When I first started studying stocks and insider trading, I got a cold call from a broker touting a medical stock saying insiders were buying. A little research showed that all the executives got company large loans to buy stock, and the company was in trouble, right before they faced bankruptcy.

Then Indiana's biggest insurance company at the time through rapid acquisition, Conseco, CEO and Board, also seemed to buy just before any big announcement. But again, they got big loans to buy stock right when they got in trouble buying the mobile home lenders. I believe it was Greentree Financials, the first "big" financial failure due subprime 10 years before the crisis of the "big" financials, who were smarter than everybody else.

After these 2 experiences, one wonders, if this is a "hail mary" signal. When the board wants insiders to buy a synthetic call (buying the stock, in effect shorting their bonds by taking a loan), do the stock and their bonds underperform?

Any studies on this?

Henrik Andersson writes: 

The firm I work for just launched a product following insider transactions and the track record per insider for Sweden. The product was first back tested. Part of the conclusion for that back test were:

After studying over 140,000 insider transactions over the past 12 years in Sweden, we conclude that following insiders leads to excess returns on average, confirming the results of numerous academic studies. However, not all insiders were created equally: some company insiders have a much higher "hit ratio". Our analysis also confirms the limited value of sell transactions for generating excess returns on an individual stock basis, although the volume of insider selling on aggregate can be a useful alarm bell for market moves. Our analysis of Swedish insider transactions shows that insiders have on average earned an excess return on share purchases of 3.2%, 5.5% and 13.3% for 3, 6 and 12-month holding periods respectively. Insider purchases outperform the market 55% of the time, but there are large deviations in this "hit ratio" by company.

The log normal distribution of the returns of the insiders look normal but with the average return beating the market.



 Is Profit an Event or a Process?

Is Loss an Event or a Process?

Is a Trade an Event or a Process?

Is Price an Event or a Process?

Is Chance an Event or a Process?

This list may become never ending. So let me begin with these only and seek answers to some equally important questions.

If these are processes then, what events are we experiencing ever?

If these are events, then seperatedness of any one type, with another event of the same type being time, is time a process?

So then observation being central to identifying an event, is time a process or is time an event?

If time is neither a process, nor an event, then what is time?



 The MegaMillions Jackpot is now $476 million. The odds of winning the jackpot are about 1:175 million. The odds of breaking even are about 1:74. This is a record jackpot for this game, and close to a record jackpot for any lottery game. The jackpot value is based on an annuity value over about 26 years. The cash value jackpot is "only" about $341 million. Some food for thought:

1) The odds of winning are the same whether the jackpot is $1 million or $1 Trillion. Presumably the odds of sharing the jackpot increase with the size of the jackpot (as more people play), but this is unknowable in advance. Hence at some point, it makes sense for every rational personal to "play" … but what is that point? (I've written about this subject previously.) Is it a jackpot of $500 million or $5 Billion or ???

2) If one structures the purchase inside of a tax exempt foundation, the payout can be tax free.

3) It is unclear to me whether a donation to the US Government (to pay down the deficit) would be tax free, as the Govt isn't a 501c(3) non-profit.

4) At what point does the jackpot stop attracting interest because of the tree-growing-to-the-sky problem? For example, there is some chance that the jackpot could just keep growing and growing and growing. Can the jackpot reach $15 Trillion and be the size of the entire US GDP? Could the Megamillions jackpot become a BLACK HOLE for the economy … sucking all liquidity into it???

5) If you won the jackpot, what would be the first thing that you do? (For me, it's call my Tax Attorney. For other people, it might be to call their Divorce Attorney.)

Just some things to think about …

Leo Jia writes:

People in my city (perhaps across the nation as well) have developed secondary betting systems on lotteries. People buy the official tickets, but instead of waiting for the official win, they bet on the numbers amongst themselves. With those, local groups can have totally separate win/loss chances to themselves. Guess they are tired of the extremely low chance of winning the official lottery. But the secondary systems do make the official lotteries significantly more popular. 



 "Try to keep your pawns coordinated. Think of them as the foundation of your house. Every crack and every hole can eventually lead to disastrous consequences for the whole house."

- Jonathan Edwards, US Correspondence champ.

Tom Wiswell couldn't have said it much better. How does it apply to markets?

P.S It is interesting to note that in checkers the traps and gems are every bit as complex, hidden, and far removed as in chess. During the 25 years I took lessons from Wiswell, and he played against people like Leopold who was as good across the board, and his thousands of games with me, I never saw once that a good player fell into a trap in go as you please. Perhaps the Checker Pres will correct me but the main point is true. To play a good player and set a trap is the seeds of death or as Wiswell would say, "beware the spider". 

Alan Millhone, the Checker Pres, replies: 

Dear Chair

I moved myself into the Masters. I like playing the best. When you lose to the best rated players like Luba or Suki etc you never have to make an excuse for the loss. I also learn from every loss as the astute Market player should.

I never play for traps. Usually setting a trap will weaken your position if your opponent does not make the move you had hoped he would. I make my move assuming my opponent will always make the best reply.

"Come into my parlor said the spider to the fly "

In Checkers as the Market , research is critical before moving or execution of a trade.



Anatoly Veltman writes: 

There is difference between checker tactics and speculation, in that checker outcome is near binary (win, lose or draw) - while one sets up its market position based on a multi-dimensional scale of odds/size of risk VS reward. Thus, your checker inclination against playing for trap - doesn't profoundly manifest in speculation. My recollection of Silver Monday April 28th, 1987 is perfect example: because a record number of speculators fell into a limit-up trap, the TRADE OF THE LIFETIME proved to be SHORTING, if only for minutes! And multiple cases of not hearing about "that local" ever again.

Reminded me another war story: Tuesday October 20th, 1987 Eurodollar futures pit. That contract normally moved 10 points on a good day. But in the wake of Black Monday, the contract was called to gap in Chicago pit "much higher". How much? Well, speechless clerks and brokers speculated 100 higher!! So seconds before the opening bell, the Salomon Brothers runner fights his way to the pit broker with a ticket sporting conspicuously much ink on the left side. It turned out to be 3000-lot to buy at the market!

So instead of opening between 94.50 and 94.75 (a usual monthly range), the broker tells the offers to shut up and announces 97.00 bid for 3000. Everyone freezes up - except for one regular local, who leaps at him over multiple pit steps with a samurai grunt "Sold!" Price traded back down below 95.00 by the end of the opening sequence, the local covered and was never heard from again in continental United States

Michael Chuprin writes: 

As the game begins, lets say within the first 5 or 10 moves, the players inform each other the kind of game that is going to be played by the way that they develop their pawns, whether it be a defensive or offensive or deceiving (luring into a trap) type of structure. After the "mood" is set, the rest of the game proceeds with the development of the heavy pieces and the pawns now act as a buffer between the two armies. Highly ranked players know that the pawns set the terrain as the heavy pieces approach each other, and this is why the accidental loss of a single pawn can shift the entire scaffolding the entire structure, much like a puncture in the hull of a battleship may incapacitate all of the ships cannons. It is no wonder why in many situations strong players give up after miscalculating a position and losing a single pawn. It may be like two martial artists fighting and one breaking a finger, the damage is relatively small, but its effects are conclusive.

Anatoly Veltman writes: 

I can easily think of market analogy: personally, it was a memorable first loss of a million dollars on a single commodity position I had. The day was Monday April 28th, 1987. Silver futures were locked limit-up for third straight day, and the freely traded spot contract rushed up yet again to an $11.25 pinnacle. It may not sound high today - but it was a multi-year high back then, and more than double the price in one month! Why - a huge squeeze was put on Mexican and Chilean producers, biggest mines were stricken by labor woes, etc.

Lo'n'behold, Japan Finance Minister is a scheduled White House guest that day - what does that do to getting any more Silver out of the ground? Suddenly, as Silver, Gold and Platinum slowly edge off their intraday peaks - the financial wires begin spitting out lightly co-operative language of the bi-lateral Forex co-operation between the two economic powers, totally periferal to Silver production. Normally quiet lunch-time turns into history's never-before seen massacre, with Silver futures flipping from limit-up to limit-down lock across the board in the time space between the salad and the main course! Physical Silver plunges $4 (more than a third of its morning value), and next day brings further depreciation due to margin call liquidation… But of course nothing changed in the mines - and following the two down days, Silver rose every day for the next three months to achieve the same valuation. Only some Silver Bugs remained buried deep in the April 28th ruins. That day's volume stayed the Exchange's record for decades, although some locals' trading cards have been never found in the aftermath…



Having considered the rollover for many years, I conclude the best thing is not to roll over at all.

Bruno Ombreux agrees: 

You are right. But that is if you have a choice. Sometime you have hedges that need to be rolled over. And it is not a choice you make. The hedges are a consequence of your underlying business, which is where you make the money. Then the hedges and the rolls are best seen as a cost, even if sometime they turn out a profit.

Gibbons Burke writes: 

An alternative to creating a single continuous contract to model the behavior of a trading regime which may holds a position across contract deliveries (as this must be tested) is to test that model's behavior using individual contract histories as you would do in real time, rolling your position at the indicated times as necessary. If you need more history for your indicators than the new contract has, then you can create a back adjusted contract anew each time with the contract inn which you have the current position reflecting the actual prices at which that contract traded, but the historical data has values from earlier contracts. This minimizes the distorting effect of cumulative rollover adjustments that you get when you make one continuous series covering the entire testing period.

Rocky Humbert writes: 

There is a paradox in this discussion. As a *theoretical* matter: I can own a cash position in something for X months/years (as a speculation, hedge or investment.) Or I can buy a future that expires in X months/years. If the p&l between the two is materially different (after taking account of leverage and financing), then this is a pure arbitrage.However, the arbitrage is problematic to exploit in physical commodities because of the logistics involved in owning and storing physical commodities. But the arbitrage should be easy to exploit in things like Stocks, Bonds, Gold, currencies, etc. The arbitrage CAN arise in the course of business precisely because hedgers, investors and speculators all have different motivations. But the arbitrageur will benefit from this dichotomy if his analysis is correct. Let's not fool ourselves: The RATIONAL ECONOMIC ARGUMENT MUST BE: the futures price is the BEST indication of where the price will be in the future. Whether that future is one month or 100 months. Any other interpretation leads to a break down in core economic principles. The rolls are simply a discontinuous manifestation of this phenomenon. 

George Coyle writes: 

I am sure this is flawed logic and welcome analysis/criticism, but all this talk has me thinking stocks are a more ideal vehicle for true trend following (vs futures). No rolling/transaction costs, potential dividend yield. You don't get the leverage and are probably subject to reg T on stocks but that may not be a bad thing.

Gibbons Burke adds: 

Another reason stocks are less susceptible to trend following strategies relative to futures markets are laws forbidding insider trading. The prohibition on a profits from privileged particulars prevents their percolation into prices until promulgated publicly. The predictable result is that when new information is released, it is immediately reflected in the price, causing a quantum move to the new value level, a trend exploitable by only the extremely nimble, or knowledgeable scofflaws.

No such prohibitions prevent futures traders from trading on inside information. The market exists mostly for the benefit of insiders. When they act on information they have, with their fingers on the pulse of the fundamentals of the commodity supply situation, and the condition of crops, etc., that telegraphs that information into the price. As the information spreads, and more traders act on it, the trend to the new value level which reflects the full discounting of that new data. So, the speed with which valuable fundamental data about commodities futures markets gets integrated into price slowly enough for a trend to form in price which is more than just noise. This creates enough beyond-noise trends which makes a trend following system able to operate and squeeze a profit out.

The for trend followers problem comes when the number of trend followers swells, and they all pile onto the signal - the systems acting on smaller noisy trends create their own noise and the increased noise increases the risk to the point where the real trends based on real changes in the supply-demand situation are not big enough to overcome the cost of catching the smaller losing noisy trends for small choppy losses.



"How Cooperation Can Slow Emergency Evacuations":

"In a fire, the obvious strategy is to leave the area by the nearest fire exit. Consequently, crowd behaviour specialists exercise a great deal of thought about how best to indicate fire exits, whether with a steady or flashing green light, for example.But what if the exits are not visible? What then is the best strategy for getting out? There are essentially two options–to make your own way to the exit, regardless of what others are doing; or to follow somebody else or a bigger group in the hope that you'll do better together than alone. "



 I was thinking that the single most important factor in the success of a company is the management. That is why it seems Buffett does a big disservice to investors when he tells them he looks for companies that any fool can run. A fool can run any great company into the ground, even with the most pristine of balance sheets and great management can turnaround a company with even the ugliest balance sheet, i.e Apple had 30 days of cash left when Steve Jobs took over in the late 90s. If stocks are for the long term, there is nothing more forward looking then management's vision for innovation and creating customers.



 From Politico's Morning Energy:

The EPA today will announce its greenhouse gas rule for new power plants, advancing a regulation that - if upheld - promises to change the way the U.S. gets its power.

The proposed standard would generally require that new power plants emit carbon dioxide at a rate comparable to or better than natural gas-fired power plants, which emit about 60 percent less greenhouse gases than coal plants.

In essence, that means that new coal-fired power plants will have to capture their carbon dioxide emissions - either for storage or, in many cases, to send the CO2 to oil and gas drilling operations where it can be used to help extract fossil fuels.

But the rule also includes a phase-in period, sources knowledgeable of the rule say, so that coal plants that are ready to build may move forward. The impending announcement was first reported Monday by The Washington Post.

Carbon capture is not a practical option. This rule will be the end for coal and it will also put an end to simple cycle gas turbines. This proposed rule seems to put the US in a box; reducing the capacity of base loaded power plants at the same time reducing peakers. If upheld, I don't see how this will end well.

Gary Rogan writes: 

From the summary:

"The EPA in 2009 found that by causing or contributing to climate change, GHGs endanger both the public health and the public welfare of current and future generations."

Another offering to the false god.

Ron Schoenberg writes: 

If the loss of Arctic ice, the decline in glaciers, the unprecedented extreme weather events such as eight serious droughts in the last ten years in Texas, tornadoes in January, the last decade's global temperatures being the hottest on record, the accelerating increase in sea level, unprecedented wildfires in Russia and other parts of the world, unprecedented droughts and floods in Australia, unprecedented insurance claims due to weather, if all of this fails to convince you of the seriousness of climate change, what would it take to convince you?

Like the mythical frog in the pot slowly being brought to a boil, you might get cooked if you fail to see what is happening. I'm genuinely interested, what would have to happen for you to decide that you needed to jump out of the pot? I'm not asking you to agree that it's happening. I'm not asking you to say there's a pot being brought to a boil. I'm just asking what would have to happen for you to admit that climate change is actually occurring.

Stefan Jovanovich responds: 

Of course, the climate is changing; that has never been the question. The debate has been over 2 issues: (1) the loss of individual liberty for people who will have unelected authorities regulating the details of their lives in the name of "saving the planet" and (2) the cost to the poor and ordinary (sic) people of the world who will need the energy produced by fossil fuels if they are to have any hope of seeing their children become secure enough to afford ecological sensitivities.

The central fact of the climate (formerly known as "global warming") debate is that there are no longitudinal data sets for terrestrial temperatures that can be cross-checked much before 1780; for sea temperature the records are not available globally much before the 1870s. All the other "facts" on offer - the hockey stick, etc. - exist only in mathematical models. The first rule of any prescriptive science is "do no harm". The cures offered in the name of "saving the planet" will prevent people in most of the world from ever getting drinking water as potable as the stuff people have in their radiators right now (excluding the anti-freeze). Without the pumps fueled either by oil, gas or coal-powered electricity and the plastic piping, there is simply no way. Fortunately, people seem to be much more aware of the choices than they were when the Brave New World was first put on offer at Kyoto.

Charles Pennington adds: 

It's worth noting that the most prominent physicists (as opposed to "climatologists") who have actually waded into this issue have tended to be on the skeptical side. These include:

Ivan Giaver (Nobelist)

Will Happer (heavy hitting Full Professor at Princeton)

Freeman Dyson (Feynman collaborator who probably should have gotten the Nobel for work they did together)

These guys were already so prominent when they spoke out on this issue that it was impossible to blackball them, but younger, less powerful scientists would risk being shunned if they spoke out–as the Climategate emails demonstrated.

Gary Rogan writes: 

Yes, the increase in atmospheric concentrations of CO2 is an undeniable fact.

And yes, the consequence of adding more CO2 into the atmosphere is unknown.

100 ppm is one molecule in 10,000. Try to visualize 10,000 of anything and think about the effects of adding 1 to it. Conversely, if it has 3 of something, than adding 1 more could be significant. Yet we hear that other participants in that 10,000 are really important, like water and methane molecules. The oceans are also exceptionally important in both diluting and releasing CO2.

Every time I hear about some "unique" phenomenon I can visualize many other "unique" phenomena of unknown provenance or importance. Unique phenomena don't prove anything, especially if one side is highly motivated to tie these unique phenomena to the outcome they seem to be highly interested in for good or bad reasons.

Many are convinced that this is obviously true. I believe this is utter nonsense because of the political circus and evidence of fraud that surround it, but it certainly is not as implausible as many totally faith-based things because people really are releasing carbon into the atmosphere in significant quantities. All I ask for is from some predictive ability of this line of thinking before I agree that bankrupting whole industries and impoverishing millions if not billions is called for. "Can't you see, it's all around you" is not enough for me.



 Laurence Bergreen has put forth a captivating contemporary accounting of the travels of Marco Polo in his book, Marco Polo, From Venice to Xanadu. Bergreen's research is a solid effort at corroborating and dispelling what the erudite trader actually did, and did not, experience in his 26-year longitudinal trek across Eastern Europe, Asia, India, Southeast Asia, and back again. One of the author's interesting assertions as to why Marco Polo's original Travels vacillates between acute observation and the fanciful and dreamlike is the traveler's use of Opium.

Speaking of fanciful and dreamlike, yesterday was a good example of working with false belief and untested ideas, trading against a strong gap-open spanning a four-day range and two open gaps. Marco Polo provides an apropos analogy after observing the behavior of Indian fishermen:

'Despite their superior technology, the sailors of India slavishly followed bizarre nautical superstitions. Marco was startled to learn how they predicted the outcome of a voyage. A ship, a strong wind, and a hapless drunk were required: "The men of the ship will have a hurdle, that is, a grating made of wickerwork, and at each corner and side of the hurdle will be tied a cord, so that there will be eight cords, and they will all be tied at the other end with a long rope," he explains. "They will find some stupid or drunken man and will bind him on the hurdle, for no wise or sane man would expose himself to that danger. When a strong wind prevails, they set up the hurdle opposite the wind, and the wind lifts the hurdle and carries it into the sky and three men hold it by a long rope… If the hurdle makes for the sky, they say that the ship for which that proof has been made will make a quick and profitable voyage, and all the merchants flock to her for the sake of sailing and going with her. And if the hurdle has not been able to go up, no merchant will be willing to enter the ship for which the proof was made, because they say that she could not finish her voyage and many disasters would afflict her. So that ship stays in port that year."'

One wonders how many rational fishermen chose to eschew such a belief and to plumb the depths for themselves, and how many erudite traders did their homework yesterday and profited handsomely as a result…




Have there been thoughts about creating daily contracts (in place of monthly contracts) to be traded at exchanges? By daily contracts, I mean futures contracts that expire on daily bases rather than by the months. Then there will be 200 (number of working days) or so contracts in any year, instead of the 12 contracts in a year. I guess this can be done very easily in this digital age - I take it that the monthly contracts are for practical reasons in the old times. This new contract structure would then eliminate the large discontinuity problem, and also create some nice arbitrage opportunities for the large trading parties. Any problems with this?



 Hello everyone,

In Ohio when you get a DUI you have to turn in your plates and pay for dark yellow DUI plates for a year.

On rare occasion I would see a set on a car. Lately I have seen many more in my area.

A sign that more drink and drive or a tie to a troubled economy?

Or is law enforcement more aggressive?



Mark Schuetz writes:


I find this very interesting. I grew up in Ohio, but have been in NYC for about the past 7 years. Even when visiting (about once or twice a year) I have never seen these plates before. Drunk driving was a huge problem in the community I grew up in, and from the news I get now, it sounds like it still is. However, I imagine Ohio as a state sits somewhere near the national average as far as fatalities and arrests.

As far as your questions, there are numerous studies about drinking habits as the economy is better or worse. Most are about substitute goods (most notable example is substituting beer for wine in bad times) or about the relative resilience of sales of alcohol during recessions (One example: "Drinking Habits Steady During Recession" and a contradiction). Beyond that, I cannot think of any economic logic underlying a correlation between a healthy economy and drunk driving habits. Law enforcement may be more aggressive, especially because in certain communities it has become such a problem. However the question is: is the purpose of the yellow plate to warn other drivers? Or some kind of deterrence (public shaming?).

Though I have lost friends to drunk driving and see it as a real problem, I'm not sure exactly what the yellow plates would do. Those who go to the bar then get in their vehicle probably don't have the fear of yellow license plates in the back of their mind. It seems it would make more sense to deal with reality (people are going to drink no matter what) while coming up with a preventative solution (better public transportation, or possibly a private service that provides affordable 24hr transportation).



 It would be interesting to know what the actual odds of hitting an iceberg were in the years noted below and how many ships had gone down due to hitting icebergs prior to Titanic. Head-on vs. side-tearing collisions:

"Collisions with icebergs were common," he says. "[There were] about 15 in 1884, 30 in 1885, 20 in 1890, 16 in 1897. For over 20 years [before the sinking of the Titanic], the editorials in many of the newspapers and shipping journals were highly critical of … the incessant demand for ever increasing speed with ships charging across the North Atlantic with undue care for safety in the hazards of fog and the hidden obstacles of derelicts and ice.

"In other words," Hill concluded, "the Titanic disaster was just waiting to happen … The most shocking thing about it was its inevitability. People knew it would happen sooner or later, but the industry did little about it.

From the Atlantic article "No, The Moon Did Not Sink the Titanic".

On why the iceberg was not seen in advance:

It's been reported that the iceberg warnings were ignored because the wireless operator was too busy sending out passenger messages via the Marconi wireless room.

But more important perhaps was the iceberg itself. What we have here is not the traditional snow-covered glacier but one that had become clear through continuous melting and refreezing, transforming it into a kind of dark mirror against the calm water and the clear night sky.

Read more here



 I've been hearing a lot of recent JPY mentions these days. Yen seems to be taking a header. YTD post several years as a champion. What is the bear case? High Debt, Low Yields/Carry/Risk On, Zombie Banks, Relative "Value" in a crisis given preexisting low rates rolling off, poor demographics, export economy seeks a weak yen. Any major selling points I am missing? Is this move a head fake to be reversed in the next leg of the rolling brownout crises or a major trend reversal?

John Floyd responds: 

There are some many possible answers to your question encompassing multiple time frames and potential driving factors. But let me try to put some of this in perspective and at least attempt to ask the right questions.

In 1985 I arrived in Japan after 23.5 hours of travel, bought some JPY at the airport at 248.55, headed to Tokyo by bus and as I put my head down on the futon there was an earthquake tremor that shook the building. The next day I read the classifieds for an English teaching job and was hired within 2 hours for a $40 an hour cash paying job. My only qualification and employment test was that I spoke English and could read the equivalent of what amounted to be a 5th grade English story book. I met many nice students ranging from businessmen in Kawasaki to the actress who later became embroiled in some sheep-poodle issues. I soon thereafter also worked for an investment company during which my first day I was informed that any lunch would have to be preordered very early and any possibility of going out to lunch would have to be done by reserving hours or days in advance. Japan was booming, money was spent with excess, and the now aging demographic spectrum was 25 plus years younger.

Since that time in 1985 the JPY has appreciated versus the U.S. dollar to 75.35, the "bubble" burst in 1989, and Japan entered what has been two lost decades of a stagnant economy. In the past several months the BOJ has adopted an inflation target of 1%, the BOP's has shown further signs of shifting course, and further intervention by the MOF/BOJ to weaken the JPY by selling it in the open market was revealed. In the longer time frame many other factors are at play such as debt levels, demographics, ownership of the JGB market, macroeconomic shifts, etc.

The message of the markets and the message I take from the recent action is Japan's new experiment bears careful watching. The shift that may be occurring in the collective forces and thoughts in Japan is potentially a very powerful catalyst juxtaposed to the macroeconomic fundamentals. The potential for the JPY to reverse much of the gains versus the U.S. Dollar from 1985 bears careful consideration and potential opportunity.




Keep it simple.
The Ideal seldom,
Presents itself,
All at once.

Sushil Kedia writes: 

My 2 cents:

1. A reward can only come from change.
2. Change, though is the only constant, its expectations are never across people or time.
3. Hence, uncertainty of change only allows for trade to occur. If all are certain ever of the amount and time required for change, prices will only jump and no trade will happen and hence no profits possible.
4. Risk thus is a twin-sister of rewards.
5. No Risk = No Reward.



There is a meal for a lifetime in understanding why otherwise intelligent people reach rash and completely wrong conclusions based on breathless internet headlines that appeal to their gut instincts.

One of the wonders of the internet is its ability to find primary source documents quickly and to NOT rely on pundits and commentators to summarize facts.

I am pleased to see that Drudge has now posted a confirmation of my statement below, namely that the new Executive Order is not news, and not a grab at martial law.

Stefan Jovanovich writes: 

There may be another explanation. People are –in their own rash way–beginning to ask WTF about what is considered "normal". The vast majority of executive orders that survive any one President's term of office. So do all the rules made by administrative law and formally-appointed Federal judges - neither of whom are ever subject to removal at the ballot box. With enough lobbying their follies and petty and major tyrrannies can be adjusted or amended or their enforcement ignored, but they are still there - ready to be used whenever someone wants to play "gotcha". Those of us lucky or foolish enough not to care what grades we got in law school used to make ourselves more than usually obnoxious by asking where in the Federal Constitution either the Congress or the President was given authority to delegate the use of their respective legislative and executive powers. The answer, as the Lististas who were not professional pains-in-the-ass also know, is that there is no authority for Congress to do so anywhere in the Constitution; the entire edifice of Presidential and administrative law authority rests on one clause in Section 3. of Article III: (he - i.e. the President) "shall take Care that the laws be faithfully executed". And from that we get the normality of our present soft tyrannies.



 What is the best recipe for leverage? Is it safest to backtest models and find the worst points historically and measure leverage accordingly? So if a model would have gone down 20% at the worst point in its history unlevered I know 5x leverage would have equaled a wipe out and thus use less always mindful the system could see that point (or worse) again? Or best to factor historical probabilities using counts or scans to do so? For example if 12/14 days my model has lost and based on history there is a 2% chance of tomorrow being a loser should I then up the leverage? Conversely if I have won 12/14 in a row should I decrease leverage or is it best to let it ride when in the black upping the leverage?

On a related note in the options market, I find most models eventually reach ruin. If you buy options you run into prolonged periods of no vol and are so depleted by the time the high vol periods return your are in trouble. If you sell options unhedged you run into crash problems. Spreads (put/call) seem interesting but the most optimal points to employ them generally result in taking in 5% or less of the capital at risk and if you up the leverage you risk ruin here too. If you don't lever up you don't make much.

Employing no leverage makes for stability and lesser concern but then a reasonable AUM is necessary to generate $$ amounts that make the game worth the effort.

Leo Jia writes: 

Hi George,

IMHO, I don't use the historically worst point to determine my leverage level. I consider that event not statistically robust. What I do is that, assuming I have a profitable model, on each trade, I determine the leverage level based on the risk level according to the model at the entry price and how much I am willing to lose for any single trade. To minimize the impacts of large and prolonged drawdowns, I sharply reduce my position sizes during those periods.




 The likelihood Entergy will win the war against the State is low. The state can easily demonstrate they do not need the power and therefore it is not in the public's interest to issue the "certificate of public good."

This is a two-front war. New York is trying to shutter Entergy's Indian Point nuclear plant using similar tactics. The NYS is using new environmental laws to claim Entergy's plant is out of compliance and incapable of receiving a license extension:

Entergy Corp won another victory in its quest to keep the Vermont
Yankee nuclear power plant operating for another 20 years when a federal
judge again blocked the state from shutting the 40-year old reactor -
this time over a spent fuel issue.

full article from Reuters

Pitt T. Maner III writes: 

Here is a photograph of the plant . Article states close to 1/3 of Vermont power for 40 yrs. generated by Yankee plant.

It's interesting to note that > 50% of the 104 US nuclear power plants are over 30 years old and many are bumping up on 40 year permit renewal.

Would natural gas or coal-fired plants replace Yankee?



 I haven't read all of Mr. Mee's letter on buying the worst but let me say that I completely recant and disavow all my conclusions about buying the worst individual stocks. My conclusions were not based on a prospective files but on compustat files. They didn't take proper account of survivor bias in many different ways nor did they uncover the 1000 fold gems that Gilespie used to like to buy. Dimson has a paper saying that buying the best is better than buying the worst, and he is a very careful researcher.

Stefan Jovanovich writes: 

There seems to me one occasion when the worst are the best — when the companies' futures as enterprises are flexion calls. As Mr. Einhorn said recently, "if the market capitalization of the equity is less than half of the face value of the debt, the stock remains in an option area"; buying those options can be profitable if one knows the central bank's is about to flex its rescue muscles. Buying $1 stocks in 1939 (after Germany invaded Poland) is another way of putting it. This is hardly a plan for sustained investing; over time the worst do come last, as the Chair says; but the longshots can be worth the bet if there is a near-certainty that the jockeys on the lead horses have all had instructions to pull back on the reins.

Gary Rogan writes: 

The well-publicized "magic formula" really says nothing more than both the price and inherent quality of the business are important, and some weighted average should be used for stock selection. If you can find something that's outstanding in both, as opposed to either outstanding in one of them this will pay off.

Yesterday I finished reading Great by Choice by Jim Collins and Morten Hansen and if I were to distill what's it saying about what it takes to outperform the market by 10x is that (a) you need to be good enough inter terms of both creativity and paranoia (b) more importantly you have to pace yourself for consistency, not moving too fast or too slow almost without regard to the external environment (c) have some sort of a detailed internal recipe that you maintain but also adapt to external changes as opposed to either not having a recipe or sticking wit the present version too long.



 As the more financially well off in the west live a more and more sheltered life, all brass and glass, and steer away from the hardships of WWII, and the acceptance of some irritations in life, to an existence where nothing can be out of place, does this effect the way we trade our markets?

This is a conditioning, no ifs or buts about it. The more things are in line, the more the general public makes sure the peanut next door toes the line and we don't get our feet wet when we don't have to, and we wear ear muffs when we mow the lawn. Does this effect how we want to knock our markets back into shape when we start believing they are not toeing the line? As individuals generally get more set in the ways the older they get, and less forgiving, does the average age of participants in a market, likewise effect the way a market moves? Are developing world markets, more generous and more flexible, forgiving and acceptable?



What are the measures or leading indicators that the world is facing liquidity issues at any one time?

In light of Victor's thoughts about when to get your cane out, it seems you buy the worst stocks when it's not just the company that's at stake, but due to help from government bureaucracy, and inadequacies and oversights (they have their paw print in there somewhere), the markets are getting trashed, and the government will flex their muscles (well, really yours or your grand kids' muscles) and they will save the world (with political overtones and because it's not their cash), no matter what.

When saving the world is imperative, at the darkest hour before dawn, it's time to be swift and strong, and start your sweeping. When volatility is off, and a big name is going backwards, it may well pay to use a cheaper cane.



 Dr. John Warren, nephew of Joseph Warren who died at Bunker Hill, was Surgeon General and Eminence Grise at Harvard as only an authoritarian Harvard professor can be. Wells, a dentist came to him in 1840 and said he had invented a painless way of doing surgery. It didn't work and Dr. Warren let the students in a cry of "bah humbug". The rest of the story is described in a book, The Century of the Surgeon. They did it again in 1846 and it worked. Dr. Warren started crying, "Gentlemen, this is no humbug". His whole life had been devoted to debunking such plain people and procedures as Dr. Wells. Another Dr. committed suicide knowing his whole life work had been wrong on the subject. I believe Wells died penniless of course.  Perhaps some day, I will be present at a demonstration of the joys and virtues of charting. It will work and I will start crying and say, "Gentlemen, this is no humbug" and will die penniless.

Kim Zussman writes: 

Besides typical faults of practicing dentistry and attending Harvard Med School in pursuit of romance, Morton was also illiberal (for trying to profit from ether anesthetic). From wiki:

William Thomas Green Morton (August 9, 1819 – July 15, 1868) was an American dentist who first publicly demonstrated the use of inhaled ether as a surgical anesthetic in 1846. The promotion of his questionable claim to have been the discoverer of anesthesia became an obsession for the rest of his life.



 Some people just worry way too much. Muppets, too, are guilty of the same character flaw according to a note I just received from Miss Piggy.

"Poor, dear Kermi, he'll never appreciate just how much I care for him or the lengths I'll go to keep him from harm. Way back in '17, when things looked dark I plopped him in a beautiful, if somewhat chilly, crock pot. To forestall his usual kvetching, I applied a minimum amount of heat. And guess what? He survived!

"Then again in '32 when things really got nasty I cranked the heat up a bit more. Once again he survived.

"Again in '50 when the Russkies sent the whole world into a shiver, I added a bit more heat (even got the go-ahead from the two old men in the balcony). Not only did he survive but began to put on weight…a lot of weight.

"'94's increase wasn't anything remarkable (he survived didn't he?), nor was this most recent one….although he's noticeably skinnier…almost looks like he did in '32.

"Despite all my attention and obvious concern, the ungrateful wretch is kvetching again. Afraid things might get too hot. Honestly, some muppets never know how great they've got it!

"Fortunately, I'm a forgiving Pig and in eight months we'll be looking back and laughing about it. And if need be, I'll crank up the heat a bit. Never hurts."



This has been posted before but I will add some color. Stocks and Treasuries have moved opposite of each other the last several years. So I am not sure waiting for the stock market to correct based on USM's decline is "money good."

If you scatter plot the changes in S&P and US this year the line of data is almost perfectly NW to SE. There are only four days all year where both have declined. And the ten times the S&P has advanced by at least ten points? US down every time.

In the spirit of ever changing cycles, tell me when US is set to improve and I will bet on the S&P correction.



 1. The stress tests assume a fixed response by the banks to dynamic changes and have nothing to do with the resilience of banks, but are designed to create a facade of sticking it hard to the banks but are really a method like most regulations to reduce competition and create an illusion of the public interest.

2. The bond stock ration has taken one of the worst declines in history the last week and this must be very bearish for stocks and bullish for bonds.

3. The decline in VIX to below 15% sets up another great opportunity for squeezes to be created by the market makers.

4. The Nikkei has crossed 10,000 and this has made the imitative Asians much happier but the foreign buyers haven't profited that much because the value of the yen has fallen about as much as the increase in the stock averages.

5. The S&P has gone above 14,000 from a low below 12,000 in two months without benefit of a reversal and this is unprecedented. But how does it affect the future?

6. Oil is about even over the last few weeks and it's future movements will determine how much stasis the current increases in stock prices will have.

 7. Like the chickadees in Memoirs of a Superfluous Man, the banks refuse to buy puts to meet the stress tests because they are so accustomed to the transfers of wealth fro the forgotten man to themselves by the cronies, and flexions that they refuse to invest the few hundred million to meet the stress tests. The ridiculous absurdity of the stress tests assumes that the banks wouldn't change their position if unemployment were to go up by about 100 %, and that they would still have their current positions.

Let us never forget that the signer named his ramblings "Briefly Speaking" instead of "Nobody Asked Me But" in disparagement of the sanctimonious flexion from Nebraska who said he wasn't "briefed" on the matter of the bribery at one of his insurance companies with AIG where the one briefed went to jail, and similar "briefings" he did not have with Sokol on companies they bought stock in.

I would recommend Ring Lardner's book of short stories Roundup particularly "Alibi Ike", "Horseshoes", and "Champion" to all who wish to enjoy the current baseball season better.

Anonymous writes: 

I put on a small long position in TLT on Friday. If one believes that the recent backup in rates will put a dent in the current record pace of corporate issuance, then the relentless rate-lock sales in treasuries ought to diminish. Combine that with the bit of central bank buying of long paper on Friday and the dearth of auctions in the immediate future, and it looks like there is a good setup for bonds.

I'm often wrong about trades like this, but I'm glad the chair is on the same side of the market, opinion-wise, as me. I must be doing something right.

Mr. Krisrock comments: 

I couldn't ignore your comment.

You might like to consider this, especially with q end so close…

Over the past several weeks, in stepwise fashion, many profound issues affecting investment policy have been deferred.

Several rounds of ECB 'LTRO' in Europe has convinced investors that the PIG financing dangers have been postponed for the near term, with the highly competent Greek Legal System adjudicating foreign claims.

Here in America, the FED's well staged narrative for releasing stress tests to be followed by large bank dividend increases blew up thanks to miscommunication with JPMORGAN.

Bernanke panicked and shocked the market with the early release of a report that 5 financial institutions had failed the test…

It's obvious from the "careful" staging that we now have "teleprompter" independent regulation.

One must remember that in the 4th quarter of 1999 the FED also telegraphed its intentions to offset financial complications from Y2K
with market participants 100% certain the FED wouldn't increase rates, investors turned to 'momentum' trading, chart breakouts and PE multiple expansion.

The unintended policy consequences planted the seeds for the subsequent negative stock market surprises in March/April 2000 when policy reverted.



A comment on the CFTC:

and this most recent crash in gold and silver during Bernanke's speech on February 29th is of notable importance, as we along with 4 other major institutions, orchestrated the violent $100 drop in Gold and subsequent drops in silver.



I said that great breakthroughs often come from extensions and innovations at the borders of two fields and that you could learn more about markets from checkers than you could from most of the books. I believe that it is significant that after two changes in coaches, Portland went from down 42 against the Knicks a win over league leading Chicago and Knicks won two in a row being up 30 or more in both games. The new coaches are humble. The other teams let up. Portland and the Knicks played harder. The other teams weakened their guard. Okay, how can this be turned into profit in markets at the borders or other fields?

Craig Mee writes: 

Just like Bacon, Victor, and pulling up a nag, if not an easy win on the minnow races, possibly flexions allow notes to come to them in the days before payrolls, without driving home the advantage to early. Get the size on, and let the numbers (and seasonals ) do their work…



 In light of the GS machine seeing a fall from grace, outlined by Rocky's man on the ground observations, and further by the recent resignation letter, and the Rolling Stone article showing past deeds do not get in the way when you have friends in high places…

How can you pinpoint when hubris has taken over the culture of a company and there's more back slapping then client phone calls taking place? Whether it's a financial company or otherwise, are there any leading indicators– proportion of bonuses to management as opposed to the minnows, for example? I recall Macquarie Group, (often referred to as Australia's Goldman) some years ago had what seemed like a ridiculous amount of money weighted to the top end, as in 6-8 board members.

Maybe though something as simple as a voice response from a cross section of the community, outlined by the following passage may give you a indication on when they're on the nose:

2007 "In the past decade Macquarie has been one of the great stories of Australian business. In the next decade it will surely be one of the most intriguing. How ready is Macquarie for the consequences of owning businesses on which citizens vitally depend? And how ready are citizens to depend upon Macquarie? While what Macquarie Bank ends up being called is of only minor significance, the tone with which people say its name may matter a lot."

 (MQG off 66.% from Nov 2007 levels).



 I am so removed from Wall Street that this may be an obvious point:

I think it will turn out that Greg Smith did Goldman Sachs a great favor. No amount of purposeful PR could have helped GS so much and turned the tide running against GS so effectively as Smith's pompous, self-serving and unsupported resignation op ed.

Except among the irrational haters of wealth and speculation, Smith's op ed will wind up generating sympathy for GS, and I predict this week will mark the bottom of GS both in reputation and stock price. It will be pretty much all up from here.

The true criticism of GS, of course, would be its corrupt, crony-capitalist relationships with current and prior Presidential Administrations. But that's too subtle and knowledgeable a criticism. Rather the criticism in the popular mind is "greed". Smith's attempt to cloak his resignation in anti-greed will be seen through and will lead to greater acceptance of a beleaguered GS just trying to go about its business of making Wall Street work.

Rocky Humbert writes: 

As a GS alum, I would like to offer a few observations, without directly commenting on Dan's point.

When I left GS as a vice president in 1989, GS was run by Whitehead and Weinberg, successors to the legendary Gus Levy. The firm was a private partnership, and importantly, the investment banking/capital markets side of the company dwarfed the trading side of the company. This is a critical distinction from today. Sure, Bob Rubin's risk arb desk was hugely profitable. Sure, we did some big block trades in equities; but the much higher commissions of that period, and the firm's limited capital, ensured that the focus was on flow and not on principal transactions. By then, Traders were second class citizens versus the hermes-wearing, first-class-flying I-bankers who, at that time, would never ever represent a company in a hostile takeover. Of course there were some guys who pushed the envelope on occasion (I won't name names), but there was a distinct belief that everything flowed from the profitability of the clients. For an analogy of the inherent tensions between Ibanking and trading, revisit the Gluckman/Peterson feud at the ancient Lehman Brothers (pre-Amex deal).

That really was the GS culture back then. Heck, Weinberg drove a crappy Ford sedan because we did the Ford IPO. And few things could get you in trouble faster than talking badly about an important client. It was unthinkable that we would push a client into a security that we thought would turn out badly. We looked down our noses at Bear Stearns and the other bulge bracket firms who were known for that sort of thing. (Aside: I posit that the GS cultural evolution can be gleaned from the type of car the CEO drove.)

The world evolves, and I believe that the evolution of GS into its current form is a reflection of:

1) The end of its being a private partnership — which ensured risk taking with OTHER people's money. I still remember having a particularly bad losing day when Eric Sheinberg walked up to me, whacked me on the head and said with a reassuring smile, "Don't sweat it. It's ONLY money…..and it's MY money."

2) The domination of trading profits versus investment banking revenues. Management realized you can only grow investment banking to a certain size due to its service nature; whereas you can compound capital by investment and trading in a theoretically unlimited way.

3) The growth of trading technology and impersonalization of counterparty relationships. (It's much easier to "screw" someone who you don't know.)

4) The 10 percent rule, where they fire the worst performing 10% of employees every year. Back in the Whitehead/Weinberg day, such a concept would have been unfathomable. It really was a family lifetime employment sort of feel, not dissimilar to GE before Jack Welch and IBM before Lou Gestner.

5) And many other examples that correlate with a 30 year bull market in debt as a pct of GDP.

I am not lamenting here. I am simply saying that Smith is right when he observes that the GS culture has changed.

Too, the world has changed.

And, to be honest, I don't really understand why Smith wrote that piece except as an attempt to be Michael Lewis-esque, but without the chuckle factor.

Jack Tierney writes: 

Notes of interest in the GS "time to buy?" discussion: Goldman's full-year net income hit a record $13.4 billion in 2009, then slipped to $8.4 billion in 2010 before tumbling to $4.4 billion last year. Goldman's share price has plummeted from its 2009 high of $192 to the current quote of $111. During 2009 and 2010, Goldman spent 71% of its net income buying back its stock. But last year, the company spent 264% of net income buying its stock (excluding the repurchase of preferred stock from Warren Buffet, Goldman still spent 140% of its net income buying its own shares last year - double the rate of 2009-10.) Last week, Goldman executives cashed in $20 million worth of stock that had been "locked up" for the last three years. Over the last five years, Goldman's management spent $21 billion of the shareholders' capital buying GS stock in the open market at an average price of $171 a share. Today, the stock sells for $111. On a mark-to-market basis, therefore, Goldman's stock buy-back "investment" has produced a loss of about $7.3 billion for shareholders…. Last week, nine Goldman insiders sold their stock as fast as the law would let them. They cashed out $20 million worth of stock at an average price of $107.44.

Fred Crossman replies: 

Great points, Jack, on buy backs. I noted that American retailers have continually expanded at a much greater rate than the population growth. In addition to declining per store sales and income these retailers have been furiously buying back stock since 2007 to goose earnings. LOW has reduced shares outstanding by 12%, BBY 18%, HD 20%, KSS 11%, WMT, 15% and SHLD 29%. All buybacks above book value (destroying share holder value). Especially HD, now trading at 4.1 times book. 

Bruno Ombreux writes: 

There is a very simple way not to be screwed by GS, or anybody else. I am talking about trading, not corporate finance.

If you are making trades directly with GS, you are presumably a company, not some small private speculator. So you have a tool which is called "Risk management policy" and you make it a sackable offense not to comply with it. In the risk management policy, you list the markets and the instruments people are allowed to trade.

For instance:

- only markets with at least 3 active market makers and x trades/per day
- only vanilla instruments like swaps In addition, you have procedures like "trader must obtain 3 quotes from 3 different counterparties prior to making a trade", and a track record of the consulted counterparties and their quotes must be kept in the trading system, for each trade. In these types of market, you are not trading every 5 minutes, so you have the time to do all this.

There is no way you are getting screwed if you restrict yourself to simple instruments and they have the best bid/ask available among several other market makers.

Rocky Humbert comments: 

Sorry, but I don't understand your distinction between trading and investing. I also don't understand your definition of vanilla. I am however a fan of "rocky road" flavor.

I agree with you that entering trades that you are not sure to be able to exit is risky. But if the market provides you with a sufficient liquidity premium, it's rational and it can be profitable. But only if you do it right of course.

Bruno Ombreux replies: 

Trading vs investing: this could be the beginning of an endless semantic debate.

But let's use a couple of examples:
- trading: I buy a basket of stocks this morning with the intention of reselling before the close
- investing: I build a portfolio of stocks with the intention to keep it a relatively long time, because I think that these stocks value will increase due to whatever reason, growth, value, the economy…

I also like the following classification, which I believe comes from Minsky:
- Profits on the position neither depend on price variation of the asset, nor on cost of carry: I am investing.
- Profits do not depend on price variation, but only on positive carry: I am trading.
- Profit depend on price variation of the asset: I am speculating.

The example and the definition are not equivalent, but they give a rough idea of what trading is and what investing is. The border between both activities can be blurry. But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.

Now, to answer your second question, what is vanilla? Vanilla is anything that is simple, easy to understand and commonly traded. In the energy markets, everybody trades swaps and Asian options. These are vanilla. What is not vanilla would be a double-barrier option on Singapore 180 cst Fuel Oil, settled at the average CAD/EUR exchange rate lagged 3 months vs the Fuel oil averaging period. That is not vanilla, and definitely more simple than many equity derivative deals.

Dylan Distasio comments: 

But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.

I will let those wiser than myself comment on the rest of your analysis, but the above jumps out at me as a poor definition of investing. Holding a bond to maturity may be a valid example of your argument, but there are plenty of people arguably INVESTING in other instruments who need a market to close their positions. A few off the top of my head include real estate, stocks, bonds not held to maturity but still held as investments, commodities including physical ones held in safes or other venues. Of course you need a market to close out most investments! I may be missing something but this seems obvious. If you cannot find someone else to buy or sell your investment at the time of closing the position, you have zero liquidity and for all intents and purposes zero value if you need that liquidity immediately. Without a secondary market, most investments cannot realize their value.



What is the psychological significance of D'Antoni resigning and the team winning by 40 points for first time in years. The air was cleared. The bad vibes were reduced. Does this have any comparable spill over for big companies when a troubled CEO resigns? Can it be quantified? Can the concept be generalized to markets?



 It's amazing how smart the public is, and how ridiculous all the experiments of the expert's breakfast friend are that duplicitously show how irrational the public is when confronted with contrived situations with deceptive self serving to the academics answers. They always sense when someone knows what he's talking about and pay attention as they did to my lessons from hard ball squash, giving more responses than any other of my posts except the one about Lady Gaga and what she can teach us about the idea that has the world in its grip.

Okay, I have to give some more lessons from the one thing I know about.

7. Never hit a soft drop shot. The opponent will be able to get there near the end of a game and kill it. It's especially bad near the end of a game, when the opponent will run for anything, do or die. Lobs are sure losers near the end of a game also for the same reason. Don't ease into your positions. You'll only get filled when it breaks out, and that's the only time that the opponents will certainly have the weather gauge. And don't arabesque into trial positions in small markets just to get your feet wet as the Pelicans at the top of the pyramid will always eat your bait, as they don't allow outsiders to dine at their expense, especially when the resources are limited.

8. Don't try to win the point with the same shot over and over. Your opponent knows when they run you up to the front right, on your rightie forehand that you are going to hit it cross court. If you happen to catch the perfect angle so that your opponent can't intercept it, and belt it down the backhand wall, for sure it was luck or he'll try harder the next time and you will lose the point. Always be ready to return the straight drop to the right side wall down the wall instead. Please don't try to make money from the market the same way two times in a row. How foolish do you think the adversary is to allow you to take his chips twice in a row. He was only setting you up for the big kill. Most people have a very good memory of what happened the last time, especially if it was a vivid loss. They are so angry that they will put their resources against you the next time, without hesitating to take billions of bail out money which they have received, or use costless loans from their past, current or future cronies at the Fed to go against you.

 9. Please learn from racquetball and jai alai how to hit a proper backhand. The swings of the racquetball players on the backhand, very nicely memorialized by the Hobo are infinitely better than the squash swings. They have 5 separate torque in there to give it exponentially more power than the placid Philadelphia, old boy English swing. And the Philadelphia swing is 10 times more powerful than the ridiculous backhand that the old Harvard players were taught in the hard ball game with the slice backhand with hardly any backswing, and no torque at all. I shudder at how high a % of the games I lost came because of the weak Harvard backhand I was taught and was too foolish ever to change, possibly because the only one that could beat me was Sharif. Martie Hogan's backhand in racquetball was a thing of beauty and since that time, it's been improved upon every 3 years or so by the next generation of racquetball players. Pedro Baccalo had the best backhand in squash which he learned from jai alai, and he could hit it 5 times harder than any other player because of all the torques in it. Learn from these improvements instead of watching the placid, effete swings of all the old time squash players and as far as I can see, the current crop of Internationalists. Okay, for crying out loud. The best lessons in markets and any field come from the borders where it meets another field. You'll learn more about markets from studying checkers or ecology or statistics or sports betting than you will from all the books on markets combined. Study the greats in other fields, e.g. Bronstein, or Armstrong or the Globetrotters to see the secrets of winning in markets.

The first six lessons:

I often get asked to talk to kids about the good old days of squash when you could make a point with a sharp angled shot and a long point only lasted 30 seconds. At a recent occasion talking to Hopkins kids I tried to relate the lessons of squash to wider endeavors. While doing it, I found myself in a dream world where flashes from markets, life, business, and school, circled around, crossed over, and fed back on each other. Since this is the one subject I know about, I thought it might be useful if I turned the tables and tried to think of the lessons that I learned from squash and how it relates to markets.

1. The game is always changing. Who would have thought that hard ball squash would now be as dead as squash tennis, or court tennis. There were once 2,000 court tennis courts in France before the revolution, but now say 10 in the world. There were once 10,000 hard ball squash courts in the world. Now, hardly any as they've all been converted. The markets you are trading now are likely to be very different from the ones you'll trade in 25 years. The rules and equipment will have changed. Electronic speed and international standards will replace manual method. I find it hard to believe that the things I traded 10 years, ago, foreign exchange, bonds, options, are no longer viable for me. How many others will find this out to their cost if they don't prepare for it.

 2. The officials, the rule making body, the association in squash, will always be like most such associations a body devoted to maximizing the power, perks and profits of the officials. Time and again, they stood in the way of professional play on the grounds that it would weaken the amateur spirit of the game, the English way of stiff upper lip, poverty for the serfs, and noblesse oblige. If you wanted to be successful in squash, it was very important to stay in the officials' good side so that they wouldn't keep you out of the good spots and good tournaments, as they so often did to me and Gardner Molloy, and countless others. If you want to be successful in the markets, be sure that the rules are not stacked against you. That you will not receive margin calls so that the officials can take the other side against you, that the members will not be able to get the edge on you thru access to unlimited capital, flexionism, and self serving decisions like those that arise when you go to arbitration on an Exchange, where the referees, and judges are invariably chosen by the exchange itself. How can you expect them to rule against their friends and cronies.

3. Counting and record keeping are crucial. A good squash player, should know exactly where the ball will land, when he hits any shot, given his current position on the court, the angle of the wall he aims for, and the velocity of the shot. You could work it out by geometry given starting with the angle of incidence equaling the angle of reflection. Very few players take the trouble to figure it out, or even think about it. How many good market players don't know what the expected volatility is on their trades given how fast and the direction it's been going in the past?

4. The first blow is half the battle. The player that gets ahead by 2 or 3 points is inordinately likely to win the game. The importance of a good start and good preparation are paramount. Bronstein once waited 2 hours before deciding on his opening move while the clock was running. The first blow in markets is still crucial. The expectations are much higher when the first x minutes are up compared to down.

 5. One of the keys to winning in squash is never to stretch. When you stretch you can't hit a hard shot, and you're limited in where you can hit it, so you're opponent can always anticipate perfectly where the shot is going. The other side is that you should always take the extra step so you'll be in position to hit any shot. It's so enticing to stretch because it saves you the step and enables you to get the ball in play but so certain to lose to losing. How many time do you stretch in markets. Put on too big a position, take a regularity that only has happened 3 of the last 5 times and run with it? How often do you end up leaving yourself vulnerable to an adversary who knows exactly how extended you are, and come into full force against you? Certainly one of the worst errors in markets.

6. I could never figure out why Sharif Khan had a winning record on me. He was sure to make at least 5 errors a game, and had a weak backhand that turned over the ball whereas I could go a whole match without making a single error. Then I realized he was the only person that could make 7 winners a game against me, where the ball bounced twice before I could touch it. Then I realized that what he did was to take every shot on the half volley. He worked off my power so that the ball came back at a higher velocity. He also didn't give me time to set up to return the ball. Most important though, by violating the stricture we had learned to wait and make the opponent commit, he prevented one from anticipating his shot and tucking in to retrieve it. Since that time Agassi and even the more loathsome sportsman Connors have pioneered using the half volley in tennis to beat players with much better equipment than they in tennis. Nowadays it's de rigeur in tennis.

Taking it on the half volley in markets means not waiting until the afternoon to put your positions on, not waiting until every market that 's a pilot fish for your market is in the right direction, not waiting for the announcements to reduce your uncertainty. If you want to speculate you have to speculate. Only the house can wait and grind you to oblivion. Taking it on the half volley in markets is getting in way before the pivot has occurred, way before the trend has changed. It's the secret of success of great players in racket sports and markets. Come to think of it, it was the secret of success in handball also.

The old time handball players are so much better than the current ones. Why? For one they hit the off the wall with deadly precision. Artie had a fantastic off the wall shot, and somehow his football killed arm was able to miraculously get back to its youthful vigor when he hit it. He always said that Ralphie Adelman was the best because he could hit everything off the wall for a killer. I now see that Martie Hogan is espousing standing in front of the service line on each shot in racket ball as the key to success there. Some day someone will teach the handball and racket ball players of today that the off the wall killer is key in games and markets.

Chris Tucker writes:

Point 5 is the similar to using power tools as I mentioned in "On Taking Down a Tree":

Never extend your reach beyond what is comfortable. Using a tool at more than arms length puts you in a position that prevents you from reacting quickly if something goes wrong. It puts undue stress on you and the tool. It removes whatever leverage you have on the tool. It also prevents you from "feeling" properly through the tool. When using a power tool you receive signals about the material you are cutting and the nature of the stresses on that material. You can always tell when a branch is about to go if you are listening carefully to the tool. That feedback is denigrated by reaching too far or by using only one hand.

When developing skills you must, occasionally reach beyond your current level. This is different from overextending your reach. But it is important to do so incrementally as overstepping your bounds too egregiously can result in devastation and trauma. Taking small steps into new areas or higher intensity or greater complexity allows you to learn while remaining close to your comfort zone. Yes, you have to reach in this sense, but you want to do it in such a way that you don't destroy yourself in the process. When you push yourself in this way you also expand your comfort zone and your skill set. This can be the translated into taking on larger size, increasing leverage, having more trades on at one time, or introducing new instruments to your repertoire.

John Floyd comments: 

 I think Ari would say, "you should set goals that are constantly reaching further, but attainable, then gradually keep moving forward. If you have a stumble then pause and evaluate why. If you set a goal too far out of reach you may be faced with disappointment at not getting it".

Charles Pennington writes: 

Steve Sailer has a nice illustration of the problem with some of Kahneman's questions.

Apparently the following background information is NOT supposed to convince you that Jack is more likely to be an engineer:

"Jack has a B.S. degree from Purdue. At work, Jack wears a short-sleeve button-front shirt with a pocket protector full of mechanical pencils, just like most of Jack's coworkers on his floor. Jack always wears a tie clasp to keep his necktie from getting smudged by the blueprints when he leans over a drafting table. Jack's favorite line from Shakespeare is, "The first thing we do, let's kill all the lawyers." In fact, that's the only line from Shakespeare he knows. Jack wanted to name his firstborn son Kirk Spock, but his wife wouldn't let him."

David Hillman comments:

From Forbes' "Five Leadership Lessons from James T. Kirk" (applies to lone wolves and markets as well) :

“You know the greatest danger facing us is ourselves, an irrational fear of the unknown. But there’s no such thing as the unknown– only things temporarily hidden, temporarily not understood.”

“One of the advantages of being a captain, Doctor, is being able to ask for advice without necessarily having to take it.”

“Risk is our business. That’s what this starship is all about. That’s why we’re aboard her.”

“Not chess, Mr. Spock. Poker. Do you know the game?”

“‘All I ask is a tall ship and a star to steer her by.’ You could feel the wind at your back in those days. The sounds of the sea beneath you, and even if you take away the wind and the water it’s still the same. The ship is yours. You can feel her. And the stars are still there, Bones.”




 In terms of using technology to take it up a notch  and play a numbers game, the Nigerian scammers are certainly up there.

I met a bloke personally recently, who said he got done for 4 grand. How did they do it? They sent him a email from his ex wife, with all the language indicative of how an email would be exchanged between the two. She subsequently said she was overseas, which she was, and had a medical issue, and was having trouble getting funds. He tried her mobile but she didn't pick up. He then sent the funds.

Bottom Line: The email that came in, on a closer inspection had one different letter on the back end of it, and his ex wife thinks that they accessed her emails through an internet cafe she was at in London. Didn't sign off, but just clicked out, and they were waiting in the wings to pounce. (Facebook is said to be a wealth of information for them too).

This activation job below, an atypical roll-out by the Nigerians, is just zoning in on pure greed…and due to the money involved, due diligence was being thrown out the window:

The 49-year-old fell victim to an online scam and was convinced a wealthy church friend of hers named Bridget had passed away and left her an inheritance.

"Bridget wasn’t poor, she traveled to South Africa 6 or 7 times a year so she had the money,” Ms Scaf recalls.

She was told she'd need to pay thousands to activate an overseas account holding the $1 million left to her. Ms Scaf says she was emailed a series of documents that appeared legitimate.

"These people are so good at what they do because they come across sounding so genuine,” she said.

Over a period of three months, she transferred almost $40,000 through an online bank account.



 This is a really fascinating article about thefts, sales, and exchanges of the Tide detergent, but it seems like it's evolving into some sort of primitive street money.

Here's a related parallel: A thriving black market appeared, with Kent cigarettes becoming Romania's second currency (it was illegal and punished with up to ten years imprisonment to own or trade any foreign currency), used to purchase everything, from food to clothes or medicine.

George Parkanyi writes: 

Well … I have a fair amount of gold right now. Should I diversify into detergent then? Are you guys long the regular, or the new-and-improved?

And how do you pitch it to clients? "Has a low beta, AND fights stains!"

Or report the closing markets … "May concentrated cold-water was down 3 cents today in active trade … Elliot-Wave theorists say this is the second leg of a major rinse cycle."



 The other day I heard somebody say:

"Assuming the future behaves the same as the past, I reason that this way makes my funds efficiently used".

I wanted to say, my experience is that the past is never like the future so we waste valuable time and skills on a false postulate.

As I see it, it is better to have a core strategy to deal with equity drawdowns, etc –based on logic–as opposed to a strategy based on the past real results or back tested as that is for the most part a make believe world since it never happens quite that way again.

Gary Rogan writes: 

Larry's statement seems to be exceptionally profound in what it's saying and in the unambiguous nature of what it's saying. Speculation seems to be about predicting the future. Is there anything but the past, in some sense, that can guide us towards correctly predicting the future? If so, and if it's not similarity, what is it about the past that can help predict the future?

John Netto comments: 

There are ample proverbs espousing the merits of both deriving information on events which have taken place before us, as well as the the complexities in attempting to accurately predict the future due to the inherent uniqueness of the time we are living. As a speculator in the financial markets, sports arena, and poker, it's my experience the answer lies somewhere in between. For me, the ability to extract alpha is how well I can ascertain what qualitative aspects are unique and execute a strategy from there.

Two sayings which are both contradictory and complimentary:

"Past is not prologue" "Those who do not learn from history are doomed to repeat it"

Gary Rogan writes: 

There are many ways to use the past, such as:

1. Under similar circumstances, Security A behaved a certain way during a statistically significant percentage of the time. I will therefore bet that Security A will do it again under similar circumstances.

2. In the past, a certain class of securities had a certain trajectory under similar circumstances. I will therefore bet that this new Security B, which seems fit to be a member of this class, is statistically likely to follow this trajectory close enough to bet on.

3. In the past, when people were this excited/depressed/confused you could bet with them/against them and make money. Let's do it again.

4. The past rarely repeats under these circumstances. Let's bet against the past.

I'm sure there is an infinite variety of similar observations. Yet in every case the past was used SOMEHOW. There is nothing but the past as the basis for human knowledge, and that's why I was so fascinated by Larry's statement, especially because he is a master of his game.

Craig Mee writes: 

Running a stop with any position, regardless of the backtest, is both logical and prudent.

Stefan Jovanovich adds:

When the British and French were forced to give up their remaining military strength in the Arabian Peninsula and the eastern Mediterranean - abandoning the base in Aden, being forced to withdraw from their assault on the Suez Canal, the U.S. did not replace them on the ground. The great fear was that "the loss of the Canal" would result in "the oil weapon" being used against "the West". The actual result was the development of supertankers that by-passed the Canal entirely and increased by an order of magnitude the ability of the oil exporters to ship their crude to Europe and Asia. At the height of the Suez crisis the inflation-adjusted price of crude (using the 1947 nominal price of $15 as the baseline) rose to $18 a barrel - higher than it had been during the Korean War. A decade and a half later - even as U.S. supplies went from 40% of world production to 10% - the inflation-adjusted price fell by nearly a third, hitting a low of $13 in 1972 after production began flowing from the North Sea discoveries.

I find myself wondering if the U.S. eventual withdrawal from Afghanistan and the withdrawal from Iraq already largely completed will not have the same paradoxical effects as the Anglo-French withdrawals did. I realize that this question is completely irrelevant to the questions that anyone trading in commodities has to answer; but those of us in the bleachers are interested in what the professionals on the field think will be the effects of the closing of America's 25-year military misadventures in Southwest Asia.

Larry's maxim: "it never happens quite that way again" - certainly applies to political history. This is the second time in my lifetime that the American public has lost its belief in the virtue of our allies. Last time they were wrong; this time they are right.




 This is a wonder filled British bookstore.

I'd seen the "Keep Calm" posters. This video explains their origin, but it's worth looking at the video just to see this bookstore.  And through that link I found this page of the 20 most beautiful bookstores in the world.

These are the types I things for which I love the web.

Best wishes,


p.s. I vote for the two Ralph Lauren mansions on Madison off 72cnd Street. They have small bookshops scattered through out them. The books and the ways they're displayed are often changed during the year.



 What keeps me obsessing about Grant and his times is that there is so much real information (diaries, letters, memoirs) from the people who were there that the newspaper versions of what happened do not become the final word. One can, with very little effort, get to the truth of things and safely ignore (or accept) the opinions of the New York Times because they are - in either case - anything but "all the news". What is also fascinating is to observe how official opinion does its best to squash all contrary ideas. The internet truly is as much of a revolution as Gutenberg's infernal machine because it gives the means for circulation of all ideas - official and unofficial. Even 10 years ago that was not the case; you were a complete crank if you challenged the academic orthodoxy, and there was literally no point in going to conferences or meetings because all the documentary evidence in the world would not stand up against "what everybody knows". Of course, Grant was a drunk, a business failure, an anti-Semite, a corrupt politician, etc. etc. The Adams boys said he was, and they should know - they went to Harvard. "True, but lots of us went to Harvard, including Al Gore; what does that have to do with the facts or the truthfulness of the sources."

 All of this is a veiled pitch for people to buy Timothy B. Smith's books. His work on Shiloh - This Great Battlefield of Shiloh: History, Memory, and the Establishment of a Civil War National Military Park - is the best book written about how a civil war battlefield now tells the story not of what happened but of what people wanted "everybody to know". Grant wrote that "the Battle of Shiloh has been perhaps less understood, or, to state the case more accurately, more persistently misunderstood, than any other engagement" in the Civil War. He would not have been surprised to be told that the park reflects that persistent misunderstanding. Smith's book is a wonderful history of how that came about.

P.S. Smith has a new book coming out on the Battle of Corinth and has already written one about Champion Hill. He has also written one about the Chickamauga Memorial - the first Civil War National Military Park. Buy them all.



 Stefan was saying twitter is so brilliant because it's like fast food on the Internet.

Twitter is what we do with it. So indeed there's a lot of fast food, but there are also very interesting accounts, giving information on science, open edition, etc.

Nobody is forced to subscribe to uninteresting accounts, and there is no lack of interesting ones.

More open than twitter, there is … and even more open is (on which is based)



A fascinating read: "How I was taken in by Britain's Madoff" :

"The mastermind in Britain's biggest Ponzi fraud lived like a playboy until his scheme collapsed, leaving a trail of broken lives. Cahal Milmo spoke to one of his victims "



You have to hand it to the market mistress. After 45 days without a 1 % decline, it came in with the 2% decline, after two down days, just when you wouldn't have expected it in a blue moon, and once having breached the magic 50 as was necessary, went back to the old highs faster than cool papa himself turning off the lights. Totally beautiful with the least effort to use the Greek news over and over to force the weak bottom feeders to contribute so much more than they have to =, to pay the top people, as if their flexionic winnings and hand outs were not enough to offset this weak card again.



 As California has continued to run deficits during this recovery, the state has managed the shortfall by internal borrowings from its trust funds. Since California still uses U.S. dollars as units of account and holds its money in dollars, these internal borrowings have involved what could be called - for lack of a better word - "real" money. To deal with the current projected deficit, California's Governor has proposed a further tax increase. Since it involves paying more money to schools, the measure has broad public appeal; after all, education is now, by far, our largest single enterprise. The proposed "TEMPORARY TAXES TO FUND EDUCATION. GUARANTEED LOCAL PUBLIC SAFETY FUNDING. INITIATIVE CONSTITUTIONAL AMENDMENT." will increase personal income taxes on annual earnings over $250,000 for five years and increase sales and use taxes by 1/2 of 1 per cent for four years. The measure will allocate 89% of the new tax revenues to K-12 schools and 11% to community colleges. The latest Public Policy Institute poll has 72% of respondents supporting the measure.

But, there may not be any substantial new revenues from the tax rate increases. There will be at least some additional money raised (increasing sales tax rates brings in more revenue until you get to 30% plus levels; then, for some inexplicable reason, every further increase leads to a slight reduction in collections). But the increase in California's highest income tax rate may be a disappointment - as it has been in the past. Only a very small number of taxpayers have incomes that will be subject to the new rate; and in the past much of those large incomes has been money made from the capital gains from IPOs. To pay the school teachers, California will needs the Facebook IPO. (Historical aside: a half century ago (1963-1964 FY), the personal income tax generated only 18% of General Fund revenues.)

Eddy's Mom - the brains in the outfit - predicts that California will not only need Facebook's IPO but also its currency. Consider this: if you go on unemployment in California now, you receive a debit card; and you become a customer of the Bank of America

The next logical step, says the EM, is for salaries and pensions to be paid in debit card credits. Those of us who amuse our small brains by spending too much time watching the California legislature on public access cable would have agree (actually, it is less watching than listening; politics in California really has become show business for people too ugly to work even behind the camera). The theme for the legislature this year has been a discussion of how important it is for California's great wealth to be "invested" in the state - i.e. spent on the schools and school teachers.

If the latest attempts to soak the rich fail because the rich hide their money, the legislature could find itself wanting to require people to be paid in debit cards. When people decided to download their debit card balances to their checking accounts, as the unemployed now can, the state will want to place exchange restrictions on the debit card accounts. The DeLongistas (worshipers at the Keynesian pump) would certainly approve of such a policy; their models will prove beyond all doubt that California's economy will increase dramatically if only California's money is only being spent in California.

But why stop there? Shouldn't California have its own currency?

Silicon Valley will approve; my God, they will be wildly in favor it - provided people can pay their taxes in Facebook credits.

There would, of course, be a downside. The out-of-state retirees (and in-state recipients as well) will be tempted to find a black market for their debit cards. But think of the advantages: not only would California finally be able to show the rest of the country just how much more Progressive we are but we would also be getting rid of all the people who refuse to see the wisdom of mandatory electric vehicles. Of course, there would be people who saw such changes as the worst kind of mercantilist thought-control; but they are the very people who should not be here in the first place. They should leave, just the way the Jews, Protestants and free-minded Catholics did when they took their skills and evil Coin and went to the New World to found that evil place now called "America".



 There has been much guitar news in the financial world of late, one good, one bad. Fender is planning an IPO in the near future and Gibson was recently raided by feds under the Lacey act for breaking imports rules. Though never charged with anything, this will still hurt Gibson production. I've owned at least one Fender since I was 16 years old, but not a Gibson, though I have always wanted a Les Paul. With respective production issues Fender guitars will pro ably go down in value and Gibson up. Given I am long one 1970 Fender Stratocaster and short one unbought Gibson Les Paul, the spread will widen against me. The only sensible trade is to cover the short side and buy a Les Paul at the next opportunity. This way I can play my Texas blues along with my Texas hedge.




Higher gas prices impact the economy, pulling spare cash from other retail expenditures.

And so do sales of smartphone and higher monthly data plans. Apple, in addition to booming sales of MacBooks, sold 172 million "post PC devices" in 2011, that is, iPhone, iPods, and iPads. And all iPhones with pricy data plans.

Today Apple announced the iPad 3, which will use more expensive higher-speed data plans.

Those who have the original iPads or iPad 2 will want an iPad 3. And those who resisted the iPad and iPad 2 will find it harder to resist the iPad 3.

So… will huge iPad 3 sales, many with monthly data plans, sink the rest of the retail economy? Let's hope gas prices start falling to leave some spare change for the rest of the retail world.




A recent article entitled "Sleight of Hand at Every Corner" in The Bali Times on the fx money changers on the Island of the Gods sounds like the markets. Even after many years in the game, the squeeze for a little more continues…



 (NYP) New York Post: Knicks' D'Antoni defends decision not to foul Celtics

It looks like very specious reasoning of the kind we see in our field here but I don't know enough about basketball to call it out. Certainly when you don't foul someone, the opponent is more likely to have had a bad shot, so the statistics of 93% when you don't foul them are wrong. But there are other things wrong also. D'Antoni has lost so many of these games you'd think he'd rethink. It also must be demoralizing to stand so far away from your opponent that you don't foul them, and make you play worse defense. The not asking his defensive coordinator is a signal that he's too up in air with his TV programs.

Pitt T. Maner III writes:

The following paper shows a decision tree for the college game given a similar situation.

It addresses this question and concludes that, contrary to popular belief, intentionally fouling is preferable to playing tight defense.

Drawing on the Gonzaga/Michigan State game for inspiration…

The opportune time for the Knicks to have fouled might have been during the exchange between Garnett and P Pierce before the act of shooting could occur. Pierce hits about 80% of his free throws and 37% of his 3 pointers.

Pro 3-pt. line is further out but Paul Pierce against passive hands up and no jumping defenders would seem to be better than 1/10.



Linked here is a very interesting chart on Sydney Dams. Funny, it wasn't so long ago that the dams were getting to a critical point. Now they are close to overflowing. This link on the overall Dams levels is interesting from the point of rapid expansion from a very low point. As with nature as with markets, like any good breakout model. Mean reversion… swift and strong, after plenty of bleeding.



 From a 1996 profile of Harvard's Buddy Fletcher in New Yorker:

His particular skill lies in devising vertiginously complex "hedges" to insure minimal loss if stocks decline while maintaining maximum profit potential if the stocks rise. His audited annual returns for the last five years have averaged over 350%, and on some days during that period his tiny firm has accounted for more than 5% of the trading volume at the New York Stock Exchange. A safe estimate would put his personal wealth at somewhere around $50 million.

There are many alarming items there — the Madoffian hedging so that really you can't go wrong while you're making 350%, the 5% of the NYSE trading volume (EdSpec observed that there are several hundred tiny firms that each control 5% of NYSE trading volume).

Charles Pennington writes: 

I thumbed through the section in Buddy Fletcher in the Jack Schwager book Stock Market Wizards (excerpts can be found under Google Books), and he has what at first seem to be some reasonable ideas for making money:

–arbitrage between the different tax needs of U.S. and overseas clients, especially the treatment of dividends

–some kind of option arbitrage that exploits the mismatch between option prices that involve a risk-free interest rate and clients who have to pay a relatively high commercial interest rate to borrow

Now those seem like reasonable germs-of-ideas, but surely they'd have very limited capacity, and surely they'd become widely known pretty quickly. They don't seem consistent with the 1996 New Yorker article description:

"His audited annual returns for the last five years have averaged over 350%, and on some days during that period his tiny firm has accounted for more than 5% of the trading volume at the New York Stock Exchange."

Humbert Humbert replies:

An astute colleague explains that the fancy options ideas described by Fletcher in Schwager's "Stock Market Wizards" sound like nothing more than ways to take advantage of the cheap access to capital that he had from his firm. If the bank let him borrow to trade and pay below-market interest rates, then he could make money just by buying a money market fund. The fancy (and almost riskless) "box " options spreads that he describes probably served the purpose of a money market fund.



 I find it pretty hard to argue with the Sage on this one. Here is what he actually said, in a Fortune magazine article (February 27, 2012 issue) based on his shareholder letter:

Today, the world's gold stock is about 170,000 metric tons. … At $1,750 per ounce … its value would be about $9.6 trillion.

…Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops–and will continue to produce that bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything.

Stefan Jovanovich writes: 

No one suggests that gold is somehow a magically superior investment; as Money it is not an investment at all, simply the means by which people can save wealth with the assurance that it will not be easily confiscated or corrupted by the government. Mr. Puffy has lived an indulged and indulgent life; since early childhood he has had the security of knowing that nobody would ever mess with him. Throughout human history many, many people have known that they would be the opposite of a Congressman's son. (Cue "Fortunate Son"). They have even been paranoid enough to think it wise to hold some of their wealth in a portable form. Calling the insurance company in order to collect on your policy might not be possible. As even the Oregano knows, there is always the regulatory risk that you may be on someone's shit list. At current prices I can fit the gold coinage equivalent of the average American's lifetime savings ($95K) in a tiny case; it will weigh less than an ultralite laptop. It is just such similarly-sized hoards of the stuff "incapable of producing anything" that allowed the Hugeunots, Moravians, Jews, Anabaptists, free thinkers and so many, many others to flee and save themselves and their families.

Comparing the world's Coin with the valuations of some of the things it could buy is a sensible exercise. Sometimes Money is overpriced, and sometimes it is not. That is for the market to decide. But using crude sums is a rhetorical trick that the Oregano really has to give up. It contradicts everything he has done in his own business practice. As he well knows, anyone who acquired even 10% of "all U.S. cropland" - let alone all of it and 16 Exxon Mobils - would find himself subject to envy regulation by the FDA and the entire Congress; the farmland would still be there a century from now - asteroid strikes being excluded as acts of God - but the returns on investment would not be. That is as certain as the fact that the people who regularly visit the White House will always want to assure the rest of us that the government's word is all we need.

The notion that the government should not "regulate" individuals' money savings is as radical these days as the idea that people have innate rights of liberty not subject to the will of the King was 250 years ago. I don't expect to win this argument in my lifetime; but things do change - sometimes even for the better.

George Parkanyi writes: 

Stefan, I fully understand why people still invest in gold. They/we believe that in the future is can be exchanged first for whatever currency prevails, and then with that currency buy goods, hopefully with roughly equivalent, or perhaps greater purchasing power. My point is that when you think about it - gold itself has limited intrinsic economic value. It does not contribute all that much to actual wealth-creating productivity. It's mainly just used as a proxy for wealth - only because enough people still agree that it is. It's not a commodity that people use day-to-day except for decorative purposes (jewelry and art) and in electronics. It's not something we need with which to sustain ourselves. That to me is its vulnerability. Yes it's tangible, but it doesn't really do anything.

I find it fascinating that in some African rural areas people use transferable cell-phone minutes as currency. That's the kind of digital-age utility I'm talking about. I think that abuses and corruption aside (you find that everywhere anyway) - electronic money is just so much more convenient, and modern economies are now totally structured around that. Modern economies use their productivity as the "collateral" behind their currencies. That actually makes sense as long as you put enough governance around it so that people are willing to trust the currency, and computer and network technology facilitates trade like never before, hugely boosting productivity. Apart from straight barter with things like refrigerators, I can't think of anything more cumbersome to use as a medium of exchange than gold. It's heavy, not easily divisible. I can't even sell my gold coin (received as a gift) to a bank without the original purchase paperwork - otherwise there's an assay charge that goes along with it. What a pain in the ass(ay). And it may not help you all that much in a Mad-Max world either - if food, water, clothing, tools, and guns are at a premium, who wants to be lugging around a heavy gold bar?

I do agree that its not going away any time soon. The emperor may have no clothes, but everyone has universally agreed to pretend that he does.

Stefan Jovanovich replies: 

The Founders and their British forebears like Isaac Newton were committed to milled coinage because, once one accepted the assay of the issuer - i.e. the Royal or U.S. Mint - the coins themselves could be valued simply by weight. Even sweating the coins (shaking them in a bag and then collecting the dust generated by the friction) and minor clipping would not affect their value because that was determined by the weight of the coins themselves, not the "face value". That is the point of the gold standard clause in the Constitution - Congress sets the weight and measure for a coin - i.e. so many ounces at the standard assay. That allowed a $20 gold piece that was worn to be discounted accordingly; the "gold clause" in a contract was a commitment to pay be weight and measure, not by face value alone. (And, yes, every store had a scale; one of the first demands of merchants for commercial regulation was to have scales themselves certified by state and county inspectors.) One of the many reasons Grant's Resumption and Legal Tender Bills (making greenbacks redeemable; setting gold as the only monetary standard for the first time in U.S. history) were so successful is that U.S. Notes - the promises of the Treasury to pay gold of a specified weight and measure - became more reliable than coin itself. The paper money did not itself have to be weighed and the printing and engraving and paper were sufficiently subtle that counterfeiting was too expensive to be profitable!




From the article "The Boy Who Played With Fusion"

As the guide runs off to fetch the center's director—You gotta see this kid!—Kenneth feels the weight coming down on him again. What he doesn't understand just yet is that he will come to look back on these days as the uncomplicated ones, when his scary-smart son was into simple things, like rocket science.

This is before Taylor would transform the family's garage into a mysterious, glow-in-the-dark cache of rocks and metals and liquids with unimaginable powers. Before he would conceive, in a series of unlikely epiphanies, new ways to use neutrons to confront some of the biggest challenges of our time: cancer and nuclear terrorism. Before he would build a reactor that could hurl atoms together in a 500-million-degree plasma core—becoming, at 14, the youngest individual on Earth to achieve nuclear fusion.

Taylor's Nuke Site


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