I have been emailing my 8-year-old grandson a daily quotation or one-line advice (about sports, learning or life in general), which he seems to enjoy.

But I am running out of quotations and pithy advice relevant to a young person. Does anyone have either a good source of these, or some particular favorite quotes or advice?

Many thanks,


Ralph Vince writes: 

Here's some for you Dan. You may want to edit them for a younger mind, plus, you may not agree with all of them, but these are some that come to mind as I sit here and thing about it:

1. Don't try making sense out of it. You're in an insane asylum – things are not going to make sense, people will do things that don't make sense, that they cannot adequately explain. People don't know what makes them tick, only that they tick.

2. Happiness, of course…is all in your head. If you don't know that, if you haven't come to that realization, you will never be happy.

3. The Bull Market Syndrome. People, when they are met with success, take personal credit for it (bull markets breed geniuses), and when they are met with failure, blame luck.

4. Actually, luck is responsible for both! If you can only die by being struck by lightning, eventually, you will die by being struck by lightning! Conversely, if a man were to live forever, and bought a lottery ticket every week, eventually, he will win the lottery, with a probability that approaches certainty. Just stay the course, keep doing today what you must do today. As Woody Allen says, "Fifty percent of success is just showing up."

Luck Trumps Brains. To get luck, keep showing up each day with your shoes on.

5. Creativity trumps money every time.

6. Fortunately in life, you don't have to succeed at everything you do, only a few things. One success often justifies all prior attempts.

7. You can buy great a education – you can not buy brains.

8. The Oswald Principle: Usually, the best course of action in life, is to take no action (and usually, the best thing to say is nothing!). The guys in jail or there not because they didn't do anything. Usually, you should just sleep in! If nothing really bad happens today, as my friend Oswald said to me in eighth grade, it's been a good day!

9. You don't have the problems you think you do. Actually, the only real problems are health and criminal problems. Everything else is just a frivolous, meaningless nuisance.

10. Never say never. Everyone, however righteous they may claim to be, however upstanding they say they are, will, under the right circumstances commit the crime. A cold morning, wet, hungry, tired, angry….they'll do things they never dreamed they would!

11. Everything is going to be OK. It always is.

12. You never know what's going on in someone else's life. Before you do or say something nasty to them, realize this. Perhaps they have just gotten some awful news of some sort. You never know what is going on in someone else's life.

13. Don't pressure yourself. Just take care of today's things today, and relax…we got all the time in the world. The proper attitude in performance of anything, be it athletic, mental, etc., is a kind of relaxed, aware, confident attitude. You see it manifest in sport all the time (Ali, Ramirez…..or hitting a gold ball).

14. Don't complain and don't explain.

15. Don't react or engage emotionally with others. There is great power in stoicisim, in a cold, blank, stare back when others are trying to engage you in a fight.

16. Similarly, if it is someone you love or must live with, trying to engage you in an argument, practice avoidance. Just try not to be around them, to avoid them. Go out for a walk.

17. Live "in the tunnel," but think outside of it. In other words, deal with the mundane, immediate issues at hand, think as out-of-the-box as you can.

18. You can always "lift" more than you think you can.

19. Women will be as bad as they are allowed to be.

20. You should pray for your enemies — you need them. You need to have some enemies to keep life interesting.

21. Treat those you love as though they were going to die at midnight.

22. Your body is a record of how you have cumulatively cared for it.

23. The easiest way to learn things in life, is through observation. Sit back, watch all the ways everyone around you will figure out to how to screw up.

24. There are two ways to learn something. The easy way and the hard way. With the easy way, someone tells you something and you learn it. The hard way is the way we usually learn things, and we usually don't learn it the first time through. So the easy way, you see, is the equivalent of a windfall. (note to teachers – you can cause the easy way in others if you can convey a different perspective on a problem, a manner wherein the person learning thinks, "Ah, I see it now."). The moral here is that there is no point lending money, time or advice to help people out if they aren't going to listen to you, if they are going to insist on remaining on their own vector, unchanged by your advice, wherein they are going to learn their lesson the hard way with or without your giving them time, money or advice. So don't give it unless they are going to incorporate it.

25. Do not succumb to the suffocating culture of comfort. If you are comfortable, you are in trouble, you just don;t see it heading towards you.

26. Remember – your best trades are ahead of you.

A commenter writes: 

The time to abandon is when you have to step UP into the lifeboat (or raft). Any other time is premature. 

Vincent Andres writes: 


A creative man is motivated by the desire to achieve, not by the desire to beat others.

All philosophical con games count on your using words as vague approximations.

A refusal to vote represents a definite expression of political opinion, a rejection of the candidates & the programs offered.

Credit is not…a magic piece of paper that reverses cause and effect, and transforms consumption into a source of production

if men want to oppose war, it is statism that they must oppose.

Man is not a lone wolf and he is not a social animal. he is a contractual animal.

and many more from A. Rand here.

The highest laws of the land (America) are not only the constitution and constitutional laws, but also contracts - H Arendt

The most radical revolutionary will become a conservative the day after the revolution. - H Arendt

Concentrated power is not rendered harmless by the good intentions of those who create it. - M Friedman

"Governments never learn. only people learn." - M Friedman

"Humility is the distinguishing virtue of the believer in freedom; arrogance, of the paternalist."

It takes a special sort of man to understand and enjoy liberty - and he is usually an outlaw in democratic societies.

The average man doesn't want to be free. he wants to be safe.

Sorry if not all quotes are appropriate for a 8 years old.

There are many specialized twitter accounts who deliver 1 or several quotes per day. There is one for Ayn Rand.

Anonymous writes: 

Try to always practice good manners; be particularly polite, deferential and prepared at bars, gas stations, convenience stores and parking lots for these places are fraught with others over-valuing matters and ready to imprudently defend their claim.

There will be fights, unavoidable fights, they will find their way to you, you don't need to look for them.

Paolo Pezzutti writes: 

It's not how to achieve your dreams.  It's about how to live your life. -Randy Pausch

Throughout the centuries there were men who took first steps down new roads armed with nothing but their own vision.  -Ayn Rand 



 Stefan was saying twitter is so brilliant because it's like fast food on the Internet.

Twitter is what we do with it. So indeed there's a lot of fast food, but there are also very interesting accounts, giving information on science, open edition, etc.

Nobody is forced to subscribe to uninteresting accounts, and there is no lack of interesting ones.

More open than twitter, there is … and even more open is (on which is based)



 I just watched Changeling  directed by Clint Eastwood (2008) yesterday and found it's a very Randian story.

The story occurs in Los Angeles in 1928. A little handful of individuals trying to fight against the system. Alas the movie is based on a horrific and true story: "the chicken coop murders".

I found the story interesting because of the depiction of how information, gaining information and broadcasting it, can change things. And also, sadly, how so many people not only cooperate with the system, but will peacefully destroy those who don't.

Rev. Gustav Briegleb Dr. Gustav A. Briegleb (September 26, 1881 – May 20, 1943) Briegleb was a Presbyterian minister and pioneer radio evangelist. He was the pastor of St. Paul's Presbyterian Church, Jefferson Boulevard at Third Avenue, Los Angeles, California. He took up many important causes in the City of Los Angeles in the 1920s and 1930s, most notably the poor handling of the Walter Collins kidnapping case in 1928. He fought to have Christine Collins released from a mental hospital after she was committed there as retaliation for disagreeing with the LAPD's version of events.

The movie is a bit long, but worthwhile.



 There are several reasons that cynics are on the rise in my opinion.

1. People assume the cynic is the expert. The cynic has an aura of authority.

2. Cynicism is masked as realism.

3. People assume the cynic is a healthy skeptic. On first encounter these two are hard to distinguish.

4. The cynic guards against disappointment.

5. The cynic creates an “us” against “them” world. "We won't be fooled again" by "them".

6. It is easier to find a problem than create a solution or even understand how complex creativity works.

7. It is easy to ignore the positive. Hard to ignore the negative.

8. People assume their bias is only one sided: When they like something too much. People recognize their biases when there is favoritism but justify their biases when there is disdain or prejudice. The cynic reinforces that their biases are the only morally defensible ones.

 9. The cynic has many times when he is proven wrong, but it is often hard to pinpoint the opportunity cost to that cynicism (for ex. the profit he missed by staying out). However, when he is proven right, it is very easy to see how much he has saved.

10. The belief that Type II errors or believing falsely in a person are much more damaging than Type I errors or not giving a good person a chance. Despite the time it takes for a person to prove she is proficient and the moment it takes to lose trust-worthiness.

11. The cynic is elevated as “your own man” by the media and politically. Thus becoming the “go to person” when they want something said or done. This creates all sort of side agreements and quid quo pro understandings.  Every TV program needs the phone numbers of a few favorite cynics.

12. Ironically, the person most likely to publicly be called down for their cynical tendencies is the person that is cynical towards the celebrated cynic.

Con-artists understand deeply the appeal of cynicism and use it against their prey.

The cynic is the ultimate champion for the status quo. The cynic can define people by their weaknesses not their strengths. Since everybody has weaknesses, they can dictate who is important by defining who is not important. Old man’s disease is giving in to the appeal of cynicism.

Rocky Humbert writes:

 "A cynic is a man who, when he smells flowers, looks around for a coffin."

H. L. Mencken

In the spirit of not being a cynic, I note today's news story reporting that volunteers in Japan are being asked to grow sunflowers to produce seeds … so even more sunflowers can be grown in areas contaminated by radioactivity from the Fukushima disaster. The proponents say sunflowers can efficiently absorb radioactivity from the soil in a process known as phytoremediation. Here's the news story.

The skeptic (as opposed to cynic) in me thought that this sounds like an example of "green" people confusing Flower Power with nuclear physics. But a little bit of research reveals a bit of "sunny" science for the weekend. There is REAL science here! Sunflowers (and certain other plants) CAN decontaminate radioactive soil faster and cheaper than many other approaches. Chernobyl was a large-scale proof of concept. Here are 2 of academic papers on the subject:"Screening of plant species for comparative uptake abilities of radioactive Co, Rb, Sr and Cs from Soil,"Gouthu et al ; Journal of Radioanalytical & Nuclear Chemistry" and  "Uranium Absorption Ability of Sunflower, Veiver and Puple Guinea Grass," Roongtanakiat et al (2010)

SO THE MORAL OF THE STORY IS: "A cynic is a man who, when he smells flowers, looks around for radioactive contamination."


Pitt T. Maner III comments: 

The phytoremediation and bioremediation fields have bloomed to aid companies tasked with difficult cleanups. Even earthworms can be useful with certain contaminants (PCBs).

Larger trees also can be used to influence the flow of impacted groundwater so that contaminants do not move offsite—effectively they act as small pumps (think of all the Florida maleleucas used to drain wetlands, now designated as "noxious weeds"). Trees can help with the treatment process through the uptake and concentration of contaminants or the breakdown of contaminants in the bacteriologically-rich portions of the root system .

The economics can be interesting and one can only imagine what they are in the Japanese case and how they affect current land values. Those with an understanding of the actual risks involved and the ability to cost effectively clean properties have in certain instances done well:

"Acquisition, adaptive re-use, and disposal of a brownfield site requires advanced and specialized appraisal analysis techniques. For example, the highest and best use of the brownfield site may be affected by the contamination, both pre- and post-remediation. Additionally, the value should take into account residual stigma and potential for third-party liability. Normal appraisal techniques frequently fail, and appraisers must rely on more advanced techniques, such as contingent valuation, case studies, or statistical analyses.[11] Nonetheless, a University of Delaware study has suggested a 17.5:1 return on dollars invested on brownfield redevelopment.[12]"

Kevin Depew writes:

Why do you believe cynicism is on the rise? In my opinion, the < 35 generation doesn't really understand it or ignores it. I don't have access to it now, but I saw some large scale polling data on Friday that was remarkable in the cross section spreads between < 35 and those over, especially > 65. The gist, based on this polling data, is that if one is > 65, one is likely to find the country going to hell, the economy going to hell, that politicians are evil and stupid and that all bankers and finance people are crooks by a wide, wide margin over younger subset. If interested I'll forward data when I get back in office Monday. I was looking at it in the first place because there is a wide divergence between consumer comfort and confidence data vs market that is outside of 25 year norms and was just curious about the asymmetry in both economy and the polling data.

Victor Niederhoffer writes: 

Artie wrote a book on cynicism in the police force that attributed cynicism as a variant of the authoritarian personality. He believed that police became cynical because they saw so much evil that their own persona looked relatively good compared to all the evil, and their cynicism and corruption was a natural outgrowth of the impossibilities of fulfilling all the requirements of an all too demanding job with conflicting goals. I believe we become cynical on the list because we see such ephemeral behavior by the public and funds, and such inside maneuvering by the cronies and flexions. It's hard to maintain a proper chivalrous attitude when confronted by these things day after day.

Jeff Watson adds:

But that cynicism, if allowed to fester, will have profound effects on one's trading. I've seen it happen too many times to people and they end up losing their edge.

Ken Drees writes:

Cynicism towards markets and politicians is healthy, but toward general mankind or society, probably not so well placed since hope and belief in goodness of the total gives one an overall positive tendency towards world view but also a well placed skepticism at certain segments.

The idea of erosion is interesting where the rigors of the job or the constant focus on conflicting outcomes that collide with the overarching worldview wear down the person's belief in good. One thought along these lines that I have is that by the end of one's life you are so distilled down in terms of your true character that its impossible to change. You are either that positive and generally nice old person, or a frown wearing old crank; the thoughtful scientist who never stops learning, or a worn out 24/7 TV watcher.

Russ Sears adds: 

I believe it also has to do with the narrow vision we have of public versus personal life of the cynic. We do not see that like a partying narcotic addict, the soul has been sold for a very narrow gain. The personal life is full of turmoil and eventually rots the productivity out of the person. Think about the cynicism required of the steroid user or EPO user for example.

I believe that many companies demise starts when a new "C" position arrives within it- the Chief Cynic. If not confronted as Artie did, often this position is allowed to become an all consuming cultural force.

Vincent Andres adds:

"the cheaper money tends to drive out the dearer"

(the money of lower value drives out the money of higher value)

–Nicolas Oresme

(« la mauvaise monnaie chasse la bonne » )



There are pictures of migrations in the current National Geographic and group think in movies in the NY Times. Part of the idea that has captured the world in current days? Relation to markets? How to predict the stages of migration and big moves in markets and individual stocks?

Vincent Andres writes:

Read this interesting article which may relate:

America, at its best, is a glittering symbol of promise to would-be immigrants. But where do they actually want to live in the United States? Trulia, the real-estate listings site, has come up with the only data set we've seen that actually breaks that question down to the city level. Their infographic, Global Pursuits of the American Dream, was built using incoming real-estate searches on Trulia's website . These were then broken down by country of origin, and the city being searched. Here's what the data looks like for two relatively wealth countries, Germany and Italy.

Steve Ellison writes:

While California was one of the top U.S. destinations for immigrants in the 1990s and 2000s, during the same years many more native citizens moved out than moved in.

Bo Keely writes:

 The most dramatic human migration in modern history is the Central Americans atop Mexican freight trains the length of Mexico to the USA border. The quest is freedom and financial independence, with the dream of staking a new individual life and sending sponsor money to their thousands of Central American villages to get the next person on the freight. Each day about one hundred wade cross the river border between Guatemala and southern Mexico, hop on a daily freight- up to 100 per train recalling the USA Great Depression- and jiggle north to Mexico City where they fan out on RR lines to the Texas, New Mexico, Arizona and California borders. I've ridden with the young men and a handful of women in three years, once getting caught in mid-stream of the Rio Grande river by US border patrol that took some explaining. A breath-taking though small sample of the month long ride is detailed in Nazario's 2003 Pulitzer Enrique's Journey. The journey for Central Americans is a tale of hardship, although this is the first time I've ever been collared by a RR bull who took me home and introduced me to her mother.



 There's a plethora of articles recently published that discuss the possibility of the sunspot cycle going into hibernation for awhile and a new Maunder Minimum (Period of decreased solar activity lasting ~70 years or more that caused a "Little Ice Age") taking place. There are articles here, here, and here that discuss a new solar minimum. Already this possibility is being politicized by the global warming crowd and articles are saying this, this, and outright falsehoods in this article.

There are many comments based on opinion and no science, like this one swirling around that said, "A new Maunder-type solar activity minimum cannot offset the global warming caused by human greenhouse gas emissions," wrote authors Georg Feulner and Stefan Rahmstorf, noting that forecasts by the Intergovernmental Panel on Climate Change forecast a maximum 4.5 degree Celsius rise by this century's end compared to the latter half of the 20th century. On that last partisan note, I expect that if there was a new solar minimum, the sun would have a solar flux of 11% of it's peak value and 50% of it's average minimum value. During that period, sunspot count could approach zero and average solar output could drop by 0.9-1.3%, going way below the solar constant. A solar minimum could be a big deal with a huge planetary climate disruption. Thinking ahead by looking to the past, one notes that Oats, barley, beets, other cold weather crops and "Ancient grains" all had an increased planting range during the last Maunder Minimum. Other crops like wheat, rice, and tropical crops had a shrinking planting range.

Jim Sogi comments:

This just shows how facts can be picked to substantiate any thesis. The verity, relevance, reliability, conflict of interest in any particular fact or its origin may affect its reliability and thus the strength of whatever conclusion is being drawn. These factors can also be used to spin facts to support spurious conclusions. Irrelevant facts often determine outcomes of decisions based on their emotive content or recency. These are well known heuristics. I know this probably better than anyone on this list. We see scientific studies by drug and food companies misused to promote their products. We see facts misused by the propagandists of the power elite to distort the truth. Thus the use of facts is not the only road to truth. The use of reflection, thought in the absence of fact can be useful and productive.

Vincent Andres writes: 

Thus, as long as the IPCC satisfies its true clients, it can– like its clients– completely ignore the critics. They are valueless, unimportant and powerless. That is what it has learned-– the classic "mind over matter" trick. It doesn't mind and we don't matter. That is the way modern government works, and the IPCC is part of it– as this brazen example shows.



Vincent Andres has a beautiful website in French with a photo of the cover of Atlas Shrugged and subheadings like "Kleptocracie" and "Liberticide".

Vincent Andres writes:

Thank you Victor for the kind word. It's far from DailySpec, but I do what I can being in a very socialist country (which is now threatening the internet.)

I must specify that I'm not alone and I'm greatly helped by marine research expert Michel Olagnon who writes many articles. (Michel works on rogue waves but he is also a very nice and active quant. You may remember him since he won one of your Dailyspec award in Feb 2006 with Jim Sogi.) 



 I think this essay is worth reading:

"primitive agricultural communities are `dynamic'. They are subject to continuing change in agricultural technology, induced by population pressure…"

And also this article by Grantham: "We're Heading Toward a Disaster of Biblical Proportions".

Victor Niederhoffer asks Alex Castaldo to explain to him what this is all about.  Alex Castaldo writes: 

The first link is a 108 page essay written in the early 1960s by Ester Boserup , a European agricultural economist I have heard about before but don't really know. At this time many people were concerned that overpopulation was a big problem for the world. In this essay she argues that actually in some cases a surge in population forced people in an area of the world to improve their agricultural technology and make other changes that were beneficial. So (local) population increase was actually a spur to innovation and economic progress.

Jeremy Grantham on the other hand is a contemporary money manager from Boston (born in England) who is always somewhat bearish (except in March 2009 when he briefly and correctly turned bullish). He is very environmentally concerned and always worries that humankind is using too many resources or using them unwisely. Quote: "Grantham [believes] that the world has undergone a permanent "paradigm shift" in which the number of people on planet Earth has finally and permanently outstripped the planet's ability to support us."

So the Boserup thesis and the Grantham thesis contradict each other, and Mr. Depew is quoting Boserup to counter Grantham.

Victor Niederhoffer writes:

Julian Simon would turn in his grave, as would the author of The Improving State of Humanity.

Vincent Andres writes: 

If on the other hand, the most valuable resource is the human brain, a larger population is better.

Steve Ellison writes: 

I would rephrase, "if on the other hand, the most valuable resource is the human independent brain,"(Because globally, what's the use of similar brains ?).

The ratio in the brain distribution between the tails and the body probably matters. And the bigger the body, the bigger its reinforcement, and maybe (?) the bigger the crushing of independant brains.

… hopefully, this line of reasoning is wrong.



A favorite quote:

"Die Macht einer Weltanschauung bewährt sich nicht durch die Antworten, die sie zu geben weiß, sondern durch die Fragen, die sie abzudrosseln versteht" Gunther Anders [Die antikiertheit des menschen]

My amateur translation: "One doesn't measure the power of an ideology only through the answers it's able to provide, but also through the questions it's able to suppress".

Scott Brooks adds:

That is a perfect portrait of the evil influence of political correctness.



For engineers in France, there is always a claim for a "shortage of skilled workers" while at the same time we saw the skilled workers not finding work.

The reality is numbers are not given by an independent entity, but by already in place oligopolies, where they typically simply add the number of offers on websites to estimate the "shortage", with the same offers often being published in 10 places or more.

This allows the recruiting of less paid people from the south or east and maintains a welcome down pressure on salaries.

PS: I'm not discussing this strategy, every entity does what it can to survive in our overtaxed world, but it's just that I don't want to eat the "numbers" supporting a shortage too naively.



 Why time and cycles influence on price and markets may have changed over the years and meant different things at different times:

Time is change. No change, no time. Change is observable time. When our ancestors found regular, predictable cycles of change against which to measure the fluctuating rhythms of their bodies – their pulses and periods, their breathing and blinking – they founded the science of timekeeping. Once timekeeping started, life could never be the same again. Humans had a unique way of organizing memory and anticipation, prioritizing tasks, and coordinating collaborative endeavors….

In the Western world, we ceased long ago to observe lunar months, except for the calculation of some rather arcane religious festivals. We can no longer be sure that the sun is at its high point at noon, nor can we still set our watches by the progress of the guard stars around Polaris. We no longer even have to respect the passage of the seasons or the sequence of the days. We can measure time according to whatever convention pleases us or best suits our ways of life and habits of work.



This sort of thing happens from time-to-time, and it's disturbing… Here's a story from 1996.

Sub-bottom line: in the process of deciding, i.e before choosing… you know neither side, so neither the other side or the guy. You just suspect some guys are (systematically) better informed. The only choice left is to refuse to play. Many do. This is simply killing the "market", as surely as socialism is.



 One 's first thoughts upon a trip to Walt Disney World with a four year old son (and the 5 and 7 year old daughters of some very good friends) is that the magic and happiness trumps everything with the little boy and the parents settling into the rhythm of creativity, joy, excitement and healthfulness of the experience. The attractions are beautiful and modern, the cast is friendly and helpful, the little girls are all dressed in their princess costumes and the boys are screaming with delight at the thrilling rides, the parks are filled with an up to date diversity of fun and educational events, teenagers are reveling in their favorites shows and games, and the guests are a cross section of the world that makes you jump for joy at the down to earth enjoyment they can take in something this good, and their productivity in being able to afford this delight.

Particularly heartwarming is the effort taken to give the ubiquitous handicapped memories and undoubtedly the happiest times of their life. The parents were also pleased with all the modern efforts to provide healthy foods, with toffuti, hummus, fresh fruits, and sugar-free commestibles available at almost all locations.

I have 7 kids and all of them have been to Disney multiple times. They look back on their vacations there as among the best and most formative experiences of their life. The four year old boy at first was frightened by all the noise and the discordant notes of all the music, and scariness of the rides and the long waits. But after a few days, he settled into the rhythm and he particularly enjoyed the parades, the Jungle Cruise, the moving sidewalk, the movie ride, the circular garden dinner and fountains at Epcot.

 And yet, I was seething after visiting the Hall of Presidents. The show is narrated by Morgan Freeman, one of the 2 or 3% of the visitors there of his color. The history of the presidents presented would be something you'd expect from Russia in the 1970s with a skip from George Washington to Andrew Jackson and then to the two Roosevelts, with lionization of their efforts to stamp out monopoly, save the country from greedy businessmen, and attempts to take from the rich and powerful and give to the weak permeating and enveloping the whole thing. Particularly loathsome was that the talking was at least 50% devoted to the current president and FDR, the two most agrarian Presidents in history. The collectivist bias of Disney in this show was consistent with the anti business movie that Disney just released about Wall Street, the well known anti business attitude and ego mania of its previous president, and the scary remake of Alice in Wonderland that made the whole show a roller coaster ride of scary escapes rather than the coming of age and creative, thoughtful adventures of a girl trying to cope with the world of the original.

Walt Disney himself, after hatching the idea for Disney World in the 1950s, arranging the financing to buy 40 square miles of swamp land, planning every detail of its infrastructure, managing to buy the land through dummy corporations so that all the land holders were happy to sell out for a song the swamp land they bought in 1912 from the Munger corporation for 5 bucks an acre, never lived to see Disney built. Mrs. Lilian Disney said that he would have been happy to see how it turned out. But how he would turn over in his grave to see the anti business, collectivist bias of the executives who have taken over his idea and made it consistent with the idea that has the world in its grip. (It is interesting to note that Eisner refers to his partnerships with Warren Buffet and Charlie Munger as helping him climb the ladder of success at Disney).

Of course, the Disney parks are a mere 25%, of the total Disney revenue of 40 billion a year, and an even lower 15% of profits. Disney itself is mainly sparked by its 100 million cable television subscribers that accounts for 60% of its profits. When they bought ABC, Eisner admitted in that self deprecating mien of the chronic egomaniac that the top guys didn't even know what ESPN was. But now they do, and the analysts that follow Disney and their capital expenditures of 10 billion here and 5 billion there to develop content make the company a play on the public's addiction to sports. Not to be gainsaid of course is the incredible feat of their movie division to have two billion dollar + revenue producers in one year in Alice in in Wonderland and Toy Story. And they continue to follow their mantra of making all their movies for 1/2 the price of any other company, and then tying it in with every aspect of their operation from parks to gifts to licenses.

Indeed, Disney is the very model of a perfect modern corporation. Its stock at 33 is near its century high of 37. It's up some 3500 % from its offering of 1.3 in 1981. It's near its all time high of 43 from 1997, and its revenues and profits this year are up at least 15% in all areas except theme parks. You have to admire the way this company like Apple has adjusted to modern times, and captured the idea that has the world in its grip, and the things that animate kids of all ages in our current generation.

Tim Melvin adds:

 The best trip I ever took to Disney was in early 2009 with my adult children. They still thrilled at the spectacle but were able to appreciate the effort and industry that goes into the enterprise that is Walt Disney World. Thankfully the hall of Presidents was closed or odds are my Ayn Rand loving daughter would have gotten us all arrested. Disney will always be on my buy-in-a-crash list. My sum of the parts for this stock is right around $38 bucks and when it drifts below $20 in a melt down (this has happened twice in the last decade) it paid off huge on both occasions for those who saw the merits of the mouse at such a level.

Steve Ellison comments:

In the Disney parks, everything is part of the show. I was at Disneyland in 2000 watching Honey I Shrunk the Audience when suddenly the action stopped, and I heard an announcement: "We have had a power outage. Please exit through the doors on the right." I assumed it was part of the show and wondered what would happen next. It was not until the doors opened and people started walking out that I realized there really was a power outage (one of many in California after the failed attempt at partial deregulation of electricity). 

Anatoly Veltman writes:

I take my kids via motorhome every Winter and Spring breaks: can't beat this destination weather-wise. I don't deem them mature enough for busy Disney Parks; ever since my first visit in 1980, I always thought of Epcot (and later Studios and Animal Kingdom) as a prime education destination. Smaller kids love watery fun of Grand Floridian, Polynesian, Caribbean, Coronado, Saratoga, Boardwalk, Orleans, Key West, Swan/Dolphin. You can access all these via comp buses, boats, monorail. The only resorts really limited to guests are Beach and Yacht Club. Feel free to quiz me for hints, or read up some more general wisdom at

Vincent Andres adds:

The picture on DailySpec triggers some analogy. The river is fake and the little boat moves only thanks to a especially built Deus ex machina. Our occidental "capitalist" world is also, for long, a true Disneyland. The main Deus ex machina are our debts and all what our master fakers are able to do with our "major" currencies. But if the debt flow slows down, we'll soon have our little businesses/boats slowing down also.

We though we were good car sellers, but was it really this difficult when our customers get /in fine/ there money thru loans or money printers ?

I'm confident our master fakers are doing all there possible for our deus ex machina to continue to work properly, but it seems the Mississipi debt river is now slowly founding more fertile soils to irrigate. (Spain just downgraded by moody's.) Let's hope our second fake motor will not also have problems.Little boats and there passengers begin to stamp.



 I was just doing some work on Intel. (I have a small position and added to it this morning.)

Before the open, Intel announced the cash purchase of McAfee at a substantial premium to its closing price. They paid a 2.7B$ premium to MFE's close, and the market immediately took $3.7B off the market cap of Intel. (This was before the market went down a lot.) So this means that the value of MFE inside of Intel is worth less than the value of MFE outside of Intel. This is not entirely crazy, but it doesn't smell right to me.

It means that the market place:

1) Puts more value on the cash that was sitting inside of Intel than on yesterday's market cap of MFE … or

20 it believes that Intel will harm MFE's business.

Vincent Andres comments:

Maybe the "substantial premium" (60% !) has been considered as shocking in today's mood. (Not considering if the deal is good or not) was such a premium really necessary to make the deal? Kind of bad execution? 



 Recently I have posited that the market to an inordinate degree shows the main attributes in its daily moves of the most vivid sports game that has not been used. I would add to this that during each hour the market is likely to move to the rhythms and dynamics of the most likely classical music being played on a classical music station in home town, for example the former WQXR in New York, in full knowledge that these programs are often selected 2 months in advance, and noting that I was a subscriber to same when I was 12 years old.

I am adding to my list of mystical encampments and predictions that the fortunes of Apple and Lady Gaga will follow a similar arc in the future, and as soon as the Lady loses her luster, or a substantial base of her gay support, Apple will be ready to nose dive.

Do you feel that because of these ideas that I should resign my post as chair of Daily Spec which is designed to deflate bally hoo, or is this just a symptom of that predilection that old men such as the sage and the fake doc have to maintain their romantic aura?

Ken Drees writes:

Lebron James' Cavs win over the bulls to end that series correlates to the spy top (04/27/10). That was the zenith of his career in Cleveland. They were then going into Boston on a full tank of expectations. The last game (as a cav) in that series marked a secondary top 08/13/10–then the melodrama begins. His great choice to go to Miami did not mark the low but was the midpoint of the latest rally—he is losing his market moving mojo–his ability to focus the market energy . So now he has lost his core fan support like lady gaga at some point will lose her core fan base. No, I don't think the Chair is that off-kilter.

Popular culture icons somehow bleed into market consciousness.

Vince Fulco writes:

I've long thought that the culture has moved into a greater phase of bally hoo, perhaps a derivative of the Romans' 'Bread & Circuses'. We are now just starting to realize or are being forced to understand that flat incomes, poorly funded retirements and insufficient skills in the aggregate set against historically outsized obligations are a recipe for disaster. Fighting falsehoods would seem to be a necessity of survival and good investing for the long haul. Moreover, one has great opportunities to choose from post deflation.

Jim Lackey shares: 

Actually no. AAPL has talent and is'nt just a fad or a show. Not sayin' that the Lady doesn't have talent, but if and when I see her write and produce tunes for others and sing Jazz, then she will be an AAPL. But no! No I did buy AAPl in 2003 when Mr. Eyerman stood right here on list and said buy it now. Jobs is back, and Itunes is brilliant. It's been a ten bagger since, which is what got me to tell the father in law naaa na na no this Xmas as he was on visit to Music City and toyed with his new Iphone all week. He's a MD and a tech freak and he said, "you know what, I don't need a PC or internet at home anymore with this"

It's not CSCO when it was on the way to a trillion dollar market cap in year 2,000. It's post crash now. Also it's no shorted up fad stock, but yes it's a fashion device an ipod in all 3 colors for different outfits. If I had to guess its a DELL circa late 90's. It never crashed and burned until much later in the tech wreck. It just stopped going up and in these markets AAPL must trade 299.75 but not 300. ha. 

Craig Mee writes:

Just like Seinfeld had the bravery to sell the high and knock back the 10Mil for a tenth season, (one of a tiny minority who do) maybe the gagas and apples should too. To keep up the product development and create new bizarreness no doubt gets harder and harder with everyone hot on your tail. Im sure income changes, say for Seinfeld, from shows to marketing, but he has been smart enough to cut and run, and keep the value. A lesson for us all. 

Marlowe Cassetti writes:

The chair has touched on a point of interest that has bothered me. I don’t know about Lady Gaga, but Apple’s climb towards the top of market valuation appears to be inline with the phenomenon of a bubble. Yes, I understand that we cannot declare a bubble until it bursts, but let’s look at the facts:

There are some 47 stock analysts that cover AAPL, all but two have either a buy or a strong buy recommendation. It is the darling of the market. Its market cap is approaching $ ¼ trillion and at the rate it is moving it is on its way to challenge Exxon Mobile Corp. XOM produces stuff that the world needs, AAPL doesn’t produce stuff that the world needs just what they like to have, until something else strikes their fancy.

It reminds me in the 1980's when people couldn't buy enough Wang stock. You hadn't arrived if your office didn't sport a Wang word processor. The bubble will burst when the last fool buys in at a nose bleed price.

Thomas Miller writes:

 Sometimes one's instincts or gut feelings can't be counted or explained but you feel its true. Probably based on years of different observations made subconsciously. A trader may feel strongly a market is about to break without being able to explain exactly why, because subconsciously they have seen patterns many times before. Considering the source, I wouldn't immediately dismiss this as ballyhoo. Instead of resigning, further testing is called for.

Steve Ellison comments: 

Mr. Aronson noted in his book that it is no fun being a skeptic and that the scientific method leaves deep human yearnings unfulfilled. Facts are often tedious and dull, but stories are captivating, which is why people who have bought into a narrative continue believing it even when presented with strong counterfactuals. "Story stocks" have always been prominent in bull markets.


Marion Dreyfus writes:

A new study reveals that people are at their angriest on Thursdays. Thus, perhaps deals might better be made on Friday, when people are delightfully anticipating the weekend, or Monday, when they are somnolently reviewing the events of their past free-time indulgences.

interesting … We have been doing product development on a tool to gather data, and do reduction for self-introspection to find and permit prediction of cyclic true 'more productive' highs, and 'down in the dumps' lows.

Jim Wildman comments:

I've been thinking a lot about rhythms. I've noticed on the treadmill at the Y that people tend to fall into step with each other. Being on treadmills, this is easier since you can be running at different speeds, but the same step count. It creates an interesting effect when the treadmills are on a suspended 2nd story as it was at the last gym. I've wondered how many people it would take to collapse the floor.

This study seems to indicate that there are (at least tendencies towards) rhythms in 'group' emotions. What other rhythms are there and how do they affect me? How do they affect the markets?

Vincent Andres adds:

Here is a good paper on this topic of frequency coupling

Some more infor:

Steven Strogatz

Steven Strogatz's publications

A good book

TED video (look at the part on fireflies, near the 10th minute on metronomes (1st historical notice by Huygens), near the 13th minute and the bridge (not Tacoma … but not very far !)… in fact the whole video examples are interesting). 

Easan Katir writes:

In a year when Paul the Octopus correctly picked 7 consecutive wins, well-documented to the world, when the underwater plume in the Gulf of Mexican Oil matched the plume of gritty ash from Eyjafjallajokull, and the rig explosion coincided with the April market top, who can say anymore what is mystical and what isn't. Lead on, Chair! Lead on!

Craig Mee writes:

Looks like Schumacher should of stayed off the track, as HIS value, now may be plummeting: "For all his greatness, he never knows when to give up. He is a shadow of his former self," added hugely experienced former driver David Coulthard" Ouch!



Steven StrogatzI've been thinking a lot about rhythms. I've noticed on the treadmill at the Y that people tend to fall into step with each other. Being on treadmills, this is easier since you can be running at different speeds, but the same step count. It creates an interesting effect when the treadmills are on a suspended 2nd story as it was at the last gym. I've wondered how many people it would take to collapse the floor.

This study seems to indicate that there are (at least tendencies towards) rhythms in 'group' emotions. What other rhythms are there and how do they affect me? How do they affect the markets?

Vincent Andres writes:

Here is a good paper on this topic of frequency coupling.


Steven Strogatz

a book on the subject .

and a TED video: (look at the part on fireflies, near the 10th minute on metronomes (1st historical notice by Huygens), near the 13th minute and the bridge (not Tacoma … but not very far!)… in fact the whole video examples are interesting).



 "Why use a stethoscope when we can just see it through a cardio exam. Slowly and gradually community hospitals will come to resemble FVA hospitals. We will have universal care like the great nations of Europe. And we'll suffer with double digit unemplyment and smaller houses and cars while we wait for the health care that is our right" et al.

The question is why is every profession, not just legal or medicine or architecture and ours, becoming more and more so that the customer is no longer the pitiless captain?

Vincent Andres answers:

1. More and more poor education (+ other reasons) makes more and more people incapable of doing something truly useful. More and more people cannot do hard jobs or dirty jobs. Nevertheless, in order for the global system to keep up appearances, those peoples have to got an official occupation. The system works well. Everybody deserves a place in the system. The system is able to provide everybody a place in itself.

2. Putting everybody several hours in front of a TV per day is a first solution, but this does not well maintain the appearances of people working. (Although there is clearly a trend admitting as socialy acceptable that people have more and more of their time leisuring.)

3. The only other solution is to adapt the level of "jobs" to the level of people, i.e make the job simpler simpler and simpler. Hard jobs or dirty jobs being forbidden, the only other possibility left is penpushers. So the system has to create millions of such jobs. But this has to be done in a credible way. So complexity is created everywhere where it is possible, in Europe, in France, new laws, rules, etc are created on a weekly basis. (even our judges don't know the law in full today). There is also a multiplication of levels, each level being able to produce its own laws/rules (fractal complexity). This justifies the creation of thousands of offices, agencies, businesses, etc, officialy to cope with this complexity, but /in fine/ truly only to provide jobs, or better said, occupations. The system is a gigantic gas factory, and one of its main function now is to add each day more and more complexity, more and more pipes, in order to justify hiring people to build and maintain those pipes. Each of us deserves a place as an extra in this global spectacle.

Of course such a system is in deficit, ie not sustainable by itself on the long term. No country can survive with ~40% of the population playing theatre. It has to import most of its energy from outside. Hard and dirty jobs have greatly to be done by outsiders.

We are currently living in a moment where energy importing from our outsides becomes a bit more difficult. This system, in which we became more and more simple "extras" is analyzed in Society of the Spectacle by Guy Debord, 1967  (caution: although the book has great ideas, it is not super well written).



lilac bushIt's not barbecue, but today I had the pleasure for the first time of tasting lilacs. I was inspired by a kid's book that said that to find out why bees like the taste of sweet things you should squeeze the nectar of some nettle plants. I took Aubrey to the Bronx Botanical Gardens and we smelled the lilacs. By far the best-smelling were the hyacinth lilacs. To me it's the best smell in the world, and it stops time and elicits every romantic spring personage that one could ever imagine.

Inspired by the reverie, I couldn't resist tasting a number of the small flowers. I found that the white ones on the top of the trees were superior in taste and smell to the red ones, especially lilac poincare and lilac common. The taste is like a mixture of raspberries and sweet peas. A slight tartness at first, but then a beautiful saladly green with sweet overtones.

I've seen some recipes for lilacs subsequently, but surprisingly nothing on the actual taste of lilacs, indeed almost a googlewhack. I highly recommend that all speculators take a break from their trading before or after the daily fray and sample a few in their area.

Phil McDonnell writes:

As a home gardener I have been amazed at the number of flowers that can be eaten and are considered delicious gourmet treats. For example, zucchini flowers. Zucchini plants have two types of flowers, male and female. The male flowers stand erect and tall as is only proper. The female flowers are short stemmed and demurely lower. Even though the two flowers look similar, I find it very easy to remember the difference.

The taller male flowers are the first to be found by the bees. They next visit the lower females, thus facilitating fruiting. If bees are lacking, then the higher male flowers can pollinate the lower female flowers simply through wind action. After the male's job is done the gourmet can harvest the male flowers for a real treat. Just sautee in butter, salt, garlic and onions. Each female will give you a zucchini.

Vincent Andres adds:

Reading Vic's post, I was thinking exactly on that: "fleur-de-courgette" and I didn't know it translated as "zucchini flowers". Thanks Phil. I'll be growing some in my potager every year. Beignet-de-fleur-de-courgette is a terribly good (and not so difficult) flower recipe. Here is a video.  I expect to have my own olive oil in the coming years to made it 100% with raw home products. 

Bruno Ombreux writes:

May I recommend a French delicacy: Crystallized violet flowers.

They are very easy to make. These are the flowers you use.



 Last summer I had to take down a large Birch tree that had died from infestation of Bronze Birch Borers. The tree overhung the site where I was preparing to build a shed and I decided to remove it first to prevent damaging my new creation.

Upon climbing the tree in preparation for its removal I found myself reflecting on trading metaphors. There are tremendous risks in being high in a tree with a powerful chainsaw.

When one gets very high in the branches of a tree one finds it is critical to take the effects of the prevailing wind into account before doing anything. The wind can determine which part of the tree to remove first and where to drop the debris.

I think about safety first and at all times during the operation. I wear a climbing harness and attach myself to the trunk of the tree in two places with two separate lines. I pay close attention to where I place my feet and hands.

Familiarize yourself with the tree. Is it recently dead or has it been for some time? Can it be climbed safely or should it be taken down from below or from a cherry picker? A recently green tree will support large weights on a one inch diameter branch, a dry or rotten tree will do no such thing. Can you drop branches safely or are you too close to the house? Sometimes each piece has to be secured prior to cutting and lowered carefully with a line.

Use a ladder to get into the tree. Tie the ladder off to the tree in a way that prevents it from wobbling or rotating. In markets, sometimes one must stand on others shoulders to get oneself in place.

Have the necessary tools with you before you climb. It is time and energy consuming to have to go back for them. And not having the proper tool can induce you to use the wrong one rather than go all the way down and back to do it right.

Be familiar with your tools and know how to use them and care for them. Powerful tools, like leverage, allow you to do big jobs quickly but they bring powerful risks. It is amazing the number of ways a chainsaw can ruin your day. Chainsaws can bounce back out of the cut right at you so it is important to keep your face and body off to one side when cutting. Chains can break and fly back as well and fly or wrap in entirely unexpected directions. Be aware of the damage that your tools can do to you, not just the tree. Pay attention to them and treat them with the respect they deserve. Try to make allowances for the unpredicted. I've seen a chain fly off the saw and become entangled around the large branch it just removed and very nearly pull the user out of the tree.

Secure heavy tools to you or to the tree with a line strong enough to hoist them but light enough to part if the tool becomes ensnared in falling debris.

Never start using a heavy power tool until you have secure footing. I usually rest my weight into the harness and let my lifelines support me, using my feet to keep me stable.

Take your time. Being rushed will get you hurt.

Never bite off more than you can chew. When removing large portions of the tree with a single cut, they can behave in unpredictable ways, such as twisting or bouncing the tree or grabbing your lifeline and pulling it down with them. Once a very heavy piece begins to fall, there is absolutely nothing you can do to stop it.

Never extend your reach beyond what is comfortable. Using a tool at more than arms length puts you in a position that prevents you from reacting quickly if something goes wrong. It puts undue stress on you and the tool. It removes whatever leverage you have on the tool. It also prevents you from "feeling" properly through the tool. When using a power tool you receive signals about the material you are cutting and the nature of the stresses on that material. You can always tell when a branch is about to go if you are listening carefully to the tool. That feedback is denegrated by reaching too far or by using only one hand.

Several years ago a friend was cutting off a tremendous horizontal limb from a large oak. He was on a ladder extended to its maximum height and leaned up against the limb. The ladder was resting on the limb between the trunk and the cut and as the limb came off, this stub end jumped up and the ladder fell away beneath it. My friend tossed the saw and grabbed the three foot thick trunk and tried to hold on but slid down and finally fell off, shattering his femur and tearing up his chest and the insides of his arms. Had he and the ladder been secured to the tree he probably would not have fallen.

What have I missed?

Scott Brooks adds:

Hunting is considered by many to be a dangerous activity, what with a bunch of guys running around with shotguns or rifles. However, there are very few actual injuries from shooting accidents. The main cause of accidents are not the inanimate objects that send forth projectiles, but another inanimate object…tree stands.

Every year, people who feel that they are immune from the laws of gravity climb into stands and sit or stand waiting for their prey to wander by. And every year there are people who are stunned to find out that the laws of gravity are much more brutal and punishing than they thought.

There are only two types of tree stand hunters: Those that have fallen and those that haven't fallen yet. No matter how much you think you'll be able to hang on, or how adept your dexterity, you simply can't react fast enough to ward off an accident or mechanical failure.

I can personally attest to the feeling of bile rising in my throat from the fear of lost balance while perched 15 up in the air…and that was when I was wearing a safety strap.

I have a standing rule on my land. If you climb up into a tree stand, you must not only wear a safety strap, but it must be the first thing you put on when you get into the stand, and the last thing you take off when you climb down. I have asked (told) people to leave my farm because I caught them up in a tree without a safety strap.

So why even climb a tree stand if it has that much risk? It's about risk vs. return. I love the return I get from arrowing a nice buck. Same is true with trading. I love it when I get a great return for my clients. But the reality is that it's important to wear a safety strap when trading. Just as I profited in my poker playing days by taking a slow grind it out approach (never going all in), I do the same with trading. I'm satisfied with the inferior returns of a non-leveraged portfolio. My theory is that the more you leverage, the higher you're climbing and the thinner your safety strap gets.

All of my bad losses and sleepless nights have come from leveraging or taking too much risk.

That's why I'm a pretty boring guy these days.

Jim Sogi comments:

Professional tree trimmers all use a belay.  Mountain climbers also belay themselves for protection or to 'hedge' their position in case of a fall.

Ken Drees writes:

Never lend your chainsaw to someone who doesn't use them much. As in don't give stock advice to people or just give them advice that is general in nature–this saves on friends. Always remember torque and twist. If you don't read and predict how the cut will behave, rethink it. I have seen trees twist and pull the wrong direction, seen limbs bind back on the saw and have trees fall off course because of hidden dead spots. Be ready for the twist of the market as it takes your trade and bends it slightly the wrong way. Once I saw a dead tree being taken down by a friend. This large straight tree as it was falling broke apart into 3 huge sections. The trunk part closest to the ground went the right way and the other two in tangents like a V. Market wise–don't mess around with a junk-trade–its just not worth it and you can get hurt. And lastly don't drink beer before operating a chainsaw, nor chop wood with only shorts on, or put your hot saw down in a pile of dead leaves.

Pitt T. Maner III adds:

 Ok, this is a little bit like what I have been doing the past 2 years–namely Health and Safety oversight for pipeline and tank construction workers… guess who the least favorite person on the jobsite is?

There are probably better business analogies than below but here it goes (this is the short list! and not complete by any means, OSHA website would be a good resource):

1. I would have a health and safety plan in place with contact numbers and how to get to the hospital. Is there a written plan of action for each step of the process with the risks involved and the ways to mitigate the risk. (Investment plan)

2. Use a "buddy system". Have a friend nearby that can help you in case of an emergency. Have a 1st Aid Kit and someone Red Cross trained in 1st Aid and CPR. (Mentors and advice of others)

3. Survey the tree to make sure there are no hazards you have missed. Electrical lines. Red ants. Poisonous plants. etc. Ask yourself what is the worse thing that could happen (What could go wrong with your investment? What could come back to bite you?)

4. Inspect your equipment. Is your climbing harness worn anywhere? Are the lanyards of the proper length? (Guys have died or hurt themselves badly by not having the proper length on the lanyard, yeah they had their fall protection on it just didn't stop them in time from hitting the ground). Is the ladder rated for your weight? Do you have a GFCI if you are using an electric chan saw? Do you have cut resistant gloves? Do you have on hearing and eye protection? Level D OSHA clothes?

5. If it is hot or cold you need to take a break. Drink water. If you get tired you are more likely to make a mistake. (Take regular breaks from the computer screen)

6. Do you have enough light? Night time operations are doubly dangerous for workers. You need visibility. (Transparency in your investments)

7. Have you set up for disposing of the branches and such. You don't want the city to fine you unnecessarily for yard trash. (Tax consequences)

8. Wouldn't it be cheaper given the risks to have a professional service do it? (ETFs/mutual funds vs. individual management)

9. Are you sure the tree won't fall on someone else's property or their fence? (What are the liability issues?)

10. If I do get hurt what will the effects be to my family and others? Do I have the skills, knowledge, and physical abilities necessary to do the job right and do I understand the risks? Am I in a good state of mind and able to stay calm and not get angry if something doesn't work out right? Do I have a fear of heights?

We always carry a card around in the wallet for safety reference and it sort of boils down to 3 steps: 1) Assess; 2) Analyze; and then 3) Act.

It sounds like overkill but an effective safety "culture" within companies has been shown to dramatically reduce injuries, deaths and all sorts of economic and emotional costs. And it is a good idea to teach everyone at home how to stay safe too. If you do not have a sense of vulnerability then you are susceptible to hurting yourself or others around you.

Russ Sears comments:

In the last four years I took down three cedar trees that were dying. Here are a few things I did that were missing from the lists above.

1. Limit the access to the area. Shut down the drive-way, no extra people or kids allowed etc. Tree cutting is not a spectator sport. The trading room is sacred. No extra people or kids. Never show off.

2. Notify the neighbors when near their property. Likewise no kids. They let me know if they would be outside etc. I worked around their schedule. When working with others money, its all about them, not you.

3. Call the buried cable hot-line to have it marked before. Know the hidden risks and try to avoid them.

4. Have lots of rope. Extra rope tied to the tree and other trees can help prevent the tree from going the wrong way onto the house. Controlled slack on a large trade is a must.

5. Keep the area clean, limbs dragged away as they are cut. You never know when you may need that exit.

6. Rent what you do not have, but get the right size saw above all. It may cost more, but do it right.

7. Have patience. Take it in small pieces. It is only impressive in the vast woods when it all comes down at once. In your yard it will only be damage. Know your size. And do not try to meet a schedule. Pay that extra day's rent, Leave the stump up till next weekend. Do not try to swing for the fences to meet some arbitrary goal. 

Vincent Andres writes:

All valuable advice in this tree thread! Not to say it's missing, but I often add an iron chain as a line (with mountain climbing equipment).

Among dangerous things a falling tree is able to do, having the foliage act like a spring is a rather vicious one. The tree falls nicely with its big round green foliage, everything seems OK, but the green foliage is slowly compressed/crushed (for 2 or 3 seconds) and then the compressed unbroken foliage uncompresses and moves the 3 ton trunk in whichever direction. If you're in the way you're killed without even noticing it. (Certainly a market analogy here!)Folded branches are also a very classic cause of injures.

Many things can happen when cutting trees– unexpected things, so as a general rule, better be largely too cautious then slightly too incautious. Even if other people do not understand, you are in the tree with the chainsaw, not them.



FDRThe pension problem in this country is a time bomb that is set to go and will likely either cripple the nation or be one of the final straws that breaks our back. Remember, pensions are backed up by the PBGC..

James Lackey writes:

I fear to quote history as a non-expert here and never ever want to imply predictions… the devalue-ists vs. the deflationists battles have always been apart of post crash, post war debate. Here we have choice of soup–the depression expert vs. the non computer using inflation expert with an American idol caught in an argument on how to restore past glory. With the people caught in the panic and demanding answers.

After Baldwin talked Churchill back to the Gold Standard they all realized prices were too high, so they had to subsidize (bail out).

Before FDR devalued, he cut govie pay and military pensions.

Pick your author on how good bad either path is/was…

Not sure if tea party baggers know how volatile these adjustments can be when the markets solve problems. Hey, wait, yeah they do. It's the NASDAQ.

Stefan Jovanovich writes:

I don't think American history offers many clues to what will happen next for jobs and incomes because there are no precedents for a country where half of the income went to teachers, government employees and people whose private sector jobs exist only because of regulations (lawyers, accountants). I don't offer that as a political statement, only an observation that we no longer have a situation where Keynesian deficits can produce more demand by creating government jobs whose workers buy things with their paychecks. We already have that economy now, and the multipliers from government borrowing and spending are now 0 or less than 0, not positive.

In terms of the dollar and its future value measured against other national currencies, I think you are right to draw lessons from the 1920s and 1930s; because that was the last time that ALL the world's trading nations devalued their currencies against gold and against each other. But that offers no clue as to how far the United States and others will go in taxing and restricting investment capital flows. The Great Depression became great because all the countries shifted to mercantilist currency and trade policies at the same time. As much as trade flows have fallen because of the GFC, the decline is nothing compared to the death spiral that occurred between 1930 to 1933.

Vincent Andres comments:

(Unfortunately) I completely share Scott's opinion.

Our states (we) have generously accorded overvalued pensions based on optimistic/erroneous previsions, (and this resembles _very closely_ to the subprime problem, where today's distribution of houses was based on tomorrow's expectations about their prices.) We thought we were able to build our present houses and our pensions by picking in the future, in the future of our kids, because as everyboby knew, trees were able to grow up to the sky.

The recurrence (in the mathematical sense) was build on the recurrence, but now we see the recurrence changing direction, trees are not growing up indefinitely; what will we do with our promised houses, promised health, promised pensions ? all those things paid by picking money in a infinitely rich future.

There are many excuses for those miscalculations (and not having know a war is probably the biggest excuse) which really made those systems function exactly as a Ponzi scheme. Today's worry is that we are unfortunately at the point where the Ponzi scheme explodes.

We live in interesting times–I also completely agree, on the other hand, looking a bit on the history side, this is not as dramatic as a WWIII.

In France (at least) WWI has seen its young generation slaughtered, while the elder were far less concerned (at least they were not slaughtered).

I wonder if our young generation would accept such a sacrifice? Such endebment for our houses, our healths and our pensions. (Maybe the massive mind-destroying we applied on our children will help them to not understand what we have done? Those days, our French government, like every 2 or 3 years is picking from Pierre's pensions to reverse to Paul's pensions (Pierre is in the private sector and Paul is in the public sector as for each reversal)  just around 5/6 billions, nothing to become nervous, and, in fact, nobody seems annoyed, so, as far as today, it seems to work fine). But even those reversal, really –theft–, will not indefinitely be enough. One can only be amazed when one sees that, on one hand, farmers are committing suicide, silently, without revolt, while in the same country, state employees are retiring at 50, having spend 20% of their life striking and with such miserable results. How is such a thing possible? What mental ascendancy is at work to obtain such passivity/resignation, unconsciousness of the horrible injustice of the situation?

… Yes, the coming period will probably be interesting. My hope is also that things will happen with a minimum of violence, but, in a form or another, I doubt our irresponsible generation will escape the hour of truth.



Stephen SondheimI am reading Stephen Sondheim's biography, and I just noticed he composed the "Stavisky" movie music:

The core narrative of the film portrays the last months in the life of Serge Alexandre (Stavisky), from late 1933 to January 1934. We see glimpses of his operations as a "financial consultant", setting up a mysterious company to deal in international bonds…



The Blind Side

The Blind Side is one of those movies that makes life worth living forever. What other such movies, plays, music, literature would you put in that category?

Vince Fulco replies:


The Road to Perdition– everyone who participated in it was at the top of their game from writers, actors (primary & secondary), producer, director, cinematographer, musical director. It made for a polished period piece with tons of emotionally charged moments and an unexpected ending.

Boondock Saints– obscure, independent type movie; very novel story telling seen both by the vantage point of the perpetrators (Irish Mob in South Boston) as well as the talented detective trying to unravel a recent flair-up in gang on gang activities (Willem Dafoe). A great example of the grey areas in life; i.e. if you are using extreme violence against a rival gang to protect one's innocent neighborhood residents, are you a saint or sinner?

Gandhi– A masterpiece in so many ways, no more needs to be said.

Laurence of Arabia– ditto.

I am a sucker for underdog movies where the lead character rises from his own self involvement and selfishness to sacrifice everything for the greater good. Not 'Laurence'–obviously his striving for personal greatness led to its own extraordinary achievements but as I get older, the accomplishment of creating these complex, grand movie projects is inspiring in its own right.


 Shogun by James Clavell

Anna Karenina

Two monumental undertakings by the authors which fully develop their characters and keep the reader engrossed from cover to cover. As for the latter, although it has been years, as I recall, the ability to interweave multiple complete stories and have them entertaining and believable was sheer genius.


Anything by Yo-Yo Ma and separately Tan Dun.

Nick White responds:

 Martha Argerich's rendition of the first movement of Rachmaninov's 3rd Piano Concerto with the Radio Symphonie Orchester Berlin and Riccardo Chailly conducting.

Her magisterial expression of the full range of human emotion in this performance is, in my opinion, unparalleled in any other work.

Thomas Miller adds:

Miracle on 34th Street and It's a Wonderful Life. Both made shortly after end of WWll. Still immensely popular 60 + years later.

Jeff Watson writes:

"Surfing for Life", is one of those special movies that makes one want to live forever. That's the movie that deals with all the old people who still surf well into their 80's.

James Lackey writes:

Cinderella Man (2005) …. Crowe as Jim Braddock is a good one. Invincible 2006 Wahlberg plays Based on the story of Vince Papale, a 30-year-old bartender from South Philadelphia who overcame long odds to play for the NFL's Philadelphia Eagles in 1976..

Ironic, I watched It's A Wonderful Life with my kids last night. What cracked me up is my quest to please my wife.I  remember 10 years ago when my boy was 4, I said "you're a bad boy" she said No no no what he did was bad, he is not bad. Ever since I have been working on my syntax to get the exact same point across with out damaging my own kids for life. ha.

Yet in It's A wonderful life the mom calls her sons idiots. It cracked me up as she was kidding sit down and eat you two idiots. The druggist smacked little George Baily around for being lazy. Baily tells the biggest backer and connected man in the county off countless times..turns down a 10x salary increase because he knew it wasn't best to sell his beliefs for money, but all the while hating his town his nickel and dime business where he cant profit much by helping others. He complained all along..which was hilarious "trapped"

Man on Porch: Why don't you kiss her instead of talking her to death? George Bailey: You want me to kiss her, huh? Man on Porch: Ah, youth is wasted on the wrong people.

George Bailey: Merry Christmas, Mr. Potter! Mr. Potter: And Happy New Year, In Jail! They're At Your House Right Now!

George Bailey: [yelling at Uncle Billy] Where's that money, you silly stupid old fool? Where's that money? Do you realize what this means? It means bankruptcy and scandal and prison. That's what it means. One of us is going to jail - well, it's not gonna be me.

Mary: I feel like a bootlegger's wife!

Stefan Jovanovich writes:

 It's A Wonderful Life is certainly popular now, but it was a bust at the box office when it was released in 1946. Its flop effectively ended Capra's career. The actors - Jimmy Stewart, Donna Read - went on to further success; but the plot reminded people of the bank runs of the pre-War era (hardly a happy memory) and they stayed away in droves. The Best Years of Our Lives was the hit that year; it was (among other things) about a banker who returned to work from the war and decided to lend a farmer money, not about depositors clamoring for their money back from an over-extended S&L.

Nick Procyk adds:

I would second Cinderella Man and Invincible.

March of the Penguins is a true-life movie about a group of emperor penguins that survive the harsh polar winter, breed, search for food — all captured in amazing photography.

Eight Below is another heartwarming movie based on a true story about a guide and his eight sled dogs. The guide is driven to reunite with his canine friends after they were stranded in Antartica during the brutal winter. It's a wonderful story about friendship, courage, and faith.

Riz Din writes:

 The Rocky films, all of 'em. I guess they just caught me at the right time. The first is the best, and Balboa doesn't even win the final bout. His victory is of another sort. The rest of the series works on several levels. You have both the quality of the Rocky films and Stallone's actual career ebbing and flowing with the ups and downs of Rocky's character. The score is everyone's 'go to' music when they want to get pumped up and motivated, the dialogue is wonderful, the characters memorable, and there are many lessons that can be drawn from the storyline, both good and bad.

From the first film:

Rocky: I been comin' here for six years, and for six years ya been stickin' it to me, an' I wanna know how come!
Mickey: Ya don't wanna know!
Rocky: I wanna know how come!
Mickey: Ya wanna know?
Mickey: OK, I'm gonna tell ya! You had the talent to become a good
fighter, but instead of that, you become a legbreaker to some cheap, second rate loanshark!
Rocky: It's a living.

John Lamberg writes:

Life worth living forever? Well, none of the following make that cut, but my favorites are:

Hans Christian Andersen's works. (The Little Match Girl is perhaps the saddest story I ever read, and it stuck with me since childhood. We'll see if Gregory Maguire's "Matchless", a re-imagination of the story compares.)

Holst, The Planets

Bodysnatchers (original)

Forbidden Planet (not for the acting or script, but for Dr. Morbius' secret)

Vincent Andres adds:

The Last Kings of Thule - Jean Malaurie, about ordinary heroes

Many of Giono's books, eg Regain - J. Giono (in french onl)

Many of Pierre Magnan books 

Dava Sobel's Longitude

Order Out of Chaos by I. Prigogine

L'imprévu by I. Ekeland (in french only)

Des rythmes au chaos by P. Bergé, Y. Pomeau, M. Dubois-Gance, 1994.

For pointing an interesting trail, Deep Simplicity: Bringing Order to Chaos and Complexity by John Gribbin.

The Foundations of Ethology by K. Lorenz 

Studies in Animal and Human Behavior  by- K. Lorenz

The First Three Minutes: A Modern View Of The Origin Of The Universe by Steven Weinberg 

Mon oncle d'Amérique by A. Resnais (in French only)



A book every speculator should read: The Farming Game by Bryan Jones, 1995.

Think Green Acres [an old U.S. television show] meets Louis L'Amour, Mark Twain, and Will Rogers. Full of wisdom and insight into the human condition in general and economics in particular.

Vincent Andres add:

A great today story: Buffalo for the Broken Heart, by Dan O'Brien, 2001.

This story resonates very strongly with my own views of life. There is a place in it for macroeconomics, microeconomics, entrepreneurial spirit, regulation (bad and good) and so many good (so many forgotten!) things. Understanding things on our own, and not through traditions, mythology or advertising. Understanding that errors, even if they are old, even if they are widely spread, even if they are deeply supported, are however errors. Thanks to Dan O'Brien for this deep story, thanks for his frankness.

Review by C.C.Bucholz Review:

"Some 20 years ago, Dan O'Brien, intoxicated by the Black Hills region of South Dakota, purchased the Broken Heart Ranch and began running cattle on more than a thousand acres. Though the decision ultimately cost him his marriage and, at times, his peace of mind, he feels a connection to the land and the lifestyle that continues to justify the decision. When necessary, he has even worked as an endangered-species biologist or English teacher in order to support his ranching habit. His engaging book, Buffalo for the Broken Heart, details both the rebirth of his ranch as well as himself.

"Desperate to rediscover purpose" in his life and disillusioned with working like a serf for the bank while supporting cows–those lumbering, small-brained icons of the plains that O'Brien describes as "a sort of reverse beast of burden. I was carrying them!"–he made a snap decision one day in January 1998 to take in 13 orphaned buffalo calves from a fellow rancher. Later, after much soul searching and contemplation of both practical and emotional matters, he decided to jump headlong into buffalo ranching. He expected differences between the two animals, of course, but was pleasantly surprised by the buffalo's self-sufficiency. Since buffalo are native to the plains, they are much gentler on the land and are able to find most of their own food and water. Plus, their meat is healthier than beef (and delicious to boot), and buffalo do not need the heavy doses of antibiotics, steroids, and hormones that cattle require–a process O'Brien likens to "locking children in a room with ice cream and potato chips and treating the health problems that result with expensive medicine."

O'Brien is a splendid storyteller, and his narrative is a skillful weave of the history of the buffalo on the Great Plains, colorful portraits of fellow ranchers, descriptions of the plains' rugged beauty, and a clear-eyed account of the harsh realities of ranching in this unforgiving landscape." — Shawn Carkonen



What is the theme of The Trees by Rush, is it Americans (oaks) vs Canadians (maples) or is it about inequality in general ? — a Reader

It is an attack on those obsessed with equality, pointing out that you can make people equal only by chopping down those who are above others.

Vincent Andres adds:

I first read that song/poem on Sardanapale, a very interesting French/English language outside-the-box thinking site.

Nick White warns:

But how do you define being "above" or — to strip away the euphemism — "better than" others? Are there not also plentiful examples whereby those whom one might consider "inferior" in one domain eventuate themselves to be superior to the original observer in another?

Such talk is dangerous. Libertarian values can all too easily be conflated with thinly-veiled elitism. Not that I am suggesting that of anyone here – just an observation from the tone of the piece.

Gordon Haave replies:

That's the point. You can't. So you chop everyone down to zero because it is the only way to make everyone equal.

J. T. Holley jokes:

Not to zero, only up to the point where all the Oaks uproot themselves and leave the Maples in their own forest and move to Colorado.

Chris Tucker concludes:

Is it not fair to say that some are better than others in a particular field of endeavor? Some are better tennis players, some are better traders, some are better friends, some have better (more) integrity, some are better at cheating. Some are definitely members of certain elites — GM Davies is an elite chessplayer, for example. The elitism that Nick refers to arises from a more broad or general sense of superiority in many ways or every way. That is the dangerous kind that leads to exclusionary thinking. The point of Neil Peart's lyrics is that we are not all equal at everything, but governments would treat us as such in order to make legislation play to the lowest common denominator, in much the same way as a teacher must teach to the slowest student in the class or the team is hamstrung by the slowest member. It is simply the distillation of one important idea, that equality can be brought about by trying to force everyone to be the same and since you definitely cannot make everyone faster or smarter or nicer or more sensible, you just might be able to make the fast ones slower, the smart ones dumber and the sensible ones senseless.



Don't you just love the way our world no longer calls things what they are? — A Reader

The dual of this being human tendency to look at the present, but with often an indelible image of the past in our eyes — which doesn't help to notice the changes.

I wonder if, as we gravely devise on whether things are or aren't changing, the change hasn't already been effective for several years. Our pink glasses and our financial + governments tricks, smokescreens and diversions being the only cause of our lag in perception.

Have you read The Simulacra (1964 science fiction novel)?



CycleI may well be wrong, but my belief is that we are at the end of a big cycle. The end of the "easy debt" cycle?

1/ 2008-2009 shows clearly that nothing will be done by borrowers to stop their dependence. Nothing will be even tried. On the contrary. Because of our debt levels, this triggers the question of solvency. At least, this makes the question of solvency exceed a significant psychological level for the lenders. Confidence lenders/borrowers is definitely affected (gone). (Even if little is publicly said about that).

2/ This situation of confidence loss is new. The exhibition of our attitude at such a level is new. The awareness/knowledge/understanding of this situation is new. Presently, neither the lenders, nor the borrowers, have exact plans to deal with this novelty.

3/ … but, under the calm and apparent status quo, they are of course actively searching. At least the lenders. With the intent to do something. (Something will be done, even due to randomness. At least some small domino pieces will fall.)

4/ so my belief is we arrive at a delicate/complex crossroads/nexus/crux/bifurcation point (à la Prigogine). We're now inside a huge, real-life, game theory exercise. Many many things can happen. (But I believe many probable scenarios will share common steps). (I believe even dramatic events are now made possible.) But the status quo seems me rather improbable (even if it would be the case, this would just postpone things).

The above sequence lacks numbers (and may look abstract), incomplete, too coarse and biased with a sort of "pessimism", (but it's not how I feel about it). I'll thank you for any help to remove the flaws/omissions/clumsiness of this reasoning.

Phil McDonnell replies:

Debt is an important part of the big picture.  But I believe that a better perspective on current economics is that private consumer debt will no longer be easy.  In fact current figures show that consumers are 'saving' in greater amounts.  To be sure this savings does not show up in savings accounts or other tangible assets.  Rather it shows up as consumers pay down credit cards and mortgages.

The key thing to understand is that the powers that be do not want a reduction in total debt.  The size of the world economy is directly related to the size of the world money supply and all of its assets.  Given the destruction of wealth in mortgages, real estate, stocks and commodities the only source of money creation to reflate the world balloon is government borrowing.  So in effect the consumer debt is being replaced by increased government debt and conscious efforts to print money out of thin air.

J. Rollert predicts:

The present environment will make people treat debt like our grandparents did… and not trust financial types in particular. This is a social change beyond the cycle.

Paolo Pezzutti recalls:

People will not change behavior and attitude unless they are forced to do it.  When I arrived in the US from Europe two years ago I went to a dealer to buy a car.  There were signs on the cars on sale indicating $400, $350 and so forth that I could not understand at first.  When I started to talk with the guy it became clear to me that the signs were the monthly payments you had to make.  When I buy a car I want to know first how much it costs, not how much I have to pay each month.  But in the US people are apparently either encouraged to buy on debt, or they like to buy on debt, or they must buy on debt because that is the only way they can afford a car.  Only if the behavior of the lenders changes, we will see a different attitude of consumers.  And this is what could happen. Even with 0% interest rates.  Unless lenders find "new" ways to lend "easy" money.

Russ Humbert writes:

It is not just Govt. debt in the traditional sense, that the Govt. is increasing, it is putting more risk on the Govt. balance sheet on the asset side as well.

The Bernanke plan is to keep it coming, from what I can tell, to those that are willing to beg from the government.  Securitization is not dead, for the government quasi guaranteed it… This includes education and housing loans for most people, up to the point of being "rich".  It would seem that those that have no real prospects of paying off the principal, those that won't better themselves will be frozen out. At the other extreme those that better themselves to the point that it's clear Government is impeding personal progress, will not get this "risk free" money.  There won't be another AIG to scoop up all the risks, without any real capital backing it, for a long time.

This may seem momentarily like we are headed back to the sixties, before even credit cards, because of the sharpness of the down turn.  But this still leaves the US with much more debt capability than existed 10 years ago, before things got out of hand.  And money will flow down to consumption, it just won't be direct and if direct not as cheap.

Legacy Daily is skeptical about big changes:

I perceive debt to be the current fuel in the engine of growth. Unless an "alternative energy" is discovered, I believe debt is here to stay. The donut maker got it wrong, "America runs on debt." One reason for the efforts to improve the geopolitical landscapes in emerging economies is to also help raise their asset bases against which further debt can be created to satisfy the unending need for growth that our markets, our 401(k), and our lifestyles require. Since there's nothing new under the sun, just as soon as this cycle of diet and slightly better behavior has run its course, the patient will be right back to the liquor store for more of the same and a new cycle will be born. When and in what shape? That's the really difficult question.

We received a contribution from thin air (or is it Thin Air?):

Let me introduce myself: my name is Thin Air. Yes, THE Thin Air. I've been around for eons upon eons and have enjoyed a fairly tranquil existence. Who or what am I? A Princeton web site defines me thusly: "thin air (nowhere to be found in a giant void) "it vanished into thin air." That's OK with me, I can even live with the example which characterizes me as the passive element in an inexplicable event. Over the centuries millions of people, things, explanations, excuses, villains, heroes, and life savings have "vanished" or "disappeared" into me.

No problem. If you humans lack the will or imagination to discover just whatever it was that was lost, misplaced, filched, or embezzled, that's fine with me. But trust me on this, I don't have any of those people or things….never even was aware they were gone until I looked me up on Google - imagine, almost 3 million references. Rosie O'Donnell's number is just slightly higher, Bill Clinton's is 7 times greater, Barack Obama's 25 times greater, and Michael Jackson's 70 times greater- a telling measure of your society's priorities.

Those individuals weren't chosen capriciously; as a member of the "thin" contingent I chose two thin representatives and, by contrast, two fat ones - although it appears I'm being dissed in relation to other "thins", I love it and want to keep it that way. But Philip McDonnell served as the straw that broke the camel's back when he penned: "So in effect the loss of consumer debt is being replaced by increased government debt and conscious efforts to print money out of thin air."

I'm getting so, so tired of hearing that. You can't get through an hour of CNBC or Bloomberg without hearing that phrase or a riff on it. But those people are pretty lame and I expected Dailyspec contributors to provide a creative twist to a tired theme. Additionally, when phrased as shown above, it appears that I had an active part in the event; that I somehow swooped down and dumped billions and billions of dollars upon a group of bankers. First off, I'm broke; I neither have nor need money (gasp). Secondly, if I did have money, do you really suppose I'd drop it on that group of dummies? Not a chance.

Being a disembodied element and not a human, I can still make value judgments, tell the truth, discriminate, and speak out without fear of being condemned, jailed, boycotted, or shunned. Among those things that are unquestionably bad is excessive debt. It would seem this is self-evident, and Mr. Andres ought to be commended for bringing it to the fore. Similarly, Mr. Conrad (on another thread) reveals that the WEEKLY treasury begging bowl calls for low-interest-loving optimists to pony up almost one quarter of a trillion dollars. If this occurred every week, Treasury's annual issuance would approach the nation's annual GDP.

One can hardly blame debt buyers, though, as it's a given that the system will get better (or as the Sage, a student of Pangloss, stated this a.m. "better than ever") and that American Exceptionalism will prevail where, in similar circumstances, similar efforts failed. On the contrary, we witnessed major adjustments following the Tulip Bulb mania, the South Sea Bubble, Teapot Dome, the Great Depression, the Salad Oil scandal, the S&L fiasco, Russia's Default, LTCM, Y2K and Tech Mania, Enron, and the Real Estate Bubble.

History has demonstrated that none of these came out of Thin Air, nor did their eventual solutions. You can check it.

Thanks for your consideration and

Please leave me alone,

Thin Air



BowlChina has huge money reserves; they don't need to print nor borrow money. Isn't it imaginable that China will use this money to order Chinese products from Chinese firms for Chinese people — i.e., to run their factories for themselves rather than stopping them because of no foreign customers — in whatever form this may be done, e.g. "one computer/car/apartment for each Chinese citizen." I have some restaurant owner friends; when the meal is not eaten by customers… they eat it themselves.



 This question is akin to an inverse of the rabbit from the empty hat trick. The rabbit has to be there in the hat before it has been taken out. The inverse of this trick would be that the affairs of men relating to wealth and money during a downturn and crash are prone to imagining a rabbit vanishing into a hat that was never put into the hat.

Money in its broadest realm is a state of the mind. Cash and currency are but one tangible subset of money, a much smaller one. There are many other tangible subsets. Then there are the intangible ones. The wealth effect espoused by financial behaviorists is but nothing else. Today's context is nothing different really conceptually from the Tulip mania or any other that has happened in between since.

Value is what money is supposed to store. Cash is one form of money. Central Banks are creating money in modern times as their dutiful function. Financial markets are producing money and consuming away their own and others' money creations periodically as a by-product of their other core functions. Whatever can be a store of value and a medium of exchange is money. That's how there was a time not too long ago when the Tulip bulb was the most important store of and producer of more money. As confidence and thus belief in the existing amount of collective wealth and value goes up so does the amount of money perceived goes up. When the amount of money perceived around exceeds far beyond the utility or the utilizable value, mankind is presented with the bills enabling reality check.

Where would the money go that never existed? That rabbit was never put in to the hat. No point in searching it there at least. But then in such cases, there were several rabbits that never existed.

Now markets, crowds, societies and the entire mankind are known to have swung from one extreme to the other one. So, as this all gets prepared to be relegated back behind to leaves of history, yet again the real rabbits will be put into the hat and won't be visible before being pulled out. In markets, non-existent rabbits are being put into hats and existent rabbits don't get seen inside the hat. Men of the markets are indulging in relishing and enjoying the magic of both kinds they are themselves creating again and again.

George Parkanyi asks:

But where has the actual cash that's been created (not the intangibles) gone? Every balance sheet begins and ends with the current assets line-item Cash. I understand that the Treasury can create money out of thin air - but whatever dollars it has created to date exist somewhere as cash - net of those dollars that have been taken out of circulation. It cannot not exist. A big chunk of it may not be CIRCULATING, or at least not in our economy, but it's SOMEWHERE. My question is where? and what would cause the money not circulating to begin circulating again?

Now some balance sheets are of course over-stated because they value assets at a market value that is not realizable. And real cash was lent against those unsustainable values. This just means that a significant amount of cash was deployed unproductively buying a house for $1,000,000 that could be replaced for $400,000, or a $1,000,000 mortgage backed issue that may only receive back $300,000 of principal. But even where cash went to purchase intangibles, the seller of the intangible still received the cash, and either "saved" it or went and bought something else.

If we assume that the cash the Treasury has created over time still mostly exists, then I believe the question becomes to what extent have balance sheets been bloated with unrealizable intangible values? And to what level do these intangibles need to readjust down for businesses to again begin investing and for people to still show up for work and maintain and grow an economy?

There are some potential implications. For example, if you have $30 trillion of cash around the world (I have no idea what the real number should be), then adding another 2, 5, or 10 trillion may not necessarily be all that inflationary. Also, if intangible "assets" on books are 3 or 4 times the amount of cash available, and they suddenly go out of favor (e.g. real estate prices drop, no-one wants junk bonds, no-one wants to pay more than book value for stocks), then demand for cash and "safe" cash equivalents will soar (and cause one godawful depression- especially if the cash is just hoarded). There may even be bank runs despite federal deposit insurance. And what if the real cash is mostly overseas, and we're holding the bag with mostly intangibles? Ouch.

I would expect that the tipping point to inflation will come when we begin to see shortages (or perceived shortages) in real assets (e.g. from droughts causing food shortages or commodity shortages due to global supply disruptions) to meet current needs, but especially if there is a fear-driven demand to acquire and hoard real assets (loss of confidence in the currency), possibly leading to hyper-inflation. That doesn't seem to be the case right now, especially in North America and Europe.

My gut reaction on this is to lean toward the deflation scenario, because even though the Treasury may throw a few $trillion out there, much of it may be absorbed by born-again savers and foreigners, and still mostly stay out of circulation while asset prices fall. However, that deferred latent purchasing power, when unleashed, could be enormous when asset prices finally turn.

Easan Katir comments:

George, here is the train of thought I think you're asking about/ applying your line of questioning to what everyone says is the root problem: housing.

Trillions were in pensions and sovereign funds. Pension plans, sovereign funds, no doubt Orange County ( they get in on all the deals ) bought CDOs from investment banks. So their cash went to investment banks. To create the CDOs, the banks had to buy mortgages from lenders. So the cash went to mortgage lenders. To originate the loan, mortgage lenders gave cash to home sellers. At this point in the logic train we have two layers of paper, not cash: CDOs and mortgages, which have had to be reduced in value because the home buyers overpaid.

Buyers and lenders gave their cash to the homebuilders, who were of course, sellers. So the homebuilders should have mountains of money. Since they don't appear to, one assumes they must have taken their money and bought more land, built more houses, which they couldn't sell, and have had to write down. Some cash went to the land sellers, the subcontractors and the materials suppliers. Private homebuilders bought more investment real estate, and gave their cash to those sellers.

Those who now have the trillions don't seem to be standing up and waving "it's here. I've got it", do they….

So a "nutshell" answer to your question, "where is the cash?" might be, it's in the bank accounts of anyone who was a seller of houses, land or stocks a few years ago. Herb and Marion Sandler, for example, who sold in 2006.

Stefan Jovanovich comments:

Most of "the money" is gone. Some very little of it is sitting in safes and vaults in the form of greenbacks and bullion, but most of it is simply up in smoke. Very few of the people invited to the A-List party have the wisdom to want to leave early or the guts to be seen leaving early. The homebuilders here in California put most of the money they made into options for and outright purchases of new lots, heavy equipment and (in the case of the public companies) stock buy-backs. They also paid a lot of money in income taxes. The value of the lots they bought or optioned here in California is close to zero, and I assume it is the same in Florida and the other places that saw a boom. The heavy equipment is worth between 10 and 25 cents on each dollar they paid in 2005, 2006 and 2007. (It is not just the slow-down in orders from China that is killing Caterpillar right now; the competition from used equipment is murderous.) The idea that somehow only we poor Americans were the suckers is funny. If anything, we have gotten off comparatively easy. The property markets in Europe and the Middle East and Asia have, as the Beach Boys might have put it, all become California dirt; and their central bankers bought far more of our crap paper than Helicopter Ben bought of theirs. What is also funny is the notion that the money center banks need to start lending again to get the economy moving again. They ARE lending - to the Treasury. Why, in a world of ZIRP, should they do anything else?

Bud Conrad writes:

Bud ConradThere are so many good questions and answers it is hard to focus on simple explanations. But first a few clarifications on George Parkanyi's initial point of view: Money is not a real thing of substantial value, and it is not created by the Treasury, but by the Federal Reserve. The Dollars in your pocket are Federal Reserve Notes. This is a minor point because your question makes perfect sense if you wrap the word "government" around both the Treasury and the Federal Reserve, and replace your use of the world Treasury by the word government.

Then your question still stands: Where did the money go? First, the real assets of homes and land and factories still exist, and they are still owned by someone. What disappeared was the value expressed in dollars. This is a form of money implosion as experienced by holders of deeds of trust that don't cover the defaults. It means less money in total. That is why we have deflation.

But as you say the government (Fed) can print money pretty much at will to keep things going. The system of fractional reserve banking is set up so that most of the "money" comes from the banking system as it makes loans. For example, mortgages are used to buy homes, not the money from a down payment. These mortgages were based on the banks making money by creating loans. About 6 times as much "money" was made by the banking system as by the Fed. In boom times and according to theory, banks always want to make more loans as that is the way they make money. They are constrained by having enough reserves to meet the Fed's requirement of supposedly 10% of deposits put on deposit at the Fed. When the Fed adds new reserves by buying Treasuries from banks, the theory expects the banks to make new loans an "multiply" the money throughout the economy making new loans. In this situation today, the Fed has bought Toxic waste giving the banks new money that could be lent. But the banks aren't lending because they have bad debts, and need to have capital adequate to meet regulatory review and because they can't find lenders they can trust who want money. So the banks have piled up "Excess Reserves" at the Fed and the money multiplier is leaving the Fed "Pushing on a string" getting no expansion of the money, even after their bailouts that they thought would be stimulating.

P.S. I like the rabbit that isn't there being put in the hat as explanation as it makes as much sense as all the details here. It is only an illusion that money is worth anything, that is left over from convention before 1971 when foreign central banks could convert dollars at $32 per oz for gold. De Gaul reached for the gold and Nixon slammed the window on his fingers after we sold off half our store. Since then it is mere historical convention, image and illusion that keeps the dollar afloat.

Nigel Davies offers:

Here's another take on it. What if most energy in any system is lost simply through friction, this frictional tendency actually increasing during an asset bubble. When the bubble deflates again, most of what you have left is the huge waste caused by people chasing something that never really existed in the first place. They were pursuing an optical illusion caused by increased liquidity and dissipating real wealth via their frenetic activity.

Jim Sogi writes:

Money, cash, and credit, is merely a counting method for confidence, or now, the lack thereof. It is created as an ether, and disappears as the fog. It is a strong only as our full faith. With mass communication, global memes seem to spread faster, turn on a dime, so to speak. I wonder if there is a correlation between speed of decline and recovery time?

Vincent Andres responds to Nigel Davies' questions about China:

Once upon a time they did build a big wall, I would posit it's now imprinted in their DNA. The surface inside the wall + the number of people there seems already a nice piece to manage. And btw, In 2008, everybody also knows how too big empires end.

So, I'm really not worrying too much about China. China managing China is already a really great challenge. Kudos if they succeed.

Just my two cents feeling, I would like to hear the flaws/missing points above.

George Parkanyi adds:

The mitigation of risk and the collective formation of capital in the capitalist system incents exploration, invention, innovation, and experimentation. Look around you at the marvellous things it has built, and the amazing discoveries it has facilitated. Next time you take a flight think about all that went into you being able to do that. Or even just driving a car. There's nothing really wrong with the current monetary system other than we've allowed it to run amok. Credit is fine as long as there is a reasonable expectation of most of it being repaid. (But even if it isn't the stuff gets built anyway; someone eventually just takes a haircut.) With some better checks and balances, there is no reason we can't dust ourselves off from this face-plant and continue to progress - hopefully a little less rough-shod over the environment and each other. The key is to keep enough people incented to keep innovating and working productively to sustain the complex societies and systems we have built.



 Diffusion-Limited Aggregation (DLA) is what results when you start with a seed particle and then release another particle from far away that moves according to Brownian motion. When it hits the seed, it attaches. You release another particle moving according to Brownian motion, and wait for it to hit the structure and attach somewhere. You keep doing this. The resulting structure is DLA. As mentioned in the Wikipedia entry, this appears naturally in certain mineral deposits and in dielectric breakdown. Here is a fun java simulation. Apparently, this phenomenon is still not well understood. At the colloquium about this I went to yesterday, the speaker said he had been working on this stuff for 20 years and had made little progress. The hope is that they can exploit the connection between DLA and Schramm-Loewner Evolution (SLE)  to better understand the phenomenon, e.g., are such structures self-similar.

Vincent Andres writes:

Here is an interesting book on the topic (by an ex-colleague).



 I've always been intrigued by circular definitions, which are described as, the meanings of whatever is to be defined are found in the definition itself. Time is one of those constructs that might exist, but one would be hard pressed to find a definition of time that didn't have "time" included in the description. Many other circular definitions exist in the world, and many fundamental units such as the kilogram are best described by circular definitions. Circular definitions, sometimes paradoxical in nature, extend to other areas of nature and humanity with regularity. One would be hard pressed to define exchange without including some aspect, meaning, of exchange in the definition. I can't think of how one could define the meaning of the word trade, without having an element of the meaning of trade in the definition, Trade and exchange could even be used interchangeably Debt could be another term best described with a circular definition, as I'd be hard pressed to find a meaning that didn't include owing something in the definition. Value, as in monetary terms, is another construct that could best be described by a circular definition. Although it's a stretch, the word money, when stripped to it's essence is best described using a circular definition, as "medium of exchange" is still money. It seems that when you drill down to the essential things in science and nature, the building blocks, the things we take for granted, circular definitions pop up with increasing regularity. If fundamental units like time and mass cannot be described without resorting to circular definitions, then our entire bedrock of human knowledge, from the time of Aristotle, is laid on quicksand.

Art Cooper writes:

The bedrock of human knowledge is in fact based on universal human experience in its broadest sense. Your criticism of circular definitions brings to mind Noam Chomsky's universal grammar, which relates to universal human experience. There is a universal human understanding of such fundamental concepts as time and mass, although there are cultural differences in the way such concepts are perceived.

Vinh Tu comments:

For those who are inclined towards things computer-sciencey, the free MIT online book Structure and Interpretation of Computer Programs is great, and in particular I found the chapter and lectures on the "metacircular evaluator" to be mind-expanding.

Vincent Andres writes:

Among the best things I have read about time are :

from I. Prigogine
1. La Nouvelle alliance - avec Isabelle Stengers, 1986,
ISBN 2-0703-2324-2
2. Les lois du chaos (Le leggi del caos) - 1993, ISBN 2-0821-0220-3

I think 1. is : Prigogine, Ilya; Stengers, Isabelle (1984). Order out of Chaos: Man's new dialogue with nature. Flamingo. ISBN 0006541151. Unfortunately, I don't know if 2/ was translated in English.

Both books are clearly written (but not always easy). It appears I. Prigogine did a great work as a contemporaneous scientist. But in those books he also achieves a truly impressive history of science job. It's this sort of book you just regret to not have read earlier.

I'd like to hear about other good books/texts on the topic of time.

Phil McDonnell adds:

How about this for a non-circular definition of time:

Time is a condition of increased entropy in the universe.

The usual meaning of 'circular definition' is when someone uses the word itself in an attempt to define the word. In order to understand such a definition one must already understand the word.

However this discussion has embraced a much wider interpretation of the word circular. If I understand correctly it is that a definition is equal to the thing itself. That is always true for every definition. A thing is equal to itself and by extension to its definition.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Jim Sogi writes:

In Henri Poincare's time, there was great dispute over time, where the meridian would be and exactly what time was it? Two places could not agree on time without adequate communication and accurate clocks, neither of which were available back then.

Now time in data is still an interesting issue. Time in Europe, NY, Chicago, Tel Aviv, Japan… whose time is it and what time is it really? Whose framework will prevail. I think this is still contested daily and weekly now. If we take a holiday, does time stop? Who is moving the markets? There have been many big gaps when our markets are closed. Whose time is it?



 A contractor told me proudly he was out of stocks since summer, because he bought a house. I suggested that house prices are currently correlated with stocks, and to the extent that most mortgages create leverage (ie, LTV 80% means if the house loses 20% you lose 100% - at least until Oh saves) the effect is amplified. Then I told him he needed an extraction, and he got mad and left.

Don't shoot the messenger?

Anyway he got me thinking about the definition of wealth. If you knew about a guy who made $100,000 per year, you might not be that impressed. Except if this happened in 1932 (that year comes up a lot now). 100K then was a lot of money, but not now. Maybe $100,000 will be respectable again soon.

Income is relative. Maybe net worth is too. Now everyone who owned stocks over the past year is worth less, and the same if you owned a house. Since most people own houses, and many own stocks, most got poorer. If you own a business it's probably worth less too.

But if you own stocks, a house, and a business, they still have worth relative to others - and ostensibly it is not zero (though the formerly low-risk concept of leverage has been revised). Now prices have to catch up, and lots of businesses don't yet understand that they need to cut prices.

It's amazing how powerfully emotion rules the mind. In 13 months the net worth of the world was about cut in half, and if you think about it, in reality how different is the world since then? Did an asteroid hit? Did Amadinejad invade Israel? No. People in many countries got carried away with house prices then got scared and stopped buying. Which pushed the leveraged upside down, foreclosures increased, counter-parties bellied up, and now everyone wants out.

Jeff Watson writes:

My son likes to watch a TV show on MTV known as Cribs when he's home from school. Cribs is a showcase of the big houses that rappers, pop stars, and others of that ilk like to buy and decorate when they get their big break. Generally, the houses have brand new furnishings and have been done in a very modern, minimalist, interchangeable styling. Part of the show is a tour of their garage, where multiple Hummers, Ferraris, Bentleys, and Escalades seem to be the cars of choice. They take you to their pool areas, which usually are very nice and expensive. All the houses have game rooms and private theaters, with state of the art equipment. My son was telling me how rich those guys must be to have all of those toys, and asked why we don't live like that. I pointed out the math to him, on an artist who has one or two hits under his belt, and grossed $10 million tops. Out of that $10 million, he has his agent and management fees taken right off the top, figure 25-35%. Then comes taxes which might be another 20%. Add the cost of a $5 million house, a million dollars worth of cars, another million in furnishings, then the salaries of their entourage, local taxes, utilities, and they're practically broke, or even have negative net worths. They are living for the now, on the expectation of their next deal, which may or may not appear. I pointed out to him that living really large on a shoestring isn't the way to exercise fiscal prudence. I also pointed that every performer whose house is showcased on Cribs has one striking similarity: a total absence of books anywhere in the houses, closets or even built in bookcases. I've never, ever seen a book in that show, and I've been forced to watch more than a few episodes. Evidently those performers never read, and one could postulate that reading is counterproductive as far as that type of success is concerned. In any case, my son learned a valuable lesson in thrift when I sat down and ran the numbers for him.

Vincent Andres adds:

Concerning the absence of books, it would be very nice if this observation were really specific to the houses showcased in such shows. I'm however afraid this observation is very general (and recursively, mainly because of many examples of this kind, the only cultural tap in so many houses is indeed just the TVs).

Entering a house is a bit like entering the owner's brains. Seeing no books, empty walls, … strange feeling. Intellectual faculties are outsourced, TV and the Jones are the spinal chord.



As you may be aware, shock and awe is a military doctrine based on the use of overwhelming power and "spectacular displays of force to paralyze an adversary's perception of the battlefield and destroy its will to fight". After the second consecutive day plunge in the markets with more than 10% lost, this was the feeling I had yesterday looking at the closing prices: shock and awe.  Your perception is paralyzed, you are not able to fully understand the context in which you are operating and therefore to make rational and informed decisions. Your will to fight is destroyed and you are simply brought to turn away your account statements in disgust.

Is this the result of a campaign built to shake weak hands (and minds)?   Most of us are vaccinated by many other bear markets and crashes, such as 1987 and 2001-2002.  Something really spectacular was needed this time to shake the resolve not to give away stocks at these ridiculous prices.  Well, "they" are doing it.  The public is shaken, hit by bad news on all sides and sudden panics in the markets. The public is selling at any price, stocks, mutual funds, bonds. The average investor cannot see the big picture, overwhelmed by negative information campaigns and catastrophic predictions.

It is difficult to resist, but I will try not to fall victim of this "shock and awe" campaign.  I will not put my stocks "for sale" at these levels.  On the contrary, I will buy new dips. Markets forces are already at work to adapt to the new situation, economies will find eventually a way to deal with the recession. It will be painful, but it will not be the end of the world and capitalism.  We will continue on the secular path of growth. On a different note, I hope that the governments' intervention to deal with dysfunctional markets and the collapse experienced in the past weeks will not kill the patient instead of curing it.   

Vincent Andres asks:

You wrote "the public is shaken". I'm wondering how much of the market is actually in "public" hands ?

If I compare what people (the public) save on their own willingly, and what the public must save in pension funds in mandatory way, I guess the public's direct participation in the markets is much lower than e.g. pension funds. So, I doubt public is now shaken, public has probably gotten out since already several weeks. Of course, this may vary from country to country.

Riz Din notes:

One public, on the other side of the world, seem to be buying with abandon as prices flirt with their lowest levels in a couple of decades. From Bloomberg .

'Nov. 7 (Bloomberg) — Japan's individual investors, armed with more than $7 trillion in cash, piled into shares trading at their cheapest valuations ever last month, even as the global credit crisis prompted overseas fund managers to sell out.'

I'm not sure about the choice of quotes in the article though:

'Individuals are the most clever out of any investor group, in my opinion'

'…they're not the kind of investors who get carried away with optimism and keep buying'



The thing to do would be to let the giants fail and just guarantee everyone's 401k, bank account, credit card debt and mortgages…

Laurence Glazier adds:

How about educating people about the true risks of buying property on loan, and explaining how it is only the assumption of government intervention to remove risk that supports a belief in this golden calf, the obeisance to which diverts many an artist from their element and muse.

And what happens to the giant firms of Wall Street is immaterial now. Trading is being democratized, moving from the ivory towers to empowered individuals, as computers did twenty years ago. One of those big waves.

Nigel Davies is sceptical:

GM NigelWhat if there is no solution, and that this whole business is merely evidence of a fatal flaw in humanity. As far as I can see EVERYONE could have acted differently at some point so as prevent this, but instead they drifted en mass along a line of short term apparent self-interest.

And what if the 'rescue plan' itself is of a similar ilk, putting off paying the piper because 'something' had to be done. After all, those making this decision couldn't possibly have their careers tarnished by a huge crisis in their time. Better to defer it to a future generation/generations, eh?

BTW, at the chessboard such thinking is heavily influenced by an excess of caffeine, so I wasn't joking about the Dr Pepper/no sleep thing. People ALWAYS try to force matters when tired and on a caffeine high.

James Sogi ponders the situation:

It is out of our hands now. Rather than trading fundamentals or quant strategies we are left waiting to see what the politicians do and jerk around with that mess as this or that secretary or politician plays their stupid game while the world markets hang in the balance. This is the problem with too much power in too few hands.

Victor Niederhoffer replies:

Yes, but all that happened was in the numbers to start with and would have happened the same way regardless, as will the eventual aftermath.

Vincent Andres replies to Nigel Davies:

Maybe not a fatal flaw in humanity, but a fatal flaw in the part of humanity which has to deal with money ?

Human societies need a blood system. Money/stocks/derivatives/etc. is this blood. But money is such an extraordinary feature/tool/invention that people working too much with it and too close to it become always crazy.

Radioactivity, morphine, also are very powerful things, but some rules must be respected.



In a gentler day, Charles Dodgson ("Lewis Carroll") wrote a conversational essay:

Eight or Nine Wise Words About Letter Writing

He anticipates all the modern conveniences of word processing, email, and describes a system for keeping a file copy, and generating a precis and index of correspondence of various type. He also has a foreshadowing of practice I usually attribute to Harry S Truman after HST incautiously sending his letter to critic Hume (my statement of the practice follows):

Write freely, to organize ones' thoughts, and to capture and spend the emotion, but then place the draft in the top desk drawer to age a bit before sending.

I see 78 'composed' but unsent email in my 'pending' folder. Most will never be seen by the recipient I initially started writing them for.

Back to the Dodgson quote:

Another Rule is, when you have written a letter that you feel may possibly irritate your friend, however necessary you may have felt it to so express yourself, put it aside till the next day.

Vincent Andres adds:

French diplomat Talleyrand was doing that with some of Napoleon's letters. In some cases, 2 or 3 days later, Napoleon asked, if it was not sent, to destroy the concerned letter…. and was quite happy it was still doable.



What is it about heists, and big scores, and Bolivia? Just watched Butch Cassidy and the Sundance Kid for the first time in a long time. And couldn't help but enjoy William Goldman's terrific writing, much of which seemed very relevant to speculators.

A selection:


(In the beginning, Butch watches a very solid, solidly-guarded bank being closed up for the night.)

Butch (to the Bank Guard): What happened to the old bank? It was beautiful.

Guard: People kept robbing it.

Butch: Small price to pay for beauty.


(The moment of recognition, of reassessing one's positions.)

Macon: I didn't know you were the Sundance Kid when I said you were cheatin'.


(Right after the "knife fight" with Harvey.)

Butch: Hey, what's this about the Flyer?

News: Well, Harvey said we'd hit it both this run and the return. Said nobody's done that to the Flyer before, and no matter how much we got the first time, they'd figure the return was safe and load it up with money.

Butch: Harvey thought of that?

News: Yes sir, he did.

Butch: Well, I'll tell you something fellas, that's exactly what we're gonna do.


(A regime change in pursuit.)

Butch: Ah, you're wasting you're time. They can't track us over rocks.

Kid: Tell them that.

Butch: (Looks for himself.) Who are those guys?


(Butch and the Kid finally escape Those Guys and return to Etta's. They read about the posse in the newspaper.)

Butch: Hey. It was Baltimore. And La Fours. You know who else?

Kid: Who?

Butch: Jeff Carley, George Hyatt, E. T. Kelleher.

Kid: (Looks at the paper.) Jees, we lucked out getting away, you know that? Why would these guys join up and take after us?

Butch: Oh forget it. A bunch like that won't stay together long.

Etta: They will. If Mr. Harriman has his way.

Kid: Who?

Etta: Mr. E. H. Harriman of the Union-Pacific Railroad. He resents the way you've been picking on him, so he's outfitted a special train and hired special employees. You spent the last couple of days avoiding them. It's really sort of flattering if you want to think about it that way.

Butch: A setup like that costs more than we ever took.

Etta: Apparently he can afford it.

Butch: That crazy Harriman. That's bad business. How long do you think I'd stay in operation if every time I pulled a job it cost me money? If he'd just pay me what he's spending to make me stop robbing him, I'd stop robbing him.


(Butch and the Kid get jobs guarding the payroll for mine operator Percy Garris, played by the great Strother Martin.)

Butch: I think they're in the trees up ahead.

Kid: In the bushes on the left.

Butch: I'm telling ya, they're in the trees up ahead.

Kid: You take the trees, I'll take the bushes on the left.

Garris: Will you two beginners cut it out.

Butch: Well, we're just trying to spot an ambush, Mr. Garris.

Garris: Morons. I've got morons on my team. Nobody is going to rob us going *down* the mountain. We have got no money going *down* the mountain. When we have got the money on the way *back*, then you can sweat.


You can watch the movie, in segments, online .

Marion Dreyfus adds:

Wm. Goldman has always been one of my most cherished reads. He is invariably intimate, clever, personable and cunning in resolving his plots. His films are always champions of amusing interactions, psychological insights and ebullient plotting. 

Stefan Jovanovich relates:

I once chauffeured Dad and Bill Goldman and one of his friends buddies to a Mets game. Seaver had one of his rare off days and the score was something like 9 to 1 by 6th inning. Dad wanted to leave early and beat the traffic but Goldman and his buddy were determine to stay. As the game ground to its inevitable conclusion, they seemed more and more interested, even animated. It finally dawned on my father that the author he was courting had a more than trivial bet on the over-under -which he won.

Vincent Andres says:

Reminds me another terrific movie from/with Paul Newman about optimism at its top (i.e. life at its worst) :

Sometimes a Great Notion (aka NEVER GIVE AN INCH)

A really great movie in my rememberings.

"Hank Stamper (Newman) and his father Henry Stamper (Fonda) operate a logging business in Wakonda, Oregon. The town comes to grips of economic despair, due to the local union's strike against a large lumber combine. When the Stamper's are asked to join the strikers, they refuse and are considered traitors. However, Hank continues to push his family on cutting more trees, despite Hank's wife (Remick) wishes for him to stop. Shortly later, Leeland Stamper, Henry's other son and Hank's half-brother, returns home after years of absence, which causes more unrest."

Stefan Jovanovich replies:

Vincent proves yet again his impeccable sensibility. SAGN is Kesey's best novel (the only one where his politics did not override his gifts as a writer), and the movie has Richard Jaekel, who was a wonderful actor. It also has a more than decent portrayal of the actual work of logging. (My claim of expertise here is based solely on one summer spent bucking logs for a gyppo outfit in the early 70s in Oregon - truly the hardest work I have ever seen or done.)



Assuming one's net speeds are up to snuff, where would the IT pros look next for bottlenecks?  Running IB, R, Excel, with a decent sized data import and IE with about 20 tabs open on an AMD 64 bit 2.4Ghz single core with 3 GB running XP_64 and two monitors on a 500Mhz+ video card feels increasingly sluggish.  Would like to move completely to Linux 100% of the time as my quad core with 4GB never has any processor/memory response hiccups but a few apps are just better on XP (unfortunately); e.g. can not make the jump to Open Office.

Vincent Andres replies:

1/ Any browser with 20 tabs open is something really heavy (this may well be the main bottleneck). And some "tabs" are very heavy.
2/ Depending on what you do with your IB screen(s), it may also be heavy because of the Internet data refresh.
3/ Data import

As for the dual screen, but I would be surprised if it's 100% managed by the video card.

We probably have all more or less similar tasks. My choice has been to split my main tasks onto several computers. So the computer on which I do my main work (where I'm sitting the most): Open Office + R for little studies + Firefox + email + etc. It's separated from other computers used for the other tasks.

Keep in mind that, although the processor speed is always the highlighted number, our jobs go through a long chain (HDD, RAM, etc.), and all pieces are not always accordingly fast. And also that the more opened tasks, the more interrupts to the processor.

Bruno Ombreux adds:

I found that the biggest bottleneck on my machine was the ZoneAlarm firewall and antivirus suite.

I got rid of this horrible piece of bloated junk. It has been replaced by a hardware firewall and an antivirus that is light on ressources yet efficient: Avira.

A DSL router acts as an impregnable firewall, is very cheap and doesn't use any computer ressources since it is sitting outside. If one absolutely wants a software firewall, Comodo is much better than ZoneAlarm. It is free and light.

Another thing to get rid of is Windows auto-update. This can slow the machine.

Jeff Rollert remarks:

I have found putting all communication (e-mail/IM programs, browsing) on a single machine makes crashes far less likely and speeds things quite a bit.  I also use Outlook 2007 (a pig) and Firefox (with so many tabs open I can't count them).

I will also keep Firefox windows open by subject, with tabs like chapters.  Doesn't help speed, but it does help organize thoughts.



Jim SogiJurists look for precedent or similarities in factual situations. Traders might use the same type of analysis rather than purely statistical numbers by looking at the context of the situations in which similar facts took place. Yesterday was the fifth consecutive gap down, today the sixth, and the third or fourth straight down day. This combo only occurred before in the bear market of 2000-20002. A year back I noticed that the facts seemed to fit the 2000 high volatility period. With this acceleration down and other recent days, I'm seeing patterns that happened in the big bear market of 2002. Last few days saw breaks to the downside from consolidation areas. I don't recall seeing this action for last few years either. Granted last week we had breaks to the upside. The number of this type of occurrences are too few to be robust in any manner statistically, but for context it is interesting to consider. Is trendfollowing in the equities going to make a come back?

A few weeks back I read C*vel's trend following book and wrote an as-yet-unposted critical review, but have reconsidered. I was critical of C*vel's uncritical use of only two simplistic examples of trendfollowing systems. I was critical of trendfollowing in general and of C*vel's insinuation that beginner traders might use it to make money. Trendfollowing must have had its cycles before, like maybe 20 years ago. It hasn't worked so well in the last 10 years or so. But I wonder if these cycles are coming back. How long has it been since you took a break out/down entry? We haven't seen a 20 day high or low for a while now, but it will be interesting which way it will go. Failure or trend? I kind of doubt trendfollowing (in equities anyway) will return in a big way, but its good to pose the question.

Kim Zussman notes:

The S&P close today was near the point last Friday before the 23 point Ambac skyrocket. Shortly thereafter a question was raised about over-anticipation and symmetry between up and down over-reactions.

This week's answer looks to have taken five trading days, with several surges on bad news thrown in to test the gut. I noted one headline: Wall Street dives on Ambac rescue doubts.

Gut, gut, That magical organ

The more you trade

The more a sore one

Vincent Andres notes:

Jim wrote that "jurists look for precedent or similarities in factual situations." As an algorithm, this way of reasoning is sometimes called "case-based reasoning," and has multiple applications.



 One of the first lessons I learned from a wise old trader was that markets move in a way that will cause people the most pain. I have sometimes found markets will cause me a lot of pain on a personal level, sometimes more pain than I can bear. However, since markets usually move with the path of least resistance, how can I reconcile the old trader's statement with efficient market theory? I never did ask him to clarify that statement, and just put it into the back of my mind. The only way he could be right is if he were referring to "people" as the general public… I don't know. Any thoughts or opinions would be greatly appreciated.

Vincent Andres replies:

"The Pareto distribution, named after the Italian economist Vilfredo Pareto, is a power law probability distribution that coincides with social, scientific, geophysical, actuarial, and many other types of observable phenomena."

– The biological world, eg jungle, is often paretian ie 10% of the jungle animals consume 90% of the jungle resources (the top of the pyramid) and 90% of the jungle animals consume 10% of the jungle resources.

– The markets are an extreme example of jungle, extreme, because since people rarely die from their failures, stupid behaviours may continue more than in a real jungle. I see the market as an extraordinary paretian machine. The normal, good working order of the machine, maintains/produces continuously a paretian distribution of the wealth among the players.

There are 90% of people who are easy to deceive and 10% of people less easy to deceive. … so the efficiency (if any), the "path of least resistance" goes exactly thru this 90/10 distribution, (and not thru an imaginary 50/50 distribution which simply doesn't exist (except maybe in some socio-communist idealized world)).

I would have rephrased your sentence as : "markets move in a way that will cause most people pain."

and this is not the fault of the "markets", the market is nothing else than the place where the people (with their 10/90 split) met. The market partition is just the people skill partition.



Ramping can only be effected by a large trading desk that can act in concert within a few minutes. When they start the move by say, buying in unison, a few minutes later naive traders pile on thinking they have picked off another trading team's signals. Meanwhile the original trading desk dumps their stock for a quick profit at the expense of the traders who have fallen for the decoy signals. PMcD.

This comment (and many others in the same vein) remind me exactly of a soccer dribble.

Player A has the ball and is in front of player B. A plans to pass on the left side, and thus A will feint going on the right side. The feint must have the maximum visual effect to lure B, and simultaneously the minimum real effect, in order for A not to go too much in the feinted (wrong) side. With some maths, one would say that A's position will exhibit as positive, but with all derivatives being negative (A has no intention to continue the move, quite the contrary).

If/when the feint works, it provokes an overreaction from B, (which B feels is necessary in order to catch up the delayed/lost part of the move), ie 1st and 2nd derivatives for B strongly positive.

If the provoked inertia/momentum is great enough, this will put B in the zag when A is in the zig. Enough to extract a little profit.

Of course, in soccer good players are able to change/adapt their plan during the dribble, if things don't work immediately as expected.

Player A may well be a restricted group of people acting together, Player B = the crowd (the expression "sucker rally" comes also to mind).

Such description is alas strongly non-predictive. Apologies. How to calculate derivatives with such noisy functions as stock prices? Which are the adequates variables/functions to consider ?

On the other hand, I suspect the example database to be potentially huge !



NervousBack in my apprentice days in the wheat pit, a wizened old guy took me under his wing. Since he had been trading successfully since the late 1930s, I was all ears. One of the anecdotal statements he made to me was that "Nervous markets always close lower." I've remembered that sage bit of wisdom for all of these years, and have followed that advice with reasonable success. Lately, I've been wondering if there was a way to quantify that statement, or if anyone in this group can lead me in the right direction. I'd like to see what the numbers and percentages of nervous markets really are.
One might ask, "What is a nervous market?" The only answer is that I can't define a nervous market, but that I know one when I see it.

Bill Rafter replies:

There has been some work done relating volatility to subsequent price behavior. Volatility (depending on how it is defined) may agree with your description of nervousness. Generally the premise is that volatility is bearish, which would be in agreement with what the wizened old guy told you.

There are many definitions of volatility. My suggestion is to look at measures other than 1-day rates of change. Earlier this year I asked around for other measures of volatility, and got approximately 20 variations. Additionally, there are “handmaidens” of volatility, such as institutional holdings.

Jim Sogi adds:

Vic and Laurel recently hypothesized that afternoons closer to the low of the day in S&P could be thought of as you say "nervous." I've also been playing around with NYSE declining volume. Today 857k. Fairly nervous. Over 1m down before the end of the day is very nervous.

Phil McDonnell remarks:

"Volatility is bearish" requires considerable qualification. In my ruminations the results have generally shown that rising volatility is bearish on a contemporaneous basis and over the short run. However high levels of volatility can be quite bullish. It is important to define what volatility we are talking about.

Victor Niederhoffer investigates:

VictorMost definitions of nervousness refer to trembling, quivering, and agitation. I thought I would look at some qualitites of markets that seem to be of that nature. I started with markets that were up at the open, down at 11 am, up at 1pm and down at 3 pm. I found 17 cases since 1999 in the S&P futures, and nine of them went down from 3 pm to the close, with an expected move of three points. Such moves occur about twice a year. I found that a similar gyration, but down at 2 pm rather than 3 pm, which happened eight times since 1999, to be visited with four up from 2 pm as of the close and four down. I found eight cases of the first pattern in bonds, and the next day was 50-50 up with an expectation of four ticks up. In general, I would say that there is not much evidence that a quivering market with numerous crossovers to the down side is bearish. In another study, I found 22 cases since 1999 where the market was up at open, down at 10 am, up at 11 am, and down at noon. Eight of these occured in 2007. Thus, the market appears to be gyrating more frequently in a way most people would get nervous about if it were their limbs or sinews. Seven of the 12 cases showed a rise from noon to the close. Thus, nervous stock markets, defined in this way, did not show any non-random predictive tendencies, although the jury is out as to whether the market shows an inordinate tendency to tremble between hours.

Vincent Andres adds:

One classical way to proceed would be to have someone provide : 100 examples of nervous/non-nervous/"don't know", status markets. (Maybe more than those three classes). Each example being the price series and the graph. Of course, it's possible to ask several people to do the classification.

Some counting would probably teach things, hopefully reveal possible clusters in the appropriate measure space. Well used, tools like neural nets (many NNs are nothing else than stat learners) may be of use here. However, there is a preprocessing to be done on the price series before feeding the counter … and this will often be the clue. (Some ideas have been provided in this thread).

It is however quite a painful job, and requires a rigorous methodology. And even if classification succeeds, it's only a piece of the job. As  P.McDonnell said, nervous => bearish is not a 100% sure implication. And markets are dynamic, not well-defined, etc.



A friend from the other coast writes:  "There is a complete collapse in demand. We here in California are almost certainly in the midst of another property slump." 

Haven't we seen this movie before? California and nearby boom states see moonshots of value and bull-market property geniuses, followed by cyclical shakeouts, despair, lather, rinse, repeat.

In places where property itself was a central business — Miami condoland, the Inland Empire of SoCal — the ugliness can be protracted. Add in the visibility of the problem, and you have the storyline being promoted by The Thundering Herd and other recession-callers. 

Let us look at some national figures.  From today's GDP report: Residential Fixed investment dropped 20.5% (annualized Q/Q change), its contribution to the change in GDP was -1.08%. This data shows how much damage has been done by the contraction in housing. A 20% decline in the sector lopped one percent off GDP. But residential real estate is still "only" ~5% of the economy, and it makes sense to keep that in perspective.

Stefan Jovanovich dissents:

Guys, I am not saying that this is the end of the world; but what used to be a real estate problem has become a banking problem. The Financial Times says that real estate loans are now 40% of bank assets.

I was all-in only a few months ago and took money out of the market only because I wanted to buy a new business. What convinced me that this was not just another slow-down was the spread between our bank's normal jive talk and what they were actually willing to do. We have had the same business in the same location long enough to have seen our "local" (sic) bank morph from Security Pacific to the B of A, and we have seen literally half a dozen people come and go as the branch managers. This is the first time, however, that no amount of collateral was sufficient to get them to say "yes" to a loan even though they are now dealing with a potential borrower who has no debt! They didn't even bother with the usual soft pass — "Have you considered an SBA Loan?" The silver lining that, in this environment, people are going to be able to "trade up" houses is comforting; but it is pure fantasy if the suppliers of actual credit have frozen up - as I think they have. Of course, it could be my bad breath and my charming manners. We shall see. 

Phil McDonnell says:

"News follows price." After a decline bad news will come out to explain it; after a price rise good news stories will come out to explain it.

To some extent the markets are pretty good predictors of events. That partially explains the relationship. However there is a deeper truth in the News Follows Price saw. Simply put the media needs something to write about. They sell fear, they provide information. It is all in pursuit of market share which ultimately leads to advertising revenue.

An author writes a book if and when  he has something to say. The situation is quite different for a media writer. He HAS to say something everyday. It doesn't matter if he actually has something important to say today. His job is to write something anyway. Ideally it will be something so compelling that you, dear reader or viewer, will stop your busy life and check it out.

One of the classic ways to make up a story every day is to look at the market action and try to explain it rationally. After the fact you can always write keen insights like 'The market went up on higher interest rate fears'. The next day might be, 'The market went down on fears of higher interest rates'. Invariably this leads to reinforcement of the meme of the day. In the 90's it was the dot com meme. Recently it has been the declining real estate meme.

But memes evolve. They evolve because the media is under pressure to make the story new. A new twist or angle keeps the meme fresh and compelling. First it was the real estate bubble has burst. Then it was the sub prime mortgage market collapse. The latter evolved into the liquidity crisis. Then the Fed eased. Oops, better not talk about that too much that could be good news. It is better to milk this meme for all it is worth. Then it was the dollar is crashing. But when a meme has been around for a while it gets stale. The media needs to turn to the 'how bad could this get' angle. Perhaps you have heard the old Johnny Carson jokes. Carson could tell a new 'How cold was it' joke every night for decades.

That is why we are seeing stories about recession. More media is piling onto the meme. This could lead to recession, global warming, nuclear winter and a falling sky! Today's article featured the new angle that real estate prices are inaccurate. It is really worse than they are telling us! The article cited one estimate that 1.5% of houses in Denver might be reported as 10% higher in price than they really are. Do the math. That would result in a .15% overvaluation in the Denver market stats - a fraction of 1%.

Quick! Check the sky! Is it still there? I live in the Seattle area so I can't check the sky, as usual. But I trust it is still there.

Bruno Ombreux agrees:

News coming after price has often very low (0) information-content. Easily/rapidly written/understood.

- Easily written: one must be amazed how newswriters are able to produce/pick descriptive "models" in often less than 24 hours ! (should they have thought of it some hours before, they would be millionaires !). Or maybe those models are just fake ?

- Easily understood, at least for people confusing understanding and memorization.

- It's either tautological "markets up because they didn't range nor gone down",

- Or completely incantatory.

Just some words from the liturgy, put together. No predictive power, even not explanatory power. But it may _look like_ something. That's enough. A majority of people will be happy with it. Thanks for this good stuff for self-deception.

- The most elaborate form may be a linear model: "things will continue". Tautological, incantatory, linear … what are others forms ?

After a market move there is always an open question : why ? Few people have time/skills/tools/data to count/answer. Even few people have time/knowledge to read a true, but a bit long and complex, explanation. (A frank explanation being most of time: "we don't know"). Though, we need to fill the question's volume, to reassure ourself, keep up appearances.

Better a void/fake explanation than no explanation at all, At least, better than an true explanation beyond ourselves.

Vincent Andres asks:

After a market move there is always an open question : why ?

The post-mortem explanations of market moves show the huge random element combined with human weakness.

Humans don't want to believe that things happen without a (knowable) reason. Ego, insecurity, uncertainty about death after life. So we ascribe explanations irregardless causation.

This is well exemplified by many of the SP500 moves in response to FED rate announcements this year. On Sept 18, they dropped 50 BP and the market jumped 50 points, because "The FED put is still there" (they will counter market declines). OK, but it is also possible the market could have dropped 50 on the same news, because "The FED sees the economy as sliding into recession", and that they cannot stop it.

Then on Dec 11, they dropped 25 BP and the market tanked (biggest drop on a FED day in recent history), "Because traders were looking for a cut of 50 BP". Yes, but it could also have gone up because the FED determined that recession risk was abating and the original crisis overblown.

Some non-human animal experiments are relevant. Recall the pigeons who were fed after pecking a lever: When the feedings came at random intervals, they began to repeat movements and rotations they thought caused the food to appear - not realizing their dance accomplished nothing. Or the rats with electrodes attached to their tails: One group had levers which stopped the painful shocks, the other's levers worked only intermittently. The rats who couldn't control their stress lost weight, shed fur, and became unhealthy, whereas the ones with control remained normal.

The terrible pain and joy generated by markets and other mostly random gambling is more than enough to bring out the animals, as well as herd them to the chapel on Sundays to ask for explanation.

Save my seat!




Doerner: (The Logic of Failure, page 61)

In scientific research, for which the immediate applicability of results is often not (nor should be) a criterion of success, “goal degeneration'' of this kind is no minor matter. Many social scientists who have set out to write computer programs they could use to evaluate an experiment have woken up years later to find themselves computer specialists. And they will hardly have realized that they have long since lost sight of ther real goal and become addicted to the fascination, challenges, and triumphs of working with a computer. An interim goal has dislodged the primary goal.

I'm a bit triggered by the above.

Some research programs have been carried out, (and it will continue), over several scientists generations. I'm thinking for instance about linguistics, but there are many other  fields one could cite. Before using computers, people working in the field were writing books. Hundreds of papers/books. Theories, nice theories, small pieces of correct theories, but also so many wrong theories, so many daydreams, some writings that were complete fiction.

- Why so many books ? Mainly of course simply because there were few other way to work.
- Why so many false assumptions ? Mainly because the risk of being contradicted was small. Hardly falsifiable/refutable. It's very easy to rave when nothing contradicts.
- Was this work useful ? afaik, i.e. in linguistics, very little.

Then we got computers. What is a computer ? A machine that can read/process/test/refute our programs/scripts. What is a program ? Executable/refutable writing. Thus, in many cases in science, writing programs is really far more efficient than just writing books.

Of course the 1st generation of researchers had to learn using computers. Yes, it took a lot of time. Yes, there was friction and time lost. Yes, the primary goal got lower priority. Yes, programming is dirty/buggy/painful/(add your own) (an engineer's job, not a scientist's). Yes, programming is often a task of its own. Yes, some people have become computer specialists. (But few have "woken up" imho)

BUT, if mastering a given tool is mandatory to succeed,
… is there really any other way than learning it until you master it ?

Some activities need tools, tools to build tools, tools to build tools to build tools, etc. Frustrating … but also so human.

Having encountered people from this 1st "computer enabled" generation, who believed in the potential of computers, even if they didn't understand them very well, I want to thank them, because it was not easy at all. It was in fact much easier to criticize them. But getting your hands dirty was the right track.



My favorite stats resources:

sci.stat.*  (Usenet)

R-help (Mail-list, very heavy)

R-sig-finance (Mail-list, reasonable traffic, interesting)

See also Statistical Software List Subscription Service



I noticed on R-Help: Many of the presentations and posters from UseR! 2007 are now available online.



… according to a new book by Ian Ayres, an econometrician and law professor at Yale, this is a microcosm of a powerful trend that will shape the economy for years to come: the replacement of expertise and intuition by objective, data-based decision making, made possible by a virtually inexhaustible supply of inexpensive information. Those who control and manipulate this data will be the masters of the new economic universe. Ayres calls them "Super Crunchers," which is also the title of his book, the latest attempt to siphon off a bit of the buzz that surrounds the hugely successful Freakonomics.[Abstract from Newsweek]

Intuition replaced by statistics. Should one therefore learn to ignore one's intuition or at least ascribe less value to it? And what about quick heuristics, rules of thumb, 'blink'-like judgments… and millions of years of instinctual bias?

Roger Arnold asks:

Are there computer systems that are being designed to handle macro issues as well? I would think that would be highly complex and beyond the scope of computers today.

Nigel Davies replies:

MasadaI can answer that for you - they don't have a hope. And I can tell you exactly why:

Despite huge resources' having been pumped into "solving" a tiny, limited game called chess, computers are just rubbish at the kind of creative synthesis of ideas at which the human brain excels. And it shows. They are totally unable to balance factors such as doubled pawns against the initiative. They just don't "think" like that.

Sure, they've made "progress," they can now beat human chess players by employing huge processing power, crunching a zillion variations a second and never getting tired. The Romans had a much better win when they took Masada.

Vincent Andres remarks:

You don't have to commit suicide! Computers are our allies — we just have to use them. Of course we have to learn to speak to them.

"I hate computers: they always do what I tell them, never what I want!"

Nigel Davies explains:

Deep Blue vs Kasparov 1997 Game 6There have been attempts to run tournaments with the players having assistance from computers — they call it "Advanced Chess." But in activities which enhance our experience of life, computers have no part. It's kind of like having computerized yoga.

The suicide has been the chess world's insistence on pitting man versus machine, which brought the computer manufacturers their Phyrric victory and allowed claims that computers were now showing "intelligence." But to me this is like claiming a Porsche is an athlete if it can beat a human in a marathon. Computers are still just number crunchers as far as I'm concerned.

I like computers; they are nice obedient slaves. But the claims they are showing any kind of intelligence is just bunk. All that has happened is that they're crunching faster.

Does fast crunching lead to consciousness and the human ability to reason? I don't think so. Humans crunch very slowly but are nonetheless able to deal with problems in which crunching is less effective. One demonstration is the miserable failure of computers in Go, which is still a closed game but "bigger" than chess. As for non-closed systems they will, therefore, be utterly hopeless.

There is another issues arising from the way that many humans are now assuming that computers have intelligence and assuming that computerized models are going to work. This viewpoint is not only wrong, the reliance on computerized models can lead to people's suspending their own intelligence or subjugating it to the computer's ideas. This is one of the main problems when human Grandmasters try to look at a chess position with a computer running in the background — they end up letting the computer take the lead.

These are very complex issues which the world will be addressing over the coming decades. But there are great dangers here, and I believe this effect was behind both LTCM and the current banking crisis.

Vincent Andres responds:

Brute force algorithms are used in chess. But they are so many other ways! Computers are doing many other things in so many and so far different ways than brute force. Chess was a challenge for number-crunching, but please don't reduce computer science to that.

Do not confound newspapers and computer scientists. We knew for years what the end of the chess story had to be. Nobody is surprised, nobody is overproud. It was a tedious job — but it had to be done. 10^30 computations had to be done, 10^31 were achieved.

In the computer science community there were few remaining people interested by the human/machine chess battle. Even the finances for the projects were questioned. A complete battle of the past, as far back as 1995 for many of us.



About two years ago, Vic and Laurel discussed control charts. I use a similar concept by tracking the drawdowns of various trading strategies. If a strategy is working well, there will be drawdowns, but the drawdown amount will repeatedly return to zero as profits exceed losses. Conversely, if a strategy is losing, the drawdowns will get further and further away from zero. Thus, a drawdown that exceeds a preset threshold or fails to return to zero for an extended number of trades might indicate that the cycle has changed.

Andrew Moe adds:

Improvements to control charts can be made by upgrading the fixed window look-backs to exponential or DSP style windows (see Ehlers, Jurik, et al). Information theorists will find additional gain via the use of fast-responding windows on the entropy. These methods are used to turn various strategies, traders, and funds on and off. I particularly like Mr. Ellison's idea of return to even from the max vis-à-vis survival statistics as traders tend to get paid on making all-time highs, and the distance and journey between tell much about the method.

Vincent Andres writes:

Cycle changes are not directly viewable. Hence we're often trapped.

I believe cycle changes are only viewable in some slightly more indirect universe of parameters. Don't look at prices or first differences of prices.

Cycle changes are of course written in them, but a bit too deeply to be seen just on the surface (price). We must go one (or more) levels downstairs. We have to search/compute indirect/deep parameters from the prices.

Plotting those deeper parameters will of course show deeper things. Just as using a microscope or X-Rays. Some parameters we may consider:

1. Correlations (in many ways)
2. Regression coefficients
3. Lags
4. Price distribution parameters

Scatter-plots may also be of interest. Points clusters may correspond to regimes.

Vic and Laurel recently had an interesting post about ordering/ranking. In a general sense, rank measures can be used in many ways — what's the cluster of the leading horses, and is it changing?

A great part of physics is simply building measurement tools. Then using them. Is market physics so different from other physics?

Adam Robinson explains:

Vincent's insights answer his own query, for the difference is fundamental and ineradicable.

In the physical world, phenomena consist of relations among unvarying "observables", and even at the quantum level, observing those phenomena offer us at worst a position vs. momentum tradeoff. Light quanta might shift a subatomic particle we have in our sights, but they don't usually change the particle.

With markets, once one or more traders observes a phenomenon (e.g., equity markets are rising as the yen falls, whatever — even spurious correlations) they begin to trade/arbitrage away the phenomenon so that it diminishes or even disappears entirely.

Hence ever-changing cycles that vex and humble us.



 The wife asks, "How was your day?" Grumble, grumble: it is never good. Lost money, or could have made more. Vic and Laurel wrote that in 10,000 days in the market they never had a satisfactory day. On the too frequent days losing, it is never pleasant, and for the occasional wins, the leverage was never enough, or too much was left on the table, and could have made more. In thinking about this and experiencing it, it has to be like this in order to maintain proper money management.

Very rarely can one go in all guns blazing and catch the bottom tick with maximum leverage. It cannot be, for it is too dangerous and would be a violation of risk guidelines.

A poignant comment made by a wise man when reminiscing over the happy years raising young children, "The days are long, but the years are short." In the markets, the days are never good, but the years or quarters can be. Two completely different sorts of consciousness are at work in the two time frames. The long term is not readily comprehensible by humans, and thus the application of the present to a long term outcome is difficult to visualize and execute.



 Last night while swimming laps I was thinking about efficiency of movement through the water. Actually this started last Friday happy hour when I took a pile of people from here to the pub and they happened to have the America's cup on TV. Several of the folks here are part-time sailors and while watching the kiwis fend off Italy through tack after tack a seed of a thought started germinating in my mind.

Efficiency is a critical component of all kinds of systems involving movement. In fluids for example we know that flow can be steady or unsteady, laminar or turbulent, and uniform or non-uniform. The more the fluid flow is steady, laminar, and uniform, the less energy per unit mass it takes to move the fluid. Unlike solids, however, elements of a fluid mass may move at different velocities and be subject to different accelerations. Still, we have three fundamental anchors: the conservation of mass (continuity), the principle of kinetic energy (flow equations), and the principle of momentum (from which the forces exerted by fluids can be established). What I am most concerned with however in this gedanken is efficiency, therefore energy relations. The most basic energy equation for flow in a fluid mass with boundary constraints, say in a channel or a pipe is (Energy at point 1) + (energy added) - (energy lost) - (energy extracted) = (energy at point 2).

In swimming, energy is added via the muscles, energy is lost due to drag, and there can be a slight effect of energy being extracted depending on the movement of water in the pool. For example, in racing at elite levels measurements have shown that the racers who are lagging behind the others can get slowed ever so slightly as they approach the wall if the wave front generated by the lead swimmers hits the wall and is already bouncing back into them. But in any event the main concern here is with drag.

We know based on the Froude relations that drag of a body or vessel through water is a function of the ratio of the length of the body to its width and depth. In general experiments show that the higher the ratio of length to width, the less drag that is exerted, which is why racing hulls tend to be long and narrow.

In swimming the practical example of this is the use of the method of front quadrant swimming, which was popularized in the 1980s and has recently come back into vogue as people examine Ian Thorpe's technique. (At least as a term or methodology.) It's beyond the scope of this post to discuss all of the minor details of FQS (you can Google it) and there is always some controversy when it comes to swimming technique but the main gist is to maximize and maintain the ratio of your body's L/w in the water in order to lessen drag. This is accomplished by swimming mainly on the sides of your body, using rapid but fluid transitions from one hip to the other, with a long body position in the water that is created by keeping one hand out in front at all times (not straight out in front of the surface of the water but in the front quad in front of your head).

I can say from experience that working with FQS can drastically reduce the number of strokes required to cross the pool, in my case by about 15-20% (3,4).

This leads me to contemplate trading efficiency. To me trading efficiency is not the same as volatility of p/l that is really what is captured by Sharpe, but rather is using the least number of contracts to capture a given level of profit. We know that in trading, as in swimming there is considerable drag in commissions, account fees, and the bid/ask spread which has to be overcome.

Also, as with swimming, I have noticed as I get older that it is not so much the losses that annoy me (although they can definitely hurt at times) but rather the periods where I am churning and getting nowhere. As daytraders we have terms we use to describe this annoying feeling, like "not in gear," "last to get the joke," "the broker is my best friend this week," etc, all of which capture that feeling of trading inefficiency.

It also begs the question as to whether trading efficiency as a metric has any predictive value, at least for traders following a systematic approach to positions. Or, conversely, is there a metric that might be developed for the market movements as whole, say over the course of the week, to assess the degree of market efficiency or the degree of market efficiency as it moves between certain goal posts (1500-1520, 1520-1540, etc)?

We have discussed before how the market often has a tendency to turbulent behavior during the course of the week only to finish nearly unchanged on the week and Victor has proposed that this is one way the system maintains itself, by enticing people to do the wrong thing at the wrong time and thereby make a contribution to the upkeep.

Jim Sogi adds: 

Here are a few additional considerations: Swimming underwater creates less drag, so there are some rules limiting the time, say one stroke, underwater in swim racing. I have a lot of experience swimming underwater trading and in the ocean when I wipe out surfing, but it seems to be part of the game and is a necessary component that might be factored in to your equations.

I like spending only the optimum time underwater, ideally none, but only a breath or two. A two-wave hold down is serious and approaches drowning. Some time underwater is necessary to pop through waves, but also to build a position, as it's impossible to get a full boat on the bottom tick every time.

The second consideration in water is planning. At a certain speed and with certain hull designs the boat starts to plane up on the surface with a break out from the limitations of the hull length/width speed formula into a new equation. When surfing, the commencement of the plane from paddling through the water is the start of the 'ride'. The length of time in a trade getting to the profit ride part seems very important in efficiency terms.

The longer and faster profit/ride, the less time underwater slogging, the greater efficiency, especially tallied over a large number. Paddling a surfboard through the water, getting onto a plane, and jumping up, while at the same time not missing the wave, takes incredible timing and strength. This is a key to trading as well, to time the opportunity, to have the strength to plow through water, sometimes under water, and get to the plane, and ride the ride, maneuvering through the changing face of the wave. Maneuvering around the sections, under the curl, until the wave ends and before hitting the reef takes skill.

Just like every trade requires such strength and courage to enter with the risk of going underwater, skill to read the changing market turns and getting the maximum distance. These things could be quantified in performance stats, but lost opportunity must also be added in as a variable, and lost opportunity has been the key variable in the recent cycle.

From Vincent Andres: 

Here is a humble suggestion. Let each trade be evaluated automatically by your computer according to some criteria (many have been given here). There may well be around 10 criteria. Evaluation may be a note between [-100, +100].

After enough trades, have a look in the criteria space to see if there is some clustering or if the distribution is random or not. Also, this is nothing else than an alike computerized version of Chair's "keep in a notebook" recent advice. 



 FX trading has become huge and very popular with the public, system sellers, and brokers. This report is from a dear friend.

I recently spoke to one of the largest Forex FCM's in the country, who has thousands of clients. He made a statement to me that is very telling. Out of the thousands of clients who have accounts with them, only about 60 - 80 are profitable this year so far. A majority are down significantly.

From Riz Din: 

Welcome to my world. FX does not afford sufficient protection to the public, and unscrupulous brokers abound. I hear complaints of trading platforms freezing up around the big numbers (payrolls etc), of orders being slipped, and of stops not being honored. I will not question the validity of these complaints but I do not believe they lie at the heart of the problem. Instead, I attribute most retail level blow-ups to inadequate capital and excessive leverage — with just 10k the inexperienced retail investor can command up to 4m of underlying.

There is also a high level of price uncertainty due to the lack of an underlying marketplace (this is being addressed). Also, while the manipulative marketing by brokers and system sellers is worrying, I have faith in the development of the market over the long-term. Spreads have tightened considerably over the past five years, and banks are moving into the retail space, offering trading platforms with more credibility than the off-shore broker who sends marketing e-mails offering 'price guarantees,' 'no slippage,' etc.

Also, while this may be less relevant to the day trader, another factor that makes FX trading a tricky proposition is the absence of a clear upward drift. Individual exchange rates may appear to exhibit long-term trends. But at their core, we are just dealing in relative prices and there is no such thing as a built-in reward for the entrepreneur such as is found in the equity market. Banks are now launching various ETF-type products that claim to capture the exchange rate beta — incorporating strategies that have proved rewarding over the longer-term, such as the carry trade. But I believe this is far more questionable than equity beta.

I find the dynamics of this marketplace fascinating, but there is no doubt that it's a tough racket. Still, I am surprised by those numbers.

From Chris Cooper: 

I, too, have been trading a lot of forex recently. I don't find it too hard to believe that there are very few profitable retail traders. Most retail brokers run operations designed to milk money from their customers. That, plus the leverage available, pretty much guarantees that few will profit. My commissions are not high, but since I trade fairly frequently (not scalping) I know that commissions alone cost me 50% of my equity annually. Slippage is even more costly. That's a pretty big nut to overcome.

There are retail brokers who are built with ECN technology, and these tend to give their customers a better deal. I would recommend either Interactive Brokers or EFX Group.

Once you move past the retail stage, I have noticed that another serious issue is liquidity. Because of the lack of a central exchange, you end up having to execute in multiple locations to find liquidity and that complicates the trading. Claims about forex being the biggest market in the world (trillions!) are so much hogwash. I can see that my trades have a brief but visible effect on the market occasionally, more than I see by trading index futures. It doesn't take much to buy the entire amount offered at the best ask.

I am optimistic about the industry, and one of the reasons is the big increase in numbers of small retail traders. They are certainly losing more than they have a right to lose, but the competition engendered for their accounts will ultimately better the experience for all customers.

Alan Millhone writes:

You all talk of 'slippage', lack of liquidity, costly commissions, retail brokers who milk their customers. Do all of you stay in the market as a challenge, make a living, just something to do to pass time?

In construction we also have 'fly by nights' who prey on the elderly and the unsuspecting and give the good builders a bad rap. Perhaps it is the same in any business. I have had plenty of experiences in the construction business where on the other end some people run out of money and simply will not pay you. Because the court always assumes the builder is making a fortune, 99% of the time it rules against the builder.

Chris Cooper replies:

To be fair, one must distinguish between the costs of doing business, which are simply features of the marketplace, and those which are borderline fraudulent.

Commissions, slippage, and lack of liquidity are all costs of trading which are fair in principle, and the magnitude is determined ultimately by competition among providers. Also, brokers in the forex markets artificially widen the spreads and take the difference for themselves, and trade against their customers. While perhaps not unethical, such practices don't enhance the perception of fairness that will ultimately lead to increased participation. Traders can educate themselves to avoid these brokers, but for now plenty do not. 

From Yishen Kuik: 

This brings to mind epidemic models. If account fatality rates are so high, should one assume that marketing is a key driver in this business (to renew the population of accounts)? 

Vincent Andres adds: 

My experience in the market is short. For what I understand from this retail market, I don't see that brokers need to do great marketing. In fact FX customers are too optimistic. They see what they want to see, e.g., "Mr. X won the FX contest with 1000%." They don't see what they should see, that 99% of participants loose their account.

I posit that some of the overconfidence may be due to the presumed knowledge each of us has about currencies, which seems simply better than what we have about stocks, etc. I believe I understand the Euro better than Merck & Co./Soybeans etc, simply because I practice/use/own them everyday.

The FX market is a closed finite market, with ten main currencies, 10×10 main vehicles. This may calm people, the liquidity meme, forgetting to look at the granularity of this liquidity. FX is de facto an oligopoly archetype, the guru. I understand nothing. But I rely on somebody who understands. In fact, the simili-pro is like one of Mr. Rafter's nice examples. The only thing the simili-pro understands is how to dupe his customers.

The reading of FX forums is a 4th dimension experience. The customer's innocence/ignorance/unwillingness to try to understand/learn/look seems without limits. At the retail level, there are few attempts to know the market, the brokers, who are the players, what is the leverage, the spread, etc. It seems like people want deliberately to play blindly. When they buy a piece of fish at the fish market, they will carefully compare, weigh, smell, touch, remember, etc. When they buy 10,000 euros with leverage 10, they will base it on two crossing lines from a surrealist Picasso like painting.

It is not so hard to quantitatively verify that a great part of the losses is not due to the market, but to the broker. People focus on the market (even completely wrongly), while the real play is not there. A great percent of trades/plays don't happen at the market level, but stay intra broker. (Hence, if you want to make money, you'll strongly have to make it from your broker, and not from the market. That's a rather different game.)

Despite all the above remarks, I found the FX a very nice teaching and training field. Since the broker's big obstacle, an oligopoly, etc, searching edges is quite hard. It's thus quite formidable. I do not pretend other markets are marshmallows, but the FX is specific. 



 When water boils, it hits 100 C, but doesn't immediately turn to steam and change state to the higher energy level. Instead it requires additional energy at 100 C staying at the same temperature, until finally it breaks out into a boil. The various convective currents within the pot swirl around in interesting patterns during that time.

In the market system, how does heat in the form of capital get transferred? On the tick level of course there are individual transactions. The overall energy level of the system is the price. There are holders of capital at various prices. The inside price is like the convection as it comes down to various levels and stirs up the holders at the lower levels with energy to spur capital transfer.

On 5/17, the boundary layer at the top, above 1420, required more energy than was available to change phase. Perhaps more convective action is needed, and more stirring to transfer capital. The convective current swirled around the top but that did not seem to gather enough energy or tip the balance. Nuclear engineers study such currents when transferring energy to water to create steam for power.

Vincent Andres adds: 

Imagine a set of nodes. Each node may have some value. Those nodes are interconnected via constraints, e.g., node1+node5+node25 < 5, etc.

Let's call alpha the ratio: number of constraint per variable. When alpha varies, there is a phase transition phenomenon quite analogous to the water phase's transitions.

Alpha small = system with many solutions, may stabilize easily

Alpha too big = no solutions, erratic system

Alpha near the alpha limit = maybe/maybe no solutions, let's be : node1 = bonds, node2 = stocks, node3= real estate, etc., and we are not too far from "markets dynamically related".



 One of the giveaways of imposters is their use of highly technical terms, as if they are on a loftier plane of understanding higher math than you and I. For instance, the Fake Doctor said today "at the moment, I still say as I said before, by algebraic implications, the odds are 2 to 1 we won't have a recession," referring to some probabilities from Fed researchers about the odds of a business slowdown, when the yield curve is inverted or when the expansion has run X quarters or more.

There are so many problems with such "algebraic" implications, starting with changing cycles, retrospection, multiple comparisons, the part-whole fallacy, and the general impossibility of predicting from retrospective small numbers of observations. But it brings up the general subject of key semantic indicators of poseurs and imposters. What key words do CEOs, advisers, et al, use when attempting to appear rigorous and profound and smart? Words that should act as a leading indicator of staying away and avoiding such poseurs? To start off, I would propose lognormal and neural networks as two other key semantic posings.

Martin Lindkvist adds:

Greenspan has been all over the media today, but I saw the headline yesterday evening, so perhaps some people got frightened and used it as a reason to sell. He now says there is "a 2 to 1 chance that the US avoids a recession." But he said something like "a 1 in 3 risk of a recession" in February. Is he trying to be funny? Or maybe he just wants to avoid being called a pessimist? Why is it that he always is in the headlines talking about recession as soon as the market goes down? Does he miss the limelight?

Victor Niederhoffer remarks:

Yes. I believe he suffers from the old lion displaced from the pride syndrome that so many other old men suffer from. It is limned in grotesque detail in the indie movie, Little Miss Sunshine. 

George Zachar adds:

Another old lion scandalized by youth:

May 16 (Bloomberg) — Nothing in John Whitehead's 37-year career at Goldman Sachs Group Inc. prepared him for the excesses of today's Wall Street. "I'm appalled at the salaries," the retired co-chairman of the securities industry's most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are "shocking,'' Whitehead said. "They're the leaders in this outrageous increase.''

From Gordon Haave: 

I have always thought the #1 way to spot a fraud would be based on the percentage of falsifiable statements per total words spoken/written. The issue you raise, i.e., speaking on a plane above others, would count to total words but not towards falsifiable statements. The general point of such statements is "until you have my level of education on this subject, you are unqualified to falsify my statements". Of course, one can't attain that level of education, because part of the education would be agreeing with them.

An example in the world of trading would be a discussion of Elliot wave theory. The Elliot wave folks defend themselves by taking it deeper and deeper into the theory to a level that you can't attain without spending years studying it. If you study it with an open mind, you will quit studying it after a few weeks. If you push on, you will have a heavy bias towards believing it in order to justify the amount of time you put in.

This is also very prevalent in academia. The most useless of all professors tend to just make up entire new words, and speak in the most complicated of matters solely to keep you from pointing out that the emperor has no clothes.

Now, you ask how to quantify and test? I have given a shot at quantifying, but you can't test. That is the whole point. They prevent you from testing because the statements are always non-falsifiable.

From Sushil Kedia: 

Regarding the Chair's posting, focusing back upon CEOs and their ilk operating or claiming to operate at a higher plane:

1. Descriptive handles: for example when on CN*C market analysts / advisors start describing market as a tough animal, as G_d etc., etc., and not answering to the point, that is, where do they think the analysis is going.

2. Deflective handles: words like in spite of, despite, even after, in the face of a hostile, or for example a Chairman's report / comment in corporate annual reports saying that despite competitive challenges your company has done well.

3. Picking the Fly: secondary variables of valuation like market share, cost management, planning. An example is,"We have chosen to push for a continued growth in market share and are certain that in the long run this would continue to accrue value to our shareholders." [Oh I thought returns in excess of the cost of funds created value, unless you believe in today's age and times you would one day become a monopoly while continuing to feed the expansion of your ego.]

4. Shifting in Time: that brings to mind another key handle called, "In the long run". Would a bad trade qualify to become a good investment? Oh, often it would if you are in the presence of an advisor. In the long run, none of them have died.

John Floyd writes:

This may get off the track of the question's intent but I think there are a number of facets of this to explore that are of use in vetting imposters, as well as helping to find profitable trading opportunities. There is choice of words, clothes, cars, etc. that all give clues.

Beyond the actual word choices and phrases, I think one should look at the number of times certain words are used and word choices changed. The currency markets, for example, have had a fixation on Trichet of the ECB's use of the words "strong vigilance". Another example would be the number of times certain words such as "slower" are used in U.S. Fed comments. The degrees to which these words are expected and unexpected by markets as well as the shifts in language often expose opportunities. Yesterday for example the fact that the market had become calloused to "strong vigilance" yielded no reaction and the Euro actually weakened in part on the comments.

Steven Pinker has done some interesting work on linguistics and cognition. I have also heard that both Mark Frank and Paul Ekman have done some worthwhile work on non-verbal communication. Marc Salem, while some of his work is clearly of the "fun" and non-scientific variety, is entertaining and I would recommend his live shows when he is in town. 

Vic replies:

I had in mind terms such as "Pareto distribution" and "infinite variance" and "closed-form solutions" or attempts to absorb prestige from academic institutions like Stanford, Caltech, MIT, or Princeton, through their "luster" and "close encounters" thereto, a la the magician who can bend keys and spoons at will. 

From Easan Katir: 

There was a certain bond trader in London who was horrible at trading, but could talk such a good story he was able to move from one high-paying desk to another. He was head of trading for a Japanese Bank, last I checked. Anyway, his favorite word to throw into a conversation was "hypersclericity". I don't know how to test prospectively, but retrospectively, when the secret account where he hid his losses came to light, it was game over. 

Vincent Andres writes: 

As a programmer working with algorithms, I must say that I'm a bit distressed seeing algorithms often blamed as faulty rather than the users. Every morning I use my razor. Yet in the hand of a baby, a razor would clearly be horrible. Should I throw my razor away?

It's exactly the same thing with algorithms, though this is not to say that there aren't bad algorithms. Hundreds are invented every day (mainly rococo useless constructions). But generally those algorithms don't reach the news.

Jason Ruspini remarks:

For many people, even "bootstrapping methods" is buzzwording. It does come back to the user/context. "Correlation" can be a buzzword, and often is. Count the unnecessary syllables. On Friday's 8pm show a CEO cited a "one hundred basis point" improvement in margins. 

Vic comments again:

Part of the pseudo-math is using a terms when one does not know the first thing about what it means. The idea that the frequency distribution of some aspect of market prices or paths more closely fits a normal distribution than a log-normal distribution, and that this explains long tails/isn't properly priced, is so complicated that it would take the most competent of practicing statisticians to unravel it.

When the person who has never had a statistics course uses it, and pretends that he has the same understanding as great 'mathletes' such as the mediaval liberal fund, or the Harvard opera fundist, or the math arbitragers from Columbia use it — why that's transference and flimflammery squared.

It amazes me that it is so easy to fool so many with these high sounding words. The other aspect of course, is that those who know math and use the words properly often lack the wisdom to consider why such exact and precise and computationally intensive methods are completely useless except as a marketing tool, due to such things as the law of simplicity, the principle of ever changing cycles, and multiple comparisons.



 Brian J. Haag wrote that it's more than 12% more likely that on a given day the market is up rather than down.

For every 100 down days (SP500 since 1980) there were 112.2 up days, so the uncertainty component in predicting daily returns strongly favored the long side.

However another possibly more important aspect of prediction is whether it is easier to forecast bullish or bearish periods. If bearish patterns were easier to find than bullish, this might out-weigh the 112/100 odds for longs. But in the real market panic sell-offs (of various incarnations) test consistently bullish subsequently, whereas there do not seem to be predictive antecedents to big declines. If this remains true, then there will still be profits as long as one is brave enough to buy earlier than everyone else (who also know that panic is bullish) and endure the pain of intermediate-term losses, and risk that they continue deeper.

In light of recent market behaviour these arguments are easier to make (and take) than (say) 2002. It would be a lot more fun to invest if up and down days were homogeneously dispersed. But the problem is that upward drift comes in streaks (like recently), is taken away in lumps, and human nature is hard to ignore. How many traders, in the face of increasing losses or even going under, got more and more bullish in 00-03?

"Gee, hun, sorry we lost the house and owe all that money to your dad's homebuilding company. But the good news is that there is high probability it will go up from here!"

Vincent Andres writes: 

I would posit (to avoid one-line questioning) that:

  1. There are fewer bearish situations than bullish ones and hence, mechanically, fewer predictive patterns to find, so the task is harder.
  2. Bearish situations are sharper than bullish ones and hence perhaps the predicting patterns are also sharper, (kind of homeopathic reasoning), i.e., easier to detect (perhaps more contrast). I try a parallel: I see a snake, and I quickly get my hand away. The move is sharp, and so is the pattern/snake.
  3. Bearish patterns maybe come with short or very short notice (think of the snake threat), while bullish patterns may be seen with enough notice. So bullish patterning might be bit easier.

Kim Zussman responds:

My (not well stated) hypothesis is that, due to the immutable nature of human fear/panic reaction, people are generally over-reactionary and bullish for the future. However there do not seem to be similarly predictive preconditions of bearish futures; prior neither to sharp declines nor gradual ones. Or alternatively, there are such preconditions but they are harder to find

2nd hypothesis: Even though the probability of up and down days is close to the same in historic totals, the way days aggregate in actual ordered series is non-random to an extent not explained by actual 0.52/0.48.

I am thinking about other ways to test this (the pairs study was a first step) such as comparing runs in actual series to randomly shuffled days from actual series. As always suggestions and amplifications are encouraged. 



 I have heard that the cause of Cyril Burt's death was gallantry to women. He insisted on walking a lady back to the subway in the rain, and died of flu a few days later.

We often see this trait in old men; an unholy courtliness to women, especially attractive ones, that borders on fixation and would be inappropriate for anyone under 70.

Certainly the Greenspan transcript on 9/11, with him showing off that he does not like the cutoff in a certain chart and that he has been fooling with his short wave radio, even as the tragedy unfolds, is a sign of sickness.

What is the general tendency of men to be overly chivalrous and boastful? This is something that is a certain mark of decay in people like the Sage, the weekly financial columnists, and the fake doctor.

I wonder if this tendency is more prevalent among chronic pessimists, and is it a symptom of something much worse?

Vincent Andres adds: 

It makes me think strongly about so many mothers who infantalize their children consciously or unconsciously? This point is not clear to me. Some women may have a real pathological and uncontrollable drive to remain mothers. Their goal seems very clear. Remain a mother. Remain a needed mother. Remain young.

Such mothers what to show the neighborhood "see how well I educate my child," and doing in fact exactly the opposite. They actually poorly socialize their kids to keep them dependant on their mom, the "only one able to understand them". The number of very precise and efficient tricks and tactics used to accomplish this is amazing.

Of course the concerned child also remain young. At 30 always at mom's home (or in jail), depending on mom's money, etc. Could any child escape this kind of situation? How? It's so cool to stay a child. This seems much more common today than 20 years ago.

Janice Dorn replies:

It is my experience that this situation differs from person to person with aging. Men of an older age tend to view themselves and women in a framework which exaggerates that which they held when younger. In essence, personality tendencies of youth are magnified in adulthood.

A depressive tends to become more depressive, a person with obsession or compulsion tends to become more obsessive and compulsive. There are certainly instances where dementia and other sorts of degenerative brain injury can lead people to behave erratically (go naked in public, go after young boys, other inappropriate behavior).

For the most part, however, "normal" aging appears to reflect exacerbation of qualities present when they were younger. You will always find those who are a sucker for a pretty face and youthful body (think of any number of women and men who use this and exploit it as a lifestyle).

By the same token, misogynists become more so. I believe that these are normal so-called defense mechanisms which individuals use in an attempt to not lose themselves.

In other words, the magnification of the personality traits with aging represents the strong need to hold on to those aspects of self which the person senses they are losing.

George Vaillant from Harvard has done some very nice lifestyle through the ages work, including study of the ego. I believe his earlier work was a bit more serious than that recently where he appears to be directing more to the masses, happiness and spirituality.

David Hillman mentions:

"Becoming a caricature of oneself," as I'm fond of calling it, was evident in corresponding for some time with a famous author who had written his magnum opus and done other good work in the '60's.

For the next 40 years, he continued to hammer away at the same off-beat theme to anyone who would listen. Increasingly fewer would. His reaction was to pump up the volume. The longer he kept it up, the more tiresome he and his theme became.

Rather than appearing to be the life-sized, thoughtful guy with interesting theoretical ideas he once was, he looked to be a ranting, bloated, washed up, parade-balloon-sized radical who hadn't had an original idea in years and couldn't let go.

At the time of our last correspondence, he was actually still quite a vital and active near-nonagenarian, and a really nice guy, but who would have known? It makes a pretty strong argument for introspection and re-inventing oneself from time to time.

Also, in this respect to 'an unholy courtliness to women,' I highly recommend Memories of My Melancholy Whores by Gabriel Garcia Marquez.

….García Márquez's slim, reflective contribution to the romance of the brothel, his first book-length fiction in a decade, is narrated by perhaps the greatest connoisseur ever of girls for hire. After a lifetime spent in the arms of prostitutes (514 when he loses count at age 50), the unnamed journalist protagonist decides that his gift to himself on his 90th birthday will be a night with an adolescent virgin. But age, followed by the unexpected blossoming of love, disrupts his plans, and he finds himself wooing the allotted 14-year-old in silence for a year, sitting beside her as she sleeps and contemplating a life idly spent….. —

Laurel Kenner quotes:

SENEX AMANS (from Latin "ancient lover"; also spelled senex amanz in Old French):

A stock character in medieval fabliaux, courtly romances, and in classical drama, the senex amans is an old, ugly, jealous man who is married to a younger, attractive but unhappy woman. He is often a poor lover (or even impotent) with bad breath, wrinkled skin, and grey hair.

He is frequently cuckolded by a younger, handsome, virile man who secretly seduces his wife. We find examples of the senex amans in Chaucer's "Miller's Tale" and "The Merchant's Tale," and in various other fabliaux. Likewise, the motif also appears in the medieval French lais such as Marie de France's "Guigemar" and similar works such as Tristan and Iseult.

The motif of the senex amans often becomes useful for fast characterization, since it often can quickly cast a predatory light on an elderly male antagonist. An example of such use would be the old king of Ghana pursuing the young Imoinda in Aphra Behn's Oronooko, or any of the aging aristocrats sadistically pursuing young innocent girls in Gothic novels. [Read More]



The machine-learning algorithm called "backpropagation" is a very beautiful algorithm.

An early (~1960) learning machine was the Perceptron by F. Rosenblatt. A Perceptron is a 1-layer neural network, a linear classifier. This path did not succeed very well. One reason was because the community working on it was unable to extend to 2-layer (and more) systems, which needed the backpropagation algorithm to work. And it hadn't been invented yet (although backpropagation algorithms on 1960s computers would also have been a challenge).

The sad part is that at the time of the Perceptron, perhaps even before, the backpropagation algorithm was already known in the physics community. Of course it didn't have this name and the same applications. So, having some people able to interface between different communities, able to speak/understand both, can sometimes be useful.

However, today the backpropagation algorithm works, and is doing many good jobs. 



 Insurance is sometimes mentioned in statistical books that contain a history of science chapter. A French-language stats book I keep handy mentions "Northampton lifetables" used by a life insurance company in 1763. The company employed statistician Richard Price. From the statistical point of view, the basis of how a life insurance company makes (or not!) money is quite well explained. I mention this since I often find that history of science is a didactic way (by returning to basics) of understanding concepts.

From the book:

Richard Price was also friendly with the mathematician Thomas Bayes. After Bayes's death in 1761, his relatives asked Price to examine his unpublished papers. Price realized their importance and submitted "An Essay Towards Solving a Problem in the Doctrine of Chances" to the Royal Society. In this work, Price, using the information provided by Bayes, introduced the idea of estimating the probability of an event from the frequency of its previous occurrences.

In 1765 Price was admitted to the Royal Society for his work on probability. He also began collecting information on life expectation and in May 1770 he wrote to the Royal Society about the proper method of calculating the values of contingent reversions. It is believed that this information drew attention to the inadequate calculations on which many insurance and benefit societies had recently been formed. 

Stefan Jovanovich extends:

Richard Price was also a founding member of the Unitarian Society. The Unitarians, for all of their intellectual influence, never succeeded in attracting many members. In the UK religious census of 1851 they were found to have 37,156 adherents while the total number of Christian church members of all denominations exceeded 6 million. The same census found that 42% of the population attended no church at all. Unlike Priestly (who preached the sermon at Price's funeral) and Bentham, Price never abandoned his lifelong belief in the divinity of Christ. That put him in the position of sharing neither the views of the Catholics, Anglicans or Non-Conformists (Wesleyan Methodists, Primitive Methodists, Quakers, Baptists, Unitarians, Congregationalists, and members of the Salvation Army) nor those of the majority view within his own minor sect. 

What I am trying to say is that Price stood apart — along with the Unitarians — in his belief that no particular ritual observance or doctrinal certainty was needed for one to be a Christian. At the same time he stood apart from his fellow Unitarians in believing that Jesus was divinely inspired by God and not merely a bright guy whose teachings should be followed. I could have put it much more simply: like his fellow Christian deist George Washington, Price was that rare creature who accepted all faiths and none without ever doubting his own. 



Severe traumatic events seem to have durable physical effects on brain, according to a recent imaging study.

In no way is the trauma from 9/11 studied in this paper comparable to market mishaps. But it is tempting to speculate about similar mechanisms following events (such as 10/87, 2000-2002, and 2/27/2007), and possible durable effects on investor psyche that play out subsequently. 

From Vincent Andres:

This reminds me about somebody speaking from the market before and after the last traders active in 1929 (ie traumatised in 1929) had disappeared, and positing that the market was not the same. (Of course there could be many other reasons.) The sum of all coincident individual trauma/psyche is certainly a big part of markets mistress's own trauma/psyche. 



 Thus, this study provides comprehensive evidence that stock investors' actual returns are considerably lower than those from passive holdings and from those documented in the existing literature on historical stock returns. (Alston Mabry)

This study is fundamentally flawed. Clearly it takes a pessimistic viewpoint. 'Investors got taken'. Only the conservative buy and hold crowd can make money. It forgets one simple thing - for every buyer there is a seller. (Philip J. McDonnell)

I may be wrong, but I understand the last sentence as "for every loser, there is a winner" and vice-versa. The problem to me is that the numbers are not at all the same.

OK, at a given moment T1, the number of buyers/sellers (or winners/losers) W1/L1 is exactly the same (with amount multiplication). OK, at the next moment T2, the number of buyers/sellers (or winners/losers) W2/L2 is exactly the same. But the worry is that there is an overlap between W2 and W1. All winners at T2 are not losers at T1 (and the reciprocal). Some winners win again. They win more than they should. (And the reciprocal). And this process continues. The overlap becomes smaller and smaller, but it doesn't vanish. It becomes like a Dirac point, a singularity, a top predator. Rarely do those top predators give their money back.

There is no symmetry. There are many more losers than winners. I find this study completely consistent with the fact that the markets are very Paretian. As far as I recall there is no symmetry between the P/L of big players. There are not enough big players losing the amount of money gained by the other big players. So, where are the big players big gains coming from? The money can only come from the rest of the players, those who cannot manipulate, do not have any edge, etc. The more unarmed people, the "small" players.

The markets are up x% those last years, but this x% performance is very far from being equitably shared between all players.

The more I think on it, the more I see the Paretian laws governing so many aspects of the biological world, just as the math/graphic illustration of (for instance) Henri Laborit's great work/experiments on rats.

I may be wrong, but I'm not at all stressed by the herd. I feel no great danger coming (directly) from this side. But I'm stressed by the big players, those who are very good, very sharp, the top predators. And need a lot of flesh to survive. They may either kill me directly like a rabbit under a harvester, or push the gnu herd in such a way I'll be trampled on.



 I was recently asked how we could make Daily Speculations a better prediction market, and Mr. Andres the questioner, pointed out that we tend to be bullish. As I have said many times, we base this on the 10,000-fold returns that have been experienced over the last century so this is not without strong foundation.

This question started me thinking about the importance of asking the right questions, and I had the following hasty thoughts which may have a little value:

I think I know how I could make the site much worse and in the process make it a much better prediction market — by asking the wrong questions. That is the most important part of proper speculation. The other way I could make the group worse is to encourage ideas that have a bearish bias.

I could encourage the dissemination of useless information — the kind that every one else reads. Also, I could feature the predictions of people whos views are completely random or have a negative correlation with the future, (everything they say seems so reasonable and it would make us all lean in their tending to be wrong direction).

Another way would be for me to encourage those who have positions to unload their views on us with the view that they could encourage us to go their way and add to the ability of them to get out better . This would really be bad because it would increase friction.

I'll have to think of some other ways to make this site a much better prediction market by making it much worse than it is, and I'd appreciate any ideas.

Vince Fulco adds:

Vic's comments remind me of a quote I read early in my career that has kept me in good stead. As I recall, the book Money Masters by John Train has an interview with the investor extraordinaire Larry Tisch. In it, he discusses the shortsightedness of the average investor and observes that "no one thinks of straw boaters in wintertime …" I've taken that phrase to heart as a constant reminder to be cognizant of the issues du jour, but it is the rare one that has not already been absorbed into market prices. 

Vincent Andres writes: 

Here are some clarifications to avoid misunderstanding due to my imprecise vocabulary (and for which I apologize):

  1. I wasn't asking how we could make Daily Speculations a better prediction market. Rather, "Could Daily Speculations make a good prediction market?" "Make" was too literal a translation from French. My meaning was "be" or "constitute," and absolutely not "become." I did not at all mean "how to make", precisely because of all the reasons mentioned by the Chair. There are zillions financial forums over the Internet which would be very good candidates. It is unnecessary to touch one of the very rare intelligence-based ones.
  2. I have always been, I am now, and will always be an optimist. It's the least one can do to thank life. So, when I speak about "noticeable bull/optimistic bias," it's in no way a critique, since I share this bias.
  3. Even if a bias is a good one, a bias remains a bias. I did just notice that Daily Speculations, being biased, is probably not a good random sample.

How do you say "comme à la prunelle de ses yeux" in English?



Here is an easy to digest 55 slide powerpoint presentation for the beginner, from George Zachar.

For those interested by the subject, I remember my own short page on this topic which contains other links as well. Could this site make a good prediction market? I suspect not, because of the noticeable bull/optimistic bias.

Alex Forshaw replies:

There definitely is some debate on the issue of play money markets' allegedly comparable efficacy to that of real money markets. In my opinion, Wolfers was too hasty in putting his academic imprimatur on the notion of effective play money markets. The MidasOracle group blog (to which I am a frequent contributor) is a very good prediction markets portal.

Russell Sears remarks:

As an actuary working in the insurance industry, I wonder what the hedging risk effect is on many of these prediction markets. It would seem to me that for many of the low probability, high risk events (bird flu pandemic, specific terrorist attack) especially for thinly traded contracts that the insurance premium would overwhelm the predictive effect. Further I suspect the variance of the "risk premium" due to media noise may dwarf the change in actual risk.



You never hear much about the real facts when people are trying to waft a detrimental meme past you. Now that inflation is all the rage again and people are fearful that there is going to be a terrible thing happening — not sub-prime, not China, not earnings slowdown, but inflation — don't expect anyone to point out that bonds closed the month at 111.24, a 35 calendar high, and up a bit on the year.

Perhaps the adjusted deflator index for March or April of this or that seasonally adjusted economic series would be more meaningful, as well as a parsing of the forces that will beset Bernanke. It is such a pleasure to have at the Fed a real economic man, who seems truly interested in providing the backdrop for a proper growth and inflation, rather than his predecessor who was always posing and always had a hidden agenda. The fake doctor reminded me of one of the old men who sat at the club windows on fifth avenue and commented on the mini skirts and diversity walking by these days.

Note the freqeunt high fives the fed boys gave each other under Dr. Greenspan when he used to tell them that by fooling the market one way or another he was able to avert upward movement.

There are many circuits in electricity and biology where the energy and health of a system is not complete until a clearing event has occurred, (I would very much like some good examples from the specs). It is interesting to speculate if such a clearing event can be described and used predictively for market movements. I would think it worth much study.

Hint … One such clearing event occured today.

Jim Sogi writes:

On the inflation meme, I was astounded at how cheap a car went for. It seems less than they cost years ago. Cars now are bigger, better, more engine, last longer for less money. Go figure.

On clearing, forest fires are a great example. There has been a debate for years in the US Forest Service on fighting fires. The policy before was to fight all the fires. The policy cost lives and in fact made the fires later worse because the underbrush grew creating tinder. The natural fires clear out the underbrush and give way to new growth and healthier forests. The policy now is to allow more natural fires to run their course to have a healthier forest. This is true with markets. A few little fires here and there help to clear out the dead wood, leaving the healthier more vibrant life. Some forests need fires to regenerate.

On that subject of running their courses, these long bars are always of interest. My favorite biochemist studies how to attach new molecules to the molecules that they want to track and follow in the body. The ones they want to track try to hide and avoid detection. The only was to find them is to cut and that is no good. The scientists attach a "handle" or a long bar molecule sticking out of the diseased molecule. To that handle they attach something like a glowing chemical or tracking device so they can see the disease in the body without cutting. This is my layperson's simplification of a complex process, but in my mind at least describes the process. Molecules operate on a very physical level, like a key in a lock. The long bars are a kind of handles that help track the market and are good handles to tag to follow the market.

David Lamb adds: 

To add to (and hope not diminish from) Mr. Sogi's comments, I quote from a Botany textbook I received from Arizona State University.

Many viable seeds do not germinate right after they are shed from the parent plant, nor do they germinate during the following growing season. Seeds can lie dormant for many years before conditions are suitable for their germination. Everywhere that seed plants grow, the soil contains viable, ungerminated seeds in natural storage-that is, a seed bank.

Seeds in a seed bank may be dormant because of their own inhibitors, as in many desert plants. Ecologists can sometimes determine what kinds of seeds are in the seed bank of a particular habitat by removing the shrubs from a small area. When a new growing season begins, the seeds of many annual plants germinate. Such experiments simulate what happens, in part, when fire sweeps through an area. In addition to eliminating the source of potential germination inhibitors, fire also releases the nutrients contained in plants. Thus, annual plants grow abundantly in burned areas during the first growing season after a fire. As perennial plants become reestablished, the newly replenished seed bank of annual plants once again goes into natural storage until the next fire."

Seed banks that require favorable environmental conditions to germinate can be compared to the famous caneology. Some of the lesser plants that do not have strong enough roots to withstand the "heat" can be cleared out in order for those other plants, the plants that have been leaning on their canes for quite some time, to show up on the stage.

Vincent Andres writes: 

There are many circuits in electricity and biology where the energy and health of the system is not complete until a clearing event has occurred.

Some rough thoughts. I would distinguish at least 2 kinds of clearing events, based on the event's duration.

1. Long clearing events:

Biology: at the end of the day we sometimes get tired, e.g., quite unable to solve a problem. A good night sleep and the problem gets solved. I think most of the night "clearing" we use our energy for our brain/body reparation/maintenance/etc.

Mechanics: I ask a bit too much to my motorized cultivator or my chain saw. So it becomes dangerously hot and I have to give it "clearing" time in order to cool a bit.

In both above cases, the clearing event is quite long. At least it has some proportionality with the working time.

Maybe markets also need to rest or to cool.

2. Short/instantaneous clearing events:

Electrical: e.g., the soft reset or hard reset on some computers. Necessary to bring a computer out of a endless loop etc. The clearing event is very short, but this effect may be very beneficial. The computer system is rebooted to an initial state.

Biology: Sometimes our mind gets confused. A problem seems very difficult. We try many issues and none work. And suddenly in the middle of the confusion a little detail, a little connection occurs, and we understand. I believe that in fact, the understanding was already here, already present, but hidden in the confusion/drafts of the work. The clearing event is maybe the moment where we decide to wipe out the useless stuff. A clearing event may also be the recognition/awareness, of denial. It's a short instant, but it may have great consequences. But, I think it would be erroneous to believe that all occurs just during the short instant. All is already prepared. The question is "when will we look at it?"

The straw that breaks the camel's back catches our attention, but the responsibility is not the straw's. And detecting the straw is probably much more difficult than noticing that the camel is overloaded.

Maybe markets have also some trigger or revelation.

I think markets are concerned by both kind of clearing events but I'm respectfully curious about precisely which kind of clearing event you were thinking of?

"For fifteen days I struggled to prove that no functions analogous to those I have since called Fuchsian functions could exist; I was then very ignorant. Every day I sat down at my work table where I spent an hour or two; I tried a great number of combinations and arrived at no result. One evening, contrary to my custom, I took black coffee; I could not go to sleep; ideas swarmed up in clouds; I sensed them clashing until, to put it so, a pair would hook together to form a stable combination. By morning I had established the existence of a class of Fuchsian functions, those derived from the hypergeometric series. I had only to write up the results which took me a few hours."

Henri Poincare

Victor Niederhoffer adds: 

It is interesting to speculate if such a clearing event can be described and used predictively for market movements. I would think it worth much study. Hint: One such clearing event occurred today. 

David Wren-Hardin writes: 

There are many circuits in electricity and biology where the energy and health of the system is not complete until a clearing event has occurred.

The first that comes to my mind is both electrical and biological. When our nerves send a signal, it's sent by an action potential. A neuron maintains a potential difference across its membrane through the use of a Na/K pump; it pumps Na out of the cell, and K into the cell. The action potential is kicked off by a signaling event, and the gates in the cell membrane open, and Na floods into the neuron, causing a rise in voltage. The Na gates are sensitive to depolarizing events, and a positive feedback circuit ensues, where more and more Na channels open, causing a spike in voltage — the action potential.

The Na channels don't just stay open, however. After depolarization and opening, they are inactivated in a voltage-dependent manner; the very process of opening and depolarizing the cell leads to their own inactivation. Another action-potential is only possible after the Na/K gradient is re-established, and the refractory period ends. In other words, more activity is only possible after a clearing out of the activity of the previous event.

One could also see the action-potential itself as the clearing event. A large potential is built up over time, and with a seemingly small synaptic event, a cascade begins that triggers a large event.



 The market's repertoire of rhythms extends past human grasp. Sometimes it seems to make no sense at all, at least to me.

Sometimes, things seem to become clear. Just as in Afro-Cuban music, a strong voice - the "mother drum" in bata - dominates the counter rhythms of the smaller drums, sometimes the Fed's announcements dominate the backdrop of lesser voices — Chinese monetary authorities, fixed-systems followers, and what have you.

Earnings season has a peculiar rhythm. But it's ever-changing, based on which companies are strongest at the time.

One quality the market shares with music, good music, anyway, is "always the surprise." Bach, Mozart, Beethoven were all masters of deception and expert at weaving rhythms across bars. Beethoven's sforzandi, unexpected sharp accents, and sudden pianissimos, will be appreciated by all traders.

Back in the '90s, when I was the editor for the stock coverage, a humorous bond reporter at Bloomberg had a saying when stocks had yet another amazing jump: "Stocks ONLY GO UP," he would say, rolling his eyes knowingly, meaning just the opposite. No good musician plays loud all the time.

Victor writes: 

I am thinking of ways to quantify the rhythms of markets. Instead of looking at what others do, critiquing it, and then augmenting, I thought I'd just take a crack at thinking of it my own way.

Music rhythms would seem to be a good starting point. The rhythms that kids are taught are those they can step or clap or slap to. They can be fast or slow to start with. And I would look to see if the number of moves in a minute is fast or slow and how this changes. The slapping would involve moves from separate markets occurring in the same time period. When we step, the first step is the accented one and that's a good way to look at moves within a period. Is it the first step that's always the biggest, and what happens when the second or third step in a period is the biggest?

I would look next at the rhythms of big moves. They obviously are reversing now, with some big Tuesdays: February 27, -58; March 8, +22; March 13, -28; and March 20, +8. Naturally this kind of stuff isn't predictive in general or else it would come out in the standard time series programs. But on occasion, it comes back and forth to an inordinate degree and the question becomes how to find it.

Animals often migrate at the same time of year to the same places even when transported geographically. One wonders if the migrations of markets after big moves have a fixed place in the price firmament that they go back to. Or is it just in time, like the conventional seasonal stuff that one can expect from the migration? Last year, prices went way down in May and migrated back the last part of the year. This year the migration started in February. The month ended with the three old bags ("a woman her age would never show her posterior to a camera") acting in concert with the rhythmic release of the perennially bearish message from the Sage.

The rhythms of political announcements always seem to follow a circular path. They start with a loose cannon doing something that hits into something else. Then others join the act. One typical sequence involves worry about inflation, based of course on a preview of an upcoming release, then the release of the number, then the big bond fund guy saying he's bearish, then the perma-bears finding other inflationary things, then the opportunistic movement in certain nations that benefit from this or that energy price, and finally the rhythm ending with the release of the next number, or the quieting influence of an open market meeting.

has some great diagrams of rhythms in the body. And the body has different rhythms that it responds to as molecules bounce into each other and create disturbances throughout other more complex molecules, thus upsetting the usual homeostatic methods. One market makes a big move, perhaps silver, and it spills over into others in a rhythmic sequence, perhaps an up in energy, and then a decline in stocks. It's not over until the initiating market has its move back down as was the actual case with the recent bloodbath and recovery, which seemed to have the elements of rhythm of all the ones I mentioned.

Of course, the rhythms have to be combined with the melodies. The speed of the moves has to be counted with the steps between those moves, sometimes big and sometimes small. And I like the way they quantify melodies in the Joy of Music and in the statistical studies of music intervals that have so much resonance with markets.

A more humdrum approach to rhythms, which I take, is to look at the rhythms of patterns. How often do the 3-day moves with their eight possible directions: —, –+, -+-, -++, +++, ++-, +-+, + — repeat? Is it a first order Markov process vis-a-vis these eight patterns, and what is the correlation between the closeness of each of the last three moves to these three patterns, and future moves? I recently ran some rhythm stuff with open, open to close, and open, and found some ministerial randomness with t's all below one, but enough evidence of non-randomness to get me thinking about rhythms on the whole.

I know enough about rhythms to know that they feel like the basic rhythms come from within the body, like the beating of the heart, and they can model it with rhythms based on the mathematics of African rhythms. Whatever quantifications they are making in bringing African rhymes and Latin rhythms into the heart beat problem would seem to be a natural for extension into the market.

I am fortunate to know someone with perfect rhythm and she is the coeditor of this column and I am going to ask her how she would try to trade in the market if she knew nothing else but markets. Perhaps other musicians with perfect rhythm might have similar expert opinions as to where market moves would be going based on their knowledge and oneness with rhythms in markets. Certainly these experts would be more prone to give good calls than the eminent people who have passed the tests of the mystical societies of America that are licensed to forecast the market.

The market's open now, and I haven't read any of the dozens of books I have on rhythms lately, but after I do and study it on the Net, perhaps I'll have some other ideas. For sure, my colleagues will be able to augment my preliminary fast ideas on this and guide others and me in proper directions.

George Zachar comments:

Perhaps other musicians with perfect rhythm might have similar expert opinions as to where market moves would be going based on their knowledge and oneness with rhythms in markets. Certainly these experts would be more prone to give good calls…

An interesting way to test this would be to submit representations of various tradeables in various time increments to musical prodigies who are naive about markets. I am thinking particularly of junior and senior high school students, who could have sufficient musical training and experience, without having been exposed to what passes for financial and economic wisdom in the popular press. 

Ken Smith writes:

In harmony with Victor's piece on music, rhythm, I attempted to write a melody with three notes. I am having difficulty conveying this little ditty because the note symbols for music are not available in email text messages.

I've tried before to get symbols to end up as they were written when they appear after I've sent them. Somewhere in the Internet circle symbols sent in email get warped, become hijra. Meanings are thus distorted.

So maybe someone can help here. The musical symbols for this simple melody would be symbols for the Dollar, Mark, and Yen, just three notes.

Create a melody using these notes - they are real notes, after all. Then choreograph a dance for the melody. Add lyrics. Create permutations and program computers to trade dollar, mark, yen - according to the melody.

"A salient feature of markets is temptation." (Syncreticus)

Todd Tracy writes:

Everyday I am inspired by the list and become more humble. In the business of music I had done well being rather sure of myself. That confidence came about from having practiced hours daily for 20 years. And even then I had much to learn. Afro-Cuban percussion was one of those things I knew nothing about until the day that my roommate brought home four percussionists. I didn't know at the time that they would be living and practicing in my living room for two years. And yes, they had many percussionist friends. The neighbors didn't seem to mind. They played all day, ten drummers strong, and then went on to their gigs at night.

One guy, Jacques, studied African rhythms. His guru was Babinga. Another guy, Blake, studied Cuban fusion. His guru was Giovanni Hidalgo. Davey was into Indian drums, Egyptian bells, and all sorts of experimental world music. Josh was a well-rounded guy who did it all. Their friends were mostly jazz funk kit players.

At any rate, I was doing 80 hours a week at the record company but on occasion they would let me sit in with them during rehearsals. When it came to the Congolese and Senegalese rhythms I had to learn to play the pattern given to me and not concentrate on the patterns the other guys were playing. The African stuff doesn't resolve like western music. Each part is simple; the complexity comes from the layering. Euro rhythms resolve every measure. Four beats to a measure at tempos ranging from 60-130 beats per minute. The African stuff would resolve many measures out, like ten equivalent western measures. It felt as though it was random until, with incredible anticipation, the resolution was at hand.

The Latin stuff was different in that the Cubans, Haitians, and Puerto Ricans had fused the African rhythms with western melodies. The most important part to the rhythm was the clave (wooden sticks that ring out when struck). The clave would be a simplified version of the rhythm. Then came the congas. They would play a rhythm called a Tumbao. Again, you had to concentrate on your part but synchronicity was achieved and resolved after just a couple of measures.

I was completely humbled by all that I did not know. But soon, through repetition, I found I had a whole new arsenal. These guys would play until their hands bled every day as they developed the incredible muscle memory needed to counter western rhythmic intuition.

Now the straight up rap beats are simple in that they are looped (kind of like rock music). But it is the anticipation of that resolution that concerns us with the market rhythms. In hip-hop the kick is on the one and the three; the snare is on the Two and the Four. The snares are played late to increase the anticipation. This lateness is the most important part, in fact, so important that rap artists actually consider the two and the four as the one and the three.

All of the rhythms resolve. There are problems in programming the beats in that there is a finite number of places to put each beat within a measure (460 ticks per beat) and the velocity of each beat is set at a value 1-127. We can, however, increase the resolution by doubling the BPM and by fine-tuning these anticipations and resolutions. I am studying the Quantlet Booklets so that I could one day break down the market rhythms as is being shown to me by the list members through the graciousness of Victor and Laurel's benevolence.

As far as what I think the S&P index will do from a musician's perspective is resolving to 1450 after channeling a bit more.

Laurence Glazier writes:

It is very tempting to apply my knowledge of music in selecting trades, though I like to follow grounded mathematical principles at this stage. I would note that much of what we consider the theory of music was derived by the posthumous analysis of the works of the one and only JS Bach (the Moses of music?), which like much technical analysis is seductive but not necessarily predictive. I work on the principle that part of this analysis represents laws of musical reality empirically testable, but not in the normal way. As Leschetitsky said, "Where words end, music begins."

Of the technical analysts of music, Schenker is particularly interesting, while those who have enjoyed "The Glen Miller Story" may have observed the appearance of another significant analyst, Schillinger.

Having said that, I believe the analogies with market rhythms, while not necessarily predictive, would be very valuable as part of a real-time virtual reality program reflecting the current state of play in the markets, and pose the question whether users of such a system would do better if they were more musical.

Victor Niederhoffer adds:

There is something rhythmic in the moves of bonds and stocks together, over and above the comparative rates of return that the Duo and Dodger have quantified. And it's like the monkey rope that Melville describes, where when one goes down and the other has to follow. But there is much thrashing around as the turbulence from the whales temporarily overrides the inextricable bond.

And in that context the bonds, after setting a 19-day low at 11,202, are still up 2/3 of a point or about 1/2% on the year. And the stocks, after setting a 19-day high at 1445, are up about 1/2% on the year. Regardless of that it's what I used to call an ugly day and the rhythm is very bad for both when a big decline in one occurs in conjunction with a big rise in the other. Something has to give, and as Berlioz would say in reviewing Beethoven, you know it's going to return.

George Criparocos writes:

The two days preceding the big note (02.27, the resonant, memorable one) had the bonds making a rhythmic intro analogous to what is expected when the largest instrument of all, the bass, announces a change in melody.

Since then, the contrabass, cellos, and violas (10s, 5s, 2s) are keeping the resonance, while the bass returns. The clarinet (Yen) is hanging around its 200MA set like a rope, refusing to let go of the anticipation and the piano (stocks) are all over the pentagram, in 1/16th intervals: four days low, four days high, four days flat, four days high.

The rhythm seems to be analogous to a symphony, lets say in F major. The allegro is in progress and I anticipate that the andante should follow in a molto mosso way.

James Sogi adds:

Todd's analysis of African rhythms resolving over eight or 12 bars or multiples rather than the simplistic four beat 16 bar square "rock" structure is right on the beat.

One of the most basic rhythms popular in the blues is called the shuffle. It is a short-long, short-long, short-long, similar to the heartbeat or train on the track, da-dum, da-dum, da-dum. This basic rhythm underlies many more complex patterns.

Applied to the market after a small beat, there the long bar, the "shuffle." The count often does not capture the rhythm, just as European musical notation does not carry information relative to rhythm. That is an odd omission. A shuffle might be notated as straight quarter notes, but played as doted quarter and eighth note sequence and designated as a shuffle, all the musicians know right away what it means.

The rhythm can get behind the pocket, giving a laid back feeling, like the end of last week. Or the rhythm can get ahead of the beat, like disco, like last month's drop.

The middle of the pocket of the beat is the march's oom-pah, oom-pah, even beats. The rhythms will swing from behind the "pocket" and give the music different feels. This is very difficult to quantify because the interaction of the multiple players is complex and the "feel" is a subtle thing to capture. Musicians know this.

To capture this in the market is a difficult matter. The main difficulty is the time structure. A structure stretched out over weeks is difficult to feel for human rhythmic sense as our rhythm is based on the heart and walking, and resides in the feet and heart and head motions. So it's hard to feel the market rhythm without condensing the time and looking at the numbers or speeding it up on a replay as an interesting exercise.

Russ Sears writes:

To Be With Me
by Russ Sears

Chic chic ca dee!
The Bluebird on our clothes line sings to me.
Come home, come home,
To be, to be,
 to be with me.

Kar Reeee! Kar Reeee!
The Bluejay mocks the hawk in perfect key
Go! Clear! Go! Clear!
Not free, not free,
No meal is free!

Tit tit ra lee!
The glorious Lark boost for all to see
Stay back, Stay back,
Match me, match me
You cant match me.

From Vincent Andres:

I am thinking of ways to "quantify" the rhythms of markets.

I didn't test it yet (will probably do so sooner or later) but the already known track of Hurst/Hölder/ exponents seem to me to be a possibly good piece of measurement.

Another possible tool could be wavelets.

Also, I recently came across a paper melting wavelets + Hölder curves : L'analyse par ondelettes, in Science, Vol.119 Sept. 1987. Yves Meyer, S. Jaffard, Olivier Rioul. The paper is in French. Very certainly progress have been made since this paper was published.




Bill Egan wrote:

Plotting the data different ways pays off all the time. I earned a US patent because I examined bi-plots of ~50 variables and saw something interesting. Further investigation showed a sensible relationship to the physical mechanism I was interested in modeling, I always use bi-plots. Once I have a feel for the data and can throw out some variables…

 Reminds me of an old and slightly caricatured study we did in my R&D lab. We were always searching data to test our algorithms. One day, we got some astronomy data. A huge volume, nearly fifteen variables. The guy who brought us the data was quite proud about the quantitative numbers. So much data, so many variables. Must be serious. We didn't know much about the physics of the problem and we were also a bit impressed. (Because, also, we had to find how practically to manipulate this data amount with our software.)

Once the practical aspects were solved, the study revealed to be very rapid. In fact, a real variables slaughter. When finished, it appeared the real dimension of the data set was between one and two. Some kind of spiral in 3D.

On the statistical forums and lists I follow, there are very regularly people complaining: "I have too much data for my computer memory/ software abilities. Please how can I handle them as a whole?"

Sounds like we made big progress since 1637 and we could forget Descartes.

"Diviser chacune des difficultés que j'examinerais, en autant de parcelles qu'il se pourrait, et qu'il serait requis pour les mieux résoudre."

[To divide up each of the difficulties which I examined into as many parts as possible, and as seemed requisite in order that it might be resolved in the best manner possible.]



 One of the reasons humans are still competitive with computers in chess is that we are aware of patterns that don't compute. Take, for example, nature of pawn structure. One can count individual pawn weaknesses but it's very hard to find an algorithm by which the harmony between pieces and pawns can be assessed. The human mind, however, is quite capable of this.

Might it not be the same with markets, that there are patterns which can't be effectively coded and others which can? As a very simple exercise one might try to count the number of waves that tend to accompany a decline from highs or see whether an n or u formation is being created. Seems to me that it's very, very difficult to do this with numbers; but the human eye is reasonably adept.

The problem of course is that without a clear computable definition of what one is looking for there will be too much that is open to "interpretation," so the results could hardly be relied up. So what is the solution?

I've been thinking about a possible way round this but please excuse me if it is scientifically unsound. What about having generic patterns that contain multiple computable definitions? For example one might have major categories like "panic" or "breakout," but then multiple and detailed definitions of what these are, just to be sure that the computer will recognize them but not for something else. Then when it comes to the stats the generic categories are tested rather than the details.

Just a thought.

Vincent Andres adds:

Another example: it's very easy and fast for a human eye to detect if points are aligned; it's quite a long calculus for a computer.

"So what is the solution?"

This is a deep question. One answer is to stop reasoning/computing with "crisp" sets. With crisp boundaries you have indeed threshold effects that make the reasoning/computing discontinuous and unstable. One way of doing that is using "fuzzy" sets. With fuzzy sets, set limits are no more crisp, but continuous. So working on them is more stable and more continuous. Nice applications are for instance in control.

Fuzzy sets are an interesting tool when it comes to trying to represent knowledge and work with it.

It's not a miraculous tool. Yes it is (or was) a buzzword. You can do the best and the worse with it. And it was done and it is done. Like with neural nets, genetic algorithms, etc, etc. Like with statistics, probability theory, etc. But it's a nice (and very mathematical) topic.

From Steve Leslie:

I like your analogy to visual patterns that don't compute. There are similar parallels in poker.

A computer can give exact statistics of making a hand and pot odds, etc. It can also calculate tendencies with a player. However poker is a game of imperfect information therefore much is subject to interpretation.

Now then:

Crandall Addington is one of the great poker players of all time and a true character. I saw him on TV 25 years ago playing in the old World Series of Poker with a $10,000 buy in. This was when no limit hold-em was essentially an obscure game and $10,000 was a lot of money. He was wearing a Mink Stetson. This was before PETA for sure.

He said that limit poker is a science but no-limit poker is an art.

Limit or structured poker contrary to popular belief contains little bluffing. Most of the hands are played straightforward. There are many multi-way pots and almost all hands go to a showdown.

No-limit hold-em is entirely different. Statistics and straightforward play will only take you so far. It is much more a game of playing the table and the opponents. A feel for the game, understanding its ebb and flow, and evaluating the dynamics of the players are critical. The best no limit poker players know when to be tight, when to turn aggressive, when to bluff, and when to truly gamble. This is where experience is essential.

Similarities occur in trading stocks and futures.

There are the fundamentalists. People like the Buffett of 20 years ago, who was a protégé of Benjamin Graham. Martin Whitman and others. They can be the value players and the grinders. They see big picture things and exploit opportunities but only when the balances are tilted in their favor.

There are certainly the quants, people like Mr. Symonds who obviously have a created a superior mousetrap. But of course, they are neither talking nor sharing what they have found to be successful. There are some others such as D.E.Shaw. Once again they are extremely secretive and are constantly working on their algorithms that identify patterns. Many of the employees are PhD's in computer sciences, mathematics, and music. They are the equivalent of the Rand Institute. Guys and gals who sit in seclusion and are constantly perfecting their own "black box."

Then there are those who trade on a combination of statistics and feel. They tend to be excellent at the "feel of the game" and reading the opponents. The Chair is one of the best of these. One of the finest traders in the world who worked for one of the great traders in Soros. Robert Prechter has had significant success trading off of Elliot Wave patterns.

Then there are the floor traders. They are very intuitive and great readers of the market. They get the first look at where the orders are being placed and who is placing them. In Education of a Speculator, Victor describes in detail how one of Soros's traders would enter the elevator to the floor and the bids would change. It became a game of the cat and the mouse.

In summary: There are opportunities for each of these to profit from the market. As each of the above have demonstrated in their abilities to make money time and time again. It then boils down to what kind of game are you are in and an understanding the rules.

From Bill Egan:

Plotting the data different ways pays off all the time. I earned a US patent because I examined bi-plots of ~50 variables and saw something interesting. Further investigation showed a sensible relationship to the physical mechanism I was interested in modeling, and I quickly built a model that has worked for eight years now.

I always use bi-plots. Once I have a feel for the data and can throw out some variables, I will color points in bi-plots by a third variable. I use this to highlight known extreme values, events, or odd experimental results. It often reveals useful patterns to the careful eye. Histograms of the distribution, data percentiles (percentile function in Matlab), and empirical cdfs are also handy. Multi-modal distributions are often interesting and show up in a histogram.

Software like SpotFire makes this very easy, and includes ways to size and shape data points by other variables (although it isn't cheap to buy). You can certainly do this sort of thing with a bit of work in R or Matlab or S+.

Another trick of the trade is to compute correlations among your variables. You can almost always remove a variable that is r^2 0.9+ with another variable. This will cut down on the amount visualization you need to do.

Further thought from Nigel Davies:

What if the most subtle and powerful engine for pattern recognition and synthesis is in fact the human brain? In this case shouldn't we be training ourselves rather than our computers?

Probably the search for patterns does this anyway but this would seem to be another benefit of the Chair's recommendation to hand count.



 On a day like today, one is sure to see the deepest darkest side of the financial markets and the financial pundits. And the bulls and bears are going to choose sides, and start to fight things out in the short term.

Being a veteran of more than 25 years of trading stocks and stock indices and living through the events of 1984, 1987, 1991, 1994, 1997, 1998, and 2001, my perspective is this:

One monkey does not close the show. A big decline like today does not lead to an end of the world or a China Syndrome.

It takes time for sanity to return to the markets on such a day as this. This means that the money will need to be sorted out and there will be continued volatility and big swings for the next several weeks.

Financial shows are in a war mode where they will begin to fight over viewership. Consider this akin to sweeps week at the networks. Financial advice will be ubiquitous. Remember, the more public the advice is and the more readily obtained it is the less valuable. The best bet is to not watch television, particularly the financial shows. Especially avoid the cable news shows. They are in the entertainment business not the moneymaking business.

Avoid all or none thinking. Eliminate Schadenfreude from your thinking. Avoid self-pity. As Bill Parcells says, "you are what you are."

Ignore the nattering nabobs of negativism. They are out there to rubber stamp their careers with one lucky call. Do not help them. Their opinions do not count anyway.

This is where all the practice, mental preparation, training, and professionalism become critical. General Patton would say, "This is where all the training pays off."

Be your own man. Make decisions based on your beliefs and your philosophy for better or for worse. If you had a good plan going into today, chances are it will be a good plan going forward.

Don't change tack. Any sailor will tell you to steer the vessel in the wave and head directly for it. As long as you have power, you have control.

Focus on what you have control of. Manage the trade; don't let it manage you.

Vincent Andres writes:

I ask myself, is it so important to identify the precise stimulus that triggered the market? There was probably one. One little shock, maybe, on one little fissure, which was enough. This is because it was applied at the right moment at the right place. But I'm afraid those remarks are of no predictive value. It is impossible to identify all possible little shocks and all possible little fissures. That's looking for a needle in a haystack.

But the market was in a state such that a little shock on a little fissure could propagate, coming from a microscopic, invisible level and emerging at the macroscopic visible level.

Why was the market in this state? Stress, pressure, tension. How to measure when the market is in such a state? I bet that some physicists have some ideas about this question.



Sasha Goodman's useful R-Seek page is quite recent (begun in February) and it works well. There were three R search engines announced this month… all mainly due to lack of specificity of the "R" keyword.

Also, since I subscribe to several R mailing lists, I have put online an R mailing lists survey page.



 From The Washington Post's Book World: "Measuring the World" has been on the German bestseller list for more than a year and sold more than 750,000 copies (2006).

From Publishers Weekly (Nov):

Loosely based on the lives of 19th-century explorer Alexander von Humboldt and a contemporary, mathematician Carl Friedrich Gauss, Kehlmann's novel, a German bestseller widely heralded as an exemplar of "new" German fiction, injects musty history with shots of whimsy and irony. Humboldt voyages to South America to map the Orinoco River, climb the Chimborazo peak in Ecuador and measure "every river, every mountain and every lake in his path." Gauss is the hedgehog to Humboldt's fox, leaping out of bed on his wedding night to jot down a formula and rarely leaving his hometown of Göttingen. The two meet at a scientific congress in 1828, when Germany is in turmoil after the fall of Napoleon. Other luminaries appear throughout the novel, including a senile Immanuel Kant, Louis Daguerre and Thomas Jefferson. The narrative is notable for its brisk pacing, lively prose and wry humor (curmudgeonly Gauss laments, for instance, how "every idiot would be able to… invent the most complete nonsense" about him 200 years hence), which keenly complements Kehlmann's intelligent, if not especially deep, treatment of science, mathematics and reason at the end of the Enlightenment.



The stock market has emerged in last 5 days and it isn't captured, I dont think, by the normal things. Here are the high and low closes for recent days:

date  open      high      low        close
206   1454.0   1454.8  1447.8   1453.3
205   1451.5   1454.0  1448.1   1453.7
202   1452.2   1454.0  1448.1   1453.7
201   1446.3   1451.7  1444.0   1450.8

The average absolute change in highs, lows, and closed, from day to day, is 1. This has to be an all time non-holiday low. IBM also is trading at exactly 100 after swinging back and forth 4 times in last month above and below. What does it portend?

Not having any keys, although I do have the book by Ken Follett, I would like to consider some childlike questions about it. Others might think about this and the generalizations of same, I think, with value.

Sushil Kedia writes:

The lull before the storm. A single day's behaviour such as this would be dismissed as indecision.

Similarly, a second day would, at best, be termed market failed to get out of its indecision.

A third day again like this would make one tilt towards thinking the simplest of possible explanations, that a lull often is seen before the storm.

As distinct from any breakouts, which might not exist for a profit seeker, a simpler visualization appeals here. In ball games, from a football to a cricket ball, the point in the trajectory where a noticeable spin seems to be developing is a similar moment of quickly vanishing lull. Not a point of reversal, not a point of inflexion, just a point where the mistress will try to shuffle out the maximum number of players diving in either direction.

I clearly have no clue how I could translate this string of thought into a testable hypothesis. 

Kim Zussman writes: 

SPY, daily partitioned into 10d non-overlapping periods (from today's close) back to 2000; every 10d period checked standard deviation of daily closes, return for this 10 days, and return for next 10d.

Ten day return regressed against concurrent 10d standard deviation was negatively correlated (T=-1.9). Regression of next 10d return against prior 10d standard deviation and return showed positive correlation with prior standard deviation (t=1.8), and slight positive with prior 10d return (t=0.9).

Going to 5d non-overlapping, the current 5d standard deviation is 6th lowest of 352. The same regressions showed different results, with slight/NS correlation between 5d returns and concurrent standard deviation. The multiple regressions for next 5d return showed significant negative correlation with prior 5d return (t=-3), and slight positive/NS with prior 5d standard deviation (t=0.24).

So it looks like over short intervals, SPY returns related more to prior returns than volatility; but in longer intervals prior standard deviation is more important. 

Vincent Andres writes:

"The average absolute change in highs, lows, and closed, from day to day, is 1. This has to be an all time non-holiday low. IBM also is trading at exactly 100 after swinging back and forth 4 times in last month above and below. What does it portend?
Not having any keys, although I do have the book by Ken Follett, I would like to consider some childlike questions about it. Others might think about this and the generalizations of same, I think, with value."

Some related thoughts:

1.) K. Lorenz often put emphasis on the pair: stimulus and duration (and duration is often considered on spec list). Not surprisingly, in general, the longer the duration, the smaller the needed stimulus to provoke an identical reaction. Maybe wrong, but I wouldn't be surprised if duration were often a good candidate to explain our stats, residues, and even more.

On more elaborated stimuli, K. Lorenz and Tinbergen speaks about "triggering schema" (schéma déclencheur). This concept may be an appropriate frame for some of our stimuli. Tinbergen got the Nobel Prize with Lorenz and Frisch. R. Dawkins was a student of Tinbergen.

2.) Remembering the previous "trend" thread, we may consider non-trending phases as quite rare events. So, if the stimulus part alone is rare, this seems a condition propitious for the whole pattern being non-random.

Apologies, no counts (… not yet).

PS: "I have found the missing link between the higher ape and civilized man: It is we." K. Lorenz. 



The book Ego Check, by Mathew Hayward, seems like it was written exactly for me. It's about the tendency towards overconfidence in striving individuals. The four major hallmarks of same are: excessive pride and boastfulness; failure to listen to foils who tell you when you're wrong; refusal to get feedback about the outcome of your activities; and not planning for problems, consequences, and corrective measures in advance.

The author gives case studies that show how these four faults led to disaster in the case of mountain climber Rob Hall, business executives Jean Messiers, Meg Whitman, Steve Jobs, Michael Dell, Dean Kamen, Merck in the Vioxx disaster, NASA in the Challenger and Columbia disasters, and The National Kidney program.

Hayward could have included me in his case studies because I have succumbed in each area. In my career in sports and markets, I have paid much too much attention to trying to be number one. I have not relied enough on family (especially my father, when he told me to take it easy), and executives within my own organization who doubted the wisdom of my activities. I have not relied enough on checkpoints to see if the original reasons for my activities were no longer valid, and I have not done enough war gaming to see what to do when my decisions or game plans go astray.

I hope that now that I have confessed these faults, which I understand is one of the keys to self-improvement, to which I will not so readily succumb in the future.

The main problem with the book is that it relies mainly anecdotal methodology to prove its points. It includes numerous cases where pride was very successful, such as Apple and Dell, where the same executive was guilty of hubris and of perfectly rational overconfidence. It espouses people like Jack Welch and Warren Buffet as role models for how not to let hubris get the better of their organization. But anyone who seriously studies these executives' activities might conclude, as I do, that these are sanctimonious scoundrels who are masterful at retrofitting their personae into a form that the media will love and whose judgment is superior to the free market.

As I read the book, I found myself thinking about my hobby, electric circuits. So many of them go into short circuits and uncontrollable output because the output is tied to the input in a positive feedback loop rather than a negative one that dampens the volatility and controls the output. Anyone who plays with op amps or amplifier circuits will know exactly how important is the dampening influence of monitoring the output and then controlling it when it gets out of a range.

A bit of modeling with economic, electrical, or game theoretic concepts like this would have helped to put many of the points in a more systematic form for me and would have led to many more testable hypotheses. And yet, Hayward is a Columbia PhD who collaborated on Harvard works, and professor of psychology at Colorado University, who has interviewed many of the actors in the case studies that he writes about. I find him particularly insightful. And I agree with his point that hubris is the key fault that leads to great disaster in striving individuals.

To his credit, Hayward realized that the mantra espoused by Collins in Good to Great, i.e., that the successful executive should be meek and humble and prudent at all times, is retrospective mumbo jumbo not suitable for the risks and leadership role successful executives must take in today's dynamic and uncertain world. The problem is how to differentiate the overconfidence that has a positive expectation, from the ones that will lead to disaster.

Vincent Andres writes:

"Retrofitting their persona into a form that the media will love . . ." 

Those words trigger others. I believe media, as do many, prefer it the simple way. That is to say it's easier to agree than to disagree. (Disagreeing needs proof to work. Agreeing needs just to believe or rely on others' work.

Thus agreeing implies *resonance*. In other words the initial signal is enlarged. No added value/*information*, but *added power*/energy.

But, the public hearing many loudspeakers, gets the impression that so many loudspeakers equals so many (independents) sources, which is dramatically untrue.

And this may also be linked to the "halo effect." With resonance, the halo's envelop grows and grows, becoming a bubble, pumping plenty of energy/power … but pumping, in fact, little true information.

But, doesn't this give us our daily bread?

Model attempt: If we liken information to halo's envelope and energy to halo's volume, as the halo grows, if there is no added information, then we get a thiner and thiner envelope, until a given point, where the too unbalanced ratio ends with … blood on the walls.

See also: "Larsen Effect" at 



 The Halo Effect, discovered by the psychologist E. Thorndike, refers to the human tendency to attribute all kinds of positive traits to people we admire.

As the Yiddish proverb says "If I were wealthy, I would be handsome and a good dancer also."

In French, "Et dans l'objet aimé, tout leur devient aimable." (And in the loved person, everything becomes lovable.")

This is also strongly linked to the hardwearing theme of "news always after numbers."



Sparked by an article on euphemism in politics, I have been studying the tendency of market participants and commentators to present themselves in a favorable light. The topics I have reviewed include the theories of boasting, euphemisms, biases in self reporting, self evaluation bias (325,000 entries), the superiority complex, the halo effect, and presentation of self in everyday life and deception. Nothing quite fits. However, considering that there are 132,000 entries for "as predicted" stock market on Google, I feel the topic deserves some serious consideration. Lacking theories or quantifications exactly on point, I'll have to take a crack at the subject myself.

 My previous forays into this subject in Education of a Speculator started with the consideration of how the oracle of Delphi was able to maintain its prominent place in Greek life for over 2000 years. I concluded that the key was never to administer a forecast that could be falsified, maintain an impressive site and a mystical ambience, evaluate your forecasts yourself, deceive with the startling forecast when you already know the answer, and mix in Bacchanalia. I gave examples of market people who had adopted these principles and classified them as mystic (the secrets of pi), unappreciated (I stood alone in making the forecast), other worldly persons ("the parking lots are as empty as the ships in the harbor"), mathematicians (the lognormal distribution explains it), the traditionalist (the opera chairman, the palindrome and the abstract mathematician use my methods), the Washingtonian (I met with the Fed chair often), the correlation expert (soybeans traditionally fall before a rally in bonds), the loner (I am on an around the world cruise), and the Insider ("a bullet bid has been made").

I also reported favorably on the late Harry Browne's magnificent analysis of self administered reports. He gives repeated hilarious examples of "as predicted" that actually weren't the way they predicted. He also gives examples of pretended modesty in admitting a gap in accuracy that is designed to make you feel that the forecaster is so much more honest than you or I that he's a model of integrity as well as a genius. (Such a deceptive technique is particularly relevant today as the world's worst forecaster in my opinion, the weekly financial columnist, who has been consistently bearish on stocks 100% of the time while the Dow went up from 800 to 12,500 over 40 years, admitted in his January 22 column that he gave a terrible forecast in saying that oil would go to 70 before 50). "The only thing positive about that prediction was that it didn't take more than a wink for us to be proved wrong." This technique is also detailed in The Perfect Lie of distracting attention from the real deception (i.e. his grotesque record on stocks, while admitting the oil statistics to be wrong).

Such a typology holds up pretty well after 12 years, but I feel it misses the essence of all the "as predicted" ones. For example, it doesn't focus on the multiple prediction, the person who predicts so many things that he has to be correct on one of them. A beautiful example of the same, as it's so compact, would be the person that says "X is the key level" and then boasts about being right if it goes up or down from that level. Also missing is the retrospective forecast, the forecaster that lets you know that he was bullish well after the bull move has started. Another omission is the survival biased forecaster, the person that reports just the fund or stock results that are extant right now, leaving out the results of the funds that have folded, or less insidiously, just the years or the results that were completely unfavorable. Another omission is the academic forecaster (the academic who writes a paper uncovering an anomaly with almost a clarion call for funding contained in the retrospective low priced impacted data presented). Another more subtle fudger is the person who reports their results while the going is good and then hides ostrich-like in the sand when the going is bad. (I have used a variant of this in my own business where I was happy to report while I was making returns sufficient to win awards but stopped when the going got tough. All I can say in my defense is that I figured that if my future results were good, it would create less supply against me and more demand with me. If they were bad, why should I give my adversaries the platform on which to drive in the final nails?)

Here are preliminary suggestions for those who wish to present performance figures without undue boasting and hype:

1. All results should be presented with a view of providing the truth, the whole truth, and nothing but the truth, and should be accompanied by a statement to that effect.
2. Particular care should be made to present the results of programs and funds that are no longer in existence or no longer reported for any reason with which you are associated. For example, one should never report 40% a year returns on the one program or two programs that you still have outstanding if others, invariably involving much higher amounts of money under management, have been eliminated.
3. A complete enumeration of money contributed, money taken out, profits made, commissions taken out, fees taken out, and net to customers should be made by month.
4. A similar enumeration should be made for any funds the manager was associated with that are not included in 3. (for example, the biotech fund or the growth stock fund or the trend following fund in stocks that is no longer in existence)
5. All changes in style of investment, markets invested in, fee schedules and leverage used should be noted with a fair discussion of how this would change results.
6. Third party arrangements of any kind with selling groups or brokers or service providers should be enumerated by year.
7. The independent third party that reported and calculated these results should be noted and addresses should be given and auditors enumerated.

In addition to following the above guidelines where applicable, those who make forecasts should add the following:

8. The exact time and levels of the items being forecasted and what it is you are forecasting and how to measure what is being forecasted.

9. A complete enumeration of all forecasts made over the last five years with the information required in #8.

10. An assessment of the accuracy of the forecasts made in the past, with the bad forecasts as well as the good ones equally featured.

11. A measure of the a priori likelihood of the forecast being true due to chance factors alone, for example, the forecast that oil will be higher in the future would have a 100% a priori chance of being true.

12. The independent party, like Hulbert who has vetted your forecasts or advisories in the past.

13. The amount of self interest the forecaster has in what he's forecasting. For example, whether he has a position in the recommendation, did he front run, and what his policy is in extricating from the forecast with respect to his own positions.

 No matter how carefully one develops a set of guidelines, it will always be possible to violate it in some way even when someone is not overly lax in presenting the truth, the whole truth, and nothing but the truth. As such, a letter from the forecaster describing any problems or gaps that the user might have in using the forecast should accompany the forecasts. For example, was the manager once managing a considerably larger set of assets? Has his organization changed now that he is a mere shadow (what used to be called a ghost in the stock markets of the 19th century) with a much smaller organization? Or have the financial circumstances of the manager changed so that he has an interest in a Hail Mary kind of prediction because he has been so devastated recently or as in the case of the weekly financial columnist, he's been short for so long that if he ever closes his trade, he'll realize a 1500% percent loss or so?

These are just preliminary suggestions. Remember that even with perfect reporting, past results have little or no reason to be predictive of future results because of the problem of ever changing cycles, and ageing as described by Bacon. However, exceptionally bad past results would seem to be somewhat predictive to the extent that they usually result from excessive fees and grind paid to the house.

I would be interested in any augmentations or suggestions that the readers might make here that would improve reporting and predictive methodology so that the users will have a better backdrop for decision making.

Vic further adds:

What he wrote for Mr. Wiz and myself, which he considered his best book, was that "when a master seems to fall into a trap, be doubly careful." This is an extension of what the able Mr. Mee had in mind and I am sure that Mr. Grandmaster Nigel Davies will have a few apt comments on this point.

Vincent Andres comments:

Another omission is the survival biased forecaster, the person that reports just the fund or stock results that are extant right now, leaving out the results of the funds that have folded …

This reminds me of a scene in Groucho Marx's biography (hope not to confound). Groucho was negotiating a contract about an advertisement using his image. The man proposes Groucho $500. Groucho laughs and says no. The man proposes Groucho $5000. Groucho also says no. The man proposes Groucho $15000, and Groucho agrees. Then the man brings out of his pocket a $15000 check, already written.

"By the hell, how did you know I will agree at $15000?" asked Groucho.

Well, I have four pockets said the man. In pocket one a $500 check, pocket two a $5000 check, pocket three a $15000 check, and pocket four a $30000 check.

Aaaaaaaaaaaaaarg! said Groucho.

Sorry for the approximate English and certainly an approximate remembrance.

Hany Saad adds:

While this is a very valuable framework for thought and it definitely will give one a significant edge in markets as well as the proverbial "don't take things at face value," I suggest looking at the other side of the coin, which admittedly is less common but every bit as valuable in solving market puzzles. I am talking here about the money manager who only talks about his losses and how tough it is to manage funds yet one realizes at year end that he outperformed all his peers by a large margin. The money manager who always starts his speeches with "I am a smaller fish than I like to admit" or "what do I know" or "after a very tough year" or my all time favorite, "yes, finally a good one" in response to a congratulation over a trade so outstanding that it can no longer be hidden under the carpet. The money manager whose performance is so mediocre that he was debating retiring in his thirties and only stopped when he realized that this year could be a good year as well … so why not? The lessons are very valuable since this practice keeps the enemy away and prevents envy, or so goes the tale. The only problem with such a practice is that year after year, the adversary starts noticing your bluff, and as he's leaving your office after you utter your usual "yes, finally a good year," you hear him murmur invariably "yeah, right."

It is mind boggling how people learn so quickly that you are laying low, but they hardly ever call your bluff when you practice your shameless grandiose on them a la Ableson.

Gordon Haave offers: 

The most common euphemism that I noticed was the naming of every downturn in almost any asset price as a "correction." One of the reasons that I find it notable is that those who call it a correction invariably are implying that the long term trend is still up. Well, if the future price will be higher, then why is having it go down today "correct" in any manner?

A good example of this would be today's bloomberg story about Rogers saying that the downward movement is just a "correction" and that the price will later go up to $100. If the price is going to $100, then any significant downward movement is not a "correction." Rather, it is a "mistake."

I for one think that oil is going to stay down, but that's not the point. The point is that this idea that anyone who is long can at the same time justify or excuse a downward price movement as being an ok event will still proclaim a long term rise in price.



I think Asperger's is a potential plus for traders. It is hypothesized that Bill Gates and Albert Einstein and Sir Isaac Newton may have or had high functioning Asperger's. To me, people with high functioning Asperger's (which is hypothesized to be more of a disorder of "mirror neurons" than the amgdala, read about it here). To me, people with high functioning Aspergers are "goal minded" to a fault. They can accomplish great things because of this singular patriot missile focus, but often have trouble with close motional relationships because of their difficulty empathizing with others. One of the frustrating things for them and the people who love them is that they do not intend to hurt, anger or frustrate others and are often at a loss for why others feel that way. A good book to address this is: Aspergers in Love by Maxine Aston.

Vincent Andres comments: 

About the biology of phobia and fear:

Read Snakes and Spiders Grab Our Attention and Grab It Even Faster If We're Phobic, A Sign That Perception Evolved To Help Us Spot Environmental Threats … Swedish Studies Show That We Can Spot Snakes In The Grass Faster Than Harmless Objects

Read Emotion Drives Attention: Detecting the Snake in the Grass by Arne Ohman, Anders Flykt, and Francisco Esteves

La biologie des phobies - Arne Ohman is a didactic nine page article in French with many clear sketches, and with biblio. and quantitative experiments about fear reaction delays. In short:

1. fear reactions are faster than others,

2. this is due to non-conscious short cuts

Nigel Davies adds:

I've seen an alternative hypothesis that mother nature is doing away with archaic social elements of the mind that were more useful for tribal groupings and shared panic in the face of sabre-tooth tiger attacks (or stock market falls). Asperger's seems to be on the increase worldwide, regardless of culture and with no two sufferers showing identical symptoms. These seem to be more characteristic of genetics and evolution rather than a 'disease.'

Might not the current research and attitudes be flawed through its view of 'normality' being assessed on the basis of what the majority is like? What if Asperger's represented the next step of human evolution, with the supposedly flawed neurology being perfect for the more specialist roles the world demands, and the diminishment of social instincts, thereby breaking down destructive national and ethnic barriers (not to mention the evening out of emotional swings in markets)?

Naturally those who are paid up members of the current status quo would not like the above argument. I suggest they would be likely to bend any evidence to show that they are in fact the perfect humanoids, incapable of improvement …



EUR/USD, by Craig Mee

January 18, 2007 | 1 Comment

A quick observation …

Since the start of 1995 through 2006, the opening week of the year in eur/usd has been the extreme (HIGH OR LOW) for the year nine out of 12 years … Will ‘07 follow this suit?

Tom Downing comments:

This looks pretty nonrandom to me notwithstanding the arcsine effect.

Define S as the number of years (out of 12) in which the min or max falls within the first week … In 10,000 simulated 12 year periods, here is the distribution of S when price changes follow a standard normal distribution: (mean 0, standard deviation 1):

S       N        Prob       Odds

0     988     0.0988     10.12
1     2504   0.2504      3.99
2     2984   0.2984      3.35
3     2145   0.2145      4.66
4     951     0.0951     10.52
5     324     0.0324     30.86
6     86       0.0086     116.28
7     16       0.0016     625.00
8     1         0.0001    10000.00
9     1         0.0001    10000.00
10   0         0.0000      NA
11   0         0.0000      NA
12   0         0.0000      NA

In only 1 of the 10000 simulations did at least 9 years of the 12 have a min or max within the first week.

If you assume some sort of drift (for example, since 2002 euro/$ mean = 3.3 pips with standard deviation of 68 pips/day), the probability of having at least one first week min or max increases, but the probability rapidly drops off after S=7:

S       N         Prob      Odds

0     579      0.0579    17.27
1     1814    0.1814     5.51
2     2789    0.2789     3.59
3     2460    0.2460     4.07
4     1473    0.1473     6.79
5     628      0.0628    15.92
6     210      0.0210    47.62
7     44       0.0044     227.27
8      3        0.0003    3333.33
9      0        0.0000      NA
10    0        0.0000      NA
11    0        0.0000      NA
12    0        0.0000      NA

Another approach would be to estimate the probability of observing a first week min or max in any given year (conditional on a price change distribution), and then calculate the probability of having at least 9 successes out of 12 trials under binomial distribution.

Vincent Andres adds: 

EUUS_W.DAT : column = OPEN 02/01/1995-25/12/2006

1995 1.2040  1.2040   1.3422   0.0000
1996 1.2740  1.2250   1.2837   0.0097
1997 1.2400  1.0556   1.2406   0.0006
1998 1.1091  1.0762   1.2085   0.0329
1999 1.1756  1.0098   1.1830   0.0074
2000 1.0133  0.8352   1.0256   0.0123
2001 0.8956  0.8437   0.9472   0.0516
2002 0.9016  0.8613   1.0100   0.0403
2003 1.0225  1.0225   1.2184   0.0000
2004 1.2352  1.1790   1.3444   0.0562
2005 1.3313  1.1709   1.3576   0.0263
2006 1.1854  1.1834   1.3353   0.0020

Read more here.

Sam Humbert adds: 

I took a quick look at this as a finger-exercise. Below is R code with some user-tweakable parameters, currently set to roughly mimic Tom's work (though I took a clean-room approach; didn't use Tom's code as a base). The idea, as suggested by Tom, is to find the "probability of observing a first week min or max in any given year," which is "Prop" in this R script, and turns out to be .177 (I'm sure Dr. Phil or others could find a closed-form solution) and plug this into the binomial, thus chopping out an order of magnitude of computing. The results I get are almost exactly Tom's, so either his work is correct (as usual) or he/I made the same mistakes.

Days<- 252 # Biz days in a year
Year<- 12 # Number of years
Week<- 5 # Biz days in a week
Sims<- 10000 # Number of sims
Data<- apply(matrix(rnorm(Days*Sims),Days),2,cumsum)
Prob<- round(diff(pbinom(Year:0,Year,Prop,F)),4); Prob<- c(Prob,1-sum(Prob))
Odds<- round(1/Prob,2)

Days<- 252
Year<- 12
Week<- 5
Sims<- 10000
Data<- apply(matrix(rnorm(Days*Sims),Days),2,cumsum)
Prob<- round(diff(pbinom(Year:0,Year,Prop,F)),4); Prob<-
Odds<- round(1/Prob,2)
     S          Prob      Odds
1      12    0.0000     Inf
2      11    0.0000     Inf
3      10    0.0000     Inf
4      9      0.0000     Inf
5      8      0.0002     5000.00
6      7      0.0016     625.00
7      6      0.0088     113.64
8      5      0.0352     28.41
9      4      0.1023     9.78
10    3      0.2113     4.73
11    2      0.2948     3.39
12    1      0.2492     4.01
13    0      0.0966     10.35



The problem is predicting behavior in the money markets using conditional probability. One theory, though not a necessary one, is that the path of prices directly reflects the underlying psychological states or utilities of the participants. There are non-random patterns that can be identified that are predictive of future price paths, just as three shouts might lead to a hit in a coercive family. It's the scientific approach. Qualitative models are used to create statistical models. We have looked at various models of frustration aggression in the markets, war, strategy, sports, survival, revulsion and release, evolutionary adaptive models, game theory, physics, mechanics, electrical theory, hunting, Tversky and Bayes. I believe that you have some theories about war and broader human tendencies using a statistical analysis. The markets and market data capture these broad human characteristics in an amazing way and the data is there ready made.

Jerry Patterson comments:

It had never occurred to me that the frustration aggression theory might have some relevance to behavior in the money markets. I was intrigued by your approach of applying conditional probability analyses to the problem. My understanding of economics is that one of their major problems in prediction is that none of the parameters in the prediction models contain terms based on measures of human behavior.

This comes close to laying out a problem that would interest a psychologist. In fact the Nobel prize in Economics last year went to Kahneman and Tversksy–two psychologists who spent their life calculating conditional p values describing risky choice.

Russ Sears adds:

From last week's performance, I believe the question for 2007 will be "how does the market perform 'when good news is bad'?" Psychology mixed with counting should get you far.

Vincent Andres mentions:

One prior side of the "patterning" job is quantitative statistics–finding non-random behaviors. Another side concerns the "whys" of the behaviors of the "mass market" entity. Concerning this second point, I found the following books of K. Lorenz very penetrating and enlightening: The Foundations of Ethology (For example, you should read II.I.7, which discusses stimuli levels reduction. The French version of this book can be found here.), Studies in Animal and Human Behavior (Many thoughts also concern fear, aggression, frustration, etc.)

I believe that the non-randomness of the mass markets, for example, its behaviors as an entity, emerges precisely at common denominator points of all its individual human components. Common denominator points are not cultural/sophisticated ones, but primitive, for example, animal ones. That's why ethology, and especially the work of Lorenz, may concern those of us interested in the "whys."

Trying to answer the "whys" may be useless, but it could help to define/find patterns we won't think about otherwise (and understanding, at least trying, cannot harm).



The reaction to fear is invariable, but the duration and magnitude of panic and recovery cannot be known with certainty.

Vincent Andres comments: 

As noticed several times here, reactions to fear (short moves) are also swift, swifter than long moves. Picking a banana doesn't need much swiftness, but escaping a snake does (in an ethologic spirit).



Thanks to Victor and Laurel for introducing me to this major work on the history of tennis, two volumes with a total of more than 1000 pages, including many gorgeous photographs.

It will take me some time to make a dent in this book, but as I thumb through it I find that it’s the kind of book that I like–one that you can pick up, turn to any page, and start reading something interesting.

Page 310, Volume 1:

“There were no doubt definite rules in England long before Mr. Lukin’s time, and it is possible that there was a printed code, for our attention has been drawn to an interesting passage in a book entitled “The Academy of Armory”, 1688, by Randle Holme… The passage is so interesting as showing how far the game had progressed in those days that we give it in full. It is as follows:

‘The Game at Tennis is a most Princely Exercise; having its first Original (as I have been informed) or brought over to us from the French Court; it is Gentile, Cleanly, Active and most ingenious Recreation, exercising all the parts of the Body; therefore for its Excellency is much approved of, and played by most Nations in Europe, especially by our great Gallants of England, where such Tennis Courts are Built…

The manner of the Play is so intricate that it is hard to describe, which I suppose is the reason none (as ever I could hear) have written concerning it, as of other Games; there being so many turnings, windings and motions of the Body; as also the several ways of striking the Ball both backwards, forwards, under and over hand, and from the rebounds, that they were endless to set down…

Laws of the Tennis Court

  1. They that serve upon the Pent-house, are to serve behind the Blew on the Hazard side, else it is a loss.
  2. If the Receiver miss two stroaks at his Serving, which is two Faults, it is a loss, which is 15.
  3. They that get the first four stroaks, get the first Game of the Set, which may be as many games as the Players order to be in the Set.
  4. All Standers in the Galleries are not to speak a word in the Games except they be asked; if they do they lie liable to play the Game that they (the players) plaid for.’”

The last rule seems to be saying that if the spectators are too noisy, they’re liable to be dragged down on the court to play the game themselves!

Another fine passage (remember, the book was written in 1924.), from p. 360,

“The change in racquets has been perhaps the most marked of all. Mr. Marshall writing in 1878 says, in comparing the racquet of that time with that of earlier generations, that the implement of his day was as perfect as could be conceived. Now, if we look at a racquet of the seventies and compare it with a present day racquet it looks a wretched thing, and perhaps again fifty years hence, the implement in use will be as far ahead of ours as is ours of one Mr. Marshall’s time.”

Around 1974, the steel Wilson T2000 and the aluminum Spalding Smasher were popular, and I remember my own brother saving all his summer’s lawn mowing wages to buy a Head Arthur Ashe Composite racquet, which cost $60 then, which was an astronomical figure at the time. Certainly the wood racquets available then were also much, much better than those of 1924.

Vincent Andres comments:

An interesting fact is that Le serment du jeu de paume, the Tennis Court Oath,
was a harbinger of the French Revolution

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