Sheltered Specs,

Thought you might enjoy this talk:

"Roland De Wolk and the Scandalous Life of Leland Stanford"

Sushil Rungta writes: 

Very interesting.

Just ordered the book also.

A subject of great interest to me.



I'm also wondering about real estate. Here there's a moratorium on evictions, a moratorium on foreclosures. Naturally no one will pay either rent, especially rent, or mortgage, because they are out of a job, and the unemployment fund is dried up.

That puts pressure on the banks, and so on down the chain.

Ralph Vince writes: 

Yes. This is why I think the virus is NOT a problem to be concerned about. Everything is downstream from everything else, in a giant circuit that is the US economy.

It cannot be started simply by reversing the order of operations form which it was stopped. Some fraction of the machine will inevitably be "amputated," I fear, and never re start.

I wish I knew what size that fraction is.

Peter St. Andre writes: 

The following is speculation, but it seems to me that much of the retail sector will not return to "normal" for at least 12 months and possibly as much as 5-10 years because apparently a vaccine will be difficult to create and distribute (the previous record for developing a vaccine - for Ebola - was 5 years [1]). You can write off theatres, music clubs, and the like. Museums and gyms and restaurants and salons and such will be severely challenged and perhaps unable to generate even 50% of their previous revenue because of persistent social distancing and the fact that many former customers will simply stay away. Some of this activity will move onto the Internet, but many of these organizations will cease to exist. Will anything take their place? That seems unlikely, which means it seems likely that retail rents will plummet ~50% too, leading to widespread bankruptcies in the commercial real estate sector. And this doesn't count factories, office buildings, and so on. What are the downstream effects on REITs, banks, pension funds, property managers, service companies, etc.? Others on the list are more expert in these matters so I'd love to hear their perspectives.

Peter Pinkhasov writes: 

If one had to throw darts I would think major consolidations in retail, airlines and O&G coming. Big winners are still middle-man removing; anti-cartel tech giants.

Ralph Vince writes: 

None of this stuff you fellows are discussing are part of the major backbone of American manufacturing though — what you are mentioning, even airlines, are not even complicated processes.

I'm talking about, say, large, design- engineered products, often one-offs like huge power transmission componentry involving oddball power transmission devices ( say, rotary actuators) that, say, operate in unusual environments, involve many complex comppnents and engineered upstream.

So if the more simpler services of the economy will struggle to reopen, how will the manufacturing backbone, comprised of it's own, interdependent, rather circuitous food-chain, stand up this decade, or ever? If things had been lost to globalism, the propensity for more of that will be far greater now by sheer necessity.

K.K Law writes: 

"COVID-19 is attacking our defense supply chains and our nation's security"

Gordon Haave writes: 

Covid 19 isn't attacking them. Human decisions are.

Julian Rowberry writes: 

Exactly Gordon, the same goes for the recovery. It won't be held back by complex physical limitations, it'll be limited in varying degrees in different segments by human decisions (red tape, regulations, access, sentiment etc).

The two areas I see that are going to do well are those with political clout to enforce the flow of decisions in their direction. These segments will be hard to swim along with because they will be able to front run, maintain and work their syndicates. The other is those who are who break the paradigm with new ideas, businesses & services, that the gatekeepers don't see coming until it's too late.

Easan Katir writes: 

Anecdote, pointing to a trend ahead:

A business-owning friend voluntarily quarantined on his yacht in Sausalito called to talk about money. He said he had just had a zoom staff meeting, and everybody said they liked working from home, and hoped it would continue.

So among other effects, the govt decision to shut down accelerates the work from home trend. #WFH



The Bard arbitraged grain and lent money. Click here for the revelation by researchers from Aberystwyth University in Wales: "Shakespeare 'The Hard Headed Business Man' Uncovered"



 Just 52 cards (weeks) with 4 suits (seasons) with 13 cards (weeks) in each season can be shuffled into 400000000000000000000000000000000000000000000000000000000000000000000 combinations. That's 4 and 69 0's.

The Pips (spots on a card) = the number of days in the year for trivia buffs (jacks count 11, Queens 12 and Kings 13).

Oh and here is a mind-fuddling bit of math that I perform with all the time and I'm still shocked that it always works: The Gilbreath Shuffle.

Easan Katir writes: 

Years ago one learned from professional card men how to shuffle overhand, riffle, even spread cards on a table and mess them up — and end up with every card in the exact place as before. Market application? There are those who know how to shuffle the news, analysts' ratings, technical patterns, so their capital increases — while the audience of investors looks on, amazed.



What are the chances…statistically, that the Dow and S&P would cross big round numbers on the same day? The Big Round Number phenomena first pointed out by the Chair in early days …. still holds true.



 1. You run a pattern to give you sustenance for a position and you nod approvingly when you see that it gives bullish forecasts. But then you realize you were looking at bonds as the dependent variable rather than stocks, and the actual forecast is disastrous to you.

2. You have a spread on and after giving up the bid asked and the commission, taking into consideration your expected profit, you're giving up more than 100% vig. But then to reduce the certainty of a loss you leg out. And you leg out of the one that was ready to go through the roof in your favor, and the leg you're stuck with plummets to terrible levels ( happened to me today).

When your friends hear that you're a speculator, they say "how can you sleep at night".

The watched pot never boils. So you step away from the market for one minute, and during that time, the one chance that you had to get in for a profit is dissipated.

5. Anyone who meets you over 50 will greet you with "you know, edspec and reminiscences of a stock speculator are my favorite two books of yours". (Is the Sherry Netherlands lounge still open?).

6. The most frequently asked question you'll be asked is "how can the fibonacci systems be so accurate?"

A bank trader will receive a bonus of 10% of his profits on a 1 billion position, and complain that he's getting less than he would if he worked for a hedge fund.

8. Your alma mater will pay its investment team 200 million in bonuses, 10 million each while they lost money in the year on the grounds that they beat their bogey.

9. When the market goes up, more than 100 dow points, all your friends will say to you "the market was way up today. You must have made a fortune" not knowing that you were short.

10. You hold onto a position while it goes violently against you and finally give up at the worst point, at which time it turns around and goes through the roof in what would have been your favor.

11. You make small gain after small gain– over a day, a week– and your confidence and well-being grow. Then it's all wiped by one big loss. 

Easan Katir adds: 

1. One could not find a more appropriate song to listen to than this while waiting for theta to decay.

2. You are called a nerd when you price an option using the Black-Scholes model going through the formula by hand.

3. No one in your family appreciates the genius of RPN.

4. It looks like a done deal so you go long double S&P, which tanks after hours.

5. You read "among the plays which men perform in taking different parts in this magnificent world theatre, the greatest comedy is played at the Exchange. There in inimitable fashion the speculators excel in tricks, they do business and find excuses wherein hiding places, concealment of facts, quarrels, provocations, mockery, idle talk, violent desires, collusions, artful deceptions, betrayals, cheating, and even the tragic end, are to be found" written by de la Vega in 1688, you and realize nothing has changed in four hundred years. 



 Our band's new lead guitar player is one of the best in town and knows music theory. He recently gave me a quick lesson on the Circle of Fifths. A chord is basically two notes, often three. Chords in a song have progression. Typical overtones are 3, 5, 7, 11, 13. Interesting to note the prime numbers. The 5 easily resolves to the 1. The 7th and higher overtones create tension and the resolution to the one is a release or catharsis. Minors and diminished chords have a unique emotional resonance. Interestingly, the same notes can be different chords depending on the the tonic. There are some similarities to Japanese Candlestick chart theory with record highs of 11 wanting to resolve. I imagine there is some tendency of stock charts to follow an emotional path similar to music and the theory would be similar also. Chair wrote about music and markets in Edspec.

Jeff Rollert writes: 

Jim's next lesson involves power chords and the blues… ; )

Easan Katir writes: 

Much more original thinking in Educ of a Spec, however as one who learned music theory before trading theory, it is useful to see how the 11th resolving to the octave is similar to the attraction of round numbers noted by the Chair.

Also the octave is similar to investors selling when they have doubled their money.

The recent trajectory of FB is not totally unlike the dominant phrase in Thus Spake Zarathustra , which could be the PR theme of its übermensch founder.

Jeff, blues might be similar to options traders, with the endless repetition of the same chord relationships selling vol the way the bluesman makes lamenting his lost loves into an art form and ekes out a living.



Here is a pumpkin pi pun to wish you a Happy Thanksgiving.



 As precious metals continue their ascent, yesterday evening I enjoyed an award-winning movie, Empire of Silver, a historical account of Confucian banking clans in 1899 Shanxi, China, which tells the tale of silver-based economy, government-issued paper money, human frailty and greatness.

In that era, the Confucian bankers were trained from age twelve, and expected to adhere to high moral and ethical principles. All in Chinese with subtitles, this viewer found the story fascinating.

Leo Jia adds: 

Empire of Silver can be watched online here.

Shanxi used to be home to many of China's riches (not counting the royals and the officials). It is very interesting today the people there are no longer good at the game of banking. Instead, they mostly rely on mining coal, which made Shanxi not a very pleasant place to visit. Unfortunately, coal can not restore their old glories for being very rich. Today, Zhejiang (on the eastern coast just south of Shanghai), which mostly relied on making something cheap to export, is home of many China's riches (also not counting the royals and the officials).

In case others outside of China can't view that link, a search on Youtube with the Chinese title "白银帝国" results in the following 8 parts of the film:

Part 1/8

Part 2/8 

Part 3/8 

Part 4/8 

Part 5/8 

Part 6/8 

Part 7/8 

Part 8/8

Leo Jia adds: 

 There are quite a few scenes in the film showing an amazing road with tunnels running on the side of a cliff. I believe it is the famous Guoliang Tunnel Road located in Henan Province, south of Shanxi Province. That road was just featured in "10 Gorgeous Roads For The Drive Of A Lifetime", of which the Guoliang slide (Slide #10) is quoted below (with a correction of the province name).

Googling for "Guoliang Tunnel" yields more pictures of it.

Using this road in the film clearly presents a dislocation in time, because the road was actually built between 1972 and 1977. The Wiki page about it is Guoliang Tunnel Road, China.

It was built by only 13 local villagers in just five years! Located in the Henan province of China, this can be considered to be a sacrificial road of sorts. Many villagers lost their lives due to its construction, but the work went on. The tunnel itself is 1,200 meters long, 5 meters high and 4 meters wide.

It's called the most dangerous road in the world despite its scenic beauty and as a wise man once said, 'the road does not tolerate any mistakes.'



 Zuck gives an interview and FB kicks up 5%. There's still no clarity on how it will triumph in the mobile space, how it will address the decline in FB use among teens and young adults in the US, or retention of employees given the stock's performance to date. I suppose one could argue that the only place for FB to go is up, but just because it doesn't decline anymore doesn't mean it will go up.

Maybe I'm missing something here?

Easan Katir writes: 

Only twenty more speeches and, at this rate, the suffering shareholders will break even. 

T.K Marks writes: 

So today's philosophical conundrum might be, would it be unethical of him…to front-run his own speeches?

Given the circumstances, that's a question more easily posed than answered.



 The news of Neil Armstrong's death hit me hard. He played an important part of my life and it was like losing a close friend, although I wasn't a close friend but rather an associate.

As a teenager I read about Neil's Korean War flying mishap in Popular Mechanics. Somehow I remembered his name probably because I was a fan of the radio serial, Jack Armstrong, the All American Boy.

I was an engineer at NASA in Houston when the second group of astronauts was announced and I learned that Neil was selected. I was selected to teach the group about flight mechanics with emphasis on launching into orbit. Neil had a great grasp of the subject. All the astronauts were active duty military and Neil was the sole exception. He was a civilian NACA/NASA test pilot who was famous, within aeronautical circles, for piloting the X-15 rocket powered research vehicle.

Neil and I crossed paths at various times within the context of mission planning for the Gemini and Apollo programs. I was pleased that he was selected to fly on the first lunar landing mission. I believe he was the best choice out of the very talented and capable group. My faith in his ability was validated with his successful mission performance.

Looking back, I see how the manned space program changed the trajectory of my life in a good and wonderful way. Goodbye Neil Armstrong, you are someone I admired and respected.

Victor Niederhoffer comments:

Inspired by Mr. Cassetti's post, I have a Neil Armstrong letter I wold like to share.

Dear David,                                                      Sep 12, 1986

"I am saddened to hear of your illness. Your father told me you are interested in the mission of Apollo 11. Apollo 2 was of course the high point of my life. When the rocket lifted off the launch pad I must confess that I was not sure I'd have the distinction of being the first man to step foot upon the moon. In every flight there's the possibility of risking one's life. As you may have studied, I had a close call aboard Gemini 1 when the craft started to roll violently. It could have ended in disaster. But Dave Scott and I lived to tell about it. The good Lord had something to do… being on the moon was somewhat like standing on the high desert of new Mexico on the night of the full moon, only it was much brighter. Looking back on the video tapes of it, earthlings didn't quite get the breathtaking spectacular of it, on their tv sets. The moon's surface was very powdery with fine granules that made beautiful footprints. And since there's no wind on the moon, my footprint will last much longer that I will. Maneuvering around on the moon was tricky at first. While the gravitational pull is only a sixth of the earth's, it was a bit of a trick keeping balance. It was a skill we mastered quickly. David, you asked me if there was any funny moment on the moon. The one thing that stands out is the fact that with all the engineering and calculations that the lem would sink more than it did into the moon's surface. The last rung of the ladder was about three feet off the ground. I remember wondering if this first historic step was going to be a big flop before the whole world. Later, I recall how ironic now that big first step was then accompanied by, "that's one small step for men, one giant leap for mankind. It's been over 17 years since Apollo 2 and while the details of it are vivid in my mind, it's still quite hard for this Ohio boy to believe he actually made the trip. Through a telescope, I can pick out the spot on mars transquilliitatis where the eagle landed. I'm still very awestruck in retrospect. The excitement of actually being there was overshadowed to a great degree by the the overwhelming tasks that were required of Buzz and I. I wish you well, David. You are a very brave little boy. I will keep your well being in my thoughts and prayers, keep up your studies and I'm sure you'll get to visit the moon someday.

Sincerely yours,

Neil Armstrong

Easan Katir adds:

Neil Armstrong should rightfully be remembered as a world hero, along with—far beyond actually— Christopher Columbus and Ferdinand Magellan.

Leo Jia replies:

Wasn't the greatness of Columbus due to the fact that he had a vision and then acted upon it which led him to realize that vision? The land he discovered is a treasure to mankind which later nurtured a great country and wonderful people. I am not sure if he would still have obtained the prestige if the land were a totally uninhabitable piece of waste, or if the land were still unreachable by people by a long shot.



 As a hedge fund manager you have nine assistants employed solely to give you advice. Each of the assistants has a different perspective on the markets. They are all good advisers, as any one of them improves your trading immeasurably. For example, the market has a 2 percent annual return, but with your skills you can generate a 10 percent return. If you also add the advice of any one of your assistants you can bump that return up to between 12 and 18 percent.

Over the last 12 representative years there have been times when the nine were universally bullish. But despite their unanimity the market did not always rise. Conversely, even in the protracted down moves of 2008, their bearishness was not unanimous. Put another way, there was always one or two that wanted to go long at the worst times. Yet each and every one over time provided great advice.

You would like to find a way to combine their advice to get even better results than by using any one alone. But that's not easy. Sometimes, adviser A is early, and late at other times on a move. Likewise with the other assistants. One simple solution would be to have them vote, but the performance result of the vote underperforms some of the individuals, although still better than not having any adviser.

*Note here that we are only considering return and not the risk taken to achieve that return. Risk should always be considered, but for the sake of moving along, let us assume that taking the advice of your advisors never increases risk and that their respective upside contribution to profits is directly proportional to their downside exposure to risk. That is, much of their positive return contributions come from reducing risk, which is what we have observed generally.

Now, let's suppose that these advisers are not people, but algorithms. That's actually better because as algorithms they can be combined in ways that individuals cannot. They can be viewed logically (on/off) as in the voting experiment, or they can be ranked by their actual values. If they have scalar values they should be normalized (given the same order of magnitude or scale). For example, you cannot compare the slope of the Dow Industrials with that of the S&P 500, as the former is an order of magnitude larger. But if you put them on the same scale (e.g. divided by price), you can easily compare them.

Normalization is exactly what you would do to your inputs if you were using a neural net, and you might be tempted to go the NN route. But NNs have problems; among them would be your inability to discover the actual combination of what worked best. You might say "who cares" as long as it works, but that philosophy does not have a good history. However there is a very good use for a NN, and that is as a trial. That is, if you are good at NNs (and most people fail), then you should by all means try. If the NN gives you good results, then proceed on your own to find a good combination without the NN. But if using a NN does not improve results for the experienced practitioner, then it is going to be very difficult to find a better combination.

 But how do you combine them to your best advantage? Well, there's an app for that. It's called linear algebra. It is somewhat vertigo-inducing for most traders, because most of them are comfortable with things they can chart. For your average trader that means two dimensions; options traders tend to be comfortable in three dimensions. But with our illustration we are likely progressing to higher dimensions, and they are not chartable, although the problem's solution is indeed a chart, albeit a virtual one.

Subsequent "chapters" (if the topic flies): Operations, Testing.

Jim Sogi writes: 

"But with our illustration we are likely progressing to higher dimensions, and they are not chartable, > although the problem's solution is indeed a chart, albeit a virtual one."

One of my first posts ever to the SL was Flatland, and the idea that multiple dimensionality is lost in two dimension charts which are typically used.

Easan Katir writes: 

Flatland, one of my all-time favorite books since I read it 40 years ago, offers insights in many arenas. Perhaps some enterprising ex-game coder would turn his attention to finance and provide charts where the point of view can be changed with a click. Will traders of the future be trading on an X-box-like device?



I question if I am being too cynical if I assume that the government is simply another "player in the game"? Talking about it in abstract theoretical terms seem to leave out that dynamic. Politics is like the weather: It changes all the time; there's not much you can do about it; and the main thing is to make sure it doesn't kill you.

Easan Katir comments: 

Not an economist am I, but sometimes one thinks about the velocity and turnover of currency: each time a dollar changes hands it is taxed in some way, whittling it away to a stump of value.




 Let us give thanks to the veterans who sacrificed life and limb to protect us from those who would do us harm or restrict our freedom. People talk about protecting the American 'way of life'. I've thought about that and concluded that in essence it is our freedom to achieve our full potential. So, to do our part, our sincere payback to veterans, is to realize what the full human potential is, and achieve it. What is the highest potential? A wise man once told me "think of the person you admire most. He or she is a reflection of your highest potential."

Of course, achievement is not necessarily be measured in money. While researching Mongolian gold mines, I discovered one-third of the population were monks a hundred years ago, in other words people serious about achieving their concept of full potential. Stalin invaded and killed most of the monks. They lost that freedom.

Let's not take our freedom to achieve for granted. In parts of the world, they play 'hunger games' for real every day, where achievement is simply surviving. We live in a peaceful prosperous land, so let us make the most of our freedom, and not waste life on trivialities. That seems to me to be a practical celebration of Memorial Day.



 Here is an amazing spectacle. Everyone knows that the house must win and the players, over time, must lose. And yet casinos flourish all over the world. Nor, contrary to the standard arbitrage argument for efficient markets, does the smart money, the house, end up with all the capital in the world while the dumb money, the players, go broke losing the capacity to sustain inefficiencies in the market. To the contrary (and contrary to one of Jarrow’s assumptions) there is a continuous source of wealth for the house to keep winning; the dumb money is constantly replenished.

From the fantastic article: "How Big is Almost?: or why the finance professoriate is clueless about managerial effectiveness"

Stefan Jovanovich quotes from the paper: 

"The paradoxical notion that uncertainty is absolute, that randomness is an objective quality, first and foremost of nature but by extension of social and economic life as well, has been rampant in our time. It was at the heart of the Copenhagen debate over the direction of quantum physics. It drove Keynesianism and Marxism and Smith’s replacement of the entrepreneur with that invisible—but oh so heavy—hand. It drove centuries of absurd debate over the relative importance of “capital” and “labor” as if they were objective fungible commodities with capabilities separable from the particular capitalists and laborers who wielded them."

"(t)here are men who consistently hit the bull’s eye at 300 yards and men who never hit it once. There are baseball players who hit .300 over a career and those who ride the bench. There are engineers with dozens of important patents to their name and those who never amount to much. There are farmers who prosper year in and year out and those for whom the weather is always bad. And generally we say the successful shooters and hitters and engineers and farmers are “good” at their jobs and the unsuccessful ones less good. We do not generally say (unless we are feeling envious), “Oh, they were just lucky,” or “they were breaking the rules.”

Can securities markets be so special among all markets, among all the arenas of our experience that in them alone diligence and skill and judgment and even raw talent do not correlate with good outcomes?"

"Randomness or “incomplete knowledge” is a subjective phenomenon. Different observers will have more or less knowledge and more or less uncertainty as a result. Moreover we can gain knowledge by dint of hard work, natural talent, and sometimes luck. We can be well prepared or poorly prepared to make a decision, discover special relativity, or buy a security. Even our best efforts to increase our knowledge may be insufficient. We may know a lot but not quite enough. We may fool ourselves about our positive expectation. There is no guarantee that our search for knowledge will bring us close enough for success. But neither is there any basis for a dogmatic ssumption of failure—or futility."

"We celebrate successful investors with other successful entrepreneurs as risk takers. This is true in the sense that the successful investor, like the entrepreneur, routinely makes judgments in the face of uncertainty. Nevertheless, the essential job of both investors and entrepreneurs is to reduce that uncertainty. Successful investors make money not by accepting risk as a given, as Modern Portfolio Theory tells us to do, but by increasing their ****

chance of making good decisions as compared to the less informed, less diligent, less talented. Admittedly how good investors, or entrepreneurs, do this is not entirely obvious. Edison helpfully told us it was 99% perspiration and 1% inspiration, but he was distinctly unhelpful in explaining how we might come by that crucial 1%. The progress from the objective uncertainty of a coin flip to sound judgment or even inspired creation is only partly a matter of quantifiable factors like more research or better math. Psychology or character or knack or what you will play an enormous role. Ultimately it does seem to matter not only what the investor or manager or entrepreneur."

Easan Katir writes: 

This is the most articulate rebuttal of the random walk theory ever! Thank you for posting.

If the heat of debate contributes to global warming, then this long conversational thread alone may have raised the earth's temperature a degree or so.

Gary Rogan writes:

It still all comes down to how predictable and persistent someone's ability to outperform SOMETHING is. Whether or not the mathematics of price movements are distinguishable from brownian motion, which they clearly are, this whole never-ending argument is about whether outperformance is reliable enough to (insert your own criteria here, like "bet the house"). The world is a confusing place, for instance Victor seems to really like "Random walk down wall street" year clearly he does other things besides putting everything into some total world ETF. Even if someone has stellar history, how can you ever know that starting tomorrow they will be on a long losing streak that will either reverse all of their gains up to now or make them quit the game?




 1. There is a critical point in the market, a critical decision that the market gods weigh on a scale like Zeus with his balance scale deciding whether Achilles or Hector will win, that determines the market fate, and it is key and should be the focus of all news stories and market considerations but never is.

Never trust anyone but your family and best friend because everyone is disloyal in a pinch. Peleus was left for dead by his father in law after killing his brother in law to become ruler and this led to the Trojan war. Caesar trusted his best friends but they turned on him when an opportunity for power, money, and romance reared its ugly head.

3. Deception is key. The most successful Greek was the Deceiver Odysseus, and he tricked everyone he dealt with as the market tries to trick you with Odyssean power.

4. The goal is always to come home. Odysseus went home, as does the market. The only loyal ones were the wife and son and the best servant. The market retraces and comes home to break even an inordinate number of times.

5. Never mix romance with business or the market. The Trojan was was started by Paris intervening in romance and being swept off his feet by Aphrodite, and Achilles killed tens of thousands and prolonged the war by 10 years when Menelaus stole his mistress.

6. Don't try to walk with the Gods. Peleus married a half God and married her the last time the Gods and mortals mingled at a celebration and it caused him to be the most distressful of men. Trying to emulate Soros or the other greats is the seed of destruction.

7. Okay, give me the rest. And correct and tighten the above. I'm out of my depth but wanted to get the gist across.

Ken Drees comments:

 Like using a mirror against Medusa, one must plan against the adversary and sometimes use their expected attacks to beat them. Like shielding oneself from the siren song, one must be totally prepared, seek council before the journey (the trade) about what dangers are expected.

Also, it seems every entity in mythology had a weak spot. It's probably best to note these weaknesses in your thinking and in your emotions, not how can I beat the market, but how can the market beat me today?

Bill Rafter writes:

The greatest two rules:

(1) nothing to excess and (2) know yourself.

Pete Earle writes:

One lesson from mythology which resonates with me is the oracles/prophets/predictors almost always forecast correctly, but rarely in an obvious or immediately relevant way. The predictions made are usually realized, but not before taking extremely circuitous, and usually counterintuitive ways to reach fulfillment.

In my experience, predictions regarding the direction of equities or commodities inferred from option markets so often prove accurate…but only after traveling in the most wrong, most unanticipated ways.

Alston Mabry responds: 

 Pete, I think of that as "shaking the tree", i.e., we're gonna get there, but we're gonna shake out as many weak hands as we can along the way.

Peter Earle replies: 

Absolutely. Stop-running and the like as the "gods" way of seeing who's "worthy"; who can withstand the flood, the fire, the sturm und drang.

Jim Lackey writes: 

In 2008 I learned from Ryan Carlson– Sisyphus. There is a little useless book Wit and Wisdom from Wallstreet. So many of the quotes are the exact opposite from 3 pages ago… yet for a day they are seemingly sage advice. Worse for the long term. It's all good advice, yet in the mean time we must eat, and in the long term we all end up dust in the wind.

Traders lament when we miss profits. We are miserable when we lose. If we are not careful we are never happy. I have the habit of having to work myself up into a fury to win a race, pass a test or trade. My wife calls it "business mode" everyone else calls it being a jerk. Finally this year I have the ability to take a loss and this week miss a glorious rally and profit… yet at 4:20 PM its over. I am done pushing the boulder back up the hill for the day. I will return at 1:30am or by 7am, all but two business days a year. It can be torture if you do not like to trade, but if you love it…

Here is a quote from my kids music, "This is Our Science" by Astronautalis: "Our work is never done/ We are Sisyphus".

p.s I notice that if I don't like the rap beats I miss quite a bit of new poetry. I hear my teenagers say random lines and say what! That is amazing. Then I hear the song and say no wonder I never heard that line before. Damn drum machines.

Jack Tierney adds: 

Recently I've been reading up on complexity, system dynamics, and the unpredictable consequences that occur when tinkering with non-linear systems. The markets seems subject to all and, if I'm even remotely correct in interpreting the literature, there's only one certainty: expecting linear consequences (e.g, provide banks with more liquidity, bringing about an increase in business borrowing, resulting in a resurgent economy) is rarely, if ever, realized.

Instead, the unseen effects on unimagined factors, almost always derails the logic train. A source I've referred to on occasion is "Cassandra's legacy." Appropriately enough, the custodian of that site provides an interesting historical allegory, in the form of Goth Princess/Roman Empress, Galla Placidia, and her part in the demise of the Roman Empire. It's a very lengthy read and, unless history like this interests you, tough going. So, a few highlights:

"Managing any large structure is difficult and we tend to do it badly; a whole empire may be an especially difficult case. To do it well, we would need to use a method what I mentioned before: system dynamics; which is a way to describe systems and the relation of the various elements that compose them.

"…every time that the Romans fought the Barbarians, they could win or lose, but each battle made the Empire a little poorer and a little weaker. The empire was using resources that could not be replaced; non-renewable resources, as we would say today….the solution was not more troops but less troops. It was not more imperial bureaucracy but less imperial bureaucracy, not more taxes but less taxes.

"In the end, the solution was right there and it was simple: it was Middle Ages. Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages.

"What Placidia could do as an Empress was, mainly, to enact laws….It seems that Placidia was acting according to her style; ease the unavoidable, don't fight it….Placidia forbade the coloni, the peasants bound to the land, to enlist in the army. That deprived the army of one of its sources of manpower and we may imagine that it greatly weakened it. Another law enacted by Placidia, allowed the great landowners to tax their subjects themselves. This deprived the Imperial Court of its main source of revenues."

Stefan Jovanovich comments:

As much as King George's scribbler Edmund Gibbon despised Christianity, he had the Middle Ages even more because its bureaucracies were the worst of all — local and mean and stupid.

Professor Bard should revise his history. What he wrote here — "Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages." - is nonsense.

The Roman Empire's tax collections were always "local"; that is why Roman politicians were willing to pay such enormous bribes to be appointed provincial governors. The legions were also "local"; the Empire's expansion came from granting "foreigners" - i.e. the people we would today call Spaniards, French and Syrians - the privileges of citizenship, which meant they were also qualified to serve in the local legions. This was equally true under the Republic; "crossing the Rubicon" would not persist as a bad metaphor if Rome's soldiery had been centralized.

As for economics, whatever the "terrible expenses of the imperial court", they were nothing compared to the ravages of coin clipping. The solidus of the Eastern Empire maintained an unchanged weight and measure for 4+ centuries - a record that is likely never to be broken. (It exceeds the span of sound money for the British Empire and the United States of America put together.) After Princess Placida's day coinage, under the wonderful decentralization of the Middle Ages, effectively disappeared.

"Dearth of provisions, too, increased by degrees, and the scarcity of good money was so great, from its being counterfeited, that, sometimes out of ten or more shillings, hardly a dozen pence would be received. The king himself was reported to have ordered the weight of the penny, as established in King Henry's time, to be reduced, because, having exhausted the vast treasures of his predecessor, he was unable to provide for the expense of so many soldiers. All things, then, became venal in England; and churches and abbeys were no longer secretly, but even publicly exposed to sale." - William of Malmsbury wrote this in 1140 AD - the period that Professor Bard praises so highly for its progress over the degeneracies of the Empire.

Hume deserves the last word on this and most other subjects that interested him.

"Mankind are so much the same, in all times and places, that history informs us of nothing new or strange in this particular. Its chief use is only to discover the constant and universal principles of human nature."

Easan Katir adds: 

The Greeks have fooled people since the Bronze Age. Instead of a horse, they now have Trojan bonds.

Steve Ellison comments: 

Jack, the Atlantic had an article about why projects that had successful pilots often failed when rolled out to the general population.

Why Pilot Projects Fail– Here are some excerpts:

Promising pilot projects often don't scale … Rolling something out across an existing system is substantially different from even a well run test, and often, it simply doesn't translate.
Sometimes the 'success' of the earlier project was simply a result of random chance …

Sometimes the success was due to what you might call a 'hidden parameter', something that researchers don't realize is affecting their test. Remember the New Coke debacle? …

Sometimes the success was due to the high quality, fully committed staff. …

Sometimes the program becomes unmanageable as it gets larger. You can think about all sorts of technical issues, where architectures that work for a few nodes completely break down when too many connections or users are added. …

Sometimes the results are survivor bias. This is an especially big problem with studying health care, and the poor. Health care, because compliance rates are quite low (by one estimate I heard, something like 3/4 of the blood pressure medication prescribed is not being taken 9 months in) and the poor, because their lives are chaotic and they tend to move around a lot … In the end, you've got a study of unusually compliant and stable people (who may be different in all sorts of ways) and oops! that's not what the general population looks like.



I understand third hand the Senator called for a buy in gold Friday last, and so congratulate Larry Williams for yet another great call.

Anatoly Veltman adds:

Of late, there is significant tie-in to world's strongest major currency: Yen. Yen was mired in tight range for over two months - and finally broke to new record Friday. Significantly, Oil prices reacted first - helped by the equity markets - on Monday. Finally, Gold caught up today.

In my view, the only real surprise here: Oil acting faster than Gold. I think I've observed this for the first time since Oil failed from its $147 grace three years ago. Oil may be taking back over from Gold, and one should be monitoring WTI's advance to $100.00 closely.

I speculate that around that exact event - we shall again get a signal for Gold direction! Just a heads-up, agree or not

Ken Drees comments:

I was just thinking that oil started running vertical after an oil dictator is killed and Iraq soldiers are to be returned home—and that there have been no real headlines in mainstream financial tv — oil snuck up on us???. Also gold which has been quiet spikes as well dragging gold stocks higher–and these groups mark the tail end on the rally troops from this October's large run up. Is the run over and the heavy weights oil and gold just signalling end here or starting a bigger fundamental lone push story related to Mideast and euro future madness–do oil and gold now decouple from stocks???

Momo stocks now being shot at point blank range always a bad sign in my book–when you can't suck any more juice out of the core you just throw it behind the woodpile.

netflix, amazon , apple (bruised), fslr, etc.



What evil intentions can we infer, by their waiting for a US market holiday to announce Jobs medical leave, whereby the internationalists who trade European markets get out before the hapless retail US investors, one of whom, a young Deloitte consultant, volunteered at a Washington DC school today and experienced this unexpected visi.



 If you are looking for a good book, try The Shadow Elite by Janine Wedel. She coined and documented the flexions of all stripes. Also very good is The Short Stories of Jack Schaefer, and Mathematics Unlimited, 2001 and Beyond by Engquist, Schmid et al

John Tierney writes:

OK, if you are looking for non-fiction try The Invisible Hook: The Hidden Economics of Pirates

Kim Zussman recommends: 

"This Time is Different" by Reinhart and Rogoff

(Spoiler hint: the common ploy of sovereign debt default via confiscation and hyperinflation appears not to apply to U$)

Scott Brooks writes: 

We've talked about it on the list before and I I found it very good: Amity Shlaes "The Forgotten Man"

Easan Katir writes: 

To the Last Penny is an excellent but little-known Edwin Lefevre work, which, thanks to Google books, one can read online.

Bud Conrad writes: 

How about my book, which explains how the economy works from the view of an engineer looking at the total system. It also gives investment recommendations in the second half. It is titled Profiting from the World's Economic Crisis and published by John Wiley. Amazon has reviews and some sample pages. It is number one in one category on interest rates. 

Craig Mee adds:

I recommend the Book on Games of Chance. A few of you may be no doubt already connected with it. Here is an interesting excerpt about it:

Cardano was an illegitimate child whose mother had tried to abort him. His father was a mathematically gifted lawyer and friend of Leonardo da Vinci. Cardano studied medicine at the University of Pavia, but his eccentricity and low birth earned him few friends. Eventually, he became the first to describe typhoid fever, a not inconsiderable achievement in itself, but today, he is best known for his love affair with algebra. He published the solutions to the cubic and quartic equations in his 1545 book Ars Magna, but Cardano was notoriously short of money, and had to keep himself solvent by gambling and playing chess. His book Liber de ludo aleae ("*Book on Games of Chance*") written in 1526, but not published until 1663, contains the first systematic treatment of probability, as well as a section on cheating methods. I told you he was bad.

Vince Fulco adds:

A little late to this thread but "Panic" by Andrew Redleaf and Richard Vigilante is proving to be a good read. Redleaf is a convert arb manager out in my neck of the woods who runs Whitebox Advisors. He is in print in his Dec 2006 letter stating, "Here is a flat out prediction for the New Year. Sometime in the next 12-18 months there is going to be a panic in credit markets. Spreads which now hover at an extremely tight 300 bps or so, will gap to more than 1,000. To put it another way, prices of HY securities will drop by something like 20 percent with some weak paper plunging even deeper"

A few powerful paragraphs from the first chapter:

The ideology of modern finance tears capitalism in two, then abandons the half beyond the ken of bureaucrats and the professors. Capitalism demands free markets because it needs free minds. Modern investment theory says efficient markets can moot the minds entirely. The entrepreneur cherishes freedom including the freedom to fail. The bureaucrat of capital dreams of a world in which failure is impossible. Confronted with demons of uncertainty, the entrepreneur wrestles with them till dawn. The bureaucrat of capital crafts idols of ignorance and worships in the dark.

Prevailing in Washington as on Wall St. were the most vile and self-destructive assumptions of anti-capitalists everywhere who imagined they could wield capital while abandoning the principles that created it; that systems could substitute for the moral standards they once embodied; or that men who lost trillions of dollars of other people's money might somehow recover it if only the govt gave them trillions more. Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men.



Once upon a time a Chicago acquaintance called. He was raising money for his new company, which was going to manufacture aluminum shipping pallets, and replace all those grungy wooden ones upon which goods are shipped. I reviewed the pro forma, assessed the risk, pointed out that unit cost would be an insurmountable hurdle as with so many new inventions, and said no.

A month or so later he called again, saying he had raised all the money except for one last tranche, and would I please reconsider, that i was such a good friend, and he had always admired my singing voice. When I said no, his voice got thick, he said I was his only hope, that couldn't i just lend it to him for a short time. He was actually crying and pleading. I said i had no interest in being part of the venture, but since he put it that way, I would loan him the money secured by his house. Amid wailing, and protests that his wife would divorce him, he finally agreed. He signed the paperwork, and i wired the funds.

Years of drama-filled annual reports went by. He listed me as an investor in the company, which died a torturous, lingering death, after a second round of capitalization.

More years went by, and I had written it off and forgotten about it.

Lo and behold, one day a set of papers arrived for my signature. The fellow called, and sounding much like a weasel, explained he just needed a quick signature to 'clean up some past documents', which of course he needed asap. After a day, I recalled what the deal had been: I guessed he was now refinancing his house, as this happened back when hapless bankers and reckless householders were still dancing jigs together.

I said I would be happy to sign upon his repayment of the loan. Oh, the shrieking! The sound of his gnashing teeth! He tried to argue I was merely a shareholder, and had taken the risk, and as the stars had in retrospect been badly misaligned, and the venture was kaput, it was only fair i suffered the same fate as his other good friends. I reminded him of the real deal, and proposed that if he paid up withing three days, I would forgive the interest. His other needs must have been pressing, because he sent me a payoff check.

When my son was very young and i was teaching him new words, i taught him this one:

kol - at - er - al …. and had him repeat it over and over and explain the meaning.

Craig Mee adds:

A friend recently told me that a friend of his, quite well-off, borrowed a sizeable "mates" loan… and unfortunately x months later, and after asking for it, had not payed it back. He then mentioned he spoke to an old mentor. His words were "when you make the decision to give a friend money, never ask for it back, and if it reappears then you have had a win". Very interesting, and I find good advice.



 I recall reading in Victor's Education of a Speculator many years ago that one of his more delightful methodologies was some sort of South American cigarette butt index. Wherein, how close a discarded butt thrown in the street was smoked down to the filter was a function of the general health of an economy. The thinking obviously being that the more tobacco left unenjoyed, the more the feeling that there was plenty more where that came from. I presume that the spirited Bo Keely was his man in the field on that one.

This was back in '96 or '97 and having been previously unfamiliar with anything he had written, amusedly thought to myself, OK, this guy is going to drive the professorial drones in the academic industrial complex nuts with this type of stuff.

Ever since that initial exposure to the notion of coming up with one's own metrics for gauging the state of things I've tried to hone an eye for such.

Toward that end, one of the things that I have long noticed is that little cup of pennies that one invariably sees on the counter right next to the cash register. Oftentimes taped to it is a sign saying, "Take a penny, leave a penny", along with a drawing of one of those smiley face things.

The blight of the smiley face cliche always kills me, but I invariably just block it out and instead reflexively think of a lyric from "Ripple", a quite beautiful Grateful Dead song: "Reach out your hand if your cup be empty, If your cup is full, may it be again."

Fine enough sentiment. That said though, I noticed a few years back that amidst the red of these cups' pennies some silver suddenly began to pop up: nickels.

I'm hardly paleolithic of years but I do recall that there was a time not eons ago when one could buy a (tabloid) newspaper for but a nickel, and now they're giving the things away. Smiled one of those little, private, personal perspective smiles the time I saw my first nickel in one of those cups. It was like quantitative easing for the proletariat rather than the princely. A year or so later beheld my first free dime. Thought to myself, OK, logic is going to hold the line on this bonanza right there: At a dime.

Then just moments ago that key resistance level was breached. I'm sitting here in a Dunkin' Donuts as I type this and up in the cash register's penny cup I just spotted atop the smattering of lowly red coins, 3 quarters, looking no less out of place than a robin's speckled blue eggs would have.

The irony being that it wasn't too long ago that the simple black coffee that I'm partial to — none of that cinnamon-topped frappachino stuff — would be a far cry from the $2.49 they just took me for, with refills at full-freight.

Now they purport to give away unrequested quarters by way of karma introduction and get the customer on the back-end, the bloated cost of the actual product.

A mildly insidious business model. Seen much worse.

But should I see at any point soon dollar bills begin to appear in those ubiquitous penny cups I will know for sure that we are in a full-blown Weimar scenario, the intent of the would-be benefactor and price of the cup of coffee notwithstanding.

Ken Drees writes:

This says something to me about the public consciousness of inflation. I mentioned not too long ago the vibe of people talking to me (strangers) at the gas pumps complaining about prices. This seems to be a cohesion type behavior where people use the topic as a bridge to conversation–like a soldiers right to complain about food quality. It's better than talking about the weather.

But as a youth of 12 years as a passenger/helper in a delivery van, the young teenagers/ early 20 year old drivers in the late 70s complained non stop about gas prices and inflation– everyone was talking about it. It was the talk of every bar, every station, and every food stop.

I got the point one day when this guy lit a dollar on fire with his lighter, used the dollar to light his cigarette, and then let the burning buck suck out of the window into the winter wind– he looked at me with a stone cold face and said that the dollar wasn't going to be worth sh*t in the near future. I got the point and started thinking about money.

We are not even close to that point again. 4$ gasoline will start it up.

Easan Katir writes:

Often I carry a pre-64 silver quarter and attempt to purchase something with its melt value, around $5. So far, no takers. When someone finally accepts, I will consider that a tipping point for the fate of the US dollar.



 I recently made a potentially serious mistake. I updated a web site and left it in a world writable state (i.e, anyone in the world could change it). Fortunately, a good friend noticed and fixed it temporarily while I scurried back to my computer to implement a permanent solution. Naturally one of the things on the web site is a page (by me) discussing the importance of a security mindset.

Mistakes are only useful if you learn from them, so I wrote up my thoughts on the subject. In summation, I set up rules, then broke some of them. Fortunately I had multiple layers of defense (stop loss rules) which made recovery easy.

In the bigger picture of my life, I see that most of the recent (last 5 years) decisions that I now consider mistakes are of the same sort. I had a rule or principle in place, then ignored it. At my age (50+) I'm not really getting surprised by much anymore; when I make a mistake, it's because I ignore what I know and charge ahead.

For example.. I REALLY wanted xyz, so I bought it despite the price, condition, etc, then did not like it, did not use it, broke it, etc. I was REALLY in a big hurry…broke something, ignored the rules, etc I was NOT going to ask for help/go back to the store again

So what strategies are there for stop loss rules, or layers of defense in life? How do you implement them without turning into a cold, heartless SOB? How do you identify reactionary rules (I'll NEVER do that again) that are not sustainable?

Time for some beginning of the year introspection. Here's what I wrote about this on my blog:

As I note in the overview, one of the things I want to focus on is security by design. Nice thought.

I switched from my hand crafted php scripts to Dokuwiki for the web site. Shortly after I pushed the web site out to the world, a good friend called me to say that the entire site was world writeable. Ooops… He was kind enough to flip it to read only while I scurried back home to fix it.

Obviously this was not a good outcome. I've spent parts of the last few days analyzing where I went wrong. How or why did I violate my principles?

- I forgot the rules. In the rush to get things done, I forgot to stop and think before I pushed send. The tyranny of the urgent got the best of me.
- I was complacent in my thinking. In the back of my mind, I knew Russ was watching things (or more correctly that his monitoring systems were). He is a very experienced admin and I trust his infrastructure.
- I did not think carefully enough about my actions. Sort of a variation of point #1, but I did not stop to think about what I was doing and the effects it might have.

In the end, even if Russ had not caught it, there was little chance of damage (other than egg on my face for a defaced web site). I've designed the site with defense in depth in mind.

- By design, the site is read only. It is the target node of the push. I never edit the site directly and never move information from the site back into the development environment. The content of the site is in a Subversion repo on another machine.
- I can easily repush the site from my secure repo
- The host that the web site runs on is not trusted by any other machine. There are no keys or logins on it that can be used on another machine that I control.
- OS level security in the form of SELinux is enabled.
- Logs are monitored
- The entire environment (OS and all) is snapshotted regularly

So the web site is in at least 3 sandboxes, each a little larger, each with their own monitoring system and recovery system or methodology.

Lessons to learn
- Think
- Use check lists to guide your thinking, especially when doing something new or different
- Have experienced people check your work
- Belt, suspenders, boots, raincoat, umbrella. Many layers work together to cover the gaps of each other
- Not only think before you act, but think about how to recover from a mistake ahead of time.

All in all, the best kind of mistake: small, relatively private, easily recoverable but widely applicable.

Nigel Davies writes:

One of the great problems with creating a lot of rules is that it simply gives you more to think about and these are usually not central to the activity itself. I believe that the only answer is to reach such a high level of mastery in a field that one feels an innate sense of revulsion when doing the wrong thing.

Easan Katir comments:

One important word for this topic: checklists. The more items from a list that can be computerized, automated, the better, the routine things, leaving one's mental capital for the important trading decisions .As you know, many working with high risk activities use checklists: pilots, some surgeons, etc..



libertarian party logoWith the view that there is a strong Libertarian streak across this web site, I pose these questions:

Should investment professionals, brokers, etc be registered and regulated by the government?

Should the government be able todetermine who should or should not be in the investment business or should the free market determine this?

Is it the government's duty to attempt to preemptively protect investors from potential fraud?

Should the government have strong laws against fraud yet have few laws determining who should be in the investment business?

A discussion delving into both sides of this would be very interesting.

Stefan Jovanovich replies:

Jeff's question deserves a proper answer. Common law fraud was the strongest possible law, and it did not involve the government (as opposed to the civil court) at all. Under common law, three elements were required to prove fraud: (1) a material false statement made with an intent to deceive (scienter), (2) a victim's reliance on the statement and (3) damages. This was the legal/regulatory world that the authors of the American Constitution were familiar with. They had all - both civilians and lawyers– read Black's definition of fraud: "All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated."

Having such a broad and general definition might seem an invitation for perpetual litigation; but it had, in fact, the opposite effect since both parties- plaintiff and defendant– had at risk the cost of their own attorneys AND those of the opposing party, if that party won the case. Nick may have a more benign view of regulation precisely because Australia follows the old American and current British tradition of requiring the loser to pay the winner's costs and attorneys fees. But, I doubt that, even in the Commonwealth countries, the sovereign has surrendered its immunity from having to pay the other party's costs and fees when the government is the loser. That immunity is really at the heart of Scott's and other's anger. The government is never required to pay its share of the burden of the regulatory system. The government can, with ease, tyrannize the citizens by bringing a criminal or regulatory action; the citizens may successfully defend themselves but they are ruined by the expense of maintaining their innocence. Under our system of sovereign immunities (the last holdover from the theocratic idea that the government is God's instrument) being the government means never having to pay any tithes for your civil servants' mistakes or, heaven forbid, requiring the civil servants themselves to have any personal stake in the outcome of their decisions. 

Easan Katir writes:

There was the famous case in old England where a father on his deathbed bequeathed his interest in a brewery equally to his six daughters, thinking he was giving them a wonderful gift.

After his death, it turned out the partners in the brewery had burdened the enterprise with mountains of debt. The creditors exercised their legal right to collect from all partners. This was before the corporate shield, so all six families of the daughters were bankrupted.

Some gift.

Gibbons Burke writes:

Small businesses, farms, individual traders and some professionals still operate in a mostly free market where the rules of accountability and the mechanism of creative destruction still obtain.

Big corporations are just as much the enemy of a free market as big gummint. I am starting to think that the world would be a better place if corporations had never been allowed to exist. The idea that the owners of an enterprise should not be held responsible for it's debts or its crimes, beyond their investment in the enterprise, seems to be an immoral one with bad consequences.

Salomon Brothers was a better organization than Salomon, Inc., as Michael Lewis has observed in many of his writings. When the partners were absolved of the risk of their investment schemes, the tenor of the schemes turned malignant and metastasized. Same idea applies to ….



horse whispererThe cathartic moves of Wednesday came just in time to create a sense of life at Jackson Hole in conjunction with the horse whispering and hiking so necessary to the research activities that occur there.

Desperate attempts to right imbalances come later in the week during the Summer than the other months because of vacation schedules at the Riviera and time with the others in the Hamptons.

To counterbalance the natural tendency to lethargy during the Summer, the market has moves approx 2% high to low in 19 of the last 20 days so that the public will not refrain any further from contributing to the overhead so necessary to keep the whole thing going in the absence of further subsidies from the centers at Brussels and the Beltway.

The top feeders must of necessity get on the same wavelength during the Summer so that they can get on the same page and possibly counterbalance the natural tendency of markets to homeostasis and this is why the trends in the summer are more pronounced than in other months.

East of Eden by Steinbeck has more insights into behavioral finance than all the studies of the so called men of promiscuous hypotheses, i.e. the behavioral finance gurus at the Universities combined.

The new Lloyd Webber show, Love Never Dies has more good work, more hummable tunes in it, a better plot than Beauty and the Beast of its predecessor than any other of his hits.

All the above assertions must be tested as to their validity to serve as a meal for a life time.

Victor Niederhoffer adds:

One wonders what the best use of horse whispering sessions there might be. Would it be to give instructions to the horses and engines that move the economy? Or would it be to receive unspoken in the native language signals as to the coming releases from the body language of the flexiopurveyors et al? What do you think? I'll award a prize for the best suggestion for the use of these whispers to any parties. Also one notes an amazingly large number of round numbers broken with SP 1050, Dow 10000, yen 85, crude 82, dax 5900 ish, nas 1800 as ever, beans 1000, and many others emerging vividly. What am I missing here? 

Easan Katir comments:

Another fascinating idea from the Chair. One recalls past analysis of Mr. Greenspan's briefcase as he walked to the Fed meetings. One thinks the main stumbling block to current and future analysis is lack of data: The viewer only gets brief video clips of the flexiopurveyors. A whisperer needs to observe the body language on his own terms to catch those small unconscious messages. Horse whisperers can't just watch rodeo clips. Maybe there is a way, but this is first reaction. 

Rocky Humbert replies:

The chancellors briefcaseIt's a cinch to note that the the horse whisperer's goal is to install a "western saddle" with its extra padding for the "fleecing," and its phallic horn. The English have no need for such contrivances for either foxhunts or dressage.

Similarly, the Greenspan briefcase indicator was developed by a group of American Anglophillys who lusted after the most famous briefcase in the world: The Chancellor's "Box"– which dates to the original leather briefcase made for William Gladstone around 1860– and which is carried by the Chancellor of the Exchequer to Parliament for the annual Budget Speech. Unfortunately, the "bulging briefcase indicator's" meaning was lost in translation from English to American– as the proper briefcase is rectangular and sold– and cannot be influenced by the battle of the bulge.

Details on the Chancellor's Briefcase.

Ken Drees comments:

The briefcase indicator was a made up cnbc gag/come-on; also Wayne Angell turned out to be not a talking font of knowledge but in court defended hinself as simply an "entertainer". Now we watch and listen to Bullard this morning–is he an entertainer, a wise font, a broken bell or a front? As Jimmy Rodger's said–get a tip from the company president and lose half your money–get that tip from the chairman of the board and lose it all. 

Jim Sogi writes:

Nik 9k

Kim Zussman shares:

Pierre-Olivier Gourinchas*, Hélène Rey**, and Nicolas Govillot***


We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an "exorbitant privilege" that significantly weakens its external constraint. In exchange for this "exorbitant privilege" we document that the US provides insurance to the rest of the world, especially in times of global stress. This "exorbitant duty" is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.

Andrew Moe comments:

As the cloistered flexions whisper, a steady stream of rumors and leaks drive speculation wildly through the thinned ranks, causing the type of ranges that the former colleagues utilize to generate 100% profitable days for the greater good. 

Russ Sears contributes:

How to Listen to Jackson Hole

I currently am in the midst of writing a paper that suggests the regulators are the magicians of the markets. They direct your attention to the left, implies that your really should focus on the right. Time after time the central planners will steer the market to focus on this risk only to let the herd be blind-sided by the risk they are ignoring. There will of course be a rabbit pulled out of the hat at Jackson Hole and nobody would want to miss that. However, everybody is watching what is happening with the Feds and postulating how or even what they will do to make that rabbit pop out of that hat. Of course the assistants are in the know already. The lovely assistances will of course be able to buy all that jewelry and build castle in Vegas that such assistance need, from the crowd's tickets. But do not fool yourself that you can profit from these assistance they will only slowly get fat and growing old.

When the local college big football game is on, it is of course the time for the studious students to go to the library or simply go for a run around the other side of campus; But also it is the worst time to leave your car unlocked by the library or the other side of town. When the focus is on the imaginary, the divertive competitions of a game and fiscal policies of the Feds appear omnipotent. This is of course time to pay attention to what is real, the long term and risk all are currently ignoring.

I could specify hunting grounds and give data to validate this but will not because of the following reasons.

1. These extra-ordinary trades, without my bad ones, would seem like I was bragging.
2. I do not want to alert the competition to their mistakes
3. People do not remember what you told them yesterday, if it proves correct; it was their idea all along. History even becomes much more fuzzy, if you were right, and much clearer if you are proved wrong.

Yes, Virginia there are inefficiencies in the market, suffice to say look at the well spring of the Government's heart to find them.

Ken Drees adds:

I was thinking in a similar vein. All this attention directed to monetary policy as a myopic focus on fixing the economy (and of course the markets) when policy and the structural problems that are slow to change remain intact. The market focus is thus back on the magician and not on the real risk which i would characterize as "outside shock of any kind". When the momentum is slowing and minus a policy change –for example if Obama said that he would keep the tax cuts permanent until 5 quarters of positive sequental gdp would emerge then that would be a market booster since it would allay fears and unknowns, call it the Obama targeted tax extension business relief act". But minus a real policy change, we are back in the soup on Monday morning. We are now at the mercy of outside shocks which could very well tip us into the damned double dip—but shock could be used by pols for blame-so maybe they like that route.

If it wasn't for "x" we would have climbed out of the recession already. The economy is weak and getting worse by all measures–what rabbit will they pull–a good pro business bunny or just another QE painted hare? At election time, it's the economy stupid, will be the song on the voter–time is running out for. Maybe its just too late this time for another trick?



 A visit to a New Jersey Gas Station sparks many sad reflections on dead weight loss and its impact on the current position. One sees lines of 20 cars waiting for gas at the stations as gas attendants amble about filling the cars. The cost in wasted time, the alternatives of productive work that could have been done by the attendants and customers in other fields is never seen the same way a dead weight loss impacts the reduction of consumer and producer surplus and other interferences with the natural order of things.

How much of the current malaise comes from such dead weight loss? Many trillions of dollars have been spent for the benefit of the flexions and their clients by the interior folks. This money has been allocated to areas that are green and organized agrarian in input. Yes, the money has been spent and used to buy assets from the above. And there is certainly the dead weight cost of the administrative involved.

But at what cost? Who would have spent this money? How were incentives to start businesses and hire workers and buy things that are useful in the day to day fray affected by this? What rational expectations come into play as to the ultimate impact of these expenses when they have to be paid back? What are the dead weight costs involved, and what goods have not been bought, and what investments in stocks have not been made because of this?

A visit to an ice cream store outside of Kira's graduation ceremony at St. Andrews in Middletown told wonders. They make a very good banana almost as good as Cones. And their peach has as much fresh peach as I've had the pleasure of eating. But they tell me their business is down considerably this year, and they cant figure out why. The owner does a nice job of making balloons outside to keep the kids happy. How many others are in similar predicaments with no explanation as we morph into a European style struggle?

Rocky Humbert writes:

One has sympathy for The Chair as he sits in a long service station queue and laments the NJ no-self-service law. And, as the early summer sun beats down upon his countenance, his thoughts evidently turn to Dead Weight Loss. Since I've started regular daily exercise (including checking my oil and pressure) I've paid more attention to live weight loss and proffer the following alternative hypotheses/observations:

New Jersey has some of the lowest gasoline taxes in the nation. Gasoline in New Jersey costs as much as 40 cents per gallon less than Westchester County, NY. I frequently fill up my gas tank on the NJ side of the George Washington Bridge; and perhaps the Chair's queue is attributable to the arbitrage of high gasoline taxes in surrounding states– rather than the NJ no-self-serve law.

2. The NJ Turnpike is a toll road with limited access. There is scant evidence to suggest that off-highway service stations have longer queues and/or poorer service in New Jersey than in other self-service states. Former Governor Corzine proposed an elimination of the self-service ban in 2006– and it actually ran into popular revolt: "I'm not against a lot of things, but I don't want to pump my own gas. It's part of the Jersey identity. It's our thing," said Rose Maurice. See this article.  

3. New York State and Connecticut both permit self-serve gas stations, however, they both require full service on certain highways. Having had an unfortunate brush with this business, my understanding is:

(1) the number of drivers who leave without paying on highways is much greater than on local roads.

(2) The throughput for a WELL-RUN busy full service station is actually higher than for a self-serve.

(3) Post-9/11, it is believed by Homeland Security that full-service highway gas stations provide a platform for surveillance. Your oil-soaked, slow-moving, non-English speaking gas jockey may actually be a highly-trained FBI agent checking your car for emissions from a concealed nuclear/biological/chemical weapon.

4. Our local town Shell station has four pumps. Two are self-service. Two are full-service. There is only one attendant for the entire station. The full-service pumps charge about $.20/gallon more than the self-serve ones. The station has maintained this model for years, and it suggests that there must be demand amongst the Chanel-clad soccer moms in Land Rovers and the very-important-Dads (in Brioni suits) not to soil their clothes while pumping gas or checking oil. In this example, the full-service pumps are a profit-enhancer, since the attendant would be there anyway.

During a recent visit to Switzerland, I observed that many gas stations have NO attendants and are open 24/7. One simply inserted a credit card, pumped gas and drove away. One should note that (due to taxes) gas in Switzerland is still massively more expensive than the USA, and it is unclear whether the absence of any attendant results in lower prices or higher profits (or both). I suspect that I would feel uncomfortable if there were NO attendants at a US gas station — on a deserted road — at 3:00 am … and the pump isn't working right … and a car filled with four youths and twice as many tattoos pulls in front of my car … and …. involuntary and not-so-politely relieves me of my wallet and luggage. I guess that's another sort of dead weight "loss."

There is no question that the NJ law introduces dead weight loss. However, the Swiss model (at the other extreme) introduces other costs (such as theft, liability risks, soiled clothes, spilled fuel etc) which are difficult to quantify.

While personal choice is usually preferable , my point is that things are almost always more complex than they appear… And policies need to consider an accurate cost/benefit analysis for the world that we actually live in - not a world that we wished we lived in.

Jeff Watson writes:

A prime example of dead weight loss is when a truck makes a delivery to a distant point and has no cargo to bring back to the warehouse wasting time, fuel, and labor. Wal Mart has engineered out much of the dead-load waste and has increased efficiency of its shipping fleet. They have automated their ordering, delivery schedules, and shrunk the number and size of their warehouses, as they consider warehousing a waste of inventory, space, time and labor. Now, with their "Just in time" ordering and shipping, they are able to use their trucks as rolling warehouses, cutting costs in so many ways and passing along the savings to the consumer. They engineer every step of the production of a product, from the manufacturing to the time it leaves the store. Wal Mart's business model is to be admired as they have introduced many products at low cost to people who otherwise couldn't have afforded them.

In addition to their main retail, Wal Mart has taken only 15 years to become the largest purveyor of groceries in the world because they applied their revolutionary methods in dry goods to the otherwise staid food business. The naysayers decry Wal Mart, but I salute them as an example of a company that took a page from Hank Reardon. Walmart is having it's moment right now, and will until something or someone comes along with a better business model. Never fear, there will be a better model, there always an evolution in business as long as man is allowed to be creative and earn a profit with minimal government interference. To those who complain that Walmart is decimating the business of Main Street, in 1920 the A&P Tea Company had 25% of the retail grocery business because it was light years ahead of the general stores of the day with the modern supermarket concept. The populists and anti-trust people took a careful look at A&P but thankfully never broke the company up. Other businesses should salute and try to emulate the way Wal Mart reduces costs, provides careers, brings a good assortment of products to market, and earns the shareholders a good return on investment.

Jeff Sasmor writes:

When I first moved to NJ from southern CA in 1996 I used to get into trouble with the gas station attendants because without really thinking about it I kept trying to operate the pumps myself. Now after being used to the attendants for so long, when I get gasoline in another state I just tend to sit in the car for a while waiting for the attendant till I remember that I have to do it myself. The attendants are nice to have if you don't want to smell like gasoline; and perhaps it's better not to have pregnant ladies handling gasoline pumps and breathing fumes. OTOH, the attendants end up breathing a lot of gasoline fumes. I recall when I was a youth (pattern recognition subroutines running in my brain just fished up that courthouse scene with Fred Gwynne from the great film "My Cousin Vinny") they used to wash your front and rear windows and check the oil on your car. Ah. My wife's car doesn't even have an oil dipstick anymore….

The great Fred Gwynne

Jeff Watson replies to Rocky Humbert:

Rocky, I know I used the term differently than how the economists use it. However, on the ground floor, the truckers use the words "Deadhead, dead load, dead log, or dead weight" interchangeably when referring to the loss experienced when driving with an empty trailer. Aside from excessive DOT regulations, the aforementioned is the biggest complaint of truckers as it eats into the bottom line, at least the ones I talk to who are non-Teamster. The union drivers don't worry about such things as empty trailers and bring a whole new subset of inefficiencies and extra costs into the equation.

Jeff Sasmor writes:

I don't think that the queue is a function of the presence of an attendant. That's an assumption that may seem natural (like a policeman directing traffic slows things down). I've not seen it in practice. Traffic in and out of gas stations is lumpy.

It's not demeaning to women– I can't imagine why anyone would want to get that smelly stuff on their hands if someone else does it and the cost is the same. And for preggos who want to keep away from things that are toxic (even if the exposure is infrequent and small) not pumping your own gas may be a good thing. And you can stay in your car in the rain and when it's cold out.

Personally I like having the attendants.

Sri Viswanath writes:

I liked your idea and explanations of dead weight loss… In my market experiences some observations that have warranted pin pricks include (fat specialists claiming to smooth order flow, short skirted well-heeled quaffed FX brokers, account reps talking about how they can get you special margins, analysts of rating agencies, mortgage brokers with outdated actuarial tables (see Bacon), derivative structured product specialists trying to sell libor cubed or some mathematically elegant swaps). All apologies to Hicks and Mr. Marshall.

It is amazing that the whole market structure can function given its oligopolistic government based subsidies (a la Citi etc) in excess of a lil' lagniappe. One case of classic deadweight loss is charging for exchange prices. Is this ecosystem capable of being quantified of such costs?

Easan Katir writes:

Charging extra to know the score at a baseball game would not sit well with fans. Somehow, the market fans are more docile and pay up. 

Craig Mee Agrees:

You say one case of classic deadweight loss is charging for exchange prices. I couldn't agree more. Isn't this a form of "restraint of trade"!



-oil spill greater than first estimated

-Euro zone bailout underestimated

-USD rise underestimated

-oil's fall underestimated

-tarp underestimated

-unemployment understated

-recession length underestimated

-volcano impact underestimated

-gold's persistence understated

-housing slump underestimated

Reality seems to be generally understated and always underestimated.

Easan Katir comments:

 With the theory that to solve a problem one first needs to define it accurately, a small point for accurate terms:

In the Gulf, there is not an oil "spill". A spill is what happens when a VLCC or Panamex double hull ruptures and leaks, or when Ms. Napolitano jiggles her teacup after reading her poll numbers. A spill is measurable and contained.

In the Gulf is a giant oil gusher from a super-high pressure reservoir, which has been spewing heavy crude oil and methane 24/7 for over a month with no end in sight, with the potential to become the worst eco-disaster in the history of civilization.

David Aronsen comments:

 It's rational and in keeping with Bayes Theorem that estimates be updated slowly in response to new information. The related cognitive errors of anchoring and conservatism bias can account for the initial low estimates cited. Then as new information comes in they should be nudged in the direction of the deviation between the prior belief and the new evidence. 

Rocky Humbert writes:

Pravda reports that the Soviets used nuclear explosions five times (from 1966 to 1972) to stop underwater well blow-outs. Here's the Pravda story.

One of the reasons that it's critical to assess to true flow rate is it's a first step towards calculating the comparative environmental damage from a nuclear explosion viz a viz a continuing leak for another two months. It's interesting that this is not being discussed in the mainstream media.

Stefan Jovanovich writes:

In 2005 petroleum engineering researchers from Texas A&M University suggested that drilling in the "dangerous and unknown" ultra-deep environment required new blowout control measures: "While drilling as a whole may be advancing to keep up with these environments, some parts lag behind. An area that has seen this stagnation and resulting call for change has been blowout control."

A redundant system might have avoided this because the Cameron Blow-out-Preventer is partially working: The incoming pressure from below the BOP has been measured at between 8,000 and 9,000 psi, while the outflow pressure into the Gulf is 2650 psi. 2 BOPs in series might have done the trick.



 A recurring topic on this site is the study of market anomalies surrounding round numbers. Perhaps this idea can be extended to interesting ticker symbols. In the US ticker symbols are formed from letters and thus whether a symbol is 'round' or interesting is largely a subjective matter.

However in Hong Kong the symbols are numbers. So could there be an attraction to round numbered easy to remember symbols? A simple way to look at this is to take all the even hundred symbols and compare them to the Hang Seng index. The following study looked at 0100, 0200, … through 0900 but some symbols were not associated with a stock. Performance for the last twelve months was as follows:

Hang Seng +51.27%

Stocks with Round symbols Avg. +172.61%
Std 108.77
t-stat 3.89
n 6

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

Easan Katir comments:

It seems all too common that a number, whether a price or an account value, approaches or touches a round number, then retreats slightly. Pure chance would suggest it would be over the round number or under equally, but it seems to be slightly under more often. Is this just my wishful thinking, or is there some corollary to Benford's Law. And here is Wikipedia's usual tour de force on Benford's Law.



will-o-the-wsipAside from all the games named after the frigid weather in Scotland where the only thing to do in the winter was drink and play checkers — the Ayrshire Lassie et. al. — there is a game named after another common situation: the Will of the Wisp. How often do we see a market move which is beautiful but can't be acted upon? A move in Japan where the bid and ask is one or two minis a side, or a move on a holiday in Europe when the US isn't open. Or a move in one market that — had your own market been open — you could have aced. What other will of the wisps are there in markets and life besides the checker game where it looks like you have a win, but it's really a loss, forgetting about the romantic situations for a moment.

Ken Drees elaborates:

From Wikipedia:

The will-o'-the-wisp can be found in numerous folk tales around the United Kingdom, and is often a malicious character in the stories. In Welsh folklore, it is said that the light is 'fairy fire' held in the hand of a pwca (compare Puck), a small goblin-like fairy that mischievously leads lone travelers off the beaten path at night. As the traveller follows the pwca through the marsh or bog, the fire is extinguished, leaving the man lost. The pwca is said to be one of the Tylwyth Teg, or fairy family. In Wales the light predicts a funeral that will take place soon in the locality.

Wirt Sikes in his book British Goblins mentions a Welsh tale about pwca. A peasant traveling home at dusk spots a bright light traveling along ahead of him. Looking closer, he sees that the light is a lantern held by a "dusky little figure", which he follows for several miles. All of a sudden he finds himself standing on the edge of a vast chasm with a roaring torrent of water rushing below him. At that precise moment the lantern-carrier leaps across the gap, lifts the light high over its head, lets out a malicious laugh and blows out the light, leaving the poor peasant a long way from home, standing in pitch darkness at the edge of a precipice. This is a fairly common cautionary tale concerning the phenomenon; however, the Ignis Fatuus was not always considered dangerous.

There are some tales told about the will-o'-the-wisp being guardians of treasure, much like the Irish leprechaun leading those brave enough to follow them to sure riches. Other stories tell of travelers getting lost in the woodland and coming upon a will-o'-the-wisp, and depending on how they treated the will-o'-the-wisp, the spirit would either get them lost further in the woods or guide them out. Also related, the Pixy-light from Devon and Cornwall is most often associated with the Pixie who often has "pixie-led" travelers away from the safe and reliable route, and into the bogs with glowing lights. "Like Poltergeist they can generate uncanny sounds. They were less serious than their German Weisse Frauen kin, frequently blowing out candles on unsuspecting courting couples or producing obscene kissing sounds, which were always misinterpreted by parents." Pixy-Light was also associated with "lambent light" which the "Old Norse" might have seen guarding their tombs.

In Cornish folklore, Pixy-Light also has associations with the Colt Pixy. "A colt pixie is a pixie that has taken the shape of a horse and enjoys playing tricks such as neighing at the other horses to lead them astray". It may well be said that the wild colt pixy would sometimes bedevil regular horses on a ride and cause them to lead their human masters into a predicament or hazard, and might have yielded the pixy - horse name variation.

In Guernsey, the light is known as the faeu boulanger (rolling fire), and is believed to be a lost soul. On being confronted with the spectre, tradition prescribes two remedies. The first is to turn one's cap or coat inside out. This has the effect of stopping the faeu boulanger in its tracks. The other solution is to stick a knife into the ground, blade up. The faeu, in an attempt to kill itself, will attack the blade.

Easan Katir comments:

Similarly, the Tibetan Book of the Dead warns against following the dully-glowing lessers lights beguiling the in-transit soul to fall to the lower bardos. Rather, seek the clear white light to the heavenly lokas and beyond.

Coincidentally, Darby O'Gill and the Little People aired on the movie channel yesterday, featuring a very young Sean Connery, thematically followed, as one would almost predict, by The Gnome Mobile, featuring a perennially-old Walter Brennan, and the usual Disney stable of supporting roles. One observed a striking resemblance of the GS CEO with a gnome, that same sly impish grin.



 Edwin LeFevre's works, while ostensibly all fiction, are based on the personalities and newsmakers of the Street at the turn of the last century, and are filled with nostalgia, as well as notions of "Le Plus Ca Change… Le Plus C'est La Meme Chose."

Easan Katir adds:

Those interested in father-son relations might enjoy Edwin LeFevre's "To the Last Penny" , an illustrated short story published in 1917, currently out of print.



 Checklists have been shown to reduce errors, improve accuracy, and increase profits in many fields. Most recently, a study in the New England Journal by Atul Gawande shows that use of a 19 point check by surgeons could reduce deaths by 30% and save billions. Such simple things as knowing all the names of your colleagues and being sure that an adequate supply of blood and respiratory equipment is available are useful.

When it was suggested to me that a checklist for my own trading might be useful, I originally had the same reaction as the doctors. "I've flown with the eagles, climbed the highest mountain, captured the mountain lion, been a member of all the exchanges, played 12,000 refereed matches, went to Harvard." But then I read the reaction of the Drs. "I'm from Harvard. I don't need such a list. But if I was operated on, I'd like such a list."

Here's a list I came up with for the forgotten man, the hundreds of thousands of traders in stocks, futures and options.

Before the Trade

1. Do you know the name and numbers of all your counterparts, especially if your equipment breaks down?

2. When does your market close, especially on holidays?

3. Do you have all the equipment you'll need to make the trade, including pens, computers, notebooks, order slips, in the normal course and in the event of a breakdown?

4. Did you write down your trade and check it to see for example that you didn't enter 400 contracts instead of the four that you meant to trade?

5. Why did you get into the trade?

6. Did you do a workout?

7. Was it statistically significant taking into account multiple comparisons and lookbacks?

8. Is there a prospective relation between statistical significance and predictivity?

9. Did you consider everchanging cycles?

10. And if you deigned to do a workout the way all turf handicappers do, did you take into account the within-day variability of prices, especially how this might affect your margin and being stopped out by your broker?

11. If a trade is based on information, was the information known to others before you?

12. Was there enough time for the market to adjust to that information?

13. What's your entry and exit point?

14. Are you going to use market, limit or stop orders?

15. If you don't get a fill how far will you go? And what is your quantity if you get filled on all your limits?

16. How much vig will you be paying if you use market or limit orders and how does that affect the workouts you did knowing that if you use stops you are likely to get the worst price of the day and all your workouts will be worthless because they didn't take into account the changing price action when you use stops, to say nothing of everchanging cycles?

17. Are you sure your equipment is as good and as fast as the big firms that take out 100 million a day with equipment that takes into account the difference between being 100 yards away from an exchange and the time it takes the speed of light to reach you?

18. Are you going to exit at a time or based on a goal? And did you take into account what Jack Aubrey always did which is to have an escape route in case all else fails?

19. What important announcements are scheduled? and how does this affect when and what kind of order to use? For example, a limit before employment is likely to be down a percent or two in a second. Or else you won't get filled and you'll be chasing it all day.

20. Did you test how to change your size and types of orders based on announcements?

21. What's the money management on this trade?

22. Are you in over your head?

23. Did you consider the changing margin requirements when the market gets testy or the rules committee with a position against you increases the margins against you?

24. How will a decline in price affect your margin and did you take into account what will happen when you get stopped out because of margin?

25. What will happen if you need some money for living expense or family matters during the trade? Or if you have to buy a house or lend money to a friend?

During and After the Trade

1. What's your game plan if it goes against you and threatens your survival?

2. Will you be able to get out? Did you take that into account in your workout?

3. More typically, what will you do if it goes way against you and then meanders back to give you a breakeven? Or if it immediately goes for you or aginst you?

4. Would you be willing to take a ½% profit if you get it in the first 10 minutes?

5. Did you test whether taking small opportunistic profits turns a winning system into a bad one?

6. How will unexpected cardinal events affect you like the "regrettably," or the pre-annnouncement of something you expected for the next open? And what happens if you're trading an individual stock and the market goes up or down a few percent during the day, or what's the impact of a related move in oil or interest rates?

7. Are you sure that you have to monitor the trade during the day? If you're using stops, then you probably don't have to but then your position size would have to be reduced so much that your chances of a reasonable profit taking account of vig are close to zero. If you're using 10% of your capital on a trade, they you'll have to monitor it for survival. But, but, but. Are you sure you won't be called away by phone calls, or the others?

8. Are you at equilibrium in your personal life? You're not as talented as Tiger Woods, and you probably won't be able to handle distressed calls for money or leaks on the home front. Are you sure that if you're losing you won't get hit on the head with a 7-iron, or berated until you have to give up at the worst possible time?

9. After the trade did you learn anything from the trade?

10. Are you organized sufficiently to have a record of all your trades for your accounting and learning?

11. Should you modify your existing systems based on it?

12. How does recency and frequency and value affect your future?

13. Did you fit your after activities to your mojo?

14. If you made a good profit, did you take some capital out of the fray for a rainy day?

15. Have you learned to say "fair" whenevever anyone asks you how you're doing and are you sure that you don't spend a fortune after a good trade, and dissipate your profits with non-economic activities?

16. Is there a better use for your time than monitoring the ticks or the market every minute of the day if you do, and if you don't, do those who do so and have much faster and better equipment than you have an insurmountable advantage against you?

Well, specs, that's what I come up with off the top. How would you improve or augment it?

Nick White comments:

If a position begins moving against beyond what was anticipated in the workout can one, through either contacts or acquired counting skills, figure out as fast as possible why the move against is occurring? With that information, can one then discern whether or not such a move needs to be heeded, faded, or left alone?

What legitimate information sources can one leverage to better understand a particular trade? A buddy who is a floor trader, a mentor, a high ranking friend of a friend in a central bank?

Are one's current skills commensurate with one's trading goals and ideas? Perhaps, more importantly, are one's trading skills of the same league and caliber as those one is competing gainst in a particular market? If not, surely best to wait and keep capital safe until one is sure of one's edge. This strongly accords with Chair's admonition to never get in over one's head, and to not spend inordinate amounts of time watching each tick when that time could be more profitably invested in training and developing new and existing skills — counting, programming, etc.

Make the strongest effort possible to find out whether the tail wags the dog in a particular instrument that you're trading. If it turns out that it does, does it happen with significance at a particular time, such as expiry? Or after a particular event? Can it be exploited after costs or is it better to fade it after the fact?

If one asks these questions and takes note of them in the essential lab notebook that ought to be at one's fingertips during all trading and researching activities, have those questions subsequently been answered by oneself? I have found this to be the most fertile soil for developing new insights and ideas. If you observe it, note it and question it — hypothesize about it and answer it.

Alston Mabry comments:

Here's one: Don't fool/confuse/tire yourself by making your execution more precise than your analysis. If your target is 2% within the next five trading days, then chasing two bps on the entry isn't going to make or break the trade.

Easan Katir adds:

  1. If you trade odd hours, get enough sleep and appropriate caffeine dosage.
  2. One well-known S&P pit trader advised two bowel movements in the morning before setting foot on the floor.
  3. Start the day with a centering routine — affirmations and goals. Remind oneself of one's larger purpose.
  4. List important times and dates on an online calendar with appropriate alerts: government numbers, earnings, ex-dividend dates.
  5. Rehearse successful behaviors and outcomes. And disaster recovery.
  6. Minimize other life stressors: long commutes, family arguments, risky vices, debt.
  7. Test backup equipment and systems regularly. I test my diesel backup power generator weekly.

Victor Niederhoffer responds:

I would add a small point. Trading foreign markets always seems much more difficult than domestic ones. For one, you never know what the important announcements are. For two, you get killed on the spread on your foreign exchange prices. For three, it seems to be 100 times more time-consuming to get into the queue than even the 1/100 of a second that's enough to give the domestic high frequency traders an insurmountable edge on you. For four, you have to go without sleep for at least one night, and then on the second night when you can't stay up the required 48 hours without sleep the move you expected and closed out is sure to happen.

Alan Millhone writes:

Checker master Tom Wiswell said to always keep the draw (escape) in sight.

Scott Brooks adds:

I have to disagree with Easan on the caffeine. I know there are many people that have to have their morning cup(s) of coffee to get their day going, and without it, don't feel/function right.

I do not want to go through life being so dependent on something that I have to have it to make myself feel right, let alone function right. I know this will be anathema to most (everyone?) that reads this, but I have to say it.

When I removed the caffeine addiction from my life (and don't fool yourself, it is an addiction…..if you have to have it everyday and then quit it, you will go through withdrawals……it is an addiction), my life changed so much for the better. I can think clearly. I can process information more quickly, and I can see solutions with greater clarity.

And your sleep will improve immensely. I suffered from severe insomnia for years. Kicking caffeine out of my life has lead to my being able to fall asleep, usually within minutes and being able to get up earlier and feel more refreshed!

You will find a level of "mental processing" that you never thought possible when you replace coffee and caffeine with purified water (I drink around a gallon a day) and a glass or two day of the organic juice of your choice.

But be prepared, you will likely have around two weeks of headaches when you go through caffeine withdrawals (you know, from the caffeine that you're not addicted too).

Nick White agrees:

Ditching caffeine is a good move. Best to save it for when may really need it on an overnight (or two) session. As mentioned in the past, Dr. Shinya is fervently anti-caffeine. Like many others, I found Dr. Shinya's principles promoted many positive health benefits for my wife and me.

On that note, i find that the Shinya nutritional principles — when moderated by the ideas behind the paleo diet — are a real winner; the increased "good" protein from the Paleo program does much to mitigate weight gain from increased carbohydrate consumption when kicking off on the Shinya program. There is a Paleo program for those involved in elite endurance sports.

George Parkanyi writes:

On any project or major activity, the first question I ask is how much time I have. That frames everything that is to come.

The very next thing is to build a contact list with names, phone numbers (backup phone numbers) and email addresses (and account numbers and passwords). This is also true in Scouts, where we need to have that information at our fingertips for safety reasons — in fact for every camp we have to draft an emergency plan — police, hospitals, parents, primary first aid responsibilities, etc. In a trading operation this is critical. If you have key support resources who have to act on your behalf at a moment's notice, then they need to be available, you need to able to access them, and if not, there must be a ready backup contact and plan B, even C. Chair's point about having a pen available can even be a critical detail — what if, in the heat of battle, you have to write down, say, a wire transfer number? In my case, reading glasses would be another.

Kim Zussman comments:

As a periodontal surgeon, I have found it much easier to stay composed and rational during difficult surgery than unruly trades. Chair's excellent list hints at why, in the form of the question "how do you know?".

Surgical complications follow rules of biology, and mistakes usually come when overlooking something or miscalculating the compounded risk of several factors. One can and should practice with a large margin of safety, which in almost every case is easy to determine. Biology is almost immutable, but markets morph wildly in real-time. It is very difficult to stick with a position if you are honest about your cluelessness and unwilling to go down with the ship. When the trade goes bad:

1. What was your hypothesis? How many others had your idea too? Or the opposite one? Are they right? What do they know that you don't? What is the source of your confidence that you can out-smart (or out-run) the million-mind-march?

2. Did you test properly beforehand? Did you miss something; a signal from another market, a subtle backdrop to your traded market? What is the chance this time is different, and should this doubt change your mental stop?

3. How heavily is your market being manipulated? By government? Big banks? Goldman's trading desk? Does persistent manipulation / insider trading change your hypothesis or render hypothesis formation useless?

4. How do you know whether the move is merely noise of your correct hypothesis, or part of a regime change you have not noticed?

5. Deep and abiding doubt is essential to science, but how do you incorporate doubt into market prediction when most of the movement is random?

6. Does the non-linear, mostly random reward system of trading corrupt your judgment (sleep, personal life, etc)? Do some people lead a happy, well-rested life with long periods of gut-wrenching loss alternating with gain, and are you one of them?

7. What unalterable beliefs are necessary to trade successfully? If you hold them, are you sure they are the right ones? Should some beliefs be discarded as a result of a changing world? Are there new ones you should know, and are you confident you will see them when they develop?

Steve Ellison adds:

Margin of safety is a key concept in many fields. While skiing, I put on the brakes a bit earlier than I absolutely must so that if I miss my footing or hit a patch of ice, I have another chance to avoid the hazard (e.g., other skier, tree, out of control speed). Graham and Dodd wrote about margin of safety in investing. Rather than buy a stock that is below book value, a value investor might wait for an opportunity to buy a stock below 80% of book value.

If I ski 10 times a year, even on the same mountain I am likely to encounter 10 different sets of conditions — temperature, wind, length of time since last snowfall, etc. One day last year, the fog was so thick I could not see the trees on either side of the trail. Some conditions dictate caution; others are more forgiving and allow me to be more aggressive. A warmup run is an excellent way to get a feel for conditions.

Nigel Davies proposes:

Checklists are very good whilst learning, but I believe that one should ultimately aspire to be able to do without them because everything has been internalised. In my own field I tend to believe that conscious thought of any kind can be a distraction, which is why I don't like the old Blumenfeld Rule (a checklist used before playing a move).

Ken Drees writes:

I just did an experiment with my son with one of his Christmas presents, an electronic learning kit. We have learned so far the basics of how electricity works. Resistors (series and parallel), Capacitors, etc. Each lesson has a page explaining the experiment, a schematic, a drawing of the circuit in relationship to how water moves through pipes — the water analogy for electrical flow resonates with my son. And each experiment has an electronic "wiring checklist'.

The checklist comes in handy since its easy to forget a connection, misrun a wire, or leave an extra connection from a previous experiment in the lab circuit.

I associate checklists with "must have"–high accuracy functions. Like programming, wiring, piloting, fixing a car, cooking –its all routine, but items can be omitted, done wrong and can be forgotten due to human error. The checklist is a tool, an aide that removes ego from the scenario. Used in trading it helps set the trade up, helps initiate or close the trade, and removes emotion from what needs to be done automatically. A checklist in the grey area of a trade like the middle game in chess, or an operation where the patient is being worked on really doesn't help much–you need to make gut-inferred decisions, unless your trade is so automated that you remove yourself from the trade entirely and rely upon a program.

Using trading checklists help bring focus and energy towards the trading exercise. Using checklists of some sort during the "live–life of its own phase of the trade" must be explored further. Maybe there are ways to check off your decisions, check your options, use your skills with the pressure of time taken into consideration–during this live phase.

But when your hand is on a hot stove, trade going wrong, does one need to look at a post-it-note do determine if one should remove hand from stovetop?

FYI: a 9 year old boy is understanding electricity –public school may teach a child these ideas in 7th grade. I am amazed at what can be taught to children that most think is way over their heads.

Alan Millhone adds his two cents:

I will add my two cents. Some years ago I bought an International dump truck and it has air brakes. My late father and myself drove it for use in our construction projects. Because it has air brakes you need your class B driver's license to be legal. We drove it several years without the proper license. Finally my father got the book and studied and took the written part for class B. After he took that part he gave me the book and I studied and took the test and passed. Quite a book to study.

Now the second part was an over the road test with the instructor in the truck with each of us. He said he had never given a back to back test to a father and son. Dad and myself had to back the truck then drive to the right close as we could to an orange cone– without touching the cone. Then each of us had to do a 50 point check list of our truck that we earned (I still remember the list ) and still check my truck before taking it onto the road. So checklists are valuable in many applications ranging from dump trucks to the Market.

On a side note, dad and I rode to the test center in our dump truck without the proper license. The instructor said he was not going to ask how we got there.

David Brooks comments:

All very good ideas. I wish there were some good way to test Atul's theory historically. Why? Because I am convinced that poorer outcomes in the last decade come from fragmentation of the system - shift work, decreased work-hours by house staff, the high volume being forced through the system and de-professionalation of nurses.

Alas, we can't measure the past, but I am convinced that the hospital I started in (The Peter Bent Brigham of the early to mid 70's) was a safer, more humane place with better (allowing for technological changes) outcomes.

All the same, the reason we have embraced checklists a la airlines has to do more with the aeronautical outcomes than medical outcomes. The amount of information that a pilot has to process is order of magnitudes more than what a surgeon has to process. Furthermore, when a pilot fails completely 300 lives are lost, and when a surgeon completely fails, 1 life is lost. The former is far more dramatic, of course.

It's nice to know the anesthesiologist's and scrub tech's name, but it's hard to believe that that is going to affect the outcome of a significant number of operations.

That said, I have the greatest admiration for Atul. He sits a short distance from me, and I am proud to have had even a small role in training him. He is a remarkable young man and we will being hearing from him for many years to come.

Newton Linchen comments:

Once I took an airplane pilot course, and I was amazed how everything was done with checklists. Actually, the first time I heard the word 'checklist' was there. (Even here in Brazil they keep all the terminology in English, for standard procedure). I realized how checklists can keep you out of trouble and save your life. In markets, perhaps a great deal of losses could be avoided if I followed my own trading checklists.

Russ Sears writes:

Checklists can be very useful in an emergency. I have found that a simple checklist was valuable in a race. When the going gets tough it is easy to panic. The list It went something like this 1. relax 2. pump the arms smoothly 3. breath in normal rhythm (One hard puff out, relax in). It is easy to panic on the edge of your limits. These 3 things are the first signs that you are starting to panicking, subconsciously without knowing it.

Runner, use checklist often as part of their diary. Each day you check your weight, evaluate your nights sleep and your overall mental state. You check your diet and fluid intake .

Before a race you follow your pre-race checklist from what to pack, to when and what to eat, and when and how you should be warming-up and stretching.

Then after the race you check how well you followed the plan, where the plan worked and where if failed.

Finally at the end of the year you check the philosophical underpinnings of your training. Your goals, why you are doing it all, what are the cost that you are willing pay and what is the best path to get there.

So checklist have there place, but you need to 1. put them in the right point of time in the process, 2. not let them lose their relevance and meaning . 3. keep them simple at critical points, simple enough that they are potent.

Easan Katir adds:

Thinking about checklists, and watching the Haiti disaster coverage, made me think about a checklist for emergencies. Then thought about a list of the various types of emergencies one might encounter, big and small. What came to mind:






home invasion


mistaken id

false accusation






missing person


currency replacement/devaluation

market crash

partner deceit


power outage




i suppose each needs its own checklist, though some may overlap. What did I miss?

Scott Brooks adds:

The best checklist you can have is to either be a great leader or be around a great leader.

It's been my experience that average and ordinary people need checklists (which they rarely if ever have or use…which is one of the reasons why they are average and ordinary), but smart people with leadership skills don't need a checklist when it comes time for a disaster.

Most disasters/problems rarely follow a fixed pattern. It takes a leader who is capable of thinking on his/her feet who can stand up, take charge and direct people as to what they need to do.

And this doesn't have to be right all the time, he just needs to make decisions and get people moving and be willing to take responsibility and shrug of criticism of the naysayers…..while listening to them to extract the wisdom that might be contained in their "naying" (I think I have just made up a word).

A leader has to have insight and the ability to see several moves ahead. A leader has to be able to see correlations and connections between seemingly disparate pieces of information.

A leader has to then take this data and formulate a solution and then direct people to execute the solution….and if possible, get people to see the vision of the completed project so that they can begin to work towards that goal with minimal supervision.

But most importantly, a leader has to be willing to make a decision when it comes time to make a decision even when the solution is not apparent. A course of action that fails is better than inaction that is guaranteed to fail.



Dan BuettnerI enjoyed this TED talk on longevity from Dan Buettner.

Jeff Watson writes:

I also enjoyed Buettner's talk very much. Although I find it difficult to accept the premise that doing X can add 4.7 or whatever years to your life, he does present many good ideas for living a full life. I am blessed with ancestors who have the longevity gene. My grandfather on my dad's side lived to 104 and my dad's mother was a spry 96 when she died. My mother's parents died at 98 and 97. All lived full, complete lives until the last months of their lives.

My 104 year old grandfather summed up his longevity by telling me that the reason he lived so long was because he spent at least five hours a day outside doing yard work. He never worried about diet, and drank 3- 4 highballs a night and smoked Pall Mall non filters from the age nine onwards. His diet consisted mainly of meat and potatoes, and he made sure that he went to the office everyday for a few hours until he was 102.5 years old. He was a reader, and he constantly wrote letters to the editor until he was well over a hundred. A chronic list-maker, he wrote me a blueprint for living a full life that I have done my best to follow. His wife, my grandmother, was healthy until the day she died of a choking accident while raiding the refrigerator after a Thanksgiving fest. She made holiday dinners for over 20 people every year until that fateful Thanksgiving. My mom's parents both smoked and drank, but ate a Mediterranean diet, which might have helped. They were also very active, well into their mid 90s. They were into intellectual development, and didn't exercise much except for yard work and cleaning. My father is 81 years old and is a 10 year lung cancer survivor. He also has a case of MS, but doesn't let that get in his way. He still golfs 18 holes at least five days a week, preferring not to use a cart but to walk. He fishes, maintains the outside of the house, and keeps it looking like a showplace. He still keeps his hand in several businesses, despite being retired. He has had many serious medical problems, but like the Energizer Bunny, "Keeps On Ticking." I suspect that he will give his dad a run for the money as far as longevity.

I'm 53 and still surf and skateboard and play many other sports. Despite my medical issues, I have no plans on giving up, and I certainly don't plan on ever retiring, despite the fact that I could quit tomorrow and live my life in comfort. All of this leads me to the conclusion that the best way to live to be 100 is to win the genetic lottery, stay active, and forget about getting old. Another common thread with my relatives is that they don't associate with other old people, preferring to be with younger people. Living in Florida, it is easy to get sucked into the Senior Citizen treadmill, and that is certain death.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MasterOfTheUniverse.

George Parkanyi comments:

One thing that drives me nuts is people who do nothing but talk about the medications they are on. I hope I never become that unbearably boring. I empathize with people that are ill, and I get it, pretty much right away, but unless you’re suffering and in distress and need medical attention or comfort at that moment, obsessing over the things that are keeping you alive doesn’t leave much for the actual living, and nobody is really interested.

George Parkanyi, Canadian telecom entrepreneur and ETF trader, blogs at StockAdventures.



 Friedrich Hayek always said that he was a "Burkean Whig". Since England was always the place where he felt most at home, it is not surprising that he would have looked to late 18th century English politics for his model of liberty. But, he might have had greater success in finding successful advocates for his ideas about money and commerce if he had looked across the pond.

When the Constitutional Convention took up the question of legal tender, the initial draft carried over the language from the Articles of Confederation: "the legislature of the United States shall have the power to borrow money and emit bills of credit." Hayek's intellectual forefathers would have none of it. They gave the Congress the Power to "borrow Money on the Credit of the United States" and "To coin Money, regulate the Value thereof, and of foreign Coin" and "To Provide for the Punishment of counterfeiting the Securities and current coin of the United States".

This was a political argument that Hamilton had no trouble winning. The delegates took it as self-evident that "to emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor ever hereafter to be employed; being, in its nature, repugnant with abuses and liable to be made the engine of imposition and fraud." (Alexander Hamilton)

Washington, as always, had the final word on the subject: "We may become a great commercial and flourishing nation. But, if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy.

Easan Katir writes:

This past month I studied "Capital & Finance in the Age of the Renaissance" [translated] in 1928, to understand how the end game might work when governments spend beyond their means. In the 1500s kings and princes overspent to fight wars, and borrowed from the wealthy to pay the soldiers, who otherwise survived through loot and pillage. In the 2000s the governments overspent to fight wars (including war on terror, war on drugs, war on poverty) and borrowed from wealthy nations. During the Renaissance, the wiser creditors insisted on collateral for their loans governments, and thus eventually foreclosed on pledged Spanish copper and Tyrolean silver mines. Even with collateral, they had trouble collecting, and would frequently advance new loans in return for receiving partial payment on previous notes.Executive Summary: back then, in the short-term, the creditors did well (for about 50 years ), in the long term (200 yrs), it ended badly for the creditors when they slipped up and lent money to governments without collateral, which of course, defaulted.

Alex Castaldo comments:

Ehrenberg's book Capital and Finance in the Age of the Renaissance: A Study of the Fuggers and their Connections  was a favorite reading assignment from the late economic historian Ch. Kindleberger.  He even provided a capsule summary:

"This classic study of the Fugger bank in Augsburg in the 16th century focuses on war and money. Money is needed to buy soldiers, but with soldiers one can acquire money. The Fuggers were involved with Venice, Austria, the Holy Roman Empire, the financial markets of Lyons, Bruges and Antwerp, and through them, with the Spanish crown, which proved their undoing. The financial center of Europe was moving northward from Lucca, Florence and Venice (Genoa, a rival of the Fuggers for the Spanish treasure that was overdue in payment for loans when it reached Seville, hung on longer). The period was one of struggling capital markets. The mistake that brought down the Fuggers, and many a bank before and since, was lending too much to kings on inadequate security".

Stephen Jovanovich adds:

As much as I appreciate the patron saint of those of us in the finance bleachers for having the wit to say he studied economic history because he could not "hack the math" of plain economics, Professor Kindleberger did have his blind spots. He was, inevitably, a devoted member of the "where have all the flowers gone" Pete Seeger school of military history. The Fuggers were "involved in Venice" because they, like everyone else in Germany, went there to learn the new Italian science of double-entry bookkeeping. The soldiery that needed money - and ultimately bankrupted Philip II - were not the ones who discovered, collected and shipped the treasure of the Indies and the Americas to Spain; they paid for themselves a hundred times over. The military extravagances that doomed Philip II were the ones made not for profit but for faith - against the Dutch for their stubborn Protestantism and against the bastard Queen Elizabeth for her persistence in the Anglican heresy. The bit about "inadequate security" is actually funny; as Hayek kept reminding the members of the German history school and their Keynesian and Marxist successors, the state NEVER keeps its promises. It is the monopoly that is above all law and, as Philip II devoutly reminded all his petitioners, the sovereign's pledges can only be made good by God. 



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

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

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

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

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

George Parkanyi asks:

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

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

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

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

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

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

Easan Katir comments:

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

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

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

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

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

Stefan Jovanovich comments:

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

Bud Conrad writes:

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

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

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

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

Nigel Davies offers:

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

Jim Sogi writes:

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

Vincent Andres responds to Nigel Davies' questions about China:

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

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

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

George Parkanyi adds:

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



 A study suggests some fiddler crabs are counters.

Market application: In some past trading years, I've noticed my yearly return was close to, or tended to track the S&P, (not last year, thank G-d) although I invested / traded diverse instruments, and so arrived at the similar return by a completely different route. Could my reptilian / crustacean brain have been keeping track?



What are the chances that within +-1%, we would see Dow 8,000, SPX 800, gold 800, all at Friday's close?



 1. "Electrocybertronics," an article in Smithsonian, March 2008 issue, points out some sexy company names, especially suffixes, from the last century starting with electric, going to "ex," then "ola" then "tronics" then "cyber" then "nano." I made a preliminary study of returns the 35 US public companies with "nano" in their names and found that most of them are near zero and have not risen in price. I can't pass this subject without noting that like most new things, those who wish us to remain primitive are fighting against this development, and much life-saving will be prevented. Apparently there are nano pants that stay clean, and perhaps this will play the same role that hybrid seeds played in opening up biotech in opening up life extension and reduction of human drudgery in nanotech.

2. We've now had the greatest number of down S&P opens in a row in history at six. And that's surprising since it's only a 1 in 64 shot.

3. How often can people take one city, one month, and send the market down a few percent, as they did with Chicago Purchasing Managers, only to reverse it the next day when the next random number, such as NAPM, comes up.

4. In "The Mauritius Command" by Patrick O'Brian there's a beautiful passage about how Mauritius bonds are trading at only 10% on the dollar recently from 80% as they follow the probabilities of success of Aubrey's imminent invasion and his recent results against the French. Very much similar to the movements in the market as Democratic prospects for victory wax and wane.

Easan Katir writes:

Vic's post stirs memories. To properly observe a mid-life crisis at age 43, I sold my book and moved to a beach house in Mauritius, about 100 yards from Point aux Cannonieres, the fort from which the French defended their island against the British in 1810. One could easily imagine those frigates in full battle. O'Brian mentions the monsoon. A few months after we moved in, a category 5 hurricane's eye passed directly over our house I can't imagine how ships of that day withstood these monsters.

So the nanos have gone the way of the Mauritian dodos. Two more words to add to the 100-year historical list might be 'railroad' and 'mining' as most of those went to zero, and more recently 'bio.' The takeaway message is be on the lookout for the next fad name. We are right in the middle of the crash of any name containing the word 'finance.' Perhaps any name with 'solar' is on deck next, unthinkable as that may now seem.

John De Palma adds:

You wrote today: "In "The Mauritius Command" by Patrick O'Brian there's a beautiful passage about how Mauritius bonds are trading at only 10% on the dollar recently from 80% as they follow the probabilities of success of Aubrey's imminent invasion and his recent results against the French. Very much similar to the movements in the market as Democratic prospects for victory wax and wane."

I'm reminded of how historian Niall Ferguson studied whether bond markets anticipated World War I, discovering that they did not: "…Ferguson is intrigued by the behavior of the financial markets on the eve of World War I because stock and bond prices at the time registered scant concern about the impending cataclysm. This contrasts with the conventional view among historians that the war was all but preordained because of a decade of escalating great-power rivalries that erupted into violence after the assassination of an Austrian archduke by a Serbian terrorist in June 1914… Ferguson was most surprised that the people who had more to lose from a war "bond investors" didn't see it coming…" 

Similarly, before the Iraq war, Penn economist Justin Wolfers ran regressions of changes in various financial assets against changes in the TradeSports Saddam contracts. He inferred the extent to which an anticipated war was built into financial market pricing and objectively determined what the impact of the war was on markets. Also, MIT economist Michael Greenstone analyzed the Iraqi bond market to gauge whether the country would survive.



MicrobeThe greatest diversity of genes and life forms appears to come from the microbial world among bacteria and archae, according to an article titled The Undiscovered Planet in Harvard Magazine. Everywhere they look, they are seeing new species and new sources of curing disease as most of the hundreds of millions of species that live within our body or within the soil are beneficial. Now scientists are learning how to cultivate them and trying to turn them into microbial medicines. One wonders if the microscopic tick data contains hundreds of millions of forms that could be used to analyze the macroscopic movements. The work of Larry Harris and of Niederhoffer and Osborne contains many interesting microscopic patterns that have not been tapped or exploited, I believe.

Easan Katir adds:

One theorizes certain tick data patterns plus trade volume could give early indications of institutional accumulation or distribution. This weekend my son and I completed an analysis of the algorithms we have used this past year to screen for investment opportunities, to determine which worked the best. Results indicate certain large trading volume increase patterns to be the most reliable of the eight or so screens we've developed. Similarly, I've read that in 16 hours, a single e. coli cell, given the proper nutrients, can multiply to equal the human population count of the planet. Its exponential growth looks a bit like a one year platinum chart. If we're comparing microbes with finance, one cannot help but notice similarities between mad cow disease and the subprime mess: gruesome massive culling of herds and portfolios. 



VNThe importance of practice in music can't be overstated. There are hardly any musicians of great competence who took up their study after the teens, and most have been practicing intensively since the age of seven. The problem is that most people hate practice, stop at an early stage, and waste their time when they do this. Michelle Siteman in her magnificent book, "The Pleasure and Perils of Raising Young Musicians " has a chapter "Practice Makes Perfect " in which she gives 10 techniques for improving the quality and quantity of such practice.I have received completely positive feedback from musicians who have read this book that the techniques she suggests are ingenious and useful. I believe the have universal value, and I will try to apply the lessons from Ms. Siteman's chapter to improve the practice of trading with a few of my own practice techniques from racket sports thrown in. This is a subject that has received much too little attention as practice makes more perfect in every field including our own, And this would apply to any trader despite his natural proclivities and abilities. It is common to think that a quality for greatness in a field is to love to practice it. But Vladimir Horowitz, Glen Gould and many other musicians, including Beethoven, hated practice when they were young, but they were able to conquer their aversion, usually with the aid of a firm parent who applied some of these techniques. Presumably the head of a trading team should insist on practice regardless of the qualms or machismo of some of those whose recent track record is good, or believe they were to the manor born. Emulate Pablo Casals and Yehudi Menuhin, who practiced eight hours a day, every day of their lives.

It's not enough to say: practice trading. Most people don't know how to do it. And most are bored while practicing so there has to be something that makes it interesting. Musicians handle this by mixing in some easy beautiful pieces with the scales, finger exercises and and arpeggios.

1. Group activity. One universal technique for making practice more interesting is to make it part of a group activity. Somehow those who play instruments in orchestras stick with their instruments to a much greater extent than piano, and this is why many impartial observers suggest that orchestral instruments are better for a child to play than piano, because they stick with it. Practice sessions for traders should be in groups.

2. Money rewards. And what follows from this is that monetary rewards are a great motivator for musicians to practice. Some parents make their kids pay part of their lessons with their allowance money. This has a very salubrious impact on the efficacy of practice. Group trading practice should have monetary rewards. It's amazing how many of us will stoop down to pick up a $5 bill.

3. Record keeping. Record keeping is an important part of a good practice session. A systematic account of what has been learned and what the goals are is always helpful as a foundation. It's also helpful to be able to review the mistakes and winning forays that went into a successful trade.

4. Parental presence. All musicians find it boring to practice alone. Having a parent around to observe reduces boredom. If it's important enough for the parent to insist the child do it, then it's also important enough for a parent to take an interest. The same would apply to a trading manager, who all too often leaves the trading practice to the subordinates without taking an interest in it.

5. Proper logistics. Practice should be at a certain time, and a certain place and there should be good lighting. That way there's no chance that a session can be missed because of a conflict in schedule that arose because the child or trader didnt know that it was scheduled for that day and time. A proper environment without sibling or other traders squawking that they are hungry also improves results.

6. Consistency. Practice every day is essential. The markets are always changing, and after a day or two all the skills begin to detiorate. I once practiced squash every day, 365 days a year, for 10 years. A trader should practice trading each day, or if a hiatus ensues, should practice steadily for a number of days before entering into the fray.

7. Read books about the techniques that other great musicians used to improve their techniques. What worked for them probably would put you on a path that has at least been tested. Eschew the techniques of traders that were not successful, for example the boy trader.

I would be interested in ideas readers have on improving the training and practice of traders.

Larry Williams adds:

Larry WilliamsI have always thought mastery is a largely the function of repetition.

Obviously you have to repeat the right things. Today's great home run hitters all have instant access in the dugout to videos of their last time at bat to review and repeat the right techniques and stop the wrong. Many scoff at paper trading — sure, it is not as emotional, but still provides valuable lessons.

Chris Ledoux won the world bareback riding championship with very few rides in actual rodeos. He was so banged up he practised on a bucking machine (also wrote a good song about it) to prevent further injury and shocked all the bettors who had never heard of him as he accomplished his gold belt-buckle dreams.

Jim Sogi suggests:

Jim SogiMy Karate teacher said, "What is the best practice and training for fighting? Fighting. You can run all day, you can do 1000 sit ups, 1000 push ups, 1000 sprints, and 1000 punches. But the best practice is fighting with an opponent. "My father once said, " The only difference between a small case and a large case is the number of zeros behind the 1."

You can read 1000 books about trading, study data for hours, but the best practice for trading is trading. Even if you do small size, which is best for practice, it keeps your wits sharp and emotions tough and keeps you in the game.

Keep a place set aside for only trading, always ready to go, 24 hours a day without having to clean up, scoot others away. Same with music practice. Have a set aside place or room for music with all the instruments just ready to walk in and pick up and play, even for 10 minutes before dinner. Pretty soon it becomes a habit.

Allen Gillespie takes it further:

Scales and etudes and pieces played with different bowings, speed, rhythm, etc. Breaking down a passage into shorter component parts. For example, if there is a long passage of quickly played 16th notes, first practice with separate bows for each note, then two on a bow, then three, etc. then change the rhythms from just 16ths notes, then just play the key notes from the scale so the ear hears where the passage is headed as many of the notes are fillers, understand and anticipate the pattern. Learn to play by ear. Finally, Always Play/Practice Musically (i.e. even when practicing the notes do not forget to include the crescendos, etc.)

For the trader,

1) Imagine as many scenarios as possible.

2) The distance between lows or highs or between lows and highs might give an indication as to the key

3) Some notes/days are more important than others

4) Trade smaller during times of practice

5) Test different combinations of variables - first separately then two, etc.

6) Despite all the practice, sometimes the best performances are not straight from the page

7) Finally, trading is an emotional game, so play with passion and remember there is always a low note and a high note and many notes in between.

Sam Marx reminisces:

Practice is important and in my sport in high school I practiced quite a bit but always felt that I had a limit because of physical limitations. I was 6 ft. tall but my hands were below average for my size. I couldn't get a good grip on a football or palm a basketball.

Once I was seated at a dinner table next to Bart Starr, former Green Bay QB. That man had huge hands. I have no doubt that enabled him to better control the football and made him a star. Another time I was in close proximity to Gil Hodges and I noticed that he also had huge hands. I believe he was a first baseman. I could just picture him with an oversize glove catching balls or scooping up grounders that would be missed by the average infielder.

A friend of mine was an excellent boxer. His arms were extremely long, also, his head was smaller than it should be for his size. He could just move around his opponent and jab him silly while keeping his head tucked behind his shoulders. Standing up with his arms dangling on his side I thought he looked like a chimpanzee. He had no desire to become a professional boxer but I've seen professionals in the ring with those characteristics. Kid Gavilan comes to mind.

On the options trading floor I noticed that some traders could hear trades from across the pit. Their hearing was acute.

Practice is important, but don't dismiss physical and mental ability, especially abilities in the 3 plus sigma range.

Don't tell your kid that he can accomplish anything if he practices enough. Offer this advice only when justified. Tell him he can greatly improve with practice but don't offer false hope of attaining the impossible. It can be frustrating if you're not in the 3 plus sigma range in the field you're practicing in.

Nigel Davies recalls:

David Bronstein once advised me to prepare for tournaments by studying chess at the exact times the games were scheduled. And I understand that Vladimir Kramnik took this concept one stage further by solving endgame studies (particularly demanding work) during the last hour of such studies. The last hour of a playing session is known to be the most critical, with most games being won or lost at this time. And it does seem that he got the better of Veselin Topalov at this point in the games.

Easan Katir mentions:

I spent one recent Saturday evening at the Hat and Hare Pub in the basement of the Magic Castle, with two accomplished card men, Aaron Fisher and Tony Picasso, discussing their art. Aaron instructed, "to improve, perform at any opportunity, for anyone." The club was full. He said, "C'mon, let's find you some people." So he rounded up a spontaneous audience comprised of three giggly young things, and gave this amateur the opportunity to perform modestly baffling illusions.

Live performing, live trading. No solo practice or paper trading like it. Mind sharp. Managing audience expectations, unexpected reactions and distractions. The joy of good execution. The thrill of conquest. The glow of accomplishment.

Much theoretical study, counting and practicing correctly precedes such moments. For trading I suppose the advice "perform at any opportunity" could be ambiguous enough to become a way to diminish one's capital, unless one adheres to tested guidelines for what constitutes an 'opportunity'. It works for me to transfer these skills to trading.

Evan McKeown writes:

John McEnroePractice is such an important topic. I have always believed that if you do what you love, and love what you do, then success will eventually come your way. Success itself means different things to different people.

I am a 5.0 tennis player, and love playing tennis. No matter how much I played, or practiced, I never was able to reach a level much higher. Notwithstanding my dedication or love for the game, I have enjoyed other success by meeting wonderful people that share my enthusiasm and we enjoy our weekly matches. John McEnroe once said he hated to practice, so, instead, he played in doubles tournaments. John had one of the best net games in tennis which is unusual today thanks to his devotion to being a doubles player as a substitute for practice.

I am a trader. Once again, I love what I do. Trading is not a job, it is a way of life, my passion. I trade every day, and practice every day. Practice for me, comes in many different forms. Just as in tennis, there is on the court, and off the court practice time. Off the court (or ticker screen) I stimulate my mind with financial literature. The best book I ever read, and the only book I ever read for a second time, is "The Education of a Speculator." This work of art should be required reading for any college finance class. Long before this book made me any money, it first saved me thousands. Years ago, when a perfect storm of events had collapsed my portfolio and nearly had me on the verge of ruin, I sent an email to Vic and Laurel for some word of encouragement after the market had crashed through a 200 day moving average, financial condition in the market that is not unlike the one we see today.

To my amazement, Vic and Laurel wrote me back with a few simple words that inspired confidence. Not so much advice, as it was knowledge on how to handle adversity. I not only made back the 50% that my portfolio had declined, I ended the year with a 27% gain. That email changed my life forever. Instead of placing a sell order and taking a loss of half my assets, I took the pearls of wisdom and made the most of the opportunity.

Thank you Vic and Laurel, for sharing your knowledge and experience of the markets, for being an inspiration for common everyday traders such as myself, and for taking a few moments and write such an inspiring email that changed my life forever!

Pitt Maner III says:

Many years ago I went for 3 days of tennis lessons at Nick Bollettieri's in Brandenton, Florida. An evaluation was done of each player's ability and then we were separated into groups and sent out to practice for about 5 hours each day (with a lunch break at mid-day to watch films of Agassi playing). Thank God it was not in the dead of summer, but at 80 or so degrees it was still quite brutal for moderately trained weekend warriors.

One of my teachers was a former Rhodesian paratrooper named Ian who picked up very quickly on my poor footwork (even for a 3.5 or 4.0 player) and tendency to "float" or not properly set my right foot when hitting a backhand. The school also emphasized the need to follow through on strokes and to keep hitting the ball deep and allowing for sufficient height of trajectory over the net. In other words give yourself a margin of error and don't try to hit winners all the time from the baseline–play it a bit safe and wear your opponent down.

The tendency of beginning tennis players love to hit winners even at the expense of hitting several poor shots and losing games was discussed. Players were taught to recognize the importance of swing points (ie. 40-30 or deuce or 30 all) and to be more aggressive at 40-0 or 40-15. At the pro level students were shown film of Agassi running Lendl and not finishing off points right away if Andre could get Lendl to "lunge" one more time and thus exert more energy. Tennis warfare by attrition.

Tennis at the highest levels was indeed a different game then what I imagined or had gathered from watching Borg and Conners on TV or reading about in Tennis magazine.

On the adjacent court one could watch the 10 year old Anna Kournikova practice with her coaches under the vigilant eyes of her Russian mother. The tennis school had a quite rigorous schedule for the kids–lots of running in the morning, tutoring–school, weightlifting, and hours and hours of hitting tennis balls. At the time Anna said she loved to play tennis and did not mind the practice. We watched as she played practice games in the afternoon against boys her age or slightly older.

At the end of 3 days my toenails were breaking off from my swollen feet (note to file–never come to a tennis camp with new tennis shoes!) I had experienced my first and only time with tachycardia after running side to side "suicides" on the court. My game had been broken down and I was now playing like a sorry 3.0 player and not able to incorporate or integrate all the intensive things that had been taught. There was a German banker who said he worked 60-70 hours a week at home and came to the camp for "relaxation"–masochism at its finest!

But the lessons were learned and not forgotten and months later my tennis game improved and my appreciation for the game greatly expanded.

Steve Scoles makes another point:

An important requirement of successful practice is getting proper feedback in a timely manner — touching a hot stove teaches you pretty quickly not to do it again. Markets, because of their probabilistic nature, are really horrible at given this kind of feedback. In investing and risk management, the short-term outcomes are often  unrelated to the quality of your decisions and it may even take years to be proven "right" or "wrong". I don't think this is a new idea to the world of trading, but I have always found playing poker to be a good way of practicing dealing with the probabilistic nature of markets.

Poker has several similarities with investing with some key ones being:
- imperfect information
- probabilistic outcomes
- emotional involvement is in play as money is on the line and your failures and successes can be monitored & commented on by the other players.

The advantage of poker over the markets is that the decision-outcome relationship is usually more analytically simple to learn from and thus the feedback loop is a lot better than what you get from the markets.

Three things that I have found poker helps you develop that can be carried over to the markets are:

1) to learn and internalize how gains and losses are really probabilistic outcomes rather than successes or failures;

2) to improve your ability to evaluate decisions on a basis other than the outcome;

3) to improve your ability to maintain emotional stability through the various ups and downs.

Jim Sogi makes his second remark:

In Japan the Sumo wrestlers live a strict regimen of diet and training. They avoid emotional upset that might affect their appetite. This is like trading. It has to be approached as a competitive sport. Physical training, proper sleep, good food, avoiding drugs and alcohol are necessary during the trading week to be in top shape when in the fray. If something upsets me or I fall out of training, the trading can be affected.

Alan Millhone follows up:

I will speculate that the Sumo's do not watch much TV nor hear any negative news while in training ? Mental discipline in Sumo, trading, board games,etc. is critical. When I attend any Checker tournament I get my rest, eat properly, no TV when on the road. Mr. Sogi is correct that being upset is a big deterrent to functioning properly in any endeavor. Staying focused is Job # 1 and critical to proper performance. The avoidance of drugs and alcohol holds true in any event we pursue. 



Yesterday a good friend's mother's obituary arrived, listing a number of her lifetime achievements of which I was unaware. Besides marking the calendar to attend her memorial, I thought, "what will mine say?" I picked a likely date — being optimistic of course — and wrote my own future fantasy obituary. I feel more focused now. The items on my to-do list for the month have fallen into order of relevance. I plan to review my obituary every few months. A way of planning from the past tense.



 I find myself in Las Vegas having just finished a four-hour lunch with a master sleight of hand artist, Armando Lucero. After the dessert dishes were cleared, he showed us — not 30 feet away on a stage, but 30 inches in front of our noses, illusions that strained my belief. The climax was when he found a card in a clever way that anyone at our table has only thought of.

If one man with a deck of cards can baffle so completely, what massive and incalculable deception might be afoot in the armies of traders with their teraflopping supercomputers?



 Early last spring, Vic and Laurel mentioned they were doing something they had not done before and were making a personal investment in Google stock. I recall this because it reminded me of when Jim Fassel, then head coach of the New York Giants, made a bold statement that the team was on their way to and through the playoffs and on to the Super Bowl. Everyone who wanted to be a part of it had better get on board. Those who were not willing to make that commitment could just get off.

At the time the stock was approximately $350. Around the same time, Jim Cramer devoted a show to Google and said the stock would climb above $500, noting fundamental reasons such as its per-share earnings and its ability to hold a 50 P/E.

Naturally there was the usual back and forth discussion. Google commentary was ubiquitous and bull and bear camps were established to debate the merits of the stock.

Today, Google is $514 per share. One year ago, Apple was $50. Today it is $144. Garmin was around $50, and now it is $80.

The lesson to learn from this: Great stocks are to be owned. Companies who dominate their space are to be kept and allowed to grow. Those who have built fantastic franchise names should be accumulated. Buy Google over Yahoo. Apple over Dell. And most importantly, the speculator should be willing to hold on, eschewing the quick buck in search of the really big gains that can be achieved through diligence and patience.

Easan Katir remarks:

"Pride cometh before.." notwithstanding, I feel compelled to relate that Thursday afternoon after hours I shorted GOOG at 547. Instant gratification feels good! Most trades have elements of shoulda woulda coulda been bigger, better, higher, lower, earlier, later, faster, slower. But not this one. This time I earned my keep! Please forgive this anecdotal, non-counting, horn toot.

Steve Bal writes:

The market favorite GOOG last week became the poster child for a market sell off. Was this the result of great earnings? If I hold average securities whose earnings are average then what chance do my stocks have of rising when GOOG, with great earnings, is selling off?

This impact is significant in the short term as stocks that have earnings releases early this week may come under selling pressure. However, by Wednesday we come up against the firm that has been setting higher records than GOOG, has rallied more than 60% this year, and has more earnings than GOOG. That stock is the new poster child for a great stock, AAPL. 



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

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

Martin Lindkvist adds:

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

Victor Niederhoffer remarks:

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

George Zachar adds:

Another old lion scandalized by youth:

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

From Gordon Haave: 

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

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

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

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

From Sushil Kedia: 

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

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

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

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

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

John Floyd writes:

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

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

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

Vic replies:

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

From Easan Katir: 

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

Vincent Andres writes: 

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

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

Jason Ruspini remarks:

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

Vic comments again:

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

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

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



I notice all three major stock indices begin with a "1", as Benford's Law says they might tend to:

I N D U     1 3 3 2 6 . 2 2
S P X         1 5 0 5 . 8 5
N D X         1 8 9 8 . 7 9

Philip J. McDonnell notes:

A quick glance at a slide rule shows that the difference between the number 1 and the number 2 takes up about a third of the scale. The slide rule scale is logarithmic and thus enables adding the lengths of the logs to facilitate multiplication. If the underlying process of any stochastic process is multiplicative as opposed to additive, then the process will follow a lognormal distribution. So if the process is lognormal then one should not be surprised that the proportion of 1-digits is one third.

George Zachar adds:

The Wolfram Demonstrations Project is a new, cool, free math visualization tool. I've run it on both Windows and OS X. 

Gibbons Burke adds:

Wolfram seems to have borrowed some features (especially the parameter sliders) from Graphing Calculator, which was distributed free with every Mac since January 1994 (though no longer — Apple has its own now). Version 3 is available for free and it is enjoyable to play with. 



 I am reading the collected short stories of Louis L'Amour and enjoying every minute. It is not well known that L'Amour wrote many adventure stories of faraway lands, not just westerns. One story takes place in the jungles of Borneo. The best so far is The Diamond of Jeru. A legendary bandit has a camp deep in the jungle. Many years before he found a large black diamond. Instead of selling it, he took it down to the village, and showed it to diamond hunters, even tourists, with the promise to take them upriver in his boat and show them the diamond fields where this came from.

His modus operandi: Once he gets them up river, he kidnaps them to his camp, kills them, and keeps their shrunken heads and all their belongings. He and his murderous band have lived on this one diamond for many years. I won't spoil the ending, but one wonders how many bandits are in the world of investing? Are there those holding up one sparkling black diamond, luring tourists with tales of untold wealth up the river to steal their savings and enjoy the sight of another head hanging from the ceiling of their thatched longhouse?



The markets remind me of "Rock, Paper, Scissors," thinking one-ahead, and then one-ahead of those thinking one-ahead. World of RPS is a good site at which to brush up on the concept.

If the market breaks out the last hour for a few days, then the next day will break out half an hour sooner, then the next day sooner still…

Janice Dorn remarks:

I often get mail from people telling me they never change their systems, that the machines do it all for them while they are on the golf course. Dr. Katir's post tells the true tale, I believe.



I have been considering the many confidence games that players in the market are exposed to with particular reference to the many false signals of imminent decline, programs of fixed quasi arithmetic bent, and expert con men who claim to have an easy way of making money. I used to use myself as an example of playing an unwitting role, i.e., being a key middle brow naive person who blindly goes his happy way allowing experts to take his money.

Indeed, I've written on the subject. And when I asked the collab the best way to research this subject she said, "go to our past writings on it." But I'm a little rusty on it and I think there have been so many new cons in the market lately that are so extensive that any previous typology has to be augmented. Any help or ideas that you all could give on this subject, particularly those related to some of our discussions on funds, that might be not as good as they seem, would be appreciated. I found the following article very helpful as a jumping off point for eliciting some market cons. 

From Jim Sogi:

It is something about the mark that allows the conman to 'turn' the victim. As with the baseball maven, the appeal to the esoteric investor who has the depth of capital to withstand drawdowns must appeal to some 'streak' in investors. In confidence games it is the greed, or dishonesty of the mark that is the key to the game. Each person, no matter how optimistic and bright, has a dark side.

Often the most apparently cheery have the darkest side. It is the job of the conman to find that side that can be used to turn the mark to his advantage. Or he finds his specialty niche. This is how elderly are preyed on with winning drawings, or the Nigerian scam. It is the combination of need with greed and a dose of dishonesty in the mark. The typical description of a con focuses on the perp, but the study of the victim yields more lessons. Most do are not aware of these seeds of darkness within, and there lies the danger.

This is the same technique used in sales, cross-examination, and religious proselytizing. Leading the victim down the primrose path feeding the victim's inner need and darker impulse. It is what happens in the market so often. Look to the victim. Look to yourself for the secrets of the con.

Eason Katir writes: 

If ya gotta lotta nerve
And ya gotta lotta plenty
Five'll get ya ten
And ten'll get ya twenty

— Singsong of the 3 card monte grifters, as they throw the

It has been written that, "In religious confidence games, this means that the religious leaders must convince the prospects that they (leaders and present members) have a special relationship to a personal God."

Market equivalent: the supplicant must prove he is worthy (accredited) and have a pious bankroll (high minimums) to have a special personal relationship with the elite hedge fund.

"The doctrine of a personal God supports: (a) perfect (infallible) leaders, (b) perfect (inerrant) sacred books, (c) perfect (marvelous) miracles, and (d) perfect (eternal happiness) posthumous rewards."

Market equivalent: the hedge fund prospectus supports (a) managers who have had a good run at some period, supported by much media hype, (b) infallible trading edge supported by scholarly white papers, (c) backtesting, hearsay, testimonials (d) eternal retirement happiness: the TV commercial or glossy magazine ad depicting the WASPy looking character in his argyle sweater sailing his wooden boat through retirement with his loving wife by his side.

"Incorrect details can expose a con game. Accordingly, details such as the location of Heaven and means of transportation thereto are not mentioned. The posthumous rewards are claimed to be wonderful, but no details are given which can be checked in the present. "

Market: black box systems. Opaqueness of current hedge fund positions.

"The advantage of the confidence games with posthumous promises, of course, is that no deceased person is going to return and ask why he did not receive his reward."

The market hasn't worked this one out as well as the article's example yet. Best it can do is provide tables and charts showing hypothetical increase in value over some long period of time, and a posteriori rationalizations about why a system stopped working.

"The religious leaders have another advantage. They carry little inventory and have small expenses."

Financial salesmen have this same advantage. They don't have to finance an inventory of expensive cars or other widgets. The mark puts up his money, and sees only flickering pixels in his browser representing his bet. Another confidence game: Feng Shui is popular. The delusion that one can fix one's problems by rearranging the furniture.

Market analogy: Beat the market by rebalancing sectors.

Michael Cook writes: 

On of the most interesting insights in "The Big Con", for me, was that it represented a new insight into human nature, namely, the depths of delusion and self-deception a mark can be led into. The very fact that the "big con" is possible was an important discovery.

And if you look at the world through the eyes of a con, it seems that everybody is conning everybody all the time, and everyone is conning himself most of all. The con, in his sociopathic cynicism, thinks that everyone is being conned except himself, but there's some saying to the effect that it's always easiest to con a con man. Why should this be true? I think it is because the most effective way to con someone is to believe the con yourself. As George Costanza said: "It's not a lie if you believe it." And once you get in the habit of believing your own lies you lose the distinction between what you know and what you don't know, the "taste" of knowledge. So the most dangerous cons suck you in by virtue of people who believe in them, and who you trust.

Hypnosis has always fascinated me as a phenomenon, and as a description of the state of mind we inhabit so often, a sort of "waking sleep", in which we are driven by suggestions, associations, and habitual patterns and reactions. Con men harness this power of the mind, as do advertisers. Are not advertisers con people? And salespeople? And don't we all sell ourselves and promote ourselves, and in so doing, engage in cons? Creating a resume is a good example - the goal is to gain the confidence, or at least the interest, of the person (or machine, these days) that is reading it. And it is shaped, edited, selectively biased - from one point of view, a "pack of lies".

The con man uses a person's propensity to con himself against him, like the way a judo master uses the momentum of his opponent against him.

If I try to convince you of anything, i.e., persuade you that it is true, am I "conning" you?

It is a compelling metaphor for all human interaction, which is a little depressing. I don't really like looking at the world through a con man's eyes, and yet I have been conned, and didn't like it, and am therefore skeptical of people's hidden motives at times.

But someone said "you must be as wise as serpents and as innocent as doves" - alert to the confidence games all around you, and even in yourself, but somehow not going through life assuming the worst about people.

One of the most visible "behavioural biases" is overconfidence, and it always amazes me when people make claims to know something that they can't possibly know. Which happens every single day. And that's their job - there is a demand for that. Portfolio managers want analysts to "pound the table" on their ideas, to have confidence, and some don't care to hear what that confidence is based on.

So overconfident salespeople marketing products they believe in - Caveat Emptor!

Russ Sears adds:

I have been attending dog-training classes on Saturdays, which is really a class on "trainer training." One thing the instructor said that struck me was that most of your dog's behavior problems can be corrected, if you can get the dog to believe you have a omniscience about everything important to them.

To paraphrase, the dog won't go nuts over that leaf that flies by the window. He will say 'my master must know it, it must be ok.' And eventually you can take him for a walk and that squirrel running by your path, will not cause him to bolt if you say 'no.' He will say, 'its ok, my master saw him and knows what he is doing.'

Dogs want you to correct them before they do it, while they are thinking about it. Still, there certainly is some element of physical force to establishing dominance. This is downplayed as many owners overestimate the need to be "omnipotent." It's more about consistency. Always show them you know what they are thinking.

It seems many of the con's tricks are similar. People have a need to believe that someone knows everything, and therefore the assumption is they are in control. One does not imply the other, however, as the media and dooms-dayists would have you to believe.

For the pacifist owner, dominance need not be harsh, but rather omniscient and omnipresent. Always have a plan. Rattle the keys annoyingly, throw rocks over their heads when they bolt etc. The preparedness causes the dog to think they knew that would happen so he knew what I was thinking. Rather con thinking is, you knew it "could" happen and were ready to imply that it "would" happen.

Perhaps this is the "set-up." Where the journalist digs out the "dirt," the reader never suspects that the story was planned, even written long ago. The subprime is a good example…



 Previous posts have focused on signals that baseball players make before the pitch, and the efforts that teams make to hide their own signals and decode the enemies'.

I have often thought that there are hidden signals in markets. My favorite signal is silver, which I call the omniscient market in that whenever something is good or bad it seems to hit the silver market first. Recently, I have been discovering the hidden signals in the Dow Jones, which seems to go the 50 and 100's during the day, much more than randomness would suggest. Another hidden signal is the movement in bond prices that always seem to predate a major move in stocks. Another one is the Israel market, which I have found quite useful in predicting where the US markets will waft.

In particular the move in the Israel market on the Tuesday morning before the war in Lebanon started was or should have been quite helpful in predicting the war. I note that the Israeli market at 1004 is at an all time high. I predict a good first day of the new quarter based on this signal.

Rodger Bastien writes:

I have spent some time in the last day or two trying to discern whether there are predictive signals one can ascertain prior to a baseball game that might parallel what has been mentioned here, as one seeks an edge in determining how activity in one market may be a precursor to a particular move in another. I would compare this to the preparation that a hitter or pitcher goes through prior to a game studying previous starts by said pitcher or at bats for hitters.

There is a tremendous amount of film study these days due to the availability and the predictive nature of the human animal, that has been successful and will be repeated. Taken further, it's no secret that crafty veteran pitchers will often change their pitch patterns, recognizing that success is often found by throwing the unexpected pitch. The truly clever don't wait until their pattern has been revealed before they change the pattern. Just as a pattern of trading is seldom successful in perpetuity, so goes a pattern of pitching.

Much has been made of successful pitchers pitching "backwards," that is to say, throwing a breaking ball on a fastball count (2-0, 3-1 etc.) and a fastball on a breaking ball count (0-1, 0-2 for example). Though not your classic example of signaling, it is certainly a great example of the importance of preparation and varying patterns to confuse the adversary.

Alston Mabry writes:

"Stylometry" is the use of quantitative methods to determine the authorship of written works. Methods have varied over the centuries, but much attention has been paid to a writer's use of unusual words or word pairings. The problem is that unusual words and word pairings are easy to mimic, should one intentionally seek to create a forgery.

However, because of modern stylometry's reliance on computers, researchers can now analyze a writer's use of very common words and word patterns. It turns out that these common words and patterns are much more subtle, tend to be generated habitually and unconsciously, and are, therefore, much harder to fake or to hide.

One thinks at least of the relationship between what is highlighted in the media, and what occurs in markets.

From J.T. Holley:

For what it's worth one of my favorite card tricks involving an accomplice is utilizing any of the four tens. You lay out ten cards making sure that one and only one of the ten cards is a ten. When they are set up you have it look exactly like the ten as such:

5H              2S

3D      JH      10C

6C      5H      KS

4D              7C

You simply ask the person involved in the trick to pick a card while your accomplice has his back turned. When your accomplice turns back around you start asking him "is this the card," "is this the card." He'll keep saying "no" until you give the hidden signal with the ten card (ten of clubs in the above example layout). You always must lead with placing your finger on the exact card that the person participating has chosen. The real magic though is when the person participating chooses the ten! Then your accomplice can guess it right out of the gate with the first guess. It never ceases to amaze me that very few people figure this out.

The Mistress might be playing the very same card trick as Vic mentions above. The Israeli market being the card the market points to first, then leads to let you know where the magic returns are going to be. Or could she have the ten chosen being the silver market whereas it is the one to be in first and right out of the gate?

Oh well, magic has it's own set of signals.

Easan Katir adds:

One hidden signal (perhaps hidden only to me) I've researched is stock option volume or increased implied volatility predicting a move in the underlying. An anecdotal example was GM in February. 30 February puts were extremely overvalued and stock proceeded to go straight down from 37 to 30.

Hany Saad writes:

This is very enlightening. One wonders why Vic thinks the Tel Aviv market is leading or helps predicting the American mkts. Now, for what it is worth, the best trader I know operates out of Haifa and we correspond daily. His very rare recommendations are money in the bank.

Kovner had a theory that the Russian markets were the same and his theory was that they open our mail.



 As a public figure, Vic is doomed. He is guilty of committing what Fitzgerald implied was the cardinal sin for an American: his life has had more than one act.

There is nothing he can ever do that will excuse him from that as far as the members of the press are concerned. A while ago, I offered the comparison with Ulysses Grant. I still think it is apt. The glee with which the New York press reported the failure of Grant & Ward was matched only by their frustration at his managing to write several classic books (the autobiography appeared in successive volumes) and to restore his family's fortunes.

The journalists' revenge was to tag Grant with the reputation of being a drunkard and corrupt. Neither accusation had any truth, of course; but both remain truisms of what "educated people" know about the lessons of American history. This proves once again the truth of what Henry Ford (yet another genius and anti-Semite fool) said: "In most cases the uses of history are bunk."

I have no doubt that the Times obituary, if it ever appears (anyone want to give odds on the paper outliving the Chair?), will feature comments from every semi-public figure who disliked, feared, or envied the deceased, just as Grant's memoriam featured prominent quotations from Henry Adams (that ultimate rich kid of American literature).

From Imogen Rose-Smith:

Fitzgerald's insight that there are no second acts in American lives means not that Americans only get one act but that lives in America are a series of one acts. Otherwise it is nonsense. Then again, it is hard to know what Fitzgerald meant. The line was a fragment, written toward the end of his life and he was probably drunk. 



 Japanese chart watchers would say 2/21 was a hanging man in the S&P, which portended lower prices, followed by a doji, which indicated indecision. The decision was made on 2/23, and it was let's go down. That's about all I see.

Larry Williams replies:

I do not look at candles. They just don't light my fire for some reason. Besides when I program them I can never get them to make money mechanically. I suggest you look at volume and open interest as well as price.



Gold, from Easan Katir

February 16, 2007 | 1 Comment

In the past few weeks I have endured three separate impromptu lectures from acquaintences on how gold is just starting a big run, the US dollar is trash, put all your children's college funds in gold, etc. Makes me muse that the gold gods might be tempted to provide another lesson for a lifetime.



 The moves in markets often seem to imitate the kinds of things we see in nature: in gas; in water; and in electricity. For example, the gentle back and forth of the stock market last week, gradually building up pressure and then exploding on the downside, is like a cork bursting from a bottle of champagne, or a volcano erupting.

In electronic circuits we often see a signal gently oscillating between set points, then gathering a slight bit of amplitude on one side or the other, and finally tripping the set point thereby triggering a major change in the output. In capacitor resistor circuits, we find the same buildup of charge, with little change in the output until the time constant of the capacitor is fulfilled and the output suddenly and dramatically changes.

The reason for these similarities is they are all results of various energy conservation laws. Energy coming into a system cannot just disappear. One major conservation law in electronics is Kirchoff's Current law. It holds that current going into the confluence of two wires equals the current coming out. Another major law is Kirchoff's voltage law. It states the voltage that's input to a closed circuit is equal to all the voltage used up in work in the circuit.

I find the major applications of conservation laws in markets relating to some input from outside a system. Usually, some information or money flow gets distributed to the various components, companies, and markets of the system. A major merger announcement affects not just one company but all companies related to it. An increase in liquidity in the system gets distributed according to market's laws similar to Kirchoff's laws in electronics.

Click here for information on Kirchoff's laws.

To be continued.

Philip McDonnell adds:

 Two summers ago, in Central Park, the Chair said something to me which was at once profound yet seemingly too simple. "There is only so much money." That was all that he said. To someone who did not understand, it would seem rather sophomoric or even downright cryptic. But it was all he needed to say because I had read his books.

The statement referred to a simple conservation law much like the conservation laws of physics. In physics energy and mass are the most significant variables in most mechanical systems. So we have laws such as the Conservation of Energy, Conservation of Mass and Conservation of Momentum. In financial markets a similar law applies. Money is conserved. At any given time 'there is only so much money'.

Let us imagine an island economy where there are only two stocks X and Y. There is only so much money on the island. When the traders on the island decide they want to invest in X they need to figure out how to pay for the purchase. The only liquid source of money is stock Y. So they sell Y. The price of X goes up and Y goes down.

Let us draw this on an X-Y coordinate plot and assign some real numbers to it. The relationship between X and Y would show up as a line from high up on the Y axis sloping downward to some point of a large X value. Suppose the amount of money were $100. If everyone wanted to own Y and no one wanted X then we would have Y=100, X=0. Conversely if everyone wanted X and not Y then Y=0 and X=100.

We can think of the distance of the current market valuations as the distance from the origin that is equal to the buying power of the money. It is a simple conservation law on our island. The $100 defines a radius from the origin. It thus defines a circle. It is easy to draw on a two-dimensional chart or even in 3D. Drawing a 5000 dimensional sphere for the 5000 actively traded stocks is a project still in progress.

Charles Sorkin adds:

Is it not the beauty of Eurodollars that since there is no reserve requirement (being out of the country and not under the auspices of the Fed), foreign banks can create and loan as many dollars as they want? 

Gregory van Kipnis adds:

Not quite. After the Eurodollar blew up in 1974, central bankers convened at the behest of the Bank of England to put a lid on the runaway growth of the Eurodollar market. It was agreed that each CB would be responsible for defaults of the banks they regulate even if the default were in the Eurodollar market. Following that, each foreign CB put reserve requirements on Eurodollar deposits.

From: George R. Zachar:

Not quite. After the eurodollar blow up in 1974 of Bank Herstadt, central bankers convened at the behest of the Bank of England to put a lid on the runaway growth of the eurodollar market. It was agreed that each CB would be responsible for defaults of the banks they regulate even if the default were in the eurodollar market. Following that, each foreign CB put reserve requirements on eurodollar deposits. /Gregory van Kipnis/


1) That central banks are increasingly players themselves,

2) The clubby incestuous relationships within the govt/bank community in places like Italy,

3) The fact that one major central bank has had a high official murdered by someone he regulated (Russia),

4) The asset explosion in nations whose financial infrastructure hasn't been tested (the Gulf States),

5) The nil possibility that govt bankers grok the array and scope of derivatives…

I would not assume the central banking clerisy is on top of things. They might be, but there's reason for doubt.

Easan Katir writes:

The moves in markets often seem to imitate the kinds of things we see in nature… VN

 To continue the Chair's analogy, it would seem the next practical question is how do we predictively discover the impedance of that market capacitor which discharged on February 8, provided the "3 of a kind," then tripped another point of capacitance and surged in the opposite direction for the past 4 days? What voltmeter can we use to measure the current passing through?

Or is this market more like a big kid bouncing on a "40-day moving average" trampoline for the past seven months?



Once upon a time, a fellow trader kindly tipped the way to put '+' signs into excel numbers, which inspired one to pass along the following:

Rounding Numbers to Millions

To round numbers to millions:

1. Press Ctrl+1 to open the Format Cells dialog box.
2. Select the Number tab, and from Category, select Custom.
3. In the Type box, enter the following Custom Formatting syntax:
#,##0,, ;[Red](#,##0,,);- ;

Original number: 5,645,625
The displaying formatted number: 6

Note: The number formatting syntax is: Positive; Negative; 0; Text

No doubt this will give that trendy 'white space' look of many a Spec's balance sheet.



When magic of the markets is felt every moment, why is there no organized market for magic?

For New Years Eve, one chose to be at the Mela restaurant, (Mela a word from the Indian vernacular means the village fair). Among a host of activities from a village fair, the restaurant specializes in bringing a personal magic show to your table for a small fee, and the question arose right there at the dinner table as to why is there no organized market, not even a national or trans-national company that specializes in retail or wholesale magic?

There are several national and international companies with listed stock in the arena of restaurants, hotels, movie making, movie screening, bowling alleys, vacation organizing, vacation sharing, culture companies, etc., but there is not a single listed stock or organized magic company. Why?

Here are some possible explanations:

Many more ideas come to mind, but then the thoughts have stayed lingering around this one point about being personal. All other human endeavours in the arena of entertainment and services that have been able to overcome the personal factor and lend themselves to being productized, standardized, predictable, mass-emulated, mass-transported, mass-communicated etc. have come to evolve into giga-corporations. Individualistic personal pursuits of acting, dramatizing and magic have failed to turn the magic of the markets to their advantage.

So, is the magic really in the crowds rather than in the magic itself. What important lessons could one derive from the failure of magic to draw the magic of the markets to its advantages?

Easan Katir adds:

This weekend I had a front-row center seat amidst a sold-out house at the Geffen Theater in L.A., to view up close a talented sleight-of-hand master, Ricky Jay and his 52 Assistants, directed by David Mamet. Consequently, I have been contemplating similar corollaries between the conjuror’s art and the trader’s art. Certainly there is plenty of misdirection and deception in both arenas. There is also plenty of explanation to convince one that the impossible is normal. Mr Jay produced winning poker hands, and explained that a card cheat must not only give himself a good hand, but give the suckers good enough hands to inspire them to stay in the game.

Steve Ellison offers:

An important parallel between magic and the markets is the role of patter in distracting customers’ attention from the sleight of hand. A thing to which a magician is drawing the audience’s attention is almost certainly not the main event. The weekly enumeration of reasons to be bearish is an example of market patter.

Laurence Glazier comments:

Magic is also a matter of political or sociological point of view. Is our very existence magic, or the random walk of chemicals? If I construct a chord progression which moves the e-motions, is it science or something more? The magician who bends forks and keys - the process often continuing after after he has ceased touching them - wil never convince the “component parts” of science, and likewise neither would those who have vibhuti.

I am not sure that music works well in the market - where it is there the market - a la Adorno - may affect it adversely, and similar considerations may apply to real magic. If life is to be magical, it must have magical qualities. It is easier for children to see them, though, so let’s stay young.

Andres Vincent counters:

Forgive me for disagreeing, but DNA strands, crystal organization, life itself, a snow flake, clouds, animal life, glass, light, rainbows, electromagnetism, classical mechanics, relativity, etc., etc.. The whole universe is magical, so to see magic there is no need to hallucinate. Just read the book of nature. But to appreciate this beauty its complexity must be (at least a bit) understood, i.e. we have to observe, to work, to learn — in other words, try to become adults.

If adults stay young, and that’s unfortunately the case of the majority, the only magic provided today is overconsumption and/or religion, i.e. deceptions.

Bruno Ombreux mentions:

I would add geology and botany to your list. I got undergraduate classes in both of those, an it is incredible what learning about these subjects does for you.

After studying geology, for instance, one sees the world in a different way. Walking in the countryside — you don’t see the normal countryside any more. You can see how landscapes came to be, you can see millions of years of evolution, movement, shocks, erosion, chemical reactions. And you don’t see rocks anymore, you see names.

You can call a stone by its true name, that is magic. It actually kills all the poetry of a walk in the countryside though, so I am glad I forgot my geology classes.



I have come across many instances in my business career of the widows of successful businessmen complaining bitterly and continuously about the price that their husband received when they sold their old business to its new owners.

Mrs. Backus of Backus Oil, which was bought by Rockefeller, devoted a large part of her remaining life to such complaints, completely unjustifiably I might add, since Rockefeller offered to re-swing the sale at any time. I have come across many other examples of this, including a few where I have bought the business from a widow, or soon to be widow at very high prices, and similar complaints have been made.

My query is, what is the genetic or evolutionary reason for this, and how is the fitness of the family unit maintained by such? Hopefully any current, past, or future wives of mine will not give utterance to similar complaints, which I could assure by falling belly up again as I did in 1997 and as my adversaries have hoped for so vociferously over the past year.

Dr. Michael Cook adds:

The “fitness of the family unit” might be improved by parents who hand on more wealth to their offspring. So those mothers with a keen sense of ownership and amassing property and wealth may enhance the reproductive fitness of their children.

Easan Katir comments:

This brings one to recall buying a business in Washington from a couple, and the negotiations proceeded with civility, each cost justified, and price multiple in the industry ballpark. This proceeded until the afternoon before the closing day, when the wife telephoned, and was apparently having an attack of Tourettes Syndrome, calling me names that would make a rap star blush, The next day the closing occurred and the husband looked a little sheepish. We owned the business for many years, and I did not hear from them again. Genetic reason? well, that would be pure speculation, but one wonders if that is her usual response to stress, or seller’s remorse, or wanting some attention, or just plain orneriness.

Russ Sears mentions:

My wife told me a story of her extended relatives after visiting her parents over Thanksgiving. The patriarchs of all her relatives are or were farmers. Many of the farms continue on through the family, but most of the kids, grandkids and now great and great-great grandkids have moved on. The tale was of one those families.

It seems in the 30’s that one family of two brothers were about to lose a farm. They were $400 dollars in debt and the bank was about to foreclose. They both agreed to pool their efforts, but like many such pools one brother slacked off and the other raised the majority of the money and paid it off.



Probably one is the last to know, a sure sign of the top, but as of this week I now spell ‘prosperity’ K-u-a-l-a L-u-m-p-u-r. From the moment I looked out the plane window at the endless new construction, to anecdotal evidence during dinner with the Deputy Trade Minister, and several “Datos” (the equivalent title to a British knighthood, bestowed by the Sultan), it is everywhere. The big news here is the merger of three palm oil plantations to create a US$9.8 billion behemoth, suitable for world-scale institutional investment. Palm oil seems to have acquired new respect as a healthy cooking ingredient, as well as a suitable bio-additive to diesel.One hears, of course, the boom is happening all over India as well, but reading about it in the WSJ in my overstuffed armchair vs. feeling the buzz up close are viscerally dissimilar …

Ryan Carlson adds:

Perhaps a lot of the construction in Kuala Lumpur is the lead up to the 50th anniversary of Malaysian independence which will be celebrated in 2007.

From a short visit to K.L. earlier in January this year, I never encountered an honest cab driver, and as a rule wouldn’t invest in a country with such experiences. If I can’t trust the local population with a $5 transaction, I wouldn’t sink thousands into their stock market. However, I’m a huge bull on Singapore.



Interactive Brokers certainly leads in a number of areas. In contrast to recent articles about hacking online brokers, IB tells me they have never been hacked successfully.

Russ Herrold replies:

The casual advice about problems-solving which the IB frontline representatives offer is not compatible with CISP grade practice, in my experience. Informal assertions of “never hacked” are perhaps comforting to a layman, but should not offer real piece of mind, nor assurance to the receiver. “An absence of evidence is not evidence of an absence” of issues. Define a published process, and sell SLAs, and I will listen more carefully. Computer and network security is not an attainable Platonic absolute; it is the process of risk identification and reduction. I taught a course on networked host security in a limited context of “Hardening Linux” last year, and left the course materials online.



On a recent Sunday morning in Central Park, we sat in a wisteria-clad arboretum talking about life and markets. One tells Victor how significant his “letters to my son” series are in one’s own family, and that my son reads them with great interest. “Yes, we’re waiting for your contribution,” he replies.So here is one…

Learn computer language(s)

Once upon a time about four hundred years ago in Europe, and a thousand years ago in China, movable type was cutting-edge high technology. Tim Berners-Lee’s internet is as big an inflection point in western history as Johann Gutenberg’s movable type press in 1440, and as in eastern history as Bi Shing’s movable type press in China in 1041. Printed books and periodicals opened up a new world of intellect, previously known only to monks and aristocrats. There were two general groups: There were the intelligentsia, who could read and write. Then there were the illiterate, who couldn’t. The literate group had many more religious, commercial and intellectual opportunities. This new facility disseminating the treasures of the intellect set the stage for the development of science.

The internet is the stage for another evolutionary surge. One needs to participate or be left behind with those who only read, write human language, listen to iPods, watch television. These days as a basic skill one should at least be able to code a web page with XHTML and CSS as easily as one typed a letter on an IBM Selectric twenty years ago. One should learn a real computer language to work with data as a farmer harvests a crop, a miner refines ore. It’s a basic skill of this millennium. It’s another great divide. There is a joke which carries a kernel of this truth: ‘there are only 10 kinds of people in the world…those who understand binary and those who don’t.”

Understand how computers fit in to our life. Several generations ago one’s family may have had a cook, a driver and domestic servants. To communicate and give instructions one learned their language. They were intelligent and did what one told them, but of course, one needed to talk to them in a way they could understand.

Here in the early years of the millennium, computers and the internet appear to be our servants for the foreseeable future. Intelligent yet docile, with superior memory and reasoning powers, few personal problems, they will do what one tells them, they will help us develop and progress, as long as we speak their language. Therefore it is important that you learn how to talk to them. HTML is an easy way to start. C++ is a good way to continue. Other dialects abound. No problem. Gutenberg and the thousand printers who went into business around Europe had similar challenges.

Remember when your father taught you touch typing, and your resistance, sloth, inattentiveness? A few years later you said, “I’m really glad I learned to type,” as you happily spent hours IM’ing friends around the world, and completed school projects. Now one’s efforts to teach you to communicate with your computer are on the same trajectory.

For a reader intimidated by these thoughts, open up a page of Notepad. Type this: Hello New MillenniumSave the file on your desktop with name: Hello.html Now double click on it’s icon, and you will see your first web page. That’s it. No big deal. Easier than planting a petunia. A skill for these times.

There are other skills to learn, which seem to apply to any age. For example, after Gutenberg printed a calendar, he went on to print scriptures, then indulgences, over borrowing to expand his business, defaulting on his debts, and his creditor repossessed his printing equipment and went into business for himself. But that is a lesson for another letter.


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