Cochrane: Britannia's Last Sea-King
by Donald Thomas
1978, The Viking Press

The book begins with the story of the Cochrane family. The subject's father was the 9th Earl of Dundonald and in the 1780s he tried to salvage the family's fortunes with innovation:

As a young man, the Earl had spent a short while in the navy. During this period, he had noticed the ravages of worms on the bottoms of ships, where they ate into the structure of the hull. The replacement of so much rotten timber was a considerable drain on the resources of the Admiralty. A few ships were "hobnailed", the bottoms covered with large-headed iron nails, but this was far too expensive a method to be undertaken often. The 9th Earl, pondering this problem, thought of the coal on the Culross estate….He had undertaken some simple experiments of his own with coal, in a kiln. When it was "reduced" to coke, a thick black substance was given off, known as coal tar. But might not the coal tar be refined in such a way that it could be used to coat the hulls of ships?

[ The Earl pays for a test where one side of a buoy was painted with coal tar and the other left as is. ]

Yes, the test had been a complete success, protecting the side of the buoy against the worm while the other side had rotted. No, the Admiralty was not interested in the invention.

The Earl was dumbfounded by this reply….Still with young Lord Cochrane in tow, he began to visit shipbuilders, to see if there was some special technical problem involved in using coal tar, some minor defect which he might be able to overcome. He received his answer at last from a shipbuilder in Limehouse.

"My lord," said the man, "we live by repairing ships as well as by building them, and the worm is our best friend. Rather than use your preparation, I would cover ships' bottoms with honey to attract worms."

Similar objections, wrote Lord Cochrane, were "everywhere encountered" among the shipbuilders. "Neither they, nor any artisans in wood, would patronise a plan to render their work durable." As for the Admiralty and the Navy Board, it was common knowledge that many of the clerks in the King's dockyards also acted as agents for the private contractors. They were hardly likely to recommend to the Board a substance which would lead to a recession among those on whose behalf they acted and whose profits they shared.

Epilogue to the story:

The financial catastrophe which had overtaken the Earl in no way diminished his enthusiasm for scientific investigation. While he and his creditors were in prolonged negotiation for the disposal of Culross, he produced his largest and most important publication, A Treatise Showing the Intimate Connection that Subsists between Agriculture and Chemistry. But once again, he was in advance of his time. What was dismissed as eccentricity in the Earl of Dundonald was to be hailed as the genius of discovery in Sir Humphrey Davy. Indeed, the most bitter irony of all was still far in the future, when the Earl was an old and dying man, struggling to support his ailing mistress and her child in Parisian squalor, to which he had been driven by the most remorseless of his creditors. From the miseries of this exile, where drink had become his last consolation, the old man heard that the Lordships of the Admiralty had conceived an interesting new idea. In 1822, they had asked a committee of the Royal Society, under the chairmanship of Sir Humphrey Davy, to investigate the possibility that coal tar might be an effective and cheap preservative for ships' bottoms. The committee reported favorably and the Lordships congratulated themselves on their acumen. Not only was their suggestion vindicated but the cantankerous Scottish earl who had taken out a patent in the 1780s had neither heart nor money to renew it in 1806. The Admiralty, by biding its time, got the process for nothing.

An overview of the 10th Earl's life.

Henry Gifford asks:

Why didn’t fishing boats, freighters, ferries, etc. adopt this technology?

Stefan Jovanovich responds:

Because it was foul stuff to work with compared to pine tar and Davy was promoting the uses of coal over which Britain had the same near monopoly that North Carolina had over turpentine and pine tar.  Britain became coal mad as they discovered that British midlands anthracite had superior qualities for ship's boilers over everyone else's stuff.  (When Admiral Dewey's squadron won the Battle of Manila Bay, they were fueled by British colliers from Hong Kong.)

Peter Grieve writes:

It looks like shipworm could have an impact on the city we love:

These Tiny Wood-Eating Creatures Want To Sink Brooklyn Bridge Park



Music and Math: The Genius of Beethoven

Laurence Glazier comments:

Very nice, I would add that Bach was the engineer who enabled Beethoven and everyone else to write in lots of different keys. 1.5^12 and 2^7, in music 12 fifths and 7 octaves, are almost but not quite the same. Bach fixed this with a tuning system which averages out the difference.

Peter Saint-Andre adds:

Indeed, there were a lot of tuning systems developed around then: Neidhardt (seemingly Bach's preferred system), Werckmeister (he developed several), etc. Just last night I read all about them in The Esoteric Keyboard Temperaments of J. S. Bach. These folks were the quants of their day!

Peter Grieve comments:

Yes, the problem with getting good fifths and good octaves in the same scale is find a power of 3 that is equal to a power of 2. This is because a fifth is a ratio of 3/2, and an octave is a ratio of two.

Of course, there is no power of 3 that is exactly equal to a power of 2. There is a fairly good match at 3^5=243, and 2^8=256. The power of 5 on the 3 means that this corresponds to a pentatonic scale. And 3^12=531,441 while 2^19=524,288, (proportionately a better match) which as Laurence says is the basis of a diatonic scale.

Because the matches aren't exact, something's gotta give, and this is what Bach's temperment ideas addressed (as Laurence said).

There are other near matches at larger powers, but a scale with dozens or hundreds of notes has limited appeal.

Laurence Glazier writes:

Excellent attachment on the tunings, esoteric is the right word. The fact that this is being rediscovered after hundreds of years, is of special interest to me.

Adam Grimes adds:

I have built and played harpsichords for many years. When you play harpsichords, you also tune them. A lesser-known fact is how quickly this instrument goes out of tune… you can have it in tune for a concert and then it will need a touch up at intermission.

So, harpsichord players quickly become very familiar with these tunings. Some are much more useful than others, but it also explains what composers meant when they talked about affects or emotions associated with certain keys. This was a very real thing, in some of the older tuning systems, but has been completely lost (for better or worse) with modern equal temperament.

Another interesting aside is that I find these historical tunings don't work that well on the modern piano. Completely aside from the temperament issues, there's also the issue of inharmonicity (the deviation of a physical string from the theoretical ideal). All strings have this, but the piano has A LOT because of the thickness of the strings. (Certain types of harpischords (Italian) have scalings that are much closer to the theoretical ideals.) A piano is tuned ever-sharper in higher octaves so that it is in tune with its own overtones rather than the actual pitches. It's subtle, but it's real and important… and it also obliterates the precision of these historical tunings. (Another interesting aside is that once your ear learns to hear in these historical tunings, moving back to ET is a kick in the gut. You'll sit down at a piano, play a chord, and think "wow. everything really IS out of tune." which is the compromise of ET. (For the record, ET is a beautiful and useful thing, as well.)

What I don't see much value in are the microtonal modern experiments, but I understand what drives that line of thought.

For any musicians, if you haven't had the experience of singing pure-tempered intervals against a drone I'd highly encourage it. You can spend hours or even weeks exploring the beauty and power of these resonances… and you'll know musical materials as an EXPERIENCE of resonance rather than a sound or a theoretical construct.

One might imagine that it was these experiences of resonance that encouraged early humans to sing, to seek sound, and maybe even to seek language… maybe in those caves where they left us paintings of mystery and power… somewhere a very long time ago.

But, seriously, go get a bass drone sound and sing some pure octaves, fifths, and thirds against it. You'll never hear the same way again.

A reader adds:

Each open tuning has a special resonance that is different than the same notes played in concert. Similarly chord inversions carry different overtones from base fingering.

Jeff Watson adds:

I love Fripp’s New Standard Tuning, CGDAEG. The mnemonic for recalling it is “California guitarists drop acid every gig.”

Adam Grimes responds:

yeah but slightly different. Fretted instruments are ET. You could potentially bend some notes, but you're still working in an ET world. (Scordatura certainly changes the timbre of instrument, and resonance of open strings, etc., but is a substantially different thing from temperaments.)

Laurence Glazier writes:

Thanks Adam, fascinating thoughts.

When transcribing from inspiration, I am sometimes unable to use the note I hear in my mind, which lies somewhere between a pair of adjacent semitones. As my software uses ET tuning, I have on occasion resorted to using MIDI control instructions to nudge the pitch into place, but in the light of your post, I now see that the issue may be with the tuning system. On one of the historical keyboard instruments, the note I require might simply be there.

I have enjoyed writing music in the past for clavichord, because of the pressure sensitivity, but am now writing mainly for orchestra.

As you say, experience trumps academic construct. I personally consider music to be an elemental force of nature, and species evolve to sense it along with every other aspect of reality. It's also interesting that lunar and planetary orbits often lock into similar ratios. The Pythagorean Comma has a counterpart in the slight divergence between the lunar and solar calendars. The term live music, in my opinion, is literally true.

Adam Grimes responds:

Clavichord is a beautiful and intensely problematic (at least in my experience!) instrument.

I own one. The intimacy of it is incredible… it puts the player's finger in almost direct, expressive contact with the vibrating string… but that brings up so many issues of control and it's such a different technique than any other keyboard instrument. To say nothing of the whisper-soft sound level (that defies amplification, which might seem to be the obvious answer.)

And you're right… all those "in between" notes exist as a possibility on that instrument. Not hard to imagine someone playing in a remote key and instinctively bending the out of tune notes into an acceptable range.

Zubin comments:

Guitar players always bend notes giving infinite micro tones. Squeezing the string to approach the note can give great feeling. Of course singers all do it too.

Vic is reminded of a Beethoven story:

During a performance of one of his piano concertos Beethoven was the soloist, and he got so carried away with conducting that at one point he forgot to play the piano. He flung his arms wide and knocked the candlesticks off each side of the piano. The audience burst out laughing, and Beethoven got so mad that he ordered the orchestra to start over again.

Two choirboys were enlisted to hold the candlesticks out of harm's way. One of them got increasingly intrigued by the piano score and came in closer and closer just as a loud passage broke forth. Out went Beethoven's arm, knocking the choirboy in the mouth so that he dropped his candlestick. The other choirboy, having followed Beethoven's motions more cautiously, ducked, to the complete delight of the audience.

Beethoven fell into such a rage that on the first chord of his solo he pounded the piano so forcefully that he broke half a dozen strings. Die-hard music lovers in the audience tried to restore order, but failed. After that debacle Beethoven became increasingly reluctant to give concerts.

From Wisconsin Public Radio: The Catastrophic Conductor



Mostly F’s

September 3, 2020 | Leave a Comment

Thanks for the comments and ideas on REITs.  I bought a basket of 10 today
under the premise that stocks down by 50% with good free cashflow, with the
ability to borrow far below lease yields, should come back. Areas like
healthcare, storage and re-purposing seem sustainable.  Amusingly the discount
broker I have been using for decades added a new rating system using classroom
grades - which I did not know about until after the purchases.  Of ten buys I
made, they graded me almost entirely with F's with a few C's.



Experts Never Fail

September 3, 2020 | Leave a Comment

Dr. Zacek writes: 

The population density in Sweden is 25 per Km2 (64 people per mi2).

New York has the highest population density of any major city in the United States, with over 27,000 people per square mile.Just saying.   

Stefan Jovanovich writes: 

That is why they need absolute authority.

Peter Grieve writes: 

Stockholm was doing fairly well, last time I heard. Also just sayin'.



 Crew costs of $3,299 a day account for about 44 percent of total operating expenses for a large container ship, according to Moore Stephens LLP, an industry accountant and consultant.

Rolls-Royce's Blue Ocean development team has set up a virtual-reality prototype at its office in Alesund, Norway, that simulates 360-degree views from a vessel's bridge. Eventually, the London-based manufacturer of engines and turbines says, captains on dry land will use similar control centers to command hundreds of crewless ships.

Jeff Rollert writes: 

As a sailor, I highly doubt that in my lifetime at least for the 0.02% of the time a ship is in a storm.

There's enormous sensory information that come from standing on a ship and feeling how it takes a wave. You'd have to create something akin to a flight simulator which would be really expensive.

Plus, if your comment link goes down, you have an unguided missile. 

Peter Grieve writes: 

Plus, there will be less damage control ability and motivation on the crewless ship.

Maybe it's just an old man talking, but these newfangled AI contraptions seem crazy. The deployment predictions seem wildly optimistic. As you imply, things can get pretty routine when the sun is shining and traffic is light, but I can't believe that the AI will be as flexible as the human mind in dealing with emergencies. Not for 20 years, anyway.

I just attended a colloquium on neural shrubs, a modification of neural nets. The main point was that we won't know how neural nets make their decisions. It will practically take psychiatry rather than software engineering to understand the machine.

I'm worried that there will be disasters which will be covered up, to retain the cost savings. And who takes responsibility for machine decisions? Someone with no skin in the game, because they're not in the car or on the ship. Do failed captains have to drown themselves in a special room in the control center?

Peter St. Andre writes:

In his book The Glass Cage: Automation and Us, Nicholas Carr argues that if you don't stay engaged with the routine aspects of a task then you won't be able to handle an emergency.

For instance, perhaps you just sit back and watch your AI-powered car as it drives you around in clear weather on paved roads in a well-ordered city, but what happens if you end up on a narrow dirt road in a snow squall?

I suspect that, more and more, reality and the humans within it will need to conform to the expectations of the machines.

Zubin al Genubi writes: 

I’ve just experienced several VR experiences in LA. It is truly amazing. Very realistic.



 I was reading this: “Our main finding is that economic data do not appear informative enough to uniquely identify the relevant predictors when a large pool of variables is available to the researcher. Put differently, predictive model uncertainty seems too pervasive to be treated as statistically negligible. The right approach to scientific reporting is thus to assess and fully convey this uncertainty, rather than understating it through the use of dogmatic (prior) assumptions favoring sparse models.”

And Karl Popper’s “Science as Falsification” came to mind. 

Peter Grieve writes: 

I’m sorry to say that there is a movement in physics to abandon Popper’s ideas about falsifiability. This seems to be motivated by the fact that string theory and the multiverse theory are at best extremely difficult to test.

Those still supporting Popper are called Popperazzi. Some of them call string theory “mathematical theology”.

Kim Zussman adds: 

Is an untestable theory that fits observations necessary to discard?

Stefan Jovanovich replies:

A theory that “fits” - i.e. usefully works with - observations cannot be discarded until those observations challenge the theory’s ability to predict events. The theory may simply be lucky enough to fit what people and their instruments can “see” and be better than chance at estimating what will happen in the future; but that “luck” will still be sufficient know-how until repeated observation reduces its foresight to no better odds than chance.

Observation is the test. Until Eddington’s observations of the eclipse in 1919, there had been no observations of the spacial interaction of matter and light that contradicted Newton’s theory. Eddington’s observations did not “prove” Einstein’s theory was “settled science” as the warmists like to say; they proved that Newton’s theory was not as useful an approximation of reality as general relativity.

The point that Eugene Fama keeps making is that economics, as a general theory of behavior, has yet to be even lucky over any extended period of time. Its interpretations of information theory seem to work fairly well in the limited domain of financial transactions but only to prove that risk’s rewards are only verifiable after the fact.

Meanwhile, we enjoy the game and keep blowing on the dice when it is our turn to roll.



 The market has been in range mode for quite a while, then one day it breaks out/down into a new range where, in this theory, it will stay for a while. Sub atomic particles have a probability that the particle will be in a certain energy sphere, but not its specific location. In the market, there would be a probability that the price will be in a certain range, but one might not know the exact price. At some point due to energy input of some sort, the particle or price jumps to a different level. The ranges seem to have some regularity as do the jumps.

Peter Grieve writes: 

Very nice– the quantum theory of markets. Particles can also "tunnel" out of boxes which they shouldn't be able to leave under classical theories, and get into other boxes. There may be a market analogy here also.

I took a class from Feynman in my undergradute days (about a million years ago) and he was a powerhouse. He had tremendous intellectual integrity, and was a strong advocate of intellectual discipline. He said something like "the person you least want to fool is yourself, and you are the easiest one for you to fool".



 There's been much hand-wringing since the Great Recession to explain not only why the US economy hasn't grown faster but why the global economy is in such a morose state. Explanations include the overhang of personal/government/corporate (take your pick) debt, demography/aging of the population, central bank interference, among others.

Carder and I had a discussion today about this subject. Somehow, the topic of 9/11 came up, and he noted that we've spent a small fortune in responding to the security issues presented by that event. There have now been a number of other terrorist attacks in Europe, and I expect that there has been a considerable amount of money spent in shoring up security there, too.

I therefore wonder if the two aren't connected. First, the amount that was spent on security infrastructure and operations was not available for investment or any other economic use. Second, that the tightening/less open state of Western society in the hopes of creating a sense of security (in the pursuit of zero incidents) has created enough impediments to wealth creation in itself that the performance of Western economies has been rendered sluggish. To rephrase, that the West has, in its search for security, reduced the openness of the society that created the wealth which placed a target on the West in the first place.

If that hypothesis were correct, then the terrorists will have succeeded in at least some of their aims without having exploded yet another bomb.

I'm sure there are those who disagree with that hypothesis, likely including many on this list. I put the idea out here for discussion.

Nigel Davies writes: 

Yes, as Nimzovitsch pointed out, the threat is stronger than the execution. Much of chess mastery consists of the correct gauging of 'threats', defending by minimal means and keeping every part of your position equally weak (Lasker). The problem is that in a democracy the clamor for resources will not be based on this kind of logic but rather than influence over the electorate per unit cost.

Peter Grieve writes: 

Excellent point. Imagine a chess game where millions of people vote to decide the next move, and subgroups receive a different share of the winnings depending on which pieces are left on the board at the end. Laskerian principles might be hard to maintain in this case.

Not a perfect analogy, of course, but I think it hits Nigel's idea.



There are endless applications of the concept of gravitational waves to markets and much more easier to perceive every minute, every hour, every day that one might even state that market folks are humbler in not stretching their own perceptive lenses to theorize physics and wait for scientists to do their jobs.

Market Cap Gravitational Waves: Very large cap stocks make a sudden wobble, indices wobble, sentiment wobbles, most stocks move with the wobble. A large mass stock wobbling the volume price fabric of endless other stocks and dramatically the smaller ones.

Earnings Gravitational Waves: Earning Season is witness to undue anxiety or excitement. The prevailing Volume/OI - Price Fabric is already constructed and the extension of this fabric, i.e. immediate next bet, is much more largely a function of the existing V/I-P Fabric. Yet, a lot of volume or change in OI continues to be witnessed on most widely researched large cap names that are good fades. Rarely do quarterly earnings ever alter permanently the existing "fabric" but most often create a temporary wobble.

Contested Gravitation Waves: Significant change in Volume or in Open Interest, both reflect a significant change in the level of contest for discovery of price. Large dramatic moves or wobbles in High Volume or High OI pits put gravitational distortion on other pits. Margin selling or contgations as their extreme are observed in falling markets and complacent buying into un-understood unanalyzed trophy adventures as a wealth effect in rising markets. Market is a casino where players' behaviours alter with the level of House Money.

Food Chain Gravitation Waves: The waves, the unduluations, the idiosyncratic movements, the never at equilibrium but tending to equilibrium behaviour of prices are all a matter of the big fish (the White Shoe Firm included) nudging with their Gravitational Waves the small fish to be swimming hither and thither. The never wavering permanently rising equity curves of some of the rarest wealth creators in markets is what one would notice at the top of the food chain. Whereas the brownian motion equity curves are at the bottom of the food chain. Gravitational Waves are working from the top down to the bottom of the chain.

So on and so forth, every perspective in markets is explained by ideas similar to gravitational waves. I should leave this note open for others to help tautomerize further.

What perplexes me much that marketmen have evolved in their thinking far ahead of the evolution of Physics. When you think about Reflexive Gravitational Waves as an idea that is routine in our "universe" wherein the Space Time Fabric itself is exerting Gravitational Waves on the future events and keeping the ecosystem in a self contained completeness, will a future discovery in Physics be guided by this imagination that the endless expansion of the Big Bang Universe is not for a reason beyond this Universe, but the Universe is the reason and that the Universe is the influence on the Universe?

Peter Grieve responds: 

From the LIGO wiki page:

"Gravitational waves that originate tens of millions of light years from Earth are expected to distort the 4 kilometer mirror spacing by about 10−18 m, less than one-thousandth the charge diameter of a proton. Equivalently, this is a relative change in distance of approximately one part in 1021"

The gross world product is estimated at $76 trillion, a fluctuation with the same proportion world be 7.6 millionths of a cent.

Which is not to say they haven't detected something, but is (in my mind) a good reason to wait for more confirmation. I hope it comes. Imagine detecting a black hole coalescence!



 On my last haircut before moving, I gave my regular lady a $100 tip on a $17 haircut (applause line here?). That small gesture brought her to tears. She is a very interesting older woman. I've enjoyed talking with the past few years. She knew I worked in investments/trading and asked if I had any ideas for her. I asked about credit card debts and she told me she just cashed in 25K of an IRA to pay down 25K of credit card debt, yet already had accumulated 2K since then and was getting in the hole again. I might invite her down to do some murals in my kids room, and perhaps do some studies on trees (She is an artist who made a living cutting hair for the last 40 years).

The point is (perhaps? At least the relevant one?) is the deadly financial problem of never having working capital that provides the flexibility that keeps one off the spike of usurious interest.

This lady had been sold on long term investments (by her branch XYZ big box bank) in high fee mutual funds with perhaps at best a 5% yr expected value over the long term, while paying off 25% interest rates on credit cards. The scams run on the lower middle class or working class are obscene.

And it is not income. Clearly if these folks can pay these obscene high interest rates, they can afford much more than they have. The problem is that they never understood the idea of having "working capital". I told my friend that her best investment is at least 6 months of living expenses in the bank. As basic as it is, and at such a low margin for error that standard that is, for many it is an alien concept. Her recent issue was a car repair that blew up her budget and started the credit card problem again. With no working capital plus compound interest against, it is like a giant pit metaphorically with wood spikes and lions at the bottom to gobble one up.

So in trading and investing, how can we use this idea? Victor has taught "never get in over ones head" as one of the key tenants of speculation. So how do we manage our cash in our speculations, investments, life's "issues" to have the flexibility to seize opportunities and avoid pit of being bent over a barrel–while still getting a solid return.

Scott Brooks writes: 

The problem is deeper than that.

The people that Ed is referring to don't have the mentality to accumulate wealth and get rich. They are sold on the "here and now" mindset. They go into debt to satisfy the here and now. Something will always come up that will prevent them from succeeding. The only thing they are really good at is coming up with PLE's (Perfectly Legitimate Excuses) to justify their failures.

They are defined by their failures.

anonymous writes: 

Especially with respect to this site, I would wonder the data and testing behind those assertions. Otherwise, one might consider them to be presumptive, elitist, and uncharitable, with mean-spirited implication. But for the grace of god….

Ed Stewart writes: 

"presumptive, elitist, and uncharitable, mean-spirited"

Yes but who cares. I'm guilty of most those things at most times. Is time preference the essence of trading? That might be a more interesting question vs. my original one. Can it be quantified? I think so, as a hypothesis generator. Does it work better than other thought models?

Russ Sears writes: 

Sorry, I disagree Scott. Ed is correct, it's a matter of education and coaching. Have a plan, believe in the plan, stick to the plan.

The average working poor Josie is not a loser. It's the average bank has learned they are more valuable dumb and paying fees than smart with small accounts. The stats say that the fees are several hundred dollars per person in the USA. So some are paying several times that. The banks have the average poor working single parent or mom in a snap trap that they can't figure how to unsnap and lift the door.

The first thing I tell kids is that you need a minimum of $1,000 in emergency cash preferably $2,000. Have a garage sale, stop buying lottery tickets, no gambling, stop buying new clothes, stop cable, and stop smart phones, etc until you have that emergency fund. Also budget, if you can't fix the budget to the pay, downsize housing, get roommates, no car, bus, pay for car pool, whatever it takes to have a workable budget. Then save for the 3 to 6 months expenses in a cash account ready for a big expense. Only then should you invest.

Most people in this problem don't have anyone they can trust to give them the advice and perhaps the tough love they need to stop living in denial. The truth is the banks want the poor.

What does this mean for "investors". Frankly I think most investors have it wrong. It's not so much managing your risk as it is managing your cash flow first, then manage your risk. You can take a lot of equity risk if your investment horizons 20 years out.

Also the lesson to investors is just because someone is in the best position to give you advice and would make some money off you if they gave you that advice, it doesn't mean they will give you the advice that's in your best interest when it conflicts with their best interest. Their best interest is CMA (cover my …) by silence or sin of omission. Then it's to make more money by selling what gives them the most profit to "cover" you like payday loans.

anonymous writes: 

The thing I practice (and I don't know if it adds any edge that can be computed) is to always take some off after a good run. No mater what, be it trading, investing, bonus, etc. Never spend it all–or even most of it. Put it away for when SHTF, because as day follows night, it will…

Andrew Goodwin writes:

A major part of the problem is the thinking that makes the credit limit on credit cards equivalent to ones own money.

For my part, I will never willingly stop at a gas station that has two prices for gasoline with one higher for the credit card user than for one paying cash.

In a world where there are card rebates on gasoline, what is the point of acting responsibly with credit when those who did not act responsibly get subsidized by those who did. The dual pricing also serves to support a cash economy against the public interest.

Peter Grieve writes: 

I feel that I am unique on this site as having been in this hairdresser's situation for most of my life (Hello, Peter). Obviously this is not due to a lack of economic education or upbringing. I feel that the factors include a lack of skepticism regarding my own appetites, a lack of faith in the future, a certain immediacy in response to the world. These are traits associated with immaturity, to which I confess. Of course this leads to tremendous inefficiencies, even when viewed from a purely hedonistic perspective, but it does have its compensations.

I do not regard Scott's comments as elitist, presumptive, uncharitable, or any of that baloney. On the contrary, I find the the use of the word "uncharitable" to be condescending. I do not feel that people in my position are a fit object of charity.

Everyone has their irrationalities, and they are often incomprehensible to those who do not share them. Scott's words are simple, honest truths, which many people (including me) would benefit by internalizing to a greater degree.

Stefan Martinek writes:

It is good to have an emergency cash for at least a decade; locked, untouchable for trading or similar. The rest can be at risk. And after MF Global steal from client accounts (is Corzine still free?), I think it is prudent to keep as little as necessary with FCM. In case of a brokerage failure, the jurisdiction matters (Switzerland is preferred, the UK is too slow but ok, then Canada, and the last option is the US broker).

Ralph Vince writes: 


I entirely disagree; emergency cash has a shelf life which is very short, and our perspective warped as we are speaking in terms of USD. Being the historian you are, you know full well how quickly that cash can be worth nothing. (And again, a many of our personal experiences here would bear out, money is lost far quicker than it can be made).

A bag of air on hand is good for one breath.

People are taught that "saving" is virtuous, borrowing a vice. I would contend that we have crossed to Rubicon in terms of the notion of stored value — no more able to contain that vapor than we can a bottle of lightning. The circulation brought upon by a zirp world, turning all those with savings into the participants at a craps table, the currency being used the product of a confidence game, among the virtues to be taught to tomorrow's youth is that of creating streams of income — things that provide an economic benefit their neighbor is willing to pay for, as opposed to a squirrel's vermiculated nuts.

"Stored value," is a synthetic notion we have accepted and teach as a virtue. It has no place in nature, it is a synthetic construct, one that is not scoffed at in the violent, life-and-death world of fire and ice. Young people need to be taught the fine distinction between the confabulation of "storing value," and that of using today's fruit to generate tomorrow's.

Stefan Jovanovich adds: 

From the other Stefan: I agree Ralph. "Stored Value" is another part of the economist dream that platonic ideals can be found. Money is and always has been one thing: the stuff you could voluntarily give to the tax man that would make the King find another excuse for throwing you into the dungeon. The gold standard did not change that; it simply gave the citizen a chance to make the same kind of unilateral demand on the government. It is hardly surprising that the fans of authority and "government" hate the Constitutional idea of money as Coin. How can you have a permanently elastic official debt if the citizens can ask for payment in something other than a different form of IOU?

However, Stef does have a point. Having a hefty cash balance is a wonderful gift; it gives you the time to figure out your next move. The sacrifice is the absence of leverage; the gain is having literally free time.

Scott Brooks comments: 

There are a lot of companies out there that take advantage of them and the bad advice they were given from their parents. Banks certainly do. Then you've got insurance companies and brokerage firms selling them crap products as well.

But that doesn't hold water in today's society with Suzie Orman and others like her being nearly ubiquitous on the airwaves and net.

These people live beyond their means. Plain and simple.

Yes, they lack education, but even with education available, they don't take advantage of it. They are just doing what they were taught as kids. For far to0 many of these people, as long as they've got enough money for their 1-2 packs of cigarettes/day and their quart of Jack/week, they go and live lives of quiet desperation, hoping that they don't lose their jobs and are lucky enough (i.e. like not spending money on stupid stuff is "luck") to pay off their debts by the time they are in their early/mid-70s so they can live out their remaining few years (if they even make it that long) on social security.

I know. I grew up with these people. I know how they think. But for grace of God (as was mentioned earlier), I might have been one of them. But for some reason, I was blessed with gray matter that works, and I saw the error of those ways, and I was able to get out.

Ken Drees writes: 

I knew a guy–lost touch with him over the years–who exclusively dealt with hairdressers and salonists. He sold variable annuities to them since these people had no retirement plans given to them from the salon owners. I believe in his mind that he was doing them a service–and I really do not know the quality of his products–but at a glance I saw them as mutual fund annuity hybrids that came from heavy fee fund families. He was a tall, dark and handsome gent and he would actually get entire staffs of salon ladies to invite him in after hours for a group meeting/financial planning discussion presentation.

He always said that business was brisk! 

Jim Sogi writes: 

When young friends ask me, how should I invest, I give them a simple asset allocation model based on ETFs or Vanguard and an averaging model. Invest x% of your paycheck off the top each time. Doesn't matter how much really.

Russ Sears writes: 

 Scott, since this is the DailySpec let us bring a little science into the discussion, even if it is social science.

Where we differ is not what is causing the hairdresser's problem. It is in what can be done about it that I differ. I believe you can coach people to delay gratification. I coached kids that never did homework before and got "D's" and "F's" during a summer and by fall the kid was an "A" or "B" student. You probably owe a hardy thanks to the coaches in your life.

Perhaps the greatest social science finding has been the "marshmallow experiment" done at Stanford. They did test on 600 4 year olds telling them if the child did not eat a marshmallow for 15 minutes after they left, they would get a second marshmallow. 1/3rd of them made the whole 15 minutes, a small percentage ate it immediately after the others had waited various amounts of time. They followed up on these kids several time in the last 40 years. Just about every way you can think of to define success was highly correlated with the time the 4 year old delayed gratification: SAT score, college/HS graduation rate, credit scores, long term committed relationships, contentment etc. And almost any way you can define failure was inversely correlated: jail time, high school.

The correlation was stronger than IQ, social economic status at 4 years old. In other words even the dumb poor kid that delayed gratification was happy/content/successful 40 years out. He may not be making much but he is happy with it.

For a humorous view of this experiment reproduced: Joachim de Posada: Don't eat the marshmallow! 



 P. J. O'Rourke, of all people, has a quote that has gotten me thinking.

"There is a simple rule here, a rule of legislation, a rule of business, a rule of life: beyond a certain point, complexity is fraud. You can apply that rule to left-wing social programs, but you can also apply that rule to credit derivatives, hedge funds, all the rest of it."

Does this contain some truth, in the areas that this list is most interested in? Or does it reflect the suspicion people have for things they can't understand?

Gordon Haave writes:

I've held this view for a long time about the Fed and most economic matters. The basics are easy, they are then made more complex primarily so that people don't understand them.

Another good example of this, by the way, is trade policy/stagnant real wages. Why are real wages stagnant? Well, NAFTA and trade policy. If you increase the supply of labor, you decrease the market clearing price. It's simple stuff. Very simple. Econ 101.

However, if the people understood it that clearly they would revolt against it, which is why it is presented as being complex, when it isn't.

That is not to say that I am anti-free trade per se, but the average american would be if he understood the short to medium run implications.



 Several years ago I saw an off-Broadway production of "Harvey" starring Jim Parsons because I loved the James Stewart film and because I liked Jim Parsons in "Big Bang Theory." It was a disappointment partially because it was hard to follow Stewart's depiction of Elwood P Dowd. It was like seeing "Sheldon" playing Elwood. Creepy. Being a big Holmes fan and having always felt that no one was ever able to follow Basil Rathbone in the role (except perhaps Jeremy Brett), I was primed to see a Holmes played like Gandalf. But Ian McKellen is a good Holmes, not Gandalf at all, albeit one who is past the end of his career and is struggling to remember… things. I don't want to spoil it. A big plus is some awesome cinematography of the English countryside and the White Cliffs of Dover. Overall a really nice character study and quite diverting.

Peter Grieve writes: 

I loved Rathbone when I was a boy, and was blown away by Brett (particularly the earlier episodes). But painful though it is to admit, Benedict Cumberbatch is my favorite Sherlock. In the first two years, anyway. Holmes series (both TV and film) seem to veer away from Conan Doyle's intent before the canon is exhausted.

Stefan Jovanovich writes: 

I agree with PG. I think having Martin Freeman as Watson is what puts them first. The first episode is truly a classic. Rubert Graves, Mark Gattis, Louise Brealey, and Philip Davis. Thank God for the Brits and their Empire.

Where would we Americans be without their performers and writers–watching endless Blue Screen ballets performed by people who don't even know how to dance.



 I'm reading an interesting book, Sapiens by Yuval Harari. In making rather blunt conclusions he theorizes that it was the new ability of Sapiens developed only about 70,000 to imagine non existent things that allowed the development of larger organizations of humans such as large tribes, countries, corporations and religions. It is through the larger organizations based on myth that man's accomplishments occurred only recently rather than in the 2.5 million prior years of homonid history. The conclusions are speculative because there is virtually no record and the very scant archeological evidence shows little of what and how ancient prehistory man thought, did, acted, believed. He discounts the importance of tools on the basis that man had tools for 2.5 million years and did not accomplish much and was no more distinguished an animal than the other apes.

In an interesting take on agriculture, he discusses how foraging man spent 4-5 hours a day working to survive, then hung out the rest of the day. Contrast modern man's long work week. He explains some of the stress comes from the fact that man is designed for 2.5 million years as a forager, and that his reactions built in haven't evolved to accommodate recent civilization only in the last 5000 years.

The timeline is interesting with 2.5 million years of not doing much. Then fire was discovered and has been used for 300,000 years; Agriculture for about 9000; Civilization less than 5000 years. Other species of humans existing until about 10,000 years ago. The recent genetic evidence seems to point to some interbreeding with humans having Neaderthal genes. Humans seem to have wiped out most of the large beasts wherever they went in short order.

I have not finished the book ,but I fear for his conclusions at the end.

Peter Grieve writes: 

Around 71,000 years ago, Mount Toba exploded in what is now Indonesia. This was the second-largest volcanic eruption in the last 450 million years, displacing 4,000 times as much earth and ash as the Mount St. Helens eruption. The result seems to have been six years of "volcanic winter", which not only triggered an Ice Age that lasted 1,000 years but also caused massive deforestation, famine for all animals, and a major die-off of human beings. According to genetic studies, the human population might have been reduced to about 2,000 people.

That certainly might have been just the kind of environmental stress to induce a major advance in human capabilities merely in order to survive.



 Many intelligent people think that they rarely use their educations. This may be true in many fields as far as specific material goes. However, if these same people tried to function without the hard-won habits of thinking precisely about abstract ideas, of paying attention to detail even in long, uninteresting tasks, and of reading and listening carefully to presentations and instructions, they might not take their educations for granted. Even the essential habit of being on time is hard won for many (including me).

I teach students every day who were not required to develop these skills in their elementary and secondary educations, and the result is not pretty. Innovation, or even routine technical work, is very difficult without this foundation.

Of course I realize that many of the future engineers that I teach will not use the techniques that I require them to know (partly because employers no longer trust them to have the skills above). I imagine that gymnastics coaches realize that few of their athletes have a practical need to dance on narrow beams or flip around parallel bars. But the enhanced coordination and confidence developed in the one case, and the precise thought and careful observation developed in the other are an obvious benefit to the student.

Take note of the people from other cultures who are successful in the technical world, they mostly were educated under strong forms of this regimented, restricting Prussian system. Talented and brilliant people are better able to develop these skills on their own.



Back in 2011, I noted how quality corporate bond yields had disconnected from sovereign yields– and was undermining the shibboleth that the "risk free rate" is the sovereign rate.

Today, a related thing is happening that may well create an interesting challenge for both the fed and investors.

It's well known that sovereign yields have gone negative in the Eurozone. The second order effect of this is that corporate bonds of GE, Philip Morris, McDonalds, and other A+ corporates are moving towards negative nominal yields too. For example, short term GE paper in Switzerland (Swiss Franc denominated) is now yielding below zero. Yes — that's right. People are giving GE money with the understanding that they will get back less in the future.

This phenomenon has never been seen before in the annals of capitalism. It begs the question of "What is an investment?" Or perhaps even "what is capitalism?"

If GE can issue debt at a negative nominal yield, what does this mean for the valuation of their equity (which is denominated in US$)?

What does this mean for the Fed model?

There are so many questions here that are not addressed in economics text books. For example, how can equity drift be positive when nominal interest rate drift is negative?

Will the answer will ultimately be found in the currency markets? Is this the essence of a liquidity trap? A roach motel for capital?

anonymous writes: 

Seems like it opens up an opportunity for currency storage. Although the highest denomination US currency is the $100 "benjamin", there exists a 1000 CHF note. I'll estimate that you can store about 200,000 notes in 1 cubic meter. With each note worth 1000 CHF, a 0.1% negative interest rate would earn GE 200,000 CHF per cubic meter of storage. For reference, Manhattan apartments rent for something like $1,000 per square meter. Each square meter in a pre-war building with high ceilings could get you about 3 cubic meters of storage. So GE could rent for $1,000 per square meter and earn 200,000 CHF in negative interest.

anonymous writes: 

Again, from the cheap seats: It seems that we're seeing all sorts of strange things because players are looking for safety with some hope of capital/forex appreciation, so they accept negative yield. And since some of the CBs and other banks are pushing negative yields anyway, what's not to like? But is anybody looking at GE's swissie bonds and thinking that the situation represents some underlying economic reality unmediated by CB action? (That's not a rhetorical question, btw.)

When they actually implemented the €Mark, I was skeptical because I thought, "Either the Italians are going to have to become a lot more like the Germans, or the Germans are going to have to become a lot more like the Italians." Now we are seeing the crucial period of the experiment, when we find out whether they can get through this to the other side. I remain skeptical.

Peter Grieve writes: 

There's the rub. There really is no such thing as Europe, just a recently cobbled-together collection of disparate nations with long histories as separate cultures (indeed, some of those nations are themselves rather recently cobbled together!).



 1. Darwin in the Origin pictures the twigs of a tree at all times trying to crowd out and overtake those surrounding it. How can this be applied to market moves?

2. The theory of maximum pain would predict that options end up at the price that maximizes the value to the option sellers. What other moves can cause maximum pain to the lower levels of the market ecosystem and how can hope be maintained and new energy be taken in if maximum pain is inflicted on a regular basis.

3. The stocks are at a 2 month low relative to bonds and this is bullish for stocks.

4. Before a market is ready to spring back it will pretend to recap the old woeful path.

5. The system of digital records for doctors is much less friendly to the patient than the old way where a patient would call the Dr. To get his results and diagnosis.

6. The bank stocks supped with the Bad One in the 2008 period, and now they must carry a long spoon. However, the more the facade of penalties on them is inflicted with one hand, the more they must wallow in the oblivion of unfavorable publicity, thereby keeping man small, the greater the likelihood of the helping hand on the other side. I like buying back below the constructal number of 15.

7. The upside down man disseminated bearish remarks on fixed income, at just the right time to create maximum level of selling at just the wrong time. For example, the bonds went down to 126 and are up almost 10 percentage points since he told everyone the gig was up. The flow of funds man at the Brothers, who held the same position as the upside down man in esteem and followship in his day was more helpful to the public when he changed from bearish to bullish in 1981 when interest rates were 16% or so.

 8. Europe has been incredibly weak relative to the Us in recent weeks down about 5 percentage points more than us stocks.

9. The best book on physics for the layman is Knowing: The Nature of Physical Law by Michael Munowitz. I have not read his book Principles of Chemistry but many reviewers and esteemable academics say he has also written the best book on chemistry.

10. The book Design in Nature by Bejan and Zane proposes that the tree like structure occurs in all things that move and this is the structure that minimizes the loss of energy during the movement.

11. The book Survival Analysis with Long Term Survivors by Maller and Zhou should be required reading for all those who say that the longer the market has gone without a great catastrophe, the greater the chance that it will die.

To be continued.

Peter Grieve writes:

 To expand on the Darwinian twig idea, visual processing centers in the retina also compete for brain space during a "plastic" period.

Kittens were placed in an environment which contained only vertical stripes (with an unpleasant sounding head clamp to make sure the stripes remained vertical with respect to their heads). The result was they responded less to other patterns in learning experiments, presumably because the vertical stripe receptors won the competition for brain support during the developmental period.

Now that I've written this, it occurs to me that the head clamp might be the most useful analogy for aspects of strategic learning.

Gary Rogan writes: 

I read this interesting book a couple of months ago: It's a Jungle in There: How Competition and Cooperation in the Brain Shape the Mind. According to the book the entire nervous system is always Darwinian on multiple levels:

"He argues that the overarching theory of biology, Darwin's theory, should be the overarching theory of cognitive psychology, the science of mental functioning. He explores this new and intriguing idea by showing how neural elements compete and cooperate in a kind of inner jungle, where only the fittest survive. Competition within your brain does as much to shape who you are as the physical and figurative competition you face externally."



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

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

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

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

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

Peter Grieve writes: 

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

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



 From The Story of Civilization by Will and Ariel Durant:

History does not tell us just when men passed from hunting to agriculture-perhaps in the Neolithic Age, and through the discovery that grain could be sown to add to the spontaneous growth of wild wheat. We may reasonably assume that the new regime demanded new virtues, and changed some old virtues into vices.

Industriousness became more vital than bravery, regularity and thrift more profitable than violence, peace more victorious than war. Children were economic assets; birth control was made immoral. On the farm the family was the unit of production under the discipline of the father and the seasons, and paternal authority had a firm economic base. Each normal son matured soon in mind and self-support; at fifteen he understood the physical tasks of life as well as he would understand them at forty; all that he needed was land, a plow, and a willing arm.

So he married early, almost as soon as nature wished; he did not fret long under the restraints placed upon premarital relations by the new order of permanent settlements and homes. As for young women, chastity was indispensable, for its loss might bring unprotected motherhood. Monogamy was demanded by the approximate numerical equality of the sexes. For fifteen hundred years this agricultural moral code of continence, early marriage, divorceless monogamy, and multiple maternity maintained itself in Christian Europe and its white colonies.It was a stern code, which produced some of the strongest characters in history.

Gradually, then rapidly and ever more widely, the Industrial Revolution changed the economic form and moral superstructure of European and American life. Men, women, and children left home and family, authority and unity, to work as individuals, individually paid, in factories built to house not men but machines. Every decade the machines multiplied and became more complex; economic maturity (the capacity to support a family) came later; children no longer were economic assets; marriage was delayed; premarital continence became more difficult to maintain. The city offered every discouragement to marriage, but it provided every stimulus and facility for sex.

Women were "emancipated"-i.e., industrialized; and contraceptives enabled them to separate intercourse from pregnancy. The authority of father and mother lost its economic base through the growing individualism of industry. The rebellious youth was no longer constrained by the surveillance of the village; he could hide his sins in the protective anonymity of the city crowd. The progress of science raised the authority of the test tube over that of the crosier; the mechanization of economic production suggested mechanistic materialistic philosophies; education spread religious doubts; morality lost more and more of its supernatural supports. The old agricultural moral code began to die.*

Interestingly, the British historian James Burke speculates humanity has now entered a period of transition, where we're trying to solve life's challenges using "archaic and out-of-date instruments".

"We live with institutions set up in the past to solve the problems of the past, with the technologies and values of the past and we wonder why they don't work too well anymore?" he says.

Peter Saint-Andre writes: 

Nice thought, except it's false. English society was individualistic in the sense described going back as far as records exist (at least to the 1200s). The classic anthropological study here is Alan Macfarlane's 1978 book The Origins of English Individualism. Here is more about Professor Macfarlane.

Also highly recommended is a new book that builds on work by Macfarlane and others, entitled America 3.0.



Over the weekend I did a bit of research into that perennial question: inflation or deflation? That let me to look more closely at velocity of money. Depending on how you measure it (M1, M2, MZM), it seems that velocity of money has been declining pretty steadily since ~2008 (M1), ~1996 (M2), or ~1981 (MZM):

Velocity of M1 Money Stock (M1V)

Velocity of M2 Money Stock (M2V)

Velocity of MZM Money Stock (MZMV)

If (and I do say if) those trends continue, one could argue that deflation is in our future. (The third graph there looks an awful lot like the Japanese experience since ~1991…)

Has anyone here done more detailed research on velocity of money?



 Orwell's contribution to the fight against totalitarianism can't be overstated. He's by far my favorite socialist — one of the ones that thinks more realistically. I especially like the Essays. Here is a random bit of sense:

If one harbours anywhere in one's mind a nationalistic loyalty or hatred, certain facts, although in a sense known to be true, are inadmissible. Here are just a few examples. I list below five types of nationalist, and against each I append a fact which it is impossible for that type of nationalist to accept, even in his secret thoughts:

BRITISH TORY: Britain will come out of this war with reduced power and prestige.

COMMUNIST: If she had not been aided by Britain and America, Russia would have been defeated by Germany.

IRISH NATIONALIST: Eire can only remain independent because of British protection.

TROTSKYIST: The Stalin regime is accepted by the Russian masses.

PACIFIST: Those who 'abjure' violence can only do so because others are committing violence on their behalf.



 1. Evolutionary Dynamics by Martin Nowak

Wherever information replicates, wherever there is life or culture, whether in the fields of stocks, language, viruses, cancers, HIV, infections, rumors, games, there is evolution. Evolutionary Dyamics is a masterful book, the kind that you will wish to read 5 or 10 times that gives you a foundation for studying the processes involved, and then applies it to all the fields. I can't recommend the book too highly.

It starts with a discussion of how simple models can lead to extraordinarily complex behavior. The discussion of finite difference equations and how the basic equation   X(t+1 ) = X(t)(1-X(t) * A can lead to all the paths that you have ever seen or imagined with time series in your life.

A discussion of the basic mathematics of how an error in replication, a mutation, can change the dynamics and lead to all sorts of ultimate outcomes from coexistence, to complete exclusion to survival of the first is also a point of departure for all topics covered.

Each chapter applies the basics to a new field. The fields covered include cancer, language, epidemics, viruses, HIV. The chapter starts with a discussion of a basic dynamic equation, how it relates to the foundation laid in previous relative to growth rates, carrying capacities, feedback effects, and equilibrias. Diagrams illustrate the main points. And summaries at the end of each chapter contain a nice review of all the main points.

 The book uses differential equations as the basic building block for illuminating all the applied fields covered. A knowledge of the basic solutions is helpful. However, the layman without that training can get the gist, and with a pencil and paper, and review of each chapter can find himself marveling about how much fuzzy thinking in the field is clarified by precise counting and tracing.

If there is one suggestion I have for the book, it would have been to use difference equations more than just once or twice to illustrate the topics covered rather than using the closed form mathematical solution. It also would have been nice to see how the computer friendly reader or researcher might have simulated the conclusions and principles reached. Applications to economics would also have been appreciated.

I can't recommend the book too highly. It's set in easy to read type. And it has a great discussion of the history and development of each field in it. I intend to read it over and over as a lynchpin for understanding modern biology, disease, and meme transmission. Darwin and Galton would both have expressed keen appreciation and amazement at the clarity which this superb book brings to the many areas that they studied.

2. The search for isomorphisms, propositions of the same structure valid in two or more disciplines, was part of systems analysis as developed by Kenneth Boulding as a way of unifying the sciences, natural and social.

-Nathan Keyfitz, in a biography of Kenneth Boulding.

What isomorphisms are useful for augmenting our knowledge and profits in markets?

Peter Grieve writes: 

 I think that unification is the highest scientific endeavor. For me, taking two things that look completely different on the surface and demonstrating an underlying unity is as good as it gets.

The highest example of this (for me) has to be when Einstein did it with space and time. He unified them into the concept of "interval" ( although they are not quite isomorphic since time has that minus sign). He also unified electric and magnetic fields to the same degree, and they appear very different on the surface.

Gary Rogan writes:

Until we answer how the physical laws "know" to work in every part of the Universe or at least a lot of it, we won't know anything but the symptoms of the cause. There is something very strange and basic about the structure of the Universe that keeps some aspects invariant.




 The current monthly issue of American Dry Cleaner had this comment from a dry cleaning plant owner:

"The advent of valet dry cleaning businesses that rely on local plants to process the work may look like a good thing for a slow plant, but they are only a Trojan horse. Enabling someone to enter the business with little to no upfront capital expense is a death knell. The services enter a market taking business away from the plant operators with the "sale" that they will bring more business to you, but the operator is getting only a fraction of the price, usually half. A route does not cost 50% to operate, but most plant owners are too lazy to start their own route. We as plant owners must stop enabling people to cannibalize our markets. If someone wants to enter the dry cleaning business, make them pay all the costs that you incurred as a plant owner, not just the cost of a van."

The idea that "capital" - i.e. money spent - deserves a rate of return seems to be an inescapable article of faith among us all. Why else would economists still be discussing "the natural rate of interest"?

BTW, If you do a full text search of the English translations of Das Kapital, you will find that the word "distribution" recurs again and again but only with regard to "capital" and "profit" , never once with regard to goods and services. The words "advertise" and "advertisement" are similarly absent. "Advertise" is found once, in a mention of a Dr. Harvey who was selling recipes for weight loss to "the bourgeoisie and aristocracy" in the 1880s; and the word "advertisement" is found once, where Marx compares child wage rates to "the advertisements" that use to appear in American newspapers" for slaves.

Peter Grieve comments:

I often see the Marxist rot in unexpected places. It seems like a very, very bad sign. Once a tumor has metastasized…



 Does the orbit of the Moon trigger earthquakes ? If so then March 16 through the 22nd could be interesting. The Moon makes its closest approach Mar 19 during the new Moon.

Here is something from Nolle's web site: his March forecast.

On a more interesting note my research showed that the stock market performs better from the new Moon to the full Moon than during the waning half of the cycle.

Jon Longtin comments: 

I wouldn't lose sleep over it.

The stress that the moon produces on the earth by constantly darting from one side to the other every day is orders of magnitude greater than the small variation in its distance to earth.

Put another way, high tide maybe a few thousandths of an inch higher when the moon is closest to the earth, on top of a several foot swing in sea level that day.

(But such events do make lovely fodder for the doomsayers…)

Peter Grieve writes:

The mixture of explicitly stated science with implied superstition seems to becoming an art form.

Jupiter and Saturn have a combined mass of less than .002 solar masses. And tidal effects vary like the inverse cube of distance. Which means that Jupiter's tidal effect is reduced by another factor of 1/64, since at its nearest it is 4 times further from us than the Sun is.

Putin will undoubtedly be pleased with dire predictions for the West.

Kim Zussman writes:

This kind of prediction is old news: see The Jupiter Effect .

As recalled, at the time astronomers estimated the net tidal pull of the 1982 planetary alignment on the sun (which, in turn, was to effect solar radiation and subsequently interact with earth's magnetic field) of ~1mm. The sun is about 864,000 miles in diameter.

Eventually with enough of these they'll get one right.

Pitt T. Maner III writes: 

Here is a good video on "pseudo-predictions" for this weekend from down under. Multiple, vague predictions debunked by scatter graphs.

I would guess, however, that there will be a resurgence of interest in the writings of catastrophists– Velikovsky being considered one of the last of the old time breed…

Phil McDonnell comments:

Speaking of Velikovsky a version of his theory is now the most favored theory for the formation of the Moon. The exception being that he thought the Moon was formed during historical times and used Biblical references to date it. For example he claimed the parting of the Red Sea was a giant Moon tidal effect. Instead current thinking dates the Mars sized Earth impact at about 300 million years after the formation of the solar System.

More on Moon formation theory:

Giant impact hypothesis

I also ran a test looking at all the earthquakes > 7.0M in 2010. I found that the number that were 'predicted' by Nolle's super Moon windows was 19%. But the number of days covered by the windows was only 10% of the year. On its face it seems like modest support, but the sample size of correct hits was only 4, so the jury is still out.



 Without going into too much detail on the matter, there is a terrible amount of inspiration for traders in studying Hannibal's victory at Cannae, his march of 100,000 infantry, cavalry and African elephants from Spain, up through the Italian Alps (!), down the Lombard plain and spine of Italy to Cannae. Hannibal's marching and battlefield tactics are replete with examples of tenacity, perseverance, deception, offensive and defensive psychology, adaptability, everything required of today's trader. In short, Robert L. O'Connell's Ghosts of Cannae is a profoundly interesting and entertaining read.

Peter Grieve comments: 

The Romans' steadfast response to Cannae and their eventual victory through Fabian tactics are worth thinking about also. And note how much gratitude "The Delayer" Quintus Fabius Maximus received for saving Rome.

Stefan Jovanovich writes: 

I think traders would find more useful information in a study of Fabius Maximus (from whom we get the term "Fabian" strategy - which the NY Times and others persist in attributing to the Fabian Society ) and a reading of Dexter Hoyos' book. Hannibal's Dynasty: Power and Politics in the Western Mediterranean, 247-183 BC is a expensive ($30 for even the Kindle edition) but it will give SpecLististers the back story– how the Barca family's rise to power affected Carthage's own choices and how, even as they won all the battles, the Barcas lost all in the Second Punic War.

P.S. Denis Feney's comparison with Stalingrad is another of Times' wonderful bits of nonsense. Professor Feney has the comparison absolutely backwards. Paulus' surrender was a defeat but it was hardly a destruction of the Wehrmacht. It was the Red Army that had already suffered 3 successive Cannaes (Minsk, Smolensk and Kiev) even before Paulus' army reached the Volga. The lessons of history are useless if you insist on only reading its book back to front.

And - I hope Jay would agree - the context has to include an understanding of how much the Roman's collective arrogance was fueled by the tension between the presumed aristocrats and the nouveaus; even the "hooray for our side" accounts make it clear that Varro and Paullus were spending far more time worrying about which one of them would wear the victor's wreath than they were spending in thought about what the stupid barbarians were up to.



Research published online Thursday in the journal Science, found that students who read a passage, then took a test asking them to recall what they had read, retained about 50 percent more of the information a week later than students who used two other methods repeatedly studying the material and drawing diagrams). One interesting paradox illuminated by this research is that struggle helps you learn but makes you feel like you're not learning.

“When you’re retrieving something out of a computer’s memory, you don’t change anything — it’s simple playback,” said Robert Bjork, a psychologist at the University of California, Los Angeles, who was not involved with the study.But “when we use our memories by retrieving things, we change our access” to that information, Dr. Bjork said. “What we recall becomes more recallable in the future. In a sense you are practicing what you are going to need to do later.”
It may also be that the struggle involved in recalling something helps reinforce it in our brains.

Maybe that is also why students who took retrieval practice tests were less confident about how they would perform a week later.

“The struggle helps you learn, but it makes you feel like you’re not learning,” said Nate Kornell, a psychologist at Williams College. “You feel like: ‘I don’t know it that well. This is hard and I’m having trouble coming up with this information.’ ”

Continue Reading in the NYT

Peter Grieve comments:

I often use exams as teaching opportunities, because that's when their minds are really open and the adrenalin is flowing. I remember plenty of exam questions from 30 years ago, but very few lecture moments.



A Red acid mordant From xxx at 13:45:17: you are rather mordant today

From Vic at 13:46:02: i didn't know it spelled with "a".

From xxx at 13:49:37: M O R D A N T

American Heritage® Dictionary adj. Bitingly sarcastic: mordant satire. Incisive and trenchant: an inquisitor's mordant questioning. Bitingly painful. Serving to fix colors in dyeing. n. A reagent, such as tannic acid, that fixes dyes to cells.

Peter Grieve comments: 

I'm mordant today? Actually I have been feeling quite dormant. Or maybe I'm mordant thinking about the looting of Britain's dormant accounts.

Rocky Humbert explains:

Mordent is a musical term, mordant is a chemical term.



Aviation Safety experts talk a lot about "The Swiss Cheese Model" of human error as described by Dr. James Reason of the University of Manchester Dept. of Psychology.

From wikipedia:: ( http://tiny.cc/ysg88 )

"James Reason hypothesizes that most accidents can be traced to one or more of four levels of failure: Organizational influences, unsafe supervision, preconditions for unsafe acts, and the unsafe acts themselves. In this model, an organization's defences against failure are modelled as a series of barriers, with individual weaknesses in individual parts of the system, and are continually varying in size and position. The system as a whole produces failures when all individual barrier weaknesses align, permitting "a trajectory of accident opportunity", so that a hazard passes through all of the holes in all of the defenses, leading to a failure."

In "Human error models and management" ( http://tiny.cc/xl25n ) James Reason criticizes the "person approach" to human error and suggests a "Systems approach": "The long-standing and widespread tradition of the person approach focuses on the unsafe acts—errors and procedural violations—of people on the front line …" ~ " It views these unsafe acts as arising primarily from aberrant mental processes such as forgetfulness, inattention, poor motivation, carelessness, negligence, and recklessness. The associated countermeasures are directed mainly at reducing unwanted variability in human behavior."

… "Another serious weakness of the person approach is that by focusing on the individual origins of error, it isolates unsafe acts from their system context. As a result, 2 important features of human error tend to be overlooked. First, it is often the best people who make the worst mistakes—error is not the monopoly of an unfortunate few. Second, far from being random, mishaps tend to fall into recurrent patterns. The same set of circumstances can provoke similar errors, regardless of the people involved. The pursuit of greater safety is seriously impeded by an approach that does not seek out and remove the error-provoking properties within the system at large."

"The basic premise in the system approach is that humans are fallible and errors are to be expected, even in the best organizations. Errors are seen as consequences rather than causes, having their origins not so much in the perversity of human nature as in “upstream” systemic factors. These include recurrent error traps in the workplace and the organizational processes that give rise to them.

Countermeasures are based on the assumption that although we cannot change the human condition, we can change the conditions under which humans work. A central idea is that of system defenses. All hazardous technologies possess barriers and safeguards. When an adverse event occurs, the important issue is not who blundered, but how and why the defenses failed."

His seminal work : "Human Error", James Reason, 1990 ( http://tiny.cc/i1q5a )

 Peter Grieve comments:

This is very similar to Nigel's chess teaching - when someone makes a blunder, usually it's been set up by a position that has been deteriorating for several moves.




Didier SornetteA friend of mine sent this very interesting link. It's about the work of Didier Sornette.

Victor Niederhoffer comments:

He's an actor  always predicting the end of world, reporting one blade of scissors never expectations, like its 30% likely there will be catastrophic decline but never that it's also 40% likely that there will be an extraordinary rise. Similarities and retrospection galore and a doomsdayist.  

Allen Gillespie writes:

I can't speak to that, but his book does have an interesting section regarding the implications of a zero interest environments and he references Von Neumann and other who wrote in the late 1930s the last time t-bill went to negative yields. The math is such that both U and -U can be solutions and hence jumps (up or down) like the "flash crash" and 1999 become acceptable solutions. That's the problem with ZIRP and QE because what is the value of a continuous stream of rising dividends at near zero discount rates? And what happens when QE stops like it did March 31, and on the fiscal side where the government reached is max transfer payments on April 15? Where despite rates still being near zero there was a exponential relative tightening of monetary conditions. And where did PG and others print? Why just below the last free market lows in 2009 before QE.

So, in effect, he does mention the possibility of a large rise and decline because both U and -U are solutions in a speculative bubble regime driven by ZIRP, QE, and massive explicit moral hazard. In short, things can trade anywhere and the days around the timing of when the Fed finally removes its ridiculous rates low forever language will be interesting as it will represent a 3rd non-traditional tightening. The issue is the Fed will probably need to run QE2 in the background when the debt roll doubles next year and climbs more in 2012 before falling and stabilizing thereafter by which time FNM and FRE might have run through the max losses.

I am not a quant but just a fundamental guy who also has a decent eye for politics, and I think it is relatively simple– the Fed's said "oh sh_t" after Lehman so they have tried to put Humpty Dumpty back together again by running bonds back to par and stocks back to Lehman levels (1166). Prices above that they will not artificially support, far enough below that they will so long as they are allowed to print $$$. The big risk, which cannot be quantified, is that historically it is a POLITICAL event which removes this support mechanism from the markets and that can happen in a day and stocks must fall a lot to find true cash (not bank convergence trade) buyers - those old men with canes who do exist but are becoming fewer.

Also, for the curious given current events– there was a large rise when the U.S. declared neutrality in the third quarter of 1939 only to fall a year later as this laid the ground work for its friends being run over. Isn't GM supposed to be IPOed then - TM problems real? - AIG insured Goldman? BP - the green energy firm - Yukos for the industry anyone - except we can't create a faux back tax - so we will just grab it with environmental taxes that will be coming. As to gold, its takes tighter money to kill a real bubble as 1999 and 2004-2007 showed and while on a relative basis the Fed has tightened with no QE, Europe has eased and until the U.S. can roll its 3 year average maturity debt with large origination years of 2008 and 2009, I am staying long and I bet other are too.

Peter Grieve writes:

The word "econophysicist" alone should be a danger signal, that someone is hubristically applying a certain analytical discipline outside its sphere.

One might as well say "gamophysicist" for "marriage counselor", or "hippophysicist" for the author of a horse betting pamphlet.

I bow to no man in my love of physics, but it only has power in clear cut situations.

Ralph Vince Concurs:


Gimme a break!

"…bubble markets display the tell signs of the human behavior that drives them. In particular, people tend to follow each other and this result in a kind of herding behavior that causes prices to fluctuate in a periodic fashion."

Really? Who would have guessed that!

Ah, Switzerland! Yodeley hee hoo! These guys are always in Switzerland, aren't they? 

Yishen Kuik writes:

Victor may be right– some of Sornette's older (erroneous) predictions which I think appeared on his faculty UCLA website aren't around.

I don't know if someone has consolidated all his predictions to check the batting average, but he certainly may have left out his losers in recent press releases and papers. He seems to have channeled a lot of energy at bringing press attention to his work. I suppose his final objective is the lecture or consulting circuit a la the distinguished expert on derivatives and other professors.



 Reading through Linchpin by Seth Godin advocates getting away from the quantified.

We measure the quantified because we can. But we should create the unquantified because it's so rare. If you can quantify it, then probably someone before you figured out a why to grind it out. And if you can grind it out, someone can grind it out cheaper than you can. On the other hand, the really valuable stuff, the stuff we pay a lot for, is unquantified. Things like creating joy or security or happiness. No easy measurements for those, thus they are art, and art is always worth more than the predicted.

Henry Gifford comments:

Similar situation with how much energy a boiler takes to heat a buildng. The quantifiable is the least important– the % efficiency while the boiler is operating (% of energy in fuel not going up the chimney, but going into heating the building).

The second most important thing is quantifiable enough to have % numbers on it, but those numbers are hopelessly inaccurate– the annual % of the energy in the fuel not going up the chimney (different from above because of the heat going up the chimney from a boiler that is hot, but not firing). Most of this loss can be avoided, but nobody bothers because the % ratings don't change with improvement.

The most important thing is so hard to quantify there is not even a unit for it– how unevenly the building is heated. The chair helped me put some units on this once, but otherwise, I have never even heard it discussed in my field. Uneven heating means overheating the whole building to satisfy the coldest room, with the overheating costing much more energy than the factors mentioned above.

So, in my field, everyone is running around measuring the least important factor, while the most important factors are not even discussed.

One solution is to focus on solving the problems, (short chimney, thermostat in every room) without being able to predict the resulting saving. But, without prediction, it's a very hard sell. Good for one's own portfolio, harder with other people's portfolios.

Peter Grieve adds:

When people are making purchasing decisions in areas in which they are not expert, there is a strong tendency to reduce things to a few numbers. These numbers are easy to compare, but present a grossly simplified picture. The simplest machine has myriad degrees of freedom, and so does the operating environment. The assessment of the interaction of these two cannot be crammed into four of five numbers.

This is especially true in government procurement, for example weapons systems. The M4A1 carbine is supposed to have an effective range of 300m. I have done a lot of shooting with the civilian version of this weapon, and I can assure you that this one number does not capture much of the essence of the range of the machine. On a hot or cold day? Shot by a master or a bumbler? Standing or prone? Against armored or unarmored targets? Shooting from sunlight or shade?

But this number is easy to compare with corresponding single numbers of other weapons.
Or take chess ratings. Chess strength is a very complicated thing, which cannot be reduced to one number. There are cases in top level chess in which A does well against B, B does well against C, and C does well against A (Nigel D. can help with examples here). Single real numbers are linearly ordered, and no three of them can satisfy A>B>C>A. Single real numbers are not adequate to encapsulate chess strength in its entirety.



sniperWhen discussing today's market action with a friend, the following chat conversation took place:

me: Market's crazy again.

friend: Yep i noticed…herd mentality causing kids to run from one side of the playground to the other.

me: Fine by me. Opportunity to play sniper in the market again and take advantage of people being dumb.

friend: one of the hardest things about being a sniper is not neccearily the distance from which you shoot, or the accuracy required when you shoot, or finding that perfect location, it's probably being too focused through the sights of your scope to not notice the private that snuck away went arround you and is now standing behind you with a gun to your head.

Wise words indeed…

Ken Drees writes:

That's why snipers work in teams–to watch prey and to cover rear guard.

Bruno Ombreux comments:

I was told that the spotter is not technically needed. He is only there to share the psychological burden arising from killing too many people.

For the same reason, some Investment Banks praise teamwork, notably in their structured finance department.

Peter Grieve writes:

Not sure this is relevant, but I heard that snipers never ever make it to prisoner of war camps. When an identifiable someone has been deliberately targeting your friends as individuals, accidents always seem to happen in the prisoner-taking process.




 This reminds of "The Night Of The Long Knives" also called Operation Hummingbird. It is interesting how the market was "prepared" for this event that occurs after an impressive up leg. We will see if the event will be able to trigger more volatility. It will say a lot about this market.

Peter Grieve writes:

You've got to love a keg full of musket balls through the stern windows from the forward port side carronade.

Unless the free market you revere is on the receiving end, of course.

Alston Mabry writes:

With financial regulation reform next on the agenda, it's more like Trafalgar: What better way to start a battle than to cross the T on the enemy's biggest ship and rake them with a full broadside?



 Aristotle once said, "All paid jobs absorb and degrade the mind" Is there any way of quantifying this, and are there any implications in the markets, life, and trade?

Aristotle also said, "We are what we repeatedly do. Excellence then, is not an act, but a habit." Does this extol the virtue of practicing until we get it right? How does one know if they are getting it right, and if they have the proper tutor.

Aristotle wrote in his Nicomachean Ethics "It is not always the same thing to be a good man and a good citizen." I've been wringing my head trying to figure out all of the different philosophers who have borrowed this idea, and have come up with a list of at least 20. Any help in compiling a complete list would be appreciated.

He also wrote in Nichomachean Ethics, "It is possible to fail in many ways…while to succeed is possible only in one way." I would like to disprove this as there are more than one path to success.

Kim Zussman replies:

Do a twin study:

Find pairs of identical twins (same genes) with different employment histories. Best would be congressman vs. doctor. Failing that, find pairs with large differences in total hours worked to date.

Perform intelligence testing on the pairs, and use paired t-test to check for difference as a function of high vs low prior work/brain wear.

A related study could be done on the productivity effects of wearing robes and fondness for little boys.

Jim Sogi writes:

At the risk of disagreeing with Aristotle, excellence is a constant struggle. At least for me it is. Habit implies some sort of easy continuation. Constant vigilance is very very difficult. Excellence also connotes superiority over others. Thus there is a the constant pushing and straining to excel over others who try even harder.

J.T. Holley replies:

I don't think Mankind or Aristotle (all thought is a mere footnote to him in Philosophy circles) should be given a break at their points in time now that we've evolved Capitalism to the point it is today. Seems to me that the most important principle here is that what was shared by Susan Niederhoffer the other day "everyday seek out knowledge". In the agrarian society that was around in Ari's time we can certainly understand that doing some "meaningless paid job" took away from the devotion, persistence, focus and the ability that Ari had at driving forward to thought and knowledge. He is reluctant to realize though that the underlying power of Capitalism and his own mind freed him up to pursue his own thoughts and not degrade his mind.

"We are what we repeatedly do."

I happen to agree with this but not in totality. His teacher Plato spoke of to paraphrase "to know the good is to be the good". Much more objective than Aristotle's "do do the good is to know the good" of which leans towards being subjective. I think both are acceptable in "being". Case in point is Plato's "Allegory of the Cave". Being tied to the post the man competed and "repeatedly" learned to beat his peers at guessing at the shadows, but once freed and outside the cave he saw the light! The objective in this allegory trumped the subjective that was thought to be the truth. The objective with the subjective seems to be balanced though if we apply Aristotle's "golden mean" that he also mentions in Nich. Ethics. A wonderful balance of both instead of just one or the other.

"Nicomachean Ethics," he said, "It is not always the same thing to be a good man and a good citizen."

Kierkegaard found and wrote of this as well. He found great power, strength, and lessons in the paradox and hypocrisies of life. His three stages of life's way is a good example of this with the movement from aesthete to ethical to final religious. In the final stage of religious for Kierkegaard he used the Paradox of Abraham to find his strength. Being told by Gawd to go to the mountain and sacrifice his son what thoughts must have been in his mind and that of his town or family? He was either a lunatic by most or the most devout believer in Gawd's word. Kierkegaard spoke of the "fear and trembling" that must've been going on as the knife was thrust to the air to the point to where it was almost at apex to come down into his young son's chest. "good man" or "good citizen"? "religious" or "crazy"? Of course as the passage goes he didn't have to ultimately sacrifice his son but the lamb. The paradox was there though when thought and decision was made to be true to himself.

He also wrote in"Nichomachean Ethics," "It is possible to fail in many ways…while to succeed is possible only in one way"

to quote the Chair "The best way to achieve victory is to master all the rules for disaster, and then concentrate on avoiding them." Trial and error is important in life and speculation. The pain from failing can often lead us to being better individuals and profit takers.

Nigel Davies writes:

GMI think there are a number of problems in discussing 'ancient wisdom', for example culture, language and context. One might ask what defined paid and unpaid work in Aristotle's time? I'd argue that to really understand what he was saying one would have to be a several thousand year old Greek.

As for the internalization of excellence (i.e. habits), the valuation of such may depend on whether one prefers 'reason' to 'intuition born of vast experience (ie habits)'. Taking a different angle on this, does an inexperienced but opinionated newcomer deserve to win against an old hand? Humans value their reason, but maybe this is just vanity talking.

Peter Grieve adds:

I bow to no man in my admiration for the literature of classical Attica, but Nigel has put his finger on a weakness. The surviving philosophical writers did tend to value reason over experience. This may be why they made tremendous progress in mathematics, but were dreadful scientists and mediocre engineers (Archimedes came later, and was a Syracusean). Their mathematics was largely intended to support astrology, for heavens sake. This is in line with their feeling that people who actually produced anything were of a lower order. Apparently people were amazed when Socrates spoke to artisans in an attempt to find answers. Aristotle's attitudes about paid work may reflect this bias.



I've been reading "The Villainy of Stock Jobbers Detected" (1701) by Daniel Defoe with much amusement. Also "Chronicles and Characters of the Stock Exchange" (1850) by John Francis.

Francis says that "Now they stand ready, as occasion offers, and profit presents, to stock-job the nation, cozen the Parliament, ruffle the Bank, run up and down stocks, and put the dice upon the whole town. " The Marxist attacks were never so charming.

Jeff Watson adds:

I assembled a whole collection of around 30 of those old market related books and put them on my blog on a separate page on the sidebar. They are complete downloads and will provide much insight to the markets. For those who were too busy during college by spending their time at the track I also have another page of classical literature books that are of benefit to all, plus several books by Nock. Jeff



 A study of the psychology of mirages might be a profitable line of investigation for speculators. The phenomena can be real, but the issue of interpretation can be a question of what we want to see.

From wikipedia:

A mirage is a naturally-occurring optical phenomenon, in which light rays are bent to produce a displaced image of distant objects or the sky. The word comes to English via the French mirage, from the Latin mirare, meaning 'to look at, to wonder at'. This is the same root as for mirror and to admire. Like a mirror, a mirage shows images of things which are elsewhere. The principal physical cause of a mirage, however, is refraction rather than reflection. A mirage is a real optical phenomenon that can be captured on camera, since light rays actually are refracted to form the false image at the observer's location. The interpretation of the image, however, is up to the fantasy of the human mind, and is easily mistaken for a small body of water.

Peter Grieve comments:

Long distance precision rifle shooters "read" the mirage ("heat waves" in other words) to get an idea of wind speed and direction. "Reading the mirage" sounds like a great name for a trading protocol– unfortunately I can't think of what it would actually be.



 Libbie and George Armstrong CusterI've been thinking about guerrilla war as a result of a trip to the Custer battlefield. Everyone knows that guerillas usually shun contact with conventional forces, "evaporate like the mist". I thought this was only good for self preservation.

But now I see the obvious fact that it has an offensive component. If the men of the conventional forces become hungry for contact and their officers come under career-changing pressure actually to fight a battle, they may become less fastidious about the kind of contact they're after. And then they get the kind they want least.

Stefan Jovanovich adds:

The pressure that Custer felt was of his own making. He and his wife believed that a victory against the Sioux would reward him with enough notoriety to make him president. In retrospect that seems like a mad fantasy. But by 1876 the Republican Party had had only three candidates for President - Fremont, Lincoln, and Grant, and two of them had been U.S. Army officers.

Largely because of Mrs. Custer's relentless promotion of her husband's folly into heroism, Custer's subordinate commanders, especially Major Reno, became the fall guys. The truth is that Lt. Colonel Custer (he had been a General of Volunteers during the Civil War) would have been court-martialed if he had survived. The plan for the campaign against the Lakota had been for three columns to attack jointly.

As commander of one of the columns, Custer disobeyed his orders by not waiting for the other 2 columns and then spliting his own command in thirds. He ended up attacking with a force 11% of the planned assault force. Yet, had he shared Teddy Roosevelt's incredible good fortune at Kettle Hill and become a hero of the Indian Wars, Custer might have become President.

From Russell Sears: 

This leads to the countable hypothesis that CEOs who marry/partner with someone within the company, soon cause the company to under perform. 

Dean Parisian writes: 

My father retired from the Bureau of Indian Affairs in Crow Agency, MT in 1985 and as a kid I spent a fair amount of time at the Battlefield there as Crow Agency adjoins the Custer Battlefield monument.

The lesson here is that when you chase returns in markets you aren’t familiar with or chase Indians in country you don’t know very well there is a good chance one can get hurt. Quick and seriously. Stick with what you know and when it looks like you are out-manned, cut your losses and run. Living to fight another day is paramount. 



 I have been thinking a lot about the important problem of establishing cause and effect, since Nigel Davies brought up the topic earlier in the week.

It seems like the more complicated systems become, the more difficult it is to establish cause and effect relationships between different phenomena. Physicists often say that two phenomena are "associated", when they don't dare establish a cause and effect relationship.

But the science that really has a problem with this is biology, which studies extremely complicated systems (remember that there are more cells in your body than there are stars in the Galaxy, and each cell is quite complex). Perhaps more biological thinking would do us good, rather than the physics-like thinking often used in market modeling.

In the germ theory of disease, for example, it is very difficult to establish the mechanism by which the germ actually causes the disease. And the mere presence of the germ in large numbers is not enough to establish cause and effect. The germ may be an opportunist, taking advantage of the diseased state to increase its numbers.

Anyway, around the turn of the last century an attempt was made to make criteria for establishing this kind of cause and effect. One scheme was called Koch's postulates. Here they are in their original form:

Koch's postulates are:

1. The microorganism must be found in all organisms suffering from the disease, but not in healthy organisms.

2. The microorganism must be isolated from a diseased organism and grown in pure culture.

3. The cultured microorganism should cause disease when introduced into a healthy organism.

4. The microorganism must be reisolated from the inoculated, diseased experimental host and identified as being identical to the original specific causative agent.

I'm sure my fellow Specs can find holes in this scheme. But can we establish our own postulates for cause and effect in markets? Of course we can't "introduce" and "culture" market phenomena (much as we would like to). But maybe some other kind of formal scheme would provide food for thought.

Nigel Davies adds: 

This seems like such a good analogy. For example there are recurrent conditions in which the sufferer has occasional outbreaks of the disease.

In considering outbreaks of a market disease there might need to be the presence of germs plus some trigger factor such as 'stress'. Even then there are no guarantees.

Bill Egan writes:

Tylenol (acetaminophen or paracetamol) is the #1 cause of fatal liver failure. It produces minor effects on the liver at the recommended dosage levels (4 grams per day in adults). Fatal liver damage (zone 3 necrosis) can happen with as little as 10 grams per day. The safety margin is a mere 2.5x between pain relief and death.

Most drugs are metabolized by enzymes in your liver, so that they can be excreted more easily. Acetaminophen is not an exception. Five percent of acetaminophen is converted to a reactive metabolite that will bind to liver cells and kill them. This is normally prevented by the body's anti-oxidant defense system, a molecule called glutathione, which binds to reactive molecules and thus prevents them from causing damage. Should your glutathione levels be low (not eating right, alcoholic, sick, etc.) you will be more susceptable to damage caused by the reactive metabolite of acetaminophen because your glutathion levels will be lower than normal. Should you ingest a bit too much acetaminophen, you rapidly exceed even the capacity of the normal levels of glutathione to prevent its damage. It is like a step function.

What market mechanisms act to prevent routine damage? What is the tolerance limit beyond which they are overwhelmed? (This is a violation of Koch's postulate #1 but it is chemical not biological.)



 The sentence, "Even mathematicians don't have all the answers" is a frightening one. Mathematicians strain hard to have all practical answers. Even engineers go up a zillion blind alleys, and often don't know that the alleys are blind until they've already been announced as the answer.

"It may well turn out, of course, that what they need are more mathematicians." Heaven help IBM, and us.

The classic mid-life arc of the mathematician (esp. the pure one) goes like this:

  1. At 42 - Notice that some friends are getting rich.
  2. At 44 - Notice that zillions of "idiots" are getting rich.
  3. At 47 - Form company based on brilliant idea. Insist on maintaining complete control, to avoid corruption of idea by idiots.
  4.  At 50 - Declare bankruptcy.
  5. Later - New buyer of company makes a success out of it, sometimes a greatone.

I must admit that the high-tech age has reduced the probability of step 4 to, say, 96%. I am not writing as an outsider.

Rich Bubb adds:

Here is an article about one of IBM's chief mathematicians, and the real-world problems her department is solving. 

Kim Zussman writes:

Re: "Zillions of 'idiots' are getting rich:"

This is actually the key to everything. You will never get over how many less (intelligent/educated/motivate/ethical) people have more than you can ever hope to, and the explanations about randomness will fall on the deaf ears of all significant others.

What is much harder and more important to appreciate is how many of your betters will always live in incomprehensible hopelessness.



I suggest that learning to play a game (poker, backgammon, chess, checkers or go) might teach far more than studying game theory. The big problem with drawing boards is that there's no opponent, so ideas are never subject to quite the same level of criticism, and they do not have to be quite as relevant to the very serious matter of winning.

Adi Schnytzer comments:

Game theory is not about drawing boards. People do not study game theory to help them in their game playing, believe it or not. They study it in order to understand the process of more perceived importance than board games.

Nigel Davies adds:

Please excuse my ignorance, I am a mere player. So what exactly is 'game theory' good for? And I'm talking a usable practical application that doesn't include getting a salary for teaching it to others. Please be very specific as I am very primitive.

Adi Schnytzer replies:

I recently posted the following note, which will introduce you to game theory and comment on its uses. Since it's written by the masters, it should help you out. There's nothing I can add to their wisdom.

Bob Aumann's Nobel Prize Lecture ("War and Peace") and his piece "On the State of the Art in Game Theory" are both worth reading … He also has a piece called "Consciousness," which is rather nice. These may all be downloaded here … In my view, the least (not non-mathematical) and most intuitive text available is Luce and Raiffa.

Nigel Davies adds:

There is still the problem of practical application which is what I've been going on about from the start.

In 'A Beautiful Mind,' we see that Nash figures that he and his friends should not go for the blonde because they will block each other, and somehow or other this later got him a Nobel Prize. However, it seems that Nash thought up his 'strategy' without any knowledge of the game, and from all indications, he was a virgin at the time. This sums it up - he thought he could win without any knowledge of how the pieces moved.

In a previous discussion, I brought up a similar error by a mathematician who gave a figure on the number of possible chess games. It's obvious to anyone who actually plays and knows the rules that the number has to be infinite. The guy was so arrogant and/or naive that he didn't bother to learn the rules properly before coming up with his number.

Frankly, I have the same problem with Robart Aumann's paper. It's all very well theorizing about peace, but has he actually tried to apply this? I suggest that without knowing the territory, too many assumptions will be wrong.

If it's any consolation, it seems that Lasker had a similar problem with Einstein and the theory of relativity. In Einstein's foreword to Hannak's biography of Lasker, you see that Lasker thought that there was no justification for claiming that the velocity of light in a vacuum would be infinite, unless this had been verified in practice.

This, incidentally, was one of my few moments of agreement with the Elizabethan ghost.

Ross Miller comments:

It is worth noting that the "real" John Nash never did this, just the John Nash invented by a screenwriter who got to write this movie based on his ability to write Batman movie screenplays. The example in the movie is not a Nash equilibrium. In a Nash equilibrium, you do the best you can taking everyone else's actions as given and ignoring responses to your own actions. If everyone else goes for the inferior females, you make a beeline for the superior one in a Nash equilibrium. As stated, this game has no Nash equilibrium if everyone believes that multiple hits on the same target generates no payoff from that target, but a single hit will. Nigel is correct in pointing out that solutions to this game require thinking beyond the game theoretic formalisms.

The best reason for the Nash equilibrium to get a Nobel Prize was that it facilitated the Arrow-Debreu work on a competitive equilibrium. It was because his equilibrium is an intrinsically competitive (and not collusive) concept. The screenwriter is not to be entirely faulted since the book from which the movie was based is full of technical errors and misstatements. Of course, technical correctness does not make for bestsellers and the average moviegoer is never going to understand what Nash did anyway, nor is much of anyone for that matter.

Peter Grieve offers:

My take on game theory (based on long but elementary study) is that:

1. It's not very useful in sequential games like chess, poker, etc. In chess it might help a computer make decisions based on a look ahead tree if the branches have some evaluation number. Game theory can't, of course, actually generate these evaluations, and they are quite important.

2. It's not very useful in games in which anyone has any experience. The simplifying assumptions are too great. Once in a while it could illuminate a connection that would not otherwise be obvious. But as far as selecting a detailed strategy in a real world, complex game, it would be madness to rely on game theory.

Game theory is a lot like the rest of applied mathematics. It's really strong on the simple stuff, things where its many simplifying assumptions are valid. It can act as an initial guide when there is no experience in an area. Occasionally it can suggest something new in known areas (which must then be extensively tested by experience, and often found lacking).

The problems arise when academic folks (who mostly talk to each other) get inflated ideas about the real world strength of their ideas.

An example of a situation where game theory would be valuable is the following. Suppose you where playing a game of Rock-Scissors-Paper with a really smart, vastly superior opponent who knew a lot about your mind. How can you at least break even in this game? Game theory tells us the answer. Roll a die, if it comes up 1-2, choose Rock, if 3-4, Paper, if 5-6, Scissors (roll the die in secret, of course). You can even tell the opponent that you will use this selection method, and it doesn't help him beat you (unless he can guess the way the dice will come up). He can use this same strategy on you, making sure he breaks even, and the game is at equilibrium. This seems intuitively obvious, but what if Rock breaks Scissors wins double? What sort of die should one roll then? Game theory will tell us.

Of course if Nigel reads this, he will immediately think of several possible strategies to bamboozle game theoretically inclined, mammoth brained opponents in Rock-Scissors-Paper. But if he is to win anything, he will have to bluff the opponent out of using the above strategy (perhaps by artfully convincing the opponent that his (Nigel's) mind is "primitive").

During the Cold War, everyone wanted to hire Air Force generals with lots of nuclear war experience, but there were none (General Ripper was long gone). The think tanks used some game theory. Thank goodness we never found out how valuable it was.

Adi Schnytzer comments:

Three points only:
1. Game Theory was used successfully to win a battle in the Pacific during WW2, though I don't have the details on hand.
2. Without game theory, a simple dumb computer would never have beaten the World Chess Champion!
3. Aumann's insights on war are useful, but make sense only to those living somewhere nuts like the Middle East. Those in cocoons who believe that the problem rests in a failure to love their fellow man (read: "Liberal Europe At Large") will never understand.

Nigel Davies adds:

Without game theory, a simple dumb computer would never have beaten the World Chess Champion!

How do you come to the conclusion that 'game theory' should take the credit? Why not Faraday, Edison or Graham Bell? As far as I know, none of the programmers studied game theory, but there were a few chess players on the Deep Blue team. If game theorists are claiming this, then by the same token shouldn't one be able to claim that the big bang was only possible thanks to physics professors? Now that would really be a feather in their cap - they might get two Nobel prizes!

Aumann's insights on war are useful, but make sense only to those living somewhere nuts like the Middle East. Those in cocoons who believe that the problem rests in a failure to love their fellow man (read: "Liberal Europe At Large") will never understand.

Ghengis Khan would probably have sorted the Middle East out in no time - old Ghengis was a good player in his day. OK, I guess you're going to claim that the Mongolian hordes had their own 'game theory' which enabled them to win their battles etc. So the academics can take the credit after all …

Game Theory was used successfully to win a battle in the Pacific during WW2, though I don't have the details on hand.

As should be clear from the above, I think specifics are needed in order to see why game theorists are taking credit for this one and why it's good shooting with one's howitzers, or even luck. And how many battles were lost by the way? Or weren't these retrospectively scored?

Stefan Jovanovich adds: 

There are only two reasons why the Americans had any chance in the Battle of Midway:

(1) Admiral Nimitz trusted his Navy code breakers and their analysis of the limited decryptions they had under Commander Rochefort. By translating messages and studying operational patterns, the code breakers predicted future Japanese operations. Relying on those predictions, Nimitz sent to sea the only three American carriers he had at Pearl Harbor and positioned them on the flank of the predicted Japanese line of attack.

(2) When an American scout plane sighted the Japanese fleet, Admiral Spruance put all of the American planes in the air for an all-out attack. In terms of conventional doctrine at the time, this was a highly suspect move, and its initial results were terrible. The Japanese fleet's air cover fighters and anti-aircraft gunnery annihilated the attacks by the Marine Corps scout bombers, Navy torpedo bombers, and U.S. Army Air Force torpedo-carrying "Marauder" bombers. The Army Air Force "Flying Fortress" high altitude bombers also failed but did not suffer any losses. The next attack by Navy torpedo bombers was literally wiped out; there were no planes and only one pilot survived. Only the last attack - by Navy dive bombers - succeeded.

If "game theory" includes cryptographic analysis, then its contribution to the Pacific War effort was, indeed, invaluable; but it required the willingness of Admiral Spruance to go "all in."

Adi Schnytzer replies: 

Thanks Stefan. No, it wasn't the cryptography I had in mind. According to Careers in Mathematics,

Game theory, a part of operations research, was used to select a strategy for the Battle of Midway, a turning point in the Pacific arena during World War II. The U.S. Navy was on one side of Midway Island, and the Japanese Navy on the other. We calculated our probability of winning in the four cases of our going north of the island or south of it, and the same for the Japanese. Game theory was then used to select the winning strategy.

As I recall, breaking the codes told the U.S. where the Japanese fleet was going, and game theory told them how to place their limited resources optimally. But since this isn't nearly as important as winning a chess game, why are we bothering?



I only found one market open yesterday, and it was Israel, which was up 1.5%. One was also wondering what kind of predictions one could make, a la the probability that the team that scores first in a basketball game will win the game, and if this is connected. Alan Abelson says that he sees 2007 shaping up as a year like 2000, and he feels the sense of Deja Vu. He has been saying this 2002, and from 1990 to 1999, when he felt a sense of Deja Vu referring to 1987. And from 1964 to 1987, he felt a sense reminding him of 1929. It is insightful to see the techniques of the perfect lie, or propaganda that he uses to maintain his self image, presumably rather than to deceive his readers. His two favorite techniques are to say that he didn’t really expect the year to play out as favorably as it did or that his crystal ball has not been entirely accurate, and his very sagacious short selling friends who have not done too badly see the problems of our economy as discounted to an inordinate extent.

Gone is the old technique of saying that the market will go down without limit until the last excess of ebullience is gone. He also doesn’t use the technique of the Elizabethan Ghost to indicate that it is wrong to be always bullish because the up trend has a variance. The problem is the uncertainty of knowing when the mean and variance of the drift have changed. Presumably if the drift were 50% a year, rather than 10,000% a century, people would be reluctant to say that their fears over-ride it, and that they would prefer to be short.

On another note, I have received numerous letters asking me if the tendency for years ‘07 to be bearish is predictive. I point out that with the last two ’07s being 1987 and 1997, with returns of 4% and 20% respectively, and 1967 being up 20%, one should not place any reliance on a pattern with 10 observations that hasn’t worked three of the last four times. The same would be said for all the foolishness about the January Barometer. It hasn’t worked for three out of the last five years, and was random before that.

I see many year end forecasters are looking for technology spending to be up some 20% or so next year. One wonders what the best way to play this might be, given the relatively lackluster performance of technology in last year.

Finally, I am convinced that training in checkers is much better for children than chess, in that it prepares them better for the basic yes, no decisions of life that make up much of logic, electronics, and computers. It is simpler with a less confined rule base, with much more potential for generalization to the situations of life. It also has the virtue of not consuming so much time to become proficient, (now that it takes a football team and extensive technology and years of study to become even a competent chess player). As well as being better to learn, it’s also much less life threatening to eat a checkers piece rather than a chess piece.

GM Nigel Davies responds:

I believe this should be tested, and probably on a larger sample than exists on the list.

I do have one observation to add, and that is that the chess players who went on to become very successful appeared to have one thing in common. They either stopped playing altogether or relegated the game to the status of a very minor hobby, which rather confirms the chair’s hypothesis that it takes up too much time.

Vis. a vis. choking hazards, I found this prevention.

Peter Grieve comments:

The chess vs. checkers comparison brings to mind fencing vs. boxing. I’d rather that a child of mine would be a boxer, but I’d much prefer to be a fencer.

The late GM Tony Miles wrote a piece extolling the virtues of checkers, and bemoaning that the fan base wasn’t larger.

Most of the great Georgian (British) boxers were fencers also. I think this was very useful cross-fertilization.



One of the best books on hunting is “Meditations on Hunting” by the Spanish philosopher Ortega y Gasset (he likes it, by the way).

One of his amusing points is that while people speak of “defenseless” animals, every hunter knows that every animal has a great defense, that of being elsewhere.

Hunting really doesn’t fit into any categories. It’s not nature, because there are rules. It’s not a sport, because one of the participants doesn’t want to play. It’s not economic behavior (nowadays, anyway), and it’s not relaxation.

My take is that it’s a kind of controlled participation in Nature, where deeply primitive elements are combined with very noble goals.



Peter Grieve queries:

Sometimes you say that opponents who don’t care for their own safety are a different kettle of fish. I’m reminded of the writings of George Silver, a sixteenth century fencing master who bemoaned the rise of “Italianated” sword play, fit only for the salon. He said that to become a fencing master, a man should have to pass the following test: And this is the trial: They shall play with such weapons as they profess to teach withal, three bouts apiece with three of the best English masters of defence & three bouts apiece with three unskillful valiant men, and three bouts apiece with three resolute men half drunk.

GM Nigel Davies responds:

Seems very true of markets and I think the S&P is currently resolute and half drunk. Reminds me of Boris Spassky’s description of William Watson, an English GM who became a barrister: “He’s very dangerous, like a drunk machine gunner.”


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