I am not merely a dead soldier who died in the service of his country. I am all the things that were made possible by freedom gained and protected. I am Mark Twain, William Faulkner and Hunter Thompson and all the words written by the geniuses spawned in the America. I am the music spawned among a free and talented people. I am Robert Johnson, Miles Davis Liberace and Ted Nugent. I'm all the great scientists and inventors that have graced this land. I am Edison, I am Feynman and I am Ford. I am all the great athletes born in the towns and cities of this nation. I am Mantle. I am Unitas. I am Jesse Owens and Jim Thorpe. I am every greatness achieved by this nation born in a sea of blood and protected by rivers of it over centuries. Do not mourn me for the time has past for that, but remember me.

Remember me for I am also the future of this great nation I died to build. Remember me as you live, as you build as you work and as your create. Remember me as youprotect my legacy from the charlatans, thieves and idiots who make up our political class. Remember me when you refuse to cede personal liberties I died for to those who have good intentions and bad ideas. Remember me when you take chances and reach for your dreams and ideal. Remember me when you refuse to participate in limiting freedom or opportunity based on skin color, sexual preference or genital make up. Remember me when you dream, when you achieve and when you celebrate. These are things for which I died and for which I would be remembered.

My voice calls to you today. Life, love, laugh dream, build achieve. Do this in remembrance of me.

Happy Memorial Day. Remember me.

Stefan Jovanovich writes: 

 Memorial Day used to be Decoration Day — the day when the graves of soldiers were draped in flags — and there was no official Federal date. In Gettysburg it was held on November 19, the day the cemetery was dedicated. In the South it was on various dates in the Spring. It was never, ever a day for speeches until the official South decided that the soldiers graves should be part of a general uprising to justify the Rebellion — the same political movement that gave us official segregation; at that same time - the late 1880s — the states began legislating official holidays for Decoration Day, they also made Jefferson Davis' birthday a state holiday. What we now observe dates only from WW II, and the date itself was fixed in the 1960s. It is strictly a Cold War ritual that has been revived for the war against unspecified terrors.

I hope Tim finds an equilibrium somewhere between thinking that everyone who ever died in uniform as a hero and believing war is everywhere and always to be considered the worst of all things. I hope everyone enjoys the ceremonies today. If I don't, it is not out of disrespect for what people have done. I don't like official remembrances for the same reason Grant hated parades; they tend, by their very nature, to be organized lies.

They allow the people in the reviewing stands to preen and they present a picture of order that is the very last thing that wars ever are.

The truth is that some wars are worth their awfulness and some are completely stupid. The people best qualified to judge are the ones who have done the fighting; as with so many other things in life, those who know the most are the very ones who don't say much. There are exceptions, like Professor Sledge:

"War is brutish, inglorious, and a terrible waste… The only redeeming factors were my comrades' incredible bravery and their devotion to each other. Marine Corps training taught us to kill efficiently and to try to survive. But it also taught us loyalty to each other - and love. That espirit de corps sustained us."

"Until the millennium arrives and countries cease trying to enslave others, it will be necessary to accept one's responsibilities and be willing to make sacrifices for one's country - as my comrades did."

anonymous comments: 

I differ…greatly.

I preface by saying I have not served in the services nor in a war.

Yet I've known many…young, naive or foolish men who have answered the call. Many didn't believe in the cause and thought their superiors to be idiots. Yet they stayed and fought. I respect and remember that loyalty, and buy dinner or drinks for them and their family when I come into contact with them. I do it out if loyalty and not guilt. They upheld their end of the bargain. The least I can do is acknowledge them.

These are not the she-men that appear to surround me, those who talk about shat should be done yet are never there to do it. They have loyalty to no one.

There are pieces meant to rouse the animal spirits and conscripted ranks. I felt Tim's piece wasn't a call to enlist as other pieces.

The generation of Vietnam castigated those who were drafted and required to fight. That double bind or catch-22 has always bothered me. There's a similar thinking in DC now, where you are encouraged to break laws and obey them simultaneously.

One if the primary social contracts is to take care of your own. Tim's piece echoed that sentiment. The Chair demonstrates it too, as do many on the list.

In the Catholic Church, there are many celebrations of saints. I have learned, not having been raised Catholic, that many saints were far from perfect. There was a similar idea in his piece. Monday isn't a celebration of personal perfection or success in war. As Tim writes, it is recalling the guy who once sat in the empty chair at our table.

Semper Fi et Ductus Exemplo. 

Ralph Vince writes: 

There is nothing more inadvertently dangerous than a young man.

There is nothing more potentially vicious than a woman on her own.

One must tread carefully around these. 

May

26

I found this blog post on game theory very interesting.

"Game Theory Is Really Counterintuitive":

Every now and then, I hear someone say that game theory doesn't tell us anything we don't already know. In a sense, they are right—game theory is a methodology, so it's not really telling us anything that our assumptions are not. However, I challenge someone to tell me that they would have believed most of the things below if we didn't have formal modeling.

Stefan Jovanovich writes: 

People often take aggressive postures that lead to mutually bad outcomes even though mutual cooperation is mutually preferable.

Even if everyone agrees that an outcome is everyone's favorite, they might not get that outcome.

Neither of these "insights" (sic) is a discovery that goes against intuition; children learn these lessons the first time they bring a toy to a "sharing" event with other toddlers.

Ralph Vince writes: 

Game theory is the study of what makes us tick, which means we step out of ourselves, observe our own behavior.

The danger with this is that we then draw conclusions about ourselves along the lines of our acting more intelligently than we previously thought; we ascribe to reflexive intellect that which is likely simply mere instinct.

And I would add at this juncture (and perhaps this bears consideration on every thread) intelligence which outsizes one's humility is a prescription for delusion. The smartest hamster on the planet is still just a hamster. 

May

20

 This Flak Evading anti-aircraft Fire World War II training film is a very interesting video for the history buffs. Trading lessons abound.

Stefan Jovanovich comments:

Since I don't trade and always hated school, I leave the question of lessons to the rest of you. American bombers in WW II had no effective means of avoiding anti-aircraft fire. The abysmal tactical doctrine of formation flying combined with the ridiculous mechanism of the Norden bombsight combined to make odds of survival horrible. For a full tour of 25 missions the bomber crews who served before 1944 had worse odds of coming home alive than those given to the Marines who landed at Iwo Jima. The British had the good sense to only fly at night since area bombing was all that gravity bombs could achieve anyway in terms of accuracy. That is why to this day they are called "dumb".

May

16

 "I understand your here to collect your share?" said the Keeper.

"My share of the taxes, yes," said the Visitor, "Piketty sent me."

"Are you sure you want to tax capital? I mean, really sure?" said the Keeper.

"It's only fair," said the Visitor.

"Well, to register and receive you must put on this headset," said the Keeper, handing over a kind of halo object, "it will read your Identity Number, calculate your distribution and begin making a fair deposit."

"Perfect!" said the Visitor, and popped the contraption onto his head. The Keeper stared at him directly, a thin smile on his lips.

The Visitor pressed the power button on the halo. "Aaaah! No, please. What." The Visitor spasmed wildly. "Aaargh! Oh my God! Please, please." The Visitor's flight reflex kicked in, his muscles began to shake violently, bringing him to his knees. The tension in his bladder collapsed and piss soaked his pants. The Visitor writhed on the floor, "MAKE IT STOP! What is this?!"

The Keeper quickly pulled a handset from his pocket and clicked the interrupt. Nobody so far had completed the deposit in full. The Visitor fell to the floor, exhausted. With his eyes blood shot, watering, the Visitor cried out, "how dare you, what was that torture? You fiend! This is criminal."

"You asked for your share," said the Keeper, "and your bank account is in credit now. Your share of the capital taxes have been delivered, proportionately."

"Are you some kind of SICKO?" screamed the Visitor.

"No. You see, you asked for your fair share. We decided in transferring capital taxes, we should also make an additional deposit to keep it balanced. We gave you a concentrated dose of every sleepless night, strained relationship, cheating business partner, every lie heard, every deal that didn't close, every set-back, every busted asset, every temptation skirted, idea stolen, regulatory intervention, bankrupt supplier, every loss adjusted insurance policy, every giant competitor… all of it. And there's much, much more. Should I complete the deposit?" asked the Keeper.

The Visitor staggered up to his feet, raised his eyes to the Keeper and paused to speak. But nothing came. Instead, he ran straight for the door.

Jared Albert writes:

I think the basic problem with Piketty style wealth redistribution is that everyone wants to read poetry, while no one wants to take out the trash.

That effort is often necessary for wealth, doesn't answer his basic point that in a fairer world we'd help those who strove and failed as well.

Victor Niederhoffer writes: 

Yes, Mr. Albert has encapped the idea that has the world in its grip. When I played ball, I always wished that my opponents would share their points when they beat me. There should have been a law. 

Jared Albert replies: 

A lot of effort has gone down dead ends in battery technology. Those efforts uncovered what doesn't work, and provided methods that may end up pushing some methods forward. Those failures benefit all of us.

According to an ideal Piketty model, the losers should be compensated in some form by winners as they helped move the sum of the effort forward.

I don't know for sure obviously, but I doubt you can find a nobel laureate who doesn't feel that they stood on the shoulders of others.

My point is that in general people are dis-incetized to try any of the routes if their reward has nothing to do with effort.

Stefan Jovanovich writes: 

In a fairer world we do help those who strive and fail; that is how successful teams (right now and for the past 5 seasons under Bruce Bochy, the SF Giants) and families (the anonymous R-Man's to take one of many examples from the List) and enterprises all work. As with most Leftist ideas Piketty has a valid complaint; as with all ideas based on the sacrifice of individual freedoms for collective good his Marxist solution is catastrophically bad. Some people do want to take out the trash rather than let it pile up, but no one does it for very long for the sake of strangers without getting paid in money that he or she gets to keep and spend. That is why inventive and naturally poetic people in Cuba live in a world of uncollected trash and free medical care where the patients bring the medicines to the doctors. But it is fair — everyone lives under the same collective incentive to read official poetry.
 

May

16

 Placed Insights calculates that people in America eat 17 Big Macs a second, 1,020 a minute, 61,200 an hour, 1,468,800 each day and 536,112,000 a year; this amounts to $2.4 billion in annual revenue from bread, beef, pickles, cheese and ketchup for the McDonalds corporation and its franchisees.


Dunn Warren Investment Advisors
thinks the Big Mac is a better measure of "inflation" (yet another word, like capitalism, that describes a real thing by giving it a unicorn label) than the C.P.I. A CFA at that firm, James Cornehisen has, with the help of his assistant, regularly tallied the price of a Big Mac at 30 McDonalds restaurants throughout the U.S. They find that the current price of the hamburger ranges from $3.78 to $5.28 with the average price being $4.45. This is an increase of 9 cents from what they found to be the average price January 2014 - a rise of 2%. However, the current average price is a drop of 11 cents (a decrease of 2.4%) from the average price in May 2013 which was $4.56.

Rocky Humbert writes:

The Economist's Big Mac Index has caused indigestion for foreign currency traders for many years.

The Big Mac Index might work a bit better to demonstrate regional differences in the cost of living within the USA. But as a general indicator of price, it suffers for the substitution problem. (That is, if the price of beef rises, people will switch to chicken.) It also assumes the premise that McDonald's has a fixed profit margin on Big Macs.

But fortunately (or last I checked) there are no hedonic adjustments necessary for 2 all beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun." (Any speclister who has no idea what I just wrote has not done enough backtesting on their trading models.)
 

May

13

 Have you seen this interesting graph of debt/GDP ratios of the G7 countries since 1946.

It's puzzling to me that in 1946, UK had 270% debt to GDP, and US and Canada had >100%, while at the same time Germany, Japan, and Italy had almost no debt.

I'm sure the allies didn't want another Versailles, but still this seems like an extreme outcome.

David Lillienfeld comments: 

Germany, Japan, and Italy also had almost no assets. Their currencies were worthless, hence no debt. I'm guessing that the same phenomenon occurred with the Confederacy as the end of the war approached.

Stefan Jovanovich retorts: 

David's answer is - alas - a muddle. The currency and the debt of the government of the Confederate States of America was officially worthless after the surrender at Appomattox. (Read Section 4. of Amendment XIV of the U.S. Constitution.) So were Germany's debts, currency and laws after the formal surrenders signed by the remaining German General Staff officers with first the Americans and British and then the Soviets. Germany, like the Confederacy, literally disappeared. That is why the line for Germany beginning in 1945 is flat at 0 until the reconstruction loans that were part of the Marshall Plan took effect in 1948. What is interesting is the other flat-line - the one for France. The Vichy French government never formally surrendered; one of deGaulle's marvelous bits of arrogance was to assert that Vichy itself was not a government and could have no recognition. Somehow that also became the rule for the debts of the Third French Republic (I don't know exactly how) as well. After the war, their debts, like those of Vichy and Germany, seem to have legally vanished. When deGaulle took charge after the Normany landings he was meticulous about asserting that he represented the Provisional Government of the French Republic (GPRF), not the Third Republic. Yet somehow the financial assets of that Republic - specifically the gold on deposit with the Federal Reserve bank - were "saved" and became the property of the new Fourth Republic that came into existence after deGaulle resigned in 1946. Italy, which had overthrown Mussolini and signed an Armistice with the Allies, and Japan, which retained its Imperial Rule, both continued to exist as governments; their debts were restructured but not officially abolished.

FWIW, Charles, I don't think the the parts of the graph that deal with the immediate aftermath of WW II have any meaning. They are another attempts to put prices on things for which there is no market. The statistics for the U.S. GDP during WW II are another example. As Higgs and others have pointed out, the "recovery" of the U.S. economy in WW II cannot, in any sense, be measured in dollars. We know what the U.S. "spent" but that money cannot be considered an "investment"; the factories had no value except to make things that only governments would want to buy and this was at a time when all the governments of the world, except the U.S., were broke.

 So, how did the U.S. "recover"? Sewell Avery and others conservatives feared that hard times would return; Truman was certain that the U.S. would need to return to Hoover and Roosevelt's managed economies. They were both wrong; just as the voters in Britain threw out the existing government, the voters in the U.S. decided that whatever they wanted, it wasn't what they already had. They voted for the war plants to be closed and the military to be demobilized, and they all went out and spent the money that they had been saving. The war had been financed by money created by the central banking system; what made this less than a fraud were the wartime restrictions on spending. The war debts were funded by the ability of the banks to draw on the deposits from the defense workers' and military inductees' pay. When WW II ended and triumphal march to socialism (ah, national health care) was at least temporarily post-poned, what came instead was a boom of spending on consumer goods by a population that had been on rationing for a decade and a half. That cash spending, plus the flood of borrowed money from consumer finance (something previously unknown except on a small scale for radios and cars) and home mortgages, did not (contrary to the usual myths) "pay off" the debt or inflate it away; but it did create incomes and the taxes that go with making money. That revenue was more than enough to fund the much smaller government and to sustain the rolling over of the maturing debts from the war. When the British and Canadians got tired of Laborism, much the same thing happened for them - as the graph illustrates.

May

12

 

It's not central bank policy per se that makes the price of the market go up or down, it's Common Knowledge regarding the ability of central banks to control economic outcomes that makes the markets go up or down.

-Ben Hunt

The market has been locked in a trading range for an extended period of time. Is it because the market is still in the process of vetting both the taper and Janet Yellen or is it simply Le Chatelier's principle's market clearing effect? And, while there has been, both a policy change and a changing-of-the-guard at the Fed, it is still unclear as to whether there has been a regime change in the market. What we are left with is a stable equilibrium where competing influences are balanced, resulting in no net change. While it is virtually impossible to predict, it will certainly be interesting to see, what shock to the system will have enough influence to disrupt this equilibrium.

Stefan Jovanovich writes:

What the market may, in fact, be forecasting is the beginning of a shift in sentiment to a common opinion that the government cannot and should not "control economic outcomes". What we now see as the classical liberalism of John Stuart Mill - laissez faire - was hardly the product of benign progress. It came to be received wisdom only after a deep skepticism had taken hold of the country. People whose families had seen a 100-fold increase in public indebtedness over the previous century had had enough when that spending to defend Britons had ended not in freedom but in the loss of traditional liberties.

I leave it to the readers of this site to gauge how the exact parallels between the post-Waterloo period and our own; but there is no question that the rise in the sentiment for "free trade" would not have occurred without the reaction to Robert Jenkinson's ministry. The suspension of Habeus Corpus in the U.K in 1817 (which had not happened during the Napoleonic Wars) was a shock; the adoption of the Six Acts was the last straw. Between them they produced a financial and political revolt that ended with the bi-partisan abolition of the Corn Laws and the adoption of the Bank Charter Act (think the repeal of the Internal Revenue Act and the enforcement of the gold clause in the original Federal Reserve Act for the appropriate modern American comparisons).

For those who may not know them, the Six Acts were these (my numbering):

1. The Training Prevention Act - which made attending a meeting for the purpose of receiving training or drill in weapons a crime punishable by transportation.

2. The Seizure of Arms Act. It allowed local magistrates to order the search of any private property for weapons, the seizure of weapons and the arrest of the owners.

3. The Misdemeanors Act. It restricted the availability of bail and allowed summary trial.

4. The Seditious Meetings Prevention Act. No meeting of more than 50 people could be held without the permission of a sheriff or magistrate if the subject of that meeting was "church or state" matters. Attendance by people not inhabitants of the parish was a violation.

5. The Blasphemous and Seditious Libels Act confirmed that political speech could be a crime; punishment was increased to fourteen years transportation.

6. The Newspaper and Stamp Duties Act required all publishers to post a surety bond and pay a duty for any publication (previously only "news" papers but not journals of opinion had been required to pay a duty; neither kind of publication had had to post a surety bond.)

Gary Phillips comments: 

Perhaps they're taking a knee, but I wouldn't count out the perception that Fed policy was responsible for sanguine market outcomes; if that wasn't the case gold would be trading at much higher levels. The QE narrative continues to persist and effectively shape our world today and like all good narratives it succeeds because it has an intrinsic ring of truth which speaks to broader interests on an intellectual and emotional level and even though, it always coincides with flexionic goals and preferences.

Stefan Jovanovich writes: 

During the century in which the Bank of England's notes were taken to be as good as gold, the metal's price declined. The market expectations are never true in a compass sense; they are always shifting - sometimes against insiders' certainties. The bets made against the dollar during and after the Civil War did a great deal to weaken the City's dominance over American finance. If the flexions in London and Amsterdam and Vienna and Paris, the Morgan Bank would still be a mere correspondent.

Anchors drag.

David Lillienfeld writes:

A number of railroad bankruptcies helped, though they also affected the Dutch, not just the English.

Apr

23

 People generally cannot understand or have difficulty understanding or picturing exponential growth. There is a story about the inventor of chess when the King condescendingly asked him what he wanted for a reward, the inventor replied that he would like the number of grains of rice, which when starting with only one grain, doubled in amount for each square on the chess board. The King laughed and thought he got off so easy. This same inability to picture compounding growth interferes with a long compounding hold of financial assets.
The same lack of ability to see compounding growth applies to study of past growth. People understand linear growth more easily.

Vince Fulco writes: 

The inability to see compounding growth interferes with the study of nearly everything I might add. We tend to think that evolution is responsible for much if not all of the world that we see, a function of random mutations that have a selective advantage. Consider, after all, the universe is about 18 billion years old. In seconds, this is 60 x 60 x 24 x 365.2425 x 18 x 1,000,000,000 = 5.68e17.

"Random mutations with a selective advantage." Yes indeed. A thousand monkeys wailing away on typewriters will eventually happen upon Hamlet.

So let's examine that (it provides an insight into the astounding character of exponential growth James writes about here). Only considering the line "To be or not to be," which comprise 18 characters. We will consider the space a character, and make no distinction between upper case and lower case, require no punctuation, but rather a keyboard for the little apes having only 27 keys. The probability of any one monkey typing only this line is 27 ^ 18 = 5.81e25

To put the relative differences into perspective, if I could take a thousand monkeys, 18 billion years ago, and permit them 5,000 keystrokes per second, we would have about an even money bet that, without regard to case or punctuation they might, with a probability of about .5, come up with something like "to be or not to be" and much less all of Hamlet.

Natural selection, whereas I do not contest its existence, does not explain a whole lot as clearly not enough time has elapsed since the big bang.

I'm wrestling constantly these days with allocation structures based on similar matters, where a copula of discrete outcomes (say, the copula of rolling a pair of dice) posses 21 possible, distinct outcomes such that the branch out across elapsed consecutive trials gets unfathomably large quite rapidly. Even with parallel processing (more monkeys, more typewriters) the problem reduces, but the scale remains too enormous still as a result of astounding nature exponential growth.

Henry Gifford writes: 

The relatively new field of epigenetics has some very interesting answers to the astute observation that random mutation alone would have taken too long.

Stefan Jovanovich writes:

So, one starts with a "known" fact that is not a fact at all — monkeys sitting at a typewriter writing Hamlet. Then, one proves mathematically that the fact is not probable; and that, in turn, raises a question about the validity of the current best hypothesis for explaining the organic world around us — namely, that through natural competition fortunate mutations win.

It seems to me that we are all saddled with two very stupid terms and our minds wear them like blinders - Marx's word for the results of enterprise ("capitalism") and the Darwin's unfortunate choice of the word "selection" for his title. "Evolution", especially in the eyes of its admirers who try to turn its theory into a fact, somehow takes on the certainty of religious moral authority; it "explains" everything just as Marxism does. No, it doesn't; but Darwin's theory does withstand the Shakespeare test. For one thing, there is no evidence that any monkey of sense would go near a typewriter.

If Marx fudged the data wherever possible to make history say what did not, in fact, happen, Darwin did the very opposite. He thought there could never be enough data to "prove" his hypothesis; but he did take heart that there was, at least not yet, no data that proved it wrong. He does seem to have realized that he had been proven wrong in his choice for the title for his first edition. But he deserves a pass for that.

In choosing On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life, he was not endorsing the Southern way of life or Dickens, Carlisle, Kingsley and Ruskin's defense of Governor Eyre. Hardly. Darwin was one of the very few people who had the courage to speak up, along with Huxley, John Bright, and John Stuart Mill. In using the words "race" and "species" Darwin was using the biologist's definition - could male and females produce offspring. In the rare times when he was asked about human "races" Darwin was genuinely bewildered by the question; there was, in his view, demonstrably only one human species/race.

That leaves the point HG notes. Useful mutations may have had their randomness accelerated.

"Timescales of Genetic and Epigenetic Inheritance":

"According to classical evolutionary theory, phenotypic variation originates from random mutations that are independent of selective pressure. However, recent findings suggest that organisms have evolved mechanisms to influence the timing or genomic location of heritable variability. Hypervariable contingency loci and epigenetic switches increase the variability of specific phenotypes; error-prone DNA replicases produce bursts of variability in times of stress. Interestingly, these mechanisms seem to tune the variability of a given phenotype to match the variability of the acting selective pressure. Although these observations do not undermine Darwin's theory, they suggest that selection and variability are less independent than once thought." 

Jeff Watson writes: 

We should revisit the Second Law of Thermodynamics, and how some scientists speculate that it enables the formation of life itself. There is some very good peer reviewed literature regarding the second law and life.

Anyways, there are some very interesting challenges to Stanley Miller's glass jar filled with water, methane, ammonia, and hydrogen.(I believe he got his PhD from the same place as the Chair). In Miller's experiment, he blasted it with an electric arc for a long time, and out of this primordial soup arose half the amino acids required for life.

Fifty years later and biochemists and physicists today are on the verge of creating an artificial organism that meets all the criteria of life.

Mr. Krisrock asks:

In evolution it's the survival of the fittest, so how come so many species still exist?

Gary Rogan writes:

There are multiple niches in the environment, so species specialize.  The famous Darwin finches were shown to adapt their overall size and beak size to different sub-environment both geographically and on the same island.  It's the same reason why Toyota doesn't operate supermarkets or Procter and Gamble doesn't own any airlines.  It's easier with conglomerates: at least they can get specialized departments, but imagine a lion competing with heat-loving microorganisms in under-water vulcanoes.

Now the jumps: just because not all species that died out left any identifiable remains, doesn't mean they didn't exist.  The absence of evidence is not evidence of absence.

Bruno Ombreux writes:

Why is it hard to believe that matter will organize itself into a more
complex form when a very high temperature source of energy is in the
sky?

Matter will organize itself when it is in an open system subjected to an energy gradient. See Prigogine's principle.

Apr

17

 Mark Steyn explains the first amendment.

"The Slow Death of Free Speech":

"Young Erin Ching at Swarthmore College has grasped the essential idea: it is not merely that, as the Big Climate enforcers say, 'the science is settled', but so is everything else, from abortion to gay marriage. So what's to talk about? Universities are no longer institutions of inquiry but 'safe spaces' where delicate flowers of diversity of race, sex, orientation, 'gender fluidity' and everything else except diversity of thought have to be protected from exposure to any unsafe ideas.

As it happens, the biggest 'safe space' on the planet is the Muslim world. For a millennium, Islamic scholars have insisted, as firmly as a climate scientist or an American sophomore, that there's nothing to debate. And what happened? As the United Nations Human Development Programme's famous 2002 report blandly noted, more books are translated in Spain in a single year than have been translated into Arabic in the last 1,000 years. Free speech and a dynamic, innovative society are intimately connected: a culture that can't bear a dissenting word on race or religion or gender fluidity or carbon offsets is a society that will cease to innovate, and then stagnate, and then decline, very fast. As American universities, British playwrights and Australian judges once understood, the 'safe space' is where cultures go to die."

Apr

17

Archie Boyd married Ursula Steven in July 1940. He later observed: "We didn't know how long I would survive, so we thought we had better get on with it." They were married for 71 years, and he is survived by their two sons and one daughter.

"Wing Commander Archie Boyd - obituary"

Apr

16

Congress enacted Aid to Families with Dependent Children (AFDC), and various housing programs in 1935; the Food Stamp Act in 1964; Medicare and Medicaid in 1965; the EITC in 1975 (and subsequent expansions of the credit in 1987, 1990, 1993, and 2001, among others); the Child Care Development Block Grant in 1990; welfare reform in 1996 (which replaced AFDC with TANF); the State Children's Health Insurance Program (SCHIP) in 1997; and the child tax credit in 1997 (expanded and made refundable in 2001).

With each subsidy for the poor, the marginal tax rate for anyone "at the bottom" trying to earn a living went up. Gene Steuerle estimated in 2012 that the marginal tax rate for a single parent with two children receiving the universally available benefits from our present system was over 54.5%; for that same parent who managed to get the maximum legally-allowable benefits, the marginal rate on earnings was 81.2%.

And people still wonder why the poor stopped getting and staying married, and the endless war on drugs became the perfect social solution (government jobs for "conservatives" as cops, prosecutors, prison guards, government jobs for "liberals" as social workers, legal aid lawyers, and teachers, cash income for the poor and places for the men to get food, shelter and gym memberships when they were between women.)

Apr

14

Bloomberg news picked up this article. I am not endorsing the paper, its methodology nor its conclusions. But counters should heed the underlying message. Especially Kora. I find it surprising that he doesn't look at the multiple comparison issue nor cite Bonferroni etc, but rather prefers to ask the question, "what is chance that a backtest generates a great result by chance." He argues that if you use 10 backtests, you are very likely to find a strategy with a Sharpe Ratio of 1.6 which is over-fitting: "Pseudo-Mathematics and Financial Charlatinism: The Effects of Backtest Overfitting on out–of-sample Performance" by David H. Bailey, Jonathan M. Borwein y Marcos Lopez de Prado z Qiji Jim Zhux, April 1, 2014

What good is a hypothesis that cannot be disproven? A Cautionary Tale (In Memory of Ross Miller)

1. Kora observes: Y = Fn(X) with a significance of T.

2. Kora raises a small amount of investment capital based on the expectation of this stochastic function alone. She gives no consideration to dynamic or causal or other exogenous relationships or intellectual or information edge.

3. Kora produces excellent performance as Y= Fn(X) as predicted.

4. Kora raises a massive amount of investment preformance after establishing a track record.

5. After raising a large amount of capital and collecting substantial management and incentive fees, something happens and Y <> Fn(X), and the clients suffer horrendous drawdowns. The fund shuts down and the total net amount of loss dwarfs the net amount of gains.6. The SpecListers say, "The probability of this was extremely small. But it is an example of Bacon's Ever Changing Cycles." Rocky says, "This is a example of bad science because any utility of the observation Y = Fn(X) without a casual understanding is limited to and qualified by, the ability to anticipate the onset of a changing cycle. And if the scientist can correctly anticipate the onset of a changing cycle, then this meta-hypothesis is vastly more important than the functional hypothesis.

Unfortunately, this is a recursive paradox, because the ability to anticipate the onset of a changing requires the ability to anticipate the onset of a changing cycle of a changing cycle, and then the onset of a changing cycle of a changing cycle of a changing cycle … and this continues ad infinitum OR UNTIL spec partiers go home to bed — whichever comes first."

Jordan Neumann writes: 

I admit not to have fully read the paper — I searched for the word transaction cost but did not find it, yet it makes finding a profitable strategy much harder than it seems.

Isn't this a problem with statistics in general? How does this differ from using thousands of drug candidates to find a drug? We still don't know why Advil works, but I take it anyway based on the statistical evidence. When quants believe that earnings or margins or insider trading affect prices, I would say that the economic justification is far from random.

There is a recent series of news articles that disparage quantitative analysis, just as several quant funds suffer for a few bad years. I would think that everything moves in cycles, and this might be the bottom.

Hernan Avella writes:

Mr. Rocky offers some valid questions to the counting battalion. However, I'm afraid his argument suffers severely from the straw man problem. It assumes that one can't have an approach that incorporates: logic, an economic framework, money management rules and counting. Even more. As you move up in the frequency spectrum, the economic framework becomes optional (useless).

The real question is (for med/long term speculators). If you incorporate all the said components in your approach, can you quantify your success per component?

Ralph Vince writes: 

Kora,

Yes, in my humble opinion, more money is to be made on the assumption of EMH (the cost of being wrong in this regard is less).

Stefan Jovanovich writes:

The test of the reality of a market is whether or not there are prices for quantities exchanged in actual transactions; and the market itself is sufficiently profitable that dealers are willing to pay for the rent and other costs of keeping the lights on. Market failure happens all the time; a trade disappears because other markets have swallowed the action or the inter-mediation itself is no longer handled by bid-ask. Even now more than a century and more after they disappeared you can find the remnants of "corn exchange" buildings throughout Britain; dealing in grain continues but it is no longer handled by open outcry involving dealers and farmers within half a day's train travel of a regional hub.

Markets are efficient in the way that engines are efficient in that they work. They are inefficient in the sense that there is wasted energy, some or much of which can be the result of insider manipulation and general fraud. The debate is over numbers matter - the economics of the companies and the world of money as a whole, the prices themselves and their patterns, the numerical indices of sentiment; for that question there is no absolute answer, nor should there be. Larry Williams, the R-Man, the Watsurf, RPH and many, many others can all be right - and wrong. And, in that sense, markets are permanently inefficient because, even among people to whom Morgan would have assigned a perfect grade for their financial character, the only final word comes when the market itself disappears. 

Apr

14

"Modern Exodus: the Sarajevo Haggadah's musical journey" from The Times of Israel:

Like all Sarajevans, Ključo, 39, was already aware of the Sarajevo Haggadah. A prized national treasure that Jews, Christians and Muslims alike have endangered themselves to keep from destruction, the book is seen as the ultimate survivor and a potent symbol of the non-sectarian unity of the people of the Bosnian capital.

Ključo, a concert accordionist who performs with chamber and philharmonic orchestras around the world, decided that she, too, must retell the story of the famed Jewish manuscript—but through the language of music. The result is "The Sarajevo Haggadah: Music of the Book," a multimedia work, which is the 2013-2014 New Jewish Culture Network's music commission.

"The Sarajevo Haggadah: Music of the Book" premiered in late March at Yellow Barn, an international center for chamber music in Putney, Vermont, where it was developed in residence. From there, the performance, which has digital art by Bart Woodstrup accompanying and interpreting Ključo's music, began a North American tour that will take it to Watertown, Mass., Dallas, Sa

Stefan Jovanovich writes: 

One of the unhappy aspects of watching the present efforts to rewrite the history of the Jews in Europe is how often, for reasons of present interest, Israel has to pretend that Muslims and Catholics were just as tolerant as Communists gypsies and Greek and Serbian Orthodox. The Sarajevo Haggadah is another work of that peculiar fiction that makes the people killed at Jasenovac and starved and killed in their villages into the spiritual equals of those who did the killing but are now — a generation or two later — gracious enough to want to join hands in the name of one world solidarity. One can hardly blame the Israelis; they are, on a very good day, far more vulnerable than the Florentines facing the Duke of Milan, the King of France and Philip II while trying to keep the Pisans in line. For them Machiavelli will always be no more than light reading.
 

Apr

9

 Kenneth Roman is the former Chairman and CEO of Ogilvy & Mather Worldwide. He is author of a book about his firm's buccaneering founder, David Ogilvy. The following eighteen lessons in leadership are inspired by Ken's book The King of Madison Avenue: David Ogilvy and the Making of Modern Advertising.

1. On principles (borrowed from J.P. Morgan): "Our policy is only first-class business, and that in a first-class way."

2. On professional standards: "Top men must not tolerate sloppy plans or mediocre work."

3. On setting lofty goals: "Raise your sights. Blaze new trails. Compete with the immortals."

4. On knowledge: "Suppose, your gall-bladder has to be removed this evening. Will you choose a surgeon who has read some books on anatomy and knows where to find your gallbladder, or a surgeon who relies on his intuition?"

5. On focus in an organization: "If we are to prevent the eventual disintegration of our world-wide church into a Tower of Babel, we must continue our evangelism, make sure that every office is headed by a member of the True Church, and not by a stranger and, never again entrust the supervision of offices to outsiders or lay brothers. This errors leads to schism, balkanization, apostasy, bankruptcy and ultimate disintegration."

6. On size in an organization: "If God is on the side of the big battalions, and that seems to be the case, the path of wisdom lies in becoming one of the big battalions."

7. On committees: "Search the parks in all your cities, You'll find no statues of committees."

8. On mergers: "Clients never like mergers. They hate them. They don't like their accounts being sold. I don't blame them. If my doctor said he had sold his patients to another doctor, whom I had never met and must consult for all future health care, I wouldn't jump up and down with joy."

9. On acquisitions: "Finance aside, I have always thought [acquisitions] a rickety way to grow. Good agencies are never for sale."

10. On hiring: "If you hire people who are smaller than you are, we shall become a company of dwarfs. If you hire people who are bigger than you, we shall become a company of giants. Hire Big People, people who are better than you. Pay them more than you pay yourself, if necessary."

11. On meritocracy: "No spouses. No nepots"

12. On corporate culture: "We treat our people like human beings. We help them when they are in trouble. We help our people make the best of their talents. Our system of management is singularly democratic. We abhor ruthlessness. We like people with gentle manners. We admire people who work hard. We despise and detest office politicians, toadies, bullies and pompous asses. The way up the ladder is open to everybody. In promoting people to top jobs, we are as influenced as much by their character as by anything else."

13. On minimizing office politics: "Sack incurable politicians. Crusade against paper warfare."

14. On compensation: "Pay peanuts and you get monkeys.

15. On checking expense accounts: "Even the Pope has a Confessor."

16. On firing people: "I think the most cruel thing you can do to people, especially I am sad to say, to men, is to fire them, to put them in a situation where they don't work. Always do your damndest to avoid condemning people to the hell of unemployment."

17. On losing clients: "Clients come, they go, they come back, we'll get a new one. The only thing that can affect who we are as a company is if [the Chairman] feels any less committed."

18. On clear and honest writing: "People who think well, write well. Woolly-minded people write woolly memos, woolly letters and woolly speeches. I believe in the dogmatism of brevity."

Stefan Jovanovich writes: 

I hate to argue yet again with an Eddy Top 10 but the central fact of David Ogilvy and his successor's careers is that they allowed two kids from Stanford to swallow their entire business. The Mad Men were terrible snobs– even worse than their publisher and broadcaster vendors. As a result they lost out on an opportunity that the inventors of their business– Wanamaker and Stewart– would have jumped at the chance to develop. Ogilvy is also wrong about canning people; it is usually the kindest thing you can do to people if they cannot do the job. We all fail; the illusion of schooling is that somehow that law of nature can be repealed.

Richard Owen writes: 

Interesting analysis Stefan! Indeed one of the anecdotes from Ken Roman is

Following a hostile takeover of his agency, Ogilvy was in the audience when the chairman of the acquiring company was asked what was next after buying J. Walter Thompson and Ogilvy 3: Mather. He had completed his goals, was the answer, and planned no further acquisitions. From the middle of the audience came a stage-whispered comment from the founder: "Just like bloody Hitler after Czechoslovakia."

Ogilvy states various things about firing people: I guess it was something along the lines of striking a balance, having long term vision, and being humane. Indeed, he encouraged one colleague who's passion wasn't advertising to pursue wildlife matters, and as a result became one of the pioneers of the WWF.

Gary Rogan writes: 

In a significant percentage of cases "cannot do the job" is too definitive of a conclusion. Also, obviously people are often let go not because they cannot do the job, but a lot of other factors. It seems like not being too random in getting rid of people even if you can easily get away with it is a mark of a humane person.

Apr

8

1) First, some thoughts on the question "what would happen if everyone lived off capital?"

If people saved, rather than spent, every dollar they earned, it would initially slow down the velocity of money. Likewise if no one ever spent savings, it would initially slow down the velocity of money. Rather than maximizing immediate consumption, people would be savers first, then very frugal consumers.

However, in both these cases the slack would be picked up in either the business sector, or the government sector, since there is now have an over supply of savers looking to invest capital. This would, of course, lower the risk, as the companies would not have to jump too high a hurdle to make interest payments. When do you think government would likewise only spend capital?

The recent financial crisis could be thought of as the opposite case where everyone thought they could leverage and overspent. This increased the risk as savers willing to lend disappeared. The money given to the flexions' banks to save them, could be thought of as printed money put in a lock box called deleveraging. Hence an increase in the quantity but a slowing of velocity of money and a risk of deflation.

2) Now for some strategies for preserving capital. The idea is to be a saver first, a consumer second.

Lets assume we invested $1,000,000 in Vanguard's index fund in April 1987. And any week we ended up with more than $1,000,000.00 we withdrew the excess. Below I list the 52 week amounts withdrawn (assuming 364 day years, 364 = 7*52). While the average $138,000 seems generous, about top 5% of earners, it would still give you many years in a row of $0 withdrawn in the 2000's. But if you think these booms and bust are systematic, then a better strategy would be to only withdraw in any one year a set amount, and save the rest for those lean $0 years. The next 2 columns shows how much you would have withdrawn if that set amount was $125000 annually. The withdrawals come from from $1 million invested in stocks excess earned, first, and then, if needed, from the amount stuffed under the mattress (not literally, of course, but previously set aside as neither consumed nor invested in stocks) . The amount invested in stock is kept at $1 million, the excess not spent in any year is mattress padding for future years.

You can see that during the bounteous years of the 1990s, you could have set aside over $1 million without compounding to cushion those upcoming lean years.

(Note: fiscal years ending in April)

Rocky Humbert writes: 

Mr. Sears' approach towards capital withdrawals is nominal, not real. So in an environment of 10% inflation and a risk free rate of 10%, he would be shrinking the real value of his corpus as he withdrew 10% on average. Conversely, in a deflationary environment, with rates at zero, he would not be consuming at all even though the corpus of his portfolio would be growing in real terms. The reality is that inflation has been averaging between 2 and 3% for the last decades and that destroys the corpus over a lifetime.

This wealth illusion associated with inflation/money printing is prevalent among both retirees and working folks. It is an insidious behavioral bias and I believe affects both consumption and economic activity. The bias is one reason that deflation is a drag on medium term growth.

Ralph Vince adds: 

I believe inevitably governments, a century or several hence, will live off of their own capital, part of a social-evolutionary process.

A structured dismantling of future liabilities (undoing the mega-Ponzi Social Security in the US, for example, in an orderly manner through generational taper with newcomers to the job market putting 100% in self-directed, those leaving the job market, 0% self-directed) and would other future liabilities to a sustainable level, and some time later, to a level of easy sustainability would allow an ultimate sinking fund of future government liabilities, eventually reaching a level of self-sustainability.

At which point, one would HOPE taxes would end, unless the Catholic Church model is employed.

Stefan Jovanovich writes: 

Everyone does live off of investment (I think this is what Russ means by "capital"). The one correlation that seems dismally robust is that, in spite of all efforts to "distribute" (sic) wealth, only the ratio of private investment to people working determines how high someone's pay can go. If there is low "capital" investment, people make very little; if there is high "capital" investment, they make much more. People instinctively know this; it is the reason we all have our eyes drawn to to displays of physical grandeur and, in the days of the gold standard, bank lobbies always had marble. But, since we live in the age of alchemy (the nominal wealth illusion the R-Man notes), "income" becomes more important than savings.

Ed Stewart writes: 

Stefan doesn't it matter how savings are deployed. Savings productively deployed in a way that increases output of goods and services increases total wealth (and if such capital is up per head, wages) but not all savings are equal in this regards. Savings deployed to fund a make-work project via government debt represents consumption. I question if in general, savings used to help another party pull forward consumption on net represents consumption and not savings, just redistributing wealth from shortsighted to farsighted — if that makes sense (??).

Russ Sears writes: 

Once again my e-mail's brevity and my poor writing causes some confusion. The "mattress" strategy was meant to be humorous, not literal. Implying you have many options as to how you use the "savings" to hedge inflation. This strategy was meant to illustrate how to take equity risk while still withdrawing a decent amount for consumption. $125000 is a decent amount in today's dollars to live off, but in 1988's dollars that was very high living, perhaps near top 1%. In the example, the amount withdrawn could easily be slowly increased for inflation, with interest earned on the savings or less savings. The bigger problem I have with my own example is what do you do if you retire/need money at the start of long term $0 return to $1,000,000 capital amount. But let us go over some inflation options:

1. Put savings back into equities…I believe, (only my opinion), this may be a good option if money keeps being put into the system due to low or negative inflation and hence likely low interest rates as we currently see. But, this also leaves you more open to risk of inflation killing the equity markets or long term bear markets in general. However, looking back long term equities returns should beat inflation if next 100 years is like last 100 years.

2. Put saved money into a long term bond fund. This could handle mild inflation, as long as it stays mild.

3. Put money initially into short term fund then as inflation gets "high" switch over to long term bond fund as inflation kicks up. But this leads to when is inflation "high" (10% seems to be Rocky's boggy). Perhaps the answer is when it starts killing equities returns because the market is worried about it. Then if you think this is the case start putting "more" of the savings into long term funds. You'll have to decide what "more" speed is and if inflation is "the cause" for poor equity returns.

4. A combination strategy.

How to invest for inflation is a tough subject which such a simple "living off capital" strategy was not meant to answer. I hope the above shows sufficiently that a disciple approach to withdrawals. even if adjust for some inflation is better than simply going with the wealth effect and spending as earned from equities. But in the end you are going to have to decide for yourself, what you think inflation will do and when it will do it. And then execute it. But at least a disciplined approach to withdrawals give you much more flexibility and with it a chance to meet this challenge.

Finally the reason "capital" was chosen instead of "investment" was to signify an investment that is somewhat dependent on a stable "monetary" base for entry and exit. As opposed to a more direct investment in human capital or even property which may out last a government and may more likely be inverse related to inflation.
 

Mar

27

 One must say that there is no reason to believe that banks are subject to always doing the wrong thing, putting on excessive risk. They've made mistakes in the past. That doesn't mean they will make them in the future. To assume that they don't learn, that they're more prey to error than others, is wrong. There are probabilities associated with their activities and expectations and distributions of the expectation. They make decisions. To assume that they should prepare now for a repeat of 2008 would be irrational. Perhaps there could be check points, where as they get closer to various pitfalls, they adjust their positions. That's what everyone in the world does,—- banks would do it also. Why should they prepare now for an event that occurs 3 times each hundred years. Anyone in the options business for example adjusts their position. They are not subject to wide spreads. I believe I've made my gist clear. They are flexible, and should be. The analogy with the bridge which usually can't be changed in its structure is not relevant for human being with access to many different alternatives to structure their balance sheet and access to many liquid markets.

Stefan Jovanovich writes: 

As some DailySpec readers already know from my private grumblings, I am still pissed off about having had to settle for an architectural degree from Harvard when what I wanted was one in naval architecture from M.I.T. The R-Man's bridge analogy may not be ideal; but he is right to look to the rivers and the oceans for a comparison. When you design a ship, one of the first calculations to be made is how strong will the bow steel be. To answer the question, you have to decide how large a wave will break over the bow - i.e. what the weight of water will be. Before satellite observation and remote telemetry buoys, the nautical world had to rely on the observations of mariners and the examinations of the damaged ships that survived rogue waves to determine what was an appropriate "stress test". What modern researchers have discovered is that the size, weight and length of freak waves is far, far greater than all previous estimates. The otherwise unexplained disappearance of super tankers and large freighters is now attributed to their having had the misfortune to run into a wave that literally tore open the ship's skin and flooded it beyond its buoyancy.

There is no lesson in any of this. Shipbuilders and ship owners still have to make the calculation of how much more money is to be spent on further strengthening bows and decks. Whatever budget is decided on will not be enough to assure absolute safety; the Breton Fisherman's Prayer will still be true.

What bewilders us aging cranks is why our central banking world persists in the belief that the fluid dynamics of credit can somehow be engineered so that nothing ever sinks. The common sense of the old world was that money should be something that could survive wrecks, storms and frauds. Credit needed no protections; it was in the very nature of people to believe in the future and to bet on it and to take the risk of sailing small boats on a large ocean. What was folly was to think that lashing all the ships together into mighty armadas would somehow persuade God to permanently moderate the waves. 

Mar

20

 I follow the sports news and commentary and find it much more erudite
and analytic than the financial commentary. Try reading the NY Times
analyses of games The Knicks play, and you'll learn more about the
market and human nature than you will from Bloomberg. 

Ken Drees writes: 

I once worked on technology to automate sports reporting using "canned" or routine language. It came to nothing at the time but it amazed me how simple it would be to automate sentence and paragraph structure of a simple sport score/ game report. You would have selected templates and fill in bursts of stats to make it seem true. Anyone who listens to an athlete's interview these days hears the same old same old.

"We battled, and that's what we are about–never give up, keep focused on the game at hand." "No, I am not looking ahead towards the next series, I am focused on the day to day–what it takes to win today is what I am about".

Seriously all these athletes talk program. All the same crap every time—I can hear it before they say it!

Anton Johnson writes: 

This is the best ever basketball interview.

Ralph Vince writes: 

It is a most peculiar sport, and the great Meadowlark Lemon worth study; that someone can be so good, so adroit at what they do, which is not comedic, that they can transform it into comedy, not take oneself so seriously, and perform to perfection. Mastery occurs when someone can do something to such perfection that they can laugh about it and about themselves as their virtuosity expresses itself, carried on a wave of euphoria of their own creation.

Contrary to what I would have expected, basketball seems to have players who are more articulate and analytical. Among the worst are those who are involved in the individual sports like golf, tennis, as well as most NFL locker rooms. For whatever reason, NBA players seem to do far better in front of the microphone.

Stefan Jovanovich writes: 

Players are not any better than actors at coming up with original lines on their own; it is the coaches (who like the writers are usually not on camera) who have the interesting stuff to say.

Mar

18

 One of the many, many reasons I adore my wife is that she is not someone who can be gulled. When a friend of ours in the California Bar came soliciting for the ACLU, Susan asked him why their only First Amendment cases were defenses of pornography. "Surely, they are the one class of defendants who can afford their own lawyers?"

Secretary Paulson hardly needs conspiracy theorists to contribute to his defense; he has been more than artful enough to evade the main question that should have been asked - namely, why did the Treasury decide that it would guarantee the banks' counter-party assets instead of their deposit liabilities?

Mar

12

 The SAT has been diligently and scientifically designed to predict performance in college. It predicts such performance better than HS grade point average.

Think about that for a moment. A 3 hour test that predicts college performance better than 4 years of HS exams, papers, classroom performance, etc. Pretty impressive.

Further, when judging the value of the SAT for college admission, one has to ask, "compared to what?"

HS grades? As indicated, the SAT is better. And HS grades are impossible to compare across thousands of different high schools, and in addition are subject to significant manipulation by the high schools seeking to look good or have their students do well. That's why college admission offices use both the SAT and HS grades.

Teacher recommendations? They are notoriously even worse.

The recommendation of the Headmaster of Exeter as to which 40 or so of his graduating seniors should be admitted into Harvard? That's the way things used to work. Good luck to Vic Niederhoffer's getting admitted to Harvard under that system.

Stefan Jovanovich writes: 

The SAT is a scam. It has been around for 50 years. It has never measured anything. And it continues to measure nothing. And the whole game is that everybody who does well on it, is so delighted by their good fortune that they don't want to attack it. And they are the people in charge. Because of course, the way you get to be in charge is by having high test scores. So it's this terrific kind of rolling scam that every so often, somebody sort of looks and says–well, you know, does it measure intelligence? No. Does it predict college grades? No. Does it tell you how much you learned in high school? No. Does it predict life happiness or life success in any measure? No. It's measuring nothing. It is a test of very basic math and very basic reading skill.

- Jon Katzman, Founder of the Princeton Review

The interview is worth reading in full.

But (of course, there would be a caveat from yours truly), Katzman wants to ignore the success that crammers have always had because he, like everyone else, does not want common public education to be what works - an intensive drill and practice of basic reading and math skills. These are subject that are, as Katzman himself says, "Nothing that a high school kid should be taking." Yet, they are the very skills that almost all children leave school now without having mastered.

Victor Niederhoffer writes: 

And yet. I disagree with him on all parts. I believe the sat is a basic measure of IQ, highly correlating with it. And IQ is the best predictor of success in school and life. I'll have to look at the studies that confirm or infirm this.

Stefan Jovanovich adds:

Gentlemen: Mr. Katzman is admittedly hyperbolic, and he was, very skillfully, talking his book. Of course the test measures IQ, but IQ is itself a measure of one's ability to take these kinds of tests. That was and is his larger point. Schooling should be about test-taking and there should be as many different kinds of tests given as possible - those for dexterity, spacial awareness, physical assembly of a jumbled set of parts. The advantage that Eddy and all the other bright kids have is that their home schooling was competitive and testing yet built confidence and pushed away fear because there was always a new and different test to take and they quickly discovered that, in some things, they could be even better than their old man. My Dad was right - for all but the most fortunate school is simply the barrel in which the poor are told to put their children so they can learn how to keep each other from climbing out. That truth is what Mr. Katzman discovered about the Joes of this world and how much the SAT has become the barrel used for adult life; and, to his credit, it pisses him off just as much as it did my old man.

Mar

10

"Reading, after a certain age, diverts the mind too much from its creative pursuits. Any man who reads too much and uses his own brain too little falls into lazy habits of thinking." - Albert Einstein

Stefan Jovanovich writes: 

This certainly explains why he and so many other brilliant people fall for the idiocies of socialism. As a system it is flawlessly logical; it lacks all the chaos, confusion, corruption that liberty produces. It requires more than a little reading to learn just how insanely vicious the logical systems of political economy all have been.
 

Mar

7

 DECLARATION AND RESOLVES OF THE FIRST CONTINENTAL CONGRESS:

October 14, 1774

Whereas, since the close of the last war, the British parliament, claiming a power, of right, to bind the people of America by statutes in all cases whatsoever, hath, in some acts, expressly imposed taxes on them, and in others, under various presences, but in fact for the purpose of raising a revenue, hath imposed rates and duties payable in these colonies, established a board of commissioners, with unconstitutional powers, and extended the jurisdiction of courts of admiralty, not only for collecting the said duties, but for the trial of causes merely arising within the body of a county:

And whereas, in consequence of other statutes, judges, who before held only estates at will in their offices, have been made dependant on the crown alone for their salaries, and standing armies kept in times of peace: And whereas it has lately been resolved in parliament, that by force of a statute, made in the thirty-fifth year of the reign of King Henry the Eighth, colonists may be transported to England, and tried there upon accusations for treasons and misprisions, or concealments of treasons committed in the colonies, and by a late statute, such trials have been directed in cases therein mentioned:

And whereas, in the last session of parliament, three statutes were made; one entitled, “:An act to discontinue, in such manner and for such time as are therein mentioned, the landing and discharging, lading, or shipping of goods, wares and merchandise, at the town, and within the harbour of Boston, in the province of Massachusetts-Bay in New England;”: another entitled, “: An act for the better regulating the government of the province of Massachusetts-Bay in New England;”: and another entitled, “:An act for the impartial administration of justice, in the cases of persons questioned for any act done by them in the execution of the law, or for the suppression of riots and tumults, in the province of the Massachusetts-Bay in New England;”: and another statute was then made, “:for making more effectual provision for the government of the province of Quebec, etc.”: All which statutes are impolitic, unjust, and cruel, as well as unconstitutional, and most dangerous and destructive of American rights:

And whereas, assemblies have been frequently dissolved, contrary to the rights of the people, when they attempted to deliberate on grievances; and their dutiful, humble, loyal, and reasonable petitions to the crown for redress, have been repeatedly treated with contempt, by his Majesty’s ministers of state:

The good people of the several colonies of New-Hampshire, Massachusetts-Bay, Rhode Island and Providence Plantations, Connecticut, New-York, New-Jersey, Pennsylvania, Newcastle, Kent, and Sussex on Delaware, Maryland, Virginia, North- Carolina and South-Carolina, justly alarmed at these arbitrary proceedings of parliament and administration, have severally elected, constituted, and appointed deputies to meet, and sit in general Congress, in the city of Philadelphia, in order to obtain such establishment, as that their religion, laws, and liberties, may not be subverted: Whereupon the deputies so appointed being now assembled, in a full and free representation of these colonies, taking into their most serious consideration, the best means of attaining the ends aforesaid, do, in the first place, as Englishmen, their ancestors in like cases have usually done, for asserting and vindicating their rights and liberties, DECLARE,

That the inhabitants of the English colonies in North-America, by the immutable laws of nature, the principles of the English constitution, and the several charters or compacts, have the following RIGHTS:

Resolved, N.C.D. 1. That they are entitled to life, liberty and property: and they have never ceded to any foreign power whatever, a right to dispose of either without their consent.

Resolved, N.C.D. 2. That our ancestors, who first settled these colonies, were at the time of their emigration from the mother country, entitled to all the rights, liberties, and immunities of free and natural- born subjects, within the realm of England.

Resolved, N.C.D. 3. That by such emigration they by no means forfeited, surrendered, or lost any of those rights, but that they were, and their descendants now are, entitled to the exercise and enjoyment of all such of them, as their local and other circumstances enable them to exercise and enjoy.

Resolved, 4. That the foundation of English liberty, and of all free government, is a right in the people to participate in their legislative council: and as the English colonists are not represented, and from their local and other circumstances, cannot properly be represented in the British parliament, they are entitled to a free and exclusive power of legislation in their several provincial legislatures, where their right of representation can alone be preserved, in all cases of taxation and internal polity, subject only to the negative of their sovereign, in such manner as has been heretofore used and accustomed: But, from the necessity of the case, and a regard to the mutual interest of both countries, we cheerfully consent to the operation of such acts of the British parliament, as are bonfide, restrained to the regulation of our external commerce, for the purpose of securing the commercial advantages of the whole empire to the mother country, and the commercial benefits of its respective members; excluding every idea of taxation internal or external, for raising a revenue on the subjects, in America, without their consent.

 Resolved, N.C.D. 5. That the respective colonies are entitled to the common law of England, and more especially to the great and inestimable privilege of being tried by their peers of the vicinage, according to the course of that law.

Resolved, N.C.D. 6. That they are entitled to the benefit of such of the English statutes, as existed at the time of their colonization; and which they have, by experience, respectively found to be applicable to their several local and other circumstances.

Resolved, N.C.D. 7. That these, his Majesty’s colonies, are likewise entitled to all the immunities and privileges granted and confirmed to them by royal charters, or secured by their several codes of provincial laws.

Resolved, N.C.D. 8. That they have a right peaceably to assemble, consider of their grievances, and petition the king; and that all prosecutions, prohibitory proclamations, and commitments for the same, are illegal.

Resolved, N.C.D. 9. That the keeping a standing army in these colonies, in times of peace, without the consent of the legislature of that colony, in which such army is kept, is against law.

Resolved, N.C.D. 10. It is indispensably necessary to good government, and rendered essential by the English constitution, that the constituent branches of the legislature be independent of each other; that, therefore, the exercise of legislative power in several colonies, by a council appointed, during pleasure, by the crown, is unconstitutional, dangerous and destructive to the freedom of American legislation.

All and each of which the aforesaid deputies, in behalf of themselves, and their constituents, do claim, demand, and insist on, as their indubitable rights and liberties, which cannot be legally taken from them, altered or abridged by any power whatever, without their own consent, by their representatives in their several provincial legislature.

Mar

5

 There seems to be a widely held belief that the Russian leaders are, and always have been, a collection of power-hungry thugs with little or no finesse. I have long felt that Putin, far from fitting that stereotype, has been a patient and successful player in the "great game."

Rather than get involved in the current duel, I suggest checking out New Lies for Old by Anatoliy Golitsyn. Written in 1984, Golitsyn had defected to America in 1961. His book, in addition to being a severe critique of the west's intelligence services, gives a whole series of predictions as to what would (and has) happen to Russia and its government. Considering how accurate most of his prognostications have turned out, it might not be a total waste of time. It's a long read and can be arduous, so I suggest reading some of the reviews before making the commitment.

Stefan Jovanovich adds his two cents: 

1. The comparisons of Putin to Stalin have to stop. Roy Medvedev (a Georgian) has calculated that Stalin killed 20 million Soviet citizens (this does not include any of the people who died during WW II) when you total all the premature deaths from these events: 1 million imprisoned or exiled between 1927 to 1929; 9 to 11 million peasants forced off their lands and another 2 to 3 million peasants arrested or exiled in the mass collectivization program; 1 million exiled from Moscow and Leningrad in 1935; 4 to 6 million dispatched to forced labor camps; and at least 1 million arrested for various "political crimes" from 1946 to 1953. The Soviet records alone directly confirm these deaths: 6 to 7 million killed by an artificial famine in 1932-1934 and 1 million executed during the ''Great Terror'' of 1937-1938. Solzhenitsyn thought Medvedev's number was almost a naive underestimation; he put the figure at 60 million.

2. The use of Emersonian racialist categories (Slavs) is not only bad history but also in very bad taste, given what the 14th Amendment to our Constitution says. "Slav" is a category invented by people who wished eastern Europeans nothing but harm (like Marx's label of "capitalism" for the freedom to own yourself and your own property). No one now alive in Eastern Europe recognizes the word as having any meaning. The Ukrainians speak a language largely indistinguishable from Russian; but they are separated from the Russians by religion, heritage and history. They are only fellow "Slavs" in the eyes of the rest of the world, which knows as much about their history as David knows about Hungary and Kosovo and the occupation of Paris by the German Army in WW II and the List knows about the Russians' two-hundred year war with the Chechens and the four hundred year war in Northern Ireland among the Irish, Scots, English, French and Spanish.

 

Mar

3

Perhaps the discussion about the events in eastern Europe could focus on the issues that are actually at hand between Russia and the Ukrainian revolt: (1) Having, once and for all, the Russian minority in the Ukraine and those still nostalgic for Soviet rule lose political control over the western Ukraine, and (2) Russia's securing absolute control over its Navy's only year-round open water port that is the Crimea.

To date the public hue and cry has been more than a bit like a discussion of how those nasty West Virginians are causing the Civil War by seceding from Virginia after Virginia itself had seceded.

Mar

3

Someone asked me, "If you were asked to give a single figure for the "average" drift of the entire market (measured, say, by the Wilshire) over time, what would it be if 0% were all down and 100% were all up?"

The answer is 51.

The Dimson data shows equities earning a roughly 5% annual premium over t-bills over the past 110 years. That's about 0.02% drift per trading day.

Let's take the annualized volatility at about 15%, and equivalently the daily volatility is about 1%.

So roughly, I'd say the drift is about 2% of the daily "sturm und drang". In Stefan's terms, the number is 51.

Feb

21

 It is time honored policy for governments to run up huge debt, then via inflation to pay back that debt in pennies to the dollar or not at all. The most extreme example would be Wiemar republic in the 20s, but there are devaluations all the time, witness Argentina. It is an easy and quiet destruction of wealth of the citizenry by their government. Keynes wrote about it. Though eventually it will work in the US, there must be frustration it is taking so long here. There must be other forces at work holding up the dollar I would call these the positive affects, like the production, innovation, demand for US currency for trade, a slowing of credit growth (second order affect). Amazingly for the time being these forces counter-act a destructive currency policy and there is a stand-off.

Stefan Jovanovich writes:

I think anonymous' point needs further support. Governments have not, in fact, "paid back" debt using inflated currencies. That is one of Keynes' historical fantasies. The debt was simply defaulted. After the new currency was refloated, some of the former debtholders (but never all or even a majority) are lucky/influential enough to be "repaid" by having their old debt instruments swapped for new IOUs using the new "sound" currency; but actual payments that extinguish the debt are never made for the simple reason that the government had no reserves in the old currency and no political ability to make one grand final payment in full. This may seem like a distinction without a difference, but it is not. Default allows the governments to wipe out all the other promises made that were not secured by indentures (pensions, social service payments, subsidies) in the name of "reform". If those obligations had, in fact, been "paid back" in the inflated legal tender, the claimants would at least have gotten old "dollars" that were worth new pennies; what, in fact, happens is that they get nothing.

The rise of the National Socialists can be directly tied to the fact that the currency reform after the hyperinflation left all the old Bismarck safety net promises in default. Hitler's most successful campaign promise was that he would restore those vanished pensions at full value (one can find parallels with the American Progressives' promise throughout the last third of the 19th century and all the times thereafter to assure farmers that they would receive "par" for their crop payments. The just-passed farm bill is a legacy of that toxic doctrine of equalism.)

Jan

29

 One is accustomed to the contumele of certain parties, especially when I point out, as the loose cannon Mr. Kora, who could ruin us all by posting such good stuff, shows that 8 or 8 such events led to substantial profits, a point which one intentionally omitted so as not to self destruct the list. But one is very surprised on a list with so many free market devotees, albeit a conservative here and there, that one doesn't consider the right of a personage to better himself. If an immigrant can gain gainful improvement and housing in this country, why in the world should we stand to prevent his pursuing his happiness and bettering himself. And of course it's good for both parties.

Jordan Neuman writes: 

The Chair is correct of course– ceteris paribus. Unfortunately, it is not ceteris paribus. For example:

In 2009 (based on data collected in 2010), 57 percent of households headed by an immigrant (legal and illegal) with children (under 18) used at least one welfare program, compared to 39 percent for native households with children.

Immigrant households' use of welfare tends to be much higher than natives for food assistance programs and Medicaid. Their use of cash and housing programs tends to be similar to native households.

A large share of the welfare used by immigrant households with children is received on behalf of their U.S.-born children, who are American citizens. But even households with children comprised entirely of immigrants (no U.S.-born children) still had a welfare use rate of 56 percent in 2009.

Source.

Gary Rogan writes:

I would like to add that eventually these immigrants start to vote and they vote, by a huge margin, for big government because (a) to them it's a significant net benefit (b) they know of no other way of thinking about the role of the government. Additionally, they are used as pawns by said big government in every way imaginable to maintain itself as the master of us all. And additionally, large flexionic business absolutely love these immigrants because they work for less (good) but as their families are subsidised to an enormous degree by the taxpayers, these business do not bear the full brunt of their cost. As these flexionic businesses are enormously powerful with the government, being flexionic and all, this creates an almost unbeatable coalition of government and crony capitalists to import a certain kind of immigrants to the detriment of us all. 

Greg Rehmke writes:

Research supporting the benefits of immigration to the U.S. is compelling. Welfare programs continue to be expensive and distorting, but vary by state. "Generous" welfare in California is more expensive and damaging to immigrants than Texas programs. But recent studies show the services provided and taxes paid by immigrants (legal and illegal) outweigh the cost of welfare programs including govt. education.

Immigrants run or are key technology people in half of Silicon Valley tech firms, for example. But even low-skill immigrants free U.S. workers to concentrate on higher skill jobs. Immigrant workers in hospitals and nursing homes provide key services.

Here is more information from Ben Powell on Liberty Fund site.

I have links to various articles here.

Stefan Jovanovich comments:

Qui bono? As long as it is that marvelous construct — the economy, "immigration" always wins; and the trivial question about whether or not people are following the Constitutional rules for naturalization can be conveniently discarded. When the question becomes who pays for the price effects of competition from illegal immigrants, obfuscation is needed. But then what else are "studies" good for if not to tell ordinary Americans that their common sense is not good economics.

I do wish Greg would read the footnotes. Mr. Powell is distorting the truth beyond all recognition when he writes that "George Borjas is probably the most established academic critic of immigration. But even he admits that immigrants create net benefits for the native-born." What Professor Borjas actually stated was this:

"The evidence indicates that the wage of the skill groups–defined in terms of educational attainment and labor market experience–that experienced the largest influx of immigrants grew most slowly over the 1960-2000 period. It has been estimated that the wages of native workers in a particular skill group will decline by about 3-4 percent for every 10-percent increase in the number of workers that can be attributed to immigration."

I have come to the conclusion that Libertarianism is, at heart, a theology that wants ownership of property, including the property of citizenship, to always be subordinated to the idea of liberty. Yet, at the same time, people should not be free to exercise the freedom to truck and barter in credit. We are back, once again, in the world of Fourier and George Ripley and Brooks Farm.

Greg Remkhe replies:

I can’t speak for libertarians or economists in general, and I don’t believe economic gain is the most important thing. I think justice is. People have rights and deserve freedom and justice before the law. Welfare state programs and business regulations distorted the immigration process for California in ways very different from Texas. Texas government policies are more open to enterprise and its booming economy is putting latin american immigrants to work. Welfare is harder to qualify for in Texas and enterprises are easier to start and expand.

It is important to separate the consequences of immigration from the consequences of dysfunctional U.S. immigration policy (and distorting state welfare and business regulation).

New competition benefits consumers,but can challenge or hurt existing producers. Immigrants are producers in the labor market and where they compete with existing producers–American workers–they challenge and can hurt both unskilled workers and high-skill tech and engineering workers.

But the challenge part matters too. Imported cars from Japan challenged U.S. car companies to improve their cars. Many U.S. firms met the challenge of imported goods and improved to regain market share and also export. The tens of thousands of immigrant workers employed by U.S. firms helps them compete overseas, and that helps U.S.-born workers in those firms.

And now U.S. companies like Boeing, Ford, Apple, Dell, HP and others are global with goods and services produced by a mix of U.S. employees plus employees and subcontractors overseas. Plus Honda, Toyota, VW and other foreign car companies invest billions and employ hundreds of thousands of U.S. workers, engineers, and designers.

Robert Guest’s “Borderless Economics ” is I think one of the most compelling discussions of the dynamics of the new global economy.

The benefits to the U.S. from immigration and from outsourcing is one part of the story. But the benefit of immigrant entrepreneurs returning home to energize China’s and India’s economy is another major benefit. Hundreds of millions have been helped overseas by the return of inspired entrepreneurs trained at American and European firms. And these now wealthier producers and consumers in China, India, Brazil and Mexico now buy more goods and services from American companies and workers.

All that said… I must agree that a combination of crummy schools and corrupt government in Mexico and other Latin American countries shapes new immigrants, legal and illegal who come to the U.S. to live and work. Crummy schools and corrupt governments in the U.S. make matters worse.

Someone noted that we don’t need to make a wall around the U.S. but instead to make a wall around the welfare state. Over the last couple years, I’ve been recommending the Krieble Foundation’s Red Card proposals. They argue that Mexican working in the U.S. now and those who wish to come should apple for a worker visa Red Card that provides documentation and insurance, but not access to welfare programs.

Jan

26

 "In so far as the statements of mathematics refer to reality, they are uncertain; and in so far that they are certain, they do not refer to reality." - Einstein (1921) "Geometry and Experience"

"In so far as a scientific statement speaks about reality, it must be falsifiable; and in so far as it is not falsifiable, it does not speak about reality." - Popper (1933) The two basic problems of the theory of knowledge

At the end of his life Popper wrote this: What impressed me most was Einstein's own clear statement that he would regard his theory as untenable if it should fail in certain tests. … Thus I arrived, by the end of 1919, at the conclusion that the scientific attitude was the critical attitude, which did not look for verifications but for crucial tests; tests which could refute the theory tested, though they could never establish it."

Or, as Einstein himself put it,"A theory can thus be recognized as erroneous [unrichtig] if there is a logical error in its deductions, or as incorrect [unzutreffend] if a fact is not in agreement with its consequences. But the truth of a theory can never be proven. For one never knows that even in the future no experience will be encountered which contradicts its consequences; and still other systems of thought are always conceivable which are capable of joining together the same given facts." - Induction and Deduction in Physics

The difficulty for those of us who indulge in a taste for political economy is that almost all the "facts" are inductive constructs, whether from surveys or government statistics. We are tempted to find empiricism where there is none and to find insights in tautologies. As Popper himself once put it, it is not philosophically legitimate "when prices of goods fall throughout the economic system, to ask whether 'in reality' the value of money has increased or the value of the goods has decreased." On the other hand, as the pros and talented amateurs on the list have both observed and proven, there is a great deal of money to be made in having the supreme lenders come flex their muscles in your financial gym while pondering the deep questions about inflation and deflation.

Dec

30

 Wall Street and the Wilds by A.W. Dimock, 1915, contains the sage of the rise and fall and rise and fall of a Wall Street gold trader, options seller, stock manipulator, developer of the clearing house, pool operator, Steamship promoter, real estate developer of Elizabeth, New Jersey, telegraph line builders, railroad builder, hunter, photographer and naturalist from 1850 to 1915.

It includes chapters on black Friday, the day that the gold bulls broke the US Treasury in 1870, the effect on prices of the civil way, the way manipulations were carried out in those days, the relation of the flexions to financiers in those days (not much different from today), systems for profiting in gold, the legal system in those days (fees of a million dollars for routine cases were common even in 1880, the early developments of photography in the wilds, hair raising tails of wars between the Native Americans and the US military, pinpoint shooting, advanced fly casting techniques, and much more.

Everything talked about is totally a propos of current techniques in Wall Street. Dimock was a minister's son born in 1840 who went to Andover and came to Wall Street at 15 and got his start scalping odd lots in insurance stocks. He developed a system of selling gold every 1/8 up and buying it every eight down. He became the Little Napoleon of Wall Street and dominated the gold exchange the way the big grain companies dominate the grain market today, using some of the same techniques. He made so much money that it was easy come, easy go, and he lost it all by guaranteeing the purchase of friends, defrauding by the Goulds during Black Friday, and finally in the crash of 1873.

The book is compelling, and instructive and a great history of 19th century stock and commodity markets, very much akin and resonant of today. It's highly instructive. I'll quote from some of the more resonant and sagacious passages:

All day I stood there, buying and selling, with a stubby pencil. Always my bids and offers were a quarter percent apart. Thus, if I had just bought five thousand at a premium of fifty and 1/8 percent, (gold was quoted at around $16.50 an ounce as a premium to dollars), I would big fifty for five more, and offer to sell five at fifty and one quarter. Every purchase was balanced. The profits of my machine were so great at the end of the year that I could withstand a fall of 25% in the price of gold.

There is a fascinating account of the lending and borrowing business and the treachery and integrity of various operators very resonant of today.

Stefan Jovanovich writes: 

 Going up against Big Al, the Chair and Dimock should be the final proof of my gilded idiocy. Here goes.

Dimock — like all the large size traders in the Gold Room — thought that the corruptions of the Lincoln and Johnson Administrations would continue under Grant and Treasury Secretary Boutwell. When they didn't, when Federal spending kept declining and the public debt kept being reduced, the speculators assumed that it was a temporary reprieve. They and most politicians expected some kind of compromise that would allow for continued greenbackery. They bet wrong, and Grant's reputation has suffered for it ever since. Not only had Grant and Boutwell opposed the conventional academic opinion - which was, then as now, that the economic pump needed continuous monetary/credit priming with more and more currency; even worse, Grant allowed his Treasury Secretary to go against the street. Only the businessmen of the country - Vanderbilt being the foremost - thought Grant and Boutwell were right. Indeed, Vanderbilt thought Grant was as much a hero for saving the country's finances and its currency as for his leadership of the Union Army during the Civil War/War Between the States. When Grant's son lost the family money in a swindle with the Bernie Madoff of the day, most of the surviving speculators from '73 celebrated; Vanderbilt, on the other hand, saved Grant by buying from him all of his memorabilia, which he later returned to the Grant family as a gift.

What did happen in 1870 was that the Treasury was unable to float its proposed loan at 4 1/2% in Europe because of a little thing called the Franco-Prussian war. What Boutwell did instead was borrow here in the U.S. "The circumstance that war was declared between France and Prussia simultaneously with the passage of the loan bill put it out of the power of the Department to make the negotiation as had been expected. The large revenues, however, of the Government continuing without material abatement until the present time, improved the credit of the country, enabled the Treasury Department, by weekly purchases, to reduce the amount of surplus bonds offered for sale, and contributed to depreciate the market value of gold."

Here are Boutwell's reports for 1870 and 1871. To understand exactly how deep a hole the war had put the country in, you need to know that in 1870 the Federal government spent $129,235,498 for interest on the public debt. The gross receipts for that same year were $411,255,477. The total public debt, including the nearly $400 million in U.S. Notes and greenbacks was $2,418,673,044 - 6 times the Federal tax collections.

1870:

"The financial condition of the country has improved during the past 5'ear. The average rate of gold for the year 1869, as shown by weekly sales, was 32.9 per centum premium, and for the first eleven months of the year 1870,15.2 per centum premium, indicating an improvement in the value of the paper currency of about 17 per centum. From the 1st day of July, 1869, to the 30th of June, 1870, inclusive, the public debt, as shown by the warrant account, was reduced in the sum of $101,601,916 88. From the 1st day of December, 1869, to the 30th day of November, 1870, inclusive, the reduction was $119,251,240 58, as shown by the monthly statements of the public debt, and the total reduction, from the 1st of March, 1869, to the 1st of December, 1870; was $191,154,765 36. The consequent reduction in the interest account is at the rate of more than ten millions of dollars per annum.

1871:

 "The country has been prosperous during the year now closing, and the public finances have shared in the general prosperity. During the fiscal year ending June 30, 1871, the reduction of the pubic debt was $94,327,764 84. The total decrease in the public debt from March 1, 1869, to December 1, 1871, was $277,211,892 16; and during the same period the annual interest charge has been reduced $16, 741, 436 04. The revenues for the year 1871, and the receipts since the first of July last, show that the time has arrived when a considerable further reduction in taxes can be made, and yet leave the Government in a position to pay at least fifty millions of dollars annually of the principal of the public debt, including the amount pledged through the sinking fund. In my annual report to Congress for 1870, I expressed the opinion that the settled policy of the country should contemplate a revenue sufficient to meet the ordinary expenses of the Government, pay the interest on the public debt, and from twenty-five to fifty millions of dollars of the principal annually. To that opinion I adhere, with even a stronger conviction that the payment annually upon the principal of the public debt should no,t be less than fifty millions of dollars.upon favorable terms if, unhappily, in the future an exigency should require such loans to be made. The power to negotiate a large loan at five per cent, interest and to enter upon negotiations for the sale of bonds bearing four-and-a-half, and four per cent, interest, is derived entirely from the exhibition of an honest purpose on the part of the people to maintain the public faith, and the consequent ability on the part of the Government to answer that expectation by large and frequent payments upon the public debt."
source


Boutwell
is a great, great figure. I steal most of my opinions about the Constitution from his great work The Constitution of the United States at the End of the First Century.

 

Dec

27

 Ralph Dillon of Global Financial Data was kind enough to send me this chart of Sidney Homer's data for the rates for the Venetian prestiti. He also forwarded Dr. Bryan Taylor's notes on this history:

"When Venice imposed large assessments, as in 1311-1314, the price of the prestiti fell, and when Venice made large repayments, as in 1344, the price could exceed 100. The worst decline in the fourteenth century came during the War of Chioggia between 1378 and 1381 with Genoa, during which Venice imposed very large assessments, suspended interest payments, made the prestiti no longer immune from tax levies, and expanded the debt 6 to 9 times its level in 1344. The price sank as low as 19 as a result. After the War of Chioggia ended, the prestiti fought their way back as confidence in the Venetian government returned, causing the price to rise to the 60 level. Unfortunately, the fifteenth century was one of ongoing wars in the Mediterranean. Venetian wars with Hungary in 1412, the Turks in 1416, Milan during the 1420s, and wars with both Florence and Milan in 1450 and the costs associated with these wars reduced confidence in the Venetian government’s ability to fund the prestiti. Emboldened by the fall of Constantinople in 1453, Sultan Mehmet II declared war on Venice, leading to a disastrous and protracted conflict between 1464 and 1479 which drove the price of prestiti back to the 20s. This led to the reissue of new prestiti as monte nuova in 1482. The graph below shows the yield on the prestiti from 1285 to 1502, assuming a 5% coupon (though in reality the prestiti paid a variable rate after 1377 and 4% during part of the 1400s)."

Venetian state IOUs continued to be issued and traded for another 300 years — until the French Revolutionary Armies "liberated" Venice in 1797; but the monte nuova became a local and at most regional vessel for savings and speculation, not the foundation of international financial dealings that the prestiti had been.

My own biased view is that the wars that weakened and then ruined Venice's fortunes came from the shift from a democratic republic to an oligarchy. Some professors even share this odd notion and have done the research to prove it. Here is their chart of the # of commoners who were members of the Colleganza - the Ruling Council.

Dec

24

 We've had some talk (some might argue too much talk) about bitcoin this year on the site. I've come across a sentinel—about as good as one can get, I think—that the currency's demise is close at hand. "Bill Gross: The Bitcoin Age". This is one of those "End of Equities?" tells. The next few months should provide some insights into its accuracy.

Dylan Distasio writes: 

The Upside Down Man always has his own book to talk, so I take his comments with that always in mind.

Gross: Part 1of 2: We live not in a new gilded age but a bitcoin age where artificial money (from central banks) creates temporary prosperity

Unless I missed another tweet that speaks more directly to bitcoin, I interpret his comment as referencing the fact that central banks magically create money out of thin air. I'm not sure how this ties into the end of bitcoin just because he is aware of it, and using it as an analogy to central bank printing.

Bitcoin has a lot of issues, including the fact, as Stefan points out, that it's not legal tender. It also has a lot of digital competitors waiting in the wings. Maybe one of those like LiteCoin or dare I say DogeCoin ultimately wins out, or maybe they all fail and expire worthlessly. It's an interesting experiment either way.

Jeff Sasmor writes: 

The NYT reported about Overstock.com accepting Bitcoin.

Stefan Jovanovich writes: 

 Details, details. Here is the link on Overstock's web site for the search results for "Bitcoin".

A guide to using Bitcoin.

What is amusing is that the price for the book is itself in dollars.

When the printing press was developed by Gutenberg, its first popular use was for the printing of indulgences. The Papal State needed the money for its military budget and the minor detail of paying for the beginning work on the new St. Peter's Basilica. Luther gets all the press for the Reformation; what is not mentioned are the effects of the invention of printing by typesetting having reduced the cost of producing an indulgence 1000-fold. For an indulgence to be real - something that you could literally take with you when you died - there had to be a document. The printing press was able to do in a morning what usually took a scribe a month. The boom in the buying and selling of indulgences that followed was spectacular. What came next was the bust; entrepreneurs (mostly minor nobles who were themselves members of the clergy or had relatives who were) started producing indulgences that had not been approved by Tetzel. When buyers questioned those documents, they were told that these indulgences were the "real" ones, not the ones produced by that fraud Tetzel. A great deal of the violence of the earlier rounds of the religious wars came from the mobs of the people who felt they had been defrauded or feared they would be.

Dec

15

 Last year, 2012, the Society for Military History gave its award for the best book on non-U.S. military history to:

The Battle for China: Essays on the Military History of the Sino-Japanse War of 1937-1945

It deserves attention. The war between China and Japan that occurred BEFORE Pearl Harbor had more deaths and destruction than any other part of the global conflict except the war between Germany and the U.S.S.R. Since the body counts for both conflicts involved guesses that would make even the BLS blush, I offer this comment only to give the List some gauge of the magnitude.

The book also serves as a reminder of the grim truth of about official American attitudes where foreign policy is concerned: if you are an ally who suffers for your loyalty, you will be criticized with far greater scorn than any enemy. Mao and the Communists receive praise while Chiang Kai-shek and the KMT are ridiculed, even though the Nationalists were, in fact, the only people who actually fought against the Japanese.

Dec

13

 I recently came across this humorous story for lawyers.

A Law teacher came across a student who was willing to learn but was unable to pay the fees.The student struck a deal saying, "I will pay your fee the day I win my first case in the court."

Teacher agreed and proceeded with the law course. When the course was finished and teacher started pestering the student to pay up the fee, the student reminded him of the deal and pushed days.

Fed up with this, the teacher decided to sue the student in the court of law and both of them decided to argue for themselves.

The teacher put forward his argument saying, "If I win this case, as per the court of law, the student has to pay me as the case is about his non-payment of dues. And if I lose the case, student will still pay me because he would have won his first case. So either way I will have to get the money."

Equally brilliant, the student argued back saying, "If I win the case, as per the court of law, I don't have to pay anything to the teacher as the case is about my non-payment of dues. I f I lose the case, I don't have to pay him because I haven't won my first case yet, so either way, I am not going to pay the teacher anything.

Questions:

1. If you are the judge before whom this case comes up, what is the best course for you to dispense justice?

2. What market situations, if any, are similar in construct?

Stefan Jovanovich writes: 

1. Disbar them both - "the case" is about their contract, not about the teacher's remedies

2. Any that involve transactions that manage to exclude themselves from the jurisdiction of the Uniform Stock Transfer Act of 1909 and its successors - i.e. just about everything where the rules have been sufficiently obfuscated to avoid the clarity that our predecessors brought to questions of money and credit.

Dec

10

 A silver lining in detroit's bankruptcy?

In the short run, a recent ruling in the Detroit bankruptcy is a win for muni bond investors and a loss for city employees. The longer-run consequences could make both sides better off.

Stefan Jovanovich writes:

When my Dad was doing the circuit as a textbook salesman in the late 1940s, he managed to visit every one of the lower 48 states — all (except for New Jersey and Connecticut and our home state of New York) by train. He once told me that those travels were what gave him the time to think about schools and school book publishing and the changes that could be made.

On his trips to Michigan Dad would visit our relatives in the Detroit area — his mother's brothers and sister and their children. Three of Dad's cousins worked at Dodge Main; and one of them was a union rep. Dad, who had never worked with his hands in life but had been raised by Wobblies, was a dedicated New Deal Democrat; so, of course, were his cousins.

On one visit Jerzy, the cousin who was the union representative, invited Dad to come visit him at the plant. Jerzy had his own window office on the 3rd floor of Assembly Building; the office also had an interior window with venetian blinds that looked out on a section of the line. During his visit Dad, showing the usual Jovanovich tact, asked what the blinds were for. "Privacy." And, what was the need for privacy? Dad's cousin, like all good politicians, knew that some things needed to be kept private. In his case it was the pinochle game that the cousin, other shop stewards and the Dodge assistant plant managers in charge of labor relations played after lunch each day.

I can believe that many and probably most of the "city employees" in Detroit were unaware of the fiscal impossibility of any business or government being able to pay the defined benefits that they were promised. The people working the line at Dodge Main, including Dad's two other cousins, were blissfully unaware of the pinochle game.

Dec

9

 Bill Rafter, thanks for your interesting posts.

I think you will be interested in the attached chart showing native-born compared to immigrant gains (or lack of gains) in employment. It is the work of a perceptive fellow like yourself who tracks such comparison from gov. statistics (whose name I have for the time being misplaced) and who reports on the vdare.com website.

As you can see from the chart, all net gains in US employment since Obama took office have gone to Foreign-born, while net employment of native-born Americans has not increased during this period.

In addition to being worrying in itself, this may well tie into your finding that while employment has increased, payroll taxes (and therefore wages) have decreased, presumably because of substitution of lower-paid immigrant workers for higher paid native-born workers.

As an illustration one can think of the US construction industry, which used to employ large numbers of middle income workers. Now as I understand it the industry largely employs immigrant Hispanic workers at far lower salaries. One can think of a number of other industry examples.

Gary Rogan writes:

In traditional economic terms substituting cheap foreign-born labor for native-born American labor is manna from heaven: the cost of goods for everyone goes down, so what's not to like? But when those displaced workers go on disability and when they vote themselves food stamps and "free" healthcare, it's not working out so well, is it? This sounds like a Luddite-type argument, and it is, but Luddite argument are valid when the number of displaced workers reaches some critical mass. People are not copper or oil, if they are desperate they resort to desperate measures. The industrial revolution produced Marx, and it was only because the positive effects of that revolution overtook the negatives quickly enough that there wasn't a Marxist revolution in England at the time.

Stefan Jovanovich writes:

Er, no. Gary should stick to his guns on the subject of migration. The reason there was not a Marxist revolution in Britain/England in the 19th century is that people emigrated from the British Isles in sufficient numbers to populate Canada, Australia, New Zealand and double the white-skinned population of the United States. You can add to those numbers the millions of Britons who went overseas to manage/rule/work for the Empire in Africa and Asia and the Caribbean. The argument for "free trade" made by Cobden and others was that the attempts to support prices for British landowners was literally starving the "native-born" population of Britain. They were right, of course; what even they did not anticipate was that, by allowing goods to come into and out of Britain without quotas and with "honest" tariffs (ones that could not be manipulated to hold the goods hostage to official approval) the free trade produced the financial revolution that made London the center of the world's capital markets. That financial revolution and the ability of Brits to do wonderful things with maths are what sustained Britain and still do, not the industrial revolution. The best scholars are now in agreement that Britain's economic rise over the rest of the world came much earlier, before combustion-driven machinery had even begun to take hold - in the 18th and early 19th century. By 1850 and certainly by 1870 Britain's "industry" had been overwhelmed by American, French and German innovation and mechanization.
 

Nov

25

 Today's note is fueled by the discovery that Wikipedia has no entries for George S. Coe. Henry Varnum Poor dedicated his best work, Money and Its Laws, to Coe; but all one finds for George S. Coe in a search is this:

and, for disambiguation, this:

George Coe (Lincoln County War) (1856–1941), Old West cowboy George Coe (Michigan politician) (1811–1869), politician from the U. S. state of Michigan George Coe (mayor), American mayor of Lancaster, Pennsylvania, 1962–1966

 Coe did what Morgan did during the Panic of 1907; he persuaded all the major banks to join together to discount each others and their counter-parties' paper. What is truly remarkable is that Coe did it in 1861 solely by the force of his character and his ability to put the matter plainly: "What," he asked everyone in the room, including Secretary Stanton, "if we do not unite?"

Here is Coe's obituary from the Times.

Also, in 1888 the Commercial Advertiser printed Coe's letter to E. G. Spaulding and Spaulding's reply.

Spaulding was Treasurer of New York before the Civil War and was the author of the Legal Tender Act — something else for which there is no wikipedia article so this will have to do:

About Spaulding Stiles, the biographer of Commodore Vanderbilt, wrote: "If Wall Street had saints, then the college of financial cardinals would surely canonize Elbridge G. Spaulding."

Nov

25

 In August, Science published a landmark study concluding that poverty, itself, hurts our ability to make decisions about school, finances, and life, imposing a mental burden similar to losing 13 IQ points.

It was widely seen as a counter-argument to claims that poor people are "to blame" for bad decisions and a rebuke to policies that withhold money from the poorest families unless they behave in a certain way. After all, if being poor leads to bad decision-making (as opposed to the other way around), then giving cash should alleviate the cognitive burdens of poverty, all on its own.

Stefan Jovanovich comments:

In their efforts to avoid blaming the poor, the researchers failed to consider a possibility that Jesus himself acknowledged: people who lack mental abilities are overwhelmingly among the more impoverished people in a society. (How is that for a sufficiently politically correct rendering of Matthew 26:11? In the King James version: "For ye have the poor always".)

People with low IQs do not make not smart decisions about money or breaking the law or many, many other things; it is highly unlikely that giving them money changes any of that. The history of what lottery winners do with their windfalls should be all the proof a reasonable inquiry into the question requires.

Education is supposed to be an answer to this problem; but, like so many other efforts at social improvement, the principal beneficiaries of schooling, social work, et. al. have been the helpers. (As a concession to David's likely objection, I am happy to acknowledge that the principal beneficiaries of national defense and homeland security have been the non-combatant defenders and the equipment contractors. Whether from the right or the left, government is equally corrupt and inept except when people are free to choose the tenure of any authority.)

That still leaves the question of bribery. If giving the poor money will not make them smart, perhaps those who are also violent can be bribed to leave the rest of us alone? Alas, the "lesson" of history is not very promising. Americans have periodically paid bribes in the name of safety and security throughout our history; but it has not worked very well. Our most expensive attempt - until now - was the tribute paid to the Barbary States. Those pirates were happy to take our money, but they did not stop raiding our merchant ships or enslaving our citizens even after we made a succession of peace treaties. But, as in so many other things, we were blessed by having other people solve the problem for us. The piracies ended when the French and Spanish decided that coastal North Africa deserved to have extended visits from their armies.

Now, there is a possibility to be considered by future researchers. If we can have another country to take over the burdens of our many wars on poverty, won't that solve the problem?

Nov

20

 Those of us stuck in the print lane are still marveling at what the combination of alternating current-powered motors, (mostly) German ink chemistries and printing wizardries, and American/Canadian paper making did at the turn of the last century. Combined with cheap (yet still profitable) railway mail deliveries, it produced an imaging revolution that equals anything currently happening now with cell phones.

One example is "1921 Paramount Sales Movie Sensation Game Cards".

The movie studios, actually the Sales Organizations where the actual profits were made, produced these by the tens of millions. Now they are semi-rarities.

Nov

18

 For whatever wonderful reasons Amazon now has a $10 Kindle edition of Bresciani-Turroni's study of what is commonly known as the German Hyperinflation. It is the only study worth reading because it is the only one that points out the obvious — Germany along with the other countries in Eastern Europe had a war that they did not pay for even as they were fighting it. German tax collections between 1914 and 1918 were 23 million marks; during that same time the government wrote checks and paid cash totaling 164 million marks.

It makes one marvel yet again at the wonders of the gold standard as a fundamental restraint on collective insanities. Until July 31 1914 every mark spent had been redeemable by the recipient in gold. The market — the decisions of self-interested people — had foretold what would happen through the simple act of asking for gold instead of paper — so much so that, before the war's extravagances had even begun, the German currency had to default.

On this subject the wikipedia article on WW I Reparations also deserves a reading. The standard Anglo-Saxon academic explanation for the events of the 1920s and 1930s is the one taken from Keynes - i.e. the allies' reparations demands were impossible for Germany to pay and this led to the hyperinflation, which, together with the misbegotten belief in the gold standard, doomed Europe to financial collapse. As usual with Keynes, his predictions about the facts of the future were extraordinarily confident and mostly wrong. What is remarkable is how thoroughly the U.S. and Britain accepted his thesis. Raymond Poincare had the good sense to point out that France had paid a larger reparation (as a % of their economy) after the Franco-Prussian War than the one Germany was actually expected to pay. He also pointed out that France had undergone turmoil equal to what Germany had endured in the years immediately following 1918 yet it had not gone bankrupt or had the franc collapse as an international currency. But, of course, what would a - a mere Prime Minister and a French one at that know about political economy? It is appalling but not surprising, given what one discovers about the prejudices of the time, (Poincare was guilty not only of being French but also of being a good Catholic), that by 1924 the British Prime Minister was making public statements implying that the war itself had been the fault of "French" militarism.

Richard Owen writes:

Great scholarship as ever. As a quick question, as i have not yet tucked in to the homework assignment: France paid larger than the Germans requirement to pay (relative to the economy)? The amount Germany was expected to pay was impossible, so how could France pay larger than an impossible amount?

Stefan Jovanovich replies: 

Richard identifies the key issue - what were the Germans expected to pay. The usual number offered is 132 billion gold marks; but that includes the "C" bonds that were, in effect, non-recourse. The actual "debt" secured by Germany's industrial and agricultural production, was 50 billion. They paid 40% of that amount; what is truly amazing is that, through the Dawes plan, they were able to borrow most of the 20 billion that they actually paid; and that 20 billion was, in turn, used to "pay" the debt the British and, to a lesser extent, the French owed the U.S. (FWVLIW, I remain bewildered by the reasoning behind the decisions of the higher minds at the Federal Reserve in the 1910s and 1920s. How exactly did they think it was in the interest of the U.S. to allow European nations to run up a tab that makes quantitative easing seem like fiscal prudence?) Back to the question of reparations - 50 billion was not an impossible sum, especially since it was to be paid out of decades. Germany's "Federal" government had spent more than that amount on the war in a single year.

Richard Owen writes: 

Very interesting. Keynes' numbers were something like $40bn treaty reparations owed and that Germany's max capacity to pay was $10bn. This is against an economy with c.$2.5bn exports. So the treaty reparations were c.16x exports. Even at peak estimate, Greece's modern debts were something like 5x exports pre restructuring. And I guess you could wonder the correct way to think about 'capacity' — a lot of Keynes' complaint was the deflationairy mistake of even going close to theoretical capacity. Which seemed to bear out.

Stefan Jovanovich responds: 

The difficulty is that Keynes used the numbers that the Germans offered, not the ones that experience proved out. For example, his estimates of coal production were only 2/3rds of what the Ruhr and Saar produced. The central fact is the one that no one in Britain or America liked; when the claimant took possession, the debtor paid. What defeated Poincare is the decision of the French communists to oppose the occupation of the Ruhr because the Comintern had decided that the Soviet Union's best interests lay in closer relations with Germany. Perhaps we can agree that these questions are those of political economy, not economic science. what remains unanswered is why the Fed thought countries that had defaulted could still set their currencies' specie prices independent of what money changers on the street corners thought the paper was worth. The best explanation for the blowoff of the U.S. stock AND bond markets after 1925 is the willingness of the Fed to pretend that Germany was materially broke yet somehow stable enough for the mark to be accepted at the administered exchange price.

Nov

14

 Some time ago Mr. Jovanovich posted an anecdote about old man Mellon to the effect that his kids never let him pay for a bill at a restaurant because the old man felt that prices should be the same as they were when he was a young man and that they were too high today. This is a common thing one runs into in certain people of age. They are accustomed to the old p/e, the average of the last 10 years, on those rare occasions in the 1930s when Ben Graham wasn't chasing the skirts, when you could buy companies at below their liquid cash, assuming incorrectly as he did that any shares were available and they weren't losing so much that the previous balance sheets were meaningless.

Galton had a way of dealing with such things, and he was the most revered man of his age, commanding universal respect, and heading all the leading scientific and geographic societies. "Let the bygones be bygones". Don't fret about bad things that happened, or look to take back the things that you could have done that would have made you so much better off. The woman you didn't marry. The stock you didn't pick. The limit order that wasn't filled.

I recently ran into this in a business meeting where I was trying to sell a company. When negotiations started the earnings of the company were half what they were when the negotiations resumed. The buyer was stuck on the old price and old earnings. The buyer consequently missed an opportunity to make a tremendous profit, of about 10 times his investment of millions in several years.

One often makes this mistake in the market. You try to catch a falling star and you miss it. And then it goes in the direction you had hoped. But you never come in again because you are trying to catch it at the bygone price. Anatoly once mentioned that he was trained in checkers by the KGB to learn to be an amnesiac so he wouldn't regret moves that he should have made on the board, and would look to the future.

In chess, the good players always say forget about the prices that have been taken and concentrate on the pieces that are on the board. I believe this is a common mistake in life and markets, and would be interested in the scientific and empirical and life and market lessons that you all have learned from similar ruminations.

Richard Owen adds: 

 Ted Turner believes a large component of his success is attributable to the fact he readily accommodated and cared not much about what had past. The Buddhist concept of acceptance and Kabbalahist idea of cause and effect are similar.

Compare Germany and Silicon Valley. In Silicon Valley ones past mistakes accrue as experience. In Germany there have been many internet start ups but also inevitably failures. Speaking to German friends, a failure there is carried like a deadweight around ones neck.

Society is destablising somewhat as the record of evidence of one's past peccadiloes becomes more extensive. Nobody can get into office or past congressional approval unless they lived a prude life of Cromwellian perfection. And its not clear one is best led by a Cromwellian prude.

Ralph Vince comments: 

There's two ways we learn things, the easy way, and the hard way.

If we learn things the hard way the FIRST time we climb up off of the pavement — that is the definition of a windfall.

Learning things the easy way is to accept facts like an obedient database. The only payoff to learning things the easy way happens when our perspective on the matter at hand altered such that we see it in its proper light and thus actually understand it, rather than merely as data.

To convey ideas to other human beings, we must amend their perspective, their point of reference on the matter, to see it anew from an entry point that they will understand it. To spare them the inevitable beatings of otherwise learning it the hard way is such a gift.

Stefan Jovanovich comments: 

In our misbegotten adventures in L.A. we had minor and almost all indirect dealings with the mouth of the South. Mr. Turner was so acutely aware of his father's defeat and death that even in casual dealings outsiders learned how determined he was to avenge/outpace/overcome his family legacy. He also was notorious, even in Hollywood, for accumulating personal grudges.

A great deal of individual success in Silicon Valley has come from the fact that the U.S. income tax code allows the tax-free pyramiding of gains through (1) buying and selling of principal residences and (2) exchanges of corporate interests. When you add the glories of carried interest, the result is a society of the well-connected in which there are very, very few failures who haven't held on to at least a respectable amount of the OPM. From the little I know of the German tax code, none of these opportunities to do a heads I win/tails you lose coin toss has ever existed in that country.

 Cromwell was many things, some of them awful; but he was never a prude. He and Elizabeth Bourchier had 9 children; and he and his wife were both, by religion, Independents. That meant they were those rarest of people who believed that Jews and (from the point of view of their Anglican, Presbyterian and Puritan contemporaries, even worse) Catholics were entitled to political and religious liberty.

What Richard may have meant is that Cromwell, as a military commander, was as piously single-minded as Joan of Arc. Like hers, his army never lost a battle once they had received proper inspiration; and each soldier literally believed in him and "the cause" for which they had a clear catechism. This was not ever going to be good news for anyone (Catholic Irish; Scots Presbyterian) who opposed him just as the Hussites (as dissidents from the true Catholic faith) would not have much mercy from St. Joan.

P.S. I find the history of Cromwell's catechism fascinating. If one were to ever come up for auction, the 1643 edition might be priced at a figure that even lovers of Bacon (the recently mentioned artist, not the writer) would respect.

For the American sequel to the story, check out The American Tract Society.

Victor Niederhoffer adds: 

One notes the Chinese proverb on a similar theme: "don't carry your hatreds into the new year" or the English variant, "you can't run a mill with water that's past". All languages seem to have a proverb similar to "let the bygones be bygones". The Jewish custom of asking forgiveness at the new year for all the harms that you have inflicted on other in the past year, and sharing a torte and tea is from a similar vein. 

Jeff Watson adds: 

One of my proverbs is to take the hit, forget about it, and move on. But then again I don't mind small losses as they are just part of my business, and I take many small losses of a couple of cents when I smell that the trade is going to be wrong. Just like surfing, where there will always be another good wave, in trading, there will always be another good trade.

Alan Millhone writes in: 

Dear Chair,

A grudge is a difficult thing to dismiss.

My Mother used to say, " I can forgive — perhaps not forget "

Sincerely,

Alan

Gyve Bones writes: 

Oliver Cromwell was an unmitigated bastard and I find no evidence he believed that Catholics were entitled to religious liberty. To the contrary, his raping and pillaging and wholesale theft of Ireland, which was clinging tenaciously to the Catholic faith, and the Penal Laws enacted for the suppression of the faith and Gaelic language starting then and continuing for a couple of hundred years was an attempt, largely successful at cultural and racial genocide.

His puritanism certainly enforced a prudery on England. Within 50 years of Shakespeare's death, his plays could not be performed. And prudery is not the same thing as having a fruitful but chaste (no roaming to other bedsteads) relationship with one's wife.

— G.B.

Show me a Puritan, and I'll show you a son-of-a-bitch. -H.L. Mencken

The President of the Old Speculator's Club writes: 

 Though Dailyspec seems to be a great repository of Mencken fans, there were a few voices which, although agreeing with him on many items, diverged on others. One such notable was G.K Chesterton. The two quotes which follow immediately demonstrate some common ground.

"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." —H. L. Mencken

"We are perpetually being told that what is wanted is a strong man who will do things. What is really wanted is a strong man who will undo things; and that will be the real test of strength." —G.K. Chesterton

On the issues of science and religion, however, Chesterton suggested that Mencken was equally skeptical:

I have already noted that, if there is such a thing as religious mania, there is also such a thing as irreligious mania. Just recently, perhaps, it has been the commoner of the two. But a very interesting study of the matter comes from a country in which we may say, without injustice, that both are fairly common. I had occasion to remark recently, in this place, that an American paper had accused me of being an anti-American writer; and I commented on the curious irony that the American paper was itself an anti-American paper. But, though I may be permitted thus to parry a purely personal charge, and a highly preposterous one, I should not like anyone to suppose that I do not both enjoy and value the magazine in question.

I am quite well aware that Mr. Mencken, the editor of the American Mercury, is really doing his duty as an American citizen in being an anti-American critic. I myself have been regarded often enough as an Anti-English critic, when I regarded myself as a patriot. In short, there are immense internal evils for Mr. Mencken to attack, and he is perfectly right to attack them. All is well so long as the good citizen abuses his own city. The trouble begins when the foreigner abuses it—or, almost as often, when the foreigner admires it. But, anyhow, the chief efforts of the American Mercury have to be directed towards this howling wilderness of sectarian sensationalism.

The popular science, that rages in the American Press and local government, is simply a dance of lunacy more ghastly than a dance of death. And an exceedingly valuable and important protest against it can be found in the same number of the Mercury from which I have picked the examples of theological hysteria. The protest is all the better because it is not the sort of protest that I should write, or that any person of my beliefs would write. The critic is writing entirely in the interests of Science, and is perfectly indifferent to the interests of Religion. And he enters a virile and telling protest against that science, which is his only religion, being dragged through the mire as a degrading superstition.

From a great article: "Religion in American History: I
Hate Methodism; and G. K. Chesterton vs. H. L. Mencken: Battle of the
Monogrammed Dudes. Surprising or Otherwise Interesting Primary Sources,
Pt IV"

Richard Owen writes: 

This is fascinating stuff. The modern day argo in British English of referring to something as Cromwellian is along the lines Gibbons indicates, although at one step removed perhaps.

Cromwell instilled the Protestant Work Ethic in puritanical fashion. That still pervades much of British psyche today, and is captured in popular imagination, for example, in the writings of the Daily Mail and the books of Tom Bower, Britain's foremost hatchet biographer of businessmen (I say this with great respect; his books are well written and I suspect Mr. Bower would be glad to acknowledge his genre bias).

Thus the Protestant Ethic mentality is to be rich and industrious. But with the emphasis on the latter. As Martin Sosnoff said of his Dad, something like: *"he never thought he'd earn an easy dollar, and he never did".*

The one thing that really irritates the Cromwellian mentality is to find out, after slogging ones guts up to Vice President and exiting to early retirement with a Carriage Clock and blue chip pension, is to find out the reason for corporate downsizing was because a kid from the JFS, assorted Anglo Norman public school boys, or an Asian immigrant rustled up a grub stake into Forbes Four Hundredism. And possibly even had some good sex, bad drugs, and hella fun in the process.

Not to make light. These are complex neuroses and threaded reasonable sense given each parties bias.

Craig Mee writes: 

Victor, the point can also be made that although a potential lost opportunity arises and there are fewer pieces on the board, the situation is then more clear. Although you may not establish the solid position you initially hoped for, many more tighter risk reward opportunities now present themselves, sometimes allowing you a defiant win on the move all the same. However, this outcome may be related to your initial and ongoing foresight about what's unfolding.

Oct

29

 As the folks at Global Financial Data remind us, sometimes "real" property prices are virtual. As their Chief Economist, Bryan Taylor, notes in an essay on the Florida Land Bubble of the 1920s, "two-thirds of all Florida real estate was sold by mail to speculators who never visited Florida. Many of them tried to flip the land through ads in the Miami Herald. For those who actually went to Florida, binder boys were hired to expedite purchases." The "binder boys" were what many mortgage brokers/real estate agents were during the most recent real estate bubble; they collected down-payments and offered seller financing for periods as little as 30-days.

One can get a gauge of the size of the crash from the price for The Land Co. of Florida common stock.

As Dr. Taylor notes, "The stock traded on the New York Curb (later the American Stock Exchange) and traded in September 1925 at 93. After the train embargo was announced in October, the price fell to the 60s, and continued to fall, decreasing to the 20s by February 1926. One would expect that the hurricane of September 1926 would have caused a further collapse, but in reality, the stock price rose after September, hitting 41 in December. Perhaps the impact of the hurricane should be reevaluated, but it was downhill from 1927 on. By the time the stock market crashed in October 1929, the price had fallen to 5 and by the end of 1930, the stock was at $0.50, never to recover. The stock stopped trading on the Curb in May 1931."

Oct

22

"Obituary: Wolfgang Holzmair was a master of the sawdust ring who tamed elephants and chimps but excelled as 'Lord of the Lions’"

"I'm scared before I go in, but when I get inside I'm the same as with elephants and horses. And then when I come out I'm shaking again."

Oct

22

 There's lots of talk, understandably, on this list about trading patterns and technicals. All well and good. But I'm a fundamentals kind of guy (back in the 1970s, I was a fundamentalist, I guess, but that word has a different meaning altogether these days). And, as Rocky can attest based on numerous emails, technicals remain something I'm still figuring out. So it was with interest that this choice article appeared yesterday in the NYTimes about the making of Fiddler on the Roof.

Many may suggest that the show was a success because it was such a compelling story–and it was/is, particularly for the 1960s, with its celebration of the centrality of the family in the journey of life. I don't mean to get off into the high grass on that topic. Rather, there's a comment in the story about when Zero Mostel went through a doorway and touched the mezzuzah, the piece of parchment on the doorpost ("You shall write them on the doorposts of your house and on your gates", Deut 6:9).

Some have suggested that the mezzuzah represents the painting of the doorways by the Israelites during the last of the 10 plagues, but it's not inferential. Robbins, who had little interest in Judaism and detested any suggestion that his parents were immigrants, changed his name to minimize his connection with a Jewish heritage. On the other hand, having been raised in an observant household, Mostel could not conceive of Tevye, the lead character of the show, going through the door without touching the mezzuzah. (Not noted in the article is Robbins' previous collaboration with Mostel in A Funny Thing Happened on the Way to the Forum.) Robbins, the director stood his ground, and Mostel deferred. The next time Mostel went through the door, he crossed himself, and touching the mezzuzah went back into the show.

The point of this story, on the Dailyspec, is its demonstration of two different views of the world. Robbins, in the here and now, could have cared less about the historical roots of Tevye and the rest of the plot. All that mattered to him was what just happened, more or less. Authenticity? Robbins wasn't bothered–it didn't affect the pattern, it wasn't therefore of interest. He was a technician, basically. If there was a pattern that might be present, he wanted to find it and use it to advantage. His choreography reflects that approach.

 In contrast, Mostel had essentially lived Tevye's life, not so much in Europe as from an observance perspective. His approach to Tevye wasn't based on the here-and-now of Robbins, but rather on the fundamentals of Tevye's character.

This isn't to say that fundamentalists and technicians need be at loggerheads, just that they are complementary views of the world, not merely different methods of addressing a given situation, and not limited to the activities usually of concern to list readers.

I thought I'd share that synthesis with the list–it provides some insights into what we do and why we do it, not merely how we do it–in life.

All of which is preamble to my question of the day: Does anyone have more than a passing familiarity with 3D printing? Please contact me off list if you do. I'm looking into the area for an investment for my grandchildren's college funds. Yes, there's a bubble now, but there won't always be.

Stefan Jovanovich writes:

"Mostel had essentially lived Tevye's life from an observance perspective."

Err, no. Zero had no fear of the Czar or the Cossacks; on the contrary, he expected to be the one wearing the uniform. (He was a member of R.O.T.C. when he was at CCNY.) Tevye was a successful dairyman; Mostel's family were such poor farmers that they fled Connecticut for the Lower East Side, and thereafter his father worked in an office as a chemist. Mostel was, like practically everyone who worked for PWAP, a communist; it is impossible to imagine Tevye being a communist or having any more success with the Leninists than any other "rich" (sic) peasants did — assuming he survived the war.

David Lillienfeld responds:

I'll go by what my grandfather and aunt, both of whom lived in the Settlement, and offer that Tevye was hardly a successful milkman–at least by community standards. The butcher was a major, wealthy member of the community, not so the diary man. There's Tevye's comment somewhere in Fiddler about having 5 daughters. That meant 5 dowries, and for a milkman to so provide as one of the lower folks on the economic totem pole was a challenge.

As for Mostel, the fact remains he was raised in an observant household. Whether he aligned with socialists, communists, Paulsenites, or whatever, isn't relevant to the discussion at hand. Both my parents were raised in observant households–my maternal grandfather was one of the founders of the Ner Israel Yeshiva back in the early 1930s and my mother used to regale my siblings and me with stories of the students who would room in my grandfather's house during the 1930s. Both of my parents were pretty liberal, my mother slightly less so than my father. That didn't impact on either's understanding of orthodox observance. One of my earliest memories of my father these days is his arguing with the Ner Israel Rosh Yeshiva (head of the yeshiva) about how one performs a bris, a circumcision. I don't remember the specifics any more, except that there was one point where my father started to curse at the Rosh Yeshiva in Yiddish, and you could tell from the RY's face that that was the last thing he was expecting. Years later, when the RY's wife was diagnosed with breast cancer, my father was the physician he consulted on what an optimal treatment might be. I guess whatever my father said during that argument didn't impact that aversely on my father.

In any case, neither Tevye's nor Mostel's political beliefs are relevant. Unless you're suggesting that Mostel was making a political statement by kissing the mezzuzah?
 

Oct

15

 Shiller got the Nobel Prize? I haven't read his scholarly papers, but from what I have read he seems prone to making blatant errors in his statistical thinking.

A common theme of his errors was to take N heavily overlapping intervals and sort of pretend that they were all independent observations. In one case he took annual stock market levels for ~30 years ("x") and compared them with the retrospectively known "present value of future earnings" ("y") summed over the following ~50 years. He then claimed that the market was irrational because there was a lot more variability among the "x" numbers than among the "y". He failed to appreciate that really the "N" for his "y" values was approximately one.

The other supposedly big insight that he had was to smooth the S&P earnings over a 10-year period to come up with a valuation metric that's averaged over the economic cycle. That's fine, but Nobel-worthy? Probably Larry Williams has come up with dozens of indicators of that sort.

Victor Niederhoffer writes: 

He also concluded that the stock market is much more variable than dividends and is therefore irrational. I guess they had to give one irrational person a Nobel and another rational person a Nobel. The terrible thing is as Tyler Cowen pointed out vis a vis the choice between the two frond runners for the Chair, one is worse than the other. As Sholem Aleichem would say, a plague on… 

Richard Owen adds: 

Mr. Shiller's work is used all over the world. It is quoted by near every stock picker fund manager and used by many in their allocations.

People state Shiller's work was "obvious". Similarly perhaps Kahneman. All this, whilst understandable, seems a bit rum. Their insights came at a time when they were heterodox to the consensus. And if his data was limited by reality, he still slugged out a conclusion. Surely that is a good thing?

If Shiller's work was easy, then good for us all that an economic Nobel is on the shelf for all of us to claim should we wish. But perhaps it only looks easy in hindsight?
 

I should imagine felt somewhat of a buzz that he could out-think the Nobels, and made a fortune from it. Professor Shiller got worldwide acclaim and academic pedigree. Both seem satiated. Perhaps Mr. Seykota is in fact correct that everyone gets what they want out of the market?

Stefan Jovanovich writes: 

Do the site readers who have Charles, Kim and the Chair's understanding of statistics have any thoughts about the fact that "earnings" changed their definition after 1913? Before that date they were, for all practical purposes, actual cash dividends because corporations did not have income tax returns. In the late 19th century it would not have been enough for the S&P's dividends to be comparable to bond yields; they would have had to be nearly double for equity securities to be seen as sound. To those of us in the bleachers still suffering from the Pirates' defeat, it seems fairly clear that neither "dividends" nor "earnings" can meet Professor Shiller's test of rationality for the entire period for which he collected data since the game changed from rounders to baseball after the 3rd inning.

It also occurs to those of us crying into our popcorn that the influences of "book value" only become important after the IRS becomes a stakeholder in the earnings of corporations. If you as an owner/promoter find yourself unable to maintain the payouts that were once "normal", the logical and rational move is to persuade the buyers of your securities that they are not just buying earnings and dividends but also assets. The Morgan Bank were meticulous about identifying the physical security for railroad debt - the deeds, trackage, mineral rights, etc. - but they made no assessments of the "value" of those assets. "Net book value" is not a term you will find in their accounts. Yet, magically, by the 1920s the term begins to appear and by the 1950s the Oregano and others have made it a metric to be engraved on the tablets of sacred financial wisdom.

Richard Owen writes: 

This is a great explanation of the money system. But the labeling of it as fraud seems quite a leap. To take just one point: the idea the fed has private shareholders. Sure, when the fed was originally set up, it was a concession granted to the participants of good value. But so was the nuclear and broadcast industries and oil rights and so many other things.

The UK bought out the boe shareholders post war. The USA they remain. However, I believe the fed has a profit sweep to the treasury so the balance sheet expansion is of low incremental profit value. Indeed the shareholders might even get a fixed coupon on par value thus it is not much more exciting or nefarious at this point than holding an 8pc government bond? But I am not sure.

The reason why the fed shareholders have never been published line by line (if this is correct)? I am not sure, but it probably is just a bunch of major banks and the 8pc on their stock is a tiny fraction of total profits. And holding the stock is perhaps is admin quirk for being a dealer or something?

As to the idea of a world without fractional reserve banking. It is possible, but a totally different economy. General Electric can either hold its working capital as subordinated creditor to a bank or cut out the banks and hold the mortgages the bank holds instead. Each has different merits, but currently not many engineering firms will accept a pile of New England mortgage certificates as down payment for a jet engine.

Stefan, is it like that? Or is there misunderstanding here?

Stefan Jovanovich writes: 

Richard raises the central question that had Americans literally at arms with one another long before slavery was a political issue of any greater importance than the Grand Bank's fishery. What is money and what is credit? What is the ultimate payment unit of account for those who want to be Keynesian traitors to the greater good by just holding cash? The Constitution offered the answer but most Republican-Democrats and a good number of Whigs quickly found that they did not like the answer. They still don't.

Oct

11

Since Bamster has apparently figured out that de-linking the CR and the debt increase isn't in his interest, isn't it clear that political strategy is now the dog and the market is the tail? If the market is so smart, why can't it see more than a day ahead, and why does it swing wildly based on words, leaks, conjectures?

Rocky Humbert writes:

When this whole thing started, I wrote: "This slow motion train wreck will probably continue (and stock guys will keep denying it) until CNBC puts the 1 month Tbill on the side of their price montage. Once that happens, you'll know it's safe to go back into the water. (I'm only half kidding)."

Remarkably, that happened late on Wednesday and the WSJ dutifully carried a large news story about the breakdown in money markets after the close Wednesday and in the print edition of Thursday. The current Obama administration is pretty light on people who understand the systemic importance of the money markets and what would have happened if the panic continued to accelerate.

I suspect that they (and perhaps you) got an impromptu lecture from the NY Fed Open Market Desk and understand this better now. (Or perhaps you consider the timing of the stop-gap, face-saving 6 week extension headline to be total coincidence???) The plumbing of our entire economy is the money markets. Not the stock market. Not the bond market. The money markets. It's the dog. And everything else is the tail. 2008/2009 demonstrated this powerfully. If you've ever been in an argument with your wife and both noticed a serious plumbing leak in the midst of your argument, you stop arguing and call the plumber. It took a spike in yields of roughly 5,000% to get the politicians back to the table. The dog wagged the tail.

Gary Rogan replies: 

I appreciate this line of thinking, it's very instructive. But help me out with one thing: my model of how Obama operates is that he would LOVE to crash the economy if he could blame it on the Republicans. While I can see how the Republicans would be forced to negotiate, is there any real pressure on Obama, Fed lectures or not? Perhaps than this is a recipe for the total Republican surrender, since they are the only side with the market pressure on them, but still: is Obama in any sense motivated to solve the market problem as opposed to find a way to assign the blame to the opposition?

David Lillienfeld writes: 

So you subscribe to the thesis that the GOP crashed the economy in 2007 to blame it on Barney Frank and get Dodd-Frank repealed?

Gary Rogan replies: 

No, this is a random thought that has never occurred to me. The GOP would never crash the economy on purpose because they are not Marxist revolutionaries and because they are largely beholden to a lot of business owners and operators. It would also be hard to believe that as a party they would want to hand the victory to the Democratic Presidential candidate in the following year, so this is an absurd suggestion.

Obama has clearly demonstrated that he personally only cares about the following things: (a) income transfer to the "unfortunate" (b) gay rights (c) Muslim rights (d) black rights (e) triumphing over any opposition regardless of any collateral damage" You can see that he has a tin ear for what's important in the "flyover country" by his handling of the "death benefit". Getting him to act normally is like trying to explain human behavior to a creature from some Alien movie: they can certainly pretend most of the time, but once in a while the algorithms fail and a few humans bite the dust.

David Lillienfeld retorts: 

Sorry, but you'd have to go back to the DNC's decision in 1972 to have George McGovern give his acceptance speech at 3 AM (at least I think it was 3 AM–I was pretty sleepy at the time) rolling all the way forward to McGovern's declaration of "1000%" support for his Vice Presidential candidate a few days before the latter withdrew to find anything rivaling the political stupidity and naivite evidenced in the GOP's actions in the past couple of months. As for the biggest absurdity in the present situation is the GOP's apparent suicide wish. I had thought after the last election, there was some desire in the GOP to come to terms with its growing political isolation, that it understood that the American electorate was not amused at the sight of an 82 year old man lecturing an empty chair on a stage. Apparently I was wrong. I also find your premise that business owners and the like are beholden to the GOP. That's starting to change, though I don't think that means they will be any more interested in aligning with the Democrats than they are right now. The effect of the shutdown and even moreso the debt ceiling doings on business has hardly been a positive one.

Not everyone in the Democratic Party is a Marxist and not everyone working in the White House is a Marxist (the idea of Chuck Hagel as a Marxist is humorous, though, I grant you, and ditto for Jack Lew). Not everyone who voted for Obama is a Marxist. And there are those who voted for him while not supportive of everything he says or does if only because of the choices they were confronted with. Just because someone disagrees with you doesn't make them a Marxist, either.

I lived through the "America: Love it or leave it" period in the late 1960s and 1970s, and I'd like to think that we're past that as a society.

Stefan Jovanovich clarifies: 

David is too good a scientist not to know that public opinion polls have become suspect precisely because so much of the actual electorate chooses not to answer the phone or answer the questionnaires. In fact, for more and more people answering Gallup's questions is considered to be the equivalent of voting - i.e. I answered the poll questions so I don't need to get an absentee ballot. Some of us made this mistake in predicting the last Presidential election; David seems determined to repeat our error by taking the "public's voice" for being equivalent to the electorate's.

As for the description of the Democrat Party, I am afraid my answer is "yes, they are all Marxists". To say that, I have to rely on my own peculiar definition of Marxism; but I think it is an accurate precis of what Marx, Engels and Lenin all thought. In their world a person always and everywhere believed that labor had a value independent of (and almost always superior to) its market price? Since the late 1950s, when I first started following politics, I have never met a Democrat, left, center or right, who did not agree with that assertion. It is hardly an odd opinion; for most of my life it has been shared by not only all Democrats but also a majority of Republicans. Both parties have shared the fantasy that there are two "sectors" in an aggregation called the economy and that the prices for the "public" sector and those for the "private" can be directly compared to one another. That is why, even now, a majority of the Congress supports labor unions, Davis Bacon, non-judicial regulation and all the other forms of soft and hard government-enforced monopoly.

All this upsets Gary - understandably. It would upset me if I were not a hopeless optimist. The idea of actual liberty - of people being absolutely free to paint their houses whatever colors they liked, swap fluids with whatever consenting adults they chose, eat, drink and smoke things that are "bad" for them, believe in Joseph Smith's golden plates, heavenly virgins, Darwin's universe, whatever - has always been a truly radical idea. That it has never yet been the majority opinion is no reason to believe that it will not someday become the "common sense" of humanity. The dedicated Communists who were my grandfather's friends - the ones who actually went to Spain to fight Franco and the Nationalists - had, in their own way, the same stubborn faith. They thought Stalin was a monster, but that not shake their belief that someday the dictatorship of the proletariat would not longer be necessary and we would all be free. Grandfather agreed. He just thought we could skip all that petty and monstrous bossing around of other people and get straight to the Don't Tread on Me that had been his reason for coming here in the first place.

Oct

7

 Dailyspecs may be interested in reading "The Sage of Equipose," a review on p C7 of the weekend WSJ of Frank Prochaska's The Memoirs of Walter Bagehot. Bagehot was the longtime editor of The Economist. The book consists mostly of Bagehot's own writings.

Fed critics will enjoy Bagehot's "Lombard Street" passage in which he "traced British financial instability to the Bank of England's special privileges, which, by restricting other banks' ability to issue circulating notes, caused them to employ Bank of England notes rather than gold as their cash-reserve medium."

Stefan Jovanovich elaborates:

Bagehot was — like all successful financial journalists — always loyal to authority and convention while seeking, whenever necessary, changes in the name of progress and the general welfare. Magically, those "reforms" invariably end up benefitting the people holding the largest sums of money– usually, but not always, the banks.

I don't fault Bagehot for any of this; it is the financial journalist's job. My difficulty is with what he had to say.

Bagehot was a supporter of the gold standard only in the sense that he did not want banks to be completely free to issue notes without some fractional reserve being held against those IOUs. One can say as much for Keynes; at Bretton Woods he did not propose that the world central banks to be completely free to issue script. Both men thought that currencies needed to have some connection to gold; but neither thought it was, in any way, a good thing to have ordinary people able to demand specie for their measly savings and then "hoard" it in hard times.

Bagehot's essay on Universal Money is a fascinating reminder of just how much snobbery underlay all modern discussions about currency "reform". Bagehot is horrified at the French and Americans for wanting a "low" gold standard - i.e. one that puts an ordinary laborer's wages within the reach of actual coin.

Bagehot was equally horrified by the Americans' notion that there should be not central bank at all. People have been taught to read Lombard Street as a prescription for somehow limiting the printing of money; but it is really a tract in favor of allowing banks to call upon the BofE for notes in a crisis without any restriction at all in the amount that the BofE itself can print or how much debt the government can sell to the central bank.

Oct

7

 My favorite Hume story is the one about his slipping and falling in a muddy lane and finding himself needing help to get up (he loved food and had acquired the shape and relative instability of a penguin on land by the time he was middle-aged). He was, by then, a recognizably famous man in Edinburgh.

A passer-by saw him sprawled in the mud and, as a good Christian, offered to help Hume get upright but only on condition that the philosopher renounce forever his attempt to prove that miracles could not happen. Hume gratefully accepted the offer and went home to dry off.

When a friend hear about the incident, he allegedly chastised Hume for having abandoned his principles. Hume replied that he had done no such thing. Miracles were entirely matters of faith; they could not, by their very nature, be proved or disproved and so he was happy to renounce an effort that would have been utterly fruitless.

Sep

30

 Today marks the close of the regular baseball season. For those of us old enough to remember, one might have expected the World Series to begin on Tuesday, possibly a night game, but more likely a day one. Now with the post-season trifectas, it's amazing the October classic isn't played in November.

Pardon the curmudgeonliness, but the Os finished 85-77. The season closed on a high point, and Jim Johnson continued in his quest to rival Don "Two Packs" Stanhouse for how close one can come to blowing a save without actually doing so while garnering his 50th save. Chris Davis finished the year leading the league (AL) in RBIs and HRs–he made it over 50, only the second Oriole in history to eclipse Frank Robinson's epic 1966 Triple Crown season with 49. Despite that, and despite Adam Jones' 3rd place in the AL RBI standings, the Os generally didn't produce what they needed to in order to get to that October/November classic. Pitching was weak. Actually, weak would have been an improvement. There was one starter on the staff with any consistency, and lots of games the bullpen blew. Still, given the prediction that last year was a fluke and the Os would return to the AL East cellar, there is some satisfaction to be had in the omnipresent cry at the end of the season, "Wait 'til next year!" I'm also betting that Buck keeps his job. And after two decades of baseball folly, to have two winning seasons in a row, well, it just puts the season into perspective.

As Tim Melvin has observed, it's now time to become re-aquainted with the Kindle. Personally, I'm looking around for a copy of "Birds on the Wing"; it's pre-Kindle, but since it's a physical book, neither of my kids will have touched it, so it will be exactly where I put it a couple of years ago (pre-Buck). If you grew up in Baltimore during the 1960s/early 70s, I'm sure you know of the book. That and Freedom's Forge should get me to Halloween. Then the countdown to spring training can begin anew.

There was an interesting piece in today's NYTimes about what ails baseball. I found myself in disagreement with the analysis–at least part of it. But I want to give the matter some more thought, and I'll get back to fellow dailyspecs with some comments in the next couple of weeks. After all, there's a cold winter to be navigated yet, and 4 months of quiet before hope springs eternal again and the cry goes out, "Play ball!"

Steve Ellison writes: 

In PracSpec, the Chair and Collab postulated that baseball was a mirror of American culture. Eras when baseball emphasized fundamentals and hard work, such as the present, tended to be followed by favorable economic periods. It was the long-ball eras that heralded trouble ahead for the economy and stock market.

Stefan Jovanovich writes: 

 Yesterday was the anniversary of Willie Mays' catch and throw in Game 1 of the 1954 World Series. Since I played hookie from school every day the Giants were in town during the summers of 1952, 1953, 1954 and the spring of 1955. (The NY Public Schools in Harlem and the Bronx were so stuffed with boomed babies that no one missed me.) As a life-long Giants fan I have no more nostalgia for the Polo Grounds than for Candlestick. As Joe Torre (born in Brooklyn but smart enough to be a Giants fan) said, "I never hated the Yankees; I just wanted our Giants to be as good a franchise as they were.)

From the beginning the Yankees were smart enough to build a stadium that rewarded their left-handed dead pull hitters. (Ruth didn't build the stadium; Rupert built it for him.) With the Polo Grounds it was the exact opposite. The stadium absolutely killed the teams that I grew up with. They had a wealth of talent; but their best players were - like so many of the great Southern ball players of that era (Aaron, Matthews) - brought up in the Ty Cobb school. They were gap hitters with power. But, instead of getting County Stadium (where Mays hit his 4 home runs and Aaron and Mathews had the careers made), my Giants got the impossibly deep alleys of the Polo Grounds - the places where Monte Irvin's and Willie Mays' homers regularly went to become outs in Richie Ashburn's glove. The only genuine sluggers the Giants ever had in all the years at the Polo Grounds were the baby Ruthies - Mel Ott and Johnny Mize - dead-pull left-hand hitters who were late on the ball if it went anywhere left of right field. (Mize thought he had died and gone to heaven when he was traded to the Yankees late in his career. The right field fence in the Polo Grounds was 15 feet high; in Yankee Stadium it was 3 feet.)

As dreadful as Candlestick was, it was not that bad; Willie Mays and McCovey could reach the right center fence without having to take steroids. But, with the wind blowing in from the north (which it still does almost all the time), only Dave Kingman had the strength to regularly hit it out to left field. To his credit Peter Macgowan had the sense to remember the Polo Grounds and Candlestick and build the former and now again AT&T Park with a short right field so that his Babe Ruth (Mr. Bonds) could find the seats. It was the making of the franchise, which sold out - again - this year even though the team only tied for third in a weak division on the final day of the season - also yesterday.

P.S. Go Cleveland, Go Pirates!

Sep

30

 The spirit of John Law returns and the Japanese under-secretaries of everything decide that the country's debt can successfully recapitalized by creating the Bank of the Empire.

Its yen notes become the sole legal tender for the country and replace the BOJ's paper.

Government debt is exchanged for Imperials.

Freed from the overhang of the existing government debt, the Diet decides that what Japan needs are bridge-tunnels to Korea and Manchuria and sells new government bonds, denominated in Imperial yen, to be secured by the toll revenues.

Japanese Pensioners begin speculating on lots in Vladivostok. 

Sep

24

The Prisoner's Dilemma is very well analyzed in the highly recommended very technical book, Evolutionary Dynamics by Martin Nowak.

The two by two payoff matrix:

                         Remain Silent       Confess

Remain Silent          -1                      -10

Confess                     0                       -7

shows payoffs to you if you and your colleague have committed a crime. The D. A says that if you confess and your colleague doesn't, you go free. But if you don't confess and he confesses you get 10 years in jail. But if you both confess you both get 7 years in jail. But if you both are silent, you both get just 1 year in jail because they can't prove anything.

 The problem is that you do better by being disloyal to your partner. And so does he.

Rapaport has a very good solution to this problem if you play the game repeatedly. It has many applications to trading. If you are a flexion and you have inside information, perhaps from being one of the hundred people receiving economic releases in advance on a need to know basis, and your conspirator is a trend follower, or someone you are revealing the news to, as so often happens, you do better if you act but your colleague doesn't. Same for him. But if you both act, you'll move the market and the opportunity will be lost.

What other situations in markets can be modeled by the prisoners dilemma, and how do the solutions that Nowak and Wiki discuss illumine our trading, and enlighten us as to the disadvantages we face.

Tyler McClellan adds: 

Freeman Dyson published a short paper in the last year or so that supposedly showed a very unintuitive and until then unknown solution to this game.

"Iterated Prisoner's Dilemma Contains Strategies the Dominate and Evolutionary Opponent"

Stefan Jovanovich writes: 

The speculations about the Prisoner's dilemma too often omit the fact that the criminals both belong to the same tribe. The criminals' choices of rat/don't rat are bounded not only by the lesser/greater punishments by the prosecutors but also by the rewards/punishments offered by the gang/group. When the group's incentives are included in the calculations, the conspirators will, as wise guys, follow the logic of silence. That is why successful Federal prosecutions of organized crime that depend on informers have to offer the additional incentive of bribery. An offer of lesser punishment is not enough.

Pitt T. Maner III comments: 

And the game rules and risk/reward payouts in open systems would seem even more variable and subject to interpretation/enforcement depending on the players involved.

This article
has two viewpoints on some recent data: "it's suggestive" vs. "overwhelming"

"Does a burst of ETF trading in the same millisecond of the Federal Reserve's policy statement raise an eyebrow? Sure. Is it indicative of a leak or insider trading? Not necessarily. For that, you'd need something besides numbers on a chart."

And this is one of the latest papers on the subject which might be of interest:

"Penn Biologists Show that Generosity Leads to Evolutionary Success"

"Last year William Press and I proposed the 'extortion strategy' in the game of Prisoner's Dilemma, enabling one player to maintain a dominant position over the other," said Dyson, who is retired as a professor of physics at the Institute for Advanced Studies in Princeton, N.J. "One year later, Stewart and Plotkin turned our strategy upside down and showed that it enables one player to coax the other gently toward collaboration. They understood our strategy better than we did. They reached by rigorous mathematics the happy conclusion that, in a game between ruthless antagonists, generosity wins." '

Richard Owen writes:

It always seems to be that the merits of a mathematical discovery aren't enough by themselves. The closed system needs to be extrapolated to the wide world. Thus a specific proof about a mathematical game is assumed to show that "it pays to be generous in life." As if, without the mathematical imprimatur, this might be held in some doubt. That particular habit of taking results proved in a closed system and extrapolating them to the wide world is probably particularly relevant to the investment field.

Jim Sogi adds: 

I definitely like this author's approach to game theory using a spreadsheet to tally levels of factors similar to a plus minus decision list. The approach can definitely be used to quantify market information and decisions. It breaks down multi factored complex decisions into manageable quantifiable choices which are tallied to arrive at the big decision.

Sep

19

 Next year, on this day, will be the 150th Anniversary of the "Battle of Flat Rock" in Oklahoma. That is how the wiki biography of General Gano describes it. The State of Oklahoma, to its credit, remembers it as the Hay Camp Action.

In their raid into what later became the State of Oklahoma Gano's Fifth Texas Cavalry Brigade and Stand Watie's First Indian Brigade (together, about 2300 men) found a foraging party of 3 companies of Union soldiers. They were cutting hay for the mules and horses of a large supply wagon train. At full strength 3 Union companies would have been 300 men; but it is likely that the 3 companies had no more than a hundred fifty men among them. (By 1864 the average size of a Union Company was 23 men.) The Union soldiers surrendered and 85 of them were taken prisoner; the rest were murdered because they had black skins.

Neither the Oklahoma State Sesquicentennial site nor Wikipedia article on Gano even touches on the truth of what happened in Wagoner County 151 years ago today. The article on General Stand Watie does acknowledge what happened but (surprise, surprise) leaves all the blame to be shouldered by the Cherokee and their Indian allies.

For the Federals the Civil War was never, even at its end, about abolishing slavery. Lincoln's words that we are all taught to revere - "Four score, etc." - were an embarrassment to men like Sherman and Sheridan, who never considered African-Americans to be capable of being or becoming their equals; and those men (and women) were always the large majority of Northern opinion. Even Grant, who had no doubt about blacks and (even worse) Indians deserving the natural rights of all citizens, thought Lincoln's words were stupidly sentimental and insulting to the citizenry. (How could Lincoln say that the nation needed a "new" birth of freedom when it had been the free choice of men to serve in the Union Army that had preserved "government of the people, by the people, for the people"?)

Yet, by 1864, even Sherman and Sheridan and almost everyone else in the western Union Armies who shared their opinions about the Negro inferiority had become "hard" on the subject of full abolition — i.e. the adoption of not only the 13th but also the 14th Amendment. They had seen too many "battles" like Flat Rock to have any other possible opinion.

Sep

12

 I went to a lecture on the hidden waterfront of New York, where containers, boats, and docks handle the biggest port in world. There was a good example of productivity started by Mclean, a trucker waiting for delivery of goods on a boat. He figured it might be good to provide a standardized flat size container that could be loaded on and off by cranes. The results. In 1965 there were 15,000 long shoreman handling, let's say, 50 million tons of freight. Now there are 1,200 comparable long shoreman handling 750 million tons of freight. (the ratios are right, but I have to check the base). As an aside, the waterfront is a very highly paid profession with about 500,000 workers there now making an average of 150,000 a year. A long shoreman makes 150,000 and a pilot 300,000. A great job for a nautically minded kid. 

Stefan Jovanovich comments: 

McLean put the idea of cargo containers and container ships into practice when he got out of the trucking business and bought the Pan Atlantic Steamship Company which became Sea-Land. For whatever reason Willie McCovey and Henry Aaron's birthplace has been for the 20th century what Boston was for the 19th - the place where American maritime innovation flourished. By the time McLean sold Sea-Land to R. J. Reynolds in 1969 it was the largest container carrier in the world.

Why RJR? Because McLean trucking had gotten its start hauling empty tobacco barrels. The McLean Brothers were from Maxton, NC; and they were, like almost everyone in the Depression, broke but they were not "poor" and certainly not without connections. Angus Wilton McLean had been Governor from 1925 to 1929 and an Assistant Secretary of the Treasury during the last year of the Wilson administration.

McLean was an inveterate innovator. McLean Trucking were among the first companies to switch their rigs from gasoline to diesel. Later on [in the mid 1970s] when McLean decided to get back into the container ship business by buying U.S. Lines, he decided that shipping's status quo needed to be challenged just as Brunel had done 120 years earlier. Like Brunel McLean bet that the demand for cargo would rise fast enough to justify really large vessels. When it was launched in 1858, the Great Eastern had a capacity of 19,000 tons, easily more than twice the size of current ships (it would be another 40 years for that size vessel to be regularly constructed). When McLean ordered his 4300 TEU ships from Daewoo in 1878, the largest existing container ships had only 3,000 TEU capacity.

Both ventures were failures — but not because of the increased size. What killed Brunel's great ship and McLean's Econships was that they were both designed to run more efficiently at slow speeds. The market demanded faster transit times than their vessels could economically deliver.

When he died in 2001, McLean was developing another innovation - roll on roll off large capacity van transport. That company - Trailer Bridge - is still at it.

Alex Castaldo adds:

Just to put these numbers in perspective, the biggest container-carrying ship today is 18,000 TEU.

Sep

6

There is an issue about the employment numbers that may not be getting proper attention - Section 530 and its interaction with state unemployment benefits. Section 530 of the Revenue Act of 1978 was the Carter Administration's gift to the farm belt. Under Section 530 an individual will not be classified as an employee if the alleged employer has a reasonable basis for treating that person as an independent contractor. "Reasonable basis" can be proved by:

(1) "Judicial precedent, published rulings, or technical advice with respect to the taxpayer, or a letter ruling to the taxpayer; (2) "A past IRS audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual"; or (3) "Long-standing recognized practice of a significant segment of the industry in which the individual was engaged."

The IRS has a "whistle-blower" form that individuals can file to challenge their classification - the SS-8. But - and here is the kicker - on the form itself the IRS warns the taxpayer that "A Form SS-8 should not be filed for supplemental wage issues." What this means, in real terms, is that people who get "fired" from their independent contractor jobs cannot use the IRS to bully state unemployment agencies into paying them benefits.

Since the states all have incentives to cut down on the cash drain from unemployment benefits, even the deep blue ones like California do not make much effort to reclassify contractors as employees once the issue gets to unemployment benefits. the result is that "the workforce" has more and more people in it who are not now and never will be classified as "employees". "Employment" itself becomes less and less of an indicator of actual incomes because the payroll numbers cannot reflect the contractors' fortunes (both good and bad).

Bill Rafter writes: 

For the "percent unemployed" number, reclassification as to who is or is not an employee may have an impact.  However this is the beauty of simply looking at the payroll tax data, as all persons (traditional employees and individual contractors) are required to pay.

Victor Niederhoffer writes: 

But with all the seasonal adjustments and other things that enter the employment numbers, how can payroll numbers not using the census seasonal adjustments be meaningfully compared. 

Bill Rafter elaborates:

It is the seasonal adjustments by the officials that we distrust. We think the adjustments are a fudge factor to be used by an administration eager to paint a picture. I don't know who is responsible (BLS or Census), but their adjustments historically have made little sense. BTW, the Fed also could use someone better at seasonal adjustment, although their number jockeys are better than whoever plays with the payroll data.

A problem is (a) do you want the truth, or (b) do you want to make money? If you are decent at it, doing your own work will get you the truth. However if the world follows the official releases as gospel, you could be right and broke. I have been in that predicament a few times.

Aug

21

 Woodrow Wilson, like so many people, found Jews somehow "different". The best analogy I can offer is Lincoln and black people; Lincoln may have been the Great Emancipator but he was physically uncomfortable to be in the same room with someone whose skin was "racially" different even if the person, like Frederick Douglass, had a color no darker than Lincoln's own sallow hue. Just as Lincoln still dreamed to the end of his life that the slaves would be freed and then all get on boats and go back to Africa and the Caribbean, Wilson was an ardent supporter of Zionism because it fulfilled the hope that one day the lower East Side of New York would lose all the Hebrew signs. That desire did not prevent him for courting the financial and political support of the mostly Democrat "Our Crowd" any more than Lincoln avoided doing his best to appease the strict abolitionists who were the bedrock of his Republican party.

Aug

15

 Not having a legal background, I was under the impression that contract law was a phenomena of say the last couple of hundred years. And naively I have always been a big believer in a gentlemen's agreement under many circumstances.

In a entertaining book called Men of Salt by Michael Benanav on the dying camel transported salt trade between the Sahara region of Taoudenni and Bamako, Mali, a reference to the ancient use of contracts surfaced. As the nomadic saying goes, "whatever leaves the head, does not leave the paper". Looking back in life, all things considered, how often would it have been in every parties' benefit to have terms clearly laid out in writing?

Only 1/2 way through, I highly recommend the book for those who enjoy the subject of adventuring through Africa in all its forms.

Stefan Jovanovich writes:

Contract law, in a form we would recognize, goes back to Justinian's Code. But, as with so much of modern life and practically all of Continental European law, Justinian's Code was regulatory; it specified which contract would be enforced by the state and which ones would not. The notion that the parties themselves could make an agreement about what they would do in the future comes almost entirely from the English common law. That was the legal experience of the people who signed the American Declaration of Independence and the Constitution; it was so thoroughly the basis for their understanding of what "the law" should be that you can find no direct reference to "the common law" in either document.

As for not having a "legal background", Vince, have no fear, we are back to Justinian's Code; the idea that parties can actually make an agreement between themselves without reference to the state is as obsolete as Morgan's belief that "the character of the borrower" is all that matters in commerce. Now, in this age of progress, we all get to sign the same printed forms.

Aug

13

 Have you seen this opinion piece by Jason Richwine: "Why Can't We Talk About IQ".

The reason "we" aka the enlightened cannot talk about IQ is that "we" don't want to know what the test mean any more than the group spokespeople who dislike what they presume the results of the testing show. Neither side of the supposed "debate" wants to accept the wisdom of the 14th Amendment.

"Race" - as crudely defined in this article - i.e. people of northeast Asian descent, European lineage, sub-Saharan African descent, Hispanic Americans - is so innately stupid a categorization that it has only one purpose - to somehow use skin color as a marker of innate capabilities. People of Northeast Asian descent, i.e Japanese, Koreans, and Chinese from Northeast Asians represent a small group of entrepreneurial minded self selected emigrants. If one were to test the descendants of similar European groups - Huguenots, Moravians, Jews, English Catholics, the IQ results would be disappointingly similar.

My father, who created the modern IQ test that is the cause of all this fuss, wanted people to be tested every 3 months so that the test could serve its proper function - which is to measure a person's changes in cognitive abilities. When he offered to sell quarterly testing services to the New York City and other "urban" schools for the same price that he was selling annual testing (in order to avoid any suggestion that he was trying to channel stuff his customers), they turned him down flat. The school bureaucracy knew what a threat such an offer was; it would make it that much harder for teachers to avoid individual accountability.

Cognitive science - the new sociology - will do everything it can to avoid using IQ tests as a measure of progress. It will be far more profitable for academics to create yet another "group" question - i.e. are "black" people really more stupid than whites, er, Europeans. If the answer is "yes", the subsidies are guaranteed to flow; if the answer is "no", then clearly there is no reason not to have further quotas in favor of having the skin color of every occupation match the color wheel of the population at large.

IQ testing is only useful as a measure of the changes in individual ability; and like all monitoring of organisms the testing needs to be done repeatedly over time for there to be any meaningful results. Dad was able to get a few odd schools to submit to regular testing; what made his experiment interesting is that he had both the parents and teachers participate. The result was what common sense would predict; the children who made the greatest progress were those whose teachers and parents also made the greatest progress over time.

His conclusion: "Genius cannot be taught; everything else responds to practice and effort."

Aug

6

 This is an interesting article for the statisticians on this site:

"How Aaron Clauset Discovered a Pattern Behind Terrorist Attacks…and What it Told Him":

"Another concern remained: The data was too clear, the pattern too obvious. "Surely, someone has thought of this before," Clauset recalls thinking. But the only example they could find of similar research was the work of Lewis Fry Richardson, an English mathematician and Quaker pacifist who drove an ambulance in World War I. Along with doing major work in the fields of weather forecasting and fractals, Richardson would go on to analyze all the wars from 1815 to 1945 and conclude that they followed a power-law distribution; he found the same pattern in gang killings in Chicago and Shanghai"

and

"At the prestigious Joint Statistical Meetings this August, however, Clauset and Woodard will return to the prediction issue: They will present new research concluding that if the level of terrorism violence remains stable — as it has, more or less, for decades — there's roughly a 30 percent chance of an attack similar to 9/11 in the next decade. To hedge their bets, they'll also note that if terrorism violence begins to ebb, that chance drops to just 7 or 8 percent. But if terrorism gets worse, the chances of another 9/11 increase significantly — to 80 percent."

Stefan Jovanovich writes:

Richardson's fundamental observation is one that anyone of sense has to agree with - "world" wars are disastrous beyond measure. The 2 World Wars– the only magnitude 7s in Richardson's classifications — were responsible for 3 out of every 5 wartime deaths in the period between the end of the Napoleonic War and VJ-Day. But those of us who cannot hack the math find one aspect of Richardson's study to be just plain bad history. By using logarithms he manages to fit a number of wars of fundamentally different importance into the same "magnitude" — a Richardson 6 war can have anywhere from 316,228 to 3,162,278 deaths.

One other random observation: those of us who love the 18th century above all others (Mozart, Washington, Watt, and Lavoisier) have this fact in our favor — the 1700s were the one period in modern (i.e. post 1400) history that had a complete absence of mass killing in war.

Statistics from Peter Brecke, Georgia Tech.

Jul

19

 Jack Barnaby, the best rackets coach, never learned how to string rackets. He wanted to be a coach and mentor for the boys and not a stringer. My friend Larry Abrams decided not to let others buy his time but to do something he loves every day and became an investor. I don't know how tanki works or other computer games so I can't discuss it with Aubrey when he calls each day to talk about tanki. So I can talk to him about other important things. Life is short. Do what you love. Try to realize the things that you're best suited to do. How does this apply to markets? Don't take flyers in things that you don't know about. Study up on the field that you're involved in. Don't listen to experts?

Vince Fulco writes: 

One excellent lesson I learned from the Chair after too much time on the sellside was shut off the media message almost entirely. In most instances, they highlight/profile those who are available and especially with a sharp witted sound bite. Neither of which makes for successful speculation.

Anatoly Veltman writes:

So true. Specialization, niche, is what scores big. Anyone achieving monopoly/oligopoly is real — just try to hold on to it!

On a parallel subject, the greatest coups in marketing history were by leaders who cultivated a whole new consumer culture. Ford, Gates, Jobs, Zuckerberg, Dimon…who else comes to mind?

Stefan Jovanovich writes:

A minor quibble about Anatoly's earlier comment about people who forged a whole new consumer culture. Ford and Hitler are not people who belong on the list. Ford created a new industrial culture but his "consumers" were as nostalgically retrograde as Dearborn Village. The customers for the Model-T were "country" people who used them as substitutes for mules and horses; the Model T was as mechanically simple as the small motor equipment that was already in use (cream separators, for example) so the farmers themselves could work on them. The car's greatest virtue were its high axles and body; it could navigate the mud of back roads in a way that other cars could not. The automobile consumer culture - automatic starter, changing body styles, pneumatic tires and brakes, dealerships and credit sales - were all invented by people other than Ford. But for Edsel, who managed to persuade his father to adopt some of these innovations, Ford might have failed even before the Depression (by 1940 it was bankrupt but was saved by WW II's war orders, rationing and tax laws which gave the family 6 years' relief from competition). As for Hitler the consumer culture of the Third Reich was even more backward-looking. The most successful industrial country in history was to become an empire of small-holding farmers - like the dairymen of the Bavarian alps. Women were not supposed to work (the most amazing single fact of WW II is that the Germans, unlike the British and Americans and, most of all, the Russians, never had any women doing any war work at all).

Jul

17

 The 7th Marquess of Anglesey has died. He is the author of what is probably the greatest single Brit work of history since Gibbon's Decline and Fall. It took him 25 years to write The History of British Cavalry. I have not read the whole thing or even half of it (I am guilty of the same thing with Gibbon; I have only read the modern abridged consolidation), but I have never read a single page without finding a fact, a turn of phrase, an observation that woke up my sluggish brain. I hope, in this digital age, someone will have the wit to release the entire work in an electronic form. (Wishes not being horses it may be a long time waiting; the Ulysses Grant Association still has not released a digital edition of Professor Simon's edit of Grant's papers.)

The Marquess was an "amateur" - i.e. he did not have tenure. Another "unlicensed" author - an American - has just had his master work published. It only took him 12+ years of wading through rosters, newspaper lists of casualties and journals to come up with the definitive description of the Confederate losses during the Overland campaign - the 6 weeks of battles in May and June 1864 that effectively ended all chance for Lee to "win the war" in the East. The Union casualties for this period were meticulously documented by the Army of the Potomac itself (Grant always kept straight books); the Confederate losses have never, until now, been properly researched. Arthur C. Young III has done what 3 generations of academics somehow failed to do; he has collected the facts. They are going to be a massive disappointment to everyone still holding on to the Lost Cause. It turns out that the Confederates were no more outnumbered in the Overland campaign than the Germans were against the British army in 1918. They simply got out-generaled; and the reward, in both cases, was for the victors to be labeled butchers. The losers, in turn, were allowed to commit with unspeakable acts and justify their revenge by telling the story of having been "stabbed in the back". In both cases the knives were entirely constructs of their own imaginations.

Jul

4

 At times like these, with the employment report two days away, the importance of Erica ("Obama Labor Agency Nominee Sent her Kids to Communist Rooted Summer Camp") can't be gainsaid. Presumably would wish a number that's not too good.

Rocky Humbert writes: 

Quoting from website: "Founded in 1923 by Jewish activists as a retreat for their children from the tenements of NYC, Camp Kinderland is true to the vision of its founders. In a difficult world, we are an oasis for children; a place where they can be themselves, feel at ease, and work and play in an atmosphere of cooperation and trust. As at many camps, our campers play sports, swim and hike, gain new experiences in arts, drama, music, dance, nature and camping. But at Kinderland they also encounter ideals of social justice and peace. They don't hesitate to sing a Yiddish labor song, paint a mural of Harriet Tubman or write a skit about putting an end to war—that's just what you do at Camp Kinderland, where it is okay to think, to care, to question and to act. There is nothing quite like it; and it works because the values of community and culture, of justice and righteousness, are inextricably integrated with the friendship, the joy, the beauty, the sheer fun and adventure, of life at sleepaway camp. Please feel free to explore our website ."

Dare I suggest that someone you know might actually benefit from a couple of weeks in this environment? I remember a summer at YMCA camp and it not only strengthened my Jewish identity, it strengthened my immune system. (The bathrooms didn't have hot water and it was my first and last interaction with a pork chop.) My wife, who's political views are somewhat right of Attila-the-Hun spent a few weeks at a Workman's Circle camp during her youth. The menu was better, but the sports were worse.

Gary Rogan writes:

"social justice" = "redistribute the loot to the 'rightful owners'", AKA "Communism", its Jesuit and later Jewish roots notwithstanding. It's worth avoiding anyone who excitedly talks about believing in it.

Stefan Jovanovich writes: 

The idea of social justice first took root in the US in the 1840s when the first flood of German immigrants - Lutherans, Catholics and Jews — took advantage of cheap tickets on the paddle wheel steamers from Hamburg. To this day their descendants remain the largest single "ethnic" group (sic) in the country. 

Rocky Humbert responds: 

Perhaps Mr. Rogan might consider starting Camp Hassen-land as an alternative to Camp Kinderland? He might find a couple of willing investors from spec list. Rocky offers this advertising copy for his website:

Founded in 2013 by cynical atheists as a retreat for their children from the tree-lined streets of Greenwich and Palm Beach, Camp Hassenland is true to the vision of its founders. In a difficult world beset by a particular idea in its grasp, we are an oasis for the self-accomplished - those who earn, deserve and consume the best; a place where money can be spent without thinking about the less fortunate or considering the possibility that one's place in life might be (just occasionally) outside of one's control. As at many camps, our campers play sports, swim and hike, gain new experiences in arts, drama, music, dance nature and camping. But at Hassenland, they also encounter vodka and inane propositions bets. They don't hesistate to sing a negro spiritual — recalling the golden age of this country — paint a mural of Sir Francis Galton, or write a skit about stepping over homeless people in the gutter — that's just what you do at Camp Hassenland — where it is okay to think, to not care, to act, and to screw your fellow campers if they are that dumb. There is nothing quite like it; and it works because the values of individualism and greed, of entitlement and smugness, are inextricably integrated with the the sheer fun and adventure of life knowing that you are superior to everyone else. Please feel free to explore our website.

Jul

3

 We believe our reverence for sacred founding documents is a long-standing American tradition. It is not. The Declaration of Independence was of so little contemporary importance that the very thing everyone knows about it (no one has ever actually read the thing) — John Hancock's large signature was not even seen by the colonists/rebels. The first broadsides — only about 200 were even printed — omitted the names of the people who signed the thing. Washington did have it read to the troops when he received a copy; but he had something read to the troops every morning.

The document that is appropriate to the season is Common Sense. That was the Declaration of Independence that the colonists/rebels took to heart. They bought a 100,000 copies when it was printed in January 1776; and, in the great American tradition of piracy, another 400,000 were bootlegged within the next year. (Paine spent part of the rest of his life bitching about having been so thoroughly ripped off; we owe the copyright provisions of the Constitution, in large part, to his having complained to EVERYONE from Washington to Franklin.)

The wikipedia article on the physical history of the Declaration is wonderful. This grump recommends it highly — as Travis Birkenstock would say, "two thumbs up".

Jun

19

I found this paper interesting:

"A Bayesian Understanding of Information Uncertainty and the Cost of Capital"

Uncertainty is not always resolved by new or better information. Also contrary to intuition, the cost of capital implied by a conventional capital asset pricing model can increase as investors become more certain about future events.

Gary Rogan writes:

I only got as far as this premise in the abstract:

"The role of financial reporting should be understood not in terms of its effect on the cost of capital per se, but as aiding investors to assess the probability distributions of future cash flows more accurately, thereby leading on average to higher expected utility portfolios."

Can widely distributing financial information to investors increase the AVERAGE expected utility? If everyone is better informed, won't the positive effects average out to zero or close?

Rocky Humbert writes: 

I have not read this paper yet, however, the answer to Mr. Rogan's question is: No, this is not a zero sum game. Better information can generate net positive value when measured at a societal level. The core economic principle which explains the net positive is that better analysis/better information will result in better capital allocation. Better capital allocation should result in higher societal productivity and hence a higher potential growth rate. This is one of the economic underpinnings behind the SEC principle of full disclosure of all relevant and material facts.

Simple example: If I "invent" a perpetual motion machine and raise $10 Billion in capital to build a factory to produce my perpetual motion machines, then this capital will be re-directed from some other potentially more productive use. In this silly example, investors rely on my prospectus to invest and have bad information. If they read the prospectus carefully however, they will see a disclaimer that the physics behind my invention are nonsense and they are better off investing in a factory that creates widgets or drugs or whatever which actually work.

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