People, people, people. Please, lose the conceit that Europe is all that is in play here. Sure, one interpretation of events is that Greece overplayed its hand. But let's consider what doors are open to Greece:

1. The China option (granted, the Chinese are busy rescuing their stock market, but I doubt that they will let the opportunity for a Mediterranean base slip by so cheaply) is still on the table.

2. Russia may not have money (although Greece may not need much on a short term basis), but it does have commodities it can barter. I don't know how easily Greece might monetize those commodities, but that option may exit.

3. The Greeks could also play the humanitarian crisis card.

4. Greece might threaten NATO with forming an alliance with China/Russia/Iran/etc. "NATO, help us or we're gone." There is a path for countries to leave NATO, as the French did in the 1960s. In the midst of the West's efforts to contain Putin's Russia, I don't know that Greece's departure from NATO would be greeted quickly with "Good riddance."

Lastly, Greece may have some issues in front of it. They may present challenges. But I think the EMU has a bigger challenge—preventing Spexit and Pexit (and maybe Itexit). It also has some write-downs to contend with.

Then again, who knows, perhaps Greece will declare war on the US. Anyone recently seen a copy recently of The Mouse That Roared? This isn't just an economic situation. It's a political one. It's a social one. The EMU leadership is no doubt angry and frustrated with Greece, but that doesn't mean it isn't in its interest to assist Greece. The last thing the EMU wants (or needs) is a Somalia on the Mediterranean 700 miles from Rome and 1,100 miles from Zurich.



 By the way, I believe it might be a subject of speculation whether  Mr. Simons and his colleagues have found anomalies that they can still exploit as they might be much too big, and there is much too much competition from other humble anomaly seekers.  Yes, as Mr. Harry Browne would say, as described by  the true believer below, their pantheon of geniuses soars on a much higher level of cognition than myself or any of my colleagues or hundreds of followers - but then again superior intelligence isn't everything. And aside from the profitability of market making, as first enumerated by MFM Osborne, it might be difficult to capture anomalies on a systematic basis that the competitors in St. Louis and other small venues might have missed, no matter their profundity.

Anatoly Veltman writes: 

Does this also answer the query as to WHY would Virtu decide to go public?

A true believer writes: 

If there is anything whatsoever to the legion of gambling analogies to markets, market ecology and human endeavor then most of the chips will end up in very few hands.

The Medallion Fund represents the very apogee of human brilliance so applied to financial markets.

What is more likely, that there is something rotten in Denmark? Or that the combined work of pure genius including:

James Simons

Elwyn Berlekamp

Robert Frey

Henry Laufer

Sean Pattison

James Ax

The whole 'European Contingent' - I will not list those names here.

Plus a host of mere 'worker ants' cleaning data, programming testing machines and keeping the lights on.

Might just have come up with the single best group of high capacity strategies ever known.

We should all celebrate this achievement. It represents everything this list is about, surely?

Trying to pick holes in something like this is the equivalent of the Barron's columnist bearing bearish for 30 years on U.S. stocks.

My belief and optimism is based on facts, not some idol worship groupie phenomenon.

anonymous writes:

Is one allowed to agree with both the True Believer and the Chair? What Simons and the others did was pure genius–they used mathematics to identify the consistent anomalies that occur when people buy and sell securities. Those of us who lack their pure brains and mathematical chops marvel at what they have accomplished and have done our best to create a glacially slow mimicry using employment data and their correlation to the business cycle. (They are playing Scarlatti the way Michelangeli did; I am playing chopsticks hitting one key a month.)

But, as Vic notes, the question is whether or not there remain any arbitrage opportunities left now that those anomalies have been examined in such detail for decades by the far greater number of smart people who have come after the folks at Medallion.

Bill Rafter adds: 

Like others, I agree with both the Chair and Shane. The question then is "how much juice is left in the fruit?" As Stefan says, he gets one a month.

I would posit that it is a question of time frame. Certainly the HFT opportunities are gone for us simple folk, and maybe much of the day trading. But there are still anomalies if we are willing to accept less certainty and leave our bets on the table a little longer. After all, realize the prop shops do not want their worker bees to have an overnight position. Which means those of us willing to have such a position will have an automatic edge. As an example, compare the Open to Close returns to the Close to Open returns of certain derivatives. There's an edge, less than it used to be, but still there, and the edge favors the overnight holders.

Also, we simple folk cannot expect to outperform by trading only SPY (or perhaps its overleveraged sisters), the most competitive and liquid of assets. The greatest returns have always been in the least liquid of assets. 

Shane James replies: 

I see no disagreement with the Chair on this thread. As with the Chair, myself, Medallion, DE Shaw, Citadel and all such people interested in trading from all walks of life - we shall continue to look at new angles, different ways of splicing the available information amongst much else. Medallion too will do this. The outcome? Only the shadow knows.

On this next point, the Chair, myself and anyone with half a clue will be in violent agreement - it is always best to be the bookie . The RenTech entity, at the last count when the info was still public, collected 8% management fee and 45% performance fee (I may be off by just a little here).

To use a collection of letters used by my children to describe this: OMG.

It's good the be the king. 

Jim Sogi writes: 

Much of what they have done is computer science not just math. It also has to do with understanding and moving or changing and understanding and exploiting regulations at the exchanges. In a competitive environment, there will always be an edge available somewhere. They change and move, but there is always opportunity in change, the change in others, the rate of change, the unforeseen effects of changes. I think there is opportunity for the slow and small as well. Computers are stuck with their algos. They leave tracks, patterns, singly and as a group. The markets are complex, and no person or computer knows exactly how it works, though they may find opportunities in complexity. There are always effects of effects of effects, unknown to the actor. Waves spread out from every action.



 Without in any way attempting to aggrandize myself, “the older we get the better we were” and all that, I had an instructive experience today playing one wall racquetball at the courts on 101 st. I lost 21-4 to a player 10 years older than me. This might not have been expected as when I was 11 I beat the best paddle ball player in the world in a big money game, and I won 4 national paddle ball tournaments, 2 in singles and 2 in doubles, and was ranked in the top 10 in racquetball some 45 years ago. I stayed back, quite afraid of mixing it up in the front court, and I was not very mobile. I hit the ball very hard and tried to blast it through my opponents who were up front and just tweaked the ball back to the front wall and since I was standing back and am not mobile I couldn’t reach the ball. To add humiliation, Aubrey was watching.

It occurs to me that macro traders find the same problem when they go into micro or day trading, and micro traders find the same problem when they go into macro trading. Their techniques are all wrong for the new game they are playing– they are fish out of water. They take long term positions and they are margined out or stopped out by the swings designed to take chips from the poor, or flexionic moves. The micro trader going into macro trading might have lost to me because when I don’t have to be mobile, I can stay back and my strokes, the macro traders fundamentals, and if he works for a bank the unlimited potential that he has to withstand loss makes him an impossible adversary for the micro trader.

One guesses the moral is that the cobbler should stick to his last. And one should always be humble about any past success and realize that things are very different in the modern era.



 Michael Munowitz's Knowing: The Nature of Physical Law is a great book. All pairs attract and repulse based on proximity. Very relevant to bond stocks last week while away. A do si do.

Gary Phillips writes: 

I was lucky enough to buy spoos/sell bonds Tuesday morning feeling that the principals had traveled far enough apart, and would begin to attract to one another. I subsequently added 20% to my position the following day as their proximity increased and the attraction between them grew stronger. Unfortunately, I only covered a portion of my position on the payrolls number, and then the balance between attraction and repulsion tilted the other way. I hope that that the principals are simply taking a "step back" (covering short bonds due to a less than robust number), and that the attraction will resume next week.

Gary Rogan writes: 

Why is it more useful to look at unrelated things being attracted to one another vs. them getting to cheap or too expensive and reverting to some sort of a "mean" which would look like attraction if one is so inclined? Or if the yield on one sort of security is out of whack with respect to another and they equalize over time is this attraction or people buying for yield and selling expensive stuff?



 There is a nice passage in Going Solo by Roald Dahl. The Vichy French are their enemies and help to destroy any Englishmen trying to fight the Germans. Dahl's squadron passes over a Vichy airfield trying to neutralize it. Sure enough all the Frenchmen are showing off their aeroplanes to a group of attractive French girls in high heels enjoying some wine. Out of chivalry the British pass off the airfield to allow the women in their high heels to run into the hangars:

"We went round again, but this time we were no longer a surprise and they were ready for us with their ground defense and I am afraid that our chivalry resulted in damage to several of our Hurricanes. But we destroyed five of them on the ground."

Dahl's story contains innumerable examples of British incompetence in the control and direction of the air force in Greece and Egypt and it appears that 90% of the pilots there were killed, mostly unnecessarily. The fog of war and as in markets.



 It takes a combination of multiple factors all to come together at one point to make really great waves. Any one thing, like wind, tide, current, change in swell, can ruin that perfect combination. Good surfers know in advance, in general, what conditions are needed for each particular spot, and can anticipate and show up early and see if the conditions predicted manifest into great waves. Also the surfer must be on top of his game, conditioned and not out of shape, with the right equipment for the day.

I've seen pictures of really good waves in the New York area. I've caught some good ones up in Rhode Island.



 I was looking at Greece's unemployment rates historically last night and found something interesting. The Greek economy seemed to hit a pothole in 1981 from which it never extricated itself. Between 1980 and 1982, unemployment tripled, and has stayed that way as a base since then. (I say 1981 because the rate didn't return to where it was, it increased.) Now, there were recessions in the US in 1980 and 1982, and Greece is a tourism-based economy. So a short-term increase in the rate can be explained in that way. However, that doesn't explain that the rate didn't go down in the 1980s. Why? Any suggestions as to the reason? It seems to me that that reason may provide more insights to the current situation than simply that the Greeks lived beyond their means. Something changed in their means.

Alex Castaldo writes:

According to Greek analyst Nick Tsafos, one reason for the low growth rate that started in 1981 was monetary mismanagement.

From 1953 to 1973 the 'third drachma' like most currencies was tied to the dollar; the exchange rate was 30 GRD per USD. This was the period that Greece experienced its best economic performance.

After the mid 70's the currency floated. It was (in round numbers) 58 in June 1981, 148 at the end of 1985, 157 at the end of 1989, 240 at the end of 1994, 328 at the end of 1999 and 325 in 2002. (In 2002 the Euro was introduced).

In other words from 1981 to 2001 the GRD was a 'soft currency' that allowed the Greek government to finance itself easily at the cost of higher inflation and currency depreciation. It could create government jobs, pay generous retirement benefits and get away with it by issuing more drachma. And the Greek politicians were masters at this kind of thing, buying support with monetarily financed expenditures.

The inflation ended in 2002 with the introduction of an externally managed currency, the Euro. For a time everything seemed wonderful. But old habits die hard and the politicians kept up their old ways of solving problems. Government debt increased but interest rates were very low, so it did not seem to matter. But the debt this time was hard debt, that inflation and devaluation would not erase…

Now for a rhetorical question: if Greece abandons the Euro and introduces the new drachma, how do you think the new currency will be managed? The past history is not encouraging.



 The metal scrappers at the largest bombing range in USA, the Chocolate Mt. Gunnery range adjacent to my property, keep a close watch on the London Metal Market, Dow, and Brass/Copper relationship in order to know when to hold or sell their precious metals. This week they're been especially vigilant while scavenging under the full moon on the bomb range.

Yesterday at sunset five quads forayed independently but in radio contact in case of breakdown, running out of gas, or pursuit by the military police or Border Patrol. There had been constant bombing for twelve hours that shook the ground we stood on and a perpetual rat-a-tats from jets and copters ejecting brass shells at over 60 per second at targets on the range. The range was littered with four-inch long shells worth a quarter. Each scrapper made two or three runs after sundown and returning with the last load before sunset with hundreds of shells per load. They pool the metal, and if the market price is right one pickup truck drives it to a San Diego recycle center that accepts military scrap. Each scrapper nets about $500 for a night's work.

They carried ice water, backpacks and milk crates for brass on their medium-size ATV's. They sleep all day, and are rising again this hour before sunset to run the range again, and again until the moon wanes later this week. The current price of brass is $1.60 a pound, so some of the men are holding, and others who need money are selling.

The metal market relationships are: When the Dow is up the price of metals is usually down. The London Metal Index is the primary guide to know when to hold or sell. When there's a war somewhere around the world, the price of aluminum jumps, and the scrappers start unscrewing the two-foot bomb fins from six-foot long 1000-lb. bombs that leave craters big enough to sit a small home into.



Every bit of bad news about Greece's situation, including the exposure of European banks to Greek debt, has been known and priced in for years.



If the el Nino forecasts for an event on a par with the supercycle of 1997-8 are correct, Brazil's recession will be ever worse still than is suggested in this piece.

"Best Forecasters of World’s Worst Currency Predicting More Pain"



 We have a summer intern with us from a university where he has been taught that prices are random and markets not predictable, EMT, anyone have any data, studies etc I can show this poorly educated fellow to enlighten him?

Rocky Humbert writes: 


It sounds like you picked a summer intern from a university that is using obsolete textbooks.

Virtually no academics (including Fama) still believe in the gospel of strong-from EMH. I don't think it's possible to "disprove" semi-strong and weak-form EMH because the theories are constructed in such a way as to leave wiggle room.

If you are suggesting that all forms of EMH are incorrect, then I beg to differ.

Lastly, data mining to find low probability events (as some speclisters have suggested) does not necessarily prove nor disprove a hypothesis anymore than pointing to Winston Churchill as proof that cognac and cigars lead to a long and vigorous life. Most of the time, the market is darn efficient. And that's one reason that markets are the best way to allocate resources.

Russ Sears writes: 

Perhaps the best set of data I can think of to disprove ALL forms of the EMH is the interest rates over the last 50-60 years. In the 60's the Phillips curve took over the feds interest rate models since then the bias has been more control of the interest rates is always right. Likewise from 85 to now feds have stopped both inflation and any liquidity crisis (real or imagined). Granted it is a bit of cherry picking to calculate the chance of randomly reaching 85's interest rate levels from 1960 and then multiple that by the chance of coming from 85's levels to 2014/15 levels

I lost a job because in the interview I told the guy in charge of the modeling for a one of the biggest insurance companies that I thought he was wasting the companies money having 2 Phd's calculate the interest rate scenarios using the random walk. The company hadn't even tested any of their correlation of their interest rates competitiveness to their change in lapse rates. But they wanted to have a risk neutral yield curve monthly binary tree model built 30 year out quarterly nodes with several orders of accuracy. If you used such a model for the past 2 X 30 year periods each actual outcome would at best been so remotely possible that only a naive statistician would not see the coin flips were rigged.

I was told that the interviewer thought I was too simply and couldn't handle the sophistication of the math they wanted. Academia seems to thrive on sophistication for job creation sake, not money making sake. Not coming from the Ivies or having a Phd I assume that the only reason I got the interview in the first place was that I had made my past two companies millions betting on long term gamma, for almost nothing. So what do I know.

Even the idea behind the Feds "control" screams non-random walk. If you stifle the short term natural swings it is bound to have long term consequences. 

Gordon Haave writes: 

"I was told that the interviewer thought I was too simply and couldn't handle the sophistication of the math they wanted. Academia seems to thrive on sophistication for job creation sake, not money making sake."

That very accurately describes all of economics and everything surrounding the Fed, although it is not for job creation sake but rather for obfuscation sake. There is nothing more satisfactory than telling an economist that the fed is printing money only for them to rant and rave that the fed doesn't actually print money, and then saying "I know, but the effect is the same".

Then the response is always "it's more complicated than that". But they will never really tell you why in a meaningful way.

Russ Sears writes: 

Perhaps I should read the paper before I comment but my bigger point was to actually be a "science", actuaries and other modelers need to form a hypothesis/model and THEN look at the actual results to at least adjust that model if not scape it altogether. The math is made to predict the data. Not the predictions must be based on the beauty of the math theory Otherwise it is a philosophy not an art.

Academia loves philosophy because it implies the philosopher should be in charge. They dispose science because it implies academia must be humble to the wisdom of the crowd. If you're predicting rate of change long term then it is not enough to validate your models using first order changes such as lapse rates. You must validate second order effects such as shock lapse rates and long term drifts. It shows it gets messy when the philosophers are in charge.

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