How I have missed you. It occurs to me after a few days without power that nothing in our modern world works without electricity. I suspect power generators are much more valuable than the market gives them credit for.

Henry Gifford writes: 

Electricity is priced in a strange way, and generally thought by many to be heavily subsidized.

Roughly described, the utility company is guaranteed a % return on investment, so once a wire or power plant is paid back, it is "a sunken cost" and carried on the books as worthless.

Residential customers pay only for buying and transporting electricity they use, and for political reasons pay nothing for unused infrastructure. This is a little like telling a taxi to wait by your door all year because you might want to go someplace on New Years Eve, or you might not want to go anyplace, but you won't pay the taxi to wait at the curb all year.

"Commercial" customers pay a "demand charge" for the infrastructure capacity that is available 24 hours 365 days per year, but only fully used for a few minutes per year, often in the late afternoon in the summer, when everyone else wants it. The demand portion of the bill can exceed the electricity buying and transporting charges, and indeed many companies are in the business of helping large users shave their peak demand, sometimes by shifting it to a non-peak time.

One example is the 20+ companies in the US that manufacture ice storage tanks. Customers with large air conditioning loads make ice at night, when their demand is lower, then use the ice for cooling during the day, reducing their peak (daytime) electricity use.

Charles Pennington clarifies: 

We're categorizing water in three ways: drinking water, washing/cleaning the body water, and flushing-the-toilet water.

Sam's Club Diet Lemon-Lime Soda is a pretty good go-to for the washing/cleaning the body water. It's cheaper than most bottled water, and because it's "Diet" it has no sugar and is good for washing your hands. I guess it's not optimal for brushing teeth, but it won't be for long, I hope.



Imagine the pressure.

The first earning report under his watch should be just as normal and clearly beating estimates if possible — can you imagine the market reaction to anything less?

He must be living in the mindset of "don't mess anything up" — keeping it PG of course. The quarter after should be Christmas sales blowout — and once again, "don't mess up, just keep with the program". Stay in the background as much as possible, don't do anything stupid. etc.



I wonder how much opportunity lost is cost by reading that always bearish website?

If a young man has expectations that his new wife is going to give him lovin' 2x a day for ever and that is his friends consensus estimate…his life will come in below expectations.

Okay so get the joke… its all BS. Yet this earnings cycle stocks were taken down a bunch and I kept reading Bloomberg say "earnings come in over expectations" when 2 weeks prior they were tankin' down.

Now it's all about the EU, but I save this to remind me not to read too much current events… here was circa end of 2007 start 08.



The Pitfalls of Positive Thinking:

From superstar athletes to self-help devotees, advocates of positive thinking—imagining yourself succeeding at something you want to happen—believe it is a surefire way to help you attain a goal. Past studies have backed that idea, too, but now researchers are refining the picture. Paint your fantasy in too rosy a hue, and you may be hurting your chances of success. One possible explanation is that idealized thinking can sap motivation, as outlined in a study published earlier this year in the Journal of Experimental Social Psychology. Researchers asked college student volunteers to think through a fantasy version of an experience (looking attractive in a pair of high-heeled shoes, winning an essay contest, or getting an A on a test) and then evaluated the fantasy’s effect on the subjects and on how things unfolded in reality. When participants envisioned the most positive outcome, their energy levels, as measured by blood pressure, dropped, and they reported having a worse experience with the actual event than those who had conjured more realistic or even negative visions. To assess subjects’ real-life experiences, the researchers compared lists of goals that subjects had set for themselves against what they had actually accomplished and also relied on self-reports. “When you fantasize about it—especially when you fantasize something very positive—it’s almost like you are actually living it,” says Heather Barry Kappes of New York University, one of the study’s co-authors. That tricks the mind into thinking the goal has been achieved, draining the incentive to “get energized to go and get it,” she explains. Subjects may be better off imagining how to surmount obstacles instead of ignoring them. The approach may also apply to sports. A report published in the July issue of Perspectives on Psychological Findings suggests that talking oneself through the fine details of an athletic task may work better than picturing an optimal outcome. “It’s positive thinking, plus instructions,” says lead author Antonis Hatzigeorgiadis of the University of Thessaly in Greece.



1. I hypothesize without testing that the movement on the announcement of the open market minutes (happens to be announced today at 2:00 pm) is opposite from the movement during the comparable period when the open market meeting actually met. Last meeting was Aug 9. Rallied 57 big points 5% from 1500gmt tp 1615. I have not tested this at all. Could be opposite from my hypothesis with equal probability or random.

2. It is common in sports these days to have flashed on the screen such statistics as Nadal has lost only 1 or 57 matches at the open when he won the first set. Or the Yankees are 57 and 2 in won games when they were ahead in the seventh inning. Such statistics are almost as worthless as the January barometer suffering from selection bias, the part whole bias, multiple classification bias, look back bias, differential enhanced probabiities of winning the next inning or set given you are ahead to start et al. But when you see a come back, it is interesting in many respects. Today's moves from up 8 on day with 10 or 20 minutes to go, to down 3 by end of day is a classic in that regard. Just a once in a year event. Hats off to the market mistress for ending our summer in such an usual day, showing us that she still is active and fertile in imagination and ability to take our chips.




Directed by Benny Chan

Eternal values, amped up with the historical costume drama of ancient feuding warlords and Shaolin monks fervidly schooled in the martial arts. Lovely ladies (one of the loveliest here: Fan Bingbing), exquisitely choreographed fight scenes–no special effects needed, as the timing and precision movements are impeccably performed throughout this rev-tempo film–and scripting that evokes empathy, enraptured involvement, sadness, awe from time to time, even tears. The monks are experts in fighting, but deeply compassionate and committed, to aiding the weak and hungry… and to not killing.

Stern, uncompromising General Hou (Andy Lau) opens the hostilities with his violence and take-no-prisoners ruthlessness in the place of no killing, the shaolin temple. Betrayed by fellow General Cao Man (Nicholas Tse), Hou is forced into monkish hiding at the Shaolins' hidden mountain retreat. Through his daily working with martial Zen, he expiates his furies and rage, though that does not deflect the vengeful tactics of his former 'brother' in arms, Cao.

'Brother' fighters fight over the conquest of a city, a gold purse handsome enough for many cannon, instant betrothals, and dominance issues. Children are involved, piteously requiring protection and succor. Gorgeous monasteries vie with mountain vistas and misty fortresses. Explosions. Swordplay. Chariot chases along narrow crevasse passes with uncertain footing. Knives and guns. (What could be bad?)

A peak experience, as one of my husbands used to opine, also includes the pleasure of a classic genial pixie we all love: Jackie Chan, playing a cook who knows from nothing in the martial arts. His bonhomie is infectious, he is willing to be as shabby as a bumpkin cook can look, in ramshackle outfits and even more mote-inflected venues–the casting is a knockout.

Strong men. Powerful images. A satisfying fight movie (a touch too long, but never mind) for kids, teens and adults who are enamored of the shaolin life, rigorous discipline and masterful boxing.

And the one geyjin in the film, a bearded Anglo gun merchant who speaks immaculate Mandarin, speaks one line in English during the 2 1/4 hrs. What is funny is that his crystal-clear English is subtitled–in English. Flash: Did they mean to subtitle it for Asian viewers into Chinese?

Zie chi'en — be good, so long. Don't bring the littlest. But for the King Fu, Tai Chi or Krav Maga addicts amongst you, this is a meaty if sanguinary entrée.



 John Wooden lived 99 2/3 years and is considered by many to be the greatest coach in history. His teams at UCLA won ten of 12 national championships, 88 games in a row, and he was a 3 time all American in college, once sinking 134 foul shots in a row. His players loved him and he developed several systems for success. After reading his book published shortly before what would have been his 100th birthday on October 14, 2010, I figured I could learn much from him.

Here are some of the things I learned. He kept good records. His father gave him a note card with suggestions. He attributes much of his success to his father. His father gave him 7 suggestions to follow and he has tried to live up to it every day of his life. Be true to yourself. Help others. Make each day your masterpiece. Read good books. Make friendship a fine art. Build for a rainy day. Be thankful for blessings each day. I liked better what his father gave him in three rules: Don't whine. Don't complain, don't make excuses.

He loved teaching. And I like the little fellow poem that guided him in his relations with his 3 kids and his students.

        A careful man I  want to be                                            
        A little fellow follows me                                             
        I dare not go astray                                                 
        for fear he'll go the self same way                                  
        I cannot once escape his eyes                                    
        What he sees me do, he tries.                                     
        Like me he says he's going to be.                                    
        The little chap who follows me.                                   
        He thinks that I am good and fine.                                   
        Believes in every word of mine                                      
        the base in me he must not see                                     
        the little chap who follows me                                    
        I must remember as I go                                            
        Through summer's sun and winter's snow.                              
        I am building for the years to be                                    
        that little chap who follows me.

He was married to his college sweetheart Nellie for 60 years and she came to every game he coached. Apparently he never earned more than 50000 a year, and he often turned down jobs that would have paid him much more because he had given his word and he never wished to tell a lie.

His pyramid of success is famous. It has at the bottom hard work, friendship, loyalty, cooperation, and enthusiasm then goes up to self control alertness action and determination. Then fitness skill term spirit poise confidence personal best.

How would I apply these things to markets? I like the never complaining and never boasting. The hard work, and loyalty and enthusiasm. The attributes of the pyramid of success would seem to be good for any activity.

His humility is a good model for all who wish to achieve success. He didn't have his hand out for money and went beyond the dollar and the clock The fact that he was such a good player must have made him a great coach. Apparently he had every minute of every workout planned. And he insisted on it being a team game rather than a forum for a star. I guess that's a bit easier when you have Alcindor and Walton on your squad.

I would have liked to know more about his day to day life and how that suited him to live to 100 and be loved by so many. Certainly the philosophy of life must and the pyramid of success much have had much to do with it.

He took losing very well, and always felt sorry for the teams that he beat.

I can't find anything that needs much improvement in his life as a model for a teacher, father, or speculator.

Charles Pennington writes: 

I thought the Chair disliked cooperative games like soccer and (I presume) basketball. What's the story there?

Fred Crossman writes: 

Never did I want to call the first time-out during a game. Never. It was almost a fetish with me because I stressed conditioning to such a degree. I wanted UCLA to come out and run our opponents so hard that they would be forced to call the first time-out just to catch their breath. I wanted them to have to stop the running before we did. At that first time-out, the opponent would know, and we would know they knew, who was in better condition.

He never called a time out at the end of the game either. Sat there with his program rolled up most of the game for he believed UCLA was better prepared mentally, too. His players knew exactly what to do. Confusion and pressure at the end of the game was their ally.



 You can now visualize a panic of a short squeeze. The panicked buying of bottled water, bread and gasoline comes in, and no it doesn't matter how many storms in a row or if this one was bad or not for the next time. That short squeeze always plays out as the retailers only let the shelves stay so full. The Florida boys are experts as they an predict how many pallets of water or how many trays of bread to bake. Yet the shelves are always less than full as it's imperative to sell out on the panic and not get caught long as everyone eats out the next week.

It's quite manly to go on personal generator power. As Jay posted it's best to run your generator at your AC machine's junction box back into the house. That's a good safe spot to tarp your generator so no Monoxide can get back into the house. If you run them in the rain, even a Honda will blow up if it sucks water into the engine.

Now once the chain saw is on, it's the second tank of gas, you may think, wow I am getting good at this. Your productivity sky rockets and this will not take as long as you thought. Stop, tighten the chain, make sure there is oil in the chain lube… and slow back down. When we get too confident with our machines with engines is when accidents happen.

Good luck with the clean up! The Hurricane news tell is when they stop talking wind and start with the storm surge. Then it is a simple big rain storm.



Though stocks rose steadily through the day, Hewlett-Packard rose in the morning then was pinned at or near 26 for 3 hours before floating up a bit more in the last hour.

Anatoly Veltman writes:

A very unusual chart indeed! HPQ was noted among Paulson's holdings. One might guess that other "size people" that Paulson talks to MAY well be stuck with it as well. We're in the era when HFT's sit ahead of any offer they've sniffed — so getting out is problematic…



 One can certainly use levels or changes in the price of gold to trade equities indices (i.e. SPY as opposed to gold mining stocks for example).

However that same person would have more success if he used the "volatility" of the price of gold to trade those same markets, at least since 1990.

That condition is not unique to gold.



 Eqecat’s initial estimate is that the damage from Irene in the state of North Carolina will be between $200 million to $400 million. Past hurricanes had these totals for damages for the Tarheel state(the figures are in constant dollars):

1. Diane (1955) - $17.2 billion
2. Hazel (1954) - $16.5 billion
3. Hugo (1989) - $7 billion to $10 billion
4. Floyd (1999) - $6.7 billion
5. Fran (1996) - $5.8 billion
6. Isabel (2003) - $4 billion

The greatest damage came from Donna (1960) - $29.6 billion.

The Natural Hazards Review published a summary of normalized hurricane damage for the period from 1900-2005 for the entire country.

"The 1970s and 1980s were notable because of the extremely low amounts of damage compared to other decades. The decade 1996–2005 has the second most damage among the past 11 decades, with only the decade 1926–1935 surpassing its costs. Over the 106 years of record, the average annual normalized damage in the continental United States is about $10 billion under both methods. The most damaging single storm is the 1926 Great Miami storm, with $140–157 billion of normalized damage: the most damaging years are 1926 and 2005. Of the total damage, about 85% is accounted for by the intense hurricanes (Saffir-Simpson Categories 3, 4, and 5), yet these have comprised only 24% of the U.S. landfalling tropical cyclones."

A psychologist adds:

Reminiscent of behavior I saw with a falling SPX with VIX nearing 50. The online world is all about attracting visitors to sites ("eyeballs"). It's difficult to do that with nuanced headlines and well-balanced stories. So events tend to be magnified by pundits wanting attention, media needing viewers, etc. A linguistic count of extreme words in headlines and lead paragraphs of stories a la Pennebaker would likely produce some insights…



Cullen Roche is right when he writes that "a government with a monopoly supply of currency in a floating exchange rate system has no solvency risk unlike a nation such as Greece which exists in a single currency system with what is essentially a foreign central bank. A government with a monopoly supply of currency in a floating exchange rate system is never revenue constrained" - i.e. it can always write a check that the Federal Reserve will clear. The only problem is that such a system literally makes people chattel. They are never in the position where they can save wealth that stands beyond the government's reach. To put it in terms that Washington, Hamilton, Madison, Jackson, Grant and Cleveland would all have agreed, the citizens have the fundamental right to insist on holding their savings as specie. And why should this matter? The answer is one that even the most rabid Keynesian acknowledges: when people can insist that the government exchange its monopoly currency for gold, the price of that currency - what it will buy - remains wonderfully stable. Some things get more costly and others get cheaper; but there is no persistent, steady devaluation similar to what the last century has offered people who have chosen to keep their money in a cookie jar.

There is another reason why a financial system has to have room for people who want to just say no, who, in Anthony Newley's words, want to "stop the world and get off ". If a "monetary system" does not allow the citizens and foreigners both to withhold their money and thereby restrict the government's ability to expand legal tender, the entire information structure of rational expectations itself begins to collapse. Everyone - even Marxists - now pretty much agrees that economic decisions are based on expectations about the future; only the Marxists persist in the fantasy that those expectations can be perfectly realized. If that is so, then where to the mistakes go? Where is the trash can for the part of investment=savings that never pays off? For the economist Wynne Godley this question - and the inability of equilibrium theorists to answer it - called into question the entire notion that prices themselves represented some perfect meeting of supply and demand. The only area where, in fact, supply and demand perfectly met was in the financial part of the economy. Everywhere else both individuals and firms needed what Godley called a "buffer", a saved resource for future income and spending that whose price was itself uncertain. Historically, for individuals the buffer was saved money that did not depend on the government's fiat; for firms it was money, in part, but also something more. For a goods producer the buffer was inventory; for a service firm it is slack labor capacity. That was, in fact, how the system of the production, distribution and sale of goods and services actually worked. In Godley's words, "outside financial markets there is neither need nor place for equilibrium conditions to bring supply into equivalence with demand." But, as [Dailyspec contributor] Tyler McLellan and others have properly reminded us, under a fiat currency system, equilibrium is always and everywhere present. It is literally impossible for firms and individuals to adjust the quantities and terms of trade at will without affecting the quantity of money itself. The result is a world where the needed buffer is nothing but an accounting entry and the banks and other dealers in credit have no actual money reserves. The further consequence is that individuals and firms have no means of calculating what an adequate buffer should be; their only possibility of finding safety is to trade in political influence so that enough of the persistent inflation of the money supply is directed to their pockets.

The ever watchful Charles Pennington adds:

The graph is a bit mis-specified. It is more accurate to plot the price level on a log scale.

This shows that inflation has decreased since the 1970's.

That said, I agree with Stefan's remarks.



For those who trade frequently throughout the day — if your late day buy and sell choices tend to prove less profitable, there may be a good reason…. check out this article "Do You Suffer From Decision Making Fatigue?"

No matter how rational and high-minded you try to be, you can’t make decision after decision without paying a biological price. It’s different from ordinary physical fatigue — you’re not consciously aware of being tired — but you’re low on mental energy.

Willpower turned out to be more than a folk concept or a metaphor. It really was a form of mental energy that could be exhausted. The experiments confirmed the 19th-century notion of willpower being like a muscle that was fatigued with use, a force that could be conserved by avoiding temptation….Part of the resistance against making decisions comes from our fear of giving up options.

Ken Drees writes:

I attended a mental toughness seminar once from a sports psychologist/ business executive improvement guru. At the end of the seminar when we were worn down he talked about diet and how levels of glucose dropped during the day, etc. Thats when he pulled out his product line of carb tabs — little wafers that would boost your levels without a lot of calories — needless to say we got some free samples and the order form was passed around and there was psychology 101 all over the room as no one wanted to not buy for fear of being a loner, and those that were worn down said what the heck, lets give it a try. You had your excited female buyers as the whip for the tired guys to give it a try, what can you lose — come on be mentally tough and make a decision to change your life. So that is what is in those cardboard boxes at the back of the room — carbo tabs. This was before Adkins so there was no anti-carb thinking back then.

A snippet from the article:

The benefits of glucose were unmistakable in the study of the Israeli parole board. In midmorning, usually a little before 10:30, the parole board would take a break, and the judges would be served a sandwich and a piece of fruit. The prisoners who appeared just before the break had only about a 20 percent chance of getting parole, but the ones appearing right after had around a 65 percent chance. The odds dropped again as the morning wore on, and prisoners really didn’t want to appear just before lunch: the chance of getting parole at that time was only 10 percent. After lunch it soared up to 60 percent, but only briefly. Remember that Jewish Israeli prisoner who appeared at 3:10 p.m. and was denied parole from his sentence for assault? He had the misfortune of being the sixth case heard after lunch. But another Jewish Israeli prisoner serving the same sentence for the same crime was lucky enough to appear at 1:27 p.m., the first case after lunch, and he was rewarded with parole. It must have seemed to him like a fine example of the justice system at work, but it probably had more to do with the judge’s glucose levels.



 It has proven hard, even in this internet age, to find a full record of the DOW for pattern study. Yahoo goes back to 1928, but before that there is little. Possibly a difficult period as the markets were interrupted in 1914 (though surely trading continued?).

Finally I found which gives closing prices since 1885. There are no open, high, low values, has anybody found some better datasets?

Reading Wikipedia on the 1929 crash, I noticed an attempt by bankers to heal the market by buying blocks of shares above their value, which reminded me of recent Bank of America action, though of course the motivation for that investment is different and answerable to shareholders:

"At 1 p.m. on the same day (October 24), several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor.[11] The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York. They chose Richard Whitney, vice president of the Exchange, to act on their behalf. With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. This tactic was similar to a tactic that ended the Panic of 1907, and succeeded in halting the slide that day. The Dow Jones Industrial Average recovered with a slight increase, closing with it down only 6.38 points for that day. In this case, however, the respite was only temporary."



And since the Fed has guaranteed free money through mid-2013, all gold has to do is about 50% a year between now and then to hit the $4000 mark much bandied about by a certain hedge fund manager famous for making a killing off of whomever Goldy could get to take the long side of the synthetic CDO trade.



 I was reminded of a funny story the other day. Back in the "open outcry trading" 1998-2000 years, I was running Foreign Broker desk for Refco in Moscow, and got Moscow Stock Exchange interested in Dow futures. So they started trading a daily-settled contract, based on what price the Dow will end up in NY. The funny part was that their closing bell would basically coincide with NY opening bell. So my open arbline to CBT Dow futures pit would do so much business in early Chicago trade, that it was setting tone to NYSE open!! It was so hilarious to listen to CNBC anchors calling the 9.30am opening direction, adding fair value, etc - while I was fully aware that I just liquidated a few hundred lots "at the market" in thin Chicago pre-open, on behalf of a hapless Russian daytrader due to his Russian clearing house end-of-day margin call…



It was good to see in one day the S&P recap the range of the last 13 days so as to have a proper resolution of all the themes of the symphony combined just before the finale.



Yesterday, the sage deal was supposed to anchor the financials but they got sold off; today the market found legs from the "tech" sector of all places with money going into the goog and apple.

Will it work or will it reverse off like the bac stuff?

Victor Niederhoffer writes:

One is reminded of the classic reaction to assassinations and crashes. First a terrible decline, and then starting the day after, a rise to on average where the decline started from with much variability.

Gary Rogan writes: 

It's pointless to anthropomorphize the market, but still enjoy imagining this reaction: "No QE3? How horrible, we can't have that, off with their stocks! Wait, come again? No QE3? Hm…could it be GOOD? Yeah!!!"

Victor Niederhoffer replies: 

A hypothesis was rejected. The market can not go up unless we get qe3. + all the Gavekal boys and other smart analysts who correctly figured he wouldn't dare to challenge the Texan had a minute to cover at 1133 ish but then when they realized that the market is rational and does not respond to cardinal events but to meals for a lifetime, they had to cover in avalanchian fashion. + the threat is always better than the execution. Now, he can hold out the possibility of "maybe" I will. From Annie.

Gary Rogan writes: 

And yet the immediate "mainstream" analysis I saw from Reuters was "when parsing the speech the market was disappointed to see no QE3 but when it realized there is no concern for inflation and thus no outright rejection of QE3 it went up on the possibility", which just goes to show for the umpteenth time people see what they want to see in anything even mildly complicated. That's why the same facts lead to different conclusion about say Global Warming depending on one's disposition.



Not to say anything that I don't know anything about. But you have to hand it to Perry. He forced Bernanke to not go with an overt QE3. And that has to be very bullish as how many resources can they take from the little man and give to their former, current or future friends, employees, bosses, wives, and relatives.

A Proverbialist writes: 

There is no modern era precedent for the Fed facing credible political opposition from within the established governing elite framework. Perry's statement had to be a game-changer for Bernanke and the Fed, as it opened an entire new attack vector on the institution's legitimacy, which is its sole true power base.

For now, I assume the threat is not being evaluated formally, generating a paper trail.

But it's a damn good bet that after the first bourbon-and-branch of the afternoon, Bernanke's inner circle wargames this.




 This purpose of this post is to help me think out loud more than anything else, and as always, I would love anyone's feedback/discussion on any points mentioned here.

Going into the Jackson Hole meeting, the market had a range of expectations around A) to what extent is Bernanke a "dove" and how urgent another round of stimulus would e; and B) to the extent that Bernanke's trigger finger is itching on the next printer cartridge, what political constraints might force Bernanke to stimulate less than what he'd prefer, given his extremely dovish writings, speeches, and policy history — and the surrounding context of 58 percent Greek government bond yields, negative Tbill rates, BNY offering negative interest rates on institutional cash deposits, and Italian government bonds beginning to trade lower despite the ECB's recent intervention?

The market sees Bernanke as an ideological dove, driven by a zeal to correct the great imbalances of the "global savings glut" (FX surpluses, and trade and employment deficits, spawned by artificially cheap Chinese currency). He can correct that imbalance by devaluing the USD; but quantitative easing is the only tool available to him to devalue the USD. The level of USD devaluation required to normalize China's balance of trade is extremely large (over 20 percent), and would require larger and larger successive iterations of QE to accomplish.

Since Bernanke believes a significantly cheaper USD is in the long-run interest of the country, and QEs of larger size devalue the USD more than smaller-size QEs, Bernanke wants to pursue QE only at such times when the political environment will grant him the most sweeping authority possible, to implement the largest QEx possible, to devalue the USD as much as possible. In other words, to seek further iterations of QE only at the points of maximum panic among the financial and political establishment. This strategy worked somewhat effectively in March 2009 and August 2010.

Having established a framework that Bernanke is ideologically extremely dovish, several events curtailed Bernanke's political latitude going into Jackson Hole 2011.

First, less than a month ago, the Republican frontrunner for president said it would be "treasonous" for Bernanke to enact a third round of quantitative easing. No Fed chairman has ever served in office against the wishes of the sitting President, and the Fed would lose market credibility if it were seen as not having the confidence of the President — or a realistic potential future President. Bernanke cannot simply ignore that comment. Even if it was a 'rookie comment' by a relative newcomer to the Republican race, the candidate (Rick Perry) was playing to a very strong strain of anti-Fed, anti-Wall Street, anti-financial establishment sentiment among the lower/lower middle class of the country, especially the white lower middle class that is the Republican Party's political backbone. Bernanke can't ignore that constituency, at least not indefinitely. Second, the Fed did announce a mini-QE by pledging low rates until mid-2013. However, that had little effect on the market when it was announced — suggesting the market would be unmoved by non-drastic Fed action. Thus, Bernanke would have had to do something drastic — further testing the Fed's political limits — to enact a policy that would suitably impress the market. Third, industrial commodity prices (oil, food, etc) remain relatively high, despite the recent hot money de-risking across all asset classes. Fourth, despite the -10% August, there is not a sense of panic, fear, or clamor for action from American investors outside of Wall Street. In 2010 the situation was arguably different — there was a more acute bear market in the aftermath of the flash crash. Fifth, Narayana Kocherlakota, whom the market perceived as a moderate dove, joined Fed hawks Fisher and Plosser in dissenting from the Fed's pledge to keep short rates near zero for another 2 years. The Fed has not had 3 dissents since the early 90's. This marked a high in terms of dissent against Bernanke's dovish inclinations.

For these reasons among others, expectations going into Jackson Hole were low, although in my opinion there was consensus on some kind of "Operation Twist" duration extension of the Fed's balance sheet.

The Fed in turn produced nothing tangible, other than a promised 2-day FOMC meeting on Sept 20-21 (longer than the customary one day) to "allow for wider discussion of the various tools at the Fed's disposal." Wink, wink, we are going to have a really big surprise for you on Sept. 21, wink wink!

The market immediately interpreted this as a green light that some variant of "Operation Twist" would go forward — whereby the Fed would sell short-dated Treasuries and buy long-dated Treasuries, thus extending the maturity of its balance sheet and increasing the money supply by forestalling until a far future date the time at which its holdings would run off the balance sheet. The S&P proceeded to rally all day long.

Two things about the market's bullish reaction puzzled me.

One, if the Fed really intended to do something inline with market consensus, why wait? Bernanke has harped on the need for "good communication" between the Fed and the market, in contrast to Greenspan, who seemed to enjoy jolting the market with indecipherable musings that served no purpose besides Greenspan's ego. The market expected something concrete out of Jackson Hole. Why not give the market something concrete out of Jackson Hole, then, unless Bernanke is waiting for something to happen between now and September 21 that would give him more latitude to act? Does he feel that he does not have enough latitude

Two, duration extension would be highly negative for banks' earnings, because it would effectively flatten the yield curve even further, depressing financials' earnings when Bank of America is already contemplating another capital raise, and European financials are trading within distance of their 2008 lows. There would be no less stimulative way of increasing American money supply than by flattening the yield curve, which as I understand, duration extension would do. Given the fearful macroeconomic environment, why would the Fed settle for such an impotent way to expand money supply?

Bernanke had no reason to do anything other than telegraph exactly what his next step would be. The fact that he didn't is important, and in my opinion suggests one of either 2 things: either that Bernanke expects something to happen which will give him more leverage between now and 9/20, to enact more drastic policy than current politics allow; or that he feels that current conditions simply aren't ripe for him to implement a further iteration of QE, at the size he wants, relative to what he thinks the political climate will tolerate.

Either way, it's bearish for the market.

What do you think?

Gary Rogan responds: 

The market decided his impotence is bullish. Lack of liquidity doesn't seem to be the cause of the current problems. More liquidity wouldn't help. The market is somewhat confused, in that there seem to be at least two camps/thought processes that interpret his impotence in diametrically opposite ways. The bearish camp is more emotion-based and thus faster in in its response, so the market first essentially gapped down, and then recovered. This is analogous to a response of a human being to a perceived potential threat that is recognized by the thinking brain to be not a threat after the initial fight or flight response.



 It is interesting to see niche exclusion , the tendency for a species most suited to a particular niche or habitat relative to its competitor to monopolize the particular niche, work itself out in the markets. We saw how New York gold crowded out Chicago gold, and how the electronic trading excluded the pit trading for all but options.

For example, only a handful of old lions trade the S&P pit any more and it used to be in its days known as a den of thieves, the abode of at least 500 vipers. Now one sees that happening in the battle between 10 year and 30 year. True, they are different animals in part. And one frequently can go to 5 or 7 points over or below the other. But now the 10 years trades 1 million contracts a day, and the 30 year lucky to do 250000. Given the coterminous correlations between changes of at least 95%, who would wish to trade the 30 year versus the 10? Only old fashioned men who are stout-hearted men.

Are there other examples of competitive exclusion working themselves out that one should be cognizant of so as not to bring up the rear?



 A former Oklahoma banker and I agreed at lunch that:

1. The statement from Buffet about BoA and the bathtub is bizarre.
2. Does not play well here in the Bible belt, so don't blame us country folk.
3. Was a picture we could do without on a down day.
4. Was intended to parallel the supposed old timer's squeaky clean conservativeness. Implying he is willing to stake his reputation on them not being dirty as everybody is saying, since he just cleaned-up.



 I view the adoration of the folksy and simplistic in finance as yin to the yang of irrational fear and hatred of allegedly "sophisticated"/"rocket science" instruments such as credit default swaps (which are, fundamentally, quite simple) and fundamentally mundane — while ostensibly terrifying — strategies and technology such as algorithmic trading.

It's a form of comforting primitivism, in my opinion.



 Such a stark contrast today: one of the greatest innovators and leaders succumbs to a terrible disease and beyond the loss in stock price one can imagine there is so much more potentially lost in productivity, pleasure, etc. for so many…..

One of the "great insiders" decides from the bathtub a day or two post a conversation with the President that he will invest a tidy sum in a financial institution that is well entrenched in the system at some many points.



 I rode out and drove away from Hurricanes in Fla. Now I'm in Nashville and my flight is cancelled for thunderstorms today at JFK. I heard the same BS on stand by for Army flights. There is always a way. Turns out they were behind from the earthquake's few hour shut down. Throw in a thunderstorm and the fear of the hurricanes and basically the airlines are telling you to not fly.

I am not sure if I am mad about the trillions of dollars blown on nothing when we could build some good airports and tech to handle a T storm stoppage. Or is it just the fact that American airlines are so cheap and efficient that one little hiccup shuts them down? Or was it the regulations of the Jet Blue ice storm fiasco a few years ago. Basically the nice looking young lady said, "you don't travel much now a days, huh?"

I thought it sounds exactly like Army stand by. Well maybe we can get you in by 8:30 Fri… for sure noon Sat… Oh to get back home… no way to tell.. think Tues or Weds. I never flew Army free air flights for that reason. First time I ever did an airline said "sir would you like a refund?" I dunno I guess this is first time I ever didn't want refund and wanted the flights. This is also first time I realized that Nashville is an awful flight route vs Fla or Atlanta or Chicago where I lived. No wonder they call us the fly over states.

Sorry I will miss you all. Lack



 When we draw a typical line chart we connect the lines. The stock may have traded at 7.00 and the next trade was 7.01. But nothing happened in between. There was no trade. Nevertheless the line drawn gives the illusion that the price action was continuous and there was a smooth transition from 7.00 to 7.01. A former collaborator of the Chair, the late M.F.M. Osborne used to argue that charts should be drawn as dots -one dot for each transaction marking its price on the vertical axis and time on the X axis. There should be nothing in between because nothing happened — just a dot cloud.

Osborne was also the first modern author to demonstrate the log Gaussian distribution as a good model for stock prices. Naturally because he was a physicist, another Professor of Finance usually gets the credit.



Looks like the Platinum vs. Gold spread is expanding. My wife will be pleased as I chose the industrial platinum over the shiny metal, and glad it has some value over just car engines. A note from my broker trying to induce me to trade gold notes that the Treasury is sitting on 260m oz of the shiny, so roughly a 130bil unintended windfall this year. Also noted yesterday: property values are down in every state except OK, ND, and the district which enjoyed a nice 12% increase yoy.



 Greetings to the Specs gathering at the Speculators Party 2011.

I would have loved to meet all at this looked forward to event, but able to travel into New York only in early September.

So here is my question, does the parabolic zoom in gold recently qualify to be a candidate for inspecting if a Lobogalaesque thud will come now?

What are the good ways to be on the lookout for a parabolic move to be turning into a Lobogalaesque detour, in general?





This chart is part of a study by the SF Fed (aka Yellin's minions). The authors calculated the M/O ratio - the ratio of Middle-Aged (40-49 year olds) in the US population to the Old folks (60-69) - and used it to generate the probable P/E ratio for the stock market. As I have written many times, Mea Culpa!

See: "Boomer Retirement: Headwind for US Equity Markets?"











 My suggestion [for understanding market inter-relations] is to set markets against each other and then look at how they react to a common metric. What you will find is that such an exercise yields valuable timing information. What many perceive as the most difficult part (choosing the metric) is often nothing to worry about. That is, almost all of them work, such that the news of markets turning is writ large across the landscape.

The first consideration however is to compile the various markets as assets in which to invest. That is, instead of using yields, one must use prices as it is prices by which they compete. The best trick I can pass on is for the game theorist to start by looking longer term and then shorten up. Think years and quarters rather than intraday.There's more if there is any interest.

Rocky Humbert writes: 

One notes that "real" interest rates have backed up about 40 bp in the past week, and gold is responding in kind. Eddy Elfenbein is one of several people who have postulated a relationship between Gold Prices, Real Interest Rates, and Gibson's Paradox. Correlation is not causation of course — but his model has been working brilliantly. Read about it here.

It's also a good moment to brush up on Gibson's Paradox which notes that interest rates follow the price level and not inflation (when operating on a gold standard). According to what I've read about Gibson (which is very little) , everyone from Larry Summers to Milton Friedman accept the existence of Gibson's Paradox … but noone seems to agree on the underlying theory.

Just a quick and dirty note: Eddy Elfenbein's model says that for every -1% (annual) move in real interest rates, gold compounds upwards by 8% (annual). So back of the envelope, a 50 basis point rise in real yields "should" clip gold by 4 or 5 percent or so … and amazingly that's what happening. Now … all I need to do is PREDICT where real interest rates will be next week…



 What is now completely forgotten is that banks used to be on their own. Neither the U.S. Treasury nor the full faith and credit of the Congress nor the Federal Reserve system stood behind them; yet somehow commerce flourished, panics were short, and - wonder of wonders - the paper currency people held was literally as good as gold. The risks of that system were the ones J.P. Morgan explained to Congress in his testimony before the Pujo Committee - one was always dependent on "the character of the borrower". And that character could and would fail, sometimes badly. What distinguishes the period before 1912 from what came afterwards is that the risks of failed character were not socialized. It was not the world we have now where everyone is everyone else's counter-party and savings=investment because that is how the equations work out. Yet it was, very much, a world of Physics and Politics.

The late 19th century financial system operated on Walter Bagehot's principles. It was assumed that, in the event of a crisis, the primary dealers in credit and money would come to the rescue but they would do so according to Morgan's hard rule. Bagehot's famous advice, "Discount freely", would be followed, but it was assumed that bad characters would not receive loans at all because their word was no good. That would be "cruel" (sic) to the depositors who trusted those bad characters, but such cruelty was an essential part of the system. Liars and cheats could not be rewarded, and neither could the fools who trusted them. One of the many things admirable about Ulysses Grant is that, when his son was swindled by a Bernie Madoff of the 19th century, he took the loss as being entirely his own. Neither he nor his family ever suggested that anyone else, besides the fraudulent partner, was to blame. Under such a system "sound" banks were the very ones that seemed most awful; they would only lend to people they knew and would always demand solid security.

This nasty truth seemed horribly undemocratic, as undemocratic (small or large D, take your pick) as the idea that people should have a sufficient down payment and prospects of reasonable income before being given a loan to buy a house. The Federal Reserve Act was promoted by Progressives as a solution to this problem. With the added security of interlinked banks and the implicit guarantee of the Treasury (the Treasury's currency was to become the Federal Reserve's), banks could cease to be so stingy. It is easy in retrospect to create conspiracy theories about "the Fed"; but there is very little justification for that. There was nothing at all radical in the actual language of the Act itself; its terms merely put in place a permanent Clearing House system that would be available at will in times of distress. The Clearing House system had worked during the Panic of 1907, but its very success had alarmed people who feared the Money Trust. Better to put the system in the hands of a quasi-public institution like the Bank of England than to leave it up to the Morgan Bank. (Note: The 1907 Panic had scared people in banking precisely because it had been a "Rich Man's Panic". The country had been fine; indeed, the "country" banks had remained sound. What was troubling was that, after the failure of the Knickerbocker Trust, those country banks had decided that the New York bank's character was less sound than had been supposed.

 So, having the Federal Reserve system serve as a banker's bank, an intermediary between the members, would not by itself be a great change. None of the supporters of the Act - Progressive or otherwise - presumed that the system would abandon the discipline of Bagehot's doctrine - no lending to bad characters. No one in the country supposed that the Act would change the currency - i.e. abandon the Constitutional gold standard. All the Act would do was create a formal authority that would have the "flexibility" to discount freely in times of crisis and thereby prevent people of "good" character from being wrongly slandered by the market. That was, of course, the beginning of a devil's bargain, but only a few cranks anticipated that it would be the beginning of the permanent destruction of the currency. 

What those cranks anticipated was that the Fed and the U.S. Treasury would decided that the Constitutional gold standard was not really a standard but only a guideline. That came in 1914, when war broke out in 1914, and the Secretary of the Treasury decided that, in the name of national security, he had the authority to shut down the New York Stock Exchange for 6 months.

That default by the government of the United States is the major part of the devil's bargain that we are still paying for. Shutting down the Exchange not only prevented the European holders of U.S. securities from selling up and asking for their bank drafts to be exchanged by the Treasury for bullion, it also destroyed overnight the private intermediaries for the bulk of world trade. The factors, dealers in commercial paper, and others who acted as the actual risk takers for payments for the greatest part of the volume of imports and exports were shut down. Trade finance ceased to be the dealings of private parties and became, instead, part of the official dealings of national treasuries and their respective central banks. The check and balance provided by those commercial dealers was literally abolished. The European governments whom Woodrow Wilson and the Congress favored - Britain and, to a lesser extent, France - were allowed to write checks for imports of food and war materials that their own pre-war banks would not have cashed. The financial tyranny of the Presidential executive order that Scott and others have so justly complained about did happen, but the author was not a 19th century Illinois Republican but a pair of modern, 20th century Virginia Democrats.

If you have no problem with any of this - and a majority of Americans and all but a few professional economists - do not, then you still have to explain why, in every financial crisis, from 1930 to 1971 to 2008, the Federal Reserve has ended up protecting the interest the banks and the banks' counter-parties and lenders and their mercantilist certainties at the expense of the savers and depositors and holders of the currency. The very hoard of gold acquired by the Treasury and the Fed in WW I was not used to "bail out" (sic) the depositors of the U.S. banks in 1930, 1931 and 1932 even though the system had been sold on the promise that "a systematic revision of banking laws in ways that would provide relief from financial panics, unemployment and business depression, and would protect the public from the domination by what is known as the Money Trust." 

In 1930, 1931 and 1932 the depositors lost their money outright; this time their money has been "protected" but its very value has been destroyed in the name of lowering real interest rates. That, of course, ignores the last part of Bagehot's doctrine - the central bank is to lend freely but only at high rates.



 Aftershocks might occur.

In the case of the magnitude 5.9 (at a different location in Va. from the current quake) on May 31, 1897:

"Aftershocks continued through June 6, 1897. " (would have to check what the magnitudes were)

It might be interesting to compare the exact "response times" on the nuclear company stock share prices in relation to the start of shaking today.

It looks like about 22 minutes from the intraday high/low earthquake event for Dominion Resources. Quake started at 13:51:04. The minute Google stock chart indicates downward stock price movement at 1352 but maybe sophisticated traders were on it in milliseconds.

Would imagine someone with the right equipment and screening capability (quake size, depth, location, historical response of markets to different seimic events) is trading on these relatively infrequent earthquake events —particularly in countries where news comes out a few seconds slower.



 I read a very entertaining article in Scientific American yesterday: "Can Math Beat Financial Markets ".

Stefan Jovanovich writes: 

Check out the author's home page.

Gary Rogan writes: 

Looking at the page brings up the age-old question: can the same techniques that are used in natural science to study the universe that doesn't change from being studied and where the fundamental rules don't change at all be applied to a system where nothing prevents most rules (other than that old "human nature") from being changed at any time? He cut his teeth on never-changing, but how will it play with ever-changing? Somehow fractal coastlines are just not the same as fractal security price charts. Fat tails and non-gaussian distributions are great, but then what? We can evidently estimate the risk of something happening he says. But can we???

Ralph Vince adds: 

Yes, when he speaks of their raison d'etre "To quantify risk" I think, "Huh? How? VAR? Just HOW DO they 'Quantify Risk.'

If alluding to using it ("algorithmic trading," in the context of some sort of proce prediction a la quant, I assume he means modelling prices using models based on SDEs. Again, "Huh? How? Does this guy know what he is talking about?")

Quant-dom, traces it's roots to pricing of various securities — warrants, options, spread on futures/forwards, backwardations, and the pricing of the plethora of derivative creatures who climbed out of the ooze of ercent decades. This is NOT predicting markets, or "Quantifying Risk," (the latter, clearly, has utterly failed using their conventional models).

The entire article smacks to me of something dumbed down to the point of being useless and silly



There is a paper making the rounds from the FRBSF that looks at the predictive relationship between "middle" savers (40-49) and "old" spenders (60-69) for equity market P/E ratios. The paper demonstrates a relationship between the M/O ratio and historical market P/E ratios from 1954-2010. The paper is a quick read.

The conclusion that is getting the attention reads:

Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.

A couple of quick points on the FRBSF economic letter:

1) The key paragraphs in terms of stock implications are:

Since we have forecast a path for the P/E ratio, predicting stock prices is straightforward if we can project earnings, the E part of the ratio. For this purpose, we assume that, in the next decade, real earnings will grow steadily at the same average 3.42% annual rate by which they grew from 1954 to 2010. To obtain real earnings, we deflate nominal earnings by the consumer price index.

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027. On the brighter side, as the M/O ratio rebounds in 2025, we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.

Note that they are using "real" stock prices. Converting this to nominal using currently depressed inflation expectations of 2.01% over the next decade (from TIP breakevens) implies an increase in stock prices that is roughly 50% higher than what is priced into long-term S&P options. If they are right (and I think they are wrong), then the returns to equities using long-term options should be around 3.7% over the next decade (better than government bonds) while the returns to holding the S&P should be roughly the same 3.65% due to dividends received over the next decade.

They are also making an assumption that trend earnings growth mimics that of 1954-2010. They are calculating this using a straight line two point growth. Fortunately, they ignore that 1954 earnings were roughly 50% above long-term trend lines while 2010 earnings are roughly 30% below trend. Using an actual trend line (rather than point to point) growth would imply that S&P earnings should grow 10% per year over the next decade (this makes more sense if you forget about "peak margin" nonsense and recognize the current profit levels are against a very depressed economic output line). Using their other data (dubious for reasons articulated above and below) and trend earnings would imply the S&P should rise roughly 83% over the next decade (to ~2,100). This would yield returns from long-term options of 22.3% per year over the next decade while holders of the S&P should receive returns of 8.1% per year.

2) They "fit" data from 1954 to 2010. There is a reason for this choice of data sets — it's the only one that works. The demographic data offers zero explanatory power for periods prior to 1954 for one very simple reason — the proportion of the population that was aged 60-69 (their "old" people who are supposedly liquidating assets) was far, far lower. This would imply that P/E ratios should have been stratospheric in the pre-1954 period. We can see a tease of this in their chart that shows rising P/E ratios from 1964-1954 on their "model generated" line. Pre-1954, this model generated P/E would have risen dramatically. In contrast, they were depressed. As a result, I would strongly question whether we can generate any real insights on the forward direction of P/E ratios from this analysis.

The reality of all this nonsense is that when equity markets are low and falling, most people will offer explanations for why they are low and falling. Those arguments will sound intelligent until equity prices begin rising inexplicably. Then they will rage against the "bubble" until they suddenly see the light and argue we are at a permanently higher plateau.

Kim Zussman writes:

This is a variant of the "sell to whom" question posed by Jeremy Siegel in "Stocks for the Long Run". ie, when boomers retire and they change from saving to consumption, who will buy their stocks?

Siegel's suggestion was younger people of developing nations / emerging markets. Given the known tendency for people to invest closer to home, why wouldn't up and coming Indians and Chinese buy domestic vehicles rather than SPY?

Jason Ruspini writes: 

Whatever problems we think we see with such studies, it is an embarrassment for economics that the effects of demographics, globalization, and diffusion of technologies are not more widely studied and understood. This provides cover for all sorts of claims like "tax rates were higher in 1950 and 1990 and we had excellent growth then…"

Russ Sears adds:

While I agree that studying the effects of the predictable real economy on the real economy should get more study. Further I agree with your implication, that jumping from fiscal/monetary policy to real economy often hides a large amount of nonsense. However, I can not encourage a tunneled vision approach of narrow real effect to narrow real effect. Especially when I see the design of the study to be such that its intent is to keep people from following their natural ambitions and make sure the individual is smaller than he needs to be by discouraging investing in capitalism. They (the govt) only do these studies when this is the case. The nonsense comes by narrowing the line of vision to reach the conclusion that we need them to protect us from ourselves.

Jason Ruspini replies:

This sort of criticism was behind some of the controversy with Tyler's Cowen's book. To those on the right it sounded dangerously like " 'We' should do something! " To those on the left, " 'We' are poor and can't do anything…"

But I don't see why low average rates of return should discourage entrepreneurs. Situations like Apple and Facebook suggest that where there is growth in a low growth environment, money funnels to the innovators just the same if not more vigorously. Regarding Facebook, my sense is that part of the "problem" with current technologies as compared to those of the 19th-20th century is that the latter often compressed time in terms of more efficient communication, travel and production while the former largely serves to fill time with questionable effects on production and average asset returns. Additionally, the diffusion of the latter 20th century type across the world is now past its inflection point.

One other point..

Japan in the '80s through present might be a better complement to the Fed study than the pre-1950s world as suggested in Mr. Green's original email. Equity returns aside, all things equal, more retirees should translate to lower rates. Given sovereign debt, I guess one should say lower real rates.

Russ Sears responds: 

The government is in competition with the private sector for capital…In the fiscal world should the retiriees give their capital to Government and let them continue to spend or should they give it to entrepreneuars and let them spend it.

In either case fewer real world projects will begin to those who loss the competition for capital. All things being equal if less money goes to the stock market, few projects are begun and cost of captial is raised. If they cannot get capital from issuing stock, they must issue more debt, real cost of borrowing goes up.

But if real demand for private sector goods are raised and fewer project in the private sector were funded, cost of loans will go up and the profits per $ in the stock market would also increase.

If more money goes to government, the more our government becomes addicted to the low cost of capital, and the more it spends on less and less productive projects.

Am I missing something?

Which do you think will raise the overall wealth the most? Would you believe a government study suggesting investing in the private sector is doomed to low real returns for decades?




 Thoughts on the Psychology of Speculation by Henry Howard Hopper published in 1926 and then reprinted by Fraser Publishing Company.

The book is excellent on many different levels. I like most that it talks about encompassing principles of human nature. Not the trivial made up ones of behavioral economics but broad human tendencies that are crucial to how we make our decisions and go about living our life.

Included among these broad human tendencies is the tendency to go crazy when you see a massive flow in front of you like the many who commit suicide in Niagara falls after seeing the water flow and the many who lose their minds as the market goes up. Also paramount is the incredible ennui that a human feels when something that he formerly owned goes thru the roof in other hands. I also like the many market periods of boom and bust he covers including the fantastic bull market of 1915 in the middle of the war where stocks of many a sage speculator was short skyrocketed by 15 fold or more. "He did not live to see General Motors at 850 on October 25, 1916," as his broker was forced to sell him out well before hand and "he had crossed the bar into the great beyond".

Like my father's experience in the Bowerey where he had to cart the bodies away when they couldn't pay the rent after dying from gambling, "the widow was left almost penniless and he was buried at the expense of the lodge". I like also the colorful vivid language so characteristic of the roaring 20s that makes on wish one was there and feel for the every emotion that he elicits.

I like best the last words he repeats of a short seller who made a fortune in leather goods and then lost it in the market through shorting. "In the past year I've suffered every torment known to the demons of hell. My only grain of comfort is that it's all over now and I have nothing more to lose." From this tragic experience, the author concludes "there is but little comfort or profit to be gained on the short side of a protracted bull market".

I will give many more incisive but pathetic recollections of the failures of speculators in the favorite stocks of the 1920s: General Motors, Studabaker, Union Pacific, Anaconda, Calumete and Hecla, Bethlehem Steel, et al.

A Psychologist writes:

Let's say for argument sake that, a la Atlas, an inventor develops a motor that eliminates the need for gasoline. In a single stroke, energy costs are reduced by 90%, creating massive savings for consumers and industrial producers. There are some who would eagerly buy on the news, anticipating an economic renaissance. There are others who would angrily pronounce this a temporary respite from the world's parlous condition and short the first market bounce. Bullishness and bearishness so often are a function of character, reflecting how people wish to see the world. The disappointment of some bears that the recent earthquake was not more catastrophic is more than a bit eye-opening.



 I have not seen a model yet that shows how all this redistribution causes weakness in economic activity. Certainly the incentives are hurt. But I think a model similar to what Friedman uses to show how money should grow with 2 or 3 people on a desert island would show how hurtful this is.

Tyler Cowen writes:

Moral hazard escalates.

Keep in mind that since bank failure is deflationary, the Fed can address bank failure by printing up a lot of money without a net inflationary effect. On the inflation front we are simply holding even, more or less.

But we are substituting interest-bearing reserves for M2, or public sector assets for private sector dealings, a very bad long-term trend.

Plus higher moral hazard and now European banks are Too Big To Save and don't have a real central bank behind them.

Did you see that JP Morgan is now forecasting 9.5 unemployment for 2012?



People are lining up in Wesport, CT to sell gold coins, according to a report on Seeking Alpha .

Has anyone ever reliably made profits from bubbles? If so, their existence can be prospectively determined, if not there is no clear answer. It's true that there may be people who know a bubble with 100% certainty, but they don't know where they are in the cycle so they are too worried about shorting them. This is pretty morally equivalent to having no idea about the existence of a bubble, although not quite. I'd say if someone can reliably predict that within a "reasonable" time the bubble will deflate below the current level, and are willing to bet on that, they "know" the bubble exists.

Jeff Watson writes: 

Look at the 1980s Hunt Brothers silver debacle. Despite the big move in silver, I never knew anyone that made a boatload of money off of that huge move. I heard lots of tales of people getting rich off the silver market, pyramiding $5,000 into millions, but those people were always friends of friends twice removed, and nobody in my clearing firm, none of my buddies ever nailed silver. I suspect those people who got rich off of the silver market are as elusive or mythical as the Yeti. I also suspect that if you were long that silver market with a $5,000 account that you would have stood a better than even chance going bust.

Rocky Humbert comments: 

The Hunt Brothers episode was a corner in an overleveraged market. I'd argue that the gold story today is totally different. Importantly, it's not a leverage-fed, euphoric or happy bull market. It's a funereal bull market. Because if gold is right, and it keeps going and going and going (?5,000? ?10,000 ?20,000 +++) all of one's paper assets will be worth what they are printed on, and the Chair will find out exactly what 2008/09 would have looked like without massive central bank liquidity infusions. (And being short stocks won't help either, since there won't be anyone left to pay you back.)

Hey Gary — for someone who thought total financial collapse was the "ONLY" outcome, how can you NOT be massively long gold??? That's not a bubble! Or is it? As I've been writing for two years now, gold's ascent is a confluence of negative real interest rates; undisciplined central bank behavior; a growing loss of confidence in government policies and financial systems; loss of Swiss bank secrecy; an accumulation of economic wealth by individuals in parts of the world without stable property rights and rule of law; etc. The CME can raise margin requirements all they want; but there needs to be a change in the underlying fundamentals (and/or perception of the fundamentals) to end this period. What will that change look like? Shouldn't that be the question on the table ….

Gary asks, "Can anyone reliably make profits from a bubble?" Hmmmm. Warren Buffett keeps a sealed envelope in his desk drawer with the name of his successor. In contrast, I keep a sealed envelope in my desk drawer with the EXACT high price in gold. Neither of us allow any peeking (or peaking.)

Note to Anatoly: You recently wrote that you think gold won't go all the way back down. If you believe that this is a genuine bubble, then you'll have been wrong on the way up. And on the way down. See Jeremy Gratham's extensive work on bubbles — and his observation that they retrace >100% of the parabolic extension.

Stefan Jovanovich says:

The U.S. Treasury had enough gold to be able to promise to redeem the customer balances of every member bank of the Federal Reserve in the United States in 1930; had that step been taken, the U.S. would not have suffered the extraordinary collapse in demand that created the death spiral of world trade

Tyler McClellan asks: 


Just for fun, how would you have lowered real interest rates in the US, without dramatically widening the gold points, or say just abandon them all together.

Stefan Jovanovich replies: 

Why would I want to administer interest rates at all? The problem with the Federal Reserve system is that its underlying premise is that the government should do so. Nothing can prevent speculation from having a component of folly and ruin — like all of life. The idea that the government — which is itself an interest group of the employees and beneficiaries of government borrowing and spending — can somehow avoid the same folly and ruin in its speculations seems to me to be the funniest of all the lunar illusions. Remove the notion that somehow banking is a special kind of business that requires absolute government guarantee (which, as we have seen, the government cannot afford any more than anyone else) and a great deal of the folly and ruin disappears because the truth — that everyone in commerce works without a net — is transparent. As someone once said, the illusion of safety is the most dangerous of all ideas.



 It's my experience that if you need to sell a portion, even if that portion is 100%, via a stop order, you're in too heavy to begin with. Being in too heavy is to be too dependent on luck.

Dylan Distasio writes: 


Can you expand on your definition of "need"? Let's use the case of HPQ as an example. x had an investment hypothesis that no longer necessarily holds true after the potential value destruction of recent company decisions. As a result, he decides to liquidate half. Maybe someone else gets in a few weeks ago after the discussion on HP here, as they agree it looks like a value play, but they have a rule to always attempt to minimize losses on new positions to a flat 10% to protect capital and to always use stops because they need them for discipline. So they get a ~20% haircut after getting stopped out on the gap down.

I'm not sure either situation of a 50 or 100% liquidation was based on what I would call need, but rather some kind of capital preservation or very basic risk management rules.

In all serious, how would you define need as I think it is worth looking into this further? Potential loss of all capital? Forced margin liquidation? I agree that being in with too much leverage or too large a position opens you up to getting taken out by noise, but what is need versus risk management?

Chris Cooper writes: 

I took a big loss on Monday of the week before last. I then cut my trade size in half, and manage to end up flat at the end of the week. The week actually would have been very profitable had I been willing to stay with my original sizing. But Ralph is correct, and I decided that if I am getting scared by a big daily loss, I'm trading too heavy, so I have left the trade size at that halfway point.

On the other hand, one might choose a rule that pares back the trade size when volatility increases. These were intraday forex trades, and clearly that week was exceptional in terms of volatility. The problem is that the volatility spikes that kill me do not appear to be predictable. Therefore I have to trade most of the time at a level that seems relatively placid in order to avoid being frightened into damaging behavior occasionally.

Gary Rogan writes:

I think this illustrates the point I was trying to make originally about the lack of logical underpinnings in the "sell half" decision: it's an emotional decision because you (a) get scared by the suddenness and violence of the move an its effect on your net worth (b) belatedly realized that you were in too much. Now the second part is sort-of logical, but it really points to the lack of imagination about what a position can do when you get into it: you imagine a slow gradual move and the thing suddenly loses a big chunk of its value without much warning. This is not theoretical for me, because for the first time ever I have faced the following: two days after buying a stock it suddenly loses 25% of it's value in a day. This happened TWICE in a row on top of that, and only underscored to me that you never know enough to say with confidence that you will not lose all, and quickly. Therefore you should assume that that's the case from the very beginning. 

Ralph Vince replies:


I'm really referring to liquidity concerns; Rocky's decision to liquidate half, I assume, is a risk-management procedure here, as opposed to a strategic one based on changed fundamentals (I may be, and, in retrospect, likely am wrong about this!).

Any risk-management concern where someone "needs" to get out, shy of that investment being entirely wiped out, will, in time, be entirely wiped out, or damn near whether by an Enron, or those gilt-edged AAA GM bonds at one time.

Dylan Distasio responds: 


Although I don't typically trade that way, I don't think the sell half is necessarily an illogical or emotional decision depending on the scenario. We have no way of knowing what the reason behind selling half is for a given individual. Reducing a losing position size is, in my mind, a way to mitigate risk of additional loss while still having some skin in the game. Keeping some powder dry is (I would imagine as an amateur) one of the more important survival skills in this game. The person selling half doesn't have to be in too deep to their overall capital pool to want to protect half of what remains of that position based on changing circumstances. Losses do add up over time.

Alston Mabry writes: 

I have found that trading breaks down into (1) analysis, and (2) execution. With "analysis" being a period of calm, quiet reflection (maybe with a cold beer) over a crowded spreadsheet; and "execution" being whatever I have to do to manage my lizard brain once there is real money at stake. They can be such radically different modes of being that sometimes it's very difficult to establish a link.

If I make "analysis" and "execution" the axes of a graph, I can place each of my trades on the graph in the appropriate quadrant: {analysis(good), execution(good)} = exhilaration, {analysis(good), execution(bad)} = regret, {analysis(bad), execution(good)} = relief, {analysis(bad), execution(bad)} = self-loathing.

The challenge of trading is that there is only one quadrant you *want* to be in.

Chris Cooper adds: 

Rocky wrote:

"I challenge anyone to demonstrate a single person who blew up while sticking to the rule: "Only add to a winning position.""

I can't meet your challenge, but I did have a week where I lost 50% of my equity. Your observation does not apply to those trading with leverage. I am now learning to scale back the leverage, make adjustments in trade size more frequently than weekly (should be real-time), and to write models which account for higher correlations during times of stress.




Mon Aug 22, 2011

3:39pm EDT(Reuters) -

Goldman Sachs Chief Executive Lloyd Blankfein has hired Reid Weingarten, a high-profile Washington defense attorney whose past clients include a former Enron accounting officer, according to a government source familiar with the matter.

Full article here



 One would imagine the Sunday open to close in Israel might be predictive of the open in the US on Sunday night, and possibly the open to close of us on Sunday. By Israel open on Sunday, the US has already passed Friday close. And Israel would be catching. Of course the US Open is not a predictive thing since it can't be acted upon, but a descriptive one. The whole subject of the influence of Indian, European, Asian, and mideast markets on the US is an interesting one and calls for much counting, correlation, and finesse.

Anatoly Veltman writes:

I'd be the first one to stress the equities "rolling wave" over the timezones, as well as inter-market influences (as in currency-gold-stocks-bonds-oil, etc). Being said, there are two clear new ingredients that make historical statistics less than meaningful: central meddling and modern algos.

1. What can possibly be the use of percentile correlations and sequences observed over any historical duration, if current market interventions and near-global ZIRP are unprecedented.

2. Modern algos thrive on constant change/adjustments. To paraphrase Jim Simons: what feeds "our" fascination is that our former immersion into discoveries (within pure science) would eventually yield an ever-lasting law or theorem — while (market) discoveries we achieve today will only live a blip of time, and so you have to journey on (almost daily) to your next discovery and implementation.

So in consideration of the above major influences, my current MO would be: do not rely on hard stats. Do rely on your instincts, understanding of the new world financial order and good occasional privileged information — and trade discretionary.

Chris Cooper adds: 

I can accept Anatoly's "two clear new ingredients" but reach different conclusions. My conclusions are:

1) Trade at a higher frequency so that you can get enough recent stats to be meaningful.

2) Trade fully automated, not discretionary, so that you don't fool yourself about your alpha. Also, it's the only sensible way to trade at a higher frequency.

"Relying on your instincts and understanding the new world financial order" are important only at the meta-level.

Paolo Pezzutti adds: 

I think:

1. Cycles are ever changing. Today it is because of ZIRP, tomorrow it will be because of new rules or products coming on that influence market structure. I don't know if cycles will be shorter or longer. You trade them until they work. Counting still works.

2. Frequency depends very much on commissions. Some regularities at shorter time frames cannot be traded if your commissions are too high. Frequency depends also on technology you have available. Also, one should trade a frequency where you have less competition.

3. New cycles means new patterns to come up and old patterns to die. Keeping track of ongoing patterns is important and also establishing criteria to determine a pattern has stopped working. Early discovery of new patterns is vital for your performance. But how much data and evidence do you need to validate a new pattern? More importantly on the tech side is how you implement the search of new patterns. A continuously running search can scan the data according to certain criteria and propose pattern to be evaluated further.

4. Trading should be fully automated to trade higher frequencies, more markets simultaneously, and decrease stress.

Newton Linchen writes: 

Dear Paolo,

You said: "Keeping track of ongoing patterns is important and also establishing criteria to determine a pattern has stopped working."

I once asked this question (how to measure the "death" of a trading strategy) to the List, and the answers were disappointingly vague. ("They work until they don't anymore", and such kind of answers).

To my knowledge, this is a vital question.

Recently, I backtested a strategy a colleague was trading, to discover that in the last 6 years you would lose your entire wealth trading it. But he kept trading it, due to an anchoring with an event when "it worked", plus a kind of empirical testing of only few months.

This means he was caught by the siren song of a series of "lucky strikes" within a larger distribution of years of losses.

This behavioral concept ("anchoring") is quite interesting, and we smile at the poor guy who don't count.

But what concerns me is that we can behave the same way, (although counting), when we face a regime shift (ever-changing cycles) and keep trading the defunct strategy… Until when?

Perhaps a rough answer would be to establish a drawdown metric related to the maximum historical drawdown? (i.e., we trade it until a drawdown x% larger than the greatest historical, and then quit?)

Or maybe the reason to trade a strategy must be quantitative whether the reason not to trade it anymore should be qualitative? (i.e., acknowledgement of the regime shift…)

A final thought would be a strategy based on market microstructure — in the way it is present in ALL regimes.

Any thoughts?




 Anger and frustration are the two emotions pulsing through my veins as I write this. HP, once the symbol of innovation, is being dismantled by its high-pedigreed board and the CEO of the hour (I truly hope his tenure will be measured in hours, not years). I vividly remember the early 2000s, when Carly Fiorina, then CEO of HP, engineered the HP merger with Compaq. She argued that the merger was a must for HP's future to be bright. Walter Hewlett, the son of one of the founders, was publicly opposed to it, and I remember the drama of the proxy fight, the TV interviews and arguments from both sides, and the finale -– Walter Hewlett lost and the merger went through. But it was not the finale, because nine years and two CEOs later HP has announced that the PC business, the one it so desperately wanted just a decade ago, is too hard a business and that it will look for ways to get rid of it. Almost in the same breath HP announced that it will kill WebOS devices, a business it acquired in April 2010 for $1 billion; and management, possibly missing the irony in those two announcements, went ahead and announced another acquisition, which this time will for sure transform the company.

HP will buy Autonomy, a UK software company, for $10 billion. I understand $10 billion doesn't sound like a lot of money in today's post-trillion-dollar-bailout world, but it is plenty for HP, especially considering what that money bought. There are many ways to illustrate how expensive and meaningless to HP's future this acquisition is: $10 billion is about a fifth of HP's market capitalization, while Autonomous will contribute 0.7% to HP's revenues, and 2.7% to its earnings; and HP paid 10x revenues and about 25 times earnings.

Leo Apotheker, HP's CEO, bragged about Autonomy:

"Autonomy has grown its revenues at a compound annual growth rate of approximately 55% and adjusted operating profit at a rate of approximately 83% over the last 5 years."

Keith Backman, a sell-side analyst from BMO Capital, asked a very pertinent question about Autonomy:

"… metrics that you threw out for Autonomy, particularly on top-line growth, included a lot of acquisitions for Autonomy. What's the organic growth rate that Autonomy has achieved lately?"

Leo did not have an answer, whereupon HP's stock started to drop. HP had reported an OK quarter, expectations were already low (its stock was at about 6x times 2011 estimates, which remain intact), and Dell had already lowered guidance a day before; so no one was surprised when HP lowered its revenue guidance for 2011 by a few percentage points. Management said that since it will pay for Autonomy from cash on the balance sheet, it will not be buying much of its stock in the near future, and then they mentioned that this acquisition will be accretive. Yes, accretive! Nothing to worry about. This transaction is accretive only for illiterates in economics and those short on common sense.

HP is using cash on the balance sheet to pay for this transaction, and thanks to the Federal Reserve this cash yields zero and thus brings zero income. As long as Autonomy's income is greater than zero (I am oversimplifying a little) then it will be accretive (at least on a cash basis). However, this assumes that HP's cost of capital is equal to the return it receives on its cash. Which is not the case, as that would ignore such minor details as the time value of money, inflation, the risk premium (after all, unlike the US government, HP cannot print money and doesn't have nuclear weapons) and, simply, opportunity cost.

Any investment HP makes today should be compared against an opportunity set that includes its own stock, which at 6x times earnings results in about a 16% yield (cost of capital). In fact, if HP used $10 billion to buy its own stock, its earnings per share and dividend would jump by 16%. Autonomy will not be able to match this return, by a long mile.

I don't need to have a great imagination to envision another conference call in August 2015, where a new CEO decides that the software business is too difficult, and HP needs to come back to its roots (maybe going back to making calculators) and will spin off the software business into a new company, take an enormous charge, and then maybe announce an acquisition that the same highly pedigreed board will rubber-stamp.

HP's valuation has not changed that much – the PC business only represents about 16% of operating profit, so even if HP gives it away, earnings power will not decline greatly. HP should still be able to get a decent price for it, as there has got to be a Chinese company out there swimming in US dollars that wants to put them to work before they become worthless. HP's core businesses, will be slightly impacted by the global economic weakness, but the company should maintain its earnings power largely intact. Autonomy reduced HP's value by about $3; but with my lack of confidence in management, I'd not buy HP at a P/E higher than 10, which would bring the stock to the mid to high 40s.

 HP's stock sold off not because the company disappointed Wall Street but because Wall Street grew tired of the overpriced "must-have" acquisitions. Wall Street has smartened up and assumed that this acquisition, as with many other "transformative" acquisitions, will do nothing of the sort. And so, today we are faced with a decision: buy, hold, or sell. At 4.6 times earnings HP is not a sell; but considering that the company is still trying to figure out what it wants to be when it grows up, it is hard to add to our holdings of the stock; so unfortunately this company has turned into a hold.

Stefan Jovanovich writes: 

There is another perspective. HP, like National Semi and so many of the other "original" Silicon Valley companies, was - at heart - a defense contractor. Its instruments were sold to and used by other defense contractors; and the HP Way was dependent on the steady stream of direct and indirect payments from Washington. The HP Cringely knew began to die when the Berlin Wall came down. What is interesting is that this was the same time when new generation of "tech" companies started up that had no experience with government Purchase Orders and purchasing requirements. The question to be asked is how far has Microsoft gone down the road towards being the next HP, only this time the graphics being generated come not from oscilloscopes but from Power Point, etc. One of the many reasons to admire the MRD ("mad" Russian duo) is that, given a choice between competing with MSFT and AAPL, they chose AAPL, even though "everybody knows" that was the wrong decision. Of course, you want to have governments and corporations with large headcounts as your primary customer base.



 In 2007, I think, I heard the Chair dismissing commodities in favor of stocks. That was based on hundred(s) years of past market performance.

We now get Sprott and half of analytical community preaching the reverse, following current decade's results. Both biases, in my view, were due to best (or most simple) assumption of everything staying constant.

What fascinates me: the FED's recent decision to try and keep ZERP constant next two years. This decision alone threw a monkey ranch into my regular logic and MO — and caused me to postpone my bearishness on Gold by additional 10% and a couple of weeks.

But really: how can capitalism adopt to the kind of interest rates meant by the supernatural canons alone! Don't permanent zero rates cause t in all market formulas peg to zero, thus rendering most market algebra dormant? Time has no value? This can't sustain, can it…

I dare hypothesize what may sustain it: baby-boomers. I notice that it's the countries most touched by baby-boomer economic cycle that mostly embark on zero-time-value course at this point in history. Who knew…



 Michael Burry, of "The Big Short" fame, mentioned farmland a while back as an (the only?) investment he saw having value.

It appears now that there are companies that are developing and possibly planning the introduction of the "first" farmland REITs. One could imagine that this might have an appeal to the general public looking for an alternative to gold and other perceived "safe havens". Buying a piece of the farm…

Here is one company that has been mentioned as being interested in introducing farmland REITs. Those with experience in this area can critique if such a thing makes sense or not…or whether watching re-runs of "Green Acres" is a better bet for city slickers.

"Our goal is to develop an agricultural and farmland investment vehicle that provides unique value to our shareholders. We seek to achieve this goal by owning farmland that is leased to independent farmers that mostly produce row crops. We own six farms in California, each of which is leased to farmers producing fruits and vegetables."

Stefan Jovanovich comments: 

European syndicates wanting to get into the "beef" boom paid for the land and the Herefords and other stock that were brought in to Kansas to improve the breed of the wild Texas cattle that Mr. Hammond, Swift and Armour were slaughtering to great profit. Somehow, the profits were never realized, even though a number of enterprising cowboys got their start with their own spreads by liberating the "half-breeds" that wandered off the Europeans' land. The author of one study described the experience of the Dutch investors as a "long slow ride to nowhere".



 Here's a great article about the current record holder for the title of oldest banker in the US. It is a very fascinating story, with a few small snacks for a lifetime. The whole moral of any type of story like this is that it pays to listen to what old timers have to say, and it also pays to examine their lives and to model the parts that make them successful, not just in business but in life. As a young kid thrown into the pits, I sought out and asked for advice from the grizzled old guys who started trading as early as the late 1920s - early 1930s (there were still a few of them around). I also learned to ignore the advice of real old clerks, etc. (There was a reason they were old clerks). It was and is my contention that if someone is a speculator for 40+ years, no matter what, he's a success if he's still in the game. They had seen it all and done it all, and I will say that taking some of advice is the difference between a 2 year speculation career and a 40 year career. Rich or poor, or in between, a 40 year veteran is going to have a superb defensive game, and a strong defense is more important to longevity than a great offense (in my opinion).



The aging population of South Florida appears particularly susceptible and vulnerable to all manner of flim-flam and scam artists:

"From storefront businesses in upscale Fort Lauderdale neighborhoods, a family of fortune tellers ran a $40-million scheme that defrauded people from near and far since 1991, federal prosecutors said in court Friday.

Among the victims was a bestselling author who gave an estimated $20 million to the family. The woman, who prosecutors refused to identify, lost her 8-year-old son in a motorcycle accident and was allegedly exploited by at least one of the defendants, Rose Marks, who she considered a friend."



Can a theme be casually constructed from the tragedy of HP (going out on a limb with a questionable plan) and the slow bleed of RIMM (no real plan) that elder tech stocks with low PEs, and hoards of cash be actually quite dangerous to invest in due to their honey dripping "value-ness" that traps a spec with its stickyness?

I would like to learn something here about these situations as a takeaway–to get something of an education about this sector that rewards high PE and high growth but treats its elderly companies with hostility via market and opinion beatdowns.



Sean Corrigan:

(John Law) also held, like all of his ilk that have succeeded him, that the panacea for a nation groaning under an unsupportable burden of debt and famished for a lack of productive capital was the emission of more and more money. This age old error of confusing the medium of exchange with the object of exchange is one we continue to commit. It's as if a man's thirst can be slaked by giving him a box of drinking straws or his appetite sated by kitting him out with a shopping basket.



 Aug 19 (Reuters) - U.S. technology company Apple is now worth as much as the 32 biggest euro zonebanks.

That reminds me of my day trader buddy that told me in 2002 that Broadcom's market cap was bigger than all the gold stocks he just bought for buy and hold. I asked him a few years later how it was working out: "Great, if I would have held them."



 One month ago in Indonesia, a guide hiked me up a jungle canyon for an hour to search and find a rare Rafflesia, the world's largest flower, in bloom. The plant though large with up to a one-meter flower and weighing forty pounds with no stem or leaves is difficult to find as it blooms for only 2-3 days before decomposing. My guide spoke no English but shrieked at each overhang or cliff en route to the flower causing to knock my head twice and sprain my wrist. We closed in on the plant in muggy jungle air by odor — it looks and smells like rotting flesh and hence the tag 'corpse flower'. The flower burst into view on a sunlit slope where I flung my cap next to the plant for scale and to relieve my swelling head. From the flower my guide led me back down to a farm that grows cat poop coffee (kopi luwak) that is processed in this strange way. The coffee beans are eaten by the civet, a jungle cat, that we tailed into the jungle to pick up the feces which contain the beans that have lost their rancidity while passing through the cat's stomach enzymes. We picked up the droppings and the farmer showed me how he washes, dries in the sun, roasts and brews. I'm not a Starbuck's drinker but might become one if they offer cat poop coffee for this is the only I've tasted without sharpness, a caffeine boost, and bitter aftertaste.



If there ever was a more beautiful play out of the traveling salesman problem that Rocky and I have written about, it was Friday. Using 10 minute prices, I count 24 new lows at the end of a period versus the previous. All reaching a climax when the last gas station was revisited at 1540 gmt at a price 132875 only to go back to 1344 in the last 10 minutes with an astonishing but unmarket like rise in the last 10. "That's not squash my friend Rainer Ratinac used to say".




Directed by Jeff Prosserman

This was on Reuters on 18 August 2011:

*Madoff Trustee Adds Claims in $2 Billion UBS Lawsuit*

08/17/2011 5:55:34 PM ET EDITOR'S NOTE:

This story has been updated throughout. NEW YORK (Reuters)—The trustee seeking money for victims of Bernard Madoff's fraud on Wednesday [Aug.17]…

Bernard Madoff made off with over $50 Billion in funds tendered him for investment over the past two decades or so. The billions came from other hedge-fund brokers, financial people, huge charities, schools, synagogues, and average working Americans. He had no actual investments, as it turned out, because he worked the classic Ponzi scheme: He continually brought in new dupes, fresh money, and paid off older 'investors' with the proceeds of his newer pigeons. His white-collar predators included bankers, international lieutenants, and sundry henchmen, all of whom 'fed' clients to the steely mastermind who heisted a larger sum than any single such dealer in history.

When Madoff, at the end of his machinations and available new marks, surrendered to the authorities in December of 2008, thousands of investors, big and little alike, suffered devastating losses. Often, in fact, their entire lifetime savings.

One persistent investigator tried matching the vaunted Madoff figures 'way back in 1999, and they made no sense. Harry Markopolos, a one-time Boston securities analyst, made it his quest to expose the clear fraudulent dealings of this highly public, highly venerated 'investor,' Bernard Madoff, acquiring a team that worked with him doggedly as he amassed mountains of documentation against the venerated, avuncular silver-maned guy with the seemingly magic touch. If Madoff accepted you, you never seemed to lose. Your earnings accreted month after month, nary a dip or a blip in the chart. The team—Marcopolos, Jeff Sackman, Randy Manis and Anton Nadler, with the legal help of Indian lawyer Gaytri Kachroo, dubbed The Foxhounds—pursued their quarry relentlessly. Years. The documentary makes frequent allusions—maybe too many—to the Eliot Ness/Al Capone /pas de deux/ in the mid-century. Though Chicago's Capone was a known criminal, and Madoff's Manhattan machinations remained shrouded and mostly unsuspected until his public arrest.

Strangely, after submitting piles of documentation, Markopolos found that no one would touch the story. /Forbes/ turned him down. The SEC ignored his repeated efforts to get their response to the ongoing fraud. Wouldn't touch it. Wouldn't return his calls. Markopolos became (understandably) frightened for his own safety, and that of his wife and adorable young twins. In the end, if it does not mar the film's unspooling too much, these cute 6-year-olds think their dad is their "hero," thinking he has "stopped a bank robber." Though they admire Spider-Man just slightly more.

 The tracery of the past decade of the team's effort makes this a compelling story. Interviews, personal recollections, plus highly stylized /mise en scene/ presents as a slightly overblown thriller that raises the ultimate questions: Can ethics exist under capitalism? Can greatness be achieved morally? Whom can we really trust?

Why did people fall for Madoff's charm, scheme, whatever? The average Joe cannot do the due diligence needed to unearth the likes of this mega-operation by a swindler who headed up NASDAQ. He seemed unimpeachable. The SEC seemed to be going about its bounden duties. And his unreal returns spoke louder than rationality. Getting into the game, when everyone was told "he has a closed shop," made surmounting the fencing even more alluring, if you will. Who doesn't relish the idea of being the last one to scoot under the wire before they clang down the *No more* mesh grating sign?

It happened. And Madoff is not the last of the predators by a long shot, though he is serving a 150-year sentence. There are still the unscrupulous, of course, and many hundreds who aided and abetted Madoff are still at large; according to the titles, 300 or so. The SEC, now peopled by new faces, witnessed the testimony, and many of the guilty resigned. But that is scant comfort to those who lost…everything, and at 75 or 80 had to go back to a McJob to pay their monthly rent.

Based on the book, *_No One Would Listen_*, by Harry Markopolos.

(John Wiley & Sons)



 Self Righting Shapes are a market metaphor for optimists:

There is something about a turtle on its back that twists your heart. With neck craning toward the ground and legs waving to no effect, it is the image of helplessness. But, malicious kids aside, turtles almost never end up upended. And it turns out that the apparent risk factor for that predicament—the turtle's rigid carapace—is less a liability than an asset, surprisingly well-suited to the turtle's goal of righting itself. The secret is in the mathematics of its shape.

Would make for a nice paperweight.



 I read the latest article written by Roubini on Al Jazeera.

I was interested 3 years ago in his views about the economy, but I was not aware of his negativity about capitalism, the welfare model of our societies and globalization. I thought his being pessimistic about the economy was linked to the temporary situation of the economy and not to his distrust in capitalism and globalization. His solution to the current mess is a mix of public and private, social welfare, public safety nets, increased regulation and supervision of the economy and markets, fiscal stimulus and progressive taxation provided by inspred governments in order to…..,as he says, enable workers to compete, be flexible and thrive in a globalised economy. A pseudo-socialist view of society very similar to what is being done in France is basically the vision of the future in a globalised world according to Mr Roubini.

The view of self-destructing capitalism is so politically driven and has no firm ground. Rather, we should consider that after several decades without any serious competitors which could challenge the leadership of western countries, today India, China, Brazil and others are able to provide goods and services at lower prices than our countries. This is causing a structural imbalance and money is quickly flowing away from Europe and the US towards other places in the world. The fact is that we are being slow in adapting to the new environment. How to educate our labor force, to do what? What is a sustainable economic model in this environment? Can we still be manufacturers? Of what? What can we export to those countries? These are the kind of questions we should try to answer as we compete in a globalized market. The problem is that now we risk to be the losers in a capitalistic "system" that we have created. The problem is that we were used to be the winners. The bitter truth is that we are getting poorer, ever more indebted and we do not want to accept that we should decrease our expectations and the living standards that we have given for granted. On the other hand, we should let the market forces at work to generate new opportunities, innovation, investments, ideas. It may take a few years, but we may come back stronger and a new balance would be found. Government intervention would only require more time for our countries to adapt because of stimulus to the wrong sectors, protectionism, unionism, bailouts of non competitive corporates, waste of scarce resources and so forth. The view of an international system a la Roubini is old, it has already failed and cannot work. It would be a disaster.


So Karl Marx, it seems, was partly right in arguing that globalisation, financial intermediation run amok, and redistribution of income and wealth from labour to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong).

Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China - and soon enough in other advanced economies and emerging markets - are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world's middle classes are feeling the squeeze of falling incomes and opportunities.

To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken. The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts. Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalised economy.



Consider how often has S&P made mistakes in the past. S&P missed the Enron crisis, the Lehman collapse, the economic troubles of Spain, Ireland and Greece, the mortgage related bonds before 2008. This time, however, it is different because it seems they overreacted (at least some say so) to the US difficulties in finding the (in)famous debt deal. It is not clear why S&P has decided to expose the US vulnerability to a higher debt level. The risk of backlash to the downgrade is high. The “system” and the environment could now become hostile or, at least, unfavorable. The downgrade was likely “political” rather than the result of a cold and independent analysis. It was the trigger for the stock markets sell off. But it was just the trigger. It is interesting, however, because S&P’s move is a crack in the Wall Street-Washington DC connection. May be just a first crack. On thin ice.



 The first sanctioned ALTA tournament I played in at 12, my first round match was against the second seed. I was on court 2 and the number 1 seed was playing on court 1. My opponent was beating me handily. Then he called out to Peter Lebhar on court 1, "Hey, Pete see you in the finals". I got so mad I won the match. Similar thing happened when I played Martie Hogan in the quarter finals of the national paddle ball tournament in 1987. Every time he made a point he'd yell, "Hold him under 10 ". Apparently he had bet that he would hold me under that level with others. He was much younger than me, and I took the liberty of taking the ball and placing it between his eyes before I beat him 21-20 in the third game.

I have always had an aversion to losing and then having an opponent or adverse spectator add fuel to the fire by lording it over me as I was losing or after the game. Sharif Khan had an annoying habit when he was beating me of yelling "Come on, Pakistan" near the end of the third or fourth game. I guess I had a similar guttural reaction when out of the clear blue sky, I got a similar in your face reaction about my losses in Rimm. Bad enough that I lost and humiliated myself and ended my forays into individual stocks. But to then have it placed back in my face and twisted in my gut, — why, it rankled.

I kept statistics on all mergers and acquisitions for 10 years when I was in the business and did note a pronounced tendency for a rash of acquisitions in a field to be a precursor of decline in the field and signals of decline in the acquirer. Certainly it was not true in every case, and it would have been hard to quantify. Certainly the variation as it applies to a single acquisition like google motorola would be many thousands of times greater than any general, amorphous tendencies.

The back and forth betwee three very erudite people about the acquistion, Dylan, Gary and Mr. X. is quite educative. If it takes me eating crow, raw squawking and fully feathered as Osborne said about Morgenstern's foray into spectral analysis applied to stock markets, it is not an inordinate price to pay.

There is no need for anyone to buy drinks, but please in the future, the dailyspec is a considerable undertaking, and it would be nice if one applied the rules of the British Navy at dinner, (we are all on a long journey together and have to get along with each other or else the ship will sink), to the host as well as the others.



 One has found that when companies pay up like this it is the handwriting on the wall.

Anatoly Veltman comments: 

True. I wonder, in addition, if the new world order means that Gold also looked at that.

Mr. X. writes:

One notes that the target of this transaction was Motorola rather than a certain Canadian smartphone manufacturer who gained a certain personage's attention based on similarly superficial and glib generalizations.

One wonders what this personage's knee-jerk reaction to the deal would have been — had the CEO of the acquiror been a god-fearing male Democrat-leaning Yalie, over the age of 65, who cheats on his wife, plays golf on Sundays with government officials, and tennis on Tuesdays with other prominent financiers…. Might that have taken the writing off the wall?

Importantly, one notes that Bloomberg is reporting that the Google agreed to pay a shockingly high $2.5 Billion breakup fee if the deal doesn't close (an amount more than 6 times the typical amount). This is bizarre and hardly subtle — so the buyer is either an idiot or he knows something that we don't know. Before rushing to judgment, one is inclined to believe that there is more than meets the eye here — and some elucidation may be provided in the soon-to-be-filed merger proxy statement.

Dylan Distasio writes:

I think at the end of the day, when all is said and done, assuming this deal goes through, the price will appear to have been a bargain. Google has had phenomenal success with Android, and as a result is in the crosshairs of both Apple vis a vis their patent battle with HTC, and with Oracle who in typical Ellison fashion picked clean the bones of the once mighty Sun, and let loose the lawyers of war. Oracle is going after the core of Android by claiming infringment on their acquired Java portfolio. With 17,000 patents just added to the Google portfolio, give or take, a cross licensing agreement with either opponent is much more likely as a worse case scenario for Google, IMO.

Motorola, despite their tarnished reputation compared to their go go days, also brings a hardware design and manufacturing ability that Google is sorely lacking in house. They took a gamble on Android, and were there with the original Droid which with the help of Verizon's heavy advertising really did more than anything to bring Android to the forefront. Google will now be able to realize their vision of what a flagship Android phone should look like with more success than they had with the ill-fated Nexus launch. They will have the capability to leverage the hardware to the hilt with the guys and gals writing the drivers in house.

The one area they will have to be careful about is alienating other major Android players like HTC. HTC's CFO was towing the line so far this morning, welcoming the deal. Microsoft is going to be heavily courting the large players for the Windows 7 phone OS, so there will be at least one alternative available to other Android handset manufacturers. I'm relatively confident Google will tread lightly though, and at the end of the day, Android is now a relatively mature OS that is FREE to the other manufacturers.

Google had a large warchest of cash, and a smash in Android that needs to be protected. I think for once, the premium will be money well spent. The landscape of tech mergers and acquisitions is littered with disastrous decisions and lack of the ever evasive synergies. I'll go on record as saying, this time it will be different, assuming the deal is not derailed by the Feds.

Drinks are on me if this one doesn't pan out over the next few years.

Gary Rogan adds:

I can't imagine that Google will not sell or spin-off the hardware business or the mobile phone part of it and keep the patents. They got MULTIPLE Android makers mouth exactly the same party line today, and they either threatened them (unwise, and hard to achieve reliable results so quickly) or promised neutrality. Keeping the smart phone manufacturing is a sure-fire way to sow discord in the eclectic Android community which can't be worth it for them. All they need is the hardware slaves killing each other making more and more popular phones to keep the advertising dollars coming in.



Concentration of everything leads to everything being too big to fail. This is an interesting article by John Seo; "Everything Will Be Too Big To Fail "



 "The market may be crazy, but that doesn't make you a psychiatrist."

-Meir Statman

Gary Rogan comments: 

I was actually reading Statman's book What Investors Really Want, highlighted in the link, and almost finished it over the weekend. It's slightly less formulaic than the typical "behavioral economics" book, and at times entertaining, but just as useless. Is there really a need for many more examples of "all we really want to do is to rationalize what we have done or feel like doing" ? It's amazing how much contempt for human beings this whole research sub-culture has, at least this one pokes fun at himself at times. But fundamentally it's the same message as always: don't attempt to beat the market because you are destined to fall victim to the emotional zeitgeist.



Dear Chair,

World 3-Move Championship Title of 2011. At the Agora theatre, Cleveland, OH. Alex Moiseyev on left and Michele Borghetti on right. After eight games a win each and six draws.

Ginsberg would have smiled last night as players drew dyke opening from deck.
















 It's always good to learn and a vacation is a good time to learn more things. Here are 10 things I learned from my recent vacation in Maine.

1. The refutation of a hypothesis often causes more violent movement than a confirmation. The rejection of the idea that the market needed an extension of the debt limit in order not to fall, caused the great decline.

2. The three greatest declines in recent history came when a clash between the welfare state and the enterprise economy was resolved in the formers favor. The debt extension without teeth, the Tarp in October 2008, and the Baker intervention to get the mark up over the October 19, 1987 weekend are recent examples.

3. The declines in the summer are often more violent than in other months except for October because the interventionists take more time to get their houses in order as they are vacationing in the Hamptons or Riviera, and can get frightened more easily.

4. Negative sequences of 2 or more through big round numbers become avalanches and trigger all sorts of panic selling. A break of a pivot of long standing duration like 1250 can inordinately create a cascade.

5. The ability to not get overextended is the key to success in markets or business. It is pitiable to see all those forced out by margins, or total fear at the bottom because of too little capital.

6. The round number of 1000 is an attractor and the decline was not over until the market breached the 1100 level and fell to the 1000's on Sunday, Aug 14.

7. The book Fur, Fortune and Empire by Eric Dolin is very good reading to show how commerce causes the establishment of countries, the forces of war, and friendship and alliance between trading parties. The founding and survival of America by the Pilgrims and the French and Indian wars as well as many others were caused and fomented in the main by the waxing and waning profitability of the beaver trade and its elusiveness and ingenuity and rarity when hunted into extinction.

8. Big moves around 1 GMT are reversed to an inordinate extent.

9. The declines in the US markets are inordinately preceded and signaled by related declines in the European markets, — the ratio of Germany equities to us fell from 6 to 5.5 before declining below 5. And oil fell below 100, and fixed income had a tremendous rise all before.

10. A ride up US 1 from New Hampshire to Maine is one of the most interesting that a person can take, and there are 100's of attractions that a person can stop at with a family that will enhance a vacation. Particularly attractive to me on a recent trip were the Desert of Maine, the Monkey See Monkey Do, L.L Bean, The Music Box, Owl's Head and Farnsworth museums, and the golf course at the Samoset, who showed the colonists where to find furs, and where Jimmy the starter at 92, who started caddying there in 1932, should be a National Icon.

11. The moves in Europe seem to know that a person can't stay up 48 or 72 hours straight and often do exactly what you thought they'd do the previous day when you are too tired or dissipated to take a position. 

12. When taking out small moves from the market works, it will lead to disaster as big moves against dwarf out the profits from the previous and charts and stops and key trading points must be adjusted accordingly. 



Incumbent Presidents voted out of office, either at the general election or by their party's convention (as noted):

John Adams                       Federalist                            1800
John Quincy Adams            Democrat-Republican           1828
Martin Van Buren               Democrat                            1840

John Tyler                         Whig                                  

(A 2-time loser; the Whigs failed to renominate him,
and his own party lost in the general election)

Millard Fillmore                  Whig                                   1852      

(Fillmore wanted to run for re-election but his party
denied him the nomination)

Franklin Pierce                  Democrat                             1856       (same as Fillmore)

James Buchanan               Democrat                             1860

Chester Arthur (?)             Republican                           1884    

(Arthur allowed himself to be nominated at the convention; but he was
severely ill — he died 2 years later — so this really should not count)

Grover Cleveland               Democrat                            1888

William Taft                       Republican                          1912

Herbert Hoover                 Republican                           1932

George H.W. Bush             Republican                           1992

You could add these names too:

Harry Truman                   Democrat                             1952

Lyndon Johnson               Democrat                              1968

Both were eligible to run for re-election but decline to do so because they would have almost certainly have lost.



Here's a laughable op-ed piece from the Oracle of Omaha with the title, "Stop Coddling the Super Rich." In the essay, he tries to perpetrate and extend, to quote the Chair, "The idea that has the world in its grip." Buffett wishes to immediately raise tax rates on those making more than a million a year. He says that super rich wouldn't mind if they "were told that they had to pay more taxes…particularly when so many of their fellow citizens are suffering."

The hidden motive in this op-ed is that he wishes to create conditions that will bring more customers to his business. Like General Electric lobbying the government to ban 100 watt incandescent light bulbs in order to sell the new ones with the higher margins, the Oracle is lobbying everyone in order to benefit his book. And his folksy, aw-shucks demeanor, his phoney populist theme, is winning over a lot of people. The Oracle is constantly quoted and cited by the statists as an example of someone who is rich and feels that we could be doing more for the government .



 It is "more pleasant to look at a splendid sea-otter skin than to examine half the pictures that are stuck up for exhibition — excepting a beautiful woman and a lovely infant… the sea otter's pelt is the most beautiful natural object in the word". They went for $ 500 a pelt in China in 1820. From Fur, Fortune and Empire by Eric Jay Dolin, a book I'm reading, purchased at L.L Bean in Maine with the Floyd little ones and Aubrey after a trip to the Desert of Maine and the ropes course (Monkey See Monkey Do), and the Farnsworth and the Owl's Head Museum, and lawn bowling, fishing, shuffleboard, swimming in the Vinalhaven quarries et al. Glad to be back and fortunately not much happened in the market while I was away, Ha.



 For the Kelly investors among us, I found this interview with Edward Thorp very interesting. 

Ralph Vince writes: 

Thank you, Stefan.

Thorp seems to be quite the interesting guy, though I have never met or corresponded with him.

The Kelly Criterion itself was not what Kelly or Shannon thought it was - a fraction (it only appears like a fraction, and equals what is the expected asymptotic growth optimal fraction under certain conditions, ubiquitious in gambling). In trading, this fact is damning.

So even if someone IS attempting to be expected growth optimal, if they are employing the Kelly Criterion, they are NOT employing what they think they are. The solution returned by the Kelly Criterion does NOT equal the expected growth optimal fraction — it is NOT bounded at 1 on the right-hand side (and because it is often < 1, it is often mistaken as a fraction to the great peril of those employing it).

Worse-still is that the formula you can determine the expected growth optimal fraction with gives us the the entire landscape for all values of the fraction (0…1) for all axes. As I pointed out to Duncan on this list a few days ago, this allows one to craft a positioning strategy to satisfy criteria aside from the medieval "expected growth optimal."

In short, in trading, I find there is NEVER any good reason to employ the Kelly Criterion, even when one is seeking to be expected growth optimal.



 The surest way to put the brakes on the upward action is to give a hefty boost to the margin requirement. The current $6000 for an $180,000 contract is just too rich a target to pass up.

On the financials which, to my mind, are being given a well deserved beating, I'm looking for another "Christopher Cox" moment. For those who may not remember the last time our nation's highly regarded bankers (including the holy of holies, Robert Rubin) received a drubbing, Cox issued a prohibition against shorting stocks in the nations 20 or so largest financial institutions. I recall it well as I had a large SKF position which really got nailed.

However, I was still in the green, though substantially less so. Cox, apparently aware of some lingering gains and a recovering SKF, shortly thereafter expanded the "may not short" list to include something like 719 financial institutions. The party was over.

I wouldn't be surprised to see it occur once again as the usual ranters (who remain remarkably quiet during bullish bubbles) are heaping complaints on the HFT system and its contribution to the current downdraft on banking equities - complaints that are gaining traction as the French now feel equally grieved as their banks just underwent a similar brutalization..

I find myself in a similar situation currently with precious metals (long) and banks (short). I've attempted to partially hedge each position with the appropriate ETFs but am skeptical that it's enough. Wall Street's Cramers and fellow-travelers get especially nasty when their icons get shellacked. However, mums the word when dotcoms and real estate go parabolically skyward - just ask Al "Irrational Exuberance" Greenspan. The Street will exact its pound of flesh.


By the way, someone commented that Prechter has been wrong all along on gold. That is absolutely correct - he has been similarly mistaken on silver.



1311.11 or about 14% above the "real" opening price. Could this be one of those bad prints that tells the future?



 National Geographic has an excellent article on the effort of scientists to determine whether they can detect the existence of other universes by carefully measuring the cosmic microwave radiation, (kind of a leftover radiation from the Big Bang), and determining whether our universe bumped into other universes shortly after they were created.

In this man's opinion, this is one of the better paths of study to determine whether our universe is alone, or if there are or were other universes in the multiverse. The scientists contention is that if there were collisions, and the collisions were detectable, they would have left behind some kind of evidence that present collection methods might be able to detect and data analysis might be able to interpret.



For any Specs interested in brushing up on their artificial intelligence, Stanford is graciously offering what appears to be an excellent intro course online in October for free. Hope to virtually see some other Specs there to discuss the course. Let me know if anyone else is going to be taking it.



 Of course rumors come in on the final scene of the first act, (french banks, etc) when the short players are looking for that button, which F1 guys call KERS, to use what's left of the anxiety in the market, as you hear, like a engine roaring, the final gasp as stops get taken out on the initial bottom pickers.

What is KERS? The acronym stands for Kinetic Energy Recovery System. The device recovers the kinetic energy that is present in the waste heat created by the car’s braking process. It stores that energy and converts it into power that can be called upon to boost acceleration.

The rumors were flying for longer during GFC, though we all know now that it is as bad we think. As CHF, gets crunched, the initial leading indicator is on the table to suggest volatility is about to be reduced, and the initial suckers rally will finally come.

We stand at attention.



Even the concept of 'programming language' is becoming somewhat blurred. In years past a language, and it's associated compiler, would translate a program written by a human directly into machine code for a specific machine. Working on a different machine (unix vs. DOS vs. Mac) required a completely different compiler.

Today in many cases what happens is the language compiles to an intermediate 'bytecode' that is then subsequently executed with a second program running on the actual machine, referred sometimes as a virtual machine. The advantage here is that the bytecode can be the same regardless of the machine it is running on, with only the virtual machine having to be adapted to a particular hardware platform. This has proved very successful, with, as noted, Java and web browsers being the archetypical example. One minor disadvantage is that the resulting programs run somewhat slower than the native compiler mentioned above, however in this day and age the gluttony of computer power and resources make the speed difference, in most cases, incidental.

Microsoft took this concept once step further by making available a huge library of pre-written functions to do a very large variety of tasks (in addition to the virtual machine concept, which they call the Common Language Runtime (CLR)). The programmer then simply pulls in the functions he/she needs from the library and they can put together a program much more quickly. This is the approach that Microsoft has taken with its .NET Framework. Then the programming language exists more to string in the various functions. To wit: there are four languages from Microsoft that can interface with the same library: C#, C++. Visual Basic, and J# and each produces the same code for the CLR.

It is also not at all uncommon for a modern application to mix several different languages; this has been made all the more easier with the separation of tasks described above. A webpage may be written with HTML and XML, then use AJAX and SQL to dynamically build content and pull from a central server, with a little Java and C# thrown in for specialty functions.

It's an ongoing evolution, that's for sure.


Jon Longtin, Ph.D.
Associate Professor and Undergraduate Program Director
Department of Mechanical Engineering

State University of New York at Stony Brook



 Hello everyone:

A world title 3 Move Restriction match is set to begin this morning downtown Cleveland at the Agoa Theatre and a few days at the Cleveland Public Library. Full details can be found at the ACF web site. Also live streaming of the match by Mr. John Acker will be shown on our ACF main page and at the usacheckers Facebook page.

This the first time a European from Italy has won the right to challenge since 1847.

Last night chatting in the Italians room the economy was brought up and I made a comment about the USA economy. The Italians said in Italy they are accustomed to a bad economy all the time, where we are not. I found the comment interesting.

We all stay the week at a Value Place in Mentor, Ohio. When I checked in I found that the Value Place runs your name and will not give a room to a registered sexual offender.

More later,




 Mr. Market has resumed the attack to Italy (and in particular banks). However, the news is that now also France, the big fish and a juicy prey, is under the spotlight with the possibility of a downgrade and SOCGEN down more than 20% today (with rumors about insolvency). Is there actually "someone" implementing a strategy behind this? Or is it just a sport looking for conspiracies everywhere? Whatever it is, it looks quite well coordinated. I think that pressure on Europe can help the US distracting the attention of speculators from its problems. Europe is much weaker both politically and economically. When we go again into a recession it is going to be tough for the Euro. And actually I don't understand why it is still so strong vs the dollar. This may be the next big opportunity when all of a sudden confidence in the Euro will vanish.



This is a lot less exciting that Bob Prechter, but have any readers noticed that M2 has suddenly started accelerating ; and M1 is picking up again too?

From last Thursday's Fed report:

13 week annualized rate of change: M1=14.2% M2=9.0%

26 week annualized rate of change: M1=14.0% M2=7.2%

52 week annualized rate of change: M1=13.6% M2=6.3%

Perhaps this is somehow related to money moving into banks ahead of the US Government default deadline? If so, we should see it start to reverse in tonight's report.

But if not….??

("Inflation is always and everywhere a monetary phenomenon.")

Rocky Humbert followed up Thursday night:

Following up on my original post (which pre-dates the ZeroTruth Post ), there was no sign of a decline in either M1 or M2 in yesterday's numbers. The revised growth rate is:

13 week annualized rate of change: M1=16.2% M2=10.1%

26 week annualized rate of change: M1=14.2% M2=7.8%

52 week annualized rate of change: M1=14.3% M3=6.6%

I'm going to offer a new (unproven) hypothesis: Can the ongoing spike in US M2 be explained by cash flowing out of European banks and flowing into American banks (as a safe haven?)

That is, is it possible that the M1/M2 spike is actually a European bank run?

I was unable to find any real-time ECB monetary statistics. Here's the ECB monthly data (last updated in May) … which shows a 2.2% growth in their M3.

Does anyone know if the ECB has more current monetary statistics?

Lastly, this is a question for monetary economists: Is it possible to have money supply collapsing in Europe and money supply spiking in the USA? And if so, what is the theoretical effect on the exchange rate?



 The  S&P kindly attributed the ratings decrease to the "republicans who refuse to vote for increased taxes on the rich". How according to plan. How perfect to keep us small. To march forward with the idea that has the world in its grip. What fools they think us mortals. The regrettable thing is that if the common man were to see through it, and understand that the whole purpose of the ratings decrease was to increase taxes and gain more power and perks for the higher authorities, as there is obviously no chance of a default now or in the future as exemplified by the long bond yield of 2.2 %, which encompasses inflation expectations of 2% a year, a return of say 0.5 %, and a minus chance of default, why then the market might not go down on Monday, and the argument that we have to raise taxes and get the Republicans to appoint fellow agrarian reformers to the committee, might fail, and then the whole plan, the whole deal with the friends at the agency, all the posturing and flexionism, would be in vain.

So the stock market on Monday and Tuesday will fall. Let us remember where the index was on Friday 1197, and compare it to where it ends up when the committee issue the report, and point out that after the downgrade the market was up 10% or so to Thanksgiving. That will be a start. But then we'll have to explain that the reason the market went down in the first place was the failure of the Tea Party congress to reign in the business as usual, the fomenting of the idea that has the world in its grip et al.



 Between and betwixt all of the market volatility, there was an under-reported litigation development on Thursday — which can both explain some of the volatility in the financial stocks AND can explain BNY/Mellon's decision to impose a fee on parking cash. This development could be a game-changer for the capital markets. (Bigger than Spitzer going after AIG for example.) During the week, the New York Attorney General sued BONY/Mellon for breach of fiduciary duty as trustees/custodians! (I suspect almost nobody noticed this.) They are the largest custodian in the USA.He's seeking penalties and restitution.

The issue at hand relates to their role in the 8+ Billion settlement with BAC (which was on the rocks already). HOWEVER, that the AG would sue a trustee/custodian (at all) and under these legal principle is a game changer — that could have repercussions for the way the entire capital markets function — and the costs of being a custodian/trustee. Being a trustee/custodian has always been a sleepy business — where you collect a couple of basis points — and fill out forms. To the extent that trustees/custodians now have billions of dollars of liability changes the landscape forever.

Jim Lackey writes:

Someone posted a chart Friday of Preferred stock index or ETF. It was down near 2% and the posted yields on some of these things are near 7%…. like ISEE after the '09 bank lows. There was one other hick up in April 2010. It was calm seas until Thursday. Friday am looks like get me out now orders. 

There are only a handful of global custodians — and when the stock market is gyrating, it's different to discern the chaff from the wheat. However, I believe that the AG's interfering in private litigation under these legal principles is just as shocking as BNY/Mellon's charging a fee for holding cash. The timing of both announcement, I believe is not a coincidence. IMHO this litigation was by far the most bearish development of the week.

keep looking »


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