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The Chairman
Victor Niederhoffer


12/17/04
Thoughts Inspired by the Wisdom Kids, by Victor Niederhoffer

At a Wiz party last night, I took the liberty of playing with the gear set the kids have on display and was incited by the President of the firm to find some applications to the market the next day.

1. Gears can be used to convert motion from a horizontal plane to a vertical plane, or a vertical to circular. And indeed in the Science Museum in London, one can see living examples of how factories and steam engines made use of that. Preliminary studies of the performance of companies with horizontal motion in recent years show that they were lack luster performers in subsequent years.

2. For many years, I have heard the adage that football players die young. Indeed there appear to be some studies floating around that show that pro linemen live to the age of 55. Worse yet, their late years are miserable ones as they gain weight and can't exercise due to arthritis. After extensive googling, I still cant track the definitive study on this although it's accepted as true. But there seems to be a medical consensus that the clashing of 300 pound bodies into each other at 30 miles an hour is not what humans are designed for and this is the cause of the problem. One notes that oil has had a fast Lobagola going up 25% from June to October, and then down 25% from October to date. The market must abhor such wasted energy, and I hypothesize that such markets perform significantly worse than random. I hasten to add that like the Daniel and David gear set I played with which suggested the use of a suction cup to convert the vertical motion to horizontal, this must be tested to enjoy the fruits.

3. Recently, much talk has been made (by people Grandpa Martin would have called "a bunch of amateurs" when his boy Artie did not have the ball) about the tendency of the beaten favorites to expand vigorously in the new year as tax loss selling and window dressing ends. But you have to put the connectors in first, in gear sets and markets and such moves are inconsistent with rational expectation so one cannot refrain from getting the jump on such fixed amateurs with propitious anticipatory positions.

Kim Zussman Replies:

Large and complex gearbox reduction assemblies are often found at aerospace surplus stores by inquisitive teen boys seeking esoteric applications. The interplay between gears, with different speeds, mechanical advantage, and rates of return is similar to the economic interactions between corporations in closely and distantly related industries. Only later courses in physics revealed inevitable sources of friction and energy loss inherent to such mechanisms, both in customer/supplier exchange and investment

One of the driving principles is the search for the frictionless machine and perpetual motion. So is the tendency to gear for and see motion when there is, in fact, none.

12/19/04
Dr. Charles Pennington Responds:

I need to disagree with Dr. Z's comment. The Chair has been talking about simple machines, such as levers, pulleys, wedges, and gears. The "inevitable" sources of friction that Dr. Z talks about aren't really inevitable, in that there's no fundamental lower limit on them. There are examples of truly frictionless motion, such as superconductivity, in which metals carry electrical current with absolutely zero "friction" or resistance, and superfluidity, in which a fluid (for example, liquid helium below about 2.2 Kelvin) can flow through a pipe with zero friction. Superconductivity or superfluidity currents can flow perpetually, and this doesn't violate any kind of physical law. It is, in fact, "perpetual motion", and it is possible to design simple machines, analogous to levers, pulleys, wedges, gears, etc., using it. For example, you could make an electrical transformer using superconducting wires. You could make a mechanical "lever" by pushing a superfluid through a pipe with a tapered diameter. (You push the fluid 1 meter at the fat end of the pipe; the fluid moves 10 meters at the narrow end.)

"Perpetual motion machine" is a phrase that is used, inaccurately, to mean a machine that perpetually provides useful power output greater than power input. That you can't do, unless there's some an inexhaustible fuel supply hidden in the machine. There's no fundamental reason though that the Chair's simple machines can't yield a power output exactly equal to and not less than the power input. See, for example, here and here

So in your trading, keep searching to lower your costs relative to your profits, because there's no *fundamental* reason that those costs can't go to zero.

Kim Zussman Responds:

Notwithstanding perpetual motion of supercooled nature, is zero really the lower limit of market friction? Zero commissions, perhaps, but spread zero? Price impact zero? Perhaps this requires infinite liquidity (sounds like a Miller question). No market makers? In this case, what incentives would intermediaries have to facilitate trade? Computers as intermediaries-who pays?

In any case, as far as humans are concerned, I suspect whenever money is involved the lower limit will be definied by an always present clever few who can make a buck off the flow (first law of the casino).

Mr. E. Responds

These are wonderful points you make Charles and totally consistent with the current state of engineering and logic.

I however see things differently.

I believe there is a "PMM" perpetual motion machine.

It is the eliptical world that survives above us and the very breathe of its totality

Let me give you some thoughts on this topic

wall street and the worlds very best engineers which i reepct you as oneof them, take for granted as TRUE that the day and night are always 24 hours, they take for true that GRAVITY acts rationally because it may be so here on earth...yes on earth the concept of a perpetual motion machine may be hard to create..

BUT that may not be so elsewhere

I for one dont accept the concept of a 24 hr day, and accept it as a false belief that i take advantage of

I dont accept the idea that a PMM doesnt exist and i argue that black holes and three trillion items moving between here and Mars dont require a mass of power to move them such as occurs here

what I am saying is heresey but once upon a time 1000 years ago the worlds smartest men believed in things that have long ago been disproved

What is the momentum of hope ?

What is the momentum of trust ?

These are issues that the athiestic scientific community doesn't have answers for, for no power source is required, no gravity can effect, no non belief can explain

Dr. Charles Pennington on Isaac Newton:

Mr. E, I think you would enjoy the biography "Isaac Newton", by James Gleick. Newton lived on the borderline between the scientific and the pre-scientific eras, which is not completely a coincidence, since he was a major cause of the transition. The book shows though that his mind was filled with concepts that we wouldn't call scientific. He put his life efforts into about 10 areas, one being math/physics, but in the other 9 he had few successes, and his efforts today would be regarded as quackery. They included all sorts of mystical things, astrology, alchemy. It's ironic that his physics thinking ushered in the idea of the "mechanical universe", while Newton himself believed in a universe animated by all kinds of spirits.

The book leaves the impression (and I don't know enough to confirm or dispute) that Newton's physics sprung out of nowhere. His father died when he was a small child, and then his mother sent him off to live with his grandmother. As an adult he became celibate and seemed to not even have any close personal friends of either gender, which is a very different response to such circumstances than that of our ex-President.

Late in life, at the peak of his fame, Newton arguably wasted his talents by taking on the job of Warden of the Mint. "By tradition the Mint posts offered easy income; Montague had promised Newton ''tis worth five or six hundred pounds per An, and has not too much bus'nesse to require more attendance than you may spare'..but (Newton) ran the Mint until his death, with diligence and even ferocity. He was, after all, the master of melters and assayers and metallurgists who multiplied gold and silver on a scale that alchemists could only dream of...In pursuing clippers and counterfeiters, he called on long-nurtured reserves of Puritan anger and righteousness...(He) oversaw prosecutions himself, all the way to the gallows."

Newton was slow to publish, hording his scientific ideas, and only the hint that Leibniz was gaining ground on him could cause him to finally publish Principia. The Gleick book reminded me that Newton even explained quantitively the cause of the precession of the earth's axis, which is not extremely difficult if you've just completed a semester on angular momentum of rigid bodies, but seems much more so if you have to invent calculus just to get started.

I found the book inspirational in an unusual way. Here was a man with many weaknesses and repellant qualities--some misanthropy, vindictiveness, stubbornness, greed, obsessiveness, provinciality (The book notes that he explained the ebb and flow of the tides, a mystery to countless seamen for thousands of years, but in his lifetime he never visited the ocean.), yet he changed the thinking of the entire world more than any other scientist before or since.

Mr. E. Responds

I will buy and read this book on my long flight to and from Belarus ..a flight that will take me back 50 years to the golden age of tyranical communism and collectivism...and i am grateful for your good counsel.

Hentry Gifford Responds

The question of Newton's physics springing from nowhere has been asked many times, but was answered by Newton himself when he said "I have stood on the shoulders of giants that came before me" in reference to this question.

Calculus was nescessary for his law of cooling, which describes the ever changing rate of cooling of say, a hot potatoe on a plate that loses a lot of heat at first, then less and less as it approaches room temperature.

Ross Miller Responds:

Those seeking physics analogies to the market may wish to indulge in Gish, a physics-based videogame about a tar blob with yellow eyes in such of profit and his lost, cuddly girlfriend. The usual addiction warnings apply.

From the GameSpot review of Gish:
"Physics" is quickly gaining currency as the newest "must-have" game industry buzzword. Gish is one of those rare games that actually manages to integrate realistic physics into its gameplay in a way that's both meaningful and, more importantly, enjoyable. That it does this with humor and style, and without the benefit of a large budget, is a small miracle.

James Sogi Responds:

The JPL has detected unexplained anomalies in the acceleration of the Pioneer spacecraft 10 and 11 out in interstellar space that is unexplained by known phenomena. The possibility exists that gravity and time does not behave out there as it does on earth.

See discussion beginning on page 44 of Study of the anomalous acceleration of Pioneer 10 and 11 on Dark matter or modified gravity, time variation. One explanation is that the gravitational field is not static with respect to cosmological expansion. Another possibility is a time variation in the Newtonian constant , or a result of an expanding universe.

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