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9/29/2005
Briefly Speaking, by Victor Niederhoffer

  1. During the last four months, bonds have moved gradually back and forth from a low of 114.00 to 118.00 in a gentle ascent-descent-ascent and now descent that covered the same ground in five months that they liked to cover in one good volatile day in the 1980s when the bond vigilantes were masters of the universe. Such a reduction in volatility has many unforeseen consequences including such things as the heightened volatility in energy, through the law of conservation of volatility.
  2. Stocks have had five up days in a row, since Sept. 21, covering in total less than half a percent. This has to be the smallest such positive run of five in history. It gives one the feeling of having had the pleasure of escorting a most elegant and attractive other to five refined and noble cultural events without being invited in for a nightcap after the festivities. But such must be tested as to its impact on the market, not on romance, and similarities for expected moves after long runs of consecutive paint drying on a Arizona wall are surprisingly unrewarding to the chronics.
  3. The bulk of the conundra in economics, such as why diamonds sell for so much more than water, are explained by the concept of diminishing marginal utility. The concept also explains why risky stocks sell for less than stable ones. The marginal utility of buying a product is affected always by the availability of substitutes. Bonds are the main substitute for stocks, and their relative lack of attractiveness increases the marginal utility and derived demand that the public has for stocks. Changes in the attractiveness of substitutes and their affects must be tested in a predictive fashion so as not to descend into the labyrinth of promiscuity that surrounds all of behavioral finance.
  4. Convection currents explain most of the weather patterns we observe in our day-to-day forays with the wind and water. The essence of the phenomenon is how a source of energy like the sun causes the replacement and lifting of hot fluids instead of the more dense cold fluids that fall to the bottom. The movement of hot stocks to the top of the best performer list in a period, only to be replaced by the laggards in the ensemble of companies in the presence of constantly increasing income, wealth and changes in tastes has always reminded me of the changing winds and temperature from day to night in Brighton Beach on the Atlantic Ocean, where I grew up. Such regularities might well be applied to market phenomena ranging from sector rotation to the changing composition of the most-active, best performers, and new highs and lows in a year. One predicts it won't be long before the estimable Mr. Soji reveals to us how similar phenomena explain the prowess of the surfing champions and can be used to daytrade stocks with great aplomb.
  5. The European stocks continue to outperform their U.S. counterparts by a wide margin, with the normal indexes there such as Eurotop 300 up 18% year to date against a measly 0.5% for the US. Part of the differential is explained by the universal law of one return for all assets, perhaps best typified by the master investor Prince Al-Waleed of Saudi Arabia (the subject of a hagiographic Fortune interview of the type previously reserved for the magazine's biggest advertisers and the Sage of Nebraska), who sits on a portfolio that must directly or indirectly through his intimates approach the trillion-dollar mark. And part of the differential must be explained by the Vic-1997 effect: "Thanks for asking. Things are much better than they were in 1997, but then again they couldn't have fallen any lower than the nadir"). Yes, things were so bad in Europe that they couldn't have got any worse, as exemplified by the great desire of the Sage and other old lions to hold European assets rather than U.S. assets since the European trade balances were so much more green than ours. But ultimately one would predict a greater harmony and equalization of the returns of Europe versus the U.S., possibly caused by the equal conduction of return theorem.

Pitt Maner comments:

Vic's comments on convection currents, weather, and market rotations reminded me of a Christmas spent in Sweden in 1969 and my fascination with a cousin's lava lamp. Ah, to watch the lamp "magma" slowly being heated until a sustained succession of upwelling and downwelling molten, red blobs was attained was truly mesmerizing to a young kid. And now it turns out that these convection cells most likely are at work in the earth's mantle and account for the driving forces of plate tectonics, the resulting distribution of diamonds, gold and material resources on the earth's surface, and the wonderful, interplate "hot spot" that formed the Hawaiian Islands. Geopoetry in motion.

A quick surf of the internet further reveals that lava lamps are still made and have been employed by clever individuals as true, random number generators to produce data needed by scientists to model complex natural systems. Random numbers also are quite essential in keeping encrypted information secret. Overestimating randomness another one of those human traits (related to Dr. Taleb's observations) that has led to past problems employing the scientific method and keeping secrets secure.

Somehow the Chudhovsky brothers crunching pi on a home-built, "supercomputer" in a hot New York apartment come to mind. Will the infinite sequence of numbers comprising pi ever reach a series of predictable numbers?

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