A favorite quote:

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

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

Scott Brooks adds:

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



Chemists and chemical engineers among us will remember the old Beilstein Handbook of Organic Chemistry — a relic of the pre-internet age that sits humbly on every self-respecting geek's bookshelf next to the CRC Handbook of Standard Math Tables. With gasoline prices approaching record highs (record=363 on 7/11/08; last=330), but natural gas stuck in the basement (7/11/08 price=13.60 ; last=4.55), it's a good time to revisit the conversion of natural gas into hydrocarbon liquids (including gasoline and jet fuel).

The "established" technique for this conversion is the Fischer-Tropsch Synthesis   "popularized" by the Nazis during WWII. However, chemistry has advanced a bit since then — and a quick google reveals that there are several companies with natgas-to-gasoline conversion patents. This story titled "Natural Gas to Gasoline"   appeared on August 25, 2008 — an inauspicious moment in the history of finance, venture capital, and energy prices. With financial conditions rather different today (and every attempt at rallying Natgas failing,) it's probably a good moment to take a fresh look at these ventures.

South Africa-based Sasol is the most obvious company that deserves a closer look.

Other companies mentioned: GeoGas Development Corp, Synfuels International

Other suggestions would be welcome — including the possibility that the very appearance of this post is a great indicator of a top in the gasoline market!



 Umberto Eco wrote a great essay about how when new products start they are used first by high end users, and then gradually diffuse to the masses so that by time the masses use them, the marginal utility keeps reducing and the first users that got real value out of it stop using them. He points to such things as railroad use and cell phones as examples.

We have see how IPO's prospectuses follow this model with info in it being completely worthless as they have to go through so many hoops that it becomes merely a boiler plate to reduce the settlements in class action litigations when the case is settled.

One notes now the apparently standard thing in financial statements "cautionary note regarding forward looking statements".

I note in a company like Rimm 30 cautionary notes including "difficulties in forecasting quarterly results" and "regulation certification and health risks". My goodness, there was a time when management statements could actually convey useful information that had a high marginal revenue.

Could we attribute this syndrome to crony capitalism or flexionism or just a natural outgrowth of the law of diminishing marginal utility? 

Rocky Humbert writes:

While the chair's assertion that disclaimers have proliferated since the passage of the PSLRA is correct, there is scant evidence that management statements ever have consistent predictive value w/r/t either the organic performance of the business or its market valuation — over a reasonable investment time period. See wikipedia on the Private Securities Litigation Reform Act.

One reason for this is that companies which are performing well have no need for management cheerleaders or CEO soothsayers; the market will eventually figure that out on its own. In fact, the worst companies are the ones where the CEO is front and center (giving "upbeat" guidance) when things are rosy, but then when things turn challenging, release 8-K's on Friday afternoons using terms such as "exogenous factors" and "one-time adjustments" (and the CEO is nowhere to be seen.) Citing Philip Arthur Fisher's Rule #14: "Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?" It's a rare company that does an IPO or secondary when business is sickly (the exception being banks which sell stock at the behest of regulators.) Hence the entire IPO process can be viewed as a possible violation of Rule #14.

On a related point, one notes that INTC stock (which was mentioned recently by Dr. P) has a compound annual return since 1982 of about 15.6% per year (versus 11% for the S&P). During the same period, AAPL stock has produced a 17.5% compound return. Yet, right now, INTC has a 10x p/e and AAPL has a 17x p/e. Both of these companies have demonstrated good long-term organic growth, RoE, product innovation, and impressive market dominance. Yet, if Mr. Market would reward Intel with only a market multiple, it's return-to-shareholders would blow away Apple — demonstrating once again that Mr. Market's valuation at any given moment dwarfs every other factor for a profitable enterprise. I submit that it's folly to attribute this irrefutable statement to crony capitalism or flexionism or the law of diminishing marginal utility. The blame should be place squarely on the market participants who continue to make the same mistakes (such as buying INTC at a 70x p/e on 3/1/2000) but shunning it at a 10x p/e on 3/1/2011. 

Ken Drees writes:

Consider the cell phone and its recent tracking news out of apple– or police being able to plug a device into your cell phone and download all your data from it– the high end user will now need tech applications to shield their privacy and will demand a next generation product that the masses do not have– a private communication device. The cycle keeps moving forward. Maybe a self destruct feature will come on the scene.on the subject of mumbo useless jumbo in fin states. Is not persistency of litigation like ants digging into the timepiece to blame for the creeping destruction of worthy information?

Bill Rafter writes:

In looking to eliminate stocks in mergers or merger talks I cannot always get that information as quick as I would like. Sometimes I have to resort to looking at the individual stock's news headlines. Before I even get to the news about the merger I see the inevitable: "The law office of Dewey, Cheetham and Howe launches an investigation into possible breaches of fiduciary duty by the Board [of the company]…"

That, I contend, is why you don't get useful information.

An Anonymous Commenter writes:

I recently read an article that the author was try to further disgrace a Euro based company whose board member had made a remark at a meeting referring to "the weaker sex". The article told of the various ways, non business groups and political active parties tried to protest these remarks. However while raising a good smoke screen; the parties complaining were inefficient and did not understand business. Has any body done a study on the stock price of a company whose leadership made non PC remarks? Could it actually increase the price, due to the signal of boldness and management willing to think outside the box? Would not such a study have been quoted in these articles that hold a company up to ridicule? Could such a study have been done but be not published due the opposite than hoped for results?



 I couldn't help noticing a few things joined at the hip today …before FOMC…

Gold Recent rally from 15 march - 25 April ….of 7 weeks 1382.40-1519.20 = 136.80

Previous rally from 28 Jan- 7 March…. of 7 weeks 1310.90-1447.20 = 136.30

Dollar index on Nov 08 Low 74.00

Eurusd: Recent large rally from low on 6 June 2010 to present = approx 2841 points

Previous large rally from low on 27 Oct 2008 to high Dec 09 = approx 2848 points.

Maybe stars are alligning for some hocus pocus.

And although I would hate to say just off this goldmine, the gods may ulimately have there say.



The Edifice Indicator.

From AFP:

Once-bustling Dubai will open the world's tallest skyscraper on Monday, boasting new limits in design and construction, hopeful of polishing an image tarnished by the debt woes afflicting the Gulf emirate. Emaar, the giant property firm part-owned by the government and which developed the needle-shaped concrete, steel and glass structure, has declined to reveal Burj Dubai's exact height. Apparently wanting to maintain the suspense, the company will say only that the tower exceeds 800 metres (2,640 feet), putting it far higher than Taiwan's Taipei 101 tower (508 metres).



 There has been discussion both recently and historically concerning the relationship of stocks and bonds. Indeed the Daily Speculations website this year started color coding the days on the calendar based on the different movements of those two basic assets.

Much of the discussion concerning this subject has been oriented around "counting". While I value that approach I must point out that the yardsticks by which stocks and bonds are measured in such analysis are of different lengths. Specifically, those markets do not open and close at identical times, which means the daily recording of their respective changes may not actually reflect their movements when they were contemporaneously open. If the daily recordings are not exactly representative, then counting those recordings in the hopes that the errors will "all come out in the wash" may not be the best approach.

Changes (as opposed to levels) are the appropriate data to study. But because of the different time periods, a period other than daily would be more representative of their respective actions.

Instead of counting the daily changes, I have been following the moving correlation of those markets. Whereas most investment professionals are of the belief that stocks and bonds are essentially opposites, we have found otherwise. For example, if you were designing a most bullish environment/setting, I believe that would be when both stocks and bonds were rising. That is, you had a positively trending stock market and declining interest rates. That can be easily modeled by a moving correlation of the two and a positive slope of their prices. Here's a chart (weekly data) of exactly that:

If it doesn't show up well, here is a link.

As you can see, periods of positive moving correlation and positive slope tend to be good times to be long equities. More importantly however is that price collapses are easily seen as periods when that best condition does not exist. The worst condition is when stocks and bonds are both declining. But the other two "not best" conditions reflect the standard (macroeconomic) business cycle and have interesting trading implications all their own. All of this can be non-subjective and can be tested. We have found it to be statistically significant. Furthermore, I show it here on a weekly chart for convenience, but the data is daily and should be watched daily.

I would posit that Daily Specs could find this an interesting area of study. For years my shop had used this as an important part of avoiding trouble, basically to tell us when to play in equities and when not. We only abandoned it when we found something better.

Some further comments/tips:

For bonds I used the DJCBTI because it is price-based and not expiring every six months. It is also third-party. I could make my own bond index, but then open myself to the charge of jury-rigging the results. N-values are hugely important. But adapt, don't optimize N-values. Also you will have to consider what level of moving correlation is significant (i.e. a positive value of .01 is somewhat of a yawner).

Bill Rafter, MathInvest

Kim Zussman writes:

Using TLT for bonds and SPY for stocks (2002-present, including divs), checked weekly return for stocks after prior weeks which were either (bonds, stocks) up up, up dn, dn up, dn dn, vs zero:

Variable    N      Mean     StDev   SE Mean      95% CI             T
BUSU      113   0.00165  0.0164  0.0015  (-0.0014, 0.0047)      1.07
BUSD      139   0.00156  0.0363  0.0030  (-0.0045, 0.0076)      0.51
BDSU      139  -0.00022  0.0213  0.0018  (-0.0038, 0.0033)   -0.13
BDSD       60    0.00519  0.0242  0.0031  (-0.0010, 0.0114)    1.66



Now if someone could just IPO an anti-piracy company and dividend out the protection money:

Admiral Gary Roughead, Chief of Naval Operations, explained to Bloomberg how "piracy syndicates in villages, mainly in largely ungoverned Somalia, solicit investors who buy shares in piracy enterprises and gain a corresponding share of ransoms paid." As ransoms grow bigger, it is not only more attractive as an investment, it also leads to a sort of wealth effect by which more people become interested, more funds are made available, and better equipment is put at the hands of brigands.



 Much ink was spilled over the recent "downgrade" of US government debt by S&P. A second-order effect — which has obvious and important business consequences — occurred with much less fanfare.

S&P's downgrade of the US Sovereign was accompanied by a similar downgrade of the five most highly rated US insurance groups: USAA, NY Life, Northwestern Mutual, TIAA-CREF and Knights of Columbus Fraternal Benefit Society. All of these insurers were previously AAA, but along with Uncle Sam, they were downgraded to "negative outlook."

"The ratings of these five US insurance groups are constrained by the sovereign rating on the US because the insurer's businesses are concentrated in the US, and domestic assets account for a large proportion of their portfolios," S&P wrote in a news release (which didn't make the front page of the Wall Street Journal.) "We factor direct and indirect sovereign risks — such as the impact of macroeconomic volatility, currency devaluation, asset impairment, and investment portfolio deterioration — into our financial strength ratings. The rating and outlook on the US constrain the ratings and outlooks on these five insurers. If we were to lower our ratings on the US, then we would also likely lower our ratings on the insurer[s]."

As S&P's singles out these five insurers (which survived the recent financial crisis with hardly a scratch), it demonstrates the capricious nature of S&P ratings (i.e. why is Northwestern Mutual more vulnerable to macroeconomic volatility than GE, Berkshire Hathaway, and Chubb?), and it also underscores some longer-term consequences should the US Sovereign lose its AAA. Put simply, an insurance company's ability to compete and write new policies is directly related to its credit rating. If/when S&P further downgrades the US Sovereign, these insurance companies will be among the most obvious innocent, first victims.

Sam Marx comments:


Would you say that there's politics involved with the people at S&P who do the ratings?

Imagine the effect on the presidential election that could be had if in late October 2012, they actually downgraded U.S. Government debt.

Russ Sears writes:

If the first law is survival, you have to wonder if the threat of the "nuclear" option was a response to the rumors of Congress taking away the rating agency immunity from investor lawsuits.



Matt Ridley's concept of Deep Optimism is very much a concept that the readers of this site can benefit from, and no doubt is a part of our script:

"the knowledge on how to make most of our technologies is distributed collectively across society, it is not held in individual brains…thats is why Im not very interested in IQ and the debate about whether one group is more clever than another. What counts is not how clever people are but how good they are communicating."



 This is a nice story by a former basketball player that reflects back on the 1996 upset of UCLA. The quotes below are from the former Princeton basketball coach, Pete Carril. He had a system and he always stayed true to it. Backdoor cuts, lots of picks, solid defense, good shot selection, established and frustrating (to opponent) pace of play, etc.

"It's good for your health to forget about all those wins and all those losses," he says from his office in Sacramento, where he's a consultant for the Kings. "And keep your mind on what you're doing now." Sure, Carril is still thrilled that he went out on top back in 1996, though he quickly adds, "If we didn't have to play another game, and lose, it would have been better."

With another March Madness set for tip-off, Carril say he doesn't watch a ton of college hoops these days, though he does offer some advice for those teams trying to pull a Princeton. "It goes back to my high school days," he says. "You walked into the football stadium, and there was a sign there I never forgot: 'If you think you can't, you won't.' That's all there is to it. Know the strong points of your team, and your weak points, and what the other team is going to try to exploit. Hold onto your guts. Don't let them force you out of what you want to do. Of course, that takes a lot of mental courage. There's physical and mental courage, and we weren't very high on the physical part. But on the mental part, no one forced us out of doing what we knew we had to do to win."

Read more here.



 During the third week of 1980, silver made a high of about 49.45/oz– and then collapsed, taking Nelson Bunker Hunt, William Herbert Hunt (and eventually Continental Illinois Bank) into bankruptcy.

Today, about 31 years later, silver finally reclaimed that "glorious" price … and traded at 49.79/oz….proving many market saws — including, EVERY market forecast will eventually be proven correct– it's the timing (and margin clerks) that make things difficult…

(A belated happy 85th birthday to Nelson Bunker….).

Recap from January 1980:

Fed Funds rate: 14.00%           Today=0.25%
10-year treasury yield: 10.6%  Today=3.4%
Dollar Index (DXY) = 86           Today=74.0
DowJones=875                        Today=12,400
CRB Continuous Commodity Index=290   Today=682
US CPI Index=78                     Today=223



 Margot Adler, from National Public Radio, interviewed me Saturday, and took my "Atlas Shrugged" walking tour.

Her piece will be three minutes long and will air Tuesday.

Google NPR for the times.

Josh Huntington writes: 

Hi Fred,

I really enjoyed your piece on NPR, and you should be very proud. Here's the link to the NPR interview, in case some of your friends missed it.





These researchers say the social-exchange frame induced a motivation for the players to do what was right, whereas the business-transaction frame induced the motivation to get as much money from playing the game as possible.

All this suggests the success economists have had in recent decades in propagating their way of framing the choices we face has subtly influenced our thinking and behavior, making us more competitive and self-seeking and less co-operative and public-spirited.

If so, we're the poorer for it. We need to frame the economic problem more carefully.



 I have been asked if a lower yield after seemingly bad news like the S&P downgrade is bullish for bonds. A lower yield than before happens often. Is it bullish or bearish? If you specify the time and the magnitude and the other conditions it can be tested. Such tests must be made conditional on the time of the day. As a hint, such tests as of the end of the day do not support anecdotal assertions being made here about qualitative factors, and sensible sounding technical shibboleths. The problem with qualitative analysis is that there are so infinitely many smart people constantly tinkering to get the right price, that the right price is the result of so many people like Paul DeRosa and the palindrome, the former of whom is completely sagacious and knowledgeable, and the latter of whom takes along with him trillions of fellow travelers that are part of the affinity group, as well as the wisdom of all the flexions that rely on such as the upside down man and he for guidance as to what they should do to finesse their positions along. Furthermore the wisdom and the access to such info from all these types is always varying, and depends on the ethos with which they look at things, which is often right during bad economic times for example for the Man of Many Books. Sometimes they're good and sometimes bad. So it's hard to follow a qualitative guru, and even more difficult to find a qualitative divergence. Certainly impossible is to make money following a shibboleth that hasn't been tested, and to extent it has, one wouldn't be writing that it's worthless unless it were truly wrong.

Rocky Humbert responds:

Here are some stats:

1. Japanese National Debt/GDP = 228%. Yet their currency is very strong; and their yields remain near record lows.
2. Italy Natioanl Debt/GDP = 115%. Their yield is 120 bp over bunds.
3. US National Debt/GDP = 97% (if you include social security etc); 60% if you don't. Yields at 10 bp over bunds.

Although academics try, it's clearly impossible to draw a straight line between National Debt/GDP and nominal sovereign debt yields.

Furthermore, and more on point, last week Gallup (and Google Trends) showed the US Budget Deficit had risen to be the "Nation's Most Important Problem." This story moved to the front of the pack — displacing job; war; healthcare; and Charlie Sheen.

That Obama gave a speech on this and that S&P issued their non-news is simply a mirror of the established public mood. Therefore, definitionally, it's in the price.

One more thing: Normally, a company PAYS MONEY to S&P to get a credit rating. That's not the case with S&P's rating of US Government debt. Hence I think we taxpayers should all thank S&P for their incredible generosity — providing their useful, cerebral and predictive analysis of the United States of America — totally free of charge. (Either that, or you get what you pay for.) 

Ken Drees writes:

Looking for the next trend or meme– could this all be a preamble to QE3 in June or the no mas to GE? So it's a battle stations type of market that comes to us this summer with much more volatility then we have been conditioned for? I wish I could quantify the persistence of trend beyond the rational into some type of indicative feature. Financial alchemy– chasing that idea.

Gary Rogan comments:

How high the debt to GDP needs to be before a country goes kaput is clearly numerically an unsolvable problem, especially for sovereign money printers like US and Japan. If the bond market keeps buying the debt this can go on essentially forever. If the economy is barely making it but trending upwards there doesn't even have to be any appreciable inflation for an unknowable period of time. Therefore it's not clear what the rational approach should be to evaluating the situation, and then people focus on the differences like the Japanese debt being owned so much by the internal population, and that population being so thrifty. Clearly part of the reason that the debt has risen in importance is not the absolute level but the seemingly uncontrollable actions of those who are creating this debt while paying lip service to "living within our means". People don't like it because to them this symbolizes irresponsible behavior, because they know that their neighbors or relatives who do that get in trouble, so then there are political consequences to this behavior and the opposition party makes even a bigger issue, and so it goes and goes. This is totally different from the bond market making a judgment about the country in question defaulting. I personally think its the ridiculous that the main generator of this debt has just made a speech in which he proclaimed that we can't spend more than we take in, and have heard it compared to Colonel Sanders making a speech declaring that we can't just go on killing chickens this way. And yet I don't know where it's all going any more than the next guy.



 Good for the market:

"You half expected to see Jared Jeffries or Roger Mason, jr. on one of the other Knicks who were floating through the fourth quarter dive to the ground and tap out."


Pitt T. Maner III writes:

The series "tap out" was foreshadowed when Carmelo Anthony heaved up a well defended, no-chance, 3-pointer at the end of regulation play in Game 1 in Boston instead of driving to the basket and possibly tying the game and extending play into overtime.

Before that final play the Knicks were turned over on a ticky tack offensive foul, Turiaf was disoriented and lost on an inbounds play that led to a slamdunk, and Celtic Ray Allen gunned in a 3. Knick discipline evaporated.

Well if your coach doesn't feel the need for a timeout at game end to settle things down and to improve chances with a set play and he doesn't want to risk grinding it out and working for a win in OT then what is your coach telling the opponent (you)? Heh you know it is going to take a lot of luck on our part to beat you (those) guys.

Improvisation works well in NYC comedy clubs and on asphalt playground courts, but it is not recommended for most teams and players on the hardwood courts of the NBA. 



 The big companies, the kind that make up the S&P 500 and the kind that accompany the President of the United States to China and Chile with 17 planes and 25 boats, (presumably gourmet meals for the beggars and their others also), are very dependent on government handouts, bailouts, licenses, and restrictions of competition. I am not sure that if the government expenditures were cut substantially, and service rates reduced by 4/5 or so, that this would not have an immediate negative impact on the S & P. After all, the theory of least effort and everything. Now these companies would have to compete rather than get hand outs. A terrible thought. Of course this immediate reaction would be counterbalanced in the fullness of a week or so by the realization that total consumer spending and wealth would increase 100% and life expectancy by 10 years, and this would be grandly bullish.



 Profiling ponzi-ists is an ever-challenging endeavor.

Members of the FBI's Behavioral Analysis Unit (FAU) are trying to apply some of the techniques used to find serial killers to detect white collar criminals. According to the first article below, the FBI now (for the first time) has an embedded agent working with the main office of the SEC.

1) Nicole Piquero, an associate professor of criminology at Florida State University, who wrote several academic papers that Hilts' BAU team is reviewing, said her research on white collar offenders, has found that many are extremely controlling in the workplace, almost obsessively so. But she said the problem profilers may encounter is that the characteristics that make a successful businessman, especially on Wall Street, are often ones shared by white collar offenders.

2) In any case, as the criminal CFO of Crazy Eddie, I found that most journalists, Wall Street analysts, investors, and auditors did not know how to ask proper questions, who to ask the proper questions to, how to handle my deceptive answers, and how to ask appropriate follow up questions.

More from Crazy Eddie's Antar:

Do not trust, just verify. Verify, verify, and verify.

White-collar criminals use a combination of charm and deceit to achieve their objectives.

White-collar criminals consider your humanity, ethics, morality, and good intentions as weaknesses to be exploited in the execution of their crimes.

White-collar criminals measure their effectiveness by the comfort level of their victims.

White-collar criminals build a wall of false integrity around them to gain the trust of their victims.

White-collar crime can be more brutal than violent crime, since white collar crime imposes a collective harm on society.

No criminal finds morality and stops committing crime simply because another criminal went to jail.



There have been many green days (bonds and stocks both up). About the highest since Nov 2009 and March.

# of green days

    2009  2010    2011

Jan  2       3        3

Feb  3      5         6

Mar  6      8        0

Apr  5      5         6 to date

May  5     2

June  5    2

July  5     5

Aug  6     2

Sep  3     4

Oct  4     6

Nov  10   5

Dec  2     7

What do you think it portends, and less interestingly, how come there are so many positive comovements?

Steve Ellison comments:

In the mid-1990s, stocks and US Treasury bonds moved in the same direction on over 65% of all days. In the last four years, stocks and bonds have moved in the same direction on less than 40% of all days. Even after the recent green days, stocks and bonds have moved in the same direction on only 27 of the 77 trading days (35%) in 2011.

Year         Percentage
1993         0.647
1994         0.739
1995         0.663
1996         0.706
1997         0.652
1998         0.418
1999         0.560
2000         0.482
2001         0.512
2002         0.348
2003         0.400
2004         0.536
2005         0.532
2006         0.512
2007         0.410
2008         0.351
2009         0.413
2010         0.368

The hypothetical value of a stock is the net present value of all future income, discounted by the risk-free interest rate. All other things being equal, then, an increase in bond prices should be bullish for stock prices. However, this relationship might break down for several reasons, including:

- Bond prices might rise (fall) in response to deteriorating (improving) economic fundamentals that reduce (increase) expected future corporate income
- Asset allocation changes between stocks and bonds might drive price movements more than fundamentals
- Variations in very low interest rates might have little or no effect on the net present value of future income (because models might assume more normal rates in the future)

Regarding the last point, there appears to be a correlation between the level of interest rates and the degree of comovement of stocks and bonds:

10-year bond yield
greater     less than               Comovement
than        or equal to     N       Percentage
2%           3%            203          0.374
3%           4%            822          0.370
4%           5%           1353         0.466
5%           6%           1124         0.560
6%           7%            862          0.643
7%           8%            246          0.687
8%           9%               4           0.750



The idea that not raising the debt ceiling should mean anything other than good news to the financial markets is a naked lie as those who are then faced with no ability to borrow can chose to spend the remaining over 50% of the budget (still) any way they want. This is like an alcoholic who works but also gets welfare claiming that if the welfare is cut he'll have to default on his mortgage without saying that his alcohol bill is larger than the welfare payment.



 I was entered in my club's golf championship, a tournament I enter every year, usually placing in the lower middle. Despite everything health wise, etc, I ended up finding my groove, shot the third best game of my life and came in 9th place overall. I even had an eagle. The weak part of my game, the long game, was on fire and my drives were dead on. I was very happy with 9th place and only wish they had a seniors division for over 50.

Hope all is well with you and yours.





 Very interesting article on Galton:

One, two, many: The prehistory of counting

The Victorian idea that "primitive" tribes can't count has cast a long shadow over efforts to understand the origins of mathematics

LOOKING back, Francis Galton would call it "our most difficult day". It was 4 March 1851, and the young English explorer was beginning to appreciate the obstacles confronting his attempts to map out the Lake Ngami region of south-western Africa. Struggling to navigate a narrow ridge of jagged rock, his wagon had "crashed and thundered and thumped" while his oxen "charged like wild buffaloes".

To make matters worse, Galton had little faith in his local guides from the Damara tribe, who appeared to lack even an understanding of basic arithmetic - a situation Galton found "very annoying". He recounts that having established an exchange rate of one sheep for two sticks of tobacco, he handed four sticks to a local herdsman in the expectation of purchasing two sheep. Having put two sticks in front of the first sheep, the man seemed surprised that two sticks remained to pay for the second. "His mind got hazy and confused," Galton reported, and the transaction had to be abandoned and the sheep purchased separately.

As further evidence of the apparent ignorance of the Damara, Galton wrote that they "use no numeral greater than three" and that they managed to keep track of their oxen only by recognising their faces, rather than by counting them. At a most inopportune time for his expedition, Galton seemed to have stumbled into a world without numbers.

To a modern reader, these tales in Galton's 1853 Narrative of an Explorer in Tropical South Africa seem little more than pithy anecdotes that reflect his prejudices as a gentleman of the growing Victorian empire. (His preoccupation with the supposed inferiority of other peoples persisted in his later work in eugenics.) Within 10 years, however, those same reports of primitive innumeracy were being used by the finest scientific minds of Victorian Britain to glimpse the savage condition of prehistoric humans.

Read the full article here

Victor Niederhoffer writes:

This seems wrong to criticize Galton. What am I missing? 

Steve Stigler writes: 


The author is a 1st year PhD student at Princeton who isn't even working on Galton, and writes carelessly without knowledge. See his bio. He looks bright but has a lot to learn.



 I just did a quick read of Fisher's Crashes, Crises, and Calamities: How We Can Use Science To Read the Early-Warning Sign s. Although I found it to be light on applied theory, I thought some of the general ideas put forth in it were worth some additional investigation.

He discusses the impact of negative and positive feedback on systems. In really simple terms, negative feedback is generally a stabilizing influence on a system but it needs to be applied quickly as a series of rapid small changes versus a larger more gradual one, and positive feedback near a transition point can cause a system to suddenly change states.

One of the more interesting phenomenon he talks about is the Allee effect in which a population can grow if it is above a certain level, but will enter freefall if it is below that cutoff density. He talks about a problem with flamingos breeding at a certain zoo due to this effect which was alleviated through the use of mirrors to give them the illusion of a higher density.

One of the other areas of interest is the idea of resilience in systems, and the fact that it is the loss of it that leads to rapid state changes in systems as they are more easily pushed through a tipping point. Loss of resilience leads to a system that is slow to recover from an initial assault, and less able to maintain equilibrium after a subsequent one.

He argues that there are 5 key early warning signs indicating a loss of resilience:

1) Increasing occurrences of extreme states

Fluctuations near a critical point can drive huge jumps between alternative states.

2) Fluctuations between different states

3) Critical slowing down

A progressively slower ability to recover from small perturbations as a crisis approaches. Under this section, he mentions Parkinson and his concept of injelititis as a disease that brings down companies. Parkinson's Law and injelititis are a subject worth an entire discussion on in their own right:

4) Changes in spatial patterns

5) Increasing skewness in the distribution of states

He also spends some time on Toynbee and his idea of the life cycle of societies corresponding to a musical rhythm of three and a half beats to the bar. This plays out as a period of initial growth followed by some event that marks an end to growth, and then a three and a half beat pattern of collapse…recovery…collapse…recovery…collapse…recovery…final collapse.

Overall, I found some interesting food for thought here.

Ralph Vince adds: 

Interesting post Dylan, thanks. I would add to this, though, a very simple amendment note– crashes in commodity prices are most often preceded by a contraction in open interest. 

If, in the midst of a price run-up (typically, what we would call a "parabolic-style" run-up, and OI begins to roll over (because a run-up is typically seen with expanding OI), as OI decreases and the price continues its rise, it's about over, and likely to come down symmetrically with how it ran up. I am speaking only of hard commodities here, not financial ones.

Henry Gifford writes:

This is similar to my old trick of watching the thickness of the multiple listings book to gauge interest in real estate, now there are gauges such as average time between listing and sale of property, etc. Proxy for OI.



 The enclosed list of best selling books of all time  is an excellent indicator of popular culture I think, and should have interesting market applications. How would one dig down into that, and do you think or do you think it's not applicable?

Steve Ellison writes:

The first thing I notice is what a diverse list it is. The Lord of the Rings is a fantasy book. Think and Grow Rich is a self help book. There are conventional novels, children's books, religious books, and even a book about science by Stephen Hawking.

Charles Pennington comments: 

Who'd have guessed that A Tale of Two Cities is the best seller (single volume) of all time? I didn't even know it was the best-selling Dickens novel, which apparently it is by a factor of 20, since no other Dickens novels appear in the list. That's very surprising; am I misinterpreting?

Stefan Jovanovich writes:

 No misinterpretation here. ATOTC was so wildly popular in the U.S. - like all Dickens' writings - that people in New York and Boston and Baltimore (? not absolutely certain about that one) literally waited at the dock for the packet to arrive from England with the latest installment. One reason Dickens disliked America and Americans is that some of our enterprising ancestors are known to have bought a copy of the latest serial, set it in type over night and had reprints out on the street the following morning for sale - at, of course, a suitable discount from the price of the legitimate copies.

Tale of Two Cities was also the last book that "Phiz" illustrated. Starting with The Pickwick Papers, Dickens has written "monthly parts" that were sold as part of a serial publication. (It literally revolutionized British publishing.) The serials were close to being graphic novels. Robert Seymour, George Cruikshank, and George Cattermole all did illustrations. Hablot Knight Browne (1815-1882) — "Phiz" — did the ones that are best remembered. When Dickens began self-publishing in his own weekly periodicals, Household Words and All the Year Round, Dickens fired his friend as chief illustrator. The parallels with Walt Disney are interesting.

Pitt T. Maner III writes:

In digging down a bit one sees that 3 of the authors, with over 100 million copies sold, are buried within a couple of hundred miles of each other in England (within a shared cultural environment) and that some of their literary themes had connections with class or race distinctions and warfare /murder (Dickens–French Revolution, Tolkien–races of mythological creatures, Christie– see wiki article on And Then There Were None (which originally had a different title and is about murderers from different classes being tricked into meeting on an island and being tricked in some cases into bumping each other off).

There is a whole series of study devoted to the Chinese book Redology and (having not read it), " Dream of the Red Chamber" appears to involve issues of class mobility.

Tsao Hsueh-chin, the author of A Dream of Red Mansions, lived between 1715 and 1763. His ancestral family once held great power. As such, he led a wealthy noble life in Nanjing as a child. When he was 13 or 14, the family was declining and moved to Beijing, where life took a turn for the worse. In his later years, he even led a poor life.Drawing on his own experience, Tsao Hsueh-chin put all his life experiences, poeticized feelings, exploratory spirit and creativity into the greatest work of all time - A Dream of Red Mansions. Drawing its materials from real life, the novel is full of the author's personal feelings filled with blood and tears.

A Dream of Red Mansions is a novel with great cultural richness. It depicts a multi-layered yet inter-fusing tragic human world through the eye of a talentless stone the Goddess used for sky mending. Jia Baoyu, the incarnation of the stone, witnessed the tragic lives of "the Twelve Beauties of Nanjing", experienced the great changes from flourishing to decline of a noble family and thus gained unique perception of life and the mortal world. Revolving around Jia Baoyu and focusing on the tragic love between Jia Baoyu and Lin Daiyu and Xue Baochai against the backdrop of the Great View Garden, the novel portrays a tragedy in which love, youth and life are ruined as well as exposes and profoundly reflects the root of the tragedy – the feudal system and culture.

Found here.

Terrible things can happen if you leave the rich and powerful unchecked and unpunished… is that close to the themes that may be partially beneath the success and appeal of the above best sellers of all time.

The meme being that it will be back to the dark ages of murder and mayhem on earth if government social services are the least bit underfunded and the rich continue to not pay their fair share.

Dylan Distasio writes:

I thought it might also be worthwhile to look at bestsellers by decade. There is a course on 20th century American literature that has been kind enough to share their materials with the interwebs. The full list by decade for the 20th century is at the below link and is worth checking out.

Pitt T. Maner III comments:

In my first paid job as a 12-year old library aide, Agatha Christie made shelving a pile of returned books easy– her works constituted 10% of the pile and were quickly put back with little effort to the same spacious shelf location. I remember reading "Jaws" then, a book hugely popular at the time.

It is doubtful, however, that the Palm Beach socialites checking out multiple Christie books each week would ascribe her popularity to the "Burkean paradigm".

The following is a piece on Christie from a self-described "Wilsonian". Perhaps an example of reading into things a bit too much…the retrospective reasons for success when starting with a point of view.

Her work conforms to Burkean conservatism in every respect: justice rarely comes from the state. Rather, it arises from within civil society – a private detective, a clever old spinster. Indeed, what is Miss Marple but the perfect embodiment of Burke's thought? She has almost infinite wisdom because she has lived so very long (by the later novels, she is barely able to move and, by some calculations, over 100). She has slowly – like parliament and all traditional bodies, according to Burke – accrued "the wisdom of the ages", and this is the key to her success. From her solitary spot in a small English village, she has learned everything about human nature. Wisdom resides, in Christie and Burke's worlds, in the very old and the very ordinary.



Part of the reason for the virulent critical reviews I suspect was that at this time Hal and I were resented as having become successful despite our maverick ventures. We had done eccentric shows and yet were not living in garrets. In the commercial theater this was not only an anomaly, it was an irritation. If we'd been teaching or working at odd jobs to stave off starvation, or if I'd been getting rich by sticking to formulaic musicals and thus easy targets for snickering condescension, it might have been acceptable. But to have done shows like Follies, Pacific Overtures, and Sweeney Todd, and still be living well was not our best revenge. It was theirs. The glory days for Hal and I were over and our partnership ended.

-Stephen Sondheim discussing the reaction to Merrily we Roll Along, his partnership with Hal Prince.

 I believe this tendency is a all too human one, rivaling the tendency of old successful men to cast aspersions on younger better successors. It also, like all general tendencies, has many market implications. I believe the reviews to new products like Playbook from a successful 10 billion entity like Rimm suffer from this. If they had still been in an attic, or Africa, and their market value was 10 mill, why great, it has lots of potential and when they fix the email, and negotiate the things with the carriers who they are now one of best suppliers to, why that would be great. But not for a company with millions of users who came out of 5 mill 8 years ago. Sort of like Lloyd Webber with the new musical Love Never dies. If it was the best ever, it still would have received unamimous negative reviews. The only exception is the Wilt Chamberlin exception, where a freak of nature, if a personage of color is given a free pass as it doesn't create the envy.



It's interesting to see the big gaps, active overnight sessions, and sleepy daytime session in SP. Seems overseas traders are starting to wag the dog.

Sushil Kedia writes:

The Senator taught me a trick when he was in Mumbai almost five years ago to treat the overnight gaps as the cost the public is paying and the intraday range as the action of the pros.

Overseas or local, the battle is fought in that same pit. Senator's attitude to gaps left a few meals for a lifetime.



 While Speaker of the House in Madison's second term, Patrick Henry pushed through legislation that DOUBLED the level of tariffs under Jefferson. The result was so disastrous that even Henry Clay, who wanted protectionist tariffs, had to argue for the repeal of the punitive rates of the Henry tariffs.)

Our current President and his fervent supporters seem far less worried about the amount of actual revenue to the government than they are about satisfying their tastes for envy and rhetorical retribution.

Let them eat fairness, indeed.



The term savings can be a bit confusing because it applies to both a stock and a flow concept. On the individual level, savings on a balance sheet concept is the amount of income one has set aside for possible future consumption. It's level will change with price changes of assets held. Stock savings can either be thought of as changes in the balance sheet value of savings (marked to market) or as the portion of earnings from production and profits not consumed but set aside for future consumption. This includes investments made directly in addition to financial assets. The term stock used in this context is not to be confused with equities. It refers to the balance sheet value of assets, that is the value of outstanding amounts.

From a flow standpoint, savings refers to valued added (amounts earned) not consumed. For business this value added is wages, interest payments and earnings based on economic depreciation not an accounting definition of depreciation. Economic depreciation refers to the amount of an invested asset that in effect is consumed in the production process and as such is a cost factor. Earnings the person as an individual it includes the amounts earned on capital by business paid out in interest and dividends. For corporations the amounts not paid out to providers of capital is called retained earnings. These savings have to be invested. Investment can be made by individuals by purchases of homes and durable goods, the value of which is consumed over the life of the items in question. Consumption includes the economic depreciation on those items. The amounts invested in financial assets represent purchasing power passed on to other entities. They can be used for consumption as is the case with consumer credit. For the economy as a whole this reduces savings as some people are dissaving. Part allows other consumers to make investments in residential housing and durable goods. Part goes to finance government, which uses proceeds for consumption, transfers that mainly result in consumption and some actual investment in such things as military weapons and highways. We treat spending on human capital (education and training) as consumption, although one can argue that this is really investment in large part. It is in the investment in plant and equipment, R&D, education that we increase the future productive power of our work effort. That is what we need to grow on a per capita basis and also on a total basis and new workers have to be supported by capital investment if overall productivity is not to be dragged down. Changes in asset values are not savings in a macro-stock sense. They add nothing to real savings, which are physical assets not financial values.

Changes in the value of equities represent changes in the discount rate of expected future cash flows to stockholders and changes in expected future cash flows. Changes in expected cash flows in part represent differences in actual retained earnings from anticipated amounts, unanticipated issuance and retirement of capital and the required rate of return (cost of capital) not paid out in dividends or stock repurchase, where we are taking in aggregate not per share terms. (Transaction prices in stock issuance or repurchase that differ from economic book value will influence per share figures.) Changes in fixed income securities represent changes in interest rates. Both interest rates and equity discount rates reflect the real non-risk rate of interest, risk premiums, inflation premiums and time preference premiums. All of these can change over time. Since these are determined on the margin, changes in the marginal investor can cause such changes.

Productive investment is made to facilitate the production of other capital assets and goods for final consumption. As capital assets are ultimately designed to produce consumer goods, one could envision a case in which present and future consumption is less than productive capacity and additional capital investment is not economical. Under such circumstances, cost of capital would be driven down to negligible levels, but it cannot go below zero in nominal terms. What often happens is that all sorts of crazy speculative investments may occur that will go down in failure. A key question is what risk premiums will remain and to the extent they deter productive investment. If investment demand is less than the savings not all labor resources will be able to be utilized until lower national income levels again equate savings and investment. Fortunately, consumer demands in most societies are such that such a problem does not represent itself except over more limited time periods. Labor may be idle for other reasons such when the productive value of the worker is below that of some prevailing minimum wage limit. The latter can be set by law or in the absence of legal restrictions by the amounts below which the workers would become ill or starve. That was never much of a problem in more primitive economics but is a greater possibility in current modern society.



Here is a very interesting article called "The End of the Live Bat Era in College".

Victor Niederhoffer writes:

This is a very significant development that Stefan has noted, and I believe by implication (see prac spec) as one of the 100 regularities that the collab and I had to come up with to get Larry Ritter to reveal the truth about the fake doc was direct predictive relation between power hitting and subsequent stock movements. I believe that Stefan has come up with the most indicative thing about coming bear markets that I've seen since Nock woke up at the Wigwam and heard the strains of Marching through Georgia. Hats off to our resident Historian and Baseballist (as if the two were not intertwined).



 Wolfram has added a new toy to their magnificent engine. They added age pyramids to their distribution data, which should be fun to play around with. Pretty soon, they will have many other pyramids that a curious person can play around with and tweak. It is of my opinion that every speculator should be well versed in using the Wolfram products.

Jim Sogi writes:

Very interesting to see difference in distributions for Japan/US vs China. China is young. Japan is old, bulging in 60+ band. US middle aged.

Laurence Glazier writes: 

What is the value of Wolfram Alpha for us. I've been meaning to try it out for possible trading benefits. I would love to be able to ask it for the 100 most trending stocks.

So I just did, and while it has not obliged me, the same question posited to Google has provided some likely looking links. Has anyone found a summary of useful adaptations by traders for this tool? 



 Steve Wynn made a wonderful crack about himself today while talking to Neil Cavuto. Wynn called the Bellagio his "practice hotel".

What he was describing is the X factor– the undefined element of enterprise that produces the magic of growth in excess of all the known inputs.

Hayek's lifelong interest was in understanding and explaining how human beings were able to increase their collective wealth so dramatically in the 19th and 20th centuries; he wanted to know how things had - this one time - been different. By the end of his life he had largely abandoned macroeconomics for the study of human perception because he realized that macroeconomics had no room for fundamental uncertainties; even its definitions of risk ended up being part of closed logic system that produced only tautologies.

What Vic calls the drift has been produced by the X factor. The delusion of our time has been that governments can "pump" "the economy" using their monopoly authority over money; but, as Hayek discovered, capital = money + enterprise. Government money alone is, as Tyler notes, just like water; no matter how much is pumped, it never seems to add any actual growth in wealth. It simply runs off into the gutter.



The results of "stock screen" Friday provided a fun and surprising riddle:

Among all of the developed markets, what is the ONLY mega-cap stock (>US$ 50 Billion) which is currently trading at under 65% of it's stated tangible book value?

Hint: It's not Berkshire Hathaway, but the company does have something in common with Warren Buffett.

Tim Melvin writes:

It's AIG, but that tangible book is a moving target at best.

Mark Schuetz writes:

I see both MTU (Mitsubishi UFJ Financial Group) and NTT (Nippon Telegraph & Telephone). I guess I'm not enough of a Buffett follower to make the connection though.

Rocky Humbert responds:

Mark, you get the buzzer– and lose everything in the final jeopardy round!! Although Bloomberg shows NTT to be trading far below book in their screening algorithm, a closer examination of NTT's balance sheet reveals Bloomberg is wrong!

Tim Melvin writes:

It's below stated book but at roughly tangible book right now…

Rocky Humbert writes:


So, the meal-for-a-lifetime thought follows:

MTU is trading at about 65% of tangible book. Citi is trading roughly at tangible book. And Citi got a Get-Out-Of-Jail card from the US government. Yet — over the past 5 and 10 years, MTU stock (despite a horrible RoE) has still outperformed Citi nicely in local currency terms!!And for US$-based investors, MTU has outperformed Citi substantially.

Nonetheless, Mr. Market is now offering a 35% haircut for MTU's assets and a 0% haircut for Citi's assets…. a striking commentary about investor preference and expectations. Note also that the slug of MS stock that MTU received this morning (as part of the perferred conversion) is trading around 114% of book.

p.s. I still remember attending a roadshow for Japanese bank stocks in the late 1980's during which the White Shoe underwriting firm explained that Japanese banks deserved a price/book multiple of 250%-300%. Presumably, the same analyst is today explaining why the same companies deserve a price/book multiple of 0.6….



 It's amazing, once again, how Apple drives market sentiment:

A large spike in sales of Mac computers, driven by the refreshed MacBook Pro, beefed up March-quarter earnings. Apple said it sold 3.76 million Macs, up 28 percent from a year ago. It also sold 18.65 million of the high-margin iPhones, which is the technology company's most important product line. ….Apple's iPad sales in the quarter fell well short of Wall Street's expectations: some analysts had projected shipments of closer to or even more than 6 million… It moved just 4.69 million iPads.

I don't think this hype is so deserved. I own an IPhone and I think its fame is way too much for what the object really provides (nice apps vs poor battery and poor signal).



 I would like to give a book to the young officers of my ship when I leave my command in a few months. The idea would be to transmit the idea that one should look at opportunities today having a vision, a road map for tomorrow's journey.

As Randy Pausch said: "It is not about how to achieve your dreams. It's about how to lead your life."

Basically it is all about the curiosity to experiment and explore your dreams. Mistakes made are not about being good or bad. Don't be afraid to pursue your dreams. Opportunities occur randomly. If the environment is favorable there is a great chance that these opportunities will be favorable. Work to create this environment. If you are not happy, change. Do something. Don't whine. Do things with passion. Exploit and realize your potential and talent to the maximum extent.

Could you please give me some advice? What is the best book?



George Parkanyi writes:

Hello Paolo,

Yes Man
by Danny Wallace is a lot of fun. It's very funny (not sure if its translated into Italian though), but the central idea is that Danny wasn't happy with his life as it was and decided to see what would happen if he simply said "yes" to every opportunity and request that came along, without filtering. The book documents what happened. This addresses the curiosity/exploration part of the message you wish to convey, done in a fun way.

Think and Grow Rich by Napoleon Hill is an excellent book. It has many very good, uplifting life messages and very practical prescriptions for success.



Scott Brooks writes:

I agree with George that Think and Grow Rich is a must! It had a huge impact on my life.

Since part of vision is proper communication, I also recommend Dale Carnegie's, How to Win Friends and Influence People. I know the officers of a ship aren't there to "win friends", but communicating properly and in a manner that is receptive to the listener is a vital characteristic of all great leaders.



 "The Poor" have very little to surrender. Direct payments to people who are broke - cash, housing and food stamps - are about 1% of the unified local, state and Federal budgets. The debate is about "jobs" - i.e. working for the government and doing work that only government regulations require to be done. The argument over Medicaid - the largest single expenditure for "the poor" - is about the medical paperwork and other make-work that program supports far more than it is about the medical care actually being provided to the poor.

As a friend of mine once said about the Peace Corps (he had himself been a volunteer), "if they had taken all the money they spent on me, my plane ticket and the support and divided it up among those people I was "helping" (sic), they could have bought enough decent farmland to become rich in their own country." When I wrote to him recently to ask if he had changed his mind, he wrote back with this:

"Hell, no. If anything, I was being soft-headed; I still thought that people really intended to help the poor, but they just didn't understand how to go about it. That was a childish illusion. Changing the world" by official decree and government action is and always has been first and foremost about having conferences and meetings and policy discussions and their own pensions. That is why everyone who rants for social justice is so quick to accuse others of selfishness; they are worried sick that somebody else might get their hands on the public purse."

Tyler McClellan comments: 

I have never met a person who I felt truly understood social security. Let me point the way forward in all humility. The money could never have done anything but be spent immediately upon receipt. The goal of social security was two fold, a transference of net wealth to the old in the first generations as an inducement for other things and more importantly, the creation of an indefinite means of savings. Savings that would be repaid based upon whatever happened in the future with no need for action in the present to make any reference to that specific future which would square the circle: a perpetual and confident solvency with only the extent of the future burden left to calculation.

It was a great leap to realize that all savings is contingent, and that which is most contingent is that which is most valuable. No trust fund ever existed, nor ever will, but by this great leap we have been able as a society to save without any commitment to the form our means of saving must take. If we spent the money poorly, no matter, so long as some in the future acquired income wisely that we might tax.

Of course the program has worked brilliantly because it is the only one to deal honestly with a contingent world (aided no doubt by the twist of phrase that we all earned it by paying in, an infantile but successful appeal to merit).

Certain people have never liked social security but that is related to the fanatical obsession with Say's law that is a great undergirding shibboleth to a whole caste of mind. The caste of false rectitude.

If all Americans gave 90 percent of their income to the poor in Africa and Africans bought nothing from Americans, 90 percent of the income in America would cease to exist and our per capita income would become African.

I'll leave it as an exercise to the reader to prove that it is impossible to transfer cash from one group to another in any large sense if they don't bank or trade with each other.

I didn't want to embarrass my friend by allowing Vic to publish this, but he said OK– anything for the one guy I have ever known you, Stefan, to voluntarily address as the Chair. So, publish away. 

Victor Niederhoffer responds: 

You are much more of a chair than I. The chair has a connotation of derision in it which I like which my former employees gave to me because I was somewhat immobile in my positions when they went against me, and in my seat unless I was playing tennis because of my old hip problems. They used to call me vicious vic when I played squash but I changed that to relentless vic or some such which my opponents were quick to adopt because they were afraid that if they didn't, I wouldn't let them maneuver to get on the other side of the draw from me so they woudn't have to meet me until the finals. I do not have that mojo with my trading as of yet, but I am hopeful that instead of being known as the blow up artist that some day they will call me the Phoenix or some such.

Stefan Jovanovich replies: 

No question. My friend's suggestion presumed that the owners of the better farm land already traded with America since they were the very politicians who cut the ribbons in the photo ops with the visiting Peace Corps' senior officials. If the poor farmers had the U.S. legal tender with which to buy the land, the politicians would be willing to sell because they couldn't put the soil in their foreign bank accounts. It would be another form of graft (less complicated than the grand tradition of stealing and selling the U.S. food aid), but this form of graft would actually benefit the poor. My friend says it would have been another form of "honest graft" - just like the old days when your cousin (my friend's name uses its y's for vowels) got a job working in the sewers and actually worked in the sewers. The only net losers would be the Peace Corps' officials who, given their respectable backgrounds, could surely find other work.

Ralph Vince writes:

What certainly won't happen in our lifetime (and, sadly, our forefathers had big balls and small brains, and never had the vision to bite this bullet) is to create a pension to sink ALL future government liabilities. The scourge of taxation should have been eliminated by now, and we have yet to even start down that necessary path.

Look, if we could pay down the national debt, even to a small degree, then, feasibly, the entire thing could be retired. And, if that were the case, then a cache of 50 trillion to the positive, at thirty year domestic rates, produces the (quite obscene) 4.5 trillion budget.

But we never got to that point — and we never will until we see that it can be done, must be done, resolve to it, and then start down that long road. It will take generations — and although a pity no previous generations had the vision or will to do this, doesn't excuse ours.



 Amazing ability of D'Antoni to deflect criticism of him by complimenting his players: "I have never been prouder of a team". With a good coach, the Knicks would have won both games. What is the trading significance?

T.K Marks writes: 

Such deflective behavior by D'Antoni reminds one of those monthly letters to investors after a fund's programs were caught on the wrong side of a violent market move.

If D'Antoni were a fund manager, at some point he would be writing something like this:

"…Though loses were severe last month we are heartened to observe that had the market moved with such vigor and determination in the opposite direction our programs would have performed in a truly Olympian fashion…"

 Therefore, it was the direction's fault. Everybody and everything else is exonerated. Variations on this theme happen every month in those monthly investor letters. One might say that it's Wall St.'s version of pulp fiction, though they do come written on higher-grade paper.

Then again, the more expensive a piece of stationary is the more circumspect I am about the verity of what's written on it. And whenever I come across something gold-embossed, my antennae go way up. Because politicians have a fetish for using (very expensive, taxpayer-paid-for) gold-embossed stationary. Guess they figure it lends an air of the regal to their act.



 1. "There is no such thing as easy money"

2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement

[An example supplied on April 18 by Mr. Rogan: "The Reason For Geithner's Weekend Media Whirlwind Tour: White House Learned About S&P Downgrade On Friday" (zerohedge )]

3. It's bad to try to make money the same way several days in a row

4. Markets that have little liquidity are almost impossible to profit from.

5. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.

6. The market puts infinitely more emphasis on ephemeral announcements that it should.

7. It is good to go against the trend followers after they have become committed.

8. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you'll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.

9. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.

10. A meme about the relation between today's events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles

11. All higher forms of math and statistics are useless in uncovering regularities.

Mark Schuetz comments: 

A point about # 2: This one might be fun to try to rigorously measure and test, looking at price movements in the time leading up to and including certain announcements (knowing this type of thing has been shown by list members before, but usually it's more descriptive instead of measured). Is it possible to show which types of announcements are more often known by participants beforehand as opposed to other types? Also, if certain participants are informed ahead of time, how far ahead of time do they know and in which way will they "front-run" the announcement (there can sometimes be many different ways to make a position on one economic statistic) ?

Victor Niederhoffer replies:

Certain participants know it and they react to it, and you can figure out which announcements are go with and go against——-but but but. The pre and the post regularities are always changing vis a vis the flexions and cronies and their nephews.

Ralph Vince writes:

What a great post. Thanks Vic. I certainly must second points 1 and 11, the bookends….and they have me thinking…

1. There is no such thing as easy money

This is so true, in the markets, in everything. Those who happen upon money where it DID come to them easily, it seems, as a witness, have had it very fleetingly. In my own case, although I am supremely confident in the profitabliity of what I am doing, in practically any market, in virtually any "regime," doesn't mean it's easy. It works like clockwork and is incredibly painful and distressing. It would be so much easier to simply sell buckets of blood."

11. All higher forms of math and statistics are useless in uncovering regularities.

Certainly in a post-'08 world, quants are out of favor, and for good reason. Most anyone I know who DOES make money in the markets, does so with very simple, robust techniques. Having considered going to quant school, and studied a good deal of it, I finally came to the conclusion that they are simply working with "models." Models of how the world behaves. unlike hard sciences like Physics and such where you can perform a test, come back a year from now, perform it again and get the same results, you don't have this in financial modeling. And I think this is where the quants have fallen short. Models are NOT reality, and they never got down to the bedrock, the reality of what his game is about. Of course it had to fail, and in a large way, at some point. A good rule of thumb is that if I need a computer, if it isn't simple enough to do in my head on the fly in the foxhole after I have been awake for over 100 hours, I can't use it. 

Jim Lackey writes: 

About point # 10: It takes no time at all for the information to spread. Yet how many times have we acted, lost a bit, recovered, then seemingly too much market time expires, and we close out a position. We say "awe everyone knows that it's priced in." The meme is then repeated for the 57th time and on a low pressure day, month, or year and then, kaboom!

Of course, I can think of the few times where we missed a huge score, being short YHOO in 2000 or selling some short in 2008. Yet there are hundreds of low magnitude fantastic long only ideas that we forget about. I look back 6 months later and say wow look at that beautiful rise, what happened? It went up very small, day after day, and only buy and hold would have worked.

Alston Mabry adds:

 12. One should not make one's analysis more precise than one's actual trading could ever possibly be.

If the rational mind has not determined the parameters of a trade, then upon execution, the lizard brain will decide.

14. Never go on vacation with open trading positions.

Or, zooming in:
<click> home

<click><click> to lunch

<click><click><click> to the bathroom 

Paolo Pezzutti writes:

One could test how the stock market reacts to good (very good, wonderful) or bad (very bad, terrible)(a sort of matrix) news when the news is released and after some time. It might help build a strength indicator. Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Alston Mabry comments:

Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Chris Tucker adds: 

Stick to your guns, but realize when you are wrong. Easier said than done. Good ideas can lead to conviction, but only experience can strengthen ones resolve. Forget the last trade, look to the next. Try, try, try to learn from your mistakes, but also from your wins.

Anton Johnson writes:

15. When correlations among many typically disparate markets become high, one should reassess leverage and seek novel opportunity.

Jeff Rollert writes:

17. Sell side liquidity is an inverse function of cell signal strength and micros0ft patch frequency, especially at lunch time.

Rocky Humbert writes:

The First Law of Rocky – In every "macro market" (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. This Law is true 99.999999999% of the time.

The Second Law of Rocky – Rocky always keeps his calculator precision set to two decimal places. Any trade that requires more precision than the hundreth decimal place, is a trade that Rocky leaves for smarter participants

Jeff Sasmor writes:

About Jeff R's # 16:

16a. Never go to the doctor when you have a profitable position as it will reach its maximum profit and reverse exactly at the time that you enter the doctor's office.

Happened to me yesterday…

Ralph Vince comments:

With regards to the First Law of Rocky…."Unless it is a new high, that price has already been seen before."

Victor Niederhoffer adds:

Beware of using hard stops as it's bad enough that the floor can always know your physical hard stops.

Jay Pasch comments:

No wonder over-leveraged daytraders always lose as they are required to deposit a hard stop with their leverage, along with their hard earned money…

Ralph Vince adds: 

Despite numerous posts on this thread, it has not been opened up beyond Vic's original 11…

T.K Marks writes:

Aristotle felt the same way about drama, posited that it could be comprehensively reduced to 6 elements. And any additional analysis would by definition be but variations on those original half-dozen themes:

"…tragedy consists of six component parts, which are listed here in order from most important to least important: plot, character, thought, diction, melody, and spectacle…"

Jim Sogi writes:

Always be aware of and consider current market conditions and how they might affect or even negate your prior analysis.

Even the the weather forecast says sunny, if the clouds look dark and the wind is blowing, stay home or dress warm.

James Goldcamp writes:

One good anecdotal rule I've found that works for investing is that the market that causes you the most psychological pain, revulsion, and visceral response from prior bad investments, or overall perception, is probably currently the best opportunity since others may also have a similar overly pessimistic view (or over assign risk premium). This seems to be especially true for post calamity emerging markets, high yield bonds, and fallen growth stocks (tech). If for no other reason, this is why I think stocks like Citi and the West Virginian's company are good buys now (and perhaps government motors and Russian stocks).

Ralph Vince comments: 

 Thinking on this a great deal the past 24 hours, I think I would add one more, which is to me the most important of them all perhaps, or at least tied with #1 and #11. And that is that most people have no business being here. They don't know why they are here, and, if pressed, can only give a sloppy, struggling answer. "I'm here to make money." "I'm here to improve my risk-adjust return," or some other nonsense.

They are here for action– whether they know it or not, whether they acknowledge it or not. The market is a magnet for gamblers, a magnet for those who compulsively seek out the very action she puts out. People are here because they want to feel they have one-up on the masses, the system, or that they are not as inadequate as they suspect. The very proof of that is their utter inability to instantly articulate their criteria in specific terms. Absent that– they're in a bad place.

They're looking for girls in the wrong dark alley.

It makes no difference how well-capitalized the individual is. The world is full of guys with $10,000 accounts who will lose it all and then some, and full of guys with very fat checkbooks who will lose all of it equally as quickly, in similar fashion.

They still think it is about what you buy, when you buy it and when you get out, facets that have nothing to do with what is going on here (which is specifically why mathematics, simple or higher-order, fails in this endeavor; people are applying to aspects they mistakenly think this thing is about.)

If you examine institutions, they may be equally as clueless as to what this thing is about, but they have one big up on the individuals– they have a specific, well-defined criteria in most cases about what they are in this for, what they are willing to do to achieve something very specific.

Most individuals– of all gradations of wealth– can't, and that's the red flag that they here for all the wrong reasons.

Jeff Rollert adds: 

Amen. If it doesn't hurt a little, you're wrong.



Obama administration officials tried to keep S&P rating at 'stable'.

Or is it a double deception?



 I'm writing this only because I think it might clarify some sloppiness in how people frame the U.S. debt problem. Thanks for the great site and the consistent advocacy for substantive discourse.

The Hydraulics of Debt are quite simple. It is impossible to lend without someone borrowing. When I buy shares in the stock market, someone is selling the shares. The marginal price at which this transaction takes place becomes a means of savings only in a roundabout way. At the end of the period we look back and say, well society earned $15 in money income, how was it spent? Some of it was consumed; some of it was held over against the future periods either in the form of additions to the capital stock or in the accumulation of inventory. Theoretically, the transactions that establish the price of the existing stock of assets (via the marginal buyers and sellers trading in continuous price discovery) also proscribe the amount of real investment that firms do . This happens both by encouraging existing firms to add or remove capital from their existing stock and also by incentivizing new entrants to produce capital of greater market value than production cost. No one saves by putting money in the stock market.

That's it, market prices effect our collective prosperity only through this roundabout and tenuous manner. Why is this relevant to the debt question? To understand the debt question, we have to first understand how tenuous savings is. Society as a whole cannot save by everyone putting money in the bank. Society is not better off if all its companies are profitable. If every company in society returned cash to its claimants (profits less capital expenditure), then society would be getting progressively poorer. We would be consuming our capital stock and suffering a real diminishment of wealth. We might care that companies are profitable because it means that their stock prices will be high, but the truth of this proposition rests on the further observation that these high prices for the stock of wealth induce creation of new wealth. High stock prices can be useful in accommodating demanded savings by serving as the basis for investment.

There are many reasons why our psychological demand to save might differ wildly from our psychological demand to invest. Most of us experience this radical difference every day. We accommodate our pessimism about the future by saving. We accommodate our optimism about the future by borrowing (investing). We are able to divorce these two things by an institutional sleight of hand. I need not intermediate my own saving demand and my own investment demand. Rather the market will intermediate all such savings and investment schedules. How this is accomplished is too long a story to go into. At the end of the period, the fact that savings and investment will be equal to each other is an identity of accounting that gives no flavor for the the great search in time that renders this identity true when looking backward. This is the fundamental insight of economic modeling. Things that are both identically true from one perspective and radically undetermined from another constitute the economic field.

All of this as a long prelude to an identity which should be hammered into every college students head. The borrowing by foreigners, businesses, households and governments has to be exactly equal as an identity to the money lent by foreigners, businesses, households and governments. It is nothing more than an identity to say that if foreigners, businesses, and households are all net savers then by definition the government must be a net borrower. But it is a deeper truth to say that the government borrowing is the means by which this savings is even possible.

So far we're on solid ground. Most observers understand intuitively that the motives causing businesses to fail to invest all their net proceeds are not related to current government policy (this has been a longstanding trend based on the increasing power of the tautology that a business is worth only the sum of its discounted future cash flows). Some observers still claim a mythical means by which government is causing this gap between funds received and funds spent. A concise refutation of this idea is that the hydraulics of debt necessitate companies lend this difference to the government. "We have no faith in our government, but we'll lend them trillions".

Most observers think it is right for households to become net savers, although the people who work building houses might disagree. But again, as a class, you cant be a net saver without someone else being a net borrower. We have already seen that businesses also refuse to be this class of borrower.

Most observers, other than the foreign governments themselves, believe that America should increase its foreign savings (by decreasing its borrowing from foreigners). We're trying, but we've also been trying for many years.

And so we're right back where we began. But now, instead of the government borrowing being an identity, we've suggested that much of this borrowing in involuntary in the sense that it has been driven by the collective desire to hold excess savings. The people's pessimism is driving their government's borrowing at least as much as their government's borrowing is driving the people's pessimism.

This has gone on way too long, for which I apologize. Ill just end by making a quick allusion to the "unfunded liability problem". Be wary of false identities. If we have a 200 trillion unfunded liability we also have a 200 trillion unrecorded asset. If those benefits were ultimately paid out they would flow through the economic system and redound to who? You guessed it, us! So what is the true fear about this unfunded liability? Ill leave that for another time. Maybe we should run around screaming, "those doctors and nurses are about to make off with our unfunded 200 trillion asset, to the barricades!"





What would be the correct way of running a multiple correlation to check this theses that a major part of the Rsquared comes from the DXY? Run one with it and one without it and see the R squared. Perhaps not enough. How much of the variation is explained by DXY amongst a bouquet of "relevant" variables.

Perhaps I am trying asking too many questions in a single one. Quants on the list will perhaps not mind tossing me out of the kitchen table with just a few strokes of their insightful knives.

Bill Rafter writes:

What would be the correct way of running a multiple correlation to check this theses that a major part of the Rsquared comes from the DXY? Run one with it and one without it and see the R squared. Perhaps not enough. How much of the variation is explained by DXY amongst a bouquet of "relevant" variables.

Perhaps I am trying asking too many questions in a single one. Quants on the list will perhaps not mind tossing me out of the kitchen table with just a few strokes of their insightful knives.



I posted this some months back:

"Considering the nature of governments, markets and timing, I find it instructive to contrast the timing of the British government's sale of gold in 1998 (which came at, or at least very near, the lowest prices of a decade-plus time frame) against the timing of Blackstone's IPO, which came within several hundred points of the highest levels the DJIA had ever seen.

It seems to me that the perfectly logical, state hostility toward markets (begrudging their existence for purposes of fruitful taxation) would suggest that unique issuance events and decisions associated with them are likely to coincide with market bottoms, but that study has a very small 'n'."

I wonder if the government's sale of GM stock– moreover, and consistently, at a loss– is a logical, perhaps generational, buying opportunity. Alternately, one wonders if the multiple factors of unions under siege, radioactive Japanese suppliers, and the like are inspiring Barry & Co. to leave a bad situation badly before bad gets worse.



 1. From time to time, I read headlines of articles that try to encap the news in order to trade. I find these articles very deficient because of the difficulties of content analysis, a field I studied in detail in connection with my thesis. "World events and stock prices" an essay that amazingly was cited by Shiller to falsely support his views that markets are irrational.

There is apparently a content trend that one of the search engines puts out. People often use it as a foundation for a prediction, and I seem to note that based on the favorabilty of the headlines, computer algorithms seem to buy and sell a nano second ahead of everyone else as they get the headlines. They seem to be wrong as much as right, although on occasion like the downgrading by S&P they got the headline ahead and then sell in strength to the poor, buy limit orders from those who can't afford a million dollar hookup adjacent to the exchange, or advance info from the flexions who worked the talk shows the previous days.

From my work on content analysis there was grave difficulty in measuring the strength of assertions, the verisimilitude and wisdom of who making it, and taking into account the activity of the statements (a scalagram score from high to low on fast slow), as well as taking into account the degree of negatives in the statement double or triple and whether that makes it favorable or unfavorable. Taking into account the untested nature of the indicator itself, as well as the look back bias in any fields and times that it actually worked on paper, I wouldn't put too much reliance on it.

In short it's another random element in the market that provides extra vig for the infra structure and top feeders.

2. I have been asked if a lower yield after seemingly bad news like the S%P downgrade is bullish for bonds. A lower yield than before happens often. Is it bullish or bearish. If you specify the time and the magnitude and the other conditions it can be tested. Such tests must be made conditional on the time of the day. As a hint, such tests as of the end of the day do not support anecdotal assertions being made here about qualitative factors, and sensible sounding technical shibboleths. The problem with qualitative analysis is that there are so infinitely many smart people constantly tinkering to get the right price. That right price is the result of so many people like Paul Derosa and the palindrome, the former of whom is completely sagacious and knowledgeable, and the latter of whom takes along with him trillions of fellow travelers that are part of the affinity group, as well as the wisdom of all the flexions that rely on such as the upside down man and he for guidance as to what they should do to finesse their positions along. Furthermore the wisdom and the access to such info from all these types is always varying, and depends on the ethos with which they look at things, which is often right during bad economic times for example for the man of many books. Sometimes they're good and sometimes bad. So it's hard to follow a qualitative guru and even more difficult to find a qualitative divergence. Certainly impossible is to make money following a shibboleth that hasn't been tested, and to extent it has, one wouldn't be writing that it's worthless unless it were truly wrong. 



 A note that "one of the first investors in the world to be bearish on mortgage back" has come across the horn. I have seen many such statements made about someone who was right the previous time. Often, as Harry Browne points out, when you read their things, it is not quite as clear cut as that as they make many statements and often their positions are different if they trade or not. But, But, But. Here's the rub. Why should the fact that someone was right or prescient at some time have anything to do with ones prescience in the future. I would posit an opposite relation.

Studies of the persistence of mutual fund performance support this. A person is not good for all seasons. My former good friend, the fencer was very bearish throughout the 2000s. He saw a 50% chance of a terrible debacle at all times. It happened in 2008. He made money. What does that mean for the future? He still sees a 50% chance of total ruination and like 99% of the bears he missed the bull market but is very happy he's only down 10% or so because he was positioned for the big one.

The same is true for the worst naivete that comes out of the route 125 boys. They noted that 1929 the months were similar to 1987. So they became very bearish and the drunken grain thresher knew that on Oct 19, it had to be a crash like Black Friday in 1929.

Such reasoning. Have conditions changed? Is there any relation between what happened 50 years ago and today. Do things repeat in a predictive way or reverse as they go the way of least effort.

Such considerations enable one to reduce the vig and grind at least by not being influenced. Hopefully those on this list will not add overly to the vig or grind. That would be a blow to the muse of not succumbing to the evil houses and their NGO consultants et al.

Steve Ellison writes:

I once worked with people whose jobs were to forecast sales. One posted a humorous list of rules for forecasters. The #1 rule was: If by some chance you are ever right, never let anyone forget it.



 I do it in reverse. I watch the market. If it moves, like yesterday or the earthquake, then I look to see what happened.

Except announcements which are scheduled ahead of time. The market usually seems to be wrong about the news.

News is just a reflection of the tenor of the popular mass and as a result is behind the curve. Markets reflect the same but is ahead of the news as it looks to the future.

The myth that the media likes to perpetuate is that the news predicts or causes the market.



Robinson Helicopter is my favorite Californian company. 



While India is a place today with intensifying struggle against corruption, here is an effort from the establishment to create divergence in the objectives of the bribe giver and the bribe taker by proposing that giving bribes should be no longer considered illegal such as the bribe giver can co-operate in the investigastions. Well it has its own bundle of issues for sure since the creative abound.

A Paper by the Chief Economic Advisor the Finance Ministry, Government of India argues this & is available here.



 I hope someone someday writes the story of Dave Bing, mayor of Detroit.

See this article "Detroit Moves Against Unions".



 Hi Victor,

A lot has happened since we spoke after my Junto presentation in February.

I've made "Inside the Mind of Ayn Rand" more compelling by focusing on what's at stake for the world if we don't embrace Rand's concepts of limited government, free markets and reason. And I've made the story of her life–epic as it was–more of an enhancement to the story rather than the main event. Thanks again for helping me see that with your feedback.

Also, in talking to people after the Junto meeting, I recognized that many Rand fans want to support the film but aren't in a position to be investors (and I'm sure there are thousands of such fans around the world). So we just launched a grassroots internet fundraising effort that we are very excited about:

I hope you will take a look. As you can see, for anyone wanting to help to get the film made, it makes it easy for them to join in. They can see our new two minute video about the project (starring yours truly!). Of course, we chose to launch the site right now to take advantage of excitement surrounding the "Atlas" movie.

This grassroots approach joins the other three financing strategies we are using: private investment, institutional support, and pre-sales to distributors.

We are hoping that everyone will want to jump in at whatever level they are comfortable with, and please do forward this to any others that you think would be interested.

Thanks for everything,




Today I caught an ox cart and ferry off bucolic Toba, Indonesia. The ambiguous visa turned against my favor. Immigration is kicking me out of the country, but won't deport me unless I stay another 35 days to become a 'criminal' that would avoid a fine. Today the immigration chief laughed, and advised I go back to Toba & enjoy an extra month. Becoming a criminal offsets the fine and blacklists me from the country for one year, plus two days in jail. I know he's the chief because I stopped in every floor of the Medan immigration skyscraper until topping out at him, he won't give me his name, speaks through an interpreter, and says the building has no phone though he packs a cell. Indonesia has a a recent watchdog system on high officials that works. His kids will like my secret mirror writing. It's too far back to Toba to consider becoming a criminal. The U.S. embassy will loan the money but nab me at the arrival airport. As it is, I'm fined $600 for overstay on the immigration oversight three months ago as a blue-jeaned embassy clerk crawled through a window and stamped my passport w/ duplistic expiration dates– 'expires April 23' in bold at the top was my incorrect guess. I've fanned out to ATM machines to accumulate the fee but ATM's don't work well with American cards… I have garnered $400 at six. There's also a remote island ferry to Singapore that may not have a computer or take a bribe.



 I have always been optimistic about the long term prospects of the global economy. However, since the 2008 crisis I have radically changed my attitude. Strong forces within western countries are greedy and willing to retain their privileged access to resources and easy money. More simply, it could be that politically in our democracies it is paramount not to make tough choices that require sacrifices to voters. The result is that in the name of keeping the economy going (that is keeping the standard of living excessively high compared to what we can afford), we have indebted ourselves to an unsustainable level. What makes things worse is that we have done this at a moment when interest rates were artificially kept at historical lows. This looks like committing suicide. Or setting a time bomb. It is only a matter of time before we have to pay this expensive bill. This folly is continuing. They do bailouts borrowing money for the bailout. Does this make sense? When is this huge scheme going to fall apart? What is going to be the trigger? I find it interesting to see how Japan, the US and Europe are all running fast toward beyond a point of no return. It seems, however, that in the alternation of bad news about the European sovereign debt, the US debt ceiling and the tragedy in Japan, focusing the attention toward the weakest link of the chain is paramount. It is not matter of avoiding collapse, it is a matter of letting (or inducing?) others to fall first as the only way to survive…a kind of economic warfare for survival. Right when difficulties in the US budget fuel speculations about a US default and a free fall of the dollar, you have once again maneuvers to put under the spotlight the Greek debt situation and even the elections in Finland…

Jim Sogi comments:

It's the same mistake consumers made after the boom was over. In order to continue their extravagant life style, they continued to 2nd mortgage the house, kept high fancy car payments, used credit to finance life style, clothes, dinners, travel. The US is using high debt to finance its lifestyle under the rubric of high employment. Like the overspending consumer, it refuses to cut out spending. It relies on debt rather than production to finance extravagance. The consumer got hit and was forced to cut back. Can the US cutback?



 The connections between sunspot activity and global climate change are a challenge for scientists to unravel (from impacts caused by volcanic dust and muliple physical variables). Jeff Watson has discussed this topic before so the clips from a couple of recent articles may be of interest.

1) From the Journal of Space Weather:

If you have the sense that the current solar cycle has been slow to build up, maybe it is more than just the "watched pot" failing to boil. A comparison with previous sunspot cycles shows that the current cycle is among the slowest-growing cycles characterized with good historical data. Figure 1 shows the smoothed sunspot number for the period from 2 years before the minimum to 2 years after it for the 24 numbered solar cycles (cycle 1 started in 1755; we are just now entering cycle 24). It illustrates the historically slow increase of the current cycle (shown in red) as of February 2011. Three of the four cycles with slower increases (shown in blue) were during the Dalton Minimum in the early nineteenth century. The fourth is the period leading into cycle 1. The red dots in the figure are cycle 24 monthly average sunspot numbers; these data are too recent to be adjusted by the smoothing algorithm that includes the influence of monthly averages within 6 months of the smoothed value. Also shown, at the bottom of the figure, for context, are the sunspot data for the first 23 cycles, which also identify the Dalton Minimum.

2) From Geophysical Research Letters:

Variations in the total solar irradiance (TSI) associated with solar activity have been argued to influence the Earth's climate system, in particular when solar activity deviates from the average for a substantial period. One such example is the 17th Century Maunder Minimum during which sunspot numbers were extremely low, as Earth experienced the Little Ice Age. Estimation of the TSI during that period has relied on extrapolations of correlations with sunspot numbers or even more indirectly with modulations of galactic cosmic rays. We argue that there is a minimum state of solar magnetic activity associated with a population of relatively small magnetic bipoles which persists even when sunspots are absent, and that consequently estimates of TSI for the Little Ice Age that are based on scalings with sunspot numbers are generally too low. The minimal solar activity, which measurements show to be frequently observable between active-region decay products regardless of the phase of the sunspot cycle, was approached globally after an unusually long lull in sunspot activity in 2008–2009. Therefore, the best estimate of magnetic activity, and presumably TSI, for the least-active Maunder Minimum phases appears to be provided by direct measurement in 2008–2009. The implied marginally significant decrease in TSI during the least active phases of the Maunder Minimum by 140 to 360 ppm relative to 1996 suggests that drivers other than TSI dominate Earth's long-term climate change.



 Connections. That is the nerve center of market knowledge. Recently I came across a great connection that sheds considerable insight on an important but controversial subject (please forgive Mr. former rocket scientist) in Mortal Games by Fred Waitzkin. He describes a disease that grandmasters get. It's the disease of thinking that every other grandmaster after them who made more money and achieved more fame was morally corrupt. Botvinnik believed that Fisher had bribed Spassky to win their match. Spassky believed that Kasparov had bribed Karpov to end their matches in a draw and that was the reason that in game 19 of their title match when Karpov had a seeming winning position, he had shaken hands with Karpov, offered him a draw and then sat animatedly analyzing the game.

Okay, if that disease doesn't afflict the old men who don't want anyone else to invest in derivatives or anyone else to pay anything but higher service rates than the current, what does? What is the bacterium that causes this disease? And how can it be used to predict markets and deflate the self serving ballyhoo of these old lions?

Tyler McClellan writes:

Let me suggest, not too strongly, that the answer has something to do with the propensity of wealthy capitalists to make gardening their post retirement focus.



 #1 Trading creates no greater good
- like when you buy grain futures, the price skyrockets, and you make a killing! A poor farmer plants more seeds as a consequence, third world children get affordable bread, hmm, did I say you make a living?

#2 Trading makes you selfish
- and that's why filthy rich old speculators turn to philanthropy.

#3 Staring at screens all day is not healthy
- which is true, and why slow lunch hours are perfect for physical exercise.

#4 Staring at screens all day is not good for your social skills
- which is why traders are out having fun when the market is closed. (Don't "normal" people spend evenings in front of the TV?)

#5 The market is a casino
- where scrupulous gamblers make it easier (and more important) for sane traders to make a living.

#6 Changing cycles make it hard to make consistent money
- and that's why I take months off traveling the world.

#7 Watching the market is sometimes like watching paint dry
- which is true, and why you should use slow hours to study arts and sciences (while some make #5 come true).

#8 Most traders lose money
- which makes it even more rewarding for successful ones.

#9 You won't make it without talent
- just like a talent is needed to become a piano, chess, or basketball professional. A zillion different market niches should make it possible to succeed for a variety of personality types though.

#10 Traders do not deserve all that money
- if spent on booze and babes. Do good and create exponentially more "greater good"! (ref #1)

Jim Sogi counters:

Good Reasons to Trade

1. Trading provide capital and liquidity for production of good.

2. Trading is an honorable profession.
3. Trading give time to exercise, ski, surf when markets close and you always get weekends off.
4. The gains have favorable tax treatment.
5. The competitive environment is tremendously rewarding.
6. The analysis is deep, wide ranging, complex and also very rewarding. It covers history, math, statistics, current events, politics, economics. No other field is as broad or deep for study.
7. Trading has economies of scale built in to the structure.
8. Immediate and easy credit is available.
9. The Spec List.
10. You can trade from home, be it Hawaii, Alaska, CA, NY, Bahamas, Singapore.
11. There are world wide markets, and many niches to fit many styles and temperments.



What is the flexionic analysis of the S&P downgrade of sovereign debt? A move to force the Republicans to capitulate on their "unholy" demands to reduce the very temperate spending of the government sector so needed by the voters?

Gary Rogan writes: 

My initial thought it was to force the Republicans to roll over on the debt extension without a peep, and it may still be because that's the nearest battle, but if the text has any meaning it's to make sure that tax hikes are a part of the "solution".



 Hat on Head

Doc Bo Keeley's Hobo Timeline

Aug 22, 1900

- The first Hobo Convention is held at Brit Iowa, and to this day hobos and the curious gather in the hobo jungle. There is a Hobo newspaper, a grapevine of symbols on RR water tanks, and the most successful hobo college in a Chicago hub of the expanding rail network.

Steven 'Doc Bo' Keeley is born in Schenectady, N.Y.

At six months whisked in a laundry basket on the back seat of a '40 Mercury to Santa Cruz, Ca.


Hit driving a VW van by a freight train and carried 200 yards on the cowcatcher for the first hobo ride.


Experimental ride with Freedom Frey from Salt Lake to the Ogden 'golden spike'.

Ride the rails from Salt Lake City to LA and learn the hobo ropes from two masters.

Nabbed by Canadian immigration during an unplanned border crossing inside a grain car.

Havre, Mt. to Minneapolis by rail and caught by the first bull who issues a warning.

Robbed by Minneapolis tramps and ask police to sleep the night in an empty cell.


Sell Michigan Garage Nirvana to tramp the country.

Cross-country hitchhike with twelve rides in four days from Michigan to San Diego.

Travel to southwestern missions with a Franciscan monk.

Pinned on an LA sidewalk by a demented man with a .45 pistol and a tin leg.

Join a Clydesdale wagon acting troupe along the California coast for a week.

Hobo throughout the West standing in food lines and staying in missions.

Invent boxcar handball.

Visit the Rajneesh ashram in Antelope, Oregon.

Climb Mt. Rainier.

Sacramento to the Brit, Iowa National Hobo Convention, and back by freight.

First Executive Hobo trip Denver to Grand Junction with a Denver businessman and Australian pilot.

Second Executive Hobo trip Las Vegas to LA with two San Diego businessmen and a psychologist.

Surrounded and punched by four hoods while rescuing a San Diego victim.

Drunk redhead begs to show what's 'inside her pants' and pulls out a hunting knife.

An epoch ends of spending one hour for about 3000 straight nights standing without a drink in bars across the country.


Finance travel with annual writing storms to create backlogs for mother to submit to magazines.

Drive a Chevy van around the USA with an invisible fish-line attached to a 7' rabbit riding shotgun to wave down interesting people.

Sacramento to Salt Lake to Denver to Chicago to Minneapolis to Seattle to Sacramento by rail.

Near suffocation riding too near the locomotives through the 6-mile Colorado Moffat tunnel.

LA to Jacksonville to Newark by freight.

Freight from California to Dallas on the old Southern Pacific for a family Christmas.


Sacramento to Brit with hoboette ChooChoo Chelsea for the National Hobo Convention.

Caught on a moving freight ladder over the Salt Lake causeway.

Hitchhike to the Sturgis Motorcycle Rally, and freight the transcontinental rail to California.

LA to Dallas and back by boxcar for a family Christmas.


Near-death from exposure trapped on a winter flatcar between Colorado Springs and Denver.

Says,' That's enough!' through spaghetti in frozen beard on the high rail between Spokane to Minneapolis.

Sleep in a coffin lined with electric blankets through the Michigan winter.

Teach a sociology course Hobo Life in America at Lansing Community College in Michigan.

Write Hobo Training Manual for the course.

Profiled in a documentary hobo film.

Volunteer stints at Lansing nursing homes, adolescent and geriatric psych wards, orphanages and school for the blind in a one year study of the mind.

Speak to the NYC Junto on hoboing.


Hobo in America is canceled after one term by the college president due to an uproar- 'The bum is teaching our kids to be tramps'.

Wilderness survival class from Peter Carrington.

Michigan to Indiana by rail with Locomotive Lotus for 'Hands Across America'.

Minneapolis to Spokane to Sacramento to St. Louis to Chicago with celebrity hobo Iowa Blackie.

Fall asleep covered with cockroaches on a kitchen floor when a lasso of Borax fails to repel them.

Hitch to the Missouri national Rainbow Gathering.

Sacramento to Brit with Hobo Queen candidate Silver Sidekick.

North Platte to Denver by freight with celebrity Hobo Herb.

First tattoo at a skid row parlor of a Road Mouse with a smile and teardrop.

Address the Aspen Eris Society about hoboing.

Grand Junction to Sacramento by boxcar with financier Doug Casey.

Spokane to Chicago to Toledo by rail with hoboette Boxcar Beetle.

Chicago to LA and hook up with the National Hobo Association of movie star and yuppie riders.

Contributor to the NHA Hobo Times


Hike three months on the California Pacific Crest Trail from Mexcio to Taho with a custom fanny pack.

Sacramento to Brit to the Eris with hoboette Mappy.

Ride in his cherry Cadillac and the rails with Hobo King Steam Train Maury Graham

Third Executive trip from Grand Junction to Roseville with LinuxCare CEO Art Tyde and Doug Casey.

Nabbed by the Salt Lake bull and to court where the judge slams gavel, 'Dismissed with prejudice'.

Three days in the LA Country Jail for jaywalking from a bank robbery in progress.

LA to North Carolina by rail for a family Christmas.


Freight the USA perimeter working odd jobs and frequenting the Willies, Sallies and Goodies for collectibles.

Hardest day's work ever ketchin' 2500 chickens with four retarded youths in deep Georgia.

Bay Area's 'Best Sunday Magazine Feature' award with a hobo ride-along reporter to Mt. Shasta.

Escort hoboettes Mappy, Silver Sidekick and ChooChoo from Sacramento to the Brit convention and back.

Caught skinny dipping with the three hoboettes by the North Platt RR bull.

Recumbent bicycle with a wind sail the 500-mile Baja Cortez coast.


Sacramento to Grand Junction to Eris by freight with hoboette Silver Sidekick.

Grand Junction to Portland by rail with Doug Casey to inspect gold mines.

Save the life of an Oregon 'apple knocker' stuck on the latch of a rolling boxcar.

Ride the RR 'low line' from Washington to Chicago to Pittsburgh visiting a string of associates.

First and only life drunk on hopping down from a boxcar near Wilmington, De. to visit a girlfriend bartender.

Start cheap living to save money for travel: French-fry hotels, basement, shed, garage, cellar, laundry room, trailer, sidecar and a boat.


Mother dies in my arms.

Tour NYC subway and steam tunnels to ferret HUD's (human underground dwellers).

Hike and canoe the Okefenokee Swamp; swept to sea by a tidal bore.

Travel under a backpack to 100 countries.


Return to Manhattan to compile a list of 'Low-Life Indicators' for commodities such as long cigarette butts in a bull market that catch print in the New York Observer and Barrons.

Ride a boxcar from Jacksonville, Fl. to New York and borrow a suit to wear to a meal with George Soros at the Four Seasons restaurant.

Explain hobo economics at global banking seminars.

Cast a skeleton list of near-deaths in a one-year sequester in a Ct. stairwell to quantify near-deaths on the rails and world byways with a dream goal of Catman with 'nine lives'.


Artist Linda Mears paints Hit by Train as part of Adventure Art that become jigsaw puzzles.

Return to alma mater MSU to lecture on hobo and world travel.


Hike the 500-mile Long Trail through Vermont.

Hike the 600-mile Florida Trail alligator gauntlet from the Everglades to Georgia.

Black Friday October 27, 1997 Dow mini-crash and The New Yorker takes a swat at Keeley for it.


Walk the 130-mile length of Death Valley and stumble on the bleaching bones of a mysterious man.

Hike the 600-mile Baja coast from Cabo San Lucas until forced out by rattlers.

Hike the Colorado Trail 500 miles through the Rockies from Denver to Durango.

From Education of a Speculator (1998, Victor Niederhoffer) - 'When all's said and done there's the Hobo (Bo).'


Retire to a desert burrow as a hermit near the California-Mexico border.

The turn of the millennium passes unnoticed in the desert with Sir the Sidewinder doorkeeper.


Second person to walk the 220-mile Mojave Road from Needles to Barstow.

Hike with a llama two weeks along the Sierra Nevada.

Freight from Reno to Colorado for Eris.


Fifth executive hobo trip from Sacramento to Denver and back with the LinuxCare CEO, a Canadian stock broker, NY speculator, and Bay Area head of emergency response; Trip ends on 9/11 that clamps security on hoboing.

First person to walk 250 miles on the California's Heritage Trail.

Begin a series The Desert News in scorching Sand Valley, Ca..


Hitchhike the perimeter of Baja Mexico.

Hike from Mexico to San Bernardino on Pacific Crest Trail.

Walk 24 hours waterless and lost in a Sonora desert near-death.


Liberty Magazine article shames a Florida peace officer after '36 hours in the Broward County Jail'.

One hundred posts of hobo and travel yarns at dailyspeculations.com, swans.com/main.shtml, northbankfred.com/stories.html and internationalman.com.


Resident Sand Valley, Ca. consultant to Rancho Costa Nada: The Dirt-Cheap Desert Homestead (Phil Garlington).

Trapped by flash floods in Sand Valley for the first full summer as three die in the heat.

Spokesman for the Canadian Safety Pak for survival.


Rail across Canada with South African accountant Tom 'Diesel' Dyson.

Ride disguised as Mexicans with Diesel Dyson and Central American immigrants through Mexico to the USA border.


Executive bo trip with Baby Jack Black (Hollywood TV show) from Eugene to Seattle.

Grammy songwriter Shandi Sinnamon writes and performs 'Baby Black Jack and Bo Kerouac'.


Bo Keely Executive Tour Services founded as businessperson's outward bound on the North American rails.


Executive outing to the Baja Santa Maria Mission ruins.


Lost on the Rails from Colton San Bernardino with executive bo Rail Mariner (Computer services).


Ride the Mexican rails with anthropologist Boxcar Dolly and Central Americans from Guaymas to Juarez.

Orange County district court switches DNA on a Conservancy trespass charge to dismiss the case.

Executive trip with Rev (Medical devices president) from Colton RR yard to Tucson.

Peter Gorman's 'Renaissance on the Rails' profile wins 1st place for the Association of Alternative Newsweeklies 'best feature of the year'.

Halloween trick or treat on the rails with Boxcar Dolly from Sacramento to Cheyenne to Portland.


Take to the rails on being fired trying to stop a 'playground war' at the Blythe, Ca. Middle School.

Keeley's Kures: Alternative healings from the Trails, Rails and Trials (Free Man Publisher).

Hobo Jungle: Tales of the Iron Road (Free Man Publisher).



The last 2 paragraphs of this article about US servicemen on a french carrier has an interesting fact: the Op Tempo for each of the U.S 11 carriers is 4x what it is for France's 1 carrier.

Paolo Pezzutti writes:

Please keep also in mind that the ships are VERY different so it is not mainly an issue of training. The French carrier can carry less than 50% of the planes (35+ vs 75+), it is smaller (255 meters vs 335), the complement is SO MUCH smaller (1350 vs 4000+). Let's be careful not to compare apples with oranges. Sorry if figures are not 100% correct, I am quoting from memory.

There are similarities in trading when the press wants to give resonance to a certain idea providing numbers that are correct but not put into context and so misleading readers.



 The op/ed page of yesterday's local rag noted that our utility company, a well-run organization with a penchant for developing alternative sources of power, would install solar panels to light a downtown park. These are not your run-of-the-mill static panels, they're axially mounted, so can articulate to capture max sunlight. Pretty nifty.

The utility company will pick up the entire $25k-$30k tab, including the install, operation and maintenance. Sure, they admit this is pocket change for them, it will promote the company and its mandate of developing cleaner energy sources, and they hope the visibility in a prominent location will inspire private enterprise to invest in other similar projects.

On the other hand, estimates are the city will save between $550 and $700 per year in lighting costs. Always cool to save some money, but in this case, the city pays the utility company less because of a system the company installed and paid for. So, by investing in the solar system, the utility actually loses money up front and on an ongoing basis. Sounds like health care economics.

But, let's assume for a minute we don't care about who pays for what and do some math. Rounding for convenience, we have a $30k cost divided by $600/yr in savings, i.e., the breakeven is 50 years.

Whoa! Fifty years! As a guy who learned 'guns and butter' the first day of Econ 101 and has lived by that principle almost religiously ever since, I'm trying to wrap my arms around this.

It's kinda like trying to justify the purchase of a Toyota Prius. No matter what, over the life of most cars, if one buys a vehicle of average cost that gets reasonable mileage, you can't make up the difference in purchase price with the savings from reduced fuel consumption. So, you pay more up front and less in the long run, but your reward is psychic, 'cause overall, you're paying more to get around than in a conventional vehicle.

The state of technology today is such that, two years ago, I turned in my expensive 21mpg leased SUV, bought a low-mileage off-lease 33mpg upscale wagon w/ a certified warranty for less than half the price of a Prius, and haven't looked back. I figure an immediate 50% increase in mileage and concomitant 37% decrease in fuel costs are pretty good returns. Reduces my operating costs and I get to help with the problem of limited oil resources without doubling my cap cost to buy a Prius, which would leave me with much less to blow on other goods and services. So, the choice was a win-win for me and a win for the greater good.

Thinking on, one begins to wonder why we are willing and able to justify spending exorbitant amounts of money on luxury items that are essentially meaningless, when we're not able to justify the same sort of over-expenditure on an item that might actually produce a return of some sort, like the solar install in the park.

Take Rolex watches, for instance. It makes absolutely no sense to me to spend $10k on one of those when it does not tell time one iota better than does a Seiko Premier with a $375 street price. And, I know better to accept the argument that it has an automatic movement [Seiko Premier's kinetic mechanicals are some of the best around for the price], that it's hand-made [Rolex makes a million watches per year. Handmade? Sure, some of their very best are, but these are not all individually hand-crafted items to be sure], or any other of the standard technical arguments.

The truth is, when one buys most any second tier luxury watch, more than half of what one pays for is hype. And good bit of the remainder is simply the jewelry value of the watch.

And, there it is. The whole deal in a nutshell. It's about value. We spend our money on what we value. Some value glitz. Others value cleaner air. Both fair propositions. Frankly, I value a fat bank balance far more than I do stuff. If I'm going to spend, I'd rather spend on seeing some part of the world I haven't seen yet and on making a memory than on hard goods. And, I'm almost always happy to exchange a physical asset for $$$$. Not everyone's built that way, but that's what makes the system work.

What's more is that system is capitalism. Capitalism it isn't about Ayn Rand. It isn't about heroes and villians, nor about big business versus the common man. It isn't about government interference, taxation and sharing the wealth.

Capitalism is about our ability to value the capital we have and exchange it with another for something else we value. A free market enables each of us individually to define what that value is and exchange it unencumbered. It's capitalism that allows us to spend or overspend if we choose, and it's what gives a utility company the ability to spend $30k for a $600 annual return inuring to someone other than itself and a 50 year breakeven if that's what it chooses.

Unfortunately, the simple idea of capitalism is too often intermingled with the ignominious behavior of high-profile market actors and con men, giving the impression the system itself is undesirable or so flawed as to require a heavy hand rather than an invisible one. But that impression is simply misguided.

What's wrong with capitalism is the same thing that's frequently said about democracy……."it's messy." Yeah, it is. And, it's imperfect, but all things considered, it works pretty well and it's just too damn grand for words.

Stefan Jovanovich writes:

In my not so humble opinion, David has explained beautifully why the authors of the Constitution had an explicit prohibition against direct taxes. Allowing the tax code to favor particular transactions over others undermines liberty itself.

Henry Gifford writes:

The numbers in the article are probably not accurate. In my experience, solar electric systems have an ATR (Average Truth Ratio) of about 10. That is, actual payback is about 10 times reported payback.
For panels that do not move to follow the sun, the cost (according to sharpUSA, claimed largest supplier in the US) is about $9 per installed Watt of capacity. What is a Watt of capacity? One Watt at solar noon, less at all other times. Maps of annual noon-equivalent sun hours stopped being published about 30 years ago, but for the 48 states, 1,200 hours per year is a rough optimistic value, yielding about 1,000 hours when losses in wires and electronics are subtracted. Utility companies call one Watt for 1,000 hours a KiloWattHour, and sell it for 9 cents (2007 US average), yielding a 100 year payback.

But, this is not even realistic, as it assumes perfect angle and perfect orientation and zero shading.

Real world, imperfect installations have much longer paybacks.

And, the above figures are for estimated production, with measured production typically at least 20% lower, even if installed perfectly. Finding data on actual measurements is almost impossible.
Some well known and frequently photographed systems had problems being connected, and were never even connected electrically, yet still produce grant money and publicity year in and year out.
Fancy systems that move to track the sun have mostly been abandoned as even more costly and too complicated and unreliable, although the claimed yield is higher.

Back in the real world, solar thermal systems that make some, but not all of a building's domestic (faucet) hot water have much better paybacks, and an ATR of perhaps 3 to 5, although assessing yield is much more complicated, as it requires assumptions regarding hot water use volume and patterns.




This article "The Next Epidemic: bubbles and the growth and decay of securities regulation" has a nice historical survey of bubbles and stock prices and fraud with an interesting simplistic model of when fraud pays. It could be expanded to predicting individual stock prices or markets I think with some benefit. The conclusions about regulation of course one finds completely out of blue.

Russ Sears comments: 

I must tie this to the one to the Chair's "10 things I learned about the market" post. I have found that higher math is NOT useless in the markets, in fact I have built my career on it time and time again. Studying them has been quite fruitful for the firms I have advised. However, it is not by actually applying them; rather it is understanding how regulators use them and thereby create blind spots for the bubbles to develop. Why people build faith in their sophistication and regulators love their absolute answers, but miss the glaring obvious that is outside the model/numbers, but still numerable.

There is a simple rule that the risks you are most blind to is the risks that naturally builds up and is totally over-allocated in your portfolio.Now that we have GPS watches that accurately measure a course, it is clear that my favorite courses were all about 1/4 mile short of my estimate and the courses I avoided were estimated as short than reality. Bubbles build because the general public and the regulators are blind to the risk in their models.

I have heard that the regulators have pinned the crisis on everybody being driven to invest in the same thing at the same time, hence they all crashed together. To solve this problem, they have come up with the wonderful (not) idea of measuring the correlation of a bank with the correlation to the others to determine the capital required of any one bank. This might actually work if we had hundreds of banks all about the same size and none of them big enough that they could dominate anyone market. So now instead of nearest neighbor/ copula coefficients misunderstanding the correlations rather than cause and effect over/under-allocations. We soon will have a system built on distancing from the nearest neighbor driving them to exotic allocations. So soon instead of having all banks investing in a deep market like the housing market until it is overwhelmed by the cash pouring in due to cheap capital requirements on AAA rated bonds. We will have each of the big banks overwhelming the smaller asset classes, due to it non-correlation to the markets.

While I have used this successfully, I purposely left out some of the details on how its executed, I will leave it to the Chair to determine if this is too valuable information to the general public/ website.



 Atlas Shrugged opened April 15 in some 240 theaters across the country. It got a 23% review on metacritic, and ends with a fire at the Wyatt oil fields, after a brief talk with John Galt who convinced him to leave things where they started, as Taylor Schilliing playing Dagny gives a non-orgasmic scream. The actors "speak the words" of the novel in many cases and you can get the gist that business men are unfairly portrayed as evil by the moochers in Washington, although the moral idea that the purpose of life is not sacrifice but pursuit of happiness is not touched on much. the completion of the railroad track scene is not very stirring as there don't seem to be many obstacles. nor is it too clear or believable why everything depends on the completion of this railroad.

The businessmen who are portrayed are the kind that would make you hate businessmen, sharp tongued, austere, inward looking. The romance in the film is quite tepid, and the cocktail scene where Dagny trades the ring with lilain is rather hateful and narrow. The movie does well on cocktail chatter and the directors must have been very experienced with that. I had hoped to recommend the film to my many acquaintances that had not read the book, but I am afraid that after seeing the movie, the viewers would have an even more stereotyped and hurtful view of the idea that has the world in its grip than they do now.

It took 54 years to make the movie, and the many readers of the book seem glad that it was finally made. It is hard to make a movie of an epic nature that shows that the idea that has the world in its grip, that the purpose of life is sacrifice, and that the people who produce must be leveled so that others will feel they are getting the fair results of the dice of life wont feel bad about themselves. It's against everything that Hollywood and the collectivists stand for, so it is guaranteed to get 23% critical success, with only true believers giving it a good review. Thus the audience for it must be very limited and it was guaranteed not to be a money maker with a big budget.

Martin Fridson gave a great review in Barrons, and I was hopeful that it would live up, but what a disappointment it was. Leaves you feeling like a bad meal or unrequited romance.


One notes that Atlas had 2 million in revenues this weekend with 300 theaters for $6,700 per theater which was second best average for this week's movies which included Rio and Scream and conspirators. That's pretty good. Also, one notes that many pictures are redone 20 years later, and this might be a good omen.

Galt told me that one of the keys to movie revenues is whether the talent is gung ho to support it with publicity and interviews. One notes that none of the stars of the movie appeared to be at the openings, and the rumour is that the female star is a (one looks around 3 times) agrarian reformer. The producers said that the talent agents wouldn't send them their A list actors, and perhaps this is a symptom.

It is amazing that Al Ruddy, the producer of the Godfather, tried for 15 years to get this film produced with people like Clint Eastwood starring, but that Ayn Rand wouldn't give up total control of the content. On such small strands do great disasters and triumphs in movies and markets.

But you have to give the current producer, John Aglialoro, credit for making it happen. I guess a 1/4 of a diamond is better than no diamond at all.



 A close friend, a three-time Grammy-nominated jazz artist [twice for best jazz vocalist, once as best jazz arranger], Todd Buffa, has released a new album after a decade-long hiatus from touring and the studio. During that time, he kept busy teaching, adjudicating jazz competitions, writing and singing gigs in local venues. Over the past month or so, we've been working on branding while he readies a second album and contemplates a European tour later in the year.

This first album is a collection of covers of influential jazz and rock artists, including jazz arrangements of a number of songs most of us would find familiar. Bob Dylan's 'All Along the Watchtower', The Zombies 'She's Not There', Brian Wilson's Beach Boys hit 'The Warmth of the Sun', and an arrangement of Otis Blackwell's 'Great Balls of Fire' among others.

Here's a link to the CDBaby download site and to Todd's site.

This is not a solicitation. Would simply appreciate a preview listen and would be happy to have any thoughts or brief review off-list.

Disclosure: Have been helping my friend as an unpaid, unofficial publicist and business consultant. I have no financial interest whatsoever. Just the pleasure of introducing a fine artist to my musically astute friends here known to appreciate same. Enjoy. Many thanks.



Let's say a high PE stock in an efficient market trades at 1x PEG. Then the share price needs to appreciate at he PE level (20 -> 20%) for the valuation to remain unchanged. This higher drift might be an argument for growth stock investing. Is this an argument usually seen?

Gary Rogan writes:

A simpler version is often seen, simply related to "growth" corresponding to a higher growth in earnings or that the stock in underpriced based on the high growth and not high enough PE. Few people make an argument based on the valuation in the sense of PEG remaining unchanged, probably because there is no rule that it has to remained unchanged due to the volatility of growth rates in growth stocks.



Heads up on a new book coming out on May 1 about the band Rush, and their philosophy. Many will know the band Rush for their great talent and lyrics that are heavily influenced by Ayn Rand.



I found this good article on the blog Money Matador about begging called "Good to Great: 5 reasons why some beggars earn more money than you."

I would add another tip I found on a wikihow article on panhandling:

Swallow your pride. Most people find it difficult to quietly beg for
money from friends or relatives; it's even harder to beg from complete
strangers where everybody can see you. Still, you're going to have to
suck it up and be humble. If you've already exhausted the alternatives
(see Tips) and begging is your last resort, it may help to keep in mind
that in many countries, begging does not hold the stigma it does in most
of the Western World, and in some places asking for alms is considered
an honorable profession.

Victor Niederhoffer adds: 

The flexions from the banks seems to have intuitively mastered this, especially with their dress code and their need to protect them from such disasters as "breaking the buck".



 It was 2 years ago at this precise time of the year when the world's experts claimed the end of Federer's career.

He lost the Aussie final to Nadal, then failed to win anything until the Madrid Masters which spring boarded him to his first title in Paris and his sixth Wimbledon crown.

I am not making any predictions what is to happen in the coming months for Federer, just pointing out the phenomenon how the masses are always the best contrarian indicator.

There was tremendous call buying in the retail and institutional classes over the last few weeks in Google.



Here is comparison of first 10 trading day return of each month (SPY 2000-2011) with first 10 days of just months of April:

Two-sample T for FOM10 AP vs FOM10

                  N    Mean   StDev  SE Mean
FOM10 AP   11  0.0050  0.045    0.014  T=0.3
FOM10       124  0.0007  0.036    0.003

>>April "pre tax" period is higher than non-April months, but N.S.

Here is same comparison of last 10 days of each month with last 10 days of Aprils:

Two-sample T for EOM10 AP vs EOM10

                   N     Mean   StDev  SE Mean
EOM10 AP   11   0.0088  0.030   0.009 T=1.3
EOM10       124  -0.0041  0.028   0.002

>Last 10D for Aprils ("post-tax") are also higher than non-Aprils



Gavekal is noting that corporate profits are down except for financials, and feels this is bearish and that the fed should get out of their quant easing and bail-outing. I didn't realize that this is true. A diffusion index of profits versus last year and expectations would be interesting as a predictor.



Here's a good video about a town in Georgia that has outsourced all city functions except fire and police. The city is run more efficiently, they've avoided the pension traps, and are able to capitalize on the efficiency of the private sector by utilizing the tax money more efficiently. The mayor states that they are able to get things done through the private sector for 25 million dollars what it would have cost the government 50 million dollars. This city is a anarcho-capitalist's dream and offers some proof that anarcho-capitalism is not a crazy, unworkable philosophy.



I just read Greenblatt's newest offering, The Big Secret for the Small Investor.

It may be the most intellectually dishonest book I have ever read. The whole thing is sales job for his newest managed accounts and mutual funds designed to create what he calls a "value weighted index." At least he didn't rewrite You Too Can Be a Stockmarket Genius, one of the best books ever written about investing in stocks. I use many of the techniques in that book and appreciate no new competition developing as a result.



In comparing a current price to something 10 years ago, it is instructive to consider the correlation of a part to a whole the correlation of ( x1+ x2 + x3 + x4 + x5 + x6 + x7 + x8 + x9 + x10) to p when the x's are uncorrelated with each other. If the correlation of x10 to p is negative then the average correlation of the other 9 x's to p must be positive, surprisingly so. And good to calculate. The correlation between the first quarters earnings and the whole years earnings is of the order of 50% assuming randomness and uncorrelation.

I had many old men very angry with me when I pointed out this fallacy in Green and Segall's and Myron Schole's work that showed that first quarter earnings were not predictive of the whole years earnings. It meant that the next 3 quarters were highly negative correlated. The same defect is relevant to the chronic bear's work, and when I took the liberty of pointing this out to him, he demurred and apologized and said something about the stochastic calculus, a trick he tried on Andy Lo with similar absurdity.

Charles Pennington writes:

I suspected that this tale had grown a bit tall with age, but here is a link to the first page of a 1966 article by Green and Segall. On that first page they do say that they can't seem to prove that the first quarter's earnings are helpful in predicting the annual earnings.




 In designing first movements, Sonata Form has often been used, and musical material of various, sometimes contrasting types, needs to be distributed in ultimately balanced sequence and quantity (not that one can simplify such an ineffable art), and it reminds me very much of the need to sprinkle bullish trades with bearish ones, the lack of such being brought to my attention right now.



 Julius Shiskin (1913-1978) pioneered some seasonal analysis programs at The Census Bureau that are widely used and responsible for much of the random data we receive on monthly increases and decreases. Around 1970, he wrote a great paper applying his methods of seasonality to stock market prediction. It was very suggestive. He immediately withdrew the paper, presumably for bureaucratic reasons. It would be interesting if that paper existed and could be applied prospectively. I looked through some google stuff and could find no reference to it.

Vince Fulco writes in:

I believe the  title of the paper you are looking for is, "Systematic Aspects of Stock Price Fluctuations", ~1968. Ask Doc to find a copy for you.



 I saw a Flip camera in an automatic dispenser Best Buy tube at the airport and bought it for 200. I see today they are the world's biggest fakers are discontinuing the product (I am long that fakers stock). Meyer Berman used to go to all the discount stores to see what's not selling and what's bad. I wonder if there are any modern ways of playing that game. I have always liked the idea of buying the companies that consumer reports rates as having the best product but it is hard to bite into such a study.



 Is the current market price of any commodity predictive of any future price in a way that can be reliably exploited?

Jeff Watson writes:

Goldman Sachs thinks so with some of their long only funds. Also, whenever a brand new commodity contract is introduced (something like the old High Fructose Corn Syrup contract), the price within the first 10 minutes of trading can offer great predictive value. Also, many floor traders know when a contract is trading they can reliably predict when the inside market is going from….say .75 bid to .75 sellers, which is a very reliable exploitation….but of course one will have to pony up the money for a lease on a seat to trade that inside market.



 The talk recently about evil men, the Titanic Thompsons, the Barnies, the Madoff's, the flexions et al…. the …., has led me to consider that it might be interesting to consider what is an evil and benevolent market. As a start, consider that when a market creates a bust, and then goes back to where it was, many weak players loses everything at the expense of the strong, and had they held out for just a little longer, they would have been whole. How would you gain footing on such a quest, and what predictive, and insightful ideas might derive from such a quest?

Sam Marx adds:

What I find interesting and somewhat overlooked is that getting into a stock after a crash and near the bottom can result in profits of 200%, 300%, 700%, or more and that trivializes the attempt at 18% returns which seems to be today's holy grail as attained by Harvard, Yale, etc.

The formula seems to be get out of a bull market when it becomes fully priced, even if it has more to run as Jos. Kennedy Sr. did in 1928, a year before the crash, and then bargain hunt (vulture invest) strong undervalued companies or in Kennedy Sr.'s case NYC real estate.

Timing and valuation are the keystones. But who are the good timers?

Steve Ellison writes:

Robert Drach, a commentator who has appeared on Nightly Business Report, has said that the stock market is an evil mechanism that transfers wealth from individuals to wealthy institutions during panics.

Jeff Watson writes:

But the fact that the public rushes in means nothing to me. Without any judgment on my part, it does not matter to me if the public makes money in the game, it only matters if "I" make money in the game. The professional spectator has no interest in whether the public will make money, or if society will benefit from his speculations, he has a personal interest in that he will make money. Society will benefit from that man's speculations by increased supplies, better availability of product, and all the other good things that result from speculation. The public is just betting that there will be a greater fool to come along in the future to ensure that the public makes a profit. (see Greater Fool Theory). Those evil hands earlier described are just running up the market and ensuring their profit now. Really, the difference is just in the time frame, "Will I make my profit now by running up the market and catching the public, or will I buy the market now and hope that a greater fool will come in and bail me out at a later date." Gaming the market, running the market, goosing bids, camouflaging positions, and fading offers, protecting bids, protecting positions…….none of this is evil or larcenous unless there is dishonesty or fraud involved. The market is just a huge game with many different smaller games being played simultaneously. The public is playing one game, the small spec is playing another, the spreader has his game going, while the broker dealer might be playing an entirely different game. Sometimes, the players don't even know which game is being played, and they are the ones that have no business being in the game. But unless dishonesty, fraud, or cheating is involved, none of the game is evil. 

Stefan Jovanovich writes: 

 Our esteemed surfer could have been a railroad man.

After William H. Vanderbilt, president of the New York Central Railroad, arrived in in his private railroad car in the yards of the Michigan Central Railroad in Chicago on Sunday October 8, 1882, a freelance reporter, Clarence Dresser, entered the private car and asked to speak to Vanderbilt. (In his memoir, Melville E. Stone, who had been the head of the Associated Press, described Dresser as "one of the offensively aggressive types—one of those wrens who make prey where eagles dare not tread. Always importunate and usually impudent.") Vanderbilt's interview with Dresser began by Vanderbilt's saying that he was in the middle of eating dinner but, if Dresser would wait until he had finished, he would give him a minute. According to Stone, the interview continued as follows:

"But it is late," Dresser said, "and I will not reach the office in time. The public—"

"The public be damned," Vanderbilt burst out. "You get out of here!"

John Steele Gordon says that Dresser tried to sell the story to the Chicago Daily News, where Stone was then editor. When the night editor refused to print the story, Dresser went to the Chicago Tribune, who ran the story the next morning. It was reprinted throughout the country and became the scandal of the year; and to this day, the only quotation for which Vanderbilt is remembered in Bartlett's. Here is the version of the interview Dresser sold to the Tribune:

"Does your limited express [between New York and Chicago] pay?"

"No, not a bit of it. We only run it because we are forced to do so by the action of the Pennsylvania Road. It doesn't pay expenses. We would abandon it if it was not for our competitor keeping its train on."

"But don't you run it for the public benefit?"

"The public be damned. What does the public care for the railroads except to get as much out of them for as small a consideration as possible. I don't take any stock in this silly nonsense about working for anybody's good, but our own because we are not. When we make a move we do it because it is our interest to do so, not because we expect to do somebody else some good. Of course we like to do everything possible for the benefit of humanity in general, but when we do we first see that we are benefiting ourselves. Railroads are not run on sentiment, but on business principles and to pay, and I don't mean to be egotistic when I say that the roads which I have had anything to do with have generally paid pretty well."

Vanderbilt's nephew, Samuel Barton, was traveling with his uncle that day. His version of the interview, as told to William A. Croffut, who published a biography of Vanderbilt in 1886, went like this:

"Why are you going to stop this fast mail-train?"

"Because it doesn't pay. I can't run a train as far as this permanently at a loss."

"But the public find it very convenient and useful. You ought to accommodate them."

"The public? How do you know they find it useful? How do you know, or how can I know, that they want it? If they want it, why don't they patronize it and make it pay? That's the only test I have of whether a thing is wanted—does it pay? If it doesn't pay, I suppose it isn't wanted."

"Mr. Vanderbilt, are you working for the public or for your stockholders?"

"The public be damned! I am working for my stockholders! If the public want the train, why don't they support it?"

in his article for American Heritage magazine (September/October 1989) John Steele Gordon notes that Vanderbilt had said things that matched much of what was printed in each of the versions of the Dresser interview. When Vanderbilt gave testimony to a committee of the New York State Assembly in the 1860s, he gave the following testimony:

"I have always served the public to the best of my ability. Why? Because, like every other man, it is my interest to do so, and to put them to as little inconvenience as possible. I don't think there is a man in the world who would go further to serve the public than I."

"My system of railroading is … to take care of it just as careful as I would of my own household affairs, handle it just as though it was all mine; … and take good care of its income; that is my aim, you know, and give that to the stockholders."

Vanderbilt, controlled the largest railroad company in the world. He never took a salary as president of three railroads; he paid himself solely out of the dividends on his shareholdings. By the time of his death he was, by his own calculation, the richest man in the world and, as he told a friend, "I would not cross the street to make another million." Harper's Weekly estimated that Vanderbilt's fortune exceeded the total value of all assessed property in Nebraska, Colorado, Nevada, and Oregon combined. In his own calculations Vanderbilt did concede that the Duke of Westminster might have a slightly larger fortune ($200,000,000 vs. his $194,000,000); but Vanderbilt thought his was the greater actual wealth because the Duke's landholdings paid less than 2 percent while his own portfolio of government bonds and railroad securities paid 6 percent, Vanderbilt's investment income was roughly a million dollars a month at a time when a middle class salary was $80-90 a month. When he suddenly died in 1885, the report of his death was the only story on the front page of The New York Times.



 I've been thinking a lot about randomness lately. Trying to define randomness, I presume that it can only be defined negatively, as in the absence of any discernible or systematic patterns. I believe that complete randomness can only be disproved and not proven; but a test will only detect a single pattern or a group of related patterns. I would appreciate any thoughts on randomness in a philosophical vein as there might be a few meals lying right under our noses.

Gary Rogan writes:

Just some random thoughts on the subject. Randomness signifies the lack of an informational connection between the process that generates one even and any other event. There are two kinds of connections: the specific knowledge of one process knowing what the other one is doing, and the inherent construction similarity between the processes. Imagine that you need to pick 100 random events. You could pick 100 individuals, put them in separate rooms and let them pick a number each. They will satisfy the lack of the first type of connection, but not the second. Their picks will not be truly random because human beings of any kind have enough similarities to not satisfy the second, yet their picks will be more random than if they were together as a group. So the trick is to find processes that have not connection to each other and no preferences to generate any particular number within the rules of what's acceptable. 

George Parkanyi adds: 

Randomness seems to be overlaid on some kind of order – a basic framework within which seemingly unconnected events then play out to set up our environment and our experiences. Kind of like a board game - a basic set of rules with additional random elements, say dice, shuffled cards and individual decisions that ensure that no two games will ever be played exactly the same way. The game overall works toward a predictable outcome (someone winning), but the means of getting there will never be the same for any two plays. 

Mark Schuetz writes: 

Apologies if Rumsfeld's quote has become hackneyed, but I think it describes one facet of randomness well.

"There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know."

Some always think of randomness as "known unknowns": everything was determined by some underlying process or fits some probability distribution. Depending on one's definition of randomness, perhaps there are more "unknown unknowns" than meets the eye: a truly random event or series of events might not determined by some underlying logical process and a descriptive probability distribution might not exist or might be impossible to know.

Russ Sears adds:

Randomness is a major topic in Abstract Algebra, and studying it almost became my career after grad school. Not sure if I can do it justice now, as I have been away from the subject for so long. However, in sequence of numbers (most events/things can be numbered), if there is no way to discern step t+delta from t even by narrowing its probability down then by most definitions it is random. For practical matters to "create" something that is random it is really a matter of hiding the pattern so that these probability distributions can not be discovered. You do this by the size of the numbers involved. In other words it is deterministic (it really can be discerned by cause and events ) but the numbers involved make it impossible to do so either because the measurement of the determining factors are impossible to categorized with enough accuracy to determine (think lottery ball drawings or weather/chaos) or because the "code" is varied and on such a large scale that only those with the "key" can decipher it.



It has been 107 trading days since QE2 was [officially] announced (Nov 4 2010). What has changed in the SP500?

SPY daily (cls-cls) returns were compared to zero for the 107 days since - and just before - the QE2 announcement:

One-Sample T: pre, post

Test of mu = 0 vs not = 0

Variable  N    Mean   StDev   SE Mean      95% CI            T      P
pre        107  0.0014  0.0109  0.0010  (-0.0006, 0.0035)  1.34  0.185
post      107  0.0008  0.0076  0.0007  (-0.0005, 0.0023)  1.21  0.230  

The pre-QE2 daily returns were actually slightly higher than since QE2: 0.14% vs 0.08%, with both not significantly different than zero. Despite civil war in the Middle East and the Japan earthquake, however, volatility post QE2 has been significantly tamed*:

Test for Equal Variances: pre, post

95% Bonferroni confidence intervals for standard deviations.

        N    Lower    StDev      Upper
 pre   107  0.0095  0.01097  0.01294
post  107  0.0066  0.00768  0.00907

F-Test (normal distribution)
Test statistic = 2.04, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 6.32, p-value = 0.013

*at what cost?

Alston Mabry comments: 

My comment immediately seems too terse, especially given that Dr Z endeavors perhaps more than anyone to add actual quantitative analysis to Spec List. The difference between announcement and implementation in this period modifies the old saw to, "Buy the rumor, then keep buying the news, but not so vigorously."

Bill Rafter writes:

My method for identifying character changes in a market is to take an indicator that you think reflects such character and then keep smoothing it and observe what happens. It does not matter that the indicator is leading, coincident or lagging, since for this exercise you are not in the forecasting business. At some point you will see certain parts of your manipulated data become very smooth while other parts retain some craziness. The chart below (previously posted) is an example. In this case the data is smooth before September 2010, but definitely more erratic from September 2010 onward.This data is a smoothed version of the difference in open interest between equity calls and puts. One might come to the opinion that despite the fact that the Fed does not dabble in equity options, they are nonetheless influenced by the Fed's presence in the marketplace. 

keep looking »


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