A quote from The Examiner about the Knicks loss to Toronto on Friday. "The main culprit was JR Smith who made only 2 of his 9 shots during the fourth quarter". How many can this man lose for the Knicks after winning two games in the early part of last year. 50. No one is a bigger example of the interplay of luck and skill (or lack thereof) than Smith to illustrate the regression fallacy and the problems in trading which arise from succumbing to it, i.e. buying stocks at the open on Monday after a big decline on Friday and seeing it work a few times.



 Wall Street and the Wilds by A.W. Dimock, 1915, contains the sage of the rise and fall and rise and fall of a Wall Street gold trader, options seller, stock manipulator, developer of the clearing house, pool operator, Steamship promoter, real estate developer of Elizabeth, New Jersey, telegraph line builders, railroad builder, hunter, photographer and naturalist from 1850 to 1915.

It includes chapters on black Friday, the day that the gold bulls broke the US Treasury in 1870, the effect on prices of the civil way, the way manipulations were carried out in those days, the relation of the flexions to financiers in those days (not much different from today), systems for profiting in gold, the legal system in those days (fees of a million dollars for routine cases were common even in 1880, the early developments of photography in the wilds, hair raising tails of wars between the Native Americans and the US military, pinpoint shooting, advanced fly casting techniques, and much more.

Everything talked about is totally a propos of current techniques in Wall Street. Dimock was a minister's son born in 1840 who went to Andover and came to Wall Street at 15 and got his start scalping odd lots in insurance stocks. He developed a system of selling gold every 1/8 up and buying it every eight down. He became the Little Napoleon of Wall Street and dominated the gold exchange the way the big grain companies dominate the grain market today, using some of the same techniques. He made so much money that it was easy come, easy go, and he lost it all by guaranteeing the purchase of friends, defrauding by the Goulds during Black Friday, and finally in the crash of 1873.

The book is compelling, and instructive and a great history of 19th century stock and commodity markets, very much akin and resonant of today. It's highly instructive. I'll quote from some of the more resonant and sagacious passages:

All day I stood there, buying and selling, with a stubby pencil. Always my bids and offers were a quarter percent apart. Thus, if I had just bought five thousand at a premium of fifty and 1/8 percent, (gold was quoted at around $16.50 an ounce as a premium to dollars), I would big fifty for five more, and offer to sell five at fifty and one quarter. Every purchase was balanced. The profits of my machine were so great at the end of the year that I could withstand a fall of 25% in the price of gold.

There is a fascinating account of the lending and borrowing business and the treachery and integrity of various operators very resonant of today.

Stefan Jovanovich writes: 

 Going up against Big Al, the Chair and Dimock should be the final proof of my gilded idiocy. Here goes.

Dimock — like all the large size traders in the Gold Room — thought that the corruptions of the Lincoln and Johnson Administrations would continue under Grant and Treasury Secretary Boutwell. When they didn't, when Federal spending kept declining and the public debt kept being reduced, the speculators assumed that it was a temporary reprieve. They and most politicians expected some kind of compromise that would allow for continued greenbackery. They bet wrong, and Grant's reputation has suffered for it ever since. Not only had Grant and Boutwell opposed the conventional academic opinion - which was, then as now, that the economic pump needed continuous monetary/credit priming with more and more currency; even worse, Grant allowed his Treasury Secretary to go against the street. Only the businessmen of the country - Vanderbilt being the foremost - thought Grant and Boutwell were right. Indeed, Vanderbilt thought Grant was as much a hero for saving the country's finances and its currency as for his leadership of the Union Army during the Civil War/War Between the States. When Grant's son lost the family money in a swindle with the Bernie Madoff of the day, most of the surviving speculators from '73 celebrated; Vanderbilt, on the other hand, saved Grant by buying from him all of his memorabilia, which he later returned to the Grant family as a gift.

What did happen in 1870 was that the Treasury was unable to float its proposed loan at 4 1/2% in Europe because of a little thing called the Franco-Prussian war. What Boutwell did instead was borrow here in the U.S. "The circumstance that war was declared between France and Prussia simultaneously with the passage of the loan bill put it out of the power of the Department to make the negotiation as had been expected. The large revenues, however, of the Government continuing without material abatement until the present time, improved the credit of the country, enabled the Treasury Department, by weekly purchases, to reduce the amount of surplus bonds offered for sale, and contributed to depreciate the market value of gold."

Here are Boutwell's reports for 1870 and 1871. To understand exactly how deep a hole the war had put the country in, you need to know that in 1870 the Federal government spent $129,235,498 for interest on the public debt. The gross receipts for that same year were $411,255,477. The total public debt, including the nearly $400 million in U.S. Notes and greenbacks was $2,418,673,044 - 6 times the Federal tax collections.


"The financial condition of the country has improved during the past 5'ear. The average rate of gold for the year 1869, as shown by weekly sales, was 32.9 per centum premium, and for the first eleven months of the year 1870,15.2 per centum premium, indicating an improvement in the value of the paper currency of about 17 per centum. From the 1st day of July, 1869, to the 30th of June, 1870, inclusive, the public debt, as shown by the warrant account, was reduced in the sum of $101,601,916 88. From the 1st day of December, 1869, to the 30th day of November, 1870, inclusive, the reduction was $119,251,240 58, as shown by the monthly statements of the public debt, and the total reduction, from the 1st of March, 1869, to the 1st of December, 1870; was $191,154,765 36. The consequent reduction in the interest account is at the rate of more than ten millions of dollars per annum.


 "The country has been prosperous during the year now closing, and the public finances have shared in the general prosperity. During the fiscal year ending June 30, 1871, the reduction of the pubic debt was $94,327,764 84. The total decrease in the public debt from March 1, 1869, to December 1, 1871, was $277,211,892 16; and during the same period the annual interest charge has been reduced $16, 741, 436 04. The revenues for the year 1871, and the receipts since the first of July last, show that the time has arrived when a considerable further reduction in taxes can be made, and yet leave the Government in a position to pay at least fifty millions of dollars annually of the principal of the public debt, including the amount pledged through the sinking fund. In my annual report to Congress for 1870, I expressed the opinion that the settled policy of the country should contemplate a revenue sufficient to meet the ordinary expenses of the Government, pay the interest on the public debt, and from twenty-five to fifty millions of dollars of the principal annually. To that opinion I adhere, with even a stronger conviction that the payment annually upon the principal of the public debt should no,t be less than fifty millions of dollars.upon favorable terms if, unhappily, in the future an exigency should require such loans to be made. The power to negotiate a large loan at five per cent, interest and to enter upon negotiations for the sale of bonds bearing four-and-a-half, and four per cent, interest, is derived entirely from the exhibition of an honest purpose on the part of the people to maintain the public faith, and the consequent ability on the part of the Government to answer that expectation by large and frequent payments upon the public debt."

is a great, great figure. I steal most of my opinions about the Constitution from his great work The Constitution of the United States at the End of the First Century.




 A few months ago, we had an animated discussion regarding the long-term viability of Facebook (and by extension its value). Reports were already starting to surface at that time that youth were moving away from FB. Some ethnic groups like blacks had moved on to other sites, such as MySpace. While most of these reports were US-focused, there is now similar findings for European youth. How FB will address these changes, if it addresses them, is not clear. Also unknown is what the recent disclosures of FB's responses to NSA surveillance requests is also not known. In any case, evidence is mounting that FB is a passing fad, at least among youth. I do not know of similar reports for their parents.

Peter Tep writes: 

In terms of cool factor amongst youth, 12-25, I believe FB is indeed fading but its usability is still second to none. As a Google+ user also, I can say that there is no comparison to FB, especially since one can also keep in touch with his older less technologically inclined older relatives.

Twitter definitely has the edge over FB now in terms of instant connection etc and teenie boppers can feel more connected to their beloved celebrities.

Although fading, I'm yet to believe that there will be a worthy competitor of FB.

My 2c



December 30, 2013 | Leave a Comment

 My apologies in advance for a seemingly strange piece of research.

Recently a Speclister posted a link to a site which inferred considerable success in trading various markets on the basis of solar and lunar events. We have all seen these for decades. There are lots of charts that seemingly draw the connection between full and new moons, sunspots, geomagnetic radiation and of course the financial markets. I myself found nothing in the way of serious data that would make me want to trade on that basis, but the site exuded so much confidence that it was hard to dismiss out of hand.

The site like many in the genre spends a lot of space arguing WHY. You know, humans are mostly water and Earth's tides are controlled by solar and lunar gravitation, so why not humans. Personally I don't care what the reason is, as long as a reason exists and the data is non-random. In this case I am going to assume that a reason exists, but is not discernible. So the answer was for me to take a look at the data with our research tools.

My period of study was from January 1, 2005 through December 27, 2013. That could always be enlarged if some worthwhile results were forthcoming. As a benchmark equity asset I used SPY, as it included dividend yield and was a real and tradable market.

Over the period SPY achieved a 7.4 percent compound annual rate of return (CAROR) while experiencing a 60.83 percent maximum drawdown (DD). Thus the return to risk ratio (R/R) was 0.12. Full statistics and a chart are here.

The site made some strong claims about the value of the full and new moon dates, so my first look was there. To look at solar influences I would need a significant number of cycles and they are approximately 11 years each. First I bracketed the half-month on either side of the full moon, and the same with regards to the new moon. With regards to the full moon, you would buy SPY at the first quarter and hold for the half-month through the full moon, selling at the third quarter. When you were out of the market you were in cash, earning nothing. Thus the following constitute programs in which you are only invested for half the possible time:

Full Moon Bracketing:           2.1% CAROR,    36% DD,     0.06 R/R
New Moon Bracketing:        5.19% CAROR,    47.98% DD,     0.11 R/R

This agreed with the site in that longs would favor the new moon. But if the full and new events corresponded to troughs and peaks, we had to look at equity growth between the events. This also constituted investing for only half the possible time.

New to Full (waxing):        9.82% CAROR,    46.08% DD,     0.21 R/R
Full to New (waning):        -2.2% CAROR,    41.17% DD,     -0.05 R/R

These results would suggest that equity prices tend to trough at the full moon and peak at the new moon, exactly as conveyed by the website.

Links to stats: 






Steve Ellison writes:

To what does the t score of 3.46 refer, and how significant is it given multiple comparisons (you tested 4 subsets of data, and one looked pretty good)?



 I found this article interesting: Iran's Turkish Gold Rush".

Once again I'm noting how government interventions open loopholes to money making (legally or not…).

In this case, it was about sanctions to Iran, the Turkish state bank and the Turkish establishment. The gas for gold deal, provided that the info in the article is correct and that gas prices plunged over the past years and gold is about 30% down from its highs, which may have proved to be very remunerative for those who conceived it.

Most of all it displays once again, sanctions or not, the role that gold continues to have in an era of fiat money and bitcoin.



 One is reminded of a dinner I hosted at Bernadin where E and a beautiful money manager from abroad were my guests. E confided to her that he owned 1/4 of the entire soybean crop at that time. And that he took time off from composing for Billy Joel to visit the crops each year and just came back from a personal barnstorming. Needless to say, the money manager paid no attention to me, not only because of our relative wealths, but also because he exuded so much more stature and resilience than myself. Presumably E in pointing to the futility of the counters is indirectly but politely pointing to the follies of a counter such as I. Yes. I have been short on several days this year, despite the correspondence of this year to 1999 (I believe it was I who gave him the final bullish nod in 1999 based on millennium signs in City Island). And I'll be short overnight tonight. Furthermore, I'll be long bonds. If anyone told me that I'd have the exact same positions overnight as the Upside Down Man, and be going against the giant money making machine of E at the same time, why—- I look around 3 times —- I'd report myself to headquarters like Willie.



 We applaud Rocky for his long stock hedge, and note that treas will issue less bonds which is making basis viral for shorts.

Comment: As we suggested in September, the Fed was on hold for 2013, and we now know will begin tapering in January 2014 similar to 1999/2000 when Greenspan ended Y2K liquidity….

By the time the Fed next meets, they will know the employment numbers which we have forecast to show strength…

A review of Bernanke's book on Targeting Inflation shows that his forecasts anticipate interest rates 2 years forward.

Fed to Start Unwinding Its Stimulus Next Month 2013-12-19 08:14:08.154 GMT

By BINYAMIN APPELBAUM; Nelson D. Schwartz contributed reporting from New York.

Dec. 19 (New York Times) — WASHINGTON — The Federal Reserve said on Wednesday that it would gradually end its bond-buying program during 2014, a modest first step toward unwinding the central bank's broader stimulus campaign as its officials gain confidence that the economy is growing steadily.



 Ralph Dillon of Global Financial Data was kind enough to send me this chart of Sidney Homer's data for the rates for the Venetian prestiti. He also forwarded Dr. Bryan Taylor's notes on this history:

"When Venice imposed large assessments, as in 1311-1314, the price of the prestiti fell, and when Venice made large repayments, as in 1344, the price could exceed 100. The worst decline in the fourteenth century came during the War of Chioggia between 1378 and 1381 with Genoa, during which Venice imposed very large assessments, suspended interest payments, made the prestiti no longer immune from tax levies, and expanded the debt 6 to 9 times its level in 1344. The price sank as low as 19 as a result. After the War of Chioggia ended, the prestiti fought their way back as confidence in the Venetian government returned, causing the price to rise to the 60 level. Unfortunately, the fifteenth century was one of ongoing wars in the Mediterranean. Venetian wars with Hungary in 1412, the Turks in 1416, Milan during the 1420s, and wars with both Florence and Milan in 1450 and the costs associated with these wars reduced confidence in the Venetian government’s ability to fund the prestiti. Emboldened by the fall of Constantinople in 1453, Sultan Mehmet II declared war on Venice, leading to a disastrous and protracted conflict between 1464 and 1479 which drove the price of prestiti back to the 20s. This led to the reissue of new prestiti as monte nuova in 1482. The graph below shows the yield on the prestiti from 1285 to 1502, assuming a 5% coupon (though in reality the prestiti paid a variable rate after 1377 and 4% during part of the 1400s)."

Venetian state IOUs continued to be issued and traded for another 300 years — until the French Revolutionary Armies "liberated" Venice in 1797; but the monte nuova became a local and at most regional vessel for savings and speculation, not the foundation of international financial dealings that the prestiti had been.

My own biased view is that the wars that weakened and then ruined Venice's fortunes came from the shift from a democratic republic to an oligarchy. Some professors even share this odd notion and have done the research to prove it. Here is their chart of the # of commoners who were members of the Colleganza - the Ruling Council.



For those who understandably thought that the Iran front would be quiet while Iran built their nuke, ’twas not to be the case.  It seems Iran is determined that if more sanctions are levied at it (and the US Senate is certainly headed in that direction, White House be damned), it will raise its enrichment program to a 60% level—well beyond any claim of a peaceful use. I’m mystified as to why Iran did this, unless it’s trying to further upend the Obama White House (I’m not sure that’s possible at this point) or to taunt the Israelis (which would be thoughtless, since the one country that won’t hesitate to strike is Israel. Given that Kerry is trying to shove a treaty down Israel’s throat and is being adamant about not releasing Jonathan Pollard even as it demands that Israel release convicted murderer, I don’t know that Obama has much credibility left in Jerusalem to throttle Bibi back. One thing is clear: When Iran detonates its device, assuming Israel has not struck Iran, Bibi’s political career will be over. I doubt Bibi is willing to accept that possibility. That’s my take. I’m sure there are some other ones on this site.



 These are some of the events that I've concluded qualify as some of the "Black Swan" events of 2014:

1. In a final pique with the US over its Iranian policy, its Syrian policy, and its Egyptian policy, Saudi Arabia announces cuts in production of 80%, sending the price of Brent up to 130. This precipitates a crash in the markets, a reversal of Spanish and Italian stabilization, and an accelerated contraction in the French economy. Christine Lagrande announces her candidacy for the Presidency of France in the face of massive demonstrations in Paris by students who looking at an umemployment rate of nearly 40% when they leave school as Hollande's approval ratings drop below those of Obama. After 6 months, the Saudis relent and return production to pre-reduction levels, but the EU has already settled into a recession.

2. India announces a ban on ownership of gold, leading to panic in the gold markets. Bitcoin prices stage a temporary rally to $1500 as investors try to find someplace "safe" to store money realized from sales of gold and out of the government's reach. An earthquake is felt in the vicinity of Jim Dines' grave (well, that one is pretty speculative, I grant you).

3. Results of five epidemiology studies suggest that drinking coffee is a cause of erectile dysfunction. Spot coffee prices go limp (sorry, couldn't resist) as Jim Rogers appears on every CNBC show proclaiming it to be a buying opportunity of the century. Dunkin Donuts and Starbucks both announce the addition to their menus of different tea varieties and drink.

4. Reports of massive corruption in Nigeria trigger a coup d'etat, with nationalization of mineral resources. China voices concern over the security of its mineral purchases in Africa and announces an across the board stockpiling of commodities. The yuan is pressured even as commodity markets show more life than during the previous 5 years.

The nation's university graduate schools face a wave of unionization following the success of such efforts at NYU. The presidents of the University of California, the University of Texas, the University of Michigan, and the University of Pennsylvania announce that unionization of their school's graduate students will push tuitions up to unacceptable levels and leave the middle class impoverished paying for college. Tuitions increases of 10% for 2014-2015 are announced.

6. The Mets win the NL pennant. The Orioles win the World Series. (Tim Melvin is pretty sure this one's a lock.)

7. A breakdown in the HVAC system at Goldman Sachs HQ in the early spring during a multi-week heat wave leads to management to allow (temporarily) employees to "dress down" and not wear ties or suits. Three days after this new, temporary dress code is put into place, the rest of Wall Street does likewise and men's clothing stores throughout NYC begin to close as a result of the decline in business.

8. is purchased by News Corp as an effort to diversify its holdings in electronic media.

9. Delta Airlines announces that beginning in 2015, all lavatories on domestic flights will require electronic payment of $0.40. In the face of consumer uproar, Delta announce that the new fees will allow it to lower airfares, which it never does. Airline stocks rally at the news.

Just some possibilities. Be on the lookout for them.

Peter Andre writes:

None of these are "Black Swan" events. Coup d'etats, market volatility, sports victories, and research outcomes may be unlikely or surprising, but they are not - as a "Black Swan" episode requires - unknown unknowns which are computationally intractable and later forced into a narrative which suggests future predictability.

Using only the first example: so long as, say, oil option prices in the wings (50 puts, 150 calls) are not only traded in some volume but priced and repriced according to news, even if erroneously, the likelihood of a price move for any reason carries some degree of computability; there are always bulls and bears in a market, and thus a price drop (or spike) does not lie outside the realm of expectation, albeit on the fringes. But if North Korea, Switzerland, or Australian researchers were to suddenly announce and demonstrate their invention of a cheap and broadly applicable energy source which in several years would render oil, gasoline, etc. obsolete, sending the price of oil to $5, with the pits eventually being closed and massive political instability taking hold across the Middle East, yes: that would be a Black Swan event.



 It's been a good run, a mere 60 trips around the sun and only 782 full moons. I've been able to watch the snow clouds whip across the summit of Mt. McKinley in mid-summer. I gave the eulogy at my Mothers funeral. I viewed the magnificent Ware Collection of Glass Flowers at Harvard University. I watched two healthy sons come into the world. I saw the pristine beauty of New Zealand. I waded into the "crowd" on the floor of the New York Stock Exchange. I hunted dinosaur fossils in the Badlands. I met my wife in Cancun, Mexico. I stood at Michael Milkens X-shaped trading desk in the Beverly Hills office of Drexel Burnham Lambert. I was accepted into 5 law schools. I ate in the lobster houses of Baja, Mexico. I know the thrill of Space Mountain. I looked down from the Eiffel Tower. I caught fish in Canada till my arms ached. I walked the Salomon Brothers trading floor in 7 World Trade before 9/11. I have seen the treasures of King Tut. I know the biggest components of net worth are great health and the ability to function. I asked my wife to marry me at the foot of the Golden Gate Bridge. I made long ocean swims in the cold. I looked down from a helicopter over Yankee Stadium. I learned that if it is a problem about money it is not really a problem. I felt the heat and humidity in Tahiti. I still want to be the winning jockey on the winning horse in the Kentucky Derby. I was in the Swiss Banks in Geneva. I have seen the Crown Jewels. I watched schools of tuna in a feeding frenzy. I watched 3 space missions blast off. I sipped scotch at the Ritz in Paris. I looked the Mona Lisa in the eye. I floated in the Dead Sea. I walked the most beautiful beaches in the world. I have eaten shrimp the size of lobsters and octopus the size of shrimp in Australia. I rode bucking horses in rodeo's. I know the best hugs come from your own children. I am still pained by the massacre at Wounded Knee. I saw aurora borealis so bright I thought I was seeing heaven from earth. I have heard the primordial howling of coyotes across many sunsets. I partied in the original Hotel California. I have seen death in many forms. I sailed from Catalina Island to San Diego. I earned a college degree. I partied at the Roxy. I learned I chose excellent parents. I admired Mt. Blanc from Café di Midi". I have been in planes that have landed on ice, on water, on snow and in cow pastures. I have ridden a motorcycle across much of the American West. I identified hundreds of different birds. I saw the artistry and beauty of World Cup soccer. I have been lost in the Louvre. I prayed at the Wailing Wall in Jerusalem. I watched the Challenger explode live on TV. I have had more fun than any man should have. I have been to the diamond cutters in Amsterdam. I grew up in the poorest county in America and lived in LaJolla. I marched as a cadet at the United States Military Academy at West Point. I know leverage works both ways in the stock market. I lost my best friend to a lightning strike. I danced in European discos and Native American pow-wows. I miss my grandparents more every year. I took my Mom to Mazatlan. I saw the Mid-night sun in Alaska! I saw two million birds in one flock. I learned that success has nothing to do with money and everything to do with how you feel about yourself. I never smoked a nicotine cigarette. I had the privilege to coach youth football. I have felt the roar of rushing Minnesota rivers in the spring. I danced in Studio 54 and at Danceteria. I know the beauty of Diamond Head. I know the laughter of friends and the spite of enemies. I know the power of big surf. I changed at least 5,000 diapers for my sons. I looked into the crater of Mt. Saint Helen's. I have been to two Olympic Games. I still dream big dreams. I know the gurgle of the Mississippi River headwaters. I know Native American racism. I ran 5k's, 10k's, 10 mile races and half-marathons. I have owned my share of winning stocks. I always questioned my dentist. I know the beauty of white-capped waves on the Sea of Gallillee. I fined a large brokerage firm $1,000,000. I remember the Minnesota Blizzard of 1975. My sailboat was nearly capsized by migrating whales. I love eating breakfast at Harry's in LaJolla. I lunched often at Harry's on Wall Street. I was on the flight deck of the USS Kitty Hawk during F-14 flight operations. I looked down on Chamonix from the French Alps. I have become a better trader every year. I know that a house is not a home without family. I know the best music came out of the 80s. I felt the warmth and life ebb from my father's body as he went into the next world and it was good. I have seen the brilliance of the Taj Mahal and tried to fathom the ghastly mass of humanity and pollution percolating in India. I have felt the power of young lions in my hands and looked a tiger straight in the eye. And, I know the real party is in Heaven! Lastly I married the most beautiful woman in America. What an amazing woman I met that night in Cancun and she agreed to partner on this life adventure. Wife, partner, friend, mother of the two finest sons any man could ask for; the love of my life, here's to many more!



 We've had some talk (some might argue too much talk) about bitcoin this year on the site. I've come across a sentinel—about as good as one can get, I think—that the currency's demise is close at hand. "Bill Gross: The Bitcoin Age". This is one of those "End of Equities?" tells. The next few months should provide some insights into its accuracy.

Dylan Distasio writes: 

The Upside Down Man always has his own book to talk, so I take his comments with that always in mind.

Gross: Part 1of 2: We live not in a new gilded age but a bitcoin age where artificial money (from central banks) creates temporary prosperity

Unless I missed another tweet that speaks more directly to bitcoin, I interpret his comment as referencing the fact that central banks magically create money out of thin air. I'm not sure how this ties into the end of bitcoin just because he is aware of it, and using it as an analogy to central bank printing.

Bitcoin has a lot of issues, including the fact, as Stefan points out, that it's not legal tender. It also has a lot of digital competitors waiting in the wings. Maybe one of those like LiteCoin or dare I say DogeCoin ultimately wins out, or maybe they all fail and expire worthlessly. It's an interesting experiment either way.

Jeff Sasmor writes: 

The NYT reported about accepting Bitcoin.

Stefan Jovanovich writes: 

 Details, details. Here is the link on Overstock's web site for the search results for "Bitcoin".

A guide to using Bitcoin.

What is amusing is that the price for the book is itself in dollars.

When the printing press was developed by Gutenberg, its first popular use was for the printing of indulgences. The Papal State needed the money for its military budget and the minor detail of paying for the beginning work on the new St. Peter's Basilica. Luther gets all the press for the Reformation; what is not mentioned are the effects of the invention of printing by typesetting having reduced the cost of producing an indulgence 1000-fold. For an indulgence to be real - something that you could literally take with you when you died - there had to be a document. The printing press was able to do in a morning what usually took a scribe a month. The boom in the buying and selling of indulgences that followed was spectacular. What came next was the bust; entrepreneurs (mostly minor nobles who were themselves members of the clergy or had relatives who were) started producing indulgences that had not been approved by Tetzel. When buyers questioned those documents, they were told that these indulgences were the "real" ones, not the ones produced by that fraud Tetzel. A great deal of the violence of the earlier rounds of the religious wars came from the mobs of the people who felt they had been defrauded or feared they would be.



Bonds are approaching a 2 1/2 year low before holiday yield of 3.91 on 30 year and yield of 2.977 on 10 year. The Upside Down Man perhaps will be conferring with his colleagues in Washinton and twittering about giving the little woman and his money away to worthy causes like Gates and Buffett, as well as saying bullish things about his holdings.



 The robot gently helped another robot after it had blown over in this morning's offshore wind at Homestead, Florida. The spectators around me applauded at the first Robotic Challenge Trials. Seventeen teem robots are competing for $34 million dollars to be divvied in $2 million grants to the winning college and private teams in each division set up like an Olympics.

Stooping in a ring next to the Good Samaritan robot, another performed heart massage on what I thought was a human, but turned out to be a dummy. However, another robot brought a stretcher and loaded the dummy into an ambulance, and waved at us before ambling on to the next mock emergency. I thought, it forgot to leave a silver nut, but otherwise this is close to real.

The 2013 Trials Robotic Challenge is sponsored by the Pentagon's DARPA - Defense Advanced Research Projects Agency. Seventeen teams are competing, mostly from U.S. universities, but also from around the world. The program listed teams from Drexal University, Texas A&M Engineering, Tohoku University, John Hopkins Research Lab, Virginia Tech, Carnegie Robotics, Polaris Industries, Team VIGIR, General Dynamics CA, Boston Dynamics, SRI International, Team Tartan Rescue, the University of Pittsburgh has a light but resilient Hazardous Operations Robot named THOR,

NASA's Jet Propulsion Labs traveled with RoboSimian, a robot that can use all four of its limbs for various tasks, and The Intelligent Pioneer Robot with Team KAIST arrived from South Korea.

An official explained to me that the reason for the DARPA trials is to establish where the science stands, as a reference point, as a way to learn the state of the art right now.

A Carnegie Mellon model called Chimp (CMU Highly Intelligent Mobile Platform) turned the doorknob in a tactical disaster scenario. It took Chimp two minutes to turn the slippery knob, and someone in the bleachers remarked that it was like watching grass grow but no one moved from his seat. However, then he turned a one-foot diameter wheel to shut a steam valve, labored at a fire hose, and deftly cleaned 2×4's and stacked them in a wagon to haul away from the disaster scene. There was every attempt to make the creatures look human, but most were slightly less handsome than Frankenstein.

 Most of the working automations are fabricated for environmental and terrorist attacks, entering burning buildings, and nuclear meltdowns.

Another 4'8" robot of Team Schaft, an elite group of former Tokyo University roboticists whose company was recently acquired by Google, successfully picked up and used a cordless drill to put a hole in a wall at the Disaster Hotel replica, and then punched through the door as the spectators watched from the easy bleachers. This robot is in the lead for overall points, amassing like an Olympics decathlon, as a loudspeaker announced running Team tallies.

A robot driver that resembled a skinless man in a baseball cap with erector set bones was sat into the driver's seat of an automobile, and guided it unaided through an obstacle course of gates and turns. He used a foot on the accelerator and two hands on the steering wheel, with cameras and sensors mounted in his head.

One university team member was programming his Robby with new strategies learned by watching the competition, that would enhance its own performance in today's trials.

Farther down the line of contending machines at the Homestead-Miami Speedway, a human announcer explained, 'There are two factors to consider in robotics: Movement and computing.' Grace and thought popped into my mind.

There were times in the roving crowd when I brushed up against what felt human but wasn't. At the trials, some autonomy was on display. For example, the Atlas robot is designed by Boston Dynamics for the ability to walk on its own, as well as balance, a challenging robotics feat. The announcer sounded staccato and I got confused. But I saw on the 30' big screen a prototype humanoid named Cheetah outrun a 25mph car with long strides. It's what they don't show you that you just can imagine. Someone in the crowd contended to put a gun in his hand and send him to Afghanistan to hunt in the caves.
Nearby, a cement cutting robot raced a human construction worker in cutting through a 3' diameter reinforced pillar. The robot wore ear protection but the man didn't. The smoking blades shot sparks ten feet away.

 The event was being filmed by a camera the size of a diesel engine mounted on the end of a 30' boom.
Suddenly the wide screen burst the image of a middle school student being interviewed in his robotic class while building a basketball player that could dunk. He said that he liked robots because they were unpredictable, and there was blood. He could invite his friends to participate.

Admission to the DAPAR event was free, and drew about a thousand with license plates from all over the southeast, New England and Chicago. I learned not only from the automations but the humans. The Team owners wore the colors of their robots, often reflecting their university colors.

The teams were composed of two strangely matched types: The beefy mechanical engineers who bolted the things together, and the computer ectomorphs who programmed them to think. There were mutual claps on the backs after a Team robot won a task of getting on an industrial ladder and climbing four steps to a landing zone. The school mechanic marveled, 'I know how it climbs but not how it sees the steps,' and the computer specialist rejoined, 'I know how it thinks but not how it lifts its feet.' Ironically, their aim is to build a composite of the two to replace humans in dangerous responses.

An interesting comment was made by a visiting U.S. Air Force pilot, 'Most people think that short pilots are required to fit in the cockpit or for less weight. But the truth is that a tall person has a longer distance between head and heart. He blacks out from the G's sooner. My distance is short so I can go longer before G'ing out.'
There was a 4' diameter drone helicopter designed for environmental survey, and a 6' robot raft built for search and rescue along the hurricane torn Florida coast. 'It can't drown during rescue,' commented the builder, and will not short circuit in a tsunami.

Most of the robots were moving about in serious business. However, a Frisbee thrower tossed with the unerring accuracy and speed of a champ, and a 2' taxidermy fish as a biology teaching tool that actually swims, detects depth and senses oxygen, and knows when to dive or swim closer to the surface. It would not take bait and it's clear that, by sci-fi standards, the robots may disappoint.

My favorite was the sandbox and woodchip challenge box, about 30' long and also filled with dips, hills and stairs. Robots raced end to end and never got stuck, as I have a dozen times at my Sand Valley, CA. The model size, remote control robot vehicles employed two types of locomotors: three sets of sequential tracks like tanks on both sides that pivoted independently from horizontal to vertical, and another that looked like a 4' crab with churning legs that operated independently to flit easily about the sandbox. Now and then, the controller caused it to tear the ground like a bulldog with its feet in a display of bravado.

Pretty, intelligent girls were passing out 'I love robots' stickers and most people slapping them over their hearts. I left before the finals, as the loudspeakers predicted, '2013 is the trials, and at the end of 2014 the real thing.'

When robots can move and sense as well as humans they'll be able to reproduce, and here we are.



 What happens to markets from the Friday before Christmas during the next 5 trading days 7 such Fridays from Dec 19 to Dec 23 since 2003

move in S&P next 4 days -1.5 %

bonds + 0.5%

nasdaq -0.2%

crude -0.1%

gold +1.0%

euro +0.5%

dollar/yen 0.5%

One doesn't believe in the predictivity of seasonal analysis but thought it might be interesting to see if there were any glaring retrospective regularities.

Kim Zussman writes: 

Here are mean daily returns for the two individual trading days before and after Xmas (X-2,X-1,X+1,X+2), using SPY (close-close) from 12/00-12/12:

Variable   N   Mean   StDev   SE Mean        95% CI             T
X-2        13   0.0020  0.0068  0.0019  (-0.0021, 0.0062)   1.08
X-1        13   0.0028  0.0095  0.0026  (-0.0029, 0.0086)   1.08
X+1       13   0.0013  0.0051  0.0014  (-0.0017, 0.0045)   0.96
X+2       13  -0.0009  0.0099  0.0027  (-0.0068, 0.0051)  -0.32



 Occasionally one comes across a sleeper in markets — a man of great practical and systematic wisdom who has written a book that is widely overlooked and should be read by all market people for great profit. Such is the case with The Master Trader by Laszlo Birinyi. He is well known as a Hall of Fame Market elf from Wall Street Week, and winner of the outstanding elf of the 1990-1999 decade in performance and analysis. He is the inventor of the money flow method of investing, based on counting the market value of upticks and downticks. When you walk with him on the street, people are likely to come up to him and thank him profusely— You recommended apple in 1994 when it was four and I bought it and now I am a wealthy man. He has a number of great calls like this including catching the market bottom in 2008 with a 850 S&P call, catching the bottom of the bond market in 1994, and maintaining a bullish mien throughout the great expansion of 2012 and 2013.

His approach is somewhat diametrically opposed to mine, so I was particularly interested in interviewing him for an upcoming book review. He loves anecdotes. He publishes a market letter, and runs a money management service. He doesn't deign to compute the proximity of his results to randomness, and he trades mainly individual stocks. Here are some of the things I learned from him.

1. Look for stocks showing a sprained ankle, i.e. a drop of 5 to 10% on such things as a trading loss, an earnings loss. Sprained ankles coming from ratings changes by inferior analysts is particularly poignant of future appreciation.

2. Do things physically. Enter all your trades yourself, and read the newspapers in original form so you can see the placement on the page, the size of the type and headline.

3. Pay attention to divergences in the performance of individual stocks from the consensus about the importance of external events. For example, the housing stocks have been strong throughout all the talk about tapering. How could interest rates be going way up if housing stocks so strong. He likes to look at NVR, Whirlpool, and Sherwin Williams for clues to the real effect of things. These stocks have the virtue of being high priced enough so as not to have high frequency trading interfere with it.

4. Little changes in the institutional structure can have tremendous effects on markets. The importance of big blocks and money flows has been negated by the black pools, multiple market makers, and payments for order flows.

5. Making money in the markets is as hard as making money as a architect or accountant. It requires constant study, practical experience, and openness to new ideas. The best traders are frequently art history majors.

6. The records of markets are frequently faulty. Particularly egregious are the industry performance figures and p/e ratios which are computed retrospectively, for most historical periods before 1940. Big problems occurred when the Dow was reconstituted without adjustment after the first world war.

7. Certain forecasters besides Abelson are particularly bad. Shiller and Prechter have been bearish since 1960.

8. Wall Street is a business where the top feeders always win, and all activities and recommendations must be considered in that context.

9. The relation of individual stock moves and market moves is not linear. For many things like the performance of individual stocks after gaps a 10% move is bearish, a 10-20% move is bullish and a 25 % move is bearish. Similarly he believes for market moves.

10. The public is a very poor consumer of market products. They believe everything they hear on the media. They don't stop to think what the agenda of the person transmitting the information is, or what their expertise is.

Laszlo started out as an immigrant who couldn't speak English. He rose to be head market analyst at Salomon Brothers working next to Mike Bloomberg for 10 years. He now runs a big business in money management, and market letter that affords him the opportunity to own the only grass tennis court in Westport which I have had the pleasure of playing on.

Gary Phillips writes: 

 Thinking about point number 5 about how the best traders are usually Art History majors, add to that…Hungarian, i.e, Birinyi, Soros, and Peterffy. I say this with tongue planted firmly in cheek, but as a first generation child of Hungarian immigrants, I can't help but feel a selfish and chauvinistic sense of pride. My father emigrated to this country in 1938, and not unlike Mr. Birinyi, couldn't speak a word of English. Like most Jewish Eastern European immigrants, he became a merchant and eventually a business owner. Unfortunately, it wasn't until after he passed away 28 years ago, that I realized what a fiercely intelligent, knowledgeable, and perceptive man he was. I cut my trading teeth working on the floor of the CME during my off-time from school, and educated myself reading Hieronymous, and Edwards and Magee. At 18, I naively took everything I read, literally. I remember explaining to my dad about how the commodity markets worked — it was simple; supply and demand. And I'll never forget the (boy, have you got a lot to learn) look on his face, when in his thick Hungarian accent, he informed me how easily and how often, the laws of supply and demand were manipulated and distorted. I was not only surprised by this revelation, but couldn't help but wonder how my dad, who was never a participant in the futures or securities markets, was aware of this esoteric bit of news. This inevitably led me to a couple very salient revelations. Never underestimate the wisdom of your father, and never take for granted the Magyar mentality.



Bonds trade up ~ 5 points, 130-15 to 135-23 in a few seconds, and then the market trades both sides for close to a minute. Certainly enough time for someone who "points and clicks" to take advantage of the "mis-pricing", on the way back down, and now they've canceled all trades above 131-12….

"It was a fat finger"

If that were true then there would have been an instant return to prior trading levels without two way action. It took close to 20 minutes to go back to the prior levels with many up and down ticks.

I'm sure all the little guys who (thought they) bought back their shorts at 131-00 are really happy it's trading at 130-10 now that they're stuck with their longs….



 Here are some personal observations from years working in the nuclear power industry that might be helpful for those interested in energy markets.

1. Since most plants need to produce power 100 percent power all the time, most managers see the power markets as inconsequential.

2. Unlike the gas turbine business, it seems nuke managers are unsure about production costs. Yesterday, I saw a slide where a senior person merged capital costs with operating costs to claim higher production costs. It seems self-defeating.

3. It seems DOE has been captured by industry groups. In particular, NE seems to be captured by NEI. Most of their data seems to come from NEI.

4. It seems DOE's NE thinks their primary role is to be the repository of other peoples' thinking. It appears they are not taking any leadership responsibilities.

After discussing this with some colleagues, we think we know some of the [financially] troubled nukes:






5. As Prof. Richter pointed out, there is no national effort to save the nation's nukes. Most industry activity has been redeployed at the state level. It seems desperate.

6. Industry leaders are mostly old white men who are drawing big salaries. The industry is managed like a country club, not a business. Their dues are too high and too few people are willing to pay the price.



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

Art Cooper writes: 

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



The movie Wall Street was released in 1987, Boiler Room in February 2000, Wall Street: Money Never Sleeps in 2010. Now there's the Wolf of Wall Street coming out.

Are there other movies to be considered and what does it portent?



 [Editor's Note: Every year at Dailyspec we post the story of "Stubby Pringle's Christmas" by Jack Schaefer. It is a wonderful, heartwarming story. Hope you enjoy it and Happy Holidays.]

High on the mountainside by the little line cabin in the crisp clean dusk of evening Stubby Pringle swings into saddle. He has shape of bear in the dimness, bundled thick against cold. Double stocks crowd scarred boots. Leather chaps with hair out cover patched corduroy pants. Fleece-lined jacket with wear of winters on it bulges body and heavy gloves blunt fingers. Two gay red bandannas folded together fatten throat under chin. Battered hat is pulled down to sit on ears and in side pocket of jacket are rabbit-skin earmuffs he can put to use if he needs them.

Stubby Pringle swings up into saddle. He looks out and down over worlds of snow and ice and tree and rock. He spreads arms wide and they embrace whole ranges of hills. He stretches tall and hat brushes stars in sky. He is Stubby Pringle, cowhand of the Triple X, and this is his night to howl. He is Stubby Pringle, son of the wild jackass, and he is heading for the Christmas dance at the schoolhouse in the valley.

Stubby Pringle swings up and his horse stands like rock. This is the pride of his string, flop-eared ewe-necked cat-hipped strawberry roan that looks like it should have died weeks ago but has iron rods for bones and nitroglycerin for blood and can go from here to doomsday with nothing more than mouthfuls of snow for water and tufts of winter-cured bunch-grass snatched between drifts for food. It stands like rock. It knows the folly of trying to unseat Stubby. It wastes no energy in futile explosions. It knows that twenty-seven miles of hard winter going are foreordained for this evening and twenty-seven more of harder uphill return by morning. It has done this before. It is saving the dynamite under its hide for the destiny of a true cowpony which is to take its rider where he wants to go – and bring him back again.

 Stubby Pringle sits in his saddle and he grins into cold and distance and future full of festivity. Join me in a look at what can be seen of him despite the bundling and frosty breath vapor that soon will hang icicles on his nose. Those are careless haphazard scrambled features under the low hatbrim, about as handsome as a blue boar's snout. Not much fuzz yet on his chin. Why, shucks, is he just a boy? Don't make that mistake, though his twentieth birthday is still six weeks away. Don't make the mistake Hutch Handley made last summer when he thought this was young unseasoned stuff and took to ragging Stubby and wound up with ears pinned back and upper lip split and nose mashed flat and the whole of him dumped in a rainbarrel. Stubby has been taking care of himself since he was orphaned at thirteen. Stubby has been doing man's work since he was fifteen. Do you think Hardrock Harper of the Triple X would have anything but an all-around hard-proved hand up here at his farthest winter line camp siding Old Jake Hanlon, toughest hard-bitten old cowman ever to ride range?

Stubby Pringle slips gloved hand under rump to wipe frost off the saddle. No sense letting it melt into patches of corduroy pants. He slaps rightside saddlebag. It contains a burlap bag wrapped around a two-pound box of candy, of fancy chocolates with variegated interiors he acquired two months ago and has kept hidden from Old Jake. He slaps leftside saddlebag. It holds a burlap bag wrapped around a paper parcel that contains a close-folded piece of dress goods and a roll of pink ribbon. Interesting items, yes. They are ammunition for the campaign he has in mind to soften the affections of whichever female of the right vintage among those at the schoolhouse appeals to him most and seems most susceptible.

Stubby Pringle settles himself firmly into the saddle. He is just another of far-scattered poorly-paid patched-clothes cowhands that inhabit these parts and likely marks and smells of his calling have not all been scrubbed away. He knows that. But this is his night to howl. He is Stubby Pringle, true-begotten son of the wildest jackass, and he has been riding line through hell and highwater and winter storms for two months without a break and he has done his share of the work and more than his share because Old Jake is getting along and slowing some and this is his night to stomp floorboards till schoolhouse shakes and kick heels up to lanterns above and whirl a willing female till she is dizzy enough to see past patched clothes to the man inside them. He wriggles toes deep into stirrups and settles himself firmly in the saddle.

 “I could of et them choc’lates,” says Old Jake from the cabin doorway. “they wasn’t hid good,” he says. “No good at all.”

“An’ he beat like a drum,” says Stubby. “An’ wrung out like a dirty dishrag.”

“By who?” says Old Jake. “By a young un like you? Why, I’d of tied you in knots afore you knew what’s what iffen you tried it. You’re a dang-blatted young fool,” he says. “A ding-busted dang-blatted fool. Riding out a night like this iffen it is Chris’mas eve. A dong-bonging ding-busted dang-blatted fool,” he says. “But iffen I was your age agin, I reckon I’d be doing it too.” He cackles like an old rooster. “Squeeze one of ‘em for me,” he says and he steps back inside and he closes the door.

Stubby Pringle is alone out there in the darkening dusk, alone with flop-eared ewe-necked cat-hipped roan that can go to the last trumpet call under him and with cold of wicked winter wind around him and with twenty-seven miles of snow-dumped distance ahead of him. "Wahoo!" he yells. "Skip to my Loo!" he shouts. "Do-si-do and round about!"

[For the rest of the story, please follow this link]



If you have a young friend or family member wanting to study markets, they might look at the power markets. They are so large, they are fascinating and no single person can master them.

Consider this:

The market's primary commodity moves at the speed of light. Unlike grains, it cannot be stored. Unlike natural gas, it must be consumed within femtoseconds of being produced (that is a split second).

On the production end, the commodity's financial attributes are entirely dependent on other commodities, most of which are uncorrelated.

On the delivery end, the commodity's financial attributes become dependent on another commodity, which is also uncorrelated. That commodity is wires, which is also auctioned at market.

Once the market is mastered (good luck with that), the student learns it is only one of ten markets operating in North America. Then the question becomes, how does the commodity move between and among markets? The issues of market seams and pancaking suddenly become relevant.

Opportunities are growing:

Power markets are at the beginning stages of development. Not only are power markets growing in North America, they are growing in Europe and Asia. China has power markets. Southeast Asia is starting a new market.

Minds are open. Opportunities abound. Careers are just starting. There are many ideas and concepts to be considered. The issues range from public policy to information technology. There has to be over 100 dissertations waiting to be written.

One interesting person for potential graduate students to consider is William Hogan. His name frequently pops up in FERC, DOE and market meetings. There are others.

The concern:

There are people with good intentions who could ruin the markets. Many want to bypass the markets by claiming the need be the exception. Their arguments range from national security, to reliability, to preserving jobs, to stranded assets to who knows what. Unfortunately, some of those arguments could have traction with policymakers.

Before anyone goes there, this is a bipartisan concern. Most in the industry love free markets - for you. They just want to preserve their cost-plus assets.

The list:

This is just a thought. While I am not personally qualified, perhaps the chair and list members might consider offering their insights. This is a good time. Policymakers are looking for thoughtful people to help them develop and expand markets.

Even if there is not personal interest, if you hear of young economists looking for careers, they might be interested in power markets. They don't need engineering. They need to understand money and markets.



 The management of sexual energy is a topic rarely discussed. It's not something that parents typically talk to their children about. Yet it is clearly something that features.

Buffett currently has a thirty year old blonde in the office next door to him as an investment assistant. In Freud's book on Michelangelo, his thesis is that part of M's brilliance came from the sublimation of his sexual energy. Then there are all the ideas of Kundalini and so forth and Napoleon Hill's works has whole chapters on the topic.

Perhaps we should lobby for a HBS class?



 Last night I had a dream about an investment opportunity, which seemed so improbable that I started to suspect I was dreaming. I had before dreamt about it (and woken up to recognize the nonsense) and this made me extra suspicious. However, I eventually used the internal logic of the dream to convince myself of its validity, and also the absurdity that I had previously suspected it as nonsense. I eventually came to believe that one of the UK's richest families was an investor. How often does this happen with investments when fully awake?



It should be a good day especially in the last hour. But there's one thing I don't like. As far as I can see, this is the first qualitative tightening move in 6 years. The tightening moves tend to come in waves. An average run is about 12 with the old things like discount rate changes. Many more will follow, all the while with many Governors trotted out to say "once is enough" or "we are mostly done". I'll sell a little of my longs now and buy them back in an hour. Then sell at close. It doesn't augur well for short term rates, I think. There should be a substantial flattening of the yield curve. But I don't know anything about this subject except for the long runs and perhaps I missed a qualitative change thing in the past. I am ready to be educated and to collect some cat food from Rocky.



 I just read Portrait of Beethoven by Fritz Zobeley, 1955. As Beethoven is perhaps the greatest musician of all time, I thought it might be interesting to record some of my impressions from the book as it might be resonant in many areas.

1. Greatness

His greatness according to Goethe came from "the feeling for proportions that have a unique beauty and are immortal." To judge his major and minor chords by quantification is as "nonsensical as looking at a painting and inquiring after the chemical formula of the paint used".

2. Music

Like almost all of eminence, Beethoven was reared in an environment where music was part of the day and fray. His father was a court organist and singer and his grandfather was an esteemed singer. He played every instrument from the age of 4 and dropped out of school to attend to his musical education. But he transcended all his teachers and developed new ideas after his apprenticeship ended.

3. A great businessman

Beethoveen always sold the same piece 5 or 6 times over to different publishers that thought they had exclusives. He managed to get retainers from all the noblemen of Vienna. When a devaluation occurred he insisted on immediate restitution. But he combined the courtly influence of the old days with profit making academies and concerts that he held in the new concert halls opened up after the Revolution. Whenever he was asked how he was doing he would answer "For a poor musician, as well as could be expected." I like to answer the same when asked… "For a poor speculator…". When his litigation to gain control of his nephew Karl occurred (the man who killed Beethoven), he insisted that his sponsors give him an increased retainer to stay in Vienna after insuring that he would win the litigation.

4. Deafness a blessing

Zobely believes that it was because of his deafness that he became the greatest musician of all. He had to combine precise harmonies and rhythms with big ideas in order to overcome his deafness.

5. Self esteem

He believed in his his own greatness above all. He often said "no one who hears my music will ever be the same." Or "I will soon teach them a thing or two." When a baroness whose home he had commandeered for a few years received thanks from him she said, "That's the least I could do" Beethoven immediately answered, "Yes, that's right". Near the end of his life he said, "I still hope to bring a few great works into the world."

6. He was very studious and systematic

He said, "I carry my thoughts about me for a long time. My memory is so tenacious that I am sure never to forget a theme that has once occurred to me… then I begin to develop it in every direction."

7. One with Nature

He got many of his ideas from Nature. He walked in the Vienna woods every morning, often scaring school kids on the way. "I wrest my ideas from nature herself — in the woods, on walks, stirred by ideas which I put into sounds."

8. Delegation

He delegated many of the non-musical things to other people except for his litigations. Schindler and Ries acted as his unpaid private secretaries for 10 years and handled all the details of life for him. He was thus free to specialize on music. This was good because he was always quarreling with his servants. "Rio met him and his face was full of scratches from a quarrel with his servants." He moved 15 times in one year as his landlords threw him out for untidiness and loud music. As Goethe said, "His talent astonishes me. Unfortunately however, he has an utterly untamed personality."

9. Love of women.

Beethoven was quite the ladies man. He wrote many of his short pieces in an effort like Gershwin to seduce many of his students. He was always falling in love with his students. Once Ries came in to see Beethoven raptly listening to a beautiful girl playing one of his Ecossaises "the sins of my youth" he called them. Ries asked him who it was that played so musically because Beethoven always walked out after 10 seconds when he heard someone playing, especially if you asked him to listen. "I never saw her before," Beethoven answered. They still can't figure out who he wrote his "immortal beloved" letter to because he fell in love so often and proposed marriage to so many who had to reject him because he was just a "poor musician". It is good to be inspired by sagacious, wealthy, and beautiful women.

To be continued. v

There is much debate as to whether Bethoveen had in mind a story from literature or apotheosis of a person or event for his compositions, but it is well known that he was the most literate of all composers before him especially compared to Hayden or Mozart who were both ignoramuses. He loved Shakespeare and Homer and often quoted them in erudite conversations recorded in his books. Zobeley concludes that B wanted the listener to impute whatever feelings appeared to literature that was most apt for the music. 

Peter Saint-Andre writes: 

The triple concerto is wonderful. Aside from its musical magnificence, it has various large sections reflecting the behaviors of the market. The beginning for instance, the pianissimo base phrase gradually turned to a stronger and higher pitched march is quite resembling the state where the market commences its actions. From the way the four instrumental threads mimicking and interacting with one another throughout the entire piece, one can get a sense of how a trend (or even bubble) develops in the market.



 My first experience with "serious" fraud was in grammar school. I had advance knowledge and just sat and watched the whole thing come off.

I was either in Fifth or Sixth Grade. My next door neighbor Paul was two years older, and Harry further up the block was in high school. Harry had one of those dream jobs: he worked as an usher at the local theatre for the Saturday kid matinees. It was a dream job because he got to see all the movies for free, and got paid to boot.

This theatre occasionally had giveaways to boost the audience. Well this one time they announced they were giving away a free bicycle (a real stunner) to someone in attendance. All you had to do was be in the theatre with a paid ticket. Of course they announced it for weeks and come the appointed Saturday, the place was packed. Kids were even sitting in the aisles as there were no serious fire regulations. There must have been 400 kids there, every one of which dreamed he was going to win that bike.

I sat next to Paul who told me in advance he was going to win. After the first show (the Saturday kid event was always a double-feature), the manager got up on stage with Harry the usher holding the giant bowl with all the tickets. Harry draws the winning ticket and gives it to the manager, who read out the number. Paul jumps up shouting "I won, I won". The next day Harry was riding around the neighborhood with his new bike. I was too young to inquire about the quid pro quo between Paul and Harry, or even perhaps between the manager and Harry. And of course I was in awe.

In many ways it was beauty in its execution. Not unlike the time the former First Lady of Arkansas used the futures markets to bag a payoff. But that's another story. Here's what made me think of the bicycle giveaway long ago:

Today I saw a news item that if no one wins the current $600+ million lottery and perhaps the next upcoming one, then the jackpot could be $1 billion. With this being the Christmas season, there could not be a better time to avoid anyone winning to run the jackpot up to all-time highs. All those people hoping and praying to hit the big one. All the promoters have to do is look into their computers to find unpurchased numbers for several weeks.

Now I'm not suggesting that they give the winning ticket to one of their buddies, like Harry and Paul arranged with the bicycle. But this could all be done with the goal of redistribution of wealth from those who purchase lotto tickets to the tax coffers of the states, who of course get most of the winnings. The individual winner himself does not matter, he's just window dressing.

Just thinking out loud.



 In a quick test of whether the scholarly market gets the skinny of the open market announcement by one means or another, or just anticipates it, inspired by my experience as a business broker where I never was able to collect a full fee from a scholarly owner, I find that before the big up days the scholarly market tends to be up, and before the big downs, the scholarly markets tends to be down. Big ups on open market day in US occurred on 9/18/2013, big downs occurred on 10/30/2013, 6/19/2013, 5/1/2013, 3/20/2013 and 10/24/2013. Presumably no cats will inculcate lymphoma around here based on this.

Victor Niederhoffer writes:

A senior poster writes that in his career as a business broker, he often was chiseled on the fee at the closing, especially by those who were men of the Good One. The below post is in response:

Richard Owen writes:

Chisiling a fee pre close is on the list of business tactics alongside reducing your bid or offer at the last minute, forgetting to pay someone's bonus in year one as quitting after twelve months is their problem more than yours, running lots of accruals or prepaids into your closing numbers, and many others.

The 'theory' is that over time, if you run this playbook, word gets around and people stop doing business with you or adjust for it so it is priced in. In practice…

What are some of the senior hands views on the list of such tactics? And is one at an advantage or disadvantage by not participating? A chump, a prude or a good businessman?

Two of my business heroes are Pete Peterson and Ron Howard. As far as one can tell, they turned their fortunes without turning anyone over.

For those big successes who were 'strokers' - did sharp practice help them? Was it a material or immaterial component in their overall success? And if it was immaterial, did it correlate to other personality characteristics that were essential? So one takes the rough with the smooth?



It is interesting to note that the serial correlation of the one day moves on consecutive fed (FOMC announcement) days is -0.23 %.

The last one was down 1/2 %. One notes the scholarly market is up about 1/3 of a % today . I hypothesized that the Governors would not wish to inflict pain in their December meeting.

on Dec 11, 2012 meeting. market down 1.5%.

on Dec 14, 2010 meeting market unchanged 0%

on Dec 15, 2009 meeting, market down 1/2 %
on Dec 16, 2008 meeting market up 4%
on Dec 11 2007 meeting market down 3%
on Dec 12, 2006 meeting market unchanged
on Dec 13, 2005 meeting market up 1/2 %
on Dec 14, 2004 meeting market up 1/2%
on Dec 9, 2003 meeting market down 1/2%.
on Dec 19, 2002 meeting market down 3%.

Another hypothesis hits the dust.

Strangely all the December meetings since 1996 were on Tuesdays, i.e. one day meetings. The Governors are working harder with this two day meeting. vic



It would be interesting to inquire how often the nikkei and the dax were up very substantially before announcements like the FOMC and employment and what the subsequent performance of SPU was subsequent to the announcement.



While we wait for the Fed to act, let us not succumb to the kind of partying, smoking, threats, exoneratory remarks, or even self serving ones so similar to what Smith so often does showing the consilience between his character and play that is so devastating to the Knicks. And the worst thing is that he hit a few lucky shots yesterday, and now they'll be tempted to use him again, thereby guaranteeing that they will end up in last place, and the poor coach will be fired.



 Driving on my way back from work, at a traffic signal just at the boundary of the business district in Mumbai, it struck me that each and every advertisement is for swank, upmarket housing. The only other billboard was from a bank offering housing loans at "attractive" rates.

With realty stocks at all time lows in India, one wonders if such advertising is a sign of the coming crash in realty prices or the bankruptcies in the debt-laden realty sector companies or both?

What kind of signs have investors noticed in other economies in the world before realty bottomed out or the realty stocks bottomed out?



 A shocking day so far. [2013/12/16]. Stocks and bonds up. Dax up 1 percentage point more than the S&P. 21 point range on S&P so far. S&P down 15 points in 1 second at 10:23 pm. Like the end of a fireworks show, or the sumo battle in edspec that had 25 turns of fate–elapsed time 30 seconds. How fortunate are those that have enough capital so that they can just buy and hold and live off profits without concerning themselves with these ephemeral movements designed to relieve the weak of their chips. 

Richard Owen writes: 

At my maths professors' retirement dinner, attended by many now asset allocating actuaries, the institutional pension money is obsessed with short term trading of 7pc return and no vol. Which is due to implied liability rates and an absence of gilt yields. Prince Charles has felt it incumbent upon him to disclaim the short term focus and I am not sure how to take being in synch with HRH.

Similarly, there was further consensus interest in bitcoin and missing the boat, 'cos a guy two offices down has made ten times', now making four out of four social occasions at which it has featured. The other commonality has been people in London doing their basement or extension as residences are trading at 4 or 5 times the construction costs. With the idea of tiding over a dry bonus year by borrowing more for a no brainer by becoming a property development nubile. Similarly a friend of a friend has pyramided London property into a ~£40m personally guaranteed, thinly equtized, bank financed block of flats with the belief that one ignores yield and makes the relative value. Mr Cameron and Carney have promised them a stop loss and they have listened.



 After thinking about buybacks, here are some observations.

1. In 2003 companies were given safe harbor from being accused of manipulating their own share prices so long as they had a proper share repurchasing plan. In 2004 they were double the dollar value of 2003, and by 2007 total dollars on repurchases had grown 7 fold to its peak (2012 is still nearly 5 times the 2003 figure).

2. Companies buying back their shares are reducing 3% of their shares outstanding, and it is supposed to be more than 4% reduction next year.

3. There is clear evidence for firm specific seasonality of buybacks. One example: In the fourth quarter, AutoZone (AZO), repurchases more than twice the average of the previous 3 quarters, and they do this every year. This is because the 4th is their highest earning quarter, and they want to finish the year with an EPS growth bang.

4. Be watchful of firms that have large buyback plans, and executive compensation based only on share price and EPS. AutoZone goes on and on about operational efficiency, and new loan facilities for general operations; its completely obvious that most of the debt is for repurchases, and the EPS growth is mostly from those repurchases. They never put it center stage…why?

5. The SEC sees using repurchases to "manipulate" earnings as a violation of the law, while at the same safe harbor can be obtained relating to price manipulation. How they separate the two is baffling; "manipulation" is dangerously vague, and many firms may get aggressive at their own peril.

6. Treasury shares are not the only place shares can go to. A very dubious dark hole on a balance sheet: The SEC interprets the law as shares repurchased do not have to be shown in treasury shares, disclosed on the balance sheet, or earnings statement.

7. From the SEC website, "Rule 13d-1(a): In calculating the number of outstanding shares, shares repurchased by the issuer to fund a stock option plan are not considered to be outstanding even if the shares are not retired or put in treasury. Section 13(d)(4) of the Exchange Act provides that the class of outstanding shares will not include shares "held by or for the account of the issuer".

8. This doesn't only apply to shares repurchased for stock option plans. Here is another from the SEC website:

9. "Shares that an issuer repurchased do not count as outstanding shares, even if the issuer did not retire the shares or account for them as treasury stock. Section 13(d)(4) of the Exchange Act excludes shares "held by or for the account of the issuer or a subsidiary of the issuer" from the class of outstanding shares. [Sep. 14, 2009]"

10. Looking at AutoZone's total share repurchases, it's easy to tease out that they repurchased over 500,000 shares from their stock option programs over the last year. That number is hidden though, because their repurchasing program is so large. The company essentially spent around 250M dollars repurchasing shares from executive compensation. You can't get that number from the balance sheet, income sheet, or other filings (I've looked very hard at this company).

11. It is supposed to be more difficult to re-float shares without notifying shareholders, or getting approval, since NYSE got rid of the "treasury share exclusion". However, if the shares are hidden away in a compensation plan which had been "approved" by shareholders those shares can float. Example next.

12. Again, picking on AZO, because that is who I know well: They have multiple compensation plans and there might be around 26% of their total market cap tucked away in various share programs. You have to look very close in multiple filings over time to get a picture of it.

13. The IRS recognizes the cost of compensation with the options are actually executed: if a repurchase plan pushes shares high enough over the period of years until the are executed, the company can write up the cost of compensation and recognize the cash flow from taxes in the current period. If you push up the stock price enough, you can recapture all of your executive compensation "costs" (cost of dubious option valuations, see next) in cash flow from taxes in future quarters. In 2011, AZO received 6% of their net profits was equivalently this cash flow.

14. It seems unlikely that any company values their stock options for compensation under the consideration that the company will be buying back half of all outstanding shares over the next 3, 4, or 5 years. Think of the firm which has given the executive suite only two targets, EPS and share price, while authorized a repurchase plan large enough to hit those targets on their own. It is not a stretch of the imagination that regulators could come to the conclusion that companies are understating that they can, and do, affect their share price.

Therefore, the economic benefit of the option award is not only more in dollar value (above the strike) than what was recorded as cost of compensation, but it is more likely to be executed than what was input into option valuations. The result could be seen as an intentional understating of the cost of compensation, while using buybacks to guarantee management targets are hit, options are awarded, and exercised well into the money.

15. Firms that repurchase their shares, as a whole, are outperforming market capitalization indexes partially because when their stock prices increase, the change will be larger than the change in market capitalization by basic math. Look at AZO, which has seen its share price grow over 5 fold, while their market cap little more than doubled over that same time period.

16. Likewise, if demand for some equities is partially, or entirely, being met by issuance of shares, those firms will increase in market cap more than than their share price.

17. Many companies are supplementing, or forgoing on dividend programs with buybacks

18. Following that logic, "Dividend stocks" as an asset class might need a modernization; depending on the truth value of the previous two claims.

19. A company can avoid "diluting operations" by pursuing buybacks; as opposed to the core operation's impact on the bottom line being watered down by chasing capital investments, or acquisitions with decreasing marginal returns. I haven't heard anything about this point of view.

20. Seemingly valid EMH critique: "In the longer run, a relative reduction in reinvestment, new investment forgone, or both, should result in a relative reduction in future returns, which in turn should relatively reduce the value of shares". This is true, if the expectation has to be that the returns foregone are of greater magnitude than the reduction in shares outstanding. It's easy to see that 10% less earnings over 11% less shares is relatively better for the people still holding their shares.

21. Additionally, humans, and many other living creatures, discount the future exponentially, or hyperbolically. We'll discount the potential longer run costs of substantial share repurchases if those repurchases are timely and of a magnitude into the future to negate the discounted opportunity cost.

22. If buybacks are accelerating and are not disclosed until each company's the quarterly reports, how are major indexes keeping up with that data, and why is this not an opportunity to get in front of ETF and other index matching funds (some funds rebalance annually)?

23. The opposite works for loss making firms: A company can give a positive trend in negative EPS simply by floating more shares. -$10 per share turns to -$8 per share simply by floating 25% more shares. Firms like this may appear to be on a positive EPS trend, while doing it a "cheaper" price.



 This article illustrates a classic case of buyer beware. If it sounds too good to be true, it probably is, and why there will always be enough for everyone to go round in the markets. Fortunately and unfortunately. Many can't resist a good gamble, illustrated so well here by a punters club on the nags with no checks or balances and up to 200 million disappearing.

"Investors count the cost as Bill Vlahos' racing bets club collapses":

"If anyone is promoting a 20-25% return on your punting, then it should send `red flags' immediately,'' V'Landys said."

"…Earlier this year, Mr Vlahos told his members he had a betting bank of more than $90 million. Fraud squad detectives are now trying to figure out how much money is gone"



 American Scientist has a recent article on The Science of Seaweed. It is behind a paywall but it has an excerpt:

"The macroalgae collectively known as seaweeds are photosynthetic marine organisms that historically have enriched human beings ecologically, industrially, medicinally, nutritionally, gastronomically, and culturally. Excerpts from Ole G. Mouritsen's latest book sample these many benefits, showing the range of Mouritsen's self-confessed obsession with what began for him as a culinary delight. The biology and chemistry of these marine macroalgae is narrated with spotlights on Victorians' beachcombing and pressing specimens in England, the fascinating discovery of the red alga Porphyra's life cycle, Mouritsen's lone sojourn to the algae treasure trove hidden in the Natural History Museum of London, and a world-class chef's irresistible concoction of seaweed-flavored ice cream. "

But I see the entire, very interesting article at the following link that mentions that seaweed contains minerals in an abundance an order of magnitude higher than terrestrial plants.

Here is Dr. Mouritsen's new Seaweed cookbook . In it he proposes a new term: "gastrophysics"!



 There should be a study of whether time outs when a team is winning is better than time outs when a team is losing. Take basketball for example. Many spurts come with non-percentage and lucky threes in the minute by minutes of a game and between games. Often a team will win big with threes in one game and then lose big the next with the same strategy. Take the worst player like Smith. He won a few games at the beginning of last season and then lost dozens more with the same non-percentage play at the end. This compounded of course with his bad character— how do teammates let a player get away with partying late in the night before a play-off? And how does a persons' percentage on risky shots drop near the crucial ends of a game or playoffs when the adversaries pay it much closer and tougher?

Of course, this relates to markets. The time to quit is when you're way ahead not, when you're way behind. Take Jeff as an example. After creating untold profits with his trifecta on the grains last year, he's been quiet. Not only because of the illness in his family. But because he knows about ever changing cycles. And he knows that at Vegas, everyone has a stop loss when they lose too much. But never a stop gain when they make too much.

Steve Ellison adds: 

In last night's hockey game between the Boston Bruins and Vancouver Canucks, Canucks coach John Tortorella called time out early in the second period immediately after the Bruins scored to tie the game, 1-1 (a Canucks defenseman muffed a pass back, and a Bruins player snatched the puck and scored on a breakaway). He was visibly angry and shouting at his players during the time out. Whether by coincidence or not, the Canucks scored within minutes to retake the lead and never looked back as they eventually won, 6-2:

"'There was a lot of emotion. He just wanted the boys to get going,' said Canucks winger David Booth of Tortorella's impassioned words early in the second." 

anonymous writes: 

 For what it's worth, this is a brief exploration of short and mid-term timeout effects on basketball scoring according to situational variable.


The aim of this study was to identify the effects of timeouts on Basketball teams' performance differences, as measured by points scored by the team that calls a timeout and points scored by the opponent team according to game location, the quality of the opponent and the game quarter. Sixty games were analysed using the play-by-play game-related statistics from the Asociación de Clubes de Baloncesto (ACB) League in Spain (2009–2010 season).

For each timeout, the points scored in the previous and post 3, 5 and 10 ball possessions were registered for the teams that called the timeout and for the opponents (nC6 and nB7, n22 andn19, n2 and n0 for 3, 5 and 10 ball possessions, respectively).

For the teams that called the timeout, the results reflected positive effects on points scored, with increases of 1.59, 2.10 and 2.29 points during the period within the third, fifth and tenth timeout ball possessions.

For the teams that have not called the timeout, the results identified timeout negative effects in points scored, during the period within the third and fifth ball possessions (decreases in points scored of 1.59 and 1.77, respectively).

Unexpectedly, the situational variables had little or no effects on points scored, which opens up this important topic for further studies and discussion.

Pitt T. Maner III adds: 

Time Outs in pro basketball are thought to favor the defense, allowing time to get set and also introducing the inbound play (and the potential for a steal). But as the writer of the following article notes there are lots of variables to consider (and you may want to call a TO quickly if Smith is dribbling down court on a 1 on 4 break).

Further testing may be needed. A couple of quotes:

"Call Time-Out? Not So Fast, Pro Coaches"

Said Stotts: "One thing I think is very difficult for basketball in comparison to football and baseball is those two sports have static events. There's an at-bat and something happens on that at-bat and you can quantify each at-bat and same thing with football with, even though there's 11 players on the field, you have a down and yardage each time and it's a very static event. Basketball is a free-flowing, with different matchups and different set of circumstances, perhaps every time down the floor."


'By utilizing play-by-play data from each game of the 2012-13 NBA season
(as well as computer skills far beyond my capabilities), it is possible
to determine what effect "prior events" have on a team's subsequent
shooting percentage. The excellent site NBAwowy.comhas this data for
each individual team. Aggregating all of this data allows one to draw
some very interesting conclusions league-wide, based on a sample of over
200,000 possessions throughout the season. At first blush, one
conclusion immediately leaped off the spreadsheet before any other:
Coaches should call timeout much less often after a change of



How can the US diet be so horrible when over the past 100 years US life expectancy has increased about 60 % ?

(Graph is average male/female life expectancy 1900-98 from a Berkeley source )

Hopefully the government will continue to protect us from capitalist farmers.

Longevity has also increased as a result of the absurd US medical system. This too is now finally being rectified.

Note the drop ca 1918 from the flu epidemic. How will vaccine manufacturers of the future can find ways around bureaucratic limits on profit in the liability minefield?



 Clarke took Brom to its best ever placing last season, but four consecutive losses takes his job.

There are many counting lessons in this story: "West Brom Sack Head Coach Clarke".

Draw down after a big year. Should four losses be a mean reversion or elbow point? If only busted stocks could be as apologetic as Mulumbu.

"Steve Clarke has been sacked as head coach of West Bromwich Albion following a fourth straight Premier League loss

"It's very harsh," Shearer commented. "They overachieved last year and that put pressure on him. When you have a slow start to the season questions will always be asked. The chairman might look at it and think other clubs have improved [after changing manager]. But even so, you have to say it's extremely harsh."

"I feel sorry for the manager," Mulumbu tweeted.(external)"Us players are on the pitch but he's the one who's getting the consequences of our bad play. I wish him all the best for the future.""



 Last year, 2012, the Society for Military History gave its award for the best book on non-U.S. military history to:

The Battle for China: Essays on the Military History of the Sino-Japanse War of 1937-1945

It deserves attention. The war between China and Japan that occurred BEFORE Pearl Harbor had more deaths and destruction than any other part of the global conflict except the war between Germany and the U.S.S.R. Since the body counts for both conflicts involved guesses that would make even the BLS blush, I offer this comment only to give the List some gauge of the magnitude.

The book also serves as a reminder of the grim truth of about official American attitudes where foreign policy is concerned: if you are an ally who suffers for your loyalty, you will be criticized with far greater scorn than any enemy. Mao and the Communists receive praise while Chiang Kai-shek and the KMT are ridiculed, even though the Nationalists were, in fact, the only people who actually fought against the Japanese.



 Good advice from Arnold Palmer on golf and trading in Golf Digest, December 2013:

"Once you decide to pull the trigger on a tough shot, relax. If you feel the worst, tension will cause you to follow the shot that got you into trouble (the previous shot) with an even worse one to follow. Take an extra club because the tendency is to come up short. Get down for control. Then make an aggressive swing. Go after it so your swing reflects your positive attitude."



 Avalanche prediction requires the study of the snowpack both historically and how the snow structure has metamorphosed over time. One of the prime causes of avalanches are weak layers and slab formation. Weak layers in the snow pack are layers in the snow that cause the snow on top of it to slide off it and down the hill causing an avalanche. Weak layers can be low density snow or an ice layer or hoar frost flakes. Slab avalanches are created when higher density snow bonds together then slides on a weak on steep hill. Avalanches can kill.

Avalanches remind me of markets. You can study market structure historically by looking at the number of trades at a price. Over time the density may change. Market order depth structure is not available in full but could be inferred to some degree. Some parties have access to full book.

The theory is there are weak layers in the market structure that might cause a market avalanche or rapid rise. There may also be dense layers in the market structure. An example is a long bar with big price change but low number if trades. Time may change the number of trades at the prices or depth of orders might affect the reactivity of the bar. And a gap is also an example of a weak layer.

Duncan Coker adds: 

Jim's post on avalanches' relationship to the market can be summed up in one word. Respect. Respect that at any point in time the market is in equilibrium. It is priced correctly given forward required return, the price of risk. If one disagrees and expresses this in a position, the null hypothesis is the market is right and I will be wrong. The mountains always prevail in the same way, and if I am venturing out in the back country, I will show due respect.



 I recently came across this humorous story for lawyers.

A Law teacher came across a student who was willing to learn but was unable to pay the fees.The student struck a deal saying, "I will pay your fee the day I win my first case in the court."

Teacher agreed and proceeded with the law course. When the course was finished and teacher started pestering the student to pay up the fee, the student reminded him of the deal and pushed days.

Fed up with this, the teacher decided to sue the student in the court of law and both of them decided to argue for themselves.

The teacher put forward his argument saying, "If I win this case, as per the court of law, the student has to pay me as the case is about his non-payment of dues. And if I lose the case, student will still pay me because he would have won his first case. So either way I will have to get the money."

Equally brilliant, the student argued back saying, "If I win the case, as per the court of law, I don't have to pay anything to the teacher as the case is about my non-payment of dues. I f I lose the case, I don't have to pay him because I haven't won my first case yet, so either way, I am not going to pay the teacher anything.


1. If you are the judge before whom this case comes up, what is the best course for you to dispense justice?

2. What market situations, if any, are similar in construct?

Stefan Jovanovich writes: 

1. Disbar them both - "the case" is about their contract, not about the teacher's remedies

2. Any that involve transactions that manage to exclude themselves from the jurisdiction of the Uniform Stock Transfer Act of 1909 and its successors - i.e. just about everything where the rules have been sufficiently obfuscated to avoid the clarity that our predecessors brought to questions of money and credit.



 We hardly admit it, but we're drowning. Everyone reading is pretty much unable to stay above the tide. Like fish, only more sentient, we're dead center of the slurry, oceans of information swarming our eyes, crashing our senses.

We feel guilty when we sleep, take just one more peek at the email, post just a quick Tweet before we meet friends, dip into our mail for a fast minute at work, find we've deleted something we regret, but simply have no seconds to stomach the full-time, endless "oughts" of the electronic tsunami.

We all know someone who fancies herself smarter than the rest of us, because she won't truck with the latest cell phone, won't bend to the Illuminati of the instagram, doesn't yield to the demands of the computer.
But that person is seen increasingly through the rear-view mirror, trafficking with the stegasauri and Jurassic eosinifils. The rest of us can't afford to be that ludicrous, in the sense of celebrating the estate of being a Luddite.

Makes a nostalgic throwback to an earlier era. We don't have the luxury.

So the increasingly few opt out. They are now so quaint a phylum they own their own kenning: The cellphobes. They neatly elude and sidestep what the rest of us live with night and day: deadly Fear of Missing Out.
And as we fail to admit we are awash and below catch-up level of our Facebook, Pinterest, Tumblr and Twitter accounts, not to mention our humdrum but cataracting email interstates on a daily basis, do we any the less avoid admitting we have FOMO phobia?

It feels ridiculous to admit the cyber manacles of our dancing digits, our pixilated programs. Though they suck the life from our life, induce stiffness in the joints and make of our bottoms the environment for immobile moss fields, we stay at our screen, at our tablets, at our Droids. Walking, as we almost all do, eventually, into curbs, traffic-filled streets, other people. We commune, we think, with others. But it is rather more a solipsistic arabesque with ourselves. We are ever more unapproachable, and even our social talking one-on-one skills are taking on water. Or oxidizing.

Can we opt out of text messaging, insta-memos, Wiki and pricky, emoticons and apps, sexting and wrexting?

Some decades ago, extrapolating from what scientists saw were disabling loss of mobilities when an organism failed to exercise an extremity or its limb, researchers predicted the loss of our toes. Why would we need these uncomplaining cuties, if we lumped ourselves endlessly at a screen, and walking was only a temporary way-station to further sedentary electronics? Think the animated feature, E-Wall, where evolution had re-scripted us, and no one could walk after centuries of sitting.

Ergo, we have, if you check your own footfalls, nearly sacrificed our metaphysical toes. We hardly walk the talk any more, making it all about the pecking order, the not-real-time message that need not extract a real-time response that might interfere with our communal communing. Do you prefer the cyberdunk over the telephonic challenge? We save time not speaking.

Even at important events, our preeny little bastards sit smugly on the table, wanting just the tocsin to light up and divert us from actual discussions with real protoplasm and corn biscuits, a bad hair day and Reeboks on decrementalizing feet.

These svelte palm-fit slugs with all the fingerprint maulings, 3" x 5" peremptory pashas, command our instant response. Our tablets command our eyes, engage our hands. NCIS would make a meal of these most intimate companions. We rush out of the conference, twist and tilt the axis enough to give us wrist-lock, artificially quell our a-borning panic with the callback feature.

Moreover, soon we are afflicted with telling thirst, as we see a dwindling energy supply. Bars fading. Shrinking-percentage screens. Making us dependent every night on the recharge buffets, slurping it slowly from our walls. Like those kissy-face suckerfish, the Plecostomus (Pleco to friends) that keep the aquarium clean by scarfing up the daily algae, their smooch-up lips tight to the glass tank; filling us up, getting us back to command-enabled. Open and charged for business, yo.

A good thing, since AAA doesn't service anything non-auto. Out of juice, we stay edgy and unfinished until we can refill. Even if we have those accessories that are quick-recharge. Another drain. Another device to keep track of, to lose.

And as with the emergence of all new industries, our energy usage obsession has spawned a pop-up industry, as devices get gussied up in a diversity of fashion: Some covers and tablet cases are fit for de Sade. Some for Masoch. Spikes, leathers, mirrorings. Studs and sequins.

Apps. Musical codas. More apps.

M etaphorically, we half-listen for a flashing beep, a vibrato, a tone, so we can importantly acknowledge our busy-ness. We choose to rudely respond to our strident musical summons, sometimes over what used to be considered far more …rewarding pursuits. Most barely remember to apologize for repairing to the handheld when in company.

Quick.Before it stops its variant b-b-r-ring.

An uncivil act, at base. Whipping us from meeting, art and intimacy. From the once-unshaken millennial cycles of sleep and life, work and rest, we get the permanent wash of twilight bytes. Crouched and poised to snap off our attention over anything less encompassing.

We are largely dependentized, now little more than unwonted reception-delivery systems.

We chomp, tautly tethered to the tele-, rather than they being umbilical to us. We subsume our creativity and -ertia to its vibratory summons. It is a molecular cyber-rope, just an architecture and definition from being just so much cyber-rape.

It is of course not Luddism we fear. It is much more the terror of being left stranded, Cast Away, but inside our metropoli. A more potent whipping than any lash; a guillotine of guilt and lockstep keeping-up'ism.

Our now-indispensable life-supports dispense telephony. We swim with, and against, the tide they provide, even if we might wish to be decoupled from their unending burden. Preferring not to be swept overboard, yet even on vacation, we clamor to outlets, recharging, hungrily back into the cyberswim.

Some of us are more manic than others, but even the mildest put in a toe, a foot, our all.

The question is, given our growling reluctance to be drowned, possessed by the nonstop tsunami: Do we dare click off?



Passing through Spokane after backcountry skiing in British Columbia, I noted that last week had unusual extended below zero F temps. There was a short local news query on whether the winter wheat crop may be affected by the cold snap.



 Virginia Postrel is the Gary Hoover, nay, the Jack Schaeffer of business writers.

How the 'Car Gal' Rose to the Very Top at GM: Virginia Postrel 

By Virginia Postrel Dec. 10 (Bloomberg) — With its appointment of Mary Barra to succeed Daniel Akerson as chief executive officer, General Motors Co. brings to a half dozen the number of major U.S. corporations headed by women.


(Virginia Postrel is a Bloomberg View columnist. Her book, "The Power of Glamour," was recently published by Simon & Schuster. Her website is at Follow her on Twitter at @vpostrel.)

Kim Zussman writes: 

 It could be fun to come up with a board game (tablet?) to pit (online) flexions against one another.

Attributes would be dealt out at random - since one has little choice over parentage. IQ, Myers-Briggs, political disposition, race, sex, how long mom was in congress, etc, only framed in such a way as to not offend. ie, non-non-non-anglo-caucasion, laterally abled, etc.

Flexionistic attributes would accelerate progress through the business/political/academic world, whereas traits such as ingenuity, thrift, work ethic, sense of fair play, and non-relative morality would slow (nee retard) progress.

The game would consist of competitive progression through prep schools, enrichment programs, Ivy colleges, government internships, Wall street, professorships, and pyramiding net worth. Final score would composite wealth + lifetime political influence + placement of kids + total tryst count.

One problem as a business model would be that those able to afford tablets to play the game might throw them out the window.



 As of December 4, 2013, US banks had $2.493 trillion on deposit at the Fed. (Source: FRB H.4.1 Report). This amount includes required and excess reserves. The amount has increased by 63% over the past 12 months and approximately 300% since the Fed started paying interest on the balances. Bernanke started paying IOER during the financial crisis, but banks had wanted this for years. Some fraction of this reserve growth is due to QE and some fraction is due to the above-market rates that the Fed is paying. (This is the so-called IOER "Interest on excess reserves.") Right now, the Fed is paying about 0.25% on IOER and the t-bill rate is 0.02%. So the Fed is paying more than 0.23% above the market. On a balance of $2.5 trillion, this is a direct subsidy to FRB member banks of roughly $5.75 Billion per year and with each QE day, the amount grows.

This subsidy is theoretically being financed by the Fed's holdings of longer-dated securities so it's positive carry for the Fed. However, from the perspective of a risk-averse banker, and ignoring capital haircuts and the risks/spreads etc., a banker would need to buy treasury securities with a maturity of greater than 2 years to get the same yield as parking overnight money at the fed. So banks are behaving quite rationally.

The elephant in the room is the rate that the Fed pays on IOER. Talk is brewing that along with the announcement of a taper, the Fed will reduce the IOER rate. I submit that this is a highly unstable equilibrium and a change in IOER will have unintended (and unpredictable) consequences. Let's imagine that the Fed cuts IOER to zero. You will suddenly have $2.5 trillion looking for a new home. Where will it go? T-bills are already at 0 yield. So if banks just buy T-bills (even outside the fed) then that is a classic liquidity trap. Or, it's possible (but improbable ) that it will suddenly go into the real loan market. If that happens, the economy would go gangbusters with possibly little upward pressure on rates since $2.5 trillion in supply is a lot of money. Or, this gusher of ?dumb? money will listen carefully to the fed's forward guidance and collapse all rates towards zero out to the 2-year etc. I think this helps explains why Bill Gross is bullish on the front end of the curve because the curve is highly arbitraged between 2 years and 5 years. So it's possible that a taper announcement combined with a drop in IOER could turn out to be very bullish for the bond market. And this would persist until the Fed actually raises the funds rate.

Additionally, dropping the IOER might appease some critics about the size of the fed's balance sheet (ignoring the sheer quantity of bonds that remain). The IOER has been a subsidy to re-capitalize the banks. And now that this process is largely complete, the subsidy of $5.75 Billion/year should end and watching the gusher of $2.5 trillion leave the reserve account will be interesting, to say the least.

Bottom line: The IOER is a bigger deal than the taper announcement. The pundits will figure this out in due course.

Alston Mabry writes: 

"Remember that money we gave you, so you could give it back to us, and then we'd pay you for keeping it with us?"


"You can't have it back."

Bud Conrad writes: 

Rocky, Thanks.

The Fed has to buy up the new debt issuance from the government to keep rates low. It is also buying the MBS to keep mortgage rates low and to allow the banks to keep on their books holdings that might otherwise be declared toxic waste from being written off. So they can't stop QE purchases.

They have to fund the purchases some how. At present the Fed has been paying over market rate to keep the deposits of Excess Reserves to obtain the money to buy the Treasuries and MBS/Agencies. I don't see how the Fed balances its books if the banks withdraw $2.5 trillion. Then the Fed would look like a commercial bank that has a run from depositors and is quickly iliquid. The equity account is only $65 billion. The Fed is like a very leveraged hedge fund. If the depositors want to withdraw their money, the Fed would have to sell off assets or EXIT, which would cause panic in the markets.That seems even less likely. So Al is right: "You can't have your money" has to be the response.

So the Fed is trapped into continuing the payments on the deposits (IOER) as long as they have income from the Treasuries and MBS to pay for it. The idea that the Fed prints up currency is a little misleading because the actual physical demand for paper is decided by the public's conventions, and there is less use for the dollar bills with more transactions being done with credit cards. So as rates rise they will be raising the IOER rate, and at some point that gets so big that it uses all the asset income, and then the Fed has to go to the government for a bailout, which means the tax payer supports the banks getting their huge interest payments.

As an aside, does anyone know if the big banks can go to the Fed and add money to their deposits to earn the above market rate? Banks are supposedly free to with draw the accounts created out of thin air to pay for QE purchases, but can they add to those deposits? It would seem not because the amounts would rise even more dramatically.

Rocky Humbert replies: 

Bud: If your head is spinning, I suggest you sit down. If you look at the situation as I articulated it, then don't you agree with my analysis….? (This is a macro-economics conversation. No conspiracy theories allowed. ; ) Namely, the Fed could theoretically exist with only $1 of equity. Their equity is irrelevant because of their ability to print currency. And so long as the currency is accepted and relatively stable, everything works. For the Fed, currency is the same thing as a paper check. So if Citibank and the other big banks say "we want to withdraw $X trillion in excess reserves" the fed can hand them a check for $X trillion. And Citibank can take that check and spend it however they want. Whether the check has a picture of Ben Franklin or looks yellow or purple or is electronic is not material. It's credit creation… (This is when the S-Man chimes in.) I believe that before the Fed existed, this was how all banks operated — namely, there was essentially no difference between XYZ Bank's check/draft, their self-issued currency, etc etc.

Rudolf Hauser writes:

There is a bit of misunderstanding here. A reserve balance at the Fed is a bank's checking account at which it holds bankers money. That is the only money, other than currency, that another bank will accept in payment unless it is willing to keep a deposit in the bank that is in the negative position of the transaction. When a bank wants to reduce its balance at the Fed, it does so by buying other assets, such a T bills, or making loans. The seller or borrower now either deposits that money in their own bank or makes loans. This process continues if no other bank receiving deposits or proceeds of sales of assets to these spenders decides to hold excess deposits. Eventually enough ends up in checking accounts so that all the excess reserves reduced by the first bank have either become required reserves or held by other banks that have increased their excess reserve balances. The Fed does not have to sell any assets or pay out anything. The reserve balances just get moved around and converted from excess to required reserves. This of course increases M1 and M2 balances and is inflationary. If the Fed wants to avoid this it either has to make holding excess reserves more attractive by raising the rate it pays, selling assets it holds, borrowing cash via reverse repos or by converting excess reserves into required reserves by raising required reserves that have to be held against any checking or other accounts.

The risks are that eventually the banks might want to reduce excess reserves, resulting in a expansion in M1 and M2 that will be inflationary. Real growth is being held back by factors other than lack of liquidity. While faster M1 and M2 growth might push some demand forward in time resulting in some temporary faster real growth, the type of growth that would clearly have to lead to higher prices for either assets and/or goods and services. Alternatively, the Fed could take the measures noted above. It's ability to pay more on excess reserves is at some point limited by what the Fed earns on its assets and the amount of equity it has. But do not forget the first hit is on the U.S. Treasury which is currently getting large contributions from the Fed, which pays most of its profits to the Treasury. This is currently a large cushion. Selling assets will cause interest rates on those assets to rise, potentially considerably depending on how much the Fed sells among other factors. Even if the Fed does not try to upset the situation, rates might rise because of actual and expected inflation. This might create problems for some holders of long term debt and securities. The least destructive way might be to raise reserve requirements, but this might create problem to the extent that excess reserves are not evenly distributed among the banks. All these moves would be politically unpopular. This is why I am somewhat skeptical of the Fed to get us out of this situation. They could do it, but it will require a FOMC with a lot of wisdom, determination and courage to do so and a Congress that does not take away the Fed's nominal independence to pull off.

anonymous writes: 

Zerohedge quotes Bridgewater on the process of QE noting that not just the amount spent, but what it is buying dictates what the economic effects are. If the assets are more risky and less like cash, the effect is supposed to be more. Seems to me the creation of new money is the big cause of the effect. and then how that money is used is the other half of the equation. It's my view that the new money sits on the Fed balance sheet and impairs its inflationary effect. The reason it sits as excess reserves is that the Fed pays above market rate on the deposits. The $ 2.5 trillion times a reasonable interest rate in normal times of 4% would cost the Fed $100 B, and that is close to it current earnings for its assets of Treasuries and MBS Rising rates is not good for the Fed either.

Bridegwater and commentary:

In the past we have explained how QE continues to "fail upward" because instead of injecting credit that makes its way into the economy, what Bernanke is doing, is sequestering money-equivalent, high-quality collateral (not to mention market liquidity)- at last check the Fed owned 33% of all 10 Year equivalents - and by injecting reserves that end up on bank balance sheets, allows banks to chase risk higher in lieu of expanding loan creation. Alas it took a few thousands words, and tens of charts, to show this. Since we always enjoy simplification of complex concepts, we were happy to read the following 104-word blurb from Bridgewater's Co-CEO and Co-CIO Greg Jensen, on how QE should work… and why it doesn't.

The effectiveness of quantitative easing is a function of the dollars spent and what those people do with that money. If the dollars get spent on an asset that is very interchangeable with cash, then you don't get much of an impact. You don't get a multiplier from that.

If the dollar is spent on an asset that's risky and very different from cash, then that money goes into other assets and into the real economy. That's really how you see the impact of quantitative easing. What do they buy? Who do they buy it from? What do those people do with that money?

Of course, this is why sooner or later the Fed will proceed to "monetize" increasingly more risky, and more non-cash equivalents assets, until "this time becomes different." Which it never is, but the Fed will still try, and try and try.



 To My Fellow Gold Advocates,

Objectivist and Forbes contributor Harry Binswanger has a new article which explains gold's spiritual value.

Gold is not "a barbarous relic" (Keynes) or "filthy lucre" (preachers) but an objective, esthetic value whose meaning has roots in the nature of how our minds work and the need for incorruptible moral integrity. Gold is the symbol of remaining pure and true. Which is why wedding bands are made of gold.

Gold jewelry is fully as objective a value as utilitarian goods, such as bread or automobiles. Those goods provide value by being consumed-by being used up. You eat bread and it is gone. You drive a car and it wears out. Gold is almost unique in being an Unconsummable Consumable. Like Aristotle's Unmoved Mover, gold provides value without being itself affected.

Gold is the ultimate expression of mind-body integration. It is the symbol of purely, "crassly" material value because it is beautiful-i.e., because it is a spiritual value.

Here is the article: "In Praise of Gold"

Kind regards,

Ed Thompson

Victor Niederhoffer writes: 

This article seems more sensible about gold than bitcoin's threat.

Jim Sogi writes:

The heft and sheen of a $1300 gold coin is beautiful. The idea that it does not require the full faith and credit of any government is also beautiful.



 Here am I in New York City, no time for longer philosophy right now, but quick observations. After talking to friends in recent days, left and right, all ages, NY TX IL …. I'm not sure the real problem is left vs right or statists vs libertarians or socialists vs capitalists, etc.

Because all those worldviews have deeper roots…

Here is what strikes me as possibly the REAL issues…

1. Emotionally driven public policy. (Holy Moses, there is a homeless man, somebody give him some money now! Raise the minimum wage! Ok, problem solved!)

2. A public that is illiterate in arithmetic (not math) and afraid of it, of data, of statistics.

3. A public with no education in economics, even the most basic understanding of how prices clear markets and how that is just as beautiful as dinosaurs and butterflies.

Of course I am saying it's a failure of our k-12 education system.

Its not socialist teachers…I see little evidence of that though of course some exist but I don't know that the students believe them….it's teachers and students piling up over the years who were never shown these things (analysis, rationality, economics) in the first place. It's a problem of curriculum balance. Every grade schooler probably knows how to recycle and figure their carbon footprint. And how to "give back."

I also think there is a real gender gap in these items, especially the emotion point for many women voters. Perhaps not unlike the gender gap in science and technology.

Or something along those lines…you get my drift….


Gary Hoover


Chairman/CEO Bigwig Games, Inc. Play Hard and Prosper

Chris Tucker writes: 

Here is a video of the talk Gary gave at the Junto, almost verbatim.

Richard Owen writes:

Mr Hoover should add John Lewis in the UK to his list of impressive department store business models. Great talk.

anonymous writes: 

I also enjoyed Gary's talk very much. Seems the historical mechanism for success in retailing has been increasing quality while reducing price. I have been wondering about this lately with respect to healthcare. Along the lines of retailing, in the wake of the recession my patients seem more sensitive to cost, and they don't want to be "nickled and dimed".

Over recent years in my periodontal practice, I have reduced fees, increased service, and do many more things without charging. Despite loss in local employment (Amgen layoffs, etc) and increasing competition, we've stayed quite busy. However like some of the retailers, our profits are down. Presumably by keeping fees low we have preserved market share.Some of my nearby colleagues take a different approach. Since their busyness and revenues are down, they raised fees - as if this will compensate for lack of demand. They are still not busy, but they do have patient flow and stay in business.

Recently I did some grocery shopping at a local supermarket I usually stay away from, which is a small chain known for high prices. One bag with a few items (including Chilean Sea Bass) cost $126, and I vowed not to come back. While in the market I saw several patients from my practice who looked very happy to be shopping there. Like many in our community, these were affluent people who don't need to budget for groceries. Perhaps they obtain status by paying extra to go to an expensive fancy grocery? The exact value of health care services is much harder for the consumer to judge than groceries. Perhaps my high priced colleagues are aiming for this demographic, and are willing to sacrifice market share. And if so, status-spending is a different twist to supply/demand.

Gary Rogan writes: 

 It is well known in high-end retailing (or actually retailing of any "prestige" products) that raising prices often increases sales. The function of prices is to communicate information about quality in that world. How can any self-respecting "prestige" buyer think highly either of themselves or the product if it's priced like cheap junk? I don't like people who think better about themselves when they pay more, but that doesn't change the reality of what sells at the high end. 

Rocky Humbert adds: 

Shopping in our local over-priced "gourmet" market last weekend, I noticed some brilliant-looking Chilean Sea Bass for $29/pound. I didn't buy any. I noticed an in-store special for Starkist Tuna for $0.99/can. I bought 15 cans. What are the lessons here?

1. It is arrogant and foolhardy to make judgments about other market participants and their motivations. The market and the economy works because participants have different preferences, values, and information. The vendor wants to know, and big corporations spends billions to shape the preferences. But they really don't and can't without unintended consequences. I didn't buy the Sea Bass because I was making a Paella. I bought the tuna because one of our cats is on a high-protein diet and at 0.99/can, the tuna is substantially less expensive than gourmet high-protein cat food!

2. Shaping customer preferences is not the same as offering a product that consumers want in a shopping environment that consumers enjoy. The couponization of consumers and the recent experiences of JCP and Sears illustrate this point well. My Lexus dealer offers an oil change for $50 whereas the Jiffy Lube charges $30. Lexus can take 3x as long as Jiffy Lube. Where do I go? Surprise! I go to the Lexus dealer because the waiting area is more comfortable, they treat me better, they have "free" coffee and danish; they give me a "free" car wash; I can do work while waiting so it's productive; and it's a generally more "enjoyable" experience. What is my enjoyment worth? Do the math. Are other people there because they are making a statement about "being seen" at the Jiffy Lube? Who knows. Product differentiation occurs at many different levels. But overall, it's rational and derives from utility curves.

3. I find that many people who have missed this stock rally (and I wish I had been more aggressive) rationalize the opportunity cost by thinking that the people who participated are "wrong". The rally has been "engineered" by the Fed. The long term fundamentals don't support the expectations. It's going to end badly. The Nikkei didn't go anywhere for X years so the S&P will do the same. Blah blah blah. I think the real story and lesson is that making value judgments about other people is not a productive exercise. Not in business. Not in the markets. And not in life.

Gary Rogan adds: 

 My favorite example of a case where judging motivation is easy comes from one of the behaviorist books I've read where a lady who owned a boutique in New Mexico had a display case of handcrafted Indian jewelry that wasn't selling at all. Once, preparing to go out of town she left a not to her assistant instructing her to mark down the jewelry with a suggested percentage. Due to her poor handwriting, the merchandise was substantially marked up instead of down, and to the owner's surprise almost completely sold out in just a few days. I will arrogantly (but not foolhardily) assume that the marginal utility of the jewelry came from the high price and not the suddenly changed quality or usefulness.

Rocky Humbert responds: 

Mr. Rogan, we both agree that there are many such examples of what you describe. Brands and pricing and intangibles matter. However, the academics often argue that these consumer preferences demonstrate irrational or gullible or other behaviors that are not "efficient" or not "optimal." My point is that the underlying supposition that "optimal" or "efficient" is a universally accepted, static, independent variable, is questionable at best, and misleading at worst. . If you voluntarily partake in an activity, you are getting "value" from it. If the activity is transactional and involves a seller and buyer, then both participants are getting "value" from the activity — or they would not engage in it. To the extent that the transaction is "zero sum" financially does not mean that some other intangible value is not being created. An observer might just not understand what the value is. It's all about personal utility curves.

An observer watching me decline the $29/lb Chilean Sea Bass and buying 15 cans of $.99 tuna would reach a very different conclusion than the truth. An observer wondering why any particular individual decides to shop at Whole Foods, Trader Joes, or the local A&P will similarly come up with questionable conclusions. (I'll bet that the person who started this whole thread doesn't shop for food regularly! Spending 60-90 minutes every week in a supermarket can be a huge chore and one of the attractions of Whole Foods is its environment and presentation.) Sure you can buy the same diamond on 47th street as at Tiffany's for a fraction of the cost. Is it the status of the blue box? Or is it the certainty and comfort of the buying experience? Or is it laziness? Or something entirely else. Countless examples of this.

Gary Hoover writes: 

 The books about marketing luxury and super luxury goods list many techniques which are the opposite of standard marketing wisdom for mainstream products. These include creating product shortages, ignoring negative reviews and keeping them off your website because you only want to talk to your advocates, raising prices to create status appeal etc.

While a walk down Fifth Avenue or other luxury districts worldwide might make you think otherwise, luxury goods are still a relatively small part of the economy. Neither BMW nor Daimler-Benz are in the world's top ten vehicle makers in units, though their dollar revenues rank them higher (especially due to Daimler's big truck and bus operations).

But the luxe segment has grown dramatically in recent years.

Nevertheless, the real dollar volume rests, like the last hundred years, in serving the huge and growing global middle class. Those companies have to pay attention to "old school" rules like price elasticity and great product availability and distribution.

In walking stores in New York the last few days, I was intrigued by the volume done by Swiss Chocolatier Lindt, with multiple Fifth Ave locations, who now drives their product through mass merchandising outlets like the drugstore chain, apparently without ruining product quality or perceptions thereof.

Amanda K comments: 

 Gary (aka Free Market Liberal),

As a female libertarian who has worked in the tech field for years, I definitely see the gender gap in both areas. I suspect that there is a higher percentage of people in tech that are libertarian-minded than other fields. Is it because they are more logical? Because they spend a disproportionate amount of time surfing the web for good ideas? I don't know. Even my female scientist friends reject small government… and they are supposed to be so logical! Of course, they are paid by the government so they may be a bit biased:)

Warning – Politically Incorrect Paragraph (or PIP) below:

I suspect that many of my girlfriends voted for Obama because he is handsome and youngish, they are more easily guilted into voting based on ethnicity, it's cool to vote Obama, to vote against him is to admit that they were wrong the first time around, and Mitt Romney is a plastic man – there is nothing to latch onto. In other words, they vote for emotional reasons.

There may be another issue in addition to the three issues you outlined:

4) A public that has abandoned basic moral principles. For example, if everyone recognized that it is wrong to steal, then it would be obvious that asking the government to steal in order to give money to the homeless guy is also immoral. Schools would be a symptom, not a cause of this problem.



P.S. – ENFPs and INTJs are the most likely to be libertarian with 5% chance each. The only letter in common is N: Intuition. One of the Myers Briggs websites contains the following statement as part of the description of an N: Sometimes I think so much about new possibilities that I never look at how to make them a reality. Sound like any libertarians you know? ;-)



 One point of Gary Hoover's, who recently spoke at Junto, was that stores that were most successful were the greatest showmen. I am not too good at the showman but I made a few sales today with an unusual Barnum close. Australian customers were in Aubrey's booth, and they were walking by. First, I offered them a hot tea. I drank it myself with them and told them the story of Gino Paolocci who swallowed the grasshopper in a taste off of his chow mein when the grasshopper was on top of the opened can. They still hesitated. I gave all the 4 daughters a free colored spice jar for 1 buck each. They demurred, but I told them a Homeric story or two with the tag line "never look a gift horse in the mouth". They still hesitated. I asked them if they had any relatives who had been Transported. They nodded. I then told them in all honesty that my father was a policeman and I felt guilty for the Transport and I give 25% discounts to all progeny whose forebears were Transported. That closed the sale and I made a 5 buck commission offsetting potential losses in the speculative field for the day.

David Lillienfeld writes: 

Showmanship takes lots of flavors—Harry Selfridge, John Wannamaker, Marshall Field, and so on.

You're in good company.



 I've just finished rereading The Mauritius Command. Jack Aubrey was studying Admiral Hamelin's moves when Maturin asked his intentions. He described his plans and options which all depended on Hamelin's moves. If he…then I will… and after that if he…..then I will…. with all the ramifications of his thoughts spelled out rationally and most of all based on his knowledge of human behavior, sea, winds, ships and guns. A profound professional knowledge like that has to be the base on which one can build success. His professional knowledge matched with the ability to project actions and consequences in the future make him the remarkable commanding officer and commodore we admire. At a certain point he had a disadvantage as far as the number of ships was concerned. Yet he was sure he would win. He felt the enemy lacked the determination to fight. And that was enough.



It just occurred to me that, with a profit of 36 bps, this trade reminds me of the Fed's QE, where the banks take the money and then give it back and get paid on the balance. I wonder where the "approx" is in the Fed's fine print?



 A silver lining in detroit's bankruptcy?

In the short run, a recent ruling in the Detroit bankruptcy is a win for muni bond investors and a loss for city employees. The longer-run consequences could make both sides better off.

Stefan Jovanovich writes:

When my Dad was doing the circuit as a textbook salesman in the late 1940s, he managed to visit every one of the lower 48 states — all (except for New Jersey and Connecticut and our home state of New York) by train. He once told me that those travels were what gave him the time to think about schools and school book publishing and the changes that could be made.

On his trips to Michigan Dad would visit our relatives in the Detroit area — his mother's brothers and sister and their children. Three of Dad's cousins worked at Dodge Main; and one of them was a union rep. Dad, who had never worked with his hands in life but had been raised by Wobblies, was a dedicated New Deal Democrat; so, of course, were his cousins.

On one visit Jerzy, the cousin who was the union representative, invited Dad to come visit him at the plant. Jerzy had his own window office on the 3rd floor of Assembly Building; the office also had an interior window with venetian blinds that looked out on a section of the line. During his visit Dad, showing the usual Jovanovich tact, asked what the blinds were for. "Privacy." And, what was the need for privacy? Dad's cousin, like all good politicians, knew that some things needed to be kept private. In his case it was the pinochle game that the cousin, other shop stewards and the Dodge assistant plant managers in charge of labor relations played after lunch each day.

I can believe that many and probably most of the "city employees" in Detroit were unaware of the fiscal impossibility of any business or government being able to pay the defined benefits that they were promised. The people working the line at Dodge Main, including Dad's two other cousins, were blissfully unaware of the pinochle game.



 The following old African story makes me think about how we view our trades and our data. We instantly love our conclusions and unfortunately love our trades to death.

How the monkeys saved the fish.

The rainy season that year had been the strongest ever and the river had broken its banks. There were floods everywhere and the animals were all running up into the hills. The floods came so fast that many drowned except the lucky monkeys who used their proverbial agility to climb up into the treetops. They looked down on the surface of the water where the fish were swimming and gracefully jumping out of the water as if they were the only ones enjoying the devastating flood.

One of the monkeys saw the fish and shouted to his companion: "Look down, my friend, look at those poor creatures. They are going to drown. Do you see how they struggle in the water?" "Yes," said the other monkey. "What a pity! Probably they were late in escaping to the hills because they seem to have no legs. How can we save them?" "I think we must do something. Let's go close to the edge of the flood where the water is not deep enough to cover us, and we can help them to get out."

So the monkeys did just that. They started catching the fish, but not without difficulty. One by one, they brought them out of the water and put them carefully on the dry land. After a short time there was a pile of fish lying on the grass motionless. One of the monkeys said, "Do you see? They were tired, but now they are just sleeping and resting. Had it not been for us, my friend, all these poor people without legs would have drowned."

The other monkey said: "They were trying to escape from us because they could not understand our good intentions. But when they wake up they will be very grateful because we have brought them salvation."

(Traditional Tanzanian Folktale)

Happy Birthday, Victor–70 is a nice number!



To: Alan Millhone and GM Rich Beckwith 

Molo oldman and dr. b: Today i am watching tv, the memorial service of tata mandela, and Obama is here. You know oldman tata mandela used to win checker tournament in robben island prison and i was going to invite him to watch the match in february and as humble as he was, he would have come. He was asked what kept him motivated when he was in prison for 27 years and he said "i knew i would come out one day". Lubabalo



The attached chart plots weekly closes of DJIA (DIA ETF) per the corresponding long-bond price close for that week (TLT).

The irregular line follows the relationship over time, from 7/02-present.

As the line moves from lower left to upper right, stocks and bonds are both rising (higher slope means rate of increase stocks>bonds, and vice versa).

From 7/02-10/07, stocks rose faster than bonds but both increased.

From 10/07-3/09, stocks declined while bonds increased.

From 3/09-7/12, stocks and bonds increased - with greater variation than the 7/02-10/07 period.

From 7/12-present, bonds have generally declined while stocks continued to increase.

The recent move went from upper-right to lower-left (bonds and stocks both declined), a pattern that appears rarely in the chart.

Benian motion instead of Brownian?



 Bill Rafter, thanks for your interesting posts.

I think you will be interested in the attached chart showing native-born compared to immigrant gains (or lack of gains) in employment. It is the work of a perceptive fellow like yourself who tracks such comparison from gov. statistics (whose name I have for the time being misplaced) and who reports on the website.

As you can see from the chart, all net gains in US employment since Obama took office have gone to Foreign-born, while net employment of native-born Americans has not increased during this period.

In addition to being worrying in itself, this may well tie into your finding that while employment has increased, payroll taxes (and therefore wages) have decreased, presumably because of substitution of lower-paid immigrant workers for higher paid native-born workers.

As an illustration one can think of the US construction industry, which used to employ large numbers of middle income workers. Now as I understand it the industry largely employs immigrant Hispanic workers at far lower salaries. One can think of a number of other industry examples.

Gary Rogan writes:

In traditional economic terms substituting cheap foreign-born labor for native-born American labor is manna from heaven: the cost of goods for everyone goes down, so what's not to like? But when those displaced workers go on disability and when they vote themselves food stamps and "free" healthcare, it's not working out so well, is it? This sounds like a Luddite-type argument, and it is, but Luddite argument are valid when the number of displaced workers reaches some critical mass. People are not copper or oil, if they are desperate they resort to desperate measures. The industrial revolution produced Marx, and it was only because the positive effects of that revolution overtook the negatives quickly enough that there wasn't a Marxist revolution in England at the time.

Stefan Jovanovich writes:

Er, no. Gary should stick to his guns on the subject of migration. The reason there was not a Marxist revolution in Britain/England in the 19th century is that people emigrated from the British Isles in sufficient numbers to populate Canada, Australia, New Zealand and double the white-skinned population of the United States. You can add to those numbers the millions of Britons who went overseas to manage/rule/work for the Empire in Africa and Asia and the Caribbean. The argument for "free trade" made by Cobden and others was that the attempts to support prices for British landowners was literally starving the "native-born" population of Britain. They were right, of course; what even they did not anticipate was that, by allowing goods to come into and out of Britain without quotas and with "honest" tariffs (ones that could not be manipulated to hold the goods hostage to official approval) the free trade produced the financial revolution that made London the center of the world's capital markets. That financial revolution and the ability of Brits to do wonderful things with maths are what sustained Britain and still do, not the industrial revolution. The best scholars are now in agreement that Britain's economic rise over the rest of the world came much earlier, before combustion-driven machinery had even begun to take hold - in the 18th and early 19th century. By 1850 and certainly by 1870 Britain's "industry" had been overwhelmed by American, French and German innovation and mechanization.



A changing of the guard in comovements between bonds and stocks on a daily basis is gradually taking place. During the 5 years from year end 2008 to Nov 30, 2013, there were 416 comovements ++ or - - between the two markets on a daily basis. 262 of these are ++ and 154 were - -. That's 4.5 a month for ++ and 2.5 a month for - - During Nov 2013, there were 5 comovements - - between bonds and stocks. And so far in Dec, the red on our Daily Spec chart, there have been 2. It is interesting to note that during March and April 2013 there were 0 comovements + + and - -. Little regularities like this can sometimes be precursors to bigger things.



 Panama's historic Darién Gap - a 10,000-square-mile swath of jungle on the border of Central and South America - has eaten explorers alive for centuries. Today, guerrillas, American trained Panamanian soldiers, drug smugglers, their bushwhackers, poachers, and jaguars rule this vast no-man's-land. I've tried to penetrate the Darien four times, and turned back as many, but it's always been thrilling.

I've tried and tried just because it's there. My first attempt was in 1985 during a racquetball clinic tour that was seeding the sport throughout Mexico, Central and South America. The last stop in the overland route before the Darien was at the US Ft. Clayton two-court racquetball gym. (I did a recent Dec. 2012 '30th anniversary' clinic and saw some of the same old Army backhands.) After the clinic, in 1984, and in 2012, the Army set me up with Darien maps and some hard advice.

 In 1985, the package included a bulky first-aid kit with three anti-snake venoms, and the counsel that the primary danger was drug carriers crossing from Colombia into Panama, and their hijackers. 'You could be mistaken for either,' a sergeant cautioned. I made it a ways into the Darien, and ended on a cow pasture air strip taking a single engine plane out.

In 2012, after the clinic, pictures and a couple of autographs, I set sail on the tiny sloop 'El Gato' that got tossed in a New Year's 20' sea troughs before the boat broke nearly into half, and after two days floundered in the Caribbean without sail, motor or rudder. Tankers in the night bore down on us until we shined them off with jumping flashlights. 'Mayday!' cried a Portuguese container ship on our radio, that received, but could not transmit. A day later, we were towed by the incredulous Colombian Coast Guard into Cartagena.

The third jab into the Darien, in the mid-90s, occurred on another personal vacation, While waiting for a canoe on a midnight riverbank at end-of-road Yaviza, Panama, a thick finger suddenly wagged under my chin that I followed up to a NY Yankees baseball cap worn by a tall Caucasian who spoke Spanish with a suspicious gringo accent.' You'll die if you go in there, and, besides, it isn't allowed.' He identified himself as Panamanian Immigration, and so I about faced for one hundred meters. I slept in a parked bus, and got lucky that at 7am the next morning it returned to Panama City.

The fourth assault into the Darien was just a few months ago, at the specific invitation of a Panamanian expat, to fly in from Florida to hook up with of a native guide who promised, for a reasonable fee, that he, and his kin who lived the length from Panama into Colombia, would get me across safely. On arrival, the guide had tics and bowed out, saying, 'Infiltrating guerrillas for two months have filled the gap, and none of my kin is willing to travel.'

The year old story goes, from one of my expat pals in Iquitos, Peru, that a Colombian General with a deformed foot went to his orthopedist for a special raised sole. The CIA had bribed the shoemaker to implant a GPS transmitter into the heel. They wisely let Achilles wander, from Colombia down into the Darien, and followed by his troops. The US government is presently putting the screws to the Colombia guerrillas via financial and high-tech support such as the GPS heel. The resulting exodus is housed under the war on drugs, and Panamanians are upset.

A Panamanian first year school teacher told me on my last attempt that she has been stationed in a one-room school house on the Darien's fringe because she has no señiority. Guerrillas materialize like hungry ghosts from the rainforest to prey on her and the students for their lunchpails, which they yield to drive them back; otherwise, they steal, or worse. It is terrorist situation.

The Pan-American highway is continuous from Alaska to Tierra del Fuego except for one 100km section through the Darien. The misnomer 'highway' is a dirt track that peters into footpaths at Yaviza, Panama. There the missing segment, that my friend George Meegan last covered in 1978, laces the beautiful, terribly occupied jungle where George was held up by his guide. He pressed on, and at that instant, part of the high academic story of human migration received its death blow that the entire Americas could not be journeyed by foot.

Even then, road construction technology had advanced along to enable a paved road that would link all the Americas. George, the teacher, the Army, racquetball players, and my chicken guide during each of my four crossing attempts have opined that that the Darien is 'closed' to a unbroken Pan America for three political reasons. A negotiable route would open three huge gates from South to the North Americas: drugs, prostitutes and illegal immigrants, including Colombian guerrillas.

A paved Darien would ruin my dream, and I probably wouldn't go there.

anonymous writes: 

One reason, I was told, why this Darien was never linked in with the road system was US fear, warranted, of animal disease blasting up to US.



 A movement of resonance from Stocks and Shares by Hartley Withers, 1910, qualifies as good to go at more than 100 years old. I just read it and it's as fresh as a daisy with such startling resonance as this relating to the moves after recent Federal Reserve changes:

A volatile excitable public acting in a narrow market will exercise an astonishing influence on price. Perhaps the most notable example in history is the rise of thirty points in the French Funds in one morning in 1789, when the confidence inspired ty the appointment of Necker as Finance Minister made folk think that France was going to be solvent and well governed." Lecky, England in the Eighteenth Century, Vol 6. But the public is sometimes quite sagacious. Hannibal had led an unconquerable host to the gates and walls of Rome: "The piece of land on which he was encamped happened to come up for sale, and it changed hands at the normal figure. With astonishing serenity the Roman public thought that Hannibal was not a factor in the positions, and its serenity proved right." Livy, vol 26.



It is interesting to speculate a to whether the close to close in the Nikkei where the flexionism and interaction between government officials and traders is legendary is predictive of the employment reactions, where it is legendary that the Fed shares information on these highly important numbers with their counterparts on a "need to know" basis.



 Deep in Baja five years ago, an exhausted, supply-less hiker was picked up by a crystal hound. The Senior took me hunting with him at certain ledges on the sides of washes showing former black volcanic activity. He taught me to spot a round dome rock that was as ugly as any other, except when you tapped on it. On knuckle rapping, if it made a hollow sound… We danced around the rock yelling, 'home run!'

It was worth a fortune, in Mexican terms; a 3' crystal sold for $80 (a week's salary). Continuing the hunt two days a week for a month, I helped him lug dozens of 30-120 lb. crystals up and into the pickup, and for the three hour drive north to San Felipe in Baja. A thief at night began stealing them, so I slept in a nearby abandoned trailer until they could be moved. On weekends, we sold them at the tourist swap meet and business was good, especially after I started putting desert cactus in the larger crystals making them planters. Others were fashioned into fountains.



Gary Hoover will be speaking Thursday at the NY Junto at 20 West 44th street at 740 pm on "how to start and run a business". All are welcome.



 Hi Victor,

I'm wondering if you have studied bitcoin at all? Or do you only consider a market once its very liquid?

Victor Niederhoffer writes: 

Seems ready to implode.

Barry Gitarts writes: 

Based on what?

Victor Niederhoffer writes: 

Crooks are using it.

Barry Gitarts writes: 

Isn't that the case with all money?

Victor Niederhoffer writes: 

It will be shut down because it competes with things the government like to monopolize.

Barry Gitarts replies:

That was a fear earlier, however the senators, agency heads and Bernanke all seem to think it serves a purpose and are afraid to stifle the innovation:

Ultimately isn't the government just run by short sighted politicians who just want to be reelected? Any politician who stands up against bitcoin or any internet application stands the risk of being "Ubered" (see this article).

Bitcoin does seem to be a disruptor for traditional banking, but so was the internet for the post office, newspapers, tv and retail, that only grew the internet not kill it.

This reminds me of a half joking quote by Russian entrepreneur: "If you create a business that disrupts big business in Russia they will kill you, in America they buy your business."

Victor Niederhoffer writes:

I remember Peter Theil the founder of PayPal
saying that if they knew what he was doing, they would have shut him
down. As it is, only the Lousiana Attorney General was fast enough out
of the box to try to shut Paypal down. 

Richard Owen writes: 

Like all good bubbles, there is a legitimate story at hand. Even with Tulips there was a valid story of rarity that then seemed as psychologically permanent as does now the rarity and desirability of a Van Gogh.

Bitcoin is a bit like the currency of an island entrepot whose domestic economy is tiny and whose export base is mainly composed of criminality and laundering and for which the currency of the island is disproportionately held as wealth of a group of island oligarchs [I suspect he has sold some and someone might correct, but it appeared superficially that the founder's bitcoin may have a billion plus market value?]. Many accidental paper fortunes are held by bitcoin miners: will they stand passive in the face of volatility?

Of the three social gatherings I attended Weds to Sat of last week, all featured discussion of bitcoin and at one - of the type featuring participants who, to listen to their narrative over time, would appear as genius and never to have taken a loss - the non-documented boastage of coups won and utmost sagacity shown in the BTC market. Mr Thiel is smart: he is financing the pick and shovel providers, not running a large position in coin.

So yes, why not $10k BTC, but also, why?

Henrik Andersson writes: 

 Richard, this is clearly the mainstream/consensus view - bubble. The contrarian trade is not always right (far from it), but was is clear is that many commentators don't understand the many faces of bitcoin. What is also clear is that a good investment decision (long term, not trading) can be done on the premise that the highest probability is that the ultimate value is zero. The question is what probability do you put to the USD 10k scenario. "Nothing is more powerful than an idea whose time has come" Victor Hugo.

Richard Owen writes: 

 You make very good points, and I am sure you know all sides of the argument well. If you are long bitcoins I hope very much it is for a large and successful profit. Please manage your risk well. I am not smart enough to assign a probability to $10k. The thoughts are offered without prejudice and are an honest sampling of my experiences as have occurred. I have no position either way and should be distrusted or discredited on that basis. There may be commentary that it is a bubble and my thoughts or analogies may be derivative and unoriginal. The price is possibly also a form of consensus and that is that each BTC is worth a bunch of money, and increasing. As many have gone bankrupt shorting bubbles as being long. 

anonymous writes:

I recall the great Jim Rogers saying that Hysteria is the first thing to look for, but one still needs to pinpoint a reason to go against it. The kind of examples he gives are buying stocks in country's whose stock markets have been closed, buying tea plantations when the price of tea has plummeted etc. Bitcoin? Might just have to let it play its course. I think its a bad joke, but even I must admit it did survive the 50% drop recently before this latest headline grabbing advance. Anyway, this is just my two cents and I have no interest in even attempting to try and speculate with or against it. 

Jan Peter-Jannsen writes: 

Bitcoin as a technology is superb. Bitcoin as a currency is questionable. Bitcoin as an investment is a bad bet.

A great strength of Bitcoin is that it is open source. Any experts can validate the code, and so far there seems to be no flaws. The crypto-curency works!

But cannot open source also be a great weakness? Anyone can copy the code, improve it, and make an even better alternative to Bitcoin. Is there any reason to stick to Bitcoin if and when that happens? Bitcoin is volatile, no prices are quoted in Bitcoins and very few have both their income and expenses in it. Those who use Bitcoin need to exchange to and from other currencies, so why not switch to another digital currency?

In terms of investment I believe it is a bubble. The supply is very low; many coins have been lost and the majority of coins are probably in the hands of the founders. I guess they are selling at the moment, but at a low enough speed to keep the bubble growing. In terms of demand; everyone talks about it these days.

In the coming years I predict new payment systems to arise based on technology pioneered by Bitcoin. But Bitcoin itself will soon be forgotten.



 From the hallowed halls…but probably not limited to them these days. Perhaps related to the perceived importance of not upsetting the confidence of gifted students? Grade plunge protection? Grist for the academics:

"A little bird has told me that the most frequently given grade at Harvard College right now is an A-," Mansfield said during the meeting's question period. "If this is true or nearly true, it represents a failure on the part of this faculty and its leadership to maintain our academic standards."

Harris then stood and looked towards FAS Dean Michael D. Smith in hesitation.

"I can answer the question, if you want me to." Harris said. "The median grade in Harvard College is indeed an A-. The most frequently awarded grade in Harvard College is actually a straight A."


Richard Owen writes: 

This is an interesting phenomenon. In the UK, the current coalition have started to engineer grade deflation for pre-uni qualification. It seems somewhat unfair to those at the inflexion point. Perhaps instead grades should be given on a continuously rising index number, so just like money, it debases but still acts as a reasonable measure.

I do not know the reality, but given that at universities like Oxford (certainly pre-WW1) it was standard practice to arrange a place for your son or daughter and that a typist could be hired to write your final papers, the idea that standards have always been nosebleedingly high doesn't seem right. Indeed, the intake quality is probably as high as ever, given the internationalisation of educational institutions. 

Stefan Jovanovich writes: 

 As Richard knows, in the 19th century even faculty positions were allocated by social rank. His idea about an index is a marvelous suggestion; perhaps there could be a "mixed" educational economy in which people were allowed to buy grades or at least grade insurance and the underprivileged could get "extra" grades.

What is certain is that the schools will not allow anyone to set standard examinations. It would sabotage compulsory education (which now includes college attendance for anyone wanting a civil service or corporate job) if there were uniform measures of skills for which anyone could take tests and get scores.

James Bower writes: 

In graduate school there was a strict 3.25 curve for all courses. It was skewed (approx 30%, 50%, 15%, 5% other), but still there were only so many A's available. You would think teachers would/should create enough difficulty to create a wider distribution of outcomes.

Victor Niederhoffer writes: 

It is interesting to note that the last thing Artie did, the day before he died was to grade all the exams of his class, and give them all A's. Usually he only gave 85% of his class A's. What's so terrible about giving an A? The kid took the class, or played the piano or great music. It's beautiful. 



There was a blue plate special in SPU yesterday (2013/12/04) designed to unleash the public from their chips. Hard to do an encore after that. A 22 point range.



 It's the international year of statistics, and each month here at SAS we celebrate a different statistician. For December it is Karl Pearson. This was posted on our internal web this morning, I thought this might be a nice posting for the DailySpec.

Hope you are all well, and happy holidays.

Celebrating statisticians: Karl Pearson

In celebration of the International Year of Statistics, the final statistician we celebrate is Karl Pearson. His work in the late 19th and early 20th centuries laid the structure of mathematical statistics.

Born March 27, 1857, in London, England, Pearson was raised in an upper-middle class family. He studied mathematics from 1876-1879 at King's College, Cambridge, graduating as the third-ranked among those receiving a degree. This scholarly success allowed Pearson to pursue further studies, which were very diverse in nature, and not suggestive of his future as one of the founding fathers of statistics. These included physics, physiology, German literature (he was actually offered a post in the German Department of Cambridge University), and socialism.

Following in the footsteps of his father, he studied the law and was called to the Bar in 1882, but he never practiced. Even as a Professor of Applied Mathematics at University College London starting from 1884 through 1890, Pearson was highly respected in a variety of areas, but had not yet moved into the study of statistics. This changed in 1891 upon meeting Walter Frank Raphael Weldon, a Professor of Zoology at University College London. Weldon also introduced Pearson to Francis Galton, who was interested in heredity and eugenics through the introductions of ideas of correlation and regression. With this, Pearson now wrote papers on heredity and evolution, leading to advancements in the correlation coefficient, introducing the chi-squared test and early ideas regarding p-value and ideas on hypothesis testing. The Pearson system of curves meant to describe non-normal curves served as the basis for continuous probability functions, and laid out ideas of principal component analysis

Pearson, Weldon and Galton co-founded the Statistical journal Biometrika in 1901, which still remains a top journal for statistical theory. His book, The Grammar of Science (1892), with Pearson's own ideas on relativity, was read by a young Albert Einstein. Pearson was elected a Fellow of the Royal Society in 1896, awarded the Darwin medal in 1898, and awarded an honorary LLD (a doctorate-level academic degree in law) from the University of St. Andrews and a DSc from University of London. Pearson was offered the Officer of the Most Excellent Order of the British Empire (OBE) in 1920 and knighthood in 1935, refusing both due to politics (he had very strong views towards both socialism and eugenics). Karl Pearson's son, Egon S. Pearson, was also a prominent statistician (Neyman-Pearson Lemma) and eventually took over his father's position at University College London and as editor of Biometrika. It seems fitting that after starting out with R.A. Fisher as the first statistician celebrated for the International Year of Statistics, we end with Karl Pearson.

There was a long and public feud between Pearson and Fisher over each other's views. This lasted even beyond Pearson's death in 1936 (see Edwards, 1994, for a fascinating read) when Fisher was asked to write about Pearson's life for the Dictionary of National Biography, an entry that was subsequently not used. Perhaps some of Pearson's achievements are overshadowed in that the study of statistics started moving towards maximum likelihood estimation and hypothesis testing at the end of Pearson's career. However, from the website "Earliest Known Uses of Some of the Words of Mathematics," consider some of the terminology attributed to Pearson (though he was not necessarily the originator of the idea itself):

* Standard deviation
* P-value
* Histogram
* Contingency table
* Spurious correlation
* Random walk
* Chi-square
* Goodness of Fit
* Hetero- and homoscedasticity
* Pearson's coefficient of correlation (r)
* Method of Moments
* Mode
* Skewness
* Kurtosis

On examining this list, I have to appreciate how many of these terms have become ingrained into our statistical vocabulary without giving thought to their origins. As the International Year of Statistics draws to a close, we celebrate Pearson, and give thanks to his contributions to the field.



 We have gone almost a year with the two percent additional payroll tax reinstated. The results are worse than expected.

What would have been expected is an increase in employment, but not enough to offset the effective tax increase. The reason you would expect an employment increase is because Americans are a resilient lot and get bored with sitting around. Sooner or later they find a way to get back to work. That is not what we have: The growth in payroll taxes is now negative, indicating a net loss in payrolls. The data is effectively "cap-weighted" so it might mean a loss in the number of jobs or switching to lower pay, as when a nuclear engineer becomes a sanitation engineer.

Philosophically, tax rate increases for individuals generate increases in tax revenue for governments. This is exactly what is expected by government, but the problem is that government does not know where to stop. They expect further rate increases to result in commensurate increases in revenue. But government neglects that individuals have a say in this: the latter can vote with their feet by leaving the workforce. America is now on the wrong side of the Laffer Curve.

Additional amounts taxed (N.B. the PPACA has been ruled by the Supremes as a tax) will have a continued negative effect.

A fellow Spec-Lister suggested I look for structural/secular changes in the employment data. My initial thought was that humans are skilled at obtaining freebies, and the disability payments coming from Social Security seemed a perfect target. Consider, faced with a lay-off, why not see a doctor, claim clinical depression and get yourself on disability? The long-term advantage of doing so may mean that you never have to work again, which would not be the case with unemployment benefits. But is my conspiratorial claim borne out by the data?
The short answer is "No". However there is more, should you feel inclined.

Firstly, which data does one use? Social Security Administration issues a report showing claimants for disability and the average claim. Multiply the two and you get the total value of disability benefits paid. Alternatively, you can go to the Treasury website and see their ledger of what actually was paid. Although the two sources (Soc.Sec. and Treasury) mimic one another, they are decidedly not identical. Of specific concern is that they differ by an odd order of magnitude, and one which is not relatively constant. So then one might posit which source does one trust.

Chart of Disability Benefits Paid

Chart of the 12-month rates of change of benefits paid

My experience suggests that the Social Security data looks as though it has been manipulated or "cleaned up". The Treasury data looks as though it contains a degree of static, which is more realistic. My guess would be that the Treasury data is "raw", while the Social Security data is "adjusted". In general my personal preference is for raw data if I cannot reverse engineer the adjustments. Both data sources indicate a relative decline in the yearly rate of change, decidedly counter to my pre-supposed conspiracy claim.

If you look a little deeper into the Treasury data you find a profound cyclic influence:

Cyclic disability benefits

This was a surprise. I did not assume the claimant had much control over the process, but the data indicates that summer is a key time to receive benefits. Oh, the joy of it all. [Skeptics should note that the cyclicality is not related to the number of days in the various months.] The cyclicality also suggests that disabled persons do return to the workplace. (I would have lost that bet.)

What is the current trend?

trend slope in disability benefits paid

For whatever reason, the drift of disability benefits is not increasing. One might optimistically believe that because conditions are not worsening, they must get better. Such logic could cost an investor a lot of his wealth.

Rocky Humbert replies: 

There was a Washington Post story yesterday that adds some color to this discussion. It notes a fact: 1.3 Million workers will have their "emergency" unemployment benefits end on December 28, unless Congress renews this aid program. This is a big number. And I was unaware of this fact. And as I consider myself somewhat informed about stuff, I'd guess relatively few market participants are aware of this fact either.

The writer then looks at the probability that a lot of these folks will file for disability claims. The author cites a study (which I have not read) which suggests that they won't. I have no opinion except that people respond to incentives. And some number of these 1.3 Million will surely find their way back into the reported labor force. This will likely distort the tax revenue, payroll, and other data to some degree in the first months of 2014.

I am raising this point not because I have any view about the currently big number of people receiving disability or what it means. (That's HR Rogan's job.) Rather, I am raising this, because the employment and tax numbers will, I believe, look really odd in January and February. (HR=hand wringer)

The story can be found here:  "Where Will Workers Go After Their Jobless Benefits Expire? Probably Not on Disability"

Jeff Rollert adds: 

Just to add another vector to the discussion, I would also argue that, since 2000 (the benchmark year in the article), the entry into the global labor pool of hundreds of millions of smart, motivated Chinese workers (not to mention Vietnamese, etc) has had a significant impact.

From the MIT Technology Review: "How Technology Is Destroying Jobs":

Given his calm and reasoned academic demeanor, it is easy to miss just how provocative Erik Brynjolfsson's contention really is. ­Brynjolfsson, a professor at the MIT Sloan School of Management, and his collaborator and coauthor Andrew McAfee have been arguing for the last year and a half that impressive advances in computer technology—from improved industrial robotics to automated translation services—are largely behind the sluggish employment growth of the last 10 to 15 years. Even more ominous for workers, the MIT academics foresee dismal prospects for many types of jobs as these powerful new technologies are increasingly adopted not only in manufacturing, clerical, and retail work but in professions such as law, financial services, education, and medicine.

That robots, automation, and software can replace people might seem obvious to anyone who's worked in automotive manufacturing or as a travel agent. But Brynjolfsson and McAfee's claim is more troubling and controversial. They believe that rapid technological change has been destroying jobs faster than it is creating them, contributing to the stagnation of median income and the growth of inequality in the United States. And, they suspect, something similar is happening in other technologically advanced countries.

Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress. On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States. For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the "great decoupling." And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.



 I did an interview at the Metals and Minerals Investment Conference in San Francisco. I gave a talk with more details on gold at the same conference. I comment on stocks vs. bonds. This is my 11 minute interview starting 30 seconds into the interview time.

Comments welcome!

Leo Jia writes: 

That is a very interesting interview. Thanks Bud.

Regarding big banks' manipulation of gold and silver, I have read such speculations for a few years. I often wonder how this can be possible given that there are big capital in the world that is not part of the banks. Why wouldn't they come in and break the manipulations and make money at the same time? Perhaps in the way Soros broke Bank of England?

Bud Conrad responds: 

Yes, Leo, you have read those speculations for years — and for years those who put them forth have been viewed as members of a lunatic fringe. The most frequently heard dismissal of the case was, to the effect, "anything that big could not go un-noticed." Yet, as we have discovered in recent years, the LIBOR market and the swap markets have, in fact, been rigged. Each, as I understand it, are much larger and more vital than the gold/silver markets. Why anyone remains doubtful puzzles me…



 In the September 5th, 2013 issue of nature, they have a nice article reviewing Batesian Mimicry, the kind where harmless and very good to eat butterflies mimic the appearance of poisonous ones to avoid being eaten. I have often pointed out that all the forms of deception that appear in nature have their counterparts in markets, and the study of such deception is one of the most useful things for the market operator to master. The nature article points out that that many microorganisms produce proteins that mimic the "form and function of host proteins to counter immune defenses." Pictures of innocuous bacteria and deadly viruses that appear identical accompany the article. They conclude: "it is exciting to consider how Bates's observations of rainforest butterflies might help to inform our understanding of infectious disease today". It is exciting to consider how the study of microscopic deception in the tick by tick prices might inform our understanding of deception in the larger spheres so endemic to market moves.

The same issue of Nature has such a loathsome article about plate tectonics saying that it shows that government funding is necessary for all scientific achievement, and that women and socialists made the key contribution to the spreading of the ocean floor and the reversals of magnetic polarity that led to plate tectonics, and that this same alliance is necessary for us to appreciate global warming that I wanted to throw my copy of nature out the window, and I did.

Pitt T. Maner III writes: 

Thank you, Vic. Here is an illustration from the issue you noted which displays the mimicry seen at the molecular level. Pretty amazing. And here is a cute one from the website of one of the authors.



"The good moves are there. They are just waiting to be made".

From Tom Wiswell, who based many of his proverbs on his sense of the market. He liked to say, "I can just feel the tension here".



 Veterinary school was a concentration camp. There was one suicide every other semester. It was the period of the baby boom, and as the country lunged forward it was buying more dog food that imposed an 'experimental program'. As I recall, it was a lobotomy. We were stuck into an accelerated curriculum of six years crammed into five to produce more DVMs.

The semester loads maxed at 18-20 credits which was 25% greater than the campus average. Each class was scientific, tough. Grades were on a class curve; and I was in competition with men and women having graduate degrees in anatomy, biology, physiology and so on. Classes ran Monday through Saturday, and during internship (in snow blown pastures and barns) we were called out on Sundays. Full classes ran concurrently with midterms and final exams.

I kept track, year by year, and the most I ever wasted was an accumulated one second of my life.

I won my first paddleball nationals by becoming an Intramural building supervisor to have a key to practice shots late into the night after closings.

Upon graduation in winter, 1972, I took an askew turn with my sheepskin west from Michigan to California. Pro racquetball was igniting and this was the mecca. One month after arrival, I took the veterinary state boards, and came to an instant understanding with educational bureaucracy on, walking out, the proctor said, 'You'll have the results of the board in six months.' it was a multiple choice test.

The first pro racquetball tour started just months after, and I chose pro racquetball, despite an eventual passing board grade. I kept the California and Michigan licenses current for about five years, while reading the AVMA journals, and then it seemed futile to pay the annual renewals.

The DVMs expired, but I've saved myself with my training dozens of times and, in reflection, there are zero regrets on my choices.

I've remained in contact with two of my colleagues, one my big brother at Farmhouse fraternity and #1 in our class, and the other an outstanding veterinary psychiatrist, to whom I refer cases if I cannot help.



"Memories pass between generations"

Behaviour can be affected by events in previous generations which have been passed on through a form of genetic memory, animal studies suggest.

Prof Marcus Pembrey, from University College London, said the findings were "highly relevant to phobias, anxiety and post-traumatic stress disorders" and provided "compelling evidence" that a form of memory could be passed between generations.



For the last 30 years (1/84-present), at the end of each month Mike bought $1000 worth of SP500 index.

Akira (who lived in the US) also bought $1000 every month of his country's stock index — the Nikkei 225.

Both dollar-cost-averagers invested a total of $358,000.

Attached are the equity curves of Mike and Akira (not accounting for dividends, transaction costs, currency slippage, etc).

Mike's SP500 investment is now worth $1,200,054. Akira's Nikkei investment is now valued at $386,106.

[DCA = Dollar Cost Averaging].



"The current bull market has been intricately connected to the Fed’s bond-buying program, which has inflated and propped up asset classes. The real question is whether or not the stock market can continue its upward trajectory after the Fed begins to taper QE". Market Comment.

I wish people would stop attributing the gains to the Fed. The term structure is such that the 30 year rate is not affected. And that is what determines the values along with the return on capital, which is probably substantially reduced by Fed activities, and the prolongation of robbing Peter to pay Paul that is a natural consequence of the kazk played at the interior and other redistributional departments and activities.

keep looking »


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