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Victor Niederhoffer



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Leverage, from Victor Niederhoffer

We are often accustomed to thinking of the mechanical advantage that comes from the output that arises from the application of an input force to one side of a lever. The force required at the input is multiplied at the output by a factor directly proportional to the distance that the input moves relative to the distance moved by the output according to the well known equation (force output x distance output) = (force input x distance input).

We see in markets many occasions when one market moves and another rotates around its fulcrum because of the movement of another. For example, the bonds are an input force that always affects the output of the stock market usually in proportion to the distance of the move in bonds. Similarly the grains are locked in a levered relation with each other, corn versus oats, wheat versus soybeans, and the metals are levered with the dollar, as the dollar is with the stock market.

The question I'd like to consider though is how circular motion in one market affects circular motion in another. Many markets are attached to each other as the wheel and the axle, with a large market like the stock market acting as the wheel exerting a tangential force on the smaller market such as silver or jewelry. How could such a relation be best quantified. The stock market recently has had a circular motion from 1300 to 1250 to 1300. What other markets have had a circular motion because of their attachment to it -- one thinks of gold as an example, and wonders whether the attached wheel like action will soon spread to oil. The trend following index is attached in a wheel and axle configuration to many markets such as stocks and when trends went up they brought the much bigger us stock market up with much smaller force. And when they went down, they caused the attached US and foreign markets to spin. Similarly the US markets and Japanese markets and European markets are attached together on a series of shafts but their moves are separated in time.

I enjoyed James Brennan's explanation of the relation between wheels and Type 1 levers, which I am trying to research so I can do a better job of teaching Aubrey about all the things we see on wheels in a day, starting with the pull and riding toys of kids, to the bicycles and cars and dollies that we see every morning.




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