Aaron Brown on 1820’s Northwest USA and Poker’s Role in the Invention of Futures Markets, from Mr. Isomorphisms
August 23, 2017 | Leave a Comment
Aaron Brown laying out his ideas on currency (also available in chapter 10 of RBR or part 7 of The Physics of Wallstreet: "The Physics of Wall Street: The Most Arrogant Book in the World? Part 7")
The most notable part of his thesis is that the standard story of futures markets (farmers love them) is false for farmers, centered on the wrong parties (should be centered on processors: millers, cleaners, shippers of grain), and backwards.
Brown claims that, instead of borrowing the cash to run a business, running the business, and repaying the creditors in cash, futures markets allow businesses to borrow something much more like what they will produce (wheat, electricity, FCOJ), and then pay back in kind—thus hedging currency risk. (This was especially important in the days of wildcat banks and soft paper monies—the wild west had little coinage.) Someone who transports wheat from St Louis to Chicago could short a location spread, for example.
Crucial to his point is that July 23 #2 soft red winter wheat at Minneapolis is *not* what I produce—it's merely similar enough that by rolling a series of short calendar spreads, I can continually borrow in terms *similar* to what I will actually produce.
In AB's world, not only are bonds, bills, notes, and corporate equity alternative currencies/numeraires –so is, with thick enough markets, each short spread on a commodity market. What's more, he claims that futures markets were not invented by anyone; they arose bottom-up out of a poker-playing culture, which had developed "clearing-houses" between 1820-1850, so that hedging credit risk/ currency risk in this way felt obvious.
Stefan Jovanovich writes:
As another Brown would say "AAAARRRRGGGGGHHHHH!!!!"
No one in 5th century Greece or 18th and 19th century Atlantic America thought that you "borrowed cash to run a business". If you could not deal in credit, you had no business to run.
The use of the term "money" seems to defeat almost everyone's understanding of these periods. There was no "paper" (or clay or parchment) money. Those were, like the Federal Reserve's small pieces of art, bills and notes - forms of IOUs. Coin - cash on the barrel head - was what you demanded from people when you no longer trusted their credit on any terms. Coin was valuable because the demand for gold and silver jewelry, plate and other forms of ornament was real and because, when there was a credit collapse, anyone holding coin could find great bargains by being willing to surrender their cash in exchange for - wait for it - bills and notes.
"Wildcat" banks were local credit merchants; people who lived within a day's ride or canal boat journey (also dependent on horses) had a pretty good sense of what the local wildcat's IOUs were worth. The conventional histories pretend that this produced a crisis because they were all written by people who found the anarchy of local credit dealing offensive. They wanted a nice, neat world run by proper people named Biddle.
I have not read the book. But I just read Aaron Brown's review. If he submitted that essay to an accounting professor, he would get an F. It is obvious to any objective observer that the proximate cause of the Bear Stearns and Lehman blowups is the same thing that blew up all of the S&L's in the 80's, Mettelgeselschaft, and countless other operating companies: they held illiquid long-term assets that were financed with short-term funding. Period. End of story.
Aaron Brown evidently has a large brain that is similar to Nassim Taleb's but he lost my respect when he wrote: "But everyone with a brain agrees that (a) derivatives are at the heart of things and (b) the essential aspect of derivatives is not contracts that reduce risk by specifying prices in advance but the system of exchanges, clearinghouses, and standardization that replace credit risk with liquidity risk."
Absent a surprising development since his last medical exam, Rocky still has a brain. And with that brain, he has written several laws — laws that have served him profitably over the past decades. One of those laws is that when a market becomes dominated by arbitrageurs and second-order instruments (whether it's merger arb, convertibles, mortgage backeds in 1994 and again 2007, CMO's etc etc etc) — it will blow up. Always has. Always will. And there are many many reasons for that. Note to Aaron Brown: (1) DERIVATIVES ARE NOT THE HEART OF THINGS. THAT IS WHY THEY ARE CALLED DERIVATIVES. (2) There is nothing remotely interesting, novel or insightful about your (b) observation. Anyone who has taken an introductory course in Finance understands there is a difference between Solvency and Liquidity.
Of the thousands of baseball quotes, my favorite is by Ty Cobb, 'Baseball is a red-blooded sport for red-blooded men. It's no pink tea, and mollycoddles had better stay out. It's a struggle for supremacy, a survival of the fittest.'
That's the way it was when I played as a kid, unable to afford mitts for hardball, and later as a city coach where we my team was chased off the field after winning the championship by the inner city bat-wielding losers.
There is the best of action of all sports in pro baseball, but it occurs so infrequently it's a lesson in delayed gratification. In recollection, on average, there are thirty shining seconds of action per inning. It's no wonder the stands become full of drunks.
The fire and splendor Ty Cobb's baseball can be revived by a mechanical pitcher.
It would be a pitching machine programmed to throw unpredictable pitches at varying speeds and spins at the hitters exactly within the strike zone. The advantages are:
• Easy and cheap to implement at a fraction the cost of flesh pitchers.
• No more batters injured by wild pitches.
• More strikes and fewer balls; no walks.
• Game tempo is doubled.
• More hits and higher batting averages.
• Higher score innings.
• An open hitting zone from home plate through second base into center field.
• No more time wasted watching pitchers chaw tobacco and nod off signs.
The mechanical pitcher would be recessed into the ground, and pop up for the pitch, and down during the hitter's swing. It could be a shot in the arm for America's greatest pastime.
Prof. Haave and I stood on the deck of the of the parking garage of our office here in STL. We were both excited to see the eclipse, but neither of us expected what we were about to see.
It blew us away!
We watched as the "Beads" formed around rim of the moon as C2 was about to occur. The Beads are formed when the mountains on the moon block out the sun, but surface of the moon hasn't fully covered the moon.
We also saw the 'Diamond Ring" as the C3 formed (no diamond ring on C2). The diamond ring was completely spectacular. I wish there was some way to show everyone what we saw at that moment, but our iPhones were not made for eclipses.
When we were in totality, we saw "Shadow Snakes" appear on the white surface of the parking garage.
But the highlight was definitely what was happening the sky during the totality. The moon was dark in the middle and rimmed with fire. The "oohhh's" and "ahhhh's" from the several hundred people watching the eclipse with us described it perfectly.
Then someone yelled, "Look, there's a star". Then others started pointing out other stars. Everyone looked on the beauty and grandeur of the stars like children who were seeing stars for the first time.
The guys in the office next to mine, had a small table set up with a speaker for their iPhone. They were playing "Dark Side of the Moon" very softly in the background. Some other people from another office in the building overheard the music and told them to "TURN IT UP!!!!". Other people chimed in and up went the volume.
Everyone on the roof of the parking garage enjoyed watching a phenomenal celestial event all while being serenaded to the appropriate song.
If you ever get a chance to see a full eclipse, you should definitely go.
The skies are getting brighter and the temperature is rising again.
Time to get back to work.
August 21, 2017 | 1 Comment
Buzzy is with Schlomo and they're both 13 and he's in love with her. She's his cousin. Her mother ran away. They get off for Succoth. He tells her that he can jump over mountains, climb through valleys, swim the deepest rivers. Why are you doing this she asks him? "To save the princess." They are holding hands. She says to Schlomo, "You don't have to try so hard". Just then the mother calls them "Schlomo, Buzzy, come in for shawl."
A short, optimistic interview: "The End of Doom: Ron Bailey on Why the Future Looks Pretty Great"
My friend Joe Stock is the best alpine ski guide in Alaska and the only IFMGA Certified guide.
His article on "Managing Avalanche Uncertainty" has great lessons for traders as well.
One big difference is an accident in the field can mean death.
Rarely is that a problem in markets, which is good.
August 20, 2017 | Leave a Comment
In reading recent bios of Beethoven, Hugo, Verdi, and Churchill, I find their persona and characteristics very similar. Do you feel that there is a certain type that is characteristic of greatness to an inordinate extent. I like that Churchill insisted as first sel lord that all hands including the captain and admirals join together each evening in singing popular ballads presumably Pinafore to maintain proper morale. Verdi would never allow anyone to give him guidance about his pumps or drilling at his estate. Beethoven said "he who has heard my music can never be the same again". "Hugo insisted on sleeping with two or 3 women each evening and kept a record of it.
In 2015, there was a very pronounced seasonality around the 3rd Friday of the month, where the market would ramp higher going into both quad-witch options expiration, and non-quarterly expiration, and then mean revert lower post expiration. J.P. Morgan had a couple of strategies that provided exposure to such options expiry momentum and it's subsequent mean reversion. Of course, this Friday's August expiration saw the market sell off the day before opex, and close unchanged on Friday. This is very similar to what happened during May opex of this year, when the ES sold off ~3% two days before expiration. While I'm not quite certain what the market will do next week, ES rebounded strongly the week following options expiration back in May.
As Kolanovic explained, the reason a broader selloff did not ensue is that none of the triggers for systematic selling were breached. Momentum stayed positive, bonds rallied and almost totally offset the equity selloff, and vol targeting strategies had already reached leverage caps at higher levels of volatility than those reached on that day. Options positioning going into May 17 was benign and long gamma, and as is often the case, moves are reverted when there is positive gamma exposure.
Bonds are once again negatively correlated to spooz, offsetting falling equity prices, and today's vol levels have only increased commensurate with May 17th's levels, however current VVIX:VIX is substantially higher than back in May, and momentum has turned negative. September options open interest is skewed toward puts in the current trading range with large pins at the 2400 and 2350 levels.
The stuffed cabbage appears to be falling apart, and there is no shortage of potential explanations as to why: trumpeachment, tax reform delay, balance sheet reduction, fed tightening, and if there were to be a selloff this Monday–renewed bellicose dialogue between the Kim and the Donald over war games.
P/C ratios continue to be bearish, and don't show signs of being overbought. A post-expiration move below 2425-20 on Monday would take dealers further short gamma as expired hedges are rolled forward boosting volatility. A test of 2400 in the ES then seems likely where a break below, might not be bought. The 'world' is leaning against that level, and recent statements imply the Fed may not be as inclined to be a buyer, as they have been in the past.
The powers that be seem determined not to allow gold to build value above 1300, however the $/yen is on the precipice, and further domestic conflict would pare it's price and support rallies in gold and treasuries. In any case triple bottoms (usd/jpy) and triple tops (gc) never hold.
Jim Sogi writes:
Last weekend they paid a nice premium for taking the risk of holding their goods over the weekend. Always risk, and that's what they pay for.
Ralph Vince writes:
Don't know if we'll see that tomorrow, but volatility is certainly telling us (very strongly) this is not the correction it seems most are looking for yet.
I still think we challenge the all-time highs first, and, very possibly, go into another strong up leg this Autumn on the inevitable tax cut legislation. The big bull–from wherever you begin looking at it from, March 09, Nov 2012, or, as I see it from January 2016, is far from over. And that means higher highs before it is.
I can be long and wrong but not short and wrong on the timing of all of this. But I'm quite certain we're going right back up to those all time highs here, just not so sure about tomorrow.
The bull market in bonds takes a breather this week.
With the murder of my friend George Carroll, New York City just became a lonelier place.
I first met George when I moved to Tribeca in 2008. He was managing a little coffee-pizza place on Reade, and made the only decent latte in the neighborhood in those pre-Starbucks, pre-Pain Quotidien days. He was a good guy and became a friend and confidant. After he left and the owner cashed out her real estate, I would occasionally bump into him on the street. He was one of the genuine people. He grew up poor in Texas, but he was a likely, bright guy and was reinventing himself.
I hadn't seen him in some years, but I thought about him. On Friday, he was stabbed by a couple of thugs hanging out on school steps — right, school steps — while apartment-shopping with his wife in Greenpoint, Brooklyn. The news stories said the attack was random, senseless, unprovoked, and started with one of the kids asking "What you looking at?"
I can see the scene. My friend, running. His wife, screaming. The two kids had been causing trouble in the neighborhood for some time and under another mayor would have been locked up.
It's a bad day when a man can be murdered for nothing at all.
A great read:
J.T Holley writes:
The Law of the ever changing. The rudder is still the objective standard. Just try a little bit harder.
Use the objective but become more subjective while using the objective as a ruler.
Count. Then count again. Count some more. Die counting.
Adam Grimes writes:
A broad question on this topic.
Thinking about volatility, I understand how selling vol can depress implieds. This is obvious and if there's an ever-present offer on volatility (e.g., from banks selling for "yield") this would have an impact on pricing of those derivatives… but am I correct in thinking that there's no mechanism whereby this can actually effect realized volatility? And if realized volatility were higher (it obviously has not been) then the mispricing of those derivatives would be clear and the sellers would be crushed. We also could not have a situation where pricing of implieds comes dramatically apart from realized vol for an extended period of time because there is a day of reckoning on most of those instruments.
I can easily understand how buying and selling might, for instance, erode cycles or seasonality in the underlying and would quickly erase arbs, but I don't see how buying and selling pressure in a derivative can affect realized volatility. (Again… just to belabor the point… impact on implieds is obvious.)
I could imagine being a very deep-pocketed seller of vol and then operating in the underlying to dampen swings there, but it would seem that I would quickly magnify my risks to unacceptable levels without any assurance that I'd be able to accomplish what I was trying to do.
Am I missing something here, or is there a missing piece to this low vol puzzle in general?
Ralph Vince replies:
Adam, YOU'RE not missing ANYTHING. The notion that too many sellers of options dampen implied vol., if it were true, would create a wonderful opportunity to buy options, which, ultimately, reflect outcomes consistent with the historical vol over the period the options have been held. That is to say, the actual outcome of price distributions between the day I buy the options and the day the expire is, datum est, a function of the historical vol over that time window.
Ultimately, like a psychotic mistress you cannot shake, implied and historical can never be too far away for too long.
Yes, this piece seems to be catered towards those whom are subscribers or clients of the author. I like to think that longevity in systematic/quantitative strategies relies on creativity and flexibility more than a fundamental understanding of statistics or arithmetic.
As Chair said "don't try to make money the same way twice".
If too many people are only focused on selling vol because that has been the main source of alpha over the last 3 years, then it would seem reasonable to expect those same actors to see heavier drawdowns and volatility being pushed like a hydraulic press into over leveraged players. A more prudent observer would find a way to take advantage or quantity some of these "irregularities".
Zubin Al Genubi writes:
A couple of questions remain unanswered: Why has volatility been so low?
Other questions: why is inflation so low with such low rates?
Won't some of the old strategies start to work again once this low vol regime ends?
Personally I don't even bother to trade the low vol. Better to travel.
Paolo Pezzutti writes:
The concept of ever changing cycles is always valid. Competition on a set of inefficiencies exploited by more and more actors reduces gradually the edge. It has always been like this. The issue is that no edge is given and working forever. Innovation and research can never stop. One has to continue counting, find new regularities , dismiss those who do not work any more. An area of research in this regard and discussed in the paper is how to exploit the growing sector of passive investing and etfs. What are the new regularities that these growing actors are creating for the speculators to exploit and profit from?
They didn't take on enough risk, it's THAT simple.
What a pile of yadda yadda, "We don't really know why things didn't work as well as they had in the past, but we've fixed it because we have a lot of smart people working for us."
A failure-justifying amphigory, and fails at that too.
Managers have to have a story to tell, especially when they under-perform the benchmark. The negative effects of index funds and ETFs is a pretty common part of the story these days. I am very skeptical because, from the cheap seats, it seems that if you took all the passive money and gave it active managers, they would wind up in aggregate holding the same positions as the passive funds held, only minus bigger fees. Following that logic, one consequence of passive investments would be higher markets because more of the customers' investable funds actually reach the market rather than being siphoned off by intermediaries. Which means that intermediaries will need to find new ways to siphon off funds.
If not today, then tomorrow…don't be shut out.
Gary Phillips writes:
2475.00 appears impenetrable, at least until after opex Friday. If $/yen was to further take it on the chin due to Trump backlash, which looks likely, then gold should break higher and take out the round at 1300.00 while bonds tag along for the ride. Thinking 2440 in es before 2480.00.
Ralph Vince writes:
Maybe so, Gary. BUT…there's no danger until the big indexes hit new all tie highs first, which is inevitable in the next couple of days.
This is good, selling off into the open. Prime chance to add for another charge at new all time highs here. We are hitting a cycle low in this Thurs/Fri area, maybe even at it right now, and some intermediate stuff that is deeply oversold.
On this day in 1843, in Honolulu, Herman Melville enlisted as a seaman on board the USS United States. He served for 18 months and was discharged in Boston in October 14, 1844. He was 25 years old. Everything Melville knew about life at sea came from the 5 years he spent on the St. Lawrence, Acushnetat, Lucy Anne, Charles & Henry and the USS US.
The public wanted him to write about those adventures. Melville wanted to preach about the unfairness of a life that saw him begin rich as a child and then get thrown out of financial paradise, never to return again. The books about what he saw and did– Typee, Omoo, Redburn, White Jacket– were all popular; the ones with the philosophical discussions never sold and remain unreadable to this day.
Admitting you are wrong is very difficult. I've noticed that almost no one can do it. I haven't seen or found any real studies of this behavior. It would be interesting to see how often people are wrong about something objective, why they are wrong, how they do or don't admit being wrong, and if they can change their opinion. Once a person make some declaration, there is some heuristic or bias that makes them cling to that even when they're obviously wrong. Often rather than admitting being wrong people will rationalize some external reason why their declaration is not right. People will actually change their memories to avoid being wrong. It's a powerful effect.
Traders need to be able to quickly admit being wrong and get out. It's one of the keys to successful trading. One needs to be able to reassess.
In expeditions and adventure travel, one needs to be able to change one's plans, admit a mistake, turn around, and give up goals. You need to have fall back plans. These are all techniques to alter one's mind, even if they fall a bit short of admitting one is wrong. I think this approach is a the way to work around the heuristic.
Another problem is the social reinforcement problem. Once a person makes a declaration of say, a trading position, it makes it harder to change. That's one of the reasons why Chair says, don't disclose your position or state your bias. Also, there is the social problem of who in the group wants to say the group is wrong. I'll call this the lemming effect. There is the expert effect, where no one in the group wants to contradict the self proclaimed expert. The effect can be more subtle, such as the first to speak in a group takes on a guru like Auro, making it hard to correct mistakes in a group.
Russ Sears writes:
Professor Haave has a law which I will paraphrase as "90% of people spend 90% of their time trying to prove that they are not wrong". I would add that most of this wasted effort is spent trying to blame someone else for things that go wrong, rather than simply admitting a bad decision and moving on. I try to be friends with those that can admit a mistake. I would add that this is paramount in picking a mate or a boss. Otherwise I am bound to be blamed for their problems. Besides wasting money on bad investment decisions. Time is wasted and perhaps the biggest cost to personal happiness can be wasted relationships and heart break.
An insight as I've aged is if I truly want to get close to and attach with my spouse, I must be willing to admit to to my spouse that much the lack of feeling attached is because of my insecurities rather than her problems or lack of compassion. It's a paradox that the compassion is only as deep as one allows themselves to admit being vulnerable to the other.
Ego exposed is certain to be defeated. It is the fastest and easiest way to do it. The resultant facts make the ego indefensible. The ego becomes unimportant to the individual. He or she is liberated of it.
It was the most valuable lesson the Senator ever taught me.
The Literary Digest was once the microphone through which that mythical beast "public opinion" spoke to America
The mass media - newspapers, movies, radio - were careful not to offer political opinions on the sensible theory that favoring one party over another would cost them money. Political opinion was limited to print and, within print, almost entirely to magazines.
In 1927 the Literary Digest had 1 million subscribers; by 1938 it was gone.
It fascinates me how the formerly mass media are well on their way to becoming the voice of minority opinion because of their one-sided politics.
Zubin Al Genubi writes:
With 500 TV channels, and a thousand news sites, information and political views have become Balkanized. Will political parties soon follow and breakdown like the parliamentary systems in Europe.
Stefan Jovanovich replies:
The Parliamentary systems in Europe may have political deadlocks but they are hardly breaking down. Brussels has authority that was Napoleon's dream. There are not 500 channels if by TV you mean mass audiences similar to those held by the 4 networks in the U.S. Britain has 5 channels, France has 3. What I was trying to point out was the obvious. Netflix, Amazon Prime and hulu–none of which offers any political "news" - have become what the movies and radio were in the 1920s and early 1930s. The audience that elite opinion thought it had literally melted away, much as it is doing now. Trump is "unpopular" only if one believes the modern Literary Digest audience represents a clear majority of the American electorate.
I'm not unfamiliar with the VC world, and I'm baffled by the size of the filecoin raise. Can anyone provide insight?
Andy Aiken writes:
In effect, Protocal Labs, the company behind Filecoin, has eschewed VC funding and simultaneously made a gambit that selling the coin will stimulate quick adoption of their app.
1) In contrast to other ICOs, Filecoin deliberately designed the ICO to be SEC-compliant, and thus could allow US investors
2) the timing could not be better, with Bitcoin and platform coins such as IOTA near ATHs. It has been hyped in a well-orchestrated marketing campaign.
3) the project/app has immediate practical value, and similar offerings have already been implemented in such projects as Sia and Storj.
4) the coin is the transaction token, and does not represent a share of the company. Think of a Filecoin as a unit of revenue, not as an indication of valuation. Consider Walmart: annual revenues this yearwill be about $500B, while Walmart market cap is <$250B. The relationship between Walmart revenue and market cap depends on other variables, such as operating margin.
I did not participate. My view is that the project will succeed and be profitable, but that the valuation is rich given the established market presence of Sia and Storj, not to mention cloud storage offerings such as AWS. But with AWS or similar cloud storage, a user is not able to generate income from their own unused storage capacity. There is a financial incentive to use apps like Sia, Storj, and Filecoin.
The future value of the coin will depend on adoption. Sia and Storj are not very easy to use. If Filecoin can make their user client easier to use, then it could well deserve the valuation.
Volume gave nothing yesterday. It’s a good sign Monday will continue through today, and the 20 constant mat convexity is only 3 1/2 over linear.
It should be a stronger day in the end than the open might indicate.
Kim Zussman writes:
So how will we know when the 8 year old “buy the dip” (slightest, shortest, before you blink) trading strategy will stop printing exponential bitcoin?
Ralph Vince writes:
Everyone is waiting on “the dip”, and more than that in numbers are the grumblers who are and have been short or not aboard at all.
It’s the 1980s, but on steroids this time. Giant transformations - far bigger than reactionary politics - were in place a year ago and are just beginning to manifest.
Like the man on the loudspeaker at the trotter track says, “Do NOT get shut out.”
The hysterical reaction of media commentators and graveled foreign policy pomposities to Trump’s "fire and fury" reminds me of the reaction to Reagan’s hot-mic joke that "we begin bombing in five minutes".
Although now the left now discusses Reagan in hushed tones as an idyllic "good conservative", it was not so at the time.
I have never read a pro-Reagan leftist. Even centrist American liberals (eg Robert Reich) conveniently count (as noted by Mr Terrill) America's decline as starting with his presidency.
Andy Aiken adds:
That was then, this is now:
Are these turkeys here to challenge Victor to a tennis game?
My family went to an annual outdoor Shakespeare performance this year, Taming of the Shrew, which is among other things, a humorous treatise on marriage.
It also revealed that his plays, as wonderful as they are to read, are meant to be staged and performed, not studied in isolation.
And it is a good reminder in this virtual age that there is no substitute for living in the real, analog, non-artificially intelligent, non virtual, messy, human, loud, world and for kids to get outside, get muddy, get lost, and come home with a story.
This article is the dumbest thing I ever read: "The Real Dirt on 7 Filthy Food Habits". He forgot waitress fingers on the top of your drinking glasses and ice in coolers. People are dropping to trailer floors like flies in Slab City: two to the hospital with kidney failure, and 12 others begging the gods for mercy. Paramedics in and out daily for free trips to the clinic. Each chart is marked,''unknown cause."
No one believes simply that it's the Community Center water that everyone started drinking in copious amounts with the heat that is literal poison. Correction: a few believe, got better in three days on reverse osmosis water, and the Slab water deliverer stopped me on the road, 'Asshole' for cutting down his business. Everyone worries about the bacteria, which is ridiculous. The people drinking directly out of the Coachella Canal that has flowed a thousand miles down dirt and concrete banks from the Rockies don't get sick.
People get ill from the bacteria killing chemicals in the Community Center and other town water, the 125F in-the-shade heat, and from drinking 5x the normal daily consumption of chemically poisoned water due to a rabid thirst and the body demand to dilute the poisoned water by drinking more water. It becomes a vicious circle, including the trips to the hospital where they're put on antibiotics and sent back to the trailers to suffer.
Please don't lecture me about the germ theory. Almost all disease is a compromised host and the bacteria, virus, protozoa and other pathogens are opportunists like the thieves in Slab City. Look to yourself and do something about it. Studied it, been sick with it no less than 50x in 100 countries around the world, and not really ready to listen to status quo opposition.
Core CPI comes less than expected. Dollar drowns Euro spikes up. Wow! A less than expected inflation in America is good for America or bad for America? A less than expected inflation in America is good for Euro or bad for the Euro? If inflation is less than expected should gold spike lower or higher? It spiked higher.
Today we are in a world where anyone having a logical mind that is sound on what should happen is irrelevant. Today is a world where what is happening you must tag along and ride all illogicalities.
This has been around for a while. With close to zero cost of money in most key economies and in a few sub-zero cost of money, the entire logic of money is gone with the wind. We spoke earlier here on this forum how the Discounted Cash Flow model is only good monkies now, since if you are discounting to present value using a negative interest rate the longer durations become even better valuations implying that those holding a bleeding asset are going to be wealthier.
It's an upside down world.
Should one try to put one's wit to work in an unwitting world? Or should one take a good long holiday and travel around the world like the adventure capitalist?
August 10, 2017 | Leave a Comment
We have seen Korea crises before. Panic abounds. Then markets bloom, again.
Well, one can never know when this phenomenon will fail and panic might be well founded. But based on logical imagination of how the supposedly irrational dictator also knows not to get pulverized on one hand and based on the history of how such panic has been induced from time to time and then dissipated…
Not sure, where to get the precise dates (week of heightened rhetoric N Korea style) and the price action through that week and next. So excusing myself out yet again from trying to count such things out. Perhaps a spec will have ways to extricate such dates and might run numbers.
This note leaves a hypothesis, the Dictator is either the smartest Put Writer in this world or is being deployed by the smartest Put Writers in the world to indulge in collection of wages of selling fear and panic, from time to time.
Peter Ringel replies:
I guess some Wyckoff-style manipulation goes on with North-Korea related news. Once the news is on Bloomberg it's old news. There is intelligence about NK every day - there are talks with NK every day ( someone, somewhere ) - there are new developments every day | yet only sometimes the news reach Bloomberg & co.
One explanation could be, that geopolitical risks are not well understood and managers go into cash once NK news hit Bloomberg.
This should make NK news a great tool if someone wants to shake out equity bulls.
(Sorry, I offer lots of opinion, but few facts)
August 10, 2017 | Leave a Comment
I've been trying to figure out what a President is *supposed* to say when a foreign power threatens:
Andy Aiken comments:
"We do not make empty threats, because empty threats weaken our credibility, and weaken the strength of threats that we do intend to carry out. As Theodore Roosevelt said, "speak softly but carry a big stick."
So is Perry speaking of Trump when he writes this, or Obama, GWB, and Clinton? The Nork nuke deal hatched by WJC, Jimmy Carter, and Madeleine Albright was the framework for the Iran nuclear deal. Both were deeply flawed miscalculations, modern versions of "peace in our time". What came of Obama's "red line" in Syria? His pronouncement was counterproductive blabber. Perry himself was probably behind that empty threat.
Rocky Humbert writes:
Well he was certainly not speaking of Reagan — who directly and openly challenged the existing Soviet military doctrines (pre-gorbachev):
From "Reagan and The Cold War":
What struck Reagan about Communism was its weakness. Communists ruled by fear and intimidation. He believed that policies of peaceful coexistence or of passively containing the Soviet Union would be disastrous. The Communists would over time use the Western fear of war, especially nuclear war, to undermine the confidence of free peoples. They practiced "salami slice" tactics of intimidation and bluff to gain marginal advantages that would eventually accumulate to a victory in the Cold War or allow the Communists to win a final showdown. Reagan sought to turn the tables on Moscow and its allies by advocating an all-out fight against the growing encroachment of Communism in this nation and throughout the world.
By all-out fight, Reagan did not mean military action, although if that was required of the United States in particular circumstances—e.g., Korea, Vietnam—the United States should have fought to win. The key front in the Cold War, in Reagan's assessment, was actually the Soviet economy. Marxism was a materialist philosophy, and its chief claim to practical allegiance around the world was its supposed ability to produce economic plenty (and thereby, social justice). In fact, Reagan believed that democracy and capitalism had decisive, natural advantages over totalitarian systems and centrally-planned economies. Reagan sought to confront the Soviet Union simultaneously with various forms of economic pressure: nearly-open ended American military spending; threats to the security of the Soviet empire (especially in Eastern Europe and Afghanistan) through direct and indirect American support to resistance movements; losses of foreign currency that the Soviets had expected from sales of oil and natural gas; and a cutoff of Western aid and technology.
Reagan argued that the Cold War would end only when there was a fundamental change in the Soviet system, and not just in Soviet policies. The strategy of economic warfare was designed to force such a change, by bringing to the fore a new generation of Soviet leaders who would finally recognize the bankruptcy of communist ideology and move toward a true political rapprochement with the West. The United States, in turn, would promote democracy throughout the world as a magnet and an example to all the peoples oppressed by dictatorships of whatever stripe.
August 8, 2017 | 1 Comment
In a visit to The War Rooms and a reading of every one of the 1000 pages in Manchester's The Last Lion, I was not impressed by the heroism of the French, and with deference to Jovanovich, the chances of the French not turning their navy over to the Reich after the armistice would seem to have been close to the proverbial parts in a salvage dump spontaneously assembling themselves into a jet. It led me to think of all the times all my opponents in squash defeated in earlier rounds would stay around to the finals hoping I would lose. This led me to think of whether when one market has a terrible fall, whether it predicts with inordinate frequency that a related market will suffer a similar fate. The latter must be tested.
Stefan Jovanovich writes:
About Dunkirk there is no question that the French stood and fought–bravely and well.
The Vichy French did not turn their Navy over to the Germans; they refused to turn it over to the British. Not quite the same thing. The result was Operation Catapult.
Churchill is not to be trusted about almost everything he wrote and said regarding the strategies of the war; in almost all cases he was a blowhard and a buffoon. But, he had luck. He had one subordinate commander brilliant enough to ignore his orders and preserve the RAF (in spite of Churchill's sending two months' of fighter production to Singapore so they could be captured by the Japanese weeks after being off-loaded in their crates on the docks). Hugh Dowding and the pilots won the Battle of Britain; and then the Germans lost the war by choosing to invade Russia instead of completing their conquest of North Africa and the Middle East and Iraq and Persia's oil reserves.
Andrew Goodwin writes:
Greenspan cares about the bond bubble. If his commentary has influence perhaps he will move to remarks about other markets that don't share the same ecosystem. That 1000 page Manchester book was excellent and the brain makes the link finally in the naming.
Sad but true: before WW I both Churchill and Roosevelt thought that the greatest threat to Anglo-American Empire would come from the Russians in Europe and the Japanese Navy in the northern Pacific. The Germans were not going to be any problem at all, no matter what the stupid French kept saying.
Jay Thompson writes:
Accepting the above as true then major kudos to Churchill and Teddy as they possessed more foresight than the vast majority of foreign policy experts–to say nothing of US Presidents–in the past 100 years. Russia was/is a threat to the civilized west if for no other reason than it has been such a tempest - incredibly unstable and nearly ungovernable The near totality of Russian leadership was Germanic (like most of Europe that mattered) yet the people are Slavs. This exacerbated the already tense relationship between the peasants and the aristocracy or, if you wane Marxist, the bourgeois and the proletariat. The Japanese had a long lead time in their accumulation of navy power and the associated increase in their sphere of influence.
Patton, and Churchill, were right. We should have continued on and/or let the Third Reich destroy the Soviets. If for no other reason it would have taken away the "Cold War" as an excuse to waste trillions of dollars and the lives lost in the hot wars of Korea and Vietnam.
Victor Niederhoffer writes:
Anyone who believes that the Vichy prezs, petain and lebrun would not have turned over their entire navy to the Germans as smoothly and easily as they killed all the jews in Southern France, and who also believes that without Churchills courage and refusal to surrender that England would not have signed an armistice with Germany in 1939 or 1940 is very biased against the man who saved the world from German rule. With French armaments their would have been no hope left for the British and Churchill would have been booted out of office by the many collaborationists he brought into his cabinet.
Back when I was an honest hustler with more brains than money in the sport that was replacing bowling as America's greatest pastime, I could not resist testing my best game by betting on it. Honest as a Michigan farm implement, with an indomitable backhand, it was the act and then the action of making the bet a win that counted. I refused to take any good person's money. If he was an evil cheater, I doubled the bet.
In the same year that I was the best shooter in the ugly sister sport of racquetball, 1973, Bobby Riggs smashed onto magazine covers and into world news by defeating Margaret Court in the Mother's Day Massacre. A few months later, slandered the 'fattest sexist pig in history', he stepped up to legendary charming Billie Jean King in the Battle of the Sexes.
You only need to know the hustler's mentality to know the outcome. You don't need to read about the mob riding Bobby for a debt, secret locker room conversations overheard by a janitor, or diagnose his supposed ailing 55 yea- old body. Just watch the video of the match and how he jumps blithely over the net after match point to congratulate the winner King.
I'm sure that he threw the match because these would have been my thoughts, and were them, when I battled the same year nearly every female racquetball champion informally or in exhibitions playing opposite handed.
Bobby said to himself, 'She doesn't stand a chance of beating me, the odds are long against King at 8:5, I'll bet a hundred thousand on myself, and tell my friends to do the same, throw the match, and still be able to get a date! Then with the first match publicity I'll make a million on the rematch.' So, assuredly 30,000 people in the Houston Astrodome and a global audience of a further 50 million watched him throw the match.
Riggs was the #1 world player for three years, won Wimbledon, and the U.S. Open. I also threw a few matches rather than take a good woman's money, and then had them treat me to a date after the match.
Andrew Hollan writes:
During my 8+ years of investigating all aspects of Paul Haber's life I interviewed a high powered Chicago lawyer that saw Haber give 15+ points and the serve to a Mob family's son who was gifted with a power serve and a good kill shot repertoire. The Chicago mobster got hot and beat Haber in a 21 point game.
Haber did not have money to cover the $ bet and they were going to beat him to a pulp or kill him. The lawyer paid Haber's debt to save his life. The attorney said the Chicago mob had a group that just played 4-wall handball within their own group but Haber being Haber got himself in their group that day by placing bets with them and giving points and the serve to start the match.
I met Bobby Riggs at the Houston Racquet Club. My group was young wooden racquets Racquetball players. He stood out to a 16 year old Andy Hollan. I played the Juice's driver Al Cowlings at the HRC too. It was jaw dropping in later years to see the Bronco ride with them on a split screen with the Rocket championship game vs. Knicks on the other 1/2 of the screen.
Bo Keely writes:
The way Haber sometimes worked that hustle was to throw the game and collect a percentage of the debt paid by the party to the mob. No mob family son was going to beat Haber with 15 points if they played all year, but Haber had to let the mob save face, while making his fee.
I did not use a single piece of paper money throughout the Baltic Scandinavian countries. Everything is cashless and wireless. Even in euroland I had trouble getting rid of my Euros. The cards have no foreign transaction fees and an attractive conversion rates.
This looks interesting, though for me personally, I don't think I could muster the data necessary to test it:
Liquid, high-yield bonds foretell equity moves: Berkeley study Professor says shares react more slowly to complex financials
The "smart" money may deserve its reputation after all.
High-yield bonds moving with the ebbs and flows of U.S. earnings announcements tend to predict stock returns for a slew of issuers — particularly firms with a modest level of institutional equity ownership. So stock investors seeking an informational edge should keep their eyes on junk-bond prices on the heels of earnings reports.
That's the conclusion of a paper by Omri Even-Tov of the University of California at Berkeley, who took a look at the bond returns that followed a whopping 19,518 quarterly earnings announcements of 770 firms from 2005 to 2014.
"The bond price reaction provides incremental explanatory power for post-announcement stock returns over and above the information contained in the earnings surprise (the post-earnings announcement drift), the level of reported accruals (the accruals anomaly), and the immediate stock price reaction to the earnings announcement," writes Even-Tov, an assistant professor at the Haas School of Business.
Russ Sears writes:
High yield bonds returns are not normal. This is because there are periods of very little volatility and then periods of high outliers. There were 2 days with in the financial crisis with more than 10% losses in the ETF JNK. That is about -12 standard deviations away from the mean (the std dev is 0.88% mean of 0.010% per day) And one day in the recovery or 15.6% returnsNeither are returns "random" as there are average spreads, over corporate bonds are predictive.
What does this have to do with the article. Well this suggest that junk bonds by definition are companies struggling to find financing. Hence in each crisis they are not diversified but will tend to behave like the struggling sector. Each recession causes and recovery are different. Last recession the struggling sector got bailed out.
But care and very long term studies with many recessions are needed to reach definitive conclusions. But yes, high spreads with widening spreads probably mean hard times and low spreads and lowering spreads are probably signs of a bull market.
I would add the real question is are junk bond "spreads" a leading indicator of recession (better than stock indexes) concurrent or lagging indicator. The financial crisis seems to imply it's a leading indicator… however, bond guys generally are insiders of financial institutions. Bonds are not as liquid as stocks and hence unless one is using an ETF (not developed till 2007), one is comparing a theoretical class backwards put together returns or a sub sector of the class from a managed fund. In short because of the cyclic/non-random nature and because of the very fat tail/non-normal distribution, one must be highly versed in statistic or perhaps economics to use junk bonds in any way to allocate assets.
I haven't read this paper, but my guess is it captures a psychological/structural phenomena which may not be systematically useful:
Making a gross generalization, I believe that most bond investors are pessimists and most stock investors are optimists. The most a bond investor ever earns is his coupon plus par, whilst there is no limit to what a stock investor can earn. Because of this tail asymmetry (to which Russ sort-of alludes), it is plausible that bond investors may be faster to pull the rip cord on a problem investment. But that doesn't mean that the bond guys are right. It just means their expected value shifts in a different way. And once a bond price has fallen away from par and into the range of distress, it trades like a stock, not a bond. So this is a dynamic process too.
SpecList has had many posts about companies whose bonds are priced for default/impairment yet the stock prices still reflect positive equity /going-concern value… certain mining stocks (that subsequently filed for bankrupty) and Valeant are just two recent examples. But which came first, the chicken or the egg???
Scientists have a lot of pressure to publish and often a null result won't publish. Some speculate that hypothesis creep may affect reproducibility. It's like curve fitting in finance.
We just visited Copenhagen, Denmark. It's a beautiful city thronging with tourists. Very few Chinese tourists…they were all in Russia. Construction on old and new everywhere. Just below Stockholm on the beautiful woman index. Canals, open squares, spires. All the young people ride bikes and drove Uber out of business. Everyone speaks perfect English. Food and lodging is expensive. Cashless everywhere.
New Nordic cuisine was the rage in all the trendy restaurants.
Denmark used to be feudal society. My theory is there are trickle down effects from ancient history. People stopped at traffic Lights: bikes, pedestrians and cars. Every follows rules, no litter. There is an undercurrent of compliance and social conformity. Those in power positions act high and mighty and expect compliance. Anecdotally a waitress was afraid to bring food problems to a chef. An Airbnb host complained "I am not your servant!"
There was no attitude of self entitlement or the attitude so prevalent in the US that the rules do not apply to me. A similar effect operates in Japan where the nail that sticks up gets pounded down.
Nuclear construction plant abandoned. About 5,000 highly skilled jobs were suddenly lost today.
South Carolina decided to walk away from their nuclear construction project. Called V. C. Summer, the project was a two-reactor commercial nuclear power plant. SCANA spent/committed about $10 billion, which is down the drain.
The decision was a direct result of the Westinghouse bankruptcy. As a result of Westinghouse's financial woes, utilities were exposed to unacceptable levels of financial risk.
Utilities looked to Washington for help. They needed a tax credit extension. All they got was rhetoric. Nice talk from Congress. Happy talk from the Administration.
In the power industry, SCG's decision to quit the V. C. Summer project is a big deal.
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