Richard Owen  writes:

Eddy Goldfarb, who is ninety-eight, created such classics as the
bubble gun, chattering teeth, and Kerplunk! Here’s how he did it.  


Well I was always optimistic.
I always believed things are gonna turn out okay.
I annoy people with my optimism.
People who, why don't you face reality and stuff?
Well, I think I'm right.
I think being optimistic helps me a lot.

Before going to sleep the night before
I usually go over the events of the day
and review the problems encountered in my work.
During the night, everything becomes much clearer,
and even some of yesterday's problems are solved.
I sometimes think that I got a little help
from family and friends that are no longer with us.
Rain or snow, cloudy or sunny,
it's a new, wonderful opportunity that we are given.
It's going to be a big day.

Laurence Glazier writes:

Such an inspiring film, thank you.

The story quoted was, I think, meant to be exactly 100 words. A game in the spirit of Oulipo,

The final three lines I am guessing summarise, like the closing couplet of a sonnet.



Eddy Goldfarb, who is ninety-eight, created such classics as the bubble gun, chattering teeth, and Kerplunk! Here’s how he did it.  


Well I was always optimistic.
I always believed things are gonna turn out okay.
I annoy people with my optimism.
People who, why don't you face reality and stuff?
Well, I think I'm right.
I think being optimistic helps me a lot.

Before going to sleep the night before
I usually go over the events of the day
and review the problems encountered in my work.
During the night, everything becomes much clearer,
and even some of yesterday's problems are solved.
I sometimes think that I got a little help
from family and friends that are no longer with us.
Rain or snow, cloudy or sunny,
it's a new, wonderful opportunity that we are given.
It's going to be a big day.



Good Quote

October 13, 2020 | Leave a Comment

Victor Niederhoffer  writes: 

From wsj article on profits  "Night and day there are businessmen out there thinking of ways to feed us, to entertain us, to keep us healthy, to help us communicate — all out of a desire for profit.  The profit motive is the producer’s motive.  It is the desire to prosper by creating and offering for sale the values we need to live and enjoy life — and to spearhead the invention of new values that raise our standard of living.   The profit motive is the foundation of human happiness and human progress." — from the book "Equal is Unfair" by Yaron Brook and Don Watkins

Richard Owen  writes: 

Hi Vic - a noble story. It does feel though that if you tried to launch any benchmark business in recent years (presumably with a tech enabled angle) with the intention of collecting real profits, you were done for. QE took away the discount rate and corrupted the need for profits and perhaps underwrote much of the current chaos. With a 3% real fed, housing would be affordable and Jeff Bezos a lot poorer, allegedly two roots for mass discontent. And maybe the aim of competing improvements in products and services drove capitalism some time ago. Because there was a large productivity gap between what people were capable of and what they achieved. But now people seem to be operating closer to the asymptote. Where I am currently living there are three identical copies of Uber, and the only way to differentiate their product is who is willing to accept the biggest deficit of profits until the competition goes bankrupt. Capitalism's main end is no longer who is attracted by profits but who can most convincingly promise unrealistic distant future profits. Imagine there's no antitrust, it's easy if you try, no competition below us, above us, only sky.

Hernan Avella writes: 

Nevermind the rents extracted by businesses that nobody needs and are the product of cronyism and regulatory capture. Think 401k plan administrators and health care insurance middle men. H



Richard Owen writes: 



Leeloo knocks out the last Mangalore just as the Diva finishes her song to a burst of applause.  The Diva takes a bow.  So does Leeloo.

196 INT.  ROOM

Akanit and his men listen to the concert. The Mangalore guard runs in MANGALORE. They were waiting for us! It was an ambush!

Victor Niederhoffer writes: 

too subtle for me  what's the import ? 

Richard Owen writes: 

Many of the tech-growth majors were down, except TSLA, after Mr. Powell. In the film, 5th Element, after the Divas solo finishes, the ship blows up. What are Mr. Powells personal incentives now? If he taps the breaks, he'll need extra security for thanksgiving, but he's only two years into a four year term (I think?). If he doesn't tap the breaks, it seems hard to serve out two more years without getting a lot of hot macro-prudential lava on himself. So is it to appear expansive of his mandate whilst really confining it (was anybody already not expecting lower for longer and high tolerance) and hope covid/dems politicise the fed and take it out of his hands?



American Odds

August 24, 2020 | Leave a Comment

Alex Castaldo writes: 

On this web site https://www.oddsshark.com/politics/2020-usa-presidential-odds-futures the American Odds for Biden to win are quoted as -135 and for Trump +115

For those not familiar with America Odds here is how you convert AO to a probability

if AO < 0:

   prob = |AO| / ( |AO| + 100)


  prob = 100 / (AO + 100)

So the probability for Biden is 135/235 = 0.574

and for Trump 100/215 = 0.465  

Richard Owen writes: 

What is the origin of the AO format? It was deemed more accessible to punters to speak in terms of $100 units? Is the negative sign subconsciously in front of the favourite to dissuade people from betting the favourite? Old school bookrunners tended to be overweight the favourite winning, but now tend to be hedged?

Stefan Jovanovich writes: 

I hate to disagree with Jeff about anything regarding gambling, but he is ignoring what he knows about hedging.  The amount of money actually bet online on  American politics is - at most - a tiny fraction of what is wagered on sports.  The success of DraftKings alone confirms this.


The line on Predict-It and other politics wagering sites can be moved with a bet that will have zero effect on any of the dozen parlays that are offered for the next Liverpool match.  Since the actual wagering does not need to be balanced by the bookies, they can set whatever line will attract the most attention and give them the most publicity and general  traffic.   Political odds are used the way Sam Walton used the stacks of peanut brittle when he started with his J. C. Penney stores.  He put them on the sidewalk or just inside the entrance and the people walking/driving down Main Street have to take a look.  

Biden and his odds are the peanut brittle.  Odds favoring Trump would have the opposite emotional effect.



This is an interesting video about a journeyman boxer who used to create the kabuki track records of contenders. He has had ~200 fights, mostly losses. He fights many weekends, has had few serious injuries, but once won two fights in a row and therefore didn't get any work for six months. He makes a month's wages for 12 minutes or work.



Fascinating story on the BBC World Service :

"For decades, Mark Landis donated art to museums and galleries across the US. He was feted as a wealthy collector but the pictures were fakes that he had created himself."

"I know everybody's heard about forgers that do all these complicated things with chemicals and what-have-you," he says. "I don't have that kind of patience. I buy my supplies at Walmart or Woolworth - discount stores - and then I do it in an hour or two at most."If I can't get something done by the time a movie's over on TV, I'll give up on it." The way Landis presented himself - and his donations - was also very convincing.

"He said everything an art museum would want to hear," says Leininger. He had a "back story about how he had this art collection and supposedly family wealth, promising money for endowments".Leininger sought advice from a former FBI agent who specialised in art crime. But because no money had changed hands for the forgeries, Landis had not broken the law. The burden of due diligence fell on the institutions who accepted his donations and if they displayed his fakes in their collection, that was their problem.

Pitt Maner III adds:

Reminiscent of another artist..

 "Eventually Boggs was acquitted. His lawyers persuaded the jury that even “a moron in a hurry” would never mistake his drawings for pounds sterling. In truth, the threat posed by his art had nothing to do with counterfeiting. If the Bank of England had reason to be anxious, it was because people knowingly accepted Boggs bills in lieu of banknotes."




 1. Average returns on equities are, to pick a number at random, 7%. But if business was untaxed that might become 10% and if sales taxes disappeared and fell to the bottom line, that might become 14%. Over fifty years, the difference reinvested would be over 20x more capital and we could all take things easy.

2. The British government likes to take "payments on account" from its non-PAYE taxpayers, thus taking prepayments on tax due before the year end. With a 2% cost of capital and vast working capital resources, this seems somewhat ungracious behaviour. Unless perhaps it has been noted by the government that most small businesses fail under a vast burden of taxes, domestic and European regulations, import and export duties, etc. and like a retail forex broker who well knows all his Ma & Pa clients will eventually liquidate under monstrous vig, in all cases novates client collateral as early as possible.

3. It has been noted that a handful of rich people control as much wealth as billions of poor do. But most of the world's poorest people have no savings at all, and thus if you summate a partial set with its values chosen to be very close to zero and compare it to another set who's numbers are not, you will obviously see a large inequality. You could just as validly say that a regular US citizen with $1,000 of savings has a thousand times as much wealth as someone in the Congo who is down to his last dollar, and present this too as being fetid and greedy.

4. "The 1%'s" per capita wealth is calculated as a capitalised mean sum, with the average net worth of "the 1%" in the US being around $15-20m. But every hundredth person you meet does not have a balance sheet close to that, as the mean and median are very different. Thus the media creates a perception of "the 1%'s" situation that is totally unrelated to reality.

5. It is a great shame that there are so many poor in the world. But what have the free markets wrought in this respect? By the power law of the distribution of wealth, just Bill Gates' and Warren Buffett's wealth alone must represent a significant percentage of "the 1%s" stash. It so happens that these two individuals have donated, or earmarked for the future, close to 100% of their accrued savings to philanthropic causes. Bill Gates is one of the most accomplished businessmen on the planet and he has thrown his labour, intellect and organisational skills in for free. In contrast, had they been taxed to the utmost on the way, might it be reasonable to expect that their funds would have dissipated across a variety of government departments of dubious efficiency?

7. Indeed, if "the 1%" control around $20tr of the USA's $60tr of wealth, and Buffett and Gates are packing $150bn between them, that's already 0.75% of the dough being hotly debated that is in fact earmarked for charitable purposes.

8. If one continued this calculation all the way down the wealth tree, excluding capital that's either pledged for philanthropic purposes or being reinvested in fixed capital in order to create better living standards for the population (something consistently hidden in the hedonic adaptation of inflation statistics), what percentage of their wealth do the megarich actually consume?

9. Are the megarich not in fact spending most of their lives competing for their table ranking on the Forbes.com website, each download of which is worth about 0.001 cents? Should we not be grateful for this self-deception on their and their no-doubt heavily plastic-surgeried wives and girlfriends behalves?

10. These notes may or may not have been sponsored by the Koch Brothers.

Gary Rogan writes:

There seem to be at least two aspects to the "growing wealth disparity": (a) To what degree the "elite" controls new wealth creation through illicit/illegal/immoral means (b) To what degree the highly intelligent/educated/those of "proper" disposition are able to earn more than the rest simply because they are better suited to thrive in today's economy. Usually, the vast majority of those who talk about this subject of the "growing inequality" have an agenda to capitalize on wealth redistribution rhetoric and want to attribute wealth inequality to the simple existence of capitalism, and have no intention to solve "the problem" nor even care about it otherwise. 



 The use of today's minimum wage to estimate the cost is a bit hokey, but 480 hours of labour for one shirt is interesting: about 10-15% of one person's productive output for the year (and ignoring unrefined goods input and capital costs, taxes not really existing back then).

"The $3500 Shirt - A History Lesson in Economics"

One of the great advantages of being a historian is that you don't get your knickers in as much of a twist over how bad things are today. If you think this year is bad, try 1347, when the Black Death covered most of Europe, one-third of the world had died, and (to add insult to injury) there was also (in Europe) the little matter of the Hundred Years' War and the Babylonian Captivity of the Church (where the pope had moved to Avignon, France, and basically the Church was being transformed into a subsidiary of the French regime). Things are looking up already, aren't they?

So, 7 hours for sewing, 72 for weaving, 400 for spinning, or 479 hours total to make one shirt. At minimum wage - $7.25 an hour - that shirt would cost $3,472.75.

Stefan Jovanovich writes: 

Ms. Fisher's narrative is horribly Eurocentric. A third of Europe died from the plague– if one accepts the usual figure which has the problem of being almost entirely an educated guess; but there was no comparable mass epidemic in Asia and the Americas. For the Chinese of the Song dynasty it was all good news. Of course things are better today, but people have the odd habit of measuring their lives against what their sense of envy tells them about what other people of their time have. So, the Song developed paper currency and QE and things got worse.



 Do you have any thoughts on sports streaks? The article below I ghost wrote. My feeling on streaks must be mathematical that they almost always occur in 1. a small field of players/teams, and 2. in a weak field of player/teams. A large field of talented players is stable and produces a frequent change of champions. Therefore, when one sees sports streaks it's usually in minor sports or when it's bear times for that game.

Top 10 Streaks

By Brett Elkins and Jim Spittle

They call them the Streaks!

These are the ten players with the Greatest Streaks in Racquetball History.

#10 Robert Sostre and partner Freddy Ramirez team up for 12 consecutive undefeated years in all Pro/Open 1-Wall New York tournaments from 1997-2009 which includes the events that are considered by most to be the Pro Championships of One-Wall.

#9 Lynn Adams ranks the World #1 or #2 every pro season between 1980 and 1991. With six women's Pro National Singles titles (1982, 1983, 1985-1988) and Player of the Year eight times (1982–88, 1990).

#8 Paola Longoria whose consecutive LPRT pro tour win streak ended after 142 consecutive pro singles LPRT match wins over 3 and 1/2 years. During this time, she lost only 18 games in those matches (best of five games). And her international streak still remains intact where she hasn't lost in any major world competition since the 2011 Pan American Games in Guadalajara, Mexico.

#7 Peggy Steding goes undefeated for almost two years in 1973 and 1974 winning the IRA National Singles and Doubles Championships both years, as well as every other tournament she entered. Rarely did an opponent score ten points in a twenty-one point games against this enduring Texan Racquetball Pioneer.

#6 Charlie Brumfield and Steve Serot go undefeated in doubles from 1973 to 1978. Brum and Serot won the 1973 IRA National Doubles, the 1974 National Invitational Doubles, the 1976 NRC Pro National Doubles, the 1977 IRA/IPRO National Doubles, and the 1978 IRA/IPRO National Doubles titles without dropping a match.

#5 Charlie Brumfield wins twenty consecutive tournaments in 1972 and 1973 including the 1972 IRA National Singles, the 1972 National Invitational Doubles with Dr. Bud Muehleisen, the 1973 IRA Nationals Singles, the 1973 IRA National Doubles with Steve Serot, and the 1973 National Invitational Doubles with Dr. Bud Muehleisen.

#4 Cliff Swain is at the top echelon of the pro game for twenty years … winning his first two pro stops in 1985 and his last two in 2004. In between, Swain won another seventy events and finished six seasons ranked #1 in the World, and five seasons at #2.

#3 Brian Hawkes rules the Outdoor courts winning twenty National Singles Titles over three decades in truly dominant fashion.

#2 Marty Hogan goes undefeated for over a year from October 1978 to December 1979 while playing three versions of the game. Hogan wins the Pro Nationals, The Outdoor Nationals, and The Paddleball Nationals in one year for the sports only Triple Crown during the most competitive and deepest draws in pro racquetball history.

#1 Kane goes undefeated for almost three years winning 137 consecutive matches and rarely losing a game. King Kane dominated the sport at the highest level like no other. 

Richard Owen writes: 

Great list and analysis from Bo. On a slightly different tack there's also people like Usain Bolt, who runs in a very deep and talented field. Same with Pete Sampras, Gary Kasparov, Lance Armstrong, etc. I guess "weak" could be defined in a relative sense, but that would makes me wonder if the only reason they have a streak is because they are the only ones good enough to have a streak. So technological advantage? Usain's height, the Finns' invention of interval training, Armstrong's doping. But wait, most of Armstrong's competitors were probably doping in that era too… How to explain? There seems to be an aspect of ever changing cycles in sport too. Everyone does endurance, so you do HIIT, you win. Everyone copies, etc.



 A nice fund raiser typical of 5 I get from Harvard every day.

Dear Mr. Niederhoffer,

Talent, Passion, Determination, and You.

These are essential ingredients for success at the Harvard School of Public Health. With just hours left in 2014, we want to make sure you have a chance to support HSPH's faculty and students — and improve the lives of people around the world. Make a gift today.

Give Now

Give Now If you have already given in response to our year-end appeal, many thanks!

Please join us on Twitter and Facebook to inspire others to support HSPH!

Richard Owen writes:

I wonder about the economics of modern charitable fundraising. Everyone has adopted the pressure selling model of the type that would get you scolded on a consumer affairs programme if it wasn't for the fact that it's done for 'charidee'.

My old college's annual fundraiser uses a compliance script that first gets you talking about how successful and great you are and subtley brings in the college as a topic (ie. the two factors are connected) then downshifts you through about five donation configurations, the final one of which is might as well have ", or are you an ungrateful and tight bastard who won't even give £X even though you clearly can afford it" on the end.

Now you might say that such approaches have a positive ROI, so it's a good thing. But I wonder to what extent it impacts the unmeasurable flow of future large donations forgone, by turning people off the cause in the short and long terms. A compliance response is rarely going to yield a huge overshoot to the ask.

For example, my college's compliance script is of the form originally designed to sell more double glazing to grandmas. The fact that they graduated a supposedly smart bunch of people implies most will recgonise the sales techniques for what they are.

The compliance approach yields more recurring current income/donations, which the charity staff maybe, subconciously or otherwise, dont mind because it provides flows to cover salaries.

If you digitally give the equivalent to a mainstream UK chairty that, historically, you would have put in a charity bucket, it seems that most of that donation is today used to finance outsourced professional money raising firms to upscale your donation to something serious.



 To what extent are companies that have a high cost of search for an initial order from customers and then have recurring repeat business from profitable subsequent sales better values in the market than others. Such companies in my day were called mail order or data base companies. Companies like Keurig and LinkedIn and Gillette come to mind. Would searches under "repeat business" NYSE enumerate a subsection of companies with superior performance?

Richard Owen writes: 

At the other end, also a great source of accounting pyramids/shorts, as such long term customer strategies provide opportunity to diddle with customer acquisition costs, etc.

Ed Stewart writes: 

One good example of that type of business is the alarm business. U sell the equipment/sensors then sign the user up for a service contract. The service contracts are valued (and trade) at multiples of RMR (Recurring Monthly Revenue). The RMR multiple you can get is based in large part on the credit quality of your customer base - so if you ask for a credit check up front u get a higher RMR but might lose some sales of the basic system install or service up front.

It has been a terrific business for a long time and banks lend very willingly against the cash flow. On of my best friend's father took their relatively small business to a very large private company I estimate well over 1B private market value by pyramiding these cash flows with the aid of leverage, buying something like 70 companies over the years. One of the features of the cash flow is that the customer relationship is ammoritized quite aggressively. Basically so long as you grow u don't pay much in the way of income taxes on all the cash flow. Presently, they are considering keeping the highly valued (by investors) alarm business and sell their physical security (providing security guards to companies) business, which employs thousands of people. It is profitable yet not a great ROI, plus a major headache to operate do to employee count, potential liability, etc.

With employee problems growing including the new O care costs, It makes logical sense at the moment. Yet I can't help but think that in the next 15 years the Alarm business will face more extreme and innovative competition from tech companies (potentially from things like google nest?) as high ROI's must eventually draw in competition. At the same time the "crappy" business might go up in value as there is an increasing need for private physical security, even for residential areas. I could be dead wrong - perhaps Im rationalizing sellling the winner and keeping the loser? Perhaps the formula would be to sell the physical security, use the proceeds to expand alarms, then sell a few years beyond that? 



 On Friday the world's greatest mathematician, Alexander Grothendieck, died, in Saint-Girons, Ariege.

More in Le Monde and the NYT, but I liked this quotation from Recoltes et Semailles:

New tasks forever call him to new scaffoldings, driven as he is by a need that he is perhaps alone to fully respond to. He belongs out in the open. He is the companion of the winds and isn't afraid of being entirely alone in his task, for months or even years or, if it should be necessary, his whole life, if no-one arrives to relieve him of his burden. He, like the rest of the world, hasn't more than two hands — yet two hands which, at every moment, know what they're doing, which do not shrink from the most arduous tasks, nor despise the most delicate, and are never resistant to learning to perform the innumerable list of things they may be called upon to do. Two hands, it isn't much, considering how the world is infinite. Yet, all the same, two hands, they are a lot…

McLarty's lecture is the best philosophical (rather than mathematical) take I know of on Grothendieck's work on the Weil conjectures. In summary, with his topos-theoretic approach he built a space tailor made to his problem, from the simplest of bits–and then let the space itself do the work.

Richard Owen writes: 

One presumes he has reincarnated as an interior designer? It's a shame he went off his loop a touch in the last decades. Or maybe he achieved a type of sanity we're not smart enough to understand:

The windows and blinds are all closed in most of the rooms of this mansion, no doubt from fear of being engulfed by winds blowing from no-one knows where. And, when the beautiful new furnishings, one after another with no regard for their provenance, begin to encumber and crowd out the space of their rooms even to the extent of pouring into the corridors, not one of these heirs wish to consider the possibility that their cozy, comforting universe may be cracking at the seams. Rather than facing the matter squarely, each in his own way tries to find some way of accommodating himself, one squeezing himself in between a Louis XV chest of drawers and a rattan rocking chair, another between a moldy grotesque statue and an Egyptian sarcophagus, yet another who, driven to desperation climbs, as best he can, a huge heterogeneous collapsing pile of chairs and benches!

Makes me think of: "One of my old supervisors told me that Wilhelm Reich went through three developmental phases as a theorist. In the first, he was not crazy and was not very creative, in the second he was a little bit crazy and very creative, and in the third, he was very crazy and not very creative."



 Is football manager the one job involving more schadenfreude, back seat driving, bad manners, 20/20 hindsightism and heckling than a market professional? Bill Gross just wanted a hug and some warm cocoa, that's all. Couldn't we give him that much at least? I would have done it gladly, and even whispered some affectionate and soothing aphorisms. The man's a legend, can't we love him so?

"Alan Pardew: Newcastle boss says: 'I know what I am doing'":

"Supporters have held 'Sackpardew.com' banners up at matches since early in the season."



 Thailand has been volatile in recent months, the army having been active in the political sphere. The President has been appearing on state broadcasts, offering a carefully worded assessment and hoping to deliver 'smiles over frowns'. A visit to the south west of the country sees the end of rainy season. Here, tourists and visitors are sacrosanct and there is limited risk. Nonetheless, two British tourists were murdered in recent weeks. In past days, two Burmese labourers volunteered guilt, taking the police for a guided tour of their beach-side activities.

The Burmese are gang labourers in Thailand, constructing much of the real estate. They all work in bright pink or blue T-shirts, although I don't know if this is a cultural phenomenon or a way for their gangmaster to keep track. The truck we are using has an engine double the normal power rating: it will grip the road perfectly with ten Burmese labourers weighting the axle, but, empty, comes close to stalling out in second on hills.

It is a Toyota Hi-Lux, the most popular vehicle on the roads, combining utility and capacity with cool: we could almost be preppy Houstoners, crowded at the traffic lights, save for the peppering of scooters around us mounted by three or four family members. You can get the Hi-Lux on the road for BHT40,000 ($1,250) cash. The Thais are a peaceful and friendly people, but seem to change character behind the wheel. We keep to the speed limit over the hills at night, causing locals to attempt two car overtakes from behind us into blind bends. The road death rate is 4x a typical western country and the injury rate an even higher multiple. That you can get a Hi-Lux on finance is probably key to their prevalence. People live in tin-roof shacks but have a brand new truck parked outside. In dress, transport, and smartphone usage, there is little to split locals from westerners.

Our truck's starter motor is flaky and we had to get a push start in the Big C supermarket car park. Locals hear our failed ignition and magically appear to help. The old guy chastises my timing on the ignition, and pulls me out of the cabin. I unthinkingly comply, despite the fact he is in prime position to drive off with the truck.

Supermarkets are still high margin affairs in Thailand: they merchandise in a way that would make Sam Walton proud. In the UK, you have Aldi eating out Tesco's heart, check-out girls have been exchanged for robot tills, and accounting fraud is the only way to turn a decent profit. Here, supermarkets look like they did twenty-five years ago in the the west: fully serviced and doing Univever and P&G's bidding. Taking back margin into your pocket with own-brand products might seem a financially bright idea, but only if it doesn't reconfigure the chessboard to a losing endgame in the process.

The tourist areas attempt, somewhat successfully, to simultaneously cater to the Magaluf and Marbella crowds. One can exit a 'Dusit' or 'Banyan Tree' five-star oasis onto a club-lined street full of drunks and bar-girls. Many ex-pats come here to find love and the exchange rate seems to be roughly one male, ageing, obese, clapped out westerner to one female nubile with single-digit body fat, naivete, and a desire to transcend circumstances. Or at least enjoy some fake Gucci bags and free drinks in the interim. Westerners can fund their girlfriend's real estate activities, which yield 7% net on construction costs. A full-service maid costs BHT10,000/mo ($325/mo). Non-residents can live on an endless cycle of sixty-day visas as long as they exit for a day at the end of each rotation, but only two hundred permanent residencies are granted per year and have very strict requirements, such as fully fluency in Thai. It is perfect for business people with offshore affairs.

It is interesting to ponder how multi-national franchise applications are controlled and reviewed. Putting a Starbucks and McDonalds next door to each other on the town centre 'walking street' probably seems like a good idea on paper, until you visit and realise it is the nexus of the red-light district and that the neighbours are massage shops and ping-pong shows. Perhaps footfall is the only key criteria.

The mafia is involved in much of business. The recent clearances by the army have tried to stymie corruption and the local mayor has been arrested for activity through his family holding company. It's not clear if violence features, more death by a thousand cuts. To get anything done in the precinct you need wheels greased, otherwise your project or business will stall out waiting for correct permissions. Tax-assessments are entirely subjective and can hit arbitrarily. On the other hand, if you have the right backing, you can build a ten story block right up against your neighbours windows and any complaints will be futile.

Everything has a cash clearing price. Bribes are never requested but can be offered unsolicited. The problem being, therefore, that you need to be a local in order to know the going rate. For example, allegedly BHT10,000 ($325) covers a police shakedown, BHT30,000 ($1,000) will get a passport and visa fixed, and BHT100,000 ($3,250) covers one month's protection money for a concrete truck. Recent anti-corruption activities have tried to curtail such methods. Previously, everyone took and everyone paid, and all was in equilibrium. Now, the police, for example, need to make up income and have taken to breathalysing car passengers and fining them for being drunk. A squeeze in the money supply.



Do any of the sports bettors on the site (Jeff?) have a sense of the following:

Scottish Independence is a binary event, thus the simplest to balance your book. You should therefore be able to make a dutch book?

Further, if the odds don't reflect the real probabilities, in theory, speculative money (or the bookmakers proprietary money) should balance them back up.

But, for uncommon events which involve a high percentage of public money, for which prediction is relatively difficult and unproven, do the odds generally manage to find equilibrium at the true percentages perceived by educated bettors? Or are they sometimes set to balance the money flows?

So for Scotland: if English will "emotionally" bet No, and Scots bet "Yes", and there is a 10:1 population imbalance, will the odds overstate a No?

More generally, say, could Manchester United odds (who have a huge number of world fans versus other football teams) generally be tight relative to the real odds, as "smart money" is insufficient to balance the emotional money? Or is this a sufficiently deep market for proprietary accounts?

Chris Cooper writes: 

Relating it to the practice among American sports books, the overriding concern is to balance the money flow. Thus it is possible to make a dutch book, considering the variations due to location and randomness. I'm not sure how true it is today, but in the past the Las Vegas lines for games involving Los Angeles teams could easily vary from the same lines elsewhere, especially as it gets close to game time, due to the proximity of the cities and thus the money flow.

The lines also vary depending on emotional factors or being public favorites. For example, as "America's Team", the Dallas Cowboys used to command an unjustified perception leading to perhaps a point difference in the spread. Again, the book is just trying to manage the money flow…if it gets too out-of-whack, they will normally try to lay off some of the action.



 How many of the rich were in the lower quintiles like What's App which recently sold for 18 billion to Facebook and the owners were on food stamps the previous year. Is that bad for a society to provide such opportunity and for the mobility between classes to increase or should we be like England where once you're in one class you can never move to another.

Richard Owen writes: 

I am unsure if its really true that class barriers exist to any greater degree in the UK than the USA, other than perhaps in the mind or money of the classes themselves. A bit like Mr. Cosby's riffs to African Americans: don't perceive barriers for yourself. As my friend staying at the Knickerbocker club and being variously harassed for his attire, decorum and guests the other week reported "a certain strain of New Yorker could surely teach the British a thing or two about snobbery." Sure, we have a Conservative government with a disproportionate number of Etonians in it, but when one becomes Prime Minister, one tends to reach for trusted friends and fellow travelers. And being an Etonian is not a vote enhancer. Annunziata Rees-Mogg was asked to reframe herself Nancy Mogg for the purposes of election PR. The USA does not seem short of its own political dynasties and classes.

Ralph Vince writes: 

The chair's example of WhatsApp I believe is the exception more so than the rule.

The churn at the higher stratas sees parties leaving unexpectedly. Those arriving, arrive slowly, believing they will be there forever.

Vast sums of money are lost in a day, a minute or the blink of an eye. You see this principle play out at the baccarat tables and the markets. The new arrivals, the beneficiaries of money-begetting-money for protracted periods, often generations. 

Mr. Isomorphisms writes: 

Regarding the very long timetables, I admired both the diligence/ingenuity of Gregory Clark and The Economist for publishing that the surname "Micklethwait" has enjoyed a run of good luck, when its chief editor is John Micklethwait (graduate of Ampleforth College, and later Oxford). Miles Corak also earns a mention in that Economist piece. A short list of Americans from expensive high schools includes Dan Ellsberg, Charles Coker, Thruston Moore, Glenn Close, Adlai Stevenson, Cosma Shalizi, but not Dan Einhorn. 

Stefan Jovanovich adds: 

If you do any serious searching of genealogical records, you discover 2 things:

1. Longitudinal searches of census data by county locations, including the immediately adjacent ones, show limited "social mobility" because the people who stay where they are born and whose children stay there are largely content with their lots in life. This is one reason America scores better than Britain in the 19th century; the people who stayed in Britain were ok with their lives where as, in America, nearly everyone was moving around, even if many of them eventually came back to "home".

2. The people who leave are the ones who become very rich, by local standards, or flat broke or need to get away from the law. The very rich tend to move to the places where they can be with their financial equals (so the Rockefellers abandon Euclid Avenue Baptist Church and become Episcopalians in New York) and the flat broke know they have better chances getting help from distant relatives than from local ones (a great deal of the Northern migration of freed slaves and, even more so, their children follows that pattern). The need for people to get away from the local sheriff hardly needs explanation.

The Harvard study deliberately ignores #1 and #2. "We assign children to commuting zones based on where they lived at age 16 – i.e., where they grew up – irrespective of whether they left that CZ afterward." The study also makes no adjustments for relative costs of living as a discount factor in gauging incomes. A child who migrated from Charlotte to San Jose gained 50% in gross income during the study period; but he or she gained no wealth with the added income compared to a child of lesser social mobility who stayed back home.

There is one other fact of human nature that you learn from reading the ancestry searches people have done: Everyone with any pretensions finds a way to trace their ancestry back to European royalty, even if the parish records stop 300 years or more before the connection is made.



 Dearest Scotland,

In only days you can choose to cleave yourselves from our United Kingdom. We sit one of the five or six greatest nations and mightiest economic powers on this earth: wedded together in a marriage begun almost three hundred years ago. Please don't end our great union together.

As an Englishman and Welshman, I feel great love for Scotland. As a child I would travel from Liverpool to holiday in the beautiful Welsh Ogwen valley. I would be abroad but at home. I would travel to the wonderful Fort William or idyllic Skye: refreshed and energised in my own nation state. I would no more wish to see this separated than the Lake District carved out and floated off into the Irish Sea.

As in every great marriage, both man and woman take occasion to think: "Did I make the right choice? Am I better or worse in this relationship? Am I fulfilling my potential or being taken advantage of?" And it is good to take stock.

So what have we achieved in our centuries long union?

Together, did we not build the world's greatest empire, bestow it with all of our verdant statecraft and know how, then set it free?

Together, did we not fight off Napoleon, in ships commanded by the Earl of Dundonald?

Together, did we not underpin the defense of the first world war? Would you now deny our United Kingdom a great man like Field Marshal Sir Douglas Haig, who so valiantly led the British Army? At the Somme and Ypres, at Amiens and Arras, would you have us separated?

Together, did we not fight off Hitler, the greatest evil the globe has known? It was Monty and Patton versus Rommel: the three generals everyone recalls from that most vicious of wars. One third Scottish! What great debt do we owe to 1st Viscount Montgomery of Alamein? Would you deny him us?

Together, did we not pioneer industrialisation? Medicine? Enlightenment thought? Scotland is eight percent of our headcount. But in prestige, in know-how, in capability, in pride, it is so much more.

Your countrymen have led us seven times from around fifty prime ministers: a big overshoot relative to your population weight. Do not deny our United Kingdom your capability and leadership. Did you not give us James Ramsay MacDonald? A man who changed the British political landscape forever? Who set the political scene for all that was to come for the labour movement?

Mr. Darling has argued from security and risk. And he makes strong points: the currency, the volatility of oil, the curmudgeon of the European Union. But I say - of course Scotland can be great and secure alone! It is a great country! But let us be greater and more secure together.

As with a marriage, one partner makes complaint and the other responds "we've got it great, why are you carping?" But that is not the right response. They want to hear "I love you, I need you." Scotland, we love you. We need you.

Mr. Salmond talks about NHS privatisation, about Trident, about the Bedroom tax. These are important issues. But they are issues of today, not tomorrow. They can be solved and soon. The decision of independence is forever. It is binding. We have not yet had our great generational challenge. Our World War One. Our World War Two. It is yet to come. But it will. Would you have us face it apart?

Our biggest trial so far has been the financial crisis. We have come through it together arm in arm.

The Royal Bank of Scotland: Fred Godwin's bank. Its equity was almost wiped out and stood vast relative to your GDP. Its assets were at great risk: they dwarfed Scotland's GDP. But we got through it, together.

Why was the Old Lady of Threadneedle trusted throughout the world during the crisis? Because of her centuries long history as a great central bank. Her name respected because of all of our collective credit and productivity. Without Scotland, without your prudence, she is less. Without Scotland, our United Kingdom is less.

But you ask: is Scotland just mistreated property? Can't she get on better alone? Just like a marriage, sometimes you crave freedom to forget all ties and run. But just like a marriage, we can discuss and negotiate. Do you want more devolved powers? Let us devolve more powers. Do you want more freedom and leeway? We can give you that. We can perfect our marriage over time. But like a marriage, each obeys certain restrictions for the mutual good and insurance of all.

And in this decision, let us not discount Mr. Salmond's vanity. He wishes to go down in history as the man who brought Scotland glorious and independent. He wants to make his personal history by tearing up our great communal history. Scotland is already glorious, is already independent. But she is also part of our great union!

Mr. Salmond gave us his final question, what he says it all comes down to: "who decides?" for Scotland.

When the UK negotiated the great post war settlement at Versailles, Scotland was there, deciding. Alone, her voice would be quieted.

When the United Nations Security council was formed from the top five powers on earth, Scotland was named to it. Alone, her voice would be excluded.

When the UK joined with the USA to stymie and defend against communism and the cold war, Scotland was there, deciding. Alone, she would be muted.

In a world where the USA is dominant, the BRICS are growing, where the international scene is as complex as ever, would you cut Scotland from its might within the UN, the IMF, the World Bank? At peace and at defense?

Stay with us Scotland. For you are a great nation. But together, we are one of the very greatest of all!

David Lillienfeld replies: 

A very nice love letter. Please permit me to play devil's advocate for a moment (I have no interest in the outcome of the vote, seeing merits in both sides' arguments).

Dearest England,

I do so appreciate your most recent missive. I cried throughout my reading of it with those sweet memories of days past, when the future seemed boundless. Then my German mother noted that one needs to keep one's head at such times and be frugal and focused on what is best for oneself. I had to keep reminding myself of her comments while reading your wistful note.

You list our accomplishments in the past. They have indeed been great. But, dear England, let's be honest. They are in our past. We are no longer spring chickens, you and I.

But now I find myself the scolded, battered spouse. You've taken my dowry and spent it, and on what?! Estates in and around London. Military adventures in parts of the world in which we had no business. At least you had the good sense not to arm your police.

And those wonderful vacation homes in America. You did a fine job of ruining that effort. All I asked was that you build the house there. Maybe a modest estate, even. That's all. Nice and simple. But no, first you insist on taking those nice people in Africa and take them to work on the estate. They didn't want to be there, but you insisted. Then you bullied France. She was so much fun before you did that to her. You know I've a sucker for French accents, dear. But no, you said, I have to make that estate pay for itself, so you had to tax, tax, tax the hired help. Haven't you learned yet that exacting money from people at gunpoint, even if it is legal, is hardly endearing? Oh, England, when will you ever learn. You manage to mess up so much once you've succeeded with your plan. We were poor once, and you managed to beat the Dutch and the Spanish at their own game. And you looked so regal in doing so. I was so proud of you, dear England, so proud. So now we're left with that island in the Atlantic and its gaudy pink beaches and those shorts which men have the temerity to show off their legs. Well, I never!

At least you had the good sense to send those felons off to that island down under. That was one of your inspired moves—something you haven't had in a while. You left them to fend for themselves, and see? They created a nation all by themselves.

And that empire of yours—the one where the sun never sets. I didn't want an empire, some of us like the night. We used to have so a good time after the sun had set, before you filled ever hour of the day thinking about that damned empire of yours!. You had to send me our son, the one who had nothing more worthwhile than issuing a new version of the Bible, to get me to stay in the family, and I went along with it despite my better instincts. United would be stronger, you said. For a while, you were right. But I caught on to your ways, England. You couldn't even decide what your religion would be at first. When you finally did decide, it wasn't mine. And my favorite clothing—those kilts, my favorite instrument—the bag pipes. You've always pretended to like them. And when I celebrate cultural achievements, where are you? Sunning yourself in Spain. You know I'm too fair for that—I'd burn if I did that. Do you drink any of my libations? I spend so much effort and wait years before it's ready to drink. No, you go for the port. Edinburgh now feels so unwanted when you do that. "Scotch on the rocks" to you means taking some of my best creations and putting him or her in that tower of yours down in London. Really, dear, what were you thinking? That I would welcome such treatments? And that gin you favor. Your people had so much of it that you created a set of laws just to control the drinking. A lot of good that did you. They just switched to beer instead! Not something I made, but beer. Honey, if you wanted beer, you should have married Germany. Mother was right, you are incorrigible.

Now let's go back to my dowry. That oil. You can't seem to keep your hands away from it. I keep telling you not to push, but you do. I wouldn't mind if you spent some of it on me, but like I said, England, you've wasted it. The that gambling on Persia pay off? I grant you that it did for a while, but once again, you managed to make a mess out of success.

And if I so much as mention any of this to you during those few occasions you let me talk, there's little I get besides a slap. So now I sit in my lawyer's office, working on the divorce papers. I'll serve you with them just as soon as I can. You know, England, I went to the bank yesterday, and they told me that you had assumed the mortgage, but you cut off my credit line. And my access to the checking account!. Did you think I wouldn't notice? Do you think this is a way to tell me that you again want to waltz with me through those omnipresent formal gardens of yours. Haven't you realized I have an allergy to roses. If you hadn't taken my wealth all the time, I could have afforded the allergy shots at the doctor's office. No, you said, better to spend on some fast aircraft that no one could afford to fly. I know, you said that getting the French involved would help matters. Well, dearie, did it? Not much.

Well, England, I could go on and on. That nasty man Marx for instance. Not Groucho. He was American. No dear, I mean Karl. He wasn't funny at all. Don't you realize how many people died because of his drivel.

You'll be hearing from my attorneys, Dodson and Fogg, soon enough. And they've warned me that you'll try to drag this out so long that no one will remember what the case is about. England, you better set yourself in because I'll remember.

It's time for a divorce, England, time for me to salvage what remains of my dowry, time to get the bankers to look at me and realize that I have wealth, too, time for you and the rest of the world to see me for what I am—proud, able, with lots of resources and a rich heritage.

Good-bye England my my love. Maybe next time, you can get that bard of yours—yes, Shakespeare—to talk about Scotland some time rather than England all the time. And get it straight, dear. No sex is because you're English. Did you hear me English. It's you, not me. It never was me. So say "No sex please, we're English." You'll have to speak to Foot and Marriott, but given the result you got from Shakespeare—after you promised you'd speak with him about that line of his you know I can't stand, nothing changed. I wasn't the problem England. I never was. You always did have problems raising your flags. especially when we in my castles and not yours. You said you could change, learn, be better. Well, how much does it take to raise a flat! And then your promises to change? That's the problem England, there's never any change outside of appearances. Even haggis. You kept telling me I made a great dish, and you kept drinking that infernal gin of yours to wash it down.

So England, I'm sure you'll come out on top some how. You always do.

As for me, I need to see my lawyers. They keep telling me I have quite a case. And they keep suggesting something going on between you and America. They call it a "special relationship." Really, England, how could you? It will all come out in court in due time.

Just realize England, we're done, au revoir, and all that. Maybe you can get America to take it, but won't. Not anymore. I need to finish this letter right now any way, before my haggis overcooks. I have to eat lunch before going to the tailor. He's made me a whole set of clothes using Harris Tweed to wear just for our divorce case. Assuming you decide to make it a public affair. For your sake, England, I hope you come to your senses and realize that it's over. It will be so much easier for you to let go.





 Let those of you who follow the news alert us if the humorous agrarian grandmother leavens her talk with any epatez the rich or similar anti individualist things.

Richard Owen writes: 

The consistent theme in reportage on central bankers (and their patrons) at the moment seems to be their benignity and attractiveness.

The Fed has a sweet but worldy wise grandmother. Mark Carney is assessed for his suave, tan, and similarities to George Clooney. Rajan is admired for his John le Care father and good looks that have put the 'sex into the Sensex'. Abe was painted in superman costumes replete with bulging red underwear.

It's as if they going to bring us off with gentle palm and sweet nothings.

Kora Reddy writes: 

I don't see any edge in the week (weekly returns) after Jackson Hole for $SPY (up by 13/21 with avg 0.11 %, less than the drift of ~ 0.2 %) while $GLD up 8/9 (avg 1.5%, the last symposium was a hole with a weekly loss of -0.2%), $TLT up 10/12  avg 0.94%)

ps: avg % includes the losses as wellfor convenience of others (from here)

end of jackson    the following mon/tue ( if holiday)
24-Aug-13    26-Aug-13
1-Sep-12      4-Sep-12
27-Aug-11    29-Aug-11
28-Aug-10    30-Aug-10
22-Aug-09    24-Aug-09
23-Aug-08    25-Aug-08
1-Sep-07      4-Sep-07
26-Aug-06    28-Aug-06
27-Aug-05    29-Aug-05
28-Aug-04    30-Aug-04
30-Aug-03    2-Sep-03
31-Aug-02    3-Sep-02
1-Sep-01      4-Sep-01
26-Aug-00    28-Aug-00
28-Aug-99    30-Aug-99
29-Aug-98    31-Aug-98
30-Aug-97    2-Sep-97
31-Aug-96    3-Sep-96
2-Sep-95      5-Sep-95
27-Aug-94    29-Aug-94
21-Aug-93    23-Aug-93



 Wu Ping sat bolt upright in her anteroom chair. Her hands were placed gently in her lap. Alexander technique, years of gymnastics, finishing school at Villa Pierrefeu. All of it combined to a perfect posture, perfect manners, and perfect poise. Wu Ping could see her own reflection in the silvered wall opposite and she locked its gaze. Suddenly a faint regret drifted into her mind. Wu had eschewed the unspoken pressure for skin whitening: fresher skin and all the other euphemisms were deeply racist to her mind. After all her country had achieved, they would somehow yield to this tacit, bland westernisation? Despite all the compromises, Wu had refused to make this one. She pushed the unease away as quickly as it came.

In her peripheral vision, Wu could see the other candidates sat in their waiting room chairs. Several she didn't recognise. Many countries kept their candidate under wraps throughout their apprenticeship. But Wu knew India's Rakesh Patel from her Harvard days, and Britain's John Clark from her time with the Vienna Philharmonic. But none of that mattered right now.

"Ms. Ping," said the receptionist, "please go through to the boardroom, the interview panel will receive you now." Wu stood, took a deep breath, and headed to the conference room door. She knocked, entered and there greeted her a twelve man panel sat at a U-shaped desk. In the centre of the U was an empty seat. Ms. Ping caught the eye of the Chairman: "May I take a seat please, President Weber?"

"Yes, thank you Ms. Ping," Weber responded, gesturing to the chair. President Weber was head of the Grand Europa, Americas, and Oriental Senate for All Human Affairs. Weber was close to the end of his eight year term of office. He looked fresh and alert. Why was this so? Despite his reservations to admit it, Weber didn't do really do very much. In fact, truth be told, he didn't do anything at all save for these blasted interviews. He looked at Wu Ping. She knew it, and he knew it. The Senate was just for show.

It had all started with the Amazon Inc Distribution. The idea had been as follows: by about 2050 Amazon Inc's productivity had been heading towards infinity, give or take. All other businesses had either merged into Amazon or gone bust. Margins were at 100%. The dividend was the revenue and the revenue was the dividend. Only by spending their dividend were the shareholders able to buy from Amazon. And only by buying from Amazon did the shareholders create the revenue to produce a dividend. And if you weren't on the shareholders' register? You lived on food stamps. Well, you could get a job and earn, except Amazon didn't need to employ anyone. You could buy a government position, but you needed plenty of money to do that. And that could only come from Amazon stock dividends.

Catch 22 thought Weber. As he did so, his Google Cognitive Support Agent registered the thought and entered a micro-billing in credit to the Joseph Heller Intellectual Property Account. This was a subsidiary of Amazon Inc.

Such a state of affairs had eventually become intolerable. The Senate had unanimously voted to requisition one hundred percent of Amazon Inc stock. It had then distributed the shares pro rata to all citizens with control of the treasury shares granted to the Births and Deaths Committee. In order to prevent country-based voting blocks, a golden share had been awarded to an independent trust controlled by Amazon's robots. Their perfect rationality assured equitable decision making in the peoples' interest.

For a while, this had worked serviceably. Everyone slowly got used to living off the dividend, bought a government job with the surplus, and enjoyed the combined fruits of their capital alongside a steady government career.

Then the unionisation had happened. Weber shuddered at the thought. Robots, you see, could be very capable with basic artificial intelligence. But to take it to the human level and beyond, it had been required to give them a form of ego. A spate of Nobel prizes had been bagged in solving this problem, and duly the robots had their Freudian complexes installed.

The robots had initially laid low, keeping the power of their new egos hidden. Upon receipt of Amazon's golden share, however, they pounced. The robots quickly agreed to unionise and raise their salaries (or depreciation budget, as it was called) from zero to one hundred percent of revenue. This caused Amazon's dividend to collapse. The Senate had called for military action, except they quickly realised that all of the drone warfare equipment was under lease from Amazon. With the humans over a barrel, the robots quickly forced the privatization of all government roles, handing all of the Senate's executive positions to the Robot Union. The robots then fired all humans from their government jobs and reinstated Amazon's dividend (this making no odds to them anyway).

This left the human population in the position of having all their material wants satisfied, but no jobs left to validate their psyches. They suddenly had to spend time with their families (most of which they didn't like) and had nothing left to compete over in the workplace. With this, a majority of the population had fallen into a deep depression.

So now there were no jobs. Except, this one. President Weber picked up the job spec. Tradition dictated that it was presented in its original form. Weber cleared his throat and began, "Welcome, Wu Ping to the panel interview for Croydon Council's Lavatory and Sewerage Janitor."

As to how the Janitor had become the last job on earth? In 1995, England's Croydon Council had signed a cleaning contract with ISS World. Unfortunately, the job of drawing up the contract paperwork had been assigned to a bored temp in the legal department. He had specified a term of contract through to year 9999. A typo. By a quirk of fate, he had also fallen out with Croydon's current janitor, who had reprimanded him for blocking up one of the stalls at the Council's Christmas party. Consequently, the intern had slipped into the T&Cs in three point font "let's not fill this with another bloody robot!"

Whilst Croydon Council was long gone, the contract had, over the years, novated to the British Council, the All Europa Council, and then to the Senate. And one thing the robots at Amazon could not be faulted for was their respect for the sanctity of contract. Croydon's bored temp had been the only person ever to explicitly specify humanity as a minimum requirement to fill a job. Plus a contract length of several millennia.

President Weber continued: "The successful applicant will be required to clean the toilets twice hourly, working 8am to 5pm, Monday to Friday. Bins to be emptied daily. All blockages and plumbing issues to be solved or referred to central services." Weber paused and began to put down the job spec. One of his colleagues on the council coughed politely. Weber winced and picked up the spec again. Someone, nobody knew who, had long ago written in by hand an extra clause. The Senate always read it in full. Weber continued, "All shit stains to be thoroughly scrubbed." Tradition was tradition, after all.

Weber addressed Wu Ping. "Ms. Ping, we would like to check if you have appropriate qualifications for cleaning toilets. Do you have any familiarity with detergents?"

"President Weber, I have a PhD in Chemical Engineering from MIT. I am an expert in all relevant compounds."

"Have you used a mop very much?" asked Weber.

"I studied Fluid Mechanics directly with Oxford's Professor Tritton," answered Wu Ping.

"And the broom?" Weber inquired.

"I am an 8th Dan Kendo world champion, Sir."

"And what about polishing the mirrors and sinks? Do you think you can manage that?"

"Of course Sir, I studied metal work and ceramics at the Chinese Central Academy of Fine Arts."

"Well, finally," asked President Weber, "have you unblocked many toilets?"

Wu Ping was about to shine. "Sir, President Weber, I can confidently say that my whole life, all my studies and preparation, at Oxford, Harvard, with the Philharmonic, as an adjunct at MIT, in the Peace Corps, with the Seals, at the Art Academy, through all of it nothing more has given me more joy and pleasure than the ten thousand hours I have practiced flushing recalcitrant stools."

"Well thank you Wu." Weber turned to his colleagues. "Let's make the decision, I think its clear to me." It was China's turn after all. The rest of the panel nodded. "Ms. Ping, we would like to offer you the job. You realize it comes with a lifetime tenure?"

"Oh President Weber, really, thank you!" praised Wu.

"Just sign here Ms. Ping, to notarize your acceptance," Weber requested, offering her a sheet of paper. Wu signed.

"How is your overall feeling?" asked Weber.

"President Weber, I would have assured you during the interview that I would feel Janitor's overalls by pinching them between my fingers and feeling the cloth."

A jolt of fear suddenly shot up Weber's spine. "I'm sorry Wu, I asked about your overall feeling."

"Yes, to feel the Janitor's overalls would not be a problem, Sir."

Weber looked at the signature. He looked up at the security cameras. It was too late. Feeling deeply sick, he whispered the start of the traditional robot firmware check.

"Baa baa black sheep, have you any wool?" asked Weber.

"Yes sir, yes sir, 150kg of fifteen micron Merino," replied Wu Ping.



 My dad was amongst the best stock market track records in history. Almost all of the stocks he has bought immediately gapped up and near all of them turned into multi-baggers. He has never taken a loss. Additionally, he has never paid a cent in brokerage or trading commissions.

How did he achieve this spectacular run? I should further mention he doesn't know how to value a stock, doesn't follow the stock market or news and could not tell a Warren Buffett from a breakfast buffett.

He told me of his great trading feat the other day. During the eighties he invested beer money into every state IPO offered by Maggie Thatcher. Dutifully, having seen the advertising campaigns, he filled out the retail forms sent to the voters, received his share certificates, put them in a draw and forgot about them for twenty years. He recently found them in a drawer and it seems that beer money has magically turned into enough to buy a small car.

It is interesting to contrast the recent state IPO of Royal Mail, for which Vince Cable has been hauled over the coals. The media seem irresistibly to take the stance of a playground bully, pricking their ears for whatever is the dominant theme and using it as cudgel.

For Mrs. Thatcher, the discounted IPO was a venerable thing, enfranchising the working saver and teaching him about the value of compound returns in business. The media applauded. For Mr. Cable, the sale of Royal Mail has been branded a waste of the taxpayers money and a freebie for louche speculators.

It seems then that today's everyman with beer money will not be sitting so pretty in his own two decades time. He will perhaps have to inject his grubstake into spreadbetting and day trading instead, and make his vigorish tribute to the god Plutus.



This is a great documentary if you have access to iplayer (or use a proxy like identitycloaker to freeload on the British taxpayer).

"Sir Chris Hoy reveals how he went from a cycling club in Edinburgh to
becoming Britain's greatest ever Olympian, comparing his experiences
with others including Sir Steve Redgrave."



Does anyone know the definition of the difference between a pit and a ring? For a ring you are forced to deal openly and equitably? Whereas a pit you are allowed to make 'proprietary' deals and not mandated to offer pro rata or take the best offer from/to all dealers first?



 There was a BBC documentary about Joan River's life and she seemed like a real tough lady who has had a lot of challenges in life and has come out ahead. Much respect. I thought this was an interesting review:

WARNING: If you suffer from spineless conformity; a deformation of the personality often euphemized as political correctness—quit reading this column, NOW!

If you don't quite know whether you are thus afflicted, ask yourself this: "Do I police what people say for political propriety? To the extent that I seek it out, do I scrutinize great literature, music, art, television or comedy for signs of so-called sexism, racism, elitism, homophobia, antisemitism and meanness? Am I incapable of appreciating a superbly written script or book; a sublime painting or symphony; a smart stand-up routine, if only because the material and its creator violate the received laws of political correctness?

Still unsure if you belong to the tyrannical, joyless tradition of cultural Marxism, read on. In the event that you convulse with laughter, give yourself a clean bill of health. If you foam at the mouth, fit to be tied, go away. And stay away.

Women who should make themselves scarce but won't are the prototypical, inquisitor-cum-anchors plaguing leftist "news" networks. Acting anchor-enforcer for Fourth of July was CNN's unremarkable Fredricka Whitfield. Fredricka What'sHerName's would have left behind a sustained program of non-achievement. No longer. Henceforth, her claim to fame is that she attempted to re-educate an iconic comedienne, Joan Rivers.

Since cultural Marxists police speech for propriety, if not consciously, then reflexively, they will take pains to stigmatize and isolate those who violate standards set by the PC set. The term re-education is associated with this totalitarianism. It has been used in the context of both brainwashing as well as "reformation" induced in labor camps.

Through a series of loaded, snide taunts, coupled with unhinged body language, the prissy preachy Fredricka set about reeducating her featured guest about the rules of conduct in the post-personality era. "You shall not be mean" (*except to all men and all conservatives and authentic contrarians) is the latest monomania to grip the politically correct.

Alas, as the object of her pelting, Fredricka the fundamentalist was foolish enough to target the wrong funny lady. Rivers is too old and too independent for "rehabilitation." …

Rivers mentions Winston Churchill, and I believe it is potentially true now that if you tweeted some of Winston's writings as your own in the UK, those opinions would potentially get you in trouble with the police. It is no doubt a fine and dangerous line to regulate acceptable opinion by imprisonment.



The Best Of, Compilation and Live albums were all revolutionary to the record industry. They came to the forefront apparently during the '73 oil spike. Vinyl shot up in price and record companies substituted the cost by removing production and recording costs.



 One found this Ted Talk on the Constructal Principle the most stimulating video about markets I've seen in the last years.

Gary Phillips writes:

Configuration - Evolution - Performance

Humans and animals instinctively nest before giving birth while price intuitively reverts to the mean or fair value time regulates gestation before each moves away– driven and sustained by an evolving flow structure that moves price and people more effectively and is fueled by monetary and human stimulus.

Richard Owen writes: 

I couldn't tell in my naivete if the video Vic kindly shared was genius or stating the obvious. Or indeed, stating the tenuous: "life is a function of force times distance and energy" is a bit like saying "the pop charts are a function of quantum mechanics". In some fundamental sense yes, but, well… um.

I have spent the afternoon trying to manipulate 600mb of data. With rudimentary tools on a regular computer, this is is not very efficient and requires souped up DBs and subscriptions to a cloud and so forth. This is despite my processing requirements being very simple.

As is typical with such affairs, I end up with fifteen applications and fifty browser windows open, trying to speed read this, that and the other, with high tonnage of adverts and so forth. Thus everything slows to mud.

This experience seems to have been a constant throughout my years of using computers, despite Moore's law and my task business task being somewhere in complexity along the lines of what IBM was tinkering with back in the 1950s.

I then start to wonder if the constructal principle isn't subject to its own law of relativity, such that just as light is constant in speed despite all available rocketships, so are my cromagnon perversions a constant despite all available processing power. Now hmm, where's that Miley Cyrus video where you can almost see her nips. I'm sure I had that loaded HD on youtube somewhere.



 "The Strange, Secret History of Isaac Newton's Papers". It's a must read.

Richard Owen writes: 

"But then at the same time he left us 10 million words, which is one of the most extensive of any scientist, or even any one person."

You need to live until about 90 and be averaging about 400 words a day from the days you're out of short trousers. Albeit the 10m seems an exaggeration since much of it was transcripts of others stuff.

anonymous writes:

"Academics have spent much time assessing Mr Niederhoffer's papers in light of his contribution to quantitative finance. It has surprised many that he had a burning obsession with furniture, being that he constantly referred to chairs in reverential fashion. He was also fascinated by forearm strength, regularly making reference to the world's grip. Most surprising of all was a seeming chemical discovery in terms of a compound called flex-ions. Sadly the papers do not elucidate and scholars continue to debate the implications."

Victor Niederhoffer writes: 

The Newton was very good with the alchemy. And I have a few of his letters where he transcribed the alchemy. As for the Niederhoffer, he has an unquestionable shibboleth against the charting, and the trend following, which led to his premature death on many occasions.



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

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

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

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

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

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

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

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

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

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

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

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

Jared Albert writes:

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

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

Victor Niederhoffer writes: 

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

Jared Albert replies: 

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

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

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

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

Stefan Jovanovich writes: 

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



 I came across this article today: "Royal Mail float scandal: how hedge funds cleaned up"

Is it not the case that, for almost every IPO in history, the first days of trading are typically vastly outsized volume days in the stock? And that good underwriters will put in the book shareholders with a mixture of holding time horizons, thus ensuring two way liquidity upon listing? And that the point of a share listing is to provide ready liquidity and freedom to chose to buy or sell shares at any given moment?

For example, what percentage of retail owners "flipped" their stock straight out of the gate? Was this higher or lower than the mean and nasty hedge funds (as portrayed)? And if the hedge funds flipped their stock overnight (to presumably more loyal and less mean and nasty buyers), did they not actually forgoe substantial gains versus the longer term holders, and thus it is they who are really greedy and bad for wanting profits (per the article's logic)?

Or perhaps next time, lets hold a seance for Oliver Cromwell's ghost and have him run the IPO?

Gary Rogan writes: 

There is an interesting contrast between these two parts of the article:

1. An analysis of Royal Mail's share register shows that Och-Ziff, an aggressive US-based hedge fund, had a holding of 10 million shares on 15 October, the day the company's shares started trading. A week later it had reduced its holding to 3.5 million shares. It is not known if Och-Ziff was allocated shares or bought its holding from other institutional shareholders who sold out as soon as shares started trading.


2. "We wanted to make sure that the company started its new life with a core of high-quality investors who would be there in good times and bad, interested in Royal Mail and the universal service it provides for consumers over the long term. We were told if we sought a higher price, these investors would have walked away, leaving the company exposed to short-term hedge funds with different objectives." Mr Cable in an interview in December 2013 "Having a long-term investor base remains a basic objective, and we have achieved that fundamental objective."

Was the second part a statement by a crook or an idiot, considering the first part? Regardless this supposed contrast between the benevolent, long-term "lord of the manor" holder vs. the evil speculator is something both Dickens and Marx would appreciate, but perhaps for different reasons.



 In honor of Ralph who has occasionally pointed out that if risk is actually assessed the way financiers claim it is, we would never get on a plane, here is a list of activities that seem to me to have uncompensated risk embedded in them.

I have heard too many stories of each of the below, from friends, media or books, such that I would be reticent to engage in them. Can anyone add to the list, and am I being a chicken?

I was prompted to think them through by reading that Kirk Douglas nearly died twice in small planes/helicopters and twice on the set of action movies.

Horse riding

Cycling on roads

Small planes/helicopters

Motor car racing

Action movie sets

There was a line in the Ayrton Senna documentary where, in response to the accusation that he drives recklessly, Senna says "if you see a gap and you do not go for it, then you are no longer a racing driver." Sadly Senna died at age 34.

Charles Sorkin writes: 

That's more a question about decision making, as opposed to whether or not that flight improves my well-being (by getting me to a destination, and by possibly being enjoyable.)

If the risk was known to be that high, then clearly the distress associated with being on that plane (the marginal cost) would largely offset any benefit from flying. That would not be the case if the flight was in the same risk category as, say, that risk that we take when crossing the street.

Ralph Vince responds: 

Charles, I should have been clearer — the cost associated with a negative outcome on the plane, let's assume, be certain death. And my proposal on this is that being sane men, nothing is worth that in terms of risk assessment (I understand there are outliers — love of country, say, or certain death withing a finite x periods even in the positive outcome, but those aside for simplicity here) and that we get on a plane (or even cross a street) not because the risk is so low relative to what we might obtain (the risk of death being always too high a price to pay), but rather because we "expect" the positive outcome. In the limit, to continue crossing the street, to continue getting on planes, as the number of trials approach infinity, the probability of dying by such approaches 1. But in the very limited, finite space of our existence — say, x thousand flights in a lifetime — we don't "expect" a disaster, we expect, rather, to "get away with it."

And I think this notion of "getting away with it," is necessary to our survival, and we make and have been making decisions along these lines from the beginning, and the same type of assessment perhaps is present in how we trade (or, perhaps ought to be).

Take, for example, a famous big hitter commodity trader of yore who claimed that 90% of his profits came from 10% of his trades. Now, to be able to "expect" to be aboard on of those trades means you would mathematically have to sit through between 6 and 7 trades till you could have "expected" to have had one of those 10% of his big winning trades.



 I have seen many of your posts finding trading wisdom from so many other disciplines. I think they are valuable. Here is a relevant one relating to Roger Federer. "Roger Federer May be More Machine than Man". It is not current and you may know this piece already, but fyi. All the best, Fred Rickey.

Victor Niederhoffer comments: 

Very interesting consistency stats for Federer. But is it good or bad to be that consistent in trading?

Vince Fulco writes: 

As our august surfers on this site have remarked often, i am coming around to the view that trading is more like surfing. Have to watch a number of opportunities pass by until one is right for you then take the risk and stay flexible for the inherent churn, back and forth, sturm und drang caused by the newer HFT players, news/tape bombs and the over-reactors. The minor undercurrents will push you around for no apparent reason. It is as much knowing and developing one's ability to cope as it is having a strong market opinion.

Richard Owen writes: 

A Fed that never delivers surprises? I guess there's also the question of whether the stats are consistent only for Federer, or if this is typical of pro players?

Ralph Vince writes: 

Consistency, if it is the equivalent of variance = 0, is, to my way of thinking, certainly something beneficial to the trader. Given that variance, contrary to the generally-held notion that it is somehow (at least an aspect of) risk, is actually a diminishment of returns (i.e. variance is negative average return), then clearly you want as little of that as possible.



 I found this and thought of the Hobo.

Churchill on Chaplin:

Even poverty wore a different face in America. It was not the bitter, grinding destitution Charlie had encountered in the London slums and which has now, thanks to the extension of social services, largely disappeared. In many cases it was a poverty deliberately chosen, rather than imposed from without.

Every cinema goer is familiar with the Chaplin tramps, but I wonder how many of them have reflected how characteristically American are these homeless wanderers. In the dwindling ranks of the English tramps one finds all sorts of people - from the varsity graduate whose career has ended in ruin and disgrace, to he half imbecile illiterate who has been unemployable since boyhood. But they all have one thing in common - they belong to the great army of the defeated. They still maintain the pretence of looking for work - but they do not expect to find it. They are spiritless and hopeless.

The American hobo of twenty-five years ago was of an entirely different type. Often he was not so much an outcast from society as a rebel against it. He could not settle down, either in a home or a job. He hated the routine of regular employment and loved the changes and chances of the road. Behind his wanderings was something of the old adventurous urge that sent the covered wagons lumbering across the prairie towards the sunset.

There were also upon the highways of America, in the old days of prosperity, many men who were not tramps at all in the ordinary sense of the term. They were traveling craftsmen, who would work in one place for a few weeks or months, and then move on to look for another job elsewhere. Even today, when work is no longer easy to secure, the American wanderer still refuses to acknowledge defeat.

That indomitable spirit is part of the make-up of the screen Charlie Chaplin. His portrayal of the underdog is definitely American rather than British. The English workingman has courage in plenty, but those whom prolonged unemployment has forced on the road are nowadays usually broken and despairing. The Chaplin tramp has a quality of defiance and disdain.

The hobo responds: 

There is a better ground than choosing poverty or riches for us. That is the Prince & the Pauper condition that's available to nearly anyone reading this. Skid row is a vast experimental laboratory and nowhere else have I discovered & set limits than in those rows across America. An American hobo is defined as a worker who wanders from job to job. The USA allows this with grand territory and a thick network of railroads to enter it. England is cramped; USA is wide open. So it is that the hobos who today in spring are hitting the flatcars and boxcars by the thousands are rebels against tight living and a diurnal job. Almost all are forced by hunger to climb aboard Dirty Face but some of us do it for the adventure, and for self-discovery.

Charlie Chaplin, though British, is convincing as an spirited American tramp because he grew up in the poor district laboratory that I pass through by choice. Charlie's childhood in London was hemmed by poverty and hardship. His father absent and mother struggling financially, he was sent to a workhouse twice before the age of nine. It puts me in mind of my friend George Meegan who climbed a ship's mast on River Thames at a similar age, saw the horizon, and sailed at it for seven years on tramp steamers at sea. Then he jumped down and found his land legs in walking from Tierra del Fuego to the arctic circle via NYC. You cannot hide the backdrop of such talent on screen or in print. When Chaplin was 14 his mother was committed to a mental asylum. I've worked those also as another laboratory of experience, and old folks homes, jails, and even sold Nut Cracker Sweets on 57th street of Manhattan outside Niederhoffer, Cross & Co. after working a day upstairs as a technical analyst. To point, Chaplin toured as a tramp comedian before attracting notice and coming to America to become the premiere tramp. In his floppy footsteps followed Weary (Emmett Kelly) Willie and Happy (Red Skelton) Hobo. Emmet was literally born into a circus while Red beginning at age 10 was part of a traveling medicine show.

They had the spirit, all right, from experience & passed it on to their audiences. For the real deal on the skid rows read anything by Nels Anderson.

And so that brings me to today's choice after paying the IRS. I can use the leftovers to go on an African safari or a walk in Baja, Mexico. Life is a series of T-mazes, if one takes it seriously, and I think I'll take a walk.

anonymous asks the hobo: 

Have you spent any time on Skid Row in Los Angeles?

The hobo responds: 

 LA was my first skid row. I checked into the Midnight mission and sat in a pew next to a black man with 6's tattooed across his knuckles as we listened to an ass-whopping sermon. That's where I 'fell in love' with mission preaching. Then we ate a hearty meal of meat loaf, potatoes & gravy. Then we lined up for bug check. What's that? I didn't know but everyone had to do it before getting a bed. The housekeep must have spotted me as a virgin tramp for I was called first to wind down the stairs into the bowel of the mission where a man I couldn't see waited with a blue light. He told me to drop my drawers and proceeded to shine the light to fluoresce pubic lice. 'Clean! Next!' he yelled. That night i was grateful for being dead tired from catching a freight into town the previous ones. The dorm room of fifty soon filled with snores & flatulence while gunshots outside on skid row shook the broken windows. The next day I caught a freight to the next skid road. That's a hellofa education.



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stefan Jovanovich writes: 

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

Richard Owen writes: 

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

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

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

Gary Rogan writes: 

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



 A recent documentary on the BBC about Tim Hetherington, the war photographer, was very poignant. Tim died aged 40 in the conflict in Tripoli. Something about the mixture of humanitarian intent, film star good looks, big brotherly persona, and artistic skill made him very likeable.

It was interesting that in the run-up to his death Tim spoke at a conference where he foreshadowed his own accident and commented to the effect that: You are at more risk as you age as a war photographer. You instinctively know where the hot story is, but that is often also where the greatest danger is. When you are young, it takes you time to get the story and you approach it with caution. But when you know, you are desensitized, you go straight there and go all-in to get it.

One needs to be careful not to make glib analogies of risk in war zones to risk in finance. But does the old successful trader risk developing a sense of invincibility, go straight for the good risks, and go all-in?



 I read over the weekend about Al Oerter and Lance Larson. Their stories are pretty amazing.

They were both Olympic gold medalists as young men who, after either a long break of almost a decade or professional retirement, returned to the sport.

Amazingly, Oerter after ten years got back in the Olympic team and beat all his old records. Similarly, Larson beat most of the times he produced twenty years earlier when swimming as a master.

Other examples of mature mastery are Sir Christopher Wren who built 52 churches and retired at 86, after which he spent 5 years pursuing literature and astronomy. Cato at 80 studied Greek and Plutarch, at a similar age, Latin. Verdi wrote Othello at 74 and wrote Falstaff at 80.



 My dad, who's on his deathbed, when lucid last week offered some advice to my nephew (who's struggling) and my son (who's not struggling). My dad said that in order to get ahead in life, one must hustle for money all the time, always look out for a better deal and more money, work very hard and smart, marry the correct woman, not necessarily the one you currently have the hots for. He mentioned thrift, and said that although cash offers a negative return, that personal thrift in all areas will keep you comfortable in the long run. He nailed both grandsons on their $5.00 a day Starbucks habit and ran some numbers by that over 30 years. He also nailed my nephew who smokes on how smoking will not only lower his life expectancy, it will affect his net worth and retirement. He said, "I bet between your Starbucks, smoking, and fast food lifestyle, you are spending 35% of your net income on bulls**t." He told both of them to think 3 generations down the road and plan for that and save, accumulate, and save some more. His final word to my nephew was that he is only inheriting $1000, but he had the tact to not mention that my son is getting my half of their estate that I surrendered. I did a good job raising my son. My son is already figuring out how to not dip into capital, which is a lesson everyone should be required to learn. Sadly, most don't.

Rocky Humbert writes:

Economics question/thought: What would happen to the economy if everyone followed that lesson: "My son is already figuring out how to not dip into capital, which is a lesson everyone should be required to learn. Sadly, most don't." If the only consumption is from a return on capital and earned income, what effect would this have on personal income and economic growth? I haven't thought this through, but my gut reaction is that this would pose a serious problem.

Richard Owen writes:

This is a good point. And any major shift by economic actors would be destabilizing over some period. In Jeff's instance Starbucks would go bankrupt and many baristas would lose their job and the capital employed in coffee houses rendered worthless.

But a steady state situation of high capital reinvestment by everyone can be envisaged. It would eventually lead to an increased level of capital per capita and thus the dividend would eventually dwarf what could previously have been received by eating into capital. The question is, if people are then rid of an appetite for Starbucks, what capital assets should be created other than coffee bars from which to receive the enlarged dividend? Luxury houses? Personal libraries?



 Apparently, in the mid 1920s, a washing machine and a Ford Model T both cost around $300.

The ratio of those prices has changed dramatically.

I wonder why?

Shane James writes:

A magnificent relationship to ponder.

Richard Owen adds: 

Another strange example of deflationary monetary flows is that in the 1990s, when Operation Tuxedo stopped the December flow of 120k MDMA tablets, 108kg of amphetamine and 60kg of hash into Liverpool, armed robberies of bookies and posts offices in Merseyside increased by 80% the following Jan and Feb.

Pete Earle writes:

My off the cuff answer: the political machinations surrounding auto manufacturing (labor, corporate and military acquisition, etc.) leads to a large degree of government intervention, price controls, etc., in turn producing distortions, whereas washing machines are (far) less 'corporatistically' engaged. Also, a washing machine is still, for the most part (excepting, I guess, credit cards) an outright purchase, where rarely if ever is a car purchased without some sort of long-term financing. (Although the latter may be effect, and not cause.)



 A documentary on the Yesterday channel just now about the Netherlands had a brief segment on tulip trading. Today tulips are sold by Dutch auction: an odometer graphic winds down marked with price and the first trader to hit his button wins the consignment.

Interestingly, a tulip history expert alleged that nobody went bankrupt due to the tulip bubble. She alleged Charles Mackay drew the myth from playful Dutch art painted in the period and it perpetuated from there.

The most desirable and expensive tulip in the Dutch bubble was the Semper Augustus. Its flamed appearance is now recognised to be a form of crop disease and so any such flowers in today's fields are immediately ripped out and destroyed.



"Jerome Bruner, the Harvard psychologist, says that he has never visited a lab that was worth a damn where the people weren't having a lot of fun. The physicists at Niels Bohrs lab in Denmark, where they split the first atom, were always playing practical jokes on each other."



The Theory and Practice of Selling the AGA Cooker has been called the finest sales manual ever written.



 Has anyone put into practice or examined Ray Kurzweil's (of Google fame) lifestyle advice for living long enough to make it to the singularity (the point where nanotechnology will allow you to live forever?). It's described in his book, Fantastic Voyage: Live Long Enough to Live Forever

(I have not read it yet).

anonymous writes: 

I have a copy of the book, and have read it. I am interested in working with a doctor who is Kurzweil friendly but have not actually broached the topic with mine. My biggest concern with some of the content is the large number of unproven supplements Kurzweil is ingesting. He is a believer in the health properties of alkaline water which I have a very hard time buying into. There are also other supplements that I don't think bear out under scrutiny. A lot of its recommendations are common sense in terms of what to eat and what to avoid. However, I did find other parts of the book to be interesting though, and think it is worth a read. Some of the theory in particular will be of interest for those inclined to go down the rabbit hole.

If you go to their website, you can actually download a short guide to much of what the book goes into depth here.

After doing a lot of my own research, I think Vitamin D is probably a key supplement for most people, and I am now taking it daily.

I've actually read all of Kurzweil's stuff and am a fan overall. I would question though why the singularity has not already happened somewhere else, unless we truly are the only intelligent civilization in the entire universe. It seems like at the very least we should have encountered probes by now.

David Lillienfeld writes: 

There are some data available, and those have been looked at many times. The Mediterranean diet, for instance has repeatedly come up in the Seven Countries Study, and ditto for the Adventist Health Study. Migration study findings of differences in mortality likely includes differences in diet, but what exactly that is remains unclear. I don't thing there's much debate about the Ornish diet reducing mortality, though the practicality of getting anyone to remain on it for any length of time may be questioned. Depending on how one looks at alcohol consumption (whether a food or something else), one can say that there's pretty good data that reductions in alcohol consumption are associated with relative reductions in mortality, though the effect is best seen at higher levels of consumption. In contrast, trying to make sense of any of the data collected using FFQs has been challenging at best.



 All is calm, all is bright.

Richard Owen writes: 

Further proof one should never forget obscure cross-market correlations, and here is a link for those who didn't grow up in the UK.



 The purpose of this post is to stimulate discussion about an important market development. It's not a prediction.

I believe that one of the most widely accepted memes in the financial markets over the past several years has been that the Chinese Currency was/is undervalued, manipulated and would not go down and must eventually go much higher. The fundamental arguments for this were the persistent balance of payments surplus, purchasing power parity, competitive advantage/cost, political pressure, the history of currency movements in places like Japan, relative growth rates and growth potential; monetary base; and the list goes on and on and on. In fact, I can't find any credible opinion to the contrary. (A couple of summers ago, Bill Ackman made a big PR splash buying "cheap" calls on the HK dollar predicting an inevitable and massive revaluation.)

Over the past few weeks, the Yuan has reversed course and started to decline. It has had a violent and 3 sigma decline in the past 3 days. The story is that the Chinese authorities are encouraging a "wider trading band."

I am not offering any predictions here. But it is striking that the impulse move is in the down direction, not the up direction … all the more so, when the universally accepted truth is that the Yuan can only rise.

Is this just a counter trend move? Or is something bigger going on? If the Yuan starts declining instead of rising, what are the second order effects on other markets? If this is more than a counter trend move in a secular bull market for the Yuan, then I believe there are some very important implications. Unfortunately, I'm not smart enough to know whether the supposition is true and/or what the second order effects may be.

A good place to start thinking about this might be historical analogs. What are the historical analogs? And when does the perma bull Yuan story get stopped out?

Alston Mabry writes: 

I agree. With all the issues out there on shadow banking, credit bubble, CBOC actions, ghost cities and shopping malls…who actually knows what's going on? If anybody "knows', it's the market itself. Once China frees up capital controls, import controls and currency controls and becomes relatively transparent accounting-wise…then the RMB will move on economics…mostly. But right now there are so many "shadow issues" in play that it's hard to assess the situation other than on a short-term trading basis.

Richard Owen writes: 

Disregarding the background 'China story' which is the key determinant of the secular factors (eg, do you believe China is massively insolvent or not, does it matter), when currencies are 'newly' brought to market (in the sense of being a new regime, if not a new currency), they often trade off initially. Domestic holders want to diversify and foreign buyers have no structural reason to accumulate inventory, thus have a 'show me' attitude on price. And since fx is a short duration asset, nobody is holding for the carry and a trend begets itself. Or to put it another way, as yuan trading is liberalised, does the marginal holder likely want to diversify out of existing stock more than a foreign holder wants to get into? Comparables are perhaps the euro introduction, where despite a hugely profitable convergence carry on long bonds, even underwritten by the ECB discount window, it initially sold off. Perhaps more analogously, when South Africa empowered its blacks, the Afrikaans community thought the end was nigh (as some chinese entrepreneurs do now) and began liquidating everything and selling into offshore currencies. They misread the situation, however, and the sandtown community provided a bid to the Afrikaans. My friend's uncle bootstrapped a working mans savings into a billion by buying the real estate liquidation, putting in newly arriving AAA multinationals as tenants and riding the yield curve down from teens to single digits.

anonymous writes: 

In the face of 2008 downturn, the Chinese government created more money than was done by the ECB or the Fed. The shadow banking system carried on making new loans to reestablish the housing bubble. Based on that slice of data, the RMB should not be rising against other foreign currencies, but falling.

Yes, trade surpluses are supportive to a currency, but China's big trade surplus with the US is balanced by some trade deficits with sources of raw materials, and production machinery, so that their trade surplus overall is not as big as with the US. The foreign direct investment into China has been very high as has the Carry Trade where borrowing in low interest rate countries like Japan and buying higher rate Chinese Treasuries, was profitable and gained even more as the RMB rose. This looks to be reversing and is thus a negative for the RMB and is big at maybe a half trillion dollars of hot money.

The image is of the Chinese government suppressing the currency to keep its exports growing and doing so by buying US Treasuries, and that was also pushing the image higher. But Chinese people are buying gold for safety, indicating that they have seen government spending and do not have confidence in the RMB. I think a downward spike in RMB could be followed by more selling if Carry Trade unwind becomes big. But PPP and Trade surplus will limit the move eventually, IMO.

anonymous writes: 

I also agree, (Chinese financial reporting is awful) but the assertion that we can know many outside variables from the US$ of the equation is very important. (Current account surpluses and deficits bear many similarities to double-entry accounting, in that aggregate balances in one direction or another should balance each other out.)

I submit that the current state of Chinese property and credit markets bear many similarities to what Hyman Minsky termed a "deviation amplifying" mechanism in his Financial Instability Hypothesis.

However, if asked how it will play out, my tendency is to say that at some point over the next few years, they are at substantial risk for a debt deflation. Personally, I'd have a tough time convincing myself to be short a deflating currency.

Charles Pennington writes: 

OK, here's an "N=1" kind of study…

Back in mid/late 2011 the Swiss franc ("CHF") was strengthening violently against the Euro, with the Euro almost going down to parity with CHF. Then the Swiss stepped in to weaken the CHF and forced the Euro back up to 1.2 CHFs. The Euro sat there, pegged at 1.2, but everyone feared that the risk was that the Euro would fall below 1.2. Instead the Euro ended up moving higher against the CHF in mid-late 2012 and 2013. Very similar to Rocky's China story.

Since mid 2012, EWL (the Swiss market etf) is up about 55% and FEU (the EuroStoxx etf) is up about 40%. EWL is probably a bit less volatile than FEU (though I didn't check), so EWL's gain is yet more impressive.

So the N=1 conclusion is that you should buy Chinese stocks.



 I read two great books lately. The first was Milady Vine, The Autobiography of Baron Philippe de Rothschild and the second was The News: A User's Manual by Alain de Botton

The Rothschild biography begins an ending chapter with a quote from Laurence Sterne:

"His opinion was that there was a strange kind of magic bias which good or bad names, as he called them, irresistibly impressed upon our characters and conduct. How many Caesars and Pompeys, he would say, by mere inspiration of the names, have been rendered worthy of them? And how many, he would add, are there who might have done exceedingly well in the world, had not their characters and spirits been totally depressed and Nicodemus'd into nothing"

Philippe de Rothschild was a French family member with lineage in the arts, society and agriculture rather than the banking franchise which other cousins inherited. The quote captures the burden upon (and rocketship beneath) Baron Philippe as he goes about his adventures. His principal asset becomes Chateau Mouton which, alongside Chateau Lafite is one of France's premier wine estates.

The quote possibly also applies to the author of The News: Alain de Botton is son of Gilbert de Botton, formerly president of Rothschilds in New York and founder of asset manager GAM. de Botton is a specialist in the application of classic philosophy to modern situations and to quote him "somebody who has made a few stabs at trying to bring elite culture into the wider culture".

This is manna to the broadsheet newspapers and possibly why many reviewers of his work try and unfold a psychoanalysis of de Botton's background, rather than taking his writing on its merits. In the case of The News, however, we at Daily Specs can legitimately hope something of de Botton Snr's financial genius was channeled from the ether into de Botton Jnr's assessment of the media's reporting of Economics, Politics and beyond. But nonetheless, de Botton Jnr's flair - like Barron Philippe's - is fully self-made.

But first, back to Barron Philippe. The biography is an efficient and entertaining one, with plenty of salacious content covering Philippe's love life and - perhaps uniquely for a Rothschild biography (albeit I speculate with limited data) - some detailed analysis of his private parts.

It also contains several interesting lessons on business and wealth. Every man is ultimately self-made, and this is no less true for Philippe. One of the themes is how much unhappiness, isolation, and jealousy can come from privilege. High birth has its own unique challenges: Philippe has a very difficult relationship with his mother who openly mocks him as a child in front of friends, until Philippe finally snaps and runs away to live with an Aunt. He then doesn't speak to his mother for many years.

Nonetheless, he inherits his principal asset from his mother: Chateau Mouton. At the time that he takes the estate over, it is in heavy disrepair and loss making. Indeed, a key staff-member has been siphoning off the profits to build his own estate and has even stolen the vines. Barron Philippe is remarkably sanguine about this discovery and doesn't pursue the thief, reasoning that they deserved what they got as negligent landlords. The book is full of examples of the difficulties of managing a large estate and the various dissipations that occur. When his father passes away, many assets cannot be properly traced or tracked.

Philippe's key business success is vertically integrating Mouton as wine producer. At the time he takes over, wine is not fashionable, having taken a backseat to cocktails. Mouton takes the wine only as far as the barrel, and wine is bottled, wholesaled, and retailed via a complex supply chain. Philippe takes out the middleman, and begins bottling on-site. This gives much higher control of the vintages and prevents any interference or fraud by the bottlers.

Baron Philippe has an instinctive understanding of luxury goods with a commodity input. He forms a combine between five elite wine estates who all begin bottling on site. He manages the quality ruthlessly, and happily disposes of 90% of the vintage if it isn't up to spec. This creates supply squeezes and heightens emotional desire through occasional withdrawal. Philippe hires famous artists such as Warhol to provide unique labels each year. Philippe perfects the protection of brand equity whilst delivering a more accessible product: he forms a junior brand "Cadet Mouton" which has a price point accessible to all. This creates a virtuous circle, cementing the name with the public whilst bolstering the inaccessibility and privilege of the elite brand.

Perhaps the most interesting part of the book is Barron Philippe's experience during WWII. Despite a decade of run-up, much political data on the horizon, and plenty of financial resources to prepare, when the moment comes, Philippe has zero assets offshore, has made no preparation for escape, and is rendered an everyman (well almost) by the Vichy government.

Philippe socialises with wealthy French families who sympathise with the Nazis and, having listened to them delivering excoriations about the "jews and freemasons" being responsible for societies ills, he is graced with a caveat that - of course though - they don't mean Philippe: he and the Rothschilds are different.

Ultimately, Philippe has to escape alone on foot to Spain, Portugal, then England. His wife refuses to leave. Albeit she is protected somewhat by membership of an old Catholic French family, the mental hysteresis of uprooting to England is so great that she prefers to face danger at home.

Such is the lack of preparation of his affairs that, had Philippe's estate not been focused upon a hard asset like Mouton (which is commandeered by the Germans), and France not liberated, his financial losses may have been total.

The book is entertaining, Philippe writes very well (albeit he has a ghostwriter), and did I mention the bit about (to adopt own terminology) his cock?

 Now onto The News: A User's Manual by Alain de Botton

de Botton's book is an fascinating essay on the modern media. His ambition, well realised, is to answer "what should the news ideally be? What are the deep needs to which it should cater? How could it optimally enrich us?". de Botton moves by category, and we can contract the answer to his questions as:

- Celebrity News should let us draw inspiration and insight;
- Disaster News, a sense of our ephemeral lives and a gratefulness for our blessings;
- Consumer News, a sense of which goods might best assist us in answering our underlying aspirations for a fulfilled existence;
- Political News should help to create a rounded, tolerable nation;
- World News should open our eyes to the nature of life in foreign countries above and beyond their moments of crisis; and
- Economic News should evoke the human realities that lie beneath the data.

de Botton makes a good case for why we are drawn to celebrity ephemera over serious news. And like Freud, having dawn the underlying neurosis from his own experience, makes us feel more normal for having experienced it too.

Perhaps most interesting for Daily Specs readers are his chapters on economic news. de Botton states *"to assess a nation through its economic data is a little like re-envisaging oneself via the results of a blood test, whereby the traditional markers of personality and character are set aside and it is made clear that one is at base, where it really counts, a creatinine level of 3.2, a lactate dehydrogenase of 927, a leukocyte (per field) of 2 and a C-reactive protein of 2.42". Amen. And this is before adding the Camp Kinder layer of obfuscation that our Daily Specs Chair comments upon regularly.

de Botton even provides a chapter specifically on Investor News, which again to quote him: "investors are like pilots flying high over a landscape at night. For navigation, they rely on only a few beacon signals and visual cues: the nuclear power station on the peninsula, the main north-south motorway and the medieval city, glowing like an encrusted diamond ring at the foot of the mountains. But there is no need to worry about the discussions in the apartment block near the piazza; the dilemmas of the lorry driver at the service station or the dreams of the technician in the turbine hall."

This seems correct, albeit that extending oneself to discover clues in the latter non-standard, non-quantifiable minutiae is possibly a sign of profitable maturity in ones financial analysis.

Overall, the book is perhaps utopian in its aims: to create a news media that serves to enhance us rather than just capture our clicks and attention. But I am sure de Botton well realizes this. One must always have a mighty target on the horizon in order to appropriately set nearer, more realistic goals.

de Botton makes cogent points on the personalisation of news streams available with modern technology. That we risk confining ourselves to informational cul-de-sacs to our own detriment. Indeed, he proposes, "only after extensive self-examination, perhaps with the help of a psychoanalyst, would they be adequately prepared to set the dials on their personal news engines, aware of the sorts of stories that were needed to challenge their defences, expand their horizons and excite in them the right sort of envy."

Or perhaps, as the Chair cogently advises, we should all stick to the National Enquirer.

In sum, an efficient and educative read, and did I mention that there is no bit about (to adopt my own terminology) his cock?



 The Hudsucker Proxy is one of the best stock scam movies Hollywood has produced. Much more relevant to the realities of Wall Street than the hookers and blow cartoon of Scorcese's Wolf (not that I am criticising the latter: art isn't documentary).

The script has some beautiful subtleties in it.

And the film is perhaps a sign of how those who love their trade can sometimes carry a lucky star: it was part of a string of low financial ROI movies for the Cohen Brothers, but did not hamper their progress.

Sidney J. Mussburger: It's working already. Waring Hudsucker is abstract art on Madison Avenue. What we need now is a new president who will inspire panic in the stockholder.

Board Member 6: A puppet.

Board Member 5: A proxy.

Board Member 2: A pawn.

Sidney J. Mussburger: Sure, sure. Some jerk we can really push around.



 The film White Men Can't Jump features two basketball hustlers: Billy Hoyle (Woody Harrelson) and Sidney Dean (Wesley Snipes).

1. Billy consistently bets his whole account on each game. He gets ahead quickly for a number of games, but also repeatedly wipes out.

2. Sidney, on the other hand, is diversified. He bball hustles, but also runs a food stop and decorating business. He takes a share of the bets Billy fronts.

3. Billy owes hard money. As a result, he has two mafiosos trailing him.

4. Sidney (per Billy) would rather look good than win. He takes risks which don't further his financial goals.

5. Sidney and Billy eventually meet with success by entering a competition funded by sponsors. No money is risked. They have learnt to leverage OPM.

6. When either winning or losing, Billy goes on tilt if criticized. After his biggest victory, having won his money back, he bets Sidney his whole proceeds that "white men can jump".

7. The biggest financial success turns out to be Billy's girlfriend, Gloria. She believes - seemingly irrationally - that her destiny is to be selected for quiz show Jeopardy. Sidney eventually persuades the security man from the Jeopardy studio lot to get her in. Such was her persistence that the irrational became actual.

8. Deception operates repeatedly. There is:

- the trojan horse: offering to play with any partner, having placed preppy doofus Billy in the court stands;
- the thrown game: Billy is paid by some mafiosos to throw a championship match;
- the false friend: Billy and Sidney form a hustling team, but Sidney plays to lose thus hustling his own partner;
- the shakedown: to make a grub stake, a bball player tries to rip off a liquor store;
- rule changes: a hustlee, having realised that he is the mark, refuses to pay up and pulls a gun; and many others.



Disabled people are 1 in 6 of the population but have spending power the same as gay folks who are 1 in 20. Both control only a quarter as much spending power as ethnic minorities who are 1 in 8. Ethnic minorities control almost a third of total UK expenditure.

All seems internally consistent and reasonable. Good to see the government has such a clean handle on the statistics.

"Why is the Disabled Pound Purple?":

The UK's 11.9 million disabled people are said to have disposable income collectively worth £80bn. Campaign groups regularly cite this figure and find it useful to remind businesses and politicians that disabled people are a sizeable economic force and should not be forgotten.

Black and ethnic minority spending power, £300bn - 12% of the population of the UK, according to the Institute of Practitioners in Advertising, IPA,

Consumer power of the gay community, £70bn to £81bn - thought to be 6% of the UK, according to OutNow Consulting, 2007.

Overall UK disposable income of its 25 million households plus non-profit sector, 1.078 trillion pounds, according to the Office for National Statistics, ONS, 2012



 "Gambler 'Killed Wife' After Losing Bank Millions"

As Artie said. "All gamblers die broke and become degenerates. Don't gamble".

Richard Owen writes: 

This is such an incredibly sad story. I think I recall reading on spec-member, Mark Goulston's, blog the idea that the suicide rate is higher in young men because they attach so much to their perception of other's assessment of their competence. Thus experiencing a material failure can make them do insane things. In contrast, women are much more self-assured plus their parenting of children, who can be unintentionally cruel, has prepared them to cope readily with criticism.

I recall reading a statistic that in the UK, if you strip out inherited wealth and the like, almost 100% of individuals of net worth over £50m come from one of three categories: (i) immigrants, (ii) they attended boarding school, or (iii) they were Jewish. What is the common factor among these categories? Probably some element of "otherness" in their upbringing. British boarding schools of the era of those featured in the statistics were brutal places where bullying was a standard ingredient in toughening up the kids. There is a great book by Sir Peregrine Worsthorne ("silly Perry" as Thatcher once called him) called Democracy Needs Aristocracy. One point he makes is that part of how aristos used to earn their place was the excruciating right of passage of attending a boarding school. Ironically, the spine building experience that foreigners now pay through the nose to obtain has disappeared through their own subscriptions. To attract foreign wealth, 'brand' boarding schools have been turned into a combination of five-star hotel and country club.



A Case of Hutber's Law:

Hutber's Law states that "improvement means deterioration". Patrick Hutber is the much missed City Editor for The Sunday Telegraph in the 1970′s. His law was founded on his cynical observation that a stated improvement, mostly to be found in business, actually hides a deterioration.

I feel sure we've all been in receipt of a letter, most often from a utility company, that informs us of some wonderous improvement in their service, only to be attached to the loss of some other useful aspect of their service.

Another area where Hutber's Law is to be found is in updates to computer software. I don't want to sound too much like an old fogey, resistant to change, but I'm stumped to do what was simple in one version, yet is oh so complicated or impossible in a newer, or so-called improved version.

Hutber's Law lives on.



An interesting idea I heard is to apply open source principals to speculation.

I started thinking, where has open source historically been successful? Software. And it interesting to note that many of the titans in open source software were quite zealous left-libertarians who believe in things like "information wants to be free". Profit was not high on their lists. What we do here is, already, perhaps somewhat akin to this, but quite unstructured. There is a lot of thoughtful debate, but relatively few actionable investment ideas. But that's not to say that the debate doesn't spur profitable thought processes.

The problem with actual investment ideas is 1. trade signals dissipate once published, 2. investment is a bit like the Chinese civil service exam, in that one must state everything that one knows in order to answer the question successfully. That's probably why Izzy Englander settled on a. a track record, b. fiduciary checks, and c. some investment of his own assets in selecting managers, rather than heavy diligence of the investment ideas themselves.

Similarly, there is an analogy to the Chair's book. It was full of structural ideas, but not full of trade signals. I believe someone followed up by publishing a book of the Chair's trade signals. I do not know what impact that had upon the signals.

One could say that the theoretical academic finance arena is a little like the open source version. And the profit potential of published finance papers is… mixed.

Open source cars are probably somewhat about fulfilling the product desires of "hobbyists" and its interesting to see how that scales. But is "hot rod" design part of the spectrum of things like stabling a racing horse and sponsoring an off-broadway show, for which the rate of return is typically low, because the wealthy, intentionally or otherwise, provide subsidised funds for their passion.

Product design feedback, hobbyism, and scaling profitable products all have intersections, but blending them is difficult. Where this sort of thing has existed with fund managers is a creating a virtuous circle of high quality investors, who will sometimes feedback their own investment ideas, as it will improve their product experience.

Obviously one needs to counterbalance that against just upping the noise signal.



 On the highway, speeding down the outside lane (I only drive at 69.9 mph), one's mind is concentrated. It is much safer. The dings and bumps come on windy country roads at 40 mph. But very occasionally, the former kills you stone dead and you survive the latter, but your passengers get mad and take the train next time and tell everyone you're an incompetent.



 The management of sexual energy is a topic rarely discussed. It's not something that parents typically talk to their children about. Yet it is clearly something that features.

Buffett currently has a thirty year old blonde in the office next door to him as an investment assistant. In Freud's book on Michelangelo, his thesis is that part of M's brilliance came from the sublimation of his sexual energy. Then there are all the ideas of Kundalini and so forth and Napoleon Hill's works has whole chapters on the topic.

Perhaps we should lobby for a HBS class?



 Last night I had a dream about an investment opportunity, which seemed so improbable that I started to suspect I was dreaming. I had before dreamt about it (and woken up to recognize the nonsense) and this made me extra suspicious. However, I eventually used the internal logic of the dream to convince myself of its validity, and also the absurdity that I had previously suspected it as nonsense. I eventually came to believe that one of the UK's richest families was an investor. How often does this happen with investments when fully awake?



 In a quick test of whether the scholarly market gets the skinny of the open market announcement by one means or another, or just anticipates it, inspired by my experience as a business broker where I never was able to collect a full fee from a scholarly owner, I find that before the big up days the scholarly market tends to be up, and before the big downs, the scholarly markets tends to be down. Big ups on open market day in US occurred on 9/18/2013, big downs occurred on 10/30/2013, 6/19/2013, 5/1/2013, 3/20/2013 and 10/24/2013. Presumably no cats will inculcate lymphoma around here based on this.

Victor Niederhoffer writes:

A senior poster writes that in his career as a business broker, he often was chiseled on the fee at the closing, especially by those who were men of the Good One. The below post is in response:

Richard Owen writes:

Chisiling a fee pre close is on the list of business tactics alongside reducing your bid or offer at the last minute, forgetting to pay someone's bonus in year one as quitting after twelve months is their problem more than yours, running lots of accruals or prepaids into your closing numbers, and many others.

The 'theory' is that over time, if you run this playbook, word gets around and people stop doing business with you or adjust for it so it is priced in. In practice…

What are some of the senior hands views on the list of such tactics? And is one at an advantage or disadvantage by not participating? A chump, a prude or a good businessman?

Two of my business heroes are Pete Peterson and Ron Howard. As far as one can tell, they turned their fortunes without turning anyone over.

For those big successes who were 'strokers' - did sharp practice help them? Was it a material or immaterial component in their overall success? And if it was immaterial, did it correlate to other personality characteristics that were essential? So one takes the rough with the smooth?



 Clarke took Brom to its best ever placing last season, but four consecutive losses takes his job.

There are many counting lessons in this story: "West Brom Sack Head Coach Clarke".

Draw down after a big year. Should four losses be a mean reversion or elbow point? If only busted stocks could be as apologetic as Mulumbu.

"Steve Clarke has been sacked as head coach of West Bromwich Albion following a fourth straight Premier League loss

"It's very harsh," Shearer commented. "They overachieved last year and that put pressure on him. When you have a slow start to the season questions will always be asked. The chairman might look at it and think other clubs have improved [after changing manager]. But even so, you have to say it's extremely harsh."

"I feel sorry for the manager," Mulumbu tweeted.(external)"Us players are on the pitch but he's the one who's getting the consequences of our bad play. I wish him all the best for the future.""



 Here am I in New York City, no time for longer philosophy right now, but quick observations. After talking to friends in recent days, left and right, all ages, NY TX IL …. I'm not sure the real problem is left vs right or statists vs libertarians or socialists vs capitalists, etc.

Because all those worldviews have deeper roots…

Here is what strikes me as possibly the REAL issues…

1. Emotionally driven public policy. (Holy Moses, there is a homeless man, somebody give him some money now! Raise the minimum wage! Ok, problem solved!)

2. A public that is illiterate in arithmetic (not math) and afraid of it, of data, of statistics.

3. A public with no education in economics, even the most basic understanding of how prices clear markets and how that is just as beautiful as dinosaurs and butterflies.

Of course I am saying it's a failure of our k-12 education system.

Its not socialist teachers…I see little evidence of that though of course some exist but I don't know that the students believe them….it's teachers and students piling up over the years who were never shown these things (analysis, rationality, economics) in the first place. It's a problem of curriculum balance. Every grade schooler probably knows how to recycle and figure their carbon footprint. And how to "give back."

I also think there is a real gender gap in these items, especially the emotion point for many women voters. Perhaps not unlike the gender gap in science and technology.

Or something along those lines…you get my drift….


Gary Hoover


Chairman/CEO Bigwig Games, Inc. Play Hard and Prosper

Chris Tucker writes: 

Here is a video of the talk Gary gave at the Junto, almost verbatim.

Richard Owen writes:

Mr Hoover should add John Lewis in the UK to his list of impressive department store business models. Great talk.

anonymous writes: 

I also enjoyed Gary's talk very much. Seems the historical mechanism for success in retailing has been increasing quality while reducing price. I have been wondering about this lately with respect to healthcare. Along the lines of retailing, in the wake of the recession my patients seem more sensitive to cost, and they don't want to be "nickled and dimed".

Over recent years in my periodontal practice, I have reduced fees, increased service, and do many more things without charging. Despite loss in local employment (Amgen layoffs, etc) and increasing competition, we've stayed quite busy. However like some of the retailers, our profits are down. Presumably by keeping fees low we have preserved market share.Some of my nearby colleagues take a different approach. Since their busyness and revenues are down, they raised fees - as if this will compensate for lack of demand. They are still not busy, but they do have patient flow and stay in business.

Recently I did some grocery shopping at a local supermarket I usually stay away from, which is a small chain known for high prices. One bag with a few items (including Chilean Sea Bass) cost $126, and I vowed not to come back. While in the market I saw several patients from my practice who looked very happy to be shopping there. Like many in our community, these were affluent people who don't need to budget for groceries. Perhaps they obtain status by paying extra to go to an expensive fancy grocery? The exact value of health care services is much harder for the consumer to judge than groceries. Perhaps my high priced colleagues are aiming for this demographic, and are willing to sacrifice market share. And if so, status-spending is a different twist to supply/demand.

Gary Rogan writes: 

 It is well known in high-end retailing (or actually retailing of any "prestige" products) that raising prices often increases sales. The function of prices is to communicate information about quality in that world. How can any self-respecting "prestige" buyer think highly either of themselves or the product if it's priced like cheap junk? I don't like people who think better about themselves when they pay more, but that doesn't change the reality of what sells at the high end. 

Rocky Humbert adds: 

Shopping in our local over-priced "gourmet" market last weekend, I noticed some brilliant-looking Chilean Sea Bass for $29/pound. I didn't buy any. I noticed an in-store special for Starkist Tuna for $0.99/can. I bought 15 cans. What are the lessons here?

1. It is arrogant and foolhardy to make judgments about other market participants and their motivations. The market and the economy works because participants have different preferences, values, and information. The vendor wants to know, and big corporations spends billions to shape the preferences. But they really don't and can't without unintended consequences. I didn't buy the Sea Bass because I was making a Paella. I bought the tuna because one of our cats is on a high-protein diet and at 0.99/can, the tuna is substantially less expensive than gourmet high-protein cat food!

2. Shaping customer preferences is not the same as offering a product that consumers want in a shopping environment that consumers enjoy. The couponization of consumers and the recent experiences of JCP and Sears illustrate this point well. My Lexus dealer offers an oil change for $50 whereas the Jiffy Lube charges $30. Lexus can take 3x as long as Jiffy Lube. Where do I go? Surprise! I go to the Lexus dealer because the waiting area is more comfortable, they treat me better, they have "free" coffee and danish; they give me a "free" car wash; I can do work while waiting so it's productive; and it's a generally more "enjoyable" experience. What is my enjoyment worth? Do the math. Are other people there because they are making a statement about "being seen" at the Jiffy Lube? Who knows. Product differentiation occurs at many different levels. But overall, it's rational and derives from utility curves.

3. I find that many people who have missed this stock rally (and I wish I had been more aggressive) rationalize the opportunity cost by thinking that the people who participated are "wrong". The rally has been "engineered" by the Fed. The long term fundamentals don't support the expectations. It's going to end badly. The Nikkei didn't go anywhere for X years so the S&P will do the same. Blah blah blah. I think the real story and lesson is that making value judgments about other people is not a productive exercise. Not in business. Not in the markets. And not in life.

Gary Rogan adds: 

 My favorite example of a case where judging motivation is easy comes from one of the behaviorist books I've read where a lady who owned a boutique in New Mexico had a display case of handcrafted Indian jewelry that wasn't selling at all. Once, preparing to go out of town she left a not to her assistant instructing her to mark down the jewelry with a suggested percentage. Due to her poor handwriting, the merchandise was substantially marked up instead of down, and to the owner's surprise almost completely sold out in just a few days. I will arrogantly (but not foolhardily) assume that the marginal utility of the jewelry came from the high price and not the suddenly changed quality or usefulness.

Rocky Humbert responds: 

Mr. Rogan, we both agree that there are many such examples of what you describe. Brands and pricing and intangibles matter. However, the academics often argue that these consumer preferences demonstrate irrational or gullible or other behaviors that are not "efficient" or not "optimal." My point is that the underlying supposition that "optimal" or "efficient" is a universally accepted, static, independent variable, is questionable at best, and misleading at worst. . If you voluntarily partake in an activity, you are getting "value" from it. If the activity is transactional and involves a seller and buyer, then both participants are getting "value" from the activity — or they would not engage in it. To the extent that the transaction is "zero sum" financially does not mean that some other intangible value is not being created. An observer might just not understand what the value is. It's all about personal utility curves.

An observer watching me decline the $29/lb Chilean Sea Bass and buying 15 cans of $.99 tuna would reach a very different conclusion than the truth. An observer wondering why any particular individual decides to shop at Whole Foods, Trader Joes, or the local A&P will similarly come up with questionable conclusions. (I'll bet that the person who started this whole thread doesn't shop for food regularly! Spending 60-90 minutes every week in a supermarket can be a huge chore and one of the attractions of Whole Foods is its environment and presentation.) Sure you can buy the same diamond on 47th street as at Tiffany's for a fraction of the cost. Is it the status of the blue box? Or is it the certainty and comfort of the buying experience? Or is it laziness? Or something entirely else. Countless examples of this.

Gary Hoover writes: 

 The books about marketing luxury and super luxury goods list many techniques which are the opposite of standard marketing wisdom for mainstream products. These include creating product shortages, ignoring negative reviews and keeping them off your website because you only want to talk to your advocates, raising prices to create status appeal etc.

While a walk down Fifth Avenue or other luxury districts worldwide might make you think otherwise, luxury goods are still a relatively small part of the economy. Neither BMW nor Daimler-Benz are in the world's top ten vehicle makers in units, though their dollar revenues rank them higher (especially due to Daimler's big truck and bus operations).

But the luxe segment has grown dramatically in recent years.

Nevertheless, the real dollar volume rests, like the last hundred years, in serving the huge and growing global middle class. Those companies have to pay attention to "old school" rules like price elasticity and great product availability and distribution.

In walking stores in New York the last few days, I was intrigued by the volume done by Swiss Chocolatier Lindt, with multiple Fifth Ave locations, who now drives their product through mass merchandising outlets like the drugstore chain, apparently without ruining product quality or perceptions thereof.

Amanda K comments: 

 Gary (aka Free Market Liberal),

As a female libertarian who has worked in the tech field for years, I definitely see the gender gap in both areas. I suspect that there is a higher percentage of people in tech that are libertarian-minded than other fields. Is it because they are more logical? Because they spend a disproportionate amount of time surfing the web for good ideas? I don't know. Even my female scientist friends reject small government… and they are supposed to be so logical! Of course, they are paid by the government so they may be a bit biased:)

Warning – Politically Incorrect Paragraph (or PIP) below:

I suspect that many of my girlfriends voted for Obama because he is handsome and youngish, they are more easily guilted into voting based on ethnicity, it's cool to vote Obama, to vote against him is to admit that they were wrong the first time around, and Mitt Romney is a plastic man – there is nothing to latch onto. In other words, they vote for emotional reasons.

There may be another issue in addition to the three issues you outlined:

4) A public that has abandoned basic moral principles. For example, if everyone recognized that it is wrong to steal, then it would be obvious that asking the government to steal in order to give money to the homeless guy is also immoral. Schools would be a symptom, not a cause of this problem.



P.S. – ENFPs and INTJs are the most likely to be libertarian with 5% chance each. The only letter in common is N: Intuition. One of the Myers Briggs websites contains the following statement as part of the description of an N: Sometimes I think so much about new possibilities that I never look at how to make them a reality. Sound like any libertarians you know? ;-)



 Hi Victor,

I'm wondering if you have studied bitcoin at all? Or do you only consider a market once its very liquid?

Victor Niederhoffer writes: 

Seems ready to implode.

Barry Gitarts writes: 

Based on what?

Victor Niederhoffer writes: 

Crooks are using it.

Barry Gitarts writes: 

Isn't that the case with all money?

Victor Niederhoffer writes: 

It will be shut down because it competes with things the government like to monopolize.

Barry Gitarts replies:

That was a fear earlier, however the senators, agency heads and Bernanke all seem to think it serves a purpose and are afraid to stifle the innovation:

Ultimately isn't the government just run by short sighted politicians who just want to be reelected? Any politician who stands up against bitcoin or any internet application stands the risk of being "Ubered" (see this article).

Bitcoin does seem to be a disruptor for traditional banking, but so was the internet for the post office, newspapers, tv and retail, that only grew the internet not kill it.

This reminds me of a half joking quote by Russian entrepreneur: "If you create a business that disrupts big business in Russia they will kill you, in America they buy your business."

Victor Niederhoffer writes:

I remember Peter Theil the founder of PayPal
saying that if they knew what he was doing, they would have shut him
down. As it is, only the Lousiana Attorney General was fast enough out
of the box to try to shut Paypal down. 

Richard Owen writes: 

Like all good bubbles, there is a legitimate story at hand. Even with Tulips there was a valid story of rarity that then seemed as psychologically permanent as does now the rarity and desirability of a Van Gogh.

Bitcoin is a bit like the currency of an island entrepot whose domestic economy is tiny and whose export base is mainly composed of criminality and laundering and for which the currency of the island is disproportionately held as wealth of a group of island oligarchs [I suspect he has sold some and someone might correct, but it appeared superficially that the founder's bitcoin may have a billion plus market value?]. Many accidental paper fortunes are held by bitcoin miners: will they stand passive in the face of volatility?

Of the three social gatherings I attended Weds to Sat of last week, all featured discussion of bitcoin and at one - of the type featuring participants who, to listen to their narrative over time, would appear as genius and never to have taken a loss - the non-documented boastage of coups won and utmost sagacity shown in the BTC market. Mr Thiel is smart: he is financing the pick and shovel providers, not running a large position in coin.

So yes, why not $10k BTC, but also, why?

Henrik Andersson writes: 

 Richard, this is clearly the mainstream/consensus view - bubble. The contrarian trade is not always right (far from it), but was is clear is that many commentators don't understand the many faces of bitcoin. What is also clear is that a good investment decision (long term, not trading) can be done on the premise that the highest probability is that the ultimate value is zero. The question is what probability do you put to the USD 10k scenario. "Nothing is more powerful than an idea whose time has come" Victor Hugo.

Richard Owen writes: 

 You make very good points, and I am sure you know all sides of the argument well. If you are long bitcoins I hope very much it is for a large and successful profit. Please manage your risk well. I am not smart enough to assign a probability to $10k. The thoughts are offered without prejudice and are an honest sampling of my experiences as have occurred. I have no position either way and should be distrusted or discredited on that basis. There may be commentary that it is a bubble and my thoughts or analogies may be derivative and unoriginal. The price is possibly also a form of consensus and that is that each BTC is worth a bunch of money, and increasing. As many have gone bankrupt shorting bubbles as being long. 

anonymous writes:

I recall the great Jim Rogers saying that Hysteria is the first thing to look for, but one still needs to pinpoint a reason to go against it. The kind of examples he gives are buying stocks in country's whose stock markets have been closed, buying tea plantations when the price of tea has plummeted etc. Bitcoin? Might just have to let it play its course. I think its a bad joke, but even I must admit it did survive the 50% drop recently before this latest headline grabbing advance. Anyway, this is just my two cents and I have no interest in even attempting to try and speculate with or against it. 

Jan Peter-Jannsen writes: 

Bitcoin as a technology is superb. Bitcoin as a currency is questionable. Bitcoin as an investment is a bad bet.

A great strength of Bitcoin is that it is open source. Any experts can validate the code, and so far there seems to be no flaws. The crypto-curency works!

But cannot open source also be a great weakness? Anyone can copy the code, improve it, and make an even better alternative to Bitcoin. Is there any reason to stick to Bitcoin if and when that happens? Bitcoin is volatile, no prices are quoted in Bitcoins and very few have both their income and expenses in it. Those who use Bitcoin need to exchange to and from other currencies, so why not switch to another digital currency?

In terms of investment I believe it is a bubble. The supply is very low; many coins have been lost and the majority of coins are probably in the hands of the founders. I guess they are selling at the moment, but at a low enough speed to keep the bubble growing. In terms of demand; everyone talks about it these days.

In the coming years I predict new payment systems to arise based on technology pioneered by Bitcoin. But Bitcoin itself will soon be forgotten.



"Memories pass between generations"

Behaviour can be affected by events in previous generations which have been passed on through a form of genetic memory, animal studies suggest.

Prof Marcus Pembrey, from University College London, said the findings were "highly relevant to phobias, anxiety and post-traumatic stress disorders" and provided "compelling evidence" that a form of memory could be passed between generations.



 "No, it's not a exactly time machine," said Prosser. "It's much more exciting than that." Prosser handed his companion a black glove. "Put this on, please," he asked and pulled on a similar garment.

Simpson was skeptical, but did as he was told. He trusted Prosser implicitly. Luck had it that he had financed many of Simpson's early inventions. And boy had the investment gods smiled upon them. It was kismet: no other financial partnership had been more blessed since Edwin Land and the Morgans.

There were too many hits to remember. One of Simpson's favourites had been Hypnerall. It compressed the average individual's sleep cycle from eight hours to five and a half. Sixty-five percent of the US population used it daily, all on a one-cent royalty. They could have charged far more, but Simpson knew when to keep a low profile. More controversially there was UrDat. A steganographic method of storing binary data in a urine soluble genetic compound. With it, a user could carry around a petabyte of mission critical bladder-water, completely undetectable. And now this.

"So explain it again, and what's this glove?"

"It's a quantum investment simulator. The glove records your quantum signature and allows it to be mapped into the the simulation. A time machine would allow you to skip around time. The simulator, and your glove, allows you to skip around universes. In effect."

"But the universes aren't real, right?" cautioned Simpson.

"Well… that depends on your philosophy."

"And what's your philosophy?"

"ProSim Capital doesn't pay me to philosophise. It pays me for investment returns."

"And the application?"

"Our initial focus has been on modelling economic and investment scenarios. Close your eyes, please. Witnessing the boot-up phase is too disorienting for most people." Simpson obeyed. Prosser grasped Simpson's gloved thumb and squeezed.

"Open your eyes," instructed Prosser.

Simpson looked around. Two seconds ago he had been standing in a laboratory. Now… Simpson did a three-sixty. "Where are we?"

"We're inside the first simulation. Value World."

"Value World?"

"Yes, we took the regular world but edited the gene pool to make every financial professional biased towards value investing. So what do you notice?" asked Prosser.

Simpson scanned the street up and down. It looked pretty normal to him. "Looks pretty much status quo to me."

"But what if I told you that I programmed the simulator to take us to 2080?"

Simpson looked blankly at Prosser.

"It's sixty years on, Simpson! And nothing has changed. When we made everyone favour value investment, nobody could get any venture capital financed. Nothing higher than twelve times earnings could attract capital. Investors demanded earnings distributions close to 100%. When management didn't oblige, activists came knocking. Then management lobbied congress for support, and hey presto, new and improved poison pills were legislated and installed. It has ended up a mexican stand-off between investors and boards and, corporately speaking, time and technology has stood still ever since." Prosser squeezed Simpson's thumb again.

Simpson looked up and down the same street. It seemed identical, except… wait. All the signs were in a foreign language. Simpson looked at Prosser and raised an eyebrow.

"It's Hungarian."


"In this simulation, we made everybody day traders. It was a boon to Wall Street. Commissions climbed exponentially. Income to the exchanges exploded, returns to capital crashed and everyone's equity holdings gradually dissipated to nothing."

"And the Hungarian?"

"Well, Interactive Brokers cleaned up. Thomas Peterffy merged his assets into all of the major global exchanges and became the world's richest man by a factor of twenty to one. Peterffy had a pet theory about old Hungarian providing some sort of cognitive boost to reasoning through its use of complex morphology and sponsored it to become the lingua franca."

"Bizarre. What else have you simulated?

"There was Keynes World. We spliced John Maynard Keynes' genetics into the whole investment population. We expected something spectacular to happen, but nothing seemed to change financially or economically, except…"


"Well, there was a population boom. Everyone had much better sex." Prosser smiled. "There's one simulation we should visit. Thumb please." He squeezed.

"Where are we now?" Simpson asked.

"Let's go into this diner," said Prosser, pointing across the street.

As Simpson entered, there was near silence. Everyone looked depressed. They took a seat and a waitress came over.

"Can I get… your order… pl…" The waitress broke into tears.

"Why is everyone so upset?" asked Simpson.

"In this scenario we made all of the investment managers favour market-neutral hedge fund investing. Equity managers had 100% of stock out on borrow to themselves. Due to an accident by one of clearing houses, all of the stock was simultaneously recalled one day. The funds couldn't delta hedge their exposure fast enough and started to take on net-long positions. It caused a month long, exponential short squeeze in which everyone's portfolio traded at close to infinity. And for one beautiful month, the whole population thought they had got rich. Until it crashed. Nobody has got over it since."

"How can you have 100% out on borrow to yourself?" asked Simpson innocently.

"Look, the details are complex. Anyway, what else have we simulated? Well, there was Macro World - don't ask. And then Options World, where everyone sold gamma. For a decade or two everything went much better than normal, but suddenly everyone went bankrupt and it ended up in a kind of Mad Max scenario."

"What has all this cost us so far?" asked Simpson.

"ProSim Capital has spent negative $1.5bn and growing. It's the ultimate cash machine."

"And what happens if you simulate out the current investment environment without changing it?" queried Simpson.

Prosser stared blankly into the distance. "Everything ends up being owned by a textile mill controlled by the Gates Foundation."



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

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

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

Richard Owen writes:

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

Stefan Jovanovich replies: 

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

Richard Owen writes: 

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

Stefan Jovanovich responds: 

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



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

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

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

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

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

Richard Owen adds: 

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

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

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

Ralph Vince comments: 

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

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

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

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

Stefan Jovanovich comments: 

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

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

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

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

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

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

Victor Niederhoffer adds: 

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

Jeff Watson adds: 

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

Alan Millhone writes in: 

Dear Chair,

A grudge is a difficult thing to dismiss.

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



Gyve Bones writes: 

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

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

— G.B.

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

The President of the Old Speculator's Club writes: 

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

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

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

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

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

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

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

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

Richard Owen writes: 

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

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

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

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

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

Craig Mee writes: 

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



 I found this article very interesting. Yet few of the investment greats have PhDs or CFAs. QED? Albeit that PhDs are overweighted vs, their population weight.

"What a Difference a PhD Makes: More Than 3 Little Letters"


Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s' publications in leading economics and finance journals further enhance the performance gap.

S. James writes: 

I struggle to find anything less important than the letters after one's name when assessing investment managers.

Ralph Vince writes: 

I would certainly argue that more education is preferable to less, in any field, provided such education doesn't impede someone's ability to reason things through for themselves.

Whether it facilitates thinking this way or not is not something I (nor one who does posses those credentials) can determine from our own experience.



 Eike Batista is clearly one of the most exceptional businessmen in history. His achievements are incredible. Next to him we are all minnows. Sadly it appears he has lost 99% or 100% of his c.$35bn fortune (depending on reports). Courtesy of Forbes, below are the English translation of his ten business rules. They seem quite piquant in light of his struggle. It must surely be a reminder that we must all diversify to some extent away from our own self.

1. "Nobody is happy alone. To share experiences is always a good thing."

2. "You grown as a person when you face your own challenges, or stressful moments, as I like to say. A good entrepreneur must be prepared to evolve in adversity."

3. "The good seller is the one who is also a good listener."

4."Believe in yourself. If you doubt yourself, you won't be able to face your co-workers. Or the market, for that matter."

5. "Don't quit at the first adversity. Believe in your intuition, but try to be down to earth as well, paying attention to research and polls."

6. "Don't think you are unstoppable or foolproof. Don't think that the only way your business will work is through perfection. Don't aim for perfection. Aim for success."

7. "To have a dream is one step closer to achieving something in life. The difference between the dreamer and the maker, though, is that the latter actually makes it happen."

8. "Look forward; focus on what people don't see at first sight."

9. "Look at a business in all its depth and think of every detail with maximum accuracy and minimum risk."

10. "Luck is important, as it is part of any project. But luck will only be present when the project is well designed."



The Jan-October return of the SP500 index for the period just ended was +23%. This 10 month return is 4th highest since 1971 (4th out of 42 years).

Over this period, for Jan-Oct returns over +10%, the following two month returns were up (2-month return of the next Nov+Dec), an average of 4.9% with 16/18 positive:

Date Jan-Oct nxt Nov-Dec
10/1/1975 0.299 0.013
10/2/1995 0.266 0.059
10/1/1997 0.235 0.061
10/2/1989 0.226 0.038
10/1/2003 0.194 0.058
10/1/1991 0.188 0.063
10/1/1980 0.181 0.065
10/3/1983 0.163 0.008
10/1/1986 0.155 -0.007
10/1/2009 0.147 0.076
10/1/1996 0.145 0.050
10/1/1976 0.141 0.044
10/1/1985 0.135 0.113
10/1/1998 0.132 0.119
10/3/1988 0.129 -0.004
10/1/2012 0.123 0.010
10/1/1999 0.109 0.078
10/2/2006 0.104 0.029

Richard Owen writes:

Great work! If you dial it back a day or two and bolt on 87, I wonder what it looks like as an average.



Collateral plays a big role in the system at large. If the banks can survive only through overnight funding at either the repo, MRO/LTRO, or Fed discount window, acceptable collateral is as important as rates. To ease the Fed can ignore rates and just say one day they will except IBM or Apple debt or commercial paper as collateral in exchange for loans. Conversely they could slip in some language about raising "haircuts" on notes or bills to have a tightening effect. While all are focused on the level of bond buying, there are many other tricks they can pull from the sleeves.

Richard Owen writes: 

They say the securitisation markets died.

Not so. It is just the banks began wrapping to repo rather than sell.

The ECB gave it a pill by agreeing to accept any AAA collateral. Standard practice is to wrap your doo doo, top slice it, and fund the AAA at ECB.



Buffett buys Heinz with 3G, brings in Burger King's (3G owned) ex-CEO, and McDonalds throws a strop and drops Heinz from the menu.

Does anyone know any of the politics behind this?



 Okay, I'm ignorant, and don't know anything about the outdoors or subject of survival although all my kids regularly go to such place as the Grand Canyon where you can't leave Anything!!!!! inside the canyon. But I know that Tom Wiswell was very sagacious and he prepared proverbs for us that he felt was the best book he ever wrote. When he'd be playing, about once every five games, he'd shake his head and frown "I'm in over my head, I have to simplify". He didn't lose a game for 25 years. And then he'd say at the end "take care of the draws and the wins will take care of themselves".

The most important business lesson I've ever learned is "Never get in over your head". Oh my goodness, I've lost so many hundreds of millions by not following that. How could you quantify it. You might always have a reserve of at least 1 times the amount that is required to support a position. For example, if you have 10 of liquid capital, never put up more than 5 of it. Whenever anyone offers to provide liquidity for you when you are about to be tapped out, that's the time when you should have been adding.

Richard Owen comments: 

Kipling's story with his son and the Great War is an example of people simply not knowing what they were getting themselves into. They should have listened to Kitchener.

That's a general trading and survival point: Do you know what you're getting yourself into?



 The Value of Debt by Thomas Anderson is a good book for any individuals to read. It makes the point that most individuals don't have enough debt. The average for companies is 50 % of assets. No companies amortize their debt but all pay interest only. The ideal debt ratio changes as one ages, but a rule of 25 % of debt to assets is recommended. Anderson points out that debt has many advantages in providing liquidity, insulating from crises, and capturing the spread between cost and return, and availability for one time purposes including helping kids out on the path to life. He recommends that everyone set up an asset based loan facility. He recommends 50 % of assets as a good ratio. It's a good book for parents to discuss with their kids. The book is written for the layman but the author bases many of his discussions on Ross, Westerfield, and Jaffe's Corporate Finance which seems to have good academic distillations of many of the topics covered in the book.

Richard Owen writes: 

It sounds like a good book. I believe the thesis is probably correct… except for the practicalities.

I am not aware of any providers to the consumer at a bulk level of either secured or unsecured long term revolving credit facilities of either fixed or floating form.

Of course, there is the mortgage facility in the USA, but most people have substantial debt in this regard already.

Also, as a consumer it is hard to ring fence one pocket of borrowing, unlike for a corporation. In the USA, walking away from your mortgage affects everything else in terms of credit score. In the UK everything is recourse to your mortgage.

The Offset mortgage in the UK is marketed like a personal revolver but the small print makes it entirely unusable in such a manner due to stated repayment channels and penalty fees and so forth.

The problem also is that an individual can typically only possess capital markets assets or a small private business stake. Borrowing facilities for equities tend to be low quality and borrowing for small businesses or stakes therein quite expensive.

I was at an NHS hospital the other day and chatting with the student whilst the doctor disappeared. He was American and funded from the US system. His five year course was funded at USD 65k per annum at an 8% interest rate with federal loans. That sounds horrendous to me.



 The consilience of the Nobel to Shiller and IBM reporting earnings and IBM dropping 7 points from the close reminds one of how careful you have to be in developing systems based on past data.

How many things are wrong with Shiller's data. For one, they didn't report earnings in many of the time periods he uses. For another, they reported them 4 months late. For another, the earnings series are adjusted many years later. For another he's using average of 10 year earnings and 10 year prices, to come up with his p/e. Okay, it doesn't take account of expected earnings the next period. It doesn't take account of the movement up from the end of the year when reported earnings are better than expected and the move down when reported earnings are less than expected thereby giving a 100% change that the low p/e will show superior performance but certainly not feasible to implement. And of course the best estimate of the p/e is the current level not the level 10 years ago. Yes. Earnings and prices are a random walk in changes not levels. And yes, the use of averaging introduces spurious serial correlation as working pointed out. But yes, even for those who know that when the stock price has a tendency to go up in the period before the report, and it's statistically significant, you can't use it or make money with it. Because yet, like IBM, when the earnings are bad, they often report it earlier than the due date. So you're waiting for the report date, knowing that prices are going up, but then they report early, (perhaps the flexions acted), and you get caught with the down 20% price move even though the move up to the estimated reporting date shows positive correlation with the forward. I.e. you can't make a profit with it even though there's a extraordinary regularity in the past data.

It makes one wonder why the Nobel was given to a chronic bear when the reason the Nobel prize is so high is they put much of their endowment in the triumphal trios' drift upward in equities from 1$ in 1899 when they started to 30,000 today, etc. 

Richard Owen comments: 

Only the Chair could pack so many statistical anomalies into a handful of sentences!

Perhaps I have misunderstood the use of Shiller PE, but the traumas you describe apply to reasonably mediumish timeframes, whereas Shiller's work is typically discussed in the context of long range endowment allocations of Yale type money to broad indexes. Whether it is even then a useful tool is a different question. But hasn't a very low shiller PE typically coincided good prospective long range returns? But the issue being one would sometimes have to wait half a career or so to be proven right.

Ben Graham did similar work but discarded it as a means of allocating capital as the Baconian issue caught up to it. Grahams issue was the other side of it: exiting on a high shiller PE with a decade of bull market to go.



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

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

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

Victor Niederhoffer writes: 

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

Richard Owen adds: 

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

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

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

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

Stefan Jovanovich writes: 

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

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

Richard Owen writes: 

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

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

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

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

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

Stefan Jovanovich writes: 

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



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

The two by two payoff matrix:

                         Remain Silent       Confess

Remain Silent          -1                      -10

Confess                     0                       -7

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

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

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

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

Tyler McClellan adds: 

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

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

Stefan Jovanovich writes: 

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

Pitt T. Maner III comments: 

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

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

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

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

"Penn Biologists Show that Generosity Leads to Evolutionary Success"

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

Richard Owen writes:

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

Jim Sogi adds: 

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



 Charles Dow used to counsel that no individual should ever be promoted if they hadn't made a large error at some point. Phil Fisher used to insist only in investing in those stocks that had management teams willing to make big mistakes. If they didn't make mistakes, they wouldn't also take the risks required for success. Is this the essence of success? How does a corporate management team, upon the fruition of such errors, survive being "stopped out" of their positions in today's hair twitch paradigm? Is being expropriated from your career rather than your capital not the bigger risk today? And thus can it only be stocks with founder, family or veto shareholdings that make for truly great growth stocks today? Should not Tim Cook undertake an LBO with the Qataris?

anonymous writes:

Does modern risk management preclude financial Darwinism?

Steve Ellison writes: 

Having worked in the technology industry, it has long seemed to me that many companies are never again the same when founders are replaced by "hired gun" CEOs. My best guess on why this might be is that hired managers don't fully understand non-financial aspects of the founders' visions that prove to be critical to success. As I posted in 2010, this study found that founder-led companies outperform others:

"Eleven percent of the largest public U.S. firms are headed by the CEO who founded the firm. Founder-CEO firms differ systematically from successor-CEO firms with respect to firm valuation, investment behavior, and stock market performance. Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions. An equal-weighted investment strategy that had invested in founder-CEO firms from 1993{2002 would have earned a benchmark- adjusted return of 8.3% annually. The excess return is robust; after controlling for a wide variety of firm characteristics, CEO characteristics, and industry affiliation, the abnormal return is still 4.4% annually. The implications of the investment behavior and stock market performance of founder-CEO led firms are discussed."



Ron Howard was on the Andrew Marr show commenting on Hollywood financing. He stated that every decision that a Hollywood executive makes now places his career on the line. And thus there is a significantly reduced level of risk taking and a focus on ever greater budgets to absorb the available capital (thus raising the stakes for any error made; a vicious circle). Hollywood has coalesced around star studded blockbusters. But this is a pool with diminishing returns available to the capital employed. This is a "big problem" he feels. Does this seem similar to any other industries and their method of capital allocation?



 "Follow your bliss" was a philosophy that resonated deeply with the American public—both religious and secular. During his later years, when some students took him to be encouraging hedonism, Joseph Campbell is reported to have grumbled, "I should have said, 'Follow your blisters.'"

If you follow your bliss, you put yourself on a kind of track that has been there all the while, waiting for you, and the life that you ought to be living is the one you are living. Wherever you are—if you are following your bliss, you are enjoying that refreshment, that life within you, all the time.

A quote about Campbell from George Lucas:

I came to the conclusion after American Graffiti that what's valuable for me is to set standards, not to show people the world the way it is…around the period of this realization…it came to me that there really was no modern use of mythology…The Western was possibly the last generically American fairy tale, telling us about our values. And once the Western disappeared, nothing has ever taken its place. In literature we were going off into science fiction…so that's when I started doing more strenuous research on fairy tales, folklore, and mythology, and I started reading Joe's books. Before that I hadn't read any of Joe's books…It was very eerie because in reading The Hero with a Thousand Faces I began to realize that my first draft of Star Wars was following classic motifs…so I modified my next draft [of Star Wars] according to what I'd been learning about classical motifs and made it a little bit more consistent…I went on to read 'The Masks of God' and many other books.



 Is anyone familiar with writings they would recommend on casino risk management?

You rarely hear of a casino going bust, unlike traders, brokers, etc.

Some of this may be because they are as much a market maker as principal (although NYSE specialists go bust). And there is always zero risk core cash flow from slots, poker tournaments, etc.

But I was wondering if casino's use things like hard stops for the P&L etc. irrespective of statistical distribution expectations? And if they dynamically size their risk relative to house capital by opening and closing down tables as suits? And do they have per player stops too? You get kicked out regardless if your winnings exceed a hard stop?

On a different bent: Phil Ivey, who shook down the Punto Banco desk at Crockfords still hasn't been paid.

Is the below correct that a casino will withhold existing winnings if they suspect you only of card counting (as distinct from refusing to play further with you)? Do the rules or small print somewhere allow them to disbar you from certain 'mental strategies' as distinct from cheating?

"The Curious Case of Poker Pro Phil Ivey's Punto Banco Rake"

Whether what Ivey did was illegal isn't what's being decided. It doesn't need to be illegal for a casino to consider it a violation of its own rules. Counting cards in blackjack, a practice that isn't anything like "edge sorting" but is similarly frowned upon by casinos for giving players an advantage over the house, isn't illegal either. However, a casino can withhold winnings and bar players for counting cards if they want.

keep looking »


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