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9/13/2005
Briefly Speaking, by Victor Niederhoffer

  1. The key to understanding the world of choice and decision making is incentives. One blade of the incentive scissors is that higher prices elicit increased supply and reduced demand. Today we read that gold is down $3 because of concern that Indian jewelers will reduce usage and that oil was down yesterday on increased levels of shipments from Europe. I note that the CRB Index is at 320, approximately where it was six months ago. Another blade of the scissors is that people work harder when they can make more money out of something. The Wall Street Journal article yesterday contrasting the beautiful and effective efforts of Wal-Mart and Home Depot to provide food, equipment and shelter for the hurricane victims, and the knowledge that the jails in New Orleans were emptied and prisoners released because no evacuation plans were developed by the city or state, reminds one of the heroism of business in responding to the profits incentives, the many escapes from jail that have occurred in conjunction with natural disasters, and the importance of developing the taste and experience of property as a necessary concomitant of civilized conduct, and of Martin Anderson's Federal Bulldozer in which he records how public housing, residents of whom again constituted an inordinate residue of the remaining occupants of New Orleans after the flood, leads to looting and bad behavior.
  2. What is the magic bullet, the golden key, the Open Sesame that will open the chest for market prediction? Is it the movement of a certain market in a certain hour? The market sentiment that arises from the happiness of people, the nearness of releases of energy from fixed decision makers like the trend followers, or those lacking in margin, the changes in uncertainty and a priori risk, the influx of liquidity from monetary injections, corporate buybacks, the changing mix of money being raised by equity versus debt, the flows of money from into money market funds versus stock funds, the liquidity of the public based on money received, the prospects for future profits, inflows from abroad, the strength of the existing holders of stocks, the path of least resistance, et al? Yes, all these are important. and all can be quantified. But if there is one single lozenge that I like to hang my hat on, one that's not always discounted, it's the relative moves of fixed income versus stocks. Yes, there's always a relation, a feeding relation between them, a substitution that is the golden key.  The problem is, it's always changing. (I attempted to reduce the fogginess of same in my chapter on Kira's education about the evils of regulation of health lozenges, and my own amiable idiocy, in chapter 16 of our worst-selling book, a book reviewed most recently as "feeding on each other's insecurities and inadequacies .. lack of success as a trader ... stupidity and embarrassment ... an empty message from an empty mind. " Reading such, one can hardly refrain from a sense of satisfaction.
  3. If there's one key mistake that traders make, it's to base their decisions on information that is past or ephemeral. The former has been discounted many months ago, and the latter, like the employment last month, or PPI last month, has nothing to do with the value of stocks. Of what moment is it that PPI in August was up 0.6% when the CRB is down 10% since then, except for those who would spur friction to cover the costs of the market firmament? Or as Bacon would say, to cause the public to lose so much more money than they have any right to lose.

Paul Marino Responds:

Regarding today's Briefly Speaking, especially the Martin Anderson reference, I came across this abstract while searching for similar problems which may happen in China and other developing nations. This seems worth reading:

Is History Repeating Itself? From Urban Renewal in the United States to Inner-City Redevelopment in China, by Yan Zhang and Ke Fang.

This study compares urban renewal in the United States in the 1950s and 1960s with inner-city redevelopment in China since the late 1980s. It finds that both programs use government authority and subsidies to make large-scale private or quasi-private investment attractive in the name of ameliorating living conditions. Cautiously applying Logan and Molotch's "growth coalition" concept to China, the authors assert that a "growth machine" has formed during China's economic decentralization processes. Despite the similarities, America's urban renewal was an ill-fated federal program in which the local government and downtown business interests cooperated to boost declining inner-cities that were competing with burgeoning suburbs. In contrast, China's redevelopment has been propelled by emerging local elites using decentralized state power to pursue fast growth in rising real estate markets. Greater insights into urban redevelopment can be gleaned through this comparative analysis.

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