Carlo Cipolla's Five Fundamental Laws of Stupidity:

1. Always and inevitably everyone underestimates the number of stupid individuals in circulation.

2. The probability that a certain person (will) be stupid is independent of any other characteristic of that person.

3. A stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses.

4. Non-stupid people always underestimate the damaging power of stupid individuals. In particular non-stupid people constantly forget that at all times and places and under any circumstances to deal and/or associate with stupid people always turns out to be a costly mistake.

5. A stupid person is the most dangerous type of person

Here's a link to Cipolla's essay.

Stefan Jovanovich writes: 

Many many thanks to AC. Cipolla's Guns, Sails, and Empires: Technological Innovation and the Early Phases of European Expansion, 1400–1700 (1965) should be required reading for anyone who wants to presume to understand our "modern" world.

anonymous writes: 

I have the most trouble identifying my own stupidity.

My swat drove home the lessons of liberalism and progressive taxation. It was in Mr Gallagher's 8th grade history class. Before class started, noxious Paul initiated a fencing match with me using pencils. It wasn't my idea but I did score the only point - with a leaden puncture to Paul's forearm. He promptly took his wound to Mr Gallagher, who summarily referred me to the vice principle's office.

Mr Curtis had me grab my ankles for three humiliating whacks. They didn't hurt so much as worry me that my parents would find out (they didn't). And it seemed unfair as I only attacked in self defense.

I won the skirmish but lost the battle, because the system was rigged pro "victim", even then. It would have been better, in a away, had I lost the fight. I wouldn't have snitched but would have learned about another kid to avoid.

Russ Sears writes: 

What I have observed is that some people are too stupid to realize that they are stupid. Studies show that those that do the worst overestimate their abilities on a test of just about anything, while those that do the best underestimate their abilities to test on just about anything. Socrates was right that the beginning of wisdom is to know one is ignorant. However, as his untimely death implies, he was wrong to point this out to stupid but powerful people. However the leaders should not be as Aristotle implies (perhaps as survival mechanism learned from Socrates experience), the most learned dictator, but the ones most capable of producing cooperation from all individuals talents. 

I was told that the reason most people do not know they are stupid is that they attribute their knowledge as being the most important, and therefore under-estimate the importance of their ignorance. Perhaps this is a form of denial, to justify their self-worth. The market's in general is brutally honest on what is "important". 



The article "Seeking the Latest Fear Trade" on p. B2 of the weekend WSJ describes the efforts of volatility pioneer NYU Stern School Prof. Menachem Brenner to derive an actionable gauge of ambiguity, to complement VIX.

Ralph Vince writes: 

Fascinating stuff. I am searching for a cached copy. Think of the rich complexity of a listed product, the spreads and just mere sentiment expressions something like a listed product on such a creature would afford.



According to this study of the Maryland Public Policy Institute, for public pension funds, higher money management fees lead to lower returns.

Which makes sense, since public pension boards are unlikely to have the expertise necessary to discern among managers in a way sufficient to overcome the vig of higher fees.

Once again, unless you have an edge– index!



New mortality estimates by the Society of Actuaries, to be adopted by most private company defined benefit pension plans, will cause DB plan obligations to grow by about 7%, increasing the motivation of plan sponsors to offload their plan obligations to insurers:

"The Big Number"



 We all know by now that one of the main purposes of the market is to create more flow so that the public can do the wrong thing. The market accomplishes this in a infinite variety of beautiful ways. One of the unobtrusive ways is through colors as in the Peacocks tail. The various quote machines flash red when down on the day and green when up on the day. Many markets, much too many for chance, flash from red to green incessantly until they attract your notice and lure you into an unprofitable for you trade. Right now Crude has flashed red to green to red about 1000 times in front of one's poor wherewithal.

Art Cooper writes: 

This is straight out of Las Vegas's playbook, where the slot machines ("One-armed bandits") are set up to maximize flashing lights, noise, etc. especially highlighting the (very rare) payouts.

Hernan Avella writes: 

Yet, it is remarkable that participants keep depending on the same limiting media tools which shape their understanding of the system. I watched this video from a leading computer programmer and it got me thinking about the possibilities if one steps out of the conventional offerings. I'm convinced that one has to design their own tools to watch the market, given our propensity to fall for deception and traps, specially of a visual kind.



Specs interested in the history of the Delphic Oracle may enjoy a book review of Michael Scott's Delphi on p C8 of the weekend WSJ:

Scott "cautions us against thinking of the oracle as 'an instrument simply for revealing the future' and invites us to see it as 'something of a management consultant — an adviser, but one with powerful authority.' 'What consultation at Delphi offered was a chance to air a difficult decision in fresh light [and] receive extra (divine-inspired) information and direction, which, while itself necessitating further discussion, brought with it powerful authority and thus a significant push toward consensus.'"



 Does the hot hand exist or is it consistent with randomness?

"The Hot Hand Might be Real After All"

The authors contend there's something to it.

Ralph Vince writes: 

Fascinating article, I think he might have pursued some avenues of thought there just a little further.

Basketball shooting is not the same, say, nor the streaks one might feel in doing it, as the streaks one might sense at a craps table, the difference being the participating aspect of one's skill (unless you attribute throwing dice to a "skill," and many of us, no-doubt, have had uncles who held that view!).

So the feedback mechanism of the previous play impacts upon the next play where skill is actually involved. Where they speak of players feeling hot, and taking greater chances as a result, the player enters a different distribution of outcomes (or, at the very least, different parameters to the distribution of outcomes) than when he didn't feel hot. This is likely true in most of life's endeavors that we must perform something.

And what a lesson there, professional athletes inadvertently might be providing.

One "sport" I find pure torture is golf. Go miss a three foot putt, and the next one looks like it's thirty feet. Go get rattled and try to hit the next shot like you did X holes ago. Clearly, there are different outcomes based on how you react to immediate previous outcomes, pro and con.

Yet, professional athletes seem to be able to compose themselves such that the negative side of the coin they are able to disregard altogether. This may be the greatest facet of their skill in fact, I certainly wouldn't be the one to judge that, but I do marvel at how they can re-compose themselves and relax in difficult situations, even when things aren't going too well for them. 



 The sun's magnetic poles are about to flip. I wonder if this cycle has been studied in regards to markets? It's an 11 year cycle.

Art Cooper writes: 

Here is William Stanley Jevons's work on the subject from 1878.



 Dailyspecs may be interested in reading "The Sage of Equipose," a review on p C7 of the weekend WSJ of Frank Prochaska's The Memoirs of Walter Bagehot. Bagehot was the longtime editor of The Economist. The book consists mostly of Bagehot's own writings.

Fed critics will enjoy Bagehot's "Lombard Street" passage in which he "traced British financial instability to the Bank of England's special privileges, which, by restricting other banks' ability to issue circulating notes, caused them to employ Bank of England notes rather than gold as their cash-reserve medium."

Stefan Jovanovich elaborates:

Bagehot was — like all successful financial journalists — always loyal to authority and convention while seeking, whenever necessary, changes in the name of progress and the general welfare. Magically, those "reforms" invariably end up benefitting the people holding the largest sums of money– usually, but not always, the banks.

I don't fault Bagehot for any of this; it is the financial journalist's job. My difficulty is with what he had to say.

Bagehot was a supporter of the gold standard only in the sense that he did not want banks to be completely free to issue notes without some fractional reserve being held against those IOUs. One can say as much for Keynes; at Bretton Woods he did not propose that the world central banks to be completely free to issue script. Both men thought that currencies needed to have some connection to gold; but neither thought it was, in any way, a good thing to have ordinary people able to demand specie for their measly savings and then "hoard" it in hard times.

Bagehot's essay on Universal Money is a fascinating reminder of just how much snobbery underlay all modern discussions about currency "reform". Bagehot is horrified at the French and Americans for wanting a "low" gold standard - i.e. one that puts an ordinary laborer's wages within the reach of actual coin.

Bagehot was equally horrified by the Americans' notion that there should be not central bank at all. People have been taught to read Lombard Street as a prescription for somehow limiting the printing of money; but it is really a tract in favor of allowing banks to call upon the BofE for notes in a crisis without any restriction at all in the amount that the BofE itself can print or how much debt the government can sell to the central bank.



 I recently discovered William Clark Russell and was blown away. Best read ever: Marooned: A Sea Tale

Largely forgotten today except by fans of sea stories, W. Clark Russell wrote close to 50 novels of the sea.

I had never heard of Russell until I read the Sherlock Holmes story, "The Five Orange Pips." During the intro to that story Dr. Watson is reading one of Russell's stories during a very stormy London day.



 If cheapskating is going to increase, we might consider whether individual stocks that cater to cheap skates might have inordinate returns. This is the kind of things that my kids might make money with in terms of the category of stock, rather than its financial characteristics. Perhaps. On another front, I believe it is important to be especially cheap after having a good year. I think of Rimm every day with grave loathsomeness.

Art Cooper writes:

It's been a market theme for quite some time to buy stocks like Family Dollar Stores, Dollar General, etc. instead of retail stocks which cater to the middle class. The high-end retail market is a different market, as it responds to different forces. 

Jeff Watson writes:

I'm always accused of being a cheap person and try to not be penny wise and pound foolish. I never pay retail for anything and try to buy only stuff that will hold value. Herb Cohen is a person I look up to. He might look a little seedy, but he makes great sense and teaches sound methods of bargaining. His first $19.95 book I ever bought was probably the best investment I ever made, saving at least a million bucks, by bargaining with some of his techniques over a 30 year period. That's a hell of a return and his techniques work…

Pitt T. Maner III writes: 

 Cheapskating is likely to be an increasingly popular topic as hidden inflation and taxes go up. Perhaps there is an opportunity for a "Global Skinflint"!

"Jeff Yeager, dubbed "The Ultimate Cheapskate" by Matt Lauer on NBC's Today show, is a very cheap guy. He re-cants, as opposed to decants, the wine he proudly serves his dinner guests, funneling cheap box wine into premium-label bottles. He believes you should never spend more than USD 1 per pound on food items. And to save time and energy costs, he soft-boils his morning eggs along with the dirty dishes in the dishwasher."

And then there is the TLC show :

"Be aware of what you're using. Victoria Hunt, who retired from her accounting career at 48 has been tracking her expenses and her income on a spreadsheet since 1989. "Every minute of every day has something to do with how I can make a better decisions financially," she points out."

Rocky Humbert writes: 

Mr. Yeager is either wasting money on his super-heated dishwasher or he's stretching the truth about his eggs. Dishwashers (generally) do not heat the water about 140 degrees. See this article on naturalhandyman. To get the egg white solid, it requires about 180 degrees. Even my Miele doesn't get the water to 180 degrees! This does not compute! (That is, he's making his money selling books. Not cooking eggs.) I would suggest that he should instead put his Pop Tarts and morning sausage on his car engine's manifold. By the time he gets to work, he'll have a well-cooked breakfast. (And he can similarly roast hot dogs on his drive home.)

Dr. Johnson writes: 

Ballyhoo? Like any good Spec, one must test, and test I did, the claim that an egg can be cooked in a dishwasher during a normal wash/dry cycle.

Equipment- Miele G5775.

Note: Perhaps not the ideal brand for testing a cheapskate's assertion.

Eggs= Phil's Fresh Farms Free Range Large 42F wrapped in plastic film.

Max Water Temperature Wash5F Max Air Temperature Dry= 185F

Time to complete cycles= 54 min wash & rinse, Dry 22 min.

Results: Egg removed immediately at end of the cycles= Yolk 134F thick and slightly flowing, settles to 1/4 height, white 151F at shell boundary with firm consistency.

Egg removed after 10 Min.= Yolk 141F thick and settles to 1/2 height, white 141F at shell boundary with firm consistency.

Conclusion: Not Ballyhoo! One important consideration for those cheapskates who want to try this method is that egg shells are semipermeable, therefore unless the taste of detergent combined with a menagerie of old food waste is to your liking, sealing the egg in plastic wrap is advisable (also which at +140 F will transmit unwanted substances).

David Hillman writes: 

Yes, let us commend Dr. Johnson both on his testing and on his using Phil's Farm Fresh Free Range eggs, the chicken egg of preference at Casa DGH…..cage-free, no chemicals, natural whole grain feed, laid in nests, and certified humane!

That said, even though my Bosch heats water to 160F and air dries at what seems to be 1200K if one opens the door during the 'sanitize' cycle and is met by a blast of superheated air, this whole business of cooking eggs in a dishwasher seems a bit impractical.

One, it seems like using a sledgehammer to place a pushpin in a cork board. Two, while the dishwasher here is run every 2-3 days, typically in the evening, eggs are a daily breakfast staple. What to do on 'accumulation' days? Three, counting time to heat water or a pan, it takes about 10 minutes to fry, poach, baste, scramble or soft boil eggs on the range. Why wait 76 minutes? Four, dishwasher cooking uses a heck of a lot of water and electricity v. range top cooking, multitasking notwithstanding.

For those who feel the need to multitask in the kitchen, there are what seem to be more practical alternatives to cooking one's breakfast eggs in the dishwasher, though at $90, this might not be thought of as 'cheapskating' …..

Pitt T. Maner III adds:

 A few older links, but possibly of interest to those seeking to find ways to ride the money-saving trend and as a possible example of a company that finds quickly (identifying trends) and uses new inventions from private inventors. Khubani the CEO started with ad in National Enquirer.:

1) From 2010: 'A.J. Khubani, the man behind many “As Seen on TV” gadgets such as the PedEgg foot scraper, is making cheapskate gimmicks a priority at his company Telebrands, one of the nation’s top direct-response TV marketing companies.

More than half of Telebrands’ gadgets, sold online and at 90,000 stores, are now focused on helping shoppers be cheap. Khubani, who has been traveling around the country to meet inventors, is speeding up the number of new products he’s launching to every 30 days from every 60 days. “The mood of the country has changed,” said Khubani. “We’ve had tremendous opportunity with this recession.”'

Since 2007, Telebrands’ revenue has doubled to several hundred million dollars, he said.

Read more.

2) The current lineup of brands.

3) From 2012: "For the first time in our company's 29 year history, TeleBrands had 15 products ranked in a single year including our most recent hits like, Slice-O-Matic, Plaque Blast, Slim Away, OrGreenic and Bake Pops," said TeleBrands' CEO/Founder, AJ Khubani. "Each year, we continue to solidify our spot as the largest and most successful marketer of DRTV products aimed at solving everyday problems and reaching mass audiences at affordable prices. In 2011 alone, we rolled-out 12 products — the most in a single year in our company's history."

Read more.

4) On Khubani from 2011:

"The son of Indian immigrants, Khubani started out at 23, spending a few thousand dollars on an ad inNational Enquirer — a move that led to his first big hit. Since then, he's sold hundreds of millions of "As Seen on TV" products, including AmberVision sunglasses, the PedEgg and Doggy Steps. He has bolstered the careers of ubiquitous TV pitchmen, including the late Billy Mays, who enthusiastically hawked products now found on the shelves of more than 100,000 retailers. Today, Khubani is the leader in the $20 billion direct consumer marketing industry, turning out more "low-tech" products than ever before."

read more.

5) Not all have been appreciative of Khubani's methods:

"But will anyone care about dust mites? Khubani wasn’t achieving much traction among his Telebrands staff with his bed-spray idea, when along came a proposal for an anti-dust-mite pillow, from a colleague Khubani mysteriously describes only as “a business associate.” It’s hardly a new concept—there are several such pillows already marketed to allergy sufferers and asthmatics. But so far, nobody has had the brilliance to incite a national panic around flesh-eating creatures that feast on human remains—and lurk in the pillow of every man, woman, and child. “The hum you sometimes hear at night?” Khubani asks eerily. “That’s the sound of 2 million dust mites eating your dead skin.” Or perhaps it’s the sound of one man in Fairfield, New Jersey, homing in on your next anxiety. "

Read more. 

Victor Niederhoffer adds: 

 Of course the main virtue about cheapskating is that it prepares you for such activities in your business. As the oil magnate said, "I am not smart enough to act one way in my personal life and another in my business. My margin is 8%, and if I gave away 8% on everything my 200,000 employees would be out of a job. So I make them pay for their telephone calls." Regrettably, the oil magnate was victimized by old man's disease (the same disease as the sage), and he was locked up in England for 20 years, with his retinue preventing him from going back to us for fear that he might change his will, and he was soporifisized by many nubile girls and other attractive women he would meet at museums. 

Funny. More important even then the fine posts with examples and tests of cheapskating is the query I have received from many of the younger hearted on the list. "Where are those museums that the oil magnate frequented?".

Gary Rogan suggests:

I suspect the Getty museum is a good place to start.

Stefan Jovanovich writes:

I hope Gary means the original one in Malibu, the villa whose design Getty himself supervised but never saw. The monstrosity built on top of the landfill by the 405 is absolutely the worst place in LA for the amusements Getty had in mind. If he were alive today and living in SoCal, he would be going to OCMA to appraise the latest generation of lovelies.

Jim Sogi adds:

Eggs can be cooked sous vide at 144 -155 for 20 plus minutes for a wonderfully cooked smooth soft boiled egg with a consistent texture throughout.

Food grade hydrogen peroxide diluted to a 3% solution is an excellent way to sanitize kitchen and utensils and not toxic like chlorine. 



 This was written at the start of a memorable bull market, by the savviest commentator, to an insider: John Steinbeck to Adlai Stephenson. Found on the great blog Letters of Note:


Mainly, Adlai, I am troubled by the cynical immorality of my country. I do not think it can survive on this basis and unless some kind of catastrophe strikes us, we are lost. But by our very attitudes we are drawing catastrophe to ourselves. What we have beaten in nature, we cannot conquer in ourselves.

Someone has to reinspect our system and that soon. We can't expect to raise our children to be good and honorable men when the city, the state, the government, the corporations all offer higher rewards for chicanery and deceit than probity and truth. On all levels it is rigged, Adlai. Maybe nothing can be done about it, but I am stupid enough and naively hopeful enough to want to try. How about you?


New York 1959 Guy Fawkes Day

Dear Adlai,

 Back from Camelot, and, reading the papers, not at all sure it was wise. Two first impressions. First, a creeping, all pervading nerve-gas of immorality which starts in the nursery and does not stop before it reaches the highest offices both corporate and governmental. Two, a nervous restlessness, a hunger, a thirst, a yearning for something unknown—perhaps morality. Then there's the violence, cruelty and hypocrisy symptomatic of a people which has too much, and last, the surly ill-temper which only shows up in human when they are frightened.

Adlai, do you remember two kinds of Christmases? There is one kind in a house where there is little and a present represents not only love but sacrifice. The one single package is opened with a kind of slow wonder, almost reverence. Once I gave my youngest boy, who loves all living things, a dwarf, peach-faced parrot for Christmas. He removed the paper and then retreated a little shyly and looked at the little bird for a long time. And finally he said in a whisper, "Now who would have ever thought that I would have a peach-faced parrot?"

Then there is the other kind of Christmas with present piled high, the gifts of guilty parents as bribes because they have nothing else to give. The wrappings are ripped off and the presents thrown down and at the end the child says—"Is that all?" Well, it seems to me that America now is like that second kind of Christmas. Having too many THINGS they spend their hours and money on the couch searching for a soul. A strange species we are. We can stand anything God and nature can throw at us save only plenty. If I wanted to destroy a nation, I would give it too much and would have it on its knees, miserable, greedy and sick. And then I think of our "Daily" in Somerset, who served your lunch. She made a teddy bear with her own hands for our grandchild. Made it out of an old bath towel dyed brown and it is beautiful. She said, "Sometimes when I have a bit of rabbit fur, they come out lovelier." Now there is a present. And that obviously male teddy bear is going to be called for all time MIZ Hicks.

When I left Bruton, I checked out with Officer 'Arris, the lone policeman who kept the peace in five villages, unarmed and on a bicycle. He had been very kind to us and I took him a bottle of Bourbon whiskey. But I felt it necessary to say—"It's a touch of Christmas cheer, officer, and you can't consider it a bribe because I don't want anything and I am going away…" He blushed and said, "Thank you, sir, but there was no need." To which I replied—"If there had been, I would not have brought it."

Mainly, Adlai, I am troubled by the cynical immorality of my country. I do not think it can survive on this basis and unless some kind of catastrophe strikes us, we are lost. But by our very attitudes we are drawing catastrophe to ourselves. What we have beaten in nature, we cannot conquer in ourselves.

Someone has to reinspect our system and that soon. We can't expect to raise our children to be good and honorable men when the city, the state, the government, the corporations all offer higher rewards for chicanery and deceit than probity and truth. On all levels it is rigged, Adlai. Maybe nothing can be done about it, but I am stupid enough and naively hopeful enough to want to try. How about you?



Art Cooper adds:

It was Steinbeck's sentiments expressed above which led him to write his last major novel, The Winter of Our Discontent.



 This working paper published by the Dallas Fed Bank is helping in articulating the questionable assumptions underlying the Fed's ultra-easy monetary policies, and the potentially harmful consequences of that policy.

Stefan Jovanovich writes: 

Peter Temin has a wonderful paragraph in the introduction to his book Did Monetary Forces Cause the Great Depression:

"it is not surprising that the policies we now recommend for similar conditions were not tried. For if they had been tried and found wanting - if the Depression had occurred despite the imposition of expansionary monetary or fiscal policies - we would not longer count them as effective. Given the existence of the Depression, only policies that were not tried could escape with untarnished reputations".

Temin's book only addresses the U.S. — the one country where the Depression was truly "Great". As Hugh Hendry recently reminded people at his Buttonwood interview, the "depression" in the early 1930s in Europe saw real output fall by less than 5% from the 1920s peak; in the U.S. the decline was a THIRD! FWVLIW my assessment of what happened in the U.S. agrees neither with Rothbard nor Keynes nor Friedman. Art Cooper and I have been discussing this question recently. Art will, I hope, forgive me for making him guilty by association in presenting the Stefan theory:

In the decades that straddle the First World War, the U.S. became - for the first time in its history - a country with customers who were overseas. If you look at the histories of the giant enterprises - Standard Oil, Ford, Firestone and the other rubber companies, General Electric, DuPont to name only the ones that immediately come to mind - all of them developed large overseas operations and exported products abroad. American and Canadian farmers enjoyed a shorter but more dramatic boom because of the war. I have to quarrel a bit with your facts about the 1920s. They were not a "boom" for the U.S. any more than the period from 1945-1955 were; they were relatively good times only because the rest of the world was flat broke. Rothbard is right about the government's extending credit but he has the wrong recipients; domestic credit in the U.S. remained strict (it is the reason the farmers found it impossible to roll over the loans they had taken out during the boom of the war years) and the beginnings of consumer credit (people buying radios and cars on credit) came not from the banks but from new "finance" companies. The easy money was the stuff being sent overseas under the Dawes Plan, etc. It began back in 1914 when the U.S. Treasury unilaterally abandoned the gold standard for the British and French Treasuries and central banks; those countries were allowed to run chronic trade deficits without ever having to settle their accounts in gold. The Depression (as opposed to the stock market crash) came from the final collapse of the European borrowers who were the defeated nations (German, Austria-Hungary). U.S. policies were not helpful; and Roosevelt prolonged the Depression by taking the U.S. off the gold standard at the very time the Europeans were restoring it (the Japanese followed the American example - which meant that military socialism became their solution just as the revival of the Wilson economy became ours). But the ultimate cause was the bill for WW I finally coming due. You cannot have your major overseas customer go broke and somehow expect that everything will be OK by paying them to continue to buy your stuff. If you then decide that you can avoid the foreign exchange pressures from your now recapitalized, lower cost customers who are now competitors (by destroying the mechanism for trade itself i.e. the gold standard) and then confiscate the nation's bank reserves, you are going to have a collapse in your employment and production that will last for a decade or more.



 One of the great regularities that I have observed from a long and not uneventful career in trading is that whatever governments want, the governments get. If they want stock prices to rise before an election, or oil prices to decrease or commodity prices to decrease they get it. They have so many trillions to work with, so many entities that can be called on to increase the perks and power of the governmental entities. There's the EU, the IMF, the central banks, the what have you. It always amazed me that the palindrome was able to overcome the Old Lady on the pound. All HM Government had to do was tell the private banks to charge 200% interest to the palindrome on the leverage. In those days, presumably the private banks were more independent, but now their very survival, profitability, and existence is dependent on the good will of the governments with the direct investments, the bailouts, the purchase of bad assets, the cost of borrowing reserves, the fines, the regulations that permit their existence unless they agree to further the "Idea". The whole thing must be quantified. And a subset of governmental market reactions must be found that are susceptible to predictions based on specific times, and events. (I think).

Art Cooper comments:

I agree that that is correct, what governments want, governments get, but that's merely the first stage. The second stage is that those groups/powers which have the greatest influence on government get what THEY want from government in those matters which are most important to them — that's who government serves. If Traveler's Insurance wants the repeal of Glass-Steagall so that, post-merger, they can continue all operations in a new Citigroup, then Glass-Steagall will be repealed. Special-purpose legislation seems the primary purpose of contemporary government.

T.K Marks writes:

I've often pondered what you said about the palindrome myself. My only conclusion was that he had to know that his position interests were favorably aligned with enough sovereign interests to pull it off. Or else Greenspan and his monetary brethren the world over would be very wary of the precedence of one private concern successfully staring down a central bank to the point of capitulation. And then basically reveling in the adulation.

Gary Rogan writes: 

And that's an example of "knowing what's going on in the world" and making money from it. He seemingly makes these highly complex "let's reason it out" calculations and bets on them. Not long ago Victor related a story about Palindrome wanting him to bet on something using his reasoning and Victor retorting that he had to do what his numbers were telling him, or something like that.

The few times I listened to him drone on about globalization or how Europe will or will not solve its problems he sounded half-insane, but it evidently still works for him. Of course he now has a lot of influence, so there are self-fulfilling prophecies possibly at work.




 A common mistake that stock people do I think is to pay attention to the increase in sales numbers. What does this have to do with future profits? I would think there is zero correlation given the earnings change since sales are so easy to manipulate by such things as discounts, pre-orders, and incentives for early buying, and reducing inventory et al. How did this ridiculous emphasis on the sales increase become as or more important than earnings relative to expectations in affecting stocks after the earnings report? I recently met with a pairs trading outfit and gave them 100 reasons I don't think it works, but it was from the seat of my pants. The main reason was of course that it goes against the drift. It hedges against the 10,000 fold return.

Gary Rogan writes: 

If sales increase while profits are decreasing, that's a bad sign. However when profits increase while sales are decreasing, this may be very good, but it can't go on too long. Sales trends gained influence as a counterbalance to profit growth being fudged. When you have profits, sales, and cash flows all increasing in unison and indebtedness not increasing, that's as good as it gets. 

Jeff Watson comments: 

Profits increasing while sales are decreasing are usually a sign of increased productivity, better inventory management, better management of labor, and better management of capital. Although Gary says this scenario can't go on too long, it really can go on forever. 

Gary Rogan replies: 

Well clearly it's mathematically possible to decrease sales by .1% per year and increase profits by .1% per year close to forever so "too long" was perhaps a bit harsh, but at some point in the real world gross margins become so high as to make further advances impossible due to competition or substitution. My statement was prompted by not being able to recall a real scenario of sustained profit growth and sales decline resulting in a good outcome having looked at hundreds of income statements, but I've never made a study out of it nor have I looked at multi-year trends. When customers are buying less of your stuff year in and year out that usually means they are not excited about your stuff, because they don't like it but perhaps in this case because the price is too high for them to use more of it. When customers get into the habit of using less of your stuff, that's hard to fight. 

Jeff Watson adds:

The Chair is 100% correct. Going back to Sears as an example…their aggressive pricing will only squeeze their retail operation out of business(if continued long enough), as prices this low are unsustainable in the long run. If a store has a 30 percent increase in sales after implementing a big sale, but it's gross profit goes from 22% to 6% or less, is that a good business plan? Even though Sears is not increasing labor to handle the increase in sales, the model is still badly flawed. I understand that one of the most important things in retail is buying right, but I suspect that most of the things Sears is selling is a loss leader. Maybe they are subscribing to the old cliche, "We might be losing a little money on each sale, so we'll make up for that with the increase in volume."

Russ Sears writes:

Coming from the world of insurance, when things sell unexpectedly well the actuaries double check their pricing. The agents and the market will quickly spot when you are selling $1 or risk coverage for 99 cents. When I started, before rate books were online, a printing error cut-off the $1 handle of 70 year old women term life insurance rate per $1,000 (this was highest age we sold term to). The month after the book went out we had more 70 yr. old women apply for insurance than we had in the past several years combined.

In other words sales increases often indicate increase in claims volatility. Sales increases make me wonder if management really knows what they are doing. One wonders if this rule holds for the retail and stocks in general. 

Carder Dimitroff adds: 

I may be naive, but in some sectors I believe the top line could be critical for long term investments. I'm thinking of regulated and capital intensive companies like electric utilities, gas utilities, water utilities, pipeline companies, transmission line companies and MLPs. In a different way, I'm also thinking of non-regulated utilities, such as independent power producers, refineries and REITs.

In all these cases, if the top line falls, the bottom line is plagued by fixed costs, such as interest, ad volerem taxes, depreciation and amortization.

The second derivative of revenues in such cases is capacity factor. Low revenues suggest low capacity factors. Low capacity factors suggest troubled assets and long-term challenges. The assets could be partially stranded by market conditions.

An example is marginally efficient coal plants. With low market prices for natural gas, many coal plants find themselves out of merit and not dispatched (zero earnings for producing energy). When natural gas prices return, marginal coal plants are again deep in the merit order and they are dispatched frequently or continuously.

Julian Rowberry writes: 

An internet marketing equivalent of over valuing sales figures is over valuing social media subscribers. Twitter followers, facebook likes, page views, ad clicks etc are all very easily manipulated.

Leo Jia adds: 

Here is my two cents regarding growth vs non-growth.

The present value of a business without growth is much lower than that of a similar sized growing business. So one obvious question to any business owner is whether he would like to receive more money or not if the business is to be sold today. The answer is obvious. But one may counter: since he is making good profits on the business, why would he sell it today? Well, isn't that the beauty of modern finance produced through Wall Street? To sell it today, the entrepreneur can collect today all his future earnings projected based on the best periods of his business performance, and with that reward, he can move on with his life, rather than be tied up by the business which may turn sourer later and cause him to suffer.

Why would Wall Street care more about growing businesses? Those people who bought out the entrepreneur have an even higher reward outlook than his and would seek higher profit on the investment.

Art Cooper writes: 

An example of this currently in the news is Hormel Foods, described in the article "Spam Sales Boost Hormel's Profit" on p B4 of today's WSJ.

The article notes that Hormel's Q3 earnings rose 13%, led by strong growth in products such as Spam and Mexican salsas, continuing a trend of higher YoY earnings. "Even so, rising commodity costs and shoppers' resistance to higher prices are pressuring its profit margins, which could affect its results in future quarters."

HRL's price has been roughly flat for a year.



 Many of the themes Vic hits strongly on in his posts about how the financial markets are fed by money supplied by the public, which ends up in the pockets of the flexions — and many others — are driven home in the article, "A Life Driven by Desire," on p C13 of today's WSJ.

The article is a review of Theodore Dreiser's "The Financier," which is based on the life of Charles Tyson Yerkes, "one of the more freewheeling Gilded Age robber barons."



Two recent ostensible bubbles were the Nasdaq and US house prices. Prof. Shiller's nominal house price data was scaled to match the high of Nasdaq stock market, and shifted in time so the two peaks concurred (HPIQ2 2006 = NASQ1 2000).

Consistent with liquidity differences the Nasdaq bubble formed and burst much faster than housing. And neglecting effects of mortgage leverage, the housing bubble gain/loss was much less than Nasdaq.

Though the Nasdaq bubble was much more dramatic, ostensibly housing effects many more people. This, along with the fact that stocks are less in demand than places to live and market distortions due to foreclosures, suggests different bubble dynamics. Nasdaq began rallying about 2 years after its peak wheras housing continues to decline now some 5 years post-high.

Art Cooper writes:

Isn't "the effect of mortgage leverage" an enormous thing to neglect? Obviously, leverage is employed far more in housing than in the purchase of NASDAQ stocks.

Kim Zussman adds:

One could make the case that homeowners key less on loan-to-value (or value of equity) in a home than what the house next door just sold for.



 The Ball brothers were on p. A3 of today's Investor's Business Daily: "The Ball Brothers Bottled Can-Do Spirit In a Jar. "

The article describes not only their self-made creation of a manufacturing success, but also the great benefits they produced & gave to the community at large.

Pitt T. Maner III writes: 

I used to buy cases and cases of Ball jars (everything available on the store shelves). The supermarket checkout ladies would laugh at me and ask what I was canning.

"Contaminated soils, Ma'am" The change in expression on their faces was priceless.

Ball jars are very useful for screening for petroleum-impacted soils in the field. You fill the jars up half way with soil, cover the top with aluminum foil, put the ring back over the foil, let them sit for a couple of minutes and then use a field organic vapor analyzer (OVA), PID (photoionization), detector to sample the air in the headspace of the jar.

There are many more uses for common products than one would think.



 If someone could relate the 10 most important ways to be a successful beggar and somehow rate the big CEO's on how they fare on this, perhaps it would be a good way to pick investments these days. Certainly the basketball player, and the [deleted pending resolution of offer and counteroffer] would be high up there, and the heads of the certain institution from areas that are renowned for their ability to compromise would have many lessons to teach, and juicy stocks ripe for investment. The head of a metals company renowned for its low cost elevators in my day was a butler and this would seem to be very ideal training in the absence of a school for beggars in this country. How to generalize?

Gary Rogan writes:

They can't really beg and retain any illusion of authority. They have to prostitute themselves to the regime while plausibly (somewhat) appearing highly enthusiastic and supportive.

Some of the skills:

-Be able to speak with passion and conviction about complete nonsense, generally in the collectivist/green future and similar areas.
-Be able to deny obvious truth with passion and conviction in public, such as the real motivation for any help from the government.
-Regularly show up in Davos.
-Express a great deal of concern for various oppressed constituencies, at home and abroad and describe at length how the company/CEO are helping them.
-Be excited about creating jobs, especially "good" jobs, "skilled" jobs, "green" jobs. Talk at length about how the US needs to be a country that "builds things".
-Be able to motivate a large number of employees by any means necessary to contribute the government political candidate.
-Invest heavily in a number of "relationships" in DC to create wide-spread support for bailing out the company.
-If the company is a conglomerate that owns any media properties turn those properties into the echo chamber for the regime.
-Infrequently offer mild criticism of the regime while emphasizing the silver lining.
-Get involved as advisers to the various regime commissions.
-Hire former regime members.

Steve Ellison writes: 

Maiming: In one country I visited, there were many beggars, who served an important role in their religion by giving the faithful opportunities to do good deeds. Many of the beggars had been purposely maimed by their handlers in order to attract more alms.

Spinning a yarn: When I first worked in the big city as a young man, I was stunned by how many panhandlers there were. Locals informed me that the Republican president was to blame. I saw the same panhandlers day after day, but every once in a while somebody would approach me with a sad story. One woman rode the subway telling everyone she needed to get to a hospital for a medical procedure but needed money to get there. I occasionally would be approached by someone claiming to be a stranded traveler who needed money to get home.

Performing unwanted services to create a sense of obligation: The last time I went to the Los Angeles airport, I was approached as I walked out of the terminal by a woman who asked if I needed help finding anything. I said I just needed to find the shuttle bus for rental cars. She pointed out where it was (it was right in front of me, and I would have found it myself within five seconds) and then asked for money. Squeegie men and charities that send preprinted address labels are in this category, too.

Feigning virtue: I know people who have offered jobs to people holding signs saying, "Will work for food". None of the sign holders have ever shown up to work.

John Tierney writes:

10 attributes which get the alms seeker off to a good start:

1. stresses that the company is concentrating on "giving back to the community"

2. actively involved in and/or seeking out green initiatives.

3. putting increased emphasis on organic growth, but always has an eye-out for M&A opportunities

4. working hand-in-hand with government agencies/NGOs to address hunger/AIDS/climate change

5. supports and serves on advisory boards of outfits like Breast Cancer Awareness, Habitat for Humanity, Thurgood Marshall Scholarship program, anti-vivisection league, and Sierra Club

6. never misses annual meetings at Davos & Jackson Hole; always has time for interview with CNBC and others; dresses casually, but not ostentatiously for same, addresses interviewer by first name…refers to this year's meeting as "one of the most exciting" ever

7. rarely indulges in short-term predictions, instead devotes most of his time to long term initiatives (which he'd like to discuss, but, at this time, is premature); sees things improving slowly but surely

8. believes the Fed did the right thing - might have made a few small errors but, generally, moved decisively at a critical time. Country will bounce back, always has.

9. bailouts, QE1 & QE2, though regrettable, were necessary for the preservation of the financial system.

10. insists the public will realize a "healthy return" on bailout funds

Vince Fulco writes:

Not to be forgotten, the institutions that pound their chests with pride in their ad campaigns using misinformation as JPM has been doing recently re: the X number of mortgages (400M as I recall) the company has modified in 2010. "In order to do our part and assist ordinary consumers get back on their feet…" is the approximate spirit of the ad. Needless to say, for better or worse, in early consultation with these companies, the administration & Treasury planned for a 4-5X number of alterations.

Gary Rogan adds: 

Basically, the main requirement for being a CEO today is excelling at credible hypocrisy.

Russ Sears contributes:

Here are a half dozen more.

1. Beg for federal money for your customers. This should allow your prices to double what they put in. Plus the room for undetected fraud goes up. (See higher education and Medicare, medicaid and first time buyers tax credits). This way you get the best of both worlds, customers thanking you for making it affordable and tax payers footing the bills.

2. Give away your product to third world countries with tax breaks so that the Feds will extend the favor by lengthening your patent protection in US. Again gratitude for sticking it too us.

3. Have the government make it illegal not to be insured, and then make sure your product must be paid for by insurance. (car, health, PMI etc) Again with the government involved raising the easy of defrauding insurance companies.

4. If you are captured by the unions, make the government give only union shops a chance.

5. Use your size to get tax breaks as incentives, use your popularity to have the citizens build your stadiums.

6. Make sure that court system understands that with all the lawyers you hire, you are the ones keeping the judges in a job. Bringing regulatory capture to a new level, too big to prosecute.

World traveler B.K. writes: 

I've seen countless mutilated beggars in India, enough to make you want to cry coins to them. However, the practical advice is not to give: "In India thousands of children are being mutilated annually. The joints of their bones get injected with bleach. Infection is the result and amputation follows. Eyes are stuck out as well. …"

However, the greatest beggar I ever saw was an armless man in the NYC subway with a sign around his neck, 'Please give to buy drum set.'

George Parkanyi writes:

That may well be, but I look at it this way– who am I to judge? I once gave a leg-less homeless man a ten-dollar bill. Well he just absolutely lit up into a beautiful smile, looked me straight in the eye and said "God bless you!". That blessing hit me like a sonic boom. I felt it physically, and walked away feeling like I received much more out of that exchange than he did. Make of that what you will, but it had a huge impact on my outlook on life, and how we relate to each other. 

Marion Dreyfus writes: 

I saw the same mutilations and deliberate crippling in Nepal. Hundreds of kids tottered after Westerners, begging and making mewling sounds. If once you gave you were encircled and could not advance another step until each and every child had gotten coins from one. 

Art Cooper writes:

One of my favorite Sherlock Holmes stories is "The Man With the Twisted Lip," an exceptionally successful London street beggar, who gave his benefactors psychic value for their alms.

Pitt T. Maner III writes:

Here is an article on organized phony beggars. Those who donate must be able to differentiate the individuals worthy of a helping hand:

"Certain persons posing as social leaders have been running the racket of beggary. We are busy in gathering necessary evidence to initiate criminal action against them," Ramalingappa said.

He claimed that at few places the "beggary business" was going on a "commission basis"

and whenever the officials conducted raids, the beggars escaped from the clutches of law and also alerted others over mobile phones.

"Whenever the beggars in disguise are arrested, lawyers rush to get them released," Ramalingappa said. Most of these rackets thrive in and around well known pilgrim centres and religious places where people generously offer to beggars. He said an awareness programme will be launched to impress upon people that beggary should not be encouraged.

Stating that no proper rehabilitation of "genuine beggars" has taken place anywhere in the State, Ramalingappa said a comprehensive survey on the conditions of beggars will be taken up soon. There are 914 beggars including 168 women in rehabilitation centres all over the State. Steps were being taken to set these centres in order.



 One is reminded of Victor Hugo's The Man Who Laughed where people in Spain, one believes in the 13th century, (albeit Cervantes didn't write about it) were purposely deformed and trained as deformed so that the rest of the population would not succumb to envy of the flexions or in general be unhappy with their relative lot. Perhaps Mr. Jov will set the record straight.

Art Cooper writes:

Here is a link to the Monty Python skit in which John Cleese plays an Oxford-educated village idiot. When a villager walks by, Cleese acts like a mentally-defective clown. When no one else is around, Cleese speaks to the camera in a highly educated tone, explaining the importance & usefulness of the traditional village idiot to the mental well-being of other villagers.

Bo Keely writes:

One must study the village idiot to discover just what cards he holds. Every town has its hunchback, dwarf, ostensible retard or combination who is the resident savant. Here in Toba, Sumatra it is a cerebral-palsied man sitting next to me doing the town accounts on the computer. In your post 'Grassroots Jungle Economy' the village idiot poisoned the town like Sweeney Todd with coconut sweets from his sewage fed coconut tree. In 'Village Idiot' the hunchback in the key Surfactio, Mexico RR junction is the secret liason to a daily dozens of illegal Central Americans riding the Mexican freights to milk the USA economy. Anyone pushed by a physical or mental deformity from out under the Bell Curve is to be seriously reckoned with.



 Hi everyone,

Watching an episode of Pawn Stars. In reality I like to see what items people bring to the pawn shop to either sell or pawn.

The owners seem to a have large shop full of all kinds of collectibles. My main concern is Rick (owns shop with his father ) constantly has to call in outside experts to evaluate or verify authenticity. To be in that business you better know a little bit about ephemera and coins and ball cards and cast iron toys and still and mechanical banks as knock offs are everywhere that antiques have risen in value. Also include art.

Is this like the Market trader having to rely on others to make important buy or sell decisions and not learning on their own to make critical educated decisions?



Sam Marx comments:

I've watched Pawn Stars a few times & the gullability of people when they need a loan is amazing. It's like watching a car accident. Also, I would venture that the average of all the IQ's of people pawning items is below average. I would also guess that the vast majority of those items pawned are never redeemed. Confession: I pawned an item once, an emergency, but I took it out of pawn 2 days later.

I know that junk car yards are connected to find parts between themselves, it's like having a vast inventory. I don't believe pawn dealers are connected this way.

Has anyone ever thought of working a deal with these pawn brokers and putting their items on an internet website. Something like an Ebay for pawn brokers or maybe they are doing it themselves ?

Thomas Miller writes:

This show is a great example of the ageless advice "never try to bullshit a bullshitter" you'll never win. I suspect most pawnbrokers love the art of haggling and would rather sell to someone one face to face to use their skills to get the best price, rather than through internet auctions.

Art Cooper adds:

Related to this, see the article "Payday Lenders Go Hunting" on p. C1 of today's WSJ, on the expanding operations of such companies as Advance America, which make unsecured loans at annualized interest rates as high as 391%.



I'm sure this review, on p D10 of today's WSJ, of Kevin Cook's book "Titanic Thompson," will be of interest to many on the List.

Thompson was the real-life inspiration for Damon Runyon's Sky Masterson.



The incentive to large size/ disincentive to small size seems an invariable result of centralization and regulation. New Deal regulation hurt small entrepreneurs disproportionately and worked to the benefit of large enterprises, and the regulatory impositions of the current administration have the same effect.



training for convoy operationsIn Iraq, convoy operations became much more effective by having intelligence troops track where IEDs (roadside bombs and mines) and ambushes were happening, applying some math to predict where future attacks would take place, and routing convoys away from the hot spots.

I understand that Operations Research developed in WWII as a way to decrease the losses to trans-Atlantic shipping from German submarines. Convoying was the basic tactic, with increasing refinement as experience was gained, dramatically reducing the losses to Allied shipping. The land convoy operations in Iraq are a modern adaptation of that basic idea.

Stefan Jovanovich writes:

What is remarkable– and truly horrible– is that the lessons of convoying had to be relearned in WWII even though they had been standard practice since the 18th century for both the French and British navies. In the spring of 1942 1.5 million tons of shipping (none of which were in convoys) were lost to U-boat attacks; the Germans lost 1 submarine. Samuel E. Morison called it the "merry massacre". Lighted channel markers helped U-boats enter U.S. ports, and lighted city skylines provided a perfect background to sight targets. Finally, in April the convoy system was once again "discovered". 

Pitt T. Maner III writes:

Remote sensing would seem to be the key. It is a field that has been highly developed for the petroleum industry, agricultural and military assessment. Searching for multi-spectral, magnetic and density anomalies, seeing non-natural linear features, surface soil moisture, reflectance, topography changes, motion sensor technologies, etc. etc. There are all sorts of ways to enhance contrast along a road way.

I really thought they were going to capture Bin Laden when he did a film many years ago with a rock outcrop in the background. There was a regional geology expert called in immediately on that one.

As discussed by Art, here is an article discussing submarine tactics:

"Teaching an old trick to a new dog may hold the key to effective irregular warfare intelligence.

Submarines, as targets, have much in common with current U.S. adversaries such as insurgents, who prefer to blend in with their environments and rely on speed and stealth to conduct attacks. In a September 2009 podcast, the U.S. chief of naval operations, Adm. Gary Roughead, USN, extended this analogy by comparing the World War II Tenth Fleet's antisubmarine warfare focus with the information operations focus of the recently reactivated U.S. Tenth Fleet. Operational intelligence methods developed over nearly the last 100 years by navies—in particular, the U.S. Navy—to track and to target submarines may be equally applicable to the current fight against insurgents and terrorists in both the physical and information domains. Antisubmarine warfare (ASW) intelligence has both a definable methodology and mindset that is applicable to other types of warfare. This ASW intelligence analytical mentality, applied to irregular warfare (IW), can enhance the effectiveness of U.S. military efforts against high-value persons such as terrorists. "



 How often does it occur in martial arts like the battle of King Arthur and King Pellinore that one combatant lets the other up for a breather out of chivalry or malevolence and then loses the battle as the other side takes the opportunity to turn the tables. What is the market analogy of this and can it be quantified before noon?

Ralph Vince comments:

Hmmm, letting your opponent up… constitutes a new fight altogether… and as I always say, "In any fight– anything can happen." (Not that I've ever been in a fight — I've just heard in passing…)

You can never be sure of anything, and all the planning and training in the world go out the window the moment it's on.

And scale doesn't matter — be it on the individual level (remember that bum who knocked out Lennox Lewis some years back, with just one lucky, little pop) or on the scale of nations (Iraq should have been a cakewalk, right?).

It's a new fight, and in any fight anything can happen — which is why fights should be avoided. There are those fights that will find their way to me that I won't be able to avoid, so I don't need to look for fights, and, if unavoidable, always take them very seriously.

Ralph Vince is the author of The Leverage Space Trading Model, Wiley, 2009

Art Cooper writes:

Mr. Sogi once recounted a personal experience of this: He represented the plaintiff in a lawsuit to recover money owed to it by the defendant. Just before the case was to be heard, defendant's attorney asked Mr. Sogi for a minute to use the restroom. Mr. Sogi obliged. (What reasonable person could refuse?) Defendant's attorney used the "bathroom break" to walk down the hall of the Courthouse and file for bankruptcy, thereby insulating his client against plaintiff's claim.

Sri Viswanath comments:

Jake LaMotta vs. Sugar Ray RobinsonA nice analogy for us sports fans… The Colts' undefeated season (would have been the first since the '73 Miami Dolphins) was "donated" as the coach benched starters much to their dismay against one the arguably worst teams and 'succeeded' in collecting a loss. This 'success' was later repeated a few weeks later in the Superbowl.

Also in pugalism, something I know a bit about as an amateur, often playing possum was a great success of Sugar Ray Robinson in his later career and many younger opponents eased up on the old man, who later took his payments with additional compounded interest. A similar thing happened in the amateur olympics in boxing in Beijing and most famously in pro football when a team removes its starters to rest its players and then proceeds to loose on a 'miraculous comeback.'

Another fake chivalry was observed yesterday at downtown building. A young man getting out of elevator made a huge gesture for a shapely young woman coming out of the elevator to proceed first. After you, my dear…But then as the woman proceeds out, the chivalrous young suitor goes in for the kill and checks out her assets and proceeds to make jokes with friends. The female turns around a then lands the knockout punch with a slap to the face and a 'how dare you'….. a lil lagniappe from the new south. female victorious again.

Max Greene replies:

I don't believe the patriots example quite fits what you were going for in the realm of chivalry. The pats were resting starters so that they would win it all, not out of courtesy or kindness. They were doing that as a strategy to win it all, not to succeed in losing that game. Often football players (injury risks) rest the big players before the playoffs because failure to protect a big player in an irrelevant game could cost a coach his job or the team their chances in the playoffs. Like the ropadope, this is a strategy tailored specifically for the situation to win (like a poison pawn). Mercy is not often found in football or the market.

The best sport to look for tradition and codes of the older guard (chivarly, honor, respect) was, is, and always will be baseball. The few examples I can think of off the top of my head in other sports and its not easy are in basketball it is customary to stop dunking and shooting 3's when up by a lot in someone else's house. That's courtesy, but on top of that the bench players usually enter the game or the starters go into cruise control (holding the ball long into the shot clock and not being as aggresive on offense or defense). So instead of driving the stake through, they leave the window open, as many great playoff games have shown, the opposing team can come back and win and have.

The 2nd example I can think of is when a great hitter is at the plate, and the opposing pitcher has the dignity and honor to go after him and "attack the zone" instead of simply throwing him garbage and hoping he swings. If the hitter's team were down and men on base, pitching to pujols could let them back in it. But not ever giving him pitches to hit is not dignified in the eyes of many.

The 3rd is when a hitter is down in the count maybe 0-2 (0 balls and 2 strikes). The pitcher may decide to throw 3 straight balls and see if he will chase or can do the honorable thing and continue to attack the zone the same as he would if the count were even. Often pitchers who do the honorable thing can get hurt badly by not stomping on the throat when they had the chance. The simplest analogy would be individual sports like tennis or boxing. Since it does not take a team decision to be chivalrous. I know all too well the pitfalls of not attacking an opponent when he's down (hence my notorious rep for coming like a mad bull from behind but losing even some of the biggest leads).

Thomas Brittain remarks:

Don’t be nice and testify in front of Congress. They will only card-stack all of the information available and try to make you look like a fool.

Victor Niederhoffer replies:

I may be excessively naïve but relative to the hearings, it seems more like the situation where a judge is definitely going to rule against you but he leans over backward to give you every benefit of the doubt in the trial so your appeal will not get to first base. The Dershowitz thing where he is asked to sit as the head of all the committees that are going to choose the establishment for the chairmanship so they can't say there was anti "scholarship" involved. The Zacharian thing "your own man says you were out." After giving the colleagues a few centi centis they are called in, "I'm going to have to give you a drubbing in public. Hope you don't mind. Otherwise we're both going to have egg on face." But I have no experience on this and certainly think this a very appropriate function of the legislative branch and related helpful executive entities.



 I was recently asked by a golfer:

Here's a basic physics question for you. One golfer's clubhead speed is 100mph at impact with the ball and 105mph immediately after. He has an accelerating swing. Another golfer has 100mph clubheadspeed at impact but only 95mph immediately after. He has a decelerating swing. Assuming everything else is constant (type of ball, wind speed, etc), does one drive go farther than the other?

My attempt to answer:

The question is a surprisingly hard one, and I've thought about this kind of question in tennis as well. Here are two extreme scenarios that are easy to understand:

1) If the club (racquet) is much, much, much heavier than the ball (hitting a golf ball with a sledgehammer), then the speed of the club is all that matters.

2) On the other hand, if the club (racquet) is much, much lighter than the ball (hitting a bowling ball with a badminton racquet ), then the speed prior to collision hardly matters, and all that matters is how much you shove through during the actual collision.

In any sports/ bat/ ball/racquet situation, you're always somewhere in between the two extreme scenarios described above because that's the best way to design the bat/racquet/club. (It is analogous to having your car in the right gear for the speed that you're driving.) So there's not any simple answer except that it's somewhere "in between". It's neither 1st gear nor overdrive, but something in between. You need high speed, but also a somewhat "firm foundation". (A quibble — it will be absolutely impossible for the swing to be moving faster immediately after compared to immediately before. [I'm modeling the club-ball collision as essentially instantaneous.] Would require you to apply an infinite torque or force or whatever applied by the golfer to the club.)

Art Cooper comments:

 This seems an obvious application of the basic principle taught to someone learning how to hit a baseball: follow-through on your swing for a better hit. It must be the case that an accelerating swing in baseball, golf, tennis or anything else will impart more force (for a longer movement of the ball), because the moment of contact is longer than instantaneous. 

Sushil Kedia writes:

You have to make an assumption that the movement of the club is following a harmonic motion as in a pendulum. Highest Kinetic Energy at the point of equilibrium and zero at the extremes. Acceleration will have to be negative from equilibrium onwards.

Case 1:

Velocity of the club after impact > velocity of the club before impact: This will be possible only when the point of impact is reached before the point of equilibrium.

Assume mass of the ball is B and the acceleration it achieves on impact is A1. Then the amount of force transferred in this case is B*(A1)^2. Since there is an equal and opposite force it exerts on the club. The net acceleration of the club at the point of impact will be calculated by adjusting the existing harmonic form of the kinetic energy equation MINUS B*(A1)^2.

If this value is 105 mph it only tells us that without knowing the length of the club AND NOT just the effective weight (Center of gravity adjusted leveraged weight for the length of the club) it would be impossible to know at which angle the impact happened.

So either it is not possible for this to happen of there is inadequate data for comparison since you mention everything else is constant.

Case 2:

Velocity of the club after impact < velocity of the club before impact: Without knowing the acceleration of the ball at the point of impact (which can be estimated by estimating the values of friction, time before which the ball stops and the distance traveled) it is not possible to calculate the net force transferred by the club into the ball at the point of impact. EVEN if one assumed that the impact happened after the equilibrium point was reached on the trajectory of the club swing. It is worth mentioning here that the swing of the club would HAVE TO HAVE A NEGATIVE acceleration beyond the point of equilibrium else it is not the point of equilibrium.

So, in both cases 1 and 2 the assumption of everything else is constant is a situation of inadequate data. If however the question is implying that the club hit both the balls at the same angle, then the question is a trick and does not have a solution.

Stefan Jovanovich writes:

 Here is a link to a fascinating site called — the most comprehensive study of the baseball swing on the web.

Charles Pennington comments:

There's no way to solve this problem theoretically–only experimentally–but there is a good theoretical framework to think about it. You model it as a totally elastic head-on collision between a mass M moving with speed V and a mass m (the golf ball) moving with initial speed 0.

In that case, the final speed of the ball is:

v = V*(2M)/(M+m)

and the final speed Vf of the "club" (*) is

Vf = V*(M-m)/(M+m)

(Note that this is always less than V, and could even be negative, e.g. if a golf club hits a bowling ball.)

The problem is, what do we use for M? Do we use the mass of the club? The mass of the golfer who's connected to the club? The mass of the earth, which provides some friction so that the golfer doesn't slide backwards?

There are some simplifying cases:

If M>>m (sledgehammer hits golf ball), you'll see that the equation reduces to v=2V, i.e. the ball will fly off with twice the initial speed of the club.

If M<<m (feather hits golf ball), then the equation reduces to v~(2M/m)V.

The only way to find out the value of M is to do an experiment: get a real golfer, measure his (pre-collision) swing speed and the speed of the ball, and then use these equations to find the golfer's "effective M". A golfer who braces himself more and has a solid stance might have a bigger effective M than a golfer who uses a more floppy, wristy swing–but he also might have a lower V, so his shot might end up with less speed.



An outstanding Op-Ed piece titled "Uncertainty and the Slow Recovery" by Becker, Davis & Murphy, in today's WSJ, argues that political/economic uncertainty is a major cause of the slow rate of recovery from the Great Recession. This is highly reminiscent of the prolonging effect of the New Deal on the Great Depression, when business uncertainty resulting from seemingly arbitrary government action caused economic malaise to linger for years.



 I heard that 25% of stocks were responsible for all of the market’s gains this year. Wasn't this Peter Lynch's mantra? It's the "10-baggers" that are responsible for all the gains in a portfolio. Play for them, while trying to avoid or weed out the real losers.

Alston Mabry writes:

This is the "ICBM" effect. It showed up a couple of years back when we looked at these guys' work on trend following. They were arguing for a back-tested system that bought mo-mo stocks and then sold them on certain rules. But the key issue was to buy enough smaller stocks so that you snagged some of the ICBMs and rode them up, which created essentially all the gain long-term. Now they're saying that was true for the whole market.

Competition and innovation!

Victor Niederhoffer comments:

One should test all these random gyrations with the cross section for a bunch of stocks that investors could reasonably have in their port like the S&P 500, and survivor based, and see that probably all these enormous pareto type concentrations with 10% accounting for 90% the way they do in everything else are most probably due to normal properties of the normal distrituion with reasonably wandering.

Kim Zussman writes:

 What Art write reminds me of this joke:

“… y’know, the, this… this guy goes to a psychiatrist and says, “Doc,
uh, my brother’s crazy; he thinks he’s a chicken!”

And, uh, the doctor says, “Well, why don’t you turn him in?”

The guy says, “I would, but I need the eggs…”

Woody Allen, "Annie Hall"



 Some time ago on this site there had been discussions about the important role of coffee and caffeine in Western culture. The article   "Bringing the Buzz Back to the Cafe" on p. W3 of today's WSJ, which discusses the important role of the coffeehouse in Western culture, is very enjoyable. It's common knowledge that Lloyd's of London began in a coffeehouse, but I was unaware, as the article states, that "the London Stock Exchange itself began with a newsletter John Castaing distributed in 1698 at Jonathan's [coffeehouse]."





RosieOne of my analytical speedbumps has been the subject of forecasting tax policy. Being a child of the incentives form of economic modeling, I cannot get away from the disincentivizing aspects of the probable 2010 and 2011 tax policy changes.

Based on my thinking, it would be natural to see a large exit of women from the workforce, as the after-tax income of working migrates closer and closer to childcare and tax-adjusted healthcare costs. This loss in demand for services would reflexively feed back in decreased demand for other services.

For fun, let's also note the popularity of Mad Men, a show of badly behaving men and their stay-at-home wives. Again, another show, Desperate Housewives, is wildly popular. Clearly this is in the forefront of women's thinking.

RBS also notes similar observations, in that the private sector gets it, while policy makers and the financial sector do not.

Considering the economics again, migration patterns between high-tax and low-tax states are increasing. That would support a change from a "two income" household  to a "one income" household. A lack of a certain activity would also "encourage" more risk taking behavior by men in the workplace.

Domestically speaking, the pie appears to be shrinking. I just can't tell if this is descriptive or predictive.

Art Cooper answers:

Tax incentives matter, but there is a more immediate cause of the shift from double to single income households: job loss. The U-6 unemployment, most recently reported at 17% nationwide, doesn't even include those who have given up looking for work. If a spouse loses his/her job, and can't find another, tax disincentives to working become irrelevant short term. Long term, such disincentives shift work to "off the books" employment, i.e., the underground economy. Because job losses have been worse for men than women (e.g., in the construction industry), the exit of workers from the workforce may result in more husbands than wives leaving formal employment. I wonder how many former construction workers turned "handymen" fully report their income?

J. Rollert replies:

I concur, but was not making the point [incentives] was a current causal factor, but a growing one. So, the ideas can run in parallel.

Point I forgot to add: am noticing conversations occurring where "older" mom commenting "one doesn't have energy for work and kids anymore" a lot. Yes, it may be a rationalization. But it's also accurate, as boomers had them later. I'm 50, and my kids just started middle school/junior high.

Was in San Diego over the weekend, and heard cash bids and mortgage bids are pretty close on residential auctions now.

Ken Drees writes:

John Williams of Shadow Government Statistics has current U-6 unemployment at 21% (including discouraged workers). I think job loss is the driver for these trends.

Construction and jobs surrounding building (residential and commercial) will be dead for years to come. Real estate jobs and banking jobs are tipped towards women. Car dealers have been decimated, which favors men losing jobs. So far this year over 1200 plus bank branches have been shuttered. So as real estate and construction have already liquidated many employees, banks will continue to close next year. Both genders are losing jobs in general. As states seize up, more government workers and education workers will be losing jobs in 2010. Education has more women, whereas government is mixed.

The movement from high tax to low tax states is affects wealthy individuals and business, rather than average families. For example, the exodus of the wealthy from New York, and the exodus of business from California. It is much more difficult to move from state to state now as a single family. If you cannot sell your home, you will not just abandon it and move, unless you are close to losing it already. Probably a lot of people who lost homes are the ones able to pull up stakes and go to lower tax states where the cost of living is more affordable and where jobs may be had. People moving to new states will probably rent first to test the waters, depending on how good the new job is — how confident they are in the job continuing. How about the person who wishes to take a higher paying job in a new state within their same corporation — you can't just sell your home in 45 days any more. The crisp housing market really made job hopping and movement within the country fast and efficient. That's over.

As the squeeze continues, tax avoidance strategies and migration trends will be more indicative of higher earners than 100k and below families. Tax avoidance and EPA/government restrictions will be the big business drivers out of states that hold these policies as important (blue states overwhelmingly).



The type of price action we have seen makes me think of possible thoughts that the public could have had during the past months.

09 March - S&P 676. The typical private investor would say: "It's over. No way I will get my money back from this mess. I knew I had to sell… Moreover, I am losing so much that I do not want to risk anything more than I have already sunk into this black hole"

09 May - S&P 929. They would say: "Come on. It is only a rebound. It is going down again soon. I am not going to put money in here"

31 July - S&P 987. The public: "Unbelievable what I missed. May be this market has really turned around. The recession has a V shape and they will fix the economy… Well, I am even on some of the positions, I reduce my exposure and sell something"

5 October - S&P 1054. "Wow. Something is going on here! They have information we do not have. I am sure the market will continue like this until the Christmas rally. They will drive it higher. How stupid I was not to enter this market last March and to start selling during the summer. I should have known that things could not be so bad! It is true that the economy is recovering. I must buy now!".

Let's see a possible scenario after a few weeks:

Some time in November/December. S&P 900: "Oh no! I messed it up again…"

And by the way, the up gap of this morning [2009/10/05, S&P opened 1043 after closing 1036.40 last night] seems to urge investors and the public to jump on board a fast running train that will not give other opportunities. Do it now or you will have to pay much more to get in!

Good luck to the buyers.

Dr. Pezzutti is a quantitative analyst and speculator who blogs as Short-TermTrading.

Art Cooper comments:

In his book Mass Psychology, James Dines prints a graph annotated with the typical investor's changing thoughts as the price of his investment changes, very similar to those you gave.



Amusing story on p 1 of today's WSJ of the steps taken by the small town of Tuscarora, NV to repel the annual invasion of hordes of Mormon Crickets. A new weapon added to the standard arsenal is hard rock music blaring from boom boxes.



 The "Bookshelf" column on p. A11 of today's Wall Street Journal reviews Barry Werth's Banquet at Delmonico's: Great Minds, the Gilded Age, and the Triumph of Evolution in America, which centers on Herbert Spencer's 1882 tour of America, culminating in a feast at Delmonico's.

Werth weaves profiles of leading figures of the Gilded Age as they relate to Spencer's application of Darwinian insights about evolution to political, economic and social life.



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

Art Cooper writes:

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

Vinh Tu comments:

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

Vincent Andres writes:

Among the best things I have read about time are :

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

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

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

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

Phil McDonnell adds:

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

Time is a condition of increased entropy in the universe.

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

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

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

Jim Sogi writes:

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

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



F & SOver and over again, we see the market moving in trepidatious concert with the father figure of the moment. It used to be the fake doc and then it was the scholarly economist chair, and now it's the former chair of the white shoe firm that maintains the Chinese wall with its former colleagues. On past occasions it's the Sage, and every now and then, a big executive like the head at Intel or the basketball player from Conn.

What's particularly damaging to the market is when these people bow. The spectacle of the Intel chief bowing and begging forgiveness I believe forever tarnished the aura of high p/e deservingness that his company with 59% profit margins might have deserved. The news that the former white shoe chair knelt in front of the chair of the Democratic party and begged her to pass the bail out bill was the death warrant for the market for a time. And now that he changed horses in midstream and gave up on buying mortgages directly, a position he had previously begged for, "based on a different set of circumstances" was the death knell for the market.

The trader has the Dostoiyefskian tendency to feel guilty about their activities from the time they were small. And they wish their father figure to be strong and not to kneel. When these figures regain the respect of their kids by being strong, maintaining the stiff upper lip, etc., we can expect a much better market. How would you quantify this and what other instances of kneeling as a bearish indicator have you seen?

Anatoly Veltman writes:

You mean like when Chancellor of the Exchequer raised discount rate 9/16/92 three times (from 3% to 7%), before rolling it back to 3% by the end of the same day… and recognized that ERM snake was in fact beheaded?

James Lackey replies:

The return of the dipsy doodle is a good start. The most damaging current meme is that the markets are at fault…  and market prices do not forecast. "Free markets need help and regulation from governments," The dog is chasing its tail. Government regulations are what cause markets to come up with crazy schemes to avoid the previous market patches, in Microsoft terms, a "hot fix."

A more direct answer is price discovery. Once we all figured out too many prices were rigged they panicked and traders bought as usual. Then when the father figures changed the rules to bailout their kin, we went on strike. No traders, no liquidity for the markets. Now the prices are caught in the crossfire of the Hatfield-McCoy feud. Do not blame the hired guns.

Art Cooper adds:

Obviously the market and economy respond positively to strong leadership, as this relates directly to human emotions (animal spirits) which are so essential a part of Main Street economics, finance and the financial markets. Hence, the Great Depression market responded positively to a strong leader who declared that "The only thing we have to fear is…fear itself," even though his economic policies were in fact counter-productive to recovery (see Jim Powell's "FDR's Folly").

Kim Zussman interjects:

The child is racked with disorienting insecurity when they first witness their parents own uncertainty, indecisiveness, and fear. Now the children are being dragged by their mother to a new daddy with undetermined rules of discipline, while being told that the last daddy was really an immoral fraud.

It's hard growing up, especially with a fickle mother.

James Lackey writes:

I listened to Santana's show tour warm-up in 2002 or so. Later that evening he was on an interview, local radio, and was describing his so called comeback. His rebirth was through collaboration with new young artists. His quote went something like, "I wanted my teenage kids to know dad can jam, and how the system works, sure they saw my old awards and shows from back in the day… but to a's now that counts." The gist was, the only reason he did the work was to prove a point to his children… boom… the return of a father figure.

J.T Holley writes:

Highly apropos, like all great literature, call me crazy if ya'll don't see it that way, this has been written in William Golding's Lord of the Flies.

Kids abandoned due to crash from adults.

Ralph pleads with Piggy about Simon's death: "You were outside, Outside the circle, Didn't you see what they did" (paraphrased).

Piggy before his murder: "Which is better? Law and rescue or hunting and breaking things?" (paraphrased). Then the rock falls.

Kids rescued from abandonment and panic/chaos when Ralph looks up at Naval Officer (adult).

I guess the big question right now and maybe one that Golding proposed is who is going to rescue the naval officer and his boat? In other words who saves the adults themselves?

Now substitute War, Atomic Bomb, Ralph, Jack, Simon, Piggy, Naval Officer, Naval Ship with traders, investors, banks, citizens, government, and politicians.

Kevin Eilian writes:

Before it became a quote dejour by Mac and others, R*bin's upper lip, bone straight poker face, "the economic fundamentals are strong,"– you believed it. He made sure he did, too, as his net worth was tied to white shoe IPO.

James Sogi says:

Demographics is the counting of the "father figure" issue. We saw the effect in the aging of Japan. Now we are seeing the aging of America. The rest of the world is quite young, averaging something like 15 years old… Many of our parents are sick, old or dying or died. There is a changing of the guard. The boomers are retiring. America is aging and gaining weight. Though America "the great white father" is kneeling or brought to its knees, the emerging world will rise in its place over time. I would watch this trend over the long term. The world is becoming multicultural. Witness, O witness, the non white majority in California.

Russ Sears adds:

I have been thinking for the last few weeks that all of this could have been avoided if the investment bankers had learned a few lessons on risk management from a mother of a smart, curious two year old or a teenage boy. You can't just tell them no and then ignore them once they've moved on and not still expect some experimention to happen. The alerrt mom always seems to have an instinct, before the father, when silence is a clue they are into something or when the truth has been stretched. How the mother always is prepared to contain while still delighting in their first taste of chocolate cake or discovery of girls and love. The good mom has the sense to help them limit these new found divine obsessions, before they ruin their mental and physical health.



As the market goes back and forth, trying to scare out the longs and then the shorts in one market or the other, stocks, bonds, et. al., and a call for more barbecue appears on this web site, one thinks of Beethoven's meeting with Rossini, when Rossini came to pay honor to the downtrodden, overlooked Beethoven in 1814 while he was in eclipse to the popular Italian operas. "Give us more Barber" Beethoven said, "and whatever you do, stick to comic opera."

What we need is more square dancing. The market going back and forth, in its very civil way, around unchanged, it's like a do si do. We need more square dancing insights (and other dancing insights) into markets.

Art Cooper replies:

It reminds me of a merengue, the partners circling each other slowly and majestically (although the tempo of the music might become frantic), sometimes twisting their handholds into intricate pretzels, sometimes separating completely while remaining "tied" to each other, their steps remaining small, each partner suggesting actions which are never quite realized.

Jim Sogi adds:

In ballroom dancing you have the basic box step, a square pattern, then after a few of those, a line step. I'm not sure what they call it, but when you dance forward or back and cover some ground. Like the market did last week, then down. Now box step, then… In country dancing, a move is sometimes punctuated by swinging your partner around in a spin. It all has a nice rhythm and feel to it with a lot of back and forth motion and various patterns set to a cadence. Our markets sure have a nicer feel to it now than the head banging mosh pit earlier this year.

Recently, The Sunbaked Spec gave me an Indo Board to play with.  Its lots of fun. It's a board on a single roller and you have to balance on it, and roll it back and forth. At first I couldn't understand why he gave it to me, but now I do. It's the perfect physical demonstration of how the markets have this tendency to roll quickly to one side or the other. Like Friday with the down volume multiples of up, or today slamming the other direction up, and Monday and Tuesday balanced in the middle. Its fun, but you have to watch out because if you are off balance, you will fall on your butt. Kind of like trading.

Duncan Coker comments:

This market of late is definitely a Quick Step, one of the fastest and most complex of the Ballroom dances. It is full of syncopated steps, explosive running and hopping moves with lots of rotation and momentum. It has some similarities to a waltz but is a dance in 4/4 time. But many of the step are 1/8th note duration and very fast. It was most popular during the Jazz Age, when the wire houses, pools and syndicates moved the markets, when fortunes were made and lost at the bucket shops and curbs.



1915 DodgeAt the farm-market in Greenfield Hill today, a restored 1915 Dodge pulled up, and as the wife browsed the corn and tomatoes, hubby gave our family a quick tour of the car.

What struck me was how close the user-interface is to today's. Gear selection was via a floor-mounted shift-lever on the driver's right, with gears 1-3 and reverse in an H-pattern. The gas/brake/clutch petals were arranged right-to-left on the floor. Steering was via a hand-controlled wheel. Round tick-marked analog gauges indicated speed, RPMs, electrical current, oil pressure.

Essentially, today's UI is unchanged from this setup (excepting the automatic transmission, popular with Californians who need a free hand for the cell phone). The driver of a 1915 Dodge could step into a modern auto, nearly 100 years later, and operate it immediately.

When I remarked on this, the owner told me that in the years just before 1915, there was widespread experimentation with user-interfaces in the auto industry, and the 1915 Dodge's layout was the design that "stuck."

The QWERTY keyboard comes to mind as a parallel. And I wonder if the computer GUIs of 100 years hence will still involve overlapping windows, icons of running programs at the bottom, pulldown menus at the top, left-click to select, right-click for context menus…

Arthur Cooper adds:

The experimentation period is illustrated by the autos in the collection of the National Auto Museum in Reno NV. It's definitely worth a visit.

Alan Millhone writes:    

I have a four-door 1948 Chevy that needs restoration. The motor is frozen (not original, a re-built Sears six-banger). The car is an antique, which makes me one as well — '48 is my birth year!



Pick up almost any popular economics textbook, and you'll find a rash of examples of how ingenious math can illuminate, as well as anecdotal examples of how you the public are getting screwed, and why the free market doesn't work as well as intervention. A typical book, I currently am looking at The Economics of Information by Ian Molho, but any of Krugman's or Stiglitz's texts would do, is replete with topics such as adverse selection, asymetric information, auction manipulation, bargaining problems, bidders colusion, cartels, cheating, coordination problems, contract credibility (boiling in oil, credibility, rationing, game theory), dominance, nash equilibria, pooling, signaling, imperfect information, private information, interested parties, job market screening, non-truth telling, moral hazards, immorality, lying, overbidding, principal agents problems, lemons, reputation effects, risk aversion, ripoff models, search costs, free riding, legal rights to silence, the crossing problem, trading delays, tactical voting, welfare losses, and winners curse.

John Lott has written a book called Freedomnomics that shows that almost all of these market imperfections are figments of the academic professors' imaginations. The free market has an incentive to solve all these problems, there are enormous incentives for businessmen and individuals to behave honestly, and competition is constantly working to give the consumer a better price and quality for his buck.

Furthermore, Lott shows how seeming differences in prices that consumers receive are a proper adjustment of the market to differences in costs and utilities of consumers. Here are some examples:

 Gas prices for self service versus full service gas stations are much lower for economy gas. The reason is that the consumer of economy gas spends more time and buys less. The same applies for wine prices at restaurants. Real estate agents get better prices for their homes than their clients by a few percent — the reason is that they make the improvements that are more likely to raise value. Insurance companies refuse to pay for Lojack, a tracking device that a manufacturer can hide — the reason is that the devices don't reduce costs because the cars are usually stripped before they can be found.

The second chapter of the Freedomnomics gives numerous examples where reputations insure that businessmen and politicians keep their word. The reason reputations work is that there are incentives for purveyors to keep their word — "The potential loss of profits stemming from the loss of a good reputation keeps business honest as long it is concerned with future profits." You might think that politicians won't care about future profits when their terms expire, and this is what economists call the 'last period problem.' Politicians however want to pass their reputation on to their children, and also seek other jobs where their previous honesty is important.

John Lott shows that incentives develop to give the customer a fair deal in almost every environment — "Incentives work to create a complex and fascinating process of markets evolve to solve cheating problems without government intervention." The classic example of this, (exhibit A in every economics book), is of asymmetric market information and the lemon principle in used car buying. A new car loses almost one third of its value the second it is driven from the car lot, based on the lemon principle. The underlying reasoning is that the seller knows more about the car than the buyer, and so the buyer assumes there must be something wrong with it, which is why the seller wants to get rid of it, and so the seller is punished with a lower price.

This story has so much the ring of truth to it and is so in vogue, that it has been good, with a little math team stuff, for a Nobel Prize or two. No one seems to have considered how come companies such as eBay haven't tried to solve this problem, until Lott came along. Lott found that in actuality a few days after a new care is bought, it sells for about 3% less than the blue book price, and some used cars, like their counterparts among aircraft, actually sell at higher prices than when new. Furthermore, extensions of the idea show that the lemon theory doesn't get the price of cars held for a year right either, and that truly they should have lower prices because of usage and obsolescence, not information asymmetry.

Freedomnomics takes about 50 of the commonly accepted ideas about the failure of the market system, and shows that in each case the market has solved the problem or that government intervention has made the problem worse. Lott points out that the value of reputations is paramount for a company, and that the competition to maintain a good reputation solves almost all the areas where a naive economist might think that the consumer gets cheated. The thing that protects the consumer is not the intrinsic honesty of the firm, but the reputation a firm seeks to maintain. The importance of a good brand name, and the asset that it represents can't be overestimated.

The third chapter of Freedomnomics is the weakest, but it covers a thousand examples of government intervention in areas like eminent domain, efforts to counter the free rider problems (such as in pollution), flood insurance, rescue services, and many more. Lott gives many great examples of how private enterprise solve these problems much better than governments can.

One good example is that polar expeditions funded by private sources had many less fatalities and made more discoveries than government funded expeditions during his sample period. However, Lott has a convoluted argument concerning diversified stock holding to explain some of his finding, that looks to be based on flimsy and weak evidence, and selected anecdotes. The same goes for his attempt to show that concealed gun laws are the main deterrent for crime — Dr. Lott lectured on this subject at the Junta, and I found his regression results completely overdetermined, the estimates of the effect very weak, with a high uncertainty, and generally based on too few observations in a few selected states. I am also critical of his argument that woman's suffrage is the cause of much of the increased government that we have experienced during the twentieth century.

It is amazing to see however, that John Lott has encapsulated in a few hundred pages, all the reasons that the free market does work, and repeatedly destroys the arguments of Freakonomics and most of the calls for intervention that we find in empirical studies and common sense economics.

At one point in his book, Lott offers the following summary:

"Countries that stuck with the free market have prospered. The reason is that the free market is based on the pursuit of economic self interest. The market acknowledges that peoples' behavior is largely determined by incentives. Allowing people the freedom to improve their own economic conditions helped to make society wealthier."

Riz Din replies:

I don't believe the free market offers solutions to all of life's ills, but I welcome questioning, inquiring thinking that challenges the orthodox prescription of how things should be run.

Glenn Escovedo remarks:

Readers might enjoy One-Armed Cowboy, a book about E. L. "Slim" Pond, a famous cowboy here in South Texas who happens to be my second cousin. 

Sam Humbert corresponds: 

As a follow-up, Chair asked me why I didn't worry about lemons when buying cars on eBay (one last year for myself, one this year for the corporate fleet). My off-the-cuff thoughts were: 1) Quality is much better than in years past so the overall incidence of lemons among late-model low-mileage (say, <50,000) cars is now quite low, and 2) The shift to leasing over the years has reduced the incidence of adverse-selection, because many (most?) cars now "automatically" find their way to the for-sale lot after three years, regardless of quality. 

Art Cooper replies:

1) Wouldn't quality be closely related to car make and model as well as low mileage, so that one would wish to restrict eBay purchases to models with a reputation for low incidence of problems?

2) If leasing is the cause of a diminished relative incidence of adverse selection, shouldn't one purchase only from vendors who sell leased vehicles (in addition to others), and not from individual vendors who are unlikely to sell vehicles that had been leased? 



 Paul Buchheit , creator and lead developer of Gmail, writes in his blog:

The secret to making things easy is to avoid hard problems.

That may seem obvious, but in my experience most engineers prefer to focus on the hard problems. Working on hard problems is impressive to other engineers, but it's not a great way to build successful products. In fact, this is one of several reasons why YouTube beat Google Video: Google spent a lot of time solving technically challenging problems, while YouTube built a product that people actually used. For me, the most effective method of getting things done quickly is to cheat (technically), take a lot of shortcuts, and find an easier way around the problem.

Like most aphorisms of this sort there is a grain of truth and also some fallacy. We have found that there definitely is value to having a few slower-moving deep thinkers in the group as well as a few very detail-oriented stick-to-the-process types. Obviously you must have people who are results-oriented and who can get the job done and the work out the door and the profits in the door. But I can tell you from experience that organizations that are purely results-oriented, always taking the shortest path to the dollar and which are entirely focused on efficiency don't last long term.

For example, we have two particular people who have a knack for finding all of the bugs and minefields in the programs we write. It's just uncanny; if there is a path to a program blowup they will find it. I believe it has to do with an ability to think in terms of what-if. The purely results-oriented work-smarter types never find these problems because they can't be bothered with what-if. So we need the creative what-if people in order to improve things long term.

Art Cooper remarks:

Work smarter, not harder. Taking shortcuts whenever possible, doing what's practicable instead of more intellectually satisfying, is to work smarter, not lazier.

Russell Sears replies:

It occurs to me that often when people say work lazier, what they are really saying is work relaxed. Go for a run at the height of a frustrating math problem, and often you'll find the answer immediately on returning. Likewise when suffering from writer's block, or when debugging computer code. Perhaps this is why military training helps in trading. After you learn to relax as someone shoots at you, trading is a piece of cake. 



 This has been used of late in a political context, but the Costanza Doctrine (taken from a Seinfeld episode in which George Constanza temporarily improved his fortunes by doing the opposite of what his instincts told him) would seem to offer hope to thousands of losing traders. The trick would seem to be to buy when you feel that knot of fear in the pit of your stomach, or sell when you feel the joy and excitement of a trade going your way.


"Why did it all turn out like this for me? I had so much promise. I was personable. I was bright. Oh, maybe not academically speaking, but I was perceptive. I always know when someone's uncomfortable at a party. It all became very clear to me sitting out there today, that every decision I've ever made in my entire life has been wrong. My life is the complete opposite of everything I want it to be. Every instinct I have in every aspect of life, be it something to wear, something to eat… It's always wrong."


"If every instinct you have is wrong, then the opposite would have to be right."

Jim Sogi adds:

There is a twist to this. In the markets, and in life, there is an asymmetry of some sort that throws this equation off. How it works in life will take some thought. But in markets, long is not the exact opposite of short.

From Kevin Depew:

A funny application of the Costanza Doctrine (pre-Seinfeld) appeared in the movie "Let It Ride," which may be the closest the movies have come to real-life racetrack bettors in action. The main character, played by Richard Dreyfuss, is a degenerate gambler/loser who one afternoon mysteriously begins winning. (That the notion of winning at the track would be considered a) mysterious, and/or b) noteworthy enough for a film or book, is itself a pretty hilarious inside joke.) Anyway, in the middle of his winning streak he decides he's not even going to handicap the next race and instead walks around the track asking various degenerate gambler acquaintances of his who they like. Whichever horse they name, he scratches off the program and eliminates from contention.

When he gets to the one horse that hasn't been named, he lets his winnings ride on the unwanted horse with predictable winning results. As an aside, Robbie Coltrane has a nice turn as a dour teller. Also worth noting, the hatred emanating from his fellow degenerate gambler "friends" as his winning streak grows; everyone hates a winner; everyone loves a loser.

Interestingly, last night on the Black Donnellys (clearly, I'm watching way too much television these days), two of the Donnelly brothers are at the OTB to place a bet and hopefully recapture some money they owe to a crime boss. The "expert," Kevin, (a fictional character who nevertheless I am convinced is a direct blood relative of mine) can't decide between two horses. After much prodding from his brother, Tommy, he chooses one rather indecisively. Naturally, Tommy bets the one Kevin didn't choose, with predictable winning results.

By the way, the Black Donnellys is not a good show. The main character, Tommy, seems to have modeled his mannerisms on Tony Soprano, and the Irish stereotypes run for a full 47 minutes, laddie; may misfortune follow you the rest of your life, and never catch up. This may sounds strange, but I think I watch the show because Eisenberg's Sandwich Shop is one of the locations for filming.

Art Cooper adds: 

One of the first things taught in a first-semester computer class is that the opposite of > is not < , but rather < or = . This applies to markets as well. The opposite of "long" is not "short," but rather "short" or "flat." 



The article Please Give at the Office on page 18 of Monday’s Barron’s discusses an article by Baruch Lev, Christine Petrovits and Suresh Radhakrishnan, which found that “for every tax-deductible dollar the average corporation gives to charity, it should expect profits to rise by roughly $2-$3.” As one might expect, the connection between increasing sales and charitable giving is especially strong for consumer-oriented companies, presumably because of the good will effect.

…there is a lesson in all this for the way we perceive the behavior of people in markets. According to the “Chicago school” of economics, consumers seek to maximize their own utility according to narrow self-interest. By contrast, the less well-known “Austrian school” allows for the possibility that consumers might be motivated by broader social interests. If corporate charity improves human welfare, is it a cynical comment on capitalism that companies might seek profits by catering to those interests? Or is it faintly inspiring?



For those interested in pursuing investments in their IRAs which are not available through standard brokerage or mutual fund accounts (real estate, non-publicly-traded stock, businesses, etc.), the article “Self-Directed IRAs Can Offer Variety but Have Complex Rules” on p B4 of today’s WSJ offers some guidance, including a list of three investment companies which will provide the required administration of such accounts.



In his memoirs Albert Jay Nock always argued that a major purpose of politics, aside from the plucking of the geese with the least hissing, was to gain inside information for wealth building. Certainly the increases in fortunes of many politicians whilst in office would be consistent with that, to say nothing of the implicit gain in wealth from their post-political lives, what with their previous connections and reputation. An example is the $500,000 speech of the former Washington dignitary in the week after he retired from office, and the comparable book and speaking tours of the run of the mill politicians, as well as all the lobbying possibilities.

All this was brought home by the recent French media reports of Bin Laden's death. What's amazing is that the emphasis of the story was on how peeved officials in France were that the information was leaked — which undermines their ability to act first on inside information.

This leads me to reminisce on the first time I realized that news always follows the price, and more importantly, it reminds me that there are a million people who know more about the impact of news than the average layman or hedge fund manager or ghost or consultant. During the drive for independence in Poland, when Russian tanks were flowing in to maintain Russian control, I was short a huge line of silver. My partner; who was a very influential professor at an Ivy League school, specialized in raising money from mavericks who needed the prestige of the donation to said school and had lines in to every professor of policy at the university. Richard Pipes was then the world's foremost expert on Russia and the "Professor" was induced to make a personal call to Pipes to find out what would happen. "They can't let the revolt succeed because it would cause dominoes to fall," Pipes said. It had such gravitas, it was so inside, so salient, that I immediately covered my short. I lost more millions on that than almost anything else I have ever done, as silver promptly fell from $14 an ounce to $9 an ounce when the Russians did nothing.

Since then I have always tried to remind myself how many experts know much more about public policy than I, and how unlikely it is that I would be able to figure out whether the additional information that I can glean from a newspaper might be bullish or bearish in its ultimate effect on the market, relative to its already discounted nature.

Ken Smith replies:

Physicist Brandon Carter said about counting:

What we can expect to observe must be restricted by the conditions necessary for our presence as observers.

Therein lies the crux overshadowing any hope the little man with limited information has for success in the stock market. His position as an observer is restricted.

The news he gets is behind the price. The indicators he sees reflect his behindness. Thus it is he always falls behind.


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