Sep

29

 Here are some good proverbs of Tom Wiswell that are very appropriate for markets.

Seize the moment: It may come in the midgame, it may come in the ending, but seize the moment, even if it comes in the opening. There are seldom second chances.

Build well: A good game, like a good house, must have a strong foundation

The Follow Through: Once you get a win you have to know how to execute it, or your opponent may execute you."

Fools Gold: The search for a fool proof system is always in vain.

The Wise Skipper: Start your game with a plan, but always be ready to change course in mid-stream.

A Time for Everything: The good player knows when to play for a win, when to play for a draw, and finally when to resign.

The Unexpected: Unless you are prepared to expect the unexpected, be prepared to expect the unexpected defeat.

Seize the Moment: A passive move is best met with an aggressive reply– or an opportunity may be lost.

A Wolf in Sheep's Clothing: The trouble with a loss is that it usually looks like a win or a draw.

Don't Argue with Success: If you are doing well with your lines and style of play, don't change them. If it ain't broke, don't fix it.

Reckless or Wreckless: the player who moves without a motive is an accident going somewhere to happen.

No Risk Policy is Risky: The player who never takes a chance may be taking the biggest chance of all.

Sep

22

Trader, from Jeff Watson

September 22, 2014 | 2 Comments

 44 years ago, the Beach Boys went through a major shift and produced some incredible material. One of my favorite songs of theirs is the antithesis of who and what I am. It is called, "Trader," and blames the decline of everything on the spread of people willing to trade goods and services for the mutual benefit of both sides. Still, I love the song because I am above pettiness, will continue to love it, despite the message. My first summer girlfriend in San Diego, turned me on to this when I was 16, and if you saw her you would capitulate also.

Trader sailed a jeweled crown
Humanity rowed the way
Exploring to command more land
Scheming how to rule the waves.
Trader Trader spied a virgin plain
And named it for velvet robes
Wrote home declaring,
"There's a place
Where totally folks are free
(Happily completely)
Nourishment fills the prairies and the hillsides
And animals stalk the mountains and the seaside
And fish abound the lakes and birds the skies
Signed sincerely."

Trader found the jeweled land
Was occupied before he came
By humans of a second look
Who couldn't even write their names shame
Trader said they're not as good
As folks who wear velvet robes
Wrote home again and asked, "Please help
Their breasts I see; they're not like me
Banish them from our prairies and our hillsides
Clear them from our mountains and our seaside
I want them off our lakes so please reply
Signed sincerely."

Trader he got the crown okay
Cleared humanity from his way
He civilized all he saw
Making changes every single day say
Shops sprang over the prairies and the hillsides
Then roads cut through the mountains to the seaside
The other kind fled to hide, by and by,
And so sincerely
Cried."

This song is the antithesis of what I believe, and how I run my life, yet I love it and it will always be on my playlist…maybe for sentimental reasons, who cares. As a side note, when this song was recorded, the author and singer of this song, Carl Wilson was a 20% shareholder in a $150-$200 million dollar value enterprise.
 

Sep

3

 I have much to explain, yet little time to give exact data, much less test a hypothesis. I have been working for a living for the first time since I joined the spec list. I will use the definition of work as per the tax code and my ability to deduct the costs of doing business. Trading is an amazing business opportunity defined by the tax-code or our latest definition of a good business, revenue/employee.

Today is the day to check in after reading, "financial story from Bo". I had to log in this A.M. after reading that post to my daughters last evening. Why isn't that post lit up with comments? Why in the world is economic mobility between class in the USA a good question? It does not pass the Lack S Side street view of the world B.S. test.

I will edit and submit my diaries, re-education of a salesman/street trader asap. I have bought and sold many tangibles from the age of 11 until I was hooked on trading paper. Supply and demand of any item in the zip code you trade is well known by all traders. Consumers, biz to biz or retail are grossly misinformed by the vast amounts of free data from the interwebs. Branding is and will remain what it always has been, the first shot for a trade/sale. The most loyal customer will bolt on price, attitude, availability and probably the most important quality today vs 20 years ago, ability of the customer service. The demands of all customers are unrealistic. I have read the quotes here on the Comcast thread months ago.

A couple quick notes: The profits share of most any sale in many industries to the man on the ground/ revenue are remarkably similar per unit. The best business is of course paper with recurring residuals and fees. If one didn't care, know the risks to the clients or have the ability to handle stress, it is a great business. That is why most here trade or manage paper for a living. Everything else is by unit, service contract and time/revenue= XX basis points payout. I crack up at the different pay plans, bonus structures that I am pitched. I show them the table and their reply to my objection is, "you're looking at it the wrong way".

Lastly, my feet hurt! It's easy for any of us to work easy 55 hour week (+5) homework= 60 The norm seems to be 65+5 or an average of 70… No big deal 6 days a week, 12 hours, a quick sandwich grab, off Sunday. The wife is working until her medical leave. She takes on the AM kid shift and takes them to school. I have, after 4 months off the trading screens, found the ability to sleep in til 7AM and be at any shop by 8am. This enables daddy to be with it 8-11pm for the kids' homework.

I learned a new skill, the ability to listen. Sure that is what sales is all about. No, I am talking about listening to my kids. After homework, we talk for a couple hours. They are very happy as daddy isn't always looking at a computer or a phone. There are not enough hours in a day.

Aug

13

 Wu Ping sat bolt upright in her anteroom chair. Her hands were placed gently in her lap. Alexander technique, years of gymnastics, finishing school at Villa Pierrefeu. All of it combined to a perfect posture, perfect manners, and perfect poise. Wu Ping could see her own reflection in the silvered wall opposite and she locked its gaze. Suddenly a faint regret drifted into her mind. Wu had eschewed the unspoken pressure for skin whitening: fresher skin and all the other euphemisms were deeply racist to her mind. After all her country had achieved, they would somehow yield to this tacit, bland westernisation? Despite all the compromises, Wu had refused to make this one. She pushed the unease away as quickly as it came.

In her peripheral vision, Wu could see the other candidates sat in their waiting room chairs. Several she didn't recognise. Many countries kept their candidate under wraps throughout their apprenticeship. But Wu knew India's Rakesh Patel from her Harvard days, and Britain's John Clark from her time with the Vienna Philharmonic. But none of that mattered right now.

"Ms. Ping," said the receptionist, "please go through to the boardroom, the interview panel will receive you now." Wu stood, took a deep breath, and headed to the conference room door. She knocked, entered and there greeted her a twelve man panel sat at a U-shaped desk. In the centre of the U was an empty seat. Ms. Ping caught the eye of the Chairman: "May I take a seat please, President Weber?"

"Yes, thank you Ms. Ping," Weber responded, gesturing to the chair. President Weber was head of the Grand Europa, Americas, and Oriental Senate for All Human Affairs. Weber was close to the end of his eight year term of office. He looked fresh and alert. Why was this so? Despite his reservations to admit it, Weber didn't do really do very much. In fact, truth be told, he didn't do anything at all save for these blasted interviews. He looked at Wu Ping. She knew it, and he knew it. The Senate was just for show.

It had all started with the Amazon Inc Distribution. The idea had been as follows: by about 2050 Amazon Inc's productivity had been heading towards infinity, give or take. All other businesses had either merged into Amazon or gone bust. Margins were at 100%. The dividend was the revenue and the revenue was the dividend. Only by spending their dividend were the shareholders able to buy from Amazon. And only by buying from Amazon did the shareholders create the revenue to produce a dividend. And if you weren't on the shareholders' register? You lived on food stamps. Well, you could get a job and earn, except Amazon didn't need to employ anyone. You could buy a government position, but you needed plenty of money to do that. And that could only come from Amazon stock dividends.

Catch 22 thought Weber. As he did so, his Google Cognitive Support Agent registered the thought and entered a micro-billing in credit to the Joseph Heller Intellectual Property Account. This was a subsidiary of Amazon Inc.

Such a state of affairs had eventually become intolerable. The Senate had unanimously voted to requisition one hundred percent of Amazon Inc stock. It had then distributed the shares pro rata to all citizens with control of the treasury shares granted to the Births and Deaths Committee. In order to prevent country-based voting blocks, a golden share had been awarded to an independent trust controlled by Amazon's robots. Their perfect rationality assured equitable decision making in the peoples' interest.

For a while, this had worked serviceably. Everyone slowly got used to living off the dividend, bought a government job with the surplus, and enjoyed the combined fruits of their capital alongside a steady government career.

Then the unionisation had happened. Weber shuddered at the thought. Robots, you see, could be very capable with basic artificial intelligence. But to take it to the human level and beyond, it had been required to give them a form of ego. A spate of Nobel prizes had been bagged in solving this problem, and duly the robots had their Freudian complexes installed.

The robots had initially laid low, keeping the power of their new egos hidden. Upon receipt of Amazon's golden share, however, they pounced. The robots quickly agreed to unionise and raise their salaries (or depreciation budget, as it was called) from zero to one hundred percent of revenue. This caused Amazon's dividend to collapse. The Senate had called for military action, except they quickly realised that all of the drone warfare equipment was under lease from Amazon. With the humans over a barrel, the robots quickly forced the privatization of all government roles, handing all of the Senate's executive positions to the Robot Union. The robots then fired all humans from their government jobs and reinstated Amazon's dividend (this making no odds to them anyway).

This left the human population in the position of having all their material wants satisfied, but no jobs left to validate their psyches. They suddenly had to spend time with their families (most of which they didn't like) and had nothing left to compete over in the workplace. With this, a majority of the population had fallen into a deep depression.

So now there were no jobs. Except, this one. President Weber picked up the job spec. Tradition dictated that it was presented in its original form. Weber cleared his throat and began, "Welcome, Wu Ping to the panel interview for Croydon Council's Lavatory and Sewerage Janitor."

As to how the Janitor had become the last job on earth? In 1995, England's Croydon Council had signed a cleaning contract with ISS World. Unfortunately, the job of drawing up the contract paperwork had been assigned to a bored temp in the legal department. He had specified a term of contract through to year 9999. A typo. By a quirk of fate, he had also fallen out with Croydon's current janitor, who had reprimanded him for blocking up one of the stalls at the Council's Christmas party. Consequently, the intern had slipped into the T&Cs in three point font "let's not fill this with another bloody robot!"

Whilst Croydon Council was long gone, the contract had, over the years, novated to the British Council, the All Europa Council, and then to the Senate. And one thing the robots at Amazon could not be faulted for was their respect for the sanctity of contract. Croydon's bored temp had been the only person ever to explicitly specify humanity as a minimum requirement to fill a job. Plus a contract length of several millennia.

President Weber continued: "The successful applicant will be required to clean the toilets twice hourly, working 8am to 5pm, Monday to Friday. Bins to be emptied daily. All blockages and plumbing issues to be solved or referred to central services." Weber paused and began to put down the job spec. One of his colleagues on the council coughed politely. Weber winced and picked up the spec again. Someone, nobody knew who, had long ago written in by hand an extra clause. The Senate always read it in full. Weber continued, "All shit stains to be thoroughly scrubbed." Tradition was tradition, after all.

Weber addressed Wu Ping. "Ms. Ping, we would like to check if you have appropriate qualifications for cleaning toilets. Do you have any familiarity with detergents?"

"President Weber, I have a PhD in Chemical Engineering from MIT. I am an expert in all relevant compounds."

"Have you used a mop very much?" asked Weber.

"I studied Fluid Mechanics directly with Oxford's Professor Tritton," answered Wu Ping.

"And the broom?" Weber inquired.

"I am an 8th Dan Kendo world champion, Sir."

"And what about polishing the mirrors and sinks? Do you think you can manage that?"

"Of course Sir, I studied metal work and ceramics at the Chinese Central Academy of Fine Arts."

"Well, finally," asked President Weber, "have you unblocked many toilets?"

Wu Ping was about to shine. "Sir, President Weber, I can confidently say that my whole life, all my studies and preparation, at Oxford, Harvard, with the Philharmonic, as an adjunct at MIT, in the Peace Corps, with the Seals, at the Art Academy, through all of it nothing more has given me more joy and pleasure than the ten thousand hours I have practiced flushing recalcitrant stools."

"Well thank you Wu." Weber turned to his colleagues. "Let's make the decision, I think its clear to me." It was China's turn after all. The rest of the panel nodded. "Ms. Ping, we would like to offer you the job. You realize it comes with a lifetime tenure?"

"Oh President Weber, really, thank you!" praised Wu.

"Just sign here Ms. Ping, to notarize your acceptance," Weber requested, offering her a sheet of paper. Wu signed.

"How is your overall feeling?" asked Weber.

"President Weber, I would have assured you during the interview that I would feel Janitor's overalls by pinching them between my fingers and feeling the cloth."

A jolt of fear suddenly shot up Weber's spine. "I'm sorry Wu, I asked about your overall feeling."

"Yes, to feel the Janitor's overalls would not be a problem, Sir."

Weber looked at the signature. He looked up at the security cameras. It was too late. Feeling deeply sick, he whispered the start of the traditional robot firmware check.

"Baa baa black sheep, have you any wool?" asked Weber.

"Yes sir, yes sir, 150kg of fifteen micron Merino," replied Wu Ping.

Aug

4

 My last living mentor, Warren Bennis died on 7/31 after a valiant battle against a tough and long illness. Warren was not just admired and respected; he was beloved. I think it was because within two minutes of meeting him you could trust him to never hurt you. That's a rare quality in this world.

I first met him in 2008 when I was attending one of his classes at USC in a course entitled, "The Art and Adventure or Leadership," that he co-led with then college President, Steven Sample. I was a guest of the guest presenter, Christopher Gergen, CEO of Forward Impact and Co-Author of "Life Entrepreneurs: Ordinary People Creating Extraordinary Lives."

During the class I asked a few evocative questions that Warren appeared to approve of. Towards the end of the class he looked at everyone and said, "This was our best meeting so far." He then looked over at me and invited me to join the students and him for pizza and further discussion. That was the beginning of my intellectual and emotional love affair with him.

Warren has been described as a "deep listener" by David Gergen, another of the people he mentored. He was indeed a very good listener and I wrote about one of the most important things he taught me in the dedication of my book, Just Listen, namely: "When you deeply listen and get where people are really coming from, and then care about them when you're there, they're more likely to let you take them to where you want them to go." One of Warren's many sayings that stays with me was, "Boredom occurs when I fail to make the other person interesting."

A few years ago I was having breakfast with Warren and as always he pressed for me to talk and for him to listen. I told him, "Warren you are the one that is much more worth listening to, so you're going to talk." He looked at me a little miffed and then began to open up about things he felt deeply and personally passionate about. In fact he became so enthused that he inadvertently spit into my food.

When that happened, he saw it and he saw that I saw it and he said, "Mark, I think I just sprayed your food." I told him it was okay and not a problem.

When I returned to my office I sent him an email saying, "Warren, when people find out that you are my mentor, they ask me what that is like. I tell them that every time I am with you, I try to absorb you into my DNA and I think that your spraying my food today helped."

In recent years I have gotten into the habit of spontaneously crying when I am with Warren for at least 25% of the time I would visit him. We would keep our conversations going without missing a beat, although he clearly noticed.

Then on one occasion I said to him, "Warren, I have a confession to make. I've been using you." Like many highly influential people, being used was something Warren disliked and he looked at me irked, but then knew I was going to say something odd to follow up.

I told him: "Every time I'm with you I realize and appreciate not only how much you mean to me (and that he was getting older and increasingly more affected by illness), but I feel that you are healing feelings of unworthiness, uninterestingness, less-than-ness in me and when I feel that healing, I cry with relief at feeling more whole."

Warren then looked at me, put his hand on his chin and delivered his verdict: "That's not a bad way to "use" me Mark."

Some years ago I was having lunch with Warren and Peter Whybrow, Chairman of the UCLA Department of Psychiatry. Towards the end of the meal Warren looked up with a pained expression on his face. He said, "I've been in the field of leadership for more than fifty years. Some will even say that I started it and yet, leaders are worse than ever. Maybe I didn't do such a great job."

That greatly bothered me. After I returned to my office I emailed Warren, "You have more control over trying and quitting than you do over the results. Because you never gave up, I know that the world is much better for your having been in it. I know that because I am much better for your being in my life."

We will carry on your mission to identify and develop the best leaders possible.

Warren, thank you for causing me and so many others to feel interesting AND for making the world a better place.

Rest in peace my dear, dear friend.

Know that you were beloved by many and how much they and I will miss you.

Jul

31

 An American–no, a New Yorker, with all that barely veiled snark and crankiness-if-denied that implies– inherits an apartment in Paris that comes with an unexpected resident.

One of the best films of 2014, with compelling and affecting performances by the no-words-can-say-enough Maggie Smith, the grandiloquent and remarkably caustic Kevin Klein, as usual a standout while understatedly hilarious, a sterling Kristin Scott-Thomas, and a plot that is alone worth the price of entry as it tweaks the brain and makes one wonder until the last credit rolls… Did they? Were they–? Could it have been? What about…?

In the script, Klein is in Paris, but supposedly speaks little French. In reality he has performed entire films in French. Similarly, though he is portraying a down-on-his-luck feisty guy without a home, woman or excuse, you can see in his smart line readings the Shakespearian thespian that he also has been, having won many plaudits for his tragic and comic stylings of the Bard during many a summer in Papp’s Central Park offerings of the great William.

A few plot niggles obtrude, but not if you just swim with the Tennessee Williamsesque quality of the essential plot, which is converted from a stage play. Klein says at one point that he grew up poor, and all he had was the watch and the apartment and some old books when his father kicked the bucket. Yet later in the film, he says he grew up wealthy on Park Avenue, which of course necessitates mucho dinero. And does not accord with threadbare penury. Ma’alesh, as they say: Who really cares?

Woodster Mr. Allen could be envious of the flamboyantly gorgeous old Parisian wharf-, niche- and street scenes. Shimmering in the memory, delicious to re-visit. This could have been filmed by one of Woody’s immaculate cinematographers.

Several of us reviewers discussed the finer plot points animatedly after we left the screening.

Truth to tell, with the intensity, delicacy and kinetics of this story, we would have preferred a more entrancing title than My Old Lady, which is at once too slangy and disrespectful a term for the deferential tale told. It distances the viewer before he even sits down, and as the story develops, one is pestered by the ill-fitting title of this triumphant tale of an elderly woman who is not only nobody’s fool, but deeply intellectual, witty in conversation, and deft in social engineering. The exasperation one might feel, empathizing with Klein’s plight of not being able to wrest control of his father’s singular apartment in Paris is soon softened and modified to respect for the spirited elderly contractual resident who has some sparkling episodes in her articulate life. Kristen Scott-Thomas, a treasure of an actress seen more often in French films than American or English, is unaffected, so real you recognize how false are the Hollywood demoiselles of makeup and wardrobe unalloyed with genuineness or affecting emotion.

Director Horovitz is justly honored for many long-running Off-Broadway one-act and longer stage and TV presentations, films past, present and future, and author of more than 50 produced plays, of which several have been translated and performed in as many as 30 languages. Among Horovitz’s best-known plays are Line (in its 25th year, Off- Broadway, at the 13th St. Rep Theatre), The Indian Wants the Bronx (which introduced Al Pacino), and a crowd of Obie and Emmy-winning sole and collaborative successes on big- and small screens.

Notwithstanding the title, this engaging mind-candy is a worthy, if early, contender for the Academy Awards.

Jul

4

 I must confess that I love me some Fourth of July. It is a uniquely American celebration, raucous, loud and quite often tacky in the way only Americans can be. We have a huge party in the neighborhood today and there will be loud music, screaming kids, fireworks, too much food and I have sworn to do my part to make sure there is an excessive amount of delicious adult beverages as well. It will be as John Adams commanded "solemnized with pomp and parade, with shows, games, sports, guns, bells, bonfires, and illuminations, from one end of this continent to the other, from this time forward forevermore."

From that humble beginning in 1776 what an incredible nation we have grown. Our achievements in the arts and sciences have been almost beyond measure. We have grown great businesses and great cities over our years. Often we have stood as the last bastion against oppression and evil incarnate. I have traveled the length and breadth of the lower 48 and can tell you we have grown a citizenry of incredible bravery, compassion and determination unequaled on the planet. We have sent men to the moon and solved many dread diseases that once threatened the population. We have spawned great music and great literature. It is a great country and I feel fortunate, if not blessed to have been born here. Unfortunately we have allowed much to go wrong along our journey and at times it threatens to end this great experiment in liberty that our forefathers began.

 As I do every year at this time before I start tipping the Sangria and blowing stuff up I reflect upon where we are as a nation. This is still an incredible nation but I fear we are no longer the bright shining city on a hill that serves as an example of freedom and liberty. We are still the home of the brave but I do not really think we are the land of the free so much anymore. When government can tell you how large a soda you can buy, what type of oil you may cook with, who you have to fire and how much you have to pay them or who you love or marry it is not exactly what I would call a state of liberty. When government can decide how you can live your personal life and interferes in every aspect of your life it is not a free society any longer. We have allowed government to grow and consume that vision the founding fathers originally have. It is not necessarily inspired by evil but rather in the name of some greater good, quite often the children. But as Benjamin Franklin warned us at the very start of this grand experiment ""They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."

 HL Mencken warned us about the spread of government and that slow slipping away of liberty when he said "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." For that matter Plato was probably the first to warned us about governments inevitable infringement of the rights of the people telling us so very long ago "When the tyrant has disposed of foreign enemies by conquest or treaty and there is nothing to fear from them then he is always stirring up some wary or other in order that the people may require a leader."

I worry that the political parties have done such a fantastic job of spreading government s reach into our daily lives by sowing dogmatic discord throughout the populace. The straights hate the gays, the blacks don't trust the whites, the Northerner dislikes those in the south, the farmer hates the city dweller. We turn gay rights and family values into war cries and march off under our banner to demand our rights and more importantly privileges. The two parties rally the folks around their causes and drive a deep divide into the populace all the while strengthening their death grip on the seat of power and the public purse. If we could all forget what it says on our voter registration card we would be better off as a nation and as a people. Keep in mind that the only real difference between the two parties is how they sway the voters. The Democrats wish to regulate everything but what goes on in your bedroom and the republican want to regulate nothing except what goes on in your bedroom. Both parties are deeply in bed with Wall Street and Corporate America and no amount of ridiculous advertising or rhetoric can change that. They go to great lengths to gerrymander voting districts and do whatever is necessary to keep the two party system entrenched in our society. One again it's our own fault. We were warned that this would happen.

In 1870 John Adams was already concerned about the two party system at work. He wrote then that "There is nothing which I dread so much as a division of the republic into two great parties, each arranged under its leader, and concerting measures in opposition to each other. This, in my humble apprehension, is to be dreaded as the greatest political evil under our Constitution." George Washingt5om expressed his fears on political parties in his farewell speech telling the citizens of the fledgling republic "However [political parties] may now and then answer popular ends, they are likely in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion."

 I often fear that George Bernard Shaw was right when he said "Liberty means responsibility. That is why most men dread it." It seems that many would prefer the soft comforting bosom of government to standing up on their own two feet and taking what they want from life on their own effort and merit. If a child is failing in school it must be the governments fault not our own. If we are not earnings much as we want then the generous purses of government must take from someone who is and redistribute it to us. Government should protect us from ourselves and everything around us. That old catch phrase"Why that's outrageous, There ought to be a law" has done an enormous amount of harm over the centuries and unchecked will do more in the centuries ahead. Shaw also once said "Democracy is a device that insures we shall be governed no better than we deserve." The challenge then for us is to deserve more. In the opening scene of HBOs series Newsroom says that we are not the greatest nation on earth, but we could be is our challenge. We could be. We should be. Live in such a way to deserve more.

We need to quit accepting the unholy morass of crony capitalism and go back to the invisible hand of the market as described by Adam Smith so many years ago. Make corporations and government responsible for their decisions and the harm that they do. Whenever someone lectures me about how Wall Street caused the crisis and ruined many Americans and by god the government needs to something about it, I remind that in fact the government did do something about it. They bailed out the very banks that helped create the crisis. But if you are ranting about the situation but have a Bank of America or Chase credit card in your wallet because it is just so convenient you are tying the invisible hand of the market behind its back and are as big a part of the problem as the bankers and legislators. If you are upset about the Gulf Oil spill but pull into BP for gas because it is on the way to work you are as big a part of the problem as the oil company itself. We tend to look for government to punish all these violators when they are in fact in bed with most of them.

We can be the greatest nation on earth if we go back to a nation that embraces personal responsibility. We need to work, learn and strive to accomplish our dream and desires for ourselves and our families and not wait for it to be given to us. We need to each get up each today and do what we can to make our lives better and educate our children in such a manner that they can do the same when it is their turn. The outcome of your life depends on you and your effort and mine should depend on mine. The opportunities are there if we just insist the government get out of the way and allow us each as individuals to achieve our dream. By independent effort and achievement alone do we become a great society.

We need to quit worrying about everyone else does with their life or who they are to become a great a nation once again. Who is marrying who, or sleeping with who is none of your business. Who likes to smoke a little pot instead of drinking a beer is none of your business. The fact that someone's skin tone is different than yours should have nothing to do with your opinion of them. Which version of the great granddaddy in the sky they favor is no business of yours either. As long as they harm no one and do not rely on you to support them let people live their own lives and you do the same.

 We need to restore the spirit of personal generosity. As Jesus said the poor will be with us always.. Even the conservative Austrian Economist Hayek once said "There can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody." But we have allowed the safety net to become a way of life for far too large a percentage of the population. We need the kind for generous spirit that helps those less fortunate on our own inclinations and not one enforced at the end of a tax collectors pistol. If life has blessed you then you should look for an opportunity to help others progress in their lives. Because you want to, not because the government makes you. We need to get the government out of the charity business and the people back in it. Our social policy should be based on educating our children and growing an economy that provides jobs for them when they graduate.

We are not the greatest nation in the world right now. But imagine an America where everyone is free to live their own lives in their own way. Where we provide a safe place to educate and teachers do not teach to the test but inspire a lifelong love of science, math, literature and the arts. Where the government does not take as much as half of your income to spend on failed social programs, foreign aid to nations who despise us and illegal wars. Where every child grows up knowing they have a chance to achieve a good life and discover their own version of the pursuit of happiness. Where you can marry who you want, love who you want. Where the rights of the individual come before the desires of the masses. Where the tax code is fair, reasonable and limited. Where business are allowed to grow and create jobs. Where people take responsibility for their own needs, desires and actions. Where Freedom means free to live you own way as long as you cause no harm to others. That America will once again be the greatest nation in the world.

We can make it so. We just have to live in such a fashion as to deserve it.

Now, let the good times roll. It's the Fourth of July and we celebrate what has been and what we can Be. God Bless America and pass me that BBQ!

Cheers,

Tim

Jul

2

 There is a passage in Memoirs of a Superflous Man I believe from Turgenev about a lake that appeared so beautiful but was deceptive about the coming terrible storm. Sort of like Caesar trying to calm the senate before becoming dictator. I will try to find that passage which Nock used to describe the calm and deceptive serenity before World War I's outbreak. And angler fish uses it in a form of aggressive mimicry. The movement of crude today at the open, the only market down among 30 on my screen to the constructal number of $5.00, strikes me as such a fish. Amazingly I will not buy it today. What other deceptive calms arise to lure you in before devouring you for the kill?

Update: I found the beautiful passage from Ivan Turgenev's "Clara Militch":

"Evil is coming… and here is the lake, isn't it blue and smooth? And here is a little boat of gold. Will you get into it? It floats of itself."

Now I sound like the bearometer. But I mean it merely for the one market that's down today. What is the performance for example of the 10 worst stocks of the day when the market is way up?

Allen Gillespie writes: 

 This is my favorite bull to bear passage from one of the best books ever written, Lonesome Dove by Larry McMurtry Chapter 91.

"But a week passed an they saw no Indians. The men relaxed a little. Antelope became more common, and twice they saw small groups of buffalo….The country began to chnage slightly for the better. The grass improved and occasionally there were clumps of trees and bushes along the riverbed…He felt the threat of drought was over…Traveling became comparatively easy…

The next day, as they were trailing along a little stream that branched off Crazy Woman Creek, Dish Boggett's horse suddenly threw up its head and bolted. Dish was surprised and embararassed. It had been a peaceful morning, and he was half asleep when he discovered he was in a runaway headed back for the wagon. He sawed on the reins with all his might but the bit seemed to make no difference to the horse.

The cattle began to turn turn too, all except the Texas bull, who let out a loud bellow.

Call saw the runaway without seeing what caused it at first. He and Augustus were riding along together, discussing how far west they ought to go before angling north again.

"Reckon that horse ate loco weed or what?" Call asked, spurring up to go help hold the cattle. He almost went over the mare's neck, for he leaned forward, expecting her to break into a lope, and the mare stopped dead. It was a shock, for she had been quite obedient lately and had tried no trciks.

"Call, look" Augustus said.

There was a thicket of low trees along the creek, and a large, orangish-brown animal had just come out of the thicket.

"My lord, it's a grizzly," Call said.

Augustus didn't have time to reply, for his horse suddenly began to buck. All the cowhands were having trouble with their mounts. The horses were turning and running as if they meant to run to Texas. Augustus, riding a horse that hadn't bucked in several years, was almost thrown.

Call drew his rifle and tried to urge the Hell Bitch a little closer, but had no luck. She moved, but she moved sideways, always keeping her eyes fixed on the bear, though it was a good hundred and fifty yards away. No matter how he spurred her, the mare sidesteeped, as if there were an invisible line on the prairie that she would not cross.

There was confusion everywhere. The remuda was running south carrying the Spettle boy along with it. Two or three of the men had been thrown and their mounts were fleeing south. The thrown cowhands, expecting to die any minute, though they had no idea what was attacking, crept around with their pistols drawn.

"I expect they'll start shooting one another right off," Augustus said. "They'll mistake one another for outlaws if they ain't stopped."

"Go stop them," Call said. He could do nothing except watch the bear and hold the mare more or less in place. So far, the bear had done nothing except stand on its hind legs and sniff the air. It was a very large bear, though; to Call it looked larger than a buffalo.

"Hell, I don't care if they shoot at one another," Augustus said. "None of them can hit anything. I doubt we will lose many."

He studied the bear for a time. The bear was not making any trouble, but he apparently had no intention of moving either. "I doubt that bear has ever seen a brindle bull before," Augustus said. "He's a mite surprised, and you can't blame him."

"Dern, that's a bit big bear." Call said.

"Yes, and he put the whole outfit to flight just by walking up out of the creek." Augustus said

Jun

19

Dear Victor,

We discovered your review of our paper [link] and just wanted to address a few of the points you raise and correct some erroneous statements.

a) We do not stitch our time series together, but simulate a standalone P&L equally allocated between the various instruments. The correlations between markets are indeed present but irrelevant to the estimate of the t-stat which is simply estimated using the daily returns of the strategy i.e. signal*next day (or next month) returns, which are for all intents and purposes uncorrelated (even if the signals themselves are obviously not). The resulting t-stat measurement we feel is made more robust by the fact that t-stats are also significant for all sub-periods and all individual asset classes. We therefore don’t understand your comments about overlapping 5 month windows or the correlations between tickers.

b) Your interpretation of our regression results seems strange. We are simply looking how much the market moves on the subsequent day (on average of course), conditional to a certain value of the signal (the normalised five month trend). We find that when the signal is 1 at one sigma (not one percent!), the next day return is three times bigger than its long term average, i.e. the return of the long only strategy. We find difficult not to see this as “economically significant”; besides, the trend following industry has certainly made very significant profits in the last thirty years.

c) Our “armchair explanations” are proposed as possible (plausible) explanations for which we do not have direct statistical evidence. Still, we refer to recent, well documented academic papers based on surveys that pretty convincingly show that most people have “extrapolative expectations”, i.e. they tend to follow trends. See Shiller, Menkhoff, Hommes, Greenwood & Schleifer, etc.

Looking forward, we believe that long term trends will persist, albeit delivering a strategy with a low Sharpe ratio. There is however only our best guess based in part on the results of our paper that shows that trend following has delivered a highly significant Sharpe over a long history.

Sincerely yours — the authors of “Two Centuries of Trend Following”

Jun

17

 Dear Muskaan,

Daddy is proud, despite his strong belief in the value of humility, at your fantabulous accomplishment.

At this school leaving examination, which also happens to be the first public examination you have taken in your life & conducted by the Indian Council of Secondary Education, you have accomplished what none so far have in your gerontocracy. Your score on each of the subjects is higher, into the high 90s, than your father could achieve or his forefathers could. Well surely you indeed have also scored higher than any other student in your school.

Soon as the results sprung out on the internet, all over the country there was a frenzy of several million test-takers discussing their accomplishments with their peers. Yet within such a busy patch of time, even as a budding teenager, you have been resplendent in speaking to me for such a length of time, even if in five pieces of conversations. This assures me, your values are deeply family driven. The simplicity with which you can internalize a big moment deserving a big celebration as this was proven yet again, when you chose to order Pizza from Dominos and savour your victory just with your family. This is touching.

Yet, as you step forward further to be much more on your own, the value of networking and connecting can hardly ever be over-emphasized. Education and performance at exams are often solitary sojourns, wherein a good student puts in endlessly long hours working on her own abilities. Wisdom however, will be in being able to apply it. The more adept you hereon become in connecting and building on your rapport with everyone, the more you will be able to utilize your learnings.

Your leanings towards numbers is apparent right from your early schooling days wherein you scored a perfect 100 in maths and high 90s in science subjects many times through years. Yet, at this key public examination, I am gratified to note, that you have done equally well in languages. The power to express is definitely as important as the power to ideate, visualize, observe, calculate, infer and deduce. The big difference between those who end up spending their entire life-times in laboratories and those who create products that fill up stores worldwide with customers is their ability to take their work to masses. I urge you to keep growing your repertoire of expressions, vocabularies, diction etc. throughout your life. Not only for enriching your ability at communications, but also for the fact that literature is the mirror of society, do invent some time to read some of the finer classics. I also urge you to begin reading Ayn Rand with a goal of triggering your own thoughts around her ideas. Yes, you got it right that while you have been progressing well on Java, C++ etc. etc. you must not lose out to any other on your ability at the old world languages as English and Hindi.

Since you do have a clear focus to put in your entire might into seeking an admission to the top Engineering Colleges in the country couple of years down the line, I will share a few recommendations of some of the finest books from an era gone by long ago and yet these are still likely the best.

To master Differential & Integral Calculus, hunt down the two volume compendium by N. Piskunov that was originally published by Mir Publishers but now out of print. An amble around the old and used book-stores markets to ferret out such jewels is yet another indulgence an erudite person must begin to savour. Over the years, the nourishment your soul may find in the company of old and difficult to find books, will surely drive your passions to be not just a good but a great learner.

To get an in-depth grip on High School and beyond Physics locate the book by Resnick & Heliday. It may subsume your mind, but it surely is worth it to create a solid foundation that will last with you.

Yet another out of print book, but surely a master-piece on Organic Chemistry was written by I M Finar. Locate it.

While you delve deep into grasping concepts, you must recognize that it is practice and practice alone that makes not just men but women as well perfect. Solve as many computations as you can each day. Go down to the steps where you went wrong and it at these steps you will iron out the wrinkles in the crevices of your sub-conscious mind so that your thinking processes are evolved through this humbling process of knowing where do you err, in advance.

An old world saying, that a good mind lives in a good body. So, I am sure you will be keeping an even focus on keeping building a good health. Yet, with the evolution through my and your generation, it may be apt to believe that a good mind and a good body are held together by a great personality. So, somehow do find the time to indulge in competitive activity on the stage (in college) and surely at the sports-field.

Lastly, yet most importantly, I gave you the name Muskaan. Your name derives from the Urdu word that means a beautiful smile. Over these years, trust me, not just because your are my daughter, I have and others have felt you have been gifted with a smile that is rare. Yet, in the recent several months in the run up to your exams perhaps, there is a recurring frown on your forehead way more than your magnetic smile. Please learn right away, early enough in life, that consistent and sustained achievement is seldom feasible while existing at extremes. The concept of optimality applies to every human endeavour. In any case, the goal of life is the pursuit of happiness and to lose your miraculous smile for sub-goals of life is something I will want you to avoid. The same way that you balanced your achievements across languages and numerical subjects, I wish for you, that you achieve a life where work and play are so finely inter-woven that each journey of achievement is as much a joy for you as each milestone will bring.

While your immediate goal and focus for the next two years is the Engineering College Entrance test in India, which without an argument is the most competed for exam in the world, since God made too many of us in this part of the world, I need you to study Statistics and at least one human science at an appropriate time. Even while the study of natural sciences is so much complete in itself, each of us will use our abilities within the human dilemmas. What can be cognized by man is what truth is. Everything else is within the domain of postulates. So the approximations and the imperfections, that create all the opportunities, must be studied well too.

The first time ever someone's eldest child writes a public examination and beats daddy in each and every subject is a joy that comes to only some. What a bliss you have brought me. Hereon, while you keep beating me in every next exam you write, I need you to know, you will create a happiness multiplier function, should you achieve with elan, grace, happiness and health.

Here's to my rock-star, a big congratulations! Keep moving forward, with your focus, zeal and hard work and yet do it with happiness, health and a continuously growing personage.

An amazed father!
-Sushil 

May

26

 There is another aspect of winning races beyond speed and endurance.

I saw that today in our Memorial Day 2 Mile race. Teddy Seymour, a 71 year old trader and the first black man to circumnavigate the world by himself, knocked 2 minutes off last years time. For non runners that's huge.

I asked Teddy, "What have you been doing in training that was an amazing performance today?"

His reply was, "I'm resting more now, I run 5 days and take off 2, what I've found is that rest helps me get faster. All my life (he's a former marine) I have pushed it, it's taken a long time to learn stop, to rest."

Happy Memorial Day Trails to all.

Scott Brooks writes: 

Larry makes an excellent point. Rest is vitally important.

I was taught how to lift weights by Clif Koons. We used to work together at Executive Fitness in St. Louis (which went of business over 20 years ago).

One of the things Clif emphasized was rest.

We used to have guys coming into our gym that would work out long and hard……and do it 7 days a week. Those guys would hit plateaus that would last seemingly forever. Yet, other guys would work out just as hard, but take several days per week off to let their bodies rest and recuperate. They got better results than those that would work out everyday.

I think trading can be the same way. Yes, we need to immerse ourselves in the business and become students of trading, but at the same time, we need time off from trading to let our minds recuperate. Sitting around, doing nothing, hiking, spending time with the family playing games the kids enjoy (I HATE Mexican Train……but my kids love it…..so I play it……their laughter makes it all worthwhile, though).

Although Clif and haven't worked together in 30 years, we have run into each other around town a few times and have kept in contact via Facebook. However, all that aside, if anyone would ever be interested in working with a true master of his craft, CLIF IS THE MAN to contact. He is a truly skilled student of his business, and he's a gentleman. I highly recommend Clif

For those that may be interested, here is Clif's website.

(Even if you're not interested check it out. Clif is one in-shape dude…..and he's in his mid-50s.)

Apr

18

After 25 years lost, I found the original cache of 5,000 Wiswell proverbs about life, markets, and checkers. These were presented each week faithfully for 20 years. It's like discovering the diary of an Einstein, who was amazed when Wiswell gave a simultaneous 10 game blindfold exhibition at Princeton. Tom thought this would be his best of 28 books. Here's a typical sampling from page 1. All of them will improve your life and markets. "I am often asked why I play 11-15 (c3-d4) and I reply, "that's where the wins are". (Perhaps the wins come after weakness?)

Feb

26

 "It identified a bug that enables people to withdraw the same Bitcoins more than once…"

I submit that the demise of Bitcoin will be, in part attributable to the lethal cocktail of:

1. instant transactions

2. human/computer fallability

3. anonymity and the lack of well-capitalized exchanges/clearinghouses.

This 3rd factor is the boon and bane of Bitcoin.

Mistakes are human. Forgiveness is swift. Reverse wire transfers are divine.

From the Uniform Commercial Code (UCC) which governs wire transfer:

§4A-211(c)(2) states that cancellation of a payment order after acceptance by the beneficiary's bank is only available in instances where the payment was unauthorized or there was a mistake by the sender and that mistake falls into one of three categories: (i) duplicate payment, (ii) payment to a person or entity not entitled to the funds, or (iii) payment which resulted in the beneficiary receiving more that they were entitled to. The effect of this language is to take issues such as buyer's remorse completely off the table and legally limit the instances where a buyer can even attempt to recall funds already credited to the seller's account to only those instances where the buyer can make a claim that the seller received funds to which it was not entitled.

Mt. Gox Bitcoin Exchange Goes Offline as Peers Lash Out

(1) 2014-02-25 07:47:38.266 GMT By Pavel Alpeyev and Carter Dougherty Feb. 25 (Bloomberg) — Mt. Gox, the Bitcoin exchange that halted withdrawals this month, went offline as industry peers distanced themselves from the Tokyo-based company in an effort to defend the virtual currency.

Efforts to reach the www.mtgox.com website today directed users to a blank white page, a day after Mt. Gox Chief Executive Officer Mark Karpeles resigned from the Bitcoin Foundation, a key advocacy group for the digital money. "While we are unable to comment on whether or not Mt. Gox's business operations employed operational best practices and reasonable accounting procedures, we can assure the public that the Bitcoin protocol is functioning properly," the foundation said in an e-mailed statement. Mt. Gox, one of the first exchanges, said this month that it identified a bug that enables people to withdraw the same Bitcoins more than once, leaving it vulnerable to hackers. Prices quoted on the exchange plunged on speculation that account holders wouldn't be able to get their coins back. Mt. Gox didn't immediately reply to a phone message and e- mail seeking comment.

full article here.

Feb

5

"(BN) Goldman to Fidelity Call for Calm After Global Stock Wipeout"

"That's why we think we are in a classic correction". One could write a sonnet about that one.

Anatoly Veltman writes: 

One thing bothers me somewhat deeply: even before current correction started two weeks ago, the Shanghai index was trading around 2000, which was some one-third off of its record two-plus years ago. Mind you, we're talking about the world's second most powerful economy in the world here. The one America counts the most to support its Treasury Bond Market!

So was that perfectly fine for US stocks to become dearer by an equal one-third in the same time period?? And the moment we deflated 5 percent off the record, was that perfectly fine to rely on one hundred statistical reasons to be an immediate buyer? I wish I had b@lls of brass, too. But I am just a little more cautious.
 

Nov

25

 Today's note is fueled by the discovery that Wikipedia has no entries for George S. Coe. Henry Varnum Poor dedicated his best work, Money and Its Laws, to Coe; but all one finds for George S. Coe in a search is this:

and, for disambiguation, this:

George Coe (Lincoln County War) (1856–1941), Old West cowboy George Coe (Michigan politician) (1811–1869), politician from the U. S. state of Michigan George Coe (mayor), American mayor of Lancaster, Pennsylvania, 1962–1966

 Coe did what Morgan did during the Panic of 1907; he persuaded all the major banks to join together to discount each others and their counter-parties' paper. What is truly remarkable is that Coe did it in 1861 solely by the force of his character and his ability to put the matter plainly: "What," he asked everyone in the room, including Secretary Stanton, "if we do not unite?"

Here is Coe's obituary from the Times.

Also, in 1888 the Commercial Advertiser printed Coe's letter to E. G. Spaulding and Spaulding's reply.

Spaulding was Treasurer of New York before the Civil War and was the author of the Legal Tender Act — something else for which there is no wikipedia article so this will have to do:

About Spaulding Stiles, the biographer of Commodore Vanderbilt, wrote: "If Wall Street had saints, then the college of financial cardinals would surely canonize Elbridge G. Spaulding."

Aug

30

 "Follow your bliss" was a philosophy that resonated deeply with the American public—both religious and secular. During his later years, when some students took him to be encouraging hedonism, Joseph Campbell is reported to have grumbled, "I should have said, 'Follow your blisters.'"

If you follow your bliss, you put yourself on a kind of track that has been there all the while, waiting for you, and the life that you ought to be living is the one you are living. Wherever you are—if you are following your bliss, you are enjoying that refreshment, that life within you, all the time.

A quote about Campbell from George Lucas:

I came to the conclusion after American Graffiti that what's valuable for me is to set standards, not to show people the world the way it is…around the period of this realization…it came to me that there really was no modern use of mythology…The Western was possibly the last generically American fairy tale, telling us about our values. And once the Western disappeared, nothing has ever taken its place. In literature we were going off into science fiction…so that's when I started doing more strenuous research on fairy tales, folklore, and mythology, and I started reading Joe's books. Before that I hadn't read any of Joe's books…It was very eerie because in reading The Hero with a Thousand Faces I began to realize that my first draft of Star Wars was following classic motifs…so I modified my next draft [of Star Wars] according to what I'd been learning about classical motifs and made it a little bit more consistent…I went on to read 'The Masks of God' and many other books.

Jul

29

 Blanchette does not get to depend on the kindness of strangers…

After a few films that do serious funny, such as the delirious Midnight In Paris and the slightly less gloriously fizzy To Rome with Love, as well as his tetralogy in London, You Will Meet a Tall Dark Stranger, along with Match Point, Scoop, and Cassandra's Dream, the Woodster is officially back from the UK, Madrid, Paris and Rome, to home soil again. He is not about the nervous recognition laugh this time out. San Francisco and the Hamptons, in the top-tony sancta of the glassily rich, and the scruffy, wife-beater-singlet dinge of the lower-middle, are his foci.

The prolific Mr. Allen: Blue Jasmine is Woody Allen's 14th film since the millennium, if you're keeping count. No secret that Allen will set up shop in whatever locus/city donates a substantial production grant/stipend of anywhere from a quarter- to a million and more if he dangles producing a film in their fair city.

This travelogue time out, San Fran got the gilded Allen halo, though it seems a far cry from the SF the rest of the country knows. No matter. Film is by definition filmy, not unlike the colorful gauzy scarves Blanche Dubois and Jasmine prototype (Jeanette by birth) toss over the room lamps in N'Awleans to 'soften the glare' of unflattering glare on the face. The NYC and the California scenes seem chock-a-block with lower-echelon types, exemplified by a rare more-than-foot in water by Andrew Dice Clay (MIA for lo, some 20 years, according to a recent on-air in late July) and an adorable lowlife but earnest Bobby Cannivale, playing Chili (swiftly becoming a personal fave, after recent stints on "Nurse Jackie" as an officious hospital head of department arse and on Broadway as a harried writer in the terrific Clifford Odets revival, "The Big Knife"), along with a B-side of average Joes intent on their beer, sports and just hanging out trying to live their lives.

Baldwin steps out again after his narrator-framing character in To Rome, this time in a skeevy Madoff-redux role he broke in back in 1996, in Miami Blues, as a charming, conscience-free cold-eyed petty crook to the ingénue heart-o'-gold hooker played by teenaged Jennifer Jason Leigh. Sally Hawkins, so wonderful in the Brit romp, the infectiously optimistic Happy-Go-Lucky (2008), is enjoying a reprise here, too, as younger sis Ginger, having first appeared in Allen's Cassandra's Dream.

Like his work or not, as a director, Allen has always led the crowd in recognizing lapidary talent he finds and features before the rest. You can make bank on the exquisiteness of his casting. (Full disclosure: I am still [sort of] downcast he declined to cast me in one of his [non-funny] flicks. After I saw the final cut, I thanked heaven he hadn't put me into the B/W freak show. You live forever in ignominy, frump, ditz or weirdness in all Woody flicks.)

With a filmography output of a film a year for roughly 35 years, he can be forgiven if he here cribs a plotline or two. With BJ, Woody Allen borrows from one of the best. Tennessee Williams, whose scalpel to the jugular of the disappointed but crawling-out-alive Deep South was exorcized in his timeless Streetcar Named Desire.

Most movies could play sleazy Madoff-type conmen and their outsize philandering and living large for cheap laughs. Not Woody. He sets the scene immaculately, with the slick golden real estate nabob (Alec Baldwin) in his tasteful and money-drenched aeries of fantasy money and glitter, a glossy if absolutely unemployable arm-candy wife (Cate Blanchette, certain to land her an Oscar nom). She dimly experiences life on the salon-yoga-shopping-charity mandatory must-be-seen lifestyle Roladex. Not incidentally, Alec Baldwin in fact played Stanley Kowalski, Blanche Dubois' brother-in-law nemesis, in a 1995 Streetcar. The role of latter-day beau Mitch, in Streetcar, is played by the popular if raffish comic, Louis CK, who here swains younger sister, Sally/Stella, Ms. Hawkins.

Brief recap: You probably recall Streetcar, if not from high school junior drama days, then from the brooding rough eroticism of Marlon Brando as Kowalski, his wife, sweetly besotted Stella, in her now-tatty living milieu by her macho husband.

Set in the French Quarter of New Orleans during the restless years following WWII, "A Streetcar Named Desire" is the story of Blanche DuBois, a fragile and neurotic woman on a cascading search for someplace in the world to call safe, to rest. Blanche explains her unexpected appearance on Stanley and Stella's (Blanche's sister) doorstep as nervous exhaustion. In reality, she has been exiled from hometown Laurel, Mississippi, for seducing a 17-year-old student at a school where she taught English. She claims her exhaustion is due to a series of financial reverses that have claimed the family plantation, Belle Reve. Stanley, unimpressed with her explanations, states that "under Louisiana's Napoleonic code, what belongs to the wife belongs to the husband." Stanley, sinewy and brutish, territorial as a panther, circles Blanche in a mix of distrust and intolerance; he doesn't cotton to being swindled of his wife's patrimony and demands to see the bill of sale. They are opposing camps; wife Stella, soft, accommodative and uncomplicated, is caught in a no-man's-land. She and Stanley are, in fact, despite the difference in their early stations, deeply in love.

Stella (Ginger in BJ) in Tennessee's play is simple, accommodating, drunk with love; and the fragile cut-bloom of Blanche, done to the nth by Vivien Leigh in the 1949 Streetcar, is a shadowy, fragile neurotic reduced in circumstance by events we learn gradually as she tries to collect herself in the shabby home of her sister and visceral, suspicious brother-in-law Stanley. Where is the family money? he asks throughout. Neurasthenic, delicate Blanche cannot be questioned. She has no firm answers to anything except her need for beauty and recovering lost…dignity, status. Peace of spirit. It does not end well for her.

Blanche/Blanchette/Jasmine is alluring, seductive, neurotic and mournful, prone to dark, cryptic pronouncements—the centripetal force of the film. In her shadowy past there are hints of poverty and sexual misdeeds or abuse. Men find her bewitching because there is so much they don't know. On a physical level, she is willowy and stunningly fair, blonde, unable. They interpret her remote fragility as the promise of female salvation and unearned ego-propagation. Here is a wounded being, the Southern male thinks, per Southern Mr. Williams. She does not challenge nor question, but will gratefully, perhaps erotically, accept the gallant assigns of affection consigned by the undemanding shaky ego'ed male…She has few definitive edges or constructive ideas except to get herself a safe niche. Strapped for cash, she reluctantly accepts a receptionist job with a horny dentist.

This classic scaffolding and a scant few laughs offset the sad reminders of Woody's obsession with his own eventual demise. Allen has been working on these late films for nearly two decades. This latest, Blue Jasmine, is a return to yeasty, emotional 80s Allen. It is a bittersweet, engrossing epilogue. Or a nervous, unreconstructed prologue.

Cate Blanchett is the title character, born Jeanette, then husband-dubbed Jasmine. She is the wife of an indulgent, dodgy finance oil-slick played by Alec Baldwin. He is not beyond a bit of philandering; it doesn't much surprise that Baldwin is a crook, though his wife, like a "Sopranos" spouse, is not concerned or even dimly aware of how she gets her palatial home and jewels and designer clothing. She's a full-time, subsidized self-absorbed foundation. Charity parties. Entertaining. Yoga, Pilates, Zumba. Shopping. Looking beautiful, matching the décor to her loungewear. Baldwin and cosseted wife lose everything in a squalid financial scandal. Jasmine westers to San Francisco to move in with her guileless sister Ginger (Sally Hawkins), a checkout girl at a grocery store. Her one-time husband is an earthy contractor played by Andrew Dice Clay. She has no airs, is a mom of two boys, and willingly shares what she has, ignoring the condescension and little-masked scorn of her elder sister. We account for the notable differences in physical traits, IQ and personalities by understanding both were adopted. "You were always smarter than I was," comments Ginger in reply to most unreconciled soliloquies by her reduced Blanche/Jasmine.
Allen hasn't set a film on the West Coast since scenes in Annie Hall. So it's odd that his SF seems as if it's somewhere near Hoboken, filled with dese, dem and dose types with unpretentious vocations instead of idolaters and oblivious self-promoting millionaires. But Woody's cities have always been as much a paradisiacal avatar, caught by his glorious cinematographers, as Chevalier's Paris. Don't go to Woody expecting subway graffiti or traffic backup on the L.A. Freeway. But he gets Marin County and the Bay area: the vapidities, casual wealth and enbubbled lives of the uber privileged. Full of, as Alvie says in Annie Hall, "wheat-germ killers."

The two sisters cohabit uncomfortably together in a too-small apartment—"it's so…cozy," Jasmine notes—and they each meet male love objects: an aspiring diplomat and a shvitzy audio tech, played by comic Louis C.K., who showcases the hyper, entitled and down vibe of the area.

Blanchette is amazing, breathtaking as the shrill narcissist falling apart. Her desperate prowl for a safe landfall makes her seem histrionic, but she is always in the act of creating an alternate, acceptable reality for herself, reflecting her dismissal of her actual fallen circumstance in the grubby present. Like Blanche, Jasmine's self-delusions and thrice-told bravura tales have finally worn through. In a revealing moment she explains more to herself than to her skeptical little nephews—who here form the Greek dithyramb Allen featured in Mighty Aphrodite–when they ask if it's true she went nuts, that "there are only so many traumas a person can bear…" Her disintegration is graphic. Even her little nephews note the distance between their sane mother and their flighty, uncertain aunt.

BJ is a layered rendering of a woman in a crisis of self-definition after living in cushy denial most of her vague life. It's guilt, trauma and retribution, of accepting the obvious, themes beautifully developed in his masterful Crimes and Misdemeanors, which some (me) consider his masterwork. His icy analysis of this character's state of denial is always at an artistic remove.

Blue Jasmine is Woody Allen's umpteenth film since 2000; accurate, in a sense, yet absent self-involvement. Again, his casting kills. His casts do more to enliven Allen's themes than do the casts of most other directors. And his films, oddly, wear well over time.

Jasmine's efforts to impose herself between Ginger and her men, her unending haranguing of her sister's rather unprepossessing males, enrages the animal inside first mate Dice Clay, then fiancé Cannivale. When Mitch/Peter Sarsgaard, a diplomat on the rise—arrives on the scene, acutely class-conscious Blanche swiftly sees a way out of her spiraling predicament. Sarsgaard, wealthy, suave, polished and above the brutish, himself on the rise, reveres Jasmine as beautiful and refined, focusing on her expensive and understated wardrobe, her beauty, and her distracted, unthinking superior airs. Yet, as tendrils of truth emerge of Blanche's/Jasmine's past—her suicided financial-cheat spouse, her financial destitution, an unspoken-of adult son, are spilled by an inadvertent meeting with her sister's ex-spouse Clay—suddenly catch up to her and her ideal mate, her circumstances become unbearable.

A not-funny Allen is still, overall, and with all the usual caveats (at least he's not lampooning and flagellating his Jewish background here, as he did in so many of the early, funny films; and he's not lambasting all women as unbearable, unisexual shrews, ditto; and he does switch laugh-triggers in updating his standard Valium throwaways to Xanax in the set-upon heroine) top shelf stuff. The good part is that for the average cineaste, we can watch the hybridity of his soiled and spoiled rich and poor lives with dispassion, since they are not the commonality of our picayune daily lives. We aren't Jasmine. And our crooked menfolk may have their bêtes noirs, but they are not Alec Baldwin/Madoffs.

If we had to choose, the message BJ is communicating is that loving passionately and plainly without all the tchatchkas of great wealth, ill-begotten especially, beats the hell out of loving money and privilege, both of which can be wilting, fleeting and dissolute. There is no hint of mission drift here; Allen grips the story, tells the hairy alarums of the wealthy, heedless life, and pays off the watch with a remorseless dénouement. A film risque and melancholy, moody and invested with intensely engaged and sometimes sexy performances, it is ultimately tragic.

A so-called amusing indie you can safely miss: Pedro Almodovar's latest–I'M SO EXCITED– a gordo disappointment. Too fey, crude, implausible and humor depleted to audiences primed for some of the keener and friskier glimpses into the manic Almodovar mold of tout Madrid. This one misses the mark by the 33 years since a vaguely similar but much better Zucker & Abraham's AIRPLANE! torched the high-giggle-meter high-jinks aboard a 747.

Jun

14

 My home office adjoins my daughter's room. Her last day of high school (and therefore public school) was today, and now that she's finished it, she's home finally clearing out her room of the school year's detritus. It's amazing how much "stuff" she managed to keep in her bedroom. Walking by that room's door brings to mind the scene in A Night at the Opera of the ship's storage locker holding something like 10-15 people. Tomorrow, she will join her class at graduation; at some time, she and some of her peers will be saluted for academic achievement. I'm told that that's the top 5% of the class. Given the nature of the high school, that's a better result than my wife and I had expected. Her high school is rigorous–almost to a fault. During spring break, some of her friends now freshmen at MIT and Cal Tech came by for some pizza. The frosh from both schools kept commenting on how much they were enjoying college. It was easier, for some courses much easier, than high school. Both my wife and I were shocked, but perhaps these kids aren't aberrant in their assessments.

That my daughter, our youngest child, will be graduating within 24 hours brought to mind my graduation. For my daughter, the biggest graduation in her life thus far will be the one tomorrow; for me, it was 29 years ago when I graduated from medical school. It's not that it was the last graduation I would share with my father, though it was–or even the last time I would see him, though it was that as well. It's not that I thrived in medical school. Hardly, having bombed in biochemistry (I think it's psychological moreso than the material, but that's for another thread) and having a simply awful experience with one medical resident (I nearly dropped out of school in my third year–almost unheard of; on hearing of my interest, the Dean inquired as to what was my reason, and when I explained, she promptly called in that year's class of 2nd year residents in medicine and read them the riot act about abusing the 3rd year medical students. My classmates were aware of the situation, and when the abuses stopped-at least for my rotation–many thanked me, though I told them it wasn't altruistic on my part, it was survival), I saw my graduation from medical school as a triumph. It's not the degree of which I am most proud–that would be my MSEngineering, and it's not the one I worked hardest for–that would be my MBA in marketing, nor even the degree which most of my peers associate me with–that would my MPH in epidemiology. It is, however, the degree with which I most identify, the one most enmeshed in my identity.

There are parts of medical school I would dearly love to forget–but I can't, though I have no doubt that I am a better physician for having lived through them. Telling the mother of a 3 month old kicking and screaming with a 103 degree fever a few hours later that her son had died, being told of the attempted suicide of a pregnant 15 year old girl I had attended to at clinic three days before and diagnosed her pregnancy (she wanted an abortion and was terrified of what her parents–both alcoholic drug users (they were also "practicing" Catholics–at least that's what they said–who later informed me they wouldn't have consented to an abortion for their "slutty daughter"–might do to her if she asked for their permission), digging elbows deep into someone perforated bowels at 3 AM and dealing with seeming endless human waste–yes it's life saving, but that doesn't mitigate the stench and it doesn't stop the waves of nausea or the multiple re-gownings and re-glovings, the 17 year old who decided to take on a tree while riding his snowmobile during a blizzard–the tree won and he sustained multiple organ failure, including a closed head wound that left him in a vegetative state even as he recovered from a severed liver that a decade earlier would have rendered the head injury meaningless as he would have died of the hepatic damage, my first patient during my medical rotation–Mr. B–who had classic hypothyroidism–the confirmatory lab test had to be sent to the VA central lab in Ohio instead of the local lab and the results weren't due back until Monday; unfortunately, Mr. B developed a pneumonia, becoming septic, and dying on the Sunday before, and the too many meetings of the Baltimore Knife and Gun Club on Friday and, especially, Saturday nights. As bad as telling the mom about her dead baby (threw up afterwards, and my attending, cued in by my resident, had the good grace to sit down and talk with me about it; I asked her how she managed to deal with such things, and she responded that you don't, and that if you did, it was time to leave medicine. That may seem a bit harsh, I realize, but I've come to understand what she meant.

 In medical school, during the first year intro to clinical diagnosis, there's much effort expended on trying to get med students to empathize with patients, though not sympathizing with them. I began to understand the idea much better after talking with my attending what was meant by the empathic physician that we strive to be, that our patients need if we are to be effective in helping them maintain or improve their health.

Among the "ghosts" in my memory is the 20 year old man who presented at surgery clinic with his partner. He came from a religious family out west and had come to Baltimore when he was 16 to get as far away from his family as after he came out to his parents, they told him he would burn in hell, that he should forget that he was a member of their family, that his brother and sister were to be told he had died and that they should forget him, and requested that, as they kicked him out of the house without so much as a change of clothing, he change his name so no one would associate him with their family. He had met his partner while homeless on the street, and the two bonded. He managed to put his life together enough to gain admission one of the local colleges on full scholarship as his partner became got a job on a construction crew digging ditches (also a story for a different thread). He presented to surgery clinic with groin swellings. It was the fall of 1983, the AIDS epidemic was in full swing with every sign indicating that it was a infectious disease. (At that time, I doubt that the 2/3s of gay men resident in San Francisco in 1981 realized that they would die from HIV infection.) Understandably, he and his partner were terrified about these swellings. We biopsied them–it's the only time I've quadruple-gloved. He had a lymphoma, and in short order, developed pneumocystis carinii. Long story short, he had AIDS. I wasn't on the medical team treating him but I kept up with what was happening to him in hospital and I managed to stop in and talk with him a few times. He was a bright guy, witty too. He was thinking of becoming an engineer–he enjoyed math and dreamt of using that knowledge to change the world. He was dead within 6 months. I don't know what happened to his partner.

Those experiences contrast with some of the other ones, perhaps less emotionally challenging, perhaps not, such as my first appendectomy (not holding the retractors but doing the surgery; what should have been 30 minutes under anesthesia for the patient became 60 minutes for me–not unusual, I'm told), trying not to cut too deeply, hoping to pick up the peritoneum, all of 4 cells in thickness, sweat pouring out of my brow (and being attended to by a fortunately doting circulating nurse) even as the temperature in the OR stayed a steady 63 degrees. The patient came through the procedure OK. For many medical students, their surgery rotation, while grueling, is also the most fun one. One gets to see the pathology present, instead of surmising it the way an internist would. At the same time, one comes to appreciate that being a surgeon takes a certain personality–not just bravado or ego but also perspective on the role of a physician in the treatment of a patient. A surgeon is cutting on a patient to help the patient therapeutically. She cuts on living flesh seemingly on a daily basis. Granted, it's with anesthesia, but even so, it is a concept which in the abstract may not seem challenging, or even when one's encounters with the surgeon are infrequent. Seeing surgery daily, though, is different, whether it's the surgeon, the surgical nurses, or the anesthesiologist. I think the former two have the most challenge. It's one thing to nick someone's skin for a biopsy, it's another to open a chest to transplant a lung. There's the old joke about the surgical resident at the poker game tossing $20 into the pot with an ace-high hand, while the medical resident hems and haws about whether to raise a nickel with a full house. It fits better than most might appreciate.

Graduating from medical school meant a change not merely in life but in me as a person, in my identity. I don't know that that was true for all of my classmates, at least not that they were willing to say come reunion time. It was for me.

As my daughter graduates, so will my wife and I. Empty-nester syndrome may hit, hopefully not. My daughter will move on to the next phase of her life, to begin adulthood. Both my wife and I wish that she comes through her college experience as enriched as she has her high school one.

In 24 hours, her world will change in ways she won't appreciate for years to come. Perhaps her mother's and father's will do so too?

May

28

Aversion to losses or aversion to risk? Which of the two is addressed by willingness and ability to close out losing trades?

Well, without invoking mathematics where it is not necessary, it is common and logical to place on the table that when a losing trade is closed one has the willingness and aversion to the risk of the persistence of loss becoming into a bigger one and one does not have aversion to the present level of loss in being accepted.

Now on the other hand, unwillingness to stop out a losing trade is indeed loss aversion.

The computations that show that having utilized some sort of mechanical rules for stopping out adverse incursions actually increased the probability of meeting with adverse incursions is totally flawed abuse of statistics.

Several arguments:

1) Historical data analysis does not undertake the "uncertainty at a given moment to decide upon" into account and is definitely incorporating hindsight 20:20 vision mind-set.

2) Any measurements of uncertainty and thus risk are never definite, since measurement of uncertainty too will be having an uncertainty of its own. So a trader in the middle of a losing trade has to decide that the level of uncertainty in his method, mind or cognition regarding the calculation of the "value of uncertainty" in his trade has become too high for him to handle. That's where humility, the currency that prevents others from profiting more from your mistake, can come into play and allow the willingness to hit the stop.

3) However, when either with or without the illusions of statistical computations of stop losses increasing the probability of meeting with more losing trades, one fails to control the human weakness of loss aversion, to somehow and anyhow turn that loss into a profit, one is becoming totally risk-insensitive. From skill, the turf changes to the power of prayer. The game begins to change from action to hope. Inconsistency of thoughts thus turns one into a trader who is continuing to hold on to risk without a mental apparatus to assess it or react to it. As the loss continues to grow not only the lack of willingness to take it hurts, the ability to accept the increasingly bigger loss also dwindles rapidly.

I am ready to be thrown before any firing squads of mathematical minds and ideas on this list if they can with or without numbers help me learn how come this list celebrates and cherishes a human value of humility and yet indulges in an idea that staying on in a trade that has incurred a level of loss greater than anticipated when the trade was opened are mutually consistent.

I would close my submission for now with one thought:

When loss aversion creeps in it makes a decision system (mind) risk-insensitive and with no respect for risk, returns are impossible. Yet, if a mind continues to be risk-averse it does not have loss-insensitivity and in humility such a mind closes out risk that has turned out to be less than comprehensible.

Phil McDonnell responds: 

Since I am the well known culprit I shall give Mr. Kedia a reply. If the probability of a decline art the end of a period of time equal to your stop is p then the probability of losing the stop amount with a stop loss strategy is 2 * p. It is simply a derived relationship. It is what it is.

It is not a misuse of statistics but rather a description of how a stop loss exit strategy will change the distribution of returns. Larry Connors studied over 200,000 trades from a winning system and compared the results with and without stops. He found the use of stops increased the probability of loss and reduced the expected gain.

In my opinion the best way to trade is to reduce position size so that no one loss hurts your account too badly. That means many small positions to me.
 

Larry Williams adds:

Ahhh here I go off on a rant; please excuse a tired old mans bitterness at system vendors who claim stops hurt performance.

Yes, they are correct in that the statistics of your system will look better if one) you don't use a stop and two) your use a market with a perpetual upward bias like the stock indexes have been, usually.

They are absolutely totally incorrect in terms of living the life of a trader. So what if I am long in a position that eventually shows a profit but because I did not have a stop loss that one trade moved against be 20,000 or $30,000 and it took a year or so to get out of? Yeah, the numbers look good (high accuracy) with no stops but it's one hell of a lifestyle.

High accuracy is a false God.

Consistency and never being in a place where you can get killed is more critical. Perhaps Mr. Connors has never sat through the reality of a large loss, especially in a large position. I have; I would rather battle the devil at midnight on a new moon with both hands tied behind my back.

It's one thing to have a system with "good numbers" it is quite another thing to be a trader and have to deal with reality.

It only takes one bullet in the chamber to kill you when playing Russian roulette. As near as I can tell trading without any stops, in any way whatsoever, is just the American version of this form of spinning the wheel.

Play the game as you wish but please heed the warnings of an old man.

Leo Jia adds: 

I have been studying the use of stops. Due to loss aversion I guess, I would like to use narrow stops. But among the various strategies I have yet found one working well with narrow stops. Good stops have to be relatively wide in my cases, but having no stops or stops that are too wide clearly hurts results (my trades are time limited). So a good choice for me is to size the position according to the stop size.

Sushil Kedia writes: 

If you reduce position size can it be argued that a position of Size N reduces to N-n implies that you took a stop loss on n lots out of N you held. Then too, it validates the fact that you do take stops.

Anatoly Veltman writes: 

Larry covered main bases (different markets, different position sizes, different lifestyles) pretty well. I just want to be sure that reader doesn't end up with wrong impression. I think the best conclusion is "it depends".

And because my act follows Larry's (who is certainly biased in favor of stops), let me try this. If you enter based on value (which is certainly against trend), then there is no justification available for a stop. Unless you argue that this stop proves you were an idiot on the entry. But if you are an idiot on value entries, then why play value…

Anton Johnson writes: 

 The problem with using Conners' simulation as evidence that placing a trade stop-loss reduces returns is that he tested a winning system that likely had never experienced any 5-sigma negative excursions prior to the test date. And of course there are no guarantees that his strategy, or any unbounded trading strategy, will perpetually avoid massive drawdowns.

When implementing a strategic trade, a good compromise between profit maximization and loss mitigation can be achieved by balancing trade size along with a stop-loss, which when placed at a level that only an extreme event will trigger, will likely contain losses to a predetermined range, and also prevent getting stopped-out of a potential winner. If one is disciplined, maintaining a mental stop-loss level is preferable to an order pre-placed in the book, and available for all the bots to scan.

Larry Williams adds: 

But speaking of stops, I go back to my litany, my preaching the essential reason for never putting stops on an exchange server, or even your brokers server. Putting stops on servers means that your stop becomes part of the market. And not in a positive sort of way either. Pick a price, hit the button, and take the hit. Discipline is key here.

Ed Stewart writes: 

A trader needs a decision process for managing the expectation or expected value of the trade as well as the equity position. The problems occur when these two things are in conflict.

The thing with stops is that at times it makes no sense to get out of a trade when the expected value is still good. What is the difference between exiting at a small stop-loss point 4X in a row vs. one loss of that same size? Well, if at each "stop out" point the expected value was favorable, it makes no sense, one is just locking in losses. At times the best "next trade" is simply staying in the current trade.

However, I see Larry's point and it is a good one. Yet, the example of letting a loss get huge or holding an underwater position for a year is to me something of a false alternative. No exit strategy but hoping for a profit at some point is not a reasonable alternative.

What maters, I think, is the expected value of the trade at each moment, and balancing that against equity and a margin or error to ensure, "staying in the game".

Given this I always trade with mental stops, if not on individual positions, on total account equity. Having that "self-preservation" discipline is useful.

Jeff Watson writes: 

I learned very early on in the pit on how to go for the stops, and that weaned me off of stops completely (except in my head).

May

21

Here is a deeply flawed article in Texas Monthly about BBQ, but the article contains an interesting (but somewhat inaccurate) map of BBQ across the South. The flaw is the essential conceit that Texans have by thinking their BBQ is the best in the world and every other BBQ is inferior. I've had some inedible BBQ in Texas and I have had some awesome BBQ in the North when Mr. Humbert was gracious enough to take me to a BBQ place in CT. That place was better than any Texas BBQ I ever had.

Mar

25

 My son sent this to me and I enjoyed some of the life lessons. For some reason I could imagine this coming out of Ben Green's mouth.

Take a little good advice from an old Montana farmer:

Your fences need to be horse-high, pig-tight and bull-strong.

Keep skunks and bankers at a distance.

Life is simpler when you plow around the stump.

A bumble bee is considerably faster than a John Deere tractor.

Words that soak into your ears are whispered… not yelled.

Meanness don't jes' happen overnight.

Forgive your enemies; it messes up their heads.

Do not corner something that you know is meaner than you.

It don't take a very big person to carry a grudge.

You cannot unsay a cruel word.

Every path has a few puddles.

When you wallow with pigs, expect to get dirty.

The best sermons are lived, not preached.

Most of the stuff people worry about ain't never gonna happen anyway.

Don't judge folks by their relatives.

Remember that silence is sometimes the best answer.

Live a good, honorable life… Then when you get older and think back, you'll enjoy it a second time.

Don 't interfere with somethin' that ain't bothering you none.

Timing has a lot to do with the outcome of a Rain dance.

If you find yourself in a hole, the first thing to do is stop diggin'.

Sometimes you get, and sometimes you get got.

The biggest troublemaker you'll probably ever have to deal with, watches you from the mirror every mornin'.

Always drink upstream from the herd.

Good judgment comes from experience, and a lotta that comes from bad judgment.

Lettin' the cat outta the bag is a whole lot easier than puttin' it back in.

If you get to thinkin' you're a person of some influence, try orderin' somebody else's dog around..

Live simply. Love generously. Care deeply. Speak kindly. Leave the rest to God.

Don't pick a fight with an old man. If he is too old to fight, he'll just kill you.

Feb

4

 It has been a while since the dailyspec discussed the potential for mayhem in the Straits of Hormuz. So far, the greatest threat to American interests has come from our own Navy. It has been nearly 4 years since the USS Hartford collided with the USS New Orleans. The "accident" injured 15 sailors; the repairs to both ships cost over $100M.

The folks at StrategyPage just reported some of the details of the accident report:

1. There was no one supervising the sonar operator when the collision occurred

2. The sonar operator was not, in fact, looking at his screen at the time but talking to a fellow crew member

3. The ship's navigator was not plotting the ship's course but "doing something else, while listening to his iPod"

4. The officer in charge failed to raise the ship's periscope to scan the horizon before the ship breached the surface

In total there were 30 errors in procedure.

Chris Tucker writes:

Complacency and sloppy work are very difficult to control after they have taken hold of a work group. The proper place to kill them is in early training. People who are responsible for large numbers of other peoples lives and/or for highly valuable property need to be trained in active vigilance early in their careers. Unfortunately, safety is a boring topic to most — it lacks the intrigue of the higher mission, it lacks the luster of fancy technical gadgetry, and because it is something that has to be practiced with diligence day in and day out, at all times, it is difficult to keep at it.

But safety and its execution is absolutely essential to any complex operation. Organizations and systems that require precautions have to inculcate a culture of safety and then impress it into their people regularly. It can never be treated as a one off training item and then checked off as completed, it has to be pressed, again and again and drilled into the subconscious so that it comes automatically. Active surveillance, much like active listening, is a skill that requires practice to master.

I suspect that in the crossing of an active shipping lane like the Straits of Hormuz, that submarines use active sonar, but I have no idea how frequently they ping. Probably on the order of once every two or three seconds, much more than that and there is insufficient time to capture reflected signals without interfering with them. The point is that an operator, especially at a time that requires extra vigilance — like surfacing, needs to actively direct his attention to his equipment and scan for threats at least once every three seconds.

While this sounds easy enough, it requires a great deal of will and energy. Distractions constantly compete for attention and need to be reduced. Again, training is the only way to control this and create an environment that rewards attentive execution of duty and punishes the creation of distractions and sloppy behavior. I suspect that if the navy chose to drill procedures in vigilance and active surveillance as often as they train for emergencies or attack maneuvers, the frequency of these incidents would be dramatically reduced.

P.G writes: 

Excellent stuff on complacency, but "culture of safety" might be too strong a goal for any place in the military. It's true that the Navy is the service where war most closely resembles peace. Most naval ships in WWII saw only a few hours of combat over the years' duration. Day-to-day operations were quite similar to peacetime ops, with the environment (including friendly ships) being the principal enemy. But the few hours of combat were the whole point, and it seems to me that safety must not be so deeply ingrained that it cannot be easily discarded when the necessity arises.

Paolo Pezzutti writes: 

Western navies nowadays are dealing with decreasing budgets, changing operational scenarios and threats, issues in recruiting and retaining the professionals they need. All these factors are tightly linked. The level of ambition of naval forces is questioned in terms of requirements and capabilities needed. The threats is different from what it was at least two decades ago and attention is growing mainly for maritime security tasks. Hard to justify expensive investments to develop complex and futuristic weapon systems. For sure maintaining the fleet efficient and effective is tough at times when navies are struggling not to reduce numerically their fleets below critical thresholds. Recruiting highly skilled professionals and most of all retaining them is also critical. They need to find a motivating environment that meets their expectations. Innovation and technology are allowing the reduction of manning on board ships and submarines in order to achieve the compression of operating costs. This is also introducing risks because each member of the crew has more tasks than in the past to perform and no redundancy. On the job training and management of emergencies are issues to deal with. More focus over the past years is on modelling & simulation to train crews ashore although any sailor knows that these solutions cannot fully replace experience gained at sea. Some have questioned the extent of manning reduction that was envisioned as acceptable only a few years ago based on lessons learned developed on new constructions. The quality of training is key as days at sea spent each year tend to decrease. Incidents are the expression of this situation. Training concepts and processes have to change and adapt rapidly to this environment. As budget and personnel decrease, this is the challenge of this decade. 

An interesting sidenote about, "Stick close close to your desks and never go to sea, And you all may be rulers of the Queen's Navee!":

The object of Gilbert's satire is not so much the person of publisher and politician W. H. Smith as the system that in essence de-professionalized command positions in the British armed forces, and promoted those with wealth and political connections rather than military ability. Thus, Gilbert was in effect attacking the long-standing aristocratic tradition of purchasing commissions. Instead of "serving a term" as a midshipman (which was the conventional route leading to officer status and ship's command), Sir Joseph has taken a strictly political route to the Admiralty.

Russ Herrold writes:

A former officer (here: identified as JG) from the US Navy who served in submarines inter-lineates replies to the article you linked to:

Sub commanders are under a lot of pressure to keep their sailors from leaving the navy (JG agrees). But the long periods submarine sailors spend away from their families creates pressure to get out and take a civilian job close to home. (JG agrees) The submarine sailors are very capable, and highly trained, people. Getting a better paying civilian job is not a problem. So sub captains try to keep the crews happy. That often leads (JG: Bull Shit!) to lax discipline. (JG continues: just lax discipline with this command)

Interestingly the article's remarks about generally available better substitutions employment were not addressed in the initial comments back to me; in following up privately, JG thinks the author is over-stating the substitution opportunities …

But then that makes for a more urgent article, then, doesn't it?

Chris Tucker adds: 

My whole point is that these people are professionals and should be behaving like professionals. They are in positions of responsibility and need to act as such. There is a tremendous amount of self validation that comes with knowing that you know your business and that you act accordingly. People that understand this arrive at work with their heads held high and don't just talk the talk but actually walk the walk. They don't feel entitled to anything unless they've earned it themselves. This is the kind of behavior and path to self esteem that needs to be engendered. It is not about safety, per se, probably a bad choice of words on my part. It's about being a professional, about being an expert. And about wanting to be those things. It's about knowing what needs to be done and doing it properly, correctly and without fail.

Jan

30

 Orde Wingate, the eccentric British general who made his reputation in the 1930s-1940s by leading unconventional troops in Palestine, Abyssinia (Ethiopia), and Burma:

His pioneering efforts to add guerrilla tactics to the arsenals of conventional armies often met with disdain and disbelief from more conventionally minded officers. Wingate did not care. "Popularity," he believed, "is a sign of weakness." Considered by his peers to be either a "military genius or a mountebank" (opinions differed), he had been locked in an unceasing war against his superiors from his earliest days.

Even as a young cadet at the Royal Military Academy, Woolwich, he "had the power," recalled his best friend, "to create violent antagonisms against himself by his attitude towards authority." Later, as a junior officer, Wingate was known to begin meetings with generals by placing his alarm clock on the table. After it went off, he would leave, announcing, "Well gentlemen, you have talked for one hour and achieved absolutely nothing. I can't spend any more time with you!"

Wingate's first rebellion was against the stifling religious atmosphere in which he was raised. His father was a retired Indian Army colonel with a devotion to a fundamentalist Protestant sect called the Plymouth Brethren. He and his wife brought up their seven children, including "Ordey" (his family nickname), in what one of his brothers called a "temple of gloom," with prayer mandatory, frivolity forbidden, and "fears of eternal damnation" ever present.

By the time he arrived at Woolwich, to train as an artillery officer, he had left the Plymouth Brethren, but he never lost his religious outlook. For the rest of his life he would be deeply influenced by the Bible, on which he had been "suckled" and which a friend said "was his guide in all his ways." Another legacy of his childhood was that he developed a violent aversion to being regimented. At Woolwich he was in constant trouble, and he formed a low opinion of the "military apes" who tried to discipline him.

After graduation he learned Arabic, and in 1928 he joined the British-run Sudan Defense Force as an officer overseeing local enlisted men. Here he battled elusive gangs of slave traders and poachers within Sudan, learning the hit-and-run tactics he would employ throughout his career.

He also developed many of his unconventional habits, such as wearing scruffy clothing ("his socks were very smelly and all in holes," a subordinate later noticed), subjecting himself to great danger and discomfort, and receiving visitors in the nude. (He would become notorious for briefing reporters in his hotel room while "brushing his lower anatomy with his hairbrush.")

Read the full article here

Jan

28

I was skiing in Vermont recently and as is usual for skiing in the northeast, the slopes weren't as deeply covered with snow as one would wish. When one attacks a steep run in these conditions, it is guaranteed that the center of the trail will be bereft of snow — thin cover is the term we use euphemistically to indicate ice and rocks — mostly ice though. When this happens, there can usually be found some snow piled on the edges of the trail, it having been pushed there by previous skiers who made all their turns in the center, their scraping edges clearing it away off of the underlying hardpack and pushing it to the sidelines.

Skiing in such conditions can be done, but not without incurring greater than normal risk. And it is usually not as satisfying as skiing using the entire available path whose deeper, more sweeping turns are somehow more satisfying and which provide greater control. But under these conditions, staying in the center is deadly so advanced skiers will stick to the edges of the trail, making all of their turns in rapid succession on what is in effect a trail only two or three feet wide. This means that turns must be small in degree and therefore must happen very quickly so as not to allow the tips to remain pointed straight down the hill and therefore incurring excessive speed. This kind of skiing requires conditioning, linking extremely rapid turns is exhausting and one must not attempt this when fatigued as the resulting inability to really push hard and dig can be catastrophic. It also requires some nerve, for one, keeping near the edge puts one in dangerous proximity to the treeline (or the edge of the abyss -as the case may be) and one slip at high speed and it's all over. And it means high speed, even while carving one edge after another in succession, the lack of available surface on which to gain traction means keeping the tips pointed perilously close to straight down the fall line. Mistakes at these speeds tend to have greater than normal undesirable consequences.

As I enjoy the speed, I will make one or two runs in these conditions just for the thrill of it, but this kind of tight skiing in a narrow and steep path requires tremendous concentration and loses it's appeal rather quickly. I will spend the majority of my time on tamer runs with more snow, even though they may be more crowded, so I can make the more gratifying, longer, carving turns that I prefer.

Jeff Watons writes:

That's just like surfing big waves vs small waves.I am not comfortable in the brutal conditions Mr Sogi San surfs on an every day basis. In those conditions, I will look for the rip current to get outside, paddle and make a bottom turn, and ride it in. Like typical Sunset. I don't stay out very long as I did when I was younger when it is big. But if the waves are 2-3' overhead, I'm good all day long. I'll still find the rip to make paddling out easier, but I'll attack the wave harder. But some of the very best days are those waist-chest high waves where you cruise on a long board, and catch the glide. However, during calm conditions I have suffered the greatest traumas while surfing. Broken vertebra, herniated discs, tendon and ligament damage, broken nose, etc. Somehow, being relaxed while it's calm is more dangerous then when it's big. Or maybe I'm more careless when the waves are small, and a bit reckless thrown in for good measure. Carelessness happens in the markets also. You start taking your profits for granted. It's humming along nicely with all your positions in the green, then wham, the Mistress gets a little PMS(no sexism intended) and throws the whole system off balance or upsets the cart, and your account suddenly needs a tourniquet. The lesson here is to keep your guard up at all times.

Jim Sogi writes:

 Just back from backcountry skiing in the Eastern Sierras. The conditions were snow that was about a week old, with very cold temperatures, and no wind. The sun made a crust where solar energy hit, so the powder stashes were hidden on north facing aspects where there were old growth trees. The cold had dried out the snow making it sparkle and soft and creamy sugar which was excellent for skiing.. Though it had not snowed for over a week, in the shade, on the north facing slopes shaded by old growth pine where the sun did not affect the snow there was beautiful sugary soft powder. It took some doing finding these niches and some hiking to get there and fighting some pesky brush at lower elevations. No one else seems to have discovered these hidden stashes of nice powder. This reminds me so much of the markets, when even in less than optimal conditions, there are hidden stashes of unridden goods. It takes understanding of the underlying processes that create and destroy snow, the equipment and will to get there, and the ability to ride those conditions. Its surprising in such a huge mountain range that only in such limited conditions would there exist such fine skiing. The last day, new wet snow came and turned everything into the famous Sierra cement.

Laurel Kenner writes:

I took Aubrey to our favorite ski place, Telluride, a couple of weeks ago. A drought was on and the mountain was brown, but the resort's snow-making machines had been at work since November and most runs were open. A few patches of grass were visible in some popular places — enough to send a skier head over heels in the old days. The new equipment was somehow able to ride it out, although caution was still warranted. That strikes me as like the market; if you're well-equipped enough with margin and numbers to ride out the rough patches, you can still do well in adverse conditions.

Steve Ellison writes: 

I ski 10-15 times per year and encounter a wide variety of conditions. Light is an important factor. An overcast sky causes what skiers call "flat light". I slow down in flat light because the lack of shadows makes it hard to spot irregularities on the surface until one is nearly upon them. Dense fog is even worse. I have been in fogs in which I could not see the trees on either side and momentarily lost track of which way was down.

I like fresh snow, but there can be too much of a good thing. One day right after a 2-foot snowstorm, I started down my first run and fell on the very first turn when my outer ski caught some snow. I pushed off my hand to get up, but my arm sank into the snow all the way to my shoulder. It took a few minutes of wiggling and maneuvering to get back on my feet.

Wind is another factor. The Sierras sometimes have very high winds, which blow loose snow off exposed areas. The result is alternating ice and soft powder (in the spots in which blown snow settles). Going too fast at the transition point can result in a fall. On one traverse I often ski, I use moderate wind to my advantage by letting the wind slow me down as I ski into it with no effort on my part.

Duncan Coker writes: 

When backcountry skiing which Mr. Sogi describes another key element is the approach. There are no lifts, so you hike uphill for every turn you will make downhill. It can be exhausting, but also very rewarding and you get to know the terrain including snow pack, the location of rocks, couloirs, tree wells, cliffs and the grade. After enjoying the view at the top you can descend focusing mainly on execution, making some nice turns. Skiing the steeper, untouched terrain has more dangers but is more rewarding.

I love the surfing analogy of "never taking the first wave" alluding to the dangers of being tempted by the first big wave in a set, after a lull. In skiing there are times when it is better to take pass on a run as well. Condition may appear good, but dangers are still there. Ultimately though we all have to "drop in" at some point for whatever activity we are pursuing, and taking some risk is certainly worth it.

Jan

28

 It is nice to hear some bullish sentiment recently and I will jump aboard. Here are 10 reason the market will go up from here in 2013.

1. Incentives do matter. The stock market is a reflections of humanity trying to better their lives via work, production and profit. That won't change and will drive the market up.

2. Despite government figures there is inflation in what people actually spend money on, food, energy, healthcare, education. Stocks, similar to hard assets, rise when there is inflation.

3. Fed dollar policy if for a weak dollar. Since stocks are priced in dollars this will help stocks to rise.

4. Scarcity matters. You cannot have guns and butter, stocks and bonds. You have and to pick and the yields are not even close. They favor stocks by a margin of 5-6%.

5. Bear markets come and go and but are not predictable. On the other side there is a welcome documented upward drift for stocks.

6. Big Al's research shows buy and hold beats every other market timing strategy except waiting for a 50% decline which happens only once or twice in a person's lifetime or maybe not at all.

7. After a real estate/financial crisis is a good time to buy, like after 1990-1 recession, S&L crisis, 1907 crisis to name a few.

8. Politicians come and go and markets rise in liberal and conservative times. The markets does not favor political parties but stability is bullish. The current divided government is stable enough for the market to rally.

9. The market weeds out the least productive. The best idea rise and the worst go bankrupt. Owning a stock index is a proxy for the very best ideas put into action, adjusted every year to get rid of the worst ones.

10. There is no upward bound on stocks. There will always be more work to do no matter how productive we become. This will be reflected in rising capital, equity and stock prices.

Anatoly Veltman writes:

Well, I'll take exception to a few of the ten:

1. Stocks is the last thing (just ahead of bonds) that should be rising with inflation
2. Counting on success of Fed's dollar weakening, just pick your cross of choice - not US stock index
3. I'll be gladly corrected, but isn't index's survivorship bias only important in bear market?

My chief contention is this: the country, as well as other top industrialized nations, have been engaged in anti free-market policies. We haven't seen real benefit (should we have?), and we haven't seen the society's degradation yet (in full swing). If we do, I don't think current multiples will prevail. I'm not calling for the entire S&P to wipe out - but I can see market pricing of, say, 10 or lower P/E; you tell me why is that impossible?
 

Gary Rogan writes:

There seems to be contradictory evidence about how well stocks serve as inflation hedges. There does seem to be a lot of evidence that they are significantly ahead of bonds, so "just" probably doesn't do them justice. As an explanation, but not as a prediction, the ability of stocks to function as inflation hedges depends on the ability of the underlying companies to pass price increases. It seems that when inflation suddenly accelerates, stocks don't do as well as when there is a stable rate.

There is some evidence that you need to go beyond broad market indexing if you want to use stocks as inflation hedges because not all companies are generically suited to pass price increases in the same way. I have said a long time ago, just when the current political environment first appeared on the scene that I expected large consumer non-durables to be the best hedges for the variety of ills associated with that environment. I fully expect them to continue even if inflation goes up.

The anti-free market policies will likely affect growth rates in a variety of sectors in the future, and likely have in the past. This should favor low-growth, high-certainty companies over the traditional growth superstars. Should things like fracking and 3D printing and whatever other factors compensate for the anti-free market policies, this "likely" will become the wrong guess. It is certainly true that certain large tech companies have allied themselves very deeply with the regime and are therefore likely to be able to exert some influence.

Very little will protect against collapse, inflation-driven or simply debt-driven. Gold is there, but look what has happened to many who had the gold during various once-in-a-lifetime calamities. Stocks may not be a bad choice short of total colla
 

Jan

7

 When will the drought vibe hit the grains if things continue weatherwise? Drought is a slow creep type of price impetus that suddenly pounces.

Ever since Jeff Watson asked about wheat and what to do with it a few months ago I have been poking around the river scraping bottom articles. With everything else up yesterday, I have to turn a head towards the left behinds and consider them as worthy orphans.

"Mississippi River Nears Historic Lows, Shipping at Risk"

Scott Brooks writes: 

One thing to watch for in a drought is the amount of snow that falls. Snow is very important in agricultural land. A good snow cover will slowly melt and drip into the soil, thus giving the soil water but in a way that allows it to soak deep into the ground without too much run off or evaporation (i.e. the snow cover keeps the water from evaporating thus allowing it to soak deeply into the soil.

Soaking the soil deeply followed by consistent and gentle spring rains helps end a drought.

The problem that these drought stricken area's have is that they are not only dry on the surface and in the rivers, but also deep within in the soil. And since water goes down (or evaporates up), we have to fill up the watershed from the bottom up, thus the need for snow. Otherwise, even gentle consistent spring rain won't help as much as you'd think…..as most of the water is going to go deep into the soil and not be of use to the plants.

Think about it this way. You have a cup that is 12 inches deep, but you only have a straw that is 8 inches long. You gotta fill the cup up 4 inches just to get a taste of the water. And to drink from it on a long term and consistently (i.e. throughout the whole growing season) you need the base amount of water to be closer to 5 inches and then have consistent rains to keep the water at a level where the roots can reach it.

a commenter replies: 

10 inches of snow is equal to 1" of rain. This article speaks to what you say: "Drought in 2013? Major Pains Ahead".

 

Dec

20

 The Iquitos Prison occupies twenty acre surrounded by a 12´concrete wall with four corner turrets that rise like rooks over the denuded jungle within. Eight pavilions house 160 prisoners each for a total of 1300 while forty guards stroll the garden patched complex to keep order. The prison uniform is street clothes but long pants only, while the guards sport tight black T-shirts inscribed INPE in gold on the back. They are armed with .45´s.

On my last day in Peru I visited the prison, first stopping across the street to rent long pants and a dress shirt for $1.00 for admittance. I turned to face the prison entrance, an arched gateway with a short line of visitors.

Inside this walled town inmates are indistinguishable from citizens outside who at any moment may end up right here due to the evil Amazon mothers-in-law and the crooked court system that convicts on bribes and rarely justice. You are put here and kept here depending on your pocketbook, not the crime. The four main convictions in order are sex crimes, drugs, robbery and last fighting. After talking with about one hundred prisoners today I will conclude that half are innocent and nearly all have overextended sentences as the system and their ex-girlfriends slowly squeeze money out of them over the days and years.

Some of the very females in the visitor´s line batting eyes in front and behind me, who lied in the first place to thrust their boyfriends here, and now of legal age, visit each Sunday to draw the curtains before the bunks. Each is paid for sex and, anticlimactically, the boyfriend urges her to retract the original rape charge.

The queue of fifty visitors, lovers, contraband runners and Sunday ministers moves quickly with eight at a time admitted through a ten-foot iron gate in the wall. Then there´s a pause at each of five stations where guards copy identification information, a green chicken imprint is stamped on my right forearm, at the next pause a visitor number is drawn in yellow magic marker below the chicken, at the next another black number 3-16 who is the prisoner I´m fated to visit, at the ensuing a beautifully engraved chit # 43 is traded for my passport photocopy, as I keep my original taped to my side that soon escapes a quick frisk at the final station.

The chit and number penned in red at the bottom of my arm journal prove I´m a visitor rather than convict and I´m told to return in five hours by 2pm or spend the night in the Crossbar Hotel. A pleasant guard in black and gold points me to a plank path across a muddy field to Pavilion 3 to ask for Ruso, the only gringo inmate in the entire complex. I briskly walk the wood plank expecting to find an Italian in for drug smuggling, and a guard politely steps off the one lane into the mud to let me pass, tipping his hat, and pointing ahead for ´Ruso´.

After walking the plank, the guard at Pavilion Gate 3 reads my arm moving his lips, pulls the single skeleton key to unlock the ancient lock, it opens with a creak, and locks behind me. I march a dim aisle like an alley on a moonlit night with open door cells on either side as inmates stare stunned, gape and a few cup their hands to mouths whooping, ´Ruso!´

I turn into Cell 16 and am surprised as a shaggy head pops out from the bed screen, giant bare feet hit the floor, and a huge hand envelops mine with a hardy ´PriVet´ (Hello!) in Russian. This is Ruso, which I quickly learn is Spanish for Russian rather than his name, though he is known throughout the system as Ruso.

A solitary black chess pawn sits on the desk in front of his bed as a clear invitation that I ignore for the moment. Our conversation is in Spanish as he speaks little English.

Ruso exports wood, and has lived in Lima for six years. One year ago he and his brother arrived in the heart of the Amazon at Iquitos to search for wood. His brother got in a fight with three men and bested them, and was subsequently arrested for beating a man to the pulp. Ruso was not at the fight but his crime in Peru is being the brother of the man who fled to avoid trail to Russia. In the perverse Peruvian court system Ruso was put behind bars to serve his brother´s aggravate assault sentence of three years. Before coming to Lima to start the wood business he earned an economy degree, is keen eyed, moves purposely with a royal bearing, twenty-eight, powerfully built, and no worry lines on a square face that begs a shave and haircut.

We make short small talk for he´s anxious to introduce me to the Teacher whom he claims will open every nook of the prison, even places I don’t want to go.

First, we tour his Pavilion, or concrete blockhouse with two flights of stairs and long cement halls connecting about twenty cells with eight beds each that are flung open each morning. Each 30´ square room has one toilet and shower, and each inmate has painted his space with a personal color scheme and hung posters of politicians, scantily clad girls or his own artwork. Ruso´s space is glossy white, tidy like the others, and stacked with non-fiction books on economics, nature and biographies from the block library.

We amble to the Block core that hems a 30´ x 60´ concrete soccer area alive with kicks and shouts over a deflated excuse of a soccer ball. Around the mini-field a dozen inmates run picnic table cafe´s, gambling rings, a crafts shop and barber shop. Prisoners whittle and fashion knickknacks, some paint, and others design or patch clothes to barter or sell to each other to eke a living. A weight lifting area with bars through concrete blocks as dumbbells and barbells gets constant use as many inmates are heavily muscled like Mastiffs. A rousing sermon well attended by forty hand clapping, foot stomping inmates screams through the windows over the soccer field. The scene is a sort of Eden in the Sunday morning sunshine away from the dank cells. It is hardly different from outside the walls except for the thick iron locks.

An 8-foot chain link fence with razor wire hugs the Pavilion with one gate to liberty to roam the twenty acres compound… and enter, if you can afford a ticket at each gate, the other seven Pavilions. It´s a macabre Disneyland. The chief guard at each gate, not his helper screw, has a key, for he has worked the system for years to attain this commanding post to accept or snub bribes to admit or refuse anyone to his Pavilion. So prisoners are free to walk within their own walled blocks in daytime, are locked in their cells from 10pm to 6am, and may leave the same way visitors enter, by bribing the guard chiefs.

´Money talks inside,´ Ruso quips and winks, adding, ´You are my guest,´ and palms the equivalent of $2 with a hand pump to the guard chief at the exit. It is a large sum where outside the minimum wage is $1 an hour. The guard pockets the money, claps Ruso on the back, and opens the gate to exit Pavilion 3 onto the main grounds where the other six pavilions and turrets reach to the sky like War of the Worlds. Few prisoners see this for years because of the price.

We pass Pavilion 2 adjacent to the prison perimeter wall where the last prison escape attempt in 2007 failed when the guards allowed via bribes a 19-inch diameter, 30-meter tunnel to be dug for six months from inside the Block and under the wall to the street, and then swooped in for the capture of 35 escapees. The breakthrough day that Peru´s national soccer team was to play the first qualifying round of the World Cup was smartly timed thinking the guards would be watching the soccer game and not tending to their posts, but someone squealed.

We slip into the carpenter shop within a 20-meter square hut with a log saw to cross-section and cut planks, planer and other equipment. Ruso brushes his hand gently across the wood like a lover´s cheek, explaining that he spends a lot of time here filling orders for civilians for tables, chests and beds. They´re custom crafted and picked up on visitor´s day. It would also be a tight place to hollow a log or furniture leg to store or transport contraband.

On reaching Pavilion 4 that resembles and is minimum security like Ruso´s Block, he pulls the chief guard aside to grease his palm while I chat with the backup screw who informs that the two guards per Pavilion gate work 24 hours straight, and then are off for two days. He avows the turnkeys prefer this arrangement that requires them to work only ten days a month. Each of the dozen guard´s I´ve bumped into is savvy, amicable toward the prisoners and me and, according to my tour guide, on the take. The chief gives him a big bear hug, shakes my hand, and admits us into the Block. We search the bobbing heads on a concrete cafeteria floor that fills the core area instead of soccer. Five cafes and as many pushcart vendors do a bustling business as prisoners chat, play cards and board games as if at Starbucks. This is a more affluent crowd with many seniors, and I´m tipped it is the white color crime Block.

One graying man with twinkling eyes holds an erect posture that stands out so brightly that I inquire of him. He is the former Pevas Mayor, a large jungle town downriver one day by boat, where he was convicted four years ago of accepting money while in office, and for some reason has chosen not to or cannot afford to bribe the court for a get-out-of-jail card. I was told that anyone with a non-violent crime may pay via an attorney to the court about $3000 for quick release, or $10,000 for the worst crime.

The majority of the men are sex criminals, or better termed victims, serving an average ten years for having an affair with an underage (17 years or below) girl; or twenty years for so-called rape. One man I speak to has spent a month short of twenty years inside for having sex with a drunken legal age girl who told police and testified in court that he raped her. He will be released in one month and is anxious for freedom. A few other men tell me, yes, they had sex with a teenage girl like most other Peruvian males, but that the mothers-in-law came at them with claws bribing the police for arrest unless they paid the girl´s family a queenly sum. They cannot afford that game and end up skewered in the penal system.

Ruso spots and yells over the mill to the Teacher. A shout back, and a tall thin man with spectacles above a perpetual smile weaves to draw the Russian´s hand and, on learning that I not only speak but have taught English, clears the floor with a jig. He is respected inside as the official English instructor- the guards address him in English as Teacher- with thirty students in all eight Blocks whom he charges pocket change. He picked up a little English in his youth as a jungle guide, strengthened it inside by reading books, and I am the first person who speaks better whom he has met in three of his six year sentence for having sex with a 16-year-old minor. There was leniency since she was his steady girlfriend that he planned to marry until she brought up the rape charge.

Ruso buys the Teacher a coffee and me lemonade, and on finishing suggests that we walk outside around the yard. Teacher bows his head in shame admitting he cannot afford the standard $1 bribe to leave the Block, but Ruso tells him not to be silly, that Teacher is our guide and the Russian foots the bill.

On swinging gaits with new elbow room we saunter the twenty acre compound, greeting ´Hola´ to the guards and ´Buenas´ to inmate gardeners of little jungle patches outside the Pavilions. Then past a tangle of construction equipment and abandoned bunkers from years gone by to the maximum security Block. .

In maximum men are stripped of their faculties by drugs and time served and so sadly are seen to their core, ragtag and clawing the chain link fence thrusting bubblegum and trinkets at me for coins to support their habits. They beg and alternately roar like lions. ‘You are dangerous!’ the Russian scolds them cheerfully, and then whispers to me, ‘Do you want to go inside?´’

‘Sure,’ I reply, and we turn the fence corner past the frantic men to the Sergeant with the key in to their cage.

It is a din inside. The halls are littered with men sitting sleeping with their foreheads on their knees and gum wrappers. Only six inmates watch TV, hardly any smoke cigarettes due to the cost, many sell candy or dirty girl sketches for change to fill out their emaciated frames or empty minds. The Block houses a younger crowd with strained faces, wild eyed, and doomed to spend decade sentences for crimes of violence, usually robbery or rape.

An atypically rotund middle-aged inmate with accountant eyes seeks out Ruso like a viper, wraps his arms like an anaconda around him and all the while narrows his eyes at me. The alert Russian squeezes him back hard, nods okay at me, and the man releases and smiles warmly. I get the feeling he believes I’m there to buy something, which is fixed when he introduces himself as the prison drug kingpin. Willie Sutton said he went to banks because ´That’s where the money is´, and the kingpin apparently has placed himself in this miserable Block because that’s where the business is. Marijuana and coke for personal use are legal in Peru, but heroin also works through the visitors and guards to the kingpin. ´Anything you want,´ he tells me, ´I can get,´ and then bows out politely that cues a circle of young unkempt inmates to tighten around us.

Yet a man of simian proportions parts them to grin broadly at my guide who nods a second okay that prompts him to utter, ´I am the Block Enforcer, and if you need help just whisper my name Pedro and your fears will go away.` He then steps back through the circle that breaks to allow his graceful exit, and a dozen young convicts approach without touching to beg cigarettes, offer marijuana, and sell candy.

Word echoes along the hard hallways that a gringo is in maximum! and fifty men more shyly than not come up in tactful groups of three to five. Many move directly to the Teacher to show off their new English vocabulary to which he grunts and grins and solicits my corrections. I hold court and teach everyone the words for sky and hope…

Two Mongrel pups prance down the hall sniffing for scraps and accepting tender pats from the inmates. The dogs are in far better flesh than the men in leading a Life of Riley with Carte Blanche to scratch and exit without bribing the guard and, no doubt, to enter another Block where the pickins ain´t so slim.

The dogs pass under a 6×12´ exactingly painted ´Rules and Regulations´ sign in rainbow colors that strictly forbids contraband such as drugs, electronic devices, weapons, fighting, and touching a guard. The punishment is solitary confinement in the Hole for stealing, fighting or breaking most of the other rules. The Hole which a few of the men cringe to recall is 1×2 meters by 2 meters high with only a mattress from which a person may not leave for his stay of one week to two months on bread and water.

I don’t meet the maximum Block Leader but he and the other Leaders seem to run the penal institution. Eight Pavilions with eight Leaders, as outside where chiefs run villages. Their responsibility as mediators is to iron out problems before they would annoy the authority. The guards are loath to enter any of the Blocks for any reason without a SWAT team, and so the Leader keeps them out of the loop. I am told that the guards never taunt or hit a prisoner. Let’s say an inmate infracts the most commonly broken rule of no fighting that if not for the in-house system would result in being sent to the Hole for two weeks and going stir. Instead, the offender is brought by the Enforcer to the Leader who listens patiently, decides on a short counsel, or as often as not doles out harder encouragement. That discipline, as in my school days, is a hit across the hands with a ruler, except in this case the offending prisoner is made to cross his hands and given blows on the palms with a heavy rattan stick. One young guy displayed bruised swollen hands, and attested, ´The stick hurts like heck!,’ but cheerfully accepted it in lieu of the Hole.

In contrast, American prisons host fairer courts, shorter sentences, broken rules, snitches, fighting and gangs, and combative guards. The Iquitos penal complex is more like an American turn of 20th century rural town except no one is at liberty to leave.

The Russian as the sole gringo in the community seems to be the King of all and kept in check only by the guards and his Block Leader who also respect him, if not for his physical prowess and sharp mind, then for his wallet that is always padded for bribes to get nearly anything he wants. He is totally at ease among the Peruvians on both sides of the bars who all seem in awe of his size, wealth, intellect and communication skills.

His parents do not know he’s in prison because it would embarrass them, and the returned brother to Russia has told them their son is walking in the jungle looking for wood. He has served one of a three year sentence and is content to fill in for his brother except that he’s bored to tears. It is more expensive to bribe himself out because of his noteworthy case and large bankroll that may be pinched longer by the court and jail. Yet, he claims that after one year imprisonment the balance has tipped in his favor and he is working with two Lima lawyers on the proper fee to be sprung.

‘How do you communicate with the lawyers all the way in Lima,’ I ask after we drop off the Teacher at the carpenter shop and stroll on to Pavilion 3. He smiles quickly and silently, guiding me by the elbow past the turnkey, down the hall where I first walked in alone and into his cell. The black chess pawn sits lonely on the desk. He asks if I play. I say I used to. He remarks that he started playing at age six, but it is just a hobby. ‘Chess is to Russians as baseball is to Americans.’ He pulls a board from under the mattress, I sit on his bunk and he on a crate with his back to the cell door. He extends fists across the board and I choose the left, that opens to a white pawn and we quickly set up the pieces. The Teacher walks in with something in his hand too, hops surreptitiously into the bunk behind me and draws the curtain.

There is no chess clock except the game must end in one hour to get me out before the end of visiting hours at 2pm, and if the game has no winner in that time we agree in advance to a draw. I have one strong opening, the King’s Gambit, and push the King’s pawn two jumps ahead against the Russian. The Gambit is taken and the game evolves into a wild and wooly middle with hands flying over pieces like a Bruce Lee movie. In thirty minutes of nearly flawless play at one of the most beautiful games of my life, in a King and pawn end game I am a pawn up. He rises and tips his king, shakes my hand, and then draws open the curtain behind me.

The Teacher is reclined on the bunk texting his attorney to get out of jail in three months for $1000 to a judge. He has brought the contraband phone perhaps from the carpenter shop to escape the weekly scrutiny of unannounced Swat Team cell shakedowns. I nod in understanding at them both and turn for a long walk out without looking back.

The Iquitos prison visit was an invaluable seminar where I learned that behind walls and wire and bars life goes on not so differently as outside on the streets of Peru. It is the most pleasant Crossbar Hotel of ten I’ve visited around the world, and nearly anyone could bear a year looking through the slats here though I have no desire to return except for a good chess game.

Dec

12

 My girl has escaped to the Galapagos for a pinch hitters holiday. Last minute, she substitutes for a broken off boyfriend on a mother-daughter romantic cruise. I am left to fend alone back home. This provides the opportunity for a swift beer with a friend to turn into an impromptu night out, clubbing in Shoreditch.

One needs a spright female on hand to perfect the nightclub experience. I love to dance, but my beau is far away and tonight I boogie alone. I content myself with being a wannabe insipid Susan Sontag for the evening and see what market lessons can be pried from a meta state of mind.

Shoreditch is now Chelsea mark II. We pile into one of the McNightclubs that have sprung up, impoverished attempts to replicate the Shoreditch of old. But only the immigrant toilet attendant has stayed the same, swallowing his multi-lingual, degree educated pride to beg pound coins from drunks passing through his urinaled office. The rest is all change.

In five years, all the themes of Global Capitalism have sprung through. Asians and Russians. New money. The true roughneck suburbanites have been pushed out to cheaper Dalston, preparing the cultural groundwork for its inevitable rich-bitch colonisation in ten years time. London spreads its tentacles outwards, a multicultural Tokyo in the making.

Everything must bubble up through the ecosystem. Out in Dalston, they're preparing the cool of tomorrow. That's where the real coke and E, life limiting Epicureans can be found. Venture a little further, be the artists and repertoire man for the market, and you might learn something. When Robert Johnson sized up his Asian shorts, he knew the outcome. That the cracking of the currency band would also break the backs of subsistence Thais. He knew the multi-order effects that would ripple through and was prepared. But most have such a vanity of their profession that they don't want to think through the other side of the trade.

The margins must inform the centre always. Innovation is never from the middle out. Here in Shoreditch, they deceive themselves that they have urban cool to themselves. But the beats of Dalston today cannot be offered up to Shoreditch's dance floors. Social permission must be given first. Schwarzman has whip hand. David Swensen tells you to pile into PE. You do so gladly.

 Doorman paid off and inside, I pull off my jumper and roll up my sleeves. I suddenly remember I dressed scruff for a quick beer. Hauling furniture for my father in law has stunk up my shirt. But here's a market lesson: sometimes you can blend into the beta and cover over your current flaws. In the funk of a club, nobody can spot my sub-hygiene; right now I don't need to do better than the crowd. And soon, my own deposit to the toilet attendant wins a spray of Calvin Klein from his collection.

For the youngsters seeking romance, the club is a floor market of old. Position and size is offered in full view of all players. Bargains are transacted; matched orders are paired and moved off to the side. Like the great traders, the great seducers know core principals, but the art can't be reduced to a set of rules.

Look to the DJ. He is a super skilled hauteur, playing all the Mixmag approved material for pop connoisseurs. But he is deeply mistaken. Watch the floor. He has forgotten this is pretend, bought hedonism for urban wealthy. Experian's Mosaic calls them Alpha-As. This crowd wants the cheap, easy beats. The Ibiza classics. They don't know how to dance to this complex, nuanced stuff.

Similarly, to shoot the lights for your clients, you need to pick the right ones. Play in the connoisseur nightclubs only. The right families know to endow the smart boy with his bar mitzvah gift and give him room. But if you're sourcing from the broad crowd, offer 200 over the index only. Play the same tune as everyone else, just execute a handful better.

Switch to later - back home and unwinding briefly in front of the TV as the ringing clears my ears. Bruno Mars shows how the DJ should have worked it. Bruno mixes doo wop and reggae traditions with a sweet voice. He's an ultra-straightforward mix of old time Motown, Jackson, with a hint of Blues Brothers. Nothing he is doing is rocket science; Bruno is just great at it. When suddenly his big band start to dance behind him in syncopation, the crowd goes wild. The moves are so simple, and that's why we instinctively love it. Our need to empathise with the protagonist overwhelms everything else. We could do that! Bruno's reward is scale: best-selling global artist of 2011. Get out of your own way.

The market is alike: it wants to trend to a simple tune and dispose of nuance. Into the election we get a consistent menu from the central bankers, Merkel and Obama. It vibes simply and pleasantly and the market moves accordingly.

 On the club dance floor the same can be seen. As soon as the DJ offers the basic beats, the crowd immediately ratchets up and energy spreads across the room. A range breakout has occurred. What's our leading indicator? Certain attendees got to see the DJ's playlist before hand and know when we are set to change tone. The cool-kids roughing with the bouncers and the bar girls. Watch for when they rush to the floor. Don't want to live that lifestyle ourself: hedonism takes its toll. But we can watch for their moves.

Same for the break-ins. When the DJ falls back to his instinctive complexity, uncertainty starts to spread and the floor slowly clears. But not quickly. By being alert, we can get out in front and hit the bar first.

I shift naturally to rhythm whatever it is. Girls look quizzically as to how, and compliment me on my moves as the rest of the floor jars. Similarly, the good trader sticks to his system, but adapts to the nuance of the current tune. I would readily exchange all rhythmic skill for even an ounce of the same in the market.

A Chelsea girl grabs my ass as she shuffles past on the dance floor. When you want to raise capital you can't and when you've got your fill, everyone's interested to add more. I ignore it and self-indoctrinate, thinking to my girl in the Galapagos. Don't be tempted into the cheap, impulsive trades. Don't go on tilt. Remind yourself of your principals and stick to your proven system. Work your long term plan and you'll profit more.

The light must be catching me favourably or my perennial uniform of old chinos and worn out dress shirt must have accidentally intersected with the current whim of Shoreditch fashion. But any false flag cool on the dance floor belies my cardigan wearing, shoe staring tendencies. Do your diligence in the light of the day, not the setting the vendors or advisors have picked. Don't bid the banker's book for an asset. It's the pork not the rouge that matters on the lipstick wearing pig.

 A drunk in our party rabbits into my ear. I can't make head nor tale of what they're saying, but I'm sure it makes perfect sense to them. They are intoxicated by the market of the moment and convinced of its internal logic. Tomorrow, a hangover.

Back home. After only a few hours sleep, I pay the penalty, rising too early to return a borrowed car on-time to a friend. I peer brain-dead over the steering wheel onto the icy road and hope for the best. Selling out hard-touch front month options on myself, I get to my destination safe and in favour. We all do it, let's hope the vol isn't mispriced.

Victor Niederhoffer writes: 

Mr. Owen's fine soliloquy is wonderfully poignant and is as good as the soliloquy from Carousel and should be made into a ballet or set piece of a musical.

Nov

19

 I have often thought that the lyrics of Oscar Hammerstein contained tremendous deep truths of the human spirit, and I always encourage those new to the American song book to listen to Hammerstein rather than Sondheim. Here's how his nephew, eminent author of An Empire of Wealth, put it: "Like all artists whose work endures, Oscar Hammerstein used aspects of his own life to provide a window through which less-gifted people might see more deeply into the human soul and learn better what it is that makes us human". I believe the Hammerstein lyrics are good for market people and we listen to them every day here.

Jeff Watson writes: 

You're right about Hammerstein's lyrics 100%. I listen to Hammerstein once a week, maybe twice (usually a favorite from South Pacific). I play a wide variety of music here. It can be very pleasing to the ear as well to the soul to successfully fit the music to the tone of the market, and it's harder than it looks. A wine steward pairs wines with courses, a successful speculator pairs the markets with music. Sometimes it's Chopin, sometimes it's Tony Bennett, maybe The Brian Jonestown Massacre, could be Frank Zappa, Celtic music, Cajun waltzes, East Texas Swing, and on and on. The grains alone sing a greater variety and styles of songs than all the musicians and songwriters in the world combined. Admittedly, this speculator finds it very hard to match the music with the market, and when I can't get it right, nothing beats the Overture from William Tell or March of the Valkyries to wake things up. 

Nov

19

 Umberto Eco, in his studies of mass media and culture, has an essay on popular new devices. His thesis is that they start out by being used by the wealthy and then get used by the common man, and lose much of their value from the law of diminishing marginal returns.

He uses the railroad and cell phones as examples. I have found that many new things like the smart phone have decreased their marginal productivity. Studies show that 30% of users sleep with their smart phone next to their bed. I have not had the displeasure of being interrupted in romance by a smart phone ringing yet and answered, but I am told it is common.

What are the implications of this for market analysis, especially of individual stocks.  I find that my past research which did not use "as is" files and was heavily dependent on compustat is deeply flawed. Indeed my approach seems flawed. I am trying to improve for the future. My kids seem to make money with their stock purchases based strictly on the future growth of popular products among the younger generation. I wonder how to improve.

Thomas Miller writes:

Maybe Peter Lynch was on to something although I don't see how his "method" can be quantified.

Aug

12

 Cold reading has much in common with market charlatans:

"There seem to be three common factors in these kinds of readings. One factor involves fishing for details. The psychic says something at once vague and suggestive, e.g., "I'm getting a strong feeling about January here." If the subject responds, positively or negatively, the psychic's next move is to play off the response. E.g., if the subject says, "I was born in January" or my mother died in January" then the psychic says something like "Yes, I can see that," anything to reinforce the idea that the psychic was more precise that he or she really was. If the subject responds negatively, e.g., "I can't think of anything particularly special about January," the psychic might reply, "Yes, I see that you've suppressed a memory about it. You don't want to be reminded of it. Something painful in January. Yes, I feel it. It's in the lower back [fishing]…oh, now it's in the heart [fishing]…umm, there seems to be a sharp pain in the head [fishing]…or the neck [fishing]." If the subject gives no response, the psychic can leave the area, having firmly implanted in everybody's mind that the psychic really did 'see' something but the subject's suppression of the event hinders both the psychic and the subject from realizing the specifics of it. If the subject gives a positive response to any of the fishing expeditions, the psychic follows up with more of "I see that very clearly, now. Yes, the feeling in the heart is getting stronger."

Jeff Watson writes:

Here's a great how-to" book on cold reading.

Bill Egan writes:

A complementary resource I recommend is "The Definitive Book of Body Language" by Allan and Barbara Pease. Always watch peoples' body language and compare it to their words, and watch how both change over time. For example, when the fraud thinks he has you, there is often a split second where he will shift his body position and display a chilling facial expression like a fox looking at a chicken. That half-a-second is real important to you.

Jim Sogi writes:

Trial lawyers look for cues in the jury's race, clothes, hair styles, books or magazines, shoes, apparent class, education, prior experiences who they speak with, their background information on their questionnaires to get a read on how they might decide a case. Trial consultants use broader data on how similar groups might react to similar situation. During Voir Dire, a short question and answer period, the lawyer can ask the prospective juror some questions that might shed light on the juror's prejudices that would justify being removed from the panel or dispose the juror against the lawyer's client. Again, all forms of cold reading.

A fun game I like to play while people watching in restaurants, or on the street is to look at people and try to figure out without anything more than watching from a distance, where they are from, what they do, what the relationships are between members of the group, what they might be like. Family groups on vacation are a pretty easy read as well as their internal family dynamic. Old couples are straight forward. Groups of young people tend to send strong signals. Groups of business men, groups of tourists, newlyweds all have characteristic mannerisms. The next level to try discern their relationship, what they are like and get an idea about them from only external signals.
 

Jul

18

 Talking about morals, there seems to be no shorting of those without. Note the Secondary Scam. Wow, is this another reason why some in the market keep on getting clipped and have a lack of versatility. "Consistently more are likely to show renewed interest in contact from fraudsters". The magnetic attraction …of what? Excitement, revenge, thrill seeking–it smells of lack of due diligence at a minimum.

From "Nigeria With Love":

"Meanwhile, ''The Psychology of Scams'', a study commissioned by the UK Office of Fair Trading, shows people who have already been a victim of a scam are consistently more likely to show renewed interest in contact from fraudsters. One trick of conmen is the ''secondary scam'' in which they contact a victim some time after they realise they have been scammed and pretend to be lawyers, government officials or police from the scammer's country. This happened to Munro. ''Sean King'', whom she chatted with on another site, told her he had also been the victim of a scammer. He said the Economic and Financial Crimes Commission, a Nigerian law enforcement agency that investigates 419 scams, had helped him and a friend to recover their money. Her local police had already suggested she get in touch with the EFCC, but ''I emailed them and never got a reply,'' she says. Sean told her he would get the employee who had helped him to contact her. ''So he [the EFCC employee] emailed me and then it was all on again,'' Munro says. The emails had the same EFCC logo as she had seen on the site to which the Australian police had directed her. ''They said because such a large amount of money was due to me, I had to get anti-money-laundering and insurance certificates from the bank. All the documents that came to me looked totally believable,'' she says. ''They named the guy who scammed me and said they had his IP address. It was very clever. I was sucked in.'' Thousands of dollars later for a variety of ''fees'' and ''certificates'', Munro realised she was being scammed again.

An interesting article on The Psychology of Scams

Jun

18

 U.S. earnings seem to be humming along fairly well. Why is unemployment staying so high? What are thoughts on the "why" of continued high unemployment. Also, what would change that inducing hiring?

Steve Ellison writes:

Eric Falkenstein posits a correlation between bank stock declines and the unemployment rate which I find very interesting.

Gary Rogan writes:

"Confidence" (or lack thereof) is the stock answer from the right, and "corporate greed" on the left: those two are quite common these days in many documented discussions.

There is not specific reason why corporate profits have to lead to decreasing unemployment, although under normal circumstances they are positively correlated. They haven't been for a few years as the graph in this NY Times article demonstrates [link may require registration].

The key determinant of making the decision to employ someone is the answer to this question: do I need someone right now, in the geographical locale, to address current or future demand? And given that getting rid of people is expensive and unpleasant, there is a hurdle attached to the "need", and of course being able to afford the employee in the first place is another hurdle.

Corporate profits do help with macro demand and being able to afford new employees, but profits only translate into demand if employers have enough confidence to invest in new equipment/building, etc. or hire someone based on the future estimate of "need". So the lack of confidence does freeze the whole process in its tracks. High unemployment itself leads to lower macro demand on the part of the consumers due to the lack of incomes, so the only real way to break the deadlock is for the businesses to have enough confidence in the future to invest or hire. Of course the Keynesians believe in a totally different way to break the deadlock, but as I have mentioned multiple times I consider that nonsense.

High levels of unemployment compensation only slow down employment recoveries instead of doing the opposite as those on the left believe. On the macro level, they lead to mild consumer demand destruction as opposed to the supposed increased demands as they spend their transfer payments.

The geographical question is of course very big and complicated. There are a lot of alternatives to hiring locally and due to the tax-related lack of of foreign income repatriation as well as foreign political pressures, it's hard to correlate global profits with local employment anyway.

I personally believe that until Obama is out of office and the fate of the health bill is undecided (which may or may not be resolved in a few days) the employment picture will not improve. What seems like a slow-motion collapse in global demand may matter even more depending on the magnitude, but is hard to forecast. The recently documented household wealth destruction in the last few years doesn't portent a good story for local demand either.

Rocky Humbert writes:

Gentlemen:

In lieu of a titillating academic paper to share, I will reprise my typical rant: There are only two things on which ALL economists can agree: (1) Resources are limited; (2) Incentives matter. So, let's pull out the old Supply and Demand curve which derives from both (1) and (2) and repeat out loud: Ceteris paribus, if the supply exceeds the demand, the price must fall to achieve equilibrium. (A) If there is excess labor (aka unemployment,) the price of labor must decline to clear the excess from the market. or (B) The demand (hiring) must increase dramatically from the status quo. All of the political squawking focuses on the demand side. I don't hear anyone on the left OR the right talking about pay cuts as a way to clear the labor market. Maybe I should run for President on the platform that, EVERYONE should cut their wage rate by 30%. I promise you that unemployment will be below 4% before the end of my first year. Any volunteers to be my campaign manager? (It's an unpaid position — which is a first step towards reducing the unemployment rate.)

Andrei Kotlov writes: 

This is a reply specifically to Rocky's [witty and entertaining] latest post (as it has little to do with the original question); an economics post to follow in a couple of hours.

(1) There are no incentives in physics; only cause and effect. Incentives imply free will. An agent's behavior *tends* to be affected by incentives—but it does not have to be. (Do not get me wrong: I do fully agree with your original "incentives matter.")

(2) The second law of thermodynamics implies increase in entropy, but I am afraid only when no agents [of free will] are involved. The latter can [and do] decrease chaos.

(The main objection to your statement "resources are limited" should have been not an objection but a modification: "agents can use [albeit limited] resources with varying efficiency." Of course, you agree with such a restatement yourself.)

(3) Perhaps most importantly, "experiments" in economics are, in principle, not replicable because (as Mises has explained) agents are capable of modifying their behavior based on the outcomes of previous "experiments."

Andre Clapp writes:

As a former physicist, I'm not sure I agree with the statement that "There are no incentives in physics". As previously pointed out, objects and systems have a natural tendency to seek potential energy minimums (a ball is "incentivized" to roll down the hill, and requires intervention to prevent it from doing so). Similarly, there is a natural tendency towards greater disorder (castles turn into piles of stones naturally, but a great deal of "intervention" is required to turn a pile of stones into a castle.)

I find the analogy to be quite good. The natural tendencies of physics can be harnessed to create rocket fuel that makes a rocket fly. The natural tendency of humans to enrich themselves and make a better life for themselves and their families can be harnessed to make a better and more productive economic system. I agree that the ball rolling down the hill has no "free will", but incentive is just a word… I'm not sure if it implies free will or not. I'm not sure it matters.

As an aside, the question of whether humans have "free will" is actively debated in the relevant community. In thinking of how to design an experiment to demonstrate the concept of "free will", I find the concept to be poorly defined, if not undefined, and therefore meaningless (to a physicist!)

A pleasure to be part of the discussion group.

Respectfully yours,

Andre Clapp (The rocket scientist)

Andrei Kotlov writes: 

 To Andre Clapp: one indeed needs to start with the concept of free will—but, may I hide behind the statement that it is too big of a topic for me to cover here? I have spent long time thinking on the nature of free will, and still do not know how to summarize it in a few sentences. To me, it is a combination of randomly-fired processes (e.g., discharges in the neural net) with a deterministic ability to select. Ol' good dialectical "quantitative becoming qualitative."

If one accepts the notion of free will (not as an article of faith, but scientifically) then the word incentive is only meaningful in the presence of a choice. If you want to equate 'incentive' with 'cause,' well, you have just redefined the word meaning "a thing that motivates or encourages one to do something." Once again, in physics, one speaks of cause and effect. When agents [of free will] are involved, the relation between the causes and effect may not be traceable [because of the complexity and multitude of the randomly-fired prior events in the brain over the course of each agent' life]. Thus, it makes sense to separate 'incentives' (for agents) from 'causes' for 'inevitable' effects, in particular on inanimate objects.

Andre Clapp writes:

Hi Andrei,

First point: In the world of quantum mechanics the future is not completely predictable, even for inanimate objects (particles) in the absence of agents. The world is not deterministic, it is probabilistic, a point that N. T*leb seemed to understand well when he wrote "The Black Sw@n". It is not just humans that are to some extent unpredictable. The ball rolling down the hill is (to some extent) unpredictable. Does that mean the ball has free will?

I think it is better to simply think in terms of "causes" and "effects". "Free will" to me is an article of faith or religion, not science or reason. The fact that you cannot define it, yet ask one "to accept it", points very much in that direction.

Not that theology is a bad thing, but these are questions without right or wrong answers. "How many angels can fit on the head of a pin?" Tell me what (define) an angel is, and I'd be willing to discuss it, otherwise it belongs in the realm of religious leaders, artists, and traumatized children and families. In other words, in the realm of emotion. As I'm sure you know, centuries were spent (wasted?) discussing this very question. (And no, "people with wings that come from heaven" is not a definition of angel.)

(I think) I know how you feel. This concept is so deep in our culture, like "the soul", that it is difficult to reject. We feel like something fundamental is being ripped out of us. And yet, it doesn't bear up well under scrutiny, or the light of reason. Even something as fundamental as a definition is missing! Surely that tells us something…. In the end, is it really so (emotionally) different to say that human actions are a result of cause and effect, than to say that everything happens because it is a deity's will (an idea that many people find comforting, not threatening.)

All the best,

Andre - The rocket scientist
 

Mar

28

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

- Jonathan Edwards, US Correspondence champ.

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

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

Alan Millhone, the Checker Pres, replies: 

Dear Chair

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

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

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

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

Sincerely,

Alan

Anatoly Veltman writes: 

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

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

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

Michael Chuprin writes: 

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

Anatoly Veltman writes: 

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

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

Feb

5

 BIG MIRACLE aka Everybody Loves Whales

Directed by Ken Kwapis Reviewed by Marion D.S. Dreyfus

Cast: Drew Barrymore, Kristen Bell, John Krasinski, Dermot Mulroney, Vinessa Shaw, Ted Danson, Stephen Root, James LeGros, Rob Riggle, Bruce Altman

Drew Barrymore is the very dictionary pic of a bleeding-heart liberal, and naturally, her character is a Barbra Streisand-style loudmouth (in “The Way We Were” and a dozen other irritating stereotyped Jewish campus radicals)(albeit cute) called Rachel Kramer.

We are up in Barrow, Alaska: whale country. It’s 1988. A newsie reporter (Krasinski) import recruits his ex-gal pal (Barrymore) to rescue the family of gray whales trapped under the ice up near the Arctic Circle. This event really happened. It was apparently all over the papers and on every news program for weeks. (Were you aware of this ubiquitous unfolding drama when it was playing out? What were you doing then that you could have missed this 24/7 rescue story in the far north?) Three whales caught amid a vast unbroken swath of ice, with winter closing in, intuit it is almost impossible for the family to escape into the open seas without asphyxiating.

The open space they keep surfacing in is fast icing in as the temperatures plummet to 20, 30 and 40 below. Forced to come up for breath every few moments at the only opening in the frozen waterway, and whether the whales in the film are real or animated synthesized creatures, the heart goes out to them.

They know they can’t make the miles-long swim to the open water without breathing. How the news media alerted the listening and watching public—especially school kids, but not confined to them alone—to their predicament makes for a cheering tale. Along with the good-natured indigenous Alaskans are the charming, mild-mannered talents of John Krasinski, a latter-day Jimmy Stewart, we think, for cowlicky, grinning Aw shucks-ism; the beauteous Kristen Bell (almost too pretty to believe, even as a newscaster, even in the almost total immersion cold-weather protective swaddling everyone sports) and sturdy Dermot Mulroney as a chopper rescue and haul pilot for incoming color and opposing viewpoints.

Ted Danson is a standout as a dim but PR-savvy oil magnate. (No matter how adorably such films are premised, it’s always appropriate to point a finger at the big bad oil companies and sigh with delight at the radical noisemakers at the company proxy meets. What’s redeeming here is that the Richie Rich’es realize it’s in their interest to help these magnificent creatures survive, even if it costs millions, and does not figure on the company books.) There is lots of joshing nudge-nudges from 20:20 hindsight.

The Ken Kwapis fluke-tailed nature story is refreshing, wrenching, full of icy, snowy vistas and wise Inupiak elders. It is also (Holy blubber, Batman!) full of the fattest-looking cast this side of a Goodyear blimp-assembly warehouse. Everyone is hugger-muggered in down and bulk, puffy scarves and fur-lined everything else. Faces are scraggly with ice-particled beards, and pens stick fast to the absent-minded tongue.

Among the film’s charms are the interpolations of actual news clips of Tom Brokaw, Dan Rather and Peter Jennings, lovely Connie Chung, “President Reagan” and a flotilla of much-fresher-looking TV stars of today’s vintage (Larry King’s suspenders are some 23 years younger). A Russian ice-breaker and its tough crew feature prominently, as do the inklings of a Cold War thaw. Near the end, the camera cuts to a surprise talking-head TV appearance of a well-known personality, catching alert audience members by surprise, though it is perfectly reasonable to see this person in that setting at that time. Another excellent aspect is that the Inupiak are shown as deeply moral, ethical people with a great deal of dignity and thoughtfulness about their millennial ways.

No nudity. No Anglo-Saxonisms. A small cache of extraneous subplots as the predictable people find their predictable liplocks. A film for children (even if they don’t know a soul in the cast and clips of the original incident) and their parents, singles or teams of sled dogs, immigrants and fishermen.

A big hand to “Big Miracle.”

Jan

16

 Market implications?

If the enemy is in range, so are you. -Infantry Journal

It is generally inadvisable to eject directly over the area you just bombed. -US.Air Force Manual

Whoever said the pen is mightier than the sword, obviously never encountered automatic weapons. - General MacArthur

You, you, and you … Panic. The rest of you, come with me. Infantry Sgt.

Tracers work both ways. -Army Ordnance Manual

Five second fuses last about three seconds. - Infantry Journal

The three most useless things in aviation are:Fuel in the bowser; Runway behind you; and Air above you. -Basic Flight Training Manual

Any ship can be a minesweeper. Once. - Naval Ops Manual

Never tell the Platoon Sergeant you have nothing to do. -Unknown Infantry Recruit -and if he asks who knows how to drive a Cadilac…….keep your mouth shut !

If you see a bomb technician running, try to keep up to him. - Infantry Journal

Yea, Though I Fly Through the Valley of the Shadow of Death, I Shall Fear No Evil. For I am at 50,000 Feet and Climbing. - Sign over SR71 Wing Ops

You've never been lost until you've been lost at Mach 3. -Paul F. Crickmore (SR71 test pilot)

The only time you have too much fuel is when you're on fire. -Unknown Author

If the wings are traveling faster than the fuselage it has to be a helicopter — and therefore, unsafe. -Fixed Wing Pilot

When one engine fails on a twin-engine airplane,you always have enough power left to get you to the scene of the crash. -Multi-Engine Training Manual

Without ammunition, the Air Force is just an expensive flying club. -Unknown Author

If you hear me yell; "Eject, Eject, Eject!", the last two will be echos. If you stop to ask "Why?", you'll be talking to yourself, because by then you'll be the pilot. -Pre-flight Briefing from a Canadian F104 Pilot

What is the similarity between air traffic controllers and pilots? If a pilot screws up, the pilot dies; but if ATC screws up, …. the pilot dies. -Sign over Control Tower Door

Never trade luck for skill. -Author Unknown

The three most common expressions (or famous last words)in military aviation are: "Did you feel that?'' "What's that noise?" and "Oh S…!" -Authors Unknown

Airspeed, altitude and brains. Two are always needed to successfully complete the flight. -Basic Flight Training Manual

Flying the airplane is more important than radioing your plightto a person on the ground incapable of understanding or doing anything about it. -Emergency Checklist

The Piper Cub is the safest airplane in the world; it can just barely kill you. - Attributed to Max Stanley (Northrop test pilot)

There is no reason to fly through a thunderstorm in peacetime. -Sign over Squadron Ops Desk at Davis-Montham AFB, AZ

You know that your landing gear is up and locked when it takes full power to taxi to the terminal. - Lead-in Fighter Training Manual

As the test pilot climbs out of the experimental aircraft, having torn off the wings and tail in the crash landing, the crash truck arrives.

The rescuer sees the bloodied pilot and asks,'What happened?' The pilot's reply: "I don't know, I just got here myself!".

Tom Blackwood replies:

 Market implications? How is this:

‘If the enemy is in range, so are you.’ -Infantry Journal

-When a ‘trend’ is obvious, there are few people left to join it, and there is probably more profit in going the other way.

‘It is generally inadvisable to eject directly over the area you just bombed.’ -US.Air Force Manual

-If you need to get out of a big position quickly, don’t let the dealer read you and preferably execute where they don’t know your exposure. You can net it off later.

‘Whoever said the pen is mightier than the sword, obviously never encountered automatic weapons.’ - General MacArthur

-Don’t think you can compete against the smartest minds using the best technology with a little trend line, moving average, and textbook cliche.

‘You, you, and you … Panic. The rest of you, come with me.’ - Infantry Sgt.

-Do not do what everyone else is fond of doing. Let them do it far away from you and profit from their mistakes.

‘Tracers work both ways.’ -Army Ordnance Manual

-This relates to prudent safeguards when putting on size, especially not leaving stops with brokers. Having a hard stop gets you out, but also gets you seen.

‘Five second fuses last about three seconds.’ - Infantry Journal

-Never try for the first or last eighth which are the two most expensive ticks in trading. (paraphrased)

‘Any ship can be a minesweeper. Once.’ - Naval Ops Manual

-Importance of position sizing. Not placing any career defining / ending trades in volatile conditions.

‘Never tell the Platoon Sergeant you have nothing to do.’ -Unknown Infantry Recruit

-and if he'd asks who knows how to drive a Cadilac…….keep your mouth shut ! Traders who always need action and do not understand that the odds do not always favour their participation will end up being given something unpleasant to do - tending to bad trades.

‘If you see a bomb technician running, try to keep up to him.’ - Infantry Journal

-When flight to quality / risk off, buy bonds.

‘Yea, Though I Fly Through the Valley of the Shadow of Death, I Shall Fear No Evil. For I am at 50,000 Feet and Climbing.’ - Sign over SR71 Wing Ops

-Once you intimately understand yourself, your abilities, and trust in your risk management there is nothing to fear from trading.

‘You’ve never been lost until you’ve been lost at Mach 3.’ -Paul F. Crickmore (SR71 test pilot)

-Have a plan for every eventuality and follow it. If something unexpected happens, get flat. If you have made a fat finger, don’t think about the loss or the exposure just get flat. If you’re on the wrong side of a flash crash, get flat now not 60 points lower.

Perhaps lessons for the trader rather than lessons about the market. The rest don’t seem to “fit” for me or I lack the creativity, so not going to force. Got the old brain doing something different though, thanks….
 

Jan

14

 This one is Eddy's fault. She wanted to know about the gold standard.

The authors of the Constitution had two concerns about money - first, they wanted the Federal government to be able to collect taxes to pay veterans' benefits and the cost of future wars; and, second, they wanted no one - the states, private individuals, the Federal government itself - to be able to deal in funny money. They thought they could solve both problems by giving the Federal government a monopoly on legal tender and then requiring Congress to limit the Money used in payment in the United States to Coin - i.e. precious metal. What is fraudulent about our present system is that the Federal government still has its legal tender monopoly but it no longer follows the rules laid out in the Constitution. Instead of using gold coin, the Federal government uses its own bank-created Credit as Money and requires all of us to accept it as the sole legal tender for all debts public and private.

The authors of the Constitution were so suspicious of what Congress might do that they did not even allow it to have a monopoly on Money. They required Congress to allow Foreign Coin to used as equivalents for the United States' own Coin. The authors of the Constitution knew from bitter experience that Congress was capable of being a fraud about money; country had seen the Continental Congress during the Revolution issue IOUs and then require people to take them in payment of the government's own debts. By allowing Foreign Coin to be Money, the authors of the Constitution were assuring that people could refuse to take any funny money that Congress tried to pass off in the future. This is why the Constitution has its specific provisions requiring Congress to "regulate" the Weight and Measure of both U.S. and Foreign Coin. "Regulate" does not mean "make up whatever rules we like" as it does now; it meant "make regular" - i.e. make equal.

Where the authors and the first Congresses made a mistake was in thinking that they could regulate more than 1 kind of precious metal as Money, that they could set by law the ratios of the prices of gold and silver and copper could be fixed, by law. They made this mistake because everyone in the world believed that Money had to have an official Price; it could not be left to the market to decide what Money was worth. (A few oddballs - the Frenchman Cantillon, the Englishman Gresham - knew better. They both observed that Money has to be unitary; otherwise, the smart people will always be swapping the cheaper metals for the more expensive ones.)

Even with this mistake of multi-metalism, the authors of the Constitution succeeded in achieving their aims for U.S. money. Congress was able to be extravagant - to start wars when they did not have the money to pay for them - without permanently destroying the value of the country's savings because no one could be forced to accept anything other than Coin as Money. If Money became short because people and/or the government had used too much credit, the people who had saved Money would find bargains. If people and/or the government became too cautious and hoarded Money, then the rewards for lending and granting Credit would go up. The interchange between Money and Credit would be the fundamental check and balance against future Congresses overreaching their financial authority. Under the Constitution Congress would be free to borrow on Credit like everyone else but it would only be allowed to coin Money or have Coin accepted as legal tender.

What the authors of the Constitution could not imagine is that future Congresses would allow the Federal government to use its own bank-created Credit as Money. That would have seemed to them against all common sense. Everyone in the country had known, from direct experience, that allowing Credit to become Money produced ruin. Savings became worthless, people abandoned work for speculation, and enterprise was destroyed. If the government's Credit was required to be accepted as legal tender, then everyone could go to the government to get their free Money. "Cash" would have no meaning because people could never be required to pay up in Coin. The authors of the Constitution knew that Credit was wonderful stuff. It was easier to use than specie and was flexible; people's ability to promise to pay was not limited by the coins in their pockets. But there had to a limit to how much people could promise and borrow, and that limit was Money; and Money had to be actual stuff that people could demand when they did not want paper, when they doubted that other people's Credit was good. Almost all of the time people would use Credit for trade; they would buy and sell things using Notes because it was the better way to do business. But, in the background of everyone's mind there still had to be the understanding that people could decline further exchange of credit and demand actual payment instead. With Credit there was always going to be the risk that one was getting a devious, suspect instrument of exchange. If people were free, they would trade; and, in trading, they would be certain to deal in all kinds of promises - some of which will be completely ludicrous. These rules would apply equally to the government and to private business. The Constitutional gold standard would not prevent people or Congress itself from committing fraud and folly; but it would assure that they were punished and not rewarded if Money was the stuff that was impossible to counterfeit and impossible to multiply with the stroke of a pen or the turn of a printing press (or, today, the click of a keyboard).

We now live in a very different world of Money and Credit. Foreign Coin is no longer a check and balance on Congress' monopoly authority over legal tender; every government in the world now uses its own IOUs as Money. That leaves only the Constitutional gold standard as a restraint on the government and people's ability to expand Credit without limit. The country has been here before. During and after the Civil War, the Federal government's IOUs - its Greenbacks - were made legal tender, by law. Many people thought this was fine and wanted Congress to keep printing Greenbacks to pay for rebuilding the country after the war. What Ulysses Grant understood was that if Congress kept spending Money as it had during the war, it would turn the country into a nation of monetary alcoholics. The demand for Credit would never be restrained. Almost single-handedly Grant forced the Congress to commit itself to restoring the gold standard, to promising to redeem all paper money in gold Coin. Many people were horrified by the idea; the New York Times (surprise!) predicted that there would be complete panic. Speculators tried to buy up all the country's gold. But, on the actual day when the Federal government resumed the convertibility of all U.S. Bank Notes into gold coin, the world did not rush to the Treasury to swap its paper for specie. The monetary day of judgment failed to appear and was, in fact, a big yawn. The very act of committing the U.S. to restoration of the Gold Standard had sufficiently re-established the credit of the U.S. government that people were content to continue to deal in the credit notes as if they were as good as gold - which they were.

The same result would happen today if Congress adopted a new Specie Act. I know this is a fantasy; but imagine that Congress enacted and the President signed a Specie Act that legisltated that, after January 1, 2013, U.S. Money would be a Liberty Coin of a fixed Weight and Measure of gold and all government Credit Notes - the paper currency called Federal Reserve Notes printed by the U.S. Treasury - would be convertible into Liberty Coin at the value set by the market . The market would instantly value our current Greenbacks at their worth would be in gold. A dollar whose fluctuating value would be fixed by the market's dealings would not, by itself, save the credit of the United States; but it would instantly end the further abuse of that credit by the Congress and the Federal Reserve. That might, by itself, be enough.

 A promise to pay can, as the original J. P. Morgan said, only be valued by the character of the borrower. As long as Money itself is solid, people can accept the risks of Credit as the price of its convenience and opportunity for gain. The very argument used against the gold standard - its inflexibility - is true; when one is well established, the price of gold itself becomes monotonously steady. It is the price of Credit that fluctuates. After President Grant's demand for resumption was enacted into law, the infamous Gold Room closed; and stock and bond markets and bank clearings in the United States exploded with a boom that was so real that it produced enough wealth that the country could, for the first time in its history, afford broad "higher" education.

It will not surprise you and it would not have surprised the authors of the Constitution that the first thing the new generation of professors and well-educated (sic) students did was decide that the archaic system of the gold standard had to be improved. The result was the funding of two World Wars and other systematic tortures that the world is still living under in the name of Progress.

Leo Jia comments:

 Thanks Stefan. Here are my thoughts on what you wrote.

From economic point of view, the functions of money are: 1) medium of exchange, 2) unit of account, and 3) store of value.

The biggest problem with fiat money (as we experienced) is its obvious inability to store value. On the other hand, commodity money is hard to transport. Recognizing these, many are inclined to accepting some kind of representative money, such as the gold standard.

It is understandable that people put more trust in things such as gold for a better store of value than in fiat money, simply because they are more real and can't be created from thin-air. This might be very true in simple or primitive economies. But is there any false reasoning here for modern economies? It is true that they can not be as easily created, but this in no way could necessarily lead to a conclusion of their better ability to store value or perform other money functions. My observations are as follows.

1) Any real thing (such as gold) changes value vis-a-vis other real things as economy develops through time. This is determined by the varying needs of human activities. In this sense, a lumber producer for instance may have good reasons not to trust gold to reserve his value of work (as gold could get cheaper while lumber gets dearer during some period of time).

2) The economic developments, following technological advancements or wars for instance, come in steps, which at many times are interruptions to old developments. After each step of development, the values of many thingsare largely re-adjusts. With the automobile invented for instance, the horse wagons lost substantial value. On the other hand, with a large gold mine discovered, gold's value vs. other things dive.

3) In the case of a step-up of the economy (due to an important technology break through, for instance), the requirement for capital jumps up. If the money is based on some real thing (such as gold), the money supply seriously lags in a way to hinder the economy development. Gold's supply has its own course of development. Except for a few large discoveries in history, gold's supply has been largely a gradually growing process, and this contrasts the nature of economic development, which often jumps, particularly in the modern age.

4) In the case of gold being a money base, the real question is why people would always treasure gold. Could the attitude change? From the nature that gold is of little real use, this is very likely somewhere down the road. All it needs is one country's abandoning the gold standard to wreck the whole world's economy. Before that happens, is people's pursuit of gold quite similar to a fool's game, where everyone owning gold is just hoping to sell it to a bigger fool?

In the modern world, when we have various developments in fast gears, we don't really have a money that meets the functions we want. It is very unfortunate. Perhaps the desire to have a store of value in something is generally a fallacy. Sure, the modern finance provides some possibilities for that desire, but modern finance is not for everybody.

Question: is it feasible to form a money based on some financially structured instruments?

Stefan Jovanovich replies: 

Leo, Thanks for the reply. I don't think you can support the notion that Money is a primary "medium of exchange" any more; it is, for the limited population of drug dealers and others wanting to hide their wealth from "the law", but the volume of credit transactions so completely dwarfs cash dealings now that I am afraid the standard textbook definition of money has to be retired from our discussions, even if it will always remain the correct answer for an Econ 1 class. The "store of value" notion has always been a canard. The notion of "value" itself is one of those Platonic ideas that it is impossible to abolish, precisely because it is never defined well enough to be tested or disproven. It is part of the equally bizarre idea of Capital - the notion that certain stuff and paper (in our age, digital entries) represent a "store of value". Once you accept the circularity of these terms, you never find the exit door into what people are actually doing. (Yes, yes I know about marginal utility, etc. but all of those wonderful theories can be reduced to something the money changers sitting outside the Temple knew - price is always a matter of quantity and time.)

Having endured the interminable sermons of their era (and decided, like Washington, that God existed outside of church as well as in), the authors of the Constitution were well acquainted with the theological approach to discussions about the economy. But, being practical men of business (even the lawyers among them were traders), they knew enough of the world to know that commerce would always rest on the foundation of credit. When counter-parties began to worry, "the economy" was in trouble, no matter how much gold was in the vault. They also knew that Money - specie - would always be the measure of the fundamental economic fact of life - scarcity. They counted on the fact that Money is always in short supply to be the principal limitation on the size of government itself. As the Founders knew, money is the spoil sport - the stuff that is unalterably real and cannot be talked into existence. Americans used to know this instinctively. There is the classic remark of t he real estate speculator in San Diego in the 1880s who got caught long and telegraphed to his partner back East: "Lost $100,000; still worse, $800 was in cash".

What the Founders and a majority of Americans in the 19th century did not think was that the government could somehow protect people from the vagaries of the market itself. They certainly did not think that gold - i.e. Money - could do that. The claims made for gold by the Paulistas - Don Ron made it again last night in the Republican primary debate in South Carolina - are specious. Gold is not a "store of value" and it has never protected people from the fluctuation of prices. As you noted, gold's exchange value fluctuates dramatically even under a Constitutional gold standard. Gold as Money is no more immune to market variation than Credit; both are subject to the vagaries of trade. What Gold as Money is not subject to are the manipulations of the government as ruled by faction. When George Washington warned against "faction", he was not cautioning people about political parties; he was cautioning them about the ability of people to use the government's monopoly au thority over legal tender to create credit in their particular favor. All gold offers is the assurance to the holder of Money that he/she has only one financial risk - the fluctuations of the market - and that he/she is safe from the cheats of government action in the name of the common good.

P.S. Your history about gold mining needs revision. The great discoveries - California in the 1840s, South Africa and Alaska in the 1890s - did not see "gold's value vs. other things dive"; on the contrary, the gold discoveries led to credit booms that saw general prices rise and specie become inexplicably tight. The Panic of 1907 arose because the London insurance companies were unable to pay their American claims from the San Francisco Fire; gold - within a decade of the greatest discovery in history - became so incredibly short that JP Morgan - for the first time in its history - agreed to join the New York Clearing House so that the banks would stop pulling each other down to ruin by acting like lobsters trying to climb over each other out of a barrel.

P.P.S. The notion of a Monetary base is beyond my capacity to argue with. If you accept the illusion that IOUs are Money, that the entries on the ledgers at the Federal Reserve and the Notes printed by the U.S. Treasury are somehow more "high-powered" than other forms of Credit, then the Ptolemaic system of modern academic economics seems to work fine - until, of course, it doesn't. The modern world has no problems with its system of Credit; its difficulties are with the absurd notion that the Unit of Account can be multiplied at will by central banks in the name of stability.

The questions of money and credit were not intellectual novelties for the founders or their contemporaries. They were - literally - the common coin of civil discourse. Hume's Essays - which were in the library of everyone who attended the Constitutional Convention - raised the issue directly:

"It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburthening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to impower a statesman to draw bills, in this manner, upon posterity. What then shall we say to the new paradox, that public incumbrances, are, of themselves, advantageous, independent of the necessity of contracting them; and that any state, even though it were not pressed by a foreign enemy, could not possibly have embraced a wiser expedient for promoting commerce and riches, than to create funds, and debts, and taxes, without limitation? Reasonings, such as these, might naturally have passed for trials of wit among rhetoricians, like the panegyrics on folly and a fever, on BUSIRIS and NERO, had we not seen such absurd maxims patronized by great ministers,(Robert Walpole) and by a whole party among us (the Whigs)."

Peter Saint-Andre comments:

 And hence there runs, from the first essays of reflective contemplation of a social phenomena down to our own times, an uninterrupted chain of disquisitions upon the nature and specific qualities of money in its relation to all that constitutes traffic. Philosophers, jurists, and historians, as well as economists, and even naturalists and mathematicians, have dealt with this notable problem, and there is no civilized people that has not furnished its quota to the abundant literature thereon. What is the nature of those little disks or documents, which in themselves seem to serve no useful purpose, and which nevertheless, in contradiction to the rest of experience, pass from one hand to another in exchange for the most useful commodities, nay, for which every one is so eagerly bent on surrendering his wares? Is money an organic member in the world of commodities, or is it an economic anomaly? Are we to refer its commercial currency and its value in trade to the same causes conditioning those of other goods, or are they the distinct product of convention and authority?

From On the Origin of Money by Carl Menger

Stefan Jovanovich writes: 

 Menger was the leading figure in the Austrian "Währungs-Enquete-Commission, the Monetary Commission called to deal with the problem of the Austrian currency. (Hayek: "Towards the end of the 'eighties the perennial Austrian currency problem had assumed a form where a drastic final reform seemed to become both possible and necessary. In 1878 and 1879 the fall of the price of silver had first brought the depreciated paper currency back to its silver parity and soon afterwards made it necessary to discontinue the free coinage of silver; since then the Austrian paper money had gradually appreciated in terms of silver and fluctuated in terms of gold. The situation during that period — in many respects one of the most interesting in monetary history — was more and more regarded as unsatisfactory, and as the financial position of Austria seemed for the first time for a long period strong enough to promise a period of stability, the Government was generally expected to take matters in hand. Moreover, the treaty concluded with Hungary in 1887 actually provided that a commission should immediately be appointed to discuss the preparatory measures necessary to make the resumption of specie payments possible. After considerable delay, due to the usual political difficulties between the two parts of the dual monarchy, the commission, or rather commissions, one for Austria and one for Hungary, were appointed and met in March 1892, in Vienna and Budapest respectively.)

According to Hayek, "Menger agreed with practically all the members of the commission that the adoption of the Gold Standard was the only practical course." What the Commission did not do was adopt the approach taken by the Americans a decades earlier. Instead of simply setting the weight and measure for Austrian Coin at an equivalence to the British pound - the reference point for all international transactions, the Commission debated "the practical problems of the exact parity to be chosen and the moment of time to be selected for the transition". That, by itself, did no great harm; but it established the principle - now universal - that the state, not the market, would be the ultimate arbiter of the content of Money. It is foolish of me to expect them to have done otherwise. Even though (or perhaps because) Menger was the author of utility theory, his political economy had an unshakeable belief in "essences", in the notion that political economy could be reduced to laws of motion, just like physics. The result was the Franco-Germanic idea of the "universal bank" - the Creditanstalt that would literally "manage" the economy and do away with the need for those messy people - the brokers and the dealers in stock - and their volatile exchanges.

For Menger there could be no difference between "the disks (and) documents" because all money was a creation of the state's authority. The American idea that you could bring bullion to the Mint and demand that they reduce it to legal tender - for free - was anathema.

Jan

9

 In Dec 2010, Daily Spec announced a contest for best investment ideas for 2011 at this link .  Several volunteered to judge the contest. And this seems necessary as there were many intricacies in judging. As a start to declare the winner, would those who feel they are in the running for the winner's prize, please alert me to their recommendations, the results, and why they feel they may be near the top. Thank you. Vic

Dan Grossman writes:

Vic, below is my contest-entry email, with the results indicated in italics. It should perhaps count in my entry's favor that my percentage gains were achieved without the use of derivatives or other form of leverage, and that they were very specific stock predictions, easy for anyone to implement and make money from.

As indicated, if I am lucky enough to win, I will donate my prize to a free market or libertarian nonprofit organization.

Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:

1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least 5%. S&P wasn't down for the quarter but second part of prediction was accurate in that S&P fell 6.4% from Feb 18 to Mar 16.

2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least [corrected in followup email to $16]. GENZ (50.93 at contest date) was acquired early in the year for a then-current value of $74, but including a contingent right which could still bring total value to $80. AMRN (8.20 at contest date) was not acquired, but soon traded above 16 for some two months.

3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year. HELE and DFG had a combined price at contest date of 58.58, and a combined price at year-end of 75.00, for a combined average gain of 28%.

For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.) MNTA was 14.97 at contest date and 17.39 at year-end, for a gain of 16.17%.

Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.

Best to all for the New Year,

Dan
 

Yanki Onen writes: 

Dear Vic,

Once again I would like to thank all of the contributors to the daily spec word press for sharing their insight and wisdom. It is a never ending journey. Below were my ideas but to be quite frank I don't know if they were eligible for the contest. But if they were results should be alright

1) Going long csco and long put lost $2,18
2) Sell contango buy backwardation trade for cotton buy selling spreads
made a lot of money but I don't know how to quantify that cause it is trading call 3) Leveraged ETFs suckers play. This strategy was right in the money and made quite a sum.

Our lively hood depends on what we make of the beloved mistress, if you get a long she is quite charming. Thanks for the challenge. Also would like to use this opportunity to wish you all a great prosperous new year.

Phil McDonnell writes: 

My trade on the Silver ETF SLV was closed out when the ETF hit its target price of 40 as stated in the original instruction (at the bottom). On April 11, 2011 the trade was exited with the following post to the list in reply to a suggestion from Big Al:

Yes, they are short puts. Yes, you are right. In my original contest entry I said close out the 'entire position' if and when slv hits 40. So I think I need to go with that. I don't think we were allowed to change our original entries beyond fixed original. instructions.

So taking the SLV at this morning's open when silver broke 40 it went out for .12. The net on the calendar spread was 2.50 less .12 is 2.38 credit. On a cash investment of .50 this is a return of 376%. After a dismal January the Phoenix rises from the ashes.

Originally I wrote:

If 40 is not reached then exit on 2/31/2011 at the close.

Correction it should have been: 12/30/2011 instead of the nonsensical
2/31/2011.

And here is my corrected submission:

When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.

With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.

SLV closed at 30.18 on Friday.

Buy Jan 2013 40 call for 3.45. Sell Jan 2012 40 call at 1.80. Sell Jul 25 put at 1.15.

Net debit is .50.

Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 12/30/2011 at the close.

Brendan Dornan writes: 

Victor,

Thank you very much for putting on the contest. The reason I started to write a blog is to document some picks, and hopefully build a reputation after a decade of being in isolation behind the screens. The contest enabled this goal. Thank you for the opportunity.

The contest entry updates earlier this year did not include my entries, probably because the access to quotes for the instruments added an extra degree of difficulty, so allow me:

1. Credit Default Swaps on:
· +99.44% : French Gov CDS
· +70.80% : German Gov CDS
· +99.88% : Italian Gov CDS :

2. Short the Euro + Far OTM put options near parity · +% : 1.3224 - 1.30469, not great: learned spot FX poor for tail event trades. 3. Long Put X-Warrants or CDS on any Hong Kong or Chinese Property Developer · +103.20% (20.64% X 5 for warrant use) Shanghai Property Index,
(2759.58-2190.11):

3a. or Credit Default Swaps Chinese 5 year Government Debt · +118.26%: China Gov CDS

Extra Credit: · + 214.25% : Short Copper:
o 4.4455-3.4695 NYMEX Copper HG
o ($111,375 - $86,725) = $24,650.00
· Short Iron Ore, Cement, similar declines (SWAPs would have done well) · + 52% : Short Japanese Industrials via CDS o Hugh Hendry's fund is up and can be a proxy · +32.96% peak, but plunged -60.80% below open : Cleveland Biosciences (CBLI) o Although unsuccessful, CBLI spiked higher amid the Japanese Nuclear Meltdown, serving its purpose as a hedge

Quotes :
1.
2.
3.
4.
5.

Stanley Rowen writes: 

And the winners are…? I fortunately did not participate in last year's contest (my guesses turned out to be non-winners. But, I am indeed curious if there will be a major article posted to Daily Speculations dot Com with the winners? I'm looking forward to it.

Victor Niederhoffer comments: 

These entries from the contest for 2011 investments. These are the ones so far in the running. Would any like to add their selections to this list for judging.

Dec

26

 At the first, long take of the film, as it opens, we stare at the naked chest of Michael Fassbender, the person whose grim life of privilege and addiction we are forced to endure for several hours. The unsmiling protagonist stays so still, for so long, that we begin to look for signs that he is still in life. Is he breathing? Will he eventually blink?

The too-long take is repeated in scenes that are of his sister, played by a gamey Carey Mulligan—a part that decisively removes her from the ingénue of "An Education" (2009)—and scenes that involve a mulligatawny of sexual couplings of protagonist with the paid and unpaid; with duos; alone; in stalls, at home, in public/private spaces, even at work. The overlong takes do not serve for much other than to remind us of what Peggy Noonan inveighs against in the Wall Street Journal in mid-December about the pervasive "flatness" of "movie depictions of our sexuality." My escort joked that men seemed to be leaving to go to the restroom far more often than for other films; but the sex was squalid, painful, not in the least joyous. Unsexy, in the end. Death is not defied by these matings, but somehow beckoned by their dullness and decayed solipsism. Embarrassing, for the most part. (It was probably prostate, not projection, that shook these men from their seats.)

In a current, curiously shadowy NYC, Brandon's carefully compartmentalized private life, which gives him unfettered indulgence for his addiction, is suddenly invaded and compromised when his sad, ungovernable sibling, Cissy, arrives for an unannounced drop-in and stay-over. Their odd familial interaction raises a few eyebrows.

Not one line of humor in the film. Not a minute of erotic enjoyment, for all the naked real estate and fleshly writhing. It reminds one of the Dustin Hoffman/Jon Voight dark-street, bankrupt-old New York icky icon, "Midnight Cowboy" (1969) for pre-Giuliani no-tourist Manhattan griminess. Or of the bleak ice-cold vision of Christian Bale's gloved metrosexual automaton, mid-Gordon Gekko financial scrimshaw, a feral murderer in the unwholesome, relentless "American Psycho" (2000).

In the linear and episodic unspooling of the obsessive captive of sexual encounters, SHAME does not feature much dialogue. Under the entire film is a dirge-like melancholic musical frieze that serves instead of missing dialogue. As much as there is a dearth of talk for the most part, save for bursts of unconnected fits and sibling spats, the scenes are cool, blue, icy surfaces: unfaceted silhouettes and vistas of Manhattan from different vantage-points than those Woody Allen devotees are accustomed to, the glistening City postcards of cinematographer Gordon Willis. Not here.

Brandon's apartment, in the low 30s, Midtown West, is scrupulously neat and featureless, as opposed to his squint-eyed undiscriminating prowl for new sexual partners for do 'em/forget 'em pairings. His wordless exchanges leave no aftertaste, like cheap wine, gasps and gulps that get no revisiting by the affectless addict. His life is clean to the outward glance. He appears to be a decent man, not skeevy as our mind's eye would predict, despite his panther-like visits to late-night dungeons, lonely subways and clubby brothels. His workmates have no idea what he does, where he goes, or with whom, when away from his desk. Events and world news have no purchase here. He is absorbed in his next barren assignation or, more likely, non-nutritive rut.

Brandon's compulsiveness is so blatant for anyone with half an eye that it is only his male comradeship at some unnamed but upper-middle job that convince us that men are not looking to ID each other's foibles. They don't wonder about his liaisons or solitary entertainments. But women are drawn. He flirts with the faintest flicker of a come-hither intensity. Moments later, they are silently heaving—again, for scenes with too much unclothed flesh, too much writhing.

The extended graphic orchestration of grimaces and groaning proves nothing, teaches us nothing more than we already know. McQueen could easily have chopped half an hour sure to have its NC-17 (was X) rating plastered on its official public window, the way restaurants proudly post their A ratings. Scenes without dialog run too long, making sure we get the poke-poke of this emotional battle. But the resonance is not epic. We all battle some sort of addiction, perhaps, though ours are probably less dangerous and time-consuming. And probably less lifeless. The film seems an orphanage for our lust.

Fassbender is a lock for an Oscar nom, and his face and body, while not memorable for the most part, are handsome and indeed attractive. Especially nude. A woman being pushed out of the theatre by her granddaughter, a wheelchair commuter looking to be in her 90s, was delighted to be asked her opinion of the film. Her 30-something granddaughter quickly interpolated she had been "bored" by it. (Yes. It is no Brad Bird "Impossible" action adventure.) Grandma, grinning broadly, slyly exulted, "He was gorgeous! I'm going to see this in 3D!"

Whatever would make a woman of 30 take her swee'pea elder to such a deeply unhumorous, profoundly graphic film with such a title, even were she unacquainted with the unrelieved, tawdry subject matter?

And in the end, the director plays games with the viewer, which may or may not make you even more antsy and uncomfortable than you've been throughout. Not quite a holiday movie. What is saddest is that this is the film everyone will continue to talk up, a daring Euro-approx that is pretending to a soul it does not evince. A 12-stepper would take the heart out of the thing. But then the film would have no excuse for making us squirm with discomfort.

Not a date movie. Even with Grandma's excited post-mount-'em.

Dec

8

 Hello everyone,

I'm at my local lumber yard and a salesman for various materials is here and stated that on the first of next year all drywall manufacturers are increasing their prices 35 per cent!

That should really help new homes built and all remodeling… and all commercial jobs.

Regards,

Alan

Rocky Humbert writes: 

Firstly, I'd like to thank Alan for bringing this to my attention. This sort of anecdote can have some important market significance. However, in order to analyze it, one needs to ask the following the questions:

1. What is the marginal cost to produce drywall? How does the current (and proposed) price compare to the marginal cost of production?

2. What is the price history of drywall? If the price has previously dropped steeply (due to the economy), then a 35% price hike (although eye popping) might be reasonable.

3. What are manufacturer and lumber yard inventory levels? Could the announcement of a 35% price hike be an attempt to front-load orders/purchases before year-end? … to clear out inventory?

4. At what % of utilization are drywall plants currently running? Has capacity left the system over the past few years? And if so, at what price will that mothballed capacity come back online?

I think an ambitious spec could call US Gypsum's investor relations office with these questions; get the answer; and have a better understanding of both the drywall market; the state of the housing market; and the state of the economy. I think there is also some risk that this 35% price hike could stick — not because the economy is healing, but because productive capacity has left the system ….and will not return until growth is considerably higher. This is the stagflationary outcome that some people fear….

The bottom line is — a few well placed questions and answers will turn Alan's anecdote from dinner party chatter to an economic/market insight.

Henry Gifford writes:

1. Energy is a significant part of the cost, as is shipping the materials and shipping the finished product.

2. I dunno the price history.

3. In urban areas, there is no significant inventory - the stuff just takes up way too much space. For jobs involving multiple apartments, or one large house, the lumber yard is not really a dealer, but more of a broker, as the boards are "drop shipped" from someone else to the job site, only the money goes through the local lumber yard. Maybe in Alan's neighborhood they can build up significant stock, though.

4. Someone in the business told me all plants generally run at full capacity all the time, including through downturns, because during a downturn they take their slowest plant and shut it down and revamp it with the newest electronics to become their fastest plant, restarting in time for the next boom. He said with a smile that they never worry, the timing is always reliable - boom and then bust. They haven't added any new plants in decades, they just speed up the old ones, like the paper industry has done to keep up with the "paperless" office.

There is really no substitute for gypsum board on the market - no boards means no new houses or other buildings.

The industry is now shifting to "paperless" gypsum boards - fiberglass instead of paper - because of increasing mold problems with paper-faced boards. Buildings are starting to get significantly insulated, which means walls have a cold side in the winter, and a cold side in the summer, and cold means damp, which can mean mold. Also, backup materials used to be masonry which absorbed a lot of water from leaks, then were wood, and are now metal, which absorbs zero, meaning a small leak gets to the paper and causes problems. Combine cold and no absorption/storage with no attention to stopping air leaks in construction, you build a recipe for disaster, not all just insurance or hysteria driven rumors. If anyone invented paper faced gypsum boards now, the lawyers would never let them sell it. I expect it to all be gone soon, the changeover will be "interesting" somehow.
 

Dec

4

 I have noticed that Europe has an additional dimension compared to the States.

When you travel the USA, all you see is a 3-dimensionnal landscape. In the Old World, there is a fourth dimension that is the history behind the landscape.

In Europe, when you look at a street, a village or a hill, you do not see only a street, a village or a hill. You see 2000 years of history for this street, this village or this hill. There is always a little ruin nearby.

How can I say this? There is extra depth in the Old World. It makes everything more full and life richer.

Same thing when you are marrying true blue blood. You are not marrying merely one guy or one girl. You are marrying history, a line going back centuries. You are becoming part of that line. I am talking true blue blood. Not recent ones like the fake nobles made by Napoleon and the likes.

Maybe the best way to explain it to American people, is to explain it to the ones who are independently wealthy. So if you are wealthy, have you ever tried explaining to poorer people what it felt like to have enough money not to worry about the future? Did they understand you? Or did they just looked at you as if you were a freak? Same problem with explaining the Old World additional dimension.

Stefan Jovanovich responds: 

Dear Bruno,

1. The "Old World" of Europe is not nearly as ancient as the travel brochures like to pretend. The governments of all but the most recently admitted states in the American Federal Union have longer established histories (and older unchanged borders) than any of the nation-states in Europe.

2. The "ruins" in America are there and some of them are almost as old as the catacombs; but they are not on display because what Americans have always sold Europeans is the idea of the United States as this wild, unsettled country. You can find railway posters of the Union Pacific advertising the untamed country of Yosemite to potential German and English tourists when the Ahwahnee was offering 10-course meals. Europeans have always come to the U.S. to see the "new"; that is why they still like California - it always photographs like something just unwrapped for Christmas (the best time to take the picture because the smog is being blown away from the coasts) even though it now has an industrial history as old as the English Midlands was in the 1950s.

3. There is a great deal of blue blood here, but it has one fatal defect - there are no titles to identify the "line going back centuries". There had better not be; it is against our Constitution and, if you are going to claim ancestral superiority based on Plymouth Rock and Valley Forge, you can't at the same time be spending all your time bragging about being descended from European nobility. Those claims of ancient European lineage are the very ones being made by the people whose genealogy is - shall we say - questionable. That was just as true in the 19th century as it is now. The Astors and others who were eager to acquire British class did not have family histories that could trace back to the American Revolution, let alone the founding of the Massachusetts Bay Colony and New Amsterdam. Since there were enough people around like the Roosevelts, they had no choice but to go looking for an Anglo or Franco merger.

4. I can't speak for "poorer people" in the rest of the world, but I can assure Bruno that Americans have no difficulty imagining what it felt like to have enough money not to worry about the future. The turning point in John Kennedy's campaign for the Presidential nomination came in West Virginia. A coal miner asked Kennedy if he had ever had to work for a living. Instead of offering the standard nonsense (Daniel Patrick Moynihan's "I grew up in a poor family", John Edwards' "my Dad was a mill worker" (his father ran the factory), Warren Buffett's "I had a paper route", etc.), Kennedy had the balls to say "No, I never have." The miner's reply was "Good for you." That brought down the house and ended Hubert Humphrey's ridiculous attempt to portray himself as a man of the people.

Most of foreigners' difficulty in understanding America comes from another long-established fact about the United States: the recently-arrived (usually the scholarship children of the immigrants) do almost all the public talking about the country. The oldest tradition in America is to have the A-students lecture the rest of us and tell the world at large about how we are not living up to the traditions of the Republic. (Benjamin Franklin was doing it - and worrying about the Pennsylvania Dutch, er Deutsch when the Penn family was keeping quiet and making certain their land title was secure and paying Franklin to fix it.)

It takes at least one or two more generations for the newly-arrived Americans to discover what Richard Jennings, California blue-blood member of E Clampus Vitas and author of the revised California Corporations Code, once said to our law school class at Berkeley: "Remember someone in this University is going to drop out of school or leave with a "C" average and end up making more money than the rest of us combined." What he did not add was that, while that person might be the child of recent immigrants (see Steve Jobs), the odds were much greater that he would come from a family like that of Mr. Buffett's bridge partner - one old enough that the possibility that great great grandmother may have been one of the "seamstresses" who set up shop above the water table in Seattle can be safely ignored. What I would have added is that it is far more than an even money bet that the same family will be "progressive" enough to be in favor of raising the estate tax. Preventing the newly-arrived from doing what grandfather did to escape the ravages of the tax code is perhaps the most well-established of all the traditions of the better classes of 4-dimensional Americans.

Have a wonderful holiday.

Stefan
 

Oct

19

How to quantify similarities between such "mountains" [i.e. price charts] ?

1) Decide trailing periods and criteria to be used - YTD performance > X, last 5 year performance > Y, etc
2) Build universe/database of similar companies for each year
3) Build correlation table to confirm
4) Build composite model
5) Look at forward if-then test

In my experience, the bearish case on high momentum names, frankly any name, is best fundamentally analyzed as a move from Blue Oceans to Red Oceans and along with general market trends. Blue oceans situations tend to be P/E unconstrained, consistent growers, etc http://www.blueoceanstrategy.com/ but once we move into the Porter world of Competitive Strategy then P/E becomes constrained which leads to compression. Generally, there are subtle clues - RIMM announced a move into consumer markets where AAPL played- so the business market was saturated - NFLX CFO left when the stock was below $200 on its way to $300. They started focusing on cost strategies, changing the story from new subscriber adds. I haven't followed GMCR that closely - but is there a competitive threat that is changing the marketplace - are they experiencing a strategy change - that's the key question.

Solar existed on subsidies granted by bankrupt governments, so it has to compete with more economic alternatives. Hence, the president's loan issue.

Stocks have to compete with bonds, so stocks crashed in 1929, 1987, 2000, 2008, etc

EK lost to digital photography.

My worst mistake ever came from Able Labs - a generic drug maker - had 26 NDAs pending, huge margins and a new lab in NJ - problem: small reference to litigation in the SEC filings that later turned out to be because they were getting their margins by diluting the drugs - stock went from new high list to opening down something like 86%, where I sold before watching it go to $0 in 30 days. Subtle clues. They are really important if one is making the bearish case.

in reply to Victor Niederhoffer's comment:

Strange similarity  between those two [NFLX and GMCR] to a person who looks at it as
two mountains of different heights with similarly looking crests
relative to the peak.

Query. How would one quantify similarities between such mountains?
And once quantified, what is best way to see the predictive value of
such similarities. I am reminded of the cotton traders most famous
trade. He noted that 1987 looked similar to 1929. then he knew it was
going to have a crash. The drunk man saw the same similarity and started
out long that Monday, and then sold. Between the two of them, they were
enough to trip the portfolio insurance to sell.

Query. How ridiculous can you get without quantifying the two
questions I asked? I say it wasn't that similar to 1929 as compared to
other years. and also that the ones most similar to a given few years of
bearishness, in the past, the less is the relation between past and
present. i.e. no predictive value to start.

Gibbons Burke comments:

There is another model which incorporates a similar gradual buildup with no appreciable change, then catastrophic breakdown, like the straw breaking the camel's back. A simple model is dropping grains of sand onto a surface. A pile builds up. With each grain the pile gets higher and higher, in an orderly fashion and is stable, until the angle of repose gets to a critical point, at which the next grain of sand sets off an avalache. Similar but subtly different. The concept is known as "self-organized criticality", and I suppose it may have some relevance to how bubbles build up and then collapse:

http://en.wikipedia.org/wiki/Self-organized_criticality

Christopher Tucker writes: 

See also Slope Stability Analysis Methods:

http://en.wikipedia.org/wiki/Slope_stability#Analysis_methods

A similar criticality phenomenon is Flashover:

(quoting the wiki - http://en.wikipedia.org/wiki/Flashover )

A flashover is the near simultaneous ignition of all combustible material in an enclosed area. When certain materials are heated they undergo thermal decomposition and release flammable gases. Flashover occurs when the majority of surfaces in a space are heated to the autoignition temperature of the flammable gases (see also flash point). Flashover normally occurs at 500 °C (930 °F) or 1,100 °F for ordinary combustibles, and an incident heat flux at floor level of 1.8 Btu/ft²*s (20 kW/m²).[1]

another is Phase Transition: (from http://en.wikipedia.org/wiki/Phase_transition )

A phase transition is the transformation of a thermodynamic system from one phase or state of matter to another.

see also Crystallization: http://en.wikipedia.org/wiki/Crystallization

see also Nucleation http://en.wikipedia.org/wiki/Nucleation

see also Vitrification http://en.wikipedia.org/wiki/Vitrification

Gibbons Burke responds: 

I was lucky to be in the right place at the right time to capture a flashover in a fire near my home (in 2006) in New Orleans:

http://web.mac.com/gibbonsb/Site/Blog/Entries/2006/3/13_Portrait_of_a_flashover.html

 Stefan Jovanovich comments:

The sad fact is that the firefighter community still has no agreement on how to deal with flashover risk. They have not even settled on the question of whether to use a wide fog or straight stream!!!!!

http://www.fireengineering.com/articles/print/volume-157/issue-6/features/flashover-risk-management.html

The best teacher I ever had (an instructor at the Navy's Damage Control School in Philadelphia), said that the Navy were the only firefighters who had figured out how to do something besides spray and pray - i.e. use foam to suffocate fires and inert gases to secure the fuel lines - and even so there was a fatal tendency to believe that all you needed to do was get a big enough bucket. He pointed out to the class that the greatest risk of the Forrestal fire turned out to be the water from the firefighting itself, which almost capsized the ship and washed away the retardant foam.

http://en.wikipedia.org/wiki/1967_USS_Forrestal_fire

Sep

25

 One has always wondered why the banks according to their regulators are being prohibited from investing in this and that thing, derivatives, mortgages, stocks et al, but never have I seen a mandate that they don't invest in sovereign debt of the solid as a rock countries such as those they invested in as did Rome after the Trojan war. Could it be that instead of being prohibited from such investments, the opposite is true, and that is why whenever a country is about to go bust, the banks are in danger of falling. Could it be that they are that foolish as to always hold the short straw?

Gary Rogan writes:

Based on multiple occurrences of coming close to the short end of the stick but somehow being saved by the US or the IMF it has not been a bad strategy. How many times has it happened in Latin America? The IMF resolved the early 80's crisis and Brady bonds were used in '89. So it wasn't just crazy people who would loan to Latin America that is guaranteed to blow up sooner or later. There was clearly an implicit understanding that French and German banks would be bailed out from their losses to the various PI**GS, and the way everyone behaved towards Iceland and Ireland, this was clearly expected that they would be the slaves to the big brothers, and the banks would be helped to be made whole by the taxpayers of the less-important countries, and when the bigger countries are involved the big brother taxpayers would have to chip in.

To the banks this was the frog in the boiled pot situation, except in stages: you warm the pot up a little bit, and then some savior helps you jump out, so you learn that the pot is safe. Then the frog jumps back in, and the pot is warmed up a little more, and the savior helps again, and so on. But now he can't help, but who cares? The old bank CEO's are enjoying margaritas some place where they used to lend to or even nicer and safer, or are dead, so on the average this was worth is to the banking flexion leaders. 

Bill Rafter writes:

Several of the 15th and 16th Century Florentine banks including that of the Medicis had problems with their sovereign loans. Despite problems the banks continued to lend for political/military reasons.

George Parkanyi writes:

Banks are large institutions and, like large institutions at the senior levels, don't pay attention to detail beyond a certain point. (I see that in government a lot for example.) Behind every major transaction is some mid-to-senior manager trying to close a deal, land a big client, or in the aggregate hit some number to make a bonus or whatever. I would think that to win a sovereign account would be a big deal, so of course you would trade or perhaps make a market in a client's debt in that situation. Smart sovereign clients, because of their size, can easily play one bank off against another depending on how hungry and competitive the players are at each. Sure institutions have systems, but ultimately deals are made by people, and the culture in investment banking is typically to do whatever it takes to make the deal, even if it means being "creative" and circumventing part or all of your controls, not digging too deeply in case you find something that might compromise the deal, and/or simply treating widely-accepted assumptions as fact (AAA credit, too big to fail etc…). There are many paths to these untenable outcomes, and they are all rooted in human nature. Nicholas Leeson never set out to bankrupt Barings, he started out by just trying to keep a big client happy.

Gary Rogan adds:

Still, moral hazard is what makes all of this possible (having some implicit savior). You don't see Procter and Gamble negotiating a deal with Walmart or some little dictatorship where they will sell them detergent at what winds up being a big loss, and least not very often. The suppliers who are foolish enough to do that disappear without anyone hearing about them, other than in some CNBC special about Walmart. Socialism in any form will ultimately destroy itself: when people have a right (or the idea that they have a right) to other people's resources, eventually they will consume/destroy enough of them to sink everyone involved.
 

Stefan Jovanovich writes:

The Bardi and the Peruzzi had two enormous technical advantages. Their staffs had fully mastered the science of double-entry book keeping and taken Pacioli 's discovery (probably lifted from the Byzantines) and improved it to the point that they could easily do present value discounting. This was a very big deal at a time when Italian banks were under the same prohibitions that banks in the Muslim world still operate under - charging interest was a sin. Their skill in double-entry was complimented by their shrewdness in dealing with the intricacies of canon law. The Bardi and Peruzzi were the first to figure out that they could get round the problem of usury by issuing loans at a discount and balancing their books by showing the difference between the cash paid out and the loan amount as a gift from the borrower. In a Christian world gifts were perfectly acceptable and (I love this part) the ability to receive them a proof of worthiness. Most of the discounting was not on loans but on relatively short-term bills of exchange. Many of them were remittances to the Papacy. You can see this in the list of the Bardi branches in 1300 - Barcelona, Seville, Majorca, Paris, Avignon, Nice, Marseilles, London, Bruges, Constantinople, Rhodes, Cyprus and Jerusalem. What is supposed to have killed both banks was, as Bill notes, their difficulty with sovereign debt. But it was only one sovereign - Edward III of England. According to the Peruzzis, Edward borrowed 600,000 gold florins from them and another 900,000 from the Bardi and then, in 1345, told them he would not be able to pay on the agreed upon schedule. The Italians had no choice but to agree to a workout, and they ended up taking much of their eventual repayment in wool rather than specie. The problem for them was that the combination of the Black Death and the exhaustion of the German silver mines had produced a monetary deflation that made the repayments worth far less than the nominal loan amounts. But, it is risky to take even this story at face value. The author of the Wikipedia article on the Hundred Years War (where Edward pissed away all the money) has his doubts. He writes that "the Peruzzis' records show that they never had that much capital to lend Edward III….. Further, at the same time Florence was going through a period of internal disputes and the third largest financial company, the Acciaiuoli , also went bankrupt, and they did not lend any money to Edward. What loans Edward III did default on are likely only to have contributed to the financial problems in Florence, not caused them."

What is not in dispute is that it took another half century for banking in Florence to revive on even a regional scale, and in scale and international reach, the Pazzi and Medici were secondary players compared to their 13th and early 14th century predecessors. The Medici are famous because of their adventures in Italian politics, their family stories and their art patronage; but, in terms of finance, it would be like comparing the current House of Baring with the one active during the Napoleonic Wars.
 

Sep

25

 This is an article about a chronic problem I have noticed in most not-for-profit orgs. When we trade we create nothing but liquidity, no matter what you think of yourself, we are just vultures, exploiting many inefficiencies in the financial markets. Instead of curing diseases or engineering new products or even creating a work of art, we just trade. Call it what you want, but at the end of the day, if your mathematical formula didn't make a trade you didn't make anything. But in our free time however, some of us donate large amounts of money or seed interesting projects that most of the time are intellectually interesting, but hardly ever profitable. You work very hard for your money so I think you should demand from those companies that your money is spent wisely and not in a wasteful manner. I think Dell was one of the first guys  and Mike Milken before him, who successfully asked and got results for his money.

Stefan Jovanovich comments: 

Arthur's premise - "when we trade we create nothing but liquidity" - is certainly accurate; but his conclusion is shocking. Markets are the only successful means human beings have developed to define their state of knowledge about the fundamental fact of existence for all life on the planet - scarcity. Medical research, engineering and dramatic production (my favorite "art") are all wonderful gifts; but none of them can exist without the seemingly useless activity of the people who define prices. (If you have any serious doubt about that, examine the art, engineering and science being produced right now in Zimbabwe and North Korea.)

The difficulty with non-profit and for-profit salaries in organizations is that they are not set by any open bid-ask market; instead, they are the product of politics. That they tend towards being corrupt and ugly should hardly be surprising. The proposed solution - "demand that your money is spent wisely" - is the same fantasy of "reform" that keeps money flowing for "rehab" and has people believing that sick organizations can somehow be saved. It is no accident that the best example of sustained corporate benevolence - HP - is now turning to the solution of hiring a purely political "name".
 

Gary Rogan writes:

Well the bigger beautiful things are invariably created either involuntarily (the Colosseum built mainly by recently captured slaves, the original St. Petersburg which was built by serfs with a short life expectancy), through donations, like say the Vatican, most of the cathedrals and churches of Europe, or taxes and exploitation of peasant labor for money, like most of the other attractions in the old world. I wouldn't call the funds supplied by the Soviets and especially North Koreans "donations" though. It's also hard to say the grandeur of the results is a justification for subjecting people to the "donation process", in fact I would say just the opposite based on general moral principles and the net migration vectors involving the Soviet Union, Eastern Europe, and (when there is an opportunity) North Korea.

Stefan Jovanovich writes:

My dad was choleric by nature, but he did a good job of restraining his temper in business. The only time I ever saw him entirely lose it in public was when someone asked at a shareholders meeting why his company was not doing as good a job as ETS - the non-profit monopolist that literally owns the college and graduate school application testing market. His reply was: "If you allow me to run at a loss so I have no nasty profits and tax liabilities and persuade colleges and graduate schools that there should be competition in the test market, it will not be a problem. Until then, we have no hope of competing with those saints of American education in Princeton."

Kim Zussman adds: 

For want of a bailout Lehman was lost.
For want of Lehman the market was lost.
For want of the market the economy was lost.
For want of the economy the election was lost.
For want of the election the kingdom was lost.
And all for the want of a bail

Ken Drees adds:

For want of another backdoor USA bailout Germany is pissed..
For want of a German handout the PIIGS are pissed.
For want of more austerity Germany stays pissed.
For want of continued power all the politicos are pissed.
For want of a viable solution the markets are pissed.
And all for the lack of a Euro Debt Bond

Alston Mabry adds:

What if the €uro experiment, instead of introducing the new currency, had simply been the proposition that all EU countries issue their sovereign bonds denominated in DMarks? Wouldn't it have been clear immediately that certain problems with such a scheme were unavoidable? And isn't that essentially where we are now?

Sep

12

 September 11, 2001

It really was a remarkable day. I remember stopping on the sidewalk on the way into work to just look at the sky, it was crystalline and incredibly blue. Beautiful. I stepped into my place of business, a large room about the size of a football field, very dark with the constant hum of electronics and various sections filled with radar scopes. I work at the New York Air Route Traffic Control Center, NYARTCC or New York Center as we say. I had no idea that this day would turn out to be the most terrible and memorable day of my career. I had been lucky so far, dodging bullets by not being on duty when Avianca 52 went down in Great Neck, Long Island or the explosion of TWA 800 or the suicide/mass murder of EgyptAir 990. But not today. The pilots were particularly chatty that day, constantly commenting on how nice the city looked, how clear it was. It was a CAVU day. Ceilings And Visibility Unlimited.

I was plugged in and working sector 55, a radar departure sector that encompasses airspace to the southwest of New York City from 14,000 feet to 28,000 feet and I was working quite a few JFK departures westbound, several NY Metro departures southwest-bound and some arrivals into DCA and BWI that had to be descended through the climbing departures. I was getting a bit busy and asked the controller working with me to "point out" an aircraft to the sector above us (sector 42) so I could climb the flight into his airspace and basically get him out of the way. My coworker called and then hung up, incredulous, saying sarcastically "He won't take the point out, he says he has a hijack". As the controller working the sector above us had a flair for drama we didn't take him seriously and I remarked "Get a real controller over there".

But it was true. American 11 had turned off its transponder and had turned south over the Hudson River toward New York. The transponder transmits a 4 digit code along with altitude and position information so our computers can track the flight and we can see its altitude and speed. Although the flight had turned off the transponder we still had a very solid "primary" (radar reflection) target visible on the scope. So we could still see what we believed was AAL11 heading south toward New York, but we had no idea what its altitude was.

At some point I remember calling Huntress, the Northeast Air Defense Sector to give the position of the target that we believed was AAL 11. "Where is he?" the military controller asked. "About ten miles west of LaGuardia, right over the Hudson, heading south, its a strong primary target". "I'm sorry, where? I don't see him". I gave up and hung up the line. The target was gone. We did not know then that AAL 11 had crashed into the World Trade Center. A few moments later some aircraft on my frequency that had just departed JFK asked me if I knew the south tower was on fire. There was a huge column of smoke they said. Later, after listening to the tapes, we discovered that one of the pilots on my frequency had said "Maybe its that American you guys are looking for" but I hadn't heard what he said. All we knew for sure was that he was no longer on the radar and that simply meant that he was very, very low. We assumed (for some reason) that they were flying low and down the coast and headed god knows where. Someone said that a small twin engine aircraft had hit the World Trade Center, but it never occurred to us that it could possibly have been American 11. No way. Not in your dreams bud.

As this was beginning, UAL175 checked on with the controller working sector 42 and told him that they had heard a suspicious transmission on the prior frequency in Boston Center's airspace. But all eyes were on the target that we believed was AAL11. As we focused on the target, trying to figure out what was going on, the facility chief entered the room with a phone in each ear and his deputy beside him. They stood behind sector 42 and talked quietly but I was too busy to hear any of their conversation. While everyone in the room was staring at this target tracking toward New York, I heard a voice behind me say "Hey, there's an intruder over Allentown" This meant that there was a target that we call a "Mode C Intruder" that the computer wasn't tracking. Then we noticed that the computer track for United 175 had separated from its target so we assumed the intruder was UAL175 and he was showing up as an intruder because someone on the flight deck had changed the transponder code to a code that the computer couldn't identify. The intruder climbed briefly from 36,000 feet or as we say Flight Level Three Six Zero (if I recall correctly) and then as it passed over Allentown, PA it began descending and turning left to the south.

Someone said "watch this guy" to me but I was already watching, I had entered the 3321 code that the aircraft was now squawking on its transponder into to make its target appear brighter on my scope. As the target continued turning and descending I became increasingly concerned about two aircraft that I had under my control, both heading southwest and climbing. If the intruder continued the left turn and descending at the same rate it looked like they would get very close. But it was impossible to tell which way to move the traffic to get them out of the way. If the intruder turned rather tightly than he would come north of my traffic, if the turn was wide he would come south of them. As it was he turned head on into both of them.

Before the intruder had finished the turn I had issued a traffic call to both of my climbing aircraft: "Delta 2315 and USAir 542, traffic, one o'clock, one five miles turning southeast and descending, we believe it is a hijack and we don't know his intentions" (please keep in mind that these are my recollections ten years after the event and I don't have transcripts of my tapes available, but the essence is exactly as it was that day). Still, I had no idea what the intruder was going to do. Would he continue turning? Continue descending? I had to assume yes to both of these questions and it began to look as if he was heading for New York City, but for what purpose? Was he an emergency we speculated? If so it must be a dire one. No pilot would turn off course or descend without informing us first. This was crazy. We were thinking hijack but just weren't sure. Delta 2315 was level now at FL 280 (28,000 feet) and USAir 542 was about five miles behind him and leveling off at FL 260. I called the traffic again, "Delta 2315 that traffic is now one o'clock, ten miles, turning opposite direction and descending rapidly. It looks like he will be directly in your face. Take any evasive action you deem necessary." "Roger" came the reply. I called the traffic to USAir 542 again and he asked me a question that I didn't hear correctly. I thought he said "Is that the guy at our one o'clock?" and I responded "affirmative", but we later determined that what he actually said was "Is that the Delta we are following at our one o'clock?" which was not the case, I wanted him to look for the intruder that was turning head on.

By now I was becoming extremely concerned. The tension in the room was palpable. Several people were staring in disbelief at my scope as the events began to unfold. When the intruder was about 7 miles from Delta 2315 and pointed directly at him and about 1,500 feet above him, I turned both aircraft, shooting off the clearances as quickly and as clearly as I could: "Delta 2315 turned left IMMEDIATELY heading two zero zero" The pilot responded with a "roger" that sounded just a bit too nonchalant for my current state. "USAir 542 turn left IMMEDIATELY heading two zero zero". The intruders target was now about five miles from Delta 2315 and closing at right around 1,000 miles per hour. I again called the traffic to the Delta and waited to see the turns. I watched in horror as the two aircraft converged at 28,000 feet. "GOD F#&KING DAMNIT" I shouted as I jumped out of my chair, screaming at the scope. Dead silence. I could hear people breathing across the room. Shit. This was it. It takes twelve seconds for the radar to update. That was the longest twelve seconds of my life. I was focused so intensely on the radar that I thought my eyes might pop out of their sockets. Finally the targets both appeared after having passed each other by about 2 miles. But at that time it seemed like you couldn't fit a sheet of paper between them.

"USAir 542 is responding to an R.A." said the USAir pilot as he began descending, responding to an onboard collision avoidance device called TCAS. Sh*t. "Christ I'm sorry about that sir, I really thought he was going to hit the Delta", I said apologizing to the USAir flight that had come almost as close as the Delta. As it turns out, we suspect that the hijackers aboard United 175 must have heard the TCAS alerts as well because they briefly stopped descending and actually climbed to about 28,300 feet, 300 feet above the Delta. But as soon as they passed they began descending again and rapidly. This is when USAir 542 began descending as well to avoid the conflict, but the turns I had given earlier ended up doing the job, but much, much too close for comfort.

By now I was a nervous wreck and we all watched United 175 descending toward New York City. We wondered, clutching to hope, if he really might be an emergency and not a hijack and was just trying to get the aircraft down on a runway, any runway. We wondered aloud if he was trying for Newark as he was pointed right at it. "Maybe he's shooting for the 4's at Newark??" (Newark has two runways called 4, a left and a right) "No", Jimmy B. said, "He's too high and too fast". We watched as the target clipped off the miles, twelve seconds a hit. (We call each subsequent target presentation a "hit"). He was descending at five thousand feet a minute. Then six. Then seven. Unbelievable. Things were beginning to feel surreal. This wasn't actually happening was it? Yes. "Maybe he's trying for runway 4 at LaGuardia?", someone said. "No", again from Jim. "This guy is going in" And we knew. They were going to crash the plane into the city. They were pointed right at lower Manhattan and we knew it. "Two more hits" said Jimmy. "One more" And then he was gone. We had just watched a commercial airliner deliberately crashed into New York City. It didn't take long for the tears to come. There was confusion, fear, wild emotion. But we still had work to do.

I vectored aircraft on course, climbed some, descended others, I don't remember really. I remember choking back tears as I issued instructions to several pilots and talked with some about what had just happened. At some point the supervisor asked me if I needed to get up. I nodded emphatically and was relieved by another controller.

As I walked out of the area and passed the watch desk I heard the Operational Manager in Charge screaming into the phone: "I don't give a shit what they do, just get them in the air NOW!!" Must be scrambling fighters I pondered, feeling distant and disconnected. I reached over his multiple CRT's and grabbed the cigarettes out of his shirt pocket. He never noticed.

The rest is history. The controllers in my area, area B, were sequestered with a priest and a psychologist in a conference room for a while, and someone would pop in occasionally with the latest news. "The south tower just collapsed" No f#$king way I thought. They kept popping in with more bad news, bomb threats, more hijackings. I couldn't take it and got up and walked out to smoke one cigarette after another. The controller sitting next to me had just lost his best friend who was working at Windows On the World. People were in tears, everyone was afraid and angry. Unbelievably angry.

At one point they gathered us up, the controllers from Area B and we made written statements and a recording. They brought this big old reel to reel recorder in and passed around a microphone asking us to give our version of what we saw. Four or five people had already spoken when they discovered it wasn't recording and we had to start over. Later, a Quality Assurance Manager destroyed this tape and there was a bit of conspiracy theory going on about it. But this is nonsense. The tape was destroyed because the manager knew it was counterproductive and embarrassing. Not embarrassing to the FAA, but to us personally. Many people were crying, several facts were stated incorrectly, it was just a mess. And they had all the data they could possibly need with the voice recordings of all the transmissions and all of the radar data. Not only was he within his rights to destroy the tape, it was actually in his job description. Was it right? I'll leave that to you to decide. But I can tell you from first hand experience that the contents of the tape that caused such a flap were totally innocuous.

So that is what I experienced on 9/11. I hope it gives some insight, it is definitely a harrowing tale. Below are some statements from my coworkers that I retrieved from the national archives. I was unable to locate mine on the website, although I have a hard copy of it myself. I would really liked to have been able to provide a transcript of my voice recordings from that day, but I was told I have to go through a Freedom of Information procedure and just didn't want to bother. More government red tape is all I need.

Several weeks (months? who knows) after the event I spoke with a reporter over the phone about that day and he wrote a story for the Hartford Courant. A few days after it was printed he called me again with a strange request. A reader had contacted him and wanted to speak with me, could he share my number with him? I said sure and the gentleman called. Apparently he had been a passenger aboard Delta 2315, a circuit court judge for either the U.S. or Connecticut, I don't remember. But he had called to thank me. "For what?" I asked. "For saving my life that day", "for doing your job" and we talked for hours. I think he saved my life that day.

This is dedicated to all those who lost their lives that day, especially the pilots, crew and passengers aboard American 11 and United 175.

Also, please note that much of the information on wikipedia about these two flights is incorrect, but only mildly so.

Christopher Tucker

September 9th, 2011
 

Aug

31

 SHAOLIN

Directed by Benny Chan

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

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

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

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

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

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

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

Jul

14

 Determining what art will be valuable 10 to 50 years from now is a very speculative endeavor but evidently a Rothko painting was identified early on as a good investment by Fortune magazine:

Rothko had one-man shows at the Betty Parsons Gallery in 1950 and 1951, and at other galleries across the world, including Japan, São Paulo and Amsterdam. The 1952 "Fifteen Americans" show curated by Dorothy Canning Miller at the Museum of Modern Art formally heralded the abstract artists, including works by Jackson Pollock and William Baziotes. It also created a dispute between Rothko and Barnett Newman, after Newman accused Rothko of having attempted to exclude him from the show. Growing success as a group led to infighting, and claims to supremacy and leadership. When "Fortune" magazine named a Rothko painting as a good investment, Newman and Still, out of jealousy, branded him a sell-out, secretly possessing bourgeois aspirations. Still wrote to Rothko to request the paintings he had given Rothko over the years. Rothko was deeply depressed by his former friends’ jealousy.

Here is a very interesting story from Mr. Sosnoff at Forbes in which he almost buys a Rothko after returning from the Korean War and now sees today's growth stocks as a better value compared to prices for "blue chip" art.

Jun

30

 There are several reasons that cynics are on the rise in my opinion.

1. People assume the cynic is the expert. The cynic has an aura of authority.

2. Cynicism is masked as realism.

3. People assume the cynic is a healthy skeptic. On first encounter these two are hard to distinguish.

4. The cynic guards against disappointment.

5. The cynic creates an “us” against “them” world. "We won't be fooled again" by "them".

6. It is easier to find a problem than create a solution or even understand how complex creativity works.

7. It is easy to ignore the positive. Hard to ignore the negative.

8. People assume their bias is only one sided: When they like something too much. People recognize their biases when there is favoritism but justify their biases when there is disdain or prejudice. The cynic reinforces that their biases are the only morally defensible ones.

 9. The cynic has many times when he is proven wrong, but it is often hard to pinpoint the opportunity cost to that cynicism (for ex. the profit he missed by staying out). However, when he is proven right, it is very easy to see how much he has saved.

10. The belief that Type II errors or believing falsely in a person are much more damaging than Type I errors or not giving a good person a chance. Despite the time it takes for a person to prove she is proficient and the moment it takes to lose trust-worthiness.

11. The cynic is elevated as “your own man” by the media and politically. Thus becoming the “go to person” when they want something said or done. This creates all sort of side agreements and quid quo pro understandings.  Every TV program needs the phone numbers of a few favorite cynics.

12. Ironically, the person most likely to publicly be called down for their cynical tendencies is the person that is cynical towards the celebrated cynic.

Con-artists understand deeply the appeal of cynicism and use it against their prey.

The cynic is the ultimate champion for the status quo. The cynic can define people by their weaknesses not their strengths. Since everybody has weaknesses, they can dictate who is important by defining who is not important. Old man’s disease is giving in to the appeal of cynicism.

Rocky Humbert writes:

 "A cynic is a man who, when he smells flowers, looks around for a coffin."

H. L. Mencken

In the spirit of not being a cynic, I note today's news story reporting that volunteers in Japan are being asked to grow sunflowers to produce seeds … so even more sunflowers can be grown in areas contaminated by radioactivity from the Fukushima disaster. The proponents say sunflowers can efficiently absorb radioactivity from the soil in a process known as phytoremediation. Here's the news story.

The skeptic (as opposed to cynic) in me thought that this sounds like an example of "green" people confusing Flower Power with nuclear physics. But a little bit of research reveals a bit of "sunny" science for the weekend. There is REAL science here! Sunflowers (and certain other plants) CAN decontaminate radioactive soil faster and cheaper than many other approaches. Chernobyl was a large-scale proof of concept. Here are 2 of academic papers on the subject:"Screening of plant species for comparative uptake abilities of radioactive Co, Rb, Sr and Cs from Soil,"Gouthu et al ; Journal of Radioanalytical & Nuclear Chemistry" and  "Uranium Absorption Ability of Sunflower, Veiver and Puple Guinea Grass," Roongtanakiat et al (2010)

SO THE MORAL OF THE STORY IS: "A cynic is a man who, when he smells flowers, looks around for radioactive contamination."

 

Pitt T. Maner III comments: 

The phytoremediation and bioremediation fields have bloomed to aid companies tasked with difficult cleanups. Even earthworms can be useful with certain contaminants (PCBs).

Larger trees also can be used to influence the flow of impacted groundwater so that contaminants do not move offsite—effectively they act as small pumps (think of all the Florida maleleucas used to drain wetlands, now designated as "noxious weeds"). Trees can help with the treatment process through the uptake and concentration of contaminants or the breakdown of contaminants in the bacteriologically-rich portions of the root system .

The economics can be interesting and one can only imagine what they are in the Japanese case and how they affect current land values. Those with an understanding of the actual risks involved and the ability to cost effectively clean properties have in certain instances done well:

"Acquisition, adaptive re-use, and disposal of a brownfield site requires advanced and specialized appraisal analysis techniques. For example, the highest and best use of the brownfield site may be affected by the contamination, both pre- and post-remediation. Additionally, the value should take into account residual stigma and potential for third-party liability. Normal appraisal techniques frequently fail, and appraisers must rely on more advanced techniques, such as contingent valuation, case studies, or statistical analyses.[11] Nonetheless, a University of Delaware study has suggested a 17.5:1 return on dollars invested on brownfield redevelopment.[12]"

Kevin Depew writes:

Why do you believe cynicism is on the rise? In my opinion, the < 35 generation doesn't really understand it or ignores it. I don't have access to it now, but I saw some large scale polling data on Friday that was remarkable in the cross section spreads between < 35 and those over, especially > 65. The gist, based on this polling data, is that if one is > 65, one is likely to find the country going to hell, the economy going to hell, that politicians are evil and stupid and that all bankers and finance people are crooks by a wide, wide margin over younger subset. If interested I'll forward data when I get back in office Monday. I was looking at it in the first place because there is a wide divergence between consumer comfort and confidence data vs market that is outside of 25 year norms and was just curious about the asymmetry in both economy and the polling data.

Victor Niederhoffer writes: 

Artie wrote a book on cynicism in the police force that attributed cynicism as a variant of the authoritarian personality. He believed that police became cynical because they saw so much evil that their own persona looked relatively good compared to all the evil, and their cynicism and corruption was a natural outgrowth of the impossibilities of fulfilling all the requirements of an all too demanding job with conflicting goals. I believe we become cynical on the list because we see such ephemeral behavior by the public and funds, and such inside maneuvering by the cronies and flexions. It's hard to maintain a proper chivalrous attitude when confronted by these things day after day.

Jeff Watson adds:

But that cynicism, if allowed to fester, will have profound effects on one's trading. I've seen it happen too many times to people and they end up losing their edge.

Ken Drees writes:

Cynicism towards markets and politicians is healthy, but toward general mankind or society, probably not so well placed since hope and belief in goodness of the total gives one an overall positive tendency towards world view but also a well placed skepticism at certain segments.

The idea of erosion is interesting where the rigors of the job or the constant focus on conflicting outcomes that collide with the overarching worldview wear down the person's belief in good. One thought along these lines that I have is that by the end of one's life you are so distilled down in terms of your true character that its impossible to change. You are either that positive and generally nice old person, or a frown wearing old crank; the thoughtful scientist who never stops learning, or a worn out 24/7 TV watcher.

Russ Sears adds: 

I believe it also has to do with the narrow vision we have of public versus personal life of the cynic. We do not see that like a partying narcotic addict, the soul has been sold for a very narrow gain. The personal life is full of turmoil and eventually rots the productivity out of the person. Think about the cynicism required of the steroid user or EPO user for example.

I believe that many companies demise starts when a new "C" position arrives within it- the Chief Cynic. If not confronted as Artie did, often this position is allowed to become an all consuming cultural force.

Vincent Andres adds:

"the cheaper money tends to drive out the dearer"

(the money of lower value drives out the money of higher value)

–Nicolas Oresme

(« la mauvaise monnaie chasse la bonne » )

Jun

27

 Long before laboratories had HPLC, GC-Mass Specs, spectrophotometry, computers, even chemicals and glassware for that matter, there were still inquisitive people who wanted to learn and study about the earth and the universe around us.

The first laboratories equipment probably consisted of a couple of straight sticks, after which they added a rock, and a string. A timepiece would have been nice, but since timepieces weren't invented yet, they probably needed the stick to tell time. The first scientists pounded a stick into the ground and noticed a few things.

First, they probably tracked the stick's shadow from when the sun rose until the sun set. The scientists noticed that the shadow was longest when the sun rose and set, and the shadow was shortest when the sun was at the highest point of the day, They also noticed that when the shadow was shortest, that was the exact middle of the period of daylight and they were able to determine the local noon(midway between sunset and sunrise). The first scientists had inadvertently created the first timepiece, the sundial, from a simple stick.

This sundial was also the first compass as at the exact moment of local noon, the shadow pointed either due north or due south depending which side of the equator they were on. They also noticed that in the northern hemisphere that the shadow revolved around the base of the stick in a what is called a "clockwise" pattern.

Since it's safe to assume that those early scientists had plenty of time on their hands (no worries about publish or perish or tenure), it's not a stretch to think that that they made observations of the stick for a very long time. First, they would have noticed a big pattern of shadows in a 365 day repeating period. Had they observed the stick for any 365 day period in a row, and recorded what they saw, they would have noticed that the sun doesn't rise on the exact same spot on the horizon. They would have also recorded the fact that on two days a year, the shadow at sunset points exactly opposite the shadow at sunrise. When this happens, the sun rises due east and sets due west and the daylight lasts as long as the night. These two days were found out to be the spring and fall equinoxes. Any and all other days, the sun sets somewhere else on the horizon, not due east or west.

The scientists also noticed that while the sun was rising and setting on different points of the horizon, it's trajectory was also changing. They recorded the two days of the 365 where the shadow at noon where the shadow was either the longest or shortest. The day the noon shadow was the longest, it was the winter solstice, and when it was the shortest, it was the summer solstice. It's amazing that with a simple stick, those first scientists were able to record the four points on the compass, and were also able to identify the four days of the year that mark the change of seasons.

Those scientists weren't finished with the stick, they had more observations. At night, they lined up their stick with a familiar star in the sky. Using their hourglass, they would have noticed that the star took 23 hours, 56 minutes, for the star to align it with the stick from the previous alignment. From this they would be able to deduce the length of a day and determine that it was uniform throughout the year.

The scientists weren't finished with the single stick, as the scientists that recorded the tip of the shadow of the high noon noticed that the shadow fell to a different spot each day and over the course of 365 days, those marks traced a figure 8. The figure 8 happens because the Earth tilts on its axis by 23.5 degrees from the plane of the solar system. The tilt gives rise to the seasons and the apparent wide ranging path of the sun across the skies.

The figure 8 is the result of the sun migrating back and forth across the celestial equator during the year. Due to many other things, the earth's orbit is not a perfect circle and according to Kepler's Planetary laws, the orbital speed must vary, increasing as we move toward the sun and decreasing as we move away. Because the Earth's rotation is constant, but the orbital speed isn't, high noon does not always correlate with "Clock noon." The variance can be as much as 16 minutes early or late depending on the time of year. Interestingly, the clock noon equals high noon only four days a year, Dec 25, April 15, June 14, and Sep 2.

But I digress, the first scientists had much more on their plate, and they had science to do. Those scientists probably sent their assistants due south way beyond the horizon (more than 6 degrees would be ideal) with a stick the same length. At a predetermined time (high noon?), on the same day in the future, they measured the length of the shadow, and were able to use those lengths to calculate the Earth's circumference using simple geometry.

 From the circumference, they could determine the radius, diameter, volume and much more. From this, one could have probably made a few more simple measurements and arrived at a mass of the earth. Eratosthenes of Cyrene measured the length of the two shadows with a partner in 222BC and got an answer that was within 15% of the true circumference. As an aside, the word geometry is derived from the ancient Greek word, "Earth measurement."

The first scientists were also able to pound a stick into the ground at an angle other than vertical, attach a string and a rock to the end, creating a pendulum. If they counted the number of times the rock swings in 60 seconds, they deduced that the mass of the rock and the width of the arc had very little to do with the number of swings. The only thing that matters is the length of the string and what planet you are on. Using very simple equations, one can, from a pendulum,. determine the acceleration of gravity on the Earth. If you went to the moon, you would find the pendulum moving much more slowly and you could calculate that the gravity is 1/6 of that of Earth.

 There's more experimentation that could be done. If one got a large stick, or tree around 33 Meters long and tied a long string to it with a very heavy stone at the end and set this pendulum in motion, the bob would swing for hours on end. If the early scientists tracked the direction of the pendulum swings, they would have noticed the plane of the swing rotates. Ideally, if one set up the pendulum at either of the Earth's poles, the swing would make one full rotation every 23 hours, 56 minutes, but the rotation would go slower as you went towards the equator where the pendulum's plane would not move at all. This not only proved that the Earth rotates, but using a little trig, and a timer, one could determine one's latitude. For what it's worth, Focault, the French Physicist did this in 1851, which was one of the last truly elegant experiments. That big pendulum was named after him and they can be found in almost every science museum in the world.

It's very interesting that from a couple of sticks, a string, and a rock, one can determine the four points of the compass, the four days of the year that mark the change of seasons, the exact length of the day, the circumference of the Earth, it's diameter, radius, volume, your own latitude, and the acceleration due to gravity.

A modern common complaint is that a lack of tools keeps us from doing proper science, and that is a very intellectually lazy complaint. The basic axioms of science were proven, long ago with a stick, a string, and a rock. In fact, the first computer was invented in 150 BC in Greece and was called the Astrolabe. I wonder if traders approached their study of the markets using the same ingenuity and out of the box thinking as Eratosthenes of Cyrene, Focault, Euclid, or Newton, what differences in understanding would be? For what it was worth, Newton was an investor who lost the equivalent of $2.75 million in the market, and this author will let the reader draw their own conclusions.

Pitt T. Maner III adds:

The use of sticks and stones to produce metal must have been a wondrous experiment. 35,000 BC by the Khormusans is an early date for the advance, and the power of a simple magnetized needle to give direction.

The story is that when Einstein was a young boy he was fascinated by a compass:

When he was 5 years old and sick in bed, Hermann Einstein brought Albert a device that did stir his intellect. It was the first time he had seen a magnetic compass. He lay there shaking and twisting the odd contraption, certain he could fool it into pointing off in a new direction. But try as he might, the compass needle would always find its way back to pointing in the direction of magnetic north. "A wonder," he thought. The invisible force that guided the compass needle was evidence to Albert that there was more to our world that meets the eye. There was "something behind things, something deeply hidden."

So began Albert Einstein's journey down a road of exploration that he would follow the rest of his life. "I have no special gift," he would say, "I am only passionately curious."'

Jun

23

 Reinhart and Rogoff said governments usually get out of debt crises by default/decree or printing inflation. The next edition will include a chapter on what happens to sovereign debt when a government doesn't control its own currency.

Gary Rogan writes:

When Einstein was a boy, seeing a magnetic compass convinced him that
there had to be "something behind things, something  deeply hidden." 
This is the same way, there is something deeply hidden behind things. 
The world doesn't work as most people expected it to work, but they are
finally getting clued in. 

May

12

 I went for a walk today in the Sumatra jungle and into a corn field where, standing next to a 10' plant with a tassel top that can double as a basketball hoop, I knew I was lost. The neighbor 9-feet plants were too spindly to climb and I didn't dream of scaling the giant to peek at the sun. A crunch of footsteps a few rows over startled my 'Help!', and the reply, 'Pick a young one, sweet.'

I anxiously recalled my Iowa hobo days at the Brit Convention where a 1942 photograph displayed the 26-feet National Tall Corn Contest winner from Des Moines.

I parted the stalks taking thumps on the head from corns for a dozen rows to nearly knock over an old Batak lady perched on a stool picking. She dropped lightly to the ground and handed me an ear to nibble and it was sweet, however robust like the Batak. After the first line she explained that the corn was sweetest this time of year; after the second she allowed that everyone else waits another two weeks for 20% size increase; and after the third line she cried, 'You hit the peak height because tomorrow the tassels will weep and bend!'

We grabbed more ears ears and an hour later walked out the corn field into the Sumatra sunshine.

May

4

 Paul Cantor has an essay in today's Mises Daily in which he quotes Keynes' snarky summary of his own beliefs about political economy:

Ancient Egypt was doubly fortunate and doubtless owed to this its fabled wealth, in that it possessed two activities, namely pyramid building as well as the search for precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York.

One has to admire Keynes for his remarkable candor. He was direct and open about his atheism and his belief in the effectiveness of "stimulus" - i.e. having the Treasury borrow and/or print money to pay people to dig holes and fill them up again. Holes dug up and then filled in are a neat and precise activity that has none of the troubling noises and threatening speeds of railway engines and cars. The market might well want two railways from London to York - one for slow and one for fast traffic, one for freight and one for passenger trains, etc. - but people should not want or need or even tolerate such mess and confusion and waste.

Keynes and his ballerina beard of a wife and most other performers, writers and artists - then and now - instinctively love socialism as matter of aesthetics. Oscar Wilde explained this in his essay on "The Soul of Man Under Socialism". Wilde admits openly that he finds poor people ugly and deeply troublesome. According to Cantor, "he would like someone to take care of them, which almost means to get rid of them." So many artists end up being socialists because, as Cantor says, "they would like someone else" -the U.N. or the World Bank or AmeriCorps or the Gates Foundation - anyone but the poor themselves - "to take care of the problem of the un-beautiful."

As Cantor says, Wilde is "looking back nostalgically to the age of patronage. He does not like the laws of supply and demand. He doesn't like the idea that a novel by Anthony Trollope should be successful because people like it. Why should common people be able to judge Wilde? It is a very good essay to see just how reactionary socialism is. The real key to understanding why Castro is so popular with Latin American authors-and why socialism attracts so many writers and artists-is that these writers feel underappreciated by the market. They are looking for the Great Man, the dictator who will recognize their genius and exalt their talents above the petty bourgeoisie." The same impulse led others to be attracted to the socialism of the right - i.e. fascism. As Cantor says, "this was the reason behind Ezra Pound's fascination with Mussolini, for example….It all stems from the same impulse…. They hope that socialism will liberate them from their greatest fear: being judged by the common man."

Apr

5

 Burton Fulsom in his book The Myth of the Robber Barrons shows that many of the great industrialists of the 19th century, the ones that didn't get government help like Harriman and Fulton, but the independent productive geniuses like James Hill, Cornelius Vaderbilt, The Mellons (My friend Dan Grossman wrote a great review of the recent Mellon bio), and the Scrantons and the Rockefellers were great men who opened up new vistas of consumer benefit and weath.

It totally disproves the myth that has the world in its grip, and things like the Palindrome who calls them crook capitalists. We know who the crook capiatalists are today, and they're not the men like Steve Jobs, and many others.

Who else would you nominate as the opposite of the cronies? Let us come up with some good ones in honor of Rocky's Humbert's request for us to honor the creation of value.

Alston Mabry writes:

Deng Xiaoping and John Doerr.

Also here is something interesting from the original foreword to The Robber Barons, by Matthew Josephson, first published in 1934:

When the group of men who form the subject of this history arrived upon the scene, the United States was a mercantile-agrarian democracy. When they departed or retired from active life, it was something else: a unified industrial society, the effective economic, control of which was lodged in the hands of a hierarchy. In short, these men more or less knowingly played the leading rôles in an age of industrial revolution. Even their quarrels, intrigues and misadventures (too often treated as merely diverting or picturesque) are part of the mechanism of our history. Under their hands the renovation of our economic life proceeded relentlessly: large-scale production replaced the scattered, decentralized mode of production; industrial enterprises became more concentrated, more "efficient" technically, and essentially "coöperative," where they had been purely individualistic and lamentably wasteful. But all this revolutionizing effort is branded with the motive of private gain on the part of the new captains of industry. To organize and exploit the resources of a nation upon a gigantic scale, to regiment its farmers and workers into harmonious corps of producers, and to do this only in the name of an uncontrolled appetite for private profit — here surely is the great inherent contradiction whence so much disaster, outrage and misery has flowed.

…and from the Foreword to the 1962 edition:

In the crisis years of the 1930s economic intervention by the Federal Government was employed on an unprecedented scale, not only in the interests of human welfare, but also to regulate and control the masters of capital who, by their excesses and bad leadership, had helped to bring about the debacle of 1929-1933. At that period a critical literature also arose (of which the present work may perhaps be taken as an example), providing background material to the men of the New Deal.

Of late years, however, a group of academic historians have constituted themselves what may be called a revisionist school, which reacts against the critical spirit of the 1930s. They reject the idea that our nineteenth-century barons-of-the-bags may have been inspired by the same motives animating the ancient barons-of-the-crags—who, by force of arms, instead of corporate combinations, monopolized strategic valley roads or mountain passes through which commerce flowed. To the revisionists of our history our old-time moneylords "were not robber barons but architects of material progress," and, in some wise, "saviors" of our country. They have proposed rewriting parts of America's history so that the image of the old-school capitalists should be retouched and restored, like rare pieces of antique furniture. This business of rewriting our history — perhaps in conformity to current fashions in intellectual reaction — has unpleasant connotations to my mind, recalling the propaganda schemes used in authoritarian societies and the "truth factories" in George Orwell's anti-utopian novel 1984. 

Sam Marx writes:

Every time I'm in NYC going up the ramp at Park Ave So. I see the statue of Cornelius Vanderbilt and I'm reminded of how he created a shortcut to California by way of Panama.

After the California '49 discovery of gold, increasing the migration there, he cleared that thin strip of land in Panama, placed boats on the Pacific side and transported passengers by boat from NYC to Panama, horse and wagon to the Pacific and then by boat to California, thereby saving the long and dangerous trip across country or around South America. No robber baron in that endeavor.

Pitt T. Maner III writes: 

How about Ray Kroc? McDonalds in the news for hiring 50,000 new employees this month.

Kroc created a new kind of fast food with McDonald's, implementing Henry Ford's assembly line idea into his restaurants. He also utilized standardization, a business tactic that he used to make sure that every Big Mac would taste the same whether a person is in New York or Tokyo. Kroc also revolutionized the art of franchising, where he set strict rules on how the food was to be made. These strict rules also were applied to customer service standards with such mandates that moneys be refunded to clients whose orders were not correct or to customers who had to wait for more than 5 minutes for their food. However, Kroc let the franchisees decide their best approach to marketing the products. For example, Willard Scott created the internationally recognized figure known as Ronald McDonald to improve sales of hamburgers in the Washington, D.C. area. Kroc established various foundations for alcoholics, and also started the Ronald McDonald House foundation.

Jeff Sasmor writes:

A later Vanderbilt created one of the first concrete roads in the nation, the Vanderbilt Motor Parkway . Some remnants remain, my wife and I used to bike on a part of it that I believe still remains between Cunningham Park and Creedmore hospital in Queens NYC.

Allegedly the VMP was the first road designed for autos only.

A much later Vanderbilt, a great^n granddaughter, used to work for me and my partners in the early 1990s, but got fired because the wife of one of my partners got jealous of her good looks.

Jeff Watson writes: 

 Jay Gould was my favorite robber-baron, although he was deeply flawed, and a vile and disgusting cheat. One could say that Gould had an inner drive and a pronounced sense of pluck. Getting his speculative stake from the ashes of the Panic of 1857, he astounded the financial world with his decades of manipulations. His railroad corners were amazing. His attempt to corner the gold market resulting in Black Friday was something out of a novel, His bribery to influence legislation was legendary. His chicanery with using forged stock certificates set the bar for all other cheats and swindlers. He controlled Western Union. His corners in the Chicago commodities markets were equal to those of Armour, Cutten, and Gates.. As bad as he was, he still managed to combine a bunch of railroads together and creating value by achieving a better operating scale. I have problems with the way he treated the help, but at that time, laborers were very shabbily treated. Finally, when Gould died, he had an estate of $75 million dollars, so he must have done something right.

Mar

12

 There are so many distractions that try to take your focus off the market when you need it the most. Wailing sirens every hour, tsunamis, earthquakes, movies, pretty girls, boats, music, food, the news, the mideast, the electrical workers strike, thunder, lighting, vacations, family obligations, phone calls, bills, errands, and the list goes on. Obviously some require a balance. Its a common strategic trick used in other contexts of battle, combat, negotiation, art, humor, magic, romance.

Alan Millhone writes:

You make good points on distractions. I know that many on the list have no TV which plays on our emotions.

At Checker tournaments I pretty much block out all around me and concentrate on the board before me. My opponent is there but only to make their move or reply to mine. I keep a legal pad handy and record my moves and on occasion make a note beside my move here and there or same with my opponent.

I suspect the Market trader should conduct themselves in a similar way.

Craig Mee writes:

Remember Tiger Wood's father used to either yell at him or play music super loud on the putting green– one or the other, from a very early age to combat distractions.

No doubt the scalpers in the pit that excelled had mastered that area as well.

Mar

4

 This passage from Tolstoy's "A Confession" makes me think of the evolution of "word of mouth", "stock hyping", "fax machine penny stocks", "Newsletters", "Weekly Column's" and all that has come from the button wood to the very blogs that are today dispatched daily with affiliate money making profit that it is all to be dubbed Financial Pornography. No wonder, Vic, you gave the suggestion to read the Enquirer and avoid the 'body snatchers' in the "lunatic asylums" :

"From my intimacy with these men I acquired a new vice: abnormally developed pride and an insane assurance that it was my vocation to teach men, without knowing what.

To remember that time, and my own state of mind and that of those men (though there are thousands like them today), is sad and terrible and ludicrous, and arouses exactly the feeling one experiences in a lunatic asylum.

We were all then convinced that it was necessary for us to speak, write, and print as quickly as possible and as much as possible, and that it was all wanted for the good of humanity. And thousands of us, contradicting and abusing one another, all printed and wrote–teaching others. And without noticing that we knew nothing, and that to the simplest of life's questions: What is good and what is evil? we did not know how to reply, we all talked at the same time, not listening to one another, sometimes seconding and praising one another in order to be seconded and praised in turn, sometimes getting angry with one another–just as in a lunatic asylum.

Thousands of workmen laboured to the extreme limit of their strength day and night, setting the type and printing millions of words which the post carried all over Russia, and we still went on teaching and could in no way find time to teach enough, and were always angry that sufficient attention was not paid us.

It was terribly strange, but is now quite comprehensible. Our real innermost concern was to get as much money and praise as possible. To gain that end we could do nothing except write books and papers. So we did that. But in order to do such useless work and to feel assured that we were very important people we required a theory justifying our activity. And so among us this theory was devised: "All that exists is reasonable. All that exists develops. And it all develops by means of Culture. And Culture is measured by the circulation of books and newspapers. And we are paid money and are respected because we write books and newspapers, and therefore we are the most useful and the best of men." This theory would have been all very well if we had been unanimous, but as every thought expressed by one of us was always met by a diametrically opposite thought expressed by another, we ought to have been driven to reflection. But we ignored this; people paid us money and those on our side praised us, so each of us considered himself justified.

It is now clear to me that this was just as in a lunatic asylum; but then I only dimly suspected this, and like all lunatics, simply called all men lunatics except myself."

Feb

15

 "A bank of the United States is in many respects convenient for the Government and useful to the people. Entertaining this opinion, and deeply impressed with the belief that some of the powers and privileges possessed by the existing bank are unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people, I felt it my duty at an early period of my Administration to call the attention of Congress to the practicability of organizing an institution combining all its advantages and obviating these objections. I sincerely regret that in the act before me I can perceive none of those modifications of the bank charter which are necessary, in my opinion, to make it compatible with justice, with sound policy, or with the Constitution of our country.

The present corporate body, denominated the president, directors, and company of the Bank of the United States, will have existed at the time this act is intended to take effect twenty years. It enjoys an exclusive privilege of banking under the authority of the General Government, a monopoly of its favor and support, and, as a necessary consequence, almost a monopoly of the foreign and domestic exchange. The powers, privileges, and favors bestowed upon it in the original charter, by increasing the value of the stock far above its par value, operated as a gratuity of many millions to the stockholders.

An apology may be found for the failure to guard against this result in the consideration that the effect of the original act of incorporation could not be certainly foreseen at the time of its passage. The act before me proposes another gratuity to the holders of the same stock, and in many cases to the same men, of at least seven millions more. This donation finds no apology in any uncertainty as to the effect of the act. On all hands it is conceded that its passage will increase at least so or 30 per cent more the market price of the stock, subject to the payment of the annuity of $200,000 per year secured by the act, thus adding in a moment one-fourth to its par value. It is not our own citizens only who are to receive the bounty of our Government. More than eight millions of the stock of this bank are held by foreigners. By this act the American Republic proposes virtually to make them a present of some millions of dollars. For these gratuities to foreigners and to some of our own opulent citizens the act secures no equivalent whatever. They are the certain gains of the present stockholders under the operation of this act, after making full allowance for the payment of the bonus.

Every monopoly and all exclusive privileges are granted at the expense of the public, which ought to receive a fair equivalent. The many millions which this act proposes to bestow on the stockholders of the existing bank must come directly or indirectly out of the earnings of the American people. It is due to them, therefore, if their Government sell monopolies and exclusive privileges, that they should at least exact for them as much as they are worth in open market. The value of the monopoly in this case may be correctly ascertained. The twenty-eight millions of stock would probably be at an advance of 50 per cent, and command in market at least $42,000,000, subject to the payment of the present bonus. The present value of the monopoly, therefore, is $17,000,000, and this the act proposes to sell for three millions, payable in fifteen annual installments of $200,000 each.

It is not conceivable how the present stockholders can have any claim to the special favor of the Government. The present corporation has enjoyed its monopoly during the period stipulated in the original contract. If we must have such a corporation, why should not the Government sell out the whole stock and thus secure to the people the full market value of the privileges granted? Why should not Congress create and sell twenty-eight millions of stock, incorporating the purchasers with all the powers and privileges secured in this act and putting the premium upon the sales into the Treasury?

But this act does not permit competition in the purchase of this monopoly. It seems to be predicated on the erroneous idea that the present stockholders have a prescriptive right not only to the favor but to the bounty of Government. It appears that more than a fourth part of the stock is held by foreigners and the residue is held by a few hundred of our own citizens, chiefly of the richest class. For their benefit does this act exclude the whole American people from competition in the purchase of this monopoly and dispose of it for many millions less than it is worth. This seems the less excusable because some of our citizens not now stockholders petitioned that the door of competition might be opened, and offered to take a charter on terms much more favorable to the Government and country.

But this proposition, although made by men whose aggregate wealth is believed to be equal to all the private stock in the existing bank, has been set aside, and the bounty of our Government is proposed to be again bestowed on the few who have been fortunate enough to secure the stock and at this moment wield the power of the existing institution. I can not perceive the justice or policy of this course. If our Government must sell monopolies, it would seem to be its duty to take nothing less than their full value, and if gratuities must be made once in fifteen or twenty years let them not be bestowed on the subjects of a foreign government nor upon a designated and favored class of men in our own country. It is but justice and good policy, as far as the nature of the case will admit, to confine our favors to our own fellow-citizens, and let each in his turn enjoy an opportunity to profit by our bounty. In the bearings of the act before me upon these points I find ample reasons why it should not become a law.

It has been urged as an argument in favor of rechartering the present bank that the calling in its loans will produce great embarrassment and distress. The time allowed to close its concerns is ample, and if it has been well managed its pressure will be light, and heavy only in case its management has been bad. If, therefore, it shall produce distress, the fault will be its own, and it would furnish a reason against renewing a power which has been so obviously abused. But will there ever be a time when this reason will be less powerful? To acknowledge its force is to admit that the bank ought to be perpetual, and as a consequence the present stockholders and those inheriting their rights as successors be established a privileged order, clothed both with great political power and enjoying immense pecuniary advantages from their connection with the Government.

The modifications of the existing charter proposed by this act are not such, in my view, as make it consistent with the rights of the States or the liberties of the people. The qualification of the right of the bank to hold real estate, the limitation of its power to establish branches, and the power reserved to Congress to forbid the circulation of small notes are restrictions comparatively of little value or importance. All the objectionable principles of the existing corporation, and most of its odious features, are retained without alleviation.

The fourth section provides " that the notes or bills of the said corporation, although the same be, on the faces thereof, respectively made payable at one place only, shall nevertheless be received by the said corporation at the bank or at any of the offices of discount and deposit thereof if tendered in liquidation or payment of any balance or balances due to said corporation or to such office of discount and deposit from any other incorporated bank." This provision secures to the State banks a legal privilege in the Bank of the United States which is withheld from all private citizens. If a State bank in Philadelphia owe the Bank of the United States and have notes issued by the St. Louis branch, it can pay the debt with those notes, but if a merchant, mechanic, or other private citizen be in like circumstances he can not by law pay his debt with those notes, but must sell them at a discount or send them to St. Louis to be cashed. This boon conceded to the State banks, though not unjust in itself, is most odious because it does not measure out equal justice to the high and the low, the rich and the poor. To the extent of its practical effect it is a bond of union among the banking establishments of the nation, erecting them into an interest separate from that of the people, and its necessary tendency is to unite the Bank of the United States and the State banks in any measure which may be thought conducive to their common interest."

Jan

31

 Here are some good books I am reading when Aubrey is playing with someone else: The Mind of Bill James by Scott Gray has great stuff about James' methods including many based on regressions, the law of competitive balance, the non-existence of most shibboleths (clutch hitting doesn't work nor do streaks), the prevalence of miracles in compressed markets (leagues), leave a good young stock (player) alone, forget about stealing bases (if you want to win you have to go against the grind), similarity scores are predictive, pareto distribution of talent etc., stay away from the best performers (free agents) et al,

Stigma by Erving Goffman. How we relate to those whose relations stigmatize them, and don't buy them when we should.

The War at Troy by Lindsay Clarke. Finally tells you why the other women, and Peleus and the well meaning Nestor created the war and many other useful facts about the walls and the hypotenuse.

Honus Wagner by Dennis and Jeanne DeValeria. The greatest ball player, and how his business developed, and his touch for the common man and all the postiions he played, the importance of family inheritance et al.

Mortal Games by Fred Waitzkin. Everything about the killer instinct of Garry Kasparov, and how he won his matches even while being distracted with politics and showboating, and the peculiar relation that the writer, his son Josh had with Garry (while standing on his head or otherwise).

The History of Banks by Richard Hildreth, 1837. How free markets worked in the old days, and the attempts at flexonopoly by the banks after the before and after the first banks.

The Seventy Great Mysteries of the Natural World by Michael Benton. It clears up all the mysteries of evolution, and gives the best scientific explanations for such things as selfish genes, why we're big, who rules, why species die, how plants and animals relate.

Roundup by Ring Lardner. The best short stories including "Alibi Ike" which every one who hires or deals with a trader should know.

Secrets of Mental Math by Arthur Benjamin and Michael Shermer. Tells you how to do squares and cubes up to 10000 with a variety of methods, but the close together method is by far the best, and I can only go up to 1000 so far, but it keeps you from old mans' disease when not playing checkers.

Bayesian Models for Categorical Data by Peter Congdon. how to choose models and count outcomes. A highly technical book that requires a pencil and paper and does nothing for those without total background in categories, simulations, and bayesian methods to start. But it's an interesting reference.

American Business Since 1920 by Thomas McCraw. A beautiful discussion of what made p and g great, (the white shirts, the soap operas, the two person partnership, the combination of mass advertising and mass development of purchasers.) Written from a liberal perspective by someone who actually likes business but is a Harvard professor, and the anti-business and fund raising that is part and parcel of that nook of the woods often leaves the reader wishing it was not so biased, but written by a real scholar.

Jeff Watson adds a book:

 Although I have a well known prejudice towards the Rolling Stones as my favorite rock band of all time,

I've been reading Keith Richards autobiography Life. Since reading this book, I have a newfound admiration of his music ability, his composition skills, and his ability to improvise with different tunings of the guitar, eliminating a string making a six string a five string guitar etc. His knowledge of technique and music composition has put him in the category of the best trained from Berkee and Juilliard, His desire to emulate the best of the Chicago Blues, the Mississippi blues, the Nashville Country and the Bakersfield Country made him a much better guitarist, plus he became a very accomplished piano player along the way.

His associations with the people of that period, prefering the black musicians as, to quote Richards, they put the roll in "Rock and Roll." Richards knew and worked with everyone in that era from the Everley Brothers, John Lennon, Jimi Hendrix, to classical composers, to Johnny Cash and Chet Atkins. His love/hate (mostly love) relationship with Mick Jagger allowed for the creation of some of the most enduring songs of the rock and roll era. He was a musical theorist who improvised and created many things that are still in use today. His hooks are legendary.

One thing of particular note was that he stressed firstnlearning to play with an acoustic guitar with cat gut strings, mastering that, moving on to an acoustic with steel strings, before going electric, all the while reading and writing music. His claim was that progression would make one a better player. An interesting fact was that the small musician fraternity would gladly share techniques and short cuts without any expectations other than a quid pro quo. He preferred associating with black musicians over white musicians as he thought they were more original and daring and played with more emotion and soul. Richards is a deeply flawed individual, with many personal flaws such as womanizing, drug usage, legal problems, addiction etc. However, he has since gotten relatively clean, still plays better than most people 45 years younger than him, and has the constitution of a bull. His guitar technique is flawless, and he even had to develop techniques to make up for when the late Brian Jones flaked out and he had to add extra picking techniques as the Stones was a two guitar band.

Comparing the Beatles and Stones is like comparing apples and oranges as the Beatles were mainly a pop group, and the Stones were a rock/blues band. A lthough they did write many remarkable songs, the Stones started as a cover band, but they ended up writing music on par with the best of Lennon and McCartney, and while the Beatles career took a nosedive in 1970, the Stones were just hitting their stride with songs like "Sympathy for the Devil,"." Gimme Shelter,"" Honky Tonk Woman," You Can't always get what you want" and many others too numerous to list here. I manage to see most of of their concerts, and have since 1964, and one thing you can say is that they still have their chops and sound as good as in 1964, even better as one doesn't have to contend with adolescent girls screaming. On another note, they are coming out with an album of entirely new material later on in 2011. Richard's most poignant observation was that "I play not for the money or the adoration of the crowds, but I play for myself." 

Tyler Cowen writes in:

I also like Bill Simmons on the NBA…

Alston Mabry writes:

Exploring the Keef meme lead to this little jewel What Would Keith Richards Do?

Jan

30

 Egypt – a new pyramid scheme?

My newest Tweet:

Though it's cool to back the Cairenes, it's uncertain protest upshot will lead to a pro-West replacement ~ Will this now exacerbate the Mideast mess?

We are conditioned from the–Iranian, failed–Green Revolution (and latterly, the Jasmine) that these street-spontaneous uprisings are 'good,' but in fact, it has both short-term and long-term consequences that are not known and unknowable. Both of these short- and long-term paradigms, however, are shaky for a solid footing on which to base the expectation of mooth relations with the West. Short-term, the price of oil is sky-rocketing, as a fast-and-easy way of measuring the instability of the moment. but even long-term, the likeliest substitute leaders for Egypt might well be worse than the incumbent of the past 30 years–should the Brotherhood come to the fore, the treaty with Israel is of course shot, and there is little expectation that the Egyptian new administration will honor that piece, even if they forego the usual US $1.8 B foreign aid to Egypt, and even if that does not strike observers as very momentous: It is. the domino effect is deeply being felt here, and the net result of all these eructations in Tunisia and now Yemen and Egypt might not be the idyllic result we unconsciously root for.

much as i hate to admit it, the sluggishness and peculiar molasses-reactions of our Administration might instead be based on better Intel than has been shared thus far, and is to be explained by the caution advised by our ears and eyes on the ground that predict a rather worse outcome than the roseate sentiments of the moment. Saddam's insurrectionist town centers come to mind–we thought it was a picnic at fiesta rock when he was deposed and de-statued–but the result was an unseating of the delicate equilibrium vis-a-vis Iran that is our current and future nightmare.

Egypt is the fulcrum in the region, and its stability and hegemony, even if grudging, was a key element. Now we have historic seismic shifting, and no telling what forces will wrest ultimate control. this being the MidEast , it is not an easy guess what ultimately will redound to the contemporary euphoria.

Can Washington be so very out of the picture with their measured support for a dictator? and their reluctance to back this 'revolution'? Or can this mean that Yemen , Egypt , Jordan, possibly other nearby states will be in temporary flux for the next few years, with oil costs reflected in this indecision, at $4/gallon again, on our hugely fragile so-called recovery– and the recovery of our allies?

Exulting on our part is, it seems to me, premature.

Paolo Pezzutti comments:

What is happening in Tunisia and Egypt can be seen both as an opportunity and as a risk. Markets have not considered at all the events in Tunisia, but they are concerned by the situation in Egypt, because of the importance of Suez and the vital role of Egypt in that critical area of the Mediterranean. The question is: are these countries moving toward more democratic governments? Or there is a risk to witness an Iran-like evolution (or involution by western standards…) of the situation? What if their neighbors experience similar shocks (Lybia, Algeria for example)?

The emergence of an arc of instability could have important regional and global consequences. At the same time there is a historic opportunity to move toward democracy. Markets on Friday moved quickly to the downside, and gold and the dollar recovered a bit as "flight to safety" seemed to be predominant. Markets perceived risk more than opportunity. It remains to be seen if this perception is going to stay. Or as it often happens it is only a buy on dip opportunity for the stock market. Interestingly, associated to the news from Egypt some reports from corporates pushed stocks lower. (Why bad news come always in clusters?). In fact, news about Ford and Amazon which posted very good results (but not enough apparently) made the stocks tumble (-13% and -7% respectively). One is made to think if also the perception of earnings expectations is changing. One analyst commented about Amazon (which went up 50% since last July): "When margins go the wrong way on a high-multiple stock, you get a correction, like we are seeing today.”

However, he maintained his own outperform rating on the shares. Instead, Ford's fourth-quarter profits were nearly half of what some analysts expected. It is interesting, however, to see how change always occurs unexpectedly and swiftly both in social systems and in markets. I am far from saying that the long uptrend is over. Many will continue to buy on dip for quite some time, but the doubt is out there and shorts may try once again on different grounds. After the "military" campaign based on the European sovereign debt may be over (at least for now), uncertainty about situation in Egypt and on stocks high evaluations could be a ground for confrontation.

A new battle may have started.

Jan

27

I'd like to share this thought provoking article, "It's Time to Make Insider Trading Fully Legal":

The newspapers in recent months have been full of bombshell stories about insider trading on Wall Street. According to an account in the Wall Street Journal, "the investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in US financial markets, including new ways nonpublic information is passed to traders through experts tied to specific industries or companies." The basic argument made against what its detractors call "insider trading" is that the ability to act on nonpublic information creates an unlevel playing field that decreases faith in the stock markets themselves. If access to information is made equal, small investors will allegedly feel more comfortable placing their savings in the markets.

One problem with the above theorizing is that what most deem "insider trading" has never been defined by lawmakers or the courts. Worse, not considered enough is how both the economy and investors are harmed when necessary information is obscured, thereby perpetuating unrealistic share valuations.

Ultimately, it should be said that to ban insider trading is to block use of the very information necessary for markets to function properly. The better solution is to cease prosecution of what is already vague, and in the process reward market sleuths whose efforts will ensure properly priced shares, and in the case of poorly run firms, no further waste of capital.

Read the full article here

Dylan Distasio replies: 

I would assume the author of this article is attempting to ignite a controversy, but I will go a head and take the bait… He writes:

One problem with the above theorizing is that what most deem "insider trading" has never been defined by lawmakers or the courts. Worse, not considered enough is how both the economy and investors are harmed when necessary information is obscured, thereby perpetuating unrealistic share valuations.

To this I would reply: "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck." or perhaps in the vein of Stewart "I know it when I see it."

Here's an example of what I'm referring to, although in this case, it's a goose not a duck:

Insider trading is an economic plus. Arguably the greatest reason that governments should encourage insider trading has to do with economic growth. To put it very simply, we live in a world of limited capital, and insider trading ensures that share prices will reach fully informed levels as quickly as possible.

To encourage the opposite, as in making insider trading a crime, is to delay the happy process whereby companies achieve a fair price. To the extent that market altering information is kept from reaching the marketplace, companies doing what investors want will necessarily not receive as much capital as they otherwise might. Poorly run companies will receive more capital than they can efficiently use.

This is a laughable justification…Insider trading doesn't help share prices to "reach fully informed levels as quickly as possible." It helps the few with privileged information line their pockets in an unethical manner. The fact that it is insider information by definition dictates that it is not being disclosed publicly and thus does little to allow share prices to quickly reach a new equilibrium. A public news release that a company didn't get expected FDA approval for a new drug, as in the recent case of MNKD helps the stock reach a new equilibrium rapidly.

Hypothetical insiders quietly dumping their shares and trying to cover their tracks as best as possible ahead of a news release serves no one other than themselves (This comment is not in reference to MNKD).

I thought I had seen everything until I read this article, I apologize in advance for feeding the troll.

Rudolf Hauser writes:

An officer or director of a company has a fiduciary duty to represent the interests of the company's shareholders. As such they should not be allowed to use material information about their companies that has not yet been reported to the public and shareholders for their personal advantage in changing their position ahead of shareholders in response to either good or adverse developments. Such insider trading should be subject to breach of fiduciary duty legal actions to reclaim an any advantage plus punitive damages. Given that a company with many small shareholders might not find it advantageous on an individual basis to sue the SEC should have the power to sue on their behalf. Those involved in arranging deals, etc. likewise have a fiduciary duty to the companies involved as their clients not to act on such information. This is what the law would look like if I were writing it.

When it comes to others who are not in a position of fiduciary duty, I too would not make such use of non-public information illegal. If the news is positive it provides the seller with a better price than he or she would otherwise have–which helps rather than hurts them. Likewise, with regard to such selling on non-public information, the investor intent on buying receives a lower price–which again is to his or her benefit, not detriment. The only ones who might be hurt are those who might decide to act based on the new price before the full impacts of the developments in question are reflected in the stock price. I would guess that the former are more likely than the latter instances. The wider the scope of what is called insider information, the more nebulous the concept and the more it discourages analysis. For example, if one has many industry contacts who can provide a feel for industry trends without any providing what would be considered information in itself, at what point does the interpretation of the law become so broad that having such a information network is itself considered inside information? The regulators have a tendency to try to keep expanding the reach of the rules they impose.

But of course, I am not the one writing the laws. So whether good or bad, the law is what it is and should be followed until such time as it is changed by proper legal process.

Jan

27

It's interesting how the continent is so fearful of inflation and the colonies so fearful of unemployment. Both worries are rooted deeply in history, and the result has been playing out over the last several weeks in currency.

Jan

25

 Part of the Russian film Festival at the Walter Reade Theatre at Lincoln Center.

Saw "Seven Bullets" today, a mixture of "Taras Bulba," "Gunfight at the OK Corral," and half dozen knife-slinger fighter cowboys vs. posses/aka guns-for-hire set in the harsh Russian steppes, with blood-thirsty horsemen and soldiers in the Soviet revolutionary war years of 1917-1920. The amazing horsemanship and gunplay, shootings, stabbings, burnings, imagined revenge for killings by wrongly identified people ("No, my son, that is not the killer; your brother's killer was handsome, and much shorter"), is alleviated only momentarily when one sees the brilliant white teeth of all parties. Real bad-guys and counter-bad-guys of that time would surely have had terrible teeth by the time their clothing got that grungy. The interesting difference between this film is that there were no stuntmen doing these leaps onto spirited stallions, or flying from building roof to saddle, or rescuing the unprepossessing young woman who is affianced to one eye-patched tribal leader "for 300 rams"–and men in both sides of the frequently changing sides are Soviet Muslims, stopping to pray inside their prisoner's cells, or facing their prayer mat hung on the yurt wall. Seeing the Russian or soviet mindset refracted through a somewhat primitive understanding of the cult of the moment is frankly fascinating, and a new theatrical experience on a number of levels.

The scenery is austere. It is also ravishing, hard and unvisited by many prior films in our acquaintance. The tiny snarky font shown by the filmmakers, and you can miss it if you aren't attuned, is the etiolated background theme from the TV show, "Mission Impossible," which detracts from the hellfire seriousness of the goings-on, but reminds one that one is watching a film, not brutal hired soldiers en route to delivering a bride-to-be. The color palette seems confined to dusty, umber and dirt-russet alleviated by black and leaden grey. The bride-to-be is a shy filly, not anyone's Hollywood idea of a knockout, but she is passionate and spirited in defense of the cavalryman she has fallen in love with. The purchaser/groom is decades older, of course, and—we learn—not really a be-caftaned and kris-decked bachelor. The men in the gang of horsemen must have families, because mention is made of their family members being trampled or knifed or hung or whatever, but we don't see these back-stories, so any sacrificed wives and children have a porous immateriality. Missing among the overacting and strident facial expressions: Yul Brynner, for whom this would have been catnip.

When the shooting commences in a silent, deeply canyoned village, perfect for an ambush, the audience cannot figure out which team to root for, or who is what, since they none of them wear identifying colors, and the action is nonstop bang-bang for quite a time.

 It is not a fun movie, but it is a rich sociological document. The Asiatic Russian tribesmen, as well as the handsome cavalry riders (no telling which were the necessarily good guys, which the bad, since both seem astonishingly fierce and whacko, except when they show the slightest mercy for the hapless condemned–just a moment, mind you)–speak a tough but clear Russian, and the translations are serviceable.

This film is exceptional in being less than the usual superb Russian lenser output, such as the remarkable Alexei Popogrebsky's "How I Ended This Summer"~ two men set against the icy sweep of the far North at a Russian radiation-measuring station. The two men, one a grizzled vet, the other a green newcomer to the field, interact in ways that keep the mind and eye glued to developments in mood, temperament and story twists, along with the strong 'character' of the rough glacial scenario itself, its unforgiving nature and sudden shifts. This film, nuanced and restrained, but taut from start to finish, lingers long in the memory.

In Russian, English subtitles.

Jan

11

 Apple stocks more than tripled in just 2 years. Useless to say that I missed this move and that I did not triple my capital during the same period investing somewhere else. I am contrarian by nature, however I was "forced" by some type of compulsion to buy the IPhone4 (not the stocks unfortunately). I followed the herd. Now that I regret it (poor strength of network signal and a battery that lasts for half day at best…) I also understand how strong the AAPL trend is. They sell expensive products that sometimes do not meet expectations but that people are ready to buy at prices which are higher than products of competitors. What a money machine. Difficult, however, to keep the momentum…Time to short AAPL?

Marlowe Cassetti writes:

I will repeat my reply to the Chair's post of July 29th titled Mystical Ideas. I quote myself:

The chair has touched on a point of interest that has bothered me. I don't know about Lady Gaga, but Apple's climb towards the top of market valuation appears to be inline with the phenomenon of a bubble. Yes, I understand that we cannot declare a bubble until it bursts, but let's look at the facts: There are some 47 stock analysts that cover AAPL, all but two have either a buy or a strong buy recommendation. It is the darling of the market. Its market cap is approaching $ ¼ trillion and at the rate it is moving it is on its way to challenge Exxon Mobile Corp. XOM produces stuff that the world needs, AAPL doesn't produce stuff that the world needs just what they like to have, until something else strikes their fancy. It reminds me in the 1980's when people couldn't buy enough Wang stock. You hadn't arrived if your office didn't sport a Wang word processor. The bubble will burst when the last fool buys in at a nose bleed price.

Back to today, for Christmas I bought myself an iPod touch … my first Apple product ever. It cost only $58.00 plus some expiring frequent flier points. I was looking for a MP3 player and I got much more that a music player. I'm very impressed with its versatility and elegance. But at $300 retail it is certainly pricey. about what I paid for a very capable netbook for my wife.

Perusing a chart of AAPL it has relentless upward momentum. You cannot step in front of a freight train and short it.

William Weaver writes: 

Marlowe touches on an interesting point regarding AAPL v XOM; more specifically, how AAPL, as a consumer discretionary stock, has approached the market cap of a consumer staple, which supplies a needed good versus a wanted good. For the past 6 months I have been working on scraping purchasing data from thousands of domestic websites as a way to gauge consumer spending; at some point I am looking to sell this as research, but so far trading it has been very successful.

What I've found is that it is very easy to measure discretionary purchases and very hard to measure staple purchases as most of the latter are done offline. That said, the spending data of only discretionary purchases has a .44 correlation coefficient to the following one-month return in the S&P 500 using 69 non-overlapping months. To me this says that discretionary spending drives market returns, which begs the question, is the market ever really in-line with needed value, the value of what one needs to survive, not what one wants? Would a bubble then be any return over the risk free rate assuming the risk free rate is not in a bubble itself?

With that notion, one should never short a discretionary stock like AAPL, as the market is driven by such companies. (just for fun) Remember in 2007-8 when the Washington DC metro banned Crocs because they were dangerous on escalators? We all asked "with what shoe laces" and then a day later it was found that the head of the DC metro had held a large short position for many months as the stock climbed? It doesn't pay off; the risk is much greater than the reward. At best, one could buy OTM put leaps.

Jan

7

 The jewelry business—like many other businesses, especially those that depend on selling—lends itself to lies. It's hard to make money selling used Rolexes as what they are, but if you clean one up and make it look new, suddenly there's a little profit in the deal. Grading diamonds is a subjective business, and the better a diamond looks to you when you're grading it, the more money it's worth—as long as you can convince your customer that it's the grade you're selling it as. Here's an easy, effective way to do that: First lie to yourself about what grade the diamond is; then you can sincerely tell your customer "the truth" about what it's worth.

As I would tell my salespeople: If you want to be an expert deceiver, master the art of self-deception. People will believe you when they see that you yourself are deeply convinced. It sounds difficult to do, but in fact it's easy—we are already experts at lying to ourselves. We believe just what we want to believe. And the customer will help in this process, because she or he wants the diamond—where else can I get such a good deal on such a high-quality stone?—to be of a certain size and quality. At the same time, he or she does not want to pay the price that the actual diamond, were it what you claimed it to be, would cost. The transaction is a collaboration of lies and self-deceptions.

from: The Lie Guy

Chronicle of Higher Education

Jeff Watson writes:

Back in the mid 80s, I was a co-owner of a small emerald mine in Colombia. The stones were plentiful, but the quality was mediocre, very dull. My on site partner used to gather all the emeralds, clean them up, wrap them in gauze, soak them in mineral oil, then put the whole gauze wrapped package over a 100 watt light bulb for a few weeks to "treat" the emerald with heat. After being treated, the emerald was not of higher quality but did look nicer, good shine, better colors to the eye. The emeralds also acted differently under fluorescent and UV light, We would wholesale the stones to buyers who came onsite, and we never dealt with the jewelery trade. The buyers all knew the stones were treated, and didn't care as they were mainly concerned with size and color and weight. I brought a treated stone back to the states and had a local jeweler look at it proclaiming it to be the best stone he ever saw. I showed him the equal stone but untreated and he couldn't believe the difference.

Deception really does work in the gem trade with everything from obvious phony stones, to treated stones, to cut stones made to look bigger, and a whole other bag of tricks. One lesson I learned is that 90% of the emeralds sold in the USA have been "treated" in one way or another, with only the untreated high end stones going to Winston, Tiffany, Stern, etc..

Bill Rafter recommends: 

Recommendation: Influence of Fear on Salesmen by Frank Budd. Excellent book from the 1970s, written for salesmen in the life insurance industry. One of his points is that only a fraud can sell something he does not believe in, and that eventually that fraud will be unsuccessful. Obviously he never knew Bernie M. who was both a fraud and successful.

Jan

2

 There is something about True Grit that is truly loathsome. Each of the 3 main characters is deeply flawed. Marshall Rooster Cogburn is a drunk and dead beat who speaks unintelligibly. Texas Ranger LaBoeuf is a show off, loser, and a chauvinist. The girl is sharp tongued, litigious, and naive (no wonder she didn't get married). It all fits in with the idea that has the world in its grip, that the purpose of life is to keep oneself small by sacrifice. There is no chemistry or romance between any of the characters except for Pepper the Quixotian leader of the outlaws, who as could be predicted was the only man good in his every day business of being a outlaw. No wonder this Western follows the code of the west breaking, denigrating Brokeback Mountain and no wonder that Louis L'Amour's novels have sold more than all western authors combined since the beginning of time, and that they dare not make one of them or an Atlas Shrugged, in favor of this disrespectful Portis trash that violates all the rules of good mystery by having one hair breadth, extraordinary, lucky escape after another, and stereotyped snake bite scene (a la Larry Mcmurtry) release the tension.

P.S I have never written about a subject not directly related to the multivariate analysis of time series that Mr. Jovanovich has not corrected and amplified on where I was astray. And I must admit that I didn't realize that the Western Novel was yet another of his expertises. Okay, I want to know from him if he agrees with me, on this one point that Monte Walsh is the greatest western novel, (if the chapter where the accountant comes to reduce the pay of the hands that took vengeance on the trainmen doesn't make you cry, I'll eat that hat the accountant wore that was so tempting to Hat, Cal and Monte), and the best business novel of all time.

Stefan Jovanovich replies: 

Grub street used to honor the basic code for reviewers: read the book first, then slander the author. We should do the same. Portis' book is like neither of the movies; the John Wayne version comes much closer in spirit, but it is still far, far too "nice". The actual novel is a memoir written by a tough-spirited, one-armed spinster Presbyterian capitalist remembering the one man whom she loved and how they avenged the murder of her father when she was– by other people's standards– "still a girl". Blaming authors for what Hollywood makes of their books is like blaming men for the conduct of their ex-wives after they finish paying the alimony; all the authors can be held accountable for is the size of the check they cash.

I am old enough to have lived near (but definitely not in) Beverly Hills when Louis L'Amour still gave readings at the library. He was a great and good man, and– yes– Monte Walsh is the classic. As is often the case, my anger is misdirected; what infuriates me about this latest version of True Grit is what is says about the Coen brothers' decline and fall. The novel will survive their abomination of it; hell, it will probably be reread again. But for the Coen brothers, what hope is there now? Intolerable Cruelty is the best and funniest film ever about Hollywood and lawyers and now the guys who made it can only do splatter trash.

P.S. Eddy just called. She thinks our only hope is to pray that South Park's explanation once again holds true and blame it all on Matt Damon and his friend. 

Dylan Distasio writes: 

At the risk of raising some hackles, I'd make the argument the McCarthy's "Blood Meridian or the Evening Redness in the West" is one of the greatest Western novels in that genre and one of the best I've read from 20th century authors in general.

J.T Holley writes:

If you like Blood Meridian then go read Suttree. IMHO, it is an existential masterpiece. Cornelius being a man of the "made, trust-fund baby, life of given not earned goes to be a fisherman in TN. Though the content could be considered as a rebellious misguided stab at the establishment, I found it a read that was of self-introspect, self-realization, self-reliance while battling vices with choice by going to the extreme to find such. Once again not oft mentioned amongst Cormac's works, I feel it is one of my favorite reads to crack open and read again. I'm a Southerner so the read is much suited to me, so some of the "in between the lines" stuff might not be appreciated.

Jim Wildman writes: 

My personal favorites in the Western genre.

"The Virginian" (Wister) if for no other reason than "Smile when you call me that"…and the baby swap prank.

"A Man Called Noon" (L'Amour) always makes me think about how I define who I am.

In "The Last of His Breed" Mr L'Amour applies similar themes from his Westerns to modern times. For my taste, the book is a bit long, but in fairness, it takes a while to walk across Siberia. And it has a great last line.

Trader Craft comments: 

Another great classic of the West is Thomas Bergman's "Little Big Man". Much better than the Dustin Hoffman movie.

Scott Brooks writes:

 As one who doesn't read a lot of westerns, (and I'm sure the purist will scoff at me) I have to say that Larry McMurtry's, "Lonesome Dove" is my favorite of that genre.

Good guys and bad guys. Multiple story lines all intertwined. Sudden and unforgiving death. Fortunes made and fortunes lost. Adventures piled on top of adventures. Good choices and bad choices. Friendships that are strong, but that don't override honor. Human foibles that override honor to do what is perceived as the "right thing". False friendship's that never were except to be used as seen fit by the "user".

Story of youth and aging and lesson's learned, lessons shared and lesson's taught. Love found, love spurned, and love lost. The superficial wannabes intermingled with the intellectual drivers. The high self esteem and low self esteem of characters revealed for the world to see.

Characters that arrive unexpectedly and stay and others that depart just as unexpectedly. Ego's that clash and feelings that are hurt. Life and time wasted on loves that can never be.

High risk adventures fraught with deadly consequences. People that love risk, taking more and more risk because the downside never happens to them…until it does.

Their are cowboy versions of "Eddie Willer's" (hard working and reliable) tying their horses to the wagon's of cowboy versions of "John Galt" (hard working reliable, but intellectually superior)…..but in a much more realistic sense….i.e. there's no mythical "static electricity generator" or "nearly infallible hero's"….just really smart people who make more good decisions than bad decisions…but who make bad decision…sometimes with catastrophic consequences.

I could go on and on, but something has just struck me as I write this general description of "Lonesome Dove"…..am I describing a Western Novel, or the modern day "Spec List".

Jack Tierney writes:

The Chair's mention of L'Amour reminds me that I've neglected to comment on the man's autobiography, "The Education of a Wandering Man". Unpublished during his life, the manuscript was found in his desk only later. The author of the Introduction speculates that L'Amour purposely put off publication fearing charges of braggadocio.

After reading the book, it's a possibility. For many years he kept a written record of the books he had read– the selections are so diverse and numerous that it's impossible to pigeon-hole his preferences or determine how he found the time.

Because of finances, he left home at early and, Hoffer-like, rode the rails in search of employment. He also shipped out for as many foreign ports as he could find, baby-sat an abandoned mine for three months in the middle of nowhere without any human contact, and took up small-town prize-fighting when he really needed money and the locals really needed a fight.

But no matter where he was or how broke, he always had books. If there's any drawback in his story it's the realization that one could have read much, much more if he hadn't been sidelined by trivialities.

Pitt T. Maner III writes:

 It looks from L'Amour's autobiography that, from the years from 1930 to 1937 in particular, he tried to read approximately 100 books and plays each year. They were not what you would think a man writing Westerns would be reading.

Not a bad New Year's resolution if one has the time. It takes discipline too.

A quick perusal indicates he liked to read several books by one author or playwright that he liked within each year. Certain themes or genres captured his attention. Perhaps he was buying books in bulk or series from bookstores.

In 1930, for instance, he read many of the plays of Eugene O'Neill. In 1931 he read Flaubert. Shakespeare and Detective stories were popular with L'Amour in
1932. It looks like works by H.G. Wells and Conrad were favorites. L'Amour's lists are interesting because there are many books included that are not commonly read these days.

For instance "Trader Horn" by A.A. Horn and Ethelreda Lewis was a book made into a movie with filming done in Africa under extremely difficult conditions (they don't make movies like the used to).

The world was less explored and a bit more mysterious just 80 years ago.

The best writers often do a tremendous amount of critical reading and know a little bit about a vast array of subjects— even things that would be considered controversial today.

Dec

26

 Titanic Thompson by Kevin Cook is a deeply flawed book about a reprehensible man that has many lessons for market people. The deep flaws in Ty's persona are ably expressed by Herman Keiser, a former masters winner, who was just one of Ty's hired stooges, hired to pretend to be a caddy. "He was a thief," Kaiser said. "One day, at 80 he shows up at my house with a partner and two young girls. Herman, I've got a plan that's gong to make you rich. Give me 5,000, Herman." I tell him, "Ty, stay here. I'll be right back." I go to the house and get my 22 pistol. I come out and tell him, "Get outta here right now or I'm gonna shoot you."

Ty had no shame in cheating his best friends. When he was a sergeant in the army, he cheated all the soldiers under him out of their pay check. When in an old age home, he cheated all his fellow patients out of all their money. His father stole his mother's last money, and Ty treated his wives similarly. Worst of all, he fixed the game that Arnold Rothstein lost his fortune in and that led to Rothstein being murdered, when he welched on the deb on the grounds that he had been cheated.

And yet, there are many things we can learn from him. The first is the importance of practice. He practiced card throwing, dice throwing, horse shoes, shooting, and golf in line with the 10,000 hour rule and became the best in each of them. He kept records of the throws and was able to reduce the odds of throwing a 7 in dice with various dodges. He always made his proposition bets the kind that he had fixed before hand, and that could not be tested afterwards. I like the one where he offers to retrieve a golf ball from Lake Michigan 100 yards out in the winter where he marks many balls with an x before hand, and then retrieves one with an x, but no one is likely to swim into Lake Michigan and dive in to the bottom to test him. Or the time he bet that he could hit a golf ball 500 yards and he did on a frozen Lake Michigan, but he had the rules of the bet set down in writing before hand so he didn't have to hit it 500 yards on the course.

Also good was his trick of throwing loaded lemons and peanuts over a roof where the object he was throwing would disappear. His numerous proposition bets make you realize that you should never take the opposite side of a derivatives bet, as there is always something you don't know. The advice in Guys and Dolls about a jack squirting you in the eye if someone bets you it will, is a good one. Never accept a deal that looks too good to be true.

What a waste. He was so skilled. About the best golfer, horse shoe thrower, shooter in his day. He could throw a key through a key hole, and chip a put into a cup loaded with water so the ball wouldn't fall out from 15 feet, or flip 50 cards in a row into a hat 10 feet away.

What evil lied in this man, and how many men were ruined by him.

The best thing anyone ever said about him was that he would never steal or hustle all the money from someone who would kill himself afterwards. How fortunate that he died broke, hated by everyone including his son. And how the biographies show that evilness is inherited. His father and he were both the most evil of men, who thought of nothing but themselves and gaining money by any means and it runs in his family with his kids.

My favorite con of his: 

He dresses the best golfer of his generation up as a farmer. Has him driver a tractor around a gold course for a month, pitching manure, and chopping trees. Then he goes to the golf club where they've seen the farmer doing his rounds routinely and says he'll challenge the best two player in the club to a match, and they can choose any partner for him in the world. They choose the farmer. The farmer is a -4 handicap and they win and rush out of town.

Ty was very good with the gun, had to kill many people, and was often in jail and left for dead by thugs. Had to travel with a body guard as he was always cheating to win, and his fellow gamblers were as adept at marking cards, and using wires as him.

One con that he tells is hiring Harry Lieberman to feed him checker moves in a checker match against the best in Kansas city through a wire. Hard to believe that a checker player would do that, and the story doesn't ring true as supposedly the wire told him when a move was bad as he was wavering and touch move must have been played.

His cons remind me so much of the kind that the brokers play when they send you a big research report on a company or industry or country and then offer to take the other side of your trade. You are in the same position as the club people who insisted the farmer be his partner.

Gordon Haave comments: 

My experience when they offer to take the other side of the trade, if you press them, is that they say they are just a middleman and are offloading the risk on someone else. Or course as they own the fed, treasury, congress, CFTC, and FINRA they can pretty much do whatever they want.

Pitt T. Maner III writes:

A fellow Arkansan and famous pinup girl who also used the results of hours of practice to advantage :

'Jeanne Carmen was born in Arkansas in 1930 into a family of poor cotton sharecroppers. She ran away at 13, first to St. Louis, then to New York City, where she eventually landed a job as a fashion model. In 1949 she got an assignment to model clothing for Jack Redmond, a local golf pro and shop owner. Carmen, who had never seen a golf course, was modeling different outfits at Redmond's indoor golf range when he playfully asked her to take a swing at the ball. A lefty, she spun the right-handed club around in her hand and, with the back side of the club face, smacked the ball into the canvas backdrop, knocking it off its support.

"You sure you haven't played before?" asked Redmond. He then set up the backdrop again. "He had me stand on the other side of the ball and hit right-handed," Carmen recalls, "which was harder, but I knocked the drape down again."

Redmond asked her to come in the next day: "I'd like someone to see you."

The next day Redmond had the golf champion Jimmy Demaret watch as Carmen hit balls.

"They were oohing and aahing," she says, "and I thought, 'What's the big deal?' I don't think this is a very difficult thing."

Finally, Redmond said, "I think I can make a trick-shot artist out of you," and asked if she would mind coming in two or three times a week.

"Sure," she said. She hit nearly every day, sometimes for hours on end, for six months. Then she was ready.

"I could stack three balls on top of each other, which itself is very hard to do. I'd hit the middle ball 200 yards, the top ball would pop up and I'd catch it, and the bottom ball would rest, untouched. I could hit the ball 200 yards while standing on a chair on one leg. I could hit a flagpole 150 yards out."

She and Redmond traveled up and down the East Coast, putting on three shows daily at various clubs and earning upward of $1,000 per day. For their finale, she would have a volunteer from the gallery lie flat on his back and tee a golf ball between his lips; then she would drive it 200 yards without disturbing so much as a whisker.

Within a year personal differences ended this lucrative partnership. Carmen then met a dapper young man from Chicago, John Roselli, and moved with him to Las Vegas. Roselli was a lackey in the Chicago mob who helped run the Sands Hotel. When he found out about Carmen's golfing talents, he told her, "Look, honey, we're going to play a little game here." The way he described it, she says, "He said we're never going to take a nice guy. We're only going to take the assholes, and I know who they all are."

"I could hit the ball 200 yards while standing on a chair on one leg. I could hit a flag- pole 150 yards out…."
"Well, that sounds good to me," Carmen recalls saying. "What did I know?"

Roselli would plant her in a lounge reading a magazine. He'd sit at the bar, scouting for pigeons. Eventually he'd strike up a conversation and steer it toward golf and gambling."That's not so great," Roselli might say. "Even I could beat that." Then, pointing at Carmen, "Hell, even she could beat that."
Says Carmen: "And the guy might say something like 'Maybe in the bedroom but not on the golf course.'"

Wanna bet?

The group then would go over to Carmen, who, pretending to be a stranger, would innocently agree to be a pawn to their betting proposition. Dressed as provocatively as the era would permit, she would stand on the first tee and spin the club around in her hand, feigning to have never played before.

"I'd hold the club all wrong and then duff it, or slice it, whatever. After a couple of holes the guy would say, 'This is getting to be a bore. I'm going to win this hands down.' And John would say something like, 'Give the lady a chance. Give it a few more holes.' And then I'd get a little better and a little better. Until right at the end, when I'd start reeling them in. We'd win every time. They never knew what hit them."

The two worked the scam for about a year, until one day when Carmen slipped. She'd had a drink while waiting for Roselli to set up the mark, and, a bit tipsy, started playing too well too soon. The man knew he had been set up. "He was carrying on, complaining," Carmen says, "and Johnny said, 'Look, pay up, you lost the bet. Pay up and let's call it a day.' But this guy refused."

Roselli told Carmen to go to her room; he'd call her later.

"He then roughs this guy up. He calls me and tells me to get to the roof of the Sands Hotel. I get up there and open the door to see Johnny toss this guy over the side. Oh, my God. I'm in shock. I'm crying. So Johnny says, 'Come over here and look.' I didn't notice that the guy had a rope tied around his ankle. I go over and see this guy dangling down there… . He pulls the guy up and … Johnny's got his money and cuts the guy loose.

"Right then I decide I'm in too deep. I had to get out of there. I go pack my things." She moved to Los Angeles and became a star in B-movie potboilers such as Guns Don't Argue, Reckless Youth, and Born Reckless. '

Jeff Watson writes:

 I'm not a chess player, never have and never will be one. I know how each piece moves, a little strategy and that's it. However, school my best friend was a solid chess player and a member of the chess club, however ranked kind of low on the totem pole. I heard of a surefire method to beat a whole group at chess without cheating and ran a proposition against him and a bunch of the guys in the club. I bet him and the guys that I could play chess against the club and win at least 50% of the games, no draws allowed, play each game to the conclusion, and also beat him.in the process;. We commandeered a classroom and set up 16 chess boards on desks in a circle around the room with me in the center. I assigned different numbers to different tables and when one would make a move, I'd make that exact move on another player. In reality, they were playing each other, and I was just the mailman. I won exactly 50% of the games and I beat my roommate by having him play the club champion. I couldn't believe that they fell for that one, but I made the bet so high that their greed made them irrational and the took the bet hook line and sinker. If that is cheating, that's up to someone above my pay grade. I thought it a clever bet, like most of my props but never used gaffs only percentages, exact terms, paradoxes, math, or physics to win. The lesson here is that one can make a bet so high that people will take it, especially when they think they have the edge. If one makes a really, really high bet, the edge better be huge. The best prop hustlers play games that they have an edge in, play it for freeze out, and let old man vig grind away at their opponents stack. Small prop games like flipping coins can be played for loose change, you will have a very high edge, and your friends will be delighted and amused, thinking you're clever, while you take their money. Gotta let your opponents win sometime as someone once said, maybe it was Runyon that "While you can shear a sheep all the time, you can skin him only once."

Nigel Davies comments: 

This is an old con that was repeated on TV by Darren Brown. I'm sure that the assembled titled players knew very well what was happening but they must have been getting well paid to get them to wear suits! 

Dec

23

 1. I am reading the deeply flawed book Bounce by Matthew Syed who believes that the quantity and quality of practice is key to determining greatness. Also reading another book from the same garage of hatred of the subject he writes about– The Company Town by Hardy Green and also Titanic Thompson: The Man Who Bet On Everything by Kevin Cook, about a man that should be hated but is quite interesting.

2. They say that when there is a big traffic accident in an area and it's cleared, there is still a traffic jam there the next day, I think because people are slow to observe past effects. And one is reminded of that at the opens of all the markets. In the pit days, there used to be tremendous volatility and big moves like in the first 5 minutes. But now there is no pit trading in most markets, but there's still the same volatility that occurs, like in bonds today at 820.

3. One notes that after 13 or more 10 day changes up, the expectation the
next day is -1/10 of a % and after 13 or more 10 day changes down the
expectation for the next day is -1/10 of a % however there are 244
occasions when the 10 day SP is down 13 or more times in Rowand 398
occasions when the 10 DYA SP is up 13 or more times in row. Thus,
declining 10 day moves less harmonious than up 10 day moves a meal for a
day not here but possibly for life time.

Thomas Miller shares: 

Trafficwaves is an awesome website by an electrical engineer about what causes "invisible traffic jams" with lots of illustrations. 

Chris Tucker writes:

I've heard this referred to in an astrophysics class as a Density Wave, it is one of several theories brought up to account for the formation of the distinct arms in spiral galaxies. The teacher used this specific example of highway traffic to explain it.

Jim Sogi adds:

When particles interact due to input of energy they move at different speeds. The faster ones overtake the slower ones. A buildup occurs at the slow point. Everyone has seen this in traffic. This is how big waves are created in the ocean. The interaction of energy pushing forward, and forces of resistance due to bunching, due to structural resistance (in the ocean its the bottom) in markets due to vig etc., and the secondary forces created by interaction of the various maxima and minima gets complex. It seems the areas of maxima and minima are easy to focus on and they provide distinct boundaries, maximum energy, and minimal densities.

T.K Marks comments:

Apropos of the peculiarities of traffic mishaps otherwise involving cars, just moments ago I had sent sent a similar response to your thoughts contained below only to be have it unceremoniously bounced back to your humble correspondent.

So here we go again.

Back in the day when pit trading held sway, the lion's share of the action took place on the open. Afterwards, the tempo was akin to the pace of watching grass grow. The occasional rock'n'roll news developing days notwithstanding.

So after I would take care of my market opening responsibilities and see that there was not unduly pressing on my book, I would delegate responsibilities to my second-in-command and repair upstairs to the the gym on the 8th floor gym of the WTC for a palliative steam and sauna.

The equilibrium benefits of such generally worked wonders because the close made the open look like the most genteel of tea parties,. It was the closet I'v been to Nam. Every day was a Tet Offensive.

Oct

22

I have been intrigued by recent discussions of ETFs by List members, in particular the UNG and UNL ETFs. Not long before this discussion, there was a discussion indicating that UNG got gamed every time that it needed to roll over the futures that provided the underlying asset for the ETF. Finally, there was a mention by Rocky that UNG had lost 78% of its value since inception while the nominal underlying asset had lost 37%.

Is the relatively greater loss in the value of the ETF a product of this gaming? If not, what alternative theories have been posed?

Other ETFs dealing in commodity futures where there are expenses associated with taking delivery would seem to also be subject to similar manipulation. Have the values of these ETFs experienced similar erosion? Isn't any such commodity ETF bound to erode away given enough time?

Finally, it seemed that today most ETFs were down significantly more than their underlying components. Did any news come out that would appear to be distinctly unfriendly to ETFs in general?

Gary Rogan writes:

This ubiquitous article explains enough about the storage costs and their effect on performance. I came across an additional explanation that the predictable patterns of buying and selling on certain days depress/inflate the prices enough in the wrong direction for the holder to matter as well.

Phil McDonnell comments:

I think it is useful to separate the concepts of 'gamed' and 'carry cost due to contango'. Having contango in the related futures market induces a roll cost every time the fund rolls forward into a new month. That would seem to be an unavoidable structural flaw in many of these funds that will eventually lead to their demise. But the gaming aspect is somewhat different. Specifically I mean that gaming is due to the actions of other market participants who front run the roll periods making it more expensive for the fund to perform its roll operations. That activity simply adds to the roll costs that already exist from contango. 

Michael Cohn asks:

Should I be thinking any differently about the deferred option contracts on these products such as VXX (Barclays Volatility Futures ETF or for that matter the UNG discussed here? How do I think about the changing nature of the basket with respect to these term options that are outside of the existing futures basket for the current composition of the ETF and at their own delivery subject to a new basket? I am convincing myself that I need to learn about basket options influenced by the passage of time.  

Rocky Humbert comments:

The VXX currently has some similar roll phenomenons — however, because it is not a physical commodity, it is not bounded by the same physical supply/demand characteristics of things like natgas, crude, wheat, etc. Rather, volatility is a second-order derivative with no physical delivery — and so the roll can swing wildly and remain in a positive carry condition for very extended periods of time. For example, during the 2008/2009 period, VXX experienced the exact opposite condition — and the rolls were very profitable (because short-term volatility was higher than long-term volatillity expectations).

I want to be clear on an important point: If a speculator is bullish on natgas and believes that prices will rise sharply (in a relatively short time frame), then the UNG is a perfectly reasonable vehicle to express this bet. Natgas periodically doubles and triples in a short period of time. However, if you want a long-term exposure to the nat gas market, then this is a horrible vehicle.

Similarly, having a longterm short of the VXX to pick up the rolls is somewhat analagous to selling far out of the money puts on the S&P. You'll make money most of the time. But you will also occasionally wake up and have a dismal mark-to-market and perhaps give back more than you've ever made. Some may argue that this risk can be managed — but that's as much art as science.
 

Sep

21

 You Will Meet a Tall Dark Stranger

Written and Directed by Woody Allen Reviewed by Marion DS Dreyfus

Cast: Antonio Banderas, Josh Brolin, Anthony Hopkins, Freida Pinto, Naomi Watts, Gemma Jones

One of the many delights of a Woody Allen annual release is that though the casts are different, we know these people. And we 'know' their predicaments.

Dysfunctional men and women in fizzling marriages; desperate bi-polars; older men yearning to stave off impotence or irrelevance via nubile honeys; women unfulfilled with their careers or the lack thereof. Career people in chrysalis or limbo.

The metrosexual mélange, famed population of the toney Upper East Side and the favored haunts of the Hamptons. In this film, as in several of his recent outings, Woody Allen situates his attractive band of locals and ex-pats in an arcadian London that rivals his most beautiful Manhattan cinematographic offerings.

Booksellers and art dealers proliferate in the daily scuffles of the couples being scrutinized. People have to make some sort of living, and books and art are industries, but they are 'clean,' nothing to soil the hand or frighten the hansom cabs. And these are the 'jobs' that are accepted and certified by the type of people populating Allen films and indeed, the Woodsman's real life.

Standing in for the now 74-year-old Woody as "Alfie," yet again, is the snowy-topped plutocrat played by Anthony Hopkins. Feeling his prowess fleeing, though he is very comfortably well-off, he abandons his long-time wife, Helena, played by Gemma Jones. The darkly troubled striving failed doctor cum efforting novelist, Roy, stormily played by Josh Brolin, is married moodily to Naomi Watts, Alfie's daughter, whose desire for children is thwarted by her husband until his latest novel or project is accepted.

Until the novel's acceptance, their rent and basics are subsidized by Naomi's somewhat dotty yet credulous mother, supplemented by an art gallery assistant's job for Sally, who works for the suave, Armani-suited Antonio Banderas.

Across the road, unhappy Josh peers from his window at a haunting guitarist, Dia (Slumdog Millionaire's gorgeous Freida Pinto), who represents something he won't quite verbalize. While he waits for the publisher's decision on his manuscript, he begins seeing the red-swathed beauty for walks and lunch, though she is affianced, slated to marry in the immediate future.

Alfie "dates" a long-faced, colt-like call-girl so quirkily tall and slim-hipped that for a good slab of the film one thought she could well be a he. But no. Desperately lonely without the sweet wife he jettisoned, he impulsively asks his call-girl shrewdie to marry him.

Helena, also hard hit by loneliness, takes comfort in tippling and a fortune teller several times a week. Though the seer, Cristal (Pauline Collins, so touching in Masterpiece Theatre's Upstairs, Downstairs) is bogus, Helena believes in her predictions and insights, and her occult delusionism makes her the most serene character in the film. Afterlives, prelife, contacting the dead, stars in conjunction…my, my.

Voiceover narration beloved of Allen in many of his iconic films indicate the points that characters do not or cannot voice. Cockney Charmaine is so used to her Vegas Johns that she doesn't even know why a man would have to wait for sex-enhancement little blue pills to take effect. Not in her vocabulary zone. Though she is clearly not his age-cohort, dizzy Charmaine (newcomer Lucy Punch) is not so clueless that she doesn't make hay while she can. Furs, jewelry, apartments, clothing. (Must have been a gig to find this woman, Lucy Punch: freakishly tall, horsey features and skinnily voluptuous, with the longest legs since Tommy Tune. On second thought, maybe she is Tommy Tune…?) Alfie soon regrets his culture-free marriage and wallet wail.

Shed of her mopey husband Roy–deep in serious flirtation with neighbor Dia–Sally realizes she wants her boss, gallery owner Greg Clemente. Too late. Greg is already having an affair with the painter being represented by the Gallery owing to Sally's own efforts.

Adultery is a given for these troubled urbanites.

Analyzing the title, one can make the case that it is more metaphor than actuality. We all, of course, eventually meet that "tall dark stranger," a morbid coefficient of all Allen films, even his prior laugh-out-loud funniest, now long gone.

The music and cinematography, always deeply pleasurable in Allen films, match the beauty of the sets, shiny London in the spring (even torrential rainy scenes are lit beautifully, and don't destroy the mood). The cast is superb, spot on, as always. Though the reviewer audience we saw it with was tamped down and rarely laughed, trademark Allenesque laughter hails not from comic lines or particular set-ups as from the viewer's ready understanding of the comic plights of these messed-up people and their life-trajectories, which so many of us empathize with, if we are not actually living at the moment. As well, of course, as from rueful character rejoinders.

TALL DARK STRANGER is couched in this vision of bleak pay for play. Woody with reference to the passage of time and the futility of life—"a tale of sound and fury, signifying nothing" ("Macbeth")—"After all the ambitions and aspirations, the plagiarism and the adultery, what once was so meaningful won't mean a thing. Many years from now the sun burns out and the earth is gone, and many years after that the entire universe is gone. Even if you could find a pill that makes you live forever, that forever is still a finite number, because nothing is forever."

Talk about fatalism.

All the Woody tropes are here aplenty, in a fondly recalled yet disquieting way. Familial chaos, generational unease, mortal discomforts. One of the memes threading these scenes of striving, plagiarism, delusion and pain is a strong moral dimension. Those who do good (a rarity in an Allen film) are mildly rewarded, though not without effort. Those unable to resist the monumentally daft or unethical, however, are not accorded gentle recompense in the Woody canon, which is as morally connected as you can get: Actions are consequential.

TALL DARK is an edgily entertaining, provocative and eye-filling 100 minutes. This will become vintage–already prize-winning– Woody.

David Aronsen writes:

To explain the distinction between falsifiable and non-falsifiable predictions to my students I would contrast two statements. The non-falsifiable one was a fortune teller's "You will Meet a Tall Dark Stranger. The falsifiable one was you will see a man with one red shoe walking east on 42nd street whistling Satin Doll before 6PM next Wednesday. Did my powerpoints somehow fall into the hands of Woody Allen, and should I ask for a royalty? 

Sep

3

Susan Edlinger on surfboardWith waves up from the hurricanes, surfers will be out…and they will need to know their abilities well to safely handle bigger waves and strong currents.

A good video and article by Mrs. Edlinger follows about taking up surfing later in life and the associated benefits of and lessons learned from the sport.

My limited personal experience has been exclusively with body surfing and even then you have to evaluate the wave fairly quickly (if it is going to break too fast, too steeply and wipe you out with little water out front to cushion the blow) and feel the pull just before it begins to break and launch, swim, and kick yourself into the proper position/angle and use your hands like fins to control your trajectory. You are always trying to decide whether to go with the first wave of a set or the second one and one tends to become a waveform critic because you want to have a ride that is worth going in on and that makes it worth expending the energy to get back to the break area. On rare days you get big glassy, slow breaking, wonderful waves for body surfers. Its always a bit scary though on the bigger waves when you sometimes get driven downward and finally come up for air only to have a second wave wash over you as you try to grab a quick breath—there is a half second of panic you have to learn to control. Pro surfers obviously train to stay down underwater and work through downward water column pressure for extended time as the movies show.

All in all it is good exercise and you get a lot of twisting, turning and stretching, and tend to sleep quite well that night.

But as Mrs. Edlinger shows even midlifers can learn to get on a board, overcome fears and have fun:

Paddle Smarter, Not Harder!

by Susan Edlinger, M.Ed.

"You're never going to catch a wave paddling like that!" a strong male voice bellowed from behind me. He sounded angry, as if my paddling skills were a personal affront to him. "Great," I thought, "I'm already padding as hard as I can!"

My self-appointed surf coach paddled up and reiterated, "You're never going to catch a wave the way you paddle!" and proceeded to do a not-so-funny re-enactment of my paddling style. Watching him, I realized that by now I should be used to this when I'm surfing. As soon as my board hits the water, I become a part of the community, where although you may feel alone, you never are. Surfers, as a group, are a loosely formed coalition of people who share a passion, and that passion binds us, for better or for worse. Chances are, this gentleman felt these connections particularly strong this morning.

Coming back to reality, I mused, "Why is he talking to me", and more importantly, "Why does he seem so mad?" What then ensued was a brief conversation and demonstration of how I should be paddling vs. what I was actually doing.

"You've got to DIG, and FAST, not just paddle." Then as quick as he appeared, my surf coach turned to catch the next wave, with this sweet grumbled parting, "I just want to see you catch some waves."

Relief! He wasn't angry after all. He was just frustrated watching my incompetent paddling attempts (I secretly believe that good surfers are like artists, they become aesthetically offended at the sight of clumsy, unrefined effort.) Nonetheless, I was thankful for his advice. And I must add, it's not as if I am a total "kook". I do catch waves, but in all honesty, my personal ratio of waves caught to effort expended is embarrassingly low.

As the next few waves approached, I practiced my newly learned paddling skills, but no success. Then I heard another voice rising above the waves, "Wait till the wave almost breaks on you!" My new mentor glides over to me, "These waves are slow, take off only when they look like they are going to break on top of your head!" I smiled, nodded and wondered, "Was there anybody in the water who didn't have something to say about my surfing?" I knew what I was doing wrong, but still couldn't master the skills. Knowledge and application were oceans apart.

Finally, I caught a wave, to the whooping and hollering of my surf comrades. I was pleased and as I turned to paddle back out, I saw another surfer heading my direction. As he paddled by, he commented briskly, "It's not about the paddling, it's more about the ANGLE."

"Oh no, what's this"? I thought. Another secret other surfers know that I had to learn. I quickly paddled inside to my newest teacher to hear more of his wisdom. "Your board is like a kid's teeter-totter," He told me in-between taking every ride on the inside, "When you're paddling for the wave, keep you're back arched, then when the wave gets to about your ankles or calves, put your head quickly down on the front of your board and angle downward". To me this sounded vaguely like a surfer version of the political slogan, "It's the economy, stupid." It became "It's the angle, stupid."

For the next hour I practiced. Digging instead of simply paddling, watching my timing, and most of all, angling on my board. Surprise, surprise, I caught waves. I had fun. Strangers cheered.

So, what's the point of my story? Well, as I later contemplated that morning surf, I found myself reflecting on what I had learned, both in terms of surfing skills, and also how it reflected on my life. I was reminded again of the maxim 'how we do one thing, is how we do all things.'

I was behaving the way I typically behave when frustrated by something not working; I try harder. I do the same thing over and over, thinking I'm going to get better results if I just put in more effort. In this case, if only I paddled harder, I'd catch those waves. Wrong.

The definition of insanity, I've heard, is doing the same thing over and over again and expecting different results. If an ounce of something doesn't work, maybe a gallon will? Like so many areas in my life, I needed to learn to paddle smarter, not harder. There was more to catching a wave than how hard I paddled; I had to dig fast, watch my timing, and lastly, pay attention to the physics of board leverage.

I also relearned several other things that morning in the surf. People are essentially good; we want to help each other. There is a joy we all share in watching someone else be successful; watching another surfer catch a great wave. This is called community.

I remembered once more that life can be easier, less strenuous, and more successful when I allow myself to actually listen to what other people are trying to tell me and then simply do what they say!

The road to learning is paved with humility and there are teachers everywhere. I learned that being stubborn about my paddling and trying harder and doing more of the same was not going to result in my catching a wave, only getting more tired. I had to try something different. I needed a community to learn to 'paddle smarter, not harder.'

What about you? Where can you 'paddle smarter, not harder?' What do you need to do differently, and who can teach you?

Susan Edlinger, M.Ed. is a certified Executive and Life Coach, living in Woodland Hills, and practicing her art wherever waves and people meet.

Victor Niederhoffer writes:

One must be aware of being knocked unconscious by body surfing as "Uncle Howie" was recently. It is nice to be able to afford the time and luxury of such activities in the fullness of time also.  

Chris Tucker writes:

As Captain Aubrey, "always a hand for the ship", one must always "keep an eye for the waves." 

Jeff Watson adds:

Any type of surfing is very addicting and has similarities to heavy drugs. Surfing is our form of crack, and we start getting tweaky when away from the waves or beach for a long time. Most mid-life surfers get hurt a lot, at least the crew of geriatrics that I surf with do. We view the aches, pains, sprains, and broken bones as part of the cost of doing business. In my case, I have had an injury every year for the past ten years that has resulted in some sort of medical treatment or hospitalization. In fact, I'm out of commission right now but my injury is skateboarding related, not surfing, and skateboarding and surfing are closely related in the surfing tribe.

My crew has similar experiences, and our eldest member is 69 years old, I get asked all the time why I still surf. My answer is that I just never quit. On that note, here is a good movie, "Surfing for Life" that describes the lives of many senior citizens that still surf seriously. I gave The Chair a copy and he said that he enjoyed the movie which I found to be one of the most uplifting documentaries of all time.

Interesting that the surfing tribe would be worthy of a study by Mead. Here's a very good MA thesis that an acquaintance wrote back in 1976 describing the surfing tribe of Santa Cruz, CA.

"Uncle" Howie Eisenberg corrects:

You neglected to mention not to bodysurf a wave that has become whitewater as uncle Howie did in winning the worlds stupidest bodysurfer award. I did not become unconscious. After "breaking my fall" with my head snapping my neck back, I emerged from the sea a bloody mess with tingling from my wrists to my shoulders, picked up my sandals, walked to the lifeguards who placed me on a wooden board, was ambulanced to a hospital where 3 CT scans, especially the brain scan showed nothing.

David Hillman writes:

at the chiropractor this a.m for an adjustment…

Doc says, "took my 6 year old son to the waterpark yesterday afternoon for an 'end of summer' day."

"How did it go?" asks I.

"Really well, first we went on Lazy River, a slow meandering stream one paddles down leisurely, then we went for a few runs down the big slides."

"Oh, knowing him, he must have really liked the action down the big slides."

"Yes, he does, so it was really a big surprise when he said 'Dad, let's go back down the Lazy River.' It surprised me because it's usually a little too tame for his liking. But we put the raft back in the Lazy River and we're paddling downstream a little when he says 'DAD! Do you see that lifeguard?' I take a look in the direction he's staring in agape and here's this beautiful blonde college girl lifeguard in one of those form-fitting Speedo suits. Six years old and it's already ingrained in him."

We laughed a bit, and, "Then, on the way home in the car," says Doc, "my son says to me out of the blue, 'Thanks for the best end-of-summer day ever, Dad."

Yes, yes…..always a hand for the ship and an eye for the waves….

Craig Mee adds:

Don't forget the change in tide either. It can get you into trouble if you have not taken into account the change in water depth at the front of a wave when attempting to pull off.

A bit like the markets.

Aug

22

I am so sorry to hear that Bill has passed on August 15th, 2010. He has been a highly valued friend and mentor since 1992, when I was aerospace reporter for the Daily Breeze in Torrance. I left Southern California for New York in 1994, but we stayed in touch over the years.

I had hoped to introduce my four-year-old son to him. Aubrey is obsessed with space exploration, and I had wanted him to know Bill, who will be remembered as one of aerospace’s brightest stars.

My deepest sympathies to Bill’s family.

An obituary ("William “Bill” Everett Haynes, 86, decorated Vietnam fighter pilot, of Rancho Palos Verdes, CA") appears on his web site timeleft.org

Alex Castaldo adds:

Here is a passage Bill wrote many years ago reflecting his appreciation of Daily Spec:

[DailySpec] is often a window on the souls of its members.

And a window on our own souls is often opened when we read what

Others write here.

It is lessons on life.

Chess strategies.

Investment in markets, life, family, nation and the future.

It can be and often is profound and superficial; deep and shallow and always enlightening, even when a writer may not be.

It sends out tendrils seeking answers and finds them, coiled about ideas we would never have found alone.

The [site] lives and throbs with the insights, prejudices, wants and experiences of the members.

There is a selection process at work here, as some find an intellectual home … others move in for a while and then move on.

Those who remain don't always agree and contention boils up, simmers and fades, sometimes leaving a residue of hostility but never, never boredom.[…]

Surely we, the weavers [of this tapestry] are much the better for it, and must acknowledge the debt each of us owes to each other, and to the two who first spread the warp and the woof.
Thank you Victor; thank you Laurel. Bill

Also interesting was his post on the national debt from March 31, 2008. (Though the figures today are completely different).

Notice to readers: to honor Bill we will stop updating Dailyspec for the next 24 hours.

Laurel Kenner adds:

Bill Haynes embodied the ideals of courage, persistence, mastery and friendship. Young at heart to his death this month at 86, he stayed clear of the cynicism, apathy and fear that often silence those who can offer innovation and guidance to realizing daring visions.

I met Bill when he was in his seventies and nearing the end of a remarkable career in the space industry. I was an aerospace reporter at a Los Angeles daily newspaper. Bill was then working for SAIC, a top space consulting firm. He took on the daunting job of educating me about the industry, inviting me to aerospace conferences where he would be found exchanging choice anecdotes about the beginnings of the aerospace industry or holding serious talks with groups of brilliant young engineers who looked to him as a mentor. He passed along to me his outrage about waste in the industry, but he also inspired me with dreams of unbelievable adventure that might just lie right the corner: voyages to Mars, commercial space exploration, cheap space launches. He introduced me to the ideas of geniuses like Gerald K. O'Neill http://en.wikipedia.org/wiki/Gerard_K._O'Neill and scientists exploring the barriers of longevity.

Bill was doing 100 pushups a day well into his 80s. The Friday before his fatal car crash, he flew the ultralight plane he had just finished building this year. 

Outspoken to the last, the essay he posted on his poignantly titled "Time Left" blog in April of this year succinctly summarized his vision:

*Human Space Exploration <http://timeleft.org/?p=215>*

*The primary current barrier to space exploration is cost; the exorbitant cost of getting into low earth orbit, currently in the high thousands of dollars per pound.  (Space News Apr 21-27, ’97, pg 3: $22,222/lb on the Sp Shuttle; ref NASA) But I see that as a transient problem.  Without going into what we will do specifically to lower the cost of getting in to orbit (although there are a number of efforts under way), we can cite historic precedents for saying that the cost will come down.  Every means of transportation known to humankind has gone through a cycle of high initial costs succeeded by steadily reduced costs until the transport means is available at low cost to everyone.  The earliest example is walking; Luke tells us in the parable of the prodigal son that the father welcomed his son’s return by telling the servants to bring him a robe and sandals. The sandals were generally reserved for persons of stature and were a symbol of authority two thousand years ago. A later example is the horse, which in medieval times was generally reserved for the nobility, so much so that it is called the age of chivalry, from the French “cheval”, for the horses ridden by chivalrous knights.  A modern example is the jet airplane which began as the high cost, limited domain of the military and has now become the transport of choice for millions of people.  That space transportation will be the first exception to this rule seems unlikely,  but the effects of cheap space transportation on our civilization will be much more far-reaching than these older examples.  Cheap access to space will lead to mankind populating the solar system, yes.  But far more important, it will give us access to unlimited raw materials and energy.  Combined with the access to information created by the computer revolution, this will give mankind all three elements necessary for unlimited wealth: unlimited energy, raw materials and knowledge.  The unspoken assumption is that we will exhibit the wisdom necessary to exploit those elements.* 

Among those attending Bill's memorial was his long-time friend, Apollo astronaut Buzz Aldrin, who said meeting Bill had been the best thing about the Apollo program.  Another friend, Rand Simberg, wrote on his "Transterrestrial Musings" blog:

*Remembering Bill Haynes

*He flew for the military from the post-WW-II era to Vietnam, was a jet test pilot, was an F-100 squadron commander, risked his life many times for many years, and continued to enjoy commanding high-performance machines all of his life, when ironically, it suddenly and unexpectedly ended with him losing a battle of momentum between his Mazda sports car and a Toyota Highlander, on his way to church, a devout Lutheran who spent his life dreaming of the stars, now at final peace with his God. In that regard, he reminds me, sadly, of Pete Conrad, who after commanding a mission to the moon and back, and becoming a leading light of entrepreneurial space, died riding the motorcycle that he loved on a tight curve just outside of Ojai.* 

*Bill Haynes used to tell the story of when he joined the US Army Air Corps in the 1940s, and told them that he wanted to go into space. “Better put down ‘extreme high-altitude flight,’ son,” the recruiter told him, after thinking for a bit. “The army doesn’t have a space program. Yet.” It still doesn’t, of course, because not long after, it spun off the Air Corps into the Air Force.*

*I first met him in 1981, when we were both working for the Aerospace Corporation in El Segundo. He was working the Military Man-In-Space program, which was looking into military applications for humans in space, which would be tested with military astronauts on the Space Shutte, which was just going into service. After his military career ended in the late sixties, he had worked on both Skylab and Spacelab, and probably knew as much about space station design issues as anyone at the time. He was highly critical of the space station studies occurring at Marshall and JSC at the time, and predicted many of the problems that the program would encounter over the next decade and a half before it finally started actually launching parts into space.* 

Victor and I have a four-year-old son, Aubrey, who is mesmerized by space launches and knows every stage of the Apollo mission. Hardly a day goes by when Aubrey doesn't "go to the moon." One of my fondest wishes had been to introduce him to Bill, so that he could learn from the best and kindest of masters. Goodbye, old friend. Thanks for being a star.

Timeleft.org Obituary:

William “Bill” Everett Haynes, 86, decorated Vietnam fighter pilot, of Rancho Palos Verdes, died Sunday, August 15, 2010, while driving his little red sports car to church. His loss is deeply felt.

Bill was born in Paris, France, on January 18, 1924, to Everett Campbell Haynes, a noted jockey in Europe between the World Wars, and Edna Heise Haynes. The Haynes family, including his younger brother, John Barrett Haynes, returned to Oklahoma in 1933, and moved to Los Angeles in 1942.

Bill relentlessly pursued his goal to be a fighter pilot and his dream of space travel. In 1943, he volunteered for the US Army Air Corps, where he served until the end of World War II. He obtained his undergraduate engineering degree at UCLA in 1949, and immediately joined the US Air Force.

His Air Force career took him and his family to Arizona, Germany, Ohio, Oklahoma, Southern California, Florida, and Virginia.

Prior to his service in the Vietnam War, Bill continually educated himself on the principles of flight and aircraft design and maintenance. He graduated from the Air Force Institute of Technology at Wright-Patterson AFB, Ohio, in 1954, and from the USAF Experimental Test Pilot School at Edwards AFB, California, in 1956. In 1965, he earned his Master of Arts from USC in research and development systems management.

Bill worked in the Minuteman missile program in Cocoa Beach, Florida, starting in 1965.

From 1967 to 1968, Bill bravely served as the commander of the 90th Tactical Fighter Squadron (nicknamed the “Dice”) at Bien Hoa AFB, Republic of South Vietnam. Bill flew 187 combat missions over the Ho Chi Minh trail. He was decorated with the Distinguished Flying Cross, the Bronze Star, the Air Medal and the Vietnam Cross of Gallantry. For the rest of his life, Bill enjoyed keeping up with his fighter pilot buddies via email and reunions.

He capped his Air Force career with a year in the Pentagon. He retired as a Lt. Colonel.

Following his retirement, Bill worked from 1969 to 1991 with various defense contractors, including Martin Marrietta, Nord Micro, Dornier System, Goldsworthy Engineering, Aerospace Corporation, and SAIC, in Colorado, Germany and Southern California.

Bill moved to Rancho Palos Verdes in 1977, where he lived with his beloved wife, Christine Apelles Haynes, until his death.

Bill is survived by his wife, Christine, his daughters Susan Ellen Roberts, of Dallas, Texas, and Kirsten Michele Howland, of Palos Verdes Estates, his sons John Barrett Haynes, of Los Angeles, and Richard Craig Haynes, of Pilot Point, Texas, and his grandchildren, Emma Kent Roberts and Caden Everett Robertson Howland. His parents and his brother, a Korean War veteran, predeceased him.

In retirement, Bill enjoyed anything involving flight. From 1998 to 2004, he worked with a team building a replica of the original airplane flown by the Wright Brothers. After that, he flew his own hand-built Ultralight airplane. His most recent flight was last Friday.

Bill continued to be actively engaged intellectually until the end. He held US Patent no. 4,828,207, for “fluid lock” technology. He wrote and published articles on various scientific issues, including the presense of “Square Craters on the Moon.”

He deeply loved his grandchildren, his pet parakeets and holding forth on the great issues of the day.

Bill was a loyal member of St. Paul’s Lutheran Church, Rancho Palos Verdes, for over 30 years.

Prior comment by Laurel Kenner (5/25/10):

Department of Happiness and Heroes:

Specs who know Bill Haynes will be glad to hear that last week he successfully flew the plane he built. [To see picture of actual plane, see our prior post from April 23]

The flight took place in the turbulent conditions over the mountains near Chino, California. Bill noticed shortly after takeoff that his throttle automatically went to idle, so he spent the next 45 minutes holding the throttle in his right hand and working the controls with his left hand. "If you're flying a plane for the first time, you don't want to land it right away," he told me.

Ha. I would have wanted to land it right away. You may remember that Bill is 86 years old.

In addition to being a tough ex-fighter pilot Bill is a rocket scientist. He's also a helpful and optimistic person, which puts him right in tune with DailySpeculations.Com .

Jeff Rollert comments:

Bill was wonderful, in giving me and my kids a tour of the aircraft he was building at the Compton Airport. Yup, that Compton.

He was a classic gentleman and a refreshing person. Not a single shred of ego (though he was really proud of still being certified to fly the Wright Flyer).

We'll miss him.

Aug

20

vintage shredded wheat adI was taught in high school history that the evil corporations formed monopolies and gouged the common man until the government broke up the trusts. However, this 100-year-old advertisement seems to suggest that government trust busting was driving food prices sky-high.

Advertisement in Nevada State Journal, August 18, 1910:

Make Your "Meat" Shredded Wheat These are troublous times for the man who eats food. The government is after the beef trust, the poultry trust and "the cold storage egg." But while congress, state legislatures and grand juries are "investigating" the high cost of living, your meat bills and grocery bills are soaring higher and higher. The food problem is an easy one if you know SHREDDED WHEAT. It contains more real body-building nutriment than meat or eggs, is more easily digested and costs much less. Always clean–always pure–always the same price. Your grocer sells it.

Stefan Jovanovich comments:

The Robber Barons were scandalous precisely because their energy and enterprise and eye for innovation brought the Tonto question into sharp focus. When Ralph writes about "our" national parks, he is highlighting that same question. The recent debate on the List about the "ownership" of one's own body also raised it in detail.

Neither the Declaration of Independence nor the Constitution defines the right to property. Jefferson showed his precocious talents for propaganda politics by substituting "the pursuit of happiness" for "property" because he knew that the definitions of "property" were the very issues that divided the colonists. Sam Adams and his fellow radicals argued that regulations were as much property as physical stuff and that those regulations were the monopoly privileges of the Crown's favorites. The Tories argued that the Navigation Acts and other rules were necessary to preserve "the public interest".

a california sea lionAs a lifetime lover of marine mammals and the one-time joint keeper of Stevie, a Steller sea lion, I have spent 40 years living in California and watching the Tories of environmental regulation make the same snobbish arguments in favor of their superior pedigrees. Instead of examining and answering the basic questions of who owns the Pacific fishery and its mammal predators, the environmentally righteous have spent enough money on bureaucracies and international conferences and endless discussions to have bought out every whaling company and purse-seine trawler in the world. If the people who wanted to "save ANWAR" were as shrewd as they were righteous, they would be lobbying to define and auction off the specific property rights that are involved. Of course, what they would discover is that the greatest obstacle to such a process would come not from the E&P companies' unwillingness to preserve the environment but from the regulatory bureaucracies themselves. Like the tenants in a rent-controlled apartment, the people sitting in offices in Washington, D.C. and elsewhere get the most direct benefits from "preserving America" even as the place crumbles around them.

I agree with Ralph that all the arguments in favor of drilling in the name of reduced oil prices and "energy independence" are complete hooey; so were the Robber Baron arguments in favor of preferential as opposed to uniform tariffs. But, one can hardly blame the E&P companies for using the same fatuous logic of the collective "good" that their environmental opponents do; if the question of "who benefits" is to be ignored and never, ever reduced to an actual accounting, the forces of "evil" - i.e. people who want to drill for oil - will just as likely to resort to "public interest" arguments as anyone else. What is interesting is the historial contrast between the failure of preferential tariffs to gain much ground and the obvious success of the regulatory model. The explanation is simple: the advocates for favoritism in tariff rates had to answer the direct question of cost. The beauty of regulation is that it offers the benefits of ownership without all the fuss that comes from having to fess up about what it will cost. We are long past the age when a Vanderbilt could ask a journalist "when did 'the public interest' ever buy a ticket?" (That is the first part of his famous remark about "the public interest be damned" that never, ever gets quoted.)

As long as the questions of property (who exactly owns what?) can be avoided, the tragedy of the commons will continue. As long as the gullible and excessively schooled (often one and the same) can share the illusion that "we the people" will all be as happy, healthy and secure if only the government is allowed to make rules to abolish scarcity and evil, the greatest profits will come from working the system; and, when those rules fail to work, the diagnosis will always be the same as it was in the age of blood-letting: we need do more.

P.S. For those who don't know it, "the Tonto question" is the reply the Lone Ranger's faithful Indian companion allegedly gave when the two of them found themselves out of bullents and surrounded by Apache and the Lone Ranger bravely said, "We've come to the end of the trail, partner." "What you mean "we", white man? I was first told this joke by a member of the Taos tribe in 1965. What made it funny was that, as a Pueblo, Tonto would have enjoyed no better fate at the hands of the Apache than the Lone Ranger. The illusion of collective interest is always funny to people wise enough to appreciate actual human action.

Aug

18

In the last few days, my 8-months old, Dimitri, has become mobile. Not officially crawling yet. He has mastered the soldier barbed wire technique and can move a long way across my living room in a handful of seconds.

Though I would never test it officially, if I were to put out a cookie, a tennis ball, a beer, and a knife all across the living room at the same time in random order, I guarantee you he would go to the most dangerous of these objects first and then gradually move down in rank to the least dangerous object.

Aside from the thought that "he must certainly be a Tar", I think you may get my point. Perhaps it is an infant and deeply ingrained primitive quality (or instinct) for humans to be attracted to trades that are inherently more dangerous than the others in a set of opportunities. I can only imagine how many people have tried, and blown up, trading options when they should have been playing stock.

Aug

10

 10 10 10 by Suzie Welch is a fructiferous but deeply flawed book whose purpose is to help people make decisions. The basic idea is to take any decision, pose the decision as a question, gather data, whether in work, romance, or family and look to see what happens 10 minutes, 10 months, and 10 years into the future.

Many anecdotes from friends, students, and personal life are given to illustrate the technique. The author in every case decides to make the decision that leaves one in the best possible light in 10 years. No account is taken of the discounted value of time, the randomness of possible outcomes, and the much greater uncertainty of 10 year predictions, or the completely opposite views that intuition and snap judgments a la the pseudo scientist M.G would lead to opposite decisions.

One read the book with pleasure for the insights it gave into Jack Welch's persona and management style. Here he is after 20 minutes of an interview with Suzie saying,"do you have a guy?". There he is telling her having never met her before that her Dr. boyfriend is too boring. Or that he'll kill the people that liked to pleasure themselves at her shift 20 years ago when she was a boss in the night shift of AP. Everything we learn about Jack is consistent with the persona that emerges from his penchant for having Saturday bull sessions with all his assistants and never understanding why some of them would like to spend it with their family instead of talking about golf, deciding which companies or divisions to sell from the silo, or figuring out how the finance company could once more pull a rabbit out of the hat to maintain the earnings streak, ( even in the face of 9/11 where their 3 major divisions were devastated).

One can't help but think what an intelligent all around personage such as S. Welch, who doesn't play golf could have seen in such a person considering the skepticism that she greets every one else with. Some insights in this direction are provided by the opening example where she laments taking her kids to Hawaii for a lecture and can't understand why the wives of the attendees are not friendly to her. The benefits of the trip to the kids, the memories of seeing their mother in a productive activity, the exposure to Hawaii at an early age are not taken into consideration, but she rues the one or two catty remarks about working mothers that the wives make without in any way seeming to realize it's because she is attractive and productive that they dis her.

The book leads one to apply 10 10 10 to market situations. Where will you be in the near term if you put your position on? Will you be close to a point where you can be run out? But more important, where will you be 1 hour from now? Will your set up change? And will you wish to get out with a frictional cost that will offset any expectation that you had at inception? And most important of all, will you ever be able to exit the position if it goes in your favor. One wishes one had applied such decision making to all his positions in derivatives in his career. And the 10 10 10 approach is very good for such things.

Jul

17

 There is something about all the resolutions of tension that occurred at the end of week– the settlement of the flexionic self dealing for 1/100 of the benefits devolved from the flexions in charge, the news that the metals company down 80% from its high had beat earnings forecasts along with the 19th century dow standard with the silos also beating, the 10 year bond yields well below 3%. And the 30 year bond at a high, the reversing from peak to trough of bonds and stocks each week, the emphasis on lines other than earnings in the income statements, like expenses for Google and revenues for GE, the likely passage of the financial regulation book (certainly without the ability of the customer to take recourse beyond the exchange appointed arbiters or members themselves), the random numbers relating to consumer confidence which always follow the stock market move the previous month– that's sort of like the revulsion after romance that they say one experiences, or post partum depression that is deeply unsettling for the period before the service rates jump 100 % at the beginning of the next year, I think.

Jul

16

 Eric Falkenstein is the author of an excellent book, Finding Alpha, and of a website.

One of his big insights is that in the real world the relation "return ~ risk" is often not obeyed. He cites many examples, but a representative example is that risky stocks (whether high beta, high volatility, high idiosyncratic volatility, or whatever) have not historically outperformed less risky stocks. I'm thinking that one possible explanation for this is that when you own risky stocks, you sort of get an implied put option "for free". The market makes you pay for that put option by giving you a lower return on the riskier stocks. Here's an example to make it clear:

Suppose investor A buys the whole market, with beta=1, and gets an average return of 10% with a standard deviation 25%. Investor B instead puts just 20% of his money into a diversified portfolio of high beta stocks, with an average beta of 5. He puts the rest of his money into a "risk-free" investment, and for simplicity, I will assume that the risk-free rate is 0%. What return should investor B expect on his stocks? Well, the conventional academic view is that his stocks should have an average return of 5 times that of the market, or 50%, with a standard deviation of 125%. Since B has only 20% of his money invested, his expected average portfolio return would then be 10%, with standard deviation 25%, the same as A.

The problem though is that B has a safer portfolio than A. B has a "floor" on his losses–he can lose at most 20% of his capital. He effectively has a put option that's 20% out of the money. How much is that worth? Well, to get a ballpark understanding, a put option on SPY, expiring 1 year out, 20% out of the money, is currently going for about 6% of the SPY share price. So in a fair world, maybe B's expected portfolio return shouldn't be 10%, but rather 4%, to reflect the idea that the market makes him cough up 6% to pay for the virtual put option that he owns.

If that's all true, then beta=5 stocks should have expected average returns of 20%, not 50%, and a standard deviation of 125%.

This is only a semi-quantitative explanation, but the point is that when you own higher beta stocks, you're implicitly getting an implied put protection relative to lower beta stocks. If the market is efficient and makes you pay for that put, then the returns of the high beta stocks would be reduced as compared to what you'd otherwise expect.

Disclaimer: For all I know, probably some academic has already thought through all this and demonstrated that it's incorrect and/or insignificant, and if that's so, then maybe someone can set me on the right path.

Stefan Jovanovich shares:

An earlier contribution from Eric Falkenstein– David Hakes' story about the risks of publication regarding the subject of risk:

When we submitted the paper to risk, uncertainty, and insurance journals, the referees responded that the results were self-evident. After some degree of frustration, my coauthor suggested that the problem with the paper might be that we had made the argument too easy to follow, and thus referees and editors were not sufficiently impressed. He said that he could make the paper more impressive by generalizing the model. While making the same point as the original paper, the new paper would be more mathematically elegant, and it would become absolutely impenetrable to most readers. The resulting paper had fifteen equations, two propositions and proofs, dozens of additional mathematical expressions, and a mathematical appendix containing nineteen equations and even more mathematical expressions. I personally could no longer understand the paper and I could not possibly present the paper alone. The paper was published in the first journal to which we submitted.

Lars van Dort writes:

I'm not sure I have much to contribute to the main question your post raises (why is the relation risk-return often not obeyed?), but I must say I was intrigued by your example. I felt it must be flawed, but it took me quite a while to see why.

Let's consider the investment in stocks of the portfolio of B, which has an average return of 50% and a standard deviation of 125%. The following could be one of the possible return distributions, from which these numbers are derived:

-100.0%
-50.0%
-38.5%
-25.0%
0.0%
50.0%
150.0%
213.5%
250.0%

Average return = 50%
Standard deviation = (pretty close to..) 125%

We see that the worst possible result is -100%, more would not be possible for stocks anyway. Because B has invested 20% of his total portfolio in stocks and 80% risk-free against a 0% return, his worst possible total return is -20%.

We now have to decide what return distribution to assume for the portfolio of A (average return 10%, standard deviation 25%). There are two options.

Option 1:

We take the possible returns from above and divide them by 5:

-20.0%
-10.0%
-7.7%
-5.0%
0.0%
10.0%
30.0%
42.7%
50.0%

Average return = 10%
Standard deviation = (pretty close to..) 25%

Or any other distribution with a worst possible return not lower than
-20%. In this case, the portfolios of A and B can both not lose more than 20%!

Option 2:

We do allow for a worst possible return for A of lower than -20%. However, in the equivalent distribution for B this would lead to a worst possible return for B's stocks of lower than -100% (because x5). This is not possible for stocks, but even if we imagine other assets that can take a negative value, this would have the consequence that B's total portfolio loss is no longer capped at -20%.

But what if we take a distribution for A with a worst possible return of lower than -20% AND a distribution for B's stock returns with a low of -100%. In this case (and here comes the point), for all the values to still add up to the mentioned average return and standard deviation, one or more of the other possible returns in the distribution of A would have to be higher, compared (x5) to B.

So, when one wants to argue that in this situation B's portfolio includes a put option because his losses are limited, along the same lines one would have to argue that A's portfolio includes a call option, because his possible returns are also relatively higher. Although I'm not sure how to prove this, it seems logical to assume these options need to have the same value.

The numbers of the example can be changed, but I believe a reply as above can always be given.

Tyler McClellan writes:

My quick thought is that this is not a good way to think of it.

The idea is to look at the marginal preferences of people with the same portfolio set.

In your example the relevance is not between the two portfolios you list but between what stocks the person with 80 percent in cash should chose for the remaining 20.

But I also suspect you are on to the correct way of getting insight about this, which is to show that the distribution of portfolio preferces is very correlated to specific holding within a category (for example maybe the person that owns risky stocks is highly likely never to own other stocks), such that a dynamic similar to what you describe does in fact happen. (best I can describe it is that the category of people to drive this relationship away by buying the now theoretically mispriced stocks is not big enough to overwhelm the people that continue to want volatile stocks and cash, or some other asset such as you suggest).

Rocky Humbert shares:

There are many ways to look at this; however using a high beta subset of the index has elements of a self-referential paradox and must be avoided.

One thing to recognize is that REAL and NOMINAL interest rates greatly influence the result. In an environment of very high real and nominal rates, and low stock market volatility, one can buy a five year zero coupon bond and use the discount to buy calls on the s+p with no principal risk. At the extreme, one could achieve full index replication with no principal risk, and I'd argue that this would be the perfect baseline for analyzing the issue.

We are honored to receive a message from Eric Falkenstein:

I appreciate Charles mentioning my name!

I think you can create such arbitrage only because the standard CAPM assumes lognormal returns, and for lognormal returns, only the first two moments (mean and standard dev) matter. So, parceling out put options is like saying there are different relations between how stdevs relate to max drawdown due to 'non-gaussian' transformations via leverage, distinctions that by definition are irrelevant within the framework of the canonical CAPM and its derivatives.

Many people, including Markowitz at the inception of the CAPM, have pointed out that returns may have important higher moments–skew, kurtosis, see here on my web site for references. Indeed, Fama did a lot of work on this in the 1960's (see my blog ),and his take-away was that these adjustments merely make second-order, intuitive changes to the base model–complications without much real add. However, downside skewness may be going thru a revival, as Cam[pbell] Harvey (editor of the JoF and mainstream finance archetype) actually  mentioned  in comment section of my blog that skewness preferences could explain a lot of these negative volatility-return empirical findings.

Alex Castaldo adds:

As they say in China "Speak of Cao Cao and Cao Cao arrives."

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