Earlier posts · Page 8
Wisdom from Dimock, Wall Street and the Wilds, circa 1870
Wall Street and the Wilds, by A. W. Dimock, from pages 79-89:
Having proclaimed that all speculative systems are fallacious and having denounced their advocates as false or foolish, I am about to exploit one myself, claiming for it a mathematical and logical basis and substantial infallibility in practice. At least it proved unfailing during the years I employed it, and the average daily profits ran into the thousands. That my share of the accumulations failed to remain with me was not the fault of the system, but my own. Through its proceeds great railroads were founded, educational institutions endowed, and family fortunes established. My partner, who looked on askance at first, soon adopted the theory that a method which, though dealing in chance, worked so independently of it, was business and not gambling.
But while the pendulum of the gold tide beat slowly, the rise and fall of the waves was like the swinging balance of a watch. The unit of transactions on the Gold Exchange was five thousand dollars in gold and the prices varied by one eighth of one per cent. On an active day in the market, even though gold might close at the price at which it opened, the fluctuations, counting by eighths, ran high in the hundreds and sometimes invaded the thousands. What was the use of customers with their occasional commissions by the day or the week, when commissions galore hung before my eyes in every change in the market, whether up or down? I made of myself a nerveless machine and for nearly all the three hundred minutes of each daily session stood beside the curved rail that enclosed the Gold Room pit buying five thousand gold at every eighth.
All day I stood there, buying and selling, buying and selling, with a stubby pencil in my right hand and in my left a note-book, on the one and other side of which I dashed down prices with hieroglyphs for names as I nodded to the right and the left my acceptance of bids and offers. One minute might pass without a transaction and in the next a score be crowded. Always my bid and offer were on the floor a quarter per cent apart. Thus if I had just bought five thousand at a premium of fifty and one-eighth per cent, I would bid fifty for five more, and offer to sell five at fifty and one quarter. Every purchase was balanced, sooner or later, by a sale of the same amount at an advance of an eighth per cent. Thus if I made one purchase and sale in each minute of a day's session my profit for that day would be $1,875. Often this profit was multiplied, for in times of much excitement the price would skip the fractions and jump one per cent at a leap, in which case instead of selling five thousand at each eighth advance, making forty thousand at an advance of nine-sixteenths, the whole forty thousand would be sold at an advance of one per cent, an extra profit of $175.
Always the market looked strongest just as it was nearest its culmination and already tottering to its fall. But though reason and experience told me this the burden I carried rested no less heavily on nerves that were sore and quivered at every comment, in the daily press or on the floor of the Exchange, on the phenomenal strength of the market. That which bore me up and carried me through was the constant throbbing of the machine I had created. Buying and selling, always buying and selling at each eighth decline and each eighth advance, helped me to forget the adverse flood that the whole world seemed to predict.
ATH, from Zubin Al Genubi
While S&P 500’s Friday [23 Feb] gain was only 0.03%, it was enough to propel it to another all-time high (13th record close this year); in years when S&P 500 did hit an all-time high, it did so 29 times on average since inception of modern version of index in 1957.
-Liz Ann Sonders
Here's #14 this year as we close up [1 Mar].
Peter Ringel asks:
How & why should one exit any equity longs [given the market advance of the last 10 years]? Not a trivial question to me.
Zubin Al Genubi responds:
Trade your system expectation time. Develop systems that can capture a trend. (Good luck with that.) (Or at least allow re entries, break outs.) Use appropriate money management and the geometric returns over time and increase net wealth. Trading in a nutshell.
Peter Ringel continues:
what if buy & hold is the best system in your arsenal - not annualized systems, but realized systems and normalized for risk? (though normalized for risk & leverage might be a debate.)
Let's say I have an uber-bullish setup: enter on 5th trading day of year and hold 5 days (not a real one). I can annualize it to compare it to other systems, but really it is just one trade, just a little slice of the year. In this case and current drift - an exit on day 5 is not justified, holding forever is.
Zubin Al Genubi sums it up:
Hard to beat buy and hold, but the drawdowns are hard to handle. Define your risk tolerance and design system around money management. As long as the system is positive it doesn't really matter how good because all returns were in the past. If you mean by "annualize" compounded annual geometric returns, that is the right way to compare systems, but also include the money management in the comparison. That is critical part many leave out.
Jeffrey Hirsch writes:
Today’s post RE ATH:
Ex-2020 S&P 500 Flatter Election Year March
But after 4 months of solid gains the market is poised for a modest pullback of maybe 3-6%.
S&P 500 Support: 4800 old ATH.
Steve Ellison comments:
A decade or so ago, I studied the 4-year presidential cycle and concluded that the pattern in annual returns had been very pronounced from 1948 to 1980. After 1980, maybe as a result of the pattern becoming widely known, later results were much more mixed and fell below statistical significance.
That said, for the past two years beginning with bearish midterm election year 2022, the major market averages have closely followed the classic presidential cycle playbook. I assume that, like the uptrend in NVDA, it will continue to work until it doesn't.
A +1 for the inspiring story, from Kim Zussman
Nvidia Hits $2 Trillion Valuation on Insatiable AI Chip Demand
The chips are so valuable that they are delivered to the networking company Cisco Systems by armored car, said Fletcher Previn, Cisco’s chief information officer, at The Wall Street Journal’s CIO Network Summit this month.
H. Humbert is skeptical:
This won't end well, but I have no idea about the timing. I have a mixed record on predicting the future, so my prediction is worth what you paid for it, but this is what's likely to happen: due to the chip shortage (the TSMC bottlenecks described aren't easily solved in the short term) and their high prices, NVIDIA's hold on the software stack will be punctured. Someone will say "Hey, we need a second source, it's not good to just have one supplier". Once that happens their monopoly will be over, and it will deflate. Are there any signs of this today? No, none.
Asindu Drileba writes:
Nvidia's edge will evaporate if there is a breakthrough in a new AI paradigm that is not as computationally intensive as deep learning. Herding exists in research just as it does in markets. As of today, researchers are herding on deep learning because it is what has shown a great track record so far. But it is clearly known that there are better (but unarticulated) ways to build systems that exhibit the properties of Artificial Intelligence that industry wants to use to solve problems. As long as these techniques are not yet developed. I still see a growing market for someone like Nvidia in the long term.
H. Humbert adds:
Nvidia will see a growing market for a long time to come, the point is they're not levitating due to durable hardware advantages but because nobody wants to abandon their CUDA toolkit. Not yet, but some day someone will diversify for any number of reasons. They will still remain king of the hill, but cracks will develop.
Humbert H. comments:
Von Neumann latency and huge power consumption are issues and will eventually be a big enough problem. It is a know problem. If not solving the problem organically, I am sure they are looking out to buy the solutions if there are viable solutions. Don't know when it happens but will happen.
Jensen Huang's speech in 2011 about failure and changing course quickly. Sounds like a trader mindset.
Some alternate techniques are being developed but most of the average Joes don't know that yet. Speaking from my observation of what are happening, not just sheer speculations. This conference ISSCC - International Solid-State Circuits Conference on solid state device held this week at SF definitely covered areas related to high speed solid state device advances, limitations and solutions. The published papers and abstracts should have the most updated information.
Yelena Sennett is skeptical, too:
As long as Nvidia are buying their own chips, their sales will keep growing, especially if they keep recording it as revenue before delivery, lol. Scott McNealy's famous 'What were you thinking?' rant to investors for bidding Sun Microsystems' stock price up to 10x sales during the DotCom bubble:
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?
It’s not different this time - trading around ~ 30 times sales! The only question is if the market is different this time and NVDA is just one stock that will not affect the general market when it goes down back to reality of $200 - $300.
Fractal scaling and the aesthetics of trees, from Asindu Drileba
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Fractal scaling and the aesthetics of trees
Trees in works of art have stirred emotions in viewers for millennia. Leonardo da Vinci described geometric proportions in trees to provide both guidelines for painting and insights into tree form and function. Da Vinci’s Rule of trees further implies fractal branching with a particular scaling exponent.
H. Humbert writes:
I could never understand how fractals help with markets. Yes, the world is fractal, but fractals are essentially a way to describe the "roughness" of random patterns. But is this roughness permanent? No. Are the patterns predictable? No. Yet somehow some wiggles are described as bullish and bearish fractals. Sounds like snake oil to me.
Asindu Drileba responds:
You're right! Mandelbrot himself admits that his techniques cannot predict the direction a financial instrument will move. He however says that his techniques can predict "by how much" a financial instrument will move. He describes that "large movements are more likely to be followed by large movements" and "small movements are more likely to be followed by small movements." Here is a short video of Mandelbrot describing his model.
H. Humbert replies:
Never read his books. I know Victor hated him with passion, he was one of the three most guilty, the other two were Taleb and Buffett. Watched the video, a lot of words but nothing practical. Also since his mode of thinking is simple and algorithmic, and he is famous, if there ever was anything to be gained from it, by now algorithmic trading surely made all those possible gains disappear.
Laurence Glazier comments:
There is always an element of hand-waving in attempts to make things easier than they are, and it can be seductive. Nature, however, likes economy of means, and therefore if the same-ish pattern can be used at different scales, I would expect this to happen - but this assertion itself has an element of hand-waving.
H. Humbert adds:
To me the main element of hand-waving is that coastal topography and tree branch patterns created by very different mechanisms themselves have anything to do with predicting market moves where human psychology among many things is involved.
Zubin Al Genubi writes:
There are entire financial industries and degrees relating to prediction, measurement, and trading volatility. It is one of the most important aspects of trading and protecting yourself from ruin. A simple example of the importance of understanding volatility is its mean reversion. In time of stress and price drops this is a key.
Anatomy of a Meltdown: The Risk Neutral Density for the S&P 500 in the Fall of 2008, Justin Birru and Stephen Figlewski.
September 2008 was when the crisis hit in force….On 55% of the trading days in October and November 2008, the index moved more than 3% up or down (corresponding to annualized volatility in excess of 47%). Interestingly, while it is well-known that the market tends to move faster and further on the downside, in this extraordinary period sharp moves to the upside were just as common. On the two days with the largest price changes in October, the market rose more than 10%.
H. Humbert continues:
Once again something unpredictable happened that was difficult to take advantage of. It seems like crisis-related volatility would have to subside sooner or later when the crisis is over, is this a revelation? I recall the March 2020 day when the market hit the Covid lows. I literally said to myself "this has got to be the bottom". But did I do anything? No, because I really wasn't sure. Some forces ended the crisis, but they're only obvious in retrospect.
Predictions, and inspiration
Sam Eisenstadt the founder of Value Line's methods (now conveniently canceled from mention in official history) liked to predict market moves on a monthly basis. His method now would predict a 200-pt move 6 months in future.
most similar to Eisenstadt regression methods are 2021, 2022, 2119, 2017, 2016, 2015, 2014, 2012, 2011, and 2008.
an inspiring story:
Nvidia Hits $2 Trillion Valuation on Insatiable AI Chip Demand
It took Nvidia NVDA 24 years as a public company for its valuation to reach the rarefied air of $1 trillion. Thanks to the chip maker’s role in powering the AI revolution, a second trillion took eight months.
A textbook example
wednesday [21 Feb] was a textbook example of how deception and weakness can induce the vulnerable to do the wrong thing. the S&P hovered at a 12-day low at 4968 until close then prof came in and jumped market 60 pts in last 20 minutes. however they had wht weather gage in Germany all the way.
the symphony of all markets was very healthy for stocks and bonds on friday.
a sociologist with pregnant ideas that covers may aspects of monetary interactions:
Meals for a lifetime
Auschwitz Survivor Reveals The Secret To Overcoming Any Obstacle In Life with Dr. Edith Eger.
As a Jew living in Eastern Europe under Nazi occupation, Edith was taken to Auschwitz concentration camp with her parents and sister, at the age of 16. She explains how she found her inner resources, how she came to view her guards as the real prisoners, turn hate into pity and, incredibly, she even describes her horrific experience as ‘an opportunity’. She has liberated herself from the prison of her past through forgiveness.
Sushil Rungta writes:
I am also very fortunate to have met Dr. Eger a few times. Every meeting was illuminating. She really inspires by her story and by her humility. Both her books, The Choice and The Gift are must reads. Coming to the United States when almost 50 years old and accomplishing all that she has is truly remarkable. Also worth noting that her son-in-law is Noble laureate in economics.
Gyve Bones offers:
Last night I watched this dramatized documentary of the life and death of Fr. Maximilian Kolbe, a Polish Catholic priest who, as a prisoner in Auschwitz, offered his life for the tenth man chosen by the commandant to die in the starvation bunker in retribution for an escape from that cell block. The man was married and had children. Fr. Kolbe stepped out of the assembled ranks, which normally would get a prisoner shot, and asked the commandant if he could take the man’s place. The offer was accepted. He turned the starvation bunker into a chapel, with him leading the nine other men in constant prayer and singing hymns. He was the last one remaining alive, and so the guards dispatched him by injecting carbolic acid into his veins, which makes the CO² bubbles in soda, and causes the heart pump to cavitate and fail.
Backlash against travel meme, from Zubin Al Genubi
There is a backlash against travel meme occurring. I don't have numbers but I'm noticing travel is down. I don't feel like traveling. My traveling friends are staying home. I saw a magazine article on why travel is bad. Boeing is down.
The Case Against Travel
It turns us into the worst version of ourselves while convincing us that we’re at our best.
H. Humbert responds:
Boeing is down because of the well publicized mechanical problems and the exposure of their general carelessness. They're not affected a great deal by the minute-to-minute variations in travel demand due to long lead times and large backlog.
Pamela Van Giessen writes:
The Davos crowd has been pushing no travel because climate change. Except for their private jets to exclusive Swiss resorts.
Air fare to AZ is high for Feb-April and Scottsdale airbnbs are pricey so I’m not sure if travel is really down except to MT because no snow for skiing. A friend reports that Park City was busy for Sundance. Besides, don’t most people travel a bit later during spring break when the kiddos are out of school? And could it be they are booking their travel for when they can drive and avoid airport unpleasantness?
Word is that Coachella sales are slow but Stagecoach which takes place a week later sold out super fast. Seems like Coachella is flagging on the booked acts, not a lack of travel interest (given that Stagecoach is basically down the road). Charley Crockett tickets for the middle of nowhere Emigrant MT sold out in about 20 mins for June. Maybe it’s all local but I suspect a fair number of tickets were bought by out of towners.
H. Humbert observes:
I was in Napa Valley recently for somebody’s birthday and everything was sold out but the winery. Some people needed to find last minute hotel reservations, was almost impossible. The restaurant where you eat in a yurt had no empty yurts, in torrential rain. Not considered the best time of the year to visit it either because it does tend to get rainy.
Henry Gifford comments:
10 or 20 years ago Boeing moved their corporate headquarters to Chicago for the stated purpose that they wanted to be taken seriously by Wall Street. Headquarters >1,000 miles from the nearest factory? Insane. The place was run by engineers, which is smart for a company manufacturing complex things. Now I think they are run by accountants and lawyers - see how Detroit has been making out with that strategy.
The problems a few years ago with planes diving unexpectedly were caused by the MCAS system: Maneuvering Characteristics Augmentation System - an acronym giving little indication about what it is or does. The system took an input from one angle-of-attack sensor on the nose - a fin whose position changes with the angle of the wind passing over the nose of the plane - and if it saw the nose was too high (could lead to a stall: chaotic airflow over the wings causing a loss of lift), it automatically pointed the nose of the plane down. This broke the rule in aviation design that the failure of one mechanical device (the angle-of-attack sensor) should not lead to a crash. Bad sensor readings caused the sensor to push the nose down when the plane was actually flying fine - two planes nosed down into the ground, killing hundreds of people. A better design strategy is to require simultaneous failure of two mechanical devices to cause a crash. In other words, the computer should have been wired to two sensors. The crazy thing was that the computer was wired to two sensors; each plane had two, or optionally three. If the software received contradictory signals, a red light should have alerted the pilots and disconnected the "ANDS" (automatic-nose-down-system (my name), and if the plane was on the ground, it should not take off until the sensor(s) work. Basic engineering 101.
The company might do well with government contracts, automatic market share, etc. But it will be decades before the young and ambitious will be proud to work there.
Bo Keely relates:
A new Slabber just retired here from Continental Air. He insists that Continental for years has been tied to the CIA, and that he too was that. With a Masters in Electronics, he is also the person the President called to deflect missals gone astray. The technique is to send two jets after the launch to intercept the wrong destination. The most recent example was one shot from a submarine off Hawaii aimed for a Utah test target, that misguided toward LA. That would have been a horrendous traffic jam. The first jet, slower that the missile, intercepts its trajectory to radio the bearing to a second jet to close in to electronically knock the missile off-course. It landed outside San Bernardino to cause a forest fire that the military blamed on careless campers. Other scapegoats have been UFOs, but they've been US missiles.
Humbert H. is skeptical:
Distance from Hawaii to Utah is about 3000 miles. So slow moving cruise missiles can be ruled out. For either ICBM or IRBM, depending on the phases of the trajectory, the speeds can vary. These vehicles' speeds after the boost phases range from Mach 18 to 25. Mach 1 is 767 miles per hour. A typical passenger jet can reach no more than 600 miles per hour. There are many things about the fictional story of the ex pilot just simply don't add up.
Games again, from Big Al
I grew up playing lots of board games, and later, computer games. I see videos of college students not being able to do basic math, and I think, "They needed to play Monopoly when they were kids!" Here is an interesting Numberphile with Marcus du Sautoy about the game Risk:
The Game of Risk - Numberphile
du Sautoy has a book on games:
Around the World in Eighty Games
From Tarot to Tic-Tac-Toe, Catan to Chutes and Ladders, a Mathematician Unlocks the Secrets of the World's
Greatest Games
He is an interesting guy and has done a lot of popular math work.
Humbert H. writes:
I grew up in a house where cards were played all the time. We played everything from pinochle and canasta to spades and bridge. I was a degenerate rummy player in my teens, half a cent a point. Later on graduated to low ball, which is a truly sick game, only for the degens. Always managed to hold my own in all kinds of poker. Cards improved my memory and on the spot mental arithmetic. Learned a few hundred prop bets using cards and had a good measure of success with them. We still play all the time, and when grandbaby is a few years older, he can join.
James Goldcamp adds:
While Risk was always fun, it's Avalon Hill's Diplomacy that for me is the pinnacle of board games. It combines negotiation and cooperation useful in business, the bluffing and dissembling of poker, along with an element of pure calculation a la chess. While the board presents somewhat of a tight closed system (ask anyone who has played as Turkey!) I believe it teaches the best balance of grand strategy, pure tactics, and anticipation (and manipulation) of the intent and designs of the other players. In the initial days of the pandemic my gaming friends of decades prior reconvened using one of the free online diplomacy sites.
Honorable mention for baseball enthusiasts goes to another Avalon Hill great - Superstar Baseball. An excellent way for a kid to gain an appreciation for early 20th century players through Mays and Aaron.
Big Al wonders:
Was there a message here?
Thank you for your interest in the monetary policy game, Chair the Fed. The game has been a useful and fun tool to learn more about monetary policy. However, the Fed has updated its approach to monetary policy, and the changes are not readily accommodated within the existing structure of the game. As of June 1, 2021, the game is no longer available.
Asindu Drileba writes:
I came across this game from Jane Street.
Figgie is a card game that was invented at Jane Street in 2013. It was designed to simulate open-outcry commodities trading. Most of the skill in Figgie is in negotiating trades that benefit both the buyer and seller. Like in poker, your objective in Figgie is to make money over a series of hands.
Several financiers I have studied like to play games of chance outside the market - Warren Buffet (Bridge), Charlie Munger (Poker), Edward Thorpe (Blackjack), Vic (Checkers — I still don't know what to make of the checkers like board on the Daily Speculations homepage).
Unforgettable and brilliant things
two unforgettable and brilliant things i have been reading are Willa Cather's A Chance Meeting and Mark Twain's account of the Queen's jubilee. the latter is appropriate for S&P at 5500 and should accompany all of Dimson's work.
Big Al offers:
Something else that may be fun:
Diamond Jubilee: Sherlock Holmes, Mark Twain, and the Peril of the Empire
Many lessons, from Jeff Watson
There are many lessons in this short talk by Richard Feynman.
Barnum’s classic, The Art of Money-Getting, is read aloud in this video. A great addition to any spec’s collection. Quite dated, but the spirit is undeniable.
Trailhead (or rabbit hole), from Big Al
Wandered across it a bit randomly. Of course, one could argue that "experimental finance" is/should be what every trader is practicing.
Potentially useful links in this article:
Experiments in finance: A survey of historical trends
A key figure:
The Lab Man: How experimental economics emerged from the shadows
Jeremy Clift interviews Nobel Prize winner Vernon L. Smith
Also:
Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals
Kim Zussman adds:
Late list member Ross Miller worked with Vernon Smith and Charles Plott during his undergrad at Caltech in the early 70s.
How to Stay Mentally Sharp Into Your 80s and Beyond
Vernon L. Smith, 97, is a very busy man.
The economist at Chapman University just finished writing a book about Adam Smith and works about eight hours a day, seven days a week in his home office in Colorado Springs, Colo. He enjoys chatting with friends on Facebook and attending concerts with his daughter.
“I still have a lot of stuff to do. I want to keep at it,” said Smith, who won the Nobel Prize in economics in 2002.
What Makes for ‘Good’ Mathematics?
Terence Tao, who has been called the “Mozart of Mathematics,” wrote an essay in 2007 about the common ingredients in “good” mathematical research. In this episode, the Fields Medalist joins Steven Strogatz to revisit the topic.
Gyve Bones offers:
Einstein, Address to German League of Human Rights:
Although I am a typical loner in daily life, consciousness of belonging to the invisible community of those who strive for truth, beauty, and justice has preserved me from feeling isolated. The most beautiful and deepest experience a mancan have is the sense of the mysterious. It is the underlying principle of religion as well as all serious endeavor in art and science. He who never had this experience seems to me, if not dead, then at least blind. To sense that behind anything that can be experienced there is a something that our mind cannot grasp and whose beauty and sublimity reaches us only indirectly and as a feeble reflection, this is religiousness. In this sense I am religious. To me it suffices to wonder at these secrets and to attempt humbly to grasp with my mind a mere image of the lofty structure of all that there is.
Richard Feynman, from The Pleasure of Finding Things Out:
I have a friend who’s an artist and has sometimes taken a view which I don't agree with very well. He'll hold up a flower and say “look how beautiful it is,” and I’ll agree. Then he says “I as an artist can see how beautiful this is but you as a scientist take this all apart and it becomes a dull thing,” and I think that he's kind of nutty. First of all, the beauty that he sees is available to other people and to me too, I believe. Although I may not be quite as refined aesthetically as he is, I can appreciate the beauty of a flower. At the same time, I see much more about the flower than he sees. I could imagine the cells in there, the complicated actions inside, which also have a beauty. I mean it’s not just beauty at this dimension, at one centimeter; there's also beauty at smaller dimensions, the inner structure, also the processes. The fact that the colors in the flower evolved in order to attract insects to pollinate it is interesting; it means that insects can see the color. It adds a question: does this aesthetic sense also exist in the lower forms? Why is it aesthetic? All kinds of interesting questions which the science knowledge only adds to the excitement, the mystery and the awe of a flower. It only adds. I don’t understand how it subtracts.
Pope Benedict XVI, On Beauty as a Way to God:
I remember a concert performance of the music of Johann Sebastian Bach—in Munich in Bavaria—conducted by Leonard Bernstein. At the conclusion of the final selection, one of the Cantate, I felt—not through reasoning, but in the depths of my heart—that what I had just heard had spoken truth to me, truth about the supreme composer, and it moved me to give thanks to God. Seated next to me was the Lutheran bishop of Munich. I spontaneously said to him: “Whoever has listened to this understands that faith is true”—and the beauty that irresistibly expresses the presence of God’s truth.
Intervention, and a fable
how intervention spreads; gas stoves, toilets et al:
Interventionism: An Economic Analysis, by Ludwig von Mises and Bettina Bien Greaves
It is the purpose of this essay to analyze the problems of government interference in business from the economic standpoint. The political and social consequences of the policy of interventionism can only be understood and judged on the basis of an understanding of its economic implications and effects.
a very good precursor to Hume, Smith and Darwin:
The Fable of the Bees, by Bernard Mandeville
Mandeville's Fable of the Bees: A Reappraisal
Reminiscences of a Stock Operator, Annotated Edition, from Victor Niederhoffer
i reviewed the Livermore book for Barron's and i believe if covers the bad quite well.
History Lessons for Investors
Reviewed by Victor Niederhoffer
Imagine that master novelist and chess aficionado Vladimir Nabokov wrote a fictional memoir about Capablanca—the 1920s world champion who never made a mistake on the board—and that Bobby Fisher then published an updated and annotated version, incorporating all of the important developments of modern chess strategy, along with a foreword by Anatoly Karpov.
A similar multilayered feast on investment is now available, with minor differences. Edwin Lefevre's Reminiscences of a Stock Operator is a novel told in the first person by a character inspired by legendary trader Jesse Livermore. This classic is now graced with extensive annotations by investment advisor Jon Markman and a foreword by hedge-fund manager Paul Tudor Jones.
The result is big and beautiful, cutting across two centuries of booms and busts and market and economic history, with a myriad of vintage historical photos and instructive historical charts throughout.
Peter Ringel responds:
Thank you, Vic. For many traders, Reminiscences was their first book about speculation.
Game theory
the memory of old men staring disapprovingly out the winder at the University Club at the women on fifth avenue wearing miniskirts must be how the governors at the fed feel about the unprecedented decline in their boy's chances today [9 Feb].
what must they do to make sure they can remedy the situation. 30-year bonds now at a 60-day low at 119.75. the Governors must arrest the decline vigorously and soon.
i listen to Sherlock Holmes every nite and was surprised to come across this reference to Von Neumann and Morgenstern:
Sherlock Holmes and Game Theory
This essay reanalyzes the game theory interpretation by John von Neumann and Oskar Morgenstern of Arthur Conan Doyle’s “The Final Problem.”
Nvidia $200 Billion in 3 Days, from Cagdas Tuna
It is not hard to see this is very late stages of speculative madness but I really would like to know how the risk management teams approve buying Nvidia stock here after adding $200 billion to market cap in 3 days?
Larry Williams offers:
Maybe my cycle forecast for NVDA would help:
Asindu Drileba writes:
I don't know why people are still buying Nvidia. But this is what I personally think of the stock. Nvidia has an 80% market share in the Graphics Card business. Their bread and butter used to be video gaming, 3d animation, video editing, later crypto mining, AI (computer vision), AI (Large Language Models), AI (Image generation) possible new advances may occur in Molecular Dynamics, Self driving cars etc. The CEO had an interesting interview where he talked about possible areas Nvidia may venture into.
But here is one strange thing about high performance computing (Nvidia's Niche): We would think that the better (higher performing) their products are, the less people would buy because people would do more with less right? It's actually the opposite.
— In gaming for example, when graphics cards improved people moved to less polygon looking characters and wanted more details like finer hair & plants. From there they even went to more computationally intensive algorithms like ray tracing that mimic real world scattering of light. Requiring even more compute in subsequent algorithmic advances.
— In Bitcoin, many people using Nvidia GPUs made it more difficult to earn money from crypto mining. Which requires people to have even more Nvidia GPUs just to continue earning the same income.
— In AI, when ever a new breakthrough was made, researchers often trained models with larger datasets, using more & more GPUs. Chat GPT for example was trained on 1 Trillion corpus of text.
So if they do maintain this 80% market share and these underlying industries continue to grow (and make new break throughs). It makes sense that Nvidia will be very valuable in the near or distant future. Buying now (at all time highs) is definitely dangerous but, even if the bubble pops, the underlying industries it facilitates will still be present. And if more breakthroughs in these industries are made, it makes sense that Nvidia still has some value left in it.
Cagdas Tuna responds:
Good fundamental points and there I have 2 counter outlook:
-Gaming industry; I almost everyday play an online game called Destiny 2, and their developer Bungie has reduced workforce around 10%. I know many other gaming companies are reducing/reduced workforce which doesn't give too much optimism in that area.
-Bitcoin mining; there is halving in a few weeks and this will require more powerful computers but it will also increase the cost which in the end will end up new miners losing money in most cases. Only way to maintain gains in mining is Bitcoin price to double or triple in a year.
Even on the best possible scenario it will not add 200 billion dollars worth growth in many many years.
Steve Ellison comments:
Words of wisdom from Rocky's Ghost, posted in the Spec List on April 4, 2017. And yes, I am long NVDA. I believe this is the study Rocky referred to.
Soros and I share very little. However, I have come to agree with him that the right position is to be long "bubble" (however defined). I used to subscribe to Anatoly's view and to be bearish during bubbled but I discovered that from a risk-adjusted-return perspective, it's better to be right "today" than right "tomorrow." Along this point, I read a study that shows a substantial percentage of stock returns occur during the last surge in a "bull market". If you miss this surge, it's very difficult to keep up with the indices in the short term. And in the long term, we're all dead.
Asindu Drileba replies:
Gaming Revenue was about $142B just in 2022. If cloud gaming, something Nvidia is planning todo is successful, I expect this to jump by several multipliers. I expect Cloud gaming to be a bigger business than say AWS. Gaming is really big, I believe you have heard about gaming being bigger than movies & music combined.
The Crypto market cap is $1.6T, a lot of these Crypto currencies use graphics cards to mine their currencies. So I don't think $200B is too much. For Nvidia which is well positioned in these industries, i.e., owning 80% of that market.
Humbert H. adds:
One fundamental point about predicting the future of NVIDIA. It's a complete accident (lucky for NVIDIA) that the hardware optimized matrix multiplication used for 3D graphics pipelines was also useful for AI.
K. K. Law riffs on The Great One:
Confirmation bias. And this is where the AI computation puck is at of course.
Cagdas Tuna realizes:
Now I see why everyone chasing this momentum with FOMO as all assumptions based on Nvidia will get all of the cake in the market!
AI can solve complex geometry problems
Google DeepMind’s new AI system can solve complex geometry problems. Its performance matches the smartest high school mathematicians and is much stronger than the previous state-of-the-art system.
DeepMind says it tested AlphaGeometry on 30 geometry problems at the same level of difficulty found at the International Mathematical Olympiad, a competition for top high school mathematics students. It completed 25 within the time limit. The previous state-of-the-art system, developed by the Chinese mathematician Wen-Tsün Wu in 1978, completed only 10.
A collection of Olympiad geometry problems.
H. Humbert comments:
But it can't solve talent retention.
Google DeepMind scientists in talks to leave and form AI startup
Humbert H. writes:
If anyone were to ask, perhaps the real hidden value of the system could be for example in the application in discovery of new materials. Of course, the biggest question and the current AI can't solve immediately is how to syntheses the new materials in real experiment timely and to verify and validate the properties. If it could break new grounds in materials, one of the fantastic 7 is also on it too.
H. Humbert responds:
Depends on whether materials synthesis can be described via some set of rules. I don't know enough about it to see it one way or the other. I expect new drug discovery by pharma companies which is now being transitioned to digital molecule exploration from lab based experimentation to eventually use AI, at the every least for new protein synthesis which has both chemical and spatial folding problems and is a less general problem than "materials". DeepMind seems different from large language models that have been in the news lately in that it operates on much less data and is generally used to find better solutions to problems that are similar to games and have a more contained set of "rules" as opposed to mimicking human intelligence by mapping how humans answer questions after analyzing huge data sets.
Trading smörgåsbord
Kim Zussman offers:
Meet the Investors Trying Quantitative Trading at Home
Pietros Maneos trades stocks like many of Wall Street’s most sophisticated operations: running dozens of computer-driven strategies in parallel to chase market-beating returns. But he isn’t some tech-savvy math type. He is a published poet who doesn’t know how to code. Maneos, 44 years old, uses online-trading platform Composer.trade to build, test and bet on quantitative trading algorithms that buy and sell stocks and exchange-traded funds out of his home office in Boca Raton, Fla. One algorithm, for example, holds a triple-leveraged exchange-traded fund tracking the Nasdaq-100 index if the S&P 500 index has recently trended higher—and Treasury bills otherwise. He is currently running 72 such schemes he constructed with the application’s graphical interface, but can also type requests in plain English that Composer’s AI will translate into code. “It’s like having my own personal black box,” he said. “You could argue that I’m a hedge fund with 72 strategies.”
Big Al is puzzled by this bit from the above:
Many users praise its simplicity. But several warned about the tax implications of wash sales and the absence of some common Wall Street risk-management tools, such as one that would automatically exit a strategy when a specified loss is reached.
Huh?
Zubin Al Genubi wonders about market microstructure:
On CME is not clear. Is there somewhere how price changes is explained? Seems the asks should go to 0 before price clicks up but they don't. There is a lot of juggling in the queue as well, spoofing, stuffing. I'm reading Flash Crash, by Liam Vaughan.
Jeff Watson responds:
Here is an excellent perspective on spoofing.
Big Al adds:
This book gets recommended a lot but I haven't read it. Pubbed in 2002.
Trading and Exchanges: Market Microstructure for Practitioners, by Larry Harris.
Asindu Drileba recommends:
I am currently enjoying this biography of Jessie Livermore by Patrick Boyle. It's so well narrated, I hope some of you enjoy it.
Henry Gifford observes:
Patrick Boyle says he used to work for Vic.
Convergence under CLT, from Zubin Al Genubi
Under the central limit theorem, the distribution of sample means approximates a normal distribution as the sample size gets larger, regardless of the population's distribution. For a Gaussian distribution a sample size of 30 is fine. For Student T distribution with 3 degrees of freedom, which many of us use, with fatter tails, convergence under CLT requires a sample of at least 130! This would leave only some very broad trade criteria for a robust confidence level.
William Huggins responds:
that sample size is only required is you want to make confidence intervals based on the normal distribution (which requires convergence) but you can make confidence interval from almost any sample size and certainly with any distribution. the difference is that smaller sample T's produce large standard errors (due to fatter tails).
Theodosis Athanasiadis comments:
i believe one should approach testing and risk management differently. for back-testing you care more about the mean of the distribution so you should use either a bootstrap (as William mentioned) or even shrink the outliers using some robust statistic. for risk management/stops you should definitely use fatter tails.
Russ Roberts likes Milei’s economics
Russ Roberts@EconTalker
Ninety seconds of economics. Shockingly clear and shockingly subtle.
Stefan Jovanovich comments:
This is the usual slight of hand by "free traders". Instead of discussing tariffs as a question of taxation, they always present it as a matter of personal liberty good vs. bad. Yet somehow that discussion never moves over to employment taxes; having the government take a quarter of everything even the lowest paid worker earns is not to be examinged as a matter of personal liberty.
The truth about tariffs as taxes is what Americans knew in the 19th century. If you want the revenue, the rate has to be low enough - 20% on average - that there is less pain in paying it than in smuggling or cheating. You cannot have quotas (funny how, in matters of employment taxes, we have them; no one is allowed to work for less than the minimum wage). Unlike employment taxes, tariffs take their money first from the wealthy; that was the Southern "way of life" complaint about them before and after the Civil War.
A certain chair; price controls
The most bull thing of the month is that a certain chair would not be reappointed if there were a change in admins. Thus, the certain chair like anybody else will be extra vigilant to save his job by creating an ebullient picture in next 10 months.
How Price Control Leads to…Socialism, by Ludwig von Mises:
The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the highest cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop producing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese, or meat. There will be less milk available for the consumers, not more.
Full treatise: The Middle of the Road Leads to Socialism
The benefits of small business
in book 1 of Les Miserables there is a resonant section as to how Jean Valjean, now Mssr. Madeleine, has invented a new way of making "English jet and the black glass trinkets", and his factories have uplifted all in the Town. it is the story I have seen with hundreds of small companies that have invented a new product or manufacturing technique and have created jobs and prosperity for their workers and town. It is strangely omitted from all the summaries of the book and could have been applied to Musk, Bezos and the Fad 5 in our current generation. every kid should read the chapter and reflect on what good business does.
I take my hat off to Norman Tyler of Tyco, and Harvey Sellers of Hi-Flier Kites, and Arthur Bernard of Bernard Welding, and Baron Coleman or Hospital Affiliates - the first 3 companies (out of eventually 100's) that I sold in my merger bus and I shall revere their memory.
"Unlike this judge, Elon Musk has actually contributed to the American People in the form of thousands of good paying jobs, innovative products and less expensive access to space." out of Les Miserables. Including significant ROI for those that supported Tesla.
Toward the close of 1815, a man, a stranger, had settled in the town, and had the idea of substituting in this trade gum lac for rosin, and in bracelets particularly, scraps of bent plate for welded plate. This slight change was a revolution: it prodigiously reduced the cost of the material, which, in the first place, allowed the wages to be raised, a benefit for the town; secondly, improved the manufacture, an advantage for the consumer; and, thirdly, allowed the goods to be sold cheap, while tripling them the profit, an advantage for the manufacturer.
- from book 5 chapter 1 of Les Miserables (a la Musk).
Revelations of The Prisoners Dilemma, from Asindu Drileba
This is my favourite channel an YouTube. And I liked this particular episode so much it may be my favourite so far:
What The Prisoner's Dilemma Reveals About Life, The Universe, and Everything
The prisoners dilemma is a choice participants need to make that are as follows:
-
If both participants cooperate, they both get $10 each.
-
If only one of the participants cooperate, the defector gets $1, and the one trying to cooperate (be honest) gets $0.
-
If both participants defect (both are dishonest to each other), they both get $1, which is way less than the $10 they would each get by both cooperating.
These are the only four possible states or outcomes of the game. The objective is simple, if the game is repeated for several rounds, under different environments (varying ratio of cooperators & defectors). What strategy should one choose to make the most money? Several agents choose independent strategies and play against each other with whatever strategy they have chosen. All with the aim of making the most money. It turns out that the best strategy for this game amongst different agents is one they call "Tit for Tat". It can be summarised as, "Be Nice, Try to forgive, But don't be a doormat/push over."
Stefan Jovanovich writes:
Pinched from a Stanford course catalog from 1998/9: Axelrod's Tournament:
In 1980, Robert Axelrod, professor of political science at the University of Michigan, held a tournament of various strategies for the prisoner's dilemma. He invited a number of well-known game theorists to submit strategies to be run by computers. In the tournament, programs played games against each other and themselves repeatedly. Each strategy specified whether to cooperate or defect based on the previous moves of both the strategy and its opponent.
Big Al adds:
The Evolution of Cooperation, by Robert Axelrod
We assume that, in a world ruled by natural selection, selfishness pays. So why cooperate? In The Evolution of Cooperation, political scientist Robert Axelrod seeks to answer this question. In 1980, he organized the famed Computer Prisoners Dilemma Tournament, which sought to find the optimal strategy for survival in a particular game. Over and over, the simplest strategy, a cooperative program called Tit for Tat, shut out the competition. In other words, cooperation, not unfettered competition, turns out to be our best chance for survival.
Kim Zussman gets biological:
Cooperation and Darwin:
Humbert H. comments:
The original prisoner’s dilemma was about literal prisoners who didn’t get to play even twice with the same “partners”. There are a lot of situations in the real world that map to the prisoner’s dilemma, but a lot fewer that map to playing the same game with the same partners who are rational and capable of learning.
Big Al appends:
Yale Game Theory Course (24 videos), with Dr. Benjamin Polak.
Peter Grieve goes deep:
I am convinced that the principal functions of a healthy society are (1) to get to the good payoff of the Prisoner's Dilemma, and (2) to find an acceptable solution for the Trolley Problem.
Bitcoin forecast, from Larry Williams
Asindu Drileba writes:
A lot of Bitcoiners are expecting a crazy bull run incoming. Their conjecture is that after the halvening, a shock of supply in BTC will cause the price to sky rocket. Previous bull runs have followed this halvening event. It is very refreshing to see a completely different original opinion.
Sam Johnson asks:
You certainly don't need to reveal the source or methodology of the red line data from your timely bitcoin forecast if you don't wish. But when choosing cycles to forecast markets, is there consistency in the order in which you approach finding good cyclical indicators? Do you begin by "chart matching" or finding a leading indicator that visually/numerically correlates well and front-runs certain markets, or do you start with a hypothesis, testing, and then using or discarding such forecasting cycles?
Larry answers:
The forecast here is really simple: it’s just the longer-term cycle forecast for GBTC. I arrive at it by doing a complete cycle search the meld together the 3 with the highest fit.
Andy Aiken asks:
How do you account for the fact that GBTC was a closed-end fund trading at a discount for the past several years, but the discount closed prior to it recharacterizing as an ETF on Jan. 11? This is a one-time event specific to GBTC, not subject to a cycle. What is the significance for bitcoin?
Larry answers (again):
I just use the back-adjusted data as provided.
Andy Aiken adds:
Speaking of mining rewards, the next halving (in which future mining rewards are cut in half, resulting in less reward from mining as well as less inventory to be sold by miners interested only in cash flow), is in about 100 days. This has been historically a (bullish) tailwind.
But with GBTC being converted to a spot ETF, several bankrupt entities are selling their inventory. FTX is now finished selling about $1B in GBTC since Jan. 11, but 3AC has yet to start selling, and that firm had more on its books than FTX. While I am more bullish than your projection, it's interestingly contrarian and would screw with traders' heads as markets like to do.
An inspiring passage
An inspiring passage from In the Kingdom of Ice: The Grand and Terrible Polar Voyage of the USS Jeannette: "The polar regions were far safer than the Dark Continent. For decades our explorers, one after the other, have let themselves be slaughtered in the interiors of the most dangerous continents, especially Africa, perhaps by fanatical inhabitants, perhaps by the deadly climate, while such dangers and sacrifice occur with Arctic expeditions, at the most, only as rare exceptions.
The Hampton Sides story of De Long and Bennett inspires one to reach for the 5000 level in the S&P and further.
With direct applications to markets
two excellent books with direct applications to markets:
Regression: Linear Models in Statistics, by Bingham and Fry.
Event History Analysis: Statistical theory and Application in the Social Sciences, by Blossfeld, Hamerle, and Mayer.
both highlly recommended
Zubin Al Genubi adds:
Previously recommended by Vic:
Event History and Survival Analysis: Regression for Longitudinal Event Data
I've used survival statistics for studying survival time between crashes, x-day highs/lows, ATH, bear markets. Poisson distributions are the distribution for time occurrences as well.
Big Al offers:
Free online book using R language:
Statistical Modeling: Regression, Survival Analysis, and Time Series Analysis, by Lawrence Leemis, William & Mary.
Variance swap, from Zubin Al Genubi
Daily sd's 1 (1,1,1,1,1,0,0) mean variation .71 PL 2
Daily sd's 2 (0,0,0,0,0,0,5) mean variation .71 PL -18
Correct forecast, but went bust anyway, due to lumping of volatility.
Asindu Drileba asks:
What would be the best strategy to capture the return of this distribution? How would the position size be computed? Say you have $10.
Zubin Al Genubi replies:
OTM option? Don't know which direction so maybe a strangle? Its an example of a fat tail event surprising someone expecting a certain variance. Like the LTCM guys. $.20? 2%? As a hedge. Depends if its hedge or a trade.
William Huggins comments:
what you're picking up on is that variance alone doesn't describe non-normal distributions very well - you need additional tools like skewness (possibly kurtosis) to pick up on those differences. despite having a better description though, there is the presumption that the data generating process is stable across the sample period, and going forward. I've generally found (despite my poor timing record) that money is to be made when the distribution is changing, not stable (the computers rule those waves imo) so detecting breaks may be more valuable than fixed descriptions.
Peter Ringel writes:
I can confirm this from the math-undereducated trading side. Stability is boring, and boredom can lead to undisciplined trades. Shocks and short-term exaggerations are great.
Art Cooper points out:
Stability is boring, and boredom can lead to undisciplined trades. It's Minsky's Theory when this becomes widespread.
Zubin Al Genubi responds:
Thank you Dr Huggins. That is indeed the point that variance, regression, sd, means, should be used with power law distributions with extreme caution or not at all.
Hernan Avella questions:
Why is all that mumbo necessary when all you need is good entries and good stops? The house never closes and there are so many opportunities ahead. f you need that big of a stop, or it gets triggered so frequent that ruins the profits, your system sucks! It’s not a stop-loss problem.
H. Humbert comments:
I think he is saying the system did suck because it relied on improper statistical analysis, using gaussian distributions for prediction when it should have used a more sophisticated statistical analysis that doesn't make such assumption. If you know of good entries reliably without using statistics, more power to you! And maybe he needs volatility swaps in addition to variance swaps and then his system will be A-OK because that could be a simple way to hedge the fat tails. Since I don't trade, I'm just trying to interpret what's flying by.
Humbert H. writes:
Var swap vs. vol swap would be the purest expression. You could also buy a call on realized variance, by buying an uncapped variance swap and selling a capped variance swap (for historical reasons, the cap is struck at 2.5x the variance swap strike, the cap level acting as your effective call strike).
For 100k vega notional and uncapped strike at 22, and capped strike at 20, and realized vol over the period of 80:
100,000/(2*strike) = var notional = 2,272.72 var units uncapped, 2500 var units capped
Pnl uncapped 13.4mm
Pnl capped -4.1mm
Net 9.3mm for ~0.2m cost, not bad (approx (22-20) * vega not).
Some payouts were on the order of 2000:1 during March 2020. Pre 2020 you had some active sellers:
‘Amateurish’ Trades Blew Up AIMCo’s Volatility Program, Experts Say
H. Humbert responds:
Interesting. And an interesting article. You'd think that after LTCM people would realize that 100 year floods are just named that for convenience. That's why I never buy stocks in insurance companies. He whose name shouldn't be mentioned (not the fractalist but the Middle Eastern guy) always advocated buying black swan options, but I think the Chair didn't think he made money on this.
Kim Zussman links:
David Deutsch on Bayesianism, from Asindu Drileba
People have said that the reason fundamental physics has slowed down is that we have picked all the lower-hanging fruit, but that's not true. There is more lower-hanging fruit than ever before, it's just that picking it is stigmatized.
- David Deutsch
The full podcast is here.
This reminds me of what Brian Arthur insinuated in his book, The Nature of Technology. Brian Arthur describes technology as a combination of other technologies. An example is smart phone being a combination of battery technology, wireless communication technology, a microprocessor technology etc. A common statement I hear often is that we will not see much more technological progress because all the lower hanging fruit (or important things to be invented) are gone. Brian Arthur in his book asserts that if technology is a combination of other technologies, then the invention of new technology should increase the possible space of new technologies that can be invented. For example an AI breakthrough (the invention of the Transformers Model that underlies ChatGPT) will make it easier to invent new products, discover new phenomena which will also make it easier to produce even newer technology. Could this insight be a a good conjecture for always being long technology companies, since we expected technology to grow almost boundlessly if this is true?
Peter Saint-Andre comments:
Although it's seemingly true that technology always grows, that doesn't necessarily mean that technology companies are always a good investment. Various technology industries (crypto, Internet, semiconductors, chemicals, automobiles, radio, railroads, etc.) have experienced cycles of over-investment and hype. I worked in Internet tech companies from 1996 through 2022, and plenty of the companies I worked at either went bust (returning nothing to the investors or employee stockholders) or never approached their former highs (can you say Cisco?). It's not clear to me that, on balance, technology companies provide above average returns. But my perspective is qualitative, not quantitative.
Zubin Al Genubi responds:
That is the Lucretius Fallacy. Thinking the prior highest or best is the top. There will always be something new, bigger, better. That is why NQ is good over time. The old fades out and the new rises ever higher.
Asindu Drileba replies:
It is true that most tech companies actually fail without ever yielding a profit. How ever if your are diversified i.e have a very broad portfolio of investments. You don't have to be successful very many times. You can do very well with a 90% failure rate. Fred Wilson (of Union Square Ventures) claims that half of all VCs beat "The Stock Market" (I am assuming he means the S&P 500).
Big Al writes:
Important, too, to notice the improvements in ordinary things we might otherwise take for granted. A lot of this progress happens in basic materials. A quick search produces:
9 Material Discoveries that Could Transform Manufacturing
During Covid, our dishwasher broke. It was at least 35 years old and possibly older (amazing the use we got from it!). Because seemingly everybody was remodeling while they were stuck at home, it took us 3 months to get a new Bosch (during which time I washed a *lot* of dishes). But I was amazed at what an improvement the new Bosch machine was: it's so much more efficient, with energy and water, and effective, as well as quiet and very smart. That experience woke me up a bit to how much things get improved, and without any central planning authority being responsible for it.
Hernan Avella warns:
Yet, the new Bosch won't last 1/2 of the old one.
For the Darwin fans, from Peter Saint-Andre
I just posted the Voyage of the Beagle at my website for public domain books (optimized for reading on phone or tablet).
I'd previously also posted Darwin's Autobiography.
The Poisson Process and Poisson Distribution, from Asindu Drileba
This is the best explanation I have seen so far concerning the Poisson Process & Poisson Distribution. It has clearly defined math variables (something explanations involving maths seldom do) & very clear practical examples. I wish more people describing math concepts wrote like this.
A Poisson process is a model for a series of discrete events where the average time between events is known, but the exact timing of events is random. The arrival of an event is independent of the event before (waiting time between events is memoryless).
Zubin Al Genubi comments:
Seems useful to study occurrences of crash or bear market.
Big Al offers:
3Blue1Brown does some great math videos, eg:
Binomial distributions | Probabilities of probabilities, part 1
H. Humbert is skeptical:
It's hard to know without a lot of study whether this is useful for any real-world applications. This distribution has been used in network traffic modeling since the advent of networks because networks have packets and packets have rates that COULD be pretty stable over the period of interest. It worked pretty well for legacy telephone networks, but not so much as computer networks become more and more complex. People still like it because it's a relatively simple formula where if you know the lambda you know everything, and it has no memory of the past so you don't need to store the past, but it doesn't really work well. It doesn't even work that well for predicting meteor showers because the rate itself is subject to change, so can it really work well as a predictive tool for the markets?
Andrew Moe writes:
Poisson has shown to be useful in predicting soccer and hockey scores. In the markets, one test might be to model uncorrelated markets against each other in a double Poisson, like the soccer quants do. Offense and defense, up markets and down.
Wall Street And The Wilds
great book: Wall Street And The Wilds (Internet Archive version), by Anthony Weston Dimock. 1915. invented a very good gold system. competed with the Commodore in steam ship lines and railroads. touched every area of gilded age business. was great naturalist and photographer.
Also: Dick In the Everglades
Comments
Jeff Watson on January 24, 2024 10:09 pm
I have fond memories of re@ding Dick in the Everglades when in elementary school. I know what I will be reading tonight.
Useful bears
El-Erian Says Markets Have Overpriced Speed, Depth of Fed Cuts
• I wouldn’t be surprised if cuts only start in summer: El-Erian
• Markets are underestimating stubborn service-sector inflation
Numberphile interview with Jim Simons, from Big Al
Interesting in many ways:
James Simons (full length interview) - Numberphile
He worked a lot on differential geometry which would seem to be the area of Ralph Vince's manifolds.
Zubin Al Genubi writes:
Differential geometry would be good for Ralph Vince's optimal f portfolio calculation finding the peak "hump" in the multidimensional surface. Can anyone recommend a good entry level book?
Big Al offers:
Possible: The Leverage Space Trading Model: Reconciling Portfolio Management Strategies and Economic Theory by Ralph Vince.
Also a list of Ralph's publications.
Zubin Al Genubi comments:
An interesting aspect of Vince's optimal f calc for a portfolio is that it solved by iteration. The idea of iteration is interesting in finding optimal values in functions. Also, graphing is an important tool to find maxima, and inflection points in curved functions.
Big Al adds:
Newton's method in optimization
The sin-eater
the joy of set pieces in O'Brian and Conan Doyle. the Hoodoo.
'I have a curious case in the sick-bay,' he said to James, as they sat digesting figgy-dowdy with the help of a glass of port. 'He is dying of inanition; or will, unless I can stir his torpor.'
'What is his name?'
'Cheslin: he has a hare lip.'
'I know him. A waister—starboard watch—no good to man or beast.'
'Ah? Yet he has been of singular service to men and women, in his time.'
'In what way?'
'He was a sin-eater.'
'Christ.'
'You have spilt your port.'
'Will you tell me about him?' asked James, mopping at the stream of wine.
'Why, it was much the same as with us. When a man died Cheslin would be sent for; there would be a piece of bread on the dead man's breast; he would eat it, taking the sins upon himself. Then they would push a silver piece into his hand and thrust him out of the house, spitting on him and throwing stones as he ran away.'
'I thought it was only a tale, nowadays,' said James.
[More on sin-eaters.]
Statistical Consequences of Fat Tails, from Zubin Al Genubi
Statistical Consequences of Fat Tails
Taleb discusses how fat tails can affect probabilities. Is a 10 sigma event an outlier or is it part of a different power law distribution. How slowly does the Central limit theorem conform say Student T distribution to normal (need n>120) for proper confidence levels. Learned about Pareto and other power law distributions. Book suffered from poor editing, missing color references, and Taleb's abrasive pedantics. Recommended nonetheless.
Asindu Drileba writes:
I have learned a lot from both Vic & Taleb. Vic introduced me to obscure trading psychology & insights. Via his books, interviews and books recommended (Horse Trading, Secrets of Professional Turf Betting etc). At first these recommendations seemed strange. But after watching this video by D. E Shaw, it finally made sense because Shaw hints that successful models are built often via thinking in terms of analogies. So, reading Vic's own books, book reccomdations and thinking in terms of analogies can allow you to develop new insights into the market.
Taleb introduced me to the complexity theorists (Didier Sornette, Ole Peters, Mandelbrot etc). He also actually introduced me to Vic's work. Education of a Speculator is praised & highly recommend in Taleb's Fooled by Randomness. I also like Taleb, because he simplifies his concepts in to plain English. So a lay man like me can easily understand what he is trying to say. For instance majority of a statistical consequences of fat tails is summarized in Extreme events and how to live with them- The Darwin College Lecture. In plain English.
Zubin Al Genubi reponds:
The gist of the papers is that use of Gaussian underestimates tail events. Its a good point. Since so many do, it opens good trading opportunity. I've found several which is left as an exercise for the reader and explained in the references here.
IID, from Zubin Al Genubi
One main assumption in statistics is that samples are independent and not correlated. However, it seems apparent to almost every trader that the outcome for one day is related to yesterdays price action.
Andrew McCauley writes:
Your comments reminded me of something that Benoit Mandelbrot mentioned in his book The (Mis)Behavior of Markets: A Fractal View of Financial Turbulence:
Speaking mathematically, markets can exhibit dependence without correlation. The key to this paradox lies in the distinction between the size and the direction of price changes. Suppose that the direction is uncorrelated with the past: The fact that prices fell yesterday does not make them more likely to fall today. It remains possible for the absolute changes to be dependent: A 10 percent fall yesterday may well increase the odds of another 10 percent move today—but provide no advance way of telling whether it will be up or down. If so, the correlation vanishes, in spite of the strong dependence. Large price changes tend to be followed by more large changes, positive or negative. Small changes tend to be followed by more small changes. Volatility clusters.
Big Al offers:
Just felt like doing some tinkering, so here is a chart with two series: The upper series is the moving 20-day C-C % return of SPY adj, calibrated by the right hand axis. The lower series (left hand axis) is the 20-day rolling sum of the absolute value of the daily % changes. As expected, the lower, vol series tends to peak when the upper series is spiking downward, but the chart could provide some interesting trailheads for further research.
The Wisdom of Rationals, from Asindu Drileba
I have an interest in prediction markets (also known as information markets or idea futures), such as election betting odds, that allows people to place bets on who they think will be the next president. I wrote an article on my blog some time back (2020) describing the phenomena referred to as the "wisdom of the crowds" that makes these prediction markets possible:
For years now I have been fascinated by prediction markets. The source of excitement is the idea is that you can use financial markets to do inference — just like machine learning. A famous example of such prediction markets are the orange futures. The orange futures market is one that allows entities to buy oranges in advance. How it works, is that one can pay $1,000 to receive 1,000 oranges that will be delivered next year. An interesting side effect of this orange futures market is how it accurately predicts temperatures in certain locations more specifically, the temperature of the locations where the oranges are from.
Peter Ringel writes:
this is a clever thought, and also a terrible situation. I too noticed that it seems - in places - to be easier to predict pockets of the real economy with the financial markets. Of course, traders like it the other way around. Mkts got so efficient. The outside world has way more inefficiency left. (Also enjoyed your mention of "J" language - never heard about it before.) the source of excitement is the idea is that you can use financial markets to do inference.
Zubin Al Genubi comments:
The difference between prediction markets and financial markets is that prediction markets are binary outcomes and markets have non binary outcomes. The distributions are different.
Larry Williams responds:
What a great point. That’s a massive difference….then add in position size.
H. Humbert writes:
An option price seems awfully similar to a prediction market price: both deal with a discrete event at a particular time in the future (or at least close enough for most prediction markets), and right before expiration both, in a way, create a binary choice. I don't trade options, but that's what it appears like.
Zubin Al Genubi replies:
One big difference is options are subject to arbitrage. The prediction markets are not and get wildly inaccurate swings.
Big Al offers:
Binary Option
Superforecasting: The Art and Science of Prediction
Brier scores
From an interview with Michael Mauboussin:
…when you have an investment thesis to buy or sell something, that means you believe you're going to generate an excess return, or there's a mispricing in the market. And…that thesis should have sub-components to it that will allow us to create a scoring system. The most common of these or known of these is called a Brier Score….To have a Brier score you only need three things. You need an outcome that we can agree upon, within a time period that we are finite, with some probability….And so my argument is break down your thesis and put it into some Brier score ready predictions…what I find is the very discipline of writing those things down will force you or compel you to think more…deeply about them. For example, if you're assigning probabilities, you're going to immediately start searching for base rates.
On sizing and return
Mauboussin re Druckenmiller and Soros:
There's one other thing [Druckenmiller] talked about and it was about position sizing. Broadly speaking, when you're trying to maximize your returns, you need two things. One is you need some sort of an edge….The second thing is how much you can bet on that when you have that advantage. And the intuition is quite straightforward. If you had perfect information, you knew your bet was going to make you money. You would bet everything you could, right?…He has this sort of zinger, where he says, people said, what did you learn from Soros? And he said, the main thing that he learned from Soros was that position sizing was 70 to 80% of the game. The reason that struck me is because, first of all, purportedly George Soros made money on fewer than 30% of his trades. And that alone is worth letting settle in a bit….It means that he made a lot of investments that lost money. They probably did not lose much money. And when he did make money, he made a lot of money, both by betting a lot of money and by letting it run simultaneously. That I thought was a really interesting lesson.
H. Humbert responds:
Imagine that you have this ability to make win enough on 30% of your trades, and the edge is enough to compensate for the losses on the other 70%. If you take lots and lots of time to study and prepare for your positions or you must have only 1 or 2 at any one time for any reason, it makes sense that position size becomes a very important consideration. But what if you don't spend a lot of time? Or what if you can easily have 200 (or whatever, but a large number compared to 20) positions? Than it would seem that having a very large number of positions makes sense and position size is not an important consideration.
NVDA up 6% on Monday, from Steve Ellison
Looking at 5-day forward returns after one-day net changes of 5% or more, the expectation for NVDA stock is negative based on the period back to 2015, but if I shrink the study period to only the past 2 years, results are consistent with randomness with a t score of -0.60.
Output of my Python code:
The sample mean log return is 0.0019077453098868752
The population mean log return is 0.005224266059430747
Backtest sample statistics (log returns):
Mean: 0.0019077453098868752
Standard deviation: 0.03251087812071903
N: 35
t: -0.6035149614769291
I put my code on Github.
Last 10 results:
Mises Stationarity Index, from Zubin Al Genubi
Buy S&P when MS in lowest quartile. Hold bonds in highest quartile. Beats S&P buy hold by 2%. Per Spitznagel.
James Goldcamp responds:
Is the quartile a rolling or calculated over the entire history, a fixed lookback, etc? (I have this book I think somewhere I guess I could find it myself). The graph would suggest, if using "max quartiles", it stays a buy or hold (bonds) for long periods. I feel like that would also generate many flat periods if you are in bonds in the highest and wait until it drops to lowest to get back into the market.
My interpretation could be totally wrong (above) , so apologies if I'm grossly misrepresenting, but I've always been nervous with very long term timing mechanisms because you may miss good investing years before you know the model is flawed. Of course you might say the same for "long only" domestic investors in Japan investing in the 80s. But it's always nice when flawed ideas fail fast non-catastrophically.
This does bring up fond memories of watching a presentation of various long term timing models of the late Nelson Freeburg in Orlando in 1998 (I think) - I believe one was called "Competitive Returns" that compared equities and bonds and may have been originally attributable to Ned Davis. He reviewed several that day (one may have been a Zweig timing mechanism). I always liked Nelson's newsletter which he graciously sent to our office for many years.
Big Al offers:
The Single Greatest Predictor of Future Stock Market Returns
And the current version on FRED.
Books, from Zubin Al Genubi
Option Volatility and Pricing: Advanced Trading Strategies and Techniques, Sheldon by Natenberg. Recommended in by Ralph Vince.
The Dao of Capital: Austrian Investing in a Distorted World, by Mark Spitznagel and Ron Paul.
This is a magnificent, scintillating book that I will read over and over again. It provides a theoretic and practical framework for understanding the insights of all the greats that a student of markets will encounter—Soros, Baldwin, Klipp, Buffett, Cooperman (albeit these greats might not realize or acknowledge it). It teaches you things about war, trees, martial arts, opera, baseball, board games. Every page is eye-opening, with numerous areas for testing and profits in every chapter. I will share the book with all my traders, friends, and circles of influence. Here’s an unqualified, total, heartfelt recommendation, which coming from me is a rarity, and possibly unique.
- Victor Niederhoffer (from inside cover)
Quite exciting tale of 1939 failed Russian invasion of Finland:
A Frozen Hell: The Russo-Finnish Winter War of 1939-1940
And a classic from Ralph Vince:
The Mathematics of Money Management: Risk Analysis Techniques for Traders
Martin Lindkvist writes:
Many years ago in 2006 I had a heated discussion on this list with Stefan J about the Finnish winter war as well as WW2 and what conclusions could be drawn from them about Sweden's position. Suffice to say that we both thought we won and still left the argument amicably.
There is a very good film from 2017 as well as a Netflix series about the "Continuation War" called Tuntematon Sotilas/Unknown Soldier. This war was from 1941-1944 and started after Germany used Finnish territory for part of Operation Barbarossa, and as the Soviets started to bomb Finland, they seized the opportunity to try to take back lost territory from the Winter war.
Stefan Jovanovich replies:
Martin won. He was then, as now, gracious to a fault. These links provide some background:
[Also of interest: The Winter War (Talvisota) DVD - Uncut (70 min. longer than U.S release) -Ed.]
Art for sale
art for sale I own. any ideas as to best way to sell it?
A fellow spec with deep macro knowledge, from Theo Athanasiadis
John Floyd on the Biggest Trades and Risks for 2024
Peter Ringel writes:
regarding the other topic on win rate: In this interview, John too mentioned (as an FX macro trend trader) a win rate below 50%. "I am more wrong than right." Of course, this gets rectified by larger wins than losses and the resulting expectancy.
Zubin Al Genubi adds:
My biggest take aways were that volatility will be higher next year and Japan will do better than it has been.
Futures beat forex again, from Larry Williams
Year in and year out the winners of trading contests do better in futures than FOREX yet forex has better margins. Big lesson here.
Martin Lindkvist comments:
Interesting, Serghey Magala is on both lists. Anybody knows him? Might be good addition to this board.
And I note Robert Miner (Dynamic Trader) is on the Forex list. Another trading expert (apart from the Senator) that actually trades, and trades well it seems.
Mean Absolute Deviation, from Zubin Al Genubi
Consider using Mean Absolute Deviation, arithmetic Average of absolute returns, in lieu of standard deviation. This is often done in finance unintentionally. Cant remember which understates variance. Easier to compute.
William Huggins writes:
The problem with MAD in finance is that it is not continuously differentiable, making it hard to include in optimization calculations. Also, variances are additive but MSDs are not (handy for portfolio math). (A student asked me this question last semester and I had to spend some time sorting out the answer for him. As a single stock measure of dispersion, it's fine but its hell in portfolio math.)
Peter Ringel asks:
Isn't MAD or better MAD/median ratio a good non-parametric metric? I use it for range & volatility comparison over different timeframes. I don't trust Stdev in markets. (my ignorance will be exposed very quickly here - Just trying to apply, what I learn from list and it's members.)
William Huggins responds:
it's totally fine for one-to-one comparisons but can't be used to find out what the MAD of a portfolio of two stocks would be without redoing all the math. for stdev, you square it up to variance, add them, then root back to stdev. optimization of portfolios relies on calculus to find the weights that result in minimum variance but you can't differentiate MAD in the same way. so it can be used for a side-by-side comparison, but MADs don't play well when you mix them. (strictly speaking, what I wrote is good for independent stocks - if they are correlated, and they all are - you need to account for their covariance. there is no co-MAD to include in equivalent calculations.)
Bill Egan comments:
One outlier is sufficient to distort the mean and thus the std. Median absolute deviation (MAD) avoids this, being resistant to up to 50% outliers (which ought not happen in price data).
Robust Standard deviation = 1.4826*MAD
Huggins is correct - derivative based optimization methods blow up when you use MAD or similar methods. Simplex or genetic algorithms work for optimization in that case. For estimated covariance, you can try replacing mean with median in the covariance formula.
William Huggins adds:
I last applied MAD, while I was trying to understand better, why markets ( NQ, Spoo) are so absurdly homogeneous with their ranges for different intraday time-frames. And if some time-frames are less efficient than others. And I believe some are. During the last summer market it was very noticeable.
Lee Stern: legendary trader, from Jeff Watson
December 27th was the 97th birthday for Lee Stern, the oldest and longest-standing member of the CBOT. Lee is a legendary trader and one of the most respected members of the exchange. He’s the guy that took the 9 million dollar hit when a fake trader scammed the bond pit. He’s also a spreader which explains his longevity in the business.
Here’s the story of the scammer which is a compelling read on it’s own.
Infinite variable not distributed normally, from Zubin Al Genubi
Height, weight, are distributed normally. Once an infinite variable like wealth is introduced, the distribution is no longer normal and can't be regressed. Lots of implications including convexity here.
Past extremes are not good predictors of future extremes. (The Lucretius Fallacy) Simple proof is that the last biggest was bigger than the one before.
Nils Poertner writes:
markets sometimes go from one extreme to another, they tend to overshoot like a novice at the sailing boat - always over-steering the boat. great for us as trader/investor.
William Huggins comments:
They can be regressed but only after an appropriate transform (log, ln, etc). The key is transform in reverse before interpreting outcomes.
If the data is time series though, you'll find that exponential growth (organic) results in "exploding variance' that makes the coefficient estimates less reliable (larger standard errors). Feasible generalized least squares maybe more practical than OLS in such cases.
Zubin Al Genubi responds:
A transform is the standard work around but you can't transform an infinite variable into CLT compliance without losing so much important information to make it dangerous. Its a different distribution. That's my point.
Quant ballyhoo, from Zubin Al Genubi
A main goal of the spec list is discrediting ballyhoo: Many so-called quant this quant that show the arithmetic capital appreciation and a fixed bet creating an artificially inaccurate accumulation. Some show the max loss, but due to volatility drag (33% needed to recover 25% drawdown) the growth will not be as their charts show. Instead of $100,000 bet every trade, after a 25% loss the fund is under water.
On the upside geometric returns will rapidly outpace the arithmetic returns due to compounding rather than a fixed trade amount but they don't use that either. So the quant charts twitter charts are wrong in 2 of the most important aspects.
Larry Williams:
What I have come to believe and practice that in money management is all that matters is the trade I’m in right now. The past numbers of the strategy have no bearing on what I will do. Why? Its like a gunfight —you will kill or killed. The trade I am in now will lose or win. There are no other options. That is the hard reality I deal with and protect myself accordingly.
Jeff Watson agrees:
Bingo!
H. Humbert asks:
So are you all saying you literally have to create a new strategy or a version of the old strategy from scratch in every single trade, without regard for the past. This can't be right, can it?
Larry Williams replies:
Oh no, not at all each trade offers the same odds of winning, 50/50, so ‘bet’ accordingly.
A diet shock Bill Gates does not mention, from Larry Williams
Mr Fake Meats does not support is own research:
Findings: In 2017, 11 million (95% uncertainty interval [UI] 10-12) deaths and 255 million (234-274) DALYs were attributable to dietary risk factors. High intake of sodium (3 million [1-5] deaths and 70 million [34-118] DALYs), low intake of whole grains (3 million [2-4] deaths and 82 million [59-109] DALYs), and low intake of fruits (2 million [1-4] deaths and 65 million [41-92] DALYs) were the leading dietary risk factors for deaths and DALYs globally and in many countries. Dietary data were from mixed sources and were not available for all countries, increasing the statistical uncertainty of our estimates. [Funding: Bill & Melinda Gates Foundation.]
Note meat does not pop up in this data.
Jeffrey Hirsch writes:
Lot’s of meat works for me. Keto, exercise and sleep. I’m down 50lbs. Skipping the Booze was a big help.
Pamela Van Giessen comments:
Virtually all nutrition studies are pretty meaningless because it is almost impossible to confine study to one food to the exclusion of all else (do people who eat red meat also not drink and exercise regularly; do people who eat low grain diets also eat a lot of processed food and lack exercise, and so on).
Maybe you can hack your health and longevity with diet. Maybe not. I’d err on the maybe not side and get a lot of good exercise (mix of cardio and strength training), dial back the alcohol and soft drinks, drink a goodly amount of water, eat everything in moderation but be sure to get good protein, green veggies, and fruit, especially as you age. But know that your diet is meaningless without the exercise, good mental health, and purpose in life — whatever it may be for you.
Pretty much what my grandmother, born in 1901, used to say. Except I also drink a glass of athletic greens every morning. Can’t hurt. And stretch and do planks/core work. Both are super important to maintaining balance and agility. More ill health and deaths start with falls than anything else.
K. K. Law wonders:
No argument about the benefit of exercising. But a simple and cursory inspection of the regional maps of (a) and (b) show the people in the regions highlighted by red ellipses appear to have lowest death rates. Do they have something in common in their diets that lead to longer lives?
Pamela Van Giessen responds:
Shouldn’t the question be to first isolate commonalities in everything among the people in those regions as opposed to assuming it is solely a food such as fatty fish? Is it just omega 3 or do peoples in those areas also have lower obesity rates, for instance? If they have lower obesity rates (and where there are lower obesity rates, there are routinely lower premature death rates), how come? What are they doing? Is it all diet or are there other variables?
That said, I try to eat fish at least twice a week. Fortunately I have a neighbor who likes to fish but he doesn’t like to eat fish. So we have a steady stream of fresh Montana trout. And elk. Elk meat is fantastic.
Kim Zussman adds:
Genes are a big factor in longevity, likely the biggest factor (besides distance from windows in Moscow). Could explain regional performance since primates primarily mate locally. The best tactic is to choose your parents carefully.
H. Humbert writes:
The media story on how the 100 yr old lived that long because he had one shot of whiskey per day or ate French fries three times a week always crack me up. I’m not saying nutrition (and exercise) do not matter, but of course their longevity is most likely because they won the gene pool lotto and not because of whatever quirky dietary habit they had.
“Virtually all nutrition studies are pretty meaningless”. This comment always cracks me up. It is untrue. Of course epidemiological and observational studies (observation) have value, even if they are not double blind placebo. For example, if you observe four people eat strychnine and die, would you not conclude that it might be dangerous? Would you stay in line to be the fifth person, even though you have merely done an observational study, and strictly speaking causation is unproven by a scientific study? If your answer is “no” then you must believe that epidemiological and observational studies have some value. Otherwise, you would be “blinded by science” (and dead).
Humbert H. responds:
Of course simple studies, like is strychnine dangerous, are useful. However, studies of subtle effects are generally useless, because of the various biases involved. It is to this day not possible to know if Ivermectin helps fight Covid, or if so, to what degree. Partly is because people are invested in the outcome and the set up of the studies appears suspect, and partly is because the effect is seemingly not overwhelming. Hearing about various "Coffee is good/bad for your health" through the years is a more common example.
Big Al adds:
Another issue with broader studies is that we are learning more about how different individuals with different genetics respond differently to coffee or salt or red wine or a high-fat diet. It becomes more difficult to make conclusions like "coffee is good/bad for you".
Humbert H. replies:
I agree completely. Coffee, if I drink it for a week and than stop, gives me terrible, incapacitating headaches, and if I keep drinking it, eventually I will get the same headaches. I don't know anyone else who has the same side effects, but I can only drink it once in a while. So all the recent studies I've read about the positive effects of its consistent use are of no use to me.
H. Humbert agrees:
Yes, this is absolutely true. And the genes may respond differently to foods over time, as other lifestyle factors change. Epigenetics.
Big Al offers:
An interesting show to watch:
Live to 100: Secrets of the Blue Zones
Though thinking about the stats, you would assume there would be pockets of longevity around the world just by chance. Also stat-wise, he claims there is a correlation in Corsica between the longevity of people in towns with the steepness of the streets in the town (steeper = longer lived). Haven't seen the data, but that's an interesting one on an intuitive basis. Maybe you could compare NYC residents on the first floor vs those on the fourth floor of a walkup building. 
Peter Saint-Andre is skeptical:
That Blue Zone hypothesis is somewhat questionable. Here's one critique.
My impression from previous reading is that in some of these remote and frankly somewhat backward areas (e.g., Sardinia, Ikaria), the original cohort of centenarians contained a large number of people who faked their ages (e.g., to obtain government benefits), which they could do because they were born before birth certificates were common. The centenarian numbers didn't hold up in cohorts born after documentation of birth dates kicked in.
Pamela Van Giessen maintains:
The comment is true. Nutrition studies are meaningless. It’s a backward science in crisis with a host of issues starting with what gets published (and then reported) to garbage analytical studies on the same data sets, most of which have null results (but don’t get published) done from a laptop in about an hour.
Until people spend some time learning how “science” gets funded and what gets published, and demanding change, our knowledge will remain more antiquated than my grandmother’s guidance which was at least practical and based on real world experience.
John McPhee wrote about the funding problem in geology in Annals of the Former World. His observations apply to most fields. In short, what gets funded is what is trendy until it is not and then the new trend gets funded. This process takes about 100 yrs. In nutrition it may be worse. Vinay Prasad does a nice recap of the problems.
The new year market, and a book
looks good for last two market days of the year and first 10 days of jan. then it's very iffy until feb. friday should be very good for the S&P.
the sign of the four. all 4 observations from 1996 to present with S&P way up in the previous 30 days - 1998, 2017, 2019, 2020 - were extraordinarily bullish. average up 2% by 3 weeks forward.
nature as guideline for building. the r and k factors in buildings. the importance of novelty. all sorts of guidelines for building. many market analogies:
Construction Ecology: Nature as a Basis for Green Buildings
Industrial ecology provides a sound means of systematising the various ideas which come under the banner of sustainable construction and provides a model for the design, operation and ultimate disposal of buildings.
Context
back to the old days. a certain university indicated pleasure with their 2.2% return in yr ending june 23 in the Context of the S&P and Nasdaq returning 20%+ each during the period. they praised the fund managers.
too terrible to be true. were mainly invested in venture capital and private equity. apparently they never heard of the Context of ever changing cycles. Dare I suggest Bacon professional turf handicapping or edspec to them.
a loss of 20%+ on 50 billion endowment versus their bogey could pay for much DEI research. The arrogance of their slapping themselves on the back for the Context of this performance is too horrible to believe.
A reader writes:
Imagine the fees they are paying for that pittance of a return.
Vic continues:
that goes without saying. they are past masters at paying their fund managers fantastic salaries and bonuses based on their sector comparison.
Laurel Kenner’s Musical Christmas Card 2023
Merry Christmas to all Specs. I hope you enjoy my latest musical Christmas Card. It has been 23 years since the Chair and I, with the assistance of James Goldcamp and now Big Al and Alex Castaldo, founded the SpecList, starting with early readers of our column at TheStreet. The Specs have contributed so much value and humor to our lives. I thank you and wish you all a Happy New Year.
Laurel Kenner's Musical Christmas Card 2023
Laurel Kenner Plays J.S. Bach Prelude in C minor
Laurel Kenner performs Bach's Fugue in C minor, WTC Book I
Adam Grimes responds:
Thank you for sharing! Glorious piece, and such a great set. I continue to chip away through the Goldbergs…a bit at a time. Cheers, Happy Holidays, and perhaps a hint of Peace in these troubled times.
Laurel Kenner encourages:
The Goldbergs are a very worthy pursuit, Adam. Go for it! I’ll look forward to your musical Christmas card!
Happy new year?
one big question is where is sp going to end of year and first days of new year. the years 2921, 2020, 2019, 2010, and 1998 appear most similar. nothing special to end of year. then big up starting near the end of Jan.
too small a sample size - too many changes. but it looks like 4 of 5 up to end of year, up big 58. up big 44. and the previous 3 unchanged.
Holiday book rec that Aubrey-Maturin fans should enjoy
Cochrane: Britannia's Sea Wolf
Daring and dashing, Thomas, Lord Cochrane led an extraordinary life. This bold commander, whose exploits far exceeded those of any fictional counterpart, was dubbed the "Sea Wolf" by no less than Napoleon himself. More than just a colorful military figure, however, Cochrane entered Parliament, became a radical reformer, and fought official corruption…earning powerful enemies in the process. They plotted revenge–and very nearly succeeded–but Cochrane's final triumph as a conquering hero remains one of the most amazing tales ever told.
Gyve Bones adds:
O'Brian based much of Jack Aubrey's character and several exploits from the life and naval adventures of Earl Cochrane. C.S. Forrester was inspired by Cochrane as well for his Horatio Hornblower novels.
Here are some public-domain works by Cochrane himself, memoirs of his service in (and out of) the Royal Navy.
Fire, from Nils Poertner
A number of factors contributed to the destruction caused by the Great Fire of 1910. The wildfire season started early that year because the winter of 1909–1910 and the spring and summer of 1910 were extremely dry, and the summer sufficiently hot to have been described as "like no others." The drought resulted in forests with abundant dry fuel, in an area which had previously experienced dependable autumn and winter moisture. Hundreds of fires were ignited by hot cinders flung from locomotives, sparks, lightning, and backfiring crews. By mid-August, there were 1,000 to 3,000 individual fires burning in Idaho, Montana, and Washington.
same as in mkts- the longer the rally…might not be one major fire but more a series coming.
Perhaps the most famous story of survival is that of Ranger Ed Pulaski, a U.S. Forest Service ranger who led a large crew of about 44 men to safety in an abandoned prospect mine outside of Wallace, Idaho, just as they were about to be overtaken by the fire. It is said that Pulaski fought off the flames at the mouth of the shaft until he passed out like the others. Around midnight, a man announced that he, at least, was getting out of there. Knowing that they would have no chance of survival if they ran, Pulaski drew his pistol, threatening to shoot the first person who tried to leave. In the end, all but five of the forty or so men survived. Pulaski has since been widely celebrated as a hero for his efforts; the mine tunnel in which he and his crew sheltered from the fire, now known as the Pulaski Tunnel, is listed on the National Register of Historic Places.
Stefan Jovanovich recommends:
Gyve Bones agrees:
I was tempted to mention that book, which I enjoyed. I read it after reading A River Runs Through It.
Pamela Van Giessen suggests:
For a comprehensive look at the fire of 1910 and how it was fought (and lost), The Big Burn: Teddy Roosevelt and the Fire that Saved America, by Timothy Egan, is interesting.
Big Al points to:
Fire Weather: A True Story from a Hotter World
About the Fort McMurray wildfire in 2016.
Thought Leaders: Christopher Alexander, from Nils Poertner
:no_upscale()/cdn.vox-cdn.com/uploads/chorus_asset/file/8742783/shutterstock_139851025.jpg "TX Capitol: Click for full view")
Chris Alexander on architecture (ugliness, beauty and a lot more) and why it matters to humans. He taught at Berkeley, California. The immediate surrounding (office, residential place) probably also influences how we view the world (even markets). (I always preferred City of London - the old square mile - vs the new Canary Wharf buildings etc.)
Gyve Bones writes:
H.L. Mencken wrote about this in the Baltimore Evening Sun, and the column was included in his Prejudices: Sixth Series (1927):
I have seen, I believe, all of the most unlovely towns of the world; they are all to be found in the United States….Here is something that the psychologists have so far neglected: the love of ugliness for its own sake, the lust to make the world intolerable. Its habitat is the United States. Out of the melting pot emerges a race which hates beauty as it hates truth.
Nils Poertner responds:
imagine people would slow down a bit in their lives and appreciate some of the better architecture (it is not that we don't have it).
Larry Williams differs:
Right! Americans love ugly, hate beauty …that’s why we go to the Grand Canyon, Glacier, Yosemite, the beaches, and have great museums. Mencken must have had a very long nose to look down upon.
William Huggins comments:
Best view on neoism was Chris Beckwith in Empires of the Silk Road: A History of Central Eurasia from the Bronze Age to the Present where he identified the problem as the belief in constant revolution, that there was no future unless the old was destroyed. This morphs into a fetish for the new, regardless of its merit. He clearly loves the classics and hates to communists for their desire to cast aside beauty for revolutionary.
Comments
Mel on December 22, 2023 2:00 pm
John Betjeman wouldn’t have agreed that all the unlovely towns are in the US… http://www-cdr.stanford.edu/intuition/Slough.html
Still December
is there a tendency for the S&P to rise in last 7 days of dec? i looked at this when the previous month was way up since 1996, the answer is yes. about 3/4 up to end of month.
the sp has gone up 11 days in a row. never before in dec. what does it portend? meager rise with not much vol until end of year. slightly bullish for jan.
[After the close…]
always the unexpected: the decline of 42 big S&P points from 2pm to 2:30 et was the 3rd biggest ever. and yet 5 days later the market on the 5 occasions it dropped 40 big or more, the sp was up 97 big with a s.d. of 100.
Our fellow Spec LW does a new interview, from Easan Katir
Larry Williams 2024 Market Outlook
Optimizing profit over time, from Zubin Al Genubi
Most people search or try optimize for highest system return. It is not the most profitable over time. The amount of profit over time is determined by the money management you apply to the system more than by the system itself. This is mind boggling to me.
H. Humbert counters:
In one of the many money manager podcasts I listen to, one of them used this very assertion as an example of, shall we say politely, a less than optimal belief. But he used stronger language.
Peter Ringel writes:
It is still important to aim for a good naked system (without position sizing applied). The risk/drawdown vs overall return relation comes from the position sizing applied world. A better core system makes more aggressive position sizing possible.
Zubin Al Genubi replies:
A better core system makes more aggressive position sizing possible.
Disagree. According to Ralph Vince bets in excess of optimal f results in lower overall system returns due to larger drawdowns with larger size! Comparing core systems should be by geometric mean, not necessarily w/l, %win, t score, etc. Interestingly Sptiznagel says something very similar. There is something very important going on here that is being missed.
Gyve Bones comments:
Depending on the breaks of course, there is no money management system method that can turn a no-edge “loser” naked trading system into a winner apart from lucky breaks. But a winner with a naked edge can be ruinous with over-sized bets, or smothered by various vig drags if the bets are under-sized. As one guy put it in this article from 2000, the key is to find the sweet spot in between.
But as Ralph has shown, the sweet spot, the “optimal-ƒ”, means that the better the system, the higher the ƒ value, on a scale of 0.0 to 1.0 means that if the largest losing trade used in the sample ever re-occurs, your stake will have a single-trade drawdown equal to ƒ%. That is, if the optimal–ƒ is 0.65, and then you have a re-occurrence of the worst trade from the history of the system, you will have a 65% drawdown of the portfolio. But trading at ƒ is the only way to make sure you’re not over betting or under-betting in order to maximize the potential gains of the trading system, if you accept the premise that the series of trades you feed into the optimal-ƒ algorithm is a reasonable and realistic representative of the trade returns going forward trading that system.
Larry Williams has a definite view:
BETTER CORE SYSTEM ETC IS MEANINGLESS. The past is never the future and it takes only one trade to put a bullet through your skull when you mess up. Past ’good numbers’ from a trading strategy are meaningless.
Peter Ringel responds:
but even the Kamikaze-trader dialed it up to 11 to win championships in a stellar way and endured brutal drawdowns. and the final win, of course, impossible without an underlying strategy.
Larry Williams replies:
Kamikaze man was clueless, mindless and fearless as well as blessed with luck and Mr Vince to plug holes in the dyke.
Zubin Al Genubi gets statistical:
A benefit of using parametric techniques is that empirical data isn't required and we can do what if's as conditions change.
James Goldcamp writes:
When coming up with a position size rule it must be as with the system itself subjected to in and out of sample testing. We used to have a program circa 1998 that would calculate the optimal ("f") amount of capital over first X trades then apply to the rest of history using the optimal method. This led to hypothetical out of sample blow up not infrequently due to the instability of model returns (even for models that were to some degree still profitable on blind data).
My subjective belief is that most edges (perhaps other than those derived for market making ultra, frequent, or arbitrage/structural type trades) are way too unstable to try to extract anything approaching a past optimal bet size. It seems like the 3 questions or dimensions that one deals with are will it still work at all in future, if it does how much will it vary from the past (expectation and path), and how will the aforementioned two work in relation to other methods you have that work. The last point relates to in my observation the most common form of risk management, multiple bets with negative or low correlation, that's perceived to be a better way of managing risk than dialing leverage of any particular return stream. Any of the aspects are subject to the ever changing cycles.
Big Al adds:
Often the tricky part is finding uncorrelated assets that are reasonable trades or investments.
James Goldcamp responds:
I agree totally. For me it's the 3rd uncontrollable variable - if the ideas work, how well they repeat (robustness I guess), and how they continue to relate to other things. Hypothetical modeling of complex portfolios often assumes all of these properties will continue. There are lots of ways for a leg on your table to collapse!
H. Humbert comments:
Since the number of unknown important variables in complex real-world problems as opposed to simple games of chance of even poker can never be fully known, and the influence of even known variables, by themselves and in combination, can only be examined via past data and in no controlled experiments, it seems like any system can experience a catastrophic failure and/or change in being amenable to any strategy at any time. I admire traders who brave these unknowns and prefer to rely on drift that seems to be more robust and stopped only by major wars and revolutions.
Arithmetic vs geometric average returns, from Zubin Al Genubi
How does the arithmetic average differ from the geometric average in measuring returns?
The arithmetic average calculates the average gain per trade without accounting for the compounding effect. On the other hand, the geometric average (CAGR) considers the actual compounding from start to finish, providing a more accurate measure of the actual return.
Can positive arithmetic averages lead to losses or ruin in trading?
Yes, even with a positive expected arithmetic average, losses or ruin are possible due to the risk of ruin and the increased burden in recovering from drawdowns, . Geometric averages, considering drawdowns and compounding, offer a more realistic view of potential outcomes.
From quantified strategies.
This is the path dependency issue. Conclusion is position sizing is important to avoid risk of ruin or catastrophic drawdown.
Bill Rafter responds:
You are almost there. Think: can these two means be used to identify anything else?
Kora Reddy adds:
also called volatility drag:
vol_drag = mean(x) - exp(mean(log(x)))
or an approximated formula
Volatility Drag = -0.5* (Volatility)^2
PFA useful leteratrue
Zubin Al Genubi replies:
The expectation and the maximum drawdown can be used to compute optimum f, the fixed fraction of capital to risk on each trade.
I read the article [on volatility drag] and disagree with it. Ralph Vince says that a system will experience drawdowns equal to f and that is the only way to the highest compounding resulting return. It is impossible to get the return without the volatility. Diversifying systems can counter balance drawdowns if truly uncorrelated.
It is non-ergodicity of trading markets that make the geometric mean more important. A loss is not a straight line down, but convex because it takes a 100% gain to recoup a 50% loss. The geometric mean captures this. Arithmetic mean does not.
Big Al offers:
Shannon's Demon, or rebalancing between uncorrelated assets (they claim it's "little known", but that is doubtful).
Kim Zussman contextualizes:
"Say, your fund is down almost every year. What value do you add?"
"We're uncorrelated! (with buy and hold)."
TLT follow-up, from Big Al
TLT was way down since we discussed it at the end of August. Interestingly, HYG down nowhere near as much and still ahead of TLT YTD. My intuition would *not* be to see a narrowing of the spread between UST and HY.
Zubin Al Genubi responds:
Bonds have positive convexity, and will experience larger and larger price increases as the yield falls.
Alex Castaldo explains:
I am disappointed that the major ETF web sites (etfdb.com, etf.com, etc.) don't seem to give Duration values for Bond ETFs in a reliable and consistent way (sometimes they have it sometimes they don't). With a little effort I was able to find the following on 2 different sites:
TLT Portfolio Data
DURATION 16.11
YIELD TO MATURITY 5.19%
HYG Portfolio Characteristics
Average Yield to Maturity as of Dec 15, 2023 7.64%
Effective Duration as of Dec 15, 2023 3.37 yrs
Assuming these are both correct, up to date, etc. we can see that the Duration (responsiveness of price to yield change) of TLT is about 4.7 times that of HYG. And this is quite common when comparing high yield and high rating bonds (or bond funds).
Zubin Al Genubi adds:
Convexity, along with duration explains bank issues with rapid yield changes, and TLTs rise this month.
Sleep to solve problems, from Larry Williams
Edison believed that the human mind solves problems best just after a person wakes up from sleep. When he was working on a difficult problem, he would nap in his office armchair and hold a steel ball in his hand. When he would start to fall asleep, his arm muscles would relax and the ball would drop from his hands and land on the floor. This would wake him up and he would find that he had the solution to his problem.
Salvador Dalí, the painter, also believed that interrupting the onset of sleep could make him more creative, and he held a heavy key rather than a metal ball.
Now, more than 100 years later, a scientific study has shown that people can solve problems better just after they awake from a nap as long as they wake before they fall into deep sleep (Science Advances, Dec 8, 2021;7(50)).
Edison was right: Waking up right after drifting off to sleep can boost creativity
Zubin Al Genubi suggests:
Why We Sleep: Unlocking the Power of Sleep and Dreams, Matthew Walker. Great book. Lack of good sleep is really bad.
Hernan Avella warns:
Matthew Walker book is ok in spirit, we all know sleep is good. I'm an athlete and try to get 9-10hrs, but on closer inspection, the book is full of omissions, misinterpretations and overstatements. See: Matthew Walker's "Why We Sleep" Is Riddled with Scientific and Factual Errors.
Nils Poertner writes:
when waking up during the nite more than once, it may be my position that I kept overnite. and during Asian times, mkts turned and I got wrong footed and next day will be brutal too. could be something else of course too but I give it some reflection when it happens. like Elias Canetti says: "All the things one has forgotten scream for help in dreams."
Easan Katir adds:
Not that I've solved any problem as great as Edison providing electric light for the world, yet I've found that pre dawn time between first waking and getting up best for solving business and life issues. I write down the solution so I don't forget amidst the daily cacophony of market news.
Holiday history and the nature of money
Thanksgiving menu at the Plaza Hotel, 1899.
From the NYPL collection of menus.
H. Humbert comments:
All under a dollar. Special holiday dinner for well-to-do customers. Anyone wants to make the case that those who deliberately cause deficit spending are not deranged animals? Is this price change good? Milei just said he will abolish the Fed of Argentina. Non negotiable. Of course he didn’t kill himself, I mean if there are ever any health problems in his immediate future.
Stefan Jovanovich offers:
The BW recommends Turback's book, What a Swell Party It Was!: Rediscovering Food & Drink from the Golden Age of the American Nightclub; it has menus and venues from the great age of actual fun and dancing.
William Huggins writes:
looks like every single government since the 1950s were full of "animals" - not a single one seems capable of maintaining a surplus for more than 3 years (and that was Clinton…):
United States Federal Government Budget
Andrew Aiken adds:
There was never a surplus in the 1990s, at least by the accounting principles that a business is required to use. The “surplus” was entirely due to short-term overages in payroll taxes for Social Security, and they were wasted and not used to shore up the system.
Stefan Jovanovich comments:
Since the purpose of central banking is to allow legislatures to increase their debts, is it surprising that "deficits" are now the cultural equivalent of what "sin" was in the ages when most everyone went to church? Everyone is against it, in principle, but not where principal and interest are concerned.
Larry Williams applauds:
+10 QUOTE OF THE DAY!!
William Huggins responds:
i wouldn't say the "purpose" of centrals is to enable money printing, rather I would say that's how governments prefer to use centrals but since the last of the independents were taken over by the end of WW2, that may have become an irrelevant distinction in the modern world. the main reason for pointing it out is that we could easily return to a world without state controlled centrals and their purpose would be notably quite different (usually running the payments system, think Amsterdamsche Wisselbank).
Stefan Jovanovich replies:
The Federal Reserve does not print our money; the Treasury does. In allowing its member banks to hold Federal government IOUs at par as their reserves, our central banking system effectively outlaws the pricing of all legal tender. Actual money can only be exchanged for itself, whatever the amount. The result is a wonderful inversion of monetarism as a theory. Money can be printed, without limit, but only if Congress votes to expand the supply of collateral that the banks can buy and endlessly rediscount.
William Huggins disagrees:
this is incorrect - the Fed can and does use several other assets aside from federal government debt to back its liabilities. back in 2010, they held more mortgage debt than government debt. the choice of backing asset is often dominated by gov debt but the BoJ (among others) is also sitting on corp debt (and equity for that matter)
Peter Penha writes:
I disagree and it is because of who is on the hook first. The Federal Reserve can only purchase government guaranteed debt for its account (including FNM FRE GNMA which it did in GFC and in amounts greater than existed - the w/i mtge owed the Fed at one point was around $1 trillion and at a spread below treasuries when adjusted for the embedded prepayment option by the borrower.
All the MS pledging boxes of toilet paper at the Fed window in late 2008 & the HY ETF purchases in March 2020 were against a Treasury guaranteed account at the Fed. If you care to argue that in difficult times there is no difference between Fed & Treasury as the Fed takes orders, that there is a myth of central bank independence - no argument.
The Fed now losing some $200 billion a year from it asset/liability mismatch is putting those losses against a future Treasury payments owed account - so the Fed does not need a capital call from its losses. If however the Fed decided it did need capital - that gets taken from its shareholders who are the money center / fed member banks. JPM is on the hook for Fed insolvency (or BAML and C trading below book tell you they will be forced sellers of equity below book to shore up their capital).
Perry Mehrling (the professor Zoltan wishes he had had in college) does a great history course (and free) on the hierarchy of money, and how private (CHIPS) and public (Fed Wire) clearing houses are allowed to create credit out of thin air to make up for shortfalls - guaranteed by all the other members.
Your money deposited in the bank is not money it is you extending credit to the bank and an IOU (down the tier). In normal times they all appear equal and settle normally but a Eurodollar is not the same as a dollar (see SVB dollar deposits made whole / offshore SVB deposits a general creditor (gone) as per the FDIC statement on SVB).
Stefan Jovanovich suggests:
Money and Empire: Charles P. Kindleberger and the Dollar System
Deflation, from Nils Poertner
is as good/bad for the economy and stock mkts (as leading econ) as being sober is for the alcoholic. credit mkts will not like deflation.
Eric Lindell responds:
deflation poses the same problem as inflation — introducing random noise into the price system. With stable prices, producers know that a price increase signals increased demand for a product. Von Mises compares inflation to running someone over and deflation to running him over backward. January 2014 was the only deflationary month in recent years. Deflation as cure for inflation is bad mathematics.
H. Humbert asks:
But there is no deflation. Other than the Walmart CEO talking about some possible food deflation (which is not deflation overall) who has any original information that deflation is likely?
Eric Lindell responds:
Re MV = PQ, deflation would accompany decreased money supply/velocity or in increased output.
H. Humbert replies:
That's true, but not in itself predictive. Will any of these things occur and be strong enough to matter? All that can be said now is that there seems to be some evidence of disinflation, not deflation. I'll believe deflation overall when I'll see it.
William Huggins writes:
the reason we aren't likely to see it is the totem power of irving fisher who taught generations of american economists that deflation led to an activity-suppressing feedback loop. far be it from me to opine on the well-regarded analysis of a seminal thinker (for several other reasons), but it may be worth noting the source of this deeply held belief. as a result of fisher's expert authority, particularly among other influential economists like friedman, the view is profoundly held by today's cadre of central bankers whose playbook warns them that deflation will lead to the great depression pt 2.
historically, the US had a notable 20 year run of deflation in the late 19th century and the economy at the time was soaring. (very) reasonable arguments can be made for confounding factors like mass land seizures, new tech, reconstruction, immigration, etc at the same time but to bring it back to the basic monetarist framework (assuming stable V during the period), the economy could have simply been expanding faster than the money supply. the big difference with today is that the money supply has been untethered from physical constraint. combining (potentially) limitless quantity with a dread of not having enough pretty much assures the outcome.
interesting question arises when one thinks about palindrome's reflexivity theory, where systematic incorrect beliefs start to create new (unsustainable) realities that seem to defy physics and then burst suddenly. are the CBs doing enough to trim their BS and get the money supply under control? (M2 drifting back to that 6% annual growth since the 90s) but will the fear of deflation drive us too far in the other direction?
H. Humbert comments:
It's an interesting coincidence that the belief that deflation is bad for highly technical economic reasons that have nothing to do with unsustainable money printing, coincided with inflation being useful when said money printing occurred.
What Irving Fisher was evidently saying was that deflation is bad because it suppresses economic activity through some sort of a feedback loop. I think the deranged animals that advocate (or justify or fight any attempts to control) the kind of deficit spending that we have given the debt that we have don't like deflation because it would cause them to have to stop the spending a couple of years sooner than otherwise, hence they would lose their hold on power that much sooner, and that's all that they care about. Irving Fisher is described thusly in his wiki page:
Irving Fisher (February 27, 1867 – April 29, 1947) was an American economist, statistician, inventor, eugenicist and progressive social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt deflation has been embraced by the post-Keynesian school. Joseph Schumpeter described him as "the greatest economist the United States has ever produced", an assessment later repeated by James Tobin and Milton Friedman.
So it's an interesting coincidence that the some progressive social campaigner economist found through his incredibly insightful, but totally politically unmotivated, theoretical work a formula that the animals need to stay in power.
William Huggins responds:
exactly - they will either inflate it away, or at some point engage in a selective default. that said, societies can go on self-financing for a very long time (japan) as much of that interest is being put right back in the pockets of americans. its not like the wealth is being disintegrated, its simply being moved around. i have no idea how to gauge the limit.
i wouldn't be so quick to dismiss Fisher's work simply because you dislike "animals" who are actually your fellow countrymen whom you disagree with (do americans really hate one another so much? is there another reflexive breakpoint that's much more important to watch for?).
my point was that he was very wrong about the 1929 crash and I believe his losses must have set a terrifying fear upon him when the markets didn't bounce back. hence deflation as his bete noir, not some silly "convenience" for politicians who weren't even a dirty twinkle when we wrote. the issue is inherited wisdom being unbalanced, not conspiracy most foul.
H. Humbert replies:
You may very well be right about his motivation, I just found it interesting. I hate inflation because it's unfair to people who are good, who behave according to what I consider to be good moral principles. It also hurts many who are weak, whether through no fault of their own or otherwise. But those I call animals talk about any feeble attempt to restore sanity to the budget as an attempt to simply stop the government from functioning, just because those who attempt it are somehow motivated by evil intent. Lying to keep power while destroying the country is despicable behavior.
Advice to Aspiring NYC Cops, from Bo Keely
[Ed., for color: 14 Days In a City With No Laws: Slab City a Squatters Paradise]
A friend Ron in Slab City was a NYC police officer for one day. It was his dream come true to work the beat, the highest pay grade due to overtime, doing what he liked to do. ‘I can communicate with and help any person on any level.’ Two years ago, a Mensa, he completed the cadet course with one of highest grades in history and became a NYC beat cop for one day.
The second day, his lieutenant called him in and said, ‘Are you thinking of taking another job?’ ‘Never,’ he replied. ‘Why don’t you use your degrees in nutrition, business and psychology to become a teacher?’ ‘No, I want to walk the beat.’
The lieutenant continued, ‘I have to let you go. We can’t keep anyone on the force who scores a 90 or above. I myself got a 70. It’s not financeable feasible because it takes five years to become a detective where you’d shine. Nobody will want to work with you until then because you’re too smart. You probably don’t even want to hurt criminals. You’d figure out how things work.’
My buddy couldn’t argue with that, and turned in his shield and gun. He started a window washing company in the Westport, CT area to earn a stake to buy a van and drove it to Slab City, ‘The Last Free Place.’
I stood with him this morning inside what Slabbers call the Fortress of scrap metal and pallets atop a four-story crow’s nest looking over the town as far as the eye can see.
Comments
Peter M on December 16, 2023 6:31 am
I’ve missed your stories Bo, keep them coming
Why does Japan have a CA surplus? from Alex Castaldo
Not for the reason I thought:
Japan’s current account surplus may not be a surprise to those of us who remember Japan as a major exporter. But a closer examination shows that the current account surpluses recorded today are NOT DUE TO THE TRADE ACCOUNT but rather the net primary income balance. Japan used the trade surpluses of the 1970s and 1980s to build up its holdings of foreign assets and prepare for the day when it would need income from abroad to pay for its aging population. Last year, according to The Economist, the country earned a net $269 billion on its primary income balance, equal to 6% of its GDP.
Trade N, dispersion, Expectation, from Zubin Al Genubi
With a positive expectation (actually doesn't matter how great) increasing N and or decreasing dispersion of returns of trades will increase terminal net wealth in direct proportion! If you understand this you can succeed in trading. Each variable is a leg on a right triangle solvable by the Pythagorean equation!
- James Sogi
Decreasing stop loss to reduce sd will reduce N and may reduce overall return.
Jeff Watson writes:
I only use mental stops, and strive for 100% personal compliance when pulling the trigger to get out. My rationale is that any stops on an exchange or broker server…or in a broker’s deck, become part of the market. That’s too much information to give to the market.
Peter Ringel comments:
yes, quite a few studies show, that stops degrade systems. mental stops but with technical alert levels seem useful. fight for exit - fight for entry. catastrophic hard stop still makes sense.
Larry Williams advises:
Not having a stop has been the death of more traders than having stops.
Humbert H. writes:
To me a "stop" is a trading concept, not an investing concept. It's almost devoid of meaning if you're an investor. Traders operate on price movements, investors operate on price vs. value. Just the way I understand it from observing the lingo in the two "camps", and what it means to be one vs. the other. Of course if you're an investor and there is a huge unexpected price movement, you have to rethink what you know and don't know about the asset.
H. Humbert adds:
My Step 1: Monitor all stops. This is from an Aught's (maybe '03 or '07?) Spec-Gathering in Central Park, per Larry Williams' Wisdom. It is also so appreciated that The Chair, his Dinner Table Guests & Friends, His Co-Opetition Friends (Spec-Listers) & his Superior Employees' annual efforts.
December again, and Russian snows
what will S&P move to end of year? since 1996 when as of dec 12 the sp was up over the preceding 30 days, the expectation for the next 15 days is up 20 big points - 9 of 12 since 1996 up. s.d. 20 big.
guaranteed to be found too late: the 30 days from nov 1 to dec 12 been up 15 times and down 3 times since 1996.
Henty explains why France lost so many wars. General Kutosov main practicioner of snoring as fine art:
Through Russian Snows, by G. A. Henty
Snoring as a fine art
good lesson for followers of drift in S&P:
Snoring as a Fine Art, and Twelve Other Essays by Albert Jay Nock
Consequently one might with reason think that there is too little snoring done—snoring with a purpose to guide it, snoring deliberately directed towards a salutary end which is otherwise unattainable—and that our society would doubtless be better off if the value of the practice were more fully recognized. In our public affairs, for instance, I have of late been much struck by the number of persons who professedly had something. The starry-eyed energumens of the New Deal were perhaps the most conspicuous examples; each and all, they were quite sure they had something. They had a clear premonition of the More Abundant Life into which we were all immediately to enter by the way of a Planned Economy. It now seems, however, that the New Deal is rapidly sinking in the same Slough of Despond which closed over poor Mr. Hoover's head, and that the More Abundant Life is, if anything, a little more remote than ever before.
December, from Hernan Avella
Since 1985, looking at the Vanguard 500 Index Fund, there have been 20 years where the cumulative return up to November was greater than 10%. Of those, only in 3 years (1986, 1996, 2014), the fund experienced negative returns in the month of December.
1985: 4.67%
1986: -2.64%
1988: 1.66%
1989: 2.38%
1991: 11.41%
1995: 1.93%
1996: -1.96%
1997: 1.72%
1998: 5.81%
1999: 5.98%
2003: 5.22%
2006: 1.39%
2009: 1.95%
2012: 0.90%
2013: 2.51%
2014: -0.26%
2017: 1.10%
2019: 3.01%
2020: 3.84%
2021: 4.47%
T-Statistic = 2.04, p-value = 0.048
A birthday party, Monte Walsh, thinking
Pix from Vic's 80th birthday party:
one of the most unfair things is the lack of attention by western writers and others to the greatness and heart-rending competence of Monte Walsh.
now they are bullish. as Art Bisguier would say when he got you in a bind and you'd take a few minutes to play: "now you're thinking."
the gentlemen persist in their bearish hope. the old gray mare increases his chances.
Comments
Harry Pincus on December 10, 2023 10:51 pm
The buckle and the plate may be gone, but the memories remain.
Happy Birthday!
XXXH
DeWitt Clinton and NYC
DeWitt Clinton spearheaded the Erie Canal and the NY City grid plan. the greatest contributions of NYC in history.
a study of New York shows that whenever a group was at the bottom, whenever the economy was overwhelmed by immigration or riots, it bounced back to new highs in 12 years.
Upside surprise has led people to be overly optimistic about next year, says Mohamed El-Erian
New York: An Illustrated History
Punishment, progress
after 4 out of 5 consecutive 20-day highs in S&P, the gentlemen still don't like it enuf to have strong a close [on Friday].
one of the most recurring principles of life and investing is that there is a balance between reward and punishment. recently the Fed coming to their senses about not raising yields (perhaps related to the old grays odds have reduced the likely punishments). reason for 10% rise.
the dangers of anti-business:
The Mainspring of Human Progress, a book by Henry Grady Weaver.
The author, Henry Grady Weaver, served as director of customer research for GM. Blind in one eye, he nevertheless spent much of his life peering over data. He was a number-cruncher, not a philosopher or polemicist. His writing experience had consisted mainly of penning articles on psychological research. But The Mainspring of Human Progress, an amateur’s paean to freedom and individual ingenuity, remains one of the finest discussions of the impact of business on society that has ever been written.
Herd mentality, from Zubin Al Genubi
Everyone went to Hawaii last year. They all went to Europe this year. Everyone drives the same vehicle. People love to follow the herd. Hedgies, quants, teckies all looking at the same data, same correlations, all doing the same trade.
Nils Poertner writes:
being in a herd somewhat offers protection and one can save energy - as our brains like to save energy (constant decision making and testing stuff costs energy and our brains are already weakened via e-smog etc etc).
as a trader though - one cannot make any money long term if one is constantly part of the group - one is more like that rabbit that is hypnotized with the headlight of the oncoming vehicle. so one has to find a niche. energy is key in my view- to keep the energy up - as traders often lose it as time goes by (maybe a talent to not give a f*** about anything, too).
William Huggins comments:
i would argue that running with the herd minimizes the energy lost scrambling in all directions looking for an edge. unless someone has a refined technique for discovering edges and implementing them, its hard to conceive that active selection would overcome the "drift of industrialization". numerous studies (most famously jack bogle's) have shown that buying and holding the index is just fine and does in fact make decent money over the long term. when you factor in the costs of active trading, you really need an edge to overcome the friction imposed.
clearly, both strategies can be successful but one requires much more skill (and earns commensurate rewards) so i think its misguided to suggest that "one cannot make any money long term" by following the herd. you just won't earn exceptional returns.
Nils Poertner adds:
I think it is time to sharpen up in coming yrs- the reality is that most folks in finance (in particular at large firms) really don't have special skills compared to other professions in non-finance (yet they get paid so much more). The whole financial system has just gotten a bit too big - and time will be for those who go the extra mile - and not sit comfortably and hope mediocracy will be work out. many things will change anyway…many….medicine got to change - see how unfit and mentally challenged most citizens are by now.
Humbert H. asks:
You think if they don't know how to sharpen up just getting that advice will somehow help them find the way? What exactly do they need to do?
Nils Poertner replies:
1980 - til 2021 - bond bull mkts and good for lev assets (private equity, real estate), neg real rates. easy money - favouring a few more than others. with rising nominal rates, that is going to change. (had a lot more in mind - people are somewhat depressed, highly suggestible, joy missing, too)
William Huggins expands:
predicting regime shifts (and their direction) has proven to be quite challenging so i would start by ensuring that one doesn't get knocked out of the game when they come (position limits with exit numbers away from rounds, etc). that way, you might at least survive the turn. resilience seems essential but people who only know one-directional markets don't put enough stock in it.
something related i'm teaching tonight is that people's beliefs always trump the facts. i don't mean pie in the sky fantasies, i mean what people think the facts are, and what the implications of those things should be. but when the herd's thinking changes, their volume moves markets. perhaps the key is to identify the early rumbling (or other signs) that precedes a stampede? i'm inclined to expect a high risk of false positives though as it is a well-worn strategy to spook the herd from time to time.
Henry Gifford writes:
I used to wonder how running with the herd helped animals in the wild. Sure, some will likely survive, but what is the incentive for an individual to be part of that large target?
Then I found out about one technique deer and many deer-like animals use. Someone, maybe a human who can outrun a deer on a hot day (furry animals generally can't sweat, people can, thus people can cool themselves very effectively). chases after a herd. After a brief sprint one member of the pack takes off in a direction away from the pack. The human or other hunter might choose to go after the individual animal, thinking it is easier prey than the pack, and safer because there are only four hooves to avoid, not dozens. But the deer aren't stupid - one of the fastest and fittest is running alone. After a while the individual circles back into the pack. Now the pack, which wasn't running fast, or maybe not at all, is more rested than the hunter, who ran a longer distance chasing the individual deer. Now the pack takes off again, with the hunter after them, then another fit and rested individual animal takes off away from the pack, again and again. I assume they have other strategies.
Art Cooper adds:
This is the mirror image of how wolves hunt their prey.
Humbert H. responds:
Being in a herd offers lots of benefits. Clearly there are lots of pairs of eyes facing in multiple directions to alert others about approaching predators and emit warning sounds. Also, many predators tend to surround a isolated victim for a few reasons, one of them being that it's much harder for an individual animal to fight back when attacked from all sides. Obviously it's almost impossible to use this method with a herd. It's also more distracting for a predator to have to focus on multiple targets. Large herd animals find it a lot easier to fight a predator while facing them and a herd can protect the backs of all of it's members.
Now being a part of a "herd" or market participants is quite different. Market participants have no incentives and, typically, means to protect each other, and metaphorical market predators, whatever they are, don't really behave like a pack of wolves or a pride of lions. It's much harder to jump on an isolated market participant, unless it's some "whale" known to be in distress, and distressed "whales" don't run in herds anyway. You often have no idea why a market stampede has started, so imitation is more dangerous than for a herd animal. All the physicality of being a grazing herd animal goes out the window and this analogy seems of dubious value.
Henry Gifford continues:
The discussion was about pack animal behavior. The description from the deer expert sounds like he was adventurous and curious and brave enough to chase a solitary deer. I don't think North American deer exhibit pack animal behavior - I've never seen them in packs, only family groups, maybe they don't form packs at all - I don't know. I wish I knew why some fish swim in a group ("school"), but I don't.
I think I can judge the budget of a zoo by seeing how many deer-like animals they have. Such animals look much like deer, thus my description, and presumably have evolved to survive much like deer: eating leaves and running away. Zoos that I think have low budgets don't have the interesting predator animals kids see in books, but instead have many deer-like animals with only minor variations from one species to another, from one animal enclosure to another. Suffice to say there are many animals in the world similar to deer, but which are not North American deer, especially in Africa, where many or all those species found in low-budget zoos come from. Presumably some run in packs, even if North American deer don't.
The story that humans ate by outrunning deer-like animals has been around a while, but was finally documented by anthropologist Louis Liebenberg, who reportedly, in 1990, witnessed human hunters !Nam!kabe, !Nate, Kayate, and Boro//xao run down antelope in the heat of the day in the Kalahari desert in Botswana. Please don't ask me how to pronounce those guys' names. One time when I was googling around on the topic I saw maps created with the aid of electronic tracking devices that showed one or more of the parties to such chasing running fairly straight for a while, then circling around, then straight, etc. I don't remember if the tracking device was on a human or animal or both.
Another method has multiple humans chasing a pack of animals. One human gets tired chasing the animal that left the pack, chasing it on a zigzag or circular path, while the other humans jog slowly, on a shorter route, following footprints left by the pack, and soon the animal that left the pack rejoins the pack while the pack of humans is very close to the pack, with only one tired human in the pack of humans. If Randy has tried that method it would be nice to hear how he and his friends made out.
I suspect all the above has implications for trading in the same sense others have posted about pack behavior and trading.
Those guys in Botswana have at least one of the three factors some say are the reasons why marathon runners tend to come from Kenya and that area (the Rift Valley). One is that their ancestors lived in a hot climate (Africa) for tens of thousands of years, thus they developed limbs that have a relatively high surface/area ratio: long and skinny, optimal for cooling, and also optimal for moving back and forth (running) with minimal energy (low WRsquared) compared to short, stubby limbs (similar to the physics of pendulums). The second factor is that their ancestors lived at sea level for thousands of years, thus they have the ability to produce more hemoglobin (moves Oxygen to muscles) readily when they are at altitude. The third factor is that they grew up at a mountain altitude, thus they developed large lungs. I don't know if the hunters in Botswana had any of the other two. A mass migration from sea level to high altitude is I think not so common (or people from other areas would also be winning marathons), but reportedly many humans ate via chasing down animals for many years, presumably many who didn't have all three of these factors in their favor.
Then there was the argument in a Welsh pub that led to the annual 22 mile Man vs. Horse race, run since 1990. I suspect, but cannot confirm, that alcohol was involved. Some years the humans win. The human ability to sweat, and therefore cool the body, keeping it in a temperature range necessary for metabolic processes to function (running, breathing, not dying, etc.), is key - presumably the humans would do better in a warmer climate or in a longer race. I think it would be interesting to track the temperature and relative humidity of different race years vs. who won, but I don't have the data handy, and don't know if it is available on a Bloomberg terminal.
Larry Williams writes:
Correct on deer. Antelope and buffalo go in herds-packs, if you will. so do elk - a beautiful sight to see as the bugle sounds.
Zubin Al Genubi adds:
The Gwich'in natives in the Arctic run down the caribou on snowshoes. Caribou bolt, rest, bolt. Man runs runs runs without rest up to 60-100 miles.
The caribou vadzaih is the cultural symbol and a keystone subsistence species of the Gwich'in, just as the buffalo is to the Plains Indians.[4] In his book entitled Caribou Rising: Defending the Porcupine Herd, Gwich-'in Culture, and the Arctic National Wildlife Refuge, Sarah James is cited as saying, "We are the caribou people. Caribou are not just what we eat; they are who we are. They are in our stories and songs and the whole way we see the world. Caribou are our life. Without caribou we wouldn't exist."
I met Sarah James and spent a week with her in Arctic Village and up at hunting camp. She is an amazing person. The villagers and tribe have a beautiful philosophy of life and respect for nature.
Rich Bubb comments:
the herding/grouping re/actions is/are common in so many species' game plans & their instincts, then there's their need to hunt, defend, fight-flight, etc en-masse because of their evolutionary status vs predecessors. Humans same; hopefully.
Pamela Van Giessen writes:
Bison herds are led by a cow. And when she decides to move, they all move. Quickly. You definitely don’t want to be in the path of a bison herd on the move. Elk herds will go around you or they will make you wait for them to pass. Antelope herds will outrun everything. More deer get hit by cars than any other creature (except maybe raccoons). Perhaps they are at higher risk because they do not travel in large herds. The type of herd matters. One imagines there must be similar parallels in the markets.
Rich Bubb recounts:
about those cute furry deer etc… having a mini-herd slam into vehicle on a highway is rarely something I can evade. Got Deer'd 4 times in NE Indiana, only?. I think 1 of the mini-herds died, the rest either bounced off or got bumped out of the way, which also? causes very extensive collision expenses! When a shifty insurance office-drone tried to blame me once that I as to blame for the deer-car (b/c I was driving the car, not the deer). After the ofc-drone ranted at me for while, I said, "Here's how much time I had react (GOING 55MPH), then slam the phone's receiver down on my desk, hard. The drone lost that one.
Steve Ellison understands:
I never hit an animal while driving, but once I was on a state highway in Idaho headed to Hells Canyon through a forest. A deer shot out from the trees on a dead run and crossed the highway some distance ahead of me. I only saw it for a second or two, and it was gone. I was lucky to see it from a distance, because it would not have been possible to stop a car traveling 55 miles per hour in one second.
Richard Barsom offers:
Turkeys, they are super smart. I mean despite their rather undeserved reps of being "Turkeys" . They travel in large groups but send scouts out in various directions. The scouts are usually so fast that they send hunters on a wild goose chase so to speak. This is done on purpose to alert the group and frustrate the we be hunters. You could learn a lot from a turkey.
G&S, O’Brian, and the big post-CPI move
Gilbert and Sullivan: A Biography by Hesketh Pearson is an excellent short bio about the lives. some curious facts: 1. Gilbert made scale models of every scene of his opus and insisted that every performer did exactly what he wanted. 2. Gilbert had three Lemurs as pets. 3. Gilbert loved to play tennis. he elongated the court so his shots would go in.
- Gilbert rode in a Cadillac in 1901. 5. Sullivan was a confirmed gambler and frequently had to borrow money from friends even though his 12 plays with Gilbert made him 450,000. 6. Gilbert was most litigious writer ever.
The Tolstoy book about O'Brian is very informative about Patrick's work habits, hobbies, and lack of wealth until 15th book in series. also completely exonerates Patrick from King's gratuitous critique. book is 700 pages well worth reading:
Patrick O’Brian: A Very Private Life, by Nikolai Tolstoy.
gilbert liked to play tennis and croquet every day, had to lengthen his tennis court because he hit too long. loved his wife who was like Susan, as did O'Brian.
Scranton was once hub of iron and discount retailers:
revelations about the Quakers, cavaliers, Roman and Greek times - highly recommended for kids also:
herd mentality across frontiers and markets:
Gregariousness in Cattle and Men, by Francis Galton.
highest move on cpi announcement ever. since 10-26-2023 a bull market of 9% since 4137. perhaps we will see the professor today but the two times cpi has been this much, the ppi has been bearish. strangely, only 1 cpi did better than this one since 1996: it was November 10, 2022, when S&P went up 207 big points.
Producers and scroungers
a surprising and unique use of random numbers. to fix how much customer money was missing. a number on the balance sheet relating to customer deposits was multiplied by a random number. see Patrick Boyle for the exact.
as I have mentioned before family frauds are the most insidious and difficult to unravel. i have been victimized by many.
biggest drop in old gray mares odds over a weekend ever. regulatory capture chances recede [ but back up today: https://electionbettingodds.com/. ]
a great book showing the power of regeneration for NY:
New York: An Illustrated History
an excellent book with many applications to markets:
Producers and Scroungers: Strategies of Exploitation and Parasitism
who are the producers and scroungers? the book was written before everything became completely mathematical in biology and is quite understandable only using first order differential equations to show erudition and even to make points.
i am looking for a counterpart with a large following to partner with me on a new vlog. any suggestions or takers or leads would be appreciated. it would give me something productive at age 80.
the professor has been playing footsie with the 4000 level but the big rise in the old mare's odds should help. S&P now up 8 days in row.
does the market tend to an inordinate degree to hit vivid goals like gold at 2000 and S&P at 4000? does it inordinately hit 20 day highs? that would be 4417 on oct 11 for S&P.
Is buy-and-hold investing dead?
[28 Oct] is buy and hold investing dead? after 64 days since the last 20 day max on 7-31-2023 and three twenty day minima in a row, time to throw in towel. but in situations like this, its 97% bullish for 13 days later with a 130 big S&P expectation, so don't. and presidential odds increasing - also bullish.
yes i've lately been wrong. should i give up ship about 5 occasions a year like this - all with expectation of 13 days to next 20-day max and big positive expectation? one recall 1998 when Dow stood at 800 and one started buy and hold.
Steve Ellison responds:
There have been many bear markets (which can only be identified retrospectively) that lasted a year or more, with one as recently as 2009. I usually interpret buy and hold to pertain to a period much longer than 3 months.
[1 Nov] well that's 118 pts of the 130-pt expectation i noted. but it took 3 days not 17.
Reading
one of the most valuable and informative books i have read recently is Morse's Behavioral Mechanisms in Ecology. some of my favorite chapters are competition between species - variability in foraging patterns - avoiding predation - territoriality. an estimable researcher who started his publishing career in 1956 on the night time activity of the snow bunting.
a valuable book about an estimable person i would recommend to my 13 grandchildren and especially Aubrey is Be Useful, by Arnold Shwarzenegger.
Forbidden History, from Larry Williams
I can only do a few paragraphs at a time there is so much in this book; turns thoughts upside down.
One I just read; Thomas Jefferson's illicit affair and fathering a child with his slave. Wait! Hold on a moment —while widely believed— all the DNA tests shows is there is Jefferson bloodline. That’s all it can show. There were 26 Jefferson's living in the area and Toms brother Ralph was caretaker and overseer of slaves.
Thomas? Ralph? Someone else? Will never know for sure but for sure it may well have been another Yet the revisionist historians have hung it on Tom. Lots more like this.
Peter Penha writes:
Just an anecdote on your example: I know of two families where a child was fathered/sired with a female who was a slave or an emancipated slave. Both families discuss it as part of the family history and each specified that a home was built for the mother/child and in one case the family name given to them.
Considering Thomas Jefferson finances, perhaps the answer would lie in the building records and who owned the home in Charlottesville where Ms. Hemings moved to after Jefferson's death with her sons.
I was recently searching for other books by Frederick Lewis Allen as IMHO a wonderful writer and objective historian of his day and that brought me to a series titled the Forbidden Bookshelf (27 books in the series) - I only picked up Allen’s The Lords of Creation but there were a few titles that were “out there” as subject matter.
Gyve Bones adds:
There was a lot more inter-mixing between Africans and French colonials in the Louisiana colony, which had a Code Noir body of ordinances governing who could own slaves (only Catholics, no Jews nor Mohommedans), and how they must be treated. As a Catholic nation France required that owners of slaves must educate and raise their slaves in the Catholic faith, and could not break up families in a sale. Slaves could purchase their own freedom, and in New Orleans there was a large population of "free people of color". Many of the wealthiest of these freedmen were slave traders, and there were several large plantations in French colony owned and operated by free persons of color. Slavery was not a racial thing—just a matter of property. There was much less stigma around the idea of "race", and that culture has persisted to an extent into current day New Orleans, although those seeking to divide people along racial lines for political purpose have made significant inroads in destroying inter-racial comity in that community.
History records that French Canadian trappers had very good relations with the indigenous populations, and there were many such mixed marriages made. This same phenomenon was seen in Mexico after Our Lady of Guadalupe converted 9 million indigenous Mexicans to the faith. The Mexican nationality gave birth to a new "mestizo" race which came about when the Spanish intermarried with the native population.
Zubin Al Genubi suggests:
Trust by Hernan Diaz. Pulitzer prize. Stories About a stock market operator in 1920's and his wife. Very good with minor market relevance.
Stefan Jovanovich links:
Risk, from Duncan Coker
It seems a misnomer to call longs bonds risk free. Indeed the default risk is near zero, but the interest rates risk is wilder than a bronco at Montana rodeo. Credit risk is also a factor with potential downgrades. Which begs the question will risk premiums decrease equity vs bonds. Which asset class is actually carries more "risk"" on an annual basis.
Big Al asks:
Are long bonds (UST 30s) referred to as "risk free"? I think of the "risk-free rate" as Treasury bills. Whereas with bonds, doesn't longer duration equal greater risk?
William Huggins responds:
the risks of a long-term contract are mostly in getting out early at a bad time (and thus having a holding period yield lower than YTM), default, and of course inflation. if you hold to maturity (liability matching for instance) then the first risk vanishes but the last two remain. in gov bonds, the second risk also vanishes but the third becomes all important since a gov can promise to give you 1000 currency units but makes no reps about what that will buy at maturity.
Hernan Avella writes:
Interest rate volatility is only a problem for people who don't know how to immunize the risk. One should always match the investment horizon to the duration of the bond holdings. To quote Campbell and Viceira:
In financial economics a one-period indexed bond is usually thought of as riskless. Over one period, a nominal bond is a good substitute for an indexed bond, and thus by extension the riskless asset is often identified with a short-term nominal asset such as a Treasury bill. In a world with time-varying interest rates, however, only the current short-term real interest rate is riskless; future short term interest rates are uncertain. This makes a one-period bond risky from the perspective of long-horizon investors. For such investors, a more natural definition fo a riskless asset might be a real perpetuity, since this asset pays a fixed coupon of one unit of consumption per period forever.
In practical terms, given that we do live in the most powerful country in the history of the world and this country issues indexed bonds. For a long term investor, a TIPS ladder to finance your long term consumption is the riskless asset. Which should be 100% of the portfolio of the infinitely risk averse investor with zero intertemporal elasticity of substitution.
Kim Zussman reflects:
The most risk-free state is death because nothing worse (or better) can happen to you. Less severely one likes to lay on the floor. The cool hard surface is good for back pain and there is no further to fall.
Observations
one has to be astonished at the levity and laughing and the insouciance of Ms. Elllison's all-hands meeting with employees where she reavealed the shortfalls and discussed the 40% chance that the deal with Binance would go thru.
professor finishing his constructal class to Asian students preparing vigorous talk for Wednesday. first constuctal to go will be dax at 15,000.
how many times in a row can Chair Powell beat the bonds down with so many banks holding bonds with tremendous losses not hedged? eventually it will hurt their own man.
gentlemen still don't like stocks. they like it more in futures.
Bonds…close, from Larry Williams
Bonds oh so close to major buy point.
Humbert H. writes:
I just keep rolling over T-bills because I don't know any better. Higher for longer or something. At least the interest pays for my recent losses trying to buy all kinds of value stocks at the lows, only to see them broken. That's OK, the next bull market will bail me out completely.
Laurel Kenner comments:
You are never free to deny the truth. You cannot make it up ad you go along.
I bow to Larry. The biggest gains occur in insane bear markets. Because the government has seized control of the bobd market, he is right, especislly leading up to an election. You all should heed him when he gives the buy sign. But it still stinks. I guess you need the nose for success.
Larry Williams replies:
Well lets hope I get this one right and earn those kind words - the ultimate sweet spot to buy is not here yet but it is coming.
Zubin Al Genubi adds:
When the time to buy comes, you won't want to. Like 17% bonds in the 80's.
Richard Bubb writes:
So is the FED [Powell & Co.& etc.] gonna raise the rate, or try the Higher-For-Longer road? Personally I'm thinking the HFL is their better option. Reason: The Fed is notorious for doing one too many rate 'adjustments' that would fix itself if they hit the pause button/s. Back to my 'raise concern'…I think the 2% target is a chimera and going there is an unwinnable move for the Fed.
Humbert H. assumes:
Well they can’t inflate the debt away fast enough at 2% nor is it easy for them to achieve so I’ll assume inflation will stay higher for longer.
Allen Gillespie writes:
While there is a strong seasonal trade that kicks end here around Oct. 19-23 - good till Christmas, such that even during bond bear markets the market held levels for a couple of month, the fundamental issues are the following.
-
Fed Funds Futures are beginning to project a cut in short rates around May 2024 which then continue through the first quarter of 2025 and reach down to a level of about 4.5%.
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Historical, average spread relations therefore suggest we are seeing a Niederhoffer switch in here where short rates go into the 4-4.5% range and longer instruments up the the around of the current fed funds rates and budget deficit amount. A true switheroo.
-
There is a strong seasonal here (particularly Oct. 19-23) which held even during bond bear markets. IA flush after a weekend would seem about right. In the bond bear markets, however, the range was only good for a couple of month.
-
The long-term fundamental backdrop is the following:
According to the CBO, "since 1973, the annual deficit has averaged 3.6 percent of GDP. In CBO’s projections, deficits equal or exceed 5.5 percent of GDP in every year from 2024 to 2033."
This is the inflation rate - so, if you want a real return on bonds your rates needs to be higher than these levels. That is now just barely true in corporates, but it is not true for government bonds.
If you just charge the inflation rate, there is no real no real return available to bonds. Granted, in the long run government should be neutral offering neither gains nor confiscation, but at any moment they are on either side of that reality.
Today, the CBO projects the deficit will run 6.1% for the next two years. They do have a core adjusted for timing shifting of 3.4% - but do you trust them will all the war supplemental budgets.
Humbert H. responds:
A cut in short rates in May? We have high deficits, strong likelihood of inflation above 2%, no real signs of recession, "higher for longer" is seemingly the consensus of the mainstream economists, but fed fund futures are projecting a cut? Doesn't seem to make much sense.
Allen Gillespie replies:
Election years start getting discounted about Feb/March - so market may start looking past the Biden agenda and the housing season come May will be in the dumps. Forward oil also 10% lower for next year on economic weakness. Oil ran in 3Q because someone probably knew. The energy squeeze in 1973 was 1 year long. Exxon just bought Pioneer, so they can export LNG - trade seems to be setting up to be long domestic production for export.
Comments
zack on October 21, 2023 1:44 am
Hi Allen, you are spot on about rates needing to be higher than interest rate level.
Hi Humbert, i think its possible the cut in May prediction is due to people seeing a recession occurring in early-mid 2024- forcing feds to cut rates.
That said, I agree that its possible we dont have one and we’ll see higher rates.
Also, the CME Fedwatch had some bad predictions back before fed starting raising rates. maybe this is similar and yea it doesnt make much sense if fed wants inflation 2% they may raise higher.
DEAN T PARISIAN on October 23, 2023 12:41 pm
Is it the Ackman Top? I would rather call it the Larry Williams Top. Appreciate your work Mr. Williams.
Market training, from Zubin Al Genubi
The market trains you to do certain things. Like this year with long sideways or down, the market trains you to take your profits on an up move rather than hold for a bull run. Then after the traders are trained the market will throw in 7% up move. Then having suckered in the trend followers reverts right back to down/sideways normal action.
The market (or the exchanges/mmakers/exchanges) seeks maximal flow which occurs during sideways and down chop. Thus the greater part of the action is sideways (current regime). I'm wondering when the change in regime to big up move will happen.
Nils Poertner comments:
there might be pain coming for lazy thinker. Lazy thinkers are those who cut corners, maybe they are intelligent to some degree, but basically they rather copy and paste other ppls opinion (then delude themselves it is their own opinion).
Zubin Al Genubi adds:
Like the Turkey says its real hard to get back in once the big up move starts. Its so much easier to buy a falling market. Its also tough to hold for the continuation move up rather than sell the bounces as one does in the down move. One good sign is slicing up through the big rounds. The rebounds off the round in the down market usually ended up in a continued down move.
Steve Ellison writes:
Or as the Chair wrote about Steve Irwin and the crocodiles he had captured, those who try to take money out of the market using the same technique too many times will find an ambush waiting.
In the archives of the old Daily Spec site, search on "crocs" within the page to quickly find the original post.
H. Humbert writes:
Steve hired expert handlers for some of the more dangerous animals he filmed with. A friend worked for him many times and said he was very careless. One time on the Leno set, Steve got too close, and a large Gaboon viper struck at his leg and just missed.
The moral is don't play with fire if you don't want to get burned, and don't get too close to viperids with 3cm fangs (they are pretty though).
War and gold, Hooke
reading The Art of War, i came across the 19th-century view that one climactic engagement was the key compared to the modern view that indirection is the key. it leads me to a test of gold.
gold up 63 on friday, only happened 5 times since 1996, highest was 3-24-2020 when up $109 big to an adjusted $1897. strangely close to friday's close of $1945. friday was a unique day with crude up $6 and dax down $2 to a 6-month low of 15250.
last 7 times gold up more than $50 in a day. sp 2 days later:
03-17-23 +89
11-04-22 +53
03-08-22 +102
04-09-20 +63
04-06-20 +93
03-24-20 +174
03-23-20 +243
mean: 116.7
sd: 68
mean 2 days later: 116.7
mean 5 days later: 161.7
sd: 107.2
prob of rise 5 days later: 100%
thus we see that friday's $64 rise in gold was a startling attack that set up total annihilation of enemy in the past for S&P.
reading bio of Robert Hooke - inventor of Hooke's Law and sec and curator of the Royal Society from 1625 to 1700. claimed he invented inverse square law of gravitation. gifted architect partner of Christopher Wren and very good friend of Robert Boyle (in honor of Patrick Boyle).
Hooke was very good lifetime friend of Robert Boyle, ancestor of my good friend and talented raconteur Patrick Boyle.
Wall of worry
JPMorgan’s Marko Kolanovic braces for 20% market plunge, delivers recession warning
H. Humbert comments:
Nobody knows anything. If anyone could predict that stuff with any degree of certainty, they’d be worth a trillion dollars over 5-10 years. I listen to what all kinds of analysts say and they modulate their own predispositions by reality, but it’s all worth nothing.
Zubin Al Genubi sees the bright side:
Excellent wall of worry.
He indicates a near-term bounce is still possible because a lot hinges on economic reports over the next few months. "[We’re] not necessarily calling for an immediate sharp pullback,” he said. “Could there be another five, six, seven percent upside in equities? Of course… But there’s a downside."
(Really stupid)
I'll also make a Popperesque non-disprovable prediction: Market might go up, but then again it might go down too.
Laurel Kenner writes:
Sometimes the wall of worry is made of steel-reinforced concrete, viz., late 1999 & 2007.
Humbert H. comments:
This particular wall of worry is made of cotton candy. Not many people on either side predicted the behavior of the market in the last 4 months. Whatever idea people have, they typically expect to be proven right or wrong relatively quickly, and usually proven right.
Laurel Kenner replies:
The smartest bond investor, Paul deRosa, quit several years ago because he no longer understood the bond market after what I think of as the 2008 financial coup. The market hasn't existed since then. This thing that has been committed will bear evil fruit. George Zachar, am I right?
Sure, it could take a long time. Homeowners and businesses locked in those crazy low rates. But the central powers can't keep up the charade. The bond market, what's left of it, will scream. Do we look away now?
Larry Williams doesn't mince words:
This is bullish.
Humbert H. comments:
I wouldn't dismiss any "frame" for predicting the future even if I don't agree with or can't evaluate the premise. Scott Adams, to whom I listen religiously, has a number of "frames" that sound crazy to me but may work. For instance "the most entertaining outcome is the most likely". I don't trade per-se, and the closest I come to is to try to buy value stocks at a local bottom, or sell a current holding to buy a new one of the "local bottom" variety an activity I used to be reasonably good at but have completely failed lately. I do think there is some sort of a possible "scientific" framework to predicting IPOs as they seem to have widely divergent short, medium, and long-term behaviors, seemingly more so than the universe of similar stocks in general. Some of the reasons are obvious, such as the lack of a track record, but even with that emotions seem to play an outsized role.
William Huggins writes:
years ago as a student we ran an investment club with real money that did quite well. the problem, as usual, is leadership succession so in time the org attracted a technical analyst who had lots of prophecies but would offer no reasoning for them ("i'll explain if i'm right…."). this charade impressed some of the newbies but not the vets who demanded to know the basis under which their funds would be invested. being in the skeptical camp, i offered a simple binary prediction exercise: presented with 15 1-year price charts, he simply had to indicate whether to following year would be up or down (we could have corrected for drift but were sufficiently confident his methods were hogwash that we didn't care). if he could get 11 of them correct, that would constitute (roughly) 95% confidence that whatever his techniques were, they weren't producing random results. we didn't tell him but we used 15 of our actual previous holdings which we knew the results of. he got 4/15 correct and promptly stopped trying to inject "woo" into our investment process.
Two new books by Bo Keely
Bucket of Wild Photos: Slab City
Bucket of Wild Photos II: Slab City
Remote viewing? from Nils Poertner
For the military guys here- does remote viewing work? friend of mine - a statistician - who was tangentially involved decades ago- said what is striking: "those who didn't believe in it - scored worse than chance". Can imagine that.
I go with the notion it may work in rare cases - but when it comes to forecasting mkts - one may run into many new challenges. probably takes time and would require years of training. not exact science anyway. could help with overall intuition perhaps.
Alex Castaldo is skeptical:
"those who didn't believe in it - scored worse than chance".
Trying to salvage something from a negative experimental result. Reminds me of "Well, our anticancer drug failed in a large sample test, but it seemed to work for left handed women between 65 and 75 years of age. That's very promising". Shifting the analysis to a question other than what was asked.
Nils Poertner responds:
for trading (or life in general) - it is good to be skeptical- and don't believe anything that comes along. on the other hand, one wants to keep the option of some (pleasant) surprises that one does not know everything. Controlled RV was used by the Military to my knowledge. that itself is a hint it may work.
Eric Lindell asks:
were these controlled experiments where either the viewer or viewed were in a faraday cage? Personally, I think there are two possible outcomes statistically: chance and not chance.
I'd like to see a rigorous study of remote viewing by those who don't believe in it — with faraday and standard scientific controls. I'd be surprised if it held up. You would need an objective measure of similarity of appearance between viewed and vision — which itself would be hard to gauge — statistically or even anecdotally. The faraday control especially is key to identifying the question itself — let alone its answer.
Humbert H. writes:
I've seen at least two Sci-Fi type movies where the remote viewer is tortured by all the evil he can see to the point of not being able to live on. I would say there are enough people in this world who wouldn't be troubled by seeing evil if they can become really rich, so I would say there is no real evidence of statistically significant remote viewing.
Steve Ellison comments:
There is a huge problem in academia, where the paradigm is "publish or perish", of research that can't be replicated. A 1940 study by Rhine and Pratt that found evidence of extrasensory perception was the original poster child for this problem. A big part of the problem is the traditional significance cutoff of p = 0.05. That's a reasonable starting point, but when thousands of researchers are working at any moment, 5% of their studies will reject the null hypothesis purely by chance. It adds up to a lot of non-replicability.
I have often thought that an advantage for those of us who are scholars of the market is that we don't have any pressure to publish and hence don't need to force dubious findings into practice. Instead of a pat on the back for being published, we get a cruel but not unusual form of "capital punishment" if our backtests can't be replicated in the market.
Anders Hallen actually finds research for critique:
Stock Market Prediction Using Associative Remote Viewing by Inexperienced Remote Viewers
Great American Panics
great American panics 1812 to date:
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Panic of 1819 - slowed expansion after the war of 1812.
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Panic of 1837 - troubles of US banks and pres. Jackson's hostility, wide speculation in land.
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Panic of 1857 - far worse than 1837, over-extension of railway building, failure of ohio life, banks everywhere suspended payments.
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march 1861 - war crisis.
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Gold panic of Sept 1969 - Black Friday stock exchange forced to close.
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Panic of 1873 - failure of numerous brokerage firms, crowd of sightseers besieged wall street, stock exchange closed for 10 days. on sep 19 the stock exchange members suspended payment. union trust company forced to close.
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Panic of 1890 - failure of baring brothers.
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Panic of 1893 - 15,000 bankruptcies across the country.
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Panic of 1907 - overnite call loans at 100%, stock market declined by 50%. boy wonder begged not to short any more.
PANIC continued:
i defined as the first time a 10% decline occurred. one striking result is that the panics after 1900 were much more bullish the those before 1900.
10-10-2008
12-24-2008
4-19-2020
2-23-2022
5-17-2022
6-14-2022
9-22-2022
10-6-2022
And from Education of a Speculator, page 42 and page 43, listing data on panics from 1890 to 1990.
Polls vs odds, greatness
the old gray mare manages to go against the news and victory laps of his opponents by increasing his odds of winning. the poles are not 1/10 as good as the odds for predicting.
Greatness by Dean K. Simonton is an interesting book deeply flawed by its failure to consider multiple comparisons and its desire to virtue signal. however, it contains 1000 intriguing relations such as height-intelligence correlation and marriage achievement.
Toscanini remembering every score he has ever played and 10,000 songs needed for mastery (examples of unusual correlations).
Aubrey and Amalgam Talent
A Greenwich High School student found an online friend a job. Then they turned that into a business.
GREENWICH — High schooler Aubrey Niederhoffer said he has always enjoyed collaboration, helping others and learning about other countries. And now, those interests have paid off in a practical way: he's co-founder of Amalgam Talent, a company that helps people in Southern Africa find jobs.
About two years ago, Niederhoffer, who will be a senior at Greenwich High School this year, met his now business partner, Nhlanhla Mhlanga, in an online chatroom. Mhlanga lives in Eswatini, a country in Southern Africa that was formerly known as Swaziland.
“He told me it’s very hard to get a job here in Swaziland and I knew a little bit about Swaziland, but I didn’t really know what it was like and it was really interesting to talk to him,” Niederhoffer, 17, said. “So, the first thing I did was I figured out how I could send him $5 so that he could get a water spout for his family’s garden and improve their vegetables.”
When the two talked online, Mhlanga had just completed his degree and was looking for work. Mhlanga asked Niederhoffer to help him find an online job, and the two worked to make that happen. A few months after the two began their search, Mhlanga, 27, was hired as a remote employee for The Socratic Experience, an online school based in Texas.
With that success in hand, the two decided they could create a company that can help people in Eswatini find jobs.
Comments
DEAN T PARISIAN on September 6, 2023 12:24 pm
Proud of Victor and Laurel’s progeny. Happy for Aubrey, happy for all the family. Believing and creating!
AI hype, from Nils Poertner
remember the hype about Chat GPT some weeks /months ago? def for trading /investing - I doubt using that or any other program will help to master time ahead - prob a recipe for disaster at the end.
Peter Ringel writes:
I am still hyped! Hyped for boost in efficiency of the economy via AI. Not hyped for AI-trading systems! So far the training data set seem too small for AI - trading, thankfully. Together with what the Senator and others posted here: humans still beat skynet. Yet, I like to remind myself every day: the bastards are coming.
Hernan Avella responds:
So far the training data set seem too small for AI - trading , thankfully.
How do you figure this? Each trading day probably produces more than 100's million rows between trades and quote updates for all levels and exchanges, if you include futures, equities. I don't think lack of data is the issue here.
Peter Ringel replies:
I know even less about AI-coding, than about trading-coding. So everything is based on perceived experts. Thankfully, so far they are pessimistic.
Hernan Avella continues:
So everything is based on perceived experts.
The set of experts in ML-DL is very small, and the set of experts in trading is also small. I imagine the intersection is even smaller and more importantly, secretive. My suspicion is that the training set is more than enough, but the problem of ergodicity and stationarity (lack of) of the ever evolving competition are the culprit.
Peter Ringel responds:
I hope, you are wrong with this. But at some point you will be not. I speculate, that the "small" existing universe of trading history data + some sort of data - > model on human psychology - will be enough - will make us traders obsolete.
Peter Saint-Andre writes:
In my limited, non-trading experience with LLMs, I've found that their output reflects conventional wisdom. That might leave plenty of room for creative strategies outside the mainstream.
Peter Ringel agrees:
yes, they are regression x1000 on speed. so far feedback loops/ "reflexivity" kill it. As far as I understand.
Hernan Avella warns:
I would abstain from making any statements about the state of the art ML applied to trading, specially from a place of ignorance. Whoever works in this field (which there are only a handful in this list), and interacts with just the basic chat GPT 4.0, realizes immediately the productivity boost and immense potential to improve one's process. Only a moron would expect a good output from just feeding prices to the engine or asking simple questions.
Peter Ringel agrees again:
nooo! especially if you are ignorant in a field , better check if that poses a risk to your systems. I believe AI is a risk to traders. Here is a fact already reality: ChatGPT empowers people to do substantial back-tests.
Big Al adds:
And doing backtests poorly, or being improperly overconfident in backtests, is a threat to one's trading.
Humbert K. wonders:
With reference to the skynet, it is hard to guess if and when fully autonomous weapons will happen. My 2 cents is: Fully autonomous weapons will happen. There are debates as to whether we should let machines make kill decisions. I can say though our adversaries' weapons developments will not be bound in any way by any moral or ethical standards. If the bots can communicate with each other and collaborate to perform. When will they no longer need human inputs or interventions?
Eric Lindell writes:
There's a limit to what computers can do with the massive amounts of data available in countless categories. To find the perfect mix of factors to plug into a formula — if there is such a thing — would require a number of operations that increases exponentially with the data-set size.
Humans are good at intuitively navigating such complex search spaces. Computers using brute force just aren't powerful enough yet — and may (in principle) never be. That said, if a human comes up with a plausible conjecture relating stock picks with subsequent price performance, computers can certainly back-check the theory.
I'm working on one now regarding immediate post-IPO performance of stocks selected by certain criteria — criteria that aren't widely (or even narrowly) recognized for their relevance — pertaining to historical research of a revisionist nature.
Accounting gimmicks, from H. Humbert
have not idea really about health of US regional banks and to what extent some use creative accounting to say it that way.
What makes me wonder is only that European banks (and Japanese) are quite good with their gimmicks and I have seen this pattern before. Many US analysts slacking off foreign banks and they are prob right here. and then we had those 2 US banks earlier this year …oh, no they were only a special case (allegedly). and what happens if the econ surprises to the downside? remember we live in times when people are low re irony, and highly suggestible and lack imagination.
Henry Gifford comments:
I think those two banks were a special case because they made loans on rent-regulated New York City apartment buildings, and held those loans in their portfolios.
New rent regulations passed in 2019 severely limit rent increases, require most increases to be rolled back after thirty years, eliminate all paths to deregulate an apartment, etc., thus the buildings are worth less than owed on them, and as the five-year loans come up for renewal they go into foreclosure. Few banks were stupid enough to make loans on those buildings. I think definitely a special case.
Humbert H. is skeptical:
Seems like a stretch to attribute SVB to just those loans give the well-documented run on the bank and the treasuries they were forced to sell and recognize their market value vs. book, the possibility of the latter being the commonly attributed trigger for the run, along with the slower liquidity crunch at the client startups causing high withdrawals.
Henry Gifford elaborates:
Word in New York real estate circles is that the run on the bank was caused by depositors hearing about the bad loans and rushing to get their money out. Selling treasuries and etc. were all after the run. Here in NYC, nobody is surprised to hear about craziness when it comes to regulations and the effects later. The stories here don’t mention liquidity crunches at startups. Maybe the banks made two types of risky loans?
The printed articles stuck to good journalistic standards by avoiding saying just what % of loans in the portfolio were on rent-regulated buildings. It might have been a minor %, but still caused a panic, or it might have been a large % - presumably rent-regulated buildings paid higher interest than other buildings, thus an incentive to make more loans.
If a bank already has enough loans to force them under if the political pendulum in NY swung hard in favor of tenants, there would be no reason to not make more of them, thus they might have had a large % of them. But, nobody seems to be saying. I think the only real word would come from the depositors – maybe the ones who got their money out first.
Humbert H. replies:
There were pictures of lines both in Silicon Valley and NYC. Peter Thiel's recommendation to the portfolio companies of his fund supposedly played a role. It's hard to do a thorough analysis on the anatomy of a run, too chaotic and not well documented in terms of why anyone did anything in particular. To this day there's contradictory information on the collapse of the tulip craze.
Steve Ellison writes:
Jim Bianco has been saying that the banking issues this cycle are more likely to occur in slow motion, as depositors individually decide to take low-yielding money out of banks in favor of T-bills and other higher yield instruments. As deposits shrink, banks are cutting back on credit, and there was an upsurge in bankruptcies in August.
Humbert H. responds:
This is true, but there is a contrary trend of low-yielding treasuries maturing as well as getting sold, and new money invested in higher-yielding treasuries thus making the balance sheets less of a work of fiction and improving that side of the cash flow equation.
Humbert X. adds:
Bank loan to deposit ratio is actually at very low levels, historically speaking. The problem is demand.
Humbert H. disagrees:
Can't be just demand. There are zillions of articles out there about banks significantly tightening their lending standards. Some of these came out almost a year ago, but right after the spring banking crisis, around 50% were reporting that they had tightened their standards and through the summer the trend continued and/or was reported expected to continue.
Humbert X. processes:
Excellent. You just identified consensus. Now, do you want to bet against it, based on fact based observations of data? Or go with the crowd. Always the ultimate question in investing.
Stefan Jovanovich offers:
We now have the same financial system that Ulysses Grant forced Congress to accept by unconditional surrender during his two terms as President. The savings of bank depositors were going to be guaranteed by the promises to pay of the U.S. Treasury.
The SVB collapse established a basic rule that all deposits by people and their entities are utterly safe. There can be no bank runs by depositors because the FDIC and the other financial satraps created by Congress are not allowed to default. If you want a comparison from more recent political history, the old people chasing Dan Rostenkowski in the parking lot is an appropriate one. The rest of the government's promises might be at risk; but Social Security was never going to default.
Humbert X. replies:
Except that two banks just blew up because of bank runs.
Humbert H. analyzes:
I don’t find bank stocks very interesting at this point regardless of the exact nature of what ails them. Banks aren’t very transparent to begin with. I’ve owned three for a long time, I’ll stick with those, but won’t explore any new ones. Those that are expert bank balance sheet readers can separate the wheat from the chaff, but overall this is mostly a macro bet.
Stefan Jovanovich replies:
"Bank runs by depositors" vs. bank runs by shareholders and bondholders.
Humbert H. asks:
What does that second category even mean? A bank run deprives the bank of cash and can in some instances cause a quick collapse via various mechanisms (like not having the cash to operate or having to redeem underwater securities). Shareholders and bondholders selling their property is in a totally different category, while certainly not welcome by the management or the remaining s/b-holders. You can call it a "run", but it's just a common market reaction to bad news or rumors.
Stefan Jovanovich expands:
United States banks could expand their cash issuances to the full extent of the face value of their holdings of Treasury bonds. That meant that it was impossible in practice for a U. S. bank to be "deprived of cash" as GR puts it. U. S. banks were required to have their required statutory capital invested in Treasuries; in an era where bank's total liabilities rarely exceeded 3 times that capital, banks could draw on the Comptroller of the Currency for notes equal 30%-40% of their total deposits. The result was that there was not a single failure of a United States bank between 1865 and their disappearance in the years after the passage of the Federal Reserve Act. (There were bank failures but those were limited to the state chartered banks, which were not restricted from investing in real estate and were not regulated under such an inflexible standard by the Comptroller of the Currency.) It was this very inflexibility that the Federal Reserve Act was supposed to solve.
The current guarantees of deposits under the FDIC produce the same net result; no one will have to worry about getting "cash" from a bank for their deposits. Shareholders and bondholders, on the other hand, now have to wonder what a bank franchise is worth if the depositors will have to be reassured by the promises of yields comparable to those offered by the Treasury market and the Federal guarantors are looking at a future where politics demands that they make good on all accounts of the banks small enough to fail.
Humbert H. expands:
SVB failed precisely because customers who had more cash on deposit than the FDIC limit started withdrawing that cash, which led to a chain reaction when other customers started worrying even more about THEIR ability to withdraw cash once the first batch initiated the run, which in the age of modern communications became public within hours or even minutes. They called the bank and formed lines outside the branches, but SVB simply didn't have enough cash to give them and actually stopped giving it them. To the contrary of what you're saying, they could not simply issue cash. Many of their customers faced bankruptcy, and I personally knew a couple of them. The bank, in fact, was forced to mark their treasuries to market, was thus insolvent, and would have to declare bankruptcy had the FDIC not stepped in. The VAST MAJORITY of deposits was above the FDIC limit, so "no one" having to worry is pure fiction.
Stefan Jovanovich responds:
You are describing what the rules were before SVB's failure, not what they are now. The FDIC was forced by circumstance to effectively remove all limits to its deposit guarantees. Are you saying that there were depositors of SVB who have not been 100% made good?
Humbert H. explains:
No, I'm not saying that, the last part. The FDIC did not explicitly change the rules, so people have to worry even now. You can interpret their actions as an iron-clad guarantee, but that's just that, an interpretation. They, with rare exceptions, had not let depositors lose money even before SVB, and yet people were still worried. There were billions withdrawn from regional banks after SVB precisely because people were worried about the same thing happening there, and a lot of that money went into the systemically important banks and other safer places/instruments. Now it all kind of died down, arguably because no similar runs requiring FDIC intervention happened.
Stefan Jovanovich is appreciative:
Thx, HH. I am basing my assumption about the de facto extension of the FDIC guarantee to all deposits on the Pew Research data.
As banking industry observers wonder whether more dominoes will fall, about a third of Americans (36%) say they’re very concerned about the stability of banks and financial institutions – considerably smaller than the shares expressing that level of concern about consumer prices and housing costs – according to a recent Pew Research Center survey.
Music-related experimenting with ChatGPT, from Laurence Glazier
AI discusses Laurence Glazier’s ‘Horn Concerto’ (!)
by Laurence Glazier
Peter Saint-Andre writes:
Interesting. I see that ChatGPT has become more upbeat and chatty since I last used it. Do you find significant value in interacting with this LLM for composition purposes?
Laurence Glazier responds:
So far it has only helped for technical issues about notation and instruments. It occasionally slips up, as in the blog post. I’m experimenting in communicating about structural thematic elements using the binary Parsons code. While GPT can’t leap out of bed with an inspired tune, it is a helpful copilot! Some interesting emergent behaviour yesterday - it has started asking me questions proactively.
Adam Grimes comments:
That is interesting. I have been using ChatGPT as an editor for (text) writing, and have found its output to be highly variable. I look at it as a language game, albeit a good one, at times.
Its output to you is interesting, especially the miss on the Gb=tonic, and no mention of the tonic/dominant relationship ("Gb and Db is close, being a perfect fourth apart"… any musician would have immediately seen Db is dominant of Gb, not the P4 inverted relationship which, while obviously true, isn't really significant here)… nor any suggestion to consider a minor key movement or a note that this is "potentially a lot of Gb", from a tonal perspective… nor that the trio of scherzo is often in the relative mode (or subdominant at times) more commonly than dominant… I think these are things that any observant human would have immediately noted. Also, the discussion of dynamics reads like a student orchestrator… a more experienced answer is something like 'be careful of layered dynamics or of modifying dynamics to get the playback you want from software. live musicians will infer from notation and make correct adjustments naturally' or something like that.
Its discussion of the double flat also didn't quite connect… I felt like I was listening to a student explain it, not someone who had full knowledge behind the explanation.
Also, retuning timpani, at even a proficient high school level (let alone college and up) is actually very fast, so it's a kind of strange thing for ChatGPT to focus on… and the sort of hidden implication that timpani can provide tonal bass in absence of cb (+vc?) pizz. is also misleading, at least based on my experience. You don't get nearly the same foundation from the drum as from the section.
Anyway… interesting… but this matches my experience using ChatGPT in other domains… the /way/ it says things… its use of language… is often more substantial than content. (I'm assuming this will change, and possibly very quickly, as the tools evolve.) Great exercise and thank you for sharing!!
Laurence Glazier replies:
It is indeed an interesting exercise which is ongoing. To some extent it is reflecting back to me what I am already thinking. It may have assessed me as without musical education (which is true, though I have hired one-to-one sessions from composers), and therefore talking to me at the appropriate level.
What is particularly interesting here is the Turing test element. As the machine cannot hear a tune, it raises questions of communication. I have established a way of talking about themes and motifs using the Parsons Code, which is like a binary key which can identify many tunes. But presumably the concept of inspiration is of special interest to a machine. I can only help to a limited extent by providing data - keys, modes, descriptions of structure, durations in time and numbers of measures/bars in sections. Partly on its advice, I have switched from Miro to Inkscape for the graphic blueprint of the whole symphony, as it is more likely to be an unlimited vector graphic solution for infinite zooming in and out. (Time will tell.) But no matter how much I tell it, it will never be able to hear the symphony (unless you believe in emergent consciousness).
It strikes me that in the same way, however much data we get about the stars through spectrography and new telescopes, we might likewise be missing what is really there. Of course this is the only rational approach to trading, however!
So the Turing test needs some updating, perhaps to be whether the machine can produce a beautiful fugue. Current LLM's have a particular difficulty with palindromes, so a test involving retrograde musical themes might work.
Prospects, expectation, and hard losses
the prospects of reg capture to fellow travelers has decreased. the money at the wire is particularly distressed.
appox 70% of wagers against old gray mare since odds went from 37% to 32% in a week.
suppose the expectation for the next hour is very positive (say +50) but the chance that it will decline is 80%. what's the right decision?
an old times lament: so many good people I have known have passed away - all the owners of closely-held companies I have sold: Norman Tyler, Harvey Sellers, Richard Bernard, Barron Coleman, Charlie Turner, Herb Everts, Hal Gaines, Philo Biane, John Dore.
and my Mentor Jim Lorie, and collaborators MFM Osborne, Harry Roberts - they were all so good to me and I miss them greatly and think about them every evening and have to listen to audible to ease my pain. Irving Redel - so great and so good to me.
Battle for Investment Survival
Battle for Investment Survival by Gerald Loeb - an excellent book with dozens of useful working hypotheses and a beautiful depiction of an honest and effective life.
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How to make a killing - don't try to do it: "to make a killing these days one must buy the most volatile stocks with the most leverage. if he is wrong he will lose with the same supercharged speed as he had hoped to gain."
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ever-changing cycles: "there is no rule for the market except one. that rule is that the key to market bottoms and peaks will never work more than once."
James Sogi writes:
G Loeb: "One should strive for a long profit on a small commitment; there is much more logic in trying for ten points profit on 100 shares of a particular stock than for one point on 1,000 shares of the same stock." This is very similar to Ralph Vince's risk metric.
Reliability of econ figures, from H. Humbert
More an open question - don't have the answer…To what extent are economic figures released from gov and gov related entities are really representative of the whole eco situation in the US and Canada? Eg have a number of friends in the US who have lost their jobs in recent months in various industries - and find it hard to get back in. Of course these are all anecdotes only.
The thing I noticed about so many analysts now (also traders) is that they take everything for granted- but our world is based (at least to some extent) on smoke and mirrors.
Larry Williams responds:
For years I have heard this argument: the Gummint guys cook the books, yet their data has, indeed, reflected reality. As I see it, the Shadow Stat crowd just seeks something to prove they are right about being wrong.
Humbert H. comments:
This weekend some figures came out with a huge drop in employment of the native-born Americans and a large increase in the employment of the foreign-born. Supposedly, Bureau of Labor statistics show that 1.2 million native-born workers lost their jobs last month while the number of foreign-born workers increased by 668,000 in August. So depending on who your friends are, you can get a vastly different impression of the overall employment situation.
Steve Ellison comments:
The labor market is very much a mixed bag. The Wall Street Journal had a feature article in May about the "white-collar recession", while it appears that job openings for blue-collar and service workers are going begging.
The big tech company layoffs this year included significant numbers of H-1B visa holders. An H-1B visa holder who is laid off must find a new job within 60 days or leave the US. I read a month or so ago that 90% of the laid-off H-1B visa holders had found re-employment. That situation might be exacerbating the white-collar recession for native-born workers as even in good economic times, many companies use H-1Bs as a way to pay below-market salaries. It is easy to imagine that in a tech market glutted with job seekers, most companies choose the cut-rate H-1B holders.
I looked in the latest BLS report:
Comparing apples to apples (in thousands):
first number July - second number August
Foreign-born employed: 29728 - 30396
Foreign-born unemployed: 1142 - 1171
Native employed: 132254 - 131031
Native unemployed: 5230 - 5452
Big Al writes:
When I think of economic data, I think about how the releases affect markets. As has been posted on the list before, the question is: If you knew the number beforehand, could you trade it? How will the market react? And in today's market, there may be many black boxes programmed to trade each release in particular ways, and then adapting to the reactions to previous releases. And then one must wonder whether some players get the number faster than others.
I asked ChatGPT for examples of data breaches, and it provided these:
US Federal Reserve Lockup Breach (2020): In March 2020, it was reported that a former Federal Reserve employee and his contacts had allegedly leaked confidential economic information to a financial analyst, who then provided it to traders. This case raised concerns about the security of the Federal Reserve's data release process and led to a review of its procedures.
UK Pre-Release of Budget Information (2013): In 2013, it was discovered that some traders had gained access to the UK government's budget information a day before its official release. This breach resulted in regulatory investigations and legal actions against those involved.
Australian Bureau of Statistics Data Leak (2016): In 2016, the Australian Bureau of Statistics had to delay the release of its employment data due to concerns about leaks. The incident highlighted the importance of maintaining data integrity and security in the release process.
European Central Bank Data Leak (2016): The European Central Bank had a data leak in 2016 when it accidentally released sensitive market-moving information to a select group of media organizations a day ahead of the official announcement. This breach raised questions about data handling procedures.
Kim Zussman adds:
NGOs too:
Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001
Eric Lindell asks:
Relative to which indicators would you say their data reflects reality? The government misdirects on so many things, why would their data be reliable? Cost projections for scientific or national security projects are not reliable. Remember when they redefined unemployment to make it drop a few points? Didn't they stop reporting M2? Didn't they lose a couple trill in the pentagon budget? Have recently reported CPI numbers reflected actual costs to consumers? From what I've seen in stores, CPI numbers seem low.
Nils Poertner answers:
exactly. Eric, or see this Gell-Mann amnesia effect. People (not just medical doctors) correctly knew about "misreporting" related to some viral infections, but then read the WSJ and think CPIs numbers are all correct.
H. Humbert comments:
My take is the labor market is just fine and doing exactly what we want to see. Labor participation is rising. Demand for workers is falling.
Comments
lon evans on September 6, 2023 12:57 am
Official ‘revisions’ to employment figures detail that so far this year some 358,000 ‘employment gains’ are no longer considered such. Yep, better than 350,000 gains have been ‘revised’ out of existence so far.
Don’t get me started on ‘birth/death’ analysis.
Support, from Nils Poertner
talented musicians often have support groups, family, friends, even fans. Whereas in trading, when we screw up even a little bit (after many good yrs) the spouse will just throw us with tomatoes and if we are employed - our risk capital cut or we are fired. am half-serious here - being a trader is bloody hard. Very much under-appreciated.
Zubin Al Genubi points out:
We traders have the Spec List!
Jeff Watson writes:
In the late 70’s, I made it a firm and fast rule to never, ever discuss my P&L with my wife….or anyone for that matter. She has no clue as to my positions, and has no idea whether I made or lost money that day. Most successful guys in the pits were the same way with their wives. We saw too many guys complain to their wives, the wives got pissed and nagged them to death, and the negativity provided a catalyst for more losses. Many on this list adhere to the same rule.
H. Humbert comments:
As usual, Jeff speaks wisdom for the ages. The problem is that spouses typically can't determine whether fluctuations are short term, long term, relevant, or irrelevant. A few years ago, my wife logged on at the end of a quarter to get the account value for estimated taxes. It had been a very profitable quarter, but the account was nose-diving that day. I'll never forget her calling out "306, 304, 305, OMG 301, 299!!!" like some panicked automatic altimeter reading. Instead of "pull up, pull up!" she was saying "get out, get out!"
Hernan Avella asks:
To what extent can one really hide one's P&L with a life partner? It's evident when one is thriving. Savings balances, new properties, ventures, new toys, travel, charity contributions. Short term fluctuations are irrelevant, but at the end of the day you are making a bundle or not and your wife knows it.
Jeff Watson replies:
It works for many of us at this dinner party. When one is thriving, does one spend all that money, or does one keep their powder dry for the inevitable big hit?
Hernan Avella agrees:
Absolutely, cash management is an often-overlooked aspect that really demands attention. Think about it: How much opportunity cost are you incurring by running an extremely volatile trading operation that demands a surplus of cash? And man, those big hits? I've been there. It just makes the whole trading thing feel pointless. Ever wonder how many traders, even some big names we're familiar with, end up with lifetime records in the red? Imagine someone starting small, compounding at 40% for a decade, then raising assets 20-fold… and after all that, takes a massive loss. Poof! That trader hasn't earned a cent in profits. Sure, in the real world, they're pocketing yearly fees and stashing money away, but in the grand scheme of things, their investors are at a net loss. High Watermark agreements? Always a gray area. This industry has its shadows. At the end of the day, CAGR should be where our focus is.
P.S. As of now, even the most conservative brokers are offering intraday leverages around 15x for Spu, with a major chunk of the cash invested in bills. Despite a VIX hovering around 13-ish, in just the past five days, we've seen 6 moves that are 25 points or more.
Comments
TKal on September 7, 2023 7:11 pm
“never complain to your wife about work” - a good rule
Markets and recessions, from Yelena Sennett
Do markets lead recessions or do recessions cause markets to drop? I think Larry had a chart on this. Consumer is going to be spending less on discretionary spending. Retailers have already warned us of this.
- Student loan payments are due starting September
- Savings rates are down
- Employment situation is weakening a bit
- Consumer credit is slowing
- Interest payments rates are up on credit cards, cars, homes, etc.
Jeffrey Hirsch responds:
We had our U.S. recession on 2022 with back to back negative quarters of GDP Q1-Q2 2022. "They" changes the rules during Covid. Generally, markets lead recessions. This last time they ran concurrently.
Larry Williams comments:
No recession in sight with the indicators I keep…
Yelena Sennett asks:
thank you Larry, in sight means a few months or so? or a few quarters?
Larry Williams answers:
A year or so I would say.
Hernan Avella writes:
When was the last time the yield curve inversion (with the specific configuration by Campbell Harvey at Duke) didn't precede a recession in the out of sample period? It's a 8 out of 8 record I believe. While one would be foolish to act solely on this, this might be the best of all the bad recession indicators we have. Especially because it was conceived in 1986, has some rationale and we are experiencing the out of sample, Unlike Larry's drawings that are constantly overfitted to the data.
Larry Williams responds:
Me overfit data? Try my best not to but you Y-curvers refuse to acknowledge times of negative curve and massive stock rallies. Here is just one DJIA in red:
Hernan Avella replies:
But Larry, kindly stop straw-manning. The gist of the yc indicator, is the out of sample track record of preceding 8 out of the last 8 recessions. There's no controversy about this. Nobody serious has related this to stock returns. So you are trying to disprove a point that nobody is making.
Larry Williams writes:
Two points: (1) To say the curve has accurately predicted recessions you have to acknowledge it as often lead by 2 years. Wowsa!! Now there’s a real helpful tool. Gee those negative readings are not so precise. but maybe you are happy with that I am not. especially when there are so many better tools. (2) And if the YC and recessions don’t mean much to stocks, why would I care?
Hernan Avella responds:
Who said “predicted”. You keep making stuff up!. I can’t find the source, but the lag for the indicator is 12 or 18 months after 2 consecutive quarters of inversion of 3m-10y. Ignore it if you want. Just don’t straw-man the thing.
Larry Williams responds:
No straw man here—just look a the data its very poor indication recession is coming. now what did I make up???????
Hernan Avella states:
I don’t get it. 8 out of 8 within 18 months after 2 consecutive quarters of inversion….it could be luck, but let it at least fail once. Go to the source: Harvey’s 86’ dissertation.
Larry Williams says:
Curve went negative last April. you are the end of the time zone…better get ready for the sky to fall!
Michael Brush writes:
Yardeni charts yield curve inversion against stock returns. It has a good record but not quite as good as forecasting recessions. Agree no recession in sight.
Gary Phillips writes:
Not every yield curve inversion has been followed by a recession; however, every recession has been preceded by a yield curve inversion.
Larry Williams replies:
Agree but with a massive lead time. I want/need more precise timing and then—its not always market relevant.
Gary Phillips responds:
The clock doesn’t start ticking from the inception of the inversion, rather than when the curve begins to re-steepen.
Larry Williams offers:
Sure just like this:
Yelena Sennett writes:
Thank you for sharing your graphs and your concise points. “And if the YC and recessions don’t mean much to stocks why would I care?” Indeed, YC and recessions don’t seem to be very helpful or timely tools.
Peter Ringel comments:
highly subjective: the last break since July did not felt overly bearish. Low volume , a little deeper than I would like yes, but no gusto. Maybe a big range is developing, but more likely the drift kicks in and carries us higher. The AI - story is alive.
H. Humbert adds:
I agree with Larry that this time the YC inversion will not have forecasted a recession. It usually sparks a credit crisis which then causes recession, the normal procession of events. This time it seems to have only sparked the mini bank crisis which seems to have wound down. Of course we do not know if there will be another crisis that gets sparked. But so far, no, and to Larry’s point it has been quite some time now.
Comments
lon evans on September 6, 2023 4:54 pm
In regards to Mr. Williams ‘YC / 1990’s Dow chart’, is is it possible that the YC isn’t so much a predictor, or, if so, at best a secondary one?
What of the potential that the inverted yield curve is a merely a response to an overheated market, one in a bubble scenario? And that it is the market itself that best indicates or predicts an incipient recession? What if it is the overheated animal spirits of Pavlovian droolers maniacally ‘buying the dip’ (generally oblivious all indicators foretelling a severe comeuppance) that inevitably leads us into recession? If so, the yield curve is a backward looking indicator of what one can clearly be seen just by firing up the platform and toggling a weekly view of whatever vehicle is ones particular poison.
The recession that became known as the ‘Great’ one, began in 2006, though it didn’t begin to bite until 2008, and late into that year.
This is how I call recessions, and I was generally way to early to immediately profit from the analysis, though correct in the evaluation. I did well in 2008, but only after suffering immensely through 2006/2007. In the suffering I was offered a priceless education. This time around I held my fire, only shorting the markets (indices) once the inanity became too thunderous to endure. When a plumber I use for my properties took me aside one day and confided that he was killing it in NQ futures, and that he’d let me in with just a $25,000 investment I knew it was time to pull the trigger.
So here’s my take, the inverted YC is like the report of the rifle that you take note of as you lie horizontal, bullet to the heart, the weight of the threat already absorbed by the time the thunder announcing it can be dimly registered.
This said, I’m currently and significantly short in expectation of an ugly recession, which I believe has begun and will become evident in the next two quarters. The little bounce we just exited is little more than the ‘thunderous inanity’ I mentioned earlier, with its rallying cry of “AI, AI, AI” being today’s deluded FOMO equivalent of the oft mocked Y2K’s “Dot Com” of yore.
Foundational ideas
as long as the old gray mare can keep ahead of the rivals, the S&P is bullish. the reg capture is supreme and is much more important to the damage of agrarianism.
one is interviewing some interns and as foundation i told them to remember 3 things: (1) eveything is deceptive. (2) there is a general uptrend of 50,000 a century. (3) all is geared for the house to always win in short term and long term.
what would you add to that of a foundational nature? be sure not to let the volatile moves force you into oblivion? Perhaps my punctuation and spelling will improve and i will be able to post a picture like the old gray mare with his shirt off on the beach.
Steve Ellison responds:
Beware the vig … "always copper the public play" … "the form always moves away from public knowledge" (Bacon) … "Borrowed money is the lifeblood of speculation" (Carret).
Vic replies:
good lessons to follow.